You should read the following discussion and analysis of our financial condition and results of operations together with the information in our annual audited Consolidated Financial Statements and the notes thereto in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onMarch 16, 2020 , 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 in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onMarch 16, 2020 , as well as the section below entitled "Special Note Regarding Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Unless the context otherwise requires, in this Quarterly Report on Form 10-Q,
"HC2" means
Our Business
We are a diversified holding company with principal operations conducted through seven operating platforms or reportable segments: Construction ("DBMG"), Energy ("ANG"), Telecommunications ("ICS"), Insurance ("CIG"), Life Sciences ("Pansend"), Broadcasting, and Other, which includes businesses that do not meet the separately reportable segment thresholds.
Certain previous year amounts have been reclassified to conform with current year presentations, including:
•The reclassification of GMSL's results to discontinued operations. Further, the reclassification of prior period assets and liabilities have been classified as held for sale; •As a result of the sale of GMSL, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of GMH and its subsidiaries as a separate segment. Formerly the Marine Services segment, these entities and the investment in HMN have been reclassified to the Other segment. •The restatement of Earnings per share in the prior period, as a result of the discontinued operations noted above. This includes presenting EPS for Net (loss) income from continuing operations, Net (loss) income from discontinuing operations, and Net (loss) income. We continually evaluate acquisition opportunities, as well as monitor a variety of key indicators of our underlying platform companies in order to maximize stakeholder value. These indicators include, but are not limited to, revenue, cost of revenue, operating profit, Adjusted EBITDA and free cash flow. Furthermore, we work very closely with our subsidiary platform executive management teams on their operations and assist them in the evaluation and diligence of asset acquisitions, dispositions and any financing or operational needs at the subsidiary level. We believe that this close relationship allows us to capture synergies within the organization across all platforms and strategically position the Company for ongoing growth and value creation. The potential for additional acquisitions and new business opportunities, while strategic, may result in acquiring assets unrelated to our current or historical operations. As part of any acquisition strategy, we may raise capital in the form of debt and/or equity securities (including preferred stock) or a combination thereof. We have broad discretion and experience in identifying and selecting acquisition and business combination opportunities and the industries in which we seek such opportunities. Many times, we face significant competition for these opportunities, including from numerous companies with a business plan similar to ours. As such, there can be no assurance that any of the past or future discussions we have had or may have with candidates will result in a definitive agreement and, if they do, what the terms or timing of any potential agreement would be. As part of our acquisition strategy, we may utilize a portion of our available cash to acquire interests in possible acquisition targets. Any securities acquired are marked to market and may increase short-term earnings volatility as a result.
Our Operations
Refer to Note 1. Organization and Business to our Condensed Consolidated Financial Statements for additional information.
Seasonality and Cyclical Patterns
Our segments' operations can be highly cyclical and subject to seasonal patterns. Our volume of business in our Construction segment may be adversely affected by declines or delays in projects, which may vary by geographic region. Project schedules, particularly in connection with large, complex, and longer-term projects can also create fluctuations in the services provided, which may adversely affect us in a given period. 43 -------------------------------------------------------------------------------- For example, in connection with larger, more complicated projects, the timing of obtaining permits and other approvals may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on such projects when they move forward. Examples of other items that may cause our results or demand for our services to fluctuate materially from quarter to quarter include: weather or project site conditions, financial condition of our customers and their access to capital; margins of projects performed during any particular period; economic, and political and market conditions on a regional, national or global scale.
Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period.
Recent Developments
COVID-19 Impact on our Business
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic resulting in action from federal, state and local governments that has significantly affected virtually all facets of theU.S. and global economies. TheU.S. federal and various state governments, have implemented enhanced screenings, quarantine requirements, and travel restrictions in connection with the COVID-19 outbreak. The Company's top priority is to protect its employees and their families, and those of the Company's customers. The Company is taking precautionary measures as directed by health authorities and the local government, including changing operational procedures as necessary, providing additional protective gear and cleaning to protect them, which has resulted and may continue to result in in disruptions to and increased costs of the Company's operations. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions. The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including, but not limited to, the duration and spread of the outbreak and related travel advisories and restrictions, and its impact to theU.S. and global financial markets, all of which are highly uncertain and cannot be predicted. Preventing the effects from and responding to this market disruption if any other public health threat, related or otherwise, may further increase costs of our business and may have a material adverse effect on our business, financial condition, and results of operations. We continue to monitor the rapidly evolving situation and guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plans. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in the future. However, we do expect that it could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to revised payment terms with certain of our customers. During the three and six months endedJune 30, 2020 , the effects of COVID-19 and the related actions undertaken in theU.S. to attempt to control its spread, specifically impact certain of our segments as follows:
Construction
DBMG is dependent on its workforce to carry out its services. Developments resulting from governmental responses to COVID-19 such as social distancing and shelter-in-place directives have impacted, and will continue to impact, DBMG's ability to deploy its workforce in its facilities and project sites efficiently. The nature of DBMG's business does not permit alternative workforce arrangements in its facilities and project sites such as remote work schemes to be implemented effectively, and as a result of potential workforce disruptions, DBMG may experience delays or suspensions of projects. DBMG has incurred significant costs related to inefficiency and additional procedures to maintain COVID-19 related safety measures. During the three and six months endedJune 30, 2020 ,$8.4 million and$8.8 million were incurred. DBMG may also experience disruptions in the supply chain depending on the spread of COVID-19 and related governmental orders. These delays, suspensions, and impacts to supply chain, may negatively impact DBMG's results of operations, cash flows or financial condition. This could cause the timing of revenue to be delayed and possibly impact earnings and backlog. Persistent delays, suspensions or cancellations of projects under contract may occur while governments implement policies designed to respond to the COVID-19 pandemic. Any such continued loss or suspension of projects under contract may negatively impact the DBMG's results of operations, cash flows or financial condition. 44 --------------------------------------------------------------------------------
Insurance
Our Insurance segment has been impacted by the COVID-19 pandemic, including multiple reductions in target interest rates by theBoard of Governors of theFederal Reserve System , and significant market volatility, driving actual and projected results of our business operations as well as our views on potential effectiveness of certain prudent and feasible tax planning strategies. The Company'sJune 30, 2020 results reflected in earnings are primarily impacted by the Insurance segment's net unrealized losses on investments of$17.9 million , included in the Net realized and unrealized gains (loss) on investments line, primarily driven by preferred stock mark to market adjustments. The impact on other comprehensive income was$9.2 million of unrealized gain on fixed maturity securities, a significant improvement as compared to the three months endedMarch 31, 2020 results, which reflected$355.5 million of unrealized loss on fixed maturity securities. Both of these were largely attributable to market factors caused by the COVID-19 crisis for each of the three month periods endedMarch 31, 2020 andJune 30, 2020 , respectively. Additional future recovery of losses will largely depend upon market reaction to additional COVID-19 stimulus packages, interest rates and timing and manner in which the economy is reopened. The unrealized losses are considered temporary in nature, as we have the ability to hold these securities to maturity.
Broadcasting
As a result of COVID-19, our Broadcasting segment has experienced adverse effects on its advertising business because of weakness in the advertising market as advertisers seek to reduce their own costs in response to the pandemic's impact on their businesses. We are not able to predict when or whether advertising budgets and the advertising market generally, will return or be comparable to historical levels.
In addition, COVID-19 could impact our Broadcasting segment's business, financial condition and results of operations in a number of other ways, including, but not limited to:
•negative impact on our broadcast station revenue, as many of our customers also rely on advertising revenues and might be negatively affected by COVID-19; •slow-down of our ability to build out additional broadcast television stations, as illness, social distancing, and other pandemic-related precautions may result in equipment delivery delays and labor shortages, including the availability of tower crews, an already limited, highly-specialized work force necessary to install broadcast equipment; •negative impact on our network distribution revenues, as consumers may seek to reduce discretionary spending by cutting back or foregoing subscriptions to cable television or other multichannel video programming distributors; •negative impact on our financial condition or our ability to fund operations or future investment opportunities due to an increase in the cost or difficulty in obtaining debt or equity financing, or refinancing our debt in the future, or our ability to comply with our covenants; •impairments of our programming inventory, goodwill and other indefinite-lived intangible assets, and other long-lived assets; and •increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online activity. The magnitude of the impact on our Broadcasting segment will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19. Even after COVID-19 has subsided, we may experience materially adverse impacts to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future. For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company's liquidity and capital resources, see "Part II-Item 1A-Risk Factors."
Debt Obligations
InMarch 2020 , with the proceeds received from the sale of GMSL, the Company repaid$15.0 million of its 2019 Revolving Credit Agreement and$76.9 million of its Senior Secured Notes.
In
In
Dividends
HC2 received
HC2 received
HC2 received$13.5 million in dividends from its Construction segment during three and six months endedJune 30, 2020 . OnAugust 6, 2020 the Construction segment paid a cash dividend of$5.0 million , or$1.30 per share. HC2 received approximately$4.5 million of the total dividend payout. 45 --------------------------------------------------------------------------------
Separation from
The Company has engaged in ongoing negotiations withMr. Falcone , the former CEO and Chairman of the Company, regarding his separation.Mr. Falcone rejected the Company's most recent severance offer. In addition,Mr. Falcone made two books and records demands of the Company in his capacity as a director, which the Company, among other reasons, has denied in light of the fact thatMr. Falcone is no longer a director of the Company.
Other
OnApril 16, 2020 , R2 received$10 million in funding from Huadong Medicine Company Limited as part of Huadong's$30 million Series B equity investment in R2. These funds will be used to commercialize R2's revolutionary CryoAesthetic technology which promises physicians a new way to lighten, brighten and rejuvenate skin. This investment represents the second tranche of Huadong's investment at an approximate post-money valuation of$90 million and reduces Pansend's ownership by 7.8% to 56.1%.
Financial Presentation Background
In the below section within this Management's Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant toU.S. GAAP andSEC disclosure rules, the Company's results of operations for the three and six months endedJune 30, 2020 as compared to the three and six months endedJune 30, 2019 . Results of Operations
The following table summarizes our results of operations and a comparison of the change between the periods (in millions):
Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Net revenue Construction$ 172.3 $ 195.7 $ (23.4) $ 348.8 $ 387.8 $ (39.0) Energy 10.3 5.5 4.8 20.7 10.6 10.1 Telecommunications 107.3 189.3 (82.0) 293.7 344.8 (51.1) Insurance 80.5 82.1 (1.6) 144.3 170.9 (26.6) Broadcasting 9.5 10.0 (0.5) 19.6 19.8 (0.2) Eliminations (1) (2.9) (3.4) 0.5 (5.3) (5.7) 0.4 Total net revenue 377.0 479.2 (102.2) 821.8 928.2 (106.4) Income (loss) from operations Construction 4.5 16.2 (11.7) 7.1 21.9 (14.8) Energy 2.2 (0.3) 2.5 3.9 (0.7) 4.6 Telecommunications 0.2 0.2 - 0.3 0.8 (0.5) Insurance 14.2 30.9 (16.7) 1.6 65.3 (63.7) Life Sciences (3.5) (1.7) (1.8) (6.7) (3.6) (3.1) Broadcasting (1.2) (1.7) 0.5 (4.1) (5.0) 0.9 Other (0.6) (0.1) (0.5) (1.6) (0.1) (1.5) Non-operating Corporate (8.0) (6.5) (1.5) (17.1) (13.7) (3.4) Eliminations (1) (2.9) (3.4) 0.5 (5.3) (5.7) 0.4 Total income (loss) from operations 4.9 33.6 (28.7) (21.9) 59.2 (81.1) Interest expense (21.4) (19.1) (2.3) (42.7) (37.9) (4.8) Loss on early extinguishment or restructuring of debt (3.4) - (3.4) (9.2) -
(9.2)
(Loss) income from equity investees (0.2) 7.2 (7.4) (2.7) 1.3 (4.0) Gain on bargain purchase - 1.1 (1.1) - 1.1 (1.1) Other income (loss) 64.0 (4.8) 68.8 66.8 (1.4) 68.2 Income (loss) from continuing operations 43.9 18.0 25.9 (9.7) 22.3 (32.0) Income tax expense (15.4) (1.1) (14.3) (2.8) (5.1) 2.3 Income (loss) from continuing operations 28.5 16.9 11.6 (12.5) 17.2
(29.7)
Loss from discontinued operations (including loss on disposal of$39.3 million ) - (7.7) 7.7 (60.0) (14.3) (45.7) Net income (loss) 28.5 9.2 19.3 (72.5) 2.9 (75.4) Net (income) loss attributable to noncontrolling interest and redeemable noncontrolling interest (15.4) 0.2 (15.6) 2.5 3.7 (1.2) 46
-------------------------------------------------------------------------------- Net income (loss) attributable to HC2 Holdings, Inc. 13.1 9.4 3.7 (70.0) 6.6 (76.6) Less: Preferred dividends, deemed dividends, and repurchase gains 0.4 0.4 - 0.8 (0.8) 1.6 Net income (loss) attributable to common stock and participating preferred stockholders$ 12.7 $ 9.0 $
3.7
(1) The Insurance segment results are inclusive of realized and unrealized gains and net investment income for the three and six months endedJune 30, 2020 and 2019, inclusive of transactions between entities under common control, which are eliminated or are reclassified in consolidation. Net revenue: Net revenue for the three months endedJune 30, 2020 decreased$102.2 million to$377.0 million from$479.2 million for the three months endedJune 30, 2019 . The decrease in revenue was driven by our Telecommunications segment, which can be attributed to changes in customer mix and fluctuations in wholesale traffic volumes, and our Construction segment primarily driven by lower revenues from our structural steel fabrication and erection business. These were partially offset by increases at our Energy segment due to the Alternative Fuels Tax Credit ("AFTC") revenue related to CNG sales recognized in the current period and the acquisition of the ampCNG stations. Net revenue for the six months endedJune 30, 2020 decreased$106.4 million to$821.8 million from$928.2 million for the six months endedJune 30, 2019 . The decrease in revenue was driven by our Telecommunications segment, which can be attributed to changes in customer mix and fluctuations in wholesale traffic volumes, and our Construction segment primarily driven by lower revenues from our structural steel fabrication and erection business. The decrease is also due to our Insurance segment, net of eliminations, largely driven by unrealized losses resulting from unfavorable market movements in values for preferred stock holdings. These were partially offset by increases at our Energy segment due to AFTC revenue related to CNG sales recognized in the current period and the acquisition of the ampCNG stations. Income (loss) from operations: Income from operations for the three months endedJune 30, 2020 decreased$28.7 million to$4.9 million from$33.6 million for the three months endedJune 30, 2019 . The decrease in operations was primarily driven by our Insurance segment due to an increase in policy benefits, changes in reserves, and commissions due to non-recurring favorable claims activity recognized in the comparable period along with unfavorable claims activity and reserves development in the current quarter, and our Construction segment primarily due to lower revenues from our structural steel fabrication and erection business and COVID-19 related costs. Income (loss) from operations for the six months endedJune 30, 2020 decreased$81.1 million to a loss of$21.9 million from income of$59.2 million for the six months endedJune 30, 2019 . The decrease was primarily driven by our Insurance segment due to an increase in policy benefits, changes in reserves, and commissions due to non-recurring favorable claims activity recognized in the comparable period along with unfavorable claims activity and reserves development in the first half of 2020. In addition there was a decline in revenues, due to unrealized losses from unfavorable market movements in preferred stock holdings. The decrease is also attributable to our Construction segment due to lower revenues from our structural steel fabrication and erection business. Interest expense: Interest expense for the three months endedJune 30, 2020 increased$2.3 million to$21.4 million from$19.1 million for the three months endedJune 30, 2019 . Interest expense for the six months endedJune 30, 2020 increased$4.8 million to$42.7 million from$37.9 million for the six months endedJune 30, 2019 . The increases were attributable to an increase in the aggregate principal amount of debt at our Broadcasting and Energy segments.
Loss on early extinguishment or restructuring of debt: Loss on early
extinguishment or restructuring of debt for the three months ended
Loss on early extinguishment or restructuring of debt for the six months endedJune 30, 2020 was$9.2 million . This was driven by the write-off of deferred financing costs and original issuance discount related to the$15.0 million pay down of the 2019 Revolving Credit Agreement and the$76.9 million redemption of the Senior Secured Notes at a 4.5% premium in the first quarter of 2020 and the$50.6 million redemption of the Senior Secured Notes at a 4.5% premium in the second quarter of 2020. (Loss) income from equity investees: (Loss) income from equity investees for the three months endedJune 30, 2020 decreased$7.4 million to a loss of$0.2 million from income of$7.2 million for the three months endedJune 30, 2019 . The decrease was driven by lower profit for the HMN investment, generally attributable to the timing of turnkey project work. (Loss) income from equity investees for the six months endedJune 30, 2020 decreased$4.0 million to a loss of$2.7 million from income of$1.3 million for the six months endedJune 30, 2019 . The decrease was driven by an increase in losses for the HMN investment, which is generally attributable to the timing of turnkey project work. Other income (loss): Other income (loss) for the three months endedJune 30, 2020 increased$68.8 million to a gain of$64.0 million from a loss of$4.8 million for the three months endedJune 30, 2019 . Other income (loss) for the six months endedJune 30, 2020 increased$68.2 million to a gain of$66.8 million from a loss of$1.4 million for the six months endedJune 30, 2020 . The increases were primarily driven by the gain recognized on the First HMN Sale partially offset by the loss recognized on the Convertible Note embedded conversion feature. 47 -------------------------------------------------------------------------------- Income tax expense: Income tax expense was an expense of$15.4 million and$1.1 million for the three months endedJune 30, 2020 and 2019, respectively. The income tax expense recorded for the three months endedJune 30, 2020 primarily relates to tax expense incurred inChina from the partial sale of HMN and projected expense as calculated under ASC 740 for tax paying entities, primarily the Insurance segment, which is no longer in a valuation allowance. Additionally, the tax benefits associated with losses generated by theHC2 Holdings, Inc. U.S. consolidated income tax return and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized prior to expiration. The income tax expense recorded for the three months endedJune 30, 2019 relates to the projected expense as calculated under ASC 740 for taxpaying entities offset by a benefit from the release of the valuation allowance of the Insurance segment due to an increase in current year income. Income tax expense was an expense of$2.8 million and$5.1 million for the six months endedJune 30, 2020 and 2019, respectively. The income tax expense recorded for the six months endedJune 30, 2020 primarily relates to tax expense incurred inChina from the partial sale of HMN and projected expense as calculated under ASC 740 for tax paying entities, primarily the Insurance segment, which is no longer in a valuation allowance, mostly offset by a tax benefit from the carryback of net operating losses at the Insurance segment as a result of the enactment of the CARES Act. Additionally, the tax benefits associated with losses generated by theHC2 Holdings, Inc. U.S. consolidated income tax return and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized prior to expiration. The income tax expense recorded for the six months endedJune 30, 2019 relates to the projected expense as calculated under ASC 740 for taxpaying entities offset by a benefit from the release of the valuation allowance of the Insurance segment due to an increase in current year income. Loss from discontinued operations (including loss on disposal of$39.3 million): Loss from discontinued operations for the three months endedJune 30, 2020 decreased$7.7 million to zero from$7.7 million for the three months endedJune 30, 2019 . Loss from discontinued operations for the six months endedJune 30, 2020 increased$45.7 million to$60.0 million from$14.3 million for the six months endedJune 30, 2019 . The increase in loss was largely driven by the$39.3 million loss on the sale of GMSL in the first quarter of 2020. Also contributing to the increase in loss was a$9.0 million increase in net loss from the discontinued entity, GMSL. The company did not recognize a tax benefit in discontinued operations from the loss on sale of GMSL and its subsidiaries due to the application of theUK Substantial Shareholder Exception, which exempt capital gains and losses from taxation. Preferred dividends, deemed dividends, and repurchase gains: Preferred dividends, and deemed dividends, and repurchase gains for the three months endedJune 30, 2020 remained unchanged from the three months endedJune 30, 2019 at loss of$0.4 million . Preferred dividends, and deemed dividends, and repurchase gains for the six months endedJune 30, 2020 decreased$1.6 million to a loss of$0.8 million compared to a gain of$0.8 million for the six months endedJune 30, 2019 . The decrease was largely driven by the Insurance segment's 2019 purchase of 10,000 shares of the Company's Series A-2 Preferred Stock at a$1.7 million discount.
Segment Results of Operations
In the Company's Condensed Consolidated Financial Statements, other operating (income) expense includes (i) (gain) loss on sale or disposal of assets, (ii) lease termination costs, (iii) asset impairment expense, (iv) accretion of asset retirement obligations, and (v)FCC reimbursements. Each table summarizes the results of operations of our operating segments and compares the amount of the change between the periods presented (in millions). Construction Segment Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Net revenue$ 172.3 $ 195.7 $ (23.4) $ 348.8 $ 387.8 $ (39.0) Cost of revenue 146.6 155.3 (8.7) 297.8 318.1 (20.3) Selling, general and administrative 18.6 20.2 (1.6) 38.5 40.0 (1.5) Depreciation and amortization 2.7 4.0 (1.3) 5.3 7.9 (2.6) Other operating (income) expense (0.1) - (0.1) 0.1 (0.1) 0.2 Income from operations$ 4.5 $ 16.2 $ (11.7) $ 7.1 $ 21.9 $ (14.8) Net revenue: Net revenue from our Construction segment for the three months endedJune 30, 2020 decreased$23.4 million to$172.3 million from$195.7 million for the three months endedJune 30, 2019 . Net revenue from our Construction segment for the six months endedJune 30, 2020 decreased$39.0 million to$348.8 million from$387.8 million for the six months endedJune 30, 2019 . The decreases were primarily driven by lower revenues from our structural steel fabrication and erection business, which had increased activity in the comparable period on certain large commercial construction projects that are now at or near completion and lower revenues from our construction modeling and detailing business. 48 -------------------------------------------------------------------------------- Cost of revenue: Cost of revenue from our Construction segment for the three months endedJune 30, 2020 decreased$8.7 million to$146.6 million from$155.3 million for the three months endedJune 30, 2019 . Cost of revenue from our Construction segment for the six months endedJune 30, 2020 decreased$20.3 million to$297.8 million from$318.1 million for the six months endedJune 30, 2019 . The decreases were primarily driven by the timing of project work under execution and change in backlog mix, including a reduction in large commercial construction projects in the current period. The decrease was partially offset by higher costs incurred in response to the COVID-19 pandemic. Selling, general and administrative: Selling, general and administrative from our Construction segment for the three months endedJune 30, 2020 decreased$1.6 million to$18.6 million from$20.2 million for the three months endedJune 30, 2019 . Selling, general and administrative from our Construction segment for the six months endedJune 30, 2020 decreased$1.5 million to$38.5 million from$40.0 million for the six months endedJune 30, 2019 . The decreases were primarily driven by lower travel expenses, acquisition costs, and bonus expense in the current period, partially offset by higher costs incurred due to COVID-19 pandemic. Depreciation and amortization: Depreciation and amortization from our Construction segment for the three months endedJune 30, 2020 decreased$1.3 million to$2.7 million from$4.0 million for the three months endedJune 30, 2019 . Depreciation and amortization from our Construction segment for the six months endedJune 30, 2020 decreased$2.6 million to$5.3 million from$7.9 million for the six months endedJune 30, 2019 . The decreases were primarily related to the full depreciation and amortization of assets that took place subsequent to the comparable periods. Energy Segment Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Net revenue$ 10.3 $ 5.5 $ 4.8 $ 20.7 $ 10.6 $ 10.1 Cost of revenue 4.7 3.3 1.4 9.7 6.5 3.2 Selling, general and administrative 1.4 1.0 0.4 3.0 1.9 1.1 Depreciation and amortization 2.0 1.5 0.5 4.1 2.9 1.2 Income (loss) from operations$ 2.2 $ (0.3) $ 2.5 $ 3.9 $ (0.7) $ 4.6 Net revenue: Net revenue from our Energy segment for the three months endedJune 30, 2020 increased$4.8 million to$10.3 million from$5.5 million for the three months endedJune 30, 2019 . Net revenue from our Energy segment for the six months endedJune 30, 2020 increased$10.1 million to$20.7 million from$10.6 million for the six months endedJune 30, 2019 . The increases were primarily driven by higher volume-related revenues attributable to the inclusion of the acquired ampCNG stations, which was acquired inJune 2019 . Additionally, the increases were driven by AFTC revenue related to CNG sales recognized in the current period. The AFTC had not yet been renewed for 2019 in the comparable period. Cost of revenue: Cost of revenue from our Energy segment for the three months endedJune 30, 2020 increased$1.4 million to$4.7 million from$3.3 million for the three months endedJune 30, 2019 . Cost of revenue from our Energy segment for the six months endedJune 30, 2020 increased$3.2 million to$9.7 million from$6.5 million for the six months endedJune 30, 2019 . The increases were due to the overall growth in volume of gasoline gallons delivered and higher commodity and utility costs driven by the acquisition of ampCNG stations. Selling, general and administrative: Selling, general and administrative expenses from our Energy segment for the three months endedJune 30, 2020 increased$0.4 million to$1.4 million from$1.0 million for the three months endedJune 30, 2019 . Selling, general and administrative expenses from our Energy segment for the six months endedJune 30, 2020 increased$1.1 million to$3.0 million from$1.9 million for the six months endedJune 30, 2019 . The increases were driven by the overall growth of the Energy segment as it continues to increase its national footprint. Depreciation and amortization: Depreciation and amortization from our Energy segment for the three months endedJune 30, 2020 increased$0.5 million to$2.0 million from$1.5 million for the three months endedJune 30, 2019 . Depreciation and amortization from our Energy segment for the six months endedJune 30, 2020 increased$1.2 million to$4.1 million from$2.9 million for the six months endedJune 30, 2019 . The increases were due to additional depreciation and amortization from the acquisition of ampCNG stations completed inJune 2019 . 49 --------------------------------------------------------------------------------
Telecommunications Segment Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Net revenue$ 107.3 $ 189.3 $ (82.0) $ 293.7 $ 344.8 $ (51.1) Cost of revenue 105.3 186.4 (81.1) 289.6 338.7 (49.1) Selling, general and administrative 1.7 2.1 (0.4) 3.6 4.6 (1.0) Depreciation and amortization 0.1 0.1 - 0.2 0.2 - Other operating expense - 0.5 (0.5) - 0.5 (0.5) Income from operations$ 0.2 $ 0.2 $ -$ 0.3 $ 0.8 $ (0.5) Net revenue: Net revenue from our Telecommunications segment for the three months endedJune 30, 2020 decreased$82.0 million to$107.3 million from$189.3 million for the three months endedJune 30, 2019 . Net revenue from our Telecommunications segment for the six months endedJune 30, 2020 decreased$51.1 million to$293.7 million from$344.8 million for the six months endedJune 30, 2019 . The decreases can be attributed to changes in our customer mix and fluctuations in wholesale traffic volumes, which can result in variability across periods. Cost of revenue: Cost of revenue from our Telecommunications segment for the three months endedJune 30, 2020 decreased$81.1 million to$105.3 million from$186.4 million for the three months endedJune 30, 2019 . Cost of revenue from our Telecommunications segment for the six months endedJune 30, 2020 decreased$49.1 million to$289.6 million from$338.7 million for the six months endedJune 30, 2019 . The decreases were directly correlated to the fluctuations in wholesale voice termination volumes, in addition to a slight reduction in margin mix attributed to market pressures on call termination rates. Selling, general and administrative: Selling, general and administrative expenses from our Telecommunications segment for the three months endedJune 30, 2020 decreased$0.4 million to$1.7 million from$2.1 million for the three months endedJune 30, 2019 . Selling, general and administrative expenses from our Telecommunications segment for the six months endedJune 30, 2020 decreased$1.0 million to$3.6 million from$4.6 million for the six months endedJune 30, 2019 . The decreases were primarily due to a decrease in compensation expense due to a lower headcount. Other operating expense: Other operating expense expenses from our Telecommunications segment for the three and six months endedJune 30, 2020 decreased$0.5 million to zero from$0.5 million for the three and six months endedJune 30, 2019 . The decreases were driven by impairment of goodwill in the comparable period as a result of declining performance at the segment. Insurance Segment Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Life, accident and health earned premiums, net$ 29.7 $ 30.1 $ (0.4) $ 58.2 $ 59.9 $ (1.7) Net investment income 51.2 52.5 (1.3) 105.5 105.5 - Net realized and unrealized gains (losses) on investments (0.4) (0.5) 0.1 (19.4) 5.5 (24.9) Net revenue 80.5 82.1 (1.6) 144.3 170.9 (26.6) Policy benefits, changes in reserves, and commissions 63.0 48.0 15.0 135.4 100.7 34.7 Selling, general and administrative 8.8 9.2 (0.4) 18.7 17.4 1.3 Depreciation and amortization (5.5) (6.0) 0.5 (11.4) (12.5) 1.1 Income from operations (1)$ 14.2 $ 30.9 $ (16.7) $ 1.6 $ 65.3 $ (63.7) (1) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the three and six months endedJune 30, 2020 and 2019, inclusive of transactions between entities under common control, which are eliminated or are reclassified in consolidation. 50 -------------------------------------------------------------------------------- Life, accident and health earned premiums, net: Life, accident and health earned premiums, net from our Insurance segment for the three months endedJune 30, 2020 decreased$0.4 million to$29.7 million from$30.1 million for the three months endedJune 30, 2019 . The decrease is due to run-off of the closed blocks of business, partially offset by an increase in KIC LTC premiums from rate increases, outpacing terminations on this block. Life, accident and health earned premiums, net from our Insurance segment for the six months endedJune 30, 2020 decreased$1.7 million to$58.2 million from$59.9 million for the six months endedJune 30, 2019 . The decrease was primarily related to run-off of the closed blocks of business. Net investment income: Net investment income from our Insurance segment for the three months endedJune 30, 2020 decreased$1.3 million to$51.2 million from$52.5 million for the three months endedJune 30, 2019 . The decrease was due to decreased holdings in preferred stocks and short term investments, largely offset from an increase in bonds due to increased holdings. Net realized and unrealized gains (losses) on investments: Net realized and unrealized gains (losses) on investments from our Insurance segment for the six months endedJune 30, 2020 decreased$24.9 million to a loss of$19.4 million from a gain of$5.5 million for the six months endedJune 30, 2019 . The decrease was driven by unfavorable market movements in common and preferred stocks driven by interest rate reductions due to the COVID-19 pandemic. Policy benefits, changes in reserves, and commissions: Policy benefits, changes in reserves, and commissions from our Insurance segment for the three months endedJune 30, 2020 increased$15.0 million to$63.0 million from$48.0 million for the three months endedJune 30, 2019 . Policy benefits, changes in reserves, and commissions from our Insurance segment for the six months endedJune 30, 2020 increased$34.7 million to$135.4 million from$100.7 million for the six months endedJune 30, 2019 . The increases were due to non-recurring favorable claims activity recognized in the comparable period primarily driven by an increase in contingent non-forfeiture option activity as a result of in-force rate actions approved and implemented and unfavorable claims activity and reserves development in the first half of 2020. Selling, general and administrative: Selling, general and administrative expenses from our Insurance segment for the three months endedJune 30, 2020 decreased$0.4 million to$8.8 million from$9.2 million for the three months endedJune 30, 2019 . Selling, general and administrative expenses from our Insurance segment for the six months endedJune 30, 2020 increased$1.3 million to$18.7 million from$17.4 million for the six months endedJune 30, 2019 . The increases were driven by increases in miscellaneous software expenses, legal expenses, additional premium taxes, and third party management fees. Depreciation and amortization: Depreciation and amortization from our Insurance segment for the three months endedJune 30, 2020 decreased$0.5 million to$5.5 million from$6.0 million for the three months endedJune 30, 2019 . Depreciation and amortization from our Insurance segment for the six months endedJune 30, 2020 decreased$1.1 million to$11.4 million from$12.5 million for the six months endedJune 30, 2019 . The decreases were driven by a reduction in negative VOBA amortization largely due to lower policy terminations for the LTC policies acquired in 2018. Life Sciences Segment Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Selling, general and administrative$ 3.4 $ 1.6 $ 1.8 $ 6.6 $ 3.5 $ 3.1 Depreciation and amortization 0.1 0.1 - 0.1 0.1 - Loss from operations$ (3.5) $ (1.7) $ (1.8) $ (6.7) $ (3.6) $ (3.1) Selling, general and administrative: Selling, general and administrative expenses from our Life Sciences segment for the three months endedJune 30, 2020 increased$1.8 million to$3.4 million from$1.6 million for the three months endedJune 30, 2019 . Selling, general and administrative expenses from our Life Sciences segment for the six months endedJune 30, 2020 increased$3.1 million to$6.6 million from$3.5 million for the six months endedJune 30, 2019 . The increases were driven by higher expenses atR2 Technologies , which increased spending from the comparable period to ramp up efforts to achieve commercialization of its products. 51 --------------------------------------------------------------------------------
Broadcasting Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Net revenue$ 9.5 $ 10.0 $ (0.5) $ 19.6 $ 19.8 $ (0.2) Cost of revenue 5.5 5.6 (0.1) 11.1 11.8 (0.7) Selling, general and administrative 5.6 5.6 - 11.3 12.0 (0.7) Depreciation and amortization 1.7 1.5 0.2 3.4 2.9 0.5 Other operating income (2.1) (1.0) (1.1) (2.1) (1.9) (0.2) Loss from operations$ (1.2) $ (1.7) $ 0.5 $ (4.1) $ (5.0) $ 0.9 Net revenue: Net revenue from our Broadcasting segment for the three months endedJune 30, 2020 decreased$0.5 million to$9.5 million from$10.0 million for the three months endedJune 30, 2019 . Net revenue from our Broadcasting segment for the six months endedJune 30, 2020 decreased$0.2 million to$19.6 million from$19.8 million for the six months endedJune 30, 2019 . The decreases were primarily driven by a decrease in advertising revenues at the Azteca network driven by the negative impact of the COVID-19 pandemic, partially offset by higher station revenues as our Broadcasting segment grew the number of operating stations and launched new customers across its broadcast platform.
Cost of revenue: Cost of revenue from our Broadcasting segment for the six
months ended
Selling, general and administrative: Selling, general and administrative expenses from our Broadcasting segment for the six months endedJune 30, 2020 decreased$0.7 million to$11.3 million from$12.0 million for the six months endedJune 30, 2019 . The decrease was primarily due to lower stock-based compensation, legal and other overhead expenses. Depreciation and amortization: Depreciation and amortization from our Broadcasting segment for the three months endedJune 30, 2020 increased$0.2 million to$1.7 million from$1.5 million for the three months endedJune 30, 2019 . Depreciation and amortization from our Broadcasting segment for the six months endedJune 30, 2020 increased$0.5 million to$3.4 million from$2.9 million for the six months endedJune 30, 2019 . The increases were driven by additional amortization of fixed assets at new stations which were acquired subsequent to the comparable period. Other operating income: Other operating income from our Broadcasting segment for the three months endedJune 30, 2020 increased$1.1 million to$2.1 million from$1.0 million for the three months endedJune 30, 2019 . Other operating income from our Broadcasting segment for the six months endedJune 30, 2020 increased$0.2 million to$2.1 million from$1.9 million for the six months endedJune 30, 2019 . The changes were primarily due to receipt ofFCC reimbursements. Other Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Selling, general and administrative$ 0.6 $ -$ 0.6 $ 1.6 $ -$ 1.6 Other operating (income) expense - 0.1 (0.1) - 0.1 (0.1) Loss from operations$ (0.6) $ (0.1) $ (0.5) $ (1.6) $ (0.1) $ (1.5) Selling, general and administrative: Selling, general and administrative expenses from our Other segment for the three months endedJune 30, 2020 increased$0.6 million to$0.6 million from zero for the three months endedJune 30, 2019 . Selling, general and administrative expenses from our Other segment for the six months endedJune 30, 2020 increased$1.6 million to$1.6 million from zero for the six months endedJune 30, 2019 . The increases were predominantly driven by costs associated with the sale of HMN, which closed during the second quarter of 2020. Non-operating Corporate Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Selling, general and administrative$ 8.0 $ 6.5 $ 1.5 $ 17.1 $ 13.7 $ 3.4 Loss from operations$ (8.0) $ (6.5) $ (1.5) $ (17.1) $ (13.7) $ (3.4) 52
-------------------------------------------------------------------------------- Selling, general and administrative: Selling, general and administrative expenses from our Non-operating Corporate segment for the three months endedJune 30, 2020 increased$1.5 million to$8.0 million from$6.5 million for the three months endedJune 30, 2019 . Selling, general and administrative expenses from our Non-operating Corporate segment for the six months endedJune 30, 2020 increased$3.4 million to$17.1 million from$13.7 million for the six months endedJune 30, 2019 . The increases were driven by legal costs incurred associated with the consent revocation, acquisition costs, and the annual stockholder meeting related to the current board solicitation matter with certain stockholders of the Company. This was partially offset by a decrease in bonus, stock compensation expense and overhead costs in the current period.
Income (loss) from Equity Investees
Three Months Ended June 30, Six Months Ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Life Sciences$ (1.1) $ (0.2) $ (0.9) $ (2.1) $ (1.3) $ (0.8) Other 0.9 7.4 (6.5) (0.6) 2.6 (3.2) Loss from equity investees$ (0.2) $ 7.2 $ (7.4) $ (2.7) $ 1.3 $ (4.0) Life Sciences: Loss from equity investees within our Life Sciences segment for the three months endedJune 30, 2020 increased$0.9 million to$1.1 million from$0.2 million for the three months endedJune 30, 2019 . Loss from equity investees within our Life Sciences segment for the six months endedJune 30, 2020 increased$0.8 million to$2.1 million from$1.3 million for the six months endedJune 30, 2019 . The increases in losses were largely due to higher equity method losses recorded from our investment in MediBeacon due to the timing of clinical trials. Other: Income (loss) from equity investees within our Other segment for the three months endedJune 30, 2020 decreased$6.5 million to income of$0.9 million from income of$7.4 million for the three months endedJune 30, 2019 . Income (loss) from equity investees within our Other segment for the six months endedJune 30, 2020 decreased$3.2 million to a loss of$0.6 million from income$2.6 million for the six months endedJune 30, 2019 . The decrease was driven by the equity investment in HMN, as the joint venture produced lower profits than in the prior periods, which is generally attributable to timing of turnkey project work, and a reduction in ownership as a result of the partial sale in the second quarter of 2020.
Non-GAAP Financial Measures and Other Information
Adjusted EBITDA
Adjusted EBITDA is not a measurement recognized underU.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 ourU.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 otherU.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 otherU.S. GAAP financial measures as a measure of our operating performance. Adjusted EBITDA excludes the results of operations and any consolidating eliminations of our Insurance segment. The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss) as adjusted for depreciation and amortization; Other operating (income) expense, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, andFCC reimbursements; asset impairment expense; interest expense; net gain (loss) on contingent consideration; loss on early extinguishment or restructuring of debt; gain (loss) on sale of subsidiaries; other (income) expense, net; foreign currency transaction (gain) loss included in cost of revenue; income tax (benefit) expense; noncontrolling interest; bonus to be settled in equity; share-based compensation expense; discontinued operations; non-recurring items; costs associated with the COVID-19 pandemic, and acquisition and disposition costs. To help our board, management and investors assess the impact of COVID-19 pandemic on our results of operations, we are excluding the impacts of COVID-19 response initiatives for the cost of personal protective equipment distributed to employees, cleaning and sanitization equipment and procedures, and additional overhead costs to maintain proper social distancing from Adjusted EBITDA. Our board and management find the exclusion of the impact of these COVID-19 response initiatives from Adjusted EBITDA to be useful because it allows us and our investors to assess the impact of these response initiatives on our results of operations. 53 --------------------------------------------------------------------------------
(in millions) Three Months Ended June 30, 2020 Core Operating Subsidiaries Early Stage & Other Other and Construction Energy Telecom Life Sciences Broadcasting Eliminations Non-operating Corporate HC2 Net income attributable toHC2 Holdings, Inc. $ 13.1 Less: Net income attributable toHC2 Holdings Insurance segment 11.4 Less: Consolidating eliminations attributable toHC2 Holdings Insurance segment (1.5) Net Income (loss) attributable toHC2 Holdings, Inc. , excluding Insurance segment $ 1.6$ 0.4 $ (0.1) $ (1.2) $ (4.7) $ 46.1 $ (38.9) $ 3.2 Adjustments to reconcile net income (loss) to Adjusted EBITDA: Depreciation and amortization 2.7 2.0 0.1 0.1 1.7 - - 6.6 Depreciation and amortization (included in cost of revenue) 2.3 - - - - - - 2.3 Other operating (income) expenses (0.1) - - - (2.1) - - (2.2) Interest expense 2.2 1.2 - - 3.5 - 14.6 21.5 Other (income) expense, net (0.1) 0.5 0.1 (2.3) 1.3 (70.7) 8.4 (62.8) Loss on early extinguishment of debt - - - - - - 3.4 3.4 Income tax (benefit) expense 0.9 - - - - 7.3 4.4 12.6 Noncontrolling interest 0.1 0.1 - (1.2) (1.3) 17.7 - 15.4 Bonus to be settled in equity - - - - - - (0.4) (0.4) Share-based payment expense - - - 0.1 0.1 - 0.1 0.3 Non-recurring items 0.9 - - - - - 3.8 4.7 Covid-19 Costs 8.4 - - - - - - 8.4 Acquisition and disposition costs 0.2 - 0.1 - 0.4 0.5 1.0 2.2 Adjusted EBITDA $ 19.1$ 4.2 $ 0.2 $ (4.5) $ (1.1) $ 0.9 $ (3.6) $ 15.2 Total Core Operating Subsidiaries $ 23.5 (in millions) Three Months Ended June 30, 2019 Core Operating Subsidiaries Early Stage & Other Other and Construction Energy Telecom Life Sciences Broadcasting Eliminations Non-operating Corporate HC2 Net income attributable toHC2 Holdings, Inc. $ 9.4 Less: Net income attributable toHC2 Holdings Insurance segment 30.3 Less: Consolidating eliminations attributable toHC2 Holdings Insurance segment (3.2) Net Income (loss) attributable toHC2 Holdings, Inc. , excluding Insurance Segment$ 8.9 $ (0.7) $ 0.4 $ (1.4) $ (3.5) $ 1.1 $ (22.5) $ (17.7) Adjustments to reconcile net income (loss) to Adjusted EBITDA: Depreciation and amortization 4.0 1.5 0.1 0.1 1.5 - - 7.2 Depreciation and amortization (included in cost of revenue) 2.4 - - - - - - 2.4 Other operating (income) expenses - 0.1 0.5 - (1.0) - - (0.4) Interest expense 2.2 0.5 - - 2.3 - 14.5 19.5 Net loss (gain) on contingent consideration - - (0.2) - - - - (0.2) Other (income) expense, net 0.2 0.1 - (0.1) 0.3 0.6 3.7 4.8 Income tax (benefit) expense 4.1 - - - 0.1 - (4.8) (0.6) Noncontrolling interest 0.8 (0.3) - (0.5) (1.0) 0.8 - (0.2) Share-based payment expense - - - 0.1 0.2 - 1.4 1.7 Discontinued operations - - - - - 4.9 2.8 7.7 Non-recurring items - - - - - - - - Acquisition and disposition costs 0.5 0.1 - - 0.2 - 0.5 1.3 Adjusted EBITDA$ 23.1 $ 1.3 $ 0.8 $ (1.8) $ (0.9) $ 7.4 $ (4.4) $ 25.5 Total Core Operating Subsidiaries$ 25.2 54 -------------------------------------------------------------------------------- Construction: Net income (loss) from our Construction segment for the three months endedJune 30, 2020 decreased by$7.3 million to income of$1.6 million from income of$8.9 million for the three months endedJune 30, 2019 . Adjusted EBITDA from our Construction segment for the three months endedJune 30, 2020 decreased$4.0 million to$19.1 million from$23.1 million for the three months endedJune 30, 2019 . The decrease in Adjusted EBITDA can be attributed to the timing of project work under execution and change in backlog mix, including a reduction in large commercial construction projects in the current period. Energy: Net income (loss) from our Energy segment for the three months endedJune 30, 2020 increased by$1.1 million to income of$0.4 million from a loss of$0.7 million for the three months endedJune 30, 2019 . Adjusted EBITDA from our Energy segment for the three months endedJune 30, 2020 increased$2.9 million to$4.2 million from$1.3 million for the three months endedJune 30, 2019 . The increase in Adjusted EBITDA was primarily driven by higher volume-related revenues from the acquisition of ampCNG stations inJune 2019 and the AFTC recognized in the current period which had not yet been renewed in the comparable period. Partially offsetting these increases were higher selling, general and administrative expenses as a result of the acquisition of the ampCNG stations. Telecommunications: Net income (loss) from our Telecommunications segment for the three months endedJune 30, 2020 decreased by$0.5 million to a loss of$0.1 million from income of$0.4 million for the three months endedJune 30, 2019 . Adjusted EBITDA from our Telecommunications segment for the three months endedJune 30, 2020 decreased$0.6 million to$0.2 million from$0.8 million for the three months endedJune 30, 2019 . The decrease in Adjusted EBITDA was primarily due to a decline in the contracting of call termination margin as a result of the continued decline in the international long distance market, partially offset by a decrease in compensation expense due to headcount decreases. Life Sciences: Net loss from our Life Sciences segment for the three months endedJune 30, 2020 decreased$0.2 million to a loss of$1.2 million from a loss of of$1.4 million for the three months endedJune 30, 2019 . Adjusted EBITDA loss from our Life Sciences segment for the three months endedJune 30, 2020 increased$2.7 million to$4.5 million from$1.8 million for the three months endedJune 30, 2019 . The increase in Adjusted EBITDA loss was primarily driven by higher expenses atR2 Technologies , which increased spending from the comparable period to ramp up efforts to achieve commercialization of its products. Broadcasting: Net loss from our Broadcasting segment for the three months endedJune 30, 2020 increased$1.2 million to$4.7 million from$3.5 million for the three months endedJune 30, 2019 . Adjusted EBITDA loss from our Broadcasting segment for the three months endedJune 30, 2020 increased$0.2 million to$1.1 million from$0.9 million for the three months endedJune 30, 2019 . Other and Eliminations: Net income from our Other and Eliminations segment for the three months endedJune 30, 2020 increased$45.0 million to$46.1 million from$1.1 million for the three months endedJune 30, 2019 . Adjusted EBITDA from our Other and Eliminations segment for the three months endedJune 30, 2020 decreased$6.5 million to$0.9 million from$7.4 million for the three months endedJune 30, 2019 . The decrease in EBITDA for Other and Eliminations was driven by lower profits for the HMN investment, which is generally attributable to the timing of turnkey project work. Non-operating Corporate: Net loss from our Non-operating Corporate segment for the three months endedJune 30, 2020 increased$16.4 million to$38.9 million from$22.5 million for the three months endedJune 30, 2019 . Adjusted EBITDA loss from our Non-operating Corporate segment for the three months endedJune 30, 2020 decreased$0.8 million to$3.6 million from$4.4 million for the three months endedJune 30, 2019 . The decrease in Adjusted EBITDA loss was driven by lower bonus and overhead costs compared to the prior period. 55 --------------------------------------------------------------------------------
(in millions) Six Months Ended June 30, 2020 Core Operating Subsidiaries Early Stage & Other Other and Construction Energy Telecom Life Sciences Broadcasting Eliminations Non-operating Corporate HC2 Net loss attributable toHC2 Holdings, Inc. $ (70.0) Less: Net income attributable toHC2 Holdings Insurance segment 11.4 Less: Consolidating eliminations attributable toHC2 Holdings Insurance segment (3.1) Net Income (loss) attributable toHC2 Holdings, Inc. , excluding Insurance segment $ 1.5$ 1.0 $ 0.5 $ (4.4) $ (10.9) $ 4.0 $ (70.0) $ (78.3) Adjustments to reconcile net income (loss) to Adjusted EBITDA: Depreciation and amortization 5.3 4.1 0.2 0.1 3.4 - - 13.1 Depreciation and amortization (included in cost of revenue) 4.6 - - - - - - 4.6 Other operating (income) expenses 0.1 - - - (2.1) - - (2.0) Interest expense 4.4 2.4 - - 6.7 - 29.3 42.8 Other (income) expense, net 0.1 0.1 (0.3) (2.3) 2.6 (71.3) 6.6 (64.5) Loss on early extinguishment of debt - - - - - - 9.2 9.2 Income tax (benefit) expense 1.1 - - - - 7.3 4.0 12.4 Noncontrolling interest 0.1 0.4 - (2.2) (2.4) 1.6 - (2.5) Bonus to be settled in equity - - - - - - (0.4) (0.4) Share-based payment expense - - - 0.1 0.2 - 1.5 1.8 Discontinued Operations - - - - - 56.3 3.8 60.1 Non-recurring items 1.8 - - - - - 5.2 7.0 Covid-19 costs 8.8 - - - - - - 8.8 Acquisition and disposition costs 0.3 - 0.2 - 0.4 1.4 2.2 4.5 Adjusted EBITDA $ 28.1$ 8.0 $ 0.6 $ (8.7) $ (2.1) $ (0.7) $ (8.6) $ 16.6 Total Core Operating Subsidiaries $ 36.7 (in millions) Six Months Ended June 30, 2019 Core Operating Subsidiaries Early Stage & Other Other and Construction Energy Telecom Life Sciences Broadcasting Eliminations Non-operating Corporate HC2 Net income attributable toHC2 Holdings, Inc. $ 6.6 Less: Net income attributable toHC2 Holdings Insurance segment 64.1 Less: Consolidating eliminations attributable toHC2 Holdings Insurance segment (5.5) Net Income (loss) attributable toHC2 Holdings, Inc. , excluding Insurance Segment$ 11.0 $ (1.3) $ 1.0 $ (4.0) $ (7.9) $ (4.7) $ (46.1) $ (52.0) Adjustments to reconcile net income (loss) to Adjusted EBITDA: Depreciation and amortization 7.9 2.9 0.2 0.1 2.9 - - 14.0 Depreciation and amortization (included in cost of revenue) 4.5 - - - - - - 4.5 Other operating (income) expenses (0.1) 0.1 0.5 - (1.9) - - (1.4) Interest expense 4.7 0.9 - - 3.9 - 28.7 38.2 Net loss (gain) on contingent consideration - - (0.2) - - - - (0.2) Other (income) expense, net 0.2 0.2 - (0.1) 0.4 (0.2) 1.0 1.5 Income tax (benefit) expense 5.1 - - - 0.1 - (2.5) 2.7 Noncontrolling interest 0.9 (0.6) - (0.8) (1.6) (1.6) - (3.7) Share-based payment expense - - - 0.1 0.4 - 2.5 3.0 Discontinued operations - - - - - 9.0 5.3 14.3 Non-recurring items - - - - - - - - Acquisition and disposition costs 1.3 0.1 0.1 - 0.3 - 0.6 2.4 Adjusted EBITDA$ 35.5 $ 2.3 $ 1.6 $ (4.7) $ (3.4) $ 2.5 $ (10.5) $ 23.3 Total Core Operating Subsidiaries$ 39.4 56 -------------------------------------------------------------------------------- Construction: Net income from our Construction segment for the six months endedJune 30, 2020 decreased$9.5 million to$1.5 million from$11.0 million for the six months endedJune 30, 2019 . Adjusted EBITDA from our Construction segment for the six months endedJune 30, 2020 decreased$7.4 million to$28.1 million from$35.5 million for the six months endedJune 30, 2019 . The decrease in Adjusted EBITDA can be attributed to the timing of project work under execution and change in backlog mix, including a reduction in large commercial construction projects in the current period. Energy: Net income (loss) from our Energy segment for the six months endedJune 30, 2020 increased by$2.3 million to income of$1.0 million from a loss of$1.3 million for the six months endedJune 30, 2019 . Adjusted EBITDA from our Energy segment for the six months endedJune 30, 2020 increased$5.7 million to$8.0 million from$2.3 million for the six months endedJune 30, 2019 . The increase in Adjusted EBITDA was primarily driven by higher volume-related revenues from the acquisition of ampCNG stations inJune 2019 and the AFTC recognized in the current period which had not yet been renewed in the comparable period. Partially offsetting these increases were higher selling, general and administrative expenses as a result of the acquisition of the ampCNG stations. Telecommunications: Net income from our Telecommunications segment for the six months endedJune 30, 2020 decreased by$0.5 million to$0.5 million from$1.0 million for the six months endedJune 30, 2019 . Adjusted EBITDA from our Telecommunications segment for the six months endedJune 30, 2020 decreased$1.0 million to$0.6 million from$1.6 million for the six months endedJune 30, 2019 . The decrease in Adjusted EBITDA was primarily due to a decline in call termination margin as a result of the continued decline in the international long distance market, partially offset by a decrease in compensation expense due to headcount decreases. Life Sciences: Net loss from our Life Sciences segment for the six months endedJune 30, 2020 increased$0.4 million to$4.4 million from$4.0 million for the six months endedJune 30, 2019 . Adjusted EBITDA loss from our Life Sciences segment for the six months endedJune 30, 2020 increased$4.0 million to$8.7 million from$4.7 million for the six months endedJune 30, 2019 . The increase in Adjusted EBITDA loss was primarily driven by higher expenses atR2 Technologies , which increased spending from the comparable period to ramp up efforts to achieve commercialization of its products and higher equity method losses recorded from our investment in MediBeacon due to the timing of clinical trials. Broadcasting: Net loss from our Broadcasting segment for the six months endedJune 30, 2020 increased$3.0 million to$10.9 million from$7.9 million for the six months endedJune 30, 2019 . Adjusted EBITDA loss from our Broadcasting segment for the six months endedJune 30, 2020 decreased$1.3 million to$2.1 million from$3.4 million for the six months endedJune 30, 2019 . The overall decrease in Adjusted EBITDA loss was primarily driven by increased revenue from broadcast stations, as well as cost reductions at Network, partially offset by increased cost of revenues associated with the higher number of operating stations, and a decrease in advertising revenues at the Azteca network driven by the negative impact of the COVID-19 pandemic. Other and Eliminations: Net income (loss) from our Other and Eliminations segment for the six months endedJune 30, 2020 increased$8.7 million to income of$4.0 million from a loss of$4.7 million for the six months endedJune 30, 2019 . Adjusted EBITDA from our Other and Eliminations segment for the six months endedJune 30, 2020 decreased$3.2 million to a loss of$0.7 million from income of$2.5 million for the six months endedJune 30, 2019 . The decrease in EBITDA for Other and Eliminations was driven by lower profits for the HMN investment, which is generally attributable to the timing of turnkey project work. Non-operating Corporate: Net loss from our Non-operating Corporate segment for the six months endedJune 30, 2020 increased$23.9 million to a loss of$70.0 million from a loss of$46.1 million for the six months endedJune 30, 2019 . Adjusted EBITDA loss from our Non-operating Corporate segment for the six months endedJune 30, 2020 decreased$1.9 million to$8.6 million from$10.5 million for the six months endedJune 30, 2019 . The decrease in Adjusted EBITDA loss was driven by non-recurring severance payments made in the comparable period and reduced overhead expenses. (in millions): Three Months Ended June 30, Six months ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Construction$ 19.1 $ 23.1 $ (4.0) $ 28.1 $ 35.5 $ (7.4) Energy 4.2 1.3 2.9 8.0 2.3 5.7 Telecommunications 0.2 0.8 (0.6) 0.6 1.6 (1.0) Total Core Operating Subsidiaries 23.5 25.2 (1.7) 36.7 39.4 (2.7) Life Sciences (4.5) (1.8) (2.7) (8.7) (4.7) (4.0) Broadcasting (1.1) (0.9) (0.2) (2.1) (3.4) 1.3 Other and Eliminations 0.9 7.4 (6.5) (0.7) 2.5 (3.2) Total Early Stage and Other (4.7) 4.7 (9.4) (11.5) (5.6) (5.9) Non-Operating Corporate (3.6) (4.4) 0.8 (8.6) (10.5) 1.9 Adjusted EBITDA$ 15.2 $ 25.5 $ (10.3) $ 16.6 $ 23.3 $ (6.7) 57
--------------------------------------------------------------------------------
Adjusted Operating Income - Insurance
Adjusted Operating Income ("Insurance AOI") and Pre-tax Adjusted Operating Income ("Pre-tax Insurance AOI") for the Insurance segment are non-U.S. GAAP financial measures frequently used throughout the insurance industry and are economic measures the Insurance segment uses to evaluate its financial performance. Management believes that Insurance AOI and Pre-tax Insurance AOI measures provide investors with meaningful information for gaining an understanding of certain results and provide insight into an organization's operating trends and facilitates comparisons between peer companies. However, Insurance AOI and Pre-tax Insurance AOI have certain limitations, and we may not calculate it the same as other companies in our industry. It should, therefore, be read together with the Company's results calculated in accordance withU.S. GAAP. Similarly to Adjusted EBITDA, using Insurance AOI and Pre-tax Insurance AOI as performance measures have inherent limitations as an analytical tool as compared to income (loss) from operations or otherU.S. GAAP financial measures, as these non-U.S. GAAP measures exclude certain items, including items that are recurring in nature, which may be meaningful to investors. As a result of the exclusions, Insurance AOI and Pre-tax Insurance AOI should not be considered in isolation and do not purport to be an alternative to income (loss) from operations or otherU.S. GAAP financial measures as measures of our operating performance. Management defines Insurance AOI as Net income for the Insurance segment adjusted to exclude the impact of net investment gains (losses), including OTTI losses recognized in operations; asset impairment; intercompany elimination; gain on bargain purchase; gain on reinsurance recaptures; and acquisition costs. Management defines Pre-tax Insurance AOI as Insurance AOI adjusted to exclude the impact of income tax (benefit) expense recognized during the current period. Management believes that Insurance AOI and Pre-tax Insurance AOI provide meaningful financial metrics that help investors understand certain results and profitability. While these adjustments are an integral part of the overall performance of the Insurance segment, market conditions impacting these items can overshadow the underlying performance of the business. Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of our operations. The table below shows the adjustments made to the reported Net income (loss) of the Insurance segment to calculate Insurance AOI and Pre-tax Insurance AOI (in millions). Refer to the analysis of the fluctuations within the results of operations section: Three Months Ended June 30, Six months ended June 30, Increase / Increase / 2020 2019 (Decrease) 2020 2019 (Decrease) Net income - Insurance segment$ 11.4 $ 30.3 $ (18.9) $ 11.4 $ 64.1 $ (52.7) Effect of investment losses (gains) (1) 0.4 0.5 (0.1) 19.4 (5.5) 24.9 Gain on bargain purchase - (1.1) 1.1 - (1.1) 1.1 Acquisition costs - 1.6 (1.6) - 1.8 (1.8) Insurance AOI 11.8 31.3 (19.5) 30.8 59.3 (28.5) Income tax expense (benefit) 2.8 1.7 1.1 (9.6) 2.4 (12.0) Pre-tax Insurance AOI$ 14.6 $ 33.0 $ (18.4) $ 21.2 $ 61.7 $ (40.5) (1) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the three and six months endedJune 30, 2020 and 2019, inclusive of transactions between entities under common control, which are eliminated or are reclassified in consolidation. Net income for the three months endedJune 30, 2020 decreased$18.9 million to$11.4 million from$30.3 million for the three months endedJune 30, 2019 . Pre-tax Insurance AOI for the three months endedJune 30, 2020 decreased$18.4 million to$14.6 million from$33.0 million for the three months endedJune 30, 2019 . The decrease was primarily driven by non-recurring favorable claims activity recognized in the comparable period driven by an increase in contingent non-forfeiture option activity as a result of in-force rate actions approved and implemented and additional unfavorable claims activity and reserve developments in the current year. Additionally, the Insurance segment incurred larger expenses due to additional premium taxes, miscellaneous software expenses, third party management fees, and legal expenses. Net income for the six months endedJune 30, 2020 decreased$52.7 million to$11.4 million from$64.1 million for the six months endedJune 30, 2019 . Pre-tax Insurance AOI for the six months endedJune 30, 2020 decreased$40.5 million to$21.2 million from$61.7 million for six months endedJune 30, 2019 . The decrease was primarily driven by non-recurring favorable claims activity recognized in the comparable period driven by an increase in contingent non-forfeiture option activity as a result of in-force rate actions approved and implemented and additional unfavorable claims activity and reserve developments in the current year. Additionally, the Insurance segment incurred larger expenses due to additional premium taxes, miscellaneous software expenses, third party management fees, and legal expenses. 58 --------------------------------------------------------------------------------
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.
Construction Segment
AtJune 30, 2020 , DBMG's backlog was$410.3 million , consisting of$349.9 million under contracts or purchase orders and$60.4 million under letters of intent or notices to proceed. Approximately$96.6 million , representing 23.5% of DBMG's backlog atJune 30, 2020 , 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.
Liquidity and Capital Resources
Short- and Long-Term Liquidity Considerations and Risks
HC2 is a holding company and its liquidity needs are primarily for interest payments on its Senior Secured Notes, 2020 Revolving Credit Agreement, 7.5% convertible notes due 2022 (the "Convertible Notes"), dividend payments on its Preferred Stock and recurring operational expenses.
As ofJune 30, 2020 , the Company had$203.8 million of cash and cash equivalents compared to$228.8 million as ofDecember 31, 2019 . On a stand-alone basis, as ofJune 30, 2020 , HC2 had cash and cash equivalents of$0.9 million compared to$11.6 million atDecember 31, 2019 . AtJune 30, 2020 , cash and cash equivalents in our Insurance segment was$139.5 million compared to$170.5 million atDecember 31, 2019 . Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment and subsea cable equipment, fueling stations, network equipment (such as switches, related transmission equipment and capacity), and service infrastructure, liabilities associated with insurance products, development of back-office systems, operating costs and expenses, and income taxes.
As of
HC2's stand-alone debt consists of the$342.4 million aggregate principal amount of the Senior Secured Notes, the$55.0 million aggregate principal amount of the Convertible Notes, and the$15.0 million 2020 Revolving Credit Agreement. HC2 is required to make semi-annual interest payments on its Senior Secured Notes and Convertible Notes, and quarterly interest payments on its 2020 Revolving Credit Agreement.
HC2 is required to make dividend payments on its outstanding Preferred Stock on
HC2 received
HC2 received
HC2 received$13.5 million in dividends from its Construction segment during the three and six months endedJune 30, 2020 , and onJuly 17, 2020 the construction segment announced it will pay a cash dividend of$5.0 million , or$1.30 per share. HC2 received approximately$4.5 million of the total dividend payout. We have financed our growth and operations to date, and expect to finance our future growth and operations, through public offerings and private placements of debt and equity securities, credit facilities, vendor financing, capital lease financing and other financing arrangements, as well as cash generated from the operations of our subsidiaries. In the future, we may also choose to sell assets or certain investments to generate cash. 59 -------------------------------------------------------------------------------- At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt service and operating leases) and other cash needs for our operations for at least the next twelve months through a combination of distributions from our subsidiaries and from raising of additional debt or equity, refinancing of certain of our indebtedness or preferred stock, other financing arrangements and/or the sale of assets and certain investments. Historically, we have chosen to reinvest cash and receivables into the growth of our various businesses, and therefore have not kept a large amount of cash on hand at the holding company level, a practice which we expect to continue in the future. The ability of HC2's subsidiaries to make distributions to HC2 is subject to numerous factors, including restrictions contained in each subsidiary's financing agreements, regulatory requirements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary's board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary's board of directors considers relevant. Our ability to sell assets and certain of our investments to meet our existing financing needs may also be limited by our existing financing instruments. Although the Company believes that it will be able to raise additional equity capital, refinance indebtedness or preferred stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient to fund any cash needs that we are not able to satisfy with the funds expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on terms satisfactory to the Company if at all. Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over the long-term. In addition, the sale of assets or the Company's investments may also make the Company less attractive to potential investors or future financing partners. We have begun to see significant costs increases, primarily at our Construction segment, driven by expenses associated with maintaining a safe work environment, and while executing on their projects. During the three and six months endedJune 30, 2020 ,$8.4 million and$8.8 million of COVID-19 costs were incurred. Although the COVID-19 pandemic did not have a material impact on the HC2's liquidity in the first half of 2020, management believes the continuation of the pandemic and its related effect on theU.S. and global economies could introduce added pressure on the Company's liquidity position and financial performance. Our sources of liquidity are primarily from the dividends from our operating subsidiaries, tax sharing agreement with DBMG, cash proceeds from completed and anticipated monetization's and other arrangements. Additionally, in response to the COVID-19 pandemic, our corporate staff is predominantly working remotely and many of our key vendors, and consultants have similarly begun to work remotely. As a result of such remote work arrangements, certain operational, reporting, accounting and other processes may slow, which could result in longer time to execute critical business functions.
Indebtedness
See Note 14. Debt Obligations, to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a description of our long-term debt.
Restrictive Covenants
The indenture governing the Senior Secured Notes datedNovember 20, 2018 , by and among HC2, the guarantors party thereto andU.S. Bank National Association , a national banking association ("U.S. Bank "), 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; (2) collateral coverage; (3) secured net leverage ratio; and (4) fixed charge coverage ratio.
The maintenance of liquidity covenant provides that the Company will not permit the aggregate amount of (i) all unrestricted cash and cash equivalents of the Company and the Subsidiary Guarantors, (ii) amounts available for drawing under revolving credit facilities and undrawn letters of credit of the Company and the Subsidiary Guarantors and (iii) dividends, distributions or payments that are immediately available to be paid to the Company by any of its Restricted Subsidiaries to be less than the Company's obligation to pay interest on the Senior Secured Notes and all other debt, including Convertible Preferred Stock mandatory cash dividends or any other mandatory cash pay Preferred Stock but excluding any obligation to pay interest on Convertible Preferred Stock or any other mandatory cash pay Preferred Stock which, in each case, may be paid by accretion or in-kind in accordance with its terms of the Company and its Subsidiary Guarantors for the next six months. As ofDecember 31, 2019 , the Company was in compliance with this covenant. The maintenance of collateral coverage provides that the Company's 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 ofJune 30, 2020 , the Company was in compliance with this covenant. 60
--------------------------------------------------------------------------------
The maintenance of secured net leverage ratio provides that the Company's Secured Net Leverage Ratio (as defined in the Secured Indenture) as of any date of determination calculated on a pro forma basis after accounting for the net proceeds from any Asset Sale which the Company has determined to apply to the repayment of any Debt to exceed 7.75 to 1.00. As ofJune 30, 2020 , the Company was in compliance with this covenant. The maintenance of fixed charge coverage ratio provides that commencing with the fiscal year endingDecember 31, 2020 , that the Company will not permit the Fixed Charge Coverage Ratio (as defined in the Secured Indenture) calculated as of the last day of each fiscal year of the Company to be less than 1.00 to 1.00 or that the Company's "HC2 Corporate Overhead" (as defined in the Secured Indenture) in any fiscal year not exceed the sum of$29.0 million for such fiscal year. As ofJune 30, 2020 , the Company was in compliance. The instruments governing the Company's Preferred Stock also limit the Company's and its subsidiaries ability to take certain actions, including, among other things, to incur additional indebtedness; issue additional Preferred Stock; engage in transactions with affiliates; and make certain restricted payments. These limitations are subject to a number of important exceptions and qualifications. The Company intends to conduct its operations in a manner that will result in continued 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.
© Edgar Online, source