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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2024
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Commission File No. 001-35210
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INNOVATE CORP.
(Exact name of registrant as specified in its charter)
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| Delaware |
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54-1708481 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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295 Madison Ave., 12th Floor, New York, NY |
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10017 |
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(212) 235-2691
(Registrant’s telephone number, including area code)
____________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
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| 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 |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒ 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 ☒ 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.:
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| Large accelerated filer |
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Accelerated filer |
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| Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The aggregate market value of INNOVATE’s common stock held by non-affiliates of the registrant as of June 30, 2024 was approximately $32.3 million based on the closing sale price of the Common Stock on such date.
As of March 27, 2025, 13,283,218 shares of common stock, par value $0.001, were outstanding.
Documents Incorporated by Reference
The registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for the 2025 Annual Meeting of Stockholders is incorporated by reference into Part III of this Form 10-K to the extent stated herein.
INNOVATE CORP.
INDEX TO FORM 10-K
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Item 1C. |
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, in this Annual Report on Form 10-K, "INNOVATE," means INNOVATE Corp. and the "Company," "we" and "our" mean INNOVATE together with its consolidated subsidiaries.
This Annual Report on Form 10-K contains forward-looking statements. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Special Note Regarding Forward-Looking Statements."
General
INNOVATE 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. As of December 31, 2024, our three operating platforms or reportable segments, based on management’s organization of the enterprise, are Infrastructure, Life Sciences and Spectrum, plus our Other segment, which includes businesses that do not meet the separately reportable segment thresholds.
Our principal operating subsidiaries include the following assets:
(i)DBM Global Inc. ("DBMG") (Infrastructure), a family of companies providing fully integrated structural and steel construction services;
(ii)Pansend Life Sciences, LLC ("Pansend") (Life Sciences), our subsidiary focused on supporting healthcare and biotechnology product development;
(iii)HC2 Broadcasting Holdings Inc. and its subsidiaries ("Broadcasting") (Spectrum), a strategic operator of Over-The-Air ("OTA") broadcasting stations across the United States ("U.S.") including Puerto Rico; and
(iv)Other, which represents all other businesses or investments that do not meet the definition of a segment individually or in the aggregate.
We expect to focus on operating and managing our portfolio of companies and building value in Infrastructure, Life Sciences and Spectrum in the future. We believe these segments are well positioned to take advantage of current trends in today’s economy and that there is opportunity to build value organically and inorganically in these three segments. We may consider opportunities outside of these businesses in the longer term to acquire and invest in businesses with attractive assets that we consider to be undervalued or fairly valued.
Overall Business Strategy
We continually evaluate strategic and business alternatives within our operating segments, which may include the following: operating, growing or acquiring additional assets or businesses related to current or historical operations; or winding down or selling our existing operations. In the longer-term, we may evaluate opportunities to acquire assets or businesses unrelated to our current or historical operations. We have generally pursued either controlling positions in durable, cash-flow generating businesses and assets that will enhance our current businesses in Infrastructure, Life Sciences and Spectrum or companies we believe exhibit substantial growth potential, which may be unrelated to the Company’s then-current operating segments. In connection with any such acquisition, we may choose to actively assemble or re-assemble a company’s management team to ensure the appropriate expertise is in place to execute the operating objectives of such business. We view ourselves as strategic and financial partners and seek to align our management teams’ incentives with our goal of delivering sustainable long-term value to our stakeholders.
As part of any acquisition strategy, we may raise capital in the form of debt or equity securities (including preferred stock) or a combination thereof. We have broad discretion in selecting a business strategy for the Company. If we elect to pursue an acquisition, while we intend to focus on Infrastructure, Life Sciences and Spectrum, we may exercise our broad discretion to identify and select an industry and the possible acquisition or business combination opportunity unrelated to our current operating segments. In connection with evaluating these strategic and business alternatives, we may at any time be engaged in ongoing discussions with respect to possible acquisitions, business combinations and debt or equity securities offerings of widely varying sizes. There can be no assurance that any of these discussions will result in a definitive agreement and, if they do, what the terms or timing of any agreement would be.
Our strategic process includes a continual evaluation of our existing businesses which may include a sale or recapitalization of businesses or operating segments. We consider many factors as we go through our evaluation, which include, but are not limited to, market factors and opportunities, growth prospects and internal needs. In connection with evaluating these strategic and business alternatives, we may at any time be engaged in ongoing discussions with respect to possible dispositions, mergers and public offerings of widely varying sizes. There can be no assurance that any of these discussions will result in a definitive agreement, and if they do, what the terms or timing of any agreement would be.
Competition
From a strategic perspective, we encounter competition for acquisition and business opportunities from other entities having similar business objectives, such as strategic investors and private equity firms, which could lead to higher prices for acquisition targets. Many of these entities are well established and have extensive experience identifying and executing transactions directly or through affiliates. Our financial resources and human resources may be relatively limited when contrasted with many of these competitors which may place us at a competitive disadvantage. Competitive conditions affecting our operating businesses are described in the discussions below.
Human Capital
As of December 31, 2024, we had 3,135 full-time employees and 26 part-time employees, including the employees of our operating businesses as described in more detail below. We consider our relations with our employees to be satisfactory.
Our Operating Subsidiaries
Infrastructure Segment (DBMG)
DBM Global Inc. (“DBMG”) is a fully integrated construction company offering both construction and professional services primarily through its core subsidiaries, Schuff Steel Company ("SSC"), Banker Steel (“Banker”) and GrayWolf Industrial (“GrayWolf”) to a wide variety of commercial and industrial market segments. These companies provide services to their clients including design-assist, modularization, fabrication and erection of structural steel, heavy steel plate, trusses and girders, heavy equipment installation, as well as facility services for maintenance and shutdowns. The companies enable best delivery of pre-construction, construction and operations services by leveraging the capabilities of the DBM Vircon business, which provides construction modeling, rebar and steel detailing, industrial design, and digital engineering services. In addition, through its Aitken business ("Aitken"), DBMG manufactures pressure vessels, strainers, filters, separators and a variety of customized products.
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, hospital and medical offices, data centers, renewables, chemical, pulp and paper mills, manufacturing facilities, bridges, mines, metal processing and power plants.
Headquartered in Phoenix, Arizona, DBMG has domestic operations in Alabama, Arizona, California, Florida, Georgia, Kansas, Kentucky, New Jersey, New York, Oregon, South Carolina, Texas, Utah, Virginia, and Washington with construction projects primarily located in the aforementioned states. In addition, DBMG has international operations in Australia, Canada, India, New Zealand, the Philippines, and the United Kingdom.
DBMG’s results of operations are affected primarily by (i) the level of commercial, industrial and infrastructure construction as well as the need for mechanical and maintenance services in its principal markets; (ii) its ability to win project contracts; (iii) the number and complexity of project changes requested by customers or general contractors; (iv) its success in utilizing its resources at or near full capacity; and (v) its ability to complete contracts on a timely and cost-effective basis. The level of commercial, industrial and infrastructure construction activity is related to several factors, including local, regional and national economic conditions, interest rates, availability of financing, and the supply of existing facilities relative to demand.
Strategy
DBMG’s objective is to achieve and maintain a leading position in the geographic regions and project segments that it serves by providing timely, high-quality services to its customers. DBMG pursues this objective with a strategy comprised of the following components:
•Pursue Large, Value-Added Projects: DBMG’s unique ability to offer a full range of steel construction services and project management capabilities makes it a preferred partner for complex construction projects in the geographic regions it serves. This capability often enables DBMG to bid against fewer competitors in a less traditional, more negotiated selection process on these kinds of projects, thereby offering the potential for higher margins while providing overall cost savings and project flexibility and efficiencies to its customers;
•Expand and Diversify Revenue Base: DBMG seeks to expand and diversify its revenue base by leveraging its long-term relationships with national and multi-national construction and engineering firms, national and regional accounts, original equipment manufacturers, industrial owners, and other customers. DBMG also intends to continue to grow its operations by targeting projects that carry higher margins and less risk of large margin fluctuations. DBMG believes that continuing to diversify its revenue base by completing projects - such as low-rise office buildings, healthcare facilities and other commercial and industrial structures - could reduce the impact of periodic adverse market or economic conditions, as well as the margin slippage that may accompany larger projects;
•Emphasize Innovative Services: DBMG focuses its building information modeling ("BIM"), digital engineering, detailing, fabrication, erection, and construction expertise on larger, more complex projects, where it typically experiences less competition and more advantageous negotiated contract opportunities. DBMG has extensive experience in providing services requiring complex BIM modeling, detailing, fabrication and erection techniques and other unusual project needs, such as BIM coordination, specialized transportation, steel treatment or specialty coating applications, piping, machinery rigging and setting, deep foundations, and specialty welding. These service capabilities have enabled DBMG to address such design-sensitive projects as stadiums, uniquely designed hotels and casinos, pulp and paper mills, chemical plants, and other industrial and manufacturing facilities;
•Diversify Customer and Product Base: Although DBMG seeks to achieve a leading share of the geographic and product markets in which it traditionally competes, it also seeks to diversify its product offerings and geographic markets through acquisition. By expanding the portfolio of products offered and geographic markets served, DBMG believes that it will be able to offer more value-added services to existing and new potential customers, as well as to reduce the impact of periodic adverse market or economic conditions; and
•Ensure Project Delivery Success through Predictive Technologies: DBMG uses resources including data analytics, modeling and detailing, laser scan to BIM, and augmented and virtual reality to provide fully integrated solutions for a project’s lifecycle from design through to fabrication and construction, as well as providing mechanical and facility services. DBMG is thus able to deliver optimal value and reliable outcomes that are on schedule and on budget across a wide variety of services and geographic regions.
Services and Customers
DBMG consists of five business units spread across diverse markets: Schuff Steel Company ("SSC") (steel fabrication and erection), Banker Steel (steel fabrication and erection), DBM Vircon (steel detailing, rebar detailing, bridge detailing, BIM modeling services and BIM management services), the Aitken product line (manufacturing of equipment for the oil and gas industry), and GrayWolf (industrial multi-discipline construction, modularization, steel fabrication and erection, specialty facility maintenance, repair, and installation services, as well as management of smaller structural steel projects, leveraging subcontractors).
For the year ended December 31, 2024, revenues were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
% of Total Revenue |
| SSC |
|
$ |
404.6 |
|
|
37.8 |
% |
| Banker Steel |
|
312.7 |
|
|
29.2 |
% |
| GrayWolf |
|
314.1 |
|
|
29.3 |
% |
| DBM Vircon |
|
33.2 |
|
|
3.1 |
% |
| Aitken |
|
7.0 |
|
|
0.6 |
% |
| Total |
|
$ |
1,071.6 |
|
|
100.0 |
% |
The majority of DBMG's business is in North America, but DBM Vircon provides detailing services on five continents. In 2024, DBMG's two largest customers represented approximately 25.5% of DBMG's revenues. In 2023, DBMG’s two largest customers represented approximately 41.3% of DBMG's revenues.
DBMG’s size gives it the production capacity to complete large-scale, demanding projects, with typical utilization per facility ranging from 84% - 94% and a sales pipeline that includes approximately $6.6 billion in potential revenue generation. DBMG believes it has benefited from being one of the largest players in a market that is highly fragmented across many small firms.
DBMG achieves a highly efficient and cost-effective construction process by focusing on collaborating with all project participants and utilizing its extensive digital engineering and design-assist capabilities with its clients. Additionally, DBMG has in-house fabrication, erection, and multi-discipline industrial construction capabilities combined with access to a network of subcontractors for smaller projects in order to provide high-quality solutions for its customers. DBMG offers a range of services across a broad geography through its 13 fabrication shops in the United States in 2024 and 33 sales and management facilities located in the United States, Australia, Canada, India, New Zealand, the Philippines, and the UK.
DBMG operates with minimal bonding requirements, with a balance of 19.2% of DBMG's total backlog of $957.2 million as of December 31, 2024, and bonding is reduced as projects are billed rather than upon completion. DBMG has limited its raw material cost exposure by securing fixed prices from mills at contract bid as well as by utilizing its purchasing power as one of the largest domestic buyers of wide flange beams in the United States.
SSC believes that the variety of services it offers to its customers enhances its ability to obtain and successfully complete projects. These services fall into six distinct groups: design-assist, pre-construction design and budgeting, steel management, fabrication, erection, and BIM:
•Design-Assist: Using the latest technology and BIM, SSC works to provide clients with cost-effective steel designs. The end result is turnkey-ready, structural steel solutions for its diverse client base;
•Pre-Construction Design and Budgeting: Clients who contact SSC in the early stages of planning can receive an SSC-performed analysis of the structure and cost breakdown. Both of these tools allow clients to accurately plan and budget for any upcoming project;
•Steel Management: Using SSC’s proprietary Steel Integrated Management System ("SIMS"), SSC can track any piece of steel and instantly know its location. Additionally, SSC can help clients manage steel subcontracts, providing clients with savings on raw steel purchases and giving them access to a variety of SSC-approved subcontractors;
•Fabrication: Through its six fabrication shops in Arizona, California, Kansas, and Utah, SSC has one of the highest fabrication capacities in the United States, with approximately 1.1 million square feet under roof and a maximum annual fabrication capacity of approximately 279,000 tons;
•Erection: Named the top steel erector in the United States for 2007, 2008, 2011, 2013-2020, and 2022, and the second top steel erector for 2021 and 2023 - 2024 by Engineering News-Record, SSC knows how to add value to its projects through the safe and efficient erection of steel structures; and
•BIM: SSC uses BIM on every project to manage its role efficiently. Additionally, SSC’s use of SIMS in conjunction with its proprietary BIM platform, Visualizer, allows for real-time reporting on a project’s progress and an information-rich model review.
Banker Steel 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 offers a variety of services to its customers, which it believes enhances its ability to obtain and successfully complete projects. These services fall into four distinct groups: design-assist, pre-construction design and budgeting, fabrication, and erection:
•Design-Assist: Using the latest technology, Banker Steel helps developers plan, schedule, model and price projects from start to finish resulting in cost-effective steel designs;
•Pre-Construction/Design and Budgeting: Clients who contact Banker Steel in the early stages of planning can receive a detailed analysis of the structure and cost breakdown. Both of these tools allow clients to accurately plan and budget for any upcoming project;
•Fabrication: Through its four fabrication shops in Florida, New Jersey, and Virginia, Banker Steel has maximum annual fabrication capacity of approximately 159,000 tons with approximately 447,000 square feet of space; typically focusing on complex, non-commoditized jobs with intensive fabrication requirements; and
•Erection: Banker Steel offers a full suite of erection services including horizontal and vertical erection services.
GrayWolf provides services including industrial multi-discipline construction, modularization, steel fabrication, steel construction management, maintenance, repair, erection, and installation to a diverse range of end markets in order to provide high-quality outage, turnaround, and new installation services to customers. GrayWolf provides the following services through its two major brands: GrayWolf Integrated Construction (formerly Titan Contracting, Titan Fabricators, and Inco Services), and Milco National Constructors.
•Multi-discipline construction and modularization services: GrayWolf offers multi-discipline construction services to manufacturing, power, petrochemical, refining, data center, oil and gas and other industrial markets. Its services include providing modularization, plant maintenance, specialty welding, equipment rigging and setting, and mechanical and electrical construction to customers in the power, industrial, petrochemical, water treatment, and refining markets at a national level;
•Specialty construction solutions for processing markets: Customers in the pulp and paper, metals, mining and minerals, oil and gas and petrochemical markets utilize GrayWolf’s specialized solutions including plant maintenance, process piping, equipment setting, and tank and vessel fabrication and erection that are catered to the needs and specifications of the customer’s industry;
•Turnarounds, tank construction, and piping services: GrayWolf offers services including plant maintenance, specialty welding, piping systems, and tanks and vessels construction to the power, pulp and paper, refining, petrochemical, and water treatment markets in the Midwest, Mid-Atlantic, Southeast, and West Coast;
•Custom steel fabrication and erection: GrayWolf offers engineering, design, fabrication, modularization, erection and additional services to the heavy commercial and industrial markets in the Southwest, Midwest, Gulf Coast and Southeast; and
•Structural steel management: GrayWolf provides turn-key steel fabrication and erection services with expertise in project management. Leveraging such strengths, GrayWolf uses its relationships with reliable subcontractors and erectors, along with state-of-the-art management systems, to deliver excellence to clients.
DBM Vircon provides steel detailing, rebar detailing, BIM modeling and BIM management services for industrial and infrastructure and commercial construction projects in Australia, New Zealand, Europe and North America.
•Steel Detailing: Utilizing industry leading technologies, DBM Vircon provides steel detailing services which include: shop drawings, erection plans, anchor bolt drawings, connection sketches, NC files for cutting and drilling, DXF files for plate work, field bolt lists, specialist reports and advance bill of material and piping;
•Rebar Detailing: These services, including rebar detailing and estimating, are delivered by a staff experienced in rebar installation and familiar with the construction practices and constructability issues that arise on project sites. Deliverables include: field placement/shop drawings, field and/or phone support, 2D and 3D modeling, connection sketches, bar listing in ASA format, DGN files, and complete rebar estimating;
•BIM Modeling: Through multidisciplinary teams, DBM Vircon creates highly accurate, scaled virtual models of each structural component. These independent models and data are integrated and standardized to produce a single 3D model simulation of the entire structure using DBM Vircon’s proprietary application, Visualizer. This integrated model contains complete information for all functional requirements of a project, including procurement and logistics, financial modeling, claims and litigation, fabrication, construction support and asset management;
•BIM Management: DBM Vircon is an industry leading provider of BIM management consultancy services ("BIM Management"), with clients ranging from government, industry organizations and general construction contractors. BIM Management of all project participants’ input, use and development of the applicable model is integral to ensuring that the model remains the single point of reference. DBM Vircon’s BIM Management service includes the governing of process and workflow management, which is a collection of defined model uses, workflows, and modeling methods used to achieve specific, repeatable and reliable information results from the model. The way the model is created and shared, and the sequencing of its application, impacts the effective and efficient use of BIM for desired project outcomes and decision support; and
•Bridge Steel Detailing: Utilizing industry leading technologies, DBM Vircon, through its wholly-owned subsidiary, Candraft VSI, provides steel detailing services for bridges which include: shop drawings, erection plans, anchor bolt drawings, connection sketches, DSTV files for cutting and drilling, DXF files for plate work, field bolt lists, specialist reports and advance bill of material and piping.
Aitken is a manufacturer of equipment used in the oil, gas, petrochemical and pipeline industries. Aitken supplies the following products both nationwide and internationally:
•Strainers: Temporary cone and basket strainers, tee-type strainers, vertical and horizontal permanent line strainers and fabricated duplex strainers;
•Measurement Equipment: Orifice meter tubes, orifice plates, orifice flanges, seal pots, flow nozzles, Venturi tubes, low loss tubes and straightening vanes; and
•Major Products: Spectacle blinds, paddle blinds, drip rings, bleed rings, and test inserts, ASME vessels, launchers and pipe spools.
Suppliers
DBMG currently purchases its steel from a variety of domestic and foreign steel producers but is not dependent on any one producer. During the year ended December 31, 2024, DBMG, through SSC and Banker Steel, purchased approximately 50.9% of the total value of steel and steel components purchased from two domestic steel vendors. Refer to Item 1A - Risk Factors - "Risks Related to the Infrastructure segment" elsewhere in this document for discussion on DBMG’s reliance on suppliers of steel and steel components.
Sales and Distributions
DBMG obtains contracts through competitive bidding or negotiation, which generally are fixed-price, cost-plus, unit cost, or time and material arrangements. Bidding and negotiations require DBMG to estimate the costs of the project up front, with most projects typically lasting from one to twelve months. However, large and more complex projects can often last two years or more.
Marketing
General managers along with sales managers lead DBMG’s sales and marketing efforts. Each general manager is primarily responsible for sales, estimating, and marketing efforts in defined geographic areas. In addition, DBMG employs full-time project estimators and chief estimators. DBMG’s sales representatives build and maintain relationships with general contractors, architects, engineers, OEMs, industrial owners, and other potential sources of business to identify potential new projects. DBMG generates future project reports to track the weekly progress of new opportunities. DBMG’s sales efforts are further supported by most of its executive officers, engineering, and strategic sales and marketing personnel, who have substantial experience in the design, detailing, modeling, fabrication, industrial construction, maintenance, and erection of structural steel and heavy steel plate.
DBMG competes for new project opportunities through its relationships and interaction with its active and prospective customer base which provides valuable current market information and sales opportunities. In addition, DBMG is often contacted by governmental agencies in connection with public construction projects, and by large private-sector project owners, general contractors and engineering firms in connection with new building projects such as manufacturing and industrial plants, data centers, warehouse and distribution centers, and other industrial and commercial facilities.
Upon selection of projects to bid or price, DBMG’s estimating departments review and prepare projected costs of shop, field, detail drawing preparation and equipment hours, steel and other raw materials, and other costs. With respect to bid projects, a formal bid is prepared detailing the specific services and materials DBMG plans to provide, along with payment terms and project completion timelines. Upon acceptance, DBMG’s bid proposal is finalized in a definitive contract.
Competition
The principal geographic and product markets DBMG serves are highly competitive, and this intense competition is expected to continue. DBMG competes with other contractors for commercial, industrial and specialty projects on a local, regional, or national basis. Continued service within these markets requires substantial resources and capital investment in equipment, technology and skilled personnel, and certain of DBMG’s competitors have financial and operating resources greater than DBMG. Competition also places downward pressure on DBMG’s contract prices and margins. The principal competitive factors within the industry are price, timeliness of project completion, quality, reputation, and the desire of customers to utilize specific contractors with whom they have favorable relationships and prior experience. While DBMG believes that it maintains a competitive advantage with respect to many of these factors, failure to continue to do so or to meet other competitive challenges could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
Human Capital
As of December 31, 2024, DBMG's workforce was comprised of 3,065 full-time and 23 part-time employees and hired 83 contractors and consultants across the globe, including the U.S., Canada, Australia, New Zealand, India, the Philippines, the UK, and Mexico. The number of persons DBMG employs on an hourly basis fluctuates directly in relation to the amount of business DBMG performs. Certain of the fabrication and erection personnel DBMG employs are represented by various trade unions. DBMG is a party to several separate collective bargaining agreements with these unions in certain of its current operating regions, which expire (if not renewed) at various times in the future. Approximately 8.3% of DBMG’s employees are covered under various collective bargaining agreements. As of December 31, 2024, most of DBMG’s collective bargaining agreements are subject to automatic annual or other renewal unless either party elects to terminate the agreement on the scheduled expiration date. DBMG considers its relationship with its employees to be satisfactory and, other than sporadic and unauthorized work stoppages of an immaterial nature, none of which have been related to its own labor relations, DBMG has not experienced a work stoppage or other labor disturbance.
DBMG strategically utilizes third-party fabrication and erection subcontractors on many of its projects and also subcontracts detailing services from time to time when its management determines that this would be economically beneficial (and/or when DBMG requires additional capacity for such services). DBMG’s inability to engage fabrication, erection and detailing subcontractors on favorable terms could limit its ability to complete projects in a timely manner or compete for new projects, which could have a material adverse effect on its operations.
Legal, Environmental and Insurance
DBMG 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 DBMG or that the resolution of any such matter will not have a material adverse effect upon DBMG or the Company’s business, consolidated financial position, results of operations or cash flows. Neither DBMG nor the Company believes that any of such pending claims and legal proceedings will have a material adverse effect on its (or the Company’s) business, consolidated financial position, results of operations or cash flows.
DBMG’s operations and properties are affected by numerous federal, state and local environmental protection laws and regulations, such as those governing discharges to air and water and the handling and disposal of solid and hazardous wastes. These laws and regulations have become increasingly stringent and compliance with these laws and regulations has become increasingly complex and costly. There can be no assurance that such laws and regulations or their interpretation will not change in a manner that could materially and adversely affect DBMG’s operations. Certain environmental laws, such as CERCLA (the Comprehensive Environmental Response, Compensation, and Liability Act) and its state law counterparts, provide for strict and joint and several liability for investigation and remediation of spills and other releases of toxic and hazardous substances. These laws may apply to conditions at properties currently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or other contamination attributable to an entity or its predecessors come to be located. Although DBMG has not incurred any material environmental related liability in the past and believes that it is in material compliance with environmental laws, there can be no assurance that DBMG, or entities for which it may be responsible, will not incur such liability in connection with the investigation and remediation of facilities it currently operates (or formerly owned or operated) or other locations in a manner that could materially and adversely affect its operations.
DBMG maintains commercial general liability insurance in the amount of $2.0 million per occurrence and $4.0 million in the aggregate. In addition, DBMG maintains umbrella coverage limits of $75.0 million. DBMG also maintains insurance against property damage caused by fire, flood, explosion and similar catastrophic events that may result in physical damage or destruction of its facilities and property. DBMG maintains professional liability insurance in the amount of $10.0 million for professional services related to our work in steel erection and fabrication projects.
All policies are subject to various deductibles and coverage limitations. Although DBMG’s management believes that its insurance is adequate for its present needs, there can be no assurance that it will be able to maintain adequate insurance at premium rates that management considers commercially reasonable, nor can there be any assurance that such coverage will be adequate to cover all claims that may arise.
Life Sciences Segment (Pansend Life Sciences, LLC)
Our Life Sciences segment is comprised of Pansend Life Sciences, LLC ("Pansend") which maintains a controlling interest of 80.0% in Genovel Orthopedics, Inc. ("Genovel"), which seeks to develop products to treat early osteoarthritis of the knee, and also has a controlling interest of 81.4% in R2 Technologies, Inc. ("R2 Technologies"), which develops aesthetic and medical technologies for the skin. Pansend also invests in other early stage or developmental stage healthcare companies including a 45.9% interest in MediBeacon Inc. ("MediBeacon"), a 1.6% fully diluted interest in Triple Ring Technologies, Inc. ("Triple Ring"), and a 20.1% interest in Scaled Cell Solutions, Inc. ("Scaled Cell").
R2 Technologies, Inc.
R2 Technologies develops and commercializes breakthrough aesthetic medical and non-medical devices in the aesthetic dermatology market. Headquartered in Silicon Valley, R2 Technologies is the world leader in CryoAesthetics™ medical devices. R2 Technologies' Glacial® platform for precision contact cooling of the skin has been shown to reduce inflammation and also brighten dark spots.
Skin lightening and brightening is a large and fast-growing segment of aesthetic dermatology. Current lightening products and/or procedures may be ineffective, unpredictable or even harmful, and patients often must compensate for lack of efficacy by using makeup or concealers. R2 Technologies developed the breakthrough CryoAesthetics™ technologies that uniquely deliver treatments that provide skin lightening, brightening, skin tone evening and reduction or elimination of hyperpigmentation and inflammation. R2’s patented CryoModulation technology uses controlled cooling to suppress melanin, inflammation and discomfort by precisely controlling time and temperature to deliver an effective treatment with little social downtime.
Founded in 2014 by Pansend and Blossom Innovations, LLC, R2 Technologies exclusively licenses intellectual property developed at Massachusetts General Hospital ("MGH") and Harvard Medical School. In 2019, R2 Technologies brought on its strategic partner, Huadong Medicine Company, Ltd., (“Huadong”). In connection with Huadong's investment, R2 Technologies entered into a distribution agreement with Huadong under which R2 Technologies granted Huadong exclusive rights to distribute all of R2 Technologies' products in the Asia-Pacific region, and R2 Technologies is entitled to receive a share of Huadong's net sales from such products.
On June 20, 2024, Pansend closed on a new Series D Preferred Stock ("Series D") investment in R2. As part of the transaction, R2 Technologies converted its intercompany notes and accrued interest with Pansend, together with an additional cash investment from Pansend, into new Series D convertible participating preferred stock, for a total new additional investment of $21.3 million, increasing Pansend's total cumulative investment in R2 Technologies to $64.5 million, which increased Pansend's ownership in R2 Technologies to 81.4% immediately post-transaction as compared to 56.8% prior to the transaction. The transaction was eliminated on consolidation.
R2 Technologies currently has four products in various stages of commercialization and development:
1.Glacial Rx – Launched in the first quarter of 2021 in the United States after receiving U.S. Food and Drug Administration (“FDA”) clearance for use in dermatologic procedures for the removal of benign lesions of the skin and for use when cooling is intended for the temporary reduction of pain, swelling, inflammation, and hematoma from minor surgical procedures. When used with R2 Technologies' Dermabrasion Tips, the intended use includes general dermabrasion, scar revision, acne scar revision and tattoo removal. The Glacial Rx system effectively and comfortably addresses these conditions, leaving the skin with a smoother and brighter appearance with little downtime for the patient. The Glacial Rx system is sold into medical practices and is operated by trained healthcare professionals.
2.Glacial Spa – Launched in the first half of 2022 in China after receiving China Non-Medical Classification, the Glacial Spa is a cooling experience used to even skin tone, and brighten and lighten skin and is intended to be operated by a trained aesthetician. The Glacial Spa system is being sold by Huadong’s existing sales force to spas. This product launched in the United States and Canada in 2023, marketed as Glacial fx. See below for more details on Glacial fx.
3.Glacial fx – Launched in the third quarter of 2023 in the United States and Canada, the Glacial fx is intended to brighten, calm, and stimulate healthy, youthful skin through its intelligent precision cooling technology. The Glacial fx system has expanded R2’s North America market into all practice types, including nonmedical and retail chains, and is intended to be operated by a trained aesthetician.
4.Glacial AI – Currently undergoing research and development, the Glacial AI is an autonomous, robotic cooling device focused on whole-body skin lightening and brightening.
Sales and Distribution
In the United States and Canada, R2 Technologies utilizes a direct sales force to sell Glacial Rx and Glacial fx. As of December 31, 2024, R2 Technologies had a sales force in the United States and Canada of 28 employees, total full-time employees of 42 and 2 part-time employees.
In international markets, R2 Technologies sells Glacial Rx, Glacial fx and Glacial Spa through distributors. Currently, R2 Technologies has contracts with distributors to sell these products into the following countries: Mexico, United Arab Emirates, Saudi Arabia, Bahrain, Qatar, Australia, Hong Kong, Singapore, Vietnam, China, United Kingdom, France, Kuwait, and India.
Seasonality and Quarterly Results
Our business is subject to moderate seasonal fluctuations. We typically experience the highest revenues and operating income in the fiscal fourth quarter and lowest revenues and operating income in the first fiscal quarter. As our business outside of the United States grows, seasonal fluctuations may smooth out. As a result, results for any interim period are not necessarily indicative of the results that may be achieved for the full fiscal year.
Competition
The medical technology and aesthetic product markets are highly competitive and dynamic and are characterized by rapid and substantial technological development and product innovations. Demand for our products could be limited by the products and technologies offered now or in the future by our competitors.
Due to less stringent regulatory requirements, there are many more aesthetic products and procedures available for use in international markets than are cleared for use in the United States. There are also fewer limitations on the claims our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, we face more competition in these markets than in the United States.
We also compete against medical technology and aesthetic companies, including those offering products and technologies unrelated to skin lightening and brightening, for physician resources and mind share. Some of our competitors have a broad range of product offerings, large direct sales forces, and long-term customer relationships, which could inhibit our market penetration efforts. Our potential customers also may need to recoup the cost of expensive products that they have already purchased from our competitors, and thus they may decide to delay or not to purchase our products.
We believe that our products compete favorably, largely based on the following competitive factors:
•Our products safely downregulate inflammation and pain, accelerate exfoliation and normalize melanin production. This is a breakthrough technology unlike any other currently available in the marketplace;
•Our products are versatile, providing customized treatment capabilities for patients of all ages and skin types making every aesthetic patient a candidate;
•Our products achieve measurable results with little to no patient discomfort and high patient satisfaction;
•Glacial Rx is FDA cleared in the United States as a complementary treatment to improve the patient experience of most other pain or inflammation inducing treatments. This allows practices to offer a highly differentiated experience to existing customers and attract new business, generating additional revenue.
Governmental Approvals
The design, development, manufacture, testing and sale of our Glacial Rx product is subject to regulation by numerous governmental authorities, principally the FDA, and corresponding state and foreign regulatory agencies.
The Glacial Rx product (also known as the Dermal Cooling System) has received 510(k) clearance from the FDA as a cryosurgical instrument intended for the use in dermatologic procedures for the removal of benign lesions of the skin; temporary reduction of pain, swelling, inflammation and hematoma from minor surgical procedures; use of optional dermabrasion tip accessories for general dermabrasion, scar revision, acne scar revision, and tattoo removal; pain minimization, inflammation, and thermal injury during laser and dermatological treatments and for temporary anesthetic relief of injections.
We have received regulatory approval or are otherwise free to market the Glacial Rx product in numerous international markets. Any devices we manufacture or distribute pursuant to clearance or approval by the FDA are subject to pervasive and continuing regulation by the FDA and certain state agencies, including establishment registration and device listing with the FDA. We are required to adhere to applicable regulations detailed in the FDA’s current Good Manufacturing Practices ("cGMP") as set forth in the Quality System Regulation, which include among other things, testing, control and documentation requirements. Non-compliance with these standards can result in, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, refusal of the government to grant 510(k) clearance of devices, withdrawal of marketing approvals and criminal prosecutions. We and our contract manufacturer have designed and operate our manufacturing facilities under the FDA's cGMP requirements and are subject to periodic inspection by the FDA for compliance with regulatory requirements. Because we are a manufacturer of medical devices, we must also comply with medical device reporting requirements by reviewing and reporting to the FDA whenever there is evidence that reasonably suggests that one of our products may have caused or contributed to a death or serious injury. We must also report any incident in which our product has malfunctioned if that malfunction would likely cause or contribute to a death or serious injury if it were to recur. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Medical devices approved or cleared by the FDA may not be promoted for unapproved or uncleared uses, otherwise known as “off-label” promotion. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.
The regulatory review process for medical devices varies from country to country, and many countries also impose product standards, packaging requirements, environmental requirements, labeling requirements and import restrictions on devices. Each country has its own tariff regulations, duties, and tax requirements. Failure to comply with applicable foreign regulatory requirements may subject a company to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, criminal prosecution, or other consequences.
In international markets, we are required to obtain and maintain various quality assurance and quality management certifications. We have obtained the following international certifications: EN ISO 13485:2016 Medical Devices - Quality Management Systems - Requirements for regulatory purposes and Medical Device Single Audit Program (US and Canada). In November 2024, we successfully completed a re-certification audit by our Certification Body, Société Générale de Surveillance ("SGS").
Sources of Raw Materials and Suppliers
We depend upon our contract manufacturer to build our products. We rely on purchase orders rather than long-term contracts with our contract manufacturer, which mitigates some risks, including price increases. However, this subjects us to other risks such as component shortages. We continue to evaluate alternative sources of supply for these components and materials.
Patents and Proprietary Technology
To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark, and trade-secret laws, as well as confidentiality provisions in our contracts. We have implemented a patent strategy designed to protect our technology and facilitate commercialization of our current and future products. As of December 31, 2024, our patent portfolio comprised 128 issued patents and 11 pending patent applications, each of which we either own directly or for which we are the exclusive licensee. Our intellectual property portfolio for our CryoModulation technology was built through the combination of licensing patents from third parties and the issuance of new patents to us as the result of our ongoing development activities. Many of our issued and pending patents were exclusively licensed from General Hospital Corporation, which owns and operates the MGH and generally relate to our core technology. In general, patents have a term of 20 years from the application filing date or earliest claimed priority date. We expect our issued and exclusively licensed patents to expire in 2035 or later.
We also rely on trade secrets, technical know-how, contractual arrangements, and continuing innovation to protect our intellectual property and maintain our competitive position. We have a policy to enter into confidentiality agreements with third parties, employees, and consultants. We also have a policy that our employees and consultants sign agreements requiring that they assign to us their interests in intellectual property such as patents and copyrights arising from their work for us.
Patent License Agreement
On December 8, 2014, the Company entered into a Patent License Agreement with MGH, whereby R2 Technologies may use certain licensor assets and patent rights for the commercial development, manufacturing, distribution and use in products and processes. The agreement, as amended, calls for royalties to be paid at 8% of net sales of all products and processes with minimum guarantees. All milestones associated with the license agreement with MGH were completed in prior years and we made all required license fee and milestone payments to MGH in accordance with the Patent License Agreement, as amended. We continue to pay the royalty on net sales as required by the agreement and currently have no additional obligations to MGH resulting from any sublicensing agreement.
MediBeacon, Inc.
MediBeacon is a medical technology company specializing in the advances of fluorescent tracer agents and transdermal measurement. MediBeacon has developed a system that enables point of care assessment monitoring of kidney function. The Transdermal GFR System (“TGFR”) is comprised of the TGFR Sensor, TGFR Monitor, and Lumitrace (relmapirazin), which, together, allow assessment of the kidney function by measuring the clearance rate of the fluorescent agent as it leaves the body. The system records Lumitrace fluorescence intensity transdermally as a function of time via a sensor placed on the skin. The TGFR Sensor records 2.5 fluorescent readings per second, and the TGFR Monitor will display the average session TGFR reading at the patient's bedside or in the outpatient setting.
On October 22, 2018, the FDA granted Breakthrough Device designation to the TGFR for the measurement of Glomerular Filtration Rate (“GFR”) in patients with impaired or normal kidney function. The FDA granted the TGFR a Breakthrough Device Designation because better tools are needed for the management of kidney patients, and this technology has the potential to provide for more effective patient management. Chronic kidney disease is estimated to affect more than 800 million people worldwide and is a leading cause of mortality worldwide. Under the Breakthrough Device program, the FDA works with companies to expedite regulatory review in order to give patients more timely access to innovative diagnostic and therapeutic technologies. MediBeacon completed its U.S. phase 3 TGFR Pivotal Study in the first quarter of 2023 and during the second quarter of 2023, submitted the results of the study to the FDA, and the results were published in April 2024 on the National Institutes of Health ("NIH") clinical studies website.
On January 17, 2025, it was announced that the FDA had approved MediBeacon’s TGFR for the assessment of kidney function in patients with normal or impaired renal function. The TGFR is validated for use in the assessment of Glomerular Filtration Rate (GFR) in patients with stable kidney function at the point of care. The TGFR utilizes an intravenous Lumitrace injection but does not require blood draws or urine analysis, unlike current methodologies requiring multiple blood draws or urine samples. In addition, current clinical practice measured GFR (mGFR) assessment requires sophisticated clinical laboratory analysis away from the patient’s point of care.
MediBeacon fluorescent tracer agent-based monitoring systems hold promise in a range of potential medical applications, including:
◦Gastrointestinal permeability, which has the potential to transform management of autoimmune and inflammatory diseases, including Crohn’s disease. Grants from the Bill and Melinda Gates Foundation, in collaboration with scientists at Washington University School of Medicine in St. Louis and the Mayo Clinic, have supported MediBeacon’s research in this area. The first in-human clinical studies were completed to study the feasibility of using fluorescent tracer agent-based systems to quantify the permeability of the gastrointestinal tract in patients with active Crohn’s disease.
◦Ocular angiography, which has the potential to diagnose and monitor vasculature leakage in the eye, a key factor in diagnosing and monitoring various diseases, including macular degeneration, diabetic retinopathy and retinal vasculitis while avoiding current potential clinical side effects such as allergic reactions, nausea and vomiting. MediBeacon was the recipient of a Small Business Innovation Research grant supported by the National Eye Institute of the NIH. MediBeacon is pursuing research into the use of Lumitrace to visualize vasculature in the eye.
◦Surgical visualization feasibility, which has the potential to be used in open, laparoscopic and robotic surgeries to identify critical structures (e.g. ureters), tumor margins and blood flow in tissues in real-time. Research in this area is underway.
In 2015, Pansend Life Sciences became the largest equity investor in MediBeacon. In 2019, MediBeacon entered into a $30 million investment and exclusive commercialization partnership in Greater China with Huadong, under which MediBeacon granted Huadong the exclusive rights to distribute all of MediBeacon’s products in Greater China, and MediBeacon will receive royalty payments on net sales of the TGFR system. Under this agreement, Huadong is also responsible for funding clinical trials, commercial and regulatory activities relating to the TGFR system in 25 countries in the Asia-Pacific region, including Greater China. MediBeacon received the first $15 million tranche during 2019 at a pre-money valuation of approximately $300 million. In 2020, Huadong amended their agreements to provide for Huadong to prepay, at a minimum, $20 million of future China royalties to fund registration of the TGFR system as a Class 1 device in China, allowing it to immediately enter the Chinese hospital system. As of December 31, 2024, approximately $29.9 million had been received by MediBeacon.
In November 2022, MediBeacon and Huadong amended their existing agreements for Huadong to provide approximately $10 million in additional funding to MediBeacon including, at a minimum, an additional $2.5 million in prepayment of future China royalties to accelerate other pre-commercialization activities. On February 23, 2023, pursuant to its amended commercial partnership with Huadong, MediBeacon issued $7.5 million of its preferred stock to Huadong, accelerating 50% of the remaining $15 million cash milestone investment due upon FDA approval of MediBeacon's TGFR.
Subsequent to year end, in January 2025, upon FDA approval, pursuant to the terms of MediBeacon's convertible notes, Pansend's convertible notes and the related accrued interest together totaling $12.9 million were converted into Series 3 Preferred Stock. In addition, pursuant to its amended commercial partnership with Huadong and, as a result of FDA approval, a $7.5 million investment in its preferred stock by Huadong was in the process of closing at a pre-money valuation of approximately $420 million. Once completed, this will decrease Pansend's ownership in MediBeacon from approximately 45.9% prior to the transaction to approximately 44.7% subsequent to the transaction. On a fully diluted basis, Pansend's ownership in MediBeacon will decrease from 40.1% to 39.7%.
Genovel Orthopedics, Inc.
Genovel is a medical device company developing novel partial and total knee replacements for the treatment of osteoarthritis of the knee based on patented technology developed at New York University School of Medicine.
Triple Ring Technologies, Inc.
Triple Ring is a research and development engineering company specializing in medical devices, homeland security, imaging sensors, optics, fluidics, robotics and mobile healthcare.
Scaled Cell Solutions, Inc.
Scaled Cell is an immunotherapy company developing a novel autologous cell therapy system to potentially improve current chimeric antigen receptor T-cell ("CAR-T") treatments.
Spectrum Segment (HC2 Broadcasting Holdings Inc.)
HC2 Broadcasting Holdings Inc., ("HC2B" and together with its subsidiaries, "Broadcasting"), a majority-owned subsidiary of INNOVATE, is an owner and operator of broadcast television ("TV") stations throughout the U.S. and an avenue for high-end content providers to deliver their product over-the-air ("OTA") to more homes and, ultimately, mobile devices, including through fifth-generation mobile network ("5G") channels, the technology of which is currently being explored. Broadcasting’s stations are interconnected to an internet protocol network backbone, which allows Broadcasting to monitor and operate the stations remotely, resulting in significant cost efficiencies.
As of December 31, 2024, Broadcasting operated 256 stations, including three Full-Power stations, 53 Class A stations and 200 Low Power Television ("LPTV") stations. Broadcasting stations are collectively able to broadcast approximately 1,700 sub-channels and reach 113 markets in the U.S., and Puerto Rico, including 34 of the top 35 markets. Broadcasting has approximately 100 stations concentrated in the top 35 markets.
Operating Broadcast Stations
Below are Broadcasting’s operating stations as of December 31, 2024, listed by call sign and market rank:
|
|
|
|
|
|
|
|
|
|
|
|
| Market |
Market
Rank (a)
|
Station |
Service |
| New York, NY |
1 |
W02CY-D |
LPTV Station |
|
|
WKOB-LD |
LPTV Station |
| Los Angeles, CA |
2 |
KHIZ-LD |
LPTV Station |
|
|
KSKJ-CD |
Class A Station |
| Chicago, IL |
3 |
W31EZ-D |
LPTV Station |
|
|
WPVN-CD |
Class A Station |
| Dallas - Ft. Worth, TX |
4 |
K07AAD-D |
LPTV Station |
|
|
KHPK-LD |
LPTV Station |
|
|
KNAV-LD |
LPTV Station |
|
|
KJJM-LD |
LPTV Station |
|
|
KODF-LD |
LPTV Station |
|
|
KPFW-LD |
LPTV Station |
| Philadelphia, PA |
5 |
W25FG-D |
LPTV Station |
|
|
WDUM-LD |
LPTV Station |
|
|
WPSJ-CD |
Class A Station |
|
|
WZPA-LD |
LPTV Station |
| Houston, TX |
6 |
KEHO-LD |
LPTV Station |
|
|
KUGB-CD |
Class A Station |
|
|
KUVM-LD |
LPTV Station |
|
|
KUVM-CD |
Class A Station |
|
|
KBMN-LD |
LPTV Station |
| Atlanta, GA |
7 |
WDWW-LD |
LPTV Station |
|
|
WUEO-LD |
LPTV Station |
|
|
WUVM-LD |
LPTV Station |
|
|
WYGA-CD |
Class A Station |
| Boston, MA |
9 |
WLEK-LD |
LPTV Station |
| San Francisco - Oakland - San Jose, CA |
10 |
KEMO-TV |
Full Power Station |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KQRO-LD |
LPTV Station |
| Tampa - St Petersburg - Sarasota, FL |
11 |
W31EG-D |
LPTV Station |
|
|
W16DQ-D |
LPTV Station |
|
|
WTAM-LD |
LPTV Station |
|
|
WXAX-CD |
Class A Station |
| Phoenix - Prescott, AZ |
12 |
K12XP-D |
LPTV Station |
|
|
KPDF-CD |
Class A Station |
|
|
KTVP-LD |
LPTV Station |
| Seattle, WA |
13 |
KUSE-LD |
LPTV Station |
| Detroit, MI |
14 |
WDWO-CD |
Class A Station |
|
|
WUDL-LD |
LPTV Station |
| Orlando - Daytona Beach - Melbourne, FL |
15 |
WATV-LD |
LPTV Station |
|
|
WFEF-LD |
LPTV Station |
| Minneapolis - St. Paul, MN |
16 |
K33LN-D |
Class A Station |
|
|
K28PQ-D |
LPTV Station |
|
|
KJNK-LD |
LPTV Station |
|
|
KMBD-LD |
LPTV Station |
|
|
KMQV-LD |
LPTV Station |
|
|
KWJM-LD |
LPTV Station |
| Denver, CO |
17 |
KRDH-LD |
LPTV Station |
| Miami - Ft. Lauderdale, FL |
18 |
W16CC-D |
LPTV Station |
| Cleveland - Akron - Canton, OH |
19 |
KONV-LD |
LPTV Station |
|
|
WEKA-LD |
LPTV Station |
|
|
WQDI-LD |
LPTV Station |
|
|
WUEK-LD |
LPTV Station |
| Sacramento - Stockton - Modesto, CA |
20 |
KFTY-LD |
LPTV Station |
|
|
K04QR-D |
LPTV Station |
|
|
K12XJ-D |
LPTV Station |
|
|
KAHC-LD |
LPTV Station |
|
|
KBIS-LD |
LPTV Station |
|
|
KBTV-CD |
Class A Station |
|
|
KFKK-LD |
LPTV Station |
|
|
KFMS-LD |
LPTV Station |
| Charlotte, NC |
21 |
W15EB-D |
Class A Station |
|
|
WVEB-LD |
LPTV Station |
|
|
WHEH-LD |
LPTV Station |
| Raleigh - Durham - Fayetteville, NC |
22 |
WIRP-LD |
LPTV Station |
|
|
WNCB-LD |
LPTV Station |
| Portland, OR |
23 |
KOXI-CD |
Class A Station |
| St. Louis, MO |
24 |
W09DL-D |
LPTV Station |
|
|
WLEH-LD |
LPTV Station |
|
|
K25NG-D |
Class A Station |
|
|
KBGU-LD |
LPTV Station |
|
|
KPTN-LD |
LPTV Station |
|
|
WODK-LD |
LPTV Station |
| Indianapolis, IN |
25 |
WQDE-LD |
LPTV Station |
|
|
WSDI-LD |
LPTV Station |
|
|
WUDZ-LD |
LPTV Station |
| Nashville, TN |
26 |
WCTZ-LD |
LPTV Station |
|
|
WKUW-LD |
LPTV Station |
| Pittsburgh, PA |
27 |
WJMB-CD |
Class A Station |
|
|
WKHU-CD |
Class A Station |
|
|
WMVH-CD |
Class A Station |
|
|
WWKH-CD |
Class A Station |
|
|
WWLM-CD |
Class A Station |
| Salt Lake City, UT |
28 |
KBTU-LD |
LPTV Station |
| Baltimore, MD |
29 |
WQAW-LD |
LPTV Station |
|
|
|
|
|
|
|
|
|
|
|
|
| San Diego, CA |
30 |
KSKT-CD |
Class A Station |
| San Antonio, TX |
31 |
K17MJ-D |
LPTV Station |
|
|
K25OB-D |
Class A Station |
|
|
KISA-LD |
LPTV Station |
|
|
KOBS-LD |
LPTV Station |
|
|
KSAA-LD |
LPTV Station |
|
|
KSSJ-LD |
LPTV Station |
|
|
KVDF-CD |
Class A Station |
| Hartford - New Haven, CT |
32 |
WRNT-LD |
LPTV Station |
|
|
WTXX-LD |
LPTV Station |
| Kansas City, MO |
33 |
KAJF-LD |
LPTV Station |
|
|
KCMN-LD |
LPTV Station |
|
|
KQML-LD |
LPTV Station |
| Austin, TX |
34 |
KGBS-CD |
Class A Station |
|
|
KVAT-LD |
LPTV Station |
| Columbus, OH |
35 |
WDEM-CD |
Class A Station |
| Greenville - Spartanburg - Asheville - Anderson, SC |
36 |
W22EY-D |
LPTV Station |
| Milwaukee, WI |
38 |
WTSJ-LD |
LPTV Station |
| West Palm Beach - Ft. Pierce, FL |
39 |
WWCI-CD |
Class A Station |
|
|
WDOX-LD |
LPTV Station |
|
|
WXOD-LD |
LPTV Station |
| Las Vegas, NV |
40 |
K36NE-D |
Class A Station |
|
|
KEGS-LD |
LPTV Station |
|
|
KHDF-CD |
Class A Station |
|
|
KNBX-CD |
Class A Station |
|
|
KVPX-LD |
LPTV Station |
| Jacksonville, FL |
41 |
WJXE-LD |
LPTV Station |
|
|
WKBJ-LD |
LPTV Station |
|
|
WODH-LD |
LPTV Station |
|
|
WRCZ-LD |
LPTV Station |
| Birmingham - Anniston - Tuscaloosa, AL |
45 |
WUDX-LD |
LPTV Station |
|
|
WUOA-LD |
LPTV Station |
| Oklahoma City, OK |
47 |
KBZC-LD |
LPTV Station |
|
|
KOHC-CD |
Class A Station |
|
|
KTOU-LD |
LPTV Station |
| Albuquerque - Santa Fe, NM |
48 |
KQDF-LD |
LPTV Station |
|
|
KWPL-LD |
LPTV Station |
| Louisville, KY |
49 |
WKUT-LD |
LPTV Station |
| New Orleans, LA |
50 |
WQDT-LD |
LPTV Station |
|
|
WTNO-CD |
Class A Station |
| Memphis, TN |
51 |
KPMF-LD |
LPTV Station |
|
|
W15EA-D |
Class A Station |
|
|
WPED-LD |
LPTV Station |
|
|
WQEK-LD |
LPTV Station |
|
|
WQEO-LD |
LPTV Station |
| Ft. Myers - Naples, FL |
53 |
WGPS-LD |
LPTV Station |
| Buffalo, NY |
54 |
WVTT-CD |
Class A Station |
|
|
WWHC-LD |
LPTV Station |
| Fresno - Visalia, CA |
55 |
K17JI-D |
Class A Station |
|
|
KZMM-CD |
Class A Station |
| Richmond - Petersburg, VA |
56 |
WFWG-LD |
LPTV Station |
|
|
WUDW-LD |
LPTV Station |
|
|
WWBK-LD |
LPTV Station |
| Mobile, AL - Pensacola, FL |
57 |
WEDS-LD |
LPTV Station |
|
|
WWBH-LD |
LPTV Station |
| Little Rock - Pine Bluff, AR |
58 |
K23OW-D |
LPTV Station |
|
|
KENH-LD |
LPTV Station |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KWMO-LD |
LPTV Station |
| Knoxville, TN |
60 |
W19FF-D |
LPTV Station |
| Tulsa, OK |
61 |
KZLL-LD |
LPTV Station |
|
|
KUOC-LD |
LPTV Station |
| Des Moines - Ames, IA |
67 |
KAJR-LD |
LPTV Station |
|
|
KCYM-LD |
LPTV Station |
|
|
KRPG-LD |
LPTV Station |
| Wichita - Hutchinson, KS |
71 |
KFVT-LD |
LPTV Station |
| Flint - Saginaw - Bay City, MI |
72 |
WFFC-LD |
LPTV Station |
|
|
W35DQ-D |
LPTV Station |
| Omaha, NE |
73 |
KAJS-LD |
LPTV Station |
|
|
KQMK-LD |
LPTV Station |
| Springfield, MO |
74 |
KCNH-LD |
LPTV Station |
|
|
KFKY-LD |
LPTV Station |
| Huntsville - Decatur - Florence, AL |
75 |
W34EY-D |
Class A Station |
| Madison, WI |
77 |
W23BW-D |
Class A Station |
|
|
WZCK-LD |
LPTV Station |
| Rochester, NY |
79 |
WGCE-CD |
Class A Station |
| Harlingen - Weslaco - Brownsville - McAllen, TX |
80 |
KAZH-LD |
LPTV Station |
|
|
KNWS-LD |
LPTV Station |
|
|
KRZG-CD |
Class A Station |
| Charleston - Huntington, WV |
82 |
WOCW-LD |
LPTV Station |
| Waco - Temple - Bryan, TX |
83 |
KAXW-LD |
LPTV Station |
|
|
KZCZ-LD |
LPTV Station |
| Savannah, GA |
84 |
WDID-LD |
LPTV Station |
|
|
WUET-LD |
LPTV Station |
| Charleston, SC |
85 |
WBSE-LD |
LPTV Station |
| Chattanooga, TN |
86 |
WYHB-CD |
Class A Station |
| Paducah, KY - Cape Girardeau, MO - Harrisburg, IL |
90 |
W29CI-D |
Class A Station |
| Shreveport, LA |
91 |
K36MU-D |
LPTV Station |
| Champaign - Springfield - Decatur, IL |
92 |
W23EW-D |
LPTV Station |
|
|
WCQA-LD |
LPTV Station |
|
|
WEAE-LD |
LPTV Station |
| Cedar Rapids - Waterloo - Iowa City, IA |
94 |
K17MH-D |
LPTV Station |
|
|
KFKZ-LD |
LPTV Station |
| Baton Rouge, LA |
95 |
K27NB-D |
LPTV Station |
|
|
K29LR-D |
LPTV Station |
| Ft. Smith - Fayetteville - Springdale - Rogers, AR |
96 |
KAJL-LD |
LPTV Station |
|
|
KFLU-LD |
LPTV Station |
| Myrtle Beach - Florence, SC |
97 |
W33DN-D |
LPTV Station |
| Boise, ID |
98 |
K17ED-D |
Class A Station |
|
|
K31FD-D |
Class A Station |
|
|
KBKI-LD |
LPTV Station |
|
|
KFLL-LD |
LPTV Station |
| South Bend - Elkhart, IN |
100 |
KPDS-LD |
LPTV Station |
| Greenville - New Bern - Washington, NC |
102 |
W35DW-D |
LPTV Station |
| Reno, NV |
103 |
K07AAI-D |
LPTV Station |
| Tallahassee, FL - Thomasville, GA |
105 |
W21EL-D |
LPTV Station |
| Tyler - Longview- Nacogdoches, TX |
106 |
KCEB |
Full Power Station |
|
|
KBJE-LD |
LPTV Station |
|
|
KDKJ-LD |
LPTV Station |
|
|
KKPD-LD |
LPTV Station |
|
|
KPKN-LD |
LPTV Station |
| Lincoln - Hastings - Kearney, NE |
107 |
KIUA-LD |
LPTV Station |
| Augusta, GA - Aiken, SC |
108 |
WIEF-LD |
LPTV Station |
| Evansville, IN |
109 |
WDLH-LD |
LPTV Station |
|
|
WEIN-LD |
LPTV Station |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WELW-LD |
LPTV Station |
| Ft. Wayne, IN |
110 |
W30EH-D |
LPTV Station |
|
|
W25FH-D |
LPTV Station |
|
|
WCUH-LD |
LPTV Station |
|
|
WFWC-CD |
Class A Station |
|
|
WODP-LD |
LPTV Station |
| Fargo - Valley City, ND |
113 |
K15MR-D |
LPTV Station |
| Yakima - Pasco - Richland - Kennewick, WA |
114 |
K33EJ-D |
Class A Station |
|
|
K28QK-D |
LPTV Station |
| Traverse City - Cadillac, MI |
116 |
W36FH-D |
LPTV Station |
| Macon, GA |
119 |
W28EU-D |
LPTV Station |
|
|
WJDO-LD |
LPTV Station |
| Eugene, OR |
120 |
K06QR-D |
LPTV Station |
|
|
KORY-CD |
Class A Station |
| Montgomery - Selma, AL |
121 |
WQAP-LD |
LPTV Station |
|
|
WDSF-LD |
LPTV Station |
| Peoria - Bloomington, IL |
122 |
W27EQ-D |
LPTV Station |
| Santa Barbara - San Luis Obispo, CA |
123 |
KDFS-CD |
Class A Station |
|
|
KLDF-CD |
Class A Station |
|
|
KQMM-CD |
Class A Station |
|
|
KSBO-CD |
Class A Station |
|
|
KVMM-CD |
Class A Station |
|
|
KZDF-LD |
LPTV Station |
| Lafayette, LA |
124 |
K21OM-D |
LPTV Station |
| Bakersfield, CA |
125 |
KTLD-CD |
Class A Station |
|
|
KXBF-LD |
LPTV Station |
| Wilmington, NC |
126 |
WQDH-LD |
LPTV Station |
| Columbus, GA - Opelika - Auburn, AL |
127 |
W31EU-D |
LPTV Station |
|
|
W29FD-D |
LPTV Station |
| Monterey - Salinas, CA |
128 |
K09AAF-D |
LPTV Station |
| La Crosse - Eau Claire, WI |
129 |
W23FC-D |
LPTV Station |
| Corpus Christi, TX |
130 |
K21OC-D |
LPTV Station |
|
|
K32OC-D |
LPTV Station |
|
|
KCCX-LD |
LPTV Station |
|
|
KYDF-LD |
LPTV Station |
| Salisbury, MD |
131 |
W35CS-D |
LPTV Station |
| Amarillo, TX |
132 |
KAUO-LD |
LPTV Station |
|
|
KLKW-LD |
LPTV Station |
| Columbia - Jefferson City, MO |
135 |
K35OY-D |
LPTV Station |
| Lubbock, TX |
140 |
K32OV-D |
LPTV Station |
|
|
KNKC-LD |
LPTV Station |
| Topeka, KS |
141 |
K35KX-D |
LPTV Station |
| Palm Springs, CA |
145 |
K21DO-D |
Class A Station |
| Joplin, MO - Pittsburg, KS |
151 |
KPJO-LD |
LPTV Station |
|
|
KRLJ-LD |
LPTV Station |
| Bangor, ME |
156 |
W20ER-D |
LPTV Station |
|
|
W32FS-D |
LPTV Station |
| Biloxi-Gulfport, MS |
158 |
W33EG-D |
LPTV Station |
| Terre Haute, IN |
159 |
W24FB-D |
LPTV Station |
| Jackson, TN |
174 |
WYJJ-LD |
LPTV Station |
| Quincy, IL - Hannibal, MO - Keokuk, IA |
175 |
K14SU-D |
LPTV Station |
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WVDM-LD |
LPTV Station |
| Bowling Green, KY |
180 |
WCZU-LD |
LPTV Station |
| Puerto Rico |
213 |
WOST |
Full Power Station |
|
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WWKQ-LD |
LPTV Station |
|
|
WQQZ-CD |
Class A Station |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W20EJ-D |
LPTV Station |
|
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W27DZ-D |
LPTV Station |
(a) Rankings are based on the relative size of a station’s Designated Market Area ("DMA") among the 210 generally recognized DMAs in the United States.
Broadcast Operations
Broadcasting carries 61 networks on its stations, distributing content across the U.S. Broadcasting provides free OTA programming to television viewing audiences in the communities it serves. The programming Broadcasting distributes includes networks targeting shopping, weather, sports and entertainment programming, as well as religious networks and networks targeting select ethnic groups.
Revenues
Broadcasting generates broadcast station revenue from its operations. Broadcast station revenue is generated primarily from the sale of television airtime in return for a fixed fee or a portion of the third-parties' related ad sales, principally from channel leases and revenue sharing agreements with minimum guarantees included within the contracts. In a typical broadcast station revenue agreement, we, as the owner/licensee of a station, make available, for a fee, airtime on one or multiple of our station subchannel(s) to a third party. The third party broadcasts during that airtime and collects revenue from advertising aired during such content. Broadcast station revenue is recognized over the life of the contract, when the program is broadcast. The fees charged can be fixed or variable, and the contracts that the Company enters into are generally short-term in nature. Variable fees are usage/sales-based and are recognized as revenue when the subsequent usage occurs.
Strategy
Broadcasting’s strategy includes the following initiatives:
•Broadcasting is principally designed to be a nationwide OTA distribution platform, targeting the growing number of OTA households in the U.S.;
•Broadcasting's vision is to capitalize on the opportunities to bring valuable content to more viewers over-the-air and to position itself for the changing media landscape and to take advantage of the technology advances rapidly underway in the industry;
•As of December 31, 2024, 248 operating stations are connected to Broadcasting's cloud-based IP backbone and can be operated and monitored remotely, allowing for substantial cost savings and operating efficiencies. In 2018, Federal Communications Commission ("FCC") deregulation in TV broadcasting eliminated the need for full time employees and studio facilities in markets where Broadcasting operates Full-Power and Class A stations, thus allowing Broadcasting to operate these stations remotely at greater cost efficiency;
•Broadcasting's major focus is to attract the highest quality content providers looking for nationwide distribution. With its national footprint and cloud-based infrastructure, Broadcasting also expects to realize premium pricing for content distribution;
•Broadcasting's growing revenue source is from providing national carriage to content providers. Carriage contracts pricing is in part determined by the signal contour of the broadcast station and the number of OTA TV households in a given market, as well as market supply and demand; and
•Broadcasting's broad portfolio of stations and our redundant coverage in major markets facilitates our ability to explore new revenue streams from other uses of our spectrum without impairing our legacy broadcast revenues. This includes converting technology used by existing stations to new standards such as the Advanced Television Systems Committee's standards ("ATSC 3.0") to explore light housing and datacasting revenue opportunities. Also, it allows us to trial 5G broadcasting to determine the viability of commercial revenues over time.
Competition
Our television stations compete in the U.S. domestic media market for multicast network tenants, viewer audiences and advertisers. In the last several years, there has been increasing competition from not just cable channels but also streaming services, digital platforms, social media, and internet-delivered video channels. These media platforms have taken market share from OTA broadcast stations like ours. Full Power stations delivering OTA multicast networks also represent direct competition in all our markets. Because our stations are mostly LPTVs and Class A stations, our signal coverage of a market is often less than that of Full Power stations, resulting in a competitive advantage for Full Power stations. As a result of improvements in digital compression technology over the last several years, many Full Power stations have increased the number of subchannels that they can lease to OTA multicast networks, resulting in increased competition in many of our markets over the last several years.
Because nearly all our stations are LPTV and Class A, they do not have primary channel “must carry” rights and, therefore, have no signal coverage and carriage on multiple video program distribution ("MVPD") systems. Our lack of MVPD distribution materially affects our television stations’ competitive position in attracting programmers and viewers. Specifically, MVPD systems can increase a broadcasting station’s competition for viewers in a market by providing both cable networks and distant television station signals not otherwise available to the station’s audience. Other sources of competition for audiences, programming and advertisers include streaming services, connected televisions, internet websites, mobile applications and wireless carriers, direct-to-consumer video distribution systems, and home entertainment systems. Recent developments by many companies, including internet streaming service providers and internet website operators, have expanded, and are continuing to expand, the variety and quality of broadcast and non-broadcast video programming available to consumers via the internet. Internet companies have developed business relationships with companies that have traditionally provided syndicated programming, network television and other content. As a result, additional programming has, and is expected to further become, available through non-traditional methods, which can directly impact the number of OTA TV viewers, and, thus, indirectly impact station revenues.
Government Approvals and Regulation
Federal broadcasting industry regulations limit our operating flexibility. The Federal Communications Commission ("FCC") regulates all local television broadcasters, including us. We must obtain FCC approval whenever we (i) apply for a new license; (ii) seek to renew or modify a license; (iii) purchase or sell a broadcast station license; and/or (iv) assign or transfer the control of one of our subsidiaries that holds a license. Our FCC licenses are critical to our operations, and we cannot operate without them. Our FCC licenses must be renewed every eight years. The current television license renewal cycle began in 2020, and all our licenses have been renewed. The weighted-average period prior to the next renewal for FCC licenses was 5.4 years and 6.2 years as of December 31, 2024 and 2023, respectively, after taking into consideration licenses that were successfully renewed shortly after year-end. While we cannot be certain that we will always obtain renewal grants in the future from the FCC, the FCC has historically renewed the Company’s broadcast licenses in substantially all cases. The Company does not believe that the expiration or non-renewal of any of our FCC licenses would have a material adverse effect on the expected future cash flows and profitability.
The FCC can sanction us for programming broadcast on our stations that it finds to be indecent. Over the past several years, the FCC has increased its enforcement efforts regarding broadcast indecency and profanity. Additionally, our Full-Power stations and Class A stations are subject to additional FCC rules regarding the airing of mandatory children’s programming and local content. While we have measures in place to remain compliant, shortfalls in required programming for Full-Power stations and Class A stations may result in financial penalties levied by the FCC or, in worst cases, the loss of license.
Federal legislation and FCC rules have changed significantly in recent years and may continue to change. These changes may affect our ability to conduct our business in ways that we believe would be advantageous and may impact our operating results.
New Broadcast TV Technology: ATSC 3.0
In 2017, the FCC approved the ATSC 3.0, the next generation broadcast standards defining how television signals are broadcast and interpreted ("NextGen TV"). ATSC 3.0 is an enhancement to previous broadcast standards, providing enhanced picture and audio quality, mobility, addressability, increased capacity, and IP connectivity. ATSC 3.0 will offer a platform to merge linear programming and non-TV data services alongside OTA and over-the-top ("OTT"). As the ATSC 3.0 standard provides for a more efficient use of spectrum, this could enable us to provide expanded or additional services to new and existing customers, Among the many emerging opportunities will be hyper-local news, weather, and traffic; dynamic ad insertion; geographic and demographic targeted advertising; customizable content; better measurement and analytics; the ability to share data with devices connected to the Internet; flexibility to add streams as needed; an ultra-high definition picture quality with enhanced immersive audio; and connectivity to automobiles. In addition, ATSC 3.0 will provide new emergency capabilities including advanced alerting functions which can relay evacuation routes and device wake-up features. Many of these features will be available to mobile devices. Currently, Broadcasting is exploring commercial opportunities in datacasting on our platform that may offer incremental revenue opportunities over the next year.
Human Capital
As of December 31, 2024, Broadcasting employed 16 full-time employees and 1 part-time employee across the U.S.
Environmental Regulation and Laws
Our operations and properties, including those of DBMG, are subject to a wide variety of increasingly complex and stringent foreign, federal, state and local environmental laws and regulations, including those concerning emissions into the air, discharge into waterways, generation, storage, handling, treatment and disposal of waste materials and health and safety of employees. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Some environmental laws provide for strict, joint and several liability for remediation of spills and other releases of hazardous substances, as well as damage to natural resources. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. These laws and regulations may also expose us to liability for the conduct of or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such acts were performed.
Compliance with federal, state and local provisions regulating the discharge of materials into the environment or relating to the protection of the environment has not had a material impact on our capital expenditures, earnings or competitive position. Based on our experience to date, we do not currently anticipate any material adverse effect on our business or consolidated financial position, results of operations or cash flows as a result of future compliance with existing environmental laws and regulations. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of existing laws and regulations, may require additional expenditures by us, which may be material. Accordingly, there can be no assurance that we will not incur significant environmental compliance costs in the future.
Corporate Information
INNOVATE, a Delaware corporation, was incorporated in 1994. Our Internet address is www.innovatecorp.com. We make available free of charge through our Internet website our Annual Reports 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 United States Securities and Exchange Commission (the "SEC"). The information on our website is not a part of this Annual Report on Form 10-K. Our reports filed with the SEC may be accessed at the SEC’s website at www.sec.gov.
The information required by this item relating to our executive officers, directors and code of conduct is set forth in Item 10 of this Form 10-K. Information relating to our Audit Committee and Audit Committee Financial Expert will be set forth in our 2025 Proxy Statement under the Caption "Board Committees" and is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Summary of Risk Factors
Investing in our common stock involves a high degree of risk. These risks are discussed more fully below and include, but are not limited to, the following, any of which could have a material adverse effect on our financial condition, results of operations and cash flows:
Risks Related to Our Businesses
•The ability of our subsidiaries to make distributions, our principal source of cash
•Substantial doubt about our ability to continue as a going concern
•Our levels of indebtedness, financing arrangements and other obligations
•Restrictive covenants in our debt and preferred stock instruments
•Ability to meet working capital requirements
•Dependence on key personnel and ability to attract and retain skilled personnel
•Any identified material weaknesses in our internal controls
•Constraints in the labor market and increases in labor costs
•Foreign exchange rate volatility and inflation
•Impact of competition on our business
•Impact of any potential future acquisitions and ability to manage future growth and the incurrence of substantial costs in connection with acquisitions
•Cyber-attacks and other privacy or data security incidents
•Managing growth related to increased operational size
•Ability to fully utilize net operating loss and other tax carryforwards
•Risk of restated financial statements
•Presentation of corporate opportunities by certain current and former directors and officers and the impact of related party transactions
•Our status as a non-investment company
•Impact of potential litigation
•Deterioration of global economic conditions and the impact of operating globally
•Impact of climate change
•Compliance costs related to our acquired businesses
•Ability of our development stage companies to produce revenues or income
•Adverse tax impact of our acquisitions or dispositions
•Lack of sole control in joint venture investments
•Ability to protect our intellectual property
•Potential dilution of our current stockholders
•Effect of future sales of common stock by preferred stockholders
•Common stock price fluctuations
•Prevention of potential takeover due to Delaware law and charter documents
•Activist stockholders
•Adoption of artificial intelligence ("AI") and government regulation
Risks Related to the Infrastructure segment
•Unpredictability in timing of DBMG’s construction contracts and payments thereunder
•Impact of construction contract pricing terms, including fixed-price and cost-plus pricing
•New or increased import tariffs on steel or other materials and the impact of fluctuations in other costs and inflation
•Termination or cancellation of construction projects
•Increased concentration of construction projects in backlog
•Ability to realize revenue value reported in backlog
•Ability to meet contractual schedule or performance requirements
•Modification or termination of government contracts
•Reliability of subcontractors and third-party vendors
•Volatility in the supply and demand for steel and steel components
•Dependability of steel component suppliers and the impact of changes in costs and tariffs
•Intense competition in construction markets
•Ability of customers to receive applicable regulatory and environmental approvals
•Impact of failure to obtain or maintain required licenses
•Impact of bonding and letter of credit capacity
•Variability in liquidity over time
•Exposure to professional liability, product liability, warranty and other claims
•Impact of environmental compliance costs
•Impact of potential litigation
•Union labor disruptions that would interfere with operations
•Ability to maintain safe work environment
Risks related to the Life Sciences segment
•Significant fluctuations in Pansend's operating results
•High levels of competition in the life sciences space, competition in general and competitive developments in the market
•Reliance on third parties for sales, marketing, manufacturing and/or distribution, including delivery service providers
•Risks associated with potential disruptions in our operations
•Lack of significant current and historical operating revenue and risks associated with the implementation of our growth strategy
•Customer demand, patient satisfaction with procedures, and the impact of general economic conditions
•Impact of a failure to obtain or maintain necessary FDA (or foreign equivalent) clearances and approvals
•Risks associated with the misuse by customers, physicians and technicians of Pansend's products
•Inventory management, Pansend's limited manufacturing experience, and our ability to scale, suspend or reduce production based on variations in product demand.
•Competition for skilled technical professional personnel
•Obsolescence of Pansend's products
•Ability of Pansend to effectively protect its intellectual property and the impact of a failure to do so
•Impact of third party intellectual property infringement claims
Risks related to the Spectrum segment
•Effectiveness of our operations in a highly competitive market
•Impact of FCC regulations, including with respect to broadcasting licenses, or Congressional legislation
Risk Factors
The following risk factors and the forward-looking statements elsewhere herein should be read carefully in connection with evaluating the business of the Company and its subsidiaries. A wide range of events and circumstances could materially affect our overall performance, the performance of particular businesses and our results of operations, and therefore, an investment in us is subject to risks and uncertainties. In addition to the important factors affecting specific business operations and the financial results of those operations identified elsewhere in this Annual Report on Form 10-K, the following important factors, among others, could adversely affect our operations. While each risk is described separately below, some of these risks are interrelated, and it is possible that certain risks could trigger the applicability of other risks described below. Also, the risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us, or that are currently deemed immaterial, could also potentially impair our overall performance, the performance of particular businesses and our results of operations. These risk factors may be amended, supplemented or superseded from time to time in filings and reports that we file with the SEC in the future.
Risks Related to Our Businesses
INNOVATE is a holding company, and its only material assets are its cash on hand, equity interests in its operating subsidiaries and its other investments. As a result, INNOVATE’s principal source of cash and cash flow is distributions from its subsidiaries, and its subsidiaries may be limited by law and by contract in making distributions to INNOVATE.
As a holding company, INNOVATE's material assets are its cash and cash equivalents, the equity interests in its subsidiaries and other investments. As of December 31, 2024, the Company had $48.8 million of cash and cash equivalents, excluding restricted cash. On a stand-alone basis, as of December 31, 2024, the Non-Operating Corporate segment had cash and cash equivalents, excluding restricted cash, of $13.8 million.
INNOVATE’s principal source of cash and cash flow is distributions from its subsidiaries. Thus, its ability to service its debt, including the $330.0 million in aggregate principal amount of 8.5% Senior Secured Notes due 2026 (the "2026 Senior Secured Notes"), $48.9 million aggregate principal of 7.50% convertible senior notes due 2026 (the "2026 Convertible Notes"), $31.0 million aggregate principal amount of 16.0% unsecured notes issued to the Continental General Insurance Company ("CGIC") due 2026 (the "CGIC Unsecured Note") and the $20.0 million secured revolving credit agreement (the “Revolving Credit Agreement”), of which $20.0 million was drawn as of December 31, 2024, and to finance future acquisitions, is dependent on the ability of its subsidiaries to generate sufficient net income and cash flows to make upstream cash distributions to INNOVATE. INNOVATE’s subsidiaries are separate legal entities, and although they may be wholly-owned or controlled by INNOVATE, they have no obligation to make any funds available to INNOVATE, whether in the form of loans, dividends, distributions or otherwise. The ability of INNOVATE’s subsidiaries to distribute cash to it is, and will remain subject to, among other things, restrictions that are contained in its subsidiaries’ financing agreements, availability of sufficient funds and applicable state laws and regulatory restrictions. For instance, DBMG is a borrower under credit facilities that restrict their ability to make distributions or loans to INNOVATE. Specifically, DBMG is party to credit agreements that include certain financial covenants that can limit the amount of cash available to make upstream dividend payments to INNOVATE. For additional information, refer to Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".
Claims of creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of INNOVATE’s subsidiaries to distribute dividends or other payments to INNOVATE could be limited in any way, our ability to grow, pursue business opportunities or make acquisitions that could be beneficial to our businesses, or otherwise fund and conduct our business could be materially limited. In addition, if INNOVATE depends on distributions and loans from its subsidiaries to make payments on INNOVATE’s debt, and if such subsidiaries were unable to distribute or loan money to INNOVATE, INNOVATE could default on its debt, which would permit the holders of such debt to accelerate the maturity of the debt which may also accelerate the maturity of other debt of ours with cross-default or cross-acceleration provisions.
To service our indebtedness and other obligations, we will require a significant amount of cash.
Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations, including under our outstanding indebtedness, and our obligations under our outstanding shares of preferred stock, could harm our business, financial condition and results of operations. Our ability to make payments on and to refinance our indebtedness and outstanding preferred stock and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control. For a description of our and our subsidiaries' indebtedness, refer to Note 11. Debt Obligations included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference.
If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us and our subsidiaries to pay our indebtedness or make mandatory redemption payments with respect to our outstanding shares of preferred stock, or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness or redeem the preferred stock, on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on us.
In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness or redeem the preferred stock will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt or financings related to the redemption of our preferred stock could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments or preferred stock may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness or dividend payments on our outstanding shares of preferred stock would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness or otherwise raise capital on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service and other obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations.
Substantial doubt about our ability to continue as a going concern
As of the date of these financial statements, there is substantial doubt about the Company's ability to continue as a going concern within one year after the date that the financial statements are issued. The principal conditions leading to this conclusion are the upcoming maturities of our Corporate Senior Secured Notes, other current debt at Corporate and certain of our subsidiaries as well as from certain cross-default provisions in the Company's Senior Secured Notes. Based on these conditions, the Company may not be able to meet its obligations at maturity and comply with certain cross-default provisions under the Senior Secured Notes over the next twelve months. The Company plans to alleviate these conditions through various initiatives it is currently exploring, including refinancing the debt at Corporate and our subsidiaries, pursuing asset sales, and raising additional capital. However, there can be no assurance that the Company will have the ability to raise additional capital when needed, be successful in any asset sales, or refinance its existing debt, on attractive terms, or at all, nor any assurances that lenders will provide additional extensions, waivers or amendments in the event of future non-compliance with the Company’s debt covenants or other possible events of default. Further, there can be no assurance that the Company will be able to execute a reduction, extension, or refinancing of the debt, or that the terms of any replacement financing would be as favorable as the terms of the debt prior to the maturity date. There can be no assurance that these plans will be successfully implemented or that they will mitigate the conditions that raise substantial doubt about the Company's ability to continue as a going concern. The potential inability to refinance or extend the maturity of the aforementioned current debt, or to obtain additional financing or raise sufficient cash to pay the debt at maturity would have a material adverse effect on our financial condition and likely cause the price of the Company’s common stock to decline.
The agreements governing our indebtedness and Certificates of Designation for our outstanding shares of preferred stock contain various covenants that limit our discretion in the operation of our business and/or require us to meet financial maintenance tests and other covenants. The failure to comply with such tests and covenants could have a material adverse effect on us.
The agreements governing our indebtedness and the Certificates of Designation for our outstanding shares of preferred stock contain, and any of our other future financing agreements may contain, covenants imposing operating and financial restrictions on our businesses.
The indentures governing our outstanding senior secured notes and convertible notes contain, and any future indentures may contain various covenants, including those that restrict our ability to, and, in certain cases, the ability of the Company’s subsidiaries, to, among other things, 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 debt facilities at our subsidiaries contain similar covenants applicable to each respective subsidiary. These covenants may limit our ability to effectively operate our businesses. For example, DBMG has an indemnity agreement with its surety bond provider that also contains covenants on retention of capital requirements for DBMG, which may limit the amount of dividends DBMG may pay to its stockholders.
In addition, the indenture governing our 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") requires that we meet certain financial tests, including a collateral coverage ratio and minimum liquidity test. Our ability to satisfy these tests may be affected by factors and events beyond our control, and we may be unable to meet such tests in the future.
Any failure to comply with the restrictions in the agreements governing our indentures, or any agreement governing other indebtedness we could incur, may result in an event of default under those agreements. Such default may allow the creditors to accelerate the related debt, which acceleration may trigger cross-acceleration or cross-default provisions in other debt. If any of these risks were to occur, our business and operations could be materially and adversely affected. Refer to Footnote 11. Debt Obligations to our Consolidated Financial Statements included in the Annual Report on Form 10-K for additional information.
The Certificates of Designation provide the holders of our preferred stock with consent and voting rights with respect to certain of the matters referred to above, in addition to certain corporate governance rights. These restrictions may interfere with our ability to obtain financings or to engage in other business activities, which could have a material adverse effect on our business and operations.
We have significant indebtedness and other financing arrangements and could incur additional indebtedness and other obligations, which could adversely affect our business and financial condition.
We have a significant amount of indebtedness and outstanding shares of preferred stock. As of December 31, 2024, our total principal amount of outstanding debt was $668.3 million and the accrued value of our outstanding preferred stock had a combined redemption value of $16.1 million and a current fair value of $16.4 million as of December 31, 2024, which is inclusive of the $0.3 million accrued dividend payable on January 15, 2025. We may not generate enough cash flow to satisfy our obligations under such indebtedness and other arrangements. This significant amount of indebtedness poses risks such as risk of inability to repay such indebtedness, as well as:
•increased vulnerability to general adverse economic and industry conditions;
•higher interest expense if interest rates increase on our floating rate borrowings are not effective to mitigate the effects of these increases;
•our 2026 Senior Secured Notes are secured by substantially all of INNOVATE’s assets and those of certain of INNOVATE’s subsidiaries that have guaranteed the 2026 Senior Secured Notes, including certain equity interests in our other subsidiaries and other investments, as well as certain intellectual property and trademarks, and those assets cannot be pledged to secure other financings;
•certain assets of our subsidiaries are pledged to secure their indebtedness, and those assets cannot be pledged to secure other financings;
•our having to divert a significant portion of our cash flow from operations to payments on our indebtedness and other arrangements, thereby reducing the availability of cash to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes;
•limiting our ability to obtain additional financing, on terms we find acceptable, if needed, for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;
•limiting our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate or to take advantage of market opportunities; and
•placing us at a competitive disadvantage compared to our competitors that have less debt and fewer other outstanding obligations.
In addition, it is possible that we may need to incur additional indebtedness or enter into additional financing arrangements in the future in the ordinary course of business. The terms of the Secured Indenture and our subsidiaries’ other financing arrangements allow us to incur additional debt and issue additional shares of preferred stock, subject to certain limitations. If additional indebtedness is incurred or equity is issued, the risks described above could intensify. In addition, our inability to maintain certain leverage ratios could result in acceleration of a portion of our debt obligations and could cause us to be in default if we are unable to repay the accelerated obligations.
We have experienced significant historical, and may experience significant future, operating losses and net losses, which may hinder our ability to meet working capital requirements or service our indebtedness, and we cannot assure you that we will generate sufficient cash flows from operations to meet such requirements or service our indebtedness.
We cannot assure you that we will recognize net income or positive cash flows from operations in future periods. If we cannot generate net income or sufficient operating profitability, we may not be able to meet our working capital requirements or service our indebtedness. Our ability to generate sufficient cash for our operations will depend upon, among other things, the future financial and operating performance of our operating businesses, which will be affected by prevailing economic and related industry conditions and financial, business, regulatory and other factors, many of which are beyond our control. We recognized net loss attributable to INNOVATE of $34.6 million in 2024 and net loss attributable to INNOVATE of $35.2 million in 2023, and we have also incurred net losses in other prior periods.
We cannot assure you that our business will generate cash flow from operations in an amount sufficient to fund our liquidity needs. If our cash flows and capital resources are insufficient, we may be forced to reduce or delay capital expenditures, sell assets and/or seek additional capital or financings. Our ability to obtain future financings will depend on the condition of the capital markets and our financial condition at such time. Any financings could be at high interest rates and may require us to comply with covenants in addition to, or more restrictive than, covenants in our current financing documents, which could further restrict our business operations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such disposition may not be adequate to meet our obligations. For the years ended December 31, 2024 and 2023, we recognized cash flows provided by operating activities of $9.1 million and $26.5 million, respectively.
Loss of our key management or other personnel, including the 2023 unexpected passing of our Chief Executive Officer, President and Director, could adversely impact our business.
We believe that the future success of INNOVATE and its operating subsidiaries is largely dependent and will depend to a significant extent upon the performance, skills, experience and efforts of our senior management and certain other key personnel. If, for any reason, one or more senior executives or key personnel were not to remain active in our Company, our results of operations could be adversely affected.
On July 23, 2023, we announced the unexpected passing of Wayne Barr, our President, Chief Executive Officer ("CEO") and Director. Mr. Barr had served as a director of INNOVATE since January 2014 and as CEO since November 2020. Following Mr. Barr’s death, on July 25, 2023, Paul K. Voigt was named Interim CEO of the Company. Mr. Voigt has served as Senior Managing Director of Investments at Lancer Capital, LLC ("Lancer Capital") since 2019. From 2014 to 2018, Mr. Voigt served as Senior Managing Director of Investments of the Company and was involved with sourcing deals and capital raising for the Company.
The executive management teams that lead our subsidiaries are also highly experienced and possess extensive skills in their relevant industries. The ability to retain key personnel is important to our success and future growth. Competition for these professionals can be intense, and we may not be able to retain and motivate our existing officers and senior employees, and continue to compensate such individuals competitively. The unexpected loss of the services of one or more of these individuals, whether due to competition, distraction caused by personal matters or otherwise, could have a detrimental effect on the financial condition or results of operations of our businesses, and could hinder the ability of such businesses to effectively compete in the various industries in which we operate.
We and our subsidiaries may not be able to attract and/or retain additional skilled personnel.
We may not be able to attract new personnel, including management and technical and sales personnel, necessary for future growth, or replace lost personnel. In particular, the activities of some of our operating subsidiaries require personnel with highly specialized skills. Competition for the best personnel in our businesses can be intense. Our financial condition and results of operations could be materially adversely affected if we are unable to attract and/or retain qualified personnel.
We may identify material weaknesses in our internal control over financial reporting which could adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2024 and 2023, management concluded that our internal control over financial reporting was effective.
In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act of 2002, (the "Sarbanes-Oxley Act") reveals or we otherwise identify one or more material weaknesses or significant deficiencies, the correction of any such material weakness or significant deficiency could require additional remedial measures including additional personnel which could be costly and time-consuming. If a material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures), our management will be unable to report favorably as of such future period year-end to the effectiveness of our internal control over financial reporting. If we are unable to assert that our internal control over financial reporting is effective in any future period, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the trading price of our common stock and potentially subject us to additional and potentially costly litigation and governmental inquiries/investigations.
Overall tightening of the labor market increases in labor costs or any possible labor unrest may adversely affect our business and results of operations.
Our business requires a substantial number of personnel. Any failure to retain stable and dedicated labor by us may lead to disruption to our business operations. Although we have not experienced any labor shortages to date, we have observed an overall tightening and increasingly competitive labor market since 2021. We have experienced, and expect to continue to experience, increases in labor costs due to increases in salary and wages, social benefits and employee headcount. We compete with other companies in our industry and other labor-intensive industries for labor, and we may not be able to offer competitive remuneration and benefits compared to them. If we are unable to manage and control our labor costs, our business, financial condition and results of operations may be materially and adversely affected.
Fluctuations in the exchange rate of the U.S. dollar, foreign currencies and inflation may adversely impact our results of operations and financial condition.
Although the majority of our products are manufactured and sold inside of the United States, we conduct various operations outside the United States. As a result, we face exposure to movements in currency exchange rates. These exposures include but are not limited to:
•re-measurement gains and losses from changes in the value of foreign denominated assets and liabilities;
•translation gains and losses on foreign subsidiary financial results that are translated into U.S. dollars, our functional currency, upon consolidation; and
•planning risk related to changes in exchange rates between the time we prepare our annual and quarterly forecasts and when actual results occur.
Our businesses are also exposed to, among other things, inflation and fuel price increases. Inflationary pressures can result in increased interest rates, fuel, wages, freight and container expenses and other costs which, if they continue for a prolonged period, may adversely affect our results of operations if we are not able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.
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 February 26, 2024, the Company was notified by the New York Stock Exchange ("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”). Pursuant to Section 802.01C, the Company had a period of six months following the receipt of the notice to regain compliance with the minimum share price requirement. On August 27, 2024, subsequent to the Reverse Stock Split, the Company was notified by the NYSE that it had again regained compliance with this listing standard. If the Company's average closing price of the Company's common stock falls below $1.00 per share again and the Company is unable to regain compliance with the $1.00 share price rule within the mandated cure period, the NYSE will initiate procedures to suspend and delist the Common Stock. If the common stock ultimately were to be delisted from the 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.
Because we face significant competition for acquisition and business opportunities, including from numerous companies with a business plan similar to ours, it may be difficult for us to fully execute our business strategy. Additionally, our subsidiaries also operate in highly competitive industries, limiting their ability to gain or maintain their positions in their respective industries.
We expect to encounter intense competition for acquisition and business opportunities from both strategic investors and other entities having a business objective similar to ours, such as private investors (which may be individuals or investment partnerships), blank check companies, and other entities, domestic and international, competing for the type of businesses that we may acquire. Many of these competitors possess greater technical, human and other resources, or more local industry knowledge, or greater access to capital, than we do, and our financial resources may be relatively limited when contrasted with those of many of these competitors. These factors may place us at a competitive disadvantage in successfully completing future acquisitions and investments.
In addition, while we believe that there are numerous target businesses that we could potentially acquire or invest in, our ability to compete with respect to the acquisition of certain target businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing in order to consummate future acquisitions and investment opportunities and cannot assure you that any additional financing will be available to us on acceptable terms, or at all, or that the terms of our existing financing arrangements will not limit our ability to do so. This inherent competitive limitation gives others an advantage in pursuing acquisition and investment opportunities.
Furthermore, our subsidiaries also face competition from both traditional and new market entrants that may adversely affect them as well, as discussed below in the risk factors related to our Infrastructure, Life Sciences and Spectrum segments.
Future acquisitions or business opportunities could involve unknown risks that could harm our business and adversely affect our financial condition and results of operations.
We are a diversified holding company that owns interests in a number of different businesses. We have in the past, and intend in the future, to acquire businesses or make investments, directly or indirectly through our subsidiaries, that involve unknown risks, some of which will be particular to the industry in which the investment or acquisition targets operate, including risks in industries with which we are not familiar or experienced. There can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us or the entities that we may acquire. We may be unable to adequately address the financial, legal and operational risks raised by such investments or acquisitions, especially if we are unfamiliar with the relevant industry, which can lead to significant losses on material investments. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the investments or acquisitions, which could adversely affect our financial condition and liquidity. In addition, our financial condition, results of operations and the ability to service our debt may be adversely impacted depending on the specific risks applicable to any business we invest in or acquire and our ability to address those risks.
We may not be able to successfully integrate acquisitions into our business, or realize the anticipated benefits of these acquisitions.
The integration of acquired businesses into our operations may be a complex and time-consuming process that may not be successful. Even if we successfully integrate these assets into our business and operations, there can be no assurance that we will realize the anticipated benefits and operating synergies. The Company's estimates regarding the earnings, operating cash flow, capital expenditures and liabilities resulting from these acquisitions may prove to be incorrect. For example, with any past or future acquisition, there is the possibility that:
•we may not have implemented company policies, procedures and cultures, in an efficient and effective manner;
•we may not be able to successfully reduce costs, increase advertising revenue or audience share;
•we may fail to retain and integrate employees and key personnel of the acquired business and assets;
•our management may be reassigned from overseeing existing operations by the need to integrate the acquired business;
•we may encounter unforeseen difficulties in extending internal control and financial reporting systems at the newly acquired business;
•we may fail to successfully implement technological integration with the newly acquired business or may exceed the capabilities of our technology infrastructure and applications;
•we may not be able to generate adequate returns;
•we may encounter and fail to address risks or other problems associated with or arising from our reliance on the representations and warranties and related indemnities, if any, provided to us by the sellers of acquired companies and assets;
•we may suffer adverse short-term effects on operating results through increased costs and may incur future impairments of goodwill associated with the acquired business;
•we may be required to increase our leverage and debt service or to assume unexpected liabilities in connection with our acquisitions; and
•we may encounter unforeseen challenges in entering new markets in which we have little or no experience.
The occurrence of any of these events or our inability generally to successfully implement our acquisition and investment strategy would have an adverse effect, which could be material, on our business, financial condition and results of operations.
We rely on information systems to conduct our businesses, and failure to protect these systems against security breaches and otherwise to implement, integrate, upgrade and maintain such systems in working order could have a material adverse effect on our results of operations, cash flows or financial condition.
The efficient operation of our businesses is dependent on computer hardware and software systems. For instance, INNOVATE and its subsidiaries rely on information systems to process customer orders, manage inventory and accounts receivable collections, purchase products, manage accounts payable processes, track costs and operations, maintain client relationships and accumulate financial results. Information technology security threats - from user error to cybersecurity attacks designed to gain unauthorized access to our systems, networks and data - are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats. Cybersecurity attacks could also include attacks targeting sensitive data or the security, integrity and/or reliability of the hardware and software installed in products we use. Additionally, the rapid advancement of AI may give rise to additional cybersecurity vulnerabilities. Through generative AI, potential threats may have new tools to automate and refine attacks or evade detection. We treat such cybersecurity risks seriously given these threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data.
Despite our implementation of industry-accepted security measures and technology, our information systems are vulnerable to and have been subject to cyber-attacks, computer viruses, malicious codes, unauthorized access, phishing efforts, denial-of-service attacks and other cyber-attacks and we expect to be subject to similar attacks in the future as such attacks become more sophisticated and frequent. Although to date, such attacks have not had a material impact on our financial condition, results of operations or liquidity, there can be no assurance that our cybersecurity measures and technology will adequately protect us from these and other risks, including internal and external risks such as natural disasters and power outages and internal risks such as insecure coding and human error. Attacks perpetrated against our information systems could result in loss of assets and critical information, theft of intellectual property or inappropriate disclosure of confidential information and could expose us to remediation costs and reputational damage. The inappropriate disclosure of confidential information or risk of theft of our intellectual property could result from the inappropriate use of AI systems by our employees, personnel, or business partners with access to such information, which could have an adverse effect on our business. In addition, the unexpected or sustained unavailability of the information systems or the failure of these systems to perform as anticipated for any reason, including cybersecurity attacks and other intentional hacking, could subject us to legal claims if there is loss, disclosure or misappropriation of or access to our customers’ information and could result in service interruptions, safety failures, security violations, regulatory compliance failures, an inability to protect information and assets against intruders, sensitive data being lost or manipulated and could otherwise disrupt our businesses and result in decreased performance, operational difficulties and increased costs, any of which could adversely affect our business, results of operations, financial condition or liquidity.
We may increase our operational size in the future, and may experience difficulties in managing growth.
We have adopted a business strategy that contemplates that we will expand our operations, including future acquisitions or other business opportunities, and as a result, we may need to increase our level of corporate functions, which may include hiring additional personnel to perform such functions and enhancing our information technology systems. Any future growth may increase our corporate operating costs and expenses and impose significant added responsibilities on members of our management, including the need to identify, recruit, maintain and integrate additional employees and implement enhanced informational technology systems. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.
We may not be able to fully utilize our net operating loss and other tax carryforwards.
Our ability to utilize our net operating loss ("NOL") and other tax carryforward amounts, such as Code Section 163(j) disallowed interest carryforwards, to reduce taxable income in future years may be limited for various reasons. As a result of the enactment of the Tax Cuts and Jobs Act ("TCJA"), the deduction for NOLs arising in tax years after December 31, 2017, will be limited to 80% of taxable income, although they can be carried forward indefinitely. NOLs that arose prior to the years beginning January 1, 2018 are still subject to the same carryforward periods.
As of December 31, 2024, the U.S. consolidated group had approximately $174.3 million of federal NOL carryforwards and $222.2 million of Code Section 163(j) interest limitation carryforwards available to offset our future taxable income, which NOLs will begin to expire in 2034. Pursuant to the Code Sections 382 and 383, use of our NOLs and certain other tax attributes may be limited by an “ownership change” within the meaning of Code Section 382 and applicable Treasury Regulations. If a corporation undergoes an “ownership change,” which is generally defined as an increase of more than 50% of the value of a corporation’s stock owned by certain “5-percent shareholders” (as such term is defined in Internal Revenue Code Section 382) over a rolling three-year period, the corporation’s ability to use its pre-change NOLs and certain other pre-change tax attributes to offset its post-change income or taxes may be limited.
On August 30, 2021, the Company entered into a Tax Benefits Preservation Plan (the "2021 Preservation Plan"). The 2021 Preservation Plan was intended to help protect the Company's ability to use its tax NOLs and other certain tax assets ("Tax Benefits") by deterring an "ownership change," as defined under the Code, by a person or group of affiliated or associated persons from acquiring beneficial ownership of 4.9% or more of the outstanding common shares. The 2021 Preservation Plan terminated on March 31, 2023, and, on April 1, 2023, the Company entered into a new Tax Benefits Preservation Plan (the “2023 Preservation Plan”). On May 6, 2024, the Company terminated its Tax Benefits Preservation Plan entered into on April 1, 2023 (the “2023 Preservation Plan”) because the Company’s Board of Directors determined that the 2023 Preservation Plan was no longer necessary or desirable for the preservation of the Company’s ability to use its tax net operating losses and other certain tax assets. Refer to Note 16. Equity and Temporary Equity included in the Consolidated Financial Statements of this Annual Report on Form 10-K for additional information on the expired 2023 Preservation Plan, which is incorporated herein by reference.
We may experience ownership changes in the future as a result of subsequent shifts in our common stock ownership, some of which may be outside of our control. If the Company were to experience an ownership change as defined in Code Section 382, its ability to utilize these tax attributes would be substantially limited.
For instance, in 2014, after substantial acquisitions of our common stock were reported by new beneficial owners, and we issued shares of our preferred stock, convertible into our common stock. We conducted a Code Section 382 review. The conclusions of this review indicated that an ownership change had occurred as of May 29, 2014.
Additionally, as a result of our common stock offering in November 2015 and our purchase of GrayWolf in November 2018, we triggered additional ownership changes at GrayWolf, imposing additional limitations on the use of the acquired NOL carryforward amounts. There can be no assurance that future ownership changes would not further negatively impact our NOL carryforward amounts because any future annual Section 382 limitation will ultimately depend on the value of our equity as determined for these purposes and the amount of unrealized gains immediately prior to such ownership change.
We may be required to restate certain of our financial statements in the future, which may lead to additional risks and uncertainties, including stockholder litigation and loss of investor confidence.
The preparation of financial statements in accordance with GAAP involves making estimates, judgments, interpretations and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and income. These estimates, judgments, interpretations and assumptions are often inherently imprecise or uncertain, and any necessary revisions to prior estimates, judgments, interpretations or assumptions could lead to a restatement of our financial statements. Any such restatement or correction may be highly time consuming, may require substantial attention from management and significant accounting costs, may result in adverse regulatory actions by the SEC or NYSE, may result in stockholder litigation, may cause us to fail to meet our reporting obligations, and may cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.
Our officers, directors, stockholders and their respective affiliates may have a pecuniary interest in certain transactions in which we are involved, and may also compete with us.
While we have adopted a code of ethics applicable designed to promote the ethical handling of actual or apparent conflicts of interest, we have not adopted a policy that expressly prohibits our directors, officers, stockholders or affiliates from having an interest in any transaction to which we are a party or in which we have an interest. Additionally, we do not have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. We have in the past engaged in transactions in which such persons have an interest (for example, the 2021 sale of Continental Insurance Group ("CIG") to Continental General Holdings LLC, an entity controlled by Michael Gorzynski, a former director of the Company). Subject to the terms of any applicable covenants in financing arrangements or other agreements, we may from time to time enter into additional transactions in which such persons have an interest. In addition, such parties may have an interest in certain transactions such as strategic partnerships or joint ventures in which we are involved, and may also compete with us.
In the course of their other business activities, certain of our current and future directors and officers may become aware of business and acquisition opportunities that may be appropriate for presentation to us as well as the other entities with which they are affiliated. Such directors and officers are not required to and may therefore not present otherwise attractive business or acquisition opportunities to us.
Certain of our current and future directors and officers may become aware of business and acquisition opportunities which may be appropriate for presentation to us as well as the other entities with which they are or may be affiliated. Due to those directors’ and officers’ affiliations with other entities, they may have obligations to present potential business and acquisition opportunities to those entities, which could cause conflicts of interest. Moreover, as permitted by Delaware law, our Certificate of Incorporation contains a provision that renounces our expectation to certain corporate opportunities that are presented to our current and future directors that serve in capacities with other entities. Accordingly, our directors and officers may not present otherwise attractive business or acquisition opportunities to us of which they may become aware.
We may suffer adverse consequences if we are deemed an investment company and we may incur significant costs to avoid investment company status.
We believe we are not an investment company as defined by the Investment Company Act of 1940, and have operated our business in accordance with such view. If the SEC or a court were to disagree with us, we could be required to register as an investment company. This would subject us to disclosure and accounting rules geared toward investment, rather than operating, companies; limit our ability to borrow money, issue options, issue multiple classes of stock and debt, and engage in transactions with affiliates; and require us to undertake significant costs and expenses to meet the disclosure and other regulatory requirements to which we would be subject as a registered investment company.
We are subject to litigation in respect of which we are unable to accurately assess our level of exposure and which, if adversely determined, may have a material adverse effect on our financial condition and results of operations.
We are currently, and may become in the future, party to legal proceedings that are considered to be either ordinary or routine litigation incidental to our current or prior businesses or not material to our financial position or results of operations. We also are currently, or may become in the future, party to legal proceedings with the potential to be material to our financial position or results of operations. There can be no assurance that we will prevail in any litigation in which we may become involved, or that our insurance coverage will be adequate to cover any potential losses. To the extent that we sustain losses from any pending litigation which are not reserved or otherwise provided for or insured against, our business, results of operations, cash flows and/or financial condition could be materially adversely affected. Refer to Item 3, "Legal Proceedings."
Deterioration of global economic conditions could adversely affect our business.
The global economy and capital and credit markets have experienced exceptional turmoil and upheaval over the past several years. Ongoing concerns about the systemic impact of potential long-term and widespread recession and potentially prolonged economic recovery, volatile energy costs, fluctuating commodity prices and interest rates, volatile exchange rates, geopolitical issues, including the armed conflict in Ukraine and Israel, natural disasters and pandemic illness, instability in credit markets, cost and terms of credit, consumer and business confidence and demand, a changing financial, regulatory and political environment, and substantially increased unemployment rates have all contributed to increased market volatility and diminished expectations for many established and emerging economies, including those in which we operate. Furthermore, austerity measures that certain countries may agree to as part of any debt crisis or disruptions to major financial trading markets may adversely affect world economic conditions and have an adverse impact on our business. These general economic conditions could have a material adverse effect on our cash flow from operations, results of operations and overall financial condition.
The availability, cost and terms of credit also have been and may continue to be adversely affected by illiquid markets and wider credit spreads. Concern about the stability of the markets generally, and the strength of counterparties specifically, has led many lenders and institutional investors to reduce credit to businesses and consumers. These factors have led to a decrease in spending by businesses and consumers over the past several years, and a corresponding slowdown in global infrastructure spending.
Continued uncertainty in the U.S. and international markets and economies and prolonged stagnation in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to access capital markets and obtain capital lease financing to meet liquidity needs.
Climate change may have an impact on our business.
While we seek to mitigate our business risks associated with climate change by establishing robust environmental programs and partnering with organizations who are also focused on mitigating their own climate-related risks, we recognize that there are inherent climate change-related risks wherever business is conducted. While there have been no direct impacts to the financial statements, any of our primary locations could be vulnerable to the adverse effects of climate change, including drought, water scarcity, heat waves, wildfires and resultant air quality impacts and power shutoffs associated with wildfire prevention. Changing market dynamics, global policy developments and the increasing frequency and impact of extreme weather events on critical infrastructure in the U.S. and elsewhere have the potential to disrupt our business, the business of our third-party suppliers and the business of our customers, and may cause us to experience higher attrition, losses and additional costs to maintain or resume operations.
We are subject to risks associated with our international operations.
We operate in international markets, and may in the future consummate additional investments in or acquisitions of foreign businesses. Our international operations are subject to a number of risks, including:
•political conditions and events, including embargo;
•changing regulatory environments;
•outbreaks of pandemic diseases, including new COVID-19 variants, or fear of such outbreaks;
•inflationary pressures;
•restrictive actions by U.S. and foreign governments;
•the imposition of withholding or other taxes on foreign income, new or increased tariffs or restrictions on foreign trade and investment;
•adverse tax consequences;
•limitations on repatriation of earnings and cash;
•currency exchange controls and import/export quotas;
•nationalization, expropriation, asset seizure, blockades and blacklisting;
•limitations in the availability, amount or terms of insurance coverage;
•loss of contract rights and inability to adequately enforce contracts;
•political instability, war and civil disturbances or other risks that may limit or disrupt markets, such as terrorist attacks, piracy and kidnapping;
•fluctuations in currency exchange rates, hard currency shortages and controls on currency exchange that affect demand for our services and our profitability;
•potential noncompliance with a wide variety of anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act of 1977 (the "FCPA"), and similar non-U.S. laws and regulations, including the U.K. Bribery Act 2010 (the "Bribery Act");
•labor strikes and shortages;
•changes in general economic and political conditions;
•adverse changes in foreign laws or regulatory requirements; and
•different liability standards and legal systems that may be less developed and less predictable than those in the United States.
If we are unable to adequately address these risks, we could lose our ability to operate in certain international markets and our business, financial condition or results of operations could be materially adversely affected.
The U.S. Departments of Justice, Commerce, Treasury and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the FCPA, and other federal statutes, sanctions and regulations, including those established by the Office of Foreign Assets Control ("OFAC") and, increasingly, similar or more restrictive foreign laws, rules and regulations. By virtue of these laws and regulations, and under laws and regulations in other jurisdictions, including the European Union and the United Kingdom, we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance.
In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant agencies to continue to increase these activities. A violation of these laws, sanctions or regulations could materially adversely affect our business, financial condition or results of operations.
The Company has compliance policies in place for its employees with respect to FCPA, OFAC, the Bribery Act and similar laws. Our operating subsidiaries also have relevant compliance policies in place for their employees, which are tailored to their operations. However, there can be no assurance that our employees, consultants or agents, or those of our subsidiaries or investees, will not engage in conduct for which we may be held responsible. Violations of the FCPA, the Bribery Act, the rules and regulations established by OFAC and other laws, sanctions or regulations may result in severe criminal or civil penalties, and we may be subject to other liabilities, which could materially adversely affect our business, financial condition or results of operations.
Additionally, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell products, and any negative sentiments towards the United States as a result of such changes, could adversely affect our business. Negative sentiments towards the United States among non-U.S. customers and among non-U.S. employees or prospective employees could adversely affect sales or hiring and retention, respectively.
We face certain risks associated with the acquisition or disposition of businesses and lack of control over certain of our investments.
In pursuing our corporate strategy, we may acquire, dispose of or exit businesses or reorganize existing investments. The success of this strategy is dependent upon our ability to identify appropriate opportunities, negotiate transactions on favorable terms and ultimately complete such transactions.
In the course of our acquisitions, we may not acquire 100% ownership of certain of our operating subsidiaries, or we may face delays in completing certain acquisitions, including in acquiring full ownership of certain of our operating companies. Once we complete acquisitions or reorganizations there can be no assurance that we will realize the anticipated benefits of any transaction, including revenue growth, operational efficiencies or expected synergies. If we fail to recognize some or all of the strategic benefits and synergies expected from a transaction, goodwill and intangible assets may be impaired in future periods. The negotiations associated with the acquisition and disposition of businesses could also disrupt our ongoing business, distract management and employees or increase our expenses.
If we dispose of or otherwise exit certain businesses, there can be no assurance that we will not incur certain disposition related charges, or that we will be able to reduce overhead related to the divested assets.
In the ordinary course of our business, we evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives or that no longer fit with our broader strategy, such as the dispositions of our Clean Energy and Insurance segments in 2021 or the acquisition of Banker Steel by our Infrastructure segment in 2021. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of our strategic objectives, or we may dispose of a business at a price or on terms which are less than we had anticipated. In addition, there is a risk that we sell a business whose subsequent performance exceeds our expectations, in which case our decision would have potentially sacrificed enterprise value.
We also own minority interests in a number of entities, such as MediBeacon, Triple Ring Technologies, Inc. and Scaled Cell, over which we do not exercise, or have only limited, management control, and we are, therefore, unable to direct or manage the business to realize the anticipated benefits that we can achieve through full integration.
Our development stage companies may never produce revenues or income.
We have made investments in and own a majority stake in a number of development stage companies, primarily in our Life Sciences segment. Each of these companies is at an early stage of development and is subject to all business risks associated with a new enterprise, including constraints on their financial and personnel resources, lack of established credit, the need to establish meaningful and beneficial vendor and customer relationships and uncertainties regarding product development and future revenues. We anticipate that many of these companies will continue to incur substantial additional operating losses for at least the next several years and expect their losses to increase as research and development efforts expand. There can be no assurance as to when or whether any of these companies will be able to develop significant sources of revenue or that any of their respective operations will become profitable, even if any of them is able to commercialize any products. As a result, we may not realize any returns on our investments in these companies, which could adversely affect our business, results of operations, financial condition or liquidity.
We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not consummated, which could materially adversely affect subsequent attempts to locate and acquire or invest in another business.
We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments with respect to such transaction will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, business opportunity or financing and capital market transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.
There may be tax consequences associated with our acquisition, investment, holding and disposition of target companies and assets.
We may incur significant taxes in connection with effecting acquisitions of, or investments in, holding, receiving payments from, operating or disposing of target companies and assets. Our decision to make a particular acquisition, sell a particular asset or increase or decrease a particular investment may be based on considerations other than the timing and amount of taxes owed as a result thereof. We may remain liable for certain tax obligations of certain disposed companies, and we may be required to make material payments in connection therewith.
Our participation in any future joint investment could be adversely affected by our lack of sole decision-making authority, our reliance on a partner’s financial condition and disputes between us and the relevant partners.
We have, indirectly through our subsidiaries, formed joint ventures, and may in the future engage in similar joint ventures with third parties. In such circumstances, we may not be in a position to exercise significant decision-making authority if we do not own a substantial majority of the equity interests of such joint venture or otherwise have contractual rights entitling us to exercise such authority. These ventures may involve risks not present were a third party not involved, including the possibility that partners might become insolvent or fail to fund their share of required capital contributions. In addition, partners may have economic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Disputes between us and partners may result in litigation or arbitration that would increase our costs and expenses and divert a substantial amount of management’s time and effort away from our businesses. We may also, in certain circumstances, be liable for the actions of our third-party partners which could have a material adverse effect on us.
We and our subsidiaries rely on trademark, copyright, trade secret, contractual restrictions and patent rights to protect our intellectual property and proprietary rights and if these rights are impaired, then our ability to generate revenue and our competitive position may be harmed.
If we fail to protect our intellectual property rights adequately, including through the improper use of AI by our personnel or business partners, our competitors might gain access to our technology, and our business might be harmed. In addition, defending our intellectual property rights might entail significant expense. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. While we have some U.S. patents and pending U.S. patent applications, we may be unable to obtain patent protection for the technology covered in our patent applications. In addition, our existing patents and any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which we operate. The laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. In addition, some of our operating subsidiaries may use trademarks which have not been registered and may be more difficult to protect.
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel.
We may issue additional shares of common stock or preferred stock, which could dilute the interests of our stockholders and present other risks.
Our certificate of incorporation, as amended, authorizes the issuance of up to 250,000,000 shares of common stock and 20,000,000 shares of preferred stock.
As of December 31, 2024, INNOVATE has 13,410,179 issued and 13,261,379 outstanding shares of its common stock, and 16,125 shares of Series A-3 and Series A-4 preferred stock issued and outstanding. However, our certificate of incorporation authorizes our board of directors, from time to time, subject to limitations prescribed by law and any consent rights granted to holders of outstanding shares of preferred stock, to issue additional shares of preferred stock having rights that are senior to those afforded to the holders of our common stock. We also have reserved shares of common stock for issuance pursuant to our broad-based equity incentive plans, upon exercise of stock options and other equity-based awards granted thereunder, and pursuant to other equity compensation arrangements.
We may issue shares of common stock or additional shares of preferred stock to raise additional capital, such as during the Rights Offering which closed during 2024, to complete a business combination or other acquisition, to capitalize new businesses or new or existing businesses of our operating subsidiaries or pursuant to other employee incentive plans, any of which could dilute the interests of our stockholders and present other risks.
The issuance of additional shares of common stock or preferred stock may, among other things:
•significantly dilute the equity interest and voting power of all other stockholders;
•subordinate the rights of holders of our outstanding common stock and/or preferred stock if preferred stock is issued with rights senior to those afforded to holders of our common stock and/or preferred stock;
•trigger an adjustment to the price at which all or a portion of our outstanding preferred stock converts into our common stock, if such stock is issued at a price lower than the then-applicable conversion price;
•entitle our existing holders of preferred stock to purchase a portion of such issuance to maintain their ownership percentage, subject to certain exceptions;
•call for us to make dividend or other payments not available to the holders of our common stock; and
•cause a change in control of our company if a substantial number of shares of our common stock are issued and/or if additional shares of preferred stock having substantial voting rights are issued.
The issuance of additional shares of common stock or preferred stock, or perceptions in the market that such issuances could occur, may also adversely affect the prevailing market price of our outstanding common stock and impair our ability to raise capital through the sale of additional equity securities.
Conversion of the 2026 Convertible Notes will dilute the ownership interest of existing stockholders, including holders who had previously converted their Convertible Notes, or may otherwise depress the market price of our common stock.
As of December 31, 2024, the holders of our 2026 Convertible Notes had rights to convert their notes into 1,154,857 shares of our common stock. The conversion of some or all of our 2026 Convertible Notes will dilute the ownership interests of existing stockholders. Any sales in the public market of the shares of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the 2026 Convertible Notes may encourage short selling by market participants because the conversion of the notes could be used to satisfy short positions, or anticipated conversion of the notes into shares of our common stock could depress the market price of our common stock.
Future sales of substantial amounts of our common stock by holders of our preferred stock or other significant stockholders may adversely affect the market price of our common stock.
As of December 31, 2024, the holders of our outstanding Series A-3 Preferred Stock and Series A-4 Preferred Stock had certain rights to convert their preferred stock into 549,884 shares of our common stock.
Pursuant to a second amended and restated registration rights agreement, dated January 5, 2015, entered into in connection with the issuance of the preferred stock, we have granted registration rights to the purchasers of our preferred stock and certain of their transferees with respect to INNOVATE common stock held by them and common stock underlying the preferred stock. This registration rights agreement allows these holders, subject to certain conditions, to require us to register the sale of their shares under the federal securities laws. Furthermore, the shares of our common stock held by these holders, as well as other significant stockholders, may be sold into the public market under Rule 144 of the Securities Act of 1933, as amended.
Future sales of substantial amounts of our common stock into the public market whether by holders of the preferred stock, by other holders of substantial amounts of our common stock or by us, or perceptions in the market that such sales could occur, may adversely affect the prevailing market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.
Price fluctuations in our common stock could result from general market and economic conditions and a variety of other factors.
The trading price of our common stock may be highly volatile and could be subject to fluctuations in response to a number of factors beyond our control, including:
•actual or anticipated fluctuations in our results of operations and the performance of our competitors;
•reaction of the market to our announcement of any future acquisitions or investments;
•the public’s reaction to our press releases, our other public announcements and our filings with the SEC;
•changes in general economic conditions;
•outbreaks of pandemic diseases, including coronavirus, or fear of such outbreaks; and
•actions of our equity investors, including sales of our common stock by significant stockholders.
Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover, even if such a transaction would be beneficial to our stockholders.
Some provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These include provisions:
•authorizing a board of directors to issue preferred stock;
•prohibiting cumulative voting in the election of directors;
•limiting the persons who may call special meetings of stockholders;
•prohibiting stockholder actions by written consent;
•creating a classified board of directors pursuant to which our directors are elected for staggered three-year terms;
•permitting the board of directors to increase the size of the board and to fill vacancies;
•requiring a super-majority vote of our stockholders to amend our bylaws and certain provisions of our certificate of incorporation; and
•establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law which limit the right of a corporation to engage in a business combination with a holder of 15 percent or more of the corporation’s outstanding voting securities, or certain affiliated persons.
Although we believe that these charter and bylaw provisions, and provisions of Delaware law, provide an opportunity for the board to assure that our stockholders realize full value for their investment, they could have the effect of delaying or preventing a change of control, even under circumstances that some stockholders may consider beneficial.
Actions of activist stockholders, including a proxy contest, could be disruptive and potentially costly and the possibility that activist stockholders may contest, or seek changes that conflict with, our strategic direction could cause uncertainty about the strategic direction of our business. Such actions may also trigger a change in control under certain agreements to which the Company is party, which could materially and adversely affect our business.
Under certain circumstances arising out of, or related to, certain actions of activist stockholders, including a proxy contest or consent solicitation, a change in a majority of our board of directors may trigger the requirement that we make an offer to redeem our shares of preferred stock at a price per share of preferred stock, equal to the greater of (i) the accrued value of the preferred stock, plus any accrued and unpaid dividends (to the extent not included in the accrued value of preferred stock), and (ii) the value that would be received if the share of preferred stock were converted into common stock, the occurrence of which could materially and adversely affect our business. In such instance, the Company cannot assure stockholders that it would be able to obtain the financing on commercially reasonable terms (if at all) to fund the offer to redeem all of the preferred stock. If any of these risks were to occur, our business, operating results and financial condition could be materially and adversely affected.
Bank failures or other similar events could adversely affect our and our customers' and vendors' liquidity and financial performance.
We maintain domestic cash deposits in Federal Deposit Insurance Corporation ("FDIC") insured banks, in excess of FDIC insurance limits. Bank failures or other similar events could disrupt our access to bank deposits or otherwise adversely impact our liquidity and financial performance. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the U.S. or applicable foreign government in the event of a failure or liquidity crisis.
Our customers and vendors may suffer similar adverse effects from a bank failure. Any resulting adverse effects to our customers could reduce the demand for our services or affect our allowance for doubtful accounts and collectability of accounts receivable. Adverse effects to our vendors could affect our ability to receive the resources and supplies we need for our business. These factors could materially affect our future financial results.
In addition, instability, liquidity constraints or other distress in the financial markets, including the effects of bank failures or similar adverse developments could impair the ability of one or more of the banks participating in our current credit facilities from honoring their commitments. This could have an adverse effect on our business if we were not able to replace those commitments or to locate other sources of liquidity on acceptable terms.
Increased adoption of artificial intelligence and government regulation could create additional costs.
Failure to keep up with the potential increased use of AI by competitors could have adverse effects on our competitiveness in the markets that we operate, and heightened government scrutiny and regulation surrounding AI, including generative AI, could lead to increased or added compliance and regulatory costs.
Risks Related to the Infrastructure segment
DBMG’s business is dependent upon major construction contracts, the unpredictable timing of which may result in significant fluctuations in its cash flow due to the timing of receipt of payment under such contracts.
DBMG’s cash flow is dependent upon obtaining major construction contracts primarily from general contractors and engineering firms responsible for commercial and industrial construction projects, such as high- and low-rise buildings and office complexes, hotels and casinos, convention centers, sports arenas, shopping malls, hospitals, dams, bridges, mines and power plants. The timing of or failure to obtain contracts, delays in awards of contracts, cancellations of contracts, delays in completion of contracts, or failure to obtain timely payment from DBMG’s customers, could result in significant periodic fluctuations in cash flows from DBMG’s operations. In addition, many of DBMG’s contracts require it to satisfy specific progress or performance milestones in order to receive payment from the customer. As a result, DBMG may incur significant costs for engineering, materials, components, equipment, labor or subcontractors prior to receipt of payment from a customer. Such expenditures could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
The nature of DBMG’s primary contracting terms for its contracts, including fixed-price and cost-plus pricing, could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
DBMG’s projects are awarded through a competitive bid process or are obtained through negotiation, but in either case generally using one of two types of contract pricing approaches: fixed-price or cost-plus pricing. Under fixed-price contracts, DBMG performs its services and executes its projects at an established price, subject to adjustment only for change orders approved by the customer, and, as a result, it may benefit from cost savings but be unable to recover any cost overruns. If DBMG does not execute such a contract within cost estimates, it may incur losses or the project may be less profitable than expected. Historically, the majority of DBMG’s contracts have been fixed-price arrangements. The revenue, cost and gross profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:
•failure to properly estimate costs of materials, including steel and steel components, engineering services, equipment, labor or subcontractors;
•costs incurred in connection with modifications to a contract that may be unapproved by the customer as to scope, schedule, and/or price;
•unanticipated technical problems with the structures, equipment or systems we supply;
•unanticipated costs or claims, including costs for project modifications, customer-caused delays, errors or changes in specifications or designs, or contract termination;
•changes in the costs of materials, engineering services, equipment, labor or subcontractors;
•changes in labor conditions, including the availability and productivity of labor;
•productivity and other delays caused by weather conditions;
•failure to engage necessary suppliers or subcontractors, or failure of such suppliers or subcontractors to perform;
•difficulties in obtaining required governmental permits or approvals;
•changes in laws and regulations; and
•changes in general economic conditions.
Under cost-plus contracts, DBMG receives reimbursement for its direct labor and material cost, plus a specified fee in excess thereof, which is typically a fixed rate per hour, an overall fixed fee, or a percentage of total reimbursable costs, up to a maximum amount, which is an arrangement that may protect DBMG against cost overruns. If DBMG is unable to obtain proper reimbursement for all costs incurred due to improper estimates, performance issues, customer disputes, or any of the additional factors noted above for fixed-price contracts, the project may be less profitable than expected.
Generally, DBMG’s contracts and projects vary in length from 1 to 24 months, depending on the size and complexity of the project, project owner demands and other factors. The foregoing risks are exacerbated for projects with longer-term durations because there is an increased risk that the circumstances upon which DBMG based its original estimates will change in a manner that increases costs. In addition, DBMG sometimes bears the risk of delays caused by unexpected conditions or events. To the extent there are future cost increases that DBMG cannot recover from its customers, suppliers or subcontractors, the outcome could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
Furthermore, revenue and gross profit from DBMG’s contracts can be affected by contract incentives or penalties that may not be known or finalized until the later stages of the contract term. Some of DBMG’s contracts provide for the customer’s review of its accounting and cost control systems to verify the completeness and accuracy of the reimbursable costs invoiced. These reviews could result in reductions in reimbursable costs and labor rates previously billed to the customer.
The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts in progress. Due to the various estimates inherent in DBMG’s contract accounting, actual results could differ from those estimates.
DBMG’s billed and unbilled revenue may be exposed to potential risk if a project is terminated or canceled or if DBMG’s customers encounter financial difficulties.
DBMG’s contracts often require it to satisfy or achieve certain milestones in order to receive payment for the work performed. As a result, under these types of arrangements, DBMG may incur significant costs or perform significant amounts of services prior to receipt of payment. If the ultimate customer does not proceed with the completion of the project or if the customer or contractor under which DBMG is a subcontractor defaults on its payment obligations, DBMG may face difficulties in collecting payment of amounts due to it for the costs previously incurred. If DBMG is unable to collect amounts owed to it, this could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
DBMG may be exposed to additional risks as it obtains new significant awards and executes its backlog, including greater backlog concentration in fewer projects, potential cost overruns and increasing requirements for letters of credit, and inability to fully realize the revenue value reported in its backlog, a substantial portion of which is attributable to a relatively small number of large contracts or other commitments, each of which could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
As DBMG obtains new significant project awards, these projects may use larger sums of working capital than other projects, and DBMG’s backlog may become concentrated among a smaller number of customers. At December 31, 2024, DBMG's backlog was $957.2 million, consisting of $793.8 million under contracts or purchase orders and $163.4 million under letters of intent or notices to proceed. Approximately $461.5 million, representing 48.2% of DBMG’s backlog at December 31, 2024, was attributable to five contracts, letters of intent, notices to proceed or purchase orders. If any significant projects such as these currently included in DBMG’s backlog or awarded in the future were to have material cost overruns, or be significantly delayed, modified or canceled, DBMG’s results of operations, cash flows or financial position could be adversely impacted, and backlog could decrease substantially if one or more of these projects terminate or reduce their scope.
Moreover, DBMG may be unable to replace the projects that it executes in its backlog. Additionally, as DBMG converts its significant projects from backlog into active construction, it may face significantly greater requirements for the provision of letters of credit or other forms of credit enhancements which exceed its current credit facilities. We can provide no assurance that DBMG would be able to access such capital and credit as needed or that it would be able to do so on economically attractive terms.
Commitments may be in the form of written contracts, letters of intent, notices to proceed and purchase orders. New awards may also include estimated amounts of work to be performed based on customer communication and historic experience and knowledge of our customers’ intentions. Backlog consists of projects which have either not yet been started or are in progress but are not yet complete. In the latter case, the revenue value reported in backlog is the remaining value associated with work that has not yet been completed, which increases or decreases to reflect modifications in the work to be performed under a given commitment. The revenue projected in DBMG’s backlog may not be realized or, if realized, may not be profitable as a result of poor contract terms or performance.
Due to project terminations, suspensions or changes in project scope and schedule, we cannot predict with certainty when or if DBMG’s backlog will be performed. From time to time, projects are canceled that appeared to have a high certainty of going forward at the time they were recorded as new awards. In the event of a project cancellation, DBMG typically has no contractual right to the total revenue reflected in its backlog. Some of the contracts in DBMG’s backlog provide for cancellation fees or certain reimbursements in the event customers cancel projects. These cancellation fees usually provide for reimbursement of DBMG’s out-of-pocket costs, costs associated with work performed prior to cancellation, and, to varying degrees, a percentage of the profit DBMG would have realized had the contract been completed. Although DBMG may be reimbursed for certain costs, it may be unable to recover all direct costs incurred and may incur additional unrecoverable costs due to the resulting under-utilization of DBMG’s assets.
DBMG’s failure to meet contractual schedule or performance requirements could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
In certain circumstances, DBMG guarantees project completion by a scheduled date or certain performance levels. Failure to meet these schedule or performance requirements could result in a reduction of revenue and additional costs, and these adjustments could exceed projected profit. Project revenue or profit could also be reduced by liquidated damages withheld by customers under contractual penalty provisions, which can be substantial and can accrue on a daily basis. Schedule delays can result in costs exceeding our projections for a particular project. Performance problems for existing and future contracts could cause actual results of operations to differ materially from those previously anticipated and could cause us to suffer damage to our reputation within our industry and our customer base.
DBMG’s government contracts may be subject to modification or termination, which could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
DBMG is a provider of services to U.S. government agencies and is therefore exposed to risks associated with government contracting. Government agencies typically can terminate or modify contracts to which DBMG is a party at their convenience, due to budget constraints or various other reasons. As a result, DBMG’s backlog may be reduced or it may incur a loss if a government agency decides to terminate or modify a contract to which DBMG is a party. DBMG is also subject to audits, including audits of internal control systems, cost reviews and investigations by government contracting oversight agencies. As a result of an audit, the oversight agency may disallow certain costs or withhold a percentage of interim payments. Cost disallowances may result in adjustments to previously reported revenue and may require DBMG to refund a portion of previously collected amounts. In addition, failure to comply with the terms of one or more of our government contracts or government regulations and statutes could result in DBMG being suspended or debarred from future government projects for a significant period of time, possible civil or criminal fines and penalties, the risk of public scrutiny of our performance, and potential harm to DBMG’s reputation, each of which could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition. Other remedies that government agencies may seek for improper activities or performance issues include sanctions such as forfeiture of profit and suspension of payments.
In addition to the risks noted above, legislatures typically appropriate funds on a year-by-year basis, while contract performance may take more than one year. As a result, contracts with government agencies may be only partially funded or may be terminated, and DBMG may not realize all of the potential revenue and profit from those contracts. Appropriations and the timing of payment may be influenced by, among other things, the state of the economy, competing political priorities, curtailments in the use of government contracting firms, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures.
DBMG is exposed to potential risks and uncertainties associated with its reliance on subcontractors and third-party vendors to execute certain projects.
DBMG relies on third-party suppliers, especially suppliers of steel and steel components, and subcontractors to assist in the completion of projects. To the extent these parties cannot execute their portion of the work and are unable to deliver their services, equipment or materials according to the agreed-upon contractual terms, or DBMG cannot engage subcontractors or acquire equipment or materials, DBMG’s ability to complete a project in a timely manner may be impacted. Furthermore, when bidding or negotiating for contracts, DBMG must make estimates of the amounts these third parties will charge for their services, equipment and materials. If the amount DBMG is required to pay for third-party goods and services in an effort to meet its contractual obligations exceeds the amount it has estimated, DBMG could experience project losses or a reduction in estimated profit.
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.
Any increase in the price of, or change in supply and demand for, the steel and steel components that DBMG utilizes to complete projects could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
The prices of the steel and steel components that DBMG utilizes in the course of completing projects are susceptible to price fluctuations due to supply and demand trends, duties and tariffs, energy costs, transportation costs, government regulations, changes in currency exchange rates, price controls, general economic conditions and other unforeseen circumstances. For example, the recent armed conflicts in Ukraine and Israel have resulted in significant uncertainty in the commodities markets. A prolonged conflict and any sanctions or import controls targeting the Russian oil and natural gas industries could lead to sustained increases in energy prices. Although DBMG may attempt to pass on certain of these increased costs to its customers, it may not be able to pass all of these cost increases on to its customers. As a result, DBMG’s margins may be adversely impacted by such cost increases.
In addition, the recently approved increases in steel import tariffs proposed by the U.S. president could lead to significant increases in the cost of steel. Tariffs on components that we or our suppliers import from certain nations that have, or may in the future have, tariffs may adversely affect our profitability unless we are able to exclude such components from the tariffs or we raise prices for our products, which may result in our services and products becoming less attractive relative to services and products offered by our competitors. To the extent that our sales or profitability are negatively affected by any such tariffs or other trade actions, our business and results of operations may be materially adversely affected.
DBMG’s dependence on suppliers of steel and steel components makes it vulnerable to a disruption in the supply of its products.
DBMG purchases a majority of the steel and steel components utilized in the course of completing projects from several domestic and foreign steel producers and suppliers. DBMG generally does not have long-term contracts with its suppliers. An adverse change in any of the following could have a material adverse effect on DBMG’s results of operations or financial condition:
•its ability to identify and develop relationships with qualified suppliers;
•the terms and conditions upon which it purchases products from its suppliers, including applicable exchange rates, transport costs and other costs, its suppliers’ willingness to extend credit to it to finance its inventory purchases and other factors beyond its control;
•financial condition of its suppliers;
•political instability in the countries in which its suppliers are located;
•its ability to import products;
•its suppliers’ noncompliance with applicable laws, trade restrictions and tariffs, including the imposition of or increase in tariffs,
export controls and other trade restrictions;
•its inability to find replacement suppliers in the event of a deterioration of the relationship with current suppliers; or
•its suppliers’ ability to manufacture and deliver products according to its standards of quality on a timely and efficient basis.
Intense competition in the markets DBMG serves could reduce DBMG’s market share and earnings.
The principal geographic and product markets DBMG serves are highly competitive, and this intense competition is expected to continue. DBMG competes with other contractors for commercial, industrial and specialty projects on a local, regional, or national basis. Continued service within these markets requires substantial resources and capital investment in equipment, technology and skilled personnel, and certain of DBMG’s competitors have financial and operating resources greater than DBMG. Competition also places downward pressure on DBMG’s contract prices and margins. Among the principal competitive factors within the industry are price, timeliness of completion of projects, quality, reputation, and the desire of customers to utilize specific contractors with whom they have favorable relationships and prior experience.
While DBMG believes that it maintains a competitive advantage with respect to these factors, failure to continue to do so or to meet other competitive challenges could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
DBMG’s customers’ ability to receive the applicable regulatory and environmental approvals for projects and the timeliness of those approvals could adversely affect DBMG’s business.
The regulatory permitting process for DBMG’s projects requires significant investments of time and money by DBMG’s customers and DBMG. There are no assurances that DBMG’s customers or DBMG will obtain the necessary permits for these projects. Applications for permits may be opposed by governmental entities, individuals or special interest groups, resulting in delays and possible non-issuance of the permits.
DBMG’s failure to obtain or maintain required licenses may adversely affect its business.
DBMG is subject to licensure and holds licenses in each of the states in the United States in which it operates and in certain local jurisdictions within such states. While we believe that DBMG is in material compliance with all contractor licensing requirements in the various jurisdictions in which it operates, the failure to obtain, loss or revocation of any license or the limitation on any of DBMG’s primary services thereunder in any jurisdiction in which it conducts substantial operations could prevent DBMG from conducting further operations in such jurisdiction and have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
Volatility in equity and credit markets could adversely impact DBMG due to its impact on the availability of funding for DBMG’s customers, suppliers and subcontractors.
Some of DBMG’s ultimate customers, suppliers and subcontractors have traditionally accessed commercial financing and capital markets to fund their operations, and the availability of funding from those sources could be adversely impacted by volatile equity or credit markets. The unavailability of financing could lead to the delay or cancellation of projects or the inability of such parties to pay DBMG or provide needed products or services and thereby have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
DBMG’s business may be adversely affected by bonding and letter of credit capacity.
Certain of DBMG’s projects require the support of bid and performance surety bonds or letters of credit. A restriction, reduction, or termination of DBMG’s surety bond agreements or letter of credit facilities could limit its ability to bid on new project opportunities, thereby limiting new awards, or to perform under existing awards.
DBMG is vulnerable to significant fluctuations in its liquidity that may vary substantially over time.
DBMG’s operations could require the utilization of large sums of working capital, sometimes on short notice and sometimes without assurance of recovery of the expenditures. Circumstances or events that could create large cash outflows include losses resulting from fixed-price contracts, environmental liabilities, litigation risks, contract initiation or completion delays, customer payment problems, professional and product liability claims and other unexpected costs. There is no guarantee that DBMG’s facilities will be sufficient to meet DBMG’s liquidity needs or that DBMG will be able to maintain such facilities or obtain any other sources of liquidity on attractive terms, or at all.
DBMG’s projects expose it to potential professional liability, product liability, warranty and other claims.
DBMG’s operations are subject to the usual hazards inherent in providing engineering and construction services for the construction of often large commercial industrial facilities, such as the risk of accidents, fires and explosions. These hazards can cause personal injury and loss of life, business interruptions, property damage and pollution and environmental damage. DBMG may be subject to claims as a result of these hazards. In addition, the failure of any of DBMG’s products to conform to customer specifications could result in warranty claims against it for significant replacement or rework costs, which could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
Although DBMG generally does not accept liability for consequential damages in its contracts, should it be determined liable, it may not be covered by insurance or, if covered, the dollar amount of these liabilities may exceed applicable policy limits. Any catastrophic occurrence in excess of insurance limits at project sites involving DBMG’s products and services could result in significant professional liability, product liability, warranty or other claims against DBMG. Any damages not covered by insurance, in excess of insurance limits or, if covered by insurance, subject to a high deductible, could result in a significant loss for DBMG, which may reduce its profits and cash available for operations. These claims could also make it difficult for DBMG to obtain adequate insurance coverage in the future at a reasonable cost. Additionally, customers or subcontractors that have agreed to indemnify DBMG against such losses may refuse or be unable to pay DBMG.
DBMG may experience increased costs and decreased cash flow due to compliance with environmental laws and regulations, liability for contamination of the environment or related personal injuries.
DBMG is subject to environmental laws and regulations, including those concerning emissions into the air, discharge into waterways, generation, storage, handling, treatment and disposal of waste materials and health and safety.
DBMG’s fabrication business often involves working around and with volatile, toxic and hazardous substances and other highly regulated pollutants, substances or wastes, for which the improper characterization, handling or disposal could constitute violations of U.S. federal, state or local laws and regulations and laws of other countries, and result in criminal and civil liabilities. Environmental laws and regulations generally impose limitations and standards for certain pollutants or waste materials and require DBMG to obtain permits and comply with various other requirements. Governmental authorities may seek to impose fines and penalties on DBMG, or revoke or deny issuance or renewal of operating permits for failure to comply with applicable laws and regulations. DBMG is also exposed to potential liability for personal injury or property damage caused by any release, spill, exposure or other accident involving such pollutants, substances or wastes. In connection with the historical operation of our facilities, substances which currently are or might be considered hazardous may have been used or disposed of at some sites in a manner that may require us to make expenditures for remediation.
The environmental, health and safety laws and regulations to which DBMG is subject are constantly changing, and it is impossible to predict the impact of such laws and regulations on DBMG in the future. We cannot ensure that DBMG’s operations will continue to comply with future laws and regulations or that these laws and regulations will not cause DBMG to incur significant costs or adopt more costly methods of operation.
Additionally, the adoption and implementation of any new regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, DBMG’s customers’ equipment and operations could significantly impact demand for DBMG’s services, particularly among its customers for industrial facilities.
Any expenditures in connection with compliance or remediation efforts or significant reductions in demand for DBMG’s services as a result of the adoption of environmental proposals could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
DBMG is and will likely continue to be involved in litigation that could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
DBMG has been and may be, from time to time, named as a defendant in legal actions claiming damages in connection with fabrication and other products and services DBMG provides and other matters. These are typically claims that arise in the normal course of business, including employment-related claims and contractual disputes or claims for personal injury or property damage which occur in connection with services performed relating to project or construction sites. Contractual disputes normally involve claims relating to the timely completion of projects or other issues concerning fabrication and other products and services DBMG provides. There can be no assurance that any of DBMG’s pending contractual, employment-related personal injury or property damage claims and disputes will not have a material effect on DBMG’s future results of operations, cash flows or financial condition.
Work stoppages, union negotiations and other labor problems could adversely affect DBMG’s business.
A portion of DBMG’s employees are represented by labor unions, and 8.3% of DBMG’s employees are covered under collective bargaining agreements that expire in less than one year, at which time they will be renegotiated. A lengthy strike or other work stoppage at any of its facilities could have a material adverse effect on DBMG’s business. There is inherent risk that ongoing or future negotiations relating to collective bargaining agreements or union representation may not be favorable to DBMG. From time to time, DBMG also has experienced attempts to unionize its non-union facilities. Such efforts can often disrupt or delay work and present risk of labor unrest.
DBMG’s employees work on projects that are inherently dangerous, and a failure to maintain a safe work site could result in significant losses.
DBMG often works on large-scale and complex projects, frequently in geographically remote locations. Such involvement often places DBMG’s employees and others near large equipment, dangerous processes or highly regulated materials. If DBMG or other parties fail to implement appropriate safety procedures for which they are responsible or if such procedures fail, DBMG’s employees or others may suffer injuries. In addition to being subject to state and federal regulations concerning health and safety, many of DBMG’s customers require that it meet certain safety criteria to be eligible to bid on contracts, and some of DBMG’s contract fees or profits are subject to satisfying safety criteria. Unsafe work conditions also have the potential of increasing employee turnover, project costs and operating costs. The failure to comply with safety policies, customer contracts or applicable regulations could subject DBMG to losses and liability and could result in a variety of administrative, civil and criminal enforcement measures.
Risks Related to the Life Sciences segment
Pansend’s operating results may fluctuate significantly, which makes its future operating results difficult to predict and could cause its operating results to fall below expectations.
Pansend’s quarterly and annual operating results may fluctuate significantly, which makes it difficult for Pansend to predict its future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of Pansend’s control and may be difficult to predict, including:
•the timing and cost of, and level of investment in, research, development, and commercialization activities relating to Pansend’s product and product candidates, which may change from time to time;
•the timing of receipt of approvals or clearances for Pansend’s product candidates from regulatory authorities in the U.S. or internationally;
•the timing and status of enrollment for Pansend’s clinical trials; the timing and success or failure of nonclinical studies and clinical trials for Pansend’s product candidates or competing product candidates, or any other change in the competitive landscape of the life sciences industry, including consolidation among Pansend’s competitors or partners;
•coverage and reimbursement policies with respect to Pansend’s product and product candidates, including the degree to which treatments using its products are covered and receive adequate reimbursement from third-party payors, and potential future drugs or devices that compete with its products, and competition in general and competitive developments in the market;
•the cost of manufacturing Pansend’s product, as well as building out its supply chain, which may vary depending on the quantity of production and the terms of Pansend’s agreements with manufacturers;
•expenditures that Pansend may incur to acquire, develop or commercialize additional product candidates and technologies;
•the level of demand for Pansend’s product and any product candidates, if approved or cleared, which may vary significantly over time and may experience seasonal fluctuations in demand;
•litigation, including patent, employment, securities class action, stockholder derivative, general commercial, product liability and other lawsuits or claims;
•changes in geographic, channel or product mix;
•weakness in consumer spending as a result of a slowdown in the global, U.S. or other economies;
•changes in relationships with our customers and distributors, including timing of orders; and
•our inability to scale, suspend or reduce production based on variations in product demand.
To respond to these and other factors, we may make business decisions that adversely affect our operating results such as modifications to our pricing policy, promotions, or operations. Most of our expenses, such as employee compensation, are relatively fixed in the short term. Moreover, expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if our net revenues for a particular period fall below expectations, we may be unable to adjust spending quickly enough to offset any shortfall in net revenues. Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for any one quarter as an indication of future performance.
Pansend operates in a highly competitive market, and may face competition from large, well-established medical technology, device and product manufacturers with significant resources, and may not be able to compete effectively.
The medical technology, medical device, biotechnology, and pharmaceutical industries are characterized by intense and dynamic competition to develop new technologies and proprietary therapies. Pansend faces competition from a number of sources, such as pharmaceutical companies, medical device companies, generic drug companies, biotechnology companies, and academic and research institutions. Pansend may find itself in competition with companies that have competitive advantages over us, such as:
•significantly greater name recognition;
•established relations with healthcare professionals, customers, and third-party payers;
•greater efficacy or better safety profiles;
•established distribution networks;
•additional lines of products, and the ability to offer rebates, higher discounts, or incentives to gain a competitive advantage;
•greater experience in obtaining patents and regulatory approvals for product candidates and other resources;
•greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory approval for products, and marketing approved products; and
•greater financial and human resources for product development, sales and marketing, and patent litigation.
Pansend may also face increased competition in the future as new companies enter Pansend’s markets and as scientific developments surrounding electro-signaling therapeutics continue to accelerate. While Pansend will seek to expand its technological capabilities to remain competitive, research and development by others may render its technology or product candidates obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us. In addition, certain of Pansend’s product candidates may compete with other dermatological products, including over the counter ("OTC") treatments, for a share of some patients’ discretionary budgets and for physicians’ attention within their clinical practices. Even if a generic product or an OTC product is less effective than Pansend’s product candidates, a less effective generic or OTC product may be more quickly adopted by physicians and patients than Pansend’s competing product candidates based upon cost or convenience. As a result, Pansend may not be able to compete effectively against current and potential future competitors or their devices and products.
Pansend may rely on third parties for its sales, marketing, manufacturing and/or distribution, including delivery service providers, and these third parties may not perform satisfactorily. A disruption in the operations of our primary freight carrier or higher shipping costs could cause a decline in our net revenues or a reduction in our earnings.
To be able to commercialize Pansend’s planned products, Pansend may elect to internally develop aspects of sales, marketing, large-scale manufacturing, or distribution, or Pansend may elect to utilize third parties with respect to one or more of these items. Pansend’s reliance on these third parties may reduce its control over these activities; however, reliance on third parties does not relieve Pansend of its responsibility to ensure compliance with all required legal, regulatory, and scientific standards. Any failure of these third parties to perform satisfactorily and in compliance with relevant laws and regulations could lead to delays in the development of Pansend’s planned products, including delays in its clinical trials, or failure to obtain regulatory approval for its planned products, or failure to successfully commercialize its planned products or other future products. Some of these events could be the basis for FDA or other regulatory action, including injunction, recall, seizure, or total or partial suspension of production.
R2 Technologies depends heavily on contracted third-party delivery service providers to deliver our products to our providers and customers. Interruptions to or failures in these delivery services could prevent the timely or successful delivery of our products. These interruptions or failures may be due to unforeseen events that are beyond our control or the control of our third-party delivery service providers, such as inclement weather, natural disasters or labor unrest, among others. If our products are not delivered on time or are delivered in a damaged state, providers and customers may refuse to accept our products and have less confidence in our services, which could negatively impact our relationships with our customers and distributors, business, financial condition and results of operations.
We are dependent on commercial freight carriers to deliver our products within the United States. If the operations of these carriers are disrupted for any reason, we may be unable to timely deliver our products to our customers. If we cannot deliver our products on time and cost effectively, our customers may choose competitive offerings causing our net revenues and gross margins to decline. In a rising fuel cost environment, our freight costs will increase. If freight costs materially increase and we are unable to pass that increase along to our customers for any reason or otherwise offset such increases in costs, our gross margin and financial results could be adversely affected.
A disruption in our operations could materially and adversely affect our business.
As a company engaged in distribution, our operations, including those of our third-party suppliers and delivery service providers, are subject to the risks inherent in such activities, including industrial accidents, supply chain disruptions, macroeconomic issues, environmental events, strikes and other labor disputes, disruptions in information systems, product quality control, safety, licensing requirements and other regulatory issues, changes in laws and regulatory requirements, as well as natural disasters, pandemics (such as the COVID-19 pandemic), border disputes, political crises, and other external factors over which we and our third-party suppliers, brokers and delivery service providers may have no control. Our ability to meet the needs of our consumers depends on the proper operation of our distribution facilities, where most of our inventory that is not in transit is housed. The loss of, or damage to, the manufacturing facilities or distribution centers of our third-party suppliers and delivery service providers could materially and adversely affect our business, financial condition and results of operations. Our insurance coverage may not be sufficient to cover the full extent of any loss or damage to our manufacturing facilities or distribution centers, and any loss, damage of or disruption to those facilities, or loss or damage of the inventory stored there, could materially and adversely affect our business, financial condition and results of operations.
Pansend currently has not generated significant product revenue and may never become profitable.
To date, Pansend has not generated significant revenue and has historically relied on financing from the sale of equity securities and issuances of additional debt to fund its operations. We expect that Pansend’s future financial results will depend primarily on its success in launching, selling, and supporting its therapies and treatments, including R2 Technologies' Glacial systems or other products based on Pansend’s technology. Pansend expects to expend significant resources on hiring of personnel, continued scientific and product research and development, potential product testing and pre-clinical and clinical investigation, intellectual property development and prosecution, marketing and promotion, capital expenditures, working capital, general and administrative expenses, and fees and expenses associated with Pansend’s capital raising efforts. Pansend is expected to incur costs and expenses related to consulting costs, laboratory development costs, hiring of scientists, engineers, sales representatives, and other operational personnel, and the continued development of relationships with potential partners. Pansend is incurring significant operating losses, and is expected to continue to incur additional losses for the foreseeable future, and we cannot assure you that it will generate significant revenue or be profitable in the future. There are no assurances that Pansend’s future products will be cleared or approved or become commercially viable or accepted for use. Even with commercially viable applications of Pansend’s technology, which may include licensing, Pansend may never recover its research and development expenses. Investment in medical technology is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product will fail to demonstrate adequate efficacy or clinical utility. Investors should evaluate an investment in Pansend in light of the uncertainties encountered by developing medical technology companies and life sciences companies in a competitive environment. There can be no assurance that Pansend’s efforts will be successful or that it will ultimately be able to achieve profitability. Even if Pansend achieves profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis.
We may not be able to successfully implement our growth strategy and we may be unable to grow our business effectively or efficiently, which would harm our business, financial condition and results of operations.
Our future growth, profitability and cash flows depend upon our ability to successfully implement our business strategy, which, in turn, is dependent upon a number of key initiatives, including our ability to: drive demand in the brand; invest in our providers; and improve productivity in our retailers, U.S. medical spa facilities and U.S. spa facilities.
There can be no assurance that we can successfully achieve any or all of the above initiatives in the manner or time period that we expect. Further, achieving these objectives will require investments that may result in short-term cost increases with net sales materializing on a longer-term horizon and therefore may be dilutive to earnings. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations.
Growing our business will place a strain on our management team, financial and information systems, supply chain and distribution capacity and other resources. To manage growth effectively, we must continue to: enhance our operational, financial and management systems, including warehouse management and inventory control; maintain and improve internal controls and disclosure controls and procedures; maintain and improve information technology systems and procedures; and expand, train and manage our employee base. We may not be able to effectively manage our expansion in any one or more of these areas, and any failure to do so could significantly harm our business, financial condition and results of operations. Growing our business may make it difficult for us to adequately predict the expenditures we will need to make in the future. If we do not make the necessary overhead expenditures to accommodate our future growth, we may be unsuccessful in executing our growth strategy and our results of operations could suffer.
R2 Technologies' success depends upon customer demand and patient satisfaction with its procedures.
R2 Technologies’ procedures are elective aesthetic procedures, the cost of which must be borne by the patient and is generally not covered by or reimbursable through government or private health insurance. In order to generate repeat and referral business, patients must be satisfied with the effectiveness of the procedures conducted using R2’s systems. The decision to undergo one of R2’s procedures is, thus, driven by patient demand, which may be influenced by a number of factors, such as:
•the success of R2’s sales and marketing programs;
•the extent to which R2’s physician customers recommend its procedures to their patients;
•the extent to which R2 Technologies’ procedures satisfy patient expectations;
•R2 Technologies’ ability to properly train its physician customers in the use of its systems so that their patients do not experience excessive discomfort during treatment or adverse side effects;
•the cost, safety, and effectiveness of R2 Technologies’ systems versus other aesthetic treatments;
•consumer sentiment about the benefits and risks of aesthetic procedures generally and R2 Technologies’ systems in particular;
•the success of any direct-to-consumer marketing efforts R2 Technologies may initiate; and
•general consumer confidence, which may be impacted by economic and political conditions outside of R2 Technologies’s control.
R2 Technologies’ financial performance will be negatively impacted in the event it cannot generate significant patient demand for procedures performed with its systems.
Demand for our products may not increase as rapidly as we anticipate due to a variety of factors, including a weakness in general economic conditions and resistance to non-traditional treatment methods.
Consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, consumer confidence and consumer perception of economic conditions. A general slowdown in the U.S. economy and certain international economies or an uncertain economic outlook could adversely affect consumer spending habits which may, among other things, result in reduced patient traffic in dermatology or internal medicine offices and in medical spa facilities and spa facilities, a reduction in consumer spending on elective, non-urgent or higher value treatments, such as those offered by our providers, or a reduction in the demand for aesthetic services generally, each of which could have a material adverse effect on our sales and operating results. Weakness in the global economy results in a challenging environment for selling aesthetic technologies and doctors or estheticians may postpone investments in capital equipment, such as our Glacial systems. Increased market acceptance of our products and treatments will depend in part upon the recommendations of medical and aesthetics professionals, as well as other factors including effectiveness, safety, ease of use, reliability, aesthetics and price compared to competing products and treatment methods.
Pansend’s failure to obtain or maintain necessary FDA clearances and approvals, or to maintain continued clearances, or equivalents thereof in the U.S. and relevant foreign markets, could hurt its ability to distribute and market its products.
In both Pansend’s U.S. and foreign markets, Pansend is affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the U.S. and at analogous levels of government in foreign jurisdictions. In addition, the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of Pansend’s products are subject to extensive regulation by various federal agencies, including, but not limited to, the FDA and the FTC, State Attorneys General in the U.S., as well as by various other federal, state, local and international regulatory authorities in the countries in which Pansend’s products are manufactured, distributed or sold. If Pansend or its manufacturers fail to comply with those regulations, Pansend could become subject to significant penalties or claims, which could harm its results of operations or its ability to conduct its business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketing of its products, resulting in significant loss of net sales.
Pansend’s failure to comply with federal or state regulations, or with regulations in foreign markets that cover its product claims and advertising, including direct claims and advertising by us, may result in enforcement actions and imposition of penalties or otherwise harm the distribution and sale of its products. Each medical device that Pansend wishes to market in the U.S. must first receive either 510(k) clearance or premarket approval ("PMA") from the FDA unless an exemption applies. Either process can be lengthy and expensive. The FDA's 510(k) clearance process may take from three to twelve months, or longer, and may or may not require human clinical data. The PMA process is much more costly and lengthy. It may take from eleven months to three years, or even longer, and will likely require significant supporting human clinical data. Delays in obtaining regulatory clearance or approval could adversely affect Pansend’s revenues and profitability.
R2 Technologies has obtained 510(k) clearances for its Glacial Rx system for various uses, including, but not limited to: the removal of benign lesions of the skin; the use of cooling technologies intended for the temporary reduction of pain; swelling; inflammation; hematoma for minor surgical procedures; general dermabrasion; scar revision; acne scar revision; tattoo removal; and minimization of pain, inflammation and thermal injury during laser and dermatological treatments. However, these approvals and clearances may be subject to revocation if post- marketing data demonstrates safety issues or lack of effectiveness. Many medical devices, such as medical lasers, are also regulated by the FDA as “electronic products.” In general, manufacturers and marketers of “electronic products” are subject to certain FDA regulatory requirements intended to ensure the radiological safety of the products. These requirements include, but are not limited to, filing certain reports with the FDA about the products and defects/safety issues related to the products as well as complying with radiological performance standards.
The medical device industry is now experiencing greater scrutiny and regulation by federal, state and foreign governmental authorities. Companies in the life sciences industry are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices, and product quality management. Such reviews and investigations may result in civil and criminal proceedings; the imposition of substantial fines and penalties; the receipt of warning letters, untitled letters, demands for recalls or the seizure of Pansend’s products; the requirement to enter into corporate integrity agreements, stipulated judgments or other administrative remedies, and result in Pansend’s incurring substantial unanticipated costs and the diversion of key personnel and management’s attention from their regular duties, any of which may have an adverse effect on Pansend’s financial condition, results of operations and liquidity, and may result in greater and continuing governmental scrutiny of Pansend’s business in the future.
Additionally, federal, state and foreign governments and entities have enacted laws and issued regulations and other standards requiring increased visibility and transparency of Pansend’s interactions with healthcare providers. For example, the U.S. Physician Payment Sunshine Act, now known as Open Payments, requires Pansend to report to the Centers for Medicare & Medicaid Services, or CMS, payments and other transfers of value to all U.S. physicians and U.S. teaching hospitals, with the reported information made publicly available on a searchable website. Failure to comply with these legal and regulatory requirements could impact Pansend’s business, and it has had and will continue to spend substantial time and financial resources to develop and implement enhanced structures, policies, systems and processes to comply with these legal and regulatory requirements, which may also impact Pansend’s business and which could have a material adverse effect on its business, financial condition, and results of operations.
International regulatory approval processes may take more or less time than the FDA clearance or approval process. If Pansend fails to comply with applicable FDA and comparable non-U.S. regulatory requirements, it may not receive regulatory clearances or approvals or may be subject to FDA or comparable non-U.S. enforcement actions. Pansend may be unable to obtain future regulatory clearance or approval in a timely manner, or at all, especially if existing regulations are changed or new regulations are adopted. For example, the FDA clearance or approval process can take longer than anticipated due to requests for additional clinical data and changes in regulatory requirements. A failure or delay in obtaining necessary regulatory clearances or approvals would materially adversely affect Pansend’s business, financial condition, and results of operations. Further, more stringent regulatory requirements or safety and quality standards may be issued in the future with an adverse effect on Pansend’s business.
Pansend’s customers, or physicians, aestheticians and technicians, as the case may be, may misuse certain of its products, and product liability lawsuits and other damages imposed on Pansend may have a material adverse impact on its business.
Pansend faces an inherent risk of product liability as a result of the marketing and sale of its products. For example, Pansend may be sued if its products cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or breach of warranty. Pansend’s products are highly complex, and some are used to treat delicate skin conditions on and near a patient's face. In addition, the clinical testing, manufacturing, marketing and use of certain of Pansend’s products and procedures may also expose Pansend to product liability, FDA regulatory and/or legal actions, or other claims. If a physician elects to apply an off-label use and the use leads to injury, Pansend may be involved in costly litigation. In addition, the fact that Pansend trains technicians whom it does not supervise in the use of the Glacial Rx system during patient treatment may expose Pansend to third-party claims if it is accused of providing inadequate training. Pansend may also be subject to claims against it even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, Pansend relies on physicians in connection with the use of its products on patients. If these physicians are not properly trained or are negligent, the capabilities and safety features of Pansend’s products may be diminished or the patient may suffer critical injury. Pansend may also be subject to claims that are caused by the actions of Pansend’s suppliers, such as those who provide it with components and sub-assemblies. A product liability claim or product recall may result in losses that could result in the FDA taking legal or regulatory enforcement action against Pansend and/or Pansend’s products including recall, and could have a material adverse effect upon Pansend’s business, financial condition and results of operations.
If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.
Our business requires us to manage inventory effectively. We depend on our forecasts of demand for, and popularity of, various products to make purchase decisions and to manage our inventory of stock-keeping units. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, rapid changes in product pricing, product defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products, competitors’ product launches, and other factors, and our consumers may not purchase products in the quantities that we expect. It may be difficult to accurately forecast demand and determine appropriate levels of product or componentry. If we fail to manage our inventory effectively we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and results of operations.
Pansend has limited experience in manufacturing its products in large-scale commercial quantities and may face manufacturing risks , including an inability to scale, suspend or reduce production based on variations in product demand, that may adversely affect its ability to manufacture products and could reduce its gross margins and negatively affect its business and operating results.
Pansend’s success depends, in part, on its ability to manufacture its current and future products in sufficient quantities and on a timely basis to meet demand, while adhering to product quality standards, complying with regulatory quality system requirements and managing manufacturing costs. For example, R2 Technologies' third-party contract manufacturer has a manufacturing facility located in Sunnyvale, California where they produce, package and warehouse the Glacial Rx, Glacial fx and Glacial Spa systems. R2 Technologies also relies on a global third-party manufacturer for production of some of the components used in the Glacial Rx and Glacial fx/Spa systems. If R2 Technologies' facility, or the facilities of its third-party contract manufacturers, suffer damage, or a force majeure event, this could materially impact R2 Technologies' ability to operate.
Pansend is also subject to other risks relating to its manufacturing capabilities, including:
•quality and reliability of components, sub-assemblies and materials that Pansend sources from third-party suppliers, who are required to meet Pansend’s quality specifications, some of whom are Pansend’s single-source suppliers for the products they supply;
•failure to secure raw materials, components and materials in a timely manner, in sufficient quantities or on commercially reasonable terms;
•inability to secure raw materials, components and materials of sufficient quality to meet the exacting needs of medical device manufacturing;
•failure to maintain compliance with quality system requirements or pass regulatory quality inspections;
•inability to increase, suspend or reduce production capacity or volumes to meet demand; and
•inability to design or modify production processes to enable Pansend to produce future products efficiently or implement changes in current products in response to design or regulatory requirements.
These risks could be exacerbated by Pansend’s limited experience as an entity with large-scale commercial manufacturing. As demand for Pansend’s products increases, Pansend will have to invest additional resources to purchase raw materials and components, sub-assemblies and materials, hire and train employees and enhance Pansend’s manufacturing processes. If Pansend fails to increase Pansend’s production capacity efficiently to meet demand for its products, it may not be able to fill customer orders on a timely basis, its sales may not increase in line with Pansend’s expectations and Pansend’s operating margins could fluctuate or decline. It may not be possible for Pansend to manufacture Pansend’s products at a cost or in quantities sufficient to make these products commercially viable or to maintain current operating margins, all of which could have a material adverse effect on Pansend’s business, financial condition and results of operations.
There is a limited talent pool of experienced professionals in the life sciences industry. If Pansend is not able to retain and recruit personnel with the requisite technical skills, it may be unable to successfully execute Pansend’s business strategy.
The specialized nature of Pansend’s industry results in an inherent scarcity of experienced personnel in the field. Pansend’s future success depends upon Pansend’s ability to attract and retain highly skilled personnel, including scientific, technical, commercial, business, regulatory and administrative personnel, necessary to support Pansend’s anticipated growth, develop Pansend’s business and perform certain contractual obligations. Given the scarcity of professionals with the scientific knowledge that Pansend requires and the competition for qualified personnel among life sciences businesses, Pansend may not succeed in attracting or retaining the personnel Pansend requires to continue and grow its operations.
Rapidly changing technology in life sciences could make the products Pansend is developing obsolete.
The life sciences industries are characterized by rapid and significant technological changes, frequent new product introductions and enhancements, and evolving industry standards. Pansend’s future success will depend on Pansend’s ability to continually develop and then improve the products that Pansend designs and to develop and introduce new products that address the evolving needs of Pansend’s customers on a timely and cost- effective basis. Pansend also will need to pursue new market opportunities that develop as a result of technological and scientific advances. These new market opportunities may be outside the scope of Pansend’s proven expertise or in areas which have unproven market demand. Any new products developed by Pansend may not be accepted in the intended markets. Pansend’s inability to gain market acceptance of new products could harm Pansend’s future operating results.
If Pansend is unable to effectively protect its intellectual property, it may not be able to operate its business, and third parties may be able to use and profit from its technology, both of which would impair Pansend’s ability to be competitive.
Pansend’s success will be heavily dependent on its ability to obtain and maintain meaningful patent protection for Pansend’s technologies and products throughout the world. Patent law relating to the scope of claims in the technology fields in which Pansend will operate is still evolving. The amount of ongoing protection for Pansend’s proprietary rights, therefore, is uncertain. Pansend will rely on patents to protect a significant part of Pansend’s intellectual property and to enhance Pansend’s competitive position. However, Pansend’s pending or future patent applications may be denied, and any patent previously issued to Pansend or Pansend’s subsidiaries may be challenged, invalidated, held unenforceable or circumvented. In particular, R2 Technologies filed a patent application with the U.S. Patent and Trademark Office for a commercial patent that covers the Glacial Rx System, U.S. Patent No. 9522031 through 2029, with additional issued patents or patent applications that, once allowed, will protect coverage through 2042. Furthermore, the patent protections Pansend has been granted may not be broad enough to prevent competitors from producing products similar to Pansend's. In addition, the laws of various foreign countries in which Pansend may compete, such as China, may not protect Pansend’s intellectual property to the same extent as the laws of the United States. If Pansend fails to obtain adequate patent protection for Pansend’s proprietary technology, Pansend’s ability to be commercially competitive will be materially impaired. In the ordinary course of business and as appropriate, Pansend intends to apply for additional patents covering both Pansend’s technologies and products, as it deems appropriate. Pansend’s existing patents and any future patents it obtains may not be sufficiently broad to prevent others from making use of technologies or developing competing products and technologies. In addition, because patent law is evolving in the life sciences industry, the patent positions of companies like ours are uncertain. As a result, the validity and enforceability of Pansend’s patents cannot be predicted with certainty.
If third parties make claims of intellectual property infringement against Pansend, or otherwise seek to establish their intellectual property rights equal or superior to Pansend’s, it may have to spend time and money in response and potentially discontinue certain of Pansend’s operations.
While Pansend currently does not believe it to be the case, third parties may claim that Pansend is employing their proprietary technology without authorization or that Pansend is infringing on their patents. If such claims were made, Pansend could incur substantial costs coupled with diversion of Pansend’s management and key technical personnel in defending against these claims. Furthermore, parties making claims against Pansend may be able to obtain injunctive or other equitable relief which could effectively halt Pansend’s ability to further develop, commercialize and sell products. In the event of a successful claim of infringement, courts may order Pansend to pay damages and obtain one or more licenses from third parties. Pansend may not be able to obtain these licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any of these licenses could prevent Pansend from commercializing available products and have a material negative effect on Pansend’s business.
Therapies targeted by Scaled Cell represent a novel approach toward treatment of certain diseases. Increased regulatory scrutiny or negative perception of certain therapies or treatments could adversely affect our business. Patients receiving CAR-T therapies or other treatment may experience severe adverse events, which may affect clinical development, regulatory approval, and public perception.
Scaled Cell is currently targeting chimeric antigen receptor CAR-T cell therapy which uses immune cells called T cells that are genetically altered in a lab to enable them in locating and destroying cancer cells more effectively. Cellular therapies like CAR-T remain novel, have caused severe side effects, including death, and may not gain widespread acceptance by the public or the medical community. Additionally, adverse events in clinical trials of Scaled Cell candidates or in other companies’ clinical trials could result in a decrease in demand for products developed by Scaled Cell. Advancing CAR-T therapy creates other challenges, including those related to the manufacture, sourcing, licensing, education, and regulation of such therapies. Additionally, responses by the FDA or other federal and state agencies to negative public perception or ethical concerns could result in increased regulation or legislation of CAR-T therapies.
Certain product candidates of Scaled Cell may have serious and potentially fatal consequences. Developments of similarly designed therapies have experienced events related to neurotoxicity and cytokine release syndrome (CRS). There is a possibility that Scaled Cell could have similarly life threatening or serious adverse side effects.
Risks related to the Spectrum segment
Our broadcasting business operates in highly competitive markets and our ability to maintain market share and generate operating revenues depends on how effectively we compete with existing and new competition.
Spectrum's broadcast stations compete for audiences and advertising revenue with other broadcast stations as well as with other media such as the Internet and radio. Broadcasting also faces competition from (i) local free OTA broadcast television and radio stations; (ii) telecommunication companies; (iii) cable and satellite system operators and cable networks; (iv) print media providers such as newspapers, direct mail and periodicals; (v) internet search engines, internet service providers, websites, and mobile applications; (vi) viewers moving to programming alternatives and alternate media content providers, a process known as "cord cutting"; and (vii) other emerging technologies including mobile television. Some of Broadcasting's current and potential competitors have greater financial and other resources than Broadcasting does and so may be better placed to extend audience reach and expand programming. Many of Broadcasting’s competitors possess greater access to capital, and its financial resources may be relatively limited when contrasted with those of such competitors. If Broadcasting needs to obtain additional funding, Broadcasting may be unable to raise such capital or, if Broadcasting is able to obtain capital it may be on unfavorable terms. If Broadcasting is unable to obtain additional funding as and when needed, it could be forced to delay its development, marketing and expansion efforts and, if it continues to experience losses, potentially cease operations.
In addition, broadcast consumers’ desire for control over their viewing experience and the methods by which they consume content continue to evolve rapidly. Consumers are also increasingly using services with time-shifting or advertisement-skipping capability, or with reduced or no advertising at all. These shifts in consumer behavior create challenges with respect to maintaining predictable broadcasting revenue, and substantial adoption of alternative technologies could negatively affect our overall broadcasting business. Also, a slowing adoption of the ATSC 3.0 standards, as well as potential barriers related to an industry shift to next-generation telecommunications technologies, such as 5G and datacasting may lead to an unpredictable landscape for the broadcasting industry.
Cable companies and others have developed national advertising networks in recent years that increase the competition for national advertising. Over the past decade, cable television programming services, other emerging video distribution platforms and the Internet have captured increasing market share. Cable providers, direct broadcast satellite companies and telecommunication companies are developing new technology that allows them to transmit more channels on their existing equipment to highly targeted audiences, reducing the cost of creating channels and potentially leading to the division of the television industry into ever more specialized niche markets. The decreased cost of creating channels may also encourage new competitors to enter Broadcasting's markets and compete with us for advertising revenue. In addition, technologies that allow viewers to digitally record, store and play back television programming may decrease viewership of commercials as recorded by media measurement services and, as a result, lower Spectrum's advertising revenues. Furthermore, technological advancements and the resulting increase in programming alternatives, such as cable television, direct broadcast satellite systems, pay-per-view, home video and entertainment systems, video-on-demand, mobile video and the Internet have also created new types of competition to television broadcast stations and will increase competition for household audiences and advertisers. We cannot provide any assurances that we will remain competitive with these developing technologies and our inability to successfully respond to new and growing sources of competition in the broadcasting industry could have an adverse effect on Broadcasting's business, financial condition and results of operations.
The FCC could implement regulations or the U.S. Congress could adopt legislation that might have a significant impact on the operations of the stations we own and the stations we provide services to or the television broadcasting industry as a whole.
The FCC regulates Broadcasting's broadcasting business. We must often times obtain the FCC’s approval to obtain, renew, assign or modify, a license, purchase a new station, sell an existing station or transfer the control of one of Broadcasting's subsidiaries that hold a license. Broadcasting's FCC licenses are critical to Broadcasting's operations; we cannot operate without them. We cannot be certain that the FCC will renew these licenses in the future or approve new acquisitions in a timely manner, if at all. If licenses are not renewed or acquisitions are not approved, we may lose revenue that we otherwise could have earned and this would have an adverse effect on Broadcasting's business, financial condition and results of operations.
In addition, Congress and the FCC may, in the future, adopt new laws, regulations and policies regarding a wide variety of matters (including, but not limited to, technological changes in spectrum assigned to particular services) that could, directly or indirectly, materially and adversely affect the operation and ownership of Broadcasting's broadcast properties.
Broadcasting Licenses are issued by, and subject to the jurisdiction of the FCC, pursuant to the Communications Act of 1934, as amended (the "Communications Act"). The Communications Act empowers the FCC, among other actions, to issue, renew, revoke and modify broadcasting licenses; determine stations’ frequencies, locations and operating power; regulate some of the equipment used by stations; adopt other regulations to carry out the provisions of the Communications Act and other laws, including requirements affecting the content of broadcasts; and to impose penalties for violation of its regulations, including monetary forfeitures, short-term renewal of licenses and license revocation or denial of license renewals. Any of these actions imposed by the FCC could result in the loss of station licenses or assets.
License Renewals. Broadcast television licenses are typically granted for standard terms of eight years. Most licenses for commercial and noncommercial TV broadcast stations, Class A TV broadcast stations, television translators and LPTV broadcast stations have expirations between 2028 and 2031; however, the Communications Act requires the FCC to renew a broadcast license if the FCC finds that the station has served the public interest, convenience and necessity and, with respect to the station, there have been no serious violations by the licensee of either the Communications Act or the FCC’s rules and regulations and there have been no other violations by the licensee of the Communications Act or the FCC’s rules and regulations that, taken together, constitute a pattern of abuse. The Company had 4 pending renewal applications at the end of 2024, and will have no applications due in 2025. Third parties may oppose license renewals. A station remains authorized to operate while its license renewal application is pending.
License Assignments. The Communications Act requires prior FCC approval for the assignment or transfer of control of an FCC licensee. Third parties may oppose the Company’s applications to assign, transfer or acquire broadcast licenses.
Full Power and Class A Station Regulations. The Communications Act and FCC rules and regulations limit the ability of individuals and entities to have certain official positions or ownership interests, known as "attributable" interests, above specific levels in full power broadcast stations as well as in other specified mass media entities. Many of these limits do not apply to Class A stations, television translators and LPTV authorizations. In seeking FCC approval for the acquisition of a broadcast television station license, the acquiring person or entity must demonstrate that the acquisition complies with applicable FCC ownership rules or that a waiver of the rules is in the public interest. Additionally, while the Communications Act and FCC regulations have been modified to no longer strictly prohibit ownership of a broadcast station license by any corporation with more than 25 percent of its stock owned or voted by non-U.S. persons, their representatives or any other corporation organized under the laws of a foreign country, foreign ownership above such threshold is determined by the FCC on a case-by-case basis, which analysis is subject to the specific circumstances of each such request. The FCC has also adopted regulations concerning children’s television programming, commercial limits, local issues and programming, political files, sponsorship identification, equal employment opportunity requirements and other requirements for full power and Class A broadcast television stations. The FCC’s rules require operational full-power and Class A stations to file quarterly reports demonstrating compliance with these regulations.
LPTV and TV Translator Authorizations. LPTV stations and TV Translators have "secondary spectrum priority" to full-service television stations. The secondary status of these authorizations prohibits LPTV and TV Translator stations from causing interference to the reception of existing or future full-service television stations and requires them to accept interference from existing or future full-service television stations and other primary licensees. LPTV and TV Translator licensees are subject to fewer regulatory obligations than full-power and Class A licensees, and there no limit on the number of LPTV stations that may be owned by any one entity.
Obscenity and Indecency Regulations. Federal law and FCC regulations prohibit the broadcast of obscene material on television at any time and the broadcast of indecent material between the hours of 6:00 a.m. and 10:00 p.m. local time. The FCC investigates complaints of broadcasts of prohibited obscene or indecent material and can assess fines of up to $0.35 million per incident for violation of the prohibition against obscene or indecent broadcasts and up to $3.3 million for any continuing violation based on any single act or failure to act. The FCC may also revoke or refuse to renew a broadcast station license based on a serious violation of the agency’s obscenity and indecency rules.
Continued uncertain financial and economic conditions may have an adverse impact on our business, results of operations or financial condition.
Financial and economic conditions continue to be uncertain over the longer term and the continuation or worsening of such conditions could reduce consumer confidence and have an adverse effect on our business, results of operations and/or financial condition. If consumer confidence were to decline, this decline could negatively affect our advertising customers’ businesses and their advertising budgets. In addition, volatile economic conditions could have a negative impact on our industry or the industries of our customers who advertise on our stations, resulting in reduced advertising sales. Furthermore, it may be possible that actions taken by any governmental or regulatory body for the purpose of stabilizing the economy or financial markets will not achieve their intended effect. In addition to any negative direct consequences to our business or results of operations arising from these financial and economic developments, some of these actions may adversely affect financial institutions, capital providers, advertisers or other consumers on whom we rely, including for access to future capital or financing arrangements necessary to support our business. Our inability to extend or obtain financing in amounts and at times necessary could make it more difficult or impossible to meet our obligations or otherwise take actions in our best interests.
Certain stations are also benefiting from our retransmission consent agreements with multichannel video programming distributors ("MVPDs"), and we cannot predict the outcome of potential regulatory changes to the retransmission consent regime.
Certain stations are also benefiting, although in very few instances on a small number of stations, on retransmission consent agreements. Our current retransmission consent agreements expire at various times over the next several years. No assurances can be provided that we will be able to renegotiate all of such agreements on favorable terms, on a timely basis, or at all. The failure to renegotiate such agreements could have no material adverse effect on our business and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cybersecurity Risk Management, Strategy, and Governance
Cybersecurity is a critical component of our operational integrity and strategic planning. Recognizing the evolving nature of cyber threats, we are committed to implementing robust cybersecurity measures to safeguard our digital assets, protect stakeholder interests, and ensure continuity of our operations.
Cybersecurity Risk Management Processes
Our approach to managing cybersecurity risks is proactive and comprehensive. We employ a range of methods to assess, identify and manage the risk of potential cybersecurity threats, including regular security audits, utilization of a third party service provider for security measures over our virtual environment, threat intelligence monitoring, and vulnerability assessments. We assess risks associated with third-party providers as part of our overall cybersecurity risk management framework by reviewing system and organization controls reports, when available, and other independent reports. We also generally require third parties to, among other things, maintain security controls to protect our confidential information and to promptly notify us of material breaches that may impact our data. Our risk management framework is designed to mitigate potential cybersecurity risks through a blend of technological safeguards, employee training programs, and incident response protocols. We devote resources to maintain and regularly update our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets against attempts by unauthorized parties to obtain access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, and we have implemented certain review and approval procedures internally and with our banks; and have implemented system-wide changes.
Cybersecurity Strategy and Investment
Our cybersecurity strategy is integral to our broader risk management policy. We invest in state-of-the-art cybersecurity technologies and infrastructure to enhance our defensive capabilities and have a dedicated system of internal controls in place to prevent, monitor and remediate cyber risks including any risks from utilization of third party service providers. Additionally, we allocate resources for ongoing staff training and awareness programs to foster a culture of cybersecurity mindfulness across the organization and maintain dedicated channels of communication with our third party service provider monitoring our virtual environment to facilitate timely cyber incident identification and remediation. Our strategic investments in cybersecurity are tailored to address the unique challenges and risks pertinent to our industry and operational scope.
Governance and Oversight
The governance of our cybersecurity efforts is overseen by the Audit Committee, which includes individuals with experience in technology and cybersecurity. The board regularly reviews and guides our cybersecurity policies and practices. Management plays a critical role in implementing these policies and in the day-to-day management of cybersecurity risks. They are empowered with the maintenance, communication and enforcement of cybersecurity policies and employ proactive measures to improve cybersecurity through review of various third party cyber tools for potential implementation. Our Head of IT and Chief Financial Officer ("CFO") are responsible for overseeing the implementation of cybersecurity strategies and ensuring compliance with regulatory standards. In addition to our in-house expertise, our independent external auditors and our outsourced internal audit team, regularly test and asses our cybersecurity controls. Any cyber incidents that occur are escalated to the CFO to facilitate resolution. Any incident determined to be material is discussed with the Audit Committee and communicated to our internal and external auditors as well as our third party virtual environment service provider, when relevant.
Material Effects of Cybersecurity Risks
Our business strategy, results of operations and financial condition have not been materially affected by risks from cybersecurity threats or incidents. However, we cannot provide assurances that they will not be materially affected by such risks or material incidents in the future. We continually assess the material effects of potential cybersecurity risks on our financial and operational performance and maintain comprehensive insurance coverage to mitigate financial losses from potential cybersecurity incidents.
Compliance and Regulatory Considerations
Our cybersecurity practices are in alignment with industry standards and regulatory requirements. We conduct regular reviews to ensure compliance with evolving cybersecurity laws and regulations. There have been no legal or regulatory proceedings related to cybersecurity against the Company in the reported period. We intend to further enhance our cybersecurity measures in response to the dynamic cyber threat landscape. This includes continuing to invest in advanced security technologies, refining our risk assessment methodologies, and continuing our commitment to staff training and development in cybersecurity awareness and best practices.
ITEM 2. PROPERTIES
Our corporate headquarters are located in New York, New York. We own select fabrication facilities, warehouses, administrative and sales offices and lease administrative, technical and sales office space in various locations in the countries in which we operate. DBMG is headquartered in Phoenix, Arizona; Spectrum is headquartered in New York, New York; R2 Technologies is headquartered in Dublin, California. We believe that our present administrative, technical and sales office facilities are adequate for our anticipated operations and that similar space can be obtained readily as needed.
ITEM 3. LEGAL PROCEEDINGS
The information regarding legal proceedings as set forth in Note 13. Commitments and Contingencies of the Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
INNOVATE common stock trades on the NYSE under the ticker symbol "VATE".
Holders of Common Stock
As of March 27, 2025, INNOVATE had approximately 43 holders of record of its common stock. This number does not include stockholders for whom shares were held in "nominee" or "street" name.
Dividends
INNOVATE paid no dividends on its common stock in 2024 or 2023, and our board of directors has no current intention of paying any dividends on our common stock in the near future. The payment of dividends on common stock, if any, in the future is within the discretion of our board of directors and will depend on our earnings, our capital requirements, financial condition, the ability to comply with the requirements of the law and agreements governing our and our subsidiaries indebtedness. The secured indentures governing certain of our debt instruments contain covenants that, among other things, limit or restrict our ability to make certain restricted payments, including the payment of cash dividends with respect to our common stock. DBMG has a revolving line of credit and term loans which contain similar covenants applicable to DBMG. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources and Note 11. Debt Obligations of our Consolidated Financial Statements included in this Annual Report on Form 10-K for more detail concerning our Secured Notes and other financing arrangements. Moreover, dividends may be restricted by other arrangements entered into in the future by us.
For details on preferred share dividends refer to Note 16. Equity and Temporary Equity included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference.
Issuer Purchases of Equity Securities
Equity Award Share Withholding
Shares of common stock withheld as payment of withholding taxes in connection with the vesting or exercise of equity awards are treated as common stock repurchases. Those withheld shares of common stock are not considered common stock repurchases under an authorized common stock repurchase plan. During the year ended December 31, 2024, there were no shares withheld in connection with the vesting of employee equity awards.
Unregistered Sales of Equity Securities
Series C Private Placement
On March 28, 2024, the Company issued and sold 25,000 shares of its Series C Non-Voting Participating Convertible Preferred Stock, par value $0.001 per share (“Series C Preferred Stock”) for the aggregate purchase price of $25.0 million to Lancer Capital LLC (“Lancer Capital”), an investment fund led by Avram A. Glazer, the Chairman of the Company’s board of directors, pursuant to that Investment Agreement dated as of March 5, 2024, (the “Investment Agreement”) by and between the Company and Lancer Capital. The related Rights Offering and the Company’s entry into the Investment Agreement was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on March 6, 2024.
On April 24, 2024, in connection with the closing of the Rights Offering, the Company sold approximately 6,286 additional shares of Series C Preferred Stock to Lancer Capital in consideration of Lancer Capital funding $6.3 million pursuant to the Investment Agreement.
On June 18, 2024, the Company held its annual shareholder meeting where Company's shareholder's approved the conversion of the Series C Preferred Stock into common stock. As a result, approximately 31,286 Series C Preferred Stock, held by Lancer Capital were converted into 4,469,390 shares of common stock (44,693,895 shares of common stock on a pre Reverse Stock Split basis).
These issuances and sales were consummated without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon an exemption from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The Company is basing such reliance upon representations made by Lancer Capital, including, but not limited to, representations as to Lancer Capital’s status as an “accredited investor” (as defined in Rule 501(a) under the Securities Act) and Lancer Capital’s investment intent. The Series C Preferred Stock was not offered or sold by any form of general solicitation or general advertising (as such terms are used in Rule 502 under the Securities Act). The Series C Preferred Stock and the corresponding shares of common stock issued upon conversion of the Series C Preferred Stock may not be re-offered or sold in the United States absent an effective registration statement or an exemption from the registration requirements under applicable federal and state securities laws.
Use of Proceeds
During the year ended December 31, 2024, the Company received $35.0 million in aggregate gross proceeds related to the Rights Offering and Concurrent Private Placement (inclusive of the $31.3 million from Lancer Capital discussed above) and incurred $1.8 million in dealer manager fees and other related costs. INNOVATE has utilized the net proceeds from the Rights Offering and Concurrent Series C Private Placement for general corporate purposes, including debt service and working capital. In addition, as a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, and on April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note.
ITEM 6. [RESERVED]
ITEM 7. 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 our consolidated annual financial statements and the notes thereto, each of which are contained in Item 8. entitled "Financial Statements and Supplementary Data," and other financial information included herein. 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 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 Annual Report on Form 10-K, "INNOVATE" means INNOVATE Corp. and the "Company," "we" and "our" mean INNOVATE together with its consolidated subsidiaries. "U.S. GAAP" means accounting principles accepted in the United States of America.
Our Business and Our Operations
We are a diversified holding company with principal operations conducted through three operating platforms or reportable segments: Infrastructure ("DBMG"), Life Sciences ("Pansend"), and Spectrum, plus our Other segment, which includes businesses that do not meet the separately reportable segment thresholds.
For additional information on our business, refer to Note 1. Organization and Business included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference.
Cyclical Patterns
Our segments' operations can be highly cyclical. Our volume of business in our Infrastructure segment may be adversely affected by declines or delays in projects, which may vary by geographic region. Project schedules, particularly in connection with large, complex, and longer-term projects can also create fluctuations in the services provided, which may adversely affect us in any 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; customer spending patterns and the financial condition of our customers and their access to capital; margins of projects performed during any particular period; rising interest rates and inflation; and regulatory, 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
We continually evaluate strategic and business alternatives within our operating segments, which may include the following: operating, growing or acquiring additional assets or businesses related to current or historical operations; or winding down or selling our existing operations. In the longer-term, we may evaluate opportunities to acquire assets or businesses unrelated to our current or historical operations. In the event we were to enter into a strategic transaction to sell any of our existing operations, our intention is to use available proceeds from such transaction to address our capital structure.
During 2024, including subsequent to year end, as part of our strategic process, we engaged in several transactions that had or will have an effect on the results of operations and financial condition of our business and individual segments.
Rights Offering and Concurrent Private Placement
On March 8, 2024, the Company commenced a $19.0 million rights offering ("Rights Offering") for its common stock. Pursuant to the Rights Offering, the Company distributed to each holder of the Company’s common stock, Series A-3 Convertible Participating Preferred Stock, Series A-4 Convertible Participating Preferred Stock and the 2026 Convertible Notes as of March 6, 2024 (the “rights offering record date”), transferable subscription rights to purchase 2.86 shares (0.2858 shares on a pre Reverse Stock Split basis) of the Company’s common stock at a price of $7.00 per whole share ($0.70 per whole share on a pre Reverse Stock Split basis).
Per the concurrent investment agreement entered into with Lancer Capital (the "Investment Agreement"), the Rights Offering was backstopped by Lancer Capital, an investment fund led by Avram A. Glazer, the Chairman of the Board and the Company’s largest stockholder. Due to limitations on the common stock that can be issued to Lancer Capital under the rules of the New York Stock Exchange ("NYSE"), in lieu of exercising its subscription rights, pursuant to the Investment Agreement, Lancer Capital would purchase up to $19.0 million of the Company’s newly issued Series C Non-Voting Participating Convertible Preferred Stock (the “Series C Preferred Stock”), for an issue price of $1,000 per share. In connection with the backstop commitment, and as a result of limitations in the amount common equity that can be raised under the Company’s effective shelf registration statement on Form S-3, Lancer Capital also agreed to purchase an additional $16.0 million of Series C Preferred Stock in a private placement transaction ("Concurrent Private Placement") which was to close concurrently with the settlement of the Rights Offering. Lancer Capital did not receive any compensation or other consideration for entering into or consummating the Investment Agreement.
As the Rights Offering had not yet settled by March 28, 2024, in accordance with the Investment Agreement, Lancer Capital purchased $25.0 million of Series C Preferred Stock, referred to as the "equity advance." On April 24, 2024, the Company completed and closed on the Rights Offering and issued a total of 530,611 shares of common stock (5,306,105 shares of common stock on a pre Reverse Stock Split basis) for $3.7 million. Based on the number of shares of common stock actually sold upon exercise of the rights to third party investors, there were no excess shares of Series C Preferred Stock purchased by Lancer Capital under the equity advance that the Company was required to redeem, and Lancer Capital purchased an additional approximately 6,286 Series C Preferred Stock for $6.3 million under the backstop commitment. In total, the Company received $35.0 million in aggregate gross proceeds related to the Rights Offering and Concurrent Private Placement and incurred $1.8 million in dealer manager fees and other related costs which have been capitalized into Additional paid in capital ("APIC"). INNOVATE has been utilizing and expects to continue to use the net proceeds from the Rights Offering and Concurrent Private Placement for general corporate purposes, including debt service and working capital. In addition, as a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, and consequently, on April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note.
Under the rules of the NYSE, because the shares purchased by Lancer Capital were greater than 20% of the Company's common stock outstanding before the issuance of the Series C Preferred Stock, those shares of Series C Preferred Stock were not allowed to be converted until stockholder approval of such issuance was obtained. On June 18, 2024, the Company held its annual shareholder meeting where Company's shareholder's approved the conversion of the Series C Preferred Stock into common stock. As a result, approximately 31,286 shares of Series C Preferred Stock, which were held by Lancer Capital, were converted into 4,469,390 shares of common stock (44,693,895 shares of common stock on a pre Reverse Stock Split basis).
The Company waived its Tax Benefits Preservation Plan to permit persons exercising rights to acquire 4.9% or more of the outstanding common stock upon the exercise thereof without becoming an Acquiring Person (as defined in the Tax Benefits Preservation Plan).
INNOVATE has utilized the net proceeds from the Rights Offering and Concurrent Private Placement for general corporate purposes, including debt service and for working capital. As a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, in the amount of the greater of $3.0 million or 12.5% of the net proceeds. On April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note.
Reverse Stock Split
On August 8, 2024, the Company effected a 1-for-10 reverse stock split of its issued and outstanding common stock (the “Reverse Stock Split”) following stockholder approval. The Reverse Stock Split became effective at 5:00 p.m. Eastern Standard Time. The Reverse Stock Split was implemented for the primary purpose of regaining compliance with the minimum bid price requirement for continued listing of the Company’s common stock on the NYSE. As a result of the Reverse Stock Split, every ten shares of the Company’s common stock issued and outstanding were automatically reclassified and changed into one new share of the Company’s common stock, with whole shares issued for fractional shares. Proportionate adjustments were made to the exercise prices and the number of shares underlying the Company’s outstanding equity awards, as applicable, as well as to the number of shares issuable under the Company’s equity incentive plans and conversion of the Company’s outstanding convertible securities. The common stock issued pursuant to the Reverse Stock Split will remain fully paid and non-assessable. The Reverse Stock Split did not change the $0.001 par value per share of the common stock or the authorized number of shares of common stock or preferred stock. As a result of the Reverse Stock Split, the number of outstanding common shares was reduced from 130,529,931 to 13,166,057, inclusive of an additional 113,064 incremental whole shares issued for fractional shares. Unless noted, all common shares and per share amounts of common stock, options and restricted stock and any associated debt or preferred stock conversion rates contained in the historical periods presented within this Management’s Discussion and Analysis of Financial Condition and Results of Operations and within the Consolidated Financial Statements have been retroactively adjusted to reflect the one-for-ten Reverse Stock Split.
Stockholders’ Rights Agreement - Tax Benefits Preservation Plan
On May 6, 2024, the Company terminated its Tax Benefits Preservation Plan entered into on April 1, 2023 (the “2023 Preservation Plan”) because the Company’s Board of Directors determined that the 2023 Preservation Plan was no longer necessary or desirable for the preservation of the Company’s ability to use its tax net operating losses and other certain tax assets. In connection with the termination of the 2023 Preservation Plan, the Company has taken routine actions to deregister the related preferred stock purchase rights under the Securities Exchange Act of 1934, and to delist the preferred stock purchase rights from the NYSE. These actions were administrative in nature and had no effect on the Company’s common stock, which will continue to be listed on the NYSE.
Amendment to Second and Restated 2014 Omnibus Equity Award Plan and Interim CEO Equity Awards
On September 30, 2024, the Board adopted, subject to stockholder approval, an amendment to the Company's Second Amended and Restated 2014 Omnibus Equity Award Plan ("Second A&R 2014 Plan") to increase the number of shares of the Company's common stock, par value $0.001 per share, available for issuance thereunder to 1,300,000 (the “Plan Amendment”). The Plan Amendment was approved by holders of a majority in voting power on October 4, 2024, by written consent in lieu of a special meeting, and was effective as of October 29, 2024.
On October 29, 2024, when the Plan Amendment became effective, the following awards which were previously awarded to the Company's Interim CEO subject to stockholder approval of the Plan Amendment to increase the number of shares of common stock available thereunder to satisfy the settlement of the grant became effective: (i) 95,322 of restricted stock unit awards ("RSU's"), which were awarded on October 11, 2023; (ii) 100,000 option awards with a strike price of $25.00 (as retroactively adjusted for the Reverse Stock Split in 2024) and an expiration date of September 15, 2033, which were awarded on September 15, 2023; (iii) 142,857 of RSUs, which were awarded on August 19, 2024; and (iv) 100,000 option awards with a strike price of $4.22 and an expiration date of September 15, 2034, which were awarded on September 15, 2024.
Debt Obligations and Financing
In addition to the Rights Offering and Concurrent Private Placement at the Non-Operating Corporate segment discussed above, during 2024 and subsequent to year end, we have refinanced some of our debt and obtained new capital financing at the subsidiary level. This financing helped us provide needed capital for our operations and the operations of our subsidiaries.
Infrastructure
On June 28, 2024, DBM and UMB entered into the Third Amendment to the UMB Credit Agreement, which added an incremental separate term loan of $25.0 million to the existing credit facility, with the same interest rate as the Revolving Line with UMB and the same maturity date as the initial UMB term loan which had an outstanding balance of $74.6 million as of December 31, 2024.
Life Sciences
R2 Technologies had various short-term notes with Lancer Capital, which expired on January 31, 2024, and, effective January 31, 2024, a new 20% note with an aggregate original principal amount of $20.0 million was issued, which was comprised of all prior outstanding principal amounts and unpaid accrued interest of $2.6 million which was capitalized into the new principal balance. Interest on the note accrues at 20% per annum and is payable monthly in arrears, in cash or, if not paid in cash, accrued and unpaid interest is capitalized monthly into the principal balance. As of December 31, 2024, the total principal outstanding, including capitalized interest was $24.0 million.
The maturity date of the 20% $20.0 million note, as subsequently amended, was December 31, 2024, or within five business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing or has a change in control, as defined in the agreement, with an optional prepayment of the entire then-outstanding and unpaid principal and accrued interest upon five-days written notice to Lancer Capital.
The 20% $20.0 million note also includes various exit fees, as amended. As of December 31, 2024, the exit fee, as amended, was equal to 11.90% of the principal amount being repaid, and effective July 31, 2024, an additional exit fee of $1.0 million was incurred each month until the end of November 2024. As of December 31, 2024, total exit fees payable were $7.9 million. The exit fees are payable on the earliest of the maturity date, the date of the acceleration of the principal amount of the note for any reason or, if any portion of the note is prepaid at any time, the date of such prepayment of the note.
Subsequent to year end, with an effective date of December 31, 2024, the maturity date of the note was extended to August 1, 2025. In addition, the exit fee continues to increase by 0.17% each month until maturity and an additional exit fee of $1.0 million was incurred under the amendment, which also continues to increase by $1.0 million each month until maturity. A new $5.0 million default fee will be payable on August 1, 2025, in the event all obligations under the note, including principal, any accrued and unpaid interest, and exit fees, are not repaid in full prior to the August 1, 2025, maturity date.
Refer to Note 11. Debt Obligations included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference, for additional information on the note and the various amendments during the years ended December 31, 2024 and 2023.
On June 20, 2024, Pansend closed on a new Series D Preferred Stock ("Series D") investment in R2. As part of the transaction, R2 Technologies converted its intercompany notes and accrued interest with Pansend, together with an additional cash investment from Pansend, into new Series D convertible participating preferred stock, for a total new additional investment of $21.3 million, which is also eliminated on consolidation and increased Pansend's ownership in R2 Technologies to 81.4% as compared to 56.8% prior to the transaction. Pansend's ownership in R2 Technologies was 81.4% and 56.6%, as of December 31, 2024 and 2023, respectively. Subsequent to year end, on February 20, 2025, Pansend closed on a new $3.5 million convertible 13.0% note instrument with R2 Technologies, which is convertible, together with any accrued interest at the time of conversion, into a new Series E Preferred Stock ("Series E") in R2 Technologies upon written notice to R2 Technologies and has a maturity date of the earlier of July 31, 2025, or a change in control, as defined in the agreement. The transaction is eliminated on consolidation. Refer to Note 16. Equity and Temporary Equity included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference, for additional information on R2 Technologies' convertible preferred stock and convertible notes.
Non-Operating Corporate
On May 6, 2024, we extended the maturity date of our Revolving Line of Credit with MSD from March 16, 2025, to May 16, 2025. Subsequent to year end, on March 6, 2025, the maturity date of the Revolving Line of Credit was extended to August 1, 2025, with all other terms substantially unchanged.
During the year ended December 31, 2024, we repurchased $2.9 million principal amount of our 2026 Convertible Notes at a market discount for $1.1 million, which is inclusive of accrued interest of $0.1 million, and recognized a $1.9 million gain on debt repurchase within Other income, net in the Consolidated Statement of Operations included in this Annual Report on Form 10-K, which is incorporated herein by reference.
Equity Method Investments
During the year ended December 31, 2024, MediBeacon issued an aggregate $2.3 million of 12% convertible notes payable to Pansend, increasing the total outstanding principal due to Pansend to $12.0 million.
As a result of these note issuances by MediBeacon during the year ended December 31, 2024, Pansend recognized $2.3 million of equity method losses which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero. As of December 31, 2024, Pansend's carrying amount of its investment in MediBeacon remains at zero, inclusive of the $12.0 million in outstanding notes which have been offset against recognized losses, and has cumulative unrecognized equity method losses relating to MediBeacon of $17.0 million.
Subsequent to year end, in January 2025, MediBeacon received approval from the U.S. Food and Drug Administration ("FDA") for its Transdermal GFR Measurement System ("TGFR"). Pursuant to the terms of MediBeacon's convertible notes, upon the FDA approval, Pansend's convertible notes and the related accrued interest together totaling $12.9 million were converted into Series 3 Preferred Stock. In addition, pursuant to its amended commercial partnership with Huadong and, as a result of FDA approval, a $7.5 million milestone investment in its preferred stock by Huadong was in process. This will decrease Pansend's ownership in MediBeacon from approximately 45.9% prior to the transaction to approximately 44.7% subsequent to the transaction. On a fully diluted basis, Pansend's ownership in MediBeacon will decrease from 40.1% to 39.7%.
Financial Presentation Background
In the below section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant to U.S. GAAP and SEC disclosure rules, the Company’s results of operations for the year ended December 31, 2024, as compared to the year ended December 31, 2023.
Results of Operations
The following table summarizes our results of operations (in millions):
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Year Ended December 31, |
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2024 |
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2023 |
|
Increase / (Decrease) |
| Revenue |
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Infrastructure |
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$ |
1,071.6 |
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$ |
1,397.2 |
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$ |
(325.6) |
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| Life Sciences |
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9.8 |
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3.3 |
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6.5 |
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| Spectrum |
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|
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25.7 |
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22.5 |
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3.2 |
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| Total revenue |
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$ |
1,107.1 |
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$ |
1,423.0 |
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$ |
(315.9) |
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| Income (loss) from operations |
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Infrastructure |
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$ |
65.7 |
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$ |
64.4 |
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$ |
1.3 |
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| Life Sciences |
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(14.1) |
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|
(15.0) |
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0.9 |
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| Spectrum |
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|
|
|
|
|
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1.4 |
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|
(3.4) |
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4.8 |
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| Other |
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— |
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(3.1) |
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3.1 |
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Non-Operating Corporate |
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(13.0) |
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(16.4) |
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3.4 |
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Total income from operations |
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$ |
40.0 |
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|
$ |
26.5 |
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|
$ |
13.5 |
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|
|
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|
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| Interest expense |
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|
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|
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|
(74.5) |
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|
(68.2) |
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|
(6.3) |
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| Loss from equity investees |
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(2.3) |
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|
(9.4) |
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7.1 |
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| Other income, net |
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|
|
|
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|
|
3.4 |
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|
16.7 |
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|
(13.3) |
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| Loss from operations before income taxes |
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|
|
|
|
|
|
$ |
(33.4) |
|
|
$ |
(34.4) |
|
|
$ |
1.0 |
|
| Income tax expense |
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|
|
|
|
|
|
(6.3) |
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|
(4.5) |
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|
(1.8) |
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| Net loss |
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$ |
(39.7) |
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$ |
(38.9) |
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|
$ |
(0.8) |
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| Net loss attributable to non-controlling interests and redeemable non-controlling interests |
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|
|
|
|
|
|
5.1 |
|
|
3.7 |
|
|
1.4 |
|
| Net loss attributable to INNOVATE Corp. |
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|
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|
|
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$ |
(34.6) |
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|
$ |
(35.2) |
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|
$ |
0.6 |
|
| Less: Preferred dividends |
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|
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|
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|
|
1.2 |
|
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2.4 |
|
|
(1.2) |
|
| Net loss attributable to common stockholders and participating preferred stockholders |
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|
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|
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$ |
(35.8) |
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$ |
(37.6) |
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|
$ |
1.8 |
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Revenue: Revenue for the year ended December 31, 2024, decreased $315.9 million to $1,107.1 million from $1,423.0 million for the year ended December 31, 2023. The decrease was driven by our Infrastructure segment, which was partially offset by increases at our Life Sciences and Spectrum segments. The decrease at our Infrastructure segment was primarily driven by the timing and size of projects, including the effect of changes in estimated costs to complete those projects recognized in the ordinary course of business, at Banker Steel and DBMG's commercial structural steel fabrication and erection business, both of which had increased activity in the prior year on certain large commercial construction projects that have since been completed in the current year. This was partially offset by an increase at the industrial maintenance and repair business as a result of an increase in project work. The increase at our Life Sciences segment was attributable to R2 Technologies, primarily driven by an increase in sales in North America and worldwide of all R2 Technologies' products, including Glacial systems and consumables. The increase at our Spectrum segment was primarily driven by network launches and expanded coverage with existing customers.
Income from operations: Income from operations for the year ended December 31, 2024, increased $13.5 million to $40.0 million from $26.5 million for the year ended December 31, 2023. The improvement was due to an increase in other operating income of $10.3 million, a decrease in selling, general and administrative ("SG&A") expenses of $7.8 million, a decrease in depreciation and amortization of $2.6 million, which were partially offset by a net decrease in gross profit of $7.2 million. The net increase in other operating income was driven by our Infrastructure segment, primarily as a result of a gain on a lease modification and net gains on disposals of fixed assets. The overall decrease in SG&A was primarily driven by unrepeated severance and reductions in compensation-related expenses at both our Non-Operating Corporate and Spectrum segments, unrepeated transaction expenses at our Other segment related to the sale of New Saxon's 19.0% investment in HMN International Co., Ltd., formerly known as Huawei Marine Networks Co. (“HMN”) in the prior year, as well as by our Infrastructure segment as a result of an unrepeated accounts receivable write-off in 2023, a decrease in expenses related to a foreign office closure in the prior year, and a decrease in legal fees and facility-related expenses. The decrease in SG&A was partially offset by an increase in compensation-related expenses and expenses related to a domestic plant closure and other initiatives announced and executed during the current year to evaluate and realign internal operations and back-office functions at our Infrastructure segment and by R2 Technologies as a result of increases in share-based compensation expense, selling costs, and sales commissions due to an increase in system sales. The overall decrease in depreciation and amortization was primarily driven by our Infrastructure segment, as certain customer contract intangibles became fully amortized in the second quarter of 2023. The decrease in gross profit was primarily driven by our Infrastructure segment due to timing and size of projects that have since been completed in the current year, including the effect of changes in estimated costs to complete those projects recognized in the ordinary course of business. This was partially offset by increases in gross profit at our Spectrum and Life Sciences segments. The increase in gross profit at Spectrum was primarily driven by network launches and expanded coverage with existing customers. The increase in gross profit at our Life Sciences segment was driven by R2 Technologies as a result of incremental Glacial system sales over the comparable year.
Interest expense: Interest expense for the year ended December 31, 2024, increased $6.3 million to $74.5 million from $68.2 million for the year ended December 31, 2023. The increase was primarily attributable to increases in exit fees and a higher outstanding principal balance at our Life Sciences segment as a result of the capitalization of unpaid interest into the principal balance subsequent to the prior year, an increase in interest expense on our Non-Operating Corporate segment's CGIC Unsecured Note which was issued in May 2023 and had five months of interest in the prior year compared to a full year of interest in the current year, an increase in interest expense on our Corporate Revolving Line of Credit as a result of a higher outstanding balance drawn during the current year, and, to a lesser extent, an increase in interest at our Spectrum segment due to increased amortization from additional exit fees from refinancings during the second half of the prior year. This was partially offset by our Infrastructure segment due to a net decrease in outstanding principal balances and a slight decrease in interest rates.
Loss from equity investees: Loss from equity investees for the year ended December 31, 2024, decreased $7.1 million to $2.3 million from $9.4 million for the year ended December 31, 2023. The decrease in loss was due to a decrease in losses recognized from MediBeacon, Triple Ring and HMN. During the year ended December 31, 2024, as a result of additional convertible note investments in MediBeacon by Pansend, Pansend's basis in MediBeacon increased by $2.3 million and Pansend recognized $2.3 million of equity method losses that were previously unrecognized, whereas during the year ended December 31, 2023, as a result of $4.7 million convertible note investments in MediBeacon by Pansend and a $3.8 million equity transaction with Huadong, Pansend's basis in MediBeacon had increased by $8.5 million and Pansend had recognized $8.5 million of equity method losses that were previously unrecognized. As of both December 31, 2024 and 2023, Pansend's net carrying amount of its investment in MediBeacon was zero, and Pansend had unrecognized losses from this investment. The partial sale of Triple Ring was completed during the fourth quarter of 2023, which resulted in Pansend's investment in Triple Ring no longer being accounted for under the equity method of accounting. Our previous investment in HMN was sold on March 6, 2023 and had losses for the approximately two months of ownership in 2023. Thus, no equity method losses from either Triple Ring or HMN were recognized in the current year. Refer to Note 6. Investments included in the Consolidated Financial Statements of this Annual Report on Form 10-K for additional information on our equity investments.
Other income, net: Other income, net for the year ended December 31, 2024, decreased $13.3 million to $3.4 million from $16.7 million for the year ended December 31, 2023. The decrease was primarily driven by the unrepeated $12.2 million gain on the sale of our equity investment in HMN of in the prior year, an unrepeated $3.8 million equity investment step-up gain from an increase in Pansend's carrying amount as a result of MediBeacon issuing $7.5 million of its preferred stock to Huadong in the prior year, and a $2.2 million loss on debt extinguishment at R2 Technologies in the current year. These decreases were partially offset by a $1.9 million gain on debt repurchase at our Non-Operating Corporate segment related to the partial repurchase of the 2026 Convertible Notes in 2024, an increase in foreign currency translation gains from our Infrastructure segment, an increase in interest income earned at our Life Sciences segment resulting from an increase in Pansend's convertible note receivable balance from MediBeacon subsequent to the prior year, and our Non-Operating Corporate segment which earned additional interest income on its money market accounts due to an increase in the outstanding deposited balances as compared to the prior year.
Income tax expense: Income tax expense for the year ended December 31, 2024, increased $1.8 million to $6.3 million from $4.5 million for the year ended December 31, 2023. The increase was primarily driven by the tax expense of INNOVATE's U.S. consolidated group utilizing its remaining unlimited NOLs in 2024 and due to the Tax Cuts and Jobs Act's 80% limitation on net operating losses incurred after 2017 and the unrepeated $1.1 million tax benefit, consisting of a current tax expense of $4.4 million related to a foreign tax payment and a deferred tax benefit of $5.5 million related to the reversal of the deferred tax liability associated with the $11.3 million put option, both of which were related to the sale of New Saxon's 19.0% investment in HMN on March 6, 2023.
The Organization for Economic Cooperation and Development ("OECD") has announced an Inclusive Framework on Base Erosion and Profit Shifting including a Pillar Two Model to provide for a 15% global minimum tax on the earnings of multinational corporations with consolidated revenue over €750 million. Many jurisdictions have enacted Pillar Two legislation that starts to become effective in 2024. The OECD, and its member countries, continue to release new guidance and legislation on Pillar Two. Based on current enacted laws, Pillar Two is not expected to materially impact our effective tax rate or cash flows in the next year. We will continue to evaluate the impact on our financial position as new legislation or guidance is introduced which could change our current assessment.
Segment Results of Operations
In the Company's Consolidated Financial Statements, other operating (income) loss includes: (i) (gain) loss on sale or disposal of assets; (ii) lease termination costs and (gains) losses on lease modifications; (iii) asset impairment expense; (iv) accretion of asset retirement obligations; and (v) Federal Communications Commission (the "FCC") reimbursements. Each table summarizes the results of operations of our operating segments (in millions).
Infrastructure Segment
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Year Ended December 31, |
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2024 |
|
2023 |
|
Increase / (Decrease) |
| Revenue |
|
|
|
|
|
|
|
$ |
1,071.6 |
|
|
$ |
1,397.2 |
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|
$ |
(325.6) |
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| Cost of revenue |
|
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880.4 |
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1,192.6 |
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|
(312.2) |
|
| Selling, general and administrative |
|
|
|
|
|
|
|
123.1 |
|
|
126.0 |
|
|
(2.9) |
|
| Depreciation and amortization |
|
|
|
|
|
|
|
12.0 |
|
|
14.4 |
|
|
(2.4) |
|
Other operating income |
|
|
|
|
|
|
|
(9.6) |
|
|
(0.2) |
|
|
(9.4) |
|
| Income from operations |
|
|
|
|
|
|
|
$ |
65.7 |
|
|
$ |
64.4 |
|
|
$ |
1.3 |
|
Revenue: Revenue for the year ended December 31, 2024, decreased $325.6 million to $1,071.6 million from $1,397.2 million for the year ended December 31, 2023. The decrease was primarily driven by the timing and size of projects, including the effect of changes in estimated costs to complete those projects recognized in the ordinary course of business, at Banker Steel and DBMG's commercial structural steel fabrication and erection business, both of which had increased activity in the prior year on certain large commercial construction projects that that have since been completed. This was partially offset by an increase at the industrial maintenance and repair business as a result of an increase in project work.
Cost of revenue: Cost of revenue for the year ended December 31, 2024, decreased $312.2 million to $880.4 million from $1,192.6 million for the year ended December 31, 2023. The decrease was primarily driven by the decrease in revenues at Banker Steel and DBMG's commercial structural steel fabrication and erection business from the timing of project activity on certain large commercial construction projects and decreases in costs as they wind down or have since been completed, which was partially offset by an increase in costs associated with the industrial maintenance and repair business as a result of an increase in project work.
Selling, general and administrative expense for the year ended December 31, 2024, decreased $2.9 million to $123.1 million from $126.0 million for the year ended December 31, 2023. The decrease was primarily driven by an unrepeated accounts receivable write-off of $2.2 million related to a customer bankruptcy in the prior year, a decrease in expenses related to a foreign office closure in the comparable year, a decrease in legal fees and facility-related expenses, which was partially offset by an increase in compensation-related expenses, expenses related to a domestic plant closure and other initiatives announced and executed during the current year to evaluate and realign DBMG's internal operations and back-office functions.
Depreciation and amortization: Depreciation and amortization for the year ended December 31, 2024, decreased $2.4 million to $12.0 million from $14.4 million for the year ended December 31, 2023. The decrease was primarily driven by Banker Steel, as certain customer contract intangibles became fully amortized in the second quarter of 2023, which was partially offset by an increase in depreciation at DBMG's commercial structural steel fabrication and erection business as a result of additional depreciable fixed assets placed into service.
Other operating income: Other operating income for the year ended December 31, 2024, increased $9.4 million to $9.6 million from $0.2 million for the year ended December 31, 2023. Other operating income for the year ended December 31, 2024, related to a gain on a lease modification and net gains on the sales of various properties in the current year, which were partially offset by a loss related to a plant closure in the first quarter of 2024.
Life Sciences Segment
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Year Ended December 31, |
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2024 |
|
2023 |
|
Increase / (Decrease) |
| Revenue |
|
|
|
|
|
|
|
$ |
9.8 |
|
|
$ |
3.3 |
|
|
$ |
6.5 |
|
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|
|
|
|
|
|
|
|
|
|
| Cost of revenue |
|
|
|
|
|
|
|
6.4 |
|
|
2.6 |
|
|
3.8 |
|
| Selling, general and administrative |
|
|
|
|
|
|
|
17.1 |
|
|
15.2 |
|
|
1.9 |
|
| Depreciation and amortization |
|
|
|
|
|
|
|
0.4 |
|
|
0.5 |
|
|
(0.1) |
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| Loss from operations |
|
|
|
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|
|
|
$ |
(14.1) |
|
|
$ |
(15.0) |
|
|
$ |
0.9 |
|
Revenue: Revenue for the year ended December 31, 2024, increased $6.5 million to $9.8 million from $3.3 million for the year ended December 31, 2023. The increase in revenue was attributable to R2 Technologies, primarily due to incremental unit sales of Glacial fx systems in North America and worldwide, which launched during the second half of 2023 in North America and in 2024 outside North America, as well as from an increase in consumable sales in both North America and worldwide. In addition, the increase in revenue as compared to the prior year was partially driven by an increase in Glacial Rx units sold in North America and an increase in Glacial Spa units sold outside North America.
Cost of revenue: Cost of revenue for the year ended December 31, 2024, increased $3.8 million to $6.4 million from $2.6 million for the year ended December 31, 2023. The increase in cost of revenue was attributable to R2 Technologies, primarily driven by the increase in revenue from the additional system and consumables sales noted above, and, to a lesser extent, increases in royalty expenses, warranty expenses and freight costs driven by the additional systems sold. The increase in cost of revenue was partially offset by changes in product mix sold as the Glacial fx and Glacial Spa systems have a lower production cost per system compared to the Glacial Rx.
Selling, general and administrative: Selling, general and administrative expense for the year ended December 31, 2024, increased $1.9 million to $17.1 million from $15.2 million for the year ended December 31, 2023. The increase was primarily driven by R2 Technologies as a result of an increase in share-based compensation expense and increases in selling costs and sales commissions resulting from an increase in system sales.
Spectrum Segment
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|
Year Ended December 31, |
|
|
|
|
|
|
|
|
2024 |
|
2023 |
|
Increase / (Decrease) |
| Revenue |
|
|
|
|
|
|
|
$ |
25.7 |
|
|
$ |
22.5 |
|
|
$ |
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of revenue |
|
|
|
|
|
|
|
11.5 |
|
|
11.8 |
|
|
(0.3) |
|
| Selling, general and administrative |
|
|
|
|
|
|
|
7.3 |
|
|
9.0 |
|
|
(1.7) |
|
| Depreciation and amortization |
|
|
|
|
|
|
|
5.1 |
|
|
5.2 |
|
|
(0.1) |
|
Other operating loss (income) |
|
|
|
|
|
|
|
0.4 |
|
|
(0.1) |
|
|
0.5 |
|
Income (loss) from operations |
|
|
|
|
|
|
|
$ |
1.4 |
|
|
$ |
(3.4) |
|
|
$ |
4.8 |
|
Revenue: Revenue for the year ended December 31, 2024, increased $3.2 million to $25.7 million from $22.5 million for the year ended December 31, 2023. The increase was primarily driven by network launches and expanded coverage with existing customers, which was partially offset by the termination of a number of smaller networks in the prior year.
Cost of revenue: Cost of revenue for the year ended December 31, 2024, decreased $0.3 million to $11.5 million from $11.8 million for the year ended December 31, 2023. The decrease was primarily driven by decreased costs as a result of the renegotiation of broadcast tower- related contracts during the current year.
Selling, general and administrative: Selling, general and administrative expense for the year ended December 31, 2024, decreased $1.7 million to $7.3 million from $9.0 million for the year ended December 31, 2023. The decrease was primarily driven by unrepeated severance expense in the prior year and a decrease in salaries and benefits expense as a result of a reduction in headcount.
Other operating loss (income): Other operating loss (income) for the year ended December 31, 2024, decreased $0.5 million to a loss of $0.4 million from income of $0.1 million for the year ended December 31, 2023. The decrease in other operating income was primarily driven by a decrease in reimbursements received from the FCC for certain station modification costs and an increase in lease termination costs, which was partially offset by a decrease in asset impairment charges which in the prior year had primarily related to the write-off of certain redundant equipment and associated capitalized costs.
Non-Operating Corporate
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|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
2024 |
|
2023 |
|
Increase / (Decrease) |
| Selling, general and administrative |
|
|
|
|
|
|
|
$ |
12.7 |
|
|
$ |
15.8 |
|
|
$ |
(3.1) |
|
| Depreciation and amortization |
|
|
|
|
|
|
|
0.1 |
|
|
0.1 |
|
|
— |
|
Other operating loss |
|
|
|
|
|
|
|
0.2 |
|
|
0.5 |
|
|
(0.3) |
|
| Loss from operations |
|
|
|
|
|
|
|
$ |
(13.0) |
|
|
$ |
(16.4) |
|
|
$ |
3.4 |
|
Selling, general and administrative: Selling, general and administrative expenses for the year ended December 31, 2024, decreased $3.1 million to $12.7 million from $15.8 million for the year ended December 31, 2023, primarily driven by unrepeated severance expense related to the Company's former Chief Operating Officer in the prior year, a decrease in salaries and benefits from a reduced headcount, decreases in accounting, consulting and legal fees, and a decrease in rent expense primarily as a result of the termination of leases in the current year.
Other operating loss: Other operating loss for the year ended December 31, 2024, decreased $0.3 million to $0.2 million from $0.5 million for the year ended December 31, 2023. Other operating loss in the current period consisted of lease termination costs for two leases the Company exited in the current year, while other operating loss in the prior year primarily consisted of an impairment of leasehold improvements for unutilized office space.
Loss from Equity Investees
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|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
2024 |
|
2023 |
|
(Increase) / Decrease |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Life Sciences |
|
|
|
|
|
|
|
$ |
(2.3) |
|
|
$ |
(9.1) |
|
|
$ |
6.8 |
|
| Other |
|
|
|
|
|
|
|
— |
|
|
(0.3) |
|
|
0.3 |
|
| Loss from equity investees |
|
|
|
|
|
|
|
$ |
(2.3) |
|
|
$ |
(9.4) |
|
|
$ |
7.1 |
|
Life Sciences: Loss from equity investees within our Life Sciences segment for the year ended December 31, 2024, decreased $6.8 million to $2.3 million from $9.1 million for the year ended December 31, 2023. The decrease in loss was due to a decrease in losses recognized from MediBeacon and Triple Ring. During the year ended December 31, 2024, as a result of additional convertible note investments in MediBeacon by Pansend, Pansend's basis in MediBeacon increased by $2.3 million and Pansend recognized $2.3 million of equity method losses that were previously unrecognized, whereas during the year ended December 31, 2023, as a result of $4.7 million convertible note investments in MediBeacon by Pansend and a $3.8 million equity transaction with Huadong, Pansend's basis in MediBeacon had increased by $8.5 million and Pansend had recognized $8.5 million of equity method losses that were previously unrecognized. As of both December 31, 2024 and 2023, Pansend's net carrying amount of its investment in MediBeacon was zero, and Pansend had unrecognized losses from this investment. Also contributing to the decrease in loss from equity investees was the partial sale of Triple Ring which was completed during the fourth quarter of 2023 and resulted in Pansend's investment in Triple Ring no longer being accounted for under the equity method of accounting. Thus, no equity method losses were recognized from Triple Ring in the current year.
Other: Loss from equity investees within our Other segment for the year ended December 31, 2024, decreased $0.3 million to zero from a loss of $0.3 million for the year ended December 31, 2023. Loss from equity investees for the year ended December 31, 2023 was driven by our previous investment in HMN, which was sold on March 6, 2023, and had losses for the approximately two months of ownership in 2023.
Refer to Note 6. Investments included in the Consolidated Financial Statements of this Annual Report on Form 10-K, for additional information on our equity investments.
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.
The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss) attributable to INNOVATE Corp., excluding: discontinued operations, if applicable; depreciation and amortization; other operating (income) loss, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, (gains) losses on lease modifications, asset impairment expense and FCC reimbursements; interest expense; other (income) expense, net; income tax expense (benefit); non-controlling interest; share-based compensation expense; legacy accounts receivable write-offs; realignment and exit costs; and acquisition and disposition costs.
Adjusted EBITDA by segment is summarized as follows:
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|
|
| (in millions): |
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
2024 |
|
2023 |
|
Increase / (Decrease) |
Infrastructure |
|
|
|
|
|
|
|
$ |
89.1 |
|
|
$ |
100.6 |
|
|
$ |
(11.5) |
|
| Life Sciences |
|
|
|
|
|
|
|
(14.5) |
|
|
(23.1) |
|
|
8.6 |
|
| Spectrum |
|
|
|
|
|
|
|
7.1 |
|
|
2.0 |
|
|
5.1 |
|
Non-Operating Corporate |
|
|
|
|
|
|
|
(10.4) |
|
|
(13.5) |
|
|
3.1 |
|
| Other and Eliminations |
|
|
|
|
|
|
|
— |
|
|
(1.0) |
|
|
1.0 |
|
| Adjusted EBITDA |
|
|
|
|
|
|
|
$ |
71.3 |
|
|
$ |
65.0 |
|
|
$ |
6.3 |
|
The tables below provide reconciliations of net income (loss) attributable to INNOVATE Corp to Adjusted EBITDA for the years ended December 31, 2024 and 2023:
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| (in millions) |
|
Year Ended December 31, 2024 |
|
|
Infrastructure |
|
Life Sciences |
|
Spectrum |
|
Non-Operating Corporate |
|
Other and Eliminations |
|
INNOVATE |
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
| Net income (loss) attributable to INNOVATE Corp. |
|
$ |
40.3 |
|
|
$ |
(19.7) |
|
|
$ |
(20.0) |
|
|
$ |
(35.3) |
|
|
$ |
0.1 |
|
|
$ |
(34.6) |
|
| Adjustments to reconcile net income (loss) to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
12.0 |
|
|
0.4 |
|
|
5.1 |
|
|
0.1 |
|
|
— |
|
|
17.6 |
|
| Depreciation and amortization (included in cost of revenue) |
|
15.2 |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
— |
|
|
15.3 |
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Other operating (income) loss |
|
(9.6) |
|
|
— |
|
|
0.4 |
|
|
0.2 |
|
|
— |
|
|
(9.0) |
|
| Interest expense |
|
10.3 |
|
|
9.8 |
|
|
14.3 |
|
|
40.1 |
|
|
— |
|
|
74.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other (income) expense, net |
|
(3.9) |
|
|
0.8 |
|
|
8.5 |
|
|
(8.7) |
|
|
(0.1) |
|
|
(3.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense (benefit) |
|
15.2 |
|
|
— |
|
|
0.2 |
|
|
(9.1) |
|
|
— |
|
|
6.3 |
|
| Non-controlling interest |
|
3.8 |
|
|
(7.3) |
|
|
(1.6) |
|
|
— |
|
|
— |
|
|
(5.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share-based compensation expense |
|
— |
|
|
1.2 |
|
|
— |
|
|
2.2 |
|
|
— |
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Realignment and exit costs |
|
5.2 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Acquisition and disposition costs |
|
0.6 |
|
|
0.2 |
|
|
0.2 |
|
|
0.1 |
|
|
— |
|
|
1.1 |
|
| Adjusted EBITDA |
|
$ |
89.1 |
|
|
$ |
(14.5) |
|
|
$ |
7.1 |
|
|
$ |
(10.4) |
|
|
$ |
— |
|
|
$ |
71.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
Year Ended December 31, 2023 |
|
|
Infrastructure |
|
Life Sciences |
|
Spectrum |
|
Non-Operating Corporate |
|
Other and Eliminations |
|
INNOVATE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) attributable to INNOVATE Corp. |
|
$ |
28.7 |
|
|
$ |
(15.5) |
|
|
$ |
(22.2) |
|
|
$ |
(33.2) |
|
|
$ |
7.0 |
|
|
$ |
(35.2) |
|
| Adjustments to reconcile net income (loss) to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
14.4 |
|
|
0.5 |
|
|
5.2 |
|
|
0.1 |
|
|
— |
|
|
20.2 |
|
| Depreciation and amortization (included in cost of revenue) |
|
15.7 |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
— |
|
|
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other operating (income) loss |
|
(0.2) |
|
|
— |
|
|
(0.1) |
|
|
0.5 |
|
|
1.1 |
|
|
1.3 |
|
| Interest expense |
|
13.8 |
|
|
2.9 |
|
|
13.4 |
|
|
38.1 |
|
|
— |
|
|
68.2 |
|
| Other (income) expense, net |
|
(1.2) |
|
|
(4.1) |
|
|
7.7 |
|
|
(6.7) |
|
|
(12.4) |
|
|
(16.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income tax expense (benefit) |
|
20.2 |
|
|
— |
|
|
0.3 |
|
|
(14.8) |
|
|
(1.2) |
|
|
4.5 |
|
| Non-controlling interest |
|
2.8 |
|
|
(7.3) |
|
|
(2.5) |
|
|
— |
|
|
3.3 |
|
|
(3.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share-based compensation expense |
|
— |
|
|
0.2 |
|
|
— |
|
|
2.0 |
|
|
— |
|
|
2.2 |
|
| Legacy accounts receivable write-off |
|
2.2 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2.2 |
|
| Realignment and exit costs |
|
2.1 |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
— |
|
|
2.2 |
|
| Acquisition and disposition costs |
|
2.1 |
|
|
0.1 |
|
|
0.1 |
|
|
0.5 |
|
|
1.2 |
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted EBITDA |
|
$ |
100.6 |
|
|
$ |
(23.1) |
|
|
$ |
2.0 |
|
|
$ |
(13.5) |
|
|
$ |
(1.0) |
|
|
$ |
65.0 |
|
Infrastructure: Net income from our Infrastructure segment for the year ended December 31, 2024, increased $11.6 million to $40.3 million from $28.7 million for the year ended December 31, 2023. Adjusted EBITDA from our Infrastructure segment for the year ended December 31, 2024, decreased $11.5 million to $89.1 million from $100.6 million for the year ended December 31, 2023. The decrease in Adjusted EBITDA was primarily driven by decrease in revenue at Banker Steel, due to timing of completion of certain large commercial construction projects and decreased gross margins at the construction modeling and detailing business. These decreases were partially offset by an increase in revenue at the industrial maintenance and repair businesses, higher gross margins on certain large commercial construction projects that have since been completed at DBMG's commercial structural steel fabrication and erection, including the effect of changes in estimated costs to complete those projects recognized in the ordinary course of business, despite the decrease in revenue, as well as a decrease in recurring SG&A, primarily as a result of a decrease in legal fees, which was partially offset by an increase in compensation-related expenses.
Life Sciences: Net loss from our Life Sciences segment for the year ended December 31, 2024, increased $4.2 million to $19.7 million from $15.5 million for the year ended December 31, 2023. Adjusted EBITDA loss from our Life Sciences segment for the year ended December 31, 2024, decreased $8.6 million to $14.5 million from $23.1 million for the year ended December 31, 2023. The decrease in Adjusted EBITDA loss was primarily due to a decrease in equity method losses recognized from MediBeacon and Triple Ring, as discussed in the Loss from Equity Investees section above. Additionally contributing to the decrease in Adjusted EBITDA loss was an increase in gross profit at R2 Technologies, driven by an increase in sales in North America and worldwide of all R2's products, including Glacial systems and consumables, which was partially offset by increases in selling costs and sales commissions due to the increase in system sales.
Spectrum: Net loss from our Spectrum segment for the year ended December 31, 2024, decreased $2.2 million to $20.0 million from $22.2 million for the year ended December 31, 2023. Adjusted EBITDA from our Spectrum segment for the year ended December 31, 2024, increased $5.1 million to $7.1 million from $2.0 million for the year ended December 31, 2023. The increase in Adjusted EBITDA was primarily due to an increase in revenue primarily driven by network launches and expanded coverage with existing customers, unrepeated severance in the prior year, as well as a decrease in salaries and benefits expense and a decrease in tower-related costs. This was partially offset by the termination of a number of smaller networks and individual markets in the prior year.
Non-Operating Corporate: Net loss from our Non-Operating Corporate segment for the year ended December 31, 2024, increased $2.1 million to $35.3 million from $33.2 million for the year ended December 31, 2023. Adjusted EBITDA loss from our Non-Operating Corporate segment for the year ended December 31, 2024, decreased $3.1 million to $10.4 million from $13.5 million for the year ended December 31, 2023. The decrease in Adjusted EBITDA loss was primarily driven by an unrepeated severance expense related to the Company's former Chief Operating Officer in the prior year, a decrease in salaries and benefits from a reduced headcount, decreases in accounting and consulting fees, and a decrease in rent expense primarily as a result of the termination of leases in the current year.
Other and Eliminations: Net income from our Other segment and Eliminations for the year ended December 31, 2024, decreased $6.9 million to $0.1 million from $7.0 million for the year ended December 31, 2023. Adjusted EBITDA loss from our Other segment for the year ended December 31, 2024, decreased $1.0 million to zero from an Adjusted EBITDA loss of $1.0 million for the year ended December 31, 2023. The decrease in Adjusted EBITDA loss was driven primarily by unrepeated severance expense at TIC Holdco, Inc. in the prior year and our previous investment in HMN, which was sold on March 6, 2023, and had equity method losses for the approximately two months of ownership in 2023.
Backlog
Backlog is our estimate of the U.S. dollar amount of future revenues we expect to realize as a result of performing work on projects in 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 December 31, 2024, DBMG's backlog was $957.2 million, consisting of $793.8 million under contracts or purchase orders and $163.4 million under letters of intent or notices to proceed. Approximately $461.5 million, representing 48.2% of DBMG’s backlog as of December 31, 2024, 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 $13.6 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.
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, Revolving Line of Credit, CGIC Unsecured Note, and dividend payments on its Series A-3 and Series A-4 Preferred Stock and recurring operational expenses.
On a consolidated basis, as of December 31, 2024, we had $48.8 million of cash and cash equivalents, excluding restricted cash, compared to $80.8 million as of December 31, 2023. On a stand-alone basis, as of December 31, 2024, our Non-Operating Corporate segment had cash and cash equivalents, excluding restricted cash, of $13.8 million and $1.8 million of marketable securities, as compared to cash and cash equivalents, excluding restricted cash, of $2.5 million as of December 31, 2023.
Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment, OTA broadcast station equipment, development of back-office systems, operating costs and expenses, and income taxes.
As of December 31, 2024, we had $668.3 million of principal indebtedness on a consolidated basis compared to $722.8 million as of December 31, 2023, a net decrease of $54.5 million, which was primarily due to a $54.1 million net decrease in debt at our Infrastructure segment and a $7.0 million decrease in debt at our Non-Operating Corporate segment, partially offset by an increase at our Life Sciences Segment due to the capitalization of $6.6 million of unpaid accrued interest at R2 Technologies into their principal balance outstanding.
On a stand-alone basis, our Non-Operating Corporate segment principal indebtedness was $429.9 million and $436.9 million as of December 31, 2024 and 2023, respectively, a decrease of $7.0 million driven by a partial redemption payment of $4.1 million of the CGIC Unsecured Note on April 26, 2024, and the repurchase of $2.9 million principal amount of 2026 Convertible Notes during the year ended December 31, 2024. The December 31, 2024, indebtedness balance consists of the $330.0 million aggregate principal amount of 2026 Senior Secured Notes, $48.9 million aggregate principal amount of 2026 Convertible Notes (which excludes the $2.9 million 2026 Convertible Notes repurchased by the Company), $31.0 million remaining principal amount of the CGIC Unsecured Note and $20.0 million aggregate principal amount drawn on our Revolving Line of Credit. Our Non-Operating Corporate segment is required to make semi-annual interest payments on the 2026 Senior Secured Notes and 2026 Convertible Notes on February 1st and August 1st of each year, quarterly interest payments on the Revolving Line of Credit, and monthly interest payments on the CGIC Unsecured Note. As described below, the interest rate on the CGIC Unsecured Note increased from 9.0% per annum to 16.0% per annum on May 9, 2024, and will increase from 16.0% per annum to 32.0% per annum on May 9, 2025.
We are required to make dividend payments on our outstanding Series A-3 Preferred Stock and Series A-4 Preferred Stock on January 15th, April 15th, July 15th, and October 15th of each year.
Our Non-Operating Corporate segment received $8.1 million in net tax sharing payments from our Infrastructure segment for the year ended December 31, 2024. In addition, DBMG redeemed the intercompany $41.8 million DBMG Series A Preferred Stock from DBMGi on June 28, 2024, for $41.8 million in cash, which was remitted to INNOVATE. DBM Global Intermediate Holdco Inc. ("DBMGi") is a 100% owned subsidiary of INNOVATE and all intercompany transactions are eliminated on consolidation.
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, finance 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.
Rights Offering and Concurrent Private Placement
On March 8, 2024, the Company commenced a $19.0 million rights offering ("Rights Offering") for its common stock. Pursuant to the Rights Offering, the Company distributed to each holder of the Company’s common stock, Series A-3 Convertible Participating Preferred Stock, Series A-4 Convertible Participating Preferred Stock and the 2026 Convertible Notes as of March 6, 2024 (the “rights offering record date”), transferable subscription rights to purchase 2.86 shares (0.2858 shares on a pre Reverse Stock Split basis) of the Company’s common stock at a price of $7.00 per whole share ($0.70 per whole share on a pre Reverse Stock Split basis).
Per the concurrent investment agreement entered into with Lancer Capital (the "Investment Agreement"), the Rights Offering was backstopped by Lancer Capital, an investment fund led by Avram A. Glazer, the Chairman of the Board and the Company’s largest stockholder. Due to limitations on the common stock that can be issued to Lancer Capital under the rules of the NYSE, in lieu of exercising its subscription rights, pursuant to the Investment Agreement, Lancer Capital would purchase up to $19.0 million of the Company’s newly issued Series C Non-Voting Participating Convertible Preferred Stock (the “Series C Preferred Stock”), for an issue price of $1,000 per share. In connection with the backstop commitment, and as a result of limitations in the amount common equity that can be raised under the Company’s effective shelf registration statement on Form S-3, Lancer Capital also agreed to purchase an additional $16.0 million of Series C Preferred Stock in a private placement transaction ("Concurrent Private Placement") which was to close concurrently with the settlement of the Rights Offering. Lancer Capital did not receive any compensation or other consideration for entering into or consummating the Investment Agreement.
As the Rights Offering had not yet settled by March 28, 2024, in accordance with the Investment Agreement, Lancer Capital purchased $25.0 million of Series C Preferred Stock, referred to as the "equity advance." On April 24, 2024, the Company completed and closed on the Rights Offering and issued a total of 530,611 shares of common stock (5,306,105 shares of common stock on a pre Reverse Stock Split basis) for $3.7 million. Based on the number of shares of common stock actually sold upon exercise of the rights to third party investors, there were no excess shares of Series C Preferred Stock purchased by Lancer Capital under the equity advance that the Company was required to redeem, and Lancer Capital purchased an additional approximately 6,286 Series C Preferred Stock for $6.3 million under the backstop commitment. In total, the Company received $35.0 million in aggregate gross proceeds related to the Rights Offering and Concurrent Private Placement and incurred $1.8 million in dealer manager fees and other related costs which have been capitalized into Additional paid in capital ("APIC"). INNOVATE has been utilizing and expects to continue to use the net proceeds from the Rights Offering and Concurrent Private Placement for general corporate purposes, including debt service and working capital. In addition, as a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, and consequently, on April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note.
Under the rules of the NYSE, because the shares purchased by Lancer Capital were greater than 20% of the Company's common stock outstanding before the issuance of the Series C Preferred Stock, those shares of Series C Preferred Stock were not allowed to be converted until stockholder approval of such issuance was obtained. On June 18, 2024, the Company held its annual shareholder meeting where Company's shareholder's approved the conversion of the Series C Preferred Stock into common stock. As a result, approximately 31,286 shares of Series C Preferred Stock, which were held by Lancer Capital, were converted into 4,469,390 shares of common stock (44,693,895 shares of common stock on a pre Reverse Stock Split basis).
The Company waived its Tax Benefits Preservation Plan to permit persons exercising rights to acquire 4.9% or more of the outstanding common stock upon the exercise thereof without becoming an Acquiring Person (as defined in the Tax Benefits Preservation Plan).
INNOVATE utilized the net proceeds from the Rights Offering and Concurrent Private Placement for general corporate purposes, including debt service and for working capital. As a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, and on April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note. See Note 16. Equity and Temporary Equity for additional information.
Going Concern
The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern. However, as of the date of these financial statements, there is substantial doubt about the Company's ability to continue as a going concern within one year after the date that the financial statements are issued.
The principal conditions leading to this conclusion are the upcoming maturities of current debt at Corporate and certain of the Company's subsidiaries as well as from certain cross-default provisions in the Company's Senior Secured Notes. Based on these conditions, the Company may not be able to meet its obligations at maturity and comply with certain cross-default provisions under the Senior Secured Notes over the next twelve months.
Management has evaluated the significance of these conditions in relation to the Company's ability to meet its obligations. The potential inability to refinance or extend the maturity of the aforementioned current debt, or to obtain additional financing, raises substantial doubt about the Company's ability to continue as a going concern.
The Company plans to alleviate these conditions through various initiatives it is currently exploring, including potentially refinancing the debt at Corporate and its subsidiaries, pursuing asset sales, and raising additional capital. However, there can be no assurance that the Company will have the ability to raise additional capital when needed, be successful in any asset sales, or refinance its existing debt, on attractive terms, or at all nor any assurances that lenders will provide additional extensions, waivers or amendments in the event of future non-compliance with the Company’s debt covenants or other possible events of default. Further, there can be no assurance that the Company will be able to execute a reduction, extension, or refinancing of the debt, or that the terms of any replacement financing would be as favorable as the terms of the debt prior to the maturity date. There can be no assurance that these plans will be successfully implemented or that they will mitigate the conditions that raise substantial doubt about the Company's ability to continue as a going concern.
The Consolidated Financial Statements included in this Annual Report on Form 10-K do not include any adjustments to the carrying amounts and classification of assets, liabilities, or expenses that may result if the Company is unable to continue as a going concern.
While the Company has noted the conditions above regarding its ability to continue as a going concern, it is important to note that the Company’s largest subsidiary, DBMG, is operationally profitable, continues to maintain a strong financial position and remains in good standing with its lenders. Under INNOVATE’s Senior Secured Notes Indenture, DBMG is a restricted subsidiary, not a guarantor, and INNOVATE’s equity interests in DBMG are pledged as collateral.
Capital Expenditures
Capital expenditures are set forth in the table below (in millions):
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Year Ended December 31, |
|
|
|
|
|
|
2024 |
|
2023 |
Infrastructure |
|
|
|
|
|
$ |
17.6 |
|
|
$ |
16.6 |
|
| Life Sciences |
|
|
|
|
|
— |
|
|
0.5 |
|
| Spectrum |
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|
|
|
|
1.4 |
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|
1.0 |
|
Non-Operating Corporate |
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|
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|
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— |
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|
0.3 |
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| Total |
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|
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|
|
$ |
19.0 |
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|
$ |
18.4 |
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Purchase Commitments
Unrecorded future minimum purchase commitments as of December 31, 2024, were $117.9 million. Refer to Note 13. Commitments and Contingencies included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference, for additional information.
Indebtedness
Non-Operating Corporate
2026 Senior Secured Notes
On February 1, 2021, our Non-Operating Corporate segment repaid the senior secured notes that were due in 2021 and issued $330.0 million aggregate principal amount of 8.50% senior secured notes due February 1, 2026 (the "2026 Senior Secured Notes"). The 2026 Senior Secured Notes mature on February 1, 2026, and accrue interest at a rate of 8.50% per year, which interest is paid semi-annually on February 1st and August 1st of each year. If the Company sells certain assets and the net cash proceeds from all applicable asset sales exceed $50.0 million since the issue date of the 2026 Senior Secured Notes, the Company may be required in certain circumstances to make an offer to purchase the notes with the net cash proceeds from such an asset sale in excess of such $50.0 million threshold at a price in cash equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase.
For additional information on the terms and conditions of the 2026 Senior Secured Notes, including guarantees, ranking and collateral, refer to Note 11. Debt Obligations included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference.
2026 Convertible Notes
The original $51.8 million aggregate principal amount of 7.50% convertible notes (the "2026 Convertible Notes") were issued under a separate indenture dated February 1, 2021, between the Company and U.S. Bank, as trustee (the "Convertible Indenture"). In July 2024, we repurchased $2.9 million principal amount of our 2026 Convertible Notes at a market discount for $1.1 million, which is inclusive of accrued interest of $0.1 million. As of December 31, 2024, we had $48.9 million principal amount of 2026 Convertible Notes outstanding. The 2026 Convertible Notes mature on August 1, 2026 unless earlier converted, redeemed or purchased. The 2026 Convertible Notes accrue interest at a rate of 7.5% per year, which interest is paid semi-annually on February 1st and August 1st of each year.
For additional information on the terms and conditions of the 2026 Convertible Notes, including optional redemption, conversion rights guarantees, ranking and collateral, refer to Note 11. Debt Obligations included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference.
Our debt contains customary events of default which could, subject to certain conditions, cause the 2026 Senior Secured Notes and the 2026 Convertible Notes to become immediately due and payable.
Revolving Line of Credit
We have a revolving credit agreement with MSD PCOF Partners IX, LLC ("MSD") which has a maximum commitment of $20.0 million ("Revolving Line of Credit"), of which $20.0 million had been drawn as of December 31, 2024. Interest on loans under the Revolving Line of Credit accrues at SOFR plus 5.75% and is payable quarterly. The Revolving Line of Credit also includes a commitment fee at a per annum rate of 1.0% calculated based off the actual daily amount of unused availability under the Revolving Line of Credit with MSD. The maturity date of the Revolving Line of Credit, as amended on May 6, 2024, is May 16, 2025. Subsequent to year end, on March 6, 2025, the maturity date of the Revolving Line of Credit was extended to August 1, 2025, with all other terms substantially unchanged. The amount outstanding under the Revolving Line of Credit is subject to mandatory prepayment from the net cash proceeds from certain asset sales in excess of $10.0 million.
For additional information on the terms and conditions of the Revolving Line of Credit, including guarantees and ranking and collateral, refer to Note 11. Debt Obligations included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference.
CGIC Unsecured Note
On May 9, 2023, in connection with the redemption of the DBMGi Series A Preferred Stock, the Company issued a subordinated unsecured promissory note to CGIC in the principal amount of $35.1 million (the "CGIC Unsecured Note"). The CGIC Unsecured Note is due February 28, 2026, and bore interest at 9.0% per annum through May 8, 2024, bears interest at 16.0% per annum from May 9, 2024, to May 8, 2025, and 32.0% per annum thereafter. The CGIC Unsecured Note also requires a mandatory prepayment from the proceeds from certain asset sales and the greater of $3.0 million or 12.5% of the net proceeds from certain equity sales. Other covenants in the CGIC Unsecured Note are generally consistent with the Company's Indenture governing the 8.50% Senior Secured Notes due 2026, dated as of February 1, 2021, by and among the Company, the guarantors party thereto and U.S. Bank National Association. As a result of the closing of the Rights Offering, on April 24, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note on April 26, 2024.
Refer to Note 16. Equity and Temporary Equity and to Note 11. Debt Obligations included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference, for additional information.
Infrastructure
As of December 31, 2024, our Infrastructure segment has aggregate principal outstanding debt, including obligations under finance leases, of $144.7 million.
DBMG has a $135.0 million Revolving Line with UMB that bears interest at a prime rate minus a spread with an interest rate floor of 4.25%. As of December 31, 2024, the outstanding balance was $45.0 million. The effective interest rate on the Revolving Line with UMB was 6.98% as of December 31, 2024. The Revolving Line with UMB matures on August 15, 2025, and interest is paid monthly. The Revolving Line with UMB also includes a commitment fee equal to 0.25% per annum times the average daily unused availability under the line.
DBMG also has a $74.6 million term loan due 2026 (the "3.25% UMB Term Loan"), which expires May 31, 2026, and bears interest at an annual rate of 3.25% with an effective interest rate of 3.3%. Interest is paid monthly. On June 28, 2024, DBM and UMB entered into the Third Amendment to the UMB Credit Agreement. The amendment added an incremental separate term loan of $25.0 million to the existing credit facility, of which $24.5 million is outstanding as of December 31, 2024. The incremental term loan bears the same interest rate as the Revolving Line with UMB and has the same maturity date as the initial 3.25% UMB Term Loan which had a balance of $74.6 million as of December 31, 2024. Principal payments and interest are paid monthly.
During the year ended December 31, 2024, DBMG made $5.0 million in scheduled payments on the 4.0% note that was payable to Banker Steel's former owner. The 4.0% note matured on March 31, 2024, and was fully redeemed on April 2, 2024.
Refer to Note 11. Debt Obligations of the Consolidated Financial Statements included in this Annual Report on Form 10-K which is incorporated herein by reference, for additional details regarding the indebtedness of our Infrastructure segment.
Life Sciences
As of December 31, 2024, our Life Sciences segment has aggregate principal outstanding debt of $24.0 million.
R2 Technologies had various short-term notes with Lancer Capital, which expired on January 31, 2024, and, effective January 31, 2024, a new 20% note with an aggregate original principal amount of $20.0 million was issued, which was comprised of all prior outstanding principal amounts and unpaid accrued interest of $2.6 million which was capitalized into the new principal balance. Interest on the note accrues at 20% per annum and is payable monthly in arrears, in cash or, if not paid in cash, accrued and unpaid interest is capitalized monthly into the principal balance. The maturity date of the 20% note, as subsequently amended, was December 31, 2024, or within five business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing or has a change in control, as defined in the agreement, with an optional prepayment of the entire then-outstanding and unpaid principal and accrued interest upon five-days written notice to Lancer Capital.
The 20% $20.0 million note also includes various exit fees, as amended. As of December 31, 2024, the exit fee, as amended, was equal to 11.90% of the principal amount being repaid, and effective July 31, 2024, an additional exit fee of $1.0 million was incurred each month until the end of November 2024. As of December 31, 2024, total exit fees payable were $7.9 million. The exit fees are payable on the earliest of the maturity date, the date of the acceleration of the principal amount of the note for any reason or, if any portion of the note is prepaid at any time, the date of such prepayment of the note.
Subsequent to year end, with an effective date of December 31, 2024, the maturity date of the note was extended to August 1, 2025. In addition, the exit fee continues to increase by 0.17% each month until maturity and an additional exit fee of $1.0 million was incurred under the amendment, which also continues to increase by $1.0 million each month until maturity. The exit fees are payable on the earliest of the maturity date, the date of the acceleration of the principal amount of the note for any reason or, if any portion of the note is prepaid at any time, the date of such prepayment of the note. A new $5.0 million default fee will be payable on August 1, 2025, in the event all obligations under the note, including principal, any accrued and unpaid interest, and exit fees, are not repaid in full prior to the August 1, 2025, maturity date. Also subsequent to year end, on February 20, 2025, Pansend closed on a new $3.5 million convertible 13.0% note instrument with R2 Technologies, which is convertible, together with any accrued interest at the time of conversion, into a new Series E Preferred Stock ("Series E") in R2 Technologies upon written notice to R2 Technologies and has a maturity date of the earlier of July 31, 2025, or a change in control, as defined in the agreement. The transaction is eliminated on consolidation.
Refer to Note 11. Debt Obligations included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference, for additional information.
Spectrum
As of December 31, 2024, our Spectrum segment has aggregate principal outstanding debt of $69.7 million, consisting of 8.50% and 11.45% Notes. Interest is capitalized and payable upon maturity of the notes. The maturity date, as amended, of Spectrum's 8.50% and 11.45% Notes, is August 15, 2025.
The exit fees associated with the notes, which are payable on the earlier of maturity or repayment of the principal, were recorded as original issue discount and are being amortized over the remaining life of the notes, which is assumed to be the maturity date. A corresponding liability of $15.9 million is reflected within Accrued Liabilities in the Consolidated Balance Sheet as of December 31, 2024. As of December 31, 2024 and 2023, the weighted-average effective interest rates on the notes, as amended, was 22.8%.
During November 2023, concurrently with Broadcasting's execution of the Ninth Amendment to Secured Notes, which among other things extended the maturity of the notes, INNOVATE entered into a related side letter with the lenders, whereby INNOVATE agreed to utilize proceeds from the sale of certain of its existing operations, as allowable under the Company's current agreements and indentures and after all other required payments have been made, for repayment of a portion of our Spectrum segment's Senior Secured Notes. Assuming there are sufficient proceeds remaining after such repayment, an additional $2.0 million is payable for payments made after November 9, 2024, and in exchange for the additional fee, the institutional investors will return their equity interests in HC2 Broadcasting Holdings, Inc. and their equity interests in DTV America.
Refer to Note 11. Debt Obligations included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference, for additional information.
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 for the next six months on the 2026 Senior Secured Notes and all other Debt, including Convertible Series A-3 and Series A-4 Preferred Stock mandatory cash dividends or any other mandatory cash pay Series A-3 and Series A-4 Preferred Stock but excluding any obligation to pay interest on Series A-3 and Series A-4 Preferred Stock or any other mandatory cash payments on Series A-3 and Series A-4 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. As of December 31, 2024, 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 December 31, 2024, the Company was in compliance with this covenant.
The instruments governing the Company’s Series A-3 Preferred Stock and Series A-4 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 Series A-3 Preferred Stock and Series A-4 Preferred Stock; engage in transactions with affiliates; and make certain restricted payments. These limitations are subject to a number of important exceptions and qualifications.
The Company has conducted its operations in a manner that has resulted in compliance with the Secured Indenture; however, compliance with certain financial covenants for future periods may depend on the Company or one or more of the Company’s subsidiaries undertaking one or more non-operational transactions, such as the management of operating cash outflows, a monetization of assets, a debt incurrence or refinancing, the raising of equity capital, or similar transactions. If the Company is unable to remain in compliance and does not make alternate arrangements, an event of default would occur under the Company’s Secured Indenture which, among other remedies, could result in the outstanding obligations under the indenture becoming immediately due and payable and permitting the exercise of remedies with respect to the collateral. There is no assurance the Company will be able to complete any non-operational transaction it may undertake to maintain compliance with covenants under the Secured Indenture or, even if the Company completes any such transaction, that it will be able to maintain compliance for any subsequent period.
The UMB term loans and Revolving Line with UMB associated with our Infrastructure segment contain customary restrictive and financial covenants related to debt levels and performance, including a Fixed Charge Coverage Ratio covenant, as defined in the agreement.
As of December 31, 2024, we were in compliance with the covenants of our debt agreements.
Summary of Consolidated Cash Flows
The below table summarizes the cash provided by or used in our activities (in millions):
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Year Ended December 31, |
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Increase / (Decrease) |
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2024 |
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2023 |
|
| Cash provided by operating activities |
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$ |
9.1 |
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$ |
26.5 |
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$ |
(17.4) |
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| Cash (used in) provided by investing activities |
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(13.9) |
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39.1 |
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(53.0) |
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| Cash used in financing activities |
|
(26.5) |
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(65.3) |
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38.8 |
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| Effects of exchange rate changes on cash, cash equivalents and restricted cash |
|
(1.7) |
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(0.2) |
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|
(1.5) |
|
| Net (decrease) increase in cash and cash equivalents, including restricted cash |
|
$ |
(33.0) |
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$ |
0.1 |
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$ |
(33.1) |
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Operating Activities
Cash provided by operating activities was $9.1 million for the year ended December 31, 2024, as compared to $26.5 million for the year ended December 31, 2023, a decrease of $17.4 million. Cash flows from operations are primarily influenced by changes in the timing of demand for services and by operating margins, but can also be affected by working capital needs associated with our operations. For the year ended December 31, 2024, the decrease in operating cash flows was primarily driven by a decrease in operating cash flows at our Infrastructure segment, partially offset by improvements at our Non-Operating Corporate segment and our Other segment. The decrease in operating cash flows at our Infrastructure segment was primarily due to the timing of completion of certain large commercial construction projects and decreased gross profit, and the net decrease in working capital cash flows at our Infrastructure segment was primarily driven by normal business fluctuations in accounts receivable, contract-related assets and liabilities, other accrued liabilities and other current liabilities. Partially offsetting the decrease in operating cash flows were improvements at our Non-Operating Corporate segment, primarily due to a decrease in SG&A expenses, and our Other segment, which had an unrepeated $4.4 million foreign tax payment in the prior year related to the 2023 sale of New Saxon's 19% investment in in HMN.
Investing Activities
Cash used in investing activities was $13.9 million for the year ended December 31, 2024, as compared to cash provided by investing activities of $39.1 million for the year ended December 31, 2023, a decrease of $53.0 million. The decrease was primarily driven by the $54.2 million of gross cash proceeds received in the prior year from the 2023 sale of New Saxon's 19.0% investment in HMN, and the $5.0 million received from Pansend's partial sale of Triple Ring in 2023. In addition, during the year ended December 31, 2024 our Non-Operating Corporate segment paid $2.0 million to purchase an investment in mark-to-market securities and our Spectrum segment paid $1.2 million for the acquisition of additional FCC station licenses. Capital expenditures for the year ended December 31, 2024 were $19.0 million, as compared to $18.4 million for the year ended December 31, 2023, an increase in cash used of $0.6 million. Proceeds from the disposal of PP&E totaled $10.1 million for the year ended December 31, 2024, and primarily related to the sale of various PP&E at our Infrastructure segment, as compared to $1.6 million in proceeds for the year ended December 31, 2023. Loans made by our Life Sciences segment to MediBeacon totaled $2.3 million for the year ended December 31, 2024, as compared to $4.0 million for the year ended December 31, 2023, a decrease in cash used of $1.7 million.
Financing Activities
Cash used in financing activities was $26.5 million for the year ended December 31, 2024, as compared to $65.3 million for the year ended December 31, 2023, an improvement in financing cash flows of $38.8 million. The improvement was primarily driven by our Non-Operating Corporate segment, which received $33.2 million in net proceeds in the current year from the Rights Offering and Concurrent Private Placement, as well as an increase in proceeds from other debt obligation due to the net proceeds of $24.8 million received in the current year at our Infrastructure segment from an incremental separate term loan, as compared to proceeds received in the prior year of $4.9 million, which related primarily to proceeds received at our Life Sciences segment from Lancer Capital. In addition, during the year ended December 31, 2024, our Other segment made $0.3 million in final distributions to New Saxons' non-controlling interests, whereas for year ended December 31, 2023, our Other segment made $15.9 million in distributions, both related to the 2023 sale of New Saxon's 19.0% investment in HMN, for a decrease in cash outflows of $15.6 million. Our Non-Operating Corporate segment also made a $7.0 million payment in the prior year in connection with the repurchase of the DBMGi Series A Preferred Stock on May 9, 2023 from CGIC, and dividend payments decreased by $1.0 million for the year ended December 31, 2024, as compared to the prior year, due to the repurchase of the DBMGi Series A Preferred Stock in 2024. For the year ended December 31, 2024, principal payments for debt obligations and repurchases of other debt obligations totaled $28.0 million, as compared to $37.1 million in the prior year, a decrease of $9.1 million, due to a decrease of $14.4 million in principal payments at our Infrastructure segment primarily due to the payoff of certain notes in the prior year, partially offset by a $4.1 million repayment on the CGIC Unsecured Note and a $1.1 million payment for the partial repurchase of our 2026 Convertible Notes at our Non-Operating Corporate segment in the current year. These improvements in financing cash flows were partially offset by a $47.3 million increase in net outflows from revolving credit line activity for the year ended December 31, 2024, as compared to the prior year, due to net payments by our Infrastructure segment to reduce the outstanding balance on its Revolving Line with UMB.
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 on 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 available funds, cash generated by operating activities and funds available under its bank credit facilities will be adequate to meet all funding requirements for its operating expenses, working capital needs, interest payments on debt and capital expenditures for the foreseeable future. However, DBMG may expand its operations through future acquisitions and may require additional equity or debt financing.
DBMG is required to make monthly interest payments on all of its debt. Based upon the December 31, 2024, debt balance, DBMG anticipates that its interest payments will be approximately $1.5 million for each quarter of 2025.
New Accounting Pronouncements
For information on new accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference, for additional information.
Critical Accounting Estimates
The preparation of financial statements in accordance with generally accepted accounting principles under U.S. Generally Accepted Accounting Principles ("GAAP") requires the use of estimates and assumptions that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental disclosures, including information about contingencies, risk and financial condition.
Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties and potentially yield materially different results under different assumptions or conditions. Given current facts and circumstances, we believe that our estimates and assumptions are reasonable, adhere to GAAP and are consistently applied. Our selection and disclosure of our critical accounting policies and estimates has been reviewed with our Audit Committee. The following is a review of the more significant assumptions and estimates used in the preparation of our consolidated financial statements. For all of these estimates, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Refer to Note 2. Summary of Significant Accounting Policies and Note 3. Revenue and Contracts in Process included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which discuss our significant accounting and revenue recognition policies and are incorporated herein by reference.
Revenue Recognition - Estimated Costs to Complete
With respect to our Infrastructure segment (DBM Global Inc.), we recognize a significant portion of our revenue over time using the input method to measure the progress of costs incurred for our service and construction contracts. DBM Global Inc. performs its services primarily under fixed-price contracts and recognizes revenue over time using the input method to measure progress for its projects. The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date. The Company has determined that one or more of these three criteria are met for such contracts. The most reliable measure of progress is the cost incurred towards delivery of the completed project. Therefore, the input method provides the most reliable method to measure progress. Revenue recognition begins when work has commenced. Costs include all direct material and labor costs related to contract performance, subcontractor costs, indirect labor, and fabrication plant overhead costs, which are charged to contract costs as incurred. Revenues relating to changes in the scope of a contract are recognized when we and a customer or general contractor have agreed on both the initial scope and price of any subsequently mutually agreed upon change orders due to a change in scope or other cost factors, the work has commenced, and that realization of revenue is reasonably assured. Revisions in estimates during the course of contract work are reflected in the accounting period in which the facts requiring the revision become known. Provisions for estimated losses on uncompleted contracts are made in the period in which a loss on a contract becomes determinable.
Income Taxes
Our annual tax rate is based on our income, statutory tax rates, exchange rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties.
We review our tax positions quarterly and adjust the balances as new information becomes available. Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. To provide insight, we use our historical experience and our short and long-range business forecasts. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance. Based on consideration of both positive and negative evidence, we determined that it was more likely than not that the net deferred tax assets of the INNOVATE Corp. U.S. consolidated income tax group and other separate entity filers will not be realized. Therefore, a full valuation allowance was maintained against the net deferred tax assets as of December 31, 2024. Although realization is not assured for the remaining deferred income tax assets, we believe it is more likely than not the deferred tax assets will be fully recoverable within the applicable statutory expiration periods. However, deferred tax assets could be reduced in the near term if our estimates of taxable income are significantly reduced.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. These assessments of uncertain tax positions contain judgments related to the interpretation of tax regulations in the jurisdictions in which we transact business. Expected outcomes of current or anticipated tax examinations, refund claims and tax-related litigation and estimates regarding additional tax liability (including interest and penalties thereon) or refunds resulting therefrom are estimates recorded to the extent applicable based on management judgement. The judgments and estimates made at a point in time may change based on the outcome of tax audits, expiration of statutes of limitations, as well as changes to, or further interpretations of, tax laws and regulations.
Refer to Note 12. Income Taxes included in the Consolidated Financial Statements of this Annual Report on Form 10-K for further information, which is incorporated herein by reference.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but, rather, are tested for impairment. We test goodwill and indefinite lived intangibles for impairment at least annually in the fourth quarter (October 1st) or when factors indicate that the carrying amounts of assets may not be recoverable and that there is a potential impairment in accordance with the provisions of ASC 350, Intangibles - Goodwill and Other ("ASC 350"). The factors that we consider important, and which could trigger an impairment review, include, but are not limited to: a more likely than not expectation of selling or disposing all, or a portion, of a reporting unit; a significant decline in the market value of our common stock or debt securities for a sustained period; a material adverse change in economic, financial market, industry or sector trends; a material failure to achieve operating results relative to historical levels or projected future levels; and significant changes in operations or business strategy. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to the impairment provisions of ASC 360, Property, plant, and equipment ("ASC 360").
We elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value, and if so, a quantitative test is performed. The quantitative evaluation for impairment of indefinite lived intangibles consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to the excess, limited to the amount of recognized goodwill.
Under the quantitative test, we estimate the fair value of a reporting unit, which requires various assumptions including projections of future cash flows, perpetual growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our assessment of a number of factors, including the reporting unit’s recent performance against budget, performance in the market that the reporting unit serves, and industry and general economic data from third-party sources. Discount rate assumptions are based on an assessment of the risk inherent in those future cash flows. Changes to the underlying businesses could affect the future cash flows, which in turn could affect the fair value of the reporting unit. Further, we assess the current market capitalization, forecasts and the amount by which the fair values exceeded the carrying values. If the carrying amount of the reporting unit exceeds the fair value, an impairment loss shall be recognized in an amount equal to the excess.
Based on qualitative assessments performed as of October 1, 2024, management determined it was more likely than not that the fair value of its reporting units and the fair value of the indefinite-lived intangible assets exceeded their carrying values, and, as such, no impairment was required.
Intangible assets not subject to amortization (i.e. indefinite lived intangibles) consist of certain television broadcast licenses. Intangible assets subject to amortization consist of certain trade names, customer contracts and developed technology. These finite lived intangible assets are amortized based on their estimated useful lives. Such assets are subject to the impairment provisions of ASC 360, wherein impairment is recognized and measured only if there are events and circumstances that indicate that the carrying amount may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset group. An impairment loss is recorded to the extent the carrying amount of the asset or asset group exceeds the fair value and is not recoverable.
Refer to Note 8. Goodwill and Intangibles, Net, included in the Consolidated Financial Statements of this Annual Report on Form 10-K for additional information on goodwill and intangible assets, including, if applicable, any intangible impairments recorded during the years presented, which is incorporated herein by reference.
Related Party Transactions
For a discussion of our Related Party Transactions, refer to Note 17. Related Parties included in the Consolidated Financial Statements of this Annual Report on Form 10-K, which is incorporated herein by reference.
Special Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. We have made statements in this Annual Report on Form 10-K for the fiscal year ended December 31, 2024 (the “2024 Annual Report”) that may constitute “forward-looking statements.” 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 future acquisitions and dispositions and the successful integration of acquisitions with INNOVATE or the applicable subsidiary, litigation, potential and contingent liabilities, management’s plans, changes in regulations and taxes.
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 Item 1A of this Annual Report on Form 10-K and the documents incorporated herein by reference, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. You should also understand that many factors described under one heading below may apply to more than one section in which we have grouped them for the purpose of this presentation. As a result, you should consider all of the following factors, together with all of the other information presented herein, in evaluating our business and that of our subsidiaries.
INNOVATE Corp. and Subsidiaries
Our actual results or other outcomes may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
•our dependence on distributions from our subsidiaries to fund our operations and payments on our obligations;
•substantial doubt about our ability to continue operating as a going concern;
•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, CGIC Unsecured Note and Revolving Line of Credit, the Certificates of Designation governing INNOVATE’s Series A-3 Preferred Stock and Series A-4 Preferred Stock and all other subsidiary debt obligations as summarized in Note 11. Debt Obligations to our Consolidated Financial Statements included in this Annual Report on Form 10-K and future financing agreements on our ability to operate our business and finance our pursuit of acquisition opportunities;
•our possible inability to generate sufficient liquidity, margins, earnings per share, cash flow and working capital from our operating segments;
•our dependence on certain key personnel including the passing in 2023 of Mr. Barr, our former CEO, President and Director and the successful transition of his management responsibilities;
•bank failures or other similar events that could adversely affect our and our customers' and vendors' liquidity and financial performance;
•our possible inability to hire and retain qualified executive management, sales, technical and other personnel;
•the potential for, and our ability to, remediate future material weaknesses in our internal controls over financial reporting;
•changes in market conditions, including from political regulatory or market uncertainty, changes in foreign exchange rates, interest rates or inflation, supply chain disruptions, labor shortages and increases in overall price levels, including in transportation costs;
•increased competition in the markets in which our operating segments conduct their businesses;
•limitations on our ability to successfully identify any strategic acquisitions or business opportunities and to compete for these opportunities with others who have greater resources;
•our ability to effectively increase the size of our organization, if needed, and manage our growth;
•the impact of expending significant resources in considering acquisition targets or business opportunities that are not consummated;
•our expectations and timing with respect to our ordinary course acquisition activity and whether such acquisitions are accretive or dilutive to stockholders;
•the effect any interests our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved;
•uncertain global economic conditions in the markets in which our operating segments conduct their businesses;
•the effects related to or resulting from ongoing and recent geopolitical events, such as the political unrest and military conflicts in the Middle East, Russia and 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;
•the impact of catastrophic events, including natural disasters, pandemic illness and the outbreak of war, or acts of terrorism;
•potential impacts on our business resulting from climate change, greenhouse gas regulations, and the impact of climate change-related changes in the frequency and severity of weather patterns;
•the impact of additional material charges associated with our oversight of acquired or target businesses and the integration of our financial reporting;
•tax consequences associated with our acquisition, holding and disposition of target companies and assets;
•our ability to remain in compliance with the listing standards of the NYSE;
•the Reverse Stock Split may not result in a sustained increase in the per share price of our common stock;
•the ability of our operating segments to attract and retain customers;
•our expectations regarding the timing, extent and effectiveness of our cost reduction initiatives and management’s ability to moderate or control discretionary spending;
•management’s plans, goals, forecasts, expectations, guidance, objectives, strategies and timing for future operations, acquisitions, synergies, asset dispositions, fixed asset and goodwill impairment charges, tax and withholding expense, selling, general and administrative expenses, product plans, performance and results;
•management’s assessment of market factors and competitive developments, including pricing actions and regulatory rulings;
•our expectations and timing with respect to any strategic dispositions and sales of our operating subsidiaries, or businesses, that we may make in the future and the effect of any such dispositions or sales on our results of operations;
•the possibility of indemnification claims arising out of divestitures of businesses; and
•our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all.
Infrastructure / DBM Global Inc.
Our actual results or other outcomes of DBMG, and, thus, our Infrastructure segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
•adverse impacts from weather affecting DBMG’s performance and timeliness of completion of projects, which could lead to increased costs and affect the quality, costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
•cost overruns on fixed-price or similar contracts or failure to receive timely or proper payments on cost-reimbursable contracts, whether as a result of improper estimates, performance, disputes, or otherwise;
•uncertain timing and funding of new contract awards, as well as project cancellations;
•potential impediments and limitations on our ability to complete ordinary course acquisitions in anticipated time frames or at all;
•changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
•changes in economic conditions, including from the impact of inflationary pressures and changes in interest rates;
•adverse outcomes of pending claims or litigation or the possibility of new claims or litigation, and the potential effect of such claims or litigation on DBMG’s business, financial condition, results of operations or cash flow;
•risks associated with labor productivity, including performance of subcontractors that DBMG hires to complete projects;
•its ability to realize cost savings from expected performance of contracts, whether as a result of improper estimates, performance, or otherwise;
•its ability to settle or negotiate unapproved change orders and claims;
•fluctuating revenue resulting from a number of factors, including the cyclical nature of the individual markets in which our customers operate;
•our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all; and
•lack of necessary liquidity to provide bid, performance, advance payment and retention bonds, guarantees, or letters of credit securing DBMG’s obligations under bids and contracts or to finance expenditures prior to the receipt of payment for the performance of contracts.
Life Sciences / Pansend Life Sciences, LLC
Our actual results or other outcomes of Pansend Life Sciences, LLC, and, thus, our Life Sciences segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
•our Life Sciences segment’s ability to invest in development stage companies;
•our Life Sciences segment’s ability to develop products and treatments related to its portfolio companies;
•medical advances in healthcare and biotechnology;
•governmental regulation in the healthcare industry; and
•our Life Sciences segment possible inability to raise additional capital when needed or refinance its existing debt, on attractive terms, or at all.
Spectrum / HC2 Broadcasting Holdings Inc.
Our actual results or other outcomes of Broadcasting, and, thus, our Spectrum segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
•our Spectrum segment’s ability to operate in highly competitive markets and maintain market share;
•our Spectrum segment’s ability to effectively implement its business strategy or be successful in the operation of its business;
•our Spectrum segment's possible inability to raise additional capital when needed or refinance its existing debt, on attractive terms, or at all;
•new and growing sources of competition in the broadcasting industry; and
•FCC regulation of the television broadcasting industry.
We caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this document. Neither we nor any of our subsidiaries undertake any duty or responsibility to update any of these forward-looking statements to reflect events or circumstances after the date of this document or to reflect actual outcomes, except as required by applicable law.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of the independent registered public accounting firm and consolidated financial statements listed in the accompanying index are included in
Item 15 of this report. Refer to the Index to the Consolidated Financial Statements on page F-1 of this Annual Report Form 10-K, which is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our interim 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 interim Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2024, 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.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance as to the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occur and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting described below was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2024. This assessment was based on updated criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control-Integrated Framework (2013). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2024.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2024, several of our subsidiaries successfully completed an implementation of a new Enterprise Resource Planning ("ERP") system, which replaced operating and financial systems and resulted in changes to internal controls over financial reporting. We have taken steps to ensure that appropriate controls are in place and operating effectively in the new system environment. These changes have been and will continue to be subject to our evaluation of the operating effectiveness of internal controls over financial reporting.
Other than as disclosed above, there have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
There were no "non-Rule 10b5-1 trading arrangements" (as defined in Item 408 of Regulation S-K of the Exchange Act) adopted, modified, or terminated during the quarter ended December 31, 2024, by our directors and Section 16 officers.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding this item will be set forth in our definitive proxy statement for our 2025 meeting of stockholders ("2025 Proxy Statement") and is incorporated herein by reference.
Code of Conduct
We have adopted a Code of Conduct applicable to all directors, officers and employees, including the Chief Executive Officer, senior financial officers and other persons performing similar functions. The Code of Conduct is a statement of business practices and principles of behavior that support our commitment to conducting business in accordance with the highest standards of business conduct and ethics. Our Code of Conduct covers, among other things, compliance resources, conflicts of interest, compliance with laws, rules and regulations, internal reporting of violations and accountability for adherence to the Code of Conduct. A copy of the Code of Conduct is available under the "Investor Relations-Corporate Governance" section of our website at www.innovatecorp.com. Any amendment of the Code of Conduct or any waiver of its provisions for a director or executive officer must be approved by the Board or a duly authorized committee thereof. We intend to post on our website all disclosures that are required by law or the rules of the NYSE concerning any amendments to, or waivers from, any provision of the Code of Conduct.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item will be set forth in our 2025 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding this item will be set forth in our 2025 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding this item will be set forth in our 2025 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services will be set forth in our 2025 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed as Part of This Report:
1) Index to Consolidated Financial Statements
2) Financial Statement Schedules
Financial statement schedules have been omitted since they either are not required, not applicable, or the information is otherwise included.
3) Exhibit Index
The following is a list of exhibits filed (including those incorporated by reference) or furnished as part of this Annual Report on Form 10-K.
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Secured Note dated October 24, 2019, by and among HC2 Station, HC2 LPTV, HC2 Broadcasting Inc. ("HC2 Broadcasting"), HC2 Network Inc. ("HC2 Network") (collectively the "Subsidiary Borrowers"), HC2 Broadcasting Intermediate Holdings Inc. ("HC2 Intermediate") (the "Intermediate Parent"), HC2 Broadcasting Holdings (the "Parent Borrower" and, together with the Intermediate Parent and the Subsidiary Borrowers, the "Borrowers"), and MSD PCOF Partners XVIII, LLC ("MSD") (incorporated by reference to Exhibit 4.12 to INNOVATE's Annual Report on Form 10-K, filed on March 16, 2020) (File No. 001-35210)
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| 4.3 |
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Amended and Restated Secured Note dated October 24, 2019, by and among HC2 Station, HC2 LPTV, HC2 Broadcasting, HC2 Network (collectively, the "Subsidiary Borrowers"), HC2 Intermediate (the "Intermediate Parent), HC2 Broadcasting Holdings (the "Parent Borrower" and, together with the Intermediate Parent and the Subsidiary Borrowers, the "Borrowers", Great American Life Insurance Company ("GALIC") and Great American Insurance Company ("GAIC") (collectively, the "Subsidiary Borrowers"), HC2 Intermediate (the "Intermediate Parent), HC2 Broadcasting Holdings (the "Parent Borrower" and, together with the Intermediate Parent and the Subsidiary Borrowers, the "Borrowers", Great American Life Insurance Company ("GALIC") and Great American Insurance Company ("GAIC") (incorporated by reference to Exhibit 4.13 to INNOVATE's Annual Report on Form 10-K, filed on March 16, 2020) (File No. 001-35210)
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| 4.4 |
|
First Omnibus Amendment to Secured Notes and Intercreditor Agreement dated as of February 21, 2020, by and among Station Group, LPTV, Broadcasting, Network, and HC2 Broadcasting Inc., Intermediate Parent, Parent Borrower, and MSD PCOF Partners, XVIII, LLC ("MSD"), GALIC and GAIC (incorporated by reference to Exhibit 4.1 to INNOVATE’s Quarterly Report on Form 10-Q, filed on May 11, 2020) (File No. 001-35210)
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| 4.5 |
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Second Omnibus Amendment to Secured Notes dated as of August 31, 2020, by and among Station Group, LPTV, Broadcasting, Network, and HC2 Broadcasting Inc., Intermediate Parent, Parent Borrower, and MSD PCOF Partners, XVIII, LLC ("MSD"), GALIC and GAIC (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K filed on March 9, 2022) (File No. 001-35210) |
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| 4.6 |
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Third Omnibus Amendment to Secured Notes and Second Amendment to Intercreditor Agreement dated as of September 25, 2020, by and among Station Group, LPTV, Broadcasting, Network, and HC2 Broadcasting Inc., Intermediate Parent, Parent Borrower, and MSD PCOF Partners, XVIII, LLC ("MSD"), GALIC and GAIC (incorporated by reference to Exhibit 10.3 on INNOVATE's Current Report on Quarterly Report on Form 10-Q filed on November 9, 2020) (File No. 001-35210)
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| 4.7 |
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Fourth Omnibus Amendment to Secured Notes and Third Amendment to Intercreditor Agreement, dated as of November 25, 2020, by and among Station Group, LPTV, Broadcasting, Network, and HC2 Broadcasting Inc., Intermediate Parent, Parent Borrower, and MSD PCOF Partners, XVIII, LLC ("MSD"), GALIC and GAIC (incorporated by reference to Exhibit 10.34 to the Annual Report on Form 10-K filed on March 9, 2022) (File No. 001-35210), |
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| 4.8 |
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Fifth Omnibus Amendment to Secured Notes, Consent and Second Amendment to Asset Sale Under Secured Notes and Intercreditor Agreement, dated as of October 21, 2021 by and among HC2 Station Group, Inc., HC2 LPTV Holdings, Inc., HC2 Broadcasting Inc., HC2 Network Inc., HC2 Broadcasting License Inc., HC2 Broadcasting Intermediate Holdings Inc., HC2 Broadcasting Holdings Inc., MSD PCOF Partners XVIII, LLC, Great American Life Insurance Company and Great American Insurance Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by INNOVATE on October 27, 2021) (File No. 001-35210) |
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| 4.9 |
|
Sixth Omnibus Amendment to Secured Notes, dated as of November 28, 2022, by and among HC2 Station Group, Inc., HC2 LPTV Holdings, Inc., HC2 Broadcasting Inc., HC2 Network Inc., HC2 Broadcasting License Inc., DTV America Corporation, HC2 Broadcasting Intermediate Holdings Inc., HC2 Broadcasting Holdings Inc., MSD PCOF Partners, XVIII, LLC, MassMutual Ascent Life Insurance Company and Great American Insurance Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by INNOVATE on November 29, 2022) (File No. 001-35210)
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| 4.10 |
|
Seventh Omnibus Amendment to Secured Notes, dated as of December 30, 2022, by and among HC2 Station Group, Inc., HC2 Broadcasting Inc., HC2 Network Inc., HC2 Broadcasting License Inc., DTV America Corporation, HC2 Broadcasting Intermediate Holdings Inc., HC2 Broadcasting Holdings Inc., MSD PCOF Partners, XVIII, LLC, MassMutual Ascent Life Insurance Company and Great American Insurance Company (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by INNOVATE on January 5, 2023) (File No. 001-35210) |
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| 4.11 |
|
Eighth Omnibus Amendment to Secured Notes, dated as of August 8, 2023, by and among, HC2 Station Group, Inc., HC2 Broadcasting Inc., HC2 Network Inc., DTV America Corporation, HC2 Broadcasting Intermediate Holdings Inc., HC2 Broadcasting Holdings Inc., MSD PCOF Partners XVIII, LLC, MassMutual Ascend Life Insurance Company and Great American Insurance Company (incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q filed by INNOVATE on August 9, 2023) (File No. 001-35210) |
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| 4.12 |
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Ninth Omnibus Amendment to Secured Notes, dated as of November 9, 2023, by and among, HC2 Station Group, Inc., HC2 Broadcasting Inc., HC2 Network Inc., DTV America Corporation, HC2 Broadcasting Intermediate Holdings Inc., HC2 Broadcasting Holdings Inc., MSD PCOF Partners XVIII, LLC, MassMutual Ascend Life Insurance Company and Great American Insurance Company (incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q filed by INNOVATE on November 9, 2023) (File No. 001-35210) |
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| 4.13 |
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Side Letter to Ninth Omnibus Amendment to Secured Notes, dated as of November 9, 2023, by and among,HC2 Station Group, Inc., HC2 Broadcasting Inc., HC2 Network, Inc., DTV America Corporation, HC2 Broadcasting Intermediate Holdings, Inc., HC2 Broadcasting Holdings, Inc., and MassMutual Life Insurance Company and Great American Insurance Company (incorporated by reference to Exhibit 10.12 to the Quarterly Report on Form 10-Q filed by INNOVATE on November 9, 2023) (File No. 001-35210) |
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| 4.14 |
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| 4.15 |
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| 4.16 |
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| 4.17 |
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| 4.18 |
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| 4.19 |
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| 4.20 |
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| 4.21 |
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| 4.22 |
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| 4.23 |
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10.1^ |
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10.2^ |
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10.3^ |
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10.4^ |
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10.5^ |
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| 10.6 |
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Securities Purchase Agreement dated as of June 27, 2017 among DTV Holding Inc., John N. Kyle II, Kristina C. Bruni, King Forward, Inc., Equity Trust Co FBO John N. Kyle, Tiger Eye Licensing L.L.C., Bella Spectra Corporation, Kim Ann Dagen and Michael S. Dagen, Trustees of the Kim Ann Dagen Revocable Living Trust Agreement dated March 2, 1999, Madison Avenue Ventures, LLC, Paul Donner, Reeves Callaway, Don Shalhub, Shalhub Medical Investments PA, Tipi Sha, LLC, Luis O. Suau, Irwin Podhajser and Humberto Garriga (incorporated by reference to Exhibit 10.1 to INNOVATE's Current Report on Form 8-K, filed on June 28, 2017) (File No. 001-35210)
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10.7^ |
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| 10.8 |
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Credit Agreement, dated as of May 27, 2021, by and among DBM Global Inc., the other Borrowers listed on Schedule 1.1 thereto, the Lenders, which are party thereto from time to time and UMB Bank, n.a., a national banking association, as Letter of Credit Issuer and as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by INNOVATE on May 27, 2021) (File No. 001-35210), |
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| 10.9 |
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10.10^ |
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10.11^ |
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10.12^ |
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10.13^ |
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10.14^ |
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| 10.15 |
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| 10.16 |
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| 10.17 |
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| 10.18 |
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| 10.19 |
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| 10.20 |
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| 10.21 |
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| 10.22 |
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| 10.23 |
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| 10.24 |
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| 10.25 |
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| 10.26 |
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| 10.27 |
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| 10.28 |
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| 10.29 |
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| 10.30 |
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| 10.31 |
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| 10.32 |
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10.33^ |
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| 10.34 |
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| 21.1 |
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| 23.1 |
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| 31.1 |
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| 31.2 |
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| 32.1* |
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| 101 |
|
The following materials from the registrant’s Annual Report on Form 10-K for the fiscal years ended December 31, 2024 and 2023, formatted in extensible business reporting language (XBRL); (i) Consolidated Statements of Operations for the years ended December 31, 2024 and 2023, (ii) Consolidated Statements of Comprehensive Loss for the years ended December 31, 2024 and 2023, (iii) Consolidated Balance Sheets as of December 31, 2024 and 2023, (iv) Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2024 and 2023, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2024 and 2023, and (vi) Notes to Consolidated Financial Statements (filed herewith). |
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| 104 |
|
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, formatted in Inline XBRL (included as Exhibit 101). |
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| * |
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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| ^ |
Indicates management contract or compensatory plan or arrangement. |
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|
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| By: |
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/S/ PAUL K. VOIGT |
|
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Paul K. Voigt
President and Interim Chief Executive Officer
(Principal Executive Officer)
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| Date: |
|
March 31, 2025 |
POWER OF ATTORNEY
Each of the officers and directors of INNOVATE Corp., whose signature appears below, in so signing, also makes, constitutes and appoints each of Paul K. Voigt and Michael J. Sena, and each of them, his true and lawful attorneys-in-fact, with full power and substitution, for him in any and all capacities, to execute and cause to be filed with the SEC any and all amendments to this Annual Report on Form 10-K, with exhibits thereto and other documents connected therewith and to perform any acts necessary to be done in order to file such documents, and hereby ratifies and confirms all that said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of March 31, 2025.
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| Signature |
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Title |
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/S/ PAUL K. VOIGT |
|
Interim Chief Executive Officer |
|
|
Paul K. Voigt |
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| /S/ MICHAEL J. SENA |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
|
|
| Michael J. Sena |
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| /S/ AVRAM A. GLAZER |
|
Director |
|
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| Avram A. Glazer |
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| /S/ WARREN H. GFELLER |
|
Director |
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| Warren H. Gfeller |
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| /S/ BRIAN S. GOLDSTEIN |
|
Director |
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| Brian S. Goldstein |
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| /S/ AMY WILKINSON |
|
Director |
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| Amy Wilkinson |
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|
INNOVATE CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
INNOVATE Corp.
New York, NY
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of INNOVATE Corp. (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive loss, stockholders’ deficit, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has maturities of certain debt obligations that exceed its current and forecasted cash balances within one year from the date of this report. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Estimated Costs to Complete for the Infrastructure Segment
As described in Note 3 to the consolidated financial statements, revenue for the Company’s Infrastructure Segment (“DBMG”) was $1.072 billion for the year ended December 31, 2024. DBMG performs its services primarily under fixed-price contracts and recognizes revenue over time using the input method to measure progress for its projects. The most reliable measure of progress is the cost incurred towards delivery of the completed project. Costs include all direct material and labor costs related to contract performance, subcontractor costs, indirect labor, and fabrication plant overhead costs, which are charged to contract costs as incurred. Revisions in estimates during the course of contract work are reflected in the accounting period in which the facts requiring the revision become known. Provisions for estimated losses on uncompleted contracts are made in the period a loss on a contract becomes determinable.
We identified the estimate of certain costs to be incurred towards delivery of projects for specific revenue contracts at DBMG as a critical audit matter. Estimating future direct materials, labor, and subcontractor costs included in the measurement of progress of projects for specific revenue contracts at DBMG required significant judgment. Auditing these elements involved especially challenging auditor judgment in evaluating the reasonableness of the estimated direct materials, labor, and subcontractor costs over the duration of these contracts.
The primary procedures we performed to address this critical audit matter included:
•Assessing the reasonableness of the estimated direct materials, labor, and subcontractor costs included in the measurement of the progress of projects for specific revenue contracts at DBMG through: (i) evaluating the reasonableness of project budgets through performing gross margin analysis using subsequently available information, (ii) assessing the reasonableness of revisions in the estimated direct materials, labor, and subcontractor costs and investigating reasons for changes in expected costs and project margins, and (iii) evaluating the reasonableness of project cost estimates to complete by performing inquiries of project management personnel and assessing the nature of activities required to complete open projects.
/s/ BDO USA, P.C.
We have served as the Company's auditor since 2011.
New York, NY
March 31, 2025
INNOVATE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except shares and per share amounts)
|
|
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|
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| |
|
|
Year Ended December 31, |
| |
|
|
|
|
2024 |
|
2023 |
| Revenue |
|
|
|
|
$ |
1,107.1 |
|
|
$ |
1,423.0 |
|
| Cost of revenue |
|
|
|
|
898.3 |
|
|
1,207.0 |
|
| Gross profit |
|
|
|
|
208.8 |
|
|
216.0 |
|
| Operating expenses: |
|
|
|
|
|
|
|
| Selling, general and administrative |
|
|
|
|
160.2 |
|
|
168.0 |
|
| Depreciation and amortization |
|
|
|
|
17.6 |
|
|
20.2 |
|
|
|
|
|
|
|
|
|
| Other operating (income) loss |
|
|
|
|
(9.0) |
|
|
1.3 |
|
| Income from operations |
|
|
|
|
40.0 |
|
|
26.5 |
|
| Other (expense) income: |
|
|
|
|
|
|
|
| Interest expense |
|
|
|
|
(74.5) |
|
|
(68.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from equity investees |
|
|
|
|
(2.3) |
|
|
(9.4) |
|
|
|
|
|
|
|
|
|
| Other income, net |
|
|
|
|
3.4 |
|
|
16.7 |
|
| Loss from operations before income taxes |
|
|
|
|
(33.4) |
|
|
(34.4) |
|
| Income tax expense |
|
|
|
|
(6.3) |
|
|
(4.5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
|
|
(39.7) |
|
|
(38.9) |
|
| Net loss attributable to non-controlling interests and redeemable non-controlling interests |
|
|
|
|
5.1 |
|
|
3.7 |
|
| Net loss attributable to INNOVATE Corp. |
|
|
|
|
(34.6) |
|
|
(35.2) |
|
| Less: Preferred dividends |
|
|
|
|
1.2 |
|
|
2.4 |
|
| Net loss attributable to common stockholders and participating preferred stockholders |
|
|
|
|
$ |
(35.8) |
|
|
$ |
(37.6) |
|
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|
|
Loss per common share - basic and diluted (1) |
|
|
|
|
$ |
(3.08) |
|
|
$ |
(4.81) |
|
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|
|
Weighted-average common shares outstanding - basic and diluted (1) |
|
|
|
|
10,696,274 |
|
|
7,814,620 |
|
|
|
|
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|
|
|
|
(1) Basic and diluted loss per common share and weighted-average common shares outstanding for the year ended December 31, 2023, have been retroactively adjusted to reflect the 1-for-10 reverse stock split effected on August 8, 2024.
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATE CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
|
|
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| |
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|
|
Year ended December 31, |
| |
|
|
|
|
|
2024 |
|
2023 |
| Net loss |
|
|
|
|
|
$ |
(39.7) |
|
|
$ |
(38.9) |
|
| Other comprehensive loss |
|
|
|
|
|
|
|
|
| Foreign currency translation adjustment, net of tax |
|
|
|
|
|
(2.3) |
|
|
(0.6) |
|
|
|
|
|
|
|
|
|
|
| Disposition of equity method investment, net of tax |
|
|
|
|
|
— |
|
|
(9.1) |
|
| Other comprehensive loss |
|
|
|
|
|
$ |
(2.3) |
|
|
$ |
(9.7) |
|
| Comprehensive loss |
|
|
|
|
|
(42.0) |
|
|
(48.6) |
|
| Comprehensive loss attributable to non-controlling interests and redeemable non-controlling interests |
|
|
|
|
|
5.3 |
|
|
6.4 |
|
| Comprehensive loss attributable to INNOVATE Corp. |
|
|
|
|
|
$ |
(36.7) |
|
|
$ |
(42.2) |
|
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATE CORP.
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2024 |
|
2023 |
| Assets |
|
|
|
|
| Current assets |
|
|
|
|
| Cash and cash equivalents |
|
$ |
48.8 |
|
|
$ |
80.8 |
|
| Accounts receivable, net |
|
194.0 |
|
|
278.4 |
|
| Contract assets |
|
106.3 |
|
|
118.6 |
|
| Inventory |
|
20.8 |
|
|
22.4 |
|
|
|
|
|
|
| Other current assets |
|
21.0 |
|
|
17.7 |
|
| Total current assets |
|
390.9 |
|
|
517.9 |
|
| Investments |
|
3.6 |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred tax asset |
|
1.6 |
|
|
2.0 |
|
| Property, plant and equipment, net |
|
133.6 |
|
|
154.6 |
|
| Goodwill |
|
126.7 |
|
|
127.1 |
|
| Intangibles, net |
|
172.4 |
|
|
178.9 |
|
| Other assets |
|
62.3 |
|
|
61.3 |
|
| Total assets |
|
$ |
891.1 |
|
|
$ |
1,043.6 |
|
|
|
|
|
|
| Liabilities, temporary equity and stockholders’ deficit |
|
|
|
|
| Current liabilities |
|
|
|
|
| Accounts payable |
|
$ |
84.8 |
|
|
$ |
142.9 |
|
| Accrued liabilities |
|
109.7 |
|
|
70.8 |
|
| Current portion of debt obligations |
|
162.2 |
|
|
30.5 |
|
| Contract liabilities |
|
109.1 |
|
|
153.5 |
|
|
|
|
|
|
|
|
|
|
|
| Other current liabilities |
|
17.2 |
|
|
16.1 |
|
| Total current liabilities |
|
483.0 |
|
|
413.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred tax liability |
|
4.4 |
|
|
4.1 |
|
| Debt obligations |
|
500.6 |
|
|
679.3 |
|
| Other liabilities |
|
46.8 |
|
|
82.7 |
|
| Total liabilities |
|
1,034.8 |
|
|
1,179.9 |
|
| Commitments and contingencies (Note 13) |
|
|
|
|
| Temporary equity |
|
|
|
|
Preferred Stock Series A-3 and Preferred Stock Series A-4, $0.001 par value |
|
16.1 |
|
|
16.4 |
|
Shares authorized: 20,000,000; Shares issued and outstanding: 6,125 of Series A-3 and 10,000 of Series A-4 |
|
|
|
|
|
|
|
|
|
| Redeemable non-controlling interest |
|
(0.5) |
|
|
(1.0) |
|
| Total temporary equity |
|
15.6 |
|
|
15.4 |
|
| Stockholders’ deficit |
|
|
|
|
Common stock, $0.001 par value (1) |
|
— |
|
|
— |
|
Shares authorized: 250,000,000 and 160,000,000, respectively |
|
|
|
|
Shares issued: 13,410,179 and 8,072,300 (1), respectively |
|
|
|
|
Shares outstanding: 13,261,379 and 7,923,500 (1), respectively |
|
|
|
|
Additional paid-in capital (1) |
|
350.1 |
|
|
328.3 |
|
Treasury stock, at cost: 148,800 (1) shares |
|
(5.4) |
|
|
(5.4) |
|
| Accumulated deficit |
|
(521.9) |
|
|
(487.3) |
|
| Accumulated other comprehensive loss |
|
(3.2) |
|
|
(1.1) |
|
| Total INNOVATE Corp. stockholders’ deficit |
|
(180.4) |
|
|
(165.5) |
|
| Non-controlling interest |
|
21.1 |
|
|
13.8 |
|
| Total stockholders’ deficit |
|
(159.3) |
|
|
(151.7) |
|
| Total liabilities, temporary equity and stockholders’ deficit |
|
$ |
891.1 |
|
|
$ |
1,043.6 |
|
(1) Common stock, Shares issued, Shares outstanding, Additional paid-in capital, and Treasury stock as of December 31, 2023, have been retroactively adjusted to reflect the 1-for-10 reverse stock split effected on August 8, 2024.
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATE CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary Equity |
|
|
Stockholders' (Deficit) Equity |
|
|
Preferred Stock and Redeemable Non-Controlling Interest |
|
|
Common Stock
|
|
Additional Paid-In Capital |
|
Treasury Stock |
|
Accumulated Deficit |
|
Accumulated Comprehensive Income (Loss) (b) |
|
Total INNOVATE Stockholders' (Deficit) Equity |
|
Non-controlling Interest |
|
Total Stockholders' (Deficit) Equity |
|
|
|
|
Shares (a)
(thousands)
|
|
Amount |
|
|
| Balance as of December 31, 2022 |
|
$ |
61.0 |
|
|
|
7,878.8 |
|
|
$ |
— |
|
|
$ |
330.2 |
|
|
$ |
(5.3) |
|
|
$ |
(452.1) |
|
|
$ |
5.9 |
|
|
$ |
(121.3) |
|
|
$ |
30.7 |
|
|
$ |
(90.6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Share-based compensation |
|
— |
|
|
|
— |
|
|
— |
|
|
2.2 |
|
|
— |
|
|
— |
|
|
— |
|
|
2.2 |
|
|
— |
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Taxes paid in lieu of shares issued for share-based compensation |
|
— |
|
|
|
(6.0) |
|
|
— |
|
|
— |
|
|
(0.1) |
|
|
— |
|
|
— |
|
|
(0.1) |
|
|
— |
|
|
(0.1) |
|
| Preferred stock dividends |
|
(1.3) |
|
|
|
— |
|
|
— |
|
|
(1.3) |
|
|
— |
|
|
— |
|
|
— |
|
|
(1.3) |
|
|
— |
|
|
(1.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock |
|
— |
|
|
|
50.7 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Distributions to non-controlling interests |
|
(5.2) |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10.7) |
|
|
(10.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Transactions with non-controlling interests |
|
— |
|
|
|
— |
|
|
— |
|
|
(2.8) |
|
|
— |
|
|
— |
|
|
— |
|
|
(2.8) |
|
|
2.9 |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
9.0 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(9.0) |
|
|
(9.0) |
|
| DBMGi preferred stock repurchase |
|
(41.8) |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| Net (loss) income |
|
(5.9) |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(35.2) |
|
|
— |
|
|
(35.2) |
|
|
2.2 |
|
|
(33.0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive loss |
|
(0.4) |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(7.0) |
|
|
(7.0) |
|
|
(2.3) |
|
|
(9.3) |
|
| Balance as of December 31, 2023 |
|
$ |
15.4 |
|
|
|
7,923.5 |
|
|
$ |
— |
|
|
$ |
328.3 |
|
|
$ |
(5.4) |
|
|
$ |
(487.3) |
|
|
$ |
(1.1) |
|
|
$ |
(165.5) |
|
|
$ |
13.8 |
|
|
$ |
(151.7) |
|
| Share-based compensation |
|
— |
|
|
|
— |
|
|
— |
|
|
3.4 |
|
|
— |
|
|
— |
|
|
— |
|
|
3.4 |
|
|
— |
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred stock dividends |
|
(0.3) |
|
|
|
— |
|
|
— |
|
|
(1.2) |
|
|
— |
|
|
— |
|
|
— |
|
|
(1.2) |
|
|
— |
|
|
(1.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock |
|
— |
|
|
|
224.8 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of preferred stock in private placement |
|
31.3 |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| Rights offering, net of transaction costs |
|
— |
|
|
|
530.6 |
|
|
— |
|
|
1.9 |
|
|
— |
|
|
— |
|
|
— |
|
|
1.9 |
|
|
— |
|
|
1.9 |
|
| Series C Preferred Share Conversion |
|
(31.3) |
|
|
|
4,469.4 |
|
|
— |
|
|
31.3 |
|
|
— |
|
|
— |
|
|
— |
|
|
31.3 |
|
|
— |
|
|
31.3 |
|
| Reverse stock split |
|
— |
|
|
|
113.1 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of Series D investment in R2 Technologies |
|
1.1 |
|
|
|
— |
|
|
— |
|
|
(13.2) |
|
|
— |
|
|
— |
|
|
— |
|
|
(13.2) |
|
|
12.1 |
|
|
(1.1) |
|
| Distributions to non-controlling interests |
|
— |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.3) |
|
|
(0.3) |
|
| Transactions with non-controlling interests |
|
— |
|
|
|
— |
|
|
— |
|
|
(0.4) |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.4) |
|
|
0.2 |
|
|
(0.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
(0.6) |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(34.6) |
|
|
— |
|
|
(34.6) |
|
|
(4.5) |
|
|
(39.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive loss |
|
— |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2.1) |
|
|
(2.1) |
|
|
(0.2) |
|
|
(2.3) |
|
| Balance as of December 31, 2024 |
|
$ |
15.6 |
|
|
|
13,261.4 |
|
|
$ |
— |
|
|
$ |
350.1 |
|
|
$ |
(5.4) |
|
|
$ |
(521.9) |
|
|
$ |
(3.2) |
|
|
$ |
(180.4) |
|
|
$ |
21.1 |
|
|
$ |
(159.3) |
|
(a) The number and amount of shares and Additional Paid-in Capital as of December 31, 2022, and as of and for the year ended December 31, 2023, have been retroactively adjusted to reflect the 1-for-10 reverse stock split effected on August 8, 2024. Refer to Note 2. Summary of Significant Accounting Policies.
(b) Inclusive of other comprehensive loss, foreign currency cumulative translation adjustments totaled a loss of $4.5 million and $2.4 million as of December 31, 2024 and 2023, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2024 |
|
2023 |
| Cash flows from operating activities |
|
|
|
|
| Net loss |
|
$ |
(39.7) |
|
|
$ |
(38.9) |
|
Adjustments to reconcile net loss to cash provided by operating activities |
|
|
|
|
| Share-based compensation expense |
|
3.4 |
|
|
2.2 |
|
| Depreciation and amortization (including amounts in cost of revenue) |
|
32.9 |
|
|
36.0 |
|
Gain on lease modification |
|
(8.7) |
|
|
— |
|
Amortization of deferred financing costs and debt discount |
|
7.7 |
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
Net loss on repurchase or extinguishment of debt |
|
0.3 |
|
|
— |
|
|
|
|
|
|
| Loss from equity investees |
|
2.3 |
|
|
9.4 |
|
Realized and unrealized losses (gains) on investments |
|
0.2 |
|
|
(15.8) |
|
| Asset impairment expense |
|
0.1 |
|
|
1.8 |
|
Deferred income tax expense (benefit) |
|
0.5 |
|
|
(5.3) |
|
|
|
|
|
|
| Other operating activities, net |
|
(2.0) |
|
|
2.1 |
|
Changes in assets and liabilities: |
|
|
|
|
| Accounts receivable |
|
91.8 |
|
|
(25.7) |
|
| Contract assets |
|
12.3 |
|
|
46.5 |
|
| Other current assets |
|
(0.1) |
|
|
(0.6) |
|
| Inventory |
|
1.9 |
|
|
(3.5) |
|
| Other assets |
|
8.4 |
|
|
15.1 |
|
| Accounts payable |
|
(57.2) |
|
|
(60.2) |
|
| Accrued liabilities |
|
12.2 |
|
|
9.9 |
|
| Contract liabilities |
|
(44.4) |
|
|
54.9 |
|
| Other current liabilities |
|
2.1 |
|
|
(11.2) |
|
| Other liabilities |
|
(14.9) |
|
|
2.9 |
|
Cash provided by operating activities |
|
9.1 |
|
|
26.5 |
|
| Cash flows from investing activities |
|
|
|
|
| Purchase of property, plant and equipment |
|
(19.0) |
|
|
(18.4) |
|
| Proceeds from disposal of property, plant and equipment |
|
10.1 |
|
|
1.6 |
|
Loans to equity method investee |
|
(2.3) |
|
|
(4.0) |
|
Purchase of investments |
|
(2.0) |
|
|
— |
|
Proceeds from sale of equity method investments |
|
— |
|
|
59.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for asset acquisitions |
|
(1.2) |
|
|
— |
|
| Other investing activities |
|
0.5 |
|
|
0.7 |
|
Cash (used in) provided by investing activities |
|
(13.9) |
|
|
39.1 |
|
| Cash flows from financing activities |
|
|
|
|
Proceeds from rights offering and private placement, net of issuance costs |
|
33.2 |
|
|
— |
|
Proceeds from lines of credit |
|
70.0 |
|
|
87.0 |
|
Payments on lines of credit |
|
(125.0) |
|
|
(94.7) |
|
Proceeds from other debt obligations, net of deferred financing costs |
|
24.8 |
|
|
4.9 |
|
Principal payments for and repurchases of other debt obligations |
|
(28.0) |
|
|
(37.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Purchase of preferred stock |
|
— |
|
|
(7.0) |
|
|
|
|
|
|
| Payments to non-controlling interests and redeemable non-controlling interests related to sale of equity method investment |
|
(0.3) |
|
|
(15.9) |
|
| Dividend payments |
|
(1.2) |
|
|
(2.2) |
|
| Other financing activities |
|
— |
|
|
(0.3) |
|
Cash used in financing activities |
|
(26.5) |
|
|
(65.3) |
|
| Effects of exchange rate changes on cash, cash equivalents and restricted cash |
|
(1.7) |
|
|
(0.2) |
|
Net (decrease) increase in cash and cash equivalents, including restricted cash |
|
(33.0) |
|
|
0.1 |
|
Cash, cash equivalents and restricted cash, beginning of year |
|
82.3 |
|
|
82.2 |
|
Cash, cash equivalents and restricted cash, end of year |
|
$ |
49.3 |
|
|
$ |
82.3 |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
INNOVATE Corp. ("INNOVATE" and, together with its consolidated subsidiaries, the "Company", "we" and "our") is a diversified holding company that has a portfolio of subsidiaries in a variety of operating segments. The Company seeks 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 non-controlling equity interest positions or debt instruments. The Company’s shares of common stock trade on the New York Stock Exchange ("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.The Company's 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, a division of Schuff Steel Company, DBMG provides full-service fabricated structural steel and erection services primarily for the U.S. East Coast and Southeast commercial and industrial construction markets, in addition to full design-assist services. The Company maintains a 91.2% controlling interest in DBMG.
2.The Company's Life Sciences segment is comprised of Pansend Life Sciences, LLC ("Pansend"), its subsidiaries and its equity investments. Pansend maintains a controlling interest of 80.0% in Genovel Orthopedics, Inc. ("Genovel"), which seeks to develop products to treat early osteoarthritis of the knee, and also has a controlling interest of 81.4% (56.6% as of December 31, 2023) in R2 Technologies, Inc. ("R2 Technologies"), which develops aesthetic and medical technologies for the skin. Pansend also invests in other early stage or developmental stage healthcare companies and, as of December 31, 2024, had a 45.9% interest (46.2% as of December 31, 2023) 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 maintained a 1.6% fully diluted interest in Triple Ring Technologies, Inc. ("Triple Ring"), a science and technology co-development company, and a 20.1% interest in Scaled Cell Solutions, Inc. ("Scaled Cell"), an immunotherapy company developing a novel autologous cell therapy system to potentially improve current CAR-T treatments.
3.The Company's 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. The Company maintains a 98.0% controlling interest in Broadcasting and maintains a controlling interest of approximately 69.2%, inclusive of 2.8% proxy rights from minority holders of DTV America Corporation ("DTV"). On a fully diluted basis, the Company would have an 85.8% controlling interest in Broadcasting.
4.The Company's 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 TIC Holdco, Inc. ("TIC"), which was dissolved May 23, 2024, and the former Marine Services segment, which included its holding company, Global Marine Holdings, LLC ("GMH") in which the Company maintained a 72.8% controlling interest until its dissolution on December 13, 2024. GMH's prior period results included its subsidiary's prior 19.0% equity method investment in HMN International Co., Ltd., formerly known as Huawei Marine Networks Co. (“HMN”), until it was sold on March 6, 2023. Refer to Note 6. Investments for additional information.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and all other subsidiaries over which the Company exerts control. All intercompany profits, transactions and balances have been eliminated in consolidation. The remaining interests not owned by the Company are presented as a non-controlling interest component of total equity.
Basis of Presentation
The accompanying 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.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Certain prior amounts have been reclassified or combined to conform to the current year presentation. In addition, unless noted, all share and per share amounts of common stock, options and restricted stock and any associated debt or preferred stock conversion rates contained in the historical periods presented within these Consolidated Financial Statements have been retroactively adjusted to reflect the one-for-ten reverse stock split of the Company's issued and outstanding common stock that was effected by the Company on August 8, 2024 (the "Reverse Stock Split"), as if it had occurred at the beginning of the earliest period presented.
Refer to Note 16. Equity and Temporary Equity for information relating to the 2024 Reverse Stock Split and adjustments resulting from the Reverse Stock Split.
Going Concern
The accompanying Consolidated Financial Statements have been prepared assuming that the Company will continue as a going concern. However, as of the date of these financial statements, there is substantial doubt about the Company's ability to continue as a going concern within one year after the date that the financial statements are issued.
The principal conditions leading to this conclusion are the upcoming maturities and covenants of the Company's Corporate Senior Secured Notes, other current debt at Corporate and certain of the Company's subsidiaries, as well as from certain cross-default provisions in the Company's Senior Secured Notes. Based on these conditions, the Company may not be able to meet its obligations at maturity and comply with certain cross-default provisions under the Senior Secured Notes over the next twelve months.
Management has evaluated the significance of these conditions in relation to the Company's ability to meet its obligations. The potential inability to refinance or extend the maturity of the aforementioned current debt, or to obtain additional financing, raises substantial doubt about the Company's ability to continue as a going concern.
The Company plans to alleviate these conditions through various initiatives it is currently exploring, including refinancing the debt at Corporate and its subsidiaries, pursuing asset sales, and raising additional capital. However, there can be no assurance that the Company will have the ability to raise additional capital when needed, be successful in any asset sales, or refinance its existing debt, on attractive terms, or at all nor any assurances that lenders will provide additional extensions, waivers or amendments in the event of future non-compliance with the Company’s debt covenants or other possible events of default. Further, there can be no assurance that the Company will be able to execute a reduction, extension, or refinancing of the debt, or that the terms of any replacement financing would be as favorable as the terms of the debt prior to the maturity date. There can be no assurance that these plans will be successfully implemented or that they will mitigate the conditions that raise substantial doubt about the Company's ability to continue as a going concern.
These Consolidated Financial Statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, or expenses that may result if the Company is unable to continue as a going concern.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and various disclosures within these consolidated financial statements as of the date of the consolidated financial statements and the reported amounts of net revenue and expenses during the reporting period These estimates are based on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates. Significant estimates include the recognition of revenue and project profit or loss, which require estimates regarding the extent of progress towards completion on contracts and contract revenue and costs on long-term contracts; allowances for credit losses; fair value estimates, including the valuation of certain investments, market assumptions used in estimating the fair values of certain assets (including goodwill and intangibles) and liabilities, the calculation used in determining the fair value of equity awards required by ASC 718, Compensation - Stock Compensation ("ASC 718"); income taxes and various other contingencies.
Estimates of fair value represent the Company’s best estimates developed with the assistance of independent appraisals or various valuation techniques and, where the foregoing have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents are comprised principally of amounts in interest bearing checking accounts and money market accounts with original maturities of three months or less. The Company considers all highly liquid investments purchased with original maturities of three months or less from the date of purchase to be cash equivalents. The Company maintains its current cash with financial institutions with balances that may exceed federally insured limits. Cash and cash equivalents are maintained at financial institutions that management considers to be of high credit quality.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Company's restricted cash balances consist of funds that are contractually or legally restricted as to usage or withdrawal and have been presented separately from cash and cash equivalents in the Consolidated Balance Sheets in the Other current assets and Other assets (noncurrent) as applicable, and are primarily comprised of security deposits for long-term leases, which are held in separate bank accounts.
Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:
•Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.
•Level 3 - Unobservable inputs that are supported by little or no market activities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
The Company’s assets and liabilities that are measured at fair value on a recurring basis include investment(s) in marketable equity securities. Our financial assets measured at fair value on a non-recurring basis include equity securities without readily determinable fair values. Other financial assets and liabilities are carried at cost (initial fair value) or amortized cost where applicable, with the current fair value disclosed, if required.
Allowance for Credit Losses
The Company maintains allowances for credit losses, for its financial assets, primarily for accounts receivable and contract assets, in accordance with Accounting Standards Codification ("ASC") Financial Instruments - Credit Losses (Topic 326). Accounts receivable are stated at amounts due from customers net of allowance for expected credit losses. The measurement and recognition of the allowance for credit losses involves the use of judgment and represents management’s estimate of expected lifetime credit losses based on historical experience and trends, current conditions and reasonable and supportable forecasts. Any changes in these assumptions can lead to a change in the estimate. Management’s assessment of expected credit losses includes consideration of current and expected economic, market and industry factors affecting the Company’s customers, including their financial condition and other factors affecting their ability to pay; the aging of account balances; historical credit loss experience; customer concentrations; and customer credit-worthiness; among other factors.
Management has elected to use a risk-based, pool-level segmentation framework to calculate the expected loss rate. Management evaluates its experience with historical losses and then applies this historical loss ratio to financial assets with similar characteristics. The Company’s historical loss ratio or its determination of risk pools may be adjusted for changes in customer, economic, market or other circumstances. The Company may also establish an allowance for credit losses for specific receivables when it is probable that the receivable will not be collected and the loss can be reasonably estimated. At each balance sheet date, all past due or potentially uncollectible accounts are assessed individually for the purpose of determining the appropriate allowance for credit losses. Once collection efforts by the Company are exhausted, the determination for charging off uncollectible receivables is made and the receivable is written off against the allowance , and reversals of previously reserved amounts are recognized if a specifically reserved item is settled for an amount exceeding the previous estimate.
Inventory
Inventory, which is primarily composed of steel components for construction projects at DBM, is valued at the lower of cost or net realizable value under the first-in, first-out method. Provision for obsolescence is made where appropriate and is charged to cost of revenue in the Consolidated Statements of Operations. These costs include only direct labor and expenses incurred to date and exclude any allocation of overhead. The policy for long-term work in progress contracts is disclosed within the Revenue and Cost Recognition accounting policy in Note 3. Revenue and Contracts in Process.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Investments
The Company utilizes the equity method to account for investments when it possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee, such as with our investments in MediBeacon and Scaled Cell, of which we own a 45.9% interest in MediBeacon and a 20.1% interest in Scaled Cell as of December 31, 2024. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company applies the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock. In applying the equity method, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by its proportionate share of the net earnings or losses and other comprehensive income (loss) of the investee, as well as any changes as a result of changes in ownership. In the event that net losses of the investee reduce the carrying amount to zero, additional net losses may be recorded if other investments in the investee are at-risk, even if the Company has not committed to provide financial support to the investee. Such additional equity method losses, if any, are based upon the change in the Company's claim on the investee’s book value.
We carry investments in marketable equity securities at fair value and record the changes in fair values in the Consolidated Statement of Operations as a component of Other income, net. The Company utilizes the measurement alternative method to account for investments when it does not possess the ability to exercise significant influence or control and the investment does not have a readily determinable fair value. Under this method, investments are initially recognized at cost and subsequently measured at cost, adjusted for any observable changes in the fair value of the investment. In addition, the Company reviews the carrying value of investments measured under the measurement alternative for impairment on a regular basis. If there is an indication of impairment, the Company assesses whether the carrying value of the investment exceeds its recoverable amount. Any impairment losses are recognized in the financial statements.
The Company's investments are recorded as a separate line in the Company’s Consolidated Balance Sheets. Income or loss from equity method investments is recorded as a separate line item in the Consolidated Statements of Operations. Changes in the fair value of equity securities and impairments recognized for measurement alternative method investments, if any, are recorded within Other income, net in the Consolidated Statements of Operations.
Accounting for Income Taxes
We recognize deferred tax assets and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred tax assets and liabilities are determined based on the difference between the book basis and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. If necessary, deferred tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance. The additional guidance provided by ASC No. 740, “Income Taxes” (“ASC 740”), clarifies the accounting for uncertainty in income taxes recognized in the financial statements. Expected outcomes of current or anticipated tax examinations, refund claims and tax-related litigation and estimates regarding additional tax liability (including interest and penalties thereon) or refunds resulting therefrom will be recorded based on the guidance provided by ASC 740 to the extent applicable.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. These assessments of uncertain tax positions contain judgments related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, expiration of statutes of limitations, as well as changes to, or further interpretations of, tax laws and regulations.
At December 31, 2024, our U.S. and foreign companies have significant deferred tax assets resulting from tax loss carryforwards. Additionally, the deferred tax assets generated by certain businesses that do not qualify to be included in the INNOVATE Corp. U.S. consolidated income tax return have been reduced by a full valuation allowance. Based on consideration of both positive and negative evidence, we determined that it was more likely than not that the net deferred tax assets of the INNOVATE Corp. U.S. consolidated filing group will not be realized. Therefore, a full valuation allowance was maintained against the INNOVATE Corp. U.S. consolidated filing group’s net deferred tax assets as of December 31, 2024. The appropriateness and amount of the valuation allowance are based on cumulative history of losses and our assumptions about the future taxable income of each affiliate and the timing of the reversal of deferred tax assets and liabilities.
In relation to tax effects for accumulated other comprehensive income ("OCI"), our policy is to release the tax effects of amounts reclassified from accumulated OCI to pre-tax income (loss) from continuing operations. Any remaining tax effect in accumulated OCI is released following a portfolio approach.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation, which is provided on the straight-line method over the estimated useful lives of the assets, which we regularly evaluate. The estimated useful lives of the assets range from 5 to 40 years for buildings and leasehold improvements, 3 to 15 years for equipment, furniture and fixtures, and 3 to 20 years for transportation equipment. Leasehold improvements are amortized over the lives of the leases or estimated useful lives of the assets, whichever is shorter. Assets under construction are not depreciated until they are complete and available for use. Land is not depreciated.
Purchased property and equipment is recorded at cost, or, if acquired in a business combination, at the acquisition date fair value. Cost includes the original purchase price of the asset, the costs attributable to bringing the asset to its working condition for its intended use and finance costs incurred prior to the asset being available for use, as well as any subsequent major expenditures for improvements and replacements which extend useful lives or increase capacity of the assets. Expenditures for maintenance and repairs are expensed as incurred. Finance lease assets are recognized based on the present value of minimum future lease payments.
Costs for internal-use software that are incurred in the preliminary project stage and in the post-implementation stage are expensed as incurred. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software, beginning when the software project is ready for its intended use, over the estimated useful life of the software, typically 3 years.
When assets are sold or otherwise retired, the costs and accumulated amortization and depreciation are removed from the books and the resulting gain or loss is included in operating results. Property, plant and equipment that have been included as part of the assets held-for-sale are no longer amortized or depreciated from the time that they are classified as such. The Company periodically utilizes a qualitative assessment to evaluate whether it is more likely than not that the fair value of its property, plant and equipment is less than its carrying value, and, if so, quantitatively evaluates the carrying value of its property, plant and equipment based upon the estimated cash flows to be generated by the related assets. If an impairment is indicated, a loss is recognized.
Acquisitions
The Company accounts for acquisitions using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Estimates of fair value included in the Consolidated Financial Statements represent the Company’s best estimates and valuations developed, when needed, with the assistance of independent appraisers or, where such valuations have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. Such estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Goodwill and Other Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but, rather, tested for impairment. The Company tests goodwill for impairment at least annually in the fourth quarter (October 1st) or when factors indicate that the carrying amounts of assets may not be recoverable and there is a potential impairment. The factors that management considers important, and which could trigger an impairment review, include, but are not limited to: a more likely than not expectation of selling or disposing all, or a portion, of a reporting unit; a significant decline in the market value of the Company's common stock or debt securities for a sustained period; a material adverse change in economic, financial market, industry or sector trends; a material failure to achieve operating results relative to historical levels or projected future levels; and significant changes in operations or business strategy.
The Company elected to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value, and if so, a quantitative test is performed. The quantitative evaluation for impairment of indefinite lived intangibles consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to the excess.
Under the quantitative test, management estimates the fair value of a reporting unit, which requires various assumptions including projections of future cash flows, perpetual growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our assessment of a number of factors, including the reporting unit’s recent performance against budget, performance in the market that the reporting unit serves, and industry and general economic data from third-party sources. Discount rate assumptions are based on an assessment of the risk inherent in those future cash flows. Changes to the underlying businesses could affect the future cash flows, which in turn could affect the fair value of the reporting unit. Further, management assesses the current market capitalization, forecasts and the amount by which the fair values exceeded the carrying values. If the carrying amount of the reporting unit exceeds the fair value, an impairment loss shall be recognized in an amount equal to the excess.
Based on qualitative assessments performed as of October 1, 2024, management determined it was more likely than not that the fair value of its reporting units and the fair value of the indefinite-lived intangible assets exceeded their carrying values, and, as such, no impairment was required.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Intangible assets not subject to amortization (i.e. indefinite lived intangibles) consist of certain television broadcast licenses. Intangible assets subject to amortization consists of certain trade names, customer contracts and developed technology. These finite lived intangible assets are amortized based on their estimated useful lives. Impairment on such assets is recognized and measured only if there are events and circumstances that indicate that the carrying amount may not be recoverable. The amount of impairment of other long-lived assets (excluding goodwill) is calculated as the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset group. An impairment loss is recorded to the extent the carrying amount of the asset or asset group exceeds the fair value and is not recoverable.
Licensing: Television broadcast licenses generally are granted for eight-year periods. They are renewable after application and reviewed by the Federal Communications Commission ("FCC") and historically are renewed except in rare cases in which a petition to deny, a complaint or an adverse finding as to the licensee's qualifications results in loss of the license.
Valuation of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. In the event of such conditions, the Company compares the expected undiscounted future cash flows to the carrying amount of the assets. If the total of the expected undiscounted future cash flows is less than the carrying amount of the assets, the Company is required to make estimates of the fair value of the long-lived assets in order to calculate the impairment loss equal to the difference between the fair value and carrying value of the assets.
The Company makes significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as determining asset groups and estimating future cash flows, remaining useful lives, discount rates and growth rates. The resulting undiscounted cash flows are projected over an extended period of time, which subjects those assumptions and estimates to an even larger degree of uncertainty. While the Company believes that its estimates are reasonable, different assumptions could materially affect the valuation of the long-lived assets. The Company derives future cash flow estimates from its historical experience and its internal business plans, which include consideration of industry trends, competitive actions, technology changes, regulatory actions, available financial resources for marketing and capital expenditures and changes in its underlying cost structure.
The Company makes assumptions about the remaining useful life of its long-lived assets. The assumptions are based on the average life of its historical capital asset additions and its historical asset purchase trend. In some cases, due to the nature of a particular industry in which the company operates, such as the broadcast or infrastructure industry, the Company may assume that technology changes in such industry render all associated assets, including equipment, obsolete with no salvage value after their useful lives. In certain circumstances in which the underlying assets could be leased for an additional period of time or salvaged, the Company includes such estimated cash flows in its estimate.
The estimate of the appropriate discount rate to be used to apply the present value model in determining fair value was the Company’s weighted-average cost of capital which is based on the effective rate of its debt obligations at the current market values (for periods during which the Company had debt obligations) as well as the current volatility and trading value of the Company’s common stock.
Leases
The Company accounts for leases on the balance sheet as lease assets and lease liabilities for leases classified as operating and finance leases. The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets are included in Other Assets, and operating lease liabilities are included in other current liabilities and other liabilities (non-current) as applicable in the Consolidated Balance Sheets for their respective short-term and long-term portions and are recognized based on the present value of lease payments over the lease term at the commencement date. Finance leases are included in property, plant and equipment and debt obligations in the Consolidated Balance Sheets and are recognized based on the present value of lease payments over the lease term at commencement date. The majority of the Company’s leases do not provide an implicit rate of return; therefore, the Company uses its incremental borrowing rate at commencement date in determining the present value of lease payments. The incremental borrowing rate represents the rate of interest that would be paid to borrow on a collateralized basis over a similar term. The Company determines its incremental borrowing rate using a portfolio approach based on information available as of the lease commencement date, including applicable lease terms and the current economic environment. For lease agreements that contain non-lease components, the Company elected to combine lease and non-lease components as a single lease component.
Leases with an initial term of twelve months or less are not recorded on the balance sheet unless they are expected to be renewed. Lease expense is recognized on a straight-line basis over the lease term. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As of December 31, 2024, the operating lease liability does not include any options to extend or terminate leases.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Foreign Currency Transactions
Foreign currency transactions are transactions denominated in a currency other than a subsidiary’s functional currency. A change in the exchange rates between a subsidiary’s functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. That increase or decrease in functional currency cash flows, which occurs upon an actual transfer of one currency to another, is reported by the Company as a foreign currency transaction gain (loss). The primary component of the Company’s foreign currency transaction gain (loss) is due to agreements in place with certain subsidiaries in foreign countries regarding intercompany transactions. The Company anticipates repayment of these transactions in the foreseeable future and recognizes the realized and unrealized gains or losses on these transactions that result from foreign currency changes in the period in which they occur as foreign currency transaction gain (loss).
Foreign Currency Translation
The assets and liabilities of the Company’s foreign subsidiaries are translated at the exchange rates in effect on the reporting date. Income and expenses are translated at the average exchange rate during the period. The net effect of such translation gains and losses are reflected within AOCI in the stockholders’ equity (deficit) section of the Consolidated Balance Sheets. If there is a planned or completed sale or liquidation of the Company's ownership in a foreign operation, the relevant foreign currency translation adjustment is recognized in the Consolidated Statement of Operations.
In these consolidated financial statements, “$” means U.S. dollars, unless otherwise noted.
Convertible Instruments
Convertible instruments are generally accounted for as a single unit of account. ASC 815 requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria included circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodied both the embedded derivative instrument and the host contract is not remeasured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The Company accounts for convertible instruments, when it has been determined that the embedded conversion options should not be bifurcated from their host instruments, as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized using the effective interest method over the term of the related debt to their stated date of redemption as a component of Interest expense in the Consolidated Statement of Operations.
Deferred Financing Costs
The Company capitalizes certain expenses incurred in connection with its debt and line of credit obligations as reductions of the outstanding loan balances as a component of the carrying amount of Debt obligations in the Consolidated Balance Sheet and amortizes them using the effective interest method over the term of the respective debt agreement as a component of Interest expense in the Consolidated Statements of Operations. If the Company extinguishes portions of its debt prior to the maturity date, deferred financing costs are charged to expense on a pro-rata basis and are included in loss on early extinguishment or restructuring of debt within Other income, net in the Consolidated Statements of Operations.
Share-Based Compensation
Share-based compensation includes restricted shares, restricted stock units and stock options, which are measured based on the grant date fair values and are recognized on a straight-line basis over the requisite service or vesting period. Any forfeitures are recorded as they occur. Non-cash stock-based compensation expense is included within general and administrative expense in the consolidated statements of operations.
Grants of restricted shares and restricted stock units are valued based on the closing market share price of INNOVATE's common stock as reported on the New York Stock Exchange (the “market price”) on the date of grant. The Company uses a Black-Scholes option valuation model to determine the grant date fair value of stock options. The Black-Scholes model incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield. The expected term of an award is no less than the option vesting period and is based on the Company’s historical experience. Expected volatility is based upon the historical volatility of the Company’s stock price. The risk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term similar to the option’s expected life. The Company uses a dividend yield of zero in the Black-Scholes option valuation model as it does not anticipate paying cash dividends in the foreseeable future. Share-based compensation is recorded net of actual forfeitures as they occur.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Income (Loss) Per Common Share
Basic income (loss) per common share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted income (loss) per common share is computed using the weighted-average number of shares of common stock, adjusted for the dilutive effect of potential common stock equivalents and related income from continuing operations, net of tax. Potential common stock equivalents, computed using the treasury stock method or the if-converted method, include stock options, restricted stock units, convertible preferred stock and convertible debt. Refer to Note 19. Basic and Diluted Loss Per Common Share for additional information.
Recent Accounting Pronouncements
Accounting Pronouncements Adopted in the Current Year
On November 27, 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 improves reportable segment disclosures by requiring enhanced disclosures about significant segment expenses. The guidance was effective for the Company for annual periods beginning on January 1, 2024, and did not have a significant impact on the related disclosures within these Consolidated Financial Statements. Refer to Note 18. Operating Segments and Related Information.
Accounting Pronouncements Issued But Pending Adoption
On November 26, 2024, the FASB issued ASU 2024-04, Debt - Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments ("ASU 2024-04"). The amendments in this update affect entities that settle convertible debt instruments for which the conversion privileges were changed to induce conversion. The amendments clarify the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. ASU 2024-04 is effective for fiscal years beginning after December 15, 2025, and interim periods within those annual reporting periods. The Company is currently evaluating the potential effect of this ASU on the Company’s Consolidated Financial Statements.
On November 4, 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The amendments in this ASU require disclosure, in the notes to financial statements, of specified information about certain costs and expenses, including the total amount of selling expenses incurred in the period and an entity's definition of selling expenses. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted, as further amended in ASU 2025-01. The Company is currently evaluating this ASU, which will only have an effect on the disclosures within the Company’s Consolidated Financial Statements.
On December 14, 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 improves income tax disclosures by adding requirements related to the tax rate reconciliation, disaggregation of income taxes paid and other miscellaneous tax disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, and the Company will reflect updates to its tax disclosures pursuant to the requirements of ASU 2023-09 in its future filings, as applicable.
Subsequent Events
ASC 855, Subsequent Events requires the Company to evaluate events that occur after the balance sheet date as of which the financial statements are issued, and to determine whether adjustments to or additional disclosures in the financial statements are necessary. Refer to Note 22. Subsequent Events.
3. Revenue and Contracts in Process
ASC 606 aligns revenue recognition with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following five steps in accordance with ASC 606:
Identify the contract with a customer
A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectability of consideration is probable. Judgment is required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectability of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Identify the performance obligations in the contract
At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the "unit of account" for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract.
In addition, when assessing performance obligations within a contract, the Company considers the warranty provisions included within such contract. To the extent the warranty terms provide the customer with an additional service, other than assurance that the promised good or service complies with agreed upon specifications, such warranty is accounted for as a separate performance obligation. In determining whether a warranty provides an additional service, the Company considers each warranty provision in comparison to warranty terms which are standard in the industry.
Determine the transaction price
The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, including contract bonuses and penalties that can either increase or decrease the transaction price, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods include: (a) the expected value method, whereby the amount of variable consideration to be recognized represents the sum of probability weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current and estimates of future performance.
Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whether: (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts.
Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer, but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied.
Changes in the estimates of transaction prices are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Such changes in estimates may also result in the reversal of previously recognized revenue if the ultimate outcome differs from the Company’s previous estimate.
Allocate the transaction price to performance obligations in the contract
For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative stand-alone selling price. The Company determines the stand-alone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the stand-alone selling price is not observable, the Company estimates the stand-alone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the stand-alone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Recognize revenue as performance obligations are satisfied
The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time. The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date. The Company has determined that one or more of these three criteria are met for such contracts.
For performance obligations satisfied over time, the Company recognizes revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.
Presentation of Taxes Collected
The Company reports a value-added tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between the Company and a customer on a net basis (excluded from revenues).
Revenue from contracts with customers consisted of the following (in millions):
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Year Ended December 31, |
| |
|
|
|
|
|
2024 |
|
2023 |
|
|
|
|
|
|
|
|
|
Infrastructure |
|
|
|
|
|
$ |
1,071.6 |
|
|
$ |
1,397.2 |
|
| Life Sciences |
|
|
|
|
|
9.8 |
|
|
3.3 |
|
| Spectrum |
|
|
|
|
|
25.7 |
|
|
22.5 |
|
|
|
|
|
|
|
|
|
|
| Total revenue |
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|
|
|
|
$ |
1,107.1 |
|
|
$ |
1,423.0 |
|
Accounts receivables, net, from contracts with customers consisted of the following (in millions):
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|
|
|
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|
|
|
December 31, |
| |
|
2024 |
|
2023 |
|
|
|
|
|
Infrastructure |
|
$ |
184.8 |
|
|
$ |
271.5 |
|
| Life Sciences |
|
1.5 |
|
|
0.3 |
|
| Spectrum |
|
1.9 |
|
|
1.4 |
|
| Total accounts receivables with customers |
|
$ |
188.2 |
|
|
$ |
273.2 |
|
As of January 1, 2023, accounts receivable, net, from contracts with customers totaled $250.4 million.
Infrastructure Segment
DBMG performs its services primarily under fixed-price contracts and recognizes revenue over time using the input method to measure progress for its projects. The most reliable measure of progress is the cost incurred towards delivery of the completed project. Therefore, the input method provides the most reliable method to measure progress. Revenue recognition begins when work has commenced. Costs include all direct material and labor costs related to contract performance, subcontractor costs, indirect labor, and fabrication plant overhead costs, which are charged to contract costs as incurred. Revenues relating to changes in the scope of a contract are recognized when DBMG and customer or general contractor have agreed on both the scope and price of changes, the work has commenced, and that realization of revenue exceeding the costs is assured beyond a reasonable doubt. Revisions in estimates during the course of contract work are reflected in the accounting period in which the facts requiring the revision become known. Provisions for estimated losses on uncompleted contracts are made in the period a loss on a contract becomes determinable.
Payment Terms
The timing of customer billings is generally dependent upon advance billing terms, milestone billings based on completion of certain phases of work, or when services are provided. Under the typical payment terms of master and other service agreements and fixed price contracts, the customer makes progress payments based on quantifiable measures of performance by the Company as defined by each specific agreement. Progress payments, generally net of amounts retained, are paid by the customer over the duration of the contract. Amounts billed and due from customers, as well as the amount of contract assets, are generally classified within current assets in the consolidated balance sheets. Refer to Contract Assets and Contract Liabilities below for related discussion. Amounts expected to be collected beyond one year are classified as other long-term assets.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Service Contracts
For service contracts (including maintenance contracts) where we have the right to consideration from the customer in an amount that corresponds directly with the value received by the customer based on our performance to date, revenue is recognized as services are performed. For all other types of service contracts, revenue is recognized over time using the input method to measure progress because it best depicts the transfer of value to the customer. Costs include all direct material and labor costs, subcontractor costs, and allocated overhead costs related to contract performance.
Construction contracts with customers generally provide that billings are to be made monthly in amounts which are commensurate with the extent of performance under the contracts. Contract receivables arise principally from the balance of amounts due on progress billings on jobs under construction. Retention on contract receivables are amounts due on progress billings, which are withheld until a future period.
Disaggregation of Revenues
DBMG's revenues are principally derived from contracts to provide fabrication and erection services to its customers. Contracts represent the majority of the revenue of the Infrastructure segment and are generally recognized over time. A majority of contracts are domestic, fixed priced, and are completed within one year. Disaggregation of the Infrastructure segment, by market or type of customer, is used to evaluate its financial performance.
The following table disaggregates DBMG's revenue by market (in millions):
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Year ended December 31, |
| |
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2024 |
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2023 |
| Industrial |
|
|
|
|
|
$ |
307.9 |
|
|
$ |
403.0 |
|
| Commercial |
|
|
|
|
|
292.6 |
|
|
382.9 |
|
| Transportation |
|
|
|
|
|
275.3 |
|
|
292.3 |
|
| Healthcare |
|
|
|
|
|
151.6 |
|
|
165.5 |
|
| Convention |
|
|
|
|
|
14.0 |
|
|
124.2 |
|
| Government |
|
|
|
|
|
11.7 |
|
|
11.2 |
|
| Leisure |
|
|
|
|
|
9.6 |
|
|
8.1 |
|
| Energy |
|
|
|
|
|
7.2 |
|
|
9.2 |
|
| Total revenue from contracts with customers |
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|
|
|
|
$ |
1,069.9 |
|
|
$ |
1,396.4 |
|
| Other revenue |
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|
|
|
|
1.7 |
|
|
0.8 |
|
| Total Infrastructure segment revenue |
|
|
|
|
|
$ |
1,071.6 |
|
|
$ |
1,397.2 |
|
Contract Assets and Contract Liabilities
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our long-term construction projects when revenue recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the United States industrial services segment, are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Our contract assets do not include capitalized costs to obtain and fulfill a contract.
Contract liabilities from our long-term construction contracts occur when amounts invoiced to our customers exceed revenues recognized. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation.
The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle.
Retainage receivable represents amounts invoiced to customers where payments have been partially withheld (usually 10% or less) pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances, such as contract-specific terms, project performance and other variables that may arise as the Company makes progress toward completion. As of December 31, 2024 and 2023, the total retainage receivable was $94.1 million and $120.6 million, respectively, and the amount of retainage receivable estimated by management to be collected beyond one year is approximately 18.8% and 9.0% of the balance, respectively.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
When payment of the retainage is contingent upon the Company fulfilling its obligations under the contract it does not meet the criteria to be included in accounts receivable and remains in the contract’s respective contract assets or contract liability, determined on a contract-by-contract basis. The Company has reflected such amounts within the Consolidated Balance Sheets.
Contract assets and contract liabilities consisted of the following (in millions):
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December 31, |
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|
2024 |
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2023 |
| Costs incurred on contracts in progress |
|
$ |
1,435.2 |
|
|
$ |
2,811.8 |
|
| Estimated earnings |
|
75.8 |
|
|
510.1 |
| Contract revenue earned on uncompleted contracts |
|
1,511.0 |
|
|
3,321.9 |
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| Less: progress billings |
|
1,513.8 |
|
|
3,356.8 |
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|
|
$ |
(2.8) |
|
|
$ |
(34.9) |
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|
|
|
|
|
The above is included in the accompanying Consolidated Balance Sheets under the following line items: |
| Contract assets |
|
$ |
106.3 |
|
|
$ |
118.6 |
|
| Contract liabilities |
|
(109.1) |
|
|
(153.5) |
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|
|
$ |
(2.8) |
|
|
$ |
(34.9) |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
December 31, |
| |
|
2024 |
|
2023 |
| Cost in excess of billings and estimated earnings |
|
$ |
50.8 |
|
|
$ |
73.8 |
|
| Conditional retainage |
|
55.5 |
|
|
44.8 |
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| Contract assets |
|
$ |
106.3 |
|
|
$ |
118.6 |
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|
|
|
|
|
| Billings in excess of costs and estimated earnings |
|
$ |
(147.7) |
|
|
$ |
(229.3) |
|
| Conditional retainage |
|
38.6 |
|
|
75.8 |
|
| Contract liabilities |
|
$ |
(109.1) |
|
|
$ |
(153.5) |
|
As of January 1, 2023, contract assets were $165.1 million and contract liabilities were $98.6 million.
Contract assets and liabilities fluctuate period to period based on various factors, including, among others, changes in the number and size of projects in progress at period end; variability in billing and payment terms, such as up-front or advance billings, interim or milestone billings, or deferred billings; and recognized unapproved change orders, contract claims and changes in estimated costs to complete in the normal course of business.
The change in contract assets during the years ended December 31, 2024 and 2023, is a result of the recording of $68.0 million and $86.6 million, respectively, of contract assets driven by new commercial projects, offset by $80.3 million and $133.1 million, respectively, of contract assets transferred to receivables from contract assets recognized at the beginning of the year, including from certain large projects completed or nearing completion and the corresponding billing of amounts previously recorded as contract assets.
The change in contract liabilities during the years ended December 31, 2024 and 2023, is a result of the recording of periodic contract liabilities of $102.3 million and $146.2 million, respectively, driven largely by new commercial projects, offset by revenue recognized that was included in the contract liability balance at the beginning of the year in the amount of $146.7 million and $91.3 million, respectively, including from certain large projects completed or nearing completion.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Transaction Price Allocated to Remaining Unsatisfied Performance Obligations
As of December 31, 2024, the transaction price allocated to remaining unsatisfied performance obligations consisted of the following (in millions):
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| |
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Within One Year |
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Within Five Years |
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Total |
| Healthcare |
|
$ |
172.6 |
|
|
$ |
128.7 |
|
|
|
|
$ |
301.3 |
|
| Transportation |
|
133.3 |
|
|
58.1 |
|
|
|
|
191.4 |
|
| Commercial |
|
158.5 |
|
|
6.1 |
|
|
|
|
164.6 |
|
| Industrial |
|
144.0 |
|
|
0.3 |
|
|
|
|
144.3 |
|
| Government |
|
87.1 |
|
|
22.8 |
|
|
|
|
109.9 |
|
| Leisure |
|
11.1 |
|
|
11.4 |
|
|
|
|
22.5 |
|
| Convention |
|
7.5 |
|
|
— |
|
|
|
|
7.5 |
|
| Energy |
|
2.1 |
|
|
— |
|
|
|
|
2.1 |
|
| Remaining unsatisfied performance obligations |
$ |
716.2 |
|
|
$ |
227.4 |
|
|
|
|
$ |
943.6 |
|
DBMG's remaining unsatisfied performance obligations increase with awards of new contracts and decrease as it performs work and recognizes revenue on existing contracts. DBMG includes a project within its remaining unsatisfied performance obligations at such time the project is awarded and agreement on contract terms has been reached. DBMG's remaining unsatisfied performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of total transaction price can be made. DBMG expects to recognize this revenue approximately within the next 2.3 years.
Remaining unsatisfied performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of DBMG's contracts are subject to cancellation at the election of its customers, in accordance with industry practice, DBMG does not limit the amount of unrecognized revenue included within its remaining unsatisfied performance obligations due to the inherent substantial economic penalty that would be incurred by its customers upon cancellation.
Life Sciences Segment
Beginning in 2021, R2 Technologies commercially launched its first product, Glacial Rx. Combined with other topical consumables, the Glacial Rx system is sold to medical practices and is intended to be operated by a trained health care professional. Beginning in 2022, R2 Technologies commercially launched its second product in China, Glacial Spa. This product launched into the United States and Canada in 2023, marketed as Glacial fx. This device is sold into nonmedical markets as a cooling experience used to even skin tone and brighten and lighten skin and is intended to be operated by a trained esthetician.
Glacial Rx and Glacial fx are sold in North America using a direct sales force. In certain cases, these systems are leased for a small, initial upfront fee and recurring lease payments over a specified timeframe. In international markets, R2 Technologies sells Glacial Rx, Glacial fx and Glacial Spa through distributors. Currently, R2 Technologies has contracts with distributors to sell these products into the following countries: Mexico, United Arab Emirates, Saudi Arabia, Bahrain, Qatar, Australia, Hong Kong, Singapore, Vietnam, China, United Kingdom, France, Kuwait, and India. The Glacial Spa system is currently sold in China and distributed by Huadong’s existing sales force to spas.
To operate the systems, kits containing a cycle card with a set number of cycles must be purchased. Once the cycles are exhausted, practices can purchase additional cards with additional cycles resulting in recurring revenues to R2 Technologies. Further, certain topical consumables are required to be utilized in conjunction with the systems also resulting in recurring revenues to R2 Technologies.
Within North America, revenue is recognized on shipment. For international sales, shipping terms are Ex Works, wherein R2 Technologies makes its products available at a specific location, but the buyer is required to pay the transportation costs. Revenue is recognized once an agreed upon freight carrier is selected and goods are picked up by the freight carrier.
Payment Terms
In both North America and internationally, R2 Technologies generally requires customers to remit payment upfront prior to shipment. These payment terms are expressly stated in the standard terms and conditions. In certain circumstances within North America, R2 Technologies accepts longer payment terms not to exceed one year. Any payment plan variation is expressly disclosed in the master services agreement which is required to be signed in conjunction with each sale by every customer. The invoiced amount to be received is recorded in Accounts Receivable, Net, in the Consolidated Balance Sheet.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The following table disaggregates the Life Sciences segment's revenue by type (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
2024 |
|
2023 |
| Systems and consumables revenue |
|
|
|
|
|
$ |
9.8 |
|
|
$ |
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Life Sciences segment revenue |
|
|
|
|
|
$ |
9.8 |
|
|
$ |
3.3 |
|
Spectrum Segment
Broadcast station revenue is generated primarily from the sale of television airtime in return for a fixed fee or a portion of the related ad sales recognized by the third party. In a typical broadcast station revenue agreement, the licensee of a station makes available, for a fee, airtime on its station to a party which supplies content to be broadcast during that airtime and collects revenue from advertising aired during such content. Broadcast station revenue is recognized over the life of the contract, when the program is broadcast. The fees that we charge can be fixed or variable and the contracts that the Company enters into are generally short-term in nature. Variable fees are usage/sales-based and recognized as revenue when the subsequent usage occurs. Transaction prices are based on the contract terms, with no material judgments or estimates.
Payment Terms
We have an unconditional right to receive payment of the amount billed generally within 30 days of the invoice date. Payment terms are expressly stated in our standard terms and conditions. The invoiced amount to be received is recorded in Accounts Receivable on our Consolidated Balance Sheet.
The following table disaggregates the Spectrum segment's revenue by type (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
2024 |
|
2023 |
| Broadcast station |
|
|
|
|
|
$ |
25.7 |
|
|
$ |
21.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
— |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Spectrum segment revenue |
|
|
|
|
|
$ |
25.7 |
|
|
$ |
22.5 |
|
Transaction Price Allocated to Remaining Unsatisfied Performance Obligations
As of December 31, 2024, the transaction price allocated to remaining unsatisfied performance obligations consisted of $16.0 million of broadcast station revenues of which $9.0 million is expected to be recognized within one year and $7.0 million is expected to be recognized within the next 3 years.
4. Accounts Receivable, Net
Accounts receivable, net, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
| |
|
2024 |
|
2023 |
| Contracts in progress |
|
$ |
184.9 |
|
|
$ |
271.7 |
|
| Unbilled retentions |
|
0.1 |
|
|
— |
|
| Trade receivables |
|
3.3 |
|
|
1.9 |
|
| Other receivables |
|
5.8 |
|
|
5.2 |
|
Allowance for expected credit losses |
|
(0.1) |
|
|
(0.4) |
|
| Total |
|
$ |
194.0 |
|
|
$ |
278.4 |
|
As of January 1, 2023, accounts receivable, net totaled $254.9 million.
For the years ended December 31, 2024 and 2023, the Company recognized a reversal of expected credit losses of $0.1 million and expected credit losses of $2.3 million, respectively, which primarily related to a receivable at the Company's Infrastructure segment expensed as a result of a legacy customer bankruptcy in 2023. Direct write-downs of accounts receivable charged against the allowance totaled $0.2 million and $2.4 million for the years ended December 31, 2024 and 2023, respectively.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
5. Inventory
Inventory consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2024 |
|
2023 |
| Raw materials and consumables |
|
$ |
19.6 |
|
|
$ |
21.0 |
|
| Work in process |
|
0.4 |
|
|
0.6 |
|
| Finished goods |
|
0.8 |
|
|
0.8 |
|
| Total inventory |
|
$ |
20.8 |
|
|
$ |
22.4 |
|
6. Investments
The carrying values of the Company's investments, by category, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date |
|
Equity
Method (1)
|
|
Fair Value (2) |
|
Measurement
Alternative (3)
|
|
Total |
| December 31, 2024 |
|
$ |
0.9 |
|
|
$ |
1.8 |
|
|
$ |
0.9 |
|
|
$ |
3.6 |
|
| December 31, 2023 |
|
$ |
0.9 |
|
|
$ |
— |
|
|
$ |
0.9 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The Company's equity method investments as of both December 31, 2024 and 2023, were comprised of MediBeacon and Scaled Cell.
(2) The Company's fair value investment in common stock of a publicly traded company was purchased during the year ended December 31, 2024.
(3) The Company's measurement alternative method investment as of both December 31, 2024 and 2023, was comprised of Triple Ring.
The Company's share of net losses from its equity method investments was $2.3 million and $9.4 million for the years ended December 31, 2024 and 2023, respectively.
MediBeacon
Pansend accounts for its preferred stock investment in MediBeacon under the equity method of accounting, inclusive of any fixed maturity securities (notes) issued by MediBeacon to Pansend. During the year ended December 31, 2024, MediBeacon issued an aggregate $2.3 million of 12% convertible notes to Pansend with each note due to Pansend in three years from date of issuance. As a result of these note issuances with MediBeacon, during the year ended December 31, 2024, Pansend recognized $2.3 million of equity method losses which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon, including the notes, had been previously reduced to zero.
During the year ended December 31, 2023, as a result of note modifications and additional note issuances with MediBeacon, Pansend recognized $4.7 million of equity method losses which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero. In addition, as a result of an equity transaction in the first quarter of 2023 at MediBeacon with Huadong, Pansend's ownership in MediBeacon decreased from approximately 47.2% as of December 31, 2022, to approximately 46.2% subsequent to the transaction, and as a result, Pansend recognized a gain of $3.8 million, which was included in Other income, net, in the Consolidated Statement of Operations for the year ended December 31, 2023, and which increased Pansend's carrying amount of its investment in MediBeacon. Concurrently, Pansend recognized equity method losses of $3.8 million which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero.
As of December 31, 2024 and 2023, MediBeacon's total outstanding principal amount of notes due to Pansend was $12.0 million and $9.7 million, respectively. Interest income earned by Pansend from the MediBeacon notes totaled $1.4 million and $0.5 million for the years ended December 31, 2024 and 2023, respectively, and the related accrued interest receivable was $1.7 million and $0.3 million as of December 31, 2024 and 2023, respectively.
As of December 31, 2024 and 2023, Pansend's carrying amount of its investment in MediBeacon remained at zero, inclusive for December 31, 2024 and 2023, of the $12.0 million and $9.7 million in convertible and secured promissory notes which were offset against recognized equity method losses, and Pansend has cumulative unrecognized equity method losses relating to MediBeacon of $17.0 million.
Subsequent to year end, in January 2025, MediBeacon received approval from the U.S. Food and Drug Administration ("FDA") for its Transdermal GFR Measurement System ("TGFR"). Pursuant to the terms of MediBeacon's convertible notes, upon the FDA approval, Pansend's convertible notes and the related accrued interest together totaling $12.9 million were converted into Series 3 Preferred Stock. In addition and concurrently, pursuant to its amended commercial partnership with Huadong and, as a result of FDA approval, a $7.5 million milestone payment from Huadong for MediBeacon preferred stock was in process. Once completed, these transactions will decrease Pansend's ownership in MediBeacon from approximately 45.9% prior to the transactions to approximately 44.7% subsequent to the transaction. On a fully diluted basis, Pansend's ownership in MediBeacon will decrease from 40.1% to 39.7%.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Marketable Securities
In October 2024, the Company purchased common shares in the open market of a publicly traded company for approximately $2.0 million, which represents less than 1% of the total outstanding common stock of the issuer. These securities are remeasured at fair value each reporting period using the externally quoted market price, a Level 1 input. For the year ended December 31, 2024, unrealized fair value losses of $0.2 million related to these securities were included in Other income, net in the Consolidated Financial Statements.
Triple Ring and Scaled Cell
On November 30, 2023, the Company sold the majority of its equity method investment in Triple Ring, in which it had held 25.8% interest and, in exchange, received 240,613 shares of Scaled Cell (valued at $0.9 million) and $5.0 million in cash proceeds. The Company recognized a loss of $0.2 million on the sale of the investment, which is reflected in Other income (expense), net, in the Consolidated Statement of Operations for the year ended December 31, 2023. Subsequent to the transaction, and as of December 31, 2023, the Company held a 7.2% common interest (1.9% on a fully diluted basis) in Triple Ring, which is accounted for using the measurement alternative method. As of December 31, 2024, the Company holds a 7.2% common interest (1.6% on a fully diluted basis). As of both December 31, 2024 and 2023, the Company still held 240,613 shares of Scaled Cell, representing a 20.1% interest. The Company accounts for its equity securities without readily determinable fair values under the measurement alternative election of ASC 321, Investments—Equity Securities, 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.
HMN
On March 6, 2023, the Company, through New Saxon 2019 Limited (“New Saxon”), an indirect subsidiary of GMH, closed on the sale of its remaining 19.0% interest in HMN to subsidiaries and an affiliate of Hengtong Optic-Electric Co Ltd. The sale was consummated pursuant to the terms of a supplemental agreement entered into by the parties in June 2022. During the year ended December 31, 2023, New Saxon received gross proceeds of $54.2 million and interest income of $0.5 million, of which $4.4 million was withheld for a foreign tax payment, and $15.9 million was distributed to GMH's non-controlling interest holders and redeemable non-controlling interest holders pursuant to the partnership agreement. New Saxon recognized a gain on sale of $12.2 million, which was included in Other income, net, in the Consolidated Statement of Operations for the year ended December 31, 2023. During the year ended December 31, 2024, a final distribution of $0.3 million was released to GMH's non-controlling interest holders pursuant to the partnership agreement, relating to amounts that were previously withheld for reserves and contingencies. Subsequently, both New Saxon and GMH were dissolved before the end of 2024, and the Company recognized no gain or loss on dissolution.
7. Property, Plant and Equipment, Net
Property, plant and equipment, net, ("PP&E") consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
| |
|
2024 |
|
2023 |
|
|
|
|
|
| Equipment, furniture and fixtures, and software |
|
$ |
211.0 |
|
|
$ |
210.7 |
|
| Building and leasehold improvements |
|
36.8 |
|
|
42.9 |
|
| Land |
|
18.6 |
|
|
25.8 |
|
| Construction in progress |
|
8.0 |
|
|
4.8 |
|
| Plant and transportation equipment |
|
7.4 |
|
|
8.1 |
|
|
|
$ |
281.8 |
|
|
$ |
292.3 |
|
| Less: Accumulated depreciation |
|
148.2 |
|
|
137.7 |
|
| Total |
|
$ |
133.6 |
|
|
$ |
154.6 |
|
Depreciation expense was $25.0 million and $24.9 million for the years ended December 31, 2024 and 2023, respectively. These amounts included $15.3 million and $15.8 million of depreciation expense recognized within cost of revenue for the years ended December 31, 2024 and 2023, respectively.
As of December 31, 2024, and December 31, 2023, the net book value of equipment held under finance leases included in PP&E was $0.5 million and $2.3 million, respectively. As of December 31, 2024, and December 31, 2023, the gross value of capitalized internal-use software included in PP&E was $20.7 million and $15.0 million, respectively, and the net book value was $9.8 million and $5.9 million, respectively.
Assets held-for-sale are included within Other current assets in the Consolidated Balance Sheets. As of December 31, 2024, there were $7.0 million in assets held-for-sale, which primarily consisted of one building, equipment and land and the associated improvements at the Company's Infrastructure segment. As of December 31, 2023, there were $3.1 million in assets held-for-sale, which primarily consisted of two buildings and the associated building improvements at the Company's Infrastructure segment, which were subsequently sold.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
8. Goodwill and Intangibles, Net
Goodwill
The carrying amounts of goodwill by segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Infrastructure |
|
Spectrum |
|
Total |
Balance at December 31, 2022 |
|
$ |
105.7 |
|
|
$ |
21.4 |
|
|
$ |
127.1 |
|
|
|
|
|
|
|
|
Translation adjustments |
|
— |
|
|
— |
|
|
— |
|
Balance as of December 31, 2023 |
|
$ |
105.7 |
|
|
$ |
21.4 |
|
|
$ |
127.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments |
|
(0.4) |
|
|
— |
|
|
(0.4) |
|
Balance as of December 31, 2024 |
|
$ |
105.3 |
|
|
$ |
21.4 |
|
|
$ |
126.7 |
|
Indefinite-lived Intangible Assets
The carrying amounts of indefinite-lived intangible assets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2024 |
|
2023 |
| FCC licenses |
|
$ |
107.7 |
|
|
$ |
106.3 |
|
|
|
|
|
|
| Total |
|
$ |
107.7 |
|
|
$ |
106.3 |
|
During the year ended December 31, 2024, the Spectrum segment completed the purchases of five Low Power Television licenses and stations for an aggregate consideration of $1.5 million, with $0.3 million payable on or before April 12, 2025. The acquisitions were accounted for as asset acquisitions.
The weighted-average period prior to the next renewal for FCC licenses was 5.4 years and 6.2 years as of December 31, 2024 and 2023, respectively, after taking into consideration licenses that were successfully renewed shortly after year-end. While broadcast television licenses are issued for a fixed period of time (generally eight years), renewals of these licenses have occurred routinely and at nominal cost. In addition, the Company does not believe that the expiration or non-renewal of any of its FCC licenses would have a material adverse effect on the expected future cash flows and profitability.
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 |
|
December 31, 2024 |
|
|
|
Gross Carrying Amount |
Accumulated Amortization |
Net |
| Trade names |
|
15 years |
|
$ |
25.1 |
|
|
$ |
(11.0) |
|
|
$ |
14.1 |
|
| Customer relationships and contracts |
|
11 years |
|
87.4 |
|
|
(49.1) |
|
|
38.3 |
|
| Channel sharing arrangements |
|
35 years |
|
12.6 |
|
|
(2.2) |
|
|
10.4 |
|
| Other |
|
10 years |
|
3.9 |
|
|
(2.0) |
|
|
1.9 |
|
| Total |
|
|
|
$ |
129.0 |
|
|
$ |
(64.3) |
|
|
$ |
64.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Original Useful Life |
|
December 31, 2023 |
|
|
|
Gross Carrying Amount |
Accumulated Amortization |
Net |
| Trade names |
|
15 years |
|
$ |
25.2 |
|
|
$ |
(9.4) |
|
|
$ |
15.8 |
|
| Customer relationships and contracts |
|
11 years |
|
87.6 |
|
|
(44.2) |
|
|
43.4 |
|
| Channel sharing arrangements |
|
35 years |
|
12.6 |
|
|
(1.8) |
|
|
10.8 |
|
| Other |
|
12 years |
|
3.9 |
|
|
(1.3) |
|
|
2.6 |
|
| Total |
|
|
|
$ |
129.3 |
|
|
$ |
(56.7) |
|
|
$ |
72.6 |
|
Amortization expense for definite lived intangible assets was $7.9 million and $11.1 million for the years ended December 31, 2024 and 2023, respectively. Amortization expense is included in Depreciation and amortization in the Consolidated Statements of Operations.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Amortization
Future estimated annual amortization expense for intangible assets as of December 31, 2024, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization |
2025 |
|
$ |
7.4 |
|
| 2026 |
|
6.7 |
|
| 2027 |
|
4.9 |
|
| 2028 |
|
4.9 |
|
| 2029 |
|
4.7 |
|
| Thereafter |
|
36.1 |
|
| Total |
|
$ |
64.7 |
|
9. Leases
The Company has entered into operating leases for land, office space, and certain Company vehicles and equipment and has entered into finance leases for certain Company vehicles and equipment. The leases will expire between 2025 and 2045. Right-of-use lease assets and lease liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
December 31, |
|
|
2024 |
|
2023 |
| Right-of-use assets: |
|
|
|
|
|
Operating lease |
Other assets (non-current) |
|
$ |
53.7 |
|
|
$ |
58.0 |
|
Finance lease |
Property, plant and equipment, net |
|
0.5 |
|
|
2.3 |
|
| Total right-of-use assets |
|
|
$ |
54.2 |
|
|
$ |
60.3 |
|
|
|
|
|
|
|
| Lease liabilities: |
|
|
|
|
|
Current portion of operating lease |
Other current liabilities |
|
$ |
12.9 |
|
|
$ |
13.5 |
|
Non-current portion of operating lease |
Other liabilities |
|
43.5 |
|
|
48.6 |
|
Finance lease |
Debt obligations |
|
0.6 |
|
|
2.4 |
|
| Total lease liabilities |
|
|
$ |
57.0 |
|
|
$ |
64.5 |
|
For the year ended December 31, 2023, the Company recorded an impairment charge to right-of-use-assets of $0.6 million, that primarily related to FCC licenses impaired. Impairment charges are included in Other operating (income) loss in the Consolidated Statements of Operations.
The tables below present financial information associated the Company's leases. The following table summarizes the components of lease expense (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
2024 |
|
2023 |
| Finance lease cost: |
|
|
|
|
|
|
|
|
| Amortization of right-of-use assets |
|
|
|
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
| Interest on lease liabilities |
|
|
|
|
|
0.1 |
|
|
0.2 |
|
| Net finance lease cost |
|
|
|
|
|
0.5 |
|
|
0.6 |
|
| Operating lease cost |
|
|
|
|
|
17.5 |
|
|
22.1 |
|
|
|
|
|
|
|
|
|
|
| Variable lease cost |
|
|
|
|
|
0.6 |
|
|
0.6 |
|
| Sublease income |
|
|
|
|
|
(0.7) |
|
|
(0.7) |
|
Total non-current lease cost |
|
|
|
|
|
17.9 |
|
|
22.6 |
|
Short-term lease costs |
|
|
|
|
|
30.0 |
|
|
39.2 |
|
Total lease cost |
|
|
|
|
|
$ |
47.9 |
|
|
$ |
61.8 |
|
Based on the short-term leases executed as of December 31, 2024, the Company expects that it will incur approximately $9.0 million in estimated short-term lease costs for the year ended December 31, 2025.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Cash flow information related to leases is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
2024 |
|
2023 |
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
Operating cash flows for operating leases(1) |
|
|
|
|
|
$ |
19.3 |
|
|
$ |
22.8 |
|
Operating cash flows for finance leases |
|
|
|
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
Financing cash flows for finance leases |
|
|
|
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
|
|
|
|
|
|
|
|
| Right-of-use assets obtained in exchange for new lease liabilities: |
|
|
|
|
|
|
|
|
| Operating leases |
|
|
|
|
|
$ |
18.5 |
|
|
$ |
9.3 |
|
| Finance leases |
|
|
|
|
|
$ |
— |
|
|
$ |
0.8 |
|
(1) For the year ended December 31, 2024, excludes $4.0 million received for a lease modification incentive. See below for additional information.
The weighted-average remaining lease term and the weighted-average discount rate for the Company's leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2024 |
|
2023 |
| Weighted-average remaining lease term (years) - operating leases |
|
7.4 |
|
7.5 |
| Weighted-average remaining lease term (years) - finance leases |
|
2.7 |
|
1.6 |
| Weighted-average discount rate - operating leases |
|
6.1 |
% |
|
5.6 |
% |
| Weighted-average discount rate - finance leases |
|
5.3 |
% |
|
6.8 |
% |
Future minimum lease commitments (undiscounted) as of December 31, 2024, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases |
|
Finance
Leases |
| 2025 |
$ |
15.6 |
|
|
$ |
0.3 |
|
| 2026 |
12.0 |
|
|
0.2 |
|
| 2027 |
9.4 |
|
|
0.1 |
|
| 2028 |
6.9 |
|
|
— |
|
| 2029 |
4.3 |
|
|
— |
|
| Thereafter |
21.3 |
|
|
— |
|
| Total future minimum lease payments |
69.5 |
|
|
0.6 |
|
| Less: amounts representing interest |
(13.1) |
|
|
— |
|
Total lease liability |
$ |
56.4 |
|
|
$ |
0.6 |
|
On May 1, 2024, a subsidiary of DBMG amended the termination date of three property leases that had an original expiry date of March 31, 2031. In exchange, and as an inducement for DBMG to early terminate, the landlord agreed to pay DBMG $12.0 million in surrender fees in three equal installments, contingent on timely vacate and inspection milestones, of which DBMG has received $4.0 million in surrender fees as of December 31, 2024, with the remaining two $4.0 million payments due to DBMG due within five business days of the vacate dates in 2025 and 2027. After final surrender of the properties, DBMG will have no further obligations under these leases. The Company accounted for this transaction as a lease modification, and recognized a $8.7 million gain on lease modification, which is included in Other operating (income) loss in the Consolidated Statement of Operations for the year ending December 31, 2024.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
In November 2021, INNOVATE entered into a ten-year lease arrangement for a special purpose space in Palm Beach, Florida, which was amended in February 2023 to extend the term of the lease to 15 years, with future monthly lease payments of approximately $0.2 million over the entire lease term and annual common area maintenance charges of $0.6 million, both of which are subject to a 3% annual upward adjustment, with total square footage of 25,184, as amended. The lease had not yet commenced for accounting purposes as the space was still under construction, and, therefore, future lease payments were not recorded on the Company's Consolidated Balance Sheets. In December 2023, the Company entered into a sublease agreement with Palm Beach Cultural Innovation Center, Inc. (“PBCIC”), a Florida not-for-profit corporation and related party to Avram A. Glazer, the Chairman of INNOVATE's Board of Directors, who is also on the board of directors of PBCIC. Pursuant to the sublease, PBCIC would have use of the underlying space and, as consideration, PBCIC agreed to undertake all of the tenant’s build-out costs and related obligations under the lease agreement between the Company, as tenant, and RPP Palm Beach Property LP, as landlord. Effective March 29, 2024, the Company assigned the lease, as amended, and the sublease to an affiliate of Mr. Glazer, releasing the Company of all obligations under the lease, as amended, and the sublease. The Company previously recorded $1.1 million in prepaid rent related to this lease, which was written-off in December 2023 upon the execution of the sublease to PBCIC. While there were no new expenses incurred during 2024, the Company also previously incurred other expenses of $1.1 million since inception related to the special purpose space and PBCIC, of which $0.7 million is included in Selling, general and administrative in the Consolidated Statement of Operations for the year ended December 31, 2023.
In December 2021, the Company entered into a five-year lease agreement for corporate office space in West Palm Beach, Florida, that would, on commencement of the lease, require future monthly lease payments of approximately $0.1 million over the entire lease term, subject to 3% annual upward adjustment. This lease had not yet commenced as the building was still under construction, and therefore, other than a $0.2 million deposit included in Other assets as of December 31, 2023, future lease payments were not recorded on the Company's Consolidated Balance Sheets. On March 29, 2024, the Company assigned the lease to Lancer Capital, an entity controlled by Mr. Glazer, releasing the Company of all obligations under the lease. The $0.2 million security deposit on the lease was also assigned to Lancer Capital and written-off in March 2024.
10. Other Assets, Accrued Liabilities and Other Liabilities
Other Current Assets
Other current assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2024 |
|
2023 |
Prepaid assets |
|
$ |
10.9 |
|
|
$ |
11.2 |
|
Assets held-for-sale |
|
7.0 |
|
|
3.1 |
|
Income tax receivable |
|
0.6 |
|
|
2.1 |
|
Restricted cash - current |
|
— |
|
|
0.9 |
|
Other |
|
2.5 |
|
|
0.4 |
|
Total other current assets |
|
$ |
21.0 |
|
|
$ |
17.7 |
|
Other Assets
Other assets, which are reflected within non-current assets in the Consolidated Balance Sheets, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2024 |
|
2023 |
| Right-of-use assets |
|
$ |
53.7 |
|
|
$ |
58.0 |
|
| Restricted cash - non-current |
|
0.5 |
|
|
0.6 |
|
| Other |
|
8.1 |
|
|
2.7 |
|
| Total other assets |
|
$ |
62.3 |
|
|
$ |
61.3 |
|
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Accrued Liabilities
Accrued liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
| |
|
2024 |
|
2023 |
| Accrued expenses |
|
$ |
13.4 |
|
|
$ |
14.3 |
|
| Accrued payroll and employee benefits |
|
34.1 |
|
|
29.2 |
|
Accrued interest and exit fees (current portion) |
|
61.0 |
|
|
17.1 |
|
Accrued sales and use taxes |
|
0.4 |
|
|
9.8 |
|
Accrued income taxes |
|
0.8 |
|
|
0.4 |
|
| Total accrued liabilities |
|
$ |
109.7 |
|
|
$ |
70.8 |
|
Other Current Liabilities
Other current liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
| |
|
2024 |
|
2023 |
Operating lease liability, current portion |
|
$ |
12.9 |
|
|
$ |
13.5 |
|
|
|
|
|
|
| Other |
|
4.3 |
|
|
2.6 |
|
| Total other current liabilities |
|
$ |
17.2 |
|
|
$ |
16.1 |
|
Other Liabilities
Other liabilities, which are reflected within non-current liabilities in the Consolidated Balance Sheets, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2024 |
|
2023 |
Operating lease liability, net of current portion |
|
$ |
43.5 |
|
|
$ |
48.6 |
|
|
|
|
|
|
Accrued interest and exit fees (non-current portion) |
|
0.7 |
|
|
30.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
2.6 |
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
| Total other liabilities |
|
$ |
46.8 |
|
|
$ |
82.7 |
|
Asset Retirement Obligations
The changes in the carrying amounts of the Company's Asset Retirement Obligations ("ARO") included in Other liabilities above are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2024 |
|
2023 |
| Carrying value, beginning of year |
$ |
1.9 |
|
|
$ |
1.7 |
|
|
|
|
|
|
|
|
|
| Accretion expense |
0.2 |
|
|
0.2 |
|
| Revisions in estimated cash flows |
(0.2) |
|
|
— |
|
Carrying value, end of year |
$ |
1.9 |
|
|
$ |
1.9 |
|
The AROs relate to Spectrum’s tower leases and related tower assets, which are removable and can be retired or redeployed elsewhere. The Company’s obligations represent the present value of future costs associated with the removal of certain assets imposed by the existing tower lease agreements.
As of December 31, 2024, there was $0.7 million of non-current accrued interest included in Other liabilities. As of December 31, 2023, there was $14.9 million of non-current accrued interest and $15.9 million of exit fees payable included in Other liabilities. Refer to Note 11. Debt Obligations for additional information on the exit fees.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
11. Debt Obligations
Debt obligations, including finance lease obligations, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
Infrastructure |
2024 |
|
2023 |
PRIME minus 0.75% Line of Credit due 2025 |
$ |
45.0 |
|
|
$ |
100.0 |
|
3.25% Term Loan due 2026 |
74.6 |
|
|
91.4 |
|
PRIME minus 0.75% Term Loan due 2026 |
24.5 |
|
|
— |
|
4.00% Note due 2024 |
— |
|
|
5.0 |
|
|
|
|
|
| Obligations under finance leases |
0.6 |
|
|
2.4 |
|
| Total Infrastructure |
$ |
144.7 |
|
|
$ |
198.8 |
|
|
|
|
|
| Spectrum |
|
|
|
8.50% Note due 2025 |
$ |
19.3 |
|
|
$ |
19.3 |
|
11.45% Notes due 2025 |
50.4 |
|
|
50.4 |
|
|
|
|
|
|
|
|
|
| Total Spectrum |
$ |
69.7 |
|
|
$ |
69.7 |
|
|
|
|
|
| Life Sciences |
|
|
|
20.00% Notes due 2025 |
$ |
24.0 |
|
|
17.4 |
|
|
|
|
|
| Total Life Sciences |
$ |
24.0 |
|
|
$ |
17.4 |
|
|
|
|
|
| Non-Operating Corporate |
|
|
|
8.50% Senior Secured Notes due 2026 |
$ |
330.0 |
|
|
$ |
330.0 |
|
7.50% Convertible Senior Notes due 2026 |
48.9 |
|
|
51.8 |
|
SOFR plus 5.75% Line of Credit due 2025 |
20.0 |
|
|
20.0 |
|
| CGIC Unsecured Note due 2026 |
31.0 |
|
|
35.1 |
|
| Total Non-Operating Corporate |
$ |
429.9 |
|
|
$ |
436.9 |
|
|
|
|
|
| Total outstanding principal |
$ |
668.3 |
|
|
$ |
722.8 |
|
| Unamortized issuance discount, issuance premium, and deferred financing costs |
(5.5) |
|
|
(13.0) |
|
| Less: current portion of debt obligations |
(162.2) |
|
|
(30.5) |
|
| Debt obligations, net of current portion |
$ |
500.6 |
|
|
$ |
679.3 |
|
As of December 31, 2024, estimated future aggregate finance lease and debt payments, including interest, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases |
|
Debt |
|
Total |
2025(1)(2) |
|
$ |
0.3 |
|
|
$ |
238.7 |
|
|
$ |
239.0 |
|
| 2026 |
|
0.2 |
|
|
508.4 |
|
|
508.6 |
|
| 2027 |
|
0.1 |
|
|
— |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum principal and interest payments |
|
0.6 |
|
|
747.1 |
|
|
747.7 |
|
Less: Amount representing interest (1)(2) |
|
— |
|
|
(79.4) |
|
|
(79.4) |
|
| Total aggregate finance lease and debt payments |
|
$ |
0.6 |
|
|
$ |
667.7 |
|
|
$ |
668.3 |
|
(1) Excludes exit fees for Spectrum and R2 Technologies.
(2) Excludes additional estimated interest payments of $0.4 million resulting from the extension subsequent to year end of the Non-Operating Corporate SOFR plus 5.75% Line of Credit from May 16, 2025, to August 1, 2025, and excludes additional estimated interest due of $2.9 million resulting from the extension subsequent to year end of the R2 Technologies 20.0% Note with Lancer Capital from December 31, 2024, to August 1, 2025.
The interest rates on finance leases ranged from approximately 3.0% to 6.8%.
Infrastructure
DBMG has a $135.0 million Revolving Line with UMB that bears interest at a prime rate minus a spread with an interest rate floor of 4.25%. The Revolving Line with UMB matures on August 15, 2025. The outstanding balance was $45.0 million and $100.0 million, as of December 31, 2024 and 2023, respectively, and availability for revolving loans was $89.9 million and $34.9 million as of December 31, 2024 and 2023, respectively. Interest is paid monthly and the effective interest rate on the Revolving Line with UMB was 6.98% and 8.33% as of December 31, 2024 and 2023, respectively. The Revolving Line with UMB also includes a commitment fee equal to 0.25% per annum times the average daily unused availability under the line.
DBMG also has a $74.6 million 3.25% term loan due 2026 (the "3.25% UMB Term Loan"), which expires May 31, 2026, and bears interest, which is paid monthly, at an annual rate of 3.25% with an effective interest rate of 3.3%.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
On June 28, 2024, DBM and UMB entered into the Third Amendment to the UMB Credit Agreement, which added an incremental separate term loan of $25.0 million to the existing credit facility ("PRIME minus 0.75% Term Loan due 2026"), with the same interest rate as the Revolving Line with UMB and the same maturity date as the initial 3.25% UMB Term Loan. Principal payments and interest are paid monthly.
The UMB term loans and Revolving Line with UMB associated with the Infrastructure segment contain customary restrictive and financial covenants related to debt levels and performance, including a Fixed Charge Coverage Ratio covenant, as defined in their agreements.
The 4.00% note matured on March 31, 2024, and was fully redeemed on April 2, 2024. Refer to Note 17. Related Parties for additional information.
DBMG is in compliance with its debt covenants as of December 31, 2024.
Spectrum
The maturity date of Spectrum's 8.50% and 11.45% Notes is August 15, 2025, as amended in November 2023. As a result of amendments to extend the maturity date during the year ended December 31, 2023, additional exit fees of $8.3 million were incurred. The exit fees associated with the notes, which are payable on the earlier of maturity or repayment of the principal, were recorded as original issue discount and are being amortized over the remaining life of the notes, which is assumed to be the maturity date. A corresponding liability for the total exit fees of $15.9 million is reflected within Accrued Liabilities in the Consolidated Balance Sheet as of December 31, 2024, and within Other Liabilities (non-current) in the Consolidated Balance Sheet as of December 31, 2023. Interest is capitalized and payable upon maturity of the notes, of which there was $20.5 million and $12.9 million of accrued but unpaid interest as of December 31, 2024 and 2023, respectively. As of December 31, 2024 and 2023, the weighted-average effective interest rate on the notes, as amended, was 22.8% per annum.
During November 2023, concurrently with Broadcasting's execution of the Ninth Amendment to Secured Notes, which among other things extended the maturity of the notes, INNOVATE entered into a related side letter with the lenders, whereby INNOVATE agreed to utilize proceeds from a sale of certain of its existing operations, as allowable under the Company's current agreements and indentures and after all other required payments have been made, for repayment of a portion of Broadcasting's Senior Secured Notes. Assuming there are sufficient proceeds remaining after such repayment, an additional $2.0 million is payable for payments made after November 9, 2024, and in exchange for the additional $2.0 million fee, the institutional investors will return their equity interests in HC2 Broadcasting Holdings, Inc. and their equity interests in DTV America. The lenders hold warrants to purchase 145,825 shares of common stock of HC2 Broadcasting Holdings, Inc which can be exercised at any time until August 2027 at an exercise price of $0.01 per share.
Life Sciences
During the year ended December 31, 2023, R2 Technologies closed on $6.6 million of additional notes from Lancer Capital, including $1.3 million of unpaid accrued interest which was capitalized into the principal balance, increasing the aggregate outstanding principal to $17.4 million as of December 31, 2023. The interest rate on the outstanding principal balance also increased to 20% per annum during 2023. The notes expired on January 31, 2024, and, effective January 31, 2024, a new 20% note with an aggregate original principal amount of $20.0 million was issued, which was comprised of all prior outstanding principal amounts and unpaid accrued interest of $2.6 million which was capitalized into the new principal balance. The 20% $20.0 million note also included an exit fee, which would be 10.5% of the principal amount being repaid as of April 30, 2024. As a result of the addition of the exit fee effective January 31, 2024, the transaction was determined to be an extinguishment of debt under ASC 470-50, Debt - Modifications and Extinguishments, and the exit fee payable to the existing lender of $2.2 million was included as a loss on debt extinguishment within Other income, net in the Consolidated Statement of Operations.
The original maturity date of the 20% $20.0 million note was April 30, 2024, or within five business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing or has a change in control, as defined in the agreement, with an optional prepayment of the entire then-outstanding and unpaid principal and accrued interest upon five-days written notice to Lancer Capital. Effective May 17, 2024, the maturity date of the note was extended to December 31, 2024, and the exit fees were amended. The May 17, 2024, amendment was determined to be a modification of debt under ASC 470-50, Debt - Modifications and Extinguishments, as the terms of the debt were not determined to be substantially different, including taking into consideration the ability to prepay the debt at anytime, and, therefore, the increases in exit fees are being amortized using the effective interest method.
The exit fee, as amended, and as of December 31, 2024, was equal to 11.90% of the principal amount being repaid. Effective July 31, 2024, an additional exit fee of $1.0 million was incurred under the amendment, which increased by $1.0 million each month until the end of November 2024. As of December 31, 2024, total exit fees payable were $7.9 million. The exit fees were amortized over the term of the note using the effective interest rate method and are included in interest expense.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Subsequent to year end, with an effective date of December 31, 2024, the maturity date of the note was extended to August 1, 2025. In addition, the exit fee continues to increase by 0.17% each month until maturity and an additional exit fee of $1.0 million was incurred under the amendment, which also continues to increase by $1.0 million each month until maturity. The exit fees are payable on the earliest of the maturity date, the date of the acceleration of the principal amount of the note for any reason or, if any portion of the note is prepaid at any time, the date of such prepayment of the note. A new $5.0 million default fee will be payable on August 1, 2025, in the event all obligations under the note, including principal, any accrued and unpaid interest, and exit fees, are not repaid in full prior to the August 1, 2025, maturity date.
Interest on the note, as amended, is payable monthly in arrears, in cash or, if not paid in cash, accrued and unpaid interest is capitalized monthly into the principal balance. Interest expense, including amortization of all exit fees, related to the note(s) with Lancer Capital was $9.8 million and $2.9 million for the years ended December 31, 2024 and 2023, respectively. For the year ended December 31, 2024, in accordance with the 20% note agreement, additional unpaid cash interest due of $4.0 million was capitalized into the principal balance. As of December 31, 2024, the total outstanding amount relating to the note was $31.9 million, inclusive of $24.0 million of principal and capitalized interest, which total is included within Current portion of debt obligations in the Consolidated Balance Sheet, and $7.9 million in total accrued exit fees which are included within Accrued liabilities in the Consolidated Balance Sheet. As of December 31, 2023, accrued interest, which had not yet been capitalized into the principal balance, was $2.4 million, and was included within Accrued liabilities in the Consolidated Balance Sheet. As of December 31, 2024 and 2023, the effective interest rate on the notes, as amended, was 57.8% and 20.0%, respectively.
Non-Operating Corporate
2026 Senior Secured Notes
The Company has $330.0 million aggregate principal amount of 8.50% senior secured notes due February 1, 2026 (the "2026 Senior Secured Notes"), which were issued in 2021 at 100% of par. The 2026 Senior Secured Notes have a stated annual interest rate of 8.50% and have an effective interest rate of 9.3%, which reflects $10.8 million of deferred financing fees, including underwriting fees. Interest is payable semi-annually in arrears on February 1st and August 1st of each year. Aggregate interest expense, including the contractual interest coupon and amortization of the deferred financing fees was $30.4 million and $30.1 million, respectively, for the years ended December 31, 2024 and 2023, respectively.
2026 Convertible Notes
The original $51.8 million aggregate principal amount of 7.50% convertible notes (the "2026 Convertible Notes") were issued under a separate indenture dated February 1, 2021, between the Company and U.S. Bank, as trustee (the "Convertible Indenture"). The 2026 Convertible Notes mature on August 1, 2026 unless earlier converted, redeemed or purchased. The 2026 Convertible Notes were issued at 100% of par with a stated annual interest rate of 7.50%. The fair value of the embedded conversion feature contained in the 2026 Convertible Notes had a fair value of $12.3 million, which was recorded as a premium on the 2026 Convertible Notes. The 2026 Convertible Notes have an effective interest rate of 3.21%, which reflects the initial $12.3 million premium and $1.1 million of deferred financing fees.
During the year ended December 31, 2024, INNOVATE repurchased $2.9 million principal amount of its 2026 Convertible Notes at a market discount for $1.1 million, which is inclusive of accrued interest of $0.1 million, and recognized a $1.9 million gain on debt repurchase within Other income, net in the Consolidated Statement of Operations. As of December 31, 2024, the 2026 Convertible Notes held by third parties had a net carrying value of $52.3 million inclusive of an unamortized premium of $3.8 million and unamortized deferred financing costs of $0.4 million. As of December 31, 2023, the 2026 Convertible Notes had a net carrying value of $57.3 million inclusive of an unamortized premium of $6.0 million and unamortized deferred financing costs of $0.5 million.
Interest is payable semi-annually in arrears on February 1st and August 1st of each year. Aggregate interest expense recognized relating to both the contractual interest coupon and amortization of discount net of premium and deferred financing costs was $1.7 million and $1.9 million, for the years ended December 31, 2024 and 2023, respectively.
Each $1,000 of principal of the 2026 Convertible Notes is convertible into 23.6327 shares of our common stock, which is equivalent to a conversion price of approximately $42.31 per share, both as adjusted for the 2024 Reverse Stock Split and subject to further adjustment upon the occurrence of specified events. Based on the closing price of our common stock of $4.94 on December 31, 2024, the if-converted value of the 2026 Convertible Notes did not exceed its principal value.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Revolving Line of Credit
The Company has a revolving credit agreement with MSD PCOF Partners IX, LLC ("MSD"), which has a maximum commitment of $20.0 million ("Revolving Line of Credit"). As of both December 31, 2024 and 2023, the outstanding balance was $20.0 million. The maturity date of the Revolving Line of Credit, as amended on May 6, 2024, was May 16, 2025. Subsequent to year end, on March 6, 2025, the maturity date of the Revolving Line of Credit was extended to August 1, 2025, with all other terms substantially unchanged. The Revolving Line of Credit has an interest rate margin applicable to loans borrowed under the Revolving Line of Credit of 5.75%, and the benchmark rates for the interest are SOFR-based rates. As of December 31, 2024 and 2023, the effective interest rate on the Revolving Line of Credit, as amended, was 10.6% and 11.3%, respectively. Interest is paid quarterly in arrears. The Revolving Line of Credit also includes a commitment fee at a per annum rate of 1.0% calculated based off the actual daily amount of unused availability under the Revolving Line of Credit with MSD, and also includes a requirement for a prepayment if net cash proceeds from certain asset sales in excess of $10.0 million are received. The affirmative and negative covenants governing the Revolving Line of Credit are substantially consistent with the affirmative and negative covenants contained in the indenture that governs the 2026 Senior Secured Notes.
CGIC Unsecured Note Due 2026
On May 9, 2023, in connection with the redemption of DBM Global Intermediate Holdco Inc.'s Series A Fixed-to-Floating Rate Perpetual Preferred Stock (the “DBMGi Series A Preferred Stock”), the Company issued a subordinated unsecured promissory note to Continental General Insurance Company ("CGIC") in the principal amount of $35.1 million (the "CGIC Unsecured Note"). Refer to Note 16. Equity and Temporary Equity for additional information. The CGIC Note, which is due February 28, 2026, bore interest at 9.0% per annum through May 8, 2024, bears interest at 16.0% per annum from May 9, 2024, to May 8, 2025, and 32.0% per annum thereafter. As of December 31, 2024 and 2023, the effective interest rate on the note, as adjusted, was 17.5%, and 18.1%, respectively. The CGIC Unsecured Note also requires a mandatory prepayment from the proceeds from certain asset sales and the greater of $3.0 million or 12.5% of the net proceeds from certain equity sales. As a result of the closing of the Rights Offering on April 24, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note on April 26, 2024. Other covenants in the CGIC Unsecured Note are generally consistent with the Company's Indenture governing the 8.50% Senior Secured Notes due 2026, dated as of February 1, 2021, by and among the Company, the guarantors party thereto and U.S. Bank National Association.
For the years ended December 31, 2024 and 2023, interest expense recognized relating to the CGIC Unsecured Note was $5.7 million and $4.1 million, respectively, and cash paid for interest to CGIC was $4.6 million and $1.8 million, respectively. Accrued interest related to the CGIC notes was $3.4 million and $2.0 million as of December 31, 2024 and 2023, respectively.
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.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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.
Restricted Payments. The Secured Indenture contains specific covenants which restrict the Company's ability and the ability of its restricted subsidiaries (as defined in the Secured Indenture) to incur certain additional indebtedness; make certain dividends, distributions, investments and other restricted payments; repay certain debt; sell certain assets; or enter into certain transactions with affiliates. These covenants are subject to a number of exceptions and qualifications. At December 31, 2024, the Company was in compliance with all covenants contained in the 2026 Senior Secured Notes.
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. As of August 1, 2023 and thereafter, 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 a conversion rate of 23.6327 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $42.31 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 NYSE, 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 2026 Convertible Notes to become immediately due and payable. As of December 31, 2024, the Company was in compliance with all covenants contained in the 2026 Convertible Notes.
Revolving Credit Agreement
Lender. MSD PCOF Partners IX, LLC
Maturity. The maturity date of the Revolving Line of Credit, as amended on May 6, 2024, was May 16, 2025. Subsequent to year end, on March 6, 2025, the maturity date of the Revolving Line of Credit was extended to August 1, 2025, with all other terms substantially unchanged.
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.
Any failure to comply with the restrictions in the agreements governing the Company's indentures, or any agreement governing other indebtedness the Company could incur, may result in an event of default under those agreements. Such default may allow the creditors to accelerate the related debt, which acceleration may trigger cross-acceleration or cross-default provisions in other debt.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
2026 Unsecured CGIC Note:
Maturity. The 2026 Unsecured CGIC Note matures on February 28, 2026.
Interest. The 2026 Unsecured CGIC Notes accrued interest at a rate 9% per year through May 8, 2024, and accrues at 16% per year from May 9, 2024 to May 8, 2025, and 32% per year thereafter. Interest on the 2026 Convertible Notes is paid monthly, on the last day of each month or next succeeding business day.
Issue Price. The issue price of the 2026 Unsecured CGIC Notes was 100% of par.
Ranking. The note is a part of 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, 2026 Convertible Notes and structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries, including trade credit.
Optional and Mandatory Prepayments. The Company may prepay the entire note or a portion thereof at any time, without incurring penalties or premiums. Such prepayments must cover the principal amount along with accrued interest up to the prepayment date, as well as any other outstanding amounts under the note. Any prepaid amount cannot be re-borrowed.
The CGIC Unsecured Note also requires a mandatory prepayment from the proceeds from certain asset sales and the greater of $3.0 million or 12.5% of the proceeds from certain equity sales.
Events of Default. The note contains customary events of default and contains cross-default provisions with the Company's Unsecured Indenture and Senior Debt which could, subject to certain conditions, cause the note to become immediately due and payable.
INNOVATE is in compliance with its debt covenants as of December 31, 2024.
12. Income Taxes
The income tax expense (benefit) for income taxes for the years indicated were as follows (in millions):
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Year Ended December 31, |
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2024 |
|
2023 |
Current tax expense |
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|
|
|
| Federal |
|
$ |
0.6 |
|
|
$ |
— |
|
| State |
|
4.5 |
|
|
4.5 |
|
| Foreign |
|
0.7 |
|
|
5.3 |
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Net current tax expense |
|
$ |
5.8 |
|
|
$ |
9.8 |
|
| Deferred tax expense (benefit) |
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|
|
|
| Federal |
|
$ |
0.2 |
|
|
$ |
0.3 |
|
| State |
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— |
|
|
0.2 |
|
| Foreign |
|
0.3 |
|
|
(5.8) |
|
Net deferred tax expense (benefit) |
|
$ |
0.5 |
|
|
$ |
(5.3) |
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|
|
|
|
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| Income tax expense |
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$ |
6.3 |
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$ |
4.5 |
|
The US and foreign components of income (loss) from continuing operations before income taxes for the years indicated were as follows (in millions):
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Year Ended December 31, |
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2024 |
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2023 |
| US |
|
$ |
(36.1) |
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|
$ |
(46.9) |
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| Foreign |
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2.7 |
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12.5 |
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Loss from continuing operations before income taxes |
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$ |
(33.4) |
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|
$ |
(34.4) |
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INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
For the years indicated, the income tax expense differed from the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes due to the following items (in millions):
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| |
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Year Ended December 31, |
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2024 |
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2023 |
| Tax (benefit) at federal statutory rate |
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$ |
(7.0) |
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$ |
(7.2) |
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| State tax, net of federal benefit |
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(1.3) |
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1.4 |
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| Non-deductible meals and entertainment |
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0.5 |
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0.6 |
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| Executive and stock compensation |
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2.1 |
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0.3 |
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| Increase (decrease) in valuation allowance |
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19.8 |
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8.9 |
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| Tax rate changes |
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(4.9) |
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1.2 |
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| Return to provision |
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(3.8) |
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0.6 |
|
| Foreign withholding tax expense |
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— |
|
|
4.4 |
|
| Gain on sale of investment |
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— |
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0.5 |
|
| Outside basis differences |
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— |
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(6.9) |
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| Other |
|
0.9 |
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0.7 |
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| Income tax expense |
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$ |
6.3 |
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$ |
4.5 |
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Income tax expense of $6.3 million for the year ended December 31, 2024, primarily relates to the tax expense for taxpaying entities, for which there was an increase in current federal tax expense due to INNOVATE's U.S. consolidated group utilizing its remaining unlimited NOLs in 2024 and due to the Tax Cuts and Jobs Act's 80% limitation on net operating losses incurred after 2017. Additionally, the tax benefits associated with losses generated by the INNOVATE Corp. U.S. tax consolidated group and certain other businesses have been reduced by a full valuation allowance as the Company does not believe it is more-likely-than not that the losses will be utilized prior to expiration.
Income tax expense of $4.5 million for the year ended December 31, 2023, primarily relates to the tax expense for taxpaying entities and includes a $1.1 million net tax benefit, consisting of a current tax expense of $4.4 million related to a foreign withholding tax payment and a deferred tax benefit of $5.5 million related to the reversal of the deferred tax liability associated with the $11.3 million HMN put option agreement and the expected foreign withholding taxes on the book over tax outside basis difference in the investment, both of which were related to the sale of New Saxon's 19% investment in HMN on March 6, 2023. Additionally, the tax benefits associated with losses generated by the INNOVATE Corp. U.S. tax consolidated group and certain other businesses have been reduced by a full valuation allowance as the Company does not believe it is more-likely-than not that the losses will be utilized prior to expiration.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Deferred income taxes reflect the net income tax effect of temporary differences between the basis of assets and liabilities for financial reporting purposes and for income tax purposes. Net deferred tax balances as of the years indicated were comprised of the following (in millions):
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December 31, |
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2024 |
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2023 |
| Net operating loss carryforwards |
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$ |
79.2 |
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$ |
74.7 |
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| Basis difference in fixed assets |
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0.4 |
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0.3 |
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| Deferred compensation |
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8.1 |
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7.4 |
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| Sec. 163(j) carryforward |
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68.3 |
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59.6 |
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| Lease liability |
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15.7 |
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18.5 |
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Investment in partnership |
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10.8 |
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9.9 |
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| Other deferred tax assets |
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8.1 |
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7.2 |
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| Total deferred tax assets |
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190.6 |
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177.6 |
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| Valuation allowance |
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(128.9) |
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|
(110.7) |
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| Total net deferred tax assets |
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$ |
61.7 |
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$ |
66.9 |
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| Basis difference in fixed assets |
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(16.4) |
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(19.5) |
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Right-of-use assets |
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(15.0) |
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(17.3) |
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| Basis difference in intangibles |
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(30.4) |
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(30.4) |
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| Lease termination |
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(1.5) |
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— |
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| Other deferred tax liabilities |
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(1.2) |
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(1.8) |
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| Total deferred tax liabilities |
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$ |
(64.5) |
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$ |
(69.0) |
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| Net deferred tax liabilities |
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$ |
(2.8) |
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$ |
(2.1) |
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Net deferred tax asset per Consolidated Balance Sheet |
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$ |
1.6 |
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$ |
2.0 |
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Deferred tax liabilities per Consolidated Balance Sheet |
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4.4 |
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|
4.1 |
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Total net deferred tax liabilities |
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$ |
(2.8) |
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$ |
(2.1) |
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Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets in essence represent future savings of taxes that would otherwise be paid in cash. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income, including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established, with a corresponding charge to net income (loss).
The Company establishes valuation allowances for deferred tax assets that, in its judgment are not more likely-than-not realizable. These judgments are based on projections of future income or loss and other positive and negative evidence by individual tax jurisdiction. Changes in industry and economic conditions and the competitive environment may impact these projections. During each reporting period, the Company assesses the likelihood that its deferred tax assets will be realized and determines if adjustments to its valuation allowances are appropriate.
Management evaluated the need to maintain the valuation allowance against the deferred taxes of the INNOVATE Corp. U.S. consolidated tax group (“the group”) for each of the reporting periods based on the positive and negative evidence available. The objective negative evidence evaluated was the group’s historical operating results over the prior three-year period. The group is in a cumulative three-year loss as of December 31, 2024, which provides negative evidence that is difficult to overcome and would require a substantial amount of objectively verifiable positive evidence of future income to support the realizability of the group’s deferred tax assets. While positive evidence exists by way of unrealized gains in the Company’s investments, management concluded that the negative evidence outweighs the positive evidence. Thus, it is more likely than not that the group’s US deferred tax assets will not be realized.
Valuation allowances have been maintained against deferred tax assets based on losses generated by certain businesses that do not qualify to be included in the INNOVATE Corp. U.S. consolidated income tax return. Generally, consolidation rules under the Internal Revenue Code require consolidation of like-kind entities with an 80% or greater equity ownership, and each individual state or foreign jurisdiction has their own distinct consolidation rules which vary.
As of December 31, 2024, the Company has not recognized any deferred tax liabilities associated with undistributed earnings of its foreign subsidiaries, as these earnings are considered permanently reinvested. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with its hypothetical calculation. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to U.S. income taxes and withholding taxes payable in various foreign jurisdictions, which could potentially be offset by foreign tax credits.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Net Operating Losses
At December 31, 2024, the Company had gross U.S. net operating loss ("NOL") carryforwards available to reduce future taxable income of the U.S. consolidated group in the amount of $174.3 million. The Company expects that approximately $117.7 million of the gross U.S. NOL carryforwards would be available to offset taxable income in 2025 and later periods. This estimate may change based on changes to actual results reported on the 2024 U.S. tax return. The amount of U.S. NOL carryforwards reflected in the financial statements differ from the amounts reported on the U.S. tax return due to uncertain tax positions related to tax laws and regulations that are subject to varied interpretation by the Internal Revenue Service ("IRS").
Due to U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the "TCJA") in 2017, U.S. NOL carryforwards in the amount of $139.7 million, generated after 2017 have an indefinite carryforward period. U.S. NOL carryforwards, in the amount of $34.6 million, generated prior to 2018 will expire, if unused, by 2037.
Additionally, as of December 31, 2024, the Company had $149.4 million of gross U.S. NOL carryforwards from its subsidiaries that do not qualify to be included in the INNOVATE U.S. consolidated income tax return, including $102.8 million from R2, $44.1 million from DTV America, and other entities of $2.5 million. Of the $149.4 million of gross U.S. NOL carryforwards, $113.3 million was generated after 2017 and will have an indefinite carryforward period; the remaining $36.1 million was generated prior to 2018 and will expire, if unused, by 2037.
Pursuant to the rules under Section 382, the Company concluded that it underwent an ownership change on May 29, 2014 and $46.1 million gross U.S. NOLs recorded in the consolidated financial statements are subject to an annual limitation under IRC Sec. 382 of approximately $2.3 million. On November 4, 2015, INNOVATE issued 8.5 million shares of its stock in a primary offering. The Company believes the issuance resulted in a Section 382 ownership change and $31.7 million gross U.S. NOLs recorded in the consolidated financial statements are subject to IRC Sec. 382.
The purchase of GrayWolf on November 30, 2018 triggered a Section 382 ownership change. $57.1 million of gross U.S. NOLs acquired are subject to an annual limitation between $3.0 million and $4.0 million for the first five years beginning in 2019 and $1.1 million afterwards. $25.4 million of the GrayWolf U.S. NOLs subject to Section 382 were generated in 2018, and, therefore, they do not expire.
Additionally, the Company has $11.4 million of acquired U.S. NOLs from DTV America, which is subject to an annual limitation under Section 382 of the Internal Revenue Code.
As of December 31, 2024, the Company had foreign operating loss carryforwards of approximately $0.8 million.
Unrecognized Tax Benefits
The Company follows the provision of ASC 740 which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative to certain tax planning strategies, including certain intercompany transactions as well as regulatory taxes.
The Company did not have any unrecognized tax benefits as of December 31, 2024 and 2023, related to uncertain tax positions that would impact the effective income tax rate if recognized. The Company has reduced the NOL carryforward by $58.7 million for uncertain tax positions based on our interpretation of tax laws and regulations that are subject to varied interpretation by the IRS.
Below is a tabular reconciliation of the total amount of unrecognized tax benefits as of the years indicated (in millions):
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Year Ended December 31, |
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2024 |
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2023 |
| Uncertain tax benefits - January 1 |
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$ |
17.6 |
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$ |
17.6 |
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|
|
Gross decreases - Tax positions in prior year |
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Uncertain tax benefits - December 31 |
|
$ |
17.6 |
|
|
$ |
17.6 |
|
Examinations
The Company conducts business globally, and as a result, INNOVATE or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. Tax years 2002-2023 remain open for examination.
The Company is currently under examination in various domestic and foreign tax jurisdictions. The open tax years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant tax period. Given the nature of tax audits, there is a risk that disputes may arise.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
13. Commitments and Contingencies
Unrecorded future minimum purchase commitments as of December 31, 2024, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2025 |
|
$ |
117.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Thereafter |
|
— |
|
|
| Total commitments |
|
$ |
117.9 |
|
|
The Company’s future minimum purchase commitments are primarily for materials and subcontractor costs to be used in its construction projects. The amounts are fixed and determinable and do not include variable components.
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 Consolidated Financial Statements. Such legal matters may include, but is not limited to, actions or claims relating to sensitive data, including proprietary business information and intellectual property, personally identifiable information of employees and contractors, cyber-attacks, data breaches and non-compliance with contractual or other legal obligations. Litigation and other legal matters are inherently unpredictable and subject to substantial uncertainties and adverse resolutions could occur. In addition, litigation and other legal matters, including class-action lawsuits, government investigations and regulatory proceedings can be costly to defend and, depending on the class size and claims, could be costly to settle. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its Consolidated Financial Statements. The Company records a liability in its Consolidated Financial Statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated as well as any legal costs incurred related to the litigation. 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 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 Consolidated Financial Statements. Any legal or other expenses associated with the litigation are accrued for as the expenses are incurred. The Company maintains liability insurance that insures it against workers’ compensation, personal and bodily injury, property damage, directors’ and officers’ liability, errors and omissions, cyber liability, employment practices liability. There can be no assurance that the liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities.
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.
DTV Derivative Litigation
On March 15, 2021, holders of DTV stock and 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 asserted claims for breach of fiduciary duty, aiding and abetting breaches of fiduciary duty, and waste against, among others, INNOVATE (f/k/a HC2 Holdings, Inc.), certain of INNOVATE’s subsidiaries, and certain current and former DTV officers and directors in connection with certain sales and purchases of broadcast stations and licenses. Defendants moved to dismiss the complaint in its entirety.
On October 28, 2022, the Court issued a Memorandum Opinion granting in part and denying in part Defendants’ motions to dismiss. On February 14, 2024, the plaintiffs amended their complaint to further narrow their claims.
On July 22, 2024, the parties reached an agreement in principle to settle the litigation for $125,000. The parties have submitted the settlement for Court approval, which is pending.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Marin General Hospital Replacement Litigation
On October 20, 2022, McCarthy Building Companies, Inc. (“McCarthy”) filed suit against Schuff Steel Company (“Schuff”), a subsidiary of DBMG, and Quality Assurance Engineering, Inc. dba Consolidated Engineering Laboratories (“CEL”) in the Superior Court of the State of California for the County of Marin, styled McCarthy Building Companies, Inc. v. Schuff Steel Company; Quality Engineering, Inc. dba Consolidated Engineering Laboratories, et al., Case No. CIV2203963 (the “Action”). In the Action, McCarthy alleges damages and delays caused by alleged failures in fabrication, erection, welding, and quality control by Schuff and improper quality assurance responsibilities by CEL on the Marin General Hospital Replacement Building (the “Project”). McCarthy asserts claims against Schuff for breach of contract, express indemnity, breach of express warranties, negligence, equitable implied indemnity, breach of implied warranties, and declaratory relief. On February 13, 2023, Schuff filed its response denying liability to McCarthy and asserting a Cross-Complaint against McCarthy, and other companies involved in the design, construction, and quality assurance, who potentially are liable for damages and delays alleged by McCarthy on the Project. In the Cross-Complaint, Schuff asserts claims for breach of contract, violation of statute, equitable indemnity apportionment, and contribution and express indemnity (the “Cross-Complaint”). Schuff intends to vigorously defend this Action and aggressively pursue the Cross-Complaint and cannot reasonably estimate any range of potential loss at this time.
Meruelo Television Litigation
On August 8, 2023, Meruelo Television, LLC (“Plaintiff”) commenced a lawsuit in the Superior Court of the State of California, Los Angeles County, subsequently removed to federal court in the U.S. District Court for the Central District of California, titled Meruelo Television, LLC v. HC2 Network, Inc. (C.D.Cal.) Case No. 2:23-cv-08184-AB-BFM (the “Lawsuit”), asserting claims against defendants HC2 Network, Inc. (“HC2”) and INNOVATE Corp. (“INNOVATE” or the “Company” and, together with HC2, the “Defendants”).
On April 9, 2024, Plaintiff and Defendants filed in the Lawsuit a Stipulation of Dismissal, as so-ordered by the Court on April 16, 2024, whereby Plaintiff dismissed without prejudice its claims as against INNOVATE, while retaining its claim against HC2. On October 28, 2024, the parties stipulated to dismiss the remaining claims in the Lawsuit. On November 1, 2024, the Court entered an Order dismissing of the Lawsuit with prejudice.
Other Commitments and Contingencies
Letters of Credit and Performance Bonds
As of December 31, 2024, DBMG had outstanding letters of credit of $0.1 million under credit and security agreements and performance bonds of $183.9 million. As of December 31, 2023, DBMG had outstanding letters of credit of $0.1 million under credit and security agreements and performance bonds of $360.8 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. The ratings of the bonding companies utilized by DBMG are highly rated, ranging from A-, A, A+ and AA.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company maintains all cash and cash equivalents at accredited financial institutions, in amounts that exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company held $5.5 million and $6.3 million of cash and restricted cash in foreign accounts as of December 31, 2024 and 2023, respectively, none of which is covered by the Federal Deposit Insurance Corporation ("FDIC"). The Company attempts to minimize the risks related to cash and cash equivalents by investing in a range of financial instruments as defined by the Company. Concentrations of credit risk with respect to accounts receivable are limited by the large number of customers comprising the Company's customer base and their geographic and business dispersion. In addition, concentrations of credit risk at DBM with respect to receivables are limited as the Company’s customers tend to be larger general contractors and subcontractors on adequately funded projects and the Company has certain lien rights. The Company performs ongoing credit evaluations of the customers' financial condition and generally does not require collateral to support customer receivables.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Company's revenue and accounts receivable concentrations of 10% and greater were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
2024 |
|
2023 |
|
Segment |
|
|
|
|
|
Revenue |
|
Accounts Receivable |
|
|
|
Revenue |
|
Accounts Receivable |
|
|
| Customer A |
Infrastructure |
|
|
|
|
|
14.4% |
|
* |
|
|
|
29.2% |
|
30.0% |
|
|
| Customer B |
Infrastructure |
|
|
|
|
|
10.3% |
|
* |
|
|
|
* |
|
* |
|
|
| Customer C |
Infrastructure |
|
|
|
|
|
* |
|
* |
|
|
|
11.4% |
|
* |
|
|
Customer D |
Infrastructure |
|
|
|
|
|
* |
|
* |
|
|
|
* |
|
11.5% |
|
|
Customer E |
Infrastructure |
|
|
|
|
|
* |
|
10.3% |
|
|
|
* |
|
* |
|
|
*Less than 10% concentration
14. Employee Retirement Plans
401(k) Plans
The Company and various subsidiaries maintain 401(k) retirement savings plans which cover eligible employees, including for certain, union steelworkers, and permit participants to contribute to the plans, subject to Internal Revenue Code restrictions and which feature matching contributions of various percentages of the first 3% to 5% of employee annual salary contributions, depending on the subsidiary. The Company made aggregate matching contributions of $2.8 million for the year ended December 31, 2024, of which $1.1 million was reflected as a component of Cost of revenue in the Consolidated Statements of Operations, and $1.7 million was reflected as a component of Selling, general and administrative in the Consolidated Statements of Operations. The Company made aggregate matching contributions of $3.3 million for the year ended December 31, 2023, of which $1.5 million was reflected as a component of Cost of revenue in the Consolidated Statements of Operations, and $1.8 million was reflected as a component of Selling, general and administrative in the Consolidated Statements of Operations.
Multi-Employer Plans
Certain of the Company's Infrastructure segment workforce are subject to collective bargaining agreements. The Company contributes to union-sponsored, multi-employer pension plans. Contributions are made in accordance with negotiated labor contracts. The passage of the Multi-Employer Pension Plan Amendments Act of 1980 ("the Act") may, under certain circumstances, cause the Company to become subject to liabilities in excess of contributions made under collective bargaining agreements. Generally, liabilities are contingent upon termination, withdrawal, or partial withdrawal from the plans. Under the Act, liabilities would be based upon the Company's proportionate share of each plan's unfunded vested benefits.
The Company made contributions to various multi-employer pension plans totaling $9.8 million and $17.3 million during the years ended December 31, 2024 and 2023, respectively, which was reflected as a component of Cost of revenue in the Consolidated Statements of Operations. As of December 31, 2024, approximately 8.3% of DBMG’s employees are covered under various collective bargaining agreements. As of December 31, 2024, most of the Infrastructure segment's collective bargaining agreements are subject to automatic annual or other renewal unless either party elects to terminate the agreement on the scheduled expiration date.
15. Share-based Compensation
On April 11, 2014, INNOVATE’s Board of Directors adopted the INNOVATE Corp. Omnibus Equity Award Plan (the "2014 Plan"), which was originally approved at the annual meeting of stockholders held on June 12, 2014. On April 21, 2017, the Board of Directors, subject to stockholder approval, adopted the Amended and Restated 2014 Omnibus Equity Award Plan (the "Restated 2014 Plan"). The Restated 2014 Plan was approved by INNOVATE's stockholders at the annual meeting of stockholders held on June 14, 2017. Subject to adjustment as provided in the Restated 2014 Plan, the Restated 2014 Plan authorized the issuance of 3,500,000 shares of common stock of INNOVATE, plus any shares that again become available for awards under the 2014 Plan, plus any shares that again become available for awards under the Restated 2014 Plan.
On April 20, 2018, the Board of Directors, subject to stockholder approval, adopted the Second Amended and Restated 2014 Omnibus Equity Award Plan (the "Second A&R 2014 Plan"). The Second A&R 2014 Plan was approved by INNOVATE's stockholders at the annual meeting of stockholders held on June 13, 2018. Subject to adjustment as provided in the Second A&R 2014 Plan, the Second A&R 2014 Plan authorized the issuance of up to 3,500,000 shares of common stock of INNOVATE, plus any shares that again become available for awards under the 2014 Plan or the Restated 2014 Plan.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Second A&R 2014 Plan provides that no further awards will be granted pursuant to the 2014 Plan or the Restated 2014 Plan. However, awards previously granted under either the 2014 Plan or the Amended 2014 Plan will continue to be subject to and governed by the terms of the 2014 Plan and Amended 2014 Plan, respectively. The Compensation Committee of INNOVATE's Board of Directors administers the 2014 Plan, the Amended 2014 Plan and the Second A&R 2014 Plan and has broad authority to administer, construe and interpret the plans. The Second A&R 2014 Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock based awards, performance compensation awards (including cash bonus awards) or any combination of the foregoing. The Company typically issues new shares of common stock upon the exercise of stock options, as opposed to using treasury shares.
On September 30, 2024, the Board of Directors adopted, subject to stockholder approval, an amendment to the Second A&R 2014 Plan to increase the number of shares of the Company's common stock, par value $0.001 per share, available for issuance thereunder to 1,300,000 (the “Plan Amendment”). Prior to the adoption by the Board of Directors, there were a total of 101,943 shares of common stock available for future award under the "Second A&R 2014 Plan. The Plan Amendment was approved by holders of a majority in voting power on October 4, 2024, by written consent in lieu of a special meeting, and was effective as of October 29, 2024. As of December 31, 2024, 463,763 shares for awards remain available for issuance under the Second A&R 2014 Plan, as amended.
Total share-based compensation expense recognized by the Company and its subsidiaries under all equity compensation arrangements was $3.4 million and $2.2 million for the years ended December 31, 2024 and 2023, respectively, which is reflected as a component of Selling, general and administrative expenses in the Consolidated Statements of Operations.
All grants are time based and vest either immediately or over a period established at grant, typically with a requisite service period of one to three years for a member of the Board of Directors or an employee to vest in the stock-based award, subject to discretion by Compensation Committee. There are no other substantive conditions for vesting. The Company recognizes compensation expense for equity awards, reduced by actual forfeitures as they are incurred, using the straight-line basis.
Restricted Stock and Restricted Stock Units
A summary of INNOVATE’s restricted stock and restricted stock unit activity (as adjusted for the Reverse Stock Split) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
Weighted Average Grant Date Fair Value |
| Unvested - December 31, 2022 |
|
|
|
|
114,180 |
|
|
|
|
$ |
25.60 |
|
| Granted |
|
|
|
|
50,696 |
|
|
|
|
$ |
25.70 |
|
| Vested |
|
|
|
|
(102,304) |
|
|
|
|
$ |
23.20 |
|
|
|
|
|
|
|
|
|
|
|
| Unvested - December 31, 2023 |
|
|
|
|
62,572 |
|
|
|
|
$ |
29.48 |
|
| Granted |
|
|
|
|
367,681 |
|
|
|
|
$ |
6.15 |
|
| Vested |
|
|
|
|
(135,590) |
|
|
|
|
$ |
12.64 |
|
|
|
|
|
|
|
|
|
|
|
| Unvested - December 31, 2024 |
|
|
|
|
294,663 |
|
|
|
|
$ |
8.12 |
|
The aggregate vesting date fair value of the restricted stock and restricted stock units which vested during the years ended December 31, 2024 and 2023, was $0.9 million and $1.9 million, respectively. As of December 31, 2024, the total unrecognized stock-based compensation expense related to unvested restricted stock and restricted stock units was $1.4 million and is expected to be recognized over the remaining weighted-average period of 1.0 year.
Stock Options
A summary of INNOVATE’s stock option activity (as adjusted for the Reverse Stock Split) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options |
|
|
|
Weighted Average Exercise Price |
| Outstanding - December 31, 2022 |
|
|
|
|
|
499,515 |
|
|
|
|
$ |
50.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expired |
|
|
|
|
|
(35,233) |
|
|
|
|
$ |
31.20 |
|
| Outstanding and exercisable- December 31, 2023 |
|
|
|
|
|
464,282 |
|
|
|
|
$ |
51.68 |
|
| Granted |
|
|
|
|
|
200,000 |
|
|
|
|
$ |
14.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Expired |
|
|
|
|
|
(446,549) |
|
|
|
|
$ |
52.02 |
|
Outstanding - December 31, 2024 |
|
|
|
|
|
217,733 |
|
|
|
|
$ |
16.94 |
|
Exercisable - December 31, 2024 |
|
|
|
|
|
117,733 |
|
|
|
|
$ |
27.74 |
|
As of December 31, 2024, the intrinsic value and weighted-average remaining life of the Company's outstanding and exercisable stock options were zero and approximately 7.9 years, respectively. The maximum contractual term of the Company's exercisable stock options is approximately ten years. As of December 31, 2024, there were 100,000 unvested stock options and $0.4 million of unrecognized stock-based compensation expense related to unvested stock options and is expected to be recognized over the remaining period of 0.7 years.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Interim CEO Equity Awards
On October 29, 2024, when the Plan Amendment became effective, the following awards which were previously awarded to the Company's Interim Chief Executive Officer ("Interim CEO"), that were subject to stockholder approval of the Plan Amendment to increase the number of shares of common stock available thereunder to satisfy the settlement of the grant, became effective: (i) 95,322 of restricted stock unit awards ("RSUs"), which were awarded on October 11, 2023; (ii) 100,000 option awards with a strike price of $25.00 (as retroactively adjusted for the Reverse Stock Split in 2024) and an expiration date of September 15, 2033, which were awarded on September 15, 2023; (iii) 142,857 of RSUs, which were awarded on August 19, 2024; and (iv) 100,000 option awards with a strike price of $4.22 and an expiration date of September 15, 2034, which were awarded on September 15, 2024.
The fair value of each option award was determined on the date of grant using the Black-Scholes option-pricing model using the following assumptions:
|
|
|
|
|
|
|
Year Ended
December 31, 2024
|
Stock price at date of grant |
$ |
6.27 |
Expected term |
5.1 years - 5.6 years |
Risk-free interest rate |
4.1 |
% |
Expected volatility |
80.9% - 82.7% |
Expected dividend yield |
— |
% |
Grant date fair value per option |
$2.67 - $4.75 |
The expected option term of the Company's "plain vanilla" stock options granted reflect the application of the simplified method, as prescribed by Staff Accounting Bulletin Topic 14. The simplified method was used as the Company does not believe it has sufficient historical exercise data to provide a reasonable basis for the expected term of its stock option grants. The simplified method will be used until such time as the Company has stock option exercise experience in which to reasonably determine the expected life. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Volatility and expected dividend yield are calculated using INNOVATE's historical volatility and dividend history.
16. Equity and Temporary Equity
Authorized Share Capital
The Company held its annual meeting of stockholders on June 18, 2024, where the Company’s stockholders approved an increase in the authorized number of common shares from 160,000,000 to 250,000,000.
Reverse Stock Split
On August 8, 2024, the Company effected a 1-for-10 reverse stock split of its issued and outstanding common stock (the “Reverse Stock Split”) following stockholder approval. The Reverse Stock Split became effective at 5:00 p.m. Eastern Standard Time. The Reverse Stock Split was implemented for the primary purpose of regaining compliance with the minimum bid price requirement for continued listing of the Company’s common stock on the NYSE. As a result of the Reverse Stock Split, every ten shares of the Company’s common stock issued and outstanding were automatically reclassified and changed into one new share of the Company’s common stock, with whole shares issued for fractional shares. Proportionate adjustments were made to the exercise prices and the number of shares underlying the Company’s outstanding equity awards, as applicable, as well as to the number of shares issuable under the Company’s equity incentive plans and conversion of the Company’s outstanding convertible securities. The common stock issued pursuant to the Reverse Stock Split will remain fully paid and non-assessable. The Reverse Stock Split did not change the $0.001 par value per share of the common stock or the authorized number of shares of common stock or preferred stock. As a result of the Reverse Stock Split, the number of outstanding common shares was reduced from 130,529,931 to 13,166,057, inclusive of an additional 113,064 incremental whole shares issued for fractional shares. Unless noted, all share and per share amounts of common stock, options and restricted stock and any associated debt or preferred stock conversion rates contained in the historical periods presented within these Consolidated Financial Statements have been retroactively adjusted to reflect the one-for-ten Reverse Stock Split as if it had occurred at the beginning of the earliest period presented.
Rights Offering and Concurrent Private Placement
On March 8, 2024, the Company commenced a $19.0 million rights offering ("Rights Offering") for its common stock. Pursuant to the Rights Offering, the Company distributed to each holder of the Company’s common stock, Series A-3 Convertible Participating Preferred Stock, Series A-4 Convertible Participating Preferred Stock and the 2026 Convertible Notes as of March 6, 2024 (the “rights offering record date”), transferable subscription rights to purchase 2.86 shares (0.2858 shares on a pre Reverse Stock Split basis) of the Company’s common stock at a price of $7.00 per whole share ($0.70 per whole share on a pre Reverse Stock Split basis).
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Per the concurrent investment agreement entered into with Lancer Capital (the "Investment Agreement"), the Rights Offering was backstopped by Lancer Capital, an investment fund led by Avram A. Glazer, the Chairman of the Board and the Company’s largest stockholder. Due to limitations on the common stock that can be issued to Lancer Capital under the rules of the NYSE, in lieu of exercising its subscription rights, pursuant to the Investment Agreement, Lancer Capital would purchase up to $19.0 million of the Company’s newly issued Series C Non-Voting Participating Convertible Preferred Stock (the “Series C Preferred Stock”), for an issue price of $1,000 per share. In connection with the backstop commitment, and as a result of limitations in the amount common equity that can be raised under the Company’s effective shelf registration statement on Form S-3, Lancer Capital also agreed to purchase an additional $16.0 million of Series C Preferred Stock in a private placement transaction ("Concurrent Private Placement") which was to close concurrently with the settlement of the Rights Offering. Lancer Capital did not receive any compensation or other consideration for entering into or consummating the Investment Agreement.
As the Rights Offering had not yet settled by March 28, 2024, in accordance with the Investment Agreement, Lancer Capital purchased $25.0 million of Series C Preferred Stock, referred to as the "equity advance." On April 24, 2024, the Company completed and closed on the Rights Offering and issued a total of 530,611 shares of common stock (5,306,105 shares of common stock on a pre Reverse Stock Split basis) for $3.7 million. Based on the number of shares of common stock actually sold upon exercise of the rights to third party investors, there were no excess shares of Series C Preferred Stock purchased by Lancer Capital under the equity advance that the Company was required to redeem, and Lancer Capital purchased an additional approximately 6,286 Series C Preferred Stock for $6.3 million under the backstop commitment. In total, the Company received $35.0 million in aggregate gross proceeds related to the Rights Offering and Concurrent Private Placement and incurred $1.8 million in dealer manager fees and other related costs which have been capitalized into Additional paid in capital ("APIC"). INNOVATE has been utilizing and expects to continue to use the net proceeds from the Rights Offering and Concurrent Private Placement for general corporate purposes, including debt service and working capital. In addition, as a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, and consequently, on April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note.
Under the rules of the NYSE, because the shares purchased by Lancer Capital were greater than 20% of the Company's common stock outstanding before the issuance of the Series C Preferred Stock, those shares of Series C Preferred Stock were not allowed to be converted until stockholder approval of such issuance was obtained. On June 18, 2024, the Company held its annual shareholder meeting where Company's shareholders approved the conversion of the Series C Preferred Stock into common stock. As a result, approximately 31,286 shares of Series C Preferred Stock, which were held by Lancer Capital, were converted into 4,469,390 shares of common stock (44,693,895 shares of common stock on a pre Reverse Stock Split basis). See "Series C Preferred Stock" below for additional information.
The Company waived its Tax Benefits Preservation Plan to permit persons exercising rights to acquire 4.9% or more of the outstanding common stock upon the exercise thereof without becoming an Acquiring Person (as defined in the Tax Benefits Preservation Plan).
Preferred Shares
The Company’s preferred shares authorized, issued and outstanding consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2024 |
|
2023 |
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 |
|
|
|
|
|
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Series C Preferred Stock
On March 5, 2024, the Company's Board of Directors approved a Certificate of Designation for 35,000 Series C Preferred Stock. The certificate of designation authorized the existing 20,000,000 shares of preferred stock, par value $0.001 to apply to this series. On March 28, 2024, the Company amended its amended and restated certificate of incorporation by filing the Certificate of Designations of the Series C Preferred Stock with the Secretary of State of the State of Delaware.
The Series C Preferred Stock was intended to be the economic equivalent of common stock, participating on an as-converted basis in all dividends, distributions, merger consideration and all other consideration receivable by holders of common stock, and a means through which the Backstop Arrangement and Concurrent Private Placement could be effected prior to the completion of the stockholder vote and the satisfaction of any other regulatory requirements.
The issued Series C Preferred Stock was classified as temporary equity as it was not mandatorily redeemable due to the presence of substantive conversion features and would only have become mandatorily redeemable on the sixth anniversary of initial issuance if not previously converted. The Series C Preferred Stock was recognized at fair value upon issuance, net of total allocated issuance costs. As the Series C Preferred Stock was contingently redeemable, subsequent accretion to redemption value including accreted dividends would only have occurred if the contingency was resolved and the redemption had become probable (i.e., if stockholder approval was no longer reasonably possible).
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
On March 28, 2024, INNOVATE issued and sold 25,000 shares of its Series C Preferred Stock, par value $0.001 per share for the aggregate purchase price of $25.0 million to Lancer Capital. On April 24, 2024, INNOVATE issued and sold an additional approximately 6,286 shares of its Series C Preferred Stock for the aggregate purchase price of $6.3 million to Lancer Capital. The Series C Preferred Stock became convertible upon the approval of shareholders during the annual shareholder meeting held on June 18, 2024, and consequently the approximately 31,286 Series C Preferred Stock held by Lancer Capital were converted at their conversion price of $7.00 ($0.70 on a pre Reverse Stock Split basis) into 4,469,390 shares of INNOVATE's common stock (44,693,895 on a pre Reverse Stock Split basis).
Prior to the conversion, holders of the Series C Preferred Stock were entitled to receive dividends anytime the Company declared a dividend on its common stock (excluding dividends consisting in whole or in part of common stock). The dividend amount would be based on the number of shares (including fractions) of common stock into which the shares of Series C Preferred Stock were convertible on the applicable record date multiplied by the dividend per share declared on the Company's common stock. As of December 31, 2024, there were no Series C Preferred Stock outstanding. On September 30, 2024, the Company filed a Certificate of Elimination to its Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, eliminating from the Second Amended and Restated Certificate of Incorporation all matters set forth in the Certificate of Designation with respect to its Series C Preferred Stock, no shares of which were then issued and outstanding.
Series A-3 and Series A-4 Shares
Issuance and Conversion. On July 1, 2021 (the "Exchange Date") as a part of the sale of Continental Insurance Group ("CIG"), INNOVATE entered into an exchange agreement (the "Exchange Agreement") with CGIC, also a former subsidiary, which held the remaining shares of the Company's previous Series A and Series A-2 Preferred Stock and was eliminated in consolidation prior to the sale of the Company's former 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 mature on July 1, 2026.
Since the time of 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 and with a current fair value of $16.4 million as of December 31, 2024, which is inclusive of the $0.3 million accrued dividend payable on January 15, 2025. On September 30, 2024, the Company filed a Certificate of Elimination to its Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, eliminating from the Second Amended and Restated Certificate of Incorporation all matters set forth in the Certificate of Designation with respect to its Series A Preferred Stock and Series A-2 Preferred Stock, no shares of which were then issued and outstanding.
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 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 values of the Series A-3 and Series A-4 Preferred Stock are 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 directly reduce the carrying value of the Series A-3 and Series A-4 Preferred Stock until the carrying value equals the redemption value. Once the carrying value is equal to the redemption value, the dividends declared are accrued by debiting retained earnings, or if retained earnings is a deficit, then by debiting additional paid in capital. The Company has a history of paying dividends on its Series A-3 and Series A-4 Preferred Stock and expects to continue to pay such dividends each quarter.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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 was initially convertible at an accrued value of $1,000 per share divided by 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 was initially convertible at an accrued value of $1,000 per share divided by 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” and unadjusted for the Reverse Stock Split). 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 in 2021 were $3.52 for the Series A and $5.33 for the Series A-2 (on a pre Reverse Stock Split basis). As a result of the Rights Offering and Concurrent Private Placement, and due to the anti-dilution provisions contained in the terms of the Series A-3 Preferred Stock and Series A-4 Preferred Stock, as of April 24, 2024, the conversion price of the Series A-3 Preferred Stock was adjusted to $2.38 (on a pre Reverse Stock Split basis) and the conversion price of the Series A-4 Preferred Stock was adjusted to $3.47 (on a pre Reverse Stock Split basis). As a result of the Reverse Stock Split, the conversion prices were further adjusted, and as of August 8, 2024, the conversion price of the Series A-3 Preferred Stock was adjusted to $23.63, and the conversion price of the Series A-4 Preferred Stock was adjusted to $34.40.
Redemption by the Holders / 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.
Redemption by the Company / "Company Call Option". At any time, 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 20 trading days out of the thirty trading day period used to calculate the 30-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 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.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
As of December 31, 2023, the Series A-3 Preferred Stock and Series A-4 Preferred Stock were convertible into 174,070 (1,740,700 on a pre Reverse Stock Split basis) and 187,554 (1,875,533 on a pre Reverse Stock Split basis) shares, respectively of INNOVATE's common stock. As a result of the Rights Offering and Concurrent Private Placement in 2024, and due to the anti-dilution provisions contained in the terms of the Series A-3 Preferred Stock and Series A-4 Preferred Stock, the conversion prices were adjusted, and as of April 24, 2024, the Series A-3 Preferred Stock and Series A-4 Preferred Stock were convertible into 256,986 (2,569,858 on a pre Reverse Stock Split basis) and 288,177 (2,881,761 on a pre Reverse Stock Split basis) shares, respectively, of INNOVATE's common stock. As of December 31, 2024, subsequent to the Reverse Stock Split, the Series A-3 Preferred Stock and Series A-4 Preferred Stock were convertible into 259,212 and 290,672 shares, respectively, of INNOVATE's common stock.
Series A-3 and Series A-4 Preferred Share Dividends
During the years ended December 31, 2024 and 2023, INNOVATE's Board of Directors (the "Board") declared cash dividends with respect to INNOVATE’s issued and outstanding Series A-3 Preferred Stock and Series A-4 Preferred Stock, as presented in the following tables (in millions):
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2024 |
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| Declaration Date and Holders of Record Date |
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March 31, 2024 |
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June 30, 2024 |
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September 30, 2024 |
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December 31, 2024 |
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| Payment Date |
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April 15, 2024 |
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July 15, 2024 |
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October 15, 2024 |
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January 15, 2025 |
| Total Dividend |
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$ |
0.3 |
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$ |
0.3 |
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$ |
0.3 |
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$ |
0.3 |
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2023 |
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| Declaration Date and Holders of Record Date |
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March 31, 2023 |
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June 30, 2023 |
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September 30, 2023 |
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December 31, 2023 |
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| Payment Date |
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April 17, 2023 |
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July 14, 2023 |
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October 13, 2023 |
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January 15, 2024 |
| Total Dividend |
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$ |
0.3 |
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$ |
0.3 |
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$ |
0.3 |
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$ |
0.3 |
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DBMGi Series A Preferred Stock
Issuance. On November 30, 2018, CGIC purchased 40,000 shares of DBMGi Series A Preferred Stock, which was then eliminated in consolidation. DBM Global Intermediate Holdco Inc. ("DBMGi") is 100% owned by INNOVATE and owns 91.2% of DBMG. On July 1, 2021, as a part of the sale of CGIC, which resulted in the deconsolidation of the entity, the Company was deemed to have issued $40.9 million of DBMGi Series A Preferred Stock to the then deconsolidated CGIC. Upon the deemed issuance of the DBMGi Series A Preferred Stock on July 1, 2021, the DBMGi Series A Preferred Stock was classified as temporary equity in the Company's Consolidated Balance Sheet. There are 500,000 shares with a par value of $0.001 each authorized for issuance. Subsequent to the issuance of the DBMGi Series A Preferred Stock, 1,820.25 shares were issued as payment in kind for dividends, resulting in a total of 41,820.25 shares of DBMGi's Series A Preferred Stock outstanding.
Redemption. The DBMGi Series A Preferred Stock was 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. On March 15, 2023, DBMGi received a redemption notice from CGIC requesting that DBMGi redeem 41,820.25 shares of DBMGi Series A Preferred Stock, representing all of the issued and outstanding shares of DBMGi Series A Preferred Stock, within 60 days of the notice, or by May 15, 2023. On May 9, 2023, the Company entered into a Stock Purchase Agreement and Subordinated Unsecured Promissory Note with CGIC whereby INNOVATE purchased the 41,820.25 shares of DBMGi Series A Preferred Stock for full satisfaction of the redemption notice. In full consideration of the DBMGi Series A Preferred Stock as well as the accrued dividend of $0.4 million, the Company paid CGIC $7.1 million on May 9, 2023, and issued a subordinated unsecured promissory note to CGIC in the principal amount of $35.1 million. The promissory note is due February 28, 2026, and bore interest at 9.0% per annum through May 8, 2024, bears interest at 16.0% per annum from May 9, 2024, to May 8, 2025, and 32.0% per annum thereafter. Refer to Note 11. Debt Obligations for additional information on the promissory note.
The DBMGi Series A Preferred Stock was measured each reporting period at its maximum redemption value, which was equal to the stated value plus all accrued, accumulated and unpaid dividends as of the end of each reporting period, as they were currently redeemable. The carrying amount as of May 9, 2023, was $41.8 million as well as the accrued dividend of $0.4 million and, subsequently, there was no gain or loss on the purchase of the DBMGi Series A Preferred Stock from CGIC.
Dividends. The DBMGi Series A Preferred Stock accrued 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 to May 9, 2023, the date that INNOVATE purchased the DBMGi Series A Preferred Stock, the dividends were eliminated on consolidation.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
During the year ended December 31, 2023, DBMGi's Board of Directors declared dividends with respect to DBMGi’s issued and outstanding DBMGi Series A Preferred Stock. The dividend paid on April 17, 2023, was paid in cash and no dividends were subsequently declared; however, in connection with the Stock Purchase Agreement entered into with CGIC on May 9, 2023, an equivalent amount of the dividends that had accrued through May 8, 2023, was paid to CGIC on May 9, 2023, as part of the purchase price: $0.1 million was paid in cash and $0.3 million was included in the principal amount of the new unsecured note that was issued on May 9, 2023. The dividend that accrued for the remaining portion of that period was eliminated on consolidation subsequent to the purchase. The declared dividends and equivalent amounts paid during the year ended December 31, 2023, are presented in the following table (in millions):
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| Declaration Date and Holders of Record Date |
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March 31, 2023 |
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May 9, 2023 |
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| Payment Date |
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April 17, 2023 |
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May 9, 2023 |
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Total Dividend |
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$ |
0.9 |
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$ |
0.4 |
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R2 Technologies Non-Controlling Interests
The Company has non-redeemable and redeemable non-controlling interests related to R2 Technologies in the form of common stock as well as convertible preferred stock that is redeemable upon the occurrence of a change in control, as defined in the respective agreements. If an event is not solely within the control of the Company, it is classified outside of permanent equity in the mezzanine section of the Company's Consolidated Balance Sheets. The Company adjusts the carrying value of the non-controlling interests based on an allocation of subsidiary earnings (losses) based on ownership interests. As of December 31, 2024 and 2023, it was not deemed probable that the amounts relating to convertible preferred stock in non-controlling interests will become redeemable as no change in control has occurred or is expected to occur; therefore, no additional adjustments or remeasurements were required under ASC 480-10, Distinguishing Liabilities from Equity.
On June 20, 2024, Pansend closed on a new Series D Preferred Stock ("Series D") investment in R2 Technologies. As part of the transaction, R2 Technologies converted its intercompany notes and accrued interest with Pansend, together with an additional cash investment from Pansend, into new Series D convertible participating preferred stock, for a total new additional investment of $21.3 million, which is also eliminated on consolidation and increased Pansend's ownership in R2 Technologies to 81.4% as compared to 56.8% prior to the transaction. Pansend's ownership in R2 Technologies was 81.4% and 56.6%, as of December 31, 2024 and 2023, respectively.
Subsequent to year end, on February 20, 2025, Pansend closed on a new $3.5 million convertible 13.0% note instrument with R2 Technologies, which is convertible, together with any accrued interest at the time of conversion, into new Series E Convertible Preferred Stock ("Series E") in R2 Technologies upon written notice to R2 Technologies and has a maturity date of the earlier of July 31, 2025, or a change in control, as defined in the agreement. The transaction is eliminated on consolidation.
As a result of the allocation of losses, the redeemable non-controlling interest related to R2 Technologies was negative $0.5 million and negative $1.0 million as of December 31, 2024 and 2023, respectively. As of December 31, 2024 and 2023, the Company had negative $4.9 million and negative $10.5 million, respectively, of R2 Technologies non-controlling interests reflected within Non-controlling interests within the Consolidated Balance Sheets.
Liquidation Preference
R2 Technologies has issued multiple A, B, C and D-series, and, in the future potentially E-series, participating convertible preferred stock (the "R2 Technologies Preferred Shares"), all of which contain a liquidation preference. In the event of a liquidation event, each Preferred Share has a liquidation preference to be paid out of the assets legally available for distribution, which entitles the holder of each series A, series C, series D and series E (upon conversion of the aforementioned $3.5 million note that is convertible into Series E) R2 Technologies Preferred Shares to receive, before any payments to holders of junior securities, the sum of the following: (i) the accrued value in cash; (ii) all accrued and unpaid dividends, including basic dividends and accreting dividends, if any, and (iii) an amount, in cash or otherwise, equivalent to what the holder would receive if they had converted the R2 Technologies Preferred Shares into R2 Technologies common stock or reference property just before the liquidation event. Series B R2 Technologies Preferred Shareholders would be entitled to receive, before any payments to holders of junior securities, the greater of (i) the sum of (A) the accrued value in cash, plus (B) all accrued and unpaid dividends, including basic dividends and accreting dividends, if any, or (ii) an amount, in cash or otherwise, equivalent to what the holder would receive if they had converted the R2 Technologies Preferred Shares into R2 Technologies common stock or reference property just before the liquidation event.
If the assets of R2 Technologies legally available for distribution are insufficient to pay these obligations in full, R2 Technologies Preferred Shareholders and holders of any parity securities share the remaining assets in proportion to the full respective amounts to which they are entitled. After receiving the full liquidation preference, R2 Technologies Preferred Shareholders have no further claim to R2 Technologies' assets, except for any new securities or instruments received as part of the liquidation preference. The value of non-cash assets distributed equals their fair market value on the distribution date. No holder of junior securities receives any payment unless the entire liquidation preference of R2 Technologies Preferred Shares is paid. If there is insufficient cash to pay the entire liquidation preference and any liquidation preference in respect of any parity securities in full in cash upon a liquidation event, R2 Technologies Preferred Shareholders and parity securities holders will share available cash proportionally.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
R2 Technologies' total liquidation preference upon a hypothetical liquidation event, including the liquidation preference for Pansend Life Sciences, LLC, was $143.5 million and $112.3 million as of December 31, 2024 and 2023, respectively, of which $51.8 million and $48.0 million as of December 31, 2024 and 2023, respectively, was attributable to redeemable and non-redeemable non-controlling interests, inclusive of initial preferred stock and unpaid accreted dividends. However, as of both December 31, 2024 and 2023, R2 Technologies had negative net assets after consideration of intercompany and third party debt, as applicable, and, therefore, there would be no legally available funds to satisfy such liquidation preferences upon a hypothetical liquidation event.
Stockholders’ Rights Agreement - Tax Benefits Preservation Plan
On May 6, 2024, the Company terminated its Tax Benefits Preservation Plan entered into on April 1, 2023 (the “2023 Preservation Plan”) because the Company’s Board of Directors determined that the 2023 Preservation Plan was no longer necessary or desirable for the preservation of the Company’s ability to use its tax NOLs and other certain tax assets. In connection with the termination of the 2023 Preservation Plan, the Company has taken routine actions to deregister the related preferred stock purchase rights under the Securities Exchange Act of 1934, and to delist the preferred stock purchase rights from the NYSE. These actions were administrative in nature and had no effect on the Company’s common stock, which will continue to be listed on the NYSE.
17. Related Parties
Non-Operating Corporate
During the first quarter of 2024, in connection with the Rights Offering, the Company entered into an Investment Agreement with Lancer Capital, an entity controlled by Avram A. Glazer, pursuant to which Lancer Capital agreed to the Backstop Commitment to purchase up to $19.0 million of Series C Preferred Stock in connection with the Rights Offering and to purchase $16.0 million of Series C Preferred Stock in a Concurrent Private Placement, of which $25.0 million would be purchased before the closing of the Rights Offering if the Rights Offering did not close by March 28, 2024. As a result of the extension of the Rights Offering, on March 28, 2024, Lancer Capital funded the equity advance of $25.0 million to the Company and received 25,000 shares of Series C Preferred Stock. As a result, Mr. Glazer's beneficial ownership increased from 29.1% as of March 5, 2024, immediately prior to the start of the Rights Offering, to 48.8% as of March 31, 2024. On April 24, 2024, as a result of the closing of the Rights Offering and Concurrent Private Placement, Lancer Capital purchased an additional approximately 6,286 shares of Series C Preferred Stock for $6.3 million, increasing Mr. Glazer's beneficial ownership to 52.1%. On June 18, 2024, the Company held its annual shareholder meeting where the Company's shareholders approved the conversion of the Series C Preferred Stock into common stock. As a result, approximately 31,286 Series C Preferred Stock held by Lancer Capital were converted into 4,469,390 shares of INNOVATE's common stock (44,693,895 on a pre Reverse Stock Split basis). Refer to Note 16. Equity and Temporary Equity for additional information. As of December 31, 2024, Mr. Glazer's beneficial ownership was 51.2%.
Lancer Capital held $2.0 million of principal amount of the Company's 7.50% 2026 Convertible Notes, as of both December 31, 2024 and 2023. As of December 31, 2024, the $2.0 million in 7.50% 2026 Convertible Notes are convertible into 47,265 shares of common stock of INNOVATE. Refer to Note 11. Debt Obligations for additional information on the 7.50% 2026 Convertible Notes. During both the years ended December 31, 2024 and 2023, Lancer Capital earned $150 thousand in interest relating to these notes.
In December 2023, the Company entered into a sublease agreement for a special purpose space with PBCIC, a Florida not-for-profit corporation and related party to Avram A. Glazer, the Chairman of INNOVATE's Board of Directors and a significant shareholder, who is also on the board of directors of PBCIC. In March 2024, the Company assigned this lease to an entity controlled by Mr. Glazer. In addition, in March 2024, the Company assigned a lease for office space to an entity controlled by Mr. Glazer. Refer to Note 9. Leases for additional information.
In September 2018, the Company entered into a 75-month lease for office space which expired in December 2024. 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 a former CEO of INNOVATE and formerly a related party, in the same building. With the adoption of ASC 842, Leases, as of January 1, 2019, this lease was recognized as a right-of-use asset and lease liability in the Consolidated Balance Sheets. As of December 31, 2024, there was no remaining lease liability or corresponding right-of-use asset.
On May 9, 2023, the Company entered into a Stock Purchase Agreement and Subordinated Unsecured Promissory Note with CGIC in the principal amount of $35.1 million. CGIC is a former significant shareholder and is the shareholder of the Series A-3 Preferred Stock and Series A-4 Preferred Stock. As a result of the closing of the Rights Offering on April 24, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note on April 26, 2024. Refer to Note 11. Debt Obligations and Note 16. Equity and Temporary Equity for additional information.
Infrastructure
Banker Steel previously leased two planes from Banker Aviation, LLC, a former related party and entity that is owned by Donald Banker, who was the CEO of Banker Steel until December 2023. Both leases had been terminated by the fourth quarter of 2023. For the year ended December 31, 2023, DBMG incurred related lease expenses of $1.2 million.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
DBMG and Banker Steel, jointly and severally, had a subordinated 4.0% note payable to Banker Steel's former owner, in which Donald Banker's family trust has a 25% interest, and jointly and severally also had a subordinated 8.0% note payable to Donald Banker's family trust, the latter of which was fully paid off in December 2023. The 4.0% note and associated accrued interest matured on March 31, 2024, and was fully redeemed on April 2, 2024. During the year ended December 31, 2024, DBMG made $5.0 million in scheduled principal payments on the 4.0% note. DBMG incurred aggregate interest expense related to these notes of $25 thousand and $1.5 million for the years ended December 31, 2024 and 2023, respectively. Accrued interest was $0.1 million as of December 31, 2023.
Life Sciences
As of December 31, 2024 and 2023, R2 Technologies had $24.0 million and $17.4 million, respectively, in principal amount of 20.0% senior secured promissory notes due to Lancer Capital. Refer to Note 11. Debt Obligations for additional information and for a subsequent event related to the extension of the maturity date of the 20.0% senior secured promissory notes due to Lancer Capital.
For the years ended December 31, 2024 and 2023, R2 Technologies recognized $1.4 million and $0.7 million, respectively, of revenue from sales and profit sharing agreements with a subsidiary of Huadong, a related party of R2. There were $0.1 million of related receivables from this subsidiary of Huadong as of December 31, 2024, and there were no related receivables from this subsidiary of Huadong as of December 31, 2023.
Share-based compensation and royalty expenses related to Blossom Innovations, LLC, an investor of R2 Technologies since 2014, totaled $1.1 million and $0.3 million, for the years ended December 31, 2024 and 2023, respectively.
Refer to Note 6. Investments for transactions with equity method investees of the Company.
18. 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, and primarily all PP&E and intangible assets reside in the United States. The reportable segments are identified based on the nature of the services and products provided, the organizational structure, and the internal reporting system used by the Chief Operating Decision Maker ("CODM") to assess performance and allocate resources. The Company has three reportable operating segments, plus the Other segment, based on management’s organization of the enterprise - Infrastructure, Life Sciences, Spectrum, and Other. The Company also has a Non-Operating Corporate segment. All inter-segment transactions are eliminated on consolidation. There are no inter-segment revenues. Refer to Note 1. Organization and Business for additional information on the organizational structure of the business and Note 3. Revenue and Contracts in Process for additional information on the products and services offered by each segment.
The Chief Operating Decision Maker ("CODM") for the Company is the Interim CEO, Paul Voigt. The CODM is primarily responsible for allocating resources at all levels that do not require board approval. The CODM monitors the performance of each segment and is responsible for making strategic decisions regarding capital and resource allocation. The CODM uses a combination of monthly reports, which detail revenue and income (loss) from operations, and quarterly summaries, which include detailed breakdowns of each segment's income (loss) from operations, to evaluate segment performance, allocate resources and make strategic decisions. These financial metrics are used to view operating trends, perform analytical comparisons and benchmark performance between periods and to monitor budget-to-actual variances on a monthly basis. The primary GAAP metric used by the CODM in assessing segment performance is income (loss) from operations.
Financial information, including revenue and expenses, with respect to the Company’s operating segments, is as follows (in millions):
|
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|
Year Ended December 31, 2024 |
|
|
Infrastructure |
|
Life Sciences |
|
Spectrum |
|
Non-Operating Corporate |
|
Other and Eliminations |
|
INNOVATE |
| Revenue |
|
$ |
1,071.6 |
|
|
$ |
9.8 |
|
|
$ |
25.7 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,107.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of revenue |
|
880.4 |
|
|
6.4 |
|
|
11.5 |
|
|
— |
|
|
— |
|
|
898.3 |
|
Selling, general and administrative expenses |
|
123.1 |
|
|
17.1 |
|
|
7.3 |
|
|
12.7 |
|
|
— |
|
|
160.2 |
|
| Depreciation and amortization |
|
12.0 |
|
|
0.4 |
|
|
5.1 |
|
|
0.1 |
|
|
— |
|
|
17.6 |
|
Other operating (income) loss (1) |
|
(9.6) |
|
|
— |
|
|
0.4 |
|
|
0.2 |
|
|
— |
|
|
(9.0) |
|
| Income (loss) from operations |
|
$ |
65.7 |
|
|
$ |
(14.1) |
|
|
$ |
1.4 |
|
|
$ |
(13.0) |
|
|
$ |
— |
|
|
$ |
40.0 |
|
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|
|
| Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (2) |
|
$ |
17.6 |
|
|
$ |
— |
|
|
$ |
1.4 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19.0 |
|
Investments (3) |
|
$ |
— |
|
|
$ |
1.8 |
|
|
$ |
— |
|
|
$ |
1.8 |
|
|
$ |
— |
|
|
$ |
3.6 |
|
Total assets |
|
$ |
683.6 |
|
|
$ |
11.9 |
|
|
$ |
178.9 |
|
|
$ |
16.7 |
|
|
$ |
— |
|
|
$ |
891.1 |
|
(1) Other operating income at our Infrastructure segment for the year ended December 31, 2024, related mainly to a gain on a lease modification and a net gain on the sale and disposal of various properties.
(2) Capital expenditures reflect cash expenditures.
(3) The Company's equity method investments in the Life Sciences segment totaled $0.9 million as of December 31, 2024.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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|
Year Ended December 31, 2023 |
|
|
Infrastructure |
|
Life Sciences |
|
Spectrum |
|
Non-Operating Corporate |
|
Other and Eliminations |
|
INNOVATE |
| Revenue |
|
$ |
1,397.2 |
|
|
$ |
3.3 |
|
|
$ |
22.5 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,423.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of revenue |
|
1,192.6 |
|
|
2.6 |
|
|
11.8 |
|
|
— |
|
|
— |
|
|
1,207.0 |
|
| Selling, general and administrative expenses |
|
126.0 |
|
|
15.2 |
|
|
9.0 |
|
|
15.8 |
|
|
2.0 |
|
|
168.0 |
|
| Depreciation and amortization |
|
14.4 |
|
|
0.5 |
|
|
5.2 |
|
|
0.1 |
|
|
— |
|
|
20.2 |
|
Other operating (income) loss (1) |
|
(0.2) |
|
|
— |
|
|
(0.1) |
|
|
0.5 |
|
|
1.1 |
|
|
1.3 |
|
Income (loss) from operations |
|
$ |
64.4 |
|
|
$ |
(15.0) |
|
|
$ |
(3.4) |
|
|
$ |
(16.4) |
|
|
$ |
(3.1) |
|
|
$ |
26.5 |
|
|
|
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|
|
|
|
|
|
| Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (2) |
|
$ |
16.6 |
|
|
$ |
0.5 |
|
|
$ |
1.0 |
|
|
$ |
0.3 |
|
|
$ |
— |
|
|
$ |
18.4 |
|
Investments (3) |
|
$ |
— |
|
|
$ |
1.8 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1.8 |
|
Total assets |
|
$ |
851.4 |
|
|
$ |
8.3 |
|
|
$ |
176.6 |
|
|
$ |
7.3 |
|
|
$ |
— |
|
|
$ |
1,043.6 |
|
(1) Other operating loss for the year ended December 31, 2023, primarily consisted of a write-off of prepaid rent at the Other segment and an impairment of leasehold improvements at the Non-Operating Corporate segment for unutilized office space.
(2) Capital expenditures reflect cash expenditures.
(3) The Company's equity method investments in the Life Sciences segment totaled $0.9 million as of December 31, 2023.
|
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|
|
|
|
|
|
|
| |
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
2024 |
|
2023 |
Reconciliation of the consolidated segment income from operations to consolidated loss from operations before income taxes: |
|
|
|
|
|
|
|
|
| Income from operations |
|
|
|
|
|
$ |
40.0 |
|
|
$ |
26.5 |
|
| Interest expense |
|
|
|
|
|
(74.5) |
|
|
(68.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from equity investees |
|
|
|
|
|
(2.3) |
|
|
(9.4) |
|
|
|
|
|
|
|
|
|
|
| Other income, net |
|
|
|
|
|
3.4 |
|
|
16.7 |
|
| Loss from operations before income taxes |
|
|
|
|
|
$ |
(33.4) |
|
|
$ |
(34.4) |
|
19. Basic and Diluted Loss Per Common Share
Earnings (loss) 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 and Series C Preferred Stock 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 and Series C Preferred Stock of the Company are considered participating securities; however, unvested shares of restricted stock do not participate in losses and, as such, are excluded from the computation of basic earnings (loss) per share during periods of net losses. The dilutive effect, if applicable, of stock options and their equivalents (including non-vested stock issued under stock-based compensation plans), is computed using the "if-converted method" if this measurement is determined to be more dilutive than the treasury stock method in a period.
The Company had no dilutive common stock equivalents during the years ended December 31, 2024 and 2023, due to the results from continuing operations being a loss, net of tax. For the years ended December 31, 2024 and 2023, 171,565 and 95,187, respectively, of common stock equivalents from unvested restricted stock awards and unvested restricted stock units were excluded from the weighted-average number of shares used to calculate diluted loss per share as their inclusion would have been anti-dilutive. Other instruments that may, in the future, if the average market price of the Company's stock exceeds the conversion prices, have a dilutive effect on EPS, but were excluded from the computations of diluted net loss per share, and may be excluded from computations of diluted EPS in the future, are: convertible preferred stock, convertible debt, and stock options. Refer to Note 15. Share-based Compensation and Note 16. Equity and Temporary Equity for additional information on INNOVATE's equity instruments.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The following table presents a reconciliation of net loss to net loss used in the basic and diluted EPS calculations (in millions, except shares and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
| |
|
|
|
|
|
2024 |
|
2023 |
| Net loss |
|
|
|
|
|
$ |
(39.7) |
|
|
$ |
(38.9) |
|
| Net loss attributable to non-controlling interest and redeemable non-controlling interest |
|
|
|
|
|
5.1 |
|
|
3.7 |
|
| Net loss attributable to INNOVATE Corp. |
|
|
|
|
|
(34.6) |
|
|
(35.2) |
|
| Less: Preferred dividends |
|
|
|
|
|
1.2 |
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss attributable to common stockholders and participating preferred stockholders |
|
|
|
|
|
$ |
(35.8) |
|
|
$ |
(37.6) |
|
|
|
|
|
|
|
|
|
|
| Loss allocable to common shares: |
|
|
|
|
|
|
|
|
Participating shares |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (1) |
|
|
|
|
|
10,696,274 |
|
|
7,814,620 |
|
|
|
|
|
|
|
|
|
|
| Series C Preferred stock |
|
|
|
|
|
947,307 |
|
|
— |
|
| Total |
|
|
|
|
|
11,643,581 |
|
|
7,814,620 |
|
|
|
|
|
|
|
|
|
|
| Percentage of loss allocated to: |
|
|
|
|
|
|
|
|
| Common stock |
|
|
|
|
|
91.9 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
| Series C Preferred stock |
|
|
|
|
|
8.1 |
% |
|
— |
% |
|
|
|
|
|
|
|
|
|
| Numerator for loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss attributable to common stock holders, basic and diluted |
|
|
|
|
|
$ |
(32.9) |
|
|
$ |
(37.6) |
|
Net loss attributable to Series C holder, basic and diluted |
|
|
|
|
|
$ |
(2.9) |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Denominator for loss per share: |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic and diluted (1) |
|
|
|
|
|
10,696,274 |
|
|
7,814,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average Series C shares outstanding - basic and diluted |
|
|
|
|
|
947,307 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic and diluted (1) |
|
|
|
|
|
$ |
(3.08) |
|
|
$ |
(4.81) |
|
Loss per Series C share - basic and diluted |
|
|
|
|
|
$ |
(3.08) |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
(1) Basic and diluted loss per common share and weighted-average common shares outstanding for the year ended December 31, 2023, in the table above have been retroactively adjusted to reflect the 1-for-10 reverse stock split effected on August 8, 2024.
20. Fair Value of Financial Instruments
Fair Value of Financial Instruments Not Measured at Fair Value
Our financial instruments primarily include cash and cash equivalents, restricted cash, accounts receivable and contract assets, marketable and non-marketable securities, including equity investments and certain other investments, notes receivable, accounts payable and other current and non-current liabilities, redeemable non-controlling interests and debt obligations. The following tables 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 and not measured using the equity method of accounting, with fair values shown according to the fair value hierarchy. The tables exclude carrying amounts for cash and cash equivalents and restricted cash (Level 1 measurements), accounts receivable and contract assets, accounts payable, contract liabilities and other current liabilities, and other assets and liabilities (Level 2 measurements) that approximate fair value due to the relatively short periods to maturity (in millions):
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
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| December 31, 2024 |
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Fair Value Measurement Using: |
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Carrying Value |
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Estimated Fair Value |
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Quoted Prices (Level 1) |
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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| Assets |
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Measurement alternative investment (1) |
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$ |
0.9 |
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$ |
0.9 |
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$ |
— |
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$ |
— |
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$ |
0.9 |
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| Total assets not accounted for at fair value |
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$ |
0.9 |
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$ |
0.9 |
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$ |
— |
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$ |
— |
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$ |
0.9 |
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| Liabilities |
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Debt obligations (2) |
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$ |
662.2 |
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$ |
577.1 |
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$ |
— |
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$ |
577.1 |
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$ |
— |
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| Total liabilities not accounted for at fair value |
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$ |
662.2 |
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$ |
577.1 |
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$ |
— |
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$ |
577.1 |
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$ |
— |
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(1) Refer to Note 6. Investments for additional information.
(2) Excludes lease obligations accounted for under ASC 842, Leases.
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| December 31, 2023 |
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Fair Value Measurement Using: |
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Carrying Value |
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Estimated Fair Value |
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Quoted Prices (Level 1) |
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Significant Other Observable Inputs
(Level 2)
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Significant Unobservable Inputs
(Level 3)
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| Assets |
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Measurement alternative investment (1) |
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$ |
0.9 |
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$ |
0.9 |
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$ |
— |
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$ |
0.9 |
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$ |
— |
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| Total assets not accounted for at fair value |
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$ |
0.9 |
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$ |
0.9 |
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$ |
— |
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$ |
0.9 |
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$ |
— |
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| Liabilities |
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Debt obligations (2) |
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$ |
707.4 |
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$ |
621.8 |
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$ |
— |
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$ |
621.8 |
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$ |
— |
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| Total liabilities not accounted for at fair value |
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$ |
707.4 |
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$ |
621.8 |
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$ |
— |
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$ |
621.8 |
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$ |
— |
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(1) Refer to Note 6. Investments for additional information.
(2) Excludes lease obligations accounted for under ASC 842, Leases.
Debt Obligations. The fair value of the Company’s long-term obligations was determined using reporting from externally quoted market prices for INNOVATE's 8.50% 2026 Senior Secured Notes and for INNOVATE's 7.50% Convertible Senior Notes due 2026, which are reflected as Level 2 fair value measurements due to limited recently available observable trading activity for these instruments. All other long-term obligations of the Company are also reflected as Level 2 fair value measurements, as this methodology combines direct recent transaction activity or, if available, market observations from contributed sources with quantitative pricing models or fair value reports from valuation providers to generate evaluated prices and are classified as Level 2 fair value measurements. Certain long-term obligations have a fair value estimate equal to their carrying value due to recent transaction activity. The fair value of the debt instruments is disclosed for informational purposes and does not necessarily represent the amount that would be realized upon settlement or transfer.
Fair Value of Financial Instruments Measured at Fair Value
The Company's investment in marketable securities is measured at fair value, using publicly available quoted market prices, a Level 1 input. Refer to Note 6. Investments.
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
21. Supplementary Financial Information
Other income, net
The following table provides information relating to Other income, net (in millions):
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Year Ended December 31, |
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2024 |
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2023 |
| Gain on sale of investments |
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$ |
— |
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$ |
12.0 |
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| Gain on step-up of equity method investment |
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— |
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3.8 |
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| Net loss on repurchase or extinguishment of debt |
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(0.3) |
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— |
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| Interest income |
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2.6 |
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1.3 |
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| Foreign currency translation gain (loss) |
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1.3 |
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(0.4) |
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Other |
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(0.2) |
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— |
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Total other income, net |
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$ |
3.4 |
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$ |
16.7 |
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Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the Consolidated Balance Sheets and Consolidated Statements of Cash Flows (in millions):
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Year Ended December 31, |
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2024 |
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2023 |
Cash and cash equivalents, beginning of the year |
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$ |
80.8 |
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$ |
80.4 |
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Restricted cash included in other current assets |
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0.9 |
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0.3 |
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| Restricted cash included in other assets (non-current) |
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0.6 |
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1.5 |
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Total cash, cash equivalents and restricted cash, beginning of the year |
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$ |
82.3 |
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$ |
82.2 |
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Cash and cash equivalents, end of the year |
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$ |
48.8 |
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$ |
80.8 |
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Restricted cash included in other current assets |
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— |
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0.9 |
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| Restricted cash included in other assets (non-current) |
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0.5 |
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0.6 |
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Total cash and cash equivalents and restricted cash, end of the year |
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$ |
49.3 |
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$ |
82.3 |
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Supplemental cash flow information: |
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| Cash paid for interest |
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$ |
48.6 |
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$ |
49.0 |
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Cash paid for income taxes, net of refunds |
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$ |
3.5 |
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$ |
6.7 |
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| Non-cash investing and financing activities: |
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| Unsecured note issued in connection with purchase of preferred stock and payment of dividends |
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$ |
— |
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$ |
35.1 |
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Accrued interest capitalized into principal debt |
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$ |
6.6 |
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$ |
1.3 |
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| Property, plant and equipment included in accounts payable or accrued expenses |
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$ |
0.5 |
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$ |
0.9 |
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22. Subsequent Events
Refer to Note 6. Investments for details related to the FDA approval received for MediBeacon's TGFR subsequent to year end. Refer to Note 11. Debt Obligations for details related to amendments to the Company's debt instruments subsequent to year end. Refer to Note 16. Equity and Temporary Equity for details related to R2 Technologies' issuance of a convertible note subsequent to year end.
EX-4.21
2
exhibit421q410k2024.htm
EX-4.21
Document
REGISTRATION RIGHTS AGREEMENT
between
HC2 HOLDINGS, INC.
and
LANCER CAPITAL LLC
___________________
Dated as of September 9, 2020
Table of Contents
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| 1. |
Certain Definitions |
1 |
| 2. |
Shelf Registration |
3 |
| 3. |
Piggyback Registration |
5 |
| 4. |
Holdback Agreements |
7 |
| 5. |
Registration Procedures |
8 |
| 6. |
Registration Expenses |
11 |
| 7. |
Indemnification |
11 |
| 8. |
Transfer of Registration Rights |
13 |
| 9. |
Prohibitions on Requests; Stockholders' Obligations |
13 |
| 10. |
Miscellaneous |
14 |
REGISTRATION RIGHTS AGREEMENT, dated as of September 9, 2020, by and between HC2 Holdings, Inc, a Delaware corporation (the “Company”), and Lancer Capital LLC, a Delaware limited liability company (the “Stockholder”).
In consideration of the mutual covenants and agreements herein contained and other good and valid consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows:
1. Certain Definitions.
In addition to the terms defined elsewhere in this Agreement, the following terms shall have the following meanings:
“Affiliate” of any Person means any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. The term “control” (including the terms “controlling,” “controlled by” and “under common control with”) as used with respect to any Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
“Agreement” means this Registration Rights Agreement, including all amendments, modifications and supplements and any exhibits or schedules to any of the foregoing, and shall refer to this Registration Rights Agreement as the same may be in effect at the time such reference becomes operative.
“Block Trade Offering” means an Underwritten Offering demanded by one or more stockholders that is a no-roadshow “block trade” take-down off of a Shelf Registration Statement.
“Business Day” means any day, except a Saturday, Sunday or legal holiday on which banking institutions in The City of New York are authorized or obligated by law or executive order to close.
“Closing Date” and “Closing Dates” have the meanings set forth in the Investment Agreement.
“Common Stock” means common stock, par value $0.001 per share, of the Company.
“Company” has the meaning set forth in the introductory paragraph and includes any other person referred to in the second sentence of Section 10(d) hereof.
“Conversion Shares” means the shares of Common Stock issuable upon conversion of the Non-Voting Participating Convertible Preferred Stock, liquidation preference of $0.01 per share, issued to the Stockholder pursuant to the Investment Agreement.
“Delay Period” has the meaning set forth in Section 2 hereof.
“Effective Period” has the meaning set forth in Section 2 hereof.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“FINRA” means the Financial Industry Regulatory Authority, Inc., and any successor regulator performing comparable functions.
“Investment Agreement” means the Investment Agreement, dated September [●], 2020, by and between the Company and the Stockholder.
“NYSE” means the New York Stock Exchange.
“Other Demanding Sellers” has the meaning assigned to it in Section 3(b) hereof.
“Other Proposed Sellers” has the meaning assigned to it in Section 3(b) hereof.
“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, governmental entity or any other entity.
“Piggyback Notice” has the meaning set forth in Section 3(a) hereof.
“Piggyback Registration” has the meaning set forth in Section 3(a) hereof.
“Prospectus” means the prospectus or prospectuses forming a part of, or deemed to form a part of, or included in, or deemed included in, the Shelf Registration Statement filed or used pursuant to Section 2(a) hereof, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Common Stock covered by such Shelf Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus or prospectuses.
“Registrable Common Stock” means (i) any shares of Common Stock issued as Conversion Shares and (ii) any other security into or for which the Common Stock referred to in clause (i) has been converted, substituted or exchanged pursuant to any reclassification, merger or consolidation, and any security issued or issuable with respect thereto upon any stock dividend or stock split. As to any particular Registrable Common Stock, such securities shall cease to be Registrable Common Stock when (A) a registration statement registering such securities under the Securities Act has been declared effective and such securities have been sold or otherwise disposed of pursuant to such effective registration statement, (B) such securities are sold or are otherwise transferred and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing any restrictive legend and such securities may be resold without subsequent registration under the Securities Act, (C) such securities are repurchased by the Company or a subsidiary of the Company or cease to be outstanding, (D) such securities may be resold pursuant to Rule 144, whether or not any such sale has occurred or (E) such securities are transferred to a Person that is not, or at any time following such transfer ceases to be, a 100% owned (directly or indirectly) Affiliate of the Stockholder.
“Registration Expenses” has the meaning set forth in Section 6 hereof.
“Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC as a replacement thereto having substantially the same effect as such rule.
“Rule 415” means Rule 415 promulgated by the SEC pursuant to the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC as a replacement thereto having substantially the same effect as such rule.
“SEC” means the Securities and Exchange Commission and any successor agency performing comparable functions.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Shelf Registration Statement” means a registration statement of the Company filed with the SEC on either (i) Form S-3 (or any successor form or other appropriate form under the Securities Act), or a prospectus supplement to an existing Form S-3, or (ii) if the Company is not permitted to file a Registration Statement on Form S-3, an evergreen registration statement on Form S-1 (or any successor form or other appropriate form under the Securities Act), in each case for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Registrable Common Stock and which may also cover any other securities of the Company.
“Shelf Underwritten Offering” has the meaning set forth in Section 2(d) hereof.
“Stockholder” has the meaning set forth in the introductory paragraph.
“Underwritten Offering” means a sale of securities of the Company to an underwriter or underwriters for reoffering to the public, including any bought deal, Block Trade Offering or other block sale to a financial institution conducted as an underwritten offering to the public.
2. Shelf Registration.
(a) Filing. Subject to Section 2(c) hereof, the Stockholder may, by written notice delivered (which notice can be delivered at any time on or after the date of this Agreement) to the Company (the “Shelf Notice”), require the Company to, at the Company’s option, either (i) file with the SEC as promptly as practicable (but no later than 30 days after the date the Shelf Notice is delivered), and to use commercially reasonable efforts to cause to be declared effective by the Commission at the earliest possible date permitted under the rules and regulations of the Commission (but no later than 60 days after such filing date), a Shelf Registration Statement covering the resale of Registrable Common Stock or (ii) file with the SEC a prospectus supplement covering the resale of Registrable Common Stock, in each case relating to the offer and sale, from time to time, of all of Registrable Common Stock owned by the Stockholder in accordance with the methods of distribution set forth in the Shelf Registration Statement. Notwithstanding the foregoing, the Stockholder shall not be entitled to require the Company to file a new Shelf Registration Statement if the Company has an effective existing Resale Registration Statement containing a plan of distribution that covers the resale of the Registrable Common Stock.
(b) Continued Effectiveness. Subject to Section 2(c) hereof, the Company will use commercially reasonable efforts to keep the Shelf Registration Statement continuously effective until the date on which all Registrable Common Stock covered by the Shelf Registration Statement (i) have been sold thereunder in accordance with the plan and method of distribution disclosed in the Prospectus included in the Shelf Registration Statement or (ii) cease to be Registrable Common Stock (such period, the “Effective Period”).
(c) Suspension of Registration. Notwithstanding anything to the contrary contained in this Agreement, the Company shall be entitled in its discretion, from time to time, by providing notice to the Stockholder, to postpone the filing or the effectiveness of the Shelf Registration Statement or require the Stockholder to suspend the use of the Prospectus for sale of Registrable Common Stock under the Shelf Registration Statement for a reasonable period of time not to exceed 60 days in succession or 180 days in the aggregate in any 12 month period (a “Delay Period”) if the Company’s Board of Directors determines in good faith and in its reasonable judgment that it is required to disclose in the Shelf Registration Statement a financing, acquisition, corporate reorganization or other similar transaction or other material event or circumstance affecting the Company or its securities. The Stockholder agrees to suspend use of the applicable Prospectus and any free writing prospectus in connection with any sale or purchase of, or offer to sell or purchase, Registrable Common Stock, upon receipt of the notice referred to above. The Company shall immediately notify the Stockholder upon the termination or expiration of any Delay Period and thereafter, as promptly as practicable, prepare a post-effective amendment or supplement to the Shelf Registration Statement or the Prospectus, or any document incorporated therein by reference, so that, as thereafter delivered to purchasers of the Registrable Common Stock included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(d) Shelf Underwritten Offerings.
(i) Subject to Section 9 hereof, during the Effective Period (except during a Delay Period), the Stockholder may notify the Company in writing of its intent to sell Registrable Common Stock covered by the Shelf Registration Statement (in whole or in part) in an Underwritten Offering (a “Shelf Underwritten Offering”); provided that the Company shall not be obligated to engage an underwriter in connection any Shelf Underwritten Offering unless the amount of Registrable Common Stock to be sold by the Stockholder, together with any shares of Common Stock to be sold for the account of the Company and any other participating stockholders, equals at least 15% of the Company’s total outstanding market capitalization for its Common Stock as of the date of such written notice. The Stockholder shall give written notice to the Company of such intention at least five Business Days (or at least two Business Days in connection with a Shelf Underwritten Offering that is a Block Trade Offering) prior to the date on which such Shelf Underwritten Offering is anticipated to launch, specifying the number of Registrable Common Stock for which the Stockholder is requesting registration under this Section 2(d) and the other material terms of such Shelf Underwritten Offering to the extent known.
(ii) If any managing underwriter of a Shelf Underwritten Offering advises the Company or the Stockholder that, in its opinion, the inclusion of all the equity securities sought to be included in such registration would adversely affect the marketability of the equity securities sought to be sold pursuant thereto, then the Company shall include in the Shelf Registration Statement applicable to such Shelf Underwritten Offering only such equity securities as the Company is so advised by such underwriter can be sold without such an effect, as follows and in the following order of priority: (1) first all the Registrable Common Stock requested to be included in such registration by the Stockholder and (2) second any securities proposed to be registered for the account of the Company or any other participating stockholder with such priorities among them as may from time to time be determined or agreed to by the Company.
(iii) The Stockholder shall be permitted to withdraw all or part of its Registrable Common Stock from a Shelf Underwritten Offering at any time prior to 7:00 a.m., New York City time, on the date on which the Shelf Underwritten Offering is anticipated to launch.
(e) Withdrawal Rights. The Stockholder having notified the Company to include any or all of its Registrable Common Stock in a Shelf Registration Statement under this Section 2 shall have the right to withdraw any such notice (which may not be re-made except in accordance with Section 9 hereof) with respect to any or all of the Registrable Common Stock designated by it for registration by giving written notice to such effect to the Company prior to the effective date of such Shelf Registration Statement. In the event of any such withdrawal, the Company shall not include such Registrable Common Stock in the applicable registration and such Registrable Common Stock shall continue to be Registrable Common Stock for all purposes of this Agreement. No such withdrawal shall affect the obligations of the Company with respect to the Registrable Common Stock not so withdrawn.
3. Piggyback Registration.
(a) Participation. Subject to the terms and conditions hereof, whenever the Company (i) proposes to register its Common Stock under the Securities Act for its own account or for the account of others (other than a registration by the Company (x) on a registration statement on Form S-4 (or any successor form thereto) or otherwise in connection with a direct or indirect acquisition by the Company or one of its subsidiaries of another Person or a similar business combination transaction, (y) on a registration statement on Form S-8 (or any successor form thereto) or otherwise solely relating to an offering and sale to employees or directors of the Company pursuant to any employee share plan or other employee benefit plan arrangement or (z) pursuant to Section 2 hereof) or (ii) proposes to effect an Underwritten Offering of its Common Stock pursuant to an effective Shelf Registration Statement (other than an Underwritten Offering pursuant to Section 2 hereof) (each, a “Piggyback Registration”), the Company shall give the Stockholder prompt written notice thereof (but not less than five Business Days prior to the filing by the Company with the SEC of such registration statement or launch of such Underwritten Offering; provided, that for any Block Trade Offering, two Business Days’ notice shall be sufficient). Such notice (a “Piggyback Notice”) shall specify the number of shares of Common Stock proposed to be included in such registration statement or Underwritten Offering, the proposed date of filing of such registration statement with the SEC or launch of such Underwritten Offering, the proposed means of distribution and the proposed managing underwriter or underwriters (if any and if known). Upon the written request of the Stockholder, given within (A) one Business Day, in the case of any Block Trade Offering, or (B) three Business Days, in the case of any other registration or offering, after such Piggyback Notice is received by the Stockholder (which written request shall specify the number of Registrable Common Stock then presently intended to be disposed of by the Stockholder), the Company, subject to the terms and conditions of this Agreement, shall use its commercially reasonable efforts to cause all such Registrable Common Stock held by the Stockholder with respect to which the Company has received such written request for inclusion to be included in such Piggyback Registration on the same terms and conditions as the Company’s Common Stock being sold in such Piggyback Registration.
(b) Piggyback Priorities. If, in connection with a Piggyback Registration, any managing underwriter (or, if such Piggyback Registration is not an Underwritten Offering, a nationally recognized investment bank selected by the Company, reasonably acceptable to the Stockholder) advises the Company that, in its opinion, the inclusion of all the equity securities sought to be included in such Piggyback Registration by (i) the Company, (ii) others who have sought to have equity securities of the Company registered in such Piggyback Registration pursuant to rights to demand (other than pursuant to so-called “piggyback” or other incidental or participation registration rights) such registration (such Persons being “Other Demanding Sellers”), (iii) the Stockholder and (iv) any other proposed sellers of equity securities of the Company (such Persons being “Other Proposed Sellers”), as the case may be, would adversely affect the marketability of the equity securities sought to be sold pursuant thereto, then the Company shall include in the registration statement applicable to such Piggyback Registration only such equity securities as the Company is so advised by such underwriter or investment bank can be sold without such an effect, as follows and in the following order of priority:
(i) if the Piggyback Registration relates to an offering for the Company’s own account, then (A) first, such number of equity securities to be sold by the Company as the Company shall have determined, (B) second, the Registrable Common Stock of the Stockholder and equity securities sought to be registered by each of the Other Demanding Sellers (if any), pro rata on the basis of the number of shares of Common Stock held by the Stockholder and the Other Demanding Sellers and (C) third, other equity securities held by any Other Proposed Sellers; or
(ii) if the Piggyback Registration relates to an offering other than for the Company’s own account, then (A) first, such number of equity securities sought to be registered by each of the Other Demanding Sellers and the Stockholder (if any), pro rata in proportion to the number of shares of Common Stock held by all such Other Demanding Sellers and the Stockholder and (B) second, other equity securities held by any Other Proposed Sellers or to be sold by the Company as determined by the Company and with such priorities among them as may from time to time be determined or agreed to by the Company.
(c) Same Underwriting Terms. In connection with any Underwritten Offering under this Section 3, the Company shall not be required to include a the Stockholder’s Registrable Common Stock in the Underwritten Offering unless the Stockholder accepts the terms and conditions of the underwriting as agreed upon between the Company and the underwriters selected by the Company, with, in the case of a combined primary and secondary offering, such differences, including any with respect to representations and warranties and indemnification, as may be customary or appropriate in combined primary and secondary offerings.
(d) Delay or Withdrawal of Piggyback Registration.
(i) If, at any time after giving written notice of its intention to register any of its equity securities or sell any Common Stock in an Underwritten Offering as set forth in this Section 3 and prior to the time the registration statement filed in connection with such Piggyback Registration is declared effective or the launch date of such Underwritten Offering, the Company shall determine for any reason not to register or sell or to delay such sale or registration of such Common Stock, the Company may, at its election, give written notice of such determination to the Stockholder and thereupon (1) in the case of a determination not to sell or register, shall be relieved of its obligation to register any Registrable Common Stock in connection with such particular withdrawn or abandoned Piggyback Registration; provided, that Stockholders may continue the registration pursuant to the terms of Section 2 hereof and (2) in the case of a determination to delay selling or registering, shall be permitted to delay selling or registering any Registrable Common Stock, for the same period as the delay in registering such other Common Stock.
(ii) The Stockholder shall be permitted to withdraw all or part of its Registrable Common Stock from a Piggyback Registration at any time prior to the effectiveness of such registration statement or at any time prior to 7:00 a.m., New York City time, on the date on which the Underwritten Offering is anticipated to launch, as the case may be.
4. Holdback Agreements.
If requested by the Company or any managing underwriter of an Underwritten Offering of the Company’s equity securities, the Stockholder shall agree not sell or otherwise transfer or dispose of any shares of Registrable Common Stock or other security of the Company during the period beginning on the date that is estimated by the Company in good faith to be the seventh (7th) calendar day prior to the effective date of the applicable registration statement (or the anticipated launch date in the case of a “take-down” off of an already effective Shelf Registration Statement) until the earlier of (i) such time as the Company and such lead managing underwriter shall agree and (ii) ninety calendar days after the effective date of the applicable registration statement (or the pricing date in the case of a “take-down” off of an already effective Shelf Registration Statement); provided, that any lead managing underwriter may extend such period as necessary to comply with applicable FINRA rules.
5. Registration Procedures.
(a) Company Cooperation. In connection with any registration and sale of Registrable Common Stock pursuant to Section 2 or 3 of this Agreement, during the Effective Period and subject to the provisions of such Sections, the Company shall:
(i) prepare and file with the SEC, as applicable, (A) the Shelf Registration Statement and use its reasonable best efforts to cause such Registration Statement to become effective or (B) the prospectus supplement, in each case as contemplated in Section 2(a) hereof;
(ii) prepare and file with the SEC such amendments and supplements to such Shelf Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the Effective Period;
(iii) furnish to the Stockholder such number of copies of such Shelf Registration Statement, each amendment and supplement thereto, each Prospectus and such other documents (but not including any report or other document filed or furnished pursuant to the Exchange Act) as the Stockholder may reasonably request in order to facilitate the disposition of the Registrable Common Stock, provided, however, that the Company shall have no such obligation to furnish copies of a final prospectus if the conditions of Rule 172(c) under the Securities Act are satisfied by the Company;
(iv) furnish to counsel for the Stockholder and for the underwriters, if any, with copies of any written comments from the SEC or any state securities authority or any written request by the SEC or any state securities authority relating to the Shelf Registration Statement or related Prospectus;
(v) use its reasonable best efforts to register or qualify such Registrable Common Stock under such other securities or blue sky laws of such U.S. jurisdictions as the Stockholder reasonably requests in writing; provided, that the Company will not be required to (1) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph (iv), (2) subject itself to taxation in any such jurisdiction, (3) consent to general service of process in any such jurisdiction or (4) make any changes to any report filed or furnished pursuant to the Exchange Act that are incorporated by reference into such Registration Statement;
(vi) notify the Stockholder, at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of any event as a result of which any Prospectus contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and, at the request of the Stockholder, promptly prepare and furnish to the Stockholder a reasonable number of copies of a supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the purchasers of Registrable Common Stock covered thereby, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading;
(vii) in connection with an Underwritten Offering, make available for inspection by the Stockholder and any underwriter participating in the Underwritten Offering, during regular business hours, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors, employees and independent accountants to supply all information reasonably requested by the Stockholder or such underwriter, to conduct a reasonable due diligence investigation within the meaning of Section 11 of the Securities Act in connection with such Registration Statement; provided, that the foregoing investigation and information gathering shall be coordinated on behalf of such parties by one firm of counsel designated by and on behalf of the Stockholder and one firm of counsel designated by and on behalf of all of the underwriters; and provided further that each Person receiving such information shall, as a condition to receiving such information, agree in writing pursuant to confidentiality agreements in form and substance reasonably satisfactory to the Company to keep such information confidential and to take such actions as are reasonably necessary to protect the confidentiality of such information;
(viii) use its reasonable best efforts to cause all such Registrable Common Stock to be listed on the principal securities exchange on which the Common Stock is then listed; and
(ix) promptly notify the Stockholder and, in connection with an Underwritten Offering, any underwriter:
(1) when the Registration Statement, any pre-effective amendment, the Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement has been filed (but not including any report or other document filed or furnished pursuant to the Exchange Act) and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective;
(2) of any written request by the SEC for amendments or supplements to the Registration Statement or any Prospectus or of any inquiry by the SEC relating to the Registration Statement;
(3) of the notification to the Company by the SEC of its initiation of any proceeding with respect to the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement; and
(4) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Common Stock for sale under the applicable securities or blue sky laws of any jurisdiction.
(b) Stockholder Cooperation.
(i) The Stockholder shall furnish to the Company any information regarding the Stockholder and the distribution of such securities as the Company reasonably determines is required or advisable in connection with the registration of the Stockholder’s Registrable Common Stock and the Company shall not have any obligation to include the Stockholder on any registration statement (or prospectus supplement to an existing Shelf Registration Statement) if such information is not promptly provided; provided, that, prior to excluding the Stockholder on the basis of its failure to provide such information, the Company shall furnish in writing a reminder to the Stockholder requesting such information at least three days prior to filing the applicable registration statement or prospectus supplement.
(ii) The Stockholder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5(a)(vi) hereof, the Stockholder will forthwith discontinue disposition of Registrable Common Stock pursuant to the applicable registration statement and Prospectus until the Stockholder is advised in writing by the Company that the use of the Prospectus may be resumed and is furnished with a supplemented or amended Prospectus contemplated by Section 5(a)(vi) hereof and, if so directed by the Company, deliver to the Company, at the Company’s expense, all copies, other than permanent file copies, then in the Stockholder’s possession of the Prospectus current at the time of receipt of such notice relating to such Registrable Common Stock.
(iii) The Stockholder shall not use any free writing prospectus (as defined in Rule 405 under the Securities Act) in connection with any registration statement covering Registrable Common Stock, without the prior written consent of the Company.
(c) Underwritten Offerings Procedures.
(i) The Stockholder may not participate in any Underwritten Offering (including a Shelf Underwritten Offering requested pursuant to Section 3(a) hereof) unless it completes, executes and delivers (or causes to be delivered, as the case may be) all questionnaires, powers of attorney, indemnities, underwriting agreements, legal opinions and other documents reasonably required under the terms of such underwriting arrangements and the provisions set forth herein in respect of registration rights.
(ii) Any investment bank(s) that will serve as an underwriter with respect to any Underwritten Offering (including a Shelf Underwritten Offering requested pursuant to Section 2(d) hereof), shall be selected by the Company.
6. Registration Expenses.
(a) The Company shall pay any and all expenses incident to the Company’s performance of or compliance with this Agreement, including, without limitation, all (i) registration and filing fees (including SEC registration fees and FINRA fees), (ii) fees and expenses of compliance with securities or blue sky laws, (iii) NYSE listing fees, (iv) expenses in connection with the preparation, printing, mailing and delivery of any registration statements, prospectuses and other documents in connection therewith and any amendments or supplements thereto, (v) transfer agent’s and registrar’s fees and expenses, (vi) fees and disbursements of counsel, accountants and other Persons retained by the Company and (vii) except as set forth in Section 6(b) hereof, all reasonable and documented out-of-pocket-expenses of the Stockholder (all such expenses, “Registration Expenses”).
(b) The Stockholder shall pay all underwriting fees, discounts and commissions applicable to the sale of its Registrable Common Stock, and fees and disbursements of its counsel.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Stockholder, its partners, directors, officers, Affiliates and agents, and each Person who controls (within the meaning of Section 15 of the Securities Act) the Stockholder from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) (each, a “Liability” and collectively, “Liabilities”), arising out of or based upon any untrue, or allegedly untrue, statement of a material fact contained in any registration statement or prospectus or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading under the circumstances such statements were made, except insofar as such Liability (x) arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission contained in such registration statement or prospectus in reliance and in conformity with information furnished in writing to the Company by the Stockholder expressly for use therein, (y) arises out of or is based upon offers or sales effected by the Stockholder “by means of” (as defined in Rule 159A under the Securities Act) a “free writing prospectus” (as defined in Rule 405 under the Securities Act) that was not authorized in writing by the Company, or (z) was caused by the Stockholder’s failure to deliver or make available to the Stockholder’s immediate purchaser a copy of the registration statement or prospectus or any amendments or supplements thereto (if the same was required by applicable law to be delivered or made available); provided, however, the obligations of the Company hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities (or actions in respect thereof) if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld, conditioned or delayed).
(b) The Stockholder agrees to indemnify and hold harmless the Company, its directors, officers, Affiliates and agents, and each Person who controls the Company (within the meaning of Section 15 of the Securities Act) to the same extent as the foregoing indemnity from the Company to the Stockholder, but only (x) if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with information furnished in writing to the Company by the Stockholder expressly for use in such registration statement or prospectus or (y) for any Liability which arises out of or is based upon offers or sales by the Stockholder “by means of” (as defined in Rule 159A under the Securities Act) a “free writing prospectus” (as defined in Rule 405 under the Securities Act) that was not authorized in writing by the Company; provided, however, that (x) the Stockholder shall not be liable hereunder for any amounts in excess of the gross proceeds received by the Stockholder pursuant to such registration, and (y) the obligations of the Stockholder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities (or actions in respect thereof) if such settlement is effected without the consent of the Stockholder (which consent shall not be unreasonably withheld, conditioned or delayed).
(c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to participate in, and to the extent that it may wish, assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld, conditioned or delayed). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel (in addition to any local counsel) for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party there may be one or more legal or equitable defenses available to such indemnified party that are in addition to or may conflict with those available to another indemnified party with respect to such claim. Failure to give prompt written notice shall not release the indemnifying party from its obligations hereunder except to the extent the indemnifying party is materially prejudiced by such failure to give notice.
(d) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities.
(e) If the indemnification provided for in or pursuant to this Section 7 is due in accordance with the terms hereof, but is held by a court to be unavailable or unenforceable in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and of the indemnified party on the other in connection with the offering of the Registrable Common Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that result in such losses, claims, damages, liabilities or expenses as well as any other relevant equitable considerations. The relative fault of the indemnifying party on the one hand and of the indemnified party on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party, and by such party’s relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. In no event shall the liability of the Stockholder be greater in amount than the amount of gross proceeds received by the Stockholder upon such sale.
8. Transfer of Registration Rights.
The Stockholder may not transfer or assign all or any portion of its rights under this Agreement without the prior written consent of the Company; provided, that the Stockholder may assign its rights and obligations hereunder (in whole or in part) to a 100% owned (directly or indirectly) Affiliate that agrees in writing with the Company to be bound by this Agreement as fully as if it were an initial signatory hereto, and any such transferee may thereafter make corresponding assignments in accordance with this proviso but only to other 100% owned (directly or indirectly) Affiliates of the Stockholder. Any assignee permitted by the preceding sentence must remain a 100% owned (directly or indirectly) Affiliate of the Stockholder. In the event any shares of Registrable Common Stock are transferred to one or more 100% (directly or indirectly) owned Affiliates in a manner permitted by this Agreement, the Stockholder shall notify the Company in writing of a single Person that shall be the authorized representative to receive notices and take all actions on behalf of the Stockholder and/or its permitted 100% owned (directly or indirectly) Affiliate assignees.
9. Prohibitions on Requests; Stockholders’ Obligations.
(a) The Stockholder shall not, without the Company’s consent, be entitled to deliver a Shelf Notice or a request for a Shelf Underwritten Offering if less than 120 calendar days have elapsed since (A) the effective date of a prior registration statement in connection with a Shelf Notice or Piggyback Registration, (B) the date of withdrawal by the Stockholder of a Shelf Notice or request for a Shelf Underwritten Offering or (C) the pricing date of any Underwritten Offering effected by the Company; provided, in each case, that the Stockholder has been provided with an opportunity to participate in the prior offering and has refused or not promptly accepted such opportunity.
(b) The Stockholder shall not be entitled to sell any of its Registrable Common Stock pursuant to this Agreement, unless the Stockholder has timely furnished the Company with all information required to be disclosed in order to make the information previously furnished to the Company by the Stockholder not misleading and any other information regarding the Stockholder and the distribution of such Registrable Common Stock as the Company may from time to time request pursuant to Section 5(b)(i) hereof. Any sale of any Registrable Common Stock by the Stockholder shall constitute a representation and warranty by the Stockholder that the information of the Stockholder furnished in writing by or on behalf of the Stockholder, to the Company does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements in such information, in the light of the circumstances under which they were made, not misleading.
10. Miscellaneous.
(a) Termination. This Agreement and the obligations of the parties hereunder shall terminate upon such time as there are no Registrable Common Stock, except for the provisions of Sections 6 and 7 of this Agreement, which shall survive such termination.
(b) Notices. All notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be hand delivered or mailed postage prepaid by registered or certified mail or by facsimile transmission (with immediate telephone confirmation thereafter) and, in the case of the Stockholder, shall also be sent via e-mail,
If to the Company:
HC2 Holdings, Inc.
450 Park Avenue
29th Floor
New York, NY 10022
Attention: General Counsel
with a copy to (which shall not constitute notice):
Skadden, Arps, Slate, Meagher & Flom LLP
One Manhattan West
New York, New York 10001
Attention: Gregory A. Fernicola, Esq.
Todd E. Freed, Esq.
If to the Stockholder:
Lancer Capital LLC
777 South Flagler Drive Suite 800W
West Palm Beach, FL 33401
Attention: Avram A. Glazer
with a copy to (which shall not constitute notice:
Woods Oviatt Gilman LLP
1900 Bausch & Lomb Place
Rochester, NY 14604
Attention: Christopher R. Rodi, Esq.
If to a transferee Stockholder, to the address of such transferee Stockholder set forth in the transfer documentation provided to the Company; in each case, or at such other address as such party each may specify by written notice to the others, and each such notice, request, consent and other communication shall for all purposes of the Agreement be treated as being effective or having been given when delivered personally, upon one Business Day after being deposited with a courier if delivered by courier, upon receipt of facsimile or email confirmation if transmitted by facsimile or email, as applicable, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and postage prepaid as aforesaid.
(c) No Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
(d) Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.
(e) Governing Law. The internal laws, and not the laws of conflicts (other than Section 5-1401 of the General Obligations Law of the State of New York), of New York shall govern the enforceability and validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties.
(f) Jurisdiction. Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may be brought in any federal or state court located in the County and State of New York, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 10(b) hereof shall be deemed effective service of process on such party.
(g) Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
(h) Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts (including electronically) and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto.
(i) Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes and replaces all other prior agreements, written or oral, among the parties hereto with respect to the subject matter hereof.
(j) Captions. The headings and other captions in this Agreement are for convenience and reference only and shall not be used in interpreting, construing or enforcing any provision of this Agreement.
(k) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.
(l) Amendments. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given, without the written consent of the Company and the Stockholder.
[Signature Page Follows]
IN WITNESS WHEREOF, this Registration Rights Agreement has been duly executed by each of the parties hereto as of the date first written above.
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COMPANY: |
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HC2 Holdings, Inc. |
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By: |
/s/ Wayne Barr, Jr. |
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Name: Wayne Barr, Jr.
Title: Interim Chief Executive Officer
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STOCKHOLDER: |
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Lancer Capital LLC |
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By: |
/s/ Avram A. Glazer |
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Name: Avram A. Glazer
Title: Sole Member
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[Signature Page to Registration Rights Agreement (Lancer Capital)]
EX-10.32
3
exhibit1032q410k2024.htm
EX-10.32
exhibit1032q410k2024
5108218-8 PANSEND LIFE SCIENCES, LLC THIRD AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT DATED AS OF November 21, 2019 Exhibit 10.32
i 5108218-8 Table of Contents ARTICLE I Definitions ........................................................................................................ 1 Section 1.1 Definitions ..................................................................................................... 1 Section 1.2 Terms Generally; Construction ..................................................................... 15 ARTICLE II General Provisions .......................................................................................... 16 Section 2.1 Formation ..................................................................................................... 16 Section 2.2 Name ........................................................................................................... 16 Section 2.3 Term ............................................................................................................ 16 Section 2.4 Purpose; Powers ........................................................................................... 16 Section 2.5 Place of Business; Registered Office and Registered Agent .......................... 16 ARTICLE III Members ......................................................................................................... 17 Section 3.1 Name and Address ....................................................................................... 17 Section 3.2 Limitation of Liability .................................................................................. 17 Section 3.3 Liability of a Member to the Company ......................................................... 17 Section 3.4 Action by Members Without a Meeting ........................................................ 17 Section 3.5 Certain Duties and Obligations of the Members............................................ 17 Section 3.6 Confidentiality ............................................................................................. 19 ARTICLE IV Management and Operation of the Company ................................................... 19 Section 4.1 Appointment, Resignation and Removal of the Manager .............................. 19 Section 4.2 General Responsibilities of the Manager ...................................................... 20 Section 4.3 Budget.......................................................................................................... 20 Section 4.4 Additional Specified Rights of the Members ................................................ 20 Section 4.5 Officers and Authorized Persons .................................................................. 21 ARTICLE V Profit Units and Capital Contributions ............................................................. 22 Section 5.1 Profit Units of the Company ......................................................................... 22 Section 5.2 Capital Contributions ................................................................................... 23 Section 5.3 Priority and Return of Capital ....................................................................... 23 Section 5.4 Withdrawal or Reduction of Capital Contributions ....................................... 24 Section 5.5 Capital Accounts .......................................................................................... 24 Section 5.6 Transfers ...................................................................................................... 24 Section 5.7 Deficit Capital Account ................................................................................ 24 Section 5.8 Modifications ............................................................................................... 24 ARTICLE VI Allocations; Distributions ................................................................................ 24 Section 6.1 Allocations of Profits and Losses.................................................................. 24 Section 6.2 Required Special Allocations........................................................................ 25 Section 6.3 Tax Allocations; Code Section 704(c) .......................................................... 25 Section 6.4 Distributions................................................................................................. 26 Section 6.5 Other Distribution Rules ............................................................................... 27 Section 6.6 Tax Distributions .......................................................................................... 27 Section 6.7 [Intentionally Omitted] ................................................................................. 28 Section 6.8 Offset ........................................................................................................... 29
ii 5108218-8 Section 6.9 Interest on and Return of Capital Contributions ............................................ 29 ARTICLE VII Taxes; Books and Records; Information .......................................................... 29 Section 7.1 Tax Filings, Elections and Cooperation ........................................................ 29 Section 7.2 Partnership Representative ........................................................................... 31 Section 7.3 Tax Matters Partner for Transition Years ...................................................... 32 Section 7.4 Survival ........................................................................................................ 33 Section 7.5 General Accounting Matters ......................................................................... 33 Section 7.6 Information .................................................................................................. 34 Section 7.7 Compliance .................................................................................................. 34 Section 7.8 Bank Accounts ............................................................................................. 35 Section 7.9 Accounting Period ........................................................................................ 35 ARTICLE VIII Dissolution ...................................................................................................... 35 Section 8.1 Dissolution ................................................................................................... 35 Section 8.2 Winding-up .................................................................................................. 35 Section 8.3 Final Distribution ......................................................................................... 35 Section 8.4 Termination .................................................................................................. 36 Section 8.5 Claims of the Members ................................................................................ 36 ARTICLE IX Transfer of Members’ Interests........................................................................ 36 Section 9.1 Restrictions on Transfer of Company Interests ............................................. 36 Section 9.2 Other Transfer Provisions ............................................................................. 37 Section 9.3 Drag-Along Rights ....................................................................................... 37 Section 9.4 Tag-Along Rights ......................................................................................... 38 ARTICLE X Miscellaneous ................................................................................................. 40 Section 10.1 Representations and Covenants by the Members .......................................... 40 Section 10.2 Arbitration.................................................................................................... 41 Section 10.3 Equitable Relief............................................................................................ 42 Section 10.4 Governing Law ............................................................................................ 42 Section 10.5 Successors and Assigns ................................................................................ 42 Section 10.6 Notices ......................................................................................................... 42 Section 10.7 Counterparts ................................................................................................. 42 Section 10.8 Entire Agreement ......................................................................................... 42 Section 10.9 Amendments ................................................................................................ 43 Section 10.10 Waivers ........................................................................................................ 43 Section 10.11 Severability .................................................................................................. 43 Section 10.12 No Partition .................................................................................................. 43 Section 10.13 Exhibits and Schedules ................................................................................. 43 Section 10.14 Further Action .............................................................................................. 43 Section 10.15 Cumulative Remedies; Prevailing Party ........................................................ 43 Section 10.16 Rules of Construction ................................................................................... 43 Section 10.17 No Third Party Beneficiaries ........................................................................ 44 Section 10.18 Time of the Essence ..................................................................................... 44
iii 5108218-8 SCHEDULES Annex A Individual Members Schedule 3.1 Members; Capital Contributions; Profit Units Schedule 4.5(c) Initial Officers
5108218-8 THIS THIRD AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (as amended, supplemented, restated or otherwise modified from time to time, this “Agreement”) OF PANSEND LIFE SCIENCES, LLC (the “Company”), dated as of November 21, 2019, by and among HC2 Holdings 2, Inc., a Delaware corporation (“HC2”) and the individuals listed on Annex A hereto (together with HC2, each a “Member” and, collectively, the “Members”). Preliminary Statement WHEREAS, the Company was formed as a Delaware limited liability company pursuant to the filing of a Certificate of Formation in the office of the Secretary of State of the State of Delaware on February 14, 2014 (the “Certificate”); WHEREAS, the Members entered into an Amended and Restated Limited Liability Company Agreement of the Company dated as of February 25, 2014 (the “Original Agreement”); WHEREAS, prior to September 2016, the Members discovered that the Original Agreement contained certain scrivener’s errors as to material terms; WHEREAS on or about September 2016, the Members, having discovered such scrivener’s errors, agreed that the Original Agreement was thereafter deemed amended to correct such errors; WHEREAS, the Members entered into a Second Amended and Restated Limited Liability Company Agreement of the Company dated as of September 20, 2017 (the “Second A&R Agreement”) to, among other things, memorialize such amendments; and WHEREAS, the Members desire to further modify and refine the rights and obligations of the Members as set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members, intending to be legally bound, hereby agree that the Second A&R Agreement is hereby amended and restated in its entirety as follows: Agreement ARTICLE I Definitions Section 1.1 Definitions. The following terms shall have the following meanings for purposes of this Agreement: “AAA” has the meaning given in Section 10.2(b). “Acceptance Notice” has the meaning given in Section 9.4(a).
2 5108218-8 “Affiliate” means, with respect to any Person, (i) any other person who Controls, is Controlled by or is under common Control with such person, (ii) any director, officer, partner or employee of such Person or any Person specified in clause (i) above, or (iii) any immediate family member of any Person specified in clause (i), (ii) or (iii) above. Notwithstanding the foregoing, (i) neither the Company nor any Subsidiary shall be deemed to be an Affiliate of any Member for any purposes of this Agreement; and (ii) Harbinger Group Inc. and its Affiliates shall be considered Affiliates of HC2 and its Affiliates and vice versa. For purposes of this definition, an “immediate family member” of any individual means (a) such individual’s spouse; (b) such individual’s children and other lineal descendants (in each of the foregoing cases, whether by birth or adoption); (c) any trust for the benefit of any of the foregoing individuals; and (d) any entity 100% of which is beneficially owned by any one or more of the foregoing individuals (e.g., a so-called “family limited partnership”). “Agreement” has the meaning given in the preamble. “Authorized Person” has the meaning given in Section 4.5(a). “Available Cash” means the sum of (a) any cash receipts or other proceeds of the Company during such period from all sources other than Capital Contributions and (b) any reduction in Reserves previously established from such receipts; less any additions to Reserves from such receipts. The Manager shall have the discretion (acting in good faith) to determine, for purposes of Section 6.4(b)(vi), whether any Available Cash results from or is derived from or attributable to BeneVir and its determination thereof shall be determinative and final. “Book Basis” means, with respect to any asset of the Company, the asset’s adjusted basis for federal income tax purposes, except as follows: (i) The initial Book Basis of any asset contributed by a Member to the Company shall be the gross fair market value of such asset. (ii) The Book Basis of the Company Assets shall be adjusted to equal their respective gross fair market values if the Manager reasonably determines to restate Capital Accounts in accordance with the Regulations. (iii) The Book Basis of any item of Company Assets distributed to any Member shall be adjusted to equal the gross fair market value of such asset on the date of distribution as reasonably determined by the Manager. (iv) The Book Basis of Company Assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704- 1(b)(2)(iv)(m) and subparagraphs (vi) of the definitions of “Net Profits” and “Net Losses” herein; provided, however, that Book Basis shall not be adjusted pursuant to this subparagraph (iv) to the extent that an adjustment pursuant to subparagraph (ii) is made
3 5108218-8 by the Manager or is required in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (iv). If the Book Basis of an asset has been determined or adjusted pursuant to subparagraph (i), (ii) or (iv), such Book Basis shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Profits and Net Losses. “Budget” has the meaning given in Section 4.3. “Business Day” means any day other than Saturday, Sunday or any other day on which commercial banks in New York, New York are closed for commercial banking business. “Capital Account” means, when used with respect to any Member, the capital account maintained for such Member in accordance with Section 5.5 hereof, as such capital account may be increased or decreased from time to time pursuant to the provisions of Section 5.5. “Capital Contributions” means the amount of money and/or the agreed upon fair market value of property contributed to the Company by a Member or its predecessor in interest on the date of contribution and shall include the contributions of such Member made pursuant to Section 5.1. “Cause” means, with respect to DP or CEP, the meaning ascribed to such term in his or her employment agreement with the Employer. “Cause Event” means, with respect to DP or CEP, the termination of his or her employment by the Employer at any time as a result of a termination for Cause. “CEP” means Cherine Eldumiati Plumaker. “Certificate” has the meaning given in the preliminary statement. “Change of Control” means, with respect to any Person (the “Subject Person”), any transaction or series of related transactions as a result of which any other Person or group, directly or indirectly, becomes the “beneficial owner” (as such term is defined in Section 13d-3 of the Exchange Act) of more than 50% of the total voting power of such Subject Person. “Class A Profit Unit” means any unit designated as such on Schedule 3.1 hereto. “Class B Profit Unit” means any unit designated as such on Schedule 3.1 hereto. “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. “Company” has the meaning given in the caption to this Agreement.
4 5108218-8 “Company Assets” means any and all real property, personal property and other assets directly or indirectly owned by the Company or any Subsidiary. “Company Minimum Gain” has the meaning given the term “partnership minimum gain” in Regulation § 1.704-2(b)(2) and Regulation § 1.704-2(d). “Company Nonrecourse Debt” has the meaning given the term “nonrecourse liability” in Regulation § 1.752-1(a)(2). “Company Nonrecourse Deductions” has the meaning given the term “nonrecourse deductions” in Regulation § 1.704-2(b)(1) and Regulation § 1.704-2(b)(2). The amount of Company Nonrecourse Deductions for a Fiscal Year is determined in accordance with Regulation § 1.704-2(c). “Control” (including its correlative meanings, “Controlled by” and “under common Control with”) means possession, directly or indirectly, of the power to direct or cause the direction of management or policies of the Person in question (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). “Depreciation” means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such taxable year, except that if the Book Basis of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Book Basis as the federal income tax depreciation, amortization, or other cost recovery deduction for such taxable year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such taxable year is zero, Depreciation shall be determined with reference to such beginning Book Basis using any reasonable method selected by the Manager. “Disability” means, with respect to DP or CEP, the meaning ascribed to such term in his or her employment agreement with the Employer. “Distribution” means any cash or other assets distributed to a Member, in such person’s capacity as a Member, by the Company. “Distribution Event” means any monetization, recapitalization, distribution, redemption, repurchase, dividend or other action with respect to a Portfolio Company resulting in the receipt of proceeds by the Company, including but not limited to any royalty or milestone payments. “DP” means David Present. “Drag-Along Sale” means (i) any sale of a majority of all interests to any Person (or group of Persons) who is not an Affiliate of HC2, (ii) any merger, consolidation or other combination of the Company with any Person (or group of Persons) who is not an Affiliate of HC2, if the Members, as determined immediately prior to the relevant
5 5108218-8 transaction, would own less than fifty percent (50%) (as measured immediately after the consummation of the relevant transaction in terms of either voting power or fair market value) of the equity interests of the surviving Person; or (iii) any sale or exchange of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any Person (or group of Persons) who is not an Affiliate of HC2. “Employer” means the Company or any Affiliate of the Company that employs DP or CEP in respect of services provided for the benefit of the Company. “Employment Agreement” has the meaning given in Section 4.5(c). “Equity Value” has the meaning given in Section 9.4(c). “Exchange Act” means the Securities Exchange Act of 1934, as amended. “Expense Account” means, as determined with respect to HC2, as of the September 20, 2017, an amount equal to $5,787,619.10. From and after such date, the Expense Account shall be increased by Expense Account Contributions, and shall be reduced by the aggregate Distributions under Section 6.4(b)(iii)(A)(1). “Expense Account Contribution” means a Capital Contribution, including any amounts deemed to be Capital Contributions pursuant to Section 5.2(b), that is not an Investment Contribution. “Expense Account Preferred Return” means, as determined with respect to HC2’s Expense Account and any Expense Account Contributions made by HC2 from and after the Second A&R Agreement Effective Date, an amount, if any (but not less than zero), that, when combined with all prior distributions made to HC2 pursuant to Section 6.4(b)(iii)(A)(2), yields a cumulative return of seven percent (7%) per annum compounded quarterly on HC2’s unreturned Expense Account and unpaid Expense Account Preferred Return. “Fair Market Value” means an amount equal to the fair market value of a Member’s Interest with respect to a purchase under Section 5.1(d), determined as follows: (v) The Manager shall propose in writing a fair market value of the Member’s Interest, (A) based on the total value of the Company that would be obtained from a sale between a willing seller and a willing unaffiliated third party purchaser in an arms’ length transaction, (B) using standard valuation techniques and (C) without regard to any illiquidity or minority interest discount (collectively, the “Fair Market Value Determination Principles”). (vi) The Member holding such Interest shall be entitled to dispute the Manager’s determination of the fair market value of such Member’s Interest by giving written notice to the Company within five (5) Business Days of receipt of the Manager’s proposal described in clause (i) above. If such Member agrees in writing with the Manager’s determination of the fair market value of such Member’s Interest or does not
6 5108218-8 provide timely written notice of a dispute, such value shall be final, binding and non- appealable. (vii) In the event of a dispute, the Manager and such Member disputing the Manager’s proposed valuation shall meet promptly to discuss any concerns and to negotiate in good faith with the objective of reaching an amicable resolution of such disagreement. If the Manager and such Member are unable to reach an amicable resolution of their disagreement within thirty (30) Business Days of the Member’s receipt of the Manager’s proposal described in clause (i) above (the “FMV Resolution Period”), the Manager and the Member shall mutually select an independent appraisal firm of nationally recognized reputation; provided, however, that if the Manager and the Member fail or are unable to agree upon a mutually acceptable independent appraisal firm within fifteen (15) Business Days following the FMV Resolution Period, the Manager and the Member shall each, at its own cost and expense, promptly retain an independent appraisal firm of nationally recognized reputation, which two firms shall, in turn, select a third independent appraisal firm of nationally recognized reputation (any firm selected pursuant to this clause (iii), the “FMV Appraiser”). The FMV Appraiser shall be retained by the Company at its own cost and expense; provided, however, in the event that the fair market value of the Member’s Interest as determined by the FMV Appraiser represents less than a ten percent (10%) increase above the fair market value as proposed by the Manager pursuant to clause (i) above, the Member shall pay or reimburse the Company for the full cost and expense of the FMV Appraiser. (viii) The FMV Appraiser shall be required to use its reasonable best efforts to complete its valuation work within ninety (90) Business Days of being retained. The FMV Appraiser shall determine the fair market value of the Member’s Interest using the Fair Market Value Determination Principles and the FMV Appraiser’s determination shall be final, binding and non-appealable absent manifest error. “Fiscal Year” means, unless determined otherwise by the Manager, the twelve month period ending on December 31 of each year, except that the first Fiscal Year shall begin on the date of formation of the Company and shall end on December 31, 2014. “Full Year Fund” means an amount of cash reasonably required by the Company to fund all Company salaries and other overhead costs for a one-year period, based on the Budget for such one-year period. “Good Reason” means, with respect to DP or CEP, the meaning ascribed to such term in his or her employment agreement with the Employer. “Governmental Entity” means any court, tribunal, department, body, board, bureau, administrative agency or commission or other governmental authority or instrumentality, whether federal, state, local or foreign, including any stock exchange or other regulatory authority. “HC2” has the meaning given in the caption to this Agreement.
7 5108218-8 “HC2 Sale” means a Transfer by HC2 of its entire Interest, provided, however, that any Change of Control of HC2 shall not constitute a Transfer (or “HC2 Sale”) for purposes hereof. “HC2 Transfer” has the meaning given in Section 9.4(a). “In-Kind Value” means an amount equal to fair market value of an in-kind interest, determined as follows: (ix) The Manager shall propose in writing a fair market value of the in-kind interest, (A) based on the total value of the Company that would be obtained from a sale between a willing seller and a willing unaffiliated third party purchaser in an arms’ length transaction, (B) using standard valuation techniques and (C) without regard to any illiquidity or minority interest discount (collectively, the “In-Kind Value Determination Principles”). (x) The In-Kind Value Recipient shall be entitled to dispute the Manager’s determination of the fair market value of the in-kind interest by giving written notice to the Company within five (5) Business Days of receipt of the Manager’s proposal described in clause (i) above. If the In-Kind Value Recipient agrees in writing with the Manager’s determination of the fair market value of the in-kind interest or does not provide timely written notice of a dispute, such value shall be final, binding and non- appealable. (xi) In the event of a dispute, the Manager and the In-Kind Value Recipient disputing the Manager’s proposed valuation shall meet promptly to discuss any concerns and to negotiate in good faith with the objective of reaching an amicable resolution of such disagreement. If the Manager and the In-Kind Value Recipient are unable to reach an amicable resolution of their disagreement within thirty (30) Business Days of the In- Kind Value Recipient’s receipt of the Manager’s proposal described in clause (i) above (the “Resolution Period”), the Manager and the In-Kind Value Recipient shall mutually select an independent appraisal firm of nationally recognized reputation; provided, however, that if the Manager and the In-Kind Value Recipient fail or are unable to agree upon a mutually acceptable independent appraisal firm within fifteen (15) Business Days following the Resolution Period, the Manager and the In-Kind Value Recipient shall each, at its own cost and expense, promptly retain an independent appraisal firm of nationally recognized reputation, which two firms shall, in turn, select a third independent appraisal firm of nationally recognized reputation (any firm selected pursuant to this clause (iii), the “Appraiser”). The Appraiser shall be retained by the Company at its own cost and expense; provided, however, in the event that the fair market value of the in-kind interest as determined by the Appraiser represents less than a ten percent (10%) increase above the fair market value as proposed by the Manager pursuant to clause (i) above, the In-Kind Value Recipient shall pay or reimburse the Company for the full cost and expense of the Appraiser. (xii) The Appraiser shall be required to use its reasonable best efforts to complete its valuation work within ninety (90) Business Days of being retained. The
8 5108218-8 Appraiser shall determine the fair market value of the in-kind interest using the In-Kind Value Determination Principles and the Appraiser’s determination shall be final, binding and non-appealable absent manifest error. “In-Kind Value Recipient” means the recipient of an in-kind distribution pursuant to Section 6.5. “Interest” means the interest of a Member in the Company, including the right of such Member in the capital, profits and losses of, and Distributions from, the Company, and the right of such Member to any and all benefits to which such Member may be entitled under this Agreement. “Investment Account” means, as determined with respect to a Member that made Investment Contributions with respect to a Portfolio Company, an amount equal to the excess of (i) such Member’s Investment Contributions in respect of such Portfolio Company, over (ii) the sum of all Distributions made to such Member pursuant to Section 6.4(b)(i) and (iv) with respect to such Portfolio Company. “Investment Contribution” means, as determined with respect to a Portfolio Company, any Capital Contribution, the proceeds of which were used to fund an investment in such Portfolio Company and any expenses incurred directly in connection with such investment or related Distribution Event. “Liquidation Value” means, with respect to any Profit Units, the amount determined by either (x) the mutual agreement of HC2 and the holders of more than 50% of the class of Profit Units being appraised, or (y) the Manager, that the holder of such Profit Units would have been entitled to receive if, as of the date such Liquidation Value is to be calculated: (i) the Company sold each of the tangible Company Assets for its fair market value and immediately liquidated, (ii) the Company’s debts and liabilities were satisfied and (iii) the remaining proceeds of the liquidation were distributed in accordance with this Agreement. Notwithstanding the foregoing, in the event of a determination of Liquidation Value hereunder upon a Resignation Event or upon a Cause Event, the Liquidation Value determined hereunder shall take into account any minority or non- liquidity discounts (which discounts shall not result in a reduction in value of more than 20%) applicable to the Profit Units. “Liquidator” means (i) the Manager or (ii) such other Person who is appointed by the Manager in accordance with applicable law to take all actions related to the winding up of the Company’s business and the distribution of the Company’s assets. “LLC Act” means the Delaware Limited Liability Company Act, 6 Del. C. §§ 18101, et seq., as it may be amended from time to time, and any successor to such statute. “Loss Event” means, as to any Portfolio Company, (i) such Portfolio Company becoming subject to a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, (ii) such Portfolio Company becoming subject to an involuntary petition regarding the foregoing that is not dismissed within 60 days after filing, (iii) such
9 5108218-8 Portfolio Company has depleted all of its cash and current assets and has determined not to, or has no reasonable prospects to, raise capital now or in the future, (iv) such Portfolio Company undergoes a Change of Control involving a monetization of the Company’s entire investment in the Company (and in any successor entity) for 100% cash consideration received directly by the Company in an amount that is less than the Company’s unrecovered direct cash investment in such Portfolio Company or (v) a reasonable determination by the Manager that the fair market value of such Portfolio Company is less than 50% of the Investment Account with respect to such Portfolio Company, the procedure for which determination shall be as follows: (A) The Manager shall provide written notice to the Members stating (1) the Manager has determined that a Loss Event has occurred because the fair market value of a Portfolio Company is less than 50% of the Investment Account with respect to such Portfolio Company, and (2) the Manager’s determination of the fair market value of such Portfolio Company. (B) Any Member shall be entitled to dispute the Manager’s determination of the fair market value of the Portfolio Company by giving written notice to the Company within five (5) Business Days after receipt of the Manager’s notice described in clause (A) above. If the Members agree in writing with the Manager’s determination of the fair market value of the Portfolio Company or no Member provides timely written notice of a dispute, such value shall be final, binding and non-appealable. (C) In the event of a dispute, the Manager and any Member(s) disputing the Manager’s determination shall meet promptly to discuss any concerns and to negotiate in good faith with the objective of reaching an amicable resolution of such disagreement. If the Manager and such Member(s) are unable to reach an amicable resolution of their disagreement within thirty (30) Business Days of the Manager’s determination described in clause (A) above (the “Loss Event Resolution Period”), the Company and such Member(s) shall mutually select an independent appraisal firm of nationally recognized reputation at the Company’s sole expense; provided, however, that if the Manager and such Member(s) fail or are unable to agree upon a mutually acceptable independent appraisal firm within fifteen (15) Business Days following the Loss Event Resolution Period, the Manager and the Member(s) shall each, at its own cost and expense, promptly retain an independent appraisal firm of nationally recognized reputation, which two firms shall, in turn, select a third independent appraisal firm of nationally recognized reputation (any firm selected pursuant to this clause (C), the “Loss Event Appraiser”). The Loss Event Appraiser shall be retained by the Company at its own cost and expense; provided, however, in the event that the fair market value of the Portfolio Company as determined by the Loss Event Appraiser represents less than a ten percent (10%) increase above the fair market value of such Portfolio Company as set forth in the written notice of the Manager pursuant to clause (A) above, the Member(s) shall bear the full cost and expense of the Loss Event Appraiser.
10 5108218-8 (D) The Loss Event Appraiser shall be required to use its reasonable best efforts to complete its valuation work to determine the fair market value of the Portfolio Company within ninety (90) Business Days of being retained. (E) The Company and the Members agree that the fair market value of the Portfolio Company shall be the value of the Portfolio Company as determined by the Loss Event Appraiser and agree that such value shall be final, binding and non-appealable, absent manifest error (it being understood that, if the value, as so determined, exceeds 50% of the Investment Account for the applicable Portfolio Company, no Loss Event shall be deemed to have occurred). “Major Action” means any decision, contract, agreements, or other material activity on the part of the Company (i) for the issuance of additional Interests, or rights to acquire additional Interests, to existing Members or new Members (including, but not limited to, any warrants, options, convertible debt or other instruments); (ii) that would have a material and adverse effect, and a materially disproportionate effect, on the rights or remedies of any Member; or (iii) the creation of any new Portfolio Company (including the contribution of a Portfolio Company by any Member to the Company). “Manager” has the meaning given in Section 4.1(a). “Maximum Pro Rata Portion” has the meaning given in Section 9.4(c). “Member” has the meaning given in the caption to this Agreement. “Member Nonrecourse Debt” means a nonrecourse debt of the Company within the meaning of Section 1.704-2(b)(4) of the Regulations. “Member Nonrecourse Deductions” means the items of loss, deduction, and expenditure attributable to Member Nonrecourse Debt within the meaning of Section 1.704-2(i)(2) of the Regulations. “Member Nonrecourse Debt Minimum Gain” has the meaning given the term “partner nonrecourse debt minimum gain” in Regulation § 1.704-2(i)(2). “Member Supermajority Approval” means the prior written consent of HC2 and the holders on the date hereof of a majority of the Class B Profit Units that are not held by HC2. “Members’ Estimated Tax Liability” has the meaning given in Section 6.6(a). “Net Losses” means, for each Fiscal Year or other period, an amount equal to the excess of (a) the Company’s items of loss and deduction for such year or other period over (b) the Company’s items of income and gain for such year or other period, determined in accordance with Section 703(a) of the Code (including all items of income, gain, loss and deduction required to be stated separately under Section 703(a)(1) of the Code), with the following adjustments:
11 5108218-8 (xiii) Any income of the Company that is exempt from federal income tax, and not otherwise taken into account in computing Net Losses, will be considered an item of income. (xiv) Gain or loss resulting from any disposition of any Company Asset with respect to which gain or loss is recognized for federal income tax purposes will be computed by reference to the Book Basis of such asset, notwithstanding that the adjusted tax basis of such asset may differ from its Book Basis. (xv) Any increase or decrease to Capital Accounts as a result of any adjustment to the Book Basis of Company Assets pursuant to Regulations Section 1.704 1(b)(2)(iv)(f) shall constitute an item of income or loss, respectively. (xvi) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) expenditures under Regulations Section 1.704 1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Losses, will be considered an item of deduction. (xvii) In lieu of depreciation, amortization and other cost recovery deductions taken into account in computing taxable income or loss, there will be taken into account the Depreciation for the taxable year or other period as determined hereunder. (xviii) To the extent an adjustment to the adjusted tax basis of any of the Company Assets pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member’s Interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Net Losses. (xix) Notwithstanding any other provision set forth in subparagraphs (i) through (vi) above, any items of income, gain, loss or deduction which are specially allocated pursuant to Section 6.2 shall not be taken into account in computing Net Losses. For the avoidance of doubt, the amounts of items of Company income, gain, loss or deduction available to be specially allocated pursuant to Section 6.2 shall be determined by applying rules comparable to those set forth in subparagraphs (i)-(vi) above. “Net Profits” means, for each Fiscal Year or other period, an amount equal to the excess of (a) the Company’s items of income and gain for such year or other period over (b) the Company’s items of deduction and loss for such year or other period, determined in accordance with Section 703(a) of the Code (including all items of income, gain, loss and deduction required to be stated separately under Section 703(a)(1) of the Code), with the following adjustments:
12 5108218-8 (xx) Any income of the Company that is exempt from federal income tax, and not otherwise taken into account in computing Net Profits, will be considered an item of income. (xxi) Gain or loss resulting from any disposition of any Company Asset with respect to which gain or loss is recognized for federal income tax purposes will be computed by reference to the Book Basis of such asset, notwithstanding that the adjusted tax basis of such asset may differ from its Book Basis. (xxii) Any increase or decrease to Capital Accounts as a result of any adjustment to the Book Basis of Company Assets pursuant to Regulations Section 1.704 1(b)(2)(iv)(f) shall constitute an item of income or loss, respectively. (xxiii) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) expenditures under Regulations Section 1.704 1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Profits, will be considered an item of deduction. (xxiv) In lieu of depreciation, amortization and other cost recovery deductions taken into account in computing taxable income or loss, there will be taken into account the Depreciation for the taxable year or other period as determined hereunder. (xxv) To the extent an adjustment to the adjusted tax basis of any of the Company Assets pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member’s Interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Net Profits. (xxvi) Notwithstanding any other provision of this Paragraph, any items of income, gain, loss or deduction which are specially allocated pursuant to Section 6.2 of this Agreement shall not be taken into account in computing Net Profits. The amounts of items of Company income, gain, loss or deduction available to be specially allocated pursuant to Section 6.2 of this Agreement shall be determined by applying rules comparable to those set forth in subparagraphs (i)-(vi) above. “Non-Transition Year” means any Fiscal Year other than a Transition Year. “Officer” has the meaning given in Section 4.5(c). “Participating Member” has the meaning given in Section 9.4(a). “Partnership Representative” has the meaning in Section 4.5(d).
13 5108218-8 “Permitted Transfer” shall mean, in each instance, (i) any direct or indirect Transfer in or by HC2, or (ii) in the case of a Member that is a natural person, any Transfer by a Member in connection with bona fide estate planning purposes. “Person” or “person” means an individual, corporation, association, partnership, limited liability company, trust, joint venture, business trust or unincorporated organization or other entity or organization, or a Governmental Entity. “Portfolio Company” means any company in which the Company makes an investment. “Preferred Return” means, as determined with respect to a Member that made Investment Contributions with respect to a Portfolio Company, an amount, if any (but not less than zero), that, when combined with all prior distributions made to such Member pursuant to Section 6.4(b)(ii), yields a cumulative return of (i) with respect to unreturned Investment Contributions made prior to the Second A&R Agreement Effective Date, eight percent (8%) per annum compounded quarterly on such Member’s unreturned Investment Contributions and unpaid Preferred Return in respect of such Portfolio Company, until immediately prior to the Second A&R Agreement Effective Date, and (ii) from and after the Second A&R Agreement Effective Date, seven percent (7%) per annum compounded quarterly on such Member’s unreturned Investment Contributions and unpaid Preferred Return in respect of such Portfolio Company. “Proceeding” means (i) any pending or completed administrative or judicial action, audit, suit, hearing, claim, arbitration, mediation, review deposition or other proceeding, whether civil or criminal and (ii) any appeal or other administrative or judicial review of any item described in clause (i). “Profit Unit” means any unit to denominate a portion of a Member’s Interest, including any Class A Profit Unit or Class B Profit Unit. “Proposed Transfer Notice” has the meaning given in Section 9.4(a). “Purchase and Sale Agreement” has the meaning given in Section 9.4(a). “Regulations” means the regulations promulgated under the Code. “Required Accounting Standards” shall mean United States generally accepted accounting principles, consistently applied. “Reserve Account” means, as determined with respect to each of the Members immediately prior to any Distribution under Section 6.4(b) and without duplication of any amount of the Expense Account, the amount that would have been distributed to such Person with prior Distributions if Section 6.4(b)(v) did not apply (but solely to the extent of application of Section 6.4(b)(v)), reduced by the aggregate Distributions under Section 6.4(b)(iii)(B)(1) to such Person.
14 5108218-8 “Reserve Account Preferred Return” means, as determined with respect to each Member’s Reserve Account, an amount, if any (but not less than zero), that, when combined with all prior distributions made to such Member pursuant to Section 6.4(b)(iii)(B)(2), yields a cumulative return of seven percent (7%) per annum compounded quarterly on such Person’s unreturned Reserve Account and unpaid Reserve Account Preferred Return. “Reserves” means funds or other amounts set aside or otherwise allocated or designated for any reasonable and valid need of the Company other than investment and without duplication of the Full Year Fund, as reasonably determined by the Manager from time to time in accordance with, and subject to, the applicable provisions of this Agreement. “Resignation Event” means, with respect to DP or CEP, the resignation of his or her employment with the Employer other than for Good Reason. “SEC” has the meaning given in Section 7.7(a). “Second A&R Agreement Effective Date” means September 20, 2017. “SOA” has the meaning given in Section 7.7(a). “State Tax” means any Tax other than U.S. federal income Tax. “Subsidiary” means any entity directly or indirectly owned in whole or in part by the Company. “Tag-Along Interest” has the meaning given in Section 9.4(c). “Tag-Along Right” has the meaning given in Section 9.4(a). “Tag-Along Sale” has the meaning given in Section 9.4(a). “Tag-Along Transferee” has the meaning given in Section 9.4(a). “Tax” means any federal, state, county, local, franchise or foreign income, payroll, employment, excise, environmental, customs, franchise, windfall profits, withholding, social security (or similar), unemployment, real property, personal property (tangible or intangible), sales, use, transfer, registration, value added, gross receipts, net proceeds, turnover, license, ad valorem, capital stock, disability, stamp, leasing, lease, excess profits, occupational and interest equalization, fuel, severance, alternative or add- on minimum or estimated tax, charge, fee, levy, duty or other assessment, and other obligations of the same or of a similar nature to any of the foregoing due or claimed to be due by or to any governmental or quasi-governmental authority, including any interest, penalty or addition thereto, whether disputed or not. “Tax Distribution” has the meaning given in Section 6.6(a).
15 5108218-8 “Tax Distribution Rate” has the meaning given in Section 6.6(a). “Tax Proceeding” means any Proceeding to which the Company is a party if and when such Proceeding involves to any significant extent any issue or other matter (including, but not limited to, any adjustment to or other determination of any nexus, permanent establishment or item of income, gain, expense or loss) relating to (i) any U.S. federal, state or local income Tax, (ii) the Company’s obligation to withhold or collect any Tax if any Manager, Member, or Officer could be held personally liable for any failure to collect or withhold such Tax and/or (iii) any other domestic or foreign Tax if there is possibility that, as result of the Proceeding, any Member could either (A) become subject to Tax in a jurisdiction where such Member was not otherwise subject to Tax during the time period at issue or (B) through the issuance of a revised Schedule K-1 or other similar mechanism, any adjustment or other determination resulting from such Proceeding would flow through to and would be required to be taken into account on any separate domestic or foreign Tax return of any Member. “Transfer” has the meaning given in Section 9.1(a). “Transferee” has the meaning given in Section 9.1(b). “Transferred Interest” has the meaning given in Section 9.4(a). “Transition Year” means any Fiscal Year beginning on or before December 31, 2017. “Underpayment Amount” means, as determined with respect to a Member, (a) any “imputed underpayment” determined under Code Section 6225, (b) any similar or corresponding amount determined under any similar or corresponding provision of any State Tax, (c) any other similar or corresponding amount if and to the extent such amount represents the payment or collection of any Tax that would otherwise be paid or payable by such Member as a result of the pass-through (or similar treatment) of any item of Net Profit or Net Loss to such Member, and (d) any withholding, estimated or other Tax required by law to be withheld or paid by the Company with respect to or on behalf of such Member. “Without Cause” means, with respect to DP or CEP, the meaning ascribed to such term in his or her employment agreement with the Employer. Section 1.2 Terms Generally; Construction. The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. Unless otherwise expressly specified, the words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation” unless such construction would lead to duplicate language. The terms “hereunder” “herein” and words of similar import shall mean this entire Agreement as a whole unless reference to a specific section of this Agreement is made. All references in this Agreement to a section or article shall mean a section or article of this Agreement, unless otherwise expressly specified. Any reference herein to a particular provision of the rule, law or regulation shall mean, such rule, law or regulation as amended and succeeded
16 5108218-8 from time to time. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision will be applicable whether such action is taken directly or indirectly by such Person. The parties acknowledge that this Agreement has been negotiated by such parties and, accordingly, any principle of law that provides that any ambiguity in a contract or agreement shall be construed against the party that drafted such contract or agreement shall be disregarded and is expressly waived by all of the parties hereto. ARTICLE II General Provisions Section 2.1 Formation. One or more Persons has acted as the organizer or organizers of the Company by preparing, executing and filing with the Delaware Secretary of State the Certificate pursuant to the LLC Act, as such Certificate may have been or may be amended from time to time. The acts of such Persons are hereby authorized and ratified. The Manager and each Authorized Person are hereby designated as authorized persons, within the meaning of the LLC Act, to execute, deliver and file any amendments and/or restatements thereof and any other certificates necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business. The execution by the Manager or any Authorized Person of any of the foregoing certificates (and any amendments and/or restatements thereof) shall be sufficient. Section 2.2 Name. The Company shall conduct its activities under the name of “Pansend Life Sciences, LLC”. Section 2.3 Term. The Company’s existence shall be perpetual, unless sooner dissolved, wound up or terminated in accordance with Article VIII of this Agreement or the LLC Act. Section 2.4 Purpose; Powers. (a) The purpose of the Company shall be to conduct and engage in lawful business activities as defined from time to time by the Manager and any other lawful business activities related or incidental thereto and to exercise all powers enumerated in the LLC Act necessary to the conduct, promotion or attainment of the purposes set forth herein and for the protection and benefit of the Company. (b) The Company is authorized and empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to, or convenient for the furtherance and accomplishment of its purposes and for the protection and benefit of the Company, including all acts and things permitted under the LLC Act and this Agreement. Section 2.5 Place of Business; Registered Office and Registered Agent. The Company shall maintain an office and principal place of business as determined from time to time by the Manager, or such other place as the Manager shall designate. The Manager shall give the Members reasonable prior notice of any change of the Company’s principal place of business. The Company shall maintain a registered office c/o Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, or such other office as is approved by the Manager. The name and address of the registered agent of the Company for service of
17 5108218-8 process on the Company in the State of Delaware is Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, or such other agent and place in the State of Delaware as the Manager may from time to time determine. ARTICLE III Members Section 3.1 Name and Address. The name, address, current Capital Contributions and Profit Units of each of the Members as of the date of this Agreement are set forth on Schedule 3.1 hereto. Such Schedule shall be amended from time to time by the Manager to reflect the admission or withdrawal of a Member or the Transfer of Interests in accordance with the terms of this Agreement and other modifications to or changes in the information set forth therein. The Manager shall promptly distribute such amendments in writing to each of the Members. Section 3.2 Limitation of Liability. Subject to Section 3.3, each Member’s liability to the Company, to any other Member or to any other third party shall be limited to the maximum extent permitted by law. A Member shall not be personally liable for any indebtedness, liability or obligation of the Company, except that such Member shall remain liable for the payment of its Capital Contribution. Section 3.3 Liability of a Member to the Company. Except as otherwise expressly authorized by any provision of this Agreement, no Member is an agent of the Company solely by virtue of being a Member, and no Member has (or shall hold itself out as having) authority to sign, act for or bind the Company solely by virtue of being a Member, all of such powers being vested in the Manager and Authorized Persons (as set forth herein). Any Member that executes any document or instrument or otherwise takes any action to bind the Company in violation of this Section 3.3 shall be solely responsible for, and shall indemnify, defend and hold harmless the Company and each other Member against, any damage, loss, liability, or expense, including reasonable attorneys’ fees, as and when incurred, that the Company, or such other Member, as the case may be, may at any time become subject to or liable for by reason of the actions specified above. The provisions of this Section 3.3 shall survive the termination of this Agreement. Section 3.4 Action by Members Without a Meeting. Whenever the Members of the Company are required or permitted to take any action by vote, such action may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing (including in electronic format), setting forth the action so taken, shall be signed by the Members who hold voting interests having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all of the Members entitled to vote thereon were present and voted and shall be delivered to the administrative office of the Company, or to an employee or agent of the Company. Section 3.5 Certain Duties and Obligations of the Members. (a) The Members shall take all action which may be reasonably necessary or appropriate (i) for the formation and continuation of the Company as a limited liability company under the laws of the State of Delaware, (ii) for the development, maintenance, preservation and operation of the business of the Company in accordance with the provisions of this Agreement and applicable laws and
18 5108218-8 regulations, and (iii) to form or qualify the Company to conduct the business in which the Company is engaged under the laws of any other jurisdiction in which the Company does or seeks to do business and to continue in effect such formation or qualification, provided that no Member may form or qualify the Company in such jurisdiction without the prior written consent of the Manager. (b) No Member shall take any action so as to cause the Company to be classified for federal income tax purposes as an association taxable as a corporation and not as a partnership. (c) The provisions of this Agreement, to the extent that they restrict or reduce the duties and/or liabilities of a Member or the Manager otherwise existing at law or in equity (including under the LLC Act), shall replace the other duties and liabilities of such Member or Manager (as the case may be). Notwithstanding anything to the contrary contained in this Agreement and to the fullest extent permitted by the LLC Act, no Member or Manager, in his, her or its capacity as such, shall have any fiduciary duties to any other Member or other Person bound by this Agreement, and each Member hereby disclaims, eliminates, and shall not be liable under any circumstances for, any actual or claimed breach of any such duties of a Member, Manager or Authorized Person (or an agent of any of the foregoing). To the extent any individual serving as a Member, Manager or Authorized Person (or as an agent of any of the foregoing) has any liabilities or duties at law or in equity for service in such capacities, including fiduciary duties or any other standard of care, more expansive than those set forth in this Section 3.5, such liabilities and duties are hereby modified to the extent permitted under the LLC Act to those set forth in the second sentence of this Section 3.5(c). Wherever in this Agreement a Person is empowered to take or make a decision, direction, consent, vote, determination, election, action or approval, whether in such Person’s capacity as a Member, Manager or Authorized Person, such Person is entitled to consider, favor and further such interests and factors as it desires, including its own interests and the interests of its Affiliates, and has no duty or obligation to consider, favor or further any other interest of the Company, any Subsidiary or any other Member or Person. This Section 3.5(c) shall not eliminate the implied contractual covenant of good faith and fair dealing. Officers of the Company, in the performance of their duties as such, shall owe to the Company and the Members duties of loyalty and due care of the type owed by officers of a Delaware corporation to such corporation and its stockholders. To the fullest extent permitted by law, including Section 18-1101(e) of the LLC Act, no Member, Manager or Authorized Person shall be liable to the Company, any Member or any other Person bound by this Agreement for breach of fiduciary duties unless such Member, Manager or Authorized Person acted in bad faith or engaged in willful misconduct. (d) To the fullest extent permitted by applicable law from time to time in effect, the Company shall indemnify the Manager, each Officer (and each former Officer), each Member (and each former Member), and their respective representatives and agents (each, an “Indemnified Party”), hold each Indemnified Party harmless, and make advances for documented out-of-pocket expenses (including reasonable attorney’s fees and expenses) to such Indemnified Party with respect to any and all losses, claims, demands, liabilities, costs, damages, expenses (including, without limitation, reasonable attorneys’ fees and expenses) and causes of action imposed on, incurred by, asserted or threatened against or to which the Indemnified Party may otherwise become subject by reason of or in connection with any act or omission of the
19 5108218-8 Indemnified Party (or the Indemnified Party’s agents or employees), including any negligent act or omission, prior to, on or following the date hereof, for and on behalf of, or otherwise in connection with, the Company that the Indemnified Party reasonably believed was in furtherance of the interest of the Company, unless such act or omission constitutes fraud, gross negligence or intentional misconduct; provided, however, that the foregoing provisions shall not be construed to grant an Indemnified Party a right to be indemnified by the Company for actions brought by the Company for breach of, or otherwise to enforce the terms of, this Agreement or any employment or other agreement between the Company and such Person. The Indemnified Party shall, upon reasonable notice, furnish such information and proper assistance to the Company (at reasonable times that do not interfere with current employment and at the Company’s cost, as applicable) as the Company may reasonably require in connection with any such litigation or any litigation in which it or any of its subsidiaries or Affiliates is, or may become, a party, while such Indemnified Party is a party to this Agreement or relating to or arising out of a period during which such Indemnified Party had been a party to this Agreement. Section 3.6 Confidentiality. Unless otherwise determined by the Manager, each Member other than the Manager agrees (“Specified Party”) that it will not, whether during the period such person is a Member or after such party ceases to be a Member, in any fashion, form, or manner, either directly or indirectly, divulge, disclose, or communicate to any third party or makes use of, directly or indirectly, any information (including, without limitation, information provided pursuant to Section 7.5 below), material or data of any kind, nature, or description that relates to the business of the Company and/or HC2 or any of their direct or indirect Affiliates that has not been disclosed by the Company and/or HC2 or their direct or indirect Affiliates to the general public (“Confidential Information”), except (i) if required or requested to be disclosed by judicial, arbitral or governmental order or process or operation of law, in which event the employee shall as soon as reasonably practicable, to the extent legally permissible, notify the Company of the requirement of disclosure and comply with any protective order or other limitation on disclosure obtained by the Company; (ii) in performance of the Specified Party’s duties on behalf of the Company; or (iii) to those authorized by the Company to know or required to know in the course of their employment and/or carrying out their duties on behalf of the Company. Confidential Information includes, solely by way of illustration and not limitation, financial plans; data; forecasts; strategic analyses; the names of borrowers, customers, clients and investors (prior, existing or prospective) and information provided by or relating to such borrowers, customers, clients and investors; financial and credit analyses; trade secrets or the working of any process, technology, invention or methods carried on or used by the Company and/or the HC2 or its direct or indirect subsidiaries; the terms of loans or potential loans; personnel information; and legal affairs. ARTICLE IV Management and Operation of the Company Section 4.1 Appointment, Resignation and Removal of the Manager. (a) Notwithstanding anything herein to the contrary and subject to the proviso at the end of this sentence, the full right, power, authority and discretion to conduct the business and affairs of the Company, and to do all things necessary to carry on the business of the Company, shall be vested in a manager (who may, but need not, be a Member; the “Manager”), acting alone and without the consent of any Member; provided, however, that, notwithstanding the foregoing or anything
20 5108218-8 to the contrary contained in this Agreement, (i) the Officers shall have, on a non-exclusive basis, responsibility and authority for the day-to-day operations of the Company to the extent the Manager has delegated duties to the Officers in accordance with Section 4.5, (ii) each of the Members shall have the right to take any action that this Agreement expressly authorizes such Member to take; and (iii) the Manager may not, (A) without obtaining the prior written consent of DP and CEP, modify or amend this Agreement in any manner that would have a material and adverse impact on DP or CEP, or (B) without obtaining prior Member Supermajority Approval, take any Major Action. (b) HC2 is hereby appointed as the Manager, and may only be removed or replaced as specifically provided in this Section 4.1(b). The Manager may be removed only by HC2. The Manager may resign as Manager by giving not less than 30 days written notice to each Member, and such resignation shall take effect at such time as is specified in such notice of resignation. Upon the removal or resignation of the Manager, the successor Manager shall be selected by HC2. The resignation or removal of the former Manager shall not affect such Manager’s rights as a Member, if any, and shall not constitute a withdrawal of a Member. Section 4.2 General Responsibilities of the Manager. Subject to the terms and conditions of this Agreement, the Manager shall have the power, authority and obligation to (i) manage the business and affairs of the Company in accordance with this Agreement, (ii) perform all other acts customary or incidental to the management of the Company, (iii) implement all Major Actions that have received Member Supermajority Approval, and (iv) discharge the Company’s obligations. Subject to the terms and conditions of this Agreement, the Manager is, to the extent of its rights and powers set forth in this Agreement, a “manager” of the Company within the meaning of Section 18-101 of the LLC Act for the purpose of conducting the Company’s business and the actions of the Manager taken in accordance with such rights and powers shall bind the Company. Section 4.3 Budget. At the Manager’s discretion, the Manager may request one or more of the Officers to prepare an annual budget for the Company. The Officers shall prepare such budget in accordance with the Manager’s request, and such Budget shall be subject at all times to the approval of and revision by the Manager in its sole discretion (such a budget approved by the Manager referred to herein as a “Budget”). Section 4.4 Additional Specified Rights of the Members. (a) Notwithstanding any provision of this Agreement to the contrary, the Manager shall not take or cause the Company or any Subsidiary to take any Major Action, without in each instance first obtaining Member Supermajority Approval. (b) In addition to other rights reserved or granted to the Members in this Agreement, each of the Members, for as long as such Person is a Member, and its agents and representatives shall have the right, at any time and from time to time, upon reasonable notice (which shall not be deemed to require notice of more than three Business Days) and during normal business hours to review the books and records required to be maintained under Article VII, but to the extent such books and records are to be made available to such Member in accordance with Article VII.
21 5108218-8 Section 4.5 Officers and Authorized Persons. (a) The Manager may designate one or more individuals as officers or agents of the Company, who may but need not have titles, and shall exercise and perform such powers and duties as shall be assigned and delegated to them from time to time by the Manager. Subject to Section 4.5(c), any such officer or agent (an “Authorized Person”) may be removed only by the decision of the Manager at any time, with or without cause. Each Authorized Person shall hold office until his or her successor is elected and qualified, unless earlier removed in accordance with this Section 4.5. Any number of offices may be held by the same individual. (b) The Authorized Persons, to the extent of their powers set forth in this Agreement or otherwise vested in them by action of the Manager not inconsistent with this Agreement, are agents of the Company for the purpose of the Company’s business and the actions of the Authorized Persons taken in accordance with such powers shall bind the Company. (c) The Company hereby appoints the Persons set forth on Schedule 4.5(c) hereto as Authorized Persons with the officer titles set forth on such schedule (the Authorized Persons set forth on such schedule, as updated from time to time by the Manager, the “Officers”). The Company has entered into an employment agreement with such Officers (each, as may be amended from time to time, an “Employment Agreement”). The Officers shall have the non-exclusive right, power and authority, and the duty, to manage the day-to-day business and affairs of the Company in accordance with this Agreement, any delegation of authority by the Manager, and the terms of their respective Employment Agreements (to the extent an Employment Agreement is then in effect), and in each case in a manner consistent with the Budget. Each Officer shall be automatically removed as an Authorized Person of the Company immediately upon termination of his or her employment with the Employer. Each Officer, in its capacity as an Officer, accepts and agrees to perform its duties and undertake its responsibilities set forth in this Agreement and any reasonable delegation of authority by the Manager, and in all cases to act in good faith and in the best interests of the Company and (without limiting the generality of the foregoing) to exercise commercially reasonable efforts to carry out the intents and purposes if this Agreement. HC2 shall continuously maintain directors and officers insurance, with an amount of coverage and terms that are no less favorable for DP and CEP than the directors and officers insurance coverage in place for HC2 or any other subsidiaries of HC2, for the benefit of each DP and CEP, as current or former Officers and in respect of any current or former role at a Portfolio Company held by them in accordance with this Agreement. (d) The partnership representative (the “Partnership Representative”) shall act (i) with respect to a Transition Year, as the “tax matters partner” within the meaning of Code Section 6231(a)(7) (as in effect with respect to the Transition Year), (ii) with respect to a Non- Transition Year, as the “partnership representative” within the meaning of Code Section 6223 (as in effect with respect to the Non-Transition Year) and/or (iii) with respect to any Fiscal Year for purposes of a State Tax, in a capacity similar to any of the foregoing positions for purposes of the State Tax. No more than one Person at any time may serve as the Partnership Representative with respect to the same Tax in the same Fiscal Year. No Person shall be selected as the Partnership Representative with respect to a Fiscal Year, unless (i) for federal income Tax purposes in the case of a Transition Year, such Person is qualified to serve as the “tax matters partner” within the meaning of Code Section 6231(a)(7) (as in effect with respect to the Transition Year), (ii) for federal income Tax purposes in the case of a Non-Transition Year, such
22 5108218-8 Person is qualified to serve as the “partnership representative” within the meaning of Code Section 6223 (as in effect with respect to the Non-Transition Year) and (iii) in the case of any State Tax for any Fiscal Year, such Person is qualified to serve in the requisite capacity under the State Tax. During any time that a Partnership Representative is not also a Manager, the Partnership Representative shall act at all times only under the supervision of and at the direction of the Manager and, except as otherwise provided in this Agreement, the Partnership Representative shall not and shall not have the authority to bind the Company, any Manager, any Member or any Officer in any Proceeding. HC2 shall be the Partnership Representative. The Company shall pay for all expenses incurred by HC2 as the Partnership Representative. ARTICLE V Profit Units and Capital Contributions Section 5.1 Profit Units of the Company. Unless otherwise determined by the Manager, (x) Profit Units will not be certificated or issued to the Members, but will be recorded on the Company’s books and records and (y) Profit Units and Members shall have no voting, consent or approval rights, except to the extent set forth in this Agreement or required by non- waivable provisions of the LLC Act; it being understood that the management of the business affairs of the Company shall be vested in whole with the Manager in accordance with this Agreement. When a vote on any matter is required by the Members, each Member shall be entitled to one vote for each Class B Profit Unit held by such Member. The Profit Units held by each of the Members are set forth on Schedule 3.1. All Profit Units granted on February 25, 2014 shall be subject to vesting, cancellation and redemption as follows (with vesting for any future grants of Profit Units to be governed by the applicable grant document): (a) All Profit Units held by HC2 vested immediately as of February 25, 2014. (b) All Profit Units held by each of DP and CEP were fully vested as of February 25, 2019. (c) Upon a Cause Event or a Resignation Event with respect to DP or CEP, (i) the Company shall have the right and option, exercisable within six months of such Cause Event or Resignation Event, to redeem all of such Member’s Profit Units for a redemption price equal to the Liquidation Value of Profit Units (with such redemption to occur within a commercially reasonable time (and in no event later than 90 days) following finalization of price), and (ii) if all of a Member’s Profit Units are redeemed, the Person shall cease to be a Member. (d) Upon the death or Disability of DP or CEP, (i) the Company shall have the right and option, exercisable within six months of such death or Disability, to redeem all of such Member’s Profit Units for a redemption price equal to the Fair Market Value of such Profit Units (with such redemption to occur within a commercially reasonable time (and in no event later than 90 days) following finalization of price), and (ii) if all of a Member’s Profit Units are redeemed, the Person shall cease to be a Member. (e) The redemption price of any Profit Units redeemed under Section 5.1(c) or (d) shall be payable by the Company from Available Cash, to the extent thereof, that would otherwise be distributed pursuant to Section 6.4(b) or, at HC2’s option, HC2 shall have the right
23 5108218-8 and option to make an Expense Account Contribution to provide the Company with sufficient Available Cash necessary to consummate such redemption. (f) At the time of original grant, the Profit Units held by each of DP and CEP were intended to constitute the grant of a “partnership profits interest” for services provided or to be provided to or for the benefit of the Company, as contemplated by Revenue Procedure 93-27 as clarified by Revenue Procedure 2001-43 and such Profit Units shall be treated consistent therewith for federal income tax purposes. (g) To the extent the Manager from time to time appoints additional Officers in accordance with Section 4.5, and such additional Officers do not hold any Profit Units, then a majority of the Officers serving prior to such appointment may authorize the issuance and granting of additional Profit Units to such additional Officers and determine the number of Profit Units to be granted to each such additional Officer, provided that (i) such issuance (together with the admission of such individuals as additional Members) shall be subject in all events to the approval, not to be unreasonably withheld, of the Manager, (ii) no more than five (5) additional Profit Units in total (with respect to all such additional Officers) may be authorized by the Officers pursuant to this Section 5.1(g), and (iii) such Profit Units will be subject to the provisions of this Agreement with respect to Profit Units held by DP and CEP. Section 5.2 Capital Contributions. (a) The Members’ current Capital Contributions as of the date hereof are set forth on Schedule 3.1. Subject to Section 4.4(a), HC2 may make additional Capital Contributions to the Company from time to time as it deems necessary or desirable in its sole discretion. (b) In addition, to the extent HC2 or any of its Affiliates incurs any costs, losses, expenses, damages or liabilities arising out of its services to, or on behalf of, the Company (in HC2’s capacity as Manager or otherwise), HC2 shall be deemed to have made a Capital Contribution in the amount of such expenses at the time such costs, losses (for clarity, not including investment losses), expenses, damages, or liabilities are incurred. Except as provided herein, no Member may make any Capital Contribution unless such Capital Contribution is approved by the Manager. The Manager may permit certain but not all Members to make a Capital Contribution. (c) No Member shall be required to make a Capital Contribution except as expressly provided in this Agreement. Subject to Section 4.4(a), the Company may issue additional Interests to Members or third parties in accordance with the terms of this Agreement in exchange for Capital Contributions or other consideration, in such number, at such price and in such classes or series and upon such other terms as are approved by the Manager. Section 5.3 Priority and Return of Capital. No Member shall have priority over any other Member, whether for the return of a Capital Contribution or for Net Profits, Net Losses or a Distribution except as provided herein; provided, however, that this Section 5.3 shall not apply to any loan, guaranty, endorsement, collateral or other indebtedness (as distinguished from a Capital Contribution) given, made or incurred by a Member to the Company or any creditor of the Company or to any indebtedness of the Company to a Member in connection with any business transaction.
24 5108218-8 Section 5.4 Withdrawal or Reduction of Capital Contributions. Except as otherwise expressly provided in this Agreement, no Member shall be entitled to demand or receive the return of its Capital Contributions. Section 5.5 Capital Accounts. A Capital Account shall be maintained for each Member and each such account shall be kept in accordance with the provisions of Section 1.704- 1(b)(2)(iv) of the Regulations. Without limiting the foregoing, each Member’s Capital Account shall be (a) increased by the net value of each Capital Contribution made by such Member, allocations to such Member of the Net Profits and any other allocations to such Member of income pursuant to Section 6.2, and (b) decreased by the net value of each Distribution made to such Member by the Company, allocations to such Member of Net Losses and other allocations to such Member pursuant to Section 6.2. The Manager shall restate Capital Accounts upon any event for which such restatement is permitted pursuant to the Regulations promulgated under Code Section 704(b). Section 5.6 Transfers. Upon a permitted sale or other transfer of an Interest in the Company, the Capital Account of the Member transferring its Interest shall become the Capital Account of the Person to whom such Interest is sold or transferred in accordance with Section 1.704-1(b)(2)(iv) of the Regulations. Section 5.7 Deficit Capital Account. Notwithstanding anything to the contrary contained herein, no Member shall have any liability to restore all or any portion of a deficit balance in a Capital Account. A deficit balance in a Member’s Capital Account is not an asset of the Company. Section 5.8 Modifications. The manner in which Capital Accounts are to be maintained pursuant to this Agreement is intended to comply with the requirements of Section 704(b) of the Code. If the Manager determines in writing that the manner in which Capital Accounts are to be maintained pursuant to this Agreement should be modified to comply with Section 704(b) of the Code, then the method in which Capital Accounts are maintained shall be so modified; provided, however, that any change in the manner of maintaining Capital Accounts shall not materially alter the economic agreement between or among the Members. ARTICLE VI Allocations; Distributions Section 6.1 Allocations of Profits and Losses. For purposes of maintaining the Capital Accounts of the Company, Net Profits or Net Losses (or any items of Net Profits or Net Losses) for any tax year (or portion thereof) shall be allocated among the Members, to the extent possible, in such a manner as to cause the balance in the Capital Account of each Member, as adjusted to reflect the allocations provided hereunder and the allocations under Section 6.2, to be equal to (a) the aggregate amount of cash such Member would receive if the Company were liquidated and each asset of the Company were sold for an amount of cash equal to its respective Book Basis, all debt obligations were satisfied in accordance with their respective terms (limited with respect to each Company Nonrecourse Debt or Member Nonrecourse Debt to the Book Basis of the asset(s) securing such debt) and the remaining cash were distributed as provided in Section 6.4(b), minus (b) the sum of (i) the amount, if any, which each Member is or would be
25 5108218-8 obligated to contribute to capital in connection with a liquidation of the Company or otherwise in accordance with the Agreement or applicable law, (ii) such Member’s share of Company Minimum Gain, and (iii) such Member’s share of Member Nonrecourse Debt Minimum Gain. Section 6.2 Required Special Allocations. Notwithstanding the terms of Section 6.1: (a) Any Member Nonrecourse Deductions shall be specially allocated to the Member(s) that bear(s) the economic risk of loss with respect to the Member Nonrecourse Debt to which the Member Nonrecourse Deductions are attributable in accordance with Section 1.704- 2(i)(1) of the Regulations. Nonrecourse deductions shall be allocated among the Members in proportion to their economic interests. (b) Appropriate allocations of income, gain, loss or deduction shall be made to the extent required to comply with the “qualified income offset” provisions of Section 1.704- 1(b)(2)(ii)(d) of the Regulations, the Company “minimum gain chargeback” provisions of Section 1.704-2(f) of the Regulations, and the Member “minimum gain chargeback” provisions of Section 1.704-2(i)(4) of the Regulations, all issued pursuant to Section 704(b) of the Code. To the extent permitted by such Regulations, the allocations in such year and subsequent years shall be further adjusted so that the cumulative effect of all the allocations shall be the same as if all such allocations were made pursuant to Section 6.1 hereof without regard to Section 6.2(a) and this Section 6.2(b). (c) In the event any Member has a deficit Capital Account balance at the end of a Fiscal Year that is in excess of the sum of (i) the amount (if any) such Member is obligated to restore pursuant to the Agreement, and (ii) the amount (if any) such member is deemed to be obligated to restore pursuant to the Regulations, taking into account all other allocations and adjustments under this Agreement (made as if this Section 6.2(c) were not in this Agreement), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible. (d) Any Company Nonrecourse Deductions for a Fiscal Year shall be specially allocated to the Members in accordance with their Profits Percentages. Solely for purposes of determining a Member’s proportionate share of any excess nonrecourse liability of the Company, as described in Regulation § 1.752-3(a)(3), the Members’ interests in Company profits shall be deemed to coincide with their respective Profits Percentages. (e) Net Profits, Net Losses, income, gain, deductions and credits allocated to a Company interest transferred, issued, or reissued during a Fiscal Year shall be allocated to the Persons who were the holders of such Company interest during such Fiscal Year, using any method selected by the Manager to the extent permitted by the Code. Section 6.3 Tax Allocations; Code Section 704(c). (a) Except as otherwise provided for in this Section 6.3, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Members in the same manner as the correlative item of book income, gain, loss or deduction is allocated pursuant to Sections 6.1 and 6.2. In addition, in accordance with Code Section 704(c) and the Regulations thereunder, items of income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall,
26 5108218-8 solely for U.S. federal income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted tax basis of such property at the time of contribution to the Company for U.S. federal income tax purposes and its initial Book Basis at the time of contribution using an allocation method in accordance with applicable Regulations determined by the Partnership Representative. (b) In the event the Book Basis of any Company Asset is adjusted in accordance with the definition of Book Basis hereof, subsequent allocations of items of income, gain, loss, and deductions with respect to such asset shall take account of any variation between the adjusted tax basis of such asset for U.S. federal income tax purposes and its adjusted Book Basis in a manner consistent with the principles of Code Section 704(c) and the applicable Regulations determined by the Partnership Representative. Section 6.4 Distributions. (a) Promptly following any Distribution Event with respect to a Portfolio Company, the Manager shall distribute or ensure the distribution of all Available Cash resulting or derived from or attributable to such Portfolio Company in accordance with this Section 6.4. At such times as the Manager makes or authorizes any Distributions, the Manager shall provide the Members with a statement setting forth in reasonable detail the manner in which the Distributions were calculated and determined. Notwithstanding any provisions to the contrary in this Agreement, the Company shall not make a Distribution if such Distribution would violate the LLC Act. (b) Distributions of Available Cash resulting or derived from or attributable to a Portfolio Company shall, subject to Sections 5.1(e), 6.6 and 8.3, be applied and distributed to the Members as follows: (i) First, to the Members who made Investment Contributions with respect to such Portfolio Company, pro rata in accordance with their respective Investment Accounts with respect to such Portfolio Company, until each such Investment Account has been reduced to zero; (ii) Second, to the Members in respect of the Preferred Return with respect to such Portfolio Company; (iii) Third, (A) to HC2, (1) first, until its Expense Account has been reduced to zero, and (2) thereafter, in respect of the Expense Account Preferred Return, and (B) to each of the Members, (1) first, until each Member’s respective Reserve Account has been reduced to zero, and (2) thereafter, in respect of each such Member’s Reserve Account Preferred Return; (iv) Fourth, in the case that any Loss Event has occurred with respect to any Portfolio Company, to the Members who made Investment Contributions with respect to each such Portfolio Company until, taking into account all other prior distributions made to such Members in respect of such Portfolio Company and all other prior distributions pursuant to this Section 6.4(b)(iv), such Members have recovered an amount equal to all realized losses, if any, to the Investment Account and Preferred Return in respect of such Portfolio Company; provided that, with respect to any Portfolio Company, in the case of any Loss Event described in clause
27 5108218-8 (v) of the definition thereof, the “realized loss” shall be deemed to equal the difference between (A) the sum of all Investment Accounts and Preferred Return of all Members at the time of the Distribution with respect to such Portfolio Company and (B) the fair market value of such Portfolio Company at the time of the Distribution as determined in accordance with the definition of Loss Event; (v) Fifth, to an escrow account of the Company for the sole purpose of funding all or any portion of the Full Year Fund to the extent not already funded; and (vi) Thereafter, (A) in the case of a Distribution of Available Cash resulting from or derived from or attributable to BeneVir Biopharm, Inc. (“BeneVir”), as determined by the Manager, to the Members, pro rata in accordance with their respective Class A Profit Units, and (B) in all other cases, Distributions shall be made in the following priority: (1) until the aggregate amount of Distributions made under Section 6.4(b) in respect of all Portfolio Companies (excluding BeneVir) equals $188,646,629, to the Members, pro rata in accordance with their respective Class A Profit Units, (2) then, 75% to HC2 and 25% to CEP, until the aggregate amount of Distributions made to CEP in respect to all Portfolio Companies other than BeneVir equals the aggregate amount of Distributions made to DP in respect to all Portfolio Companies other than BeneVir; and (3) then, to the Members, pro rata in accordance with their Class B Profit Units. The Members acknowledge and agree that the amount set forth in Section 6.4(b)(vi)(1) reflects the agreed upon fair market value of the Company as of the date of this Agreement (excluding BeneVir), which has been determined based on third party appraisals of the values of the Portfolio Companies (excluding BeneVir). (c) Any reference in this Agreement to a Distribution pursuant to this Section 6.4 or any subsection thereof shall, as the context requires, include a corresponding Distribution pursuant to Section 8.3(b). Section 6.5 Other Distribution Rules. All distributions of property in kind shall be made as Available Cash under and in accordance with Section 6.4 and/or Section 8.3, as applicable. Property distributed in kind shall be unencumbered and, for purposes of determining Available Cash, shall be treated as cash in an amount equal to its In-Kind Value. Except as explicitly provided under this Agreement or as otherwise required under the LLC Act, no Member shall be entitled to distributions of property other than cash. Section 6.6 Tax Distributions. (a) In the event that the cumulative amount of Distributions made to the Members pursuant to Section 6.4 hereof for any Fiscal Year of the Company is less than the Members’ Estimated Tax Liability at any time during such Fiscal Year, then the Manager shall, to the extent of the cash then available to the Company (after taking into account reasonable
28 5108218-8 reserves for anticipated future expenditures), make a Distribution (a “Tax Distribution”) to the Members not later than the date specified below, in an amount sufficient to cause the cumulative amount of Distributions made to the Members pursuant to Section 6.4 and this Section 6.6 with respect to such Fiscal Year to equal the following amounts as of the end of the calendar month preceding each of the following specified dates: (1) prior to the tenth day of April in an amount equal to 1/4 of the Members’ Estimated Tax Liability as of March 31; (2) prior to the tenth day of June in an amount equal to 1/2 of the Members’ Estimated Tax Liability as of May 31; (3) prior to the tenth day of September in an amount equal to 3/4 of the Members’ Estimated Tax Liability as of August 31; and (4) prior to the tenth day of January of the following Fiscal Year of the Company in an amount equal to the Members’ Estimated Tax Liability as of December 31 of the immediately preceding Fiscal Year of the Company. For purposes of this Section 6.6, the “Members’ Estimated Tax Liability” means the product of (i) the taxable income of the Company, determined without regard to any income, gain, loss or deduction attributable any “built-in gain” within the meaning of (and the elimination of any book-tax disparity related thereto pursuant to) Code section 704(c), for the then current Fiscal Year of the Company (except that the January distribution shall be for the prior Fiscal Year), as projected from time to time reasonably and in good faith by the Manager, multiplied by (ii) the Tax Distribution Rate, which amount shall be distributed among the Members pro rata in proportion to their respective estimated approximate allocable shares of such taxable income for such year, as so projected; provided, however, that the Tax Distribution payable to the Members for a Fiscal Year of the Company (or portion thereof) shall be reduced to reflect net losses and deductions (i.e., the excess of losses and deductions over income and gains) and credits allocated by the Company to the Members generally for U.S. federal income tax purposes in any and all earlier periods (except to the extent previously applied to reduce a Tax Distribution or to the extent the carryforward period for such losses or credits has expired). For purposes of this Section 6.6, the “Tax Distribution Rate” shall initially mean the approximate highest current marginal combined U.S. federal, state or local income tax rate applicable to an individual resident in New York, New York, taking into account the character of the income (such as ordinary income or capital gains). All amounts distributed to Members pursuant to this Section 6.5 shall be advances of amounts otherwise distributable to Members under the provisions of Article VI hereof, including a corresponding Distribution pursuant to Section 8.3(b). Notwithstanding the foregoing, no Tax Distributions shall be made in connection with the liquidation of the Company or with respect to any proceeds realized by the Company upon any transaction (other than in the ordinary course of business of the Company) at the time of or in connection with such liquidation. (b) Any Distributions under Section 6.6(a) to and any Underpayment Amount required by law to be withheld or paid by the Company with respect to or on behalf of or that is otherwise allocable to a Member shall be treated as an advance and offset against and shall reduce any amount otherwise distributable to a Member under Section 6.4(b), including a corresponding Distribution pursuant to Section 8.3(b). Promptly upon demand from the Company, a Member shall pay to the Company an amount equal to any Underpayment Amount (to the extent not previously offset against any Distributions under Section 6.4(b) or otherwise reimbursed to the Company by the Member) that the Company has withheld or paid with respect to such Member. Section 6.7 [Intentionally Omitted].
29 5108218-8 Section 6.8 Offset. The Company may offset all amounts owing to the Company by a Member against any other payments, including Distributions, to be made to such Member. Section 6.9 Interest on and Return of Capital Contributions. No Member shall be entitled to interest on its Capital Contribution or to a return of its Capital Contribution, except as specifically set forth in this Agreement. ARTICLE VII Taxes; Books and Records; Information Section 7.1 Tax Filings, Elections and Cooperation. (a) The Manager shall, at the expense of the Company, cause to be prepared and filed all necessary federal, state and local income Tax returns for the Company (and each Subsidiary), which Tax returns shall be prepared, except as otherwise provided herein, in such manner (including, but not limited to, the making of any election or the taking of any position) as the Manager may determine in good faith to be in the best interests of the Members. Unless otherwise required by applicable law, the Company shall use the Fiscal Year as the Tax period on all income Tax returns. (b) The Company shall (i) use reasonable efforts to cause to be delivered within ninety (90) days after the end of each Fiscal Year (but in no event later than September 15 of the Fiscal Year immediately following each such Fiscal Year), a Schedule K-1 with respect to each such Fiscal Year to each Person that was a Member at any time during each such Fiscal Year; and (ii) make available to each Member such other information as may be necessary for the preparation of any Tax return for or including such Member or the making of any estimated Tax payment for on behalf of such Member (or if such Member is a flow-through entity for federal income Tax purposes, its direct or indirect owners). (c) With respect to each Non-Transition Year, to the maximum extent permitted by the Code, the Regulations and other applicable law, the Company shall make or cause to be made and shall maintain or cause to be maintained the following elections: (i) in the case of any Non-Transition Year with respect to which the Company is eligible to make an election under Code Section 6221(b), an election to apply Code Section 6221(b), and (ii) in the case of any Non-Transition Year with respect to which the Company fails or is ineligible to make an election under Code Section 6221(b), an election to apply Code Section 6226. (d) With respect to each Non-Transition Year, the Company shall take and shall cause to be taken any and all actions (including, but not limited to, the providing of all notices required under Code Section 6221(b)(1)(E) and all statements required under Code Section 6226(a)(2)) necessary to allow the making and maintenance of any election in accordance with Section 7.1(c). As determined by the Manager, the Company may apply any reasonable method for the purpose of determining (i) a Member’s share of any adjustment described in Code Section 6226(a)(2) (including, but not limited to, for the purpose of providing
30 5108218-8 any statement described in Code Section 6226(a)(2)) or for any other Tax purpose or (ii) the extent to which any Underpayment Amount has been withheld or paid by the Company with respect to or on behalf of or is otherwise attributable to a Member. Any determination under the preceding sentence shall be final and binding on the Company and all Members and neither the Company nor any Member shall take any position for any purpose that is inconsistent with such determination. (e) To the extent permitted by a State Tax, the Company shall take such actions as may be reasonably necessary to reduce, prevent or otherwise mitigate the Company’s liability for any Underpayment Amount under the State Tax, including, but not limited to, making elections similar to and in the same order of preference as the elections described in each of Section 7.1(c) and Section 7.1(d). (f) As determined by the Manager in good faith, the Company may elect in a timely manner pursuant to Code Section 754 and pursuant to any corresponding provisions of applicable state and local Tax laws to adjust the bases of the assets of the Company pursuant to Code Sections 734 and 743 and pursuant to any corresponding provisions of applicable state and local Tax laws. (g) Neither the Company, any Manager, any Officer, nor any Member shall take any action (including, but not limited to, the filing of any Tax return or the making of any election on or in connection with any Tax return) or permit or cause any action to be taken by or on behalf of the Company that would cause or otherwise result in: (i) the classification of the Company or any of its Affiliates as an association taxable as a corporation for any income Tax purpose, (ii) the exclusion of the Company from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of other applicable Tax law, (iii) the taking by any Member of any position for any purpose that is inconsistent with the treatment of such position on any U.S. federal income Tax return of the Company or any of its Affiliates, (iv) in the case of a Transition Year, the application of all or any portion of any of Code Sections 6221 through 6241, as in effect with respect to any Non- Transition Year, and (v) in the case of a Non-Transition Year, the amendment, revocation, lapse or termination of any election under Code Section 6221(b) or Code Section 6226, each as in effect with respect to the Non-Transition Year. (h) When and as requested by the Company, each Member, at the Company’s own expense, shall preserve and furnish to the Company all documents and information (including, but not limited to, any change in mailing address or other contact information, any change in residency for any Tax purpose, and any social security, employer identification or other taxpayer identification number), and shall take such other action (including, but not limited
31 5108218-8 to, a Member’s filing of one or more amended Tax returns) as may be necessary to enable the Company or the Manager (or any Person on behalf of the Company or the Manager) to (i) prepare, amend and/or file any Tax return (including, but not limited to, any making, amendment, rescission or revocation of any election on or with respect to any Tax return), (ii) eliminate, settle, limit, reduce, modify or otherwise determine any liability for any Underpayment Amount (including, but not limited to, any “imputed underpayment amount” under Code Section 6225(c)), (iii) register to do business, collect Tax, or comply with any similar prerequisite to doing business or conducting any other activity in any jurisdiction, or (iv) pursue, defend, settle or otherwise respond to any Proceeding. In the case of any Non-Transition Year with respect to which an election under Code Section 6226 (or under any other similar or corresponding provisions of any State Tax) is or will be in effect, each Member shall comply with all provisions of Code Section 6226 (and any other similar or corresponding provisions of any State Tax), including, but not limited to, taking such Member’s share of any adjustment under Code Section 6226 into account on any separate Tax return of such Member, the amendment of all Tax returns affected by such adjustment, and the payment of any increased or additional Tax resulting therefrom. (i) Without the consent of the Manager, which consent shall be at the reasonable discretion of the Manager, no Member shall take any action (including, but not limited to, converting from an entity described in Code Section 6221(b)(1)(C) to an entity not described in Code Section 6221(b)(1)(C) and any gift, bequest or other Transfer) that, either alone or in conjunction with any other action or other circumstance, can or will revoke, amend, terminate or otherwise adversely affect any election under Code Section 6221(b) or the Company’s present or future ability or eligibility to make any election under Code Section 6221(b). Section 7.2 Partnership Representative. (a) This Section 7.2 shall only apply with respect to Non-Transition Years and to any Tax Proceedings for any Non-Transition Year. (b) The Partnership Representative shall serve as the “partnership representative” within the meaning of Code Section 6223 and, if and to the extent permitted by an applicable State Tax, as the “partnership representative” or “tax matters partner” or in any other similar capacity for purposes of such State Tax. If the Partnership Representative for federal income Tax purposes cannot also serve in the capacity of a “partnership representative” or “tax matters partner” or in any other similar capacity for purposes of a State Tax, the Partnership Representative designated by the Manager for purposes of such State Tax shall act in such capacity for purposes of such State Tax (and only for purposes of such State Tax). (c) Within ten (10) days after the receipt of any notice from the Internal Revenue Service (or other Tax authority) relating to any Tax Proceeding, the Company shall mail or cause to be mailed a copy of such notice to each Member. Thereafter, the Company shall deliver or cause to be delivered to each Member in writing (or in such other form as may be necessary to preserve any applicable attorney-client privilege) a report setting forth in reasonable detail the status of the Tax Proceeding, no later than ten (10) days after the close of each calendar quarter or an occurrence of any significant change, progress or other development in the Tax
32 5108218-8 Proceeding (including, but not limited to, copies of all material written communications relating to the Tax Proceeding that the Company, any Manager or any Officer may send or receive). (d) Neither the Company, any Manager nor any Officer, either directly or through any of their respective Affiliates, shall take any material direct or indirect action or make any material decision with respect to any Tax Proceeding, any of Code Sections 6221 through 6241 (as in effect with respect to any Non-Transition Year) or any of Code Sections 6221 through 6234 (as in effect with respect to any Transition Year), unless (i) the Company has first given the Members written notice of the contemplated action or decision at least ten (10) Business Days prior to the taking such action or (ii) the Manager determines in good faith that obtaining the written consent of the Members in accordance with the immediately preceding clause would result, in the interim required to obtain such consent, in a default judicial or administrative judgment against the Company, any Manager, any Member or any of their respective Affiliates. Neither the Company, any Manager nor any Officer shall bind any Member to a settlement agreement with respect to any Tax without first obtaining the written consent of such Member. (e) To the extent permitted by a State Tax, the Company shall take such actions as may be reasonably necessary to reduce, prevent or otherwise mitigate the Company’s liability for any Underpayment Amount under the State Tax, including, but not limited to, making elections similar to and in the same order of preference as the elections described in each of Section 7.1(c) and Section 7.1(d). Section 7.3 Tax Matters Partner for Transition Years. (a) This Section 7.3 shall apply only with respect to Transition Years and to any Tax Proceedings for any Transition Year. All Code sections referenced in and other applicable Tax law otherwise relating to implementation of this Section 7.3 shall be applied as in effect with respect to a Transition Year. (b) The Partnership Representative shall serve as the “tax matters partner” within the meaning of Code Section 6231(a)(7) and, if and to the extent permitted by an applicable State Tax, as the “partnership representative” or “tax matters partner” or in any other similar capacity for purposes of such State Tax. If the Partnership Representative for federal income Tax purposes cannot also serve in the capacity of a “partnership representative” or “tax matters partner” or in any other similar capacity for purposes of a State Tax, the Partnership Representative designated by the Manager for purposes of such State Tax shall act in such capacity for purposes of such State Tax (and only for purposes of such State Tax). (c) Within ten (10) days after the receipt of any notice from the Internal Revenue Service (or other Tax authority) relating to any Tax Proceeding for a Transition Year, the Company shall mail or cause to be mailed a copy of such notice to each Member and shall take such action as may be necessary to cause each Member to become a “notice partner” within the meaning of Code Section 6231(a)(8). Thereafter, the Company shall deliver or cause to be delivered to each Member in writing (or in such other form as may be necessary to preserve any applicable attorney-client privilege) a report setting forth in reasonable detail the status of the Tax Proceeding, no later than ten (10) days after the close of each calendar quarter or an
33 5108218-8 occurrence of any significant change, progress or other development in the Tax Proceeding (including, but not limited to, copies of all material written communications relating to the Tax Proceeding that the Company, any Manager or any Officer may send or receive). (d) Neither the Company, any Manager nor any Officer, either directly or through any of their respective Affiliates, shall take any material direct or indirect action or make any material decision with respect to any Tax Proceeding, any of Code Sections 6221 through 6241 (as in effect with respect to any Non-Transition Year) or any of Code Sections 6221 through 6234 (as in effect with respect to any Transition Year), unless (i) the Company has first given the Members written notice of the contemplated action or decision at least ten (10) Business Days prior to the taking such action or (ii) the Manager determines in good faith that obtaining the written consent of the Members in accordance with the immediately preceding clause would result, in the interim required to obtain such consent, in a default judicial or administrative judgment against the Company, any Manager, any Member or any of their respective Affiliates. Neither the Company, any Manager nor any Officer shall bind any Member to a settlement agreement with respect to any Tax without first obtaining the written consent of such Member. Section 7.4 Survival. If a Person, in whole or in part, makes a Transfer of an Interest or otherwise ceases to be a Member (including, but not limited to, as a result of any redemption under Sections 5.1(c) or (d) and 9.3, any Permitted Transfer or other Transfer permitted under Section 9.1 or any abandonment of an Interest), then such Person shall remain obligated and subject to the terms and conditions of each of Section 6.6(b) and Sections 7.1 through 7.4, along with any other provisions of this Agreement necessary or ancillary to implementation of any of Section 6.6(b) and Sections 7.1 through 7.4, in the same manner as if such Transfer or cessation never occurred. Section 7.5 General Accounting Matters. On behalf of the Company, the Manager shall keep or cause to be kept books and records pertaining to the Company’s (and each Subsidiary’s) business showing all of its assets and liabilities, receipts and disbursements and all transactions entered into by the Company (or such Subsidiary). Such books and records, and all supporting data, of the Company (and each Subsidiary) shall be kept at the office of the Company and the Members and their representatives shall at all reasonable times have free access thereto for the purpose of inspecting or copying the same; provided that such inspection does not unreasonably interfere with the day-to-day operations of the Company and is for a purpose reasonably related to the Member’s Interest in the Company, is at reasonable times on reasonable notice, and the Manager may in its reasonable good faith judgment, if reasonably necessary in the best interest of all Members, refuse to provide access to information to the extent necessary to comply with any law or contract, to preserve legal privilege and/or safeguard commercially sensitive information. The Company’s (and each Subsidiary’s) books of account shall be kept on an accrual method of accounting and otherwise in accordance with the Required Accounting Standards. The quarterly financial statements of the Company shall be reviewed and the year end financial statements of the Company shall be audited, at the Company’s cost, by an independent third party accounting firm designated by the Manager. Without limiting the foregoing or the information available to HC2 under Section 7.6, the Company shall, at the Company’s cost, deliver the following financial information to each Member (i) no later than the dates set forth below, and (ii) in such form as reasonably requested by such Member to comply
34 5108218-8 with its or its Affiliates’ reporting obligations, which shall mean, at a minimum, that the financial information shall either be presented in accordance with the Required Accounting Standards or in a manner to permit such Member to convert such information into the Required Accounting Standards without incurring material cost or delay: (a) Monthly, unaudited management reports, within 14 days after the end of each month; (b) Quarterly unaudited consolidated financial statements of the Company and a management’s discussion and analysis of such financial statements, within 14 days after the end of each fiscal quarter; and (c) Annual consolidated financial statements of the Company and a management’s discussion and analysis of such financial statements, accompanied by the audit report of the auditor within 60 days after the end of each Fiscal Year; provided, however, that in the event that HC2 or its Affiliate reports financial results and financial position of the Company as a consolidated subsidiary, then the Company shall, at the Company’s cost, use commercially reasonable efforts to provide the foregoing financial information and access to HC2’s independent outside auditor on such shorter time frames as HC2 may reasonably specify taking into account HC2 and its Affiliates’ applicable periodic reporting obligations under the Exchange Act or otherwise reasonably requested. Section 7.6 Information. A Member may inspect during ordinary business hours and at the principal place of business of the Company the Certificate, this Agreement and any Tax returns of the Company for the immediately preceding three (3) Fiscal Years; provided that such inspection does not unreasonably interfere with the day-to-day operations of the Company and is for a purpose reasonably related to the Member’s Interest in the Company, is at reasonable times on reasonable notice, and the Manager may in its reasonable good faith judgment, if reasonably necessary in the best interest of all Members, refuse to provide access to information to the extent required to comply with any law or contract, to preserve legal privilege and/or safeguard commercially sensitive information. At the request of HC2 (and at the Company’s sole cost), the Manager will furnish promptly to HC2 and/or its representatives all information concerning the business and properties of the Company, including financial information, as HC2 and/or its representatives may reasonably request to comply with HC2 or its Affiliates’ disclosure obligations, including disclosure pursuant to any applicable securities laws (including HC2’s or its Affiliates’ reporting obligations under Sections 13(a) and 15(d) of the Exchange Act), any offering of such Person’s securities (including customary assistance in connection with underwritten offerings). At the request of any Member, the Manager will furnish promptly to such Member any disclosure required or requested by any Governmental Entity or in response to a valid request for information in a subpoena, court order or as otherwise required by applicable law. Section 7.7 Compliance. (a) The Company shall take all actions at the Company’s cost that HC2 may deem necessary or appropriate to enable the Company to satisfy its financial reporting obligations, including the applicable obligations under Sections 302, 404 and 906 of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the Securities and Exchange Commission (the “SEC”) pursuant thereto (collectively, as amended from time to
35 5108218-8 time, the “SOA”) and the other requirements of the SOA with respect to the Company, including establishing and maintaining adequate disclosure controls and procedures and internal controls over financial reporting, as such terms are defined in the SOA. (b) At the request of HC2, the Company shall, at the Company’s cost, provide HC2 with one or more certificates containing reasonable representations and warranties regarding the information provided to HC2 pursuant to this Agreement, including (a) that financial information was, as of the date presented, prepared in accordance with the Required Accounting Standards and applied on a consistent basis throughout the periods presented, and fairly presented in all material respects the financial position and consolidated results of the Company as of the date presented, (b) that all other information did not, as of the date provided, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading and (c) that the Company is in compliance with the requirements of Sections 302, 404 and 906 of the SOA. Section 7.8 Bank Accounts. All receipts, funds and income of the Company shall be deposited in the name of the Company in such banks or other financial institutions as are determined by the Manager. Withdrawals from said banks or other financial institutions (including the writing of checks or making wire transfers therefrom) shall be made only on signatures of Authorized Persons or other such person or persons as shall be authorized by the Manager. Section 7.9 Accounting Period. The accounting period of the Company shall be the Fiscal Year. ARTICLE VIII Dissolution Section 8.1 Dissolution. The Company shall be dissolved and subsequently terminated upon the occurrence, and only upon the occurrence, of the first of the following events: (a) decision of the Manager to dissolve and subsequently terminate the Company; or (b) the entry of a decree of judicial dissolution under the LLC Act. Section 8.2 Winding-up. When the Company is dissolved, the business and property of the Company shall be wound up and liquidated by the Liquidator. The Liquidator shall use its best efforts to reduce to cash and cash equivalent items such Company Assets as the Liquidator shall deem it advisable to sell, subject to obtaining fair value for such assets and any tax or other legal considerations. Section 8.3 Final Distribution. Upon winding up of the Company, the assets of the Company shall be distributed in the following manner and order: (a) first, to creditors, including Members who are creditors, to the extent permitted by law, in the order of priority as provided by law to satisfy the liabilities of the
36 5108218-8 Company whether by payment or by the establishment of adequate reserves, excluding liabilities for Distributions to Members pursuant to Article VI; and (b) thereafter, the remaining assets of the Company shall be applied and distributed to the Members in accordance with Section 6.4(b) and, to the extent applicable, Section 6.5. Section 8.4 Termination. The Company shall terminate when all of the assets of the Company have been distributed in the manner provided for in this Article VIII, and the existence of the Company shall have been terminated in the manner required by the LLC Act. The Liquidator (or Members if necessary) shall take all other actions as may be necessary to terminate the Company. Section 8.5 Claims of the Members. Current Members and former Members shall look solely to the Company’s assets for the return of their Capital Contributions, and if the assets of the Company remaining after payment of or due provision for all debts, liabilities and obligations of the Company are insufficient to return such Capital Contributions, the Members and former Members shall have no recourse against the Company or any other Member or former Member. ARTICLE IX Transfer of Members’ Interests Section 9.1 Restrictions on Transfer of Company Interests. (a) Except for Permitted Transfers, no Member may, directly or indirectly, assign, sell, exchange, transfer, pledge, hypothecate or otherwise dispose of all or any part of its Interest (or permit any of the foregoing to occur), including any direct or indirect interest (whether legal or beneficial) in such Member (any such assignment, sale, exchange, transfer, pledge, hypothecation or other disposition of an Interest or a direct or indirect interest in a Member being herein collectively called a “Transfer”) to any Person without the prior approval of the Manager; provided that, if such Transfer occurs following the death or Disability of a Member that previously held such Interest, such consent shall not be unreasonably withheld or delayed. In the event of a partial Transfer of an Interest that is effectuated in accordance with the provisions hereof, such Transferee shall, for the purposes of this Article IX, be treated, together with the Member who transferred such Interest to the Transferee, as a single entity, with such transferor Member having the authority to make elections and give notices hereunder on behalf of such transferor Member and Transferee. Any such partial Transferee will be bound by the elections made by such transferor Member. (b) Upon any Transfer of a Member’s Interest in the Company in compliance with this Article IX, the Person (the “Transferee”) to whom the Member’s Interest was Transferred shall be admitted as a Member upon the Transferee’s written acceptance and adoption of all of the terms and provisions of this Agreement and delivery to the Manager by the transferring Member and its Transferee of any other documents and instruments, including any legal opinions, reasonably requested by the Manager. For all purposes hereof, any reference to a Member shall be deemed to include any Transferee of such Member. (c) Without limiting the foregoing, no Transfer or substitution shall be recognized if the Manager reasonably believes that such Transfer or substitution would pose a
37 5108218-8 material risk that the Company will be treated as a “publicly traded partnership” within the meaning of Section 7704 of the Code and the regulations promulgated thereunder. Section 9.2 Other Transfer Provisions. (a) Any purported Transfer by a Member of all or any part of its Interest in violation of this Article IX shall be null and void and of no force or effect. (b) Except as provided in this Article IX, no Member shall have the right to withdraw from the Company prior to its termination and no additional Member may be admitted to the Company unless approved by the Manager. In the event that a Member purports to resign as a Member, such Member shall not be entitled to receive any Distributions or fees and shall not otherwise be entitled to receive value for or in respect of its Interest except as otherwise expressly provided herein. Notwithstanding any provision of this Agreement to the contrary, a Member may not Transfer all or any part of its Interest if the Manager reasonably determines such Transfer would jeopardize the status of the Company as a partnership for federal income tax purposes, or would violate, or would cause the Company to violate, any applicable law or regulation, including any applicable federal or state securities laws or any document or instrument evidencing indebtedness of the Company secured by the Company Assets. (c) Concurrently with the admission of any substitute or additional Member in accordance with this Agreement, the Members shall forthwith cause any necessary papers to be filed and recorded and notice to be given wherever and to the extent required showing the substitution of a Transferee as a substitute Member in place of the Member Transferring its Interest, or the admission of an additional Member, all at the expense, including payment of any professional and filing fees incurred, of such substituted or additional Member. The admission of any person as a substitute or additional Member shall be conditioned upon such person or entity’s written acceptance and adoption of all the terms and provisions of this Agreement. (d) If any Interest of a Member is Transferred during any accounting period in compliance with the provisions of this Article IX, each item of income, gain, loss, expense, deduction and credit and all other items attributable to such Interest for such period shall be divided and allocated between the transferor and the transferee by taking into account their varying Interests during such period in accordance with Section 706(d) of the Code, using any conventions permitted by law and selected by the Manager acting reasonably. All Distributions on or before the date of such Transfer shall be made to the transferor, and all Distributions thereafter shall be made to the transferee. Solely for purposes of making such allocations and Distributions, the Company shall recognize a Transfer on the date that the Manager receives notice of the Transfer which complies with this Article IX from the Member Transferring its Interest. (e) If a Member Transfers its Interest in accordance with this Agreement, then, at the election of such Member, the Company will make a Section 754 election under the Code. Section 9.3 Drag-Along Rights. (a) HC2 shall have the right to cause a Drag-Along Sale pursuant to this Section 9.3 at any time. HC2 shall use reasonable efforts to notify the other Members in writing not less than thirty (30) days prior to the proposed consummation of a Drag-
38 5108218-8 Along Sale. In the event of any such Drag-Along Sale, each Member other than HC2 (i) will consent to and raise no objections against a Drag-Along Sale or the process pursuant to which the Drag-Along Sale was arranged, (ii) sell all or part of (as applicable) its Interest pursuant to the terms and conditions of the Drag-Along Sale and (iii) shall promptly take all actions reasonably necessary to effectuate such Drag-Along Sale; provided that in the case of any Drag- Along Sale: (A) the terms and conditions of the Drag-Along Sale provide that the purchase of the Interests of each of the non-HC2 Members shall be upon terms and conditions not worse for each such non-HC2 Member than the terms and conditions of the purchase of the Interest of HC2; and (B) each non-HC2 Member shall not bear more than its proportionate share of the aggregate liability of all Members (except as to representations or warranties specific to a Member, such as title to a Member’s Interest or authority to dispose of such Interest) in any Drag-Along Sale (and in all events for no more than the consideration received by such Member in the Drag-Along Sale). (b) Upon the completion of a Drag-Along Sale, the Members will be entitled to receive all the amounts they would have received if the Company had sold all the Company Assets for the purchase price of the Drag-Along Sale and the proceeds of such sale were distributed in accordance with Section 8.3. Each Member will take all necessary and desirable actions as directed by HC2 in connection with the consummation of any Drag-Along Sale, including executing the applicable agreements. Each Member shall bear its respective portion of all transactions costs associated with such Drag-Along Sale in the ratio of their respective distribution amounts; provided that, in the event such Drag-Along Sale is not consummated, such costs shall be borne in their entirety by the Company. Section 9.4 Tag-Along Rights. (a) Exercise of Right. If HC2 proposes to make a direct or indirect Transfer of all or any of its Profit Units (together with any other Interest, if any, Transferred by HC2 in the same transaction, the “Transferred Interest”) to an unaffiliated third party (a “Tag-Along Transferee” and such transfer, an “HC2 Transfer”), HC2 shall deliver written notice (the “Proposed Transfer Notice”) to each of DP and CEP not later than thirty (30) days prior to the consummation of such HC2 Transfer. The Proposed Transfer Notice shall contain the material terms and conditions, including price and form of consideration of the proposed HC2 Transfer, the identity of the prospective Tag-Along Transferee and the intended date of the proposed HC2 Transfer. Each of DP and CEP shall have a right to Transfer his or her Profit Units in such HC2 Transfer (a “Tag-Along Right”) as set forth in this Section 9.4 and on the terms and conditions specified in the Proposed Transfer Notice, which shall be at least as favorable to DP and CEP as the terms and conditions applicable to HC2 with respect to its Profits Units. Each of DP or CEP may elect to exercise his or her Tag-Along Right (each, a “Participating Member”) by giving HC2 written notice to that effect within fifteen (15) days after the delivery of the Proposed Transfer Notice (the “Acceptance Notice”), and upon giving such notice such Participating Member shall be deemed to have effectively elected to exercise his or her Tag-Along Right (any such sale pursuant to this Section 9.4, a “Tag-Along Sale”). (b) Purchase and Sale Agreement. Each Participating Member and HC2 agree that the terms and conditions of any proposed HC2 Transfer in accordance with this Section 9.4 will be memorialized in, and governed by, a written purchase and sale agreement with the
39 5108218-8 prospective Tag-Along Transferee (the “Purchase and Sale Agreement”) with customary terms and provisions for such a transaction (including tag along), and each Participating Member and HC2 further covenant and agree to enter into such Purchase and Sale Agreement as a condition precedent to any sale or other transfer in accordance with this Section 9.4 (c) Allocation of Sale. Each Participating Member may participate in such HC2 Transfer (and receive consideration in such HC2 Transfer in respect of such participation) by selling up to a percentage of the Participating Member’s Profit Units that are of the same class as the Profit Units being transferred by HC2 equal to the percentage of Profit Units being transferred by HC2 in such HC2 Transfer (the “Maximum Pro Rata Portion”). To the extent any Participating Member delivers an Acceptance Notice to HC2, HC2 shall cause the Tag-Along Transferee to purchase from such Participating Member a portion of such Participating Member’s Profit Units that are of the same class as the Profit Units being transferred by HC2 equal to the lesser of (i) such Participating Member’s Maximum Pro Rata Portion and (ii) the portion of such Participating Member’s Profit Units set forth in such Acceptance Notice (such lesser amount, the “Tag-Along Interest”). Such purchase from such Participating Member shall be at a purchase price equal to the portion of the Equity Value that would have been distributed to such Participating Member, solely with respect to its Tag-Along Interest, had the entire Equity Value of the Company been distributed pursuant to Section 8.3(b). The “Equity Value” of the Company shall be an amount equal to the aggregate amount that would have to be distributed pursuant to Section 8.3(b) to result in a distribution to HC2, solely with respect to the Transferred Interest, equal to the purchase price to be paid by the Tag-Along Transferee to HC2 for the Transferred Interest. (d) Purchase by HC2; Deliveries. Notwithstanding Section 9.4(b) above, if any prospective Tag-Along Transferee or Transferees refuse(s) to purchase any Tag-Along Interest from any Participating Member or Members, HC2 may not sell its Profit Units to such prospective Tag-Along Transferee or Transferees unless and until, simultaneously with such sale, HC2 purchases the Profit Units that the Participating Members would otherwise be able to sell pursuant to their Tag-Along Rights for the consideration provided in Section 9.4(c). Any such Profit Units transferred to HC2 will be transferred against payment therefor by HC2 of the consideration to which each Participating Member is entitled by reason of its participation in such sale. (e) Further Assurances. The Participating Member shall take all actions which HC2 deems reasonably necessary or desirable to consummate such Tag-Along Sale, including (i) entering into agreements with third parties which may include representations, indemnities, holdbacks and escrows; provided, that such agreements are on terms substantially identical or more favorable to such Participating Member than those agreed to by HC2; provided, further, that no Participating Member shall be liable in respect of any indemnification obligation pursuant to any Tag-Along Sale (1) to the extent relating to or in respect of representations, warranties or covenants applicable solely to any other Member or any other Person’s Interests or (2) in excess of the total consideration (net of broker fees and other selling expenses) paid to such Participating Member in such Tag-Along Sale (or, if lower, its pro rata share of any “cap” on indemnification obligations of all Members generally in such Tag-Along Sale); and (ii) using commercially reasonable efforts to obtain all consents and approvals reasonably necessary or desirable to consummate such transaction. Each of the Participating Members and HC2 shall
40 5108218-8 pay its pro rata share (based upon the portion of the proceeds from the Tag-Along Sale to which each is entitled) of any reasonable transaction costs associated with the sale other than the legal expenses and selling commissions of the other participants in the Tag-Along Sale. (f) Additional Compliance. If any proposed HC2 Transfer is not consummated within one hundred twenty (120) days after receipt of the Proposed Transfer Notice by each of DP and CEP, HC2 may not sell all or any portion of its Interest unless it first complies in full with each provision of this Section 9.4; provided, that in the event any regulatory approvals or clearances are required to be obtained or waiting periods thereunder are required to elapse in connection with such HC2 Transfer, such time period shall be extended until all such approvals and clearances have been obtained and such waiting periods have elapsed. The exercise or election not to exercise any right by DP or CEP hereunder shall not adversely affect his or her right to participate in any other proposed HC2 Transfers subject to this Section 9.4. ARTICLE X Miscellaneous Section 10.1 Representations and Covenants by the Members. Each Member represents, warrants, covenants, acknowledges and agrees that: (a) It is either (i) a corporation, limited liability company or partnership, as applicable, duly organized or formed and validly existing and in good standing under the laws of the state of its organization or formation or (ii) an individual; it has all requisite power and authority to enter into this Agreement, to acquire and hold its Interest and to perform its obligations hereunder; and the execution, delivery and performance of this Agreement has been duly authorized. (b) This Agreement and all agreements, instruments and documents herein provided to be executed or caused to be executed by it are duly authorized, executed and delivered by and are and will be binding and enforceable against it. (c) Neither (i) the execution and delivery of this Agreement and the performance of its obligations hereunder nor (ii) the origination or acquisition by the Company or any Subsidiary of any Company investment will conflict with, result in a breach of or constitute a default (or any event that, with notice or lapse of time, or both, would constitute a default) or result in the acceleration of any obligation under any of the terms, conditions or provisions of any other agreement or instrument to which it (or any of its Affiliates) is a party or by which it (or any of its Affiliates) is bound or to which any of its (or any of its Affiliate’s) property or assets are subject, conflict with or violate any of the provisions of its organizational documents, or violate any statute or any order, rule or regulation of any Governmental Entity, that would materially and adversely affect the performance of its duties hereunder; such Member has obtained any consent, approval, authorization or order of any court or governmental agency or body required for the execution, delivery and performance by such Member of its obligations hereunder.
41 5108218-8 (d) There is no Proceeding pending or, to its knowledge, threatened against it in any court or by or before any other Governmental Entity that would prohibit its entry into or performance of this Agreement. (e) This Agreement is a binding agreement on the part of such Member enforceable in accordance with its terms against such Member. (f) It has been advised to engage, and has engaged, its own counsel (whether in-house or external) and any other advisors it deems necessary and appropriate. By reason of its business or financial experience, or by reason of the business or financial experience of its own attorneys, accountants and financial advisors (which advisors, attorneys and accountants are not Affiliates of the Company or any other Member), it is capable of evaluating the risks and merits of an investment in the Interest and of protecting its own interests in connection with this investment. Nothing in this Agreement should or may be construed to allow any Member to rely upon the advice of counsel acting for another Member or to create an attorney-client relationship between a Member and counsel for another Member. (g) (i) each Person owning a 10% or greater interest in such Member (A) is not currently identified on the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Assets Control, Department of the Treasury (or any other similar list maintained by the Office of Foreign Assets Control pursuant to any authorizing statute, executive order or regulation) and (B) is not a Person with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of U.S. law, regulation, or executive order of the President of the United States, and (ii) such Member has implemented procedures, and will consistently apply those procedures, to ensure the foregoing representations and warranties remain true and correct at all times. (h) It shall comply with all requirements of law relating to money laundering, anti-terrorism, trade embargos and economic sanctions, now or hereafter in effect and shall immediately notify the other Members in writing if it becomes aware that any of the foregoing representations, warranties or covenants are no longer true or have been breached or if the Member has a reasonable basis to believe that they may no longer be true or have been breached. Section 10.2 Arbitration. (a) Each of the Members agrees to arbitrate any controversy or claim arising out of this Agreement or otherwise relating to the Members’ Interests. (b) Any such controversy or claim shall be fully and finally resolved in confidential, binding arbitration to the fullest extent permitted by law. Such arbitration proceeding shall take place in the State of New York, City of New York, before a panel of three arbitrators in accordance with the applicable Rules of the American Arbitration Association (“AAA”) with substantial experience in the business of the Company. The arbitrators may grant specific performance in addition to monetary damages. The arbitrators shall not have the authority to modify or change any of the terms of this Agreement. Notwithstanding any provision of the Rules of the AAA to the contrary but subject to Section 10.15, each Member shall each be responsible for paying its, his, or hers attorney’s fees and costs in such arbitration to the fullest extent permitted by law. The arbitrators’ award shall be final and binding upon the parties.
42 5108218-8 (c) If any portion of this arbitration provision is determined by a court of competent jurisdiction to be unenforceable, such determination will not affect the remainder of this arbitration provision. If, however, a court of competent jurisdiction determines that a party’s claim is not arbitrable, then the parties waive, to the fullest extent permitted by law, their right, if any, to a trial by jury of any such claim arising out of or in connection with this Agreement or each Member’s Interest. Section 10.3 Equitable Relief. The Members hereby confirm that damages at law may be an inadequate remedy for a breach or threatened breach of this Agreement and agree that, in the event of a breach or threatened breach of any provision hereof, the respective rights and obligations hereunder shall (in addition to remedies at law) be enforceable by specific performance, injunction or other equitable remedy, but, nothing herein contained is intended to, nor shall it, limit or affect any right or rights at law or by statute or otherwise of a Member aggrieved as against the other for a breach or threatened breach of any provision hereof, it being the intention of this Section 10.3 to make clear the agreement of the Members that the respective rights and obligations of the Members hereunder shall be enforceable in equity as well as at law or otherwise and that the mention herein of any particular remedy shall not preclude a Member from any other remedy it or he might have, either in law or in equity. Section 10.4 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. In particular, the Company is formed pursuant to the LLC Act, and the rights and liabilities of the Members shall be as provided therein, except as herein otherwise expressly provided. Section 10.5 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their respective successors and permitted assigns. Section 10.6 Notices. Whenever notice is required or permitted by this Agreement to be given, such notice shall be in writing and shall be given to any Member or Manager at its address (including via electronic mail) or facsimile number shown either in the Company’s books and records or on Schedule 3.1 hereto. Each such notice shall be effective (i) if given by facsimile or electronic mail, upon transmission, (ii) if given by mail, on the 4th day after deposit in the mails (certified or registered return receipt requested) addressed as aforesaid, (iii) if given by overnight courier service, when received and (iv) if given by any other means, when delivered to and receipted for at the address of such Member or Manager specified as aforesaid. Section 10.7 Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall constitute a single instrument. In addition, the parties may execute this Agreement by telecopy, other facsimile machine, pdf or other electronic method and such signature shall be deemed an original. Section 10.8 Entire Agreement. This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter hereof.
43 5108218-8 Section 10.9 Amendments. Any amendment or modification to this Agreement shall be effective if and only if such amendment is evidenced by a written instrument duly executed and delivered by HC2 and such other Member or Members, if any, as required pursuant to Section 4.1, and shall be effective from and after such execution and delivery. Section 10.10 Waivers. No waiver of any breach of any term of this Agreement shall be effective unless made in writing signed by the party against whom enforcement of the waiver is sought, and no such waiver of any breach of that term or any other term of the same or different nature shall be construed as a waiver of any subsequent breach of that term of the same or different nature. Section 10.11 Severability. It is the express intention of the parties that the agreements contained herein shall have the widest application possible. If any agreement contained herein is found by a court having jurisdiction to be unreasonable in scope or character, the agreement shall not be rendered unenforceable thereby, but rather the scope or character of such agreement shall be deemed reduced or modified with retroactive effect to render such agreement reasonable and such agreement shall be enforced as thus modified. If the court having jurisdiction will not review the agreement, then the parties shall mutually agree to revise the unenforceable provision to as close as permitted by law to the provision declared unenforceable. The parties further agree that in the event a court having jurisdiction determines, despite the express intent of the parties, that any portion of any covenant or agreement contained herein is not enforceable, the remaining provisions of this Agreement shall nonetheless remain valid and enforceable. Section 10.12 No Partition. The Members hereby waive any right of partition they may have with respect to any assets of the Company, now existing or hereafter acquired. Section 10.13 Exhibits and Schedules. The Schedules and Exhibits attached hereto are hereby incorporated herein and made a part of this Agreement. Section 10.14 Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 10.15 Cumulative Remedies; Prevailing Party. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law or otherwise. If any Member seeks judicial enforcement of its rights under this Agreement, the prevailing party in any such action shall be entitled to recover its costs incurred in such action, including reasonable attorneys’ fees. Section 10.16 Rules of Construction. Section titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text hereof. This Agreement is not subject to the principle of construing its meaning against the party that drafted it, and each Member acknowledges that it was represented by its own counsel in connection with its negotiation and drafting. Wherever in this Agreement the Manager or any Member is permitted or required to make a decision or determination (including any direction, vote, election, action, consent or approval), (i) the Manager or Member may make that decision or
44 5108218-8 determination in its sole and absolute discretion (except as otherwise expressly provided herein), and (ii) without limiting the generality of the foregoing, in making such decision or determination, the Manager or Member is entitled to consider, favor and further only such interests and factors as it desires, including its own interests, and has no duty or obligation to consider, favor or further any other interest of the Company, any Subsidiary or any other Member. Section 10.17 No Third Party Beneficiaries. No provision of this Agreement (including any obligation of any Member to make Contributions) shall be interpreted as bestowing any rights whatsoever upon any third party. Section 10.18 Time of the Essence. Time is of the essence as to the parties’ obligations under this Agreement. [Remainder of Page Intentionally Left Blank]
Schedule 3.1 – Page 1 5108218-8 Schedule 3.1 Members; Capital Contributions; Profit Units Member Capital Contribution and Reserve Account Profit Units Class A Profit Units Class B Profit Units HC2 Holdings 2, Inc. $60,400343.61 75 75 David Present $300,000 15 12.5 Cherine Eldumiati Plumaker $200,000 10 12.5 Total $60,353,338 100 100
Schedule 4.5(c) – Page 1 5108218-8 Schedule 4.5(c) Initial Officers Name Title 1. David Present President, Partner 2. Cherine Eldumiati Plumaker Vice President, Partner
EX-10.33
4
exhibit1033q410k2024.htm
EX-10.33
Document
INNOVATE CORP.
RESTRICTED STOCK UNIT AWARD AGREEMENT
THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “Agreement”), is made effective as of [DATE] (hereinafter the “Date of Grant”), between INNOVATE Corp. (the “Company”), and [NAME] (the “Participant”).
RECITALS:
WHEREAS, the Company has adopted the INNOVATE Corp. Second Amended and Restated 2014 Omnibus Equity Award Plan (as amended or amended and restated from time to time, the “Plan”), pursuant to which awards of Restricted Stock Units may be granted; and
WHEREAS, the Participant is currently an employee of the Company or any of its subsidiaries; and
WHEREAS, the Compensation Committee of the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders to grant to the Participant an award of Restricted Stock Units as provided herein and subject to the terms set forth herein.
NOW THEREFORE, for and in consideration of the premises and the covenants of the parties contained in this Agreement, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, for themselves, their successors and assigns, hereby agree as follows:
1. Grant of Restricted Stock Units. The Company hereby grants on the Date of Grant to the Participant a total of [•] restricted stock units (the “RSUs”), on the terms and conditions set forth in this Agreement and as otherwise provided in the Plan. The RSUs shall vest and be settled in accordance with Section 3 hereof.
2. Incorporation by Reference, etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement shall have the definitions set forth in the Plan. In the event of a conflict between the Plan and this Agreement, the terms and conditions of the Plan shall govern. The Committee shall have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations under them, and its decision shall be binding and conclusive upon the Participant and his legal representative in respect of any questions arising under the Plan or this Agreement.
3. Terms and Conditions.
(a) Vesting and Forfeiture. Except as otherwise provided in the Plan and this Agreement (or as otherwise provided in an employment, consulting or other written agreement between the Participant and the Company or any of its subsidiaries), the RSUs shall vest and become non-forfeitable as follows: [•] of the RSUs shall vest on [•], 20[•], [•] of the RSUs shall vest on [•], 20[•], and [•] of the RSUs shall vest on [•], 20[•] (each such date, a “Vesting Date”). The vesting of the RSUs pursuant to this Section 3(a) is contingent upon the Participant’s continued service to the Company through the Vesting Date.
(b) Transfer Restrictions; Holding Requirement. Prior to the Vesting Date, the RSUs granted hereunder may not be sold, pledged, loaned, gifted or otherwise transferred (other than by will or the laws of descent and distribution) and may not be subject to lien, garnishment, attachment or other legal process. In addition, the Participant agrees to comply with any written holding requirement policy adopted by the Company for employees in respect of any shares of Common Stock delivered in connection with the settlement of the RSUs.
(c) Settlement. Any RSUs that become vested and non-forfeitable in accordance with Section 3(a) of this Agreement shall be settled, unless otherwise determined by the Committee, by the Company through the delivery to the Participant of a number of shares of Common Stock equal to the number of RSUs that vested and became non-forfeitable by no later than March 15 of the calendar year following the calendar year in which the Vesting Date occurs. As a condition to the receipt of any shares of Common Stock issuable in respect of vested RSUs, the Participant shall at the request of the Company deliver to the Company one or more stock powers, duly endorsed in blank, relating to such shares of Common Stock.
(d) Effect of Termination of Service. Except as otherwise provided below (or as otherwise provided in an employment, consulting or other written agreement between the Participant and the Company or any of its subsidiaries), if the Participant’s employment with the Company and its subsidiaries terminates prior to the Vesting Date for any reason, the RSUs shall be forfeited without consideration to the Participant on the date of termination of employment. Notwithstanding anything to the contrary herein, if the Participant’s employment with the Company and its subsidiaries terminates prior to the Vesting Date due to death or Disability, the RSUs shall immediately become fully vested upon such termination of employment.
(e) Rights as a Stockholder; Dividends. The Participant shall not have any privileges of a stockholder of the Company with respect to any RSUs, including without limitation any right to vote any shares of Common Stock underlying such RSUs, unless and until shares of Common Stock underlying the RSUs are delivered to the Participant in accordance with Section 3(c) hereof. If on any date while RSUs are outstanding the Company shall pay any dividend on the shares of Common Stock (other than a dividend payable in shares of Common Stock), the number of RSUs granted to the Participant shall, as of the record date for such dividend payment, be increased by a number of RSUs equal to: (a) the product of (x) the number of RSUs held by the Participant as of such record date, multiplied by (y) the per share of Common Stock amount of any cash dividend (or, in the case of any dividend payable, in whole or in part, other than in cash, the per share of Common Stock value of such dividend, as determined in good faith by the Company), divided by (b) the average closing price of a share of Common Stock on the New York Stock Exchange on the twenty (20) trading days preceding, but not including, such record date. In the case of any dividend declared on shares of Common Stock that is payable in the form of shares of Common Stock, the number of RSUs granted to the Participant shall be increased by a number equal to the product of (1) the aggregate number of RSUs held by the Participant on the record date for such dividend, multiplied by (2) the number of shares of Common Stock (including any fraction thereof) payable as a dividend on a share of Common Stock. Such dividends shall only be distributed or paid to the extent that the underlying RSUs vest and are settled into shares of Common Stock in accordance with Section 3(c) hereof. In no event shall the Participant be entitled to any payments or distributions relating to dividends paid after the earlier to occur of the settlement or forfeiture of the applicable RSUs and, for the avoidance of doubt, all accumulated dividends shall be forfeited immediately upon the forfeiture or cancellation of the underlying RSUs or applicable portion thereof.
(f) Taxes and Withholding. The Participant shall be responsible for all income taxes payable in respect of the RSUs. Upon the issuance of any shares of Common Stock underlying the RSUs, the Participant shall be required to pay to the Company, and the Company shall have the right and is hereby authorized to withhold any cash, shares of Common Stock, other securities or other property deliverable under the RSUs or from any compensation or other amounts owing to a Participant, the amount (in cash, Common Stock, other securities or other property) of any required withholding taxes in respect of the RSUs, and to take such other action as may be necessary in the opinion of the Committee to satisfy all obligations for the payment of such withholding taxes, if applicable. In addition, the Committee may, in its sole discretion, permit a Participant to satisfy, in whole or in part, the foregoing withholding liability by (A) the delivery of shares of Common Stock (which are not subject to any pledge or other security interest and which would not result in adverse accounting to the Company) owned by the Participant having a Fair Market Value equal to such withholding liability or (B) having the Company withhold from the number of shares of Common Stock otherwise issuable or deliverable pursuant to the vesting and settlement of the RSUs, a number of shares with a Fair Market Value equal to such withholding liability (but not to exceed an amount that would result in adverse accounting to the Company). The obligations of the Company under this Agreement will be conditional on such payment or arrangements, and the Company will, to the extent permitted by law, have the right to deduct any such withholding taxes from any payment of any kind otherwise due to Participant.
4. Miscellaneous.
(a) Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery:
if to the Company:
INNOVATE Corp.
Attn: Chief Financial Officer
295 Madison Avenue, 12th Floor
New York, NY 10017
E-mail: Legal@INNOVATEcorp.com
if to the Participant, at the Participant’s last known address on file with the Company.
All such notices, demands and other communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial courier service; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied.
(b) Clawback/Forfeiture. If the Participant receives any amount in excess of what the Participant should have received with respect to the RSUs for any reason (including without limitation by reason of a financial restatement, mistake in calculations or other administrative error), then the Participant shall be required to repay any such excess amount to the Company upon 30 days prior written demand by the Committee. To the extent required by applicable law (including without limitation Section 304 of the Sarbanes Oxley Act and Section 954 of the Dodd Frank Act), the RSUs, and any property paid or issued in respect of any portion of the RSUs, shall be subject to any required clawback, forfeiture or similar requirement.
(c) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.
(d) No Rights to Service. Nothing contained in this Agreement shall be construed as giving the Participant any right to be retained, in any position as an employee, consultant or director of the Company or its Affiliates or shall interfere with or restrict in any way the rights of the Company or its Affiliates, which are hereby expressly reserved, to remove, terminate or discharge the Participant at any time for any reason whatsoever.
(e) Bound by Plan. By signing this Agreement, the Participant acknowledges that he has received a copy of the Plan and has had an opportunity to review the Plan and agrees to be bound by all the terms and provisions of the Plan.
(f) Beneficiary. The Participant may file with the Committee a written designation of a beneficiary on Exhibit A hereto or on such other form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Participant, the executor or administrator of the Participant’s estate shall be deemed to be the Participant’s beneficiary.
(g) Successors. The terms of this Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Participant and the beneficiaries, executors, administrators, heirs and successors of the Participant.
(h) Section 409A. It is intended that the RSUs be exempt from or comply with Section 409A of the Code and this Agreement shall be interpreted consistent therewith. This Agreement is subject to Section 15(u) of the Plan.
(i) Electronic Delivery. By executing this Agreement, the Participant hereby consents to the electronic delivery of prospectuses, annual reports and other information required to be delivered by Securities and Exchange Commission rules. This consent may be revoked in writing by the Participant at any time upon three business days’ notice to the Company, in which case subsequent prospectuses, annual reports and other information will be delivered in hard copy to the Participant.
(j) Securities Laws. The Participant agrees that the obligation of the Company to issue RSUs shall also be subject, as conditions precedent, to compliance with applicable provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, state securities or corporation laws, rules and regulations under any of the foregoing and applicable requirements of any securities exchange upon which the Company’s securities shall be listed.
(k) Entire Agreement. This Agreement and the Plan contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and supersede all prior communications, representations and negotiations in respect thereto. No change, modification or waiver of any provision of this Agreement shall be valid unless the same be in writing and signed by the parties hereto.
(l) Governing Law. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without regard to principles of conflicts of law thereof, or principals of conflicts of laws of any other jurisdiction which could cause the application of the laws of any jurisdiction other than the State of Delaware.
(m) Headings. The headings of the Sections hereof are provided for convenience only and are not to serve as a basis for interpretation or construction, and shall not constitute a part, of this Agreement.
(n) Signature in Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
[Signatures on next page]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Date of Grant.
INNOVATE Corp.
By:
Michael J. Sena
Chief Financial Officer
Dated:
Participant
Printed Name:
Dated:
[Signature page to Restricted Stock Unit Award Agreement of [NAME]]
EXHIBIT A
TO
INNOVATE CORP.
RESTRICTED STOCK UNIT AWARD AGREEMENT
OF [PARTICIPANT NAME]
DATED AS OF [DATE]
BENEFICIARY DESIGNATION
Pursuant to paragraph 4(f) of this Restricted Stock Unit Agreement (this “Agreement”), you may designate a beneficiary on a form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation.
Should you wish to designate a beneficiary, please provide the following information for each person named:
Name: Date of Birth:
Relationship:
Share percentage:
Name: Date of Birth:
Relationship:
Share percentage:
Name: Date of Birth:
Relationship:
Share percentage:
Name: Date of Birth:
Relationship:
Share percentage:
Total percentage (must add up to 100%):
Signature:
Dated: ________________
Printed Name:
This Beneficiary Designation rescinds and changes any designation which you might have submitted previously.
You understand that in the event you do not designate the share percentages above, the share percentages shall be distributed equally among the listed beneficiaries. You understand that in the event not all beneficiaries survive you, the interest of the non-surviving beneficiaries shall be shared by the surviving beneficiaries in proportion to the share percentage otherwise allocated to them. You also understand that in the event you do not designate a beneficiary or all your beneficiaries do not survive you, the award pursuant to this Agreement shall revert to your estate in accordance with the applicable laws of descent and distribution.
EX-10.34
5
exhibit1034q410k2024.htm
EX-10.34
Document
AMENDMENT NO. 3 OF SENIOR SECURED PROMISSORY NOTE
This Amendment No. 3 of Senior Secured Promissory Note (this “Amendment”), dated effective as of December 31, 2024 (the “Effective Date”), is entered into by and between R2 Technologies, Inc., a Delaware corporation (the “Company”), and Lancer Capital LLC (“Investor”). Capitalized terms used herein, but not otherwise defined herein, shall have the meaning assigned to them in the Note (as defined below).
RECITALS
WHEREAS, the Company and Investor are parties to that certain Senior Secured Promissory Note, dated January 31, 2024, in the principal amount of $20,000,000.00, as amended by that certain Amendment of Senior Secured Promissory Note dated effective as of April 30, 2024, as further amended by that certain Amendment No. 2 of Senior Secured Promissory Note dated effective as of May 17, 2024 (as amended, the “Note”); and
WHEREAS, the Company and the undersigned Investors desire to further amend the Note to extend the Maturity Date and to add an additional fee in consideration of such extension, each as provided herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and for other valuable consideration the receipt of which is hereby acknowledged, the Company and Investor hereby agree as follows:
1. Maturity Date. Section 1(c)(i) of the Note is hereby amended to read “August 1, 2025.”
2. Schedule A. Schedule A of the Note is hereby amended and restated in its entirety as follows:
|
|
|
|
|
|
|
|
|
| If Principal Payment is made: |
|
Exit Fee is the equal to the principal repaid times the following percentage: |
| On or after: |
and prior to: |
|
| February 1, 2024 |
March 1, 2024 |
10.20% |
| March 1, 2024 |
April 1, 2024 |
10.37% |
| April 1, 2024 |
May 1, 2024 |
10.54% |
| May 1, 2024 |
June 1, 2024 |
10.71% |
| June 1, 2024 |
July 1, 2024 |
10.88% |
| July 1, 2024 |
August 1, 2024 |
11.05% |
| August 1, 2024 |
September 1, 2024 |
11.22% |
| September 1, 2024 |
October 1, 2024 |
11.39% |
| October 1, 2024 |
November 1, 2024 |
11.56% |
| November 1, 2024 |
December 1, 2024 |
11.73% |
| December 1, 2024 |
January 1, 2025 |
11.90% |
| January 1, 2025 |
February 1, 2025 |
12.07% |
| February 1, 2025 |
March 1, 2025 |
12.24% |
| March 1, 2025 |
April 1, 2025 |
12.41% |
| April 1, 2025 |
May 1, 2025 |
12.58% |
| May 1, 2025 |
June 1, 2025 |
12.75% |
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| June 1, 2025 |
July 1, 2025 |
12.92% |
| July 1, 2025 |
August 1, 2025 |
13.09% |
3. Amendment to Additional Exit Fee.
(a) In consideration of the extension of the Maturity Date set forth herein, the Additional Exit Fee as set forth in the Note is hereby amended and restated as follows:
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| If all outstanding amounts pursuant to the Note are not prepaid in full on or before: |
The Additional Extension shall be, in the aggregate: |
| July 31, 2024 |
$1,000,000.00 |
| August 31, 2024 |
$2,000,000.00 |
| September 30, 2024 |
$3,000,000.00 |
| October 31, 2024 |
$4,000,000.00 |
| November 30, 2024 |
$5,000,000.00 |
| December 31, 2024 |
$6,000,000.00 |
| January 31, 2025 |
$7,000,000.00 |
| February 28, 2025 |
$8,000,000.00 |
| March 30, 2025 |
$9,000,000.00 |
| April 31, 2025 |
$10,000,000.00 |
| May 31, 2025 |
$11,000,000.00 |
| June 30, 2025 |
$12,000,000.00 |
| July 31, 2025 |
$13,000,000.00 |
(b) The Company shall pay such Additional Exit Fee on the earliest of (a) the Maturity Date, (b) the date of the acceleration of the principal amount of this Note for any reason or, (c) if any portion of this Note is prepaid at any time, the date of such prepayment of this Note. For the avoidance of doubt, the Additional Exit Fee is in addition to, and not in replacement of, the Exit Fee.
4. Default Fee. In further consideration of the extension of the Maturity Date set forth herein, in the event that all obligations pursuant to the Note, including without limitation the principal, any accrued and unpaid interest, exits fees, extension fees, and all other fees and expenses, are not repaid in full on or prior the earliest of (a) the Maturity Date, (b) the date of the acceleration of the principal amount of this Note for any reason, then the Company shall pay an additional default fee equal to $5,000,000.00 (the “Default Fee”) to the Company, which Default Fee shall accrue and be payable immediately on such date. The Default Fee shall be payable in addition to any other default interest or other feeds payable upon an event of default.
5. Effect on Note. The term “Note” as used in the Note shall at all times refer to, collectively, the Note as amended by this Amendment. Except as amended hereby, the Note shall remain in full force and effect.
6. Expenses. The Company agrees to pay all reasonable attorneys’ fees incurred by Investor in connection with this Amendment.
7. Further Instruments. The undersigned parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Amendment.
8. Applicable Law; Entire Agreement; Amendments. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware as it applies to agreements between Delaware residents, entered into and to be performed entirely within Delaware. This Amendment constitutes the entire agreement of the parties with respect to the subject matter hereof superseding all prior written or oral agreements, and no amendment or addition hereto shall be deemed effective unless agreed to in writing by the parties hereto.
9. Counterparts; Electronic Delivery. This Amendment may be executed and delivered electronically and in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
10. Schedule. The parties agree that the schedule attached hereto represents the amortization schedule of this Note.
[Signature Page Follows]
The parties have executed this Amendment No. 3 of Senior Secured Promissory Note effective as of the date first written above.
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| R2 TECHNOLOGIES, INC. |
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/s/ Tim Holt |
| By: |
Timothy Holt |
| Title: |
Chief Executive Officer |
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| LANCER CAPITAL LLC |
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| By: Avram Glazer Irrevocable Exempt Trust, its Sole Member |
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| By: |
/s/ Avram Glazer |
| Name: |
Avram Glazer |
| Title: |
Trustee |
EX-21.1
6
exhibit211-q410k2024.htm
EX-21.1
Document
SUBSIDIARIES OF THE REGISTRANT(1)
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| Subsidiary |
Jurisdiction of Organization |
| DBM Global Intermediate Holdco Inc. |
Delaware |
| INNOVATE 2 Corp |
Delaware |
| INNOVATE International Holding Corp. |
Delaware |
Subsidiaries of DBM Global Intermediate Holdco Inc., INNOVATE 2 Corp. and INNOVATE International Holding Corp., are listed below. All subsidiaries are wholly-owned by their respective parent, except where otherwise indicated.
SUBSIDIARIES OF DBM GLOBAL INTERMEDIATE HOLDCO INC.
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| Subsidiary |
Jurisdiction of Organization |
DBM Global Inc. (91.21%)(2) |
Delaware |
| CB-Horn Holdings, Inc. |
Delaware |
GrayWolf Industrial, Inc.(3)(4) |
Delaware |
GrayWolf Integrated Construction Company(5) |
Delaware |
| Titan Fabricators, Inc. |
Kentucky |
| GrayWolf Integrated Construction Company-Southeast, Inc. |
Georgia |
| M. Industrial Mechanical, Inc. |
Delaware |
Midwest Environmental, Inc.(6) |
Kentucky |
Milco National Constructors, Inc.(7) |
Delaware |
| DBM Digital Pty Ltd. |
Australia |
| DBM Global - North America Inc. |
Delaware |
| Addison Structural Services, Inc. |
Florida |
| Quincy Joist Company |
Delaware |
| Aitken Manufacturing Inc. |
Delaware |
DBM Vircon Services (USA), Inc.(8) |
Arizona |
| Innovative Structural Systems Inc. |
Delaware |
| On-Time Steel Management Holding, Inc. |
Delaware |
| Schuff Steel Management Company-Southwest, Inc. |
Delaware |
| PDC Services (USA) Inc. |
Delaware |
Schuff Steel Company(9) |
Delaware |
Derr and Isbell Construction, LLC(10) |
Texas |
| Lynchburg Freight & Specialty LLC |
Delaware |
| Schuff Steel - Atlantic, LLC |
Florida |
| US Erectors LLC |
Delaware |
Innovative Engineering Solutions LLC(11) |
Delaware |
Memco LLC(12) |
Delaware |
| NYC Constructors, LLC |
Delaware |
| NYCC Construction Services, LLC |
Delaware |
| US Construction Services Inc. |
Delaware |
| Innovative Detailing Services, Ltd. |
Ontario, Canada |
| NYC Construction Services, Ltd. |
Ontario, Canada |
| Schuff Steel Company Panama, S. de R.L. |
Panama |
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| Subsidiary |
Jurisdiction of Organization |
| DBM Global Holdings Inc. |
Delaware |
DBM Vircon Services (Canada) LTD (13) |
British Columbia, Canada |
| DBM Vircon Services (India) Private Limited |
India |
| DBM Vircon Services (UK) Ltd |
United Kingdom |
| DBMG International PTE LTD |
Singapore |
| DBMG Singapore PTE LTD |
Singapore |
| DBM Vircon (Australia) Pty Ltd |
Australia |
| DBM Vircon Services (Australia) Pty Ltd |
Australia |
BDS Steel Detailers (Australia) Pty Ltd |
Australia |
| DBM Vircon Services (NZ) Ltd |
New Zealand |
| PDC Operations (Australia) Pty Ltd |
Australia |
| DBM Vircon Services (Philippines) Inc. |
Philippines |
| DBM Vircon Services (Thailand) Co. LTD |
Thailand |
| Schuff Premier Services LLC |
Delaware |
SUBSIDIARIES OF INNOVATE 2 CORP.
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| Subsidiary |
Jurisdiction of Organization |
HC2 Broadcasting Holdings Inc.(98%) |
Delaware |
| HC2 Broadcasting Intermediate Holdings Inc. |
Delaware |
| HC2 Broadcasting Inc. |
Delaware |
DTV America Corporation (69.22%)(14) |
Delaware |
HC2 Network Inc. |
Delaware |
| HC2 Station Group, Inc. |
Delaware |
| Pansend Life Sciences, LLC |
Delaware |
| Genovel Orthopedics, Inc. (80%) |
Delaware |
R2 Technologies, Inc. (81.35%)(15) |
Delaware |
SUBSIDIARIES OF INNOVATE INTERNATIONAL HOLDING CORP.
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| Subsidiary |
Jurisdiction of Organization |
| ICS Group Holdings Inc. |
Delaware |
| PTGi International Carrier Services Ltd |
United Kingdom |
(1) Registrant, INNOVATE Corp., also does business as INNOVATE Corp. of the Mideast (VA); INNOVATE Corp. of the Southeast (FL and NC); INNOVATE Corp. of the West Coast (CA); and INNOVATE of the Northeast (NY).
(2) Registrant holds a total of 91.21% as follows: 89.83% through DBM Global Intermediate Holdco Inc. and 1.38% through INNOVATE Corp.
(3) GrayWolf Industrial, Inc. also does business as Graywolf (KY).
(4) Schuff Steel Company and Schuff Steel Management Company-Southwest, Inc., are minority shareholders of GrayWolf Industrial, Inc.
(5) GrayWolf Integrated Construction Company also does business as GrayWolf Integrated Construction Company, Inc. (AL, AK, MN, MT and NY).
(6) Midwest Environmental, Inc. also does business as Midwest Environmental Inc. (GA) and Midwest Environmental, Inc., A Graywolf Company (Midwest Environmental, Inc.) (OH).
(7) Milco National Constructors, Inc. also does business as Milco National Constructors Corporation (NJ).
(8) DBM Vircon Services (USA), Inc. also does business as BDS Vircon (WV).
(9) Schuff Steel Company also does business as Schuff Steel Company, Inc. (AL and Schuff Steel Company Inc. (NY).
(10) Derr and Isbell Construction, LLC also does business as Derr & Isbell Construction, LLC (FL).
(11) Innovative Engineering Solutions LLC also does business as Innovative Engineers, LLC (FL) and Innovative Steel Solutions, LLC (New York).
(12) Memco LLC also does business as Memco Erectors LLC (CT and FL).
(13) DBM Vircon Services (Canada) Ltd also does business as Candraft VSI (BC).
(14) Registrant holds a total of 69.22%, as follows: 42.35% (representing 98% of 43.22% direct interests) through HC2 Broadcasting Inc., 5.28% (representing 98% of 5.38% direct interests) through HC2 Broadcasting Holdings, Inc. and 17.83% through INNOVATE 2 Corp. In addition, HC2 holds an additional 2.79% voting interest through proxies from minority shareholders, for a total controlling interest of 69.22%.
(15) R2 Technologies, Inc. also does business as GlacialSkin by R2, Inc. (Alberta, Canada), Glacial Systems by R2, Inc. (BC), R2 Medical Technologies, Inc. (CA, OK, PA, TN, TX) and R2 Technologies, Inc. (De) (GA and LA).
EX-23.1
7
exhibit231-q410k2024.htm
EX-23.1
Document
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-274760, No. 333-248695, No. 333-217274, No. 333-213107, No. 333-207470, and No. 333-207266) and Form S-8 (No. 333-282899, No. 333-224657, No. 333-218835, and No. 333-198727) of INNOVATE Corp. (the Company) of our report dated March 31, 2025, relating to the consolidated financial statements which appears in this Annual Report on Form 10-K. Our report contains an explanatory paragraph regarding the Company’s ability to continue as a going concern.
/s/ BDO USA, P.C.
New York, NY
March 31, 2025
EX-31.1
8
exhibit311-q410k2024.htm
EX-31.1
Document
Exhibit 31.1
CERTIFICATIONS
I, Paul K. Voigt, certify that:
1. I have reviewed this Annual Report on Form 10-K of INNOVATE Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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| Dated: March 31, 2025 |
By: |
/s/ Paul K. Voigt |
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Name: |
Paul K. Voigt |
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Title: |
Interim President and Chief Executive Officer |
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(Principal Executive Officer) |
EX-31.2
9
exhibit312-q410k2024.htm
EX-31.2
Document
Exhibit 31.2
CERTIFICATIONS
I, Michael J. Sena, certify that:
1.I have reviewed this Annual Report on Form 10-K of INNOVATE Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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| Dated: March 31, 2025 |
By: |
/s/ Michael J. Sena |
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Name: |
Michael J. Sena |
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Title: |
Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
EX-32.1
10
exhibit321-q410k2024.htm
EX-32.1
Document
Exhibit 32.1
CERTIFICATION
Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted), Paul K. Voigt, the Interim President and Chief Executive Officer (Principal Executive Officer) of INNOVATE Corp. (the “Company”), and Michael J. Sena, the Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, each hereby certifies that, to the best of his knowledge:
1. The Company’s Annual Report on Form 10-K for the year ended December 31, 2024, to which this Certification is attached as Exhibit 32 (the “Annual Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Annual Report and results of operations of the Company for the period covered by the Annual Report.
Dated: March 31, 2025
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| /s/ Paul K. Voigt |
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/s/ Michael J. Sena |
| Paul K. Voigt |
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Michael J. Sena |
| Interim President and Chief Executive Officer (Principal Executive Officer) |
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Chief Financial Officer (Principal Financial and Accounting Officer) |
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