INNOVATE CORP. You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated annual audited financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 9, 2022 (the "2021 Annual Report") and the unaudited financial statements and related notes included in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section in our 2021 Annual Report as well as the section below entitled "Special Note Regarding Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Unless the context otherwise requires, in this Quarterly Report on Form 10-Q, "INNOVATE" meansINNOVATE Corp. and the "Company," "we" and "our" mean INNOVATE together with its consolidated subsidiaries. "U.S. GAAP" means accounting principles accepted inthe United States of America .
Our Business
We are a diversified holding company with principal operations conducted through
three operating platforms or reportable segments: Infrastructure ("DBMG"), Life
Sciences ("Pansend"), and Spectrum ("Broadcasting"), plus our Other segment,
which includes businesses that do not meet the separately reportable segment
thresholds.
Our Operations
Refer to Note 1. Organization and Business to our Condensed Consolidated Financial Statements for additional information.
Cyclical Patterns
Our segments' operations can be highly cyclical. Our volume of business in our Infrastructure segment may be adversely affected by declines or delays in projects, which may vary by geographic region. Project schedules, particularly in connection with large, complex, and longer-term projects can also create fluctuations in the services provided, which may adversely affect us in a given period. For example, in connection with larger, more complicated projects, the timing of obtaining permits and other approvals may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on such projects when they move forward. Examples of other items that may cause our results or demand for our services to fluctuate materially from quarter to quarter include: weather or project site conditions, financial condition of our customers and their access to capital; margins of projects performed during any particular period; 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 a novel coronavirus ("COVID-19") as a pandemic, and onMarch 13, 2020 ,the United States declared the pandemic to be a national emergency. As COVID-19 spread throughout the country, the situation has continued to evolve, including, more recently, the increasing adoption of the COVID-19 vaccine and the reopening of state economies. The Company's top priority has been to protect its employees and their families, and those of the Company's customers. The Company continues to take precautionary measures as directed by health authorities and local governments, including changing operational procedures as necessary, providing additional protective gear and cleaning to protect personnel and customers, which has resulted and may continue to result in disruptions to and increased costs of the Company's operations. We may take further action as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our operations. As the vaccine rollout has commenced, certain employees have begun to return to the office, either full-time or part-time. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, including any new strains of the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions. The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including, but not limited to, the outbreak of any new strains of the coronavirus, any related travel advisories and restrictions, 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. 33 -------------------------------------------------------------------------------- COVID-19 has caused supply chain challenges related to labor shortages and supply chain disruptions, which may create significant delays in our ability to complete projects or deliver products. The receipt of material from impacted areas has been slowed or disrupted and our suppliers are expected to face similar challenges in fulfilling orders. In addition, reductions in the number of ocean carrier voyages, ocean freight capacity issues, congestion at major international gateways and other economic factors continue to persist worldwide due to COVID-19 and worldwide supply impacts as there is much greater demand for shipping and reduced capacity and equipment, which has resulted in recent price increases per shipping container. In addition, inthe United States , trucking costs have continued to rise due to driver shortages and increased labor costs, and new federal and state safety, environmental and labor regulations could be implemented. These changes may disrupt our supply chain, which may result in a delay in the completion of our projects or manufacturing of our products and may cause us to incur significant additional costs. Although we may attempt to pass on certain of these increased costs to our customers, we may not be able to pass all of these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost increases. These supply chain disruptions and transportation challenges could have a material adverse effect on our results of operations or financial condition. We continue to monitor the evolving situation and guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plans. As such, given the dynamic nature of this situation, we cannot reasonably estimate the continued impact of COVID-19 on our results of operations, financial condition, or cash flows in the future, but it could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to revised payment terms with certain of our customers.
During the three months ended
Infrastructure
DBMG was not materially impacted by COVID-19 and incurred zero COVID-19 costs during the three months endedMarch 31, 2022 . DBMG continues to perform work on jobs contracted during the last twelve to twenty-four months that had lower point of sale margins to maintain shop capacity and utilization, but is beginning to see an increase in point of sale margins on newer contracted work.
Life Sciences
Spectrum
Spectrum was not materially impacted by COVID-19 during the three months ended
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
34
--------------------------------------------------------------------------------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 March
31,
Increase /
2022 2021 (Decrease)
Revenue
Infrastructure $ 402.2 $ 161.3 $ 240.9
Life Sciences 0.8 - 0.8
Spectrum 9.8 10.5 (0.7)
Total revenue 412.8 171.8 241.0
Income (loss) from operations
Infrastructure $ 11.9 $ 2.2 $ 9.7
Life Sciences (5.0) (4.8) (0.2)
Spectrum (0.4) (1.2) 0.8
Other (0.1) (0.4) 0.3
Non-operating Corporate (5.7) (6.7) 1.0
Total income (loss) from operations 0.7 (10.9) 11.6
Interest expense (12.6) (21.4) 8.8
Loss on early extinguishment or restructuring of debt - (10.8) 10.8
Loss from equity investees (0.5) (2.1) 1.6
Other (loss) income (0.1) 3.4 (3.5)
Loss from continuing operations (12.5) (41.8) 29.3
Income tax expense (1.6) (1.1) (0.5)
Loss from continuing operations (14.1) (42.9) 28.8
Income from discontinued operations (including gain on disposal
of
- 51.9 (51.9)
Net (loss) income (14.1) 9.0 (23.1)
Net income attributable to noncontrolling interest and redeemable noncontrolling interest
1.7 3.6 (1.9)
Net (loss) income attributable to INNOVATE Corp. (12.4) 12.6 (25.0)
Less: Preferred dividends, deemed dividends, and repurchase gains
1.2 0.4 0.8
Net (loss) income attributable to common stock and participating
preferred stockholders $ (13.6) $ 12.2 $ (25.8)
Revenue: Revenue for the three months ended March 31, 2022 increased $241.0
million to $412.8 million from $171.8 million for the three months ended March
31, 2021 . The increase in revenue was primarily due to the Infrastructure
segment, which acquired Banker Steel in the second quarter of 2021, and
increases in Infrastructure market demand along with larger projects entering
the market.
Income (loss) from operations: Income from operations for the three months ended
March 31, 2022 increased $11.6 million to income of $0.7 million from a loss of
$10.9 million for the three months ended March 31, 2021 . The increase in Income
from operations was attributable to the Infrastructure segment as a result of
the contribution from Banker Steel, which was acquired in the second quarter of
2021, the Non-operating Corporate, which had decreases in legal expenses and
non-recurring costs related to the proxy contest in the comparable period, which
was partially offset by increased professional service fees mainly due to
timing, increased discretionary bonus due to the anticipated cash versus equity
split and increased stock compensation expense, as well as additional expenses
incurred in relation to the settlement with the Company's former CEO. The
increase in Income from operations is also attributable to decreased salaries
and severance expense at the Spectrum segment.
Interest expense: Interest expense for the three months ended March 31, 2022
decreased $8.8 million to $12.6 million from $21.4 million for the three months
ended March 31, 2021 . The decrease was primarily attributable to Non-Operating
Corporate's refinancing of the 2021 Senior Secured Notes in the first quarter of
2021, which decreased interest expense in the first quarter of 2022.
Loss on early extinguishment or restructuring of debt: Loss on early
extinguishment or restructuring of debt for the three months ended March 31,
2022 decreased $10.8 million to zero from a loss of $10.8 million for the three
months ended March 31, 2021 . This expense in the comparable period was driven by
the write-off of deferred financing costs and original issuance discount related
to the refinancing of the 2021 Senior Secured Notes and the 2022 Convertible
Notes in the first quarter of 2021. There was no comparable expense in the
current period.
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Loss from equity investees: Loss from equity investees for the three months
ended March 31, 2022 decreased $1.6 million to $0.5 million from $2.1 million
for the three months ended March 31, 2021 . The decrease in loss was driven by
increase in the equity income in HMN Technologies Co., Ltd. ("HMN"), which
produced higher profits in the first quarter of 2022 as compared to the
comparable period, and was generally attributable to the timing of turnkey
project work. Additionally contributing to the decrease in the loss was higher
equity method income generated from our investment in Triple Ring, which was
partially offset by higher equity method losses recorded from our investment in
MediBeacon, which is getting ready to submit an Investigational Device Exemption
("IDE") application to the Food and Drug Administration ("FDA"), the first step
toward receiving approval from the FDA to commence its US Pivotal Study of the
Transdermal Glomerular Filtration Rate ("TGFR"), which enables real-time, direct
monitoring of kidney function.
Other (loss) income: Other (loss) income for the three months ended March 31,
2022 decreased $3.5 million to a loss of $0.1 million from income of $3.4
million for the three months ended March 31, 2021 . The decrease was
predominantly driven by the income recognized on a litigation settlement in the
comparable period.
Income tax expense: Income tax expense was $1.6 million and $1.1 million for the
three months ended March 31, 2022 and 2021, respectively. The income tax expense
recorded for the three months ended March 31, 2022 and 2021 primarily relates to
the tax expense as calculated under ASC 740 for taxpaying entities.
Additionally, the tax benefits associated with losses generated by the INNOVATE
Corp. U.S. consolidated income tax return and certain other businesses have been
reduced by a full valuation allowance as we do not believe it is
more-likely-than-not that the losses will be utilized prior to expiration.
Segment Results of Operations
In the Company's Condensed Consolidated Financial Statements, other operating (income) expense includes (i) (gain) loss on sale or disposal of assets, (ii) lease termination costs, (iii) asset impairment expense, (iv) accretion of asset retirement obligations, and (v)FCC reimbursements. Each table summarizes the results of operations of our operating segments and compares the amount of the change between the periods presented (in millions). Infrastructure Segment Three Months Ended March 31, Increase / 2022 2021 (Decrease) Revenue$ 402.2 $ 161.3 $ 240.9 Cost of revenue 357.7 137.0 220.7 Selling, general and administrative 27.9 19.7 8.2 Depreciation and amortization 5.3 2.4 2.9 Other operating income (0.6) - (0.6) Income from operations$ 11.9 $ 2.2 $ 9.7 Revenue: Revenue from our Infrastructure segment for the three months endedMarch 31, 2022 increased$240.9 million to$402.2 million from$161.3 million for the three months endedMarch 31, 2021 . The increase was primarily driven by DBMG's acquisition of Banker Steel, which was acquired in the second quarter of 2021 and contributed an incremental$136.1 million of revenue as well as an increase from the legacy fabrication and erection business. This was partially offset by a decrease at the construction modeling and detailing business due to the completion of projects in 2021 and the industrial maintenance and repair business. Cost of revenue: Cost of revenue from our Infrastructure segment for the three months endedMarch 31, 2022 increased$220.7 million to$357.7 million from$137.0 million for the three months endedMarch 31, 2021 . The increase was primarily driven by DBMG's acquisition of Banker Steel, which was acquired in the second quarter of 2021 and contributed incremental cost of revenue of$119.8 million for the three months endedMarch 31, 2022 , as well as the revenue improvements described above. Selling, general and administrative: Selling, general and administrative expense from our Infrastructure segment for the three months endedMarch 31, 2022 increased$8.2 million to$27.9 million from$19.7 million for the three months endedMarch 31, 2021 . The increases were primarily driven by the acquisition of Banker Steel, which was acquired in the second quarter of 2021 and contributed an incremental$6.7 million of selling, general and administrative expenses, as well as increases in consulting fees, travel, and meals and entertainment. Depreciation and amortization: Depreciation and amortization from our Infrastructure segment for the three months endedMarch 31, 2022 increased$2.9 million to$5.3 million from$2.4 million for the three months endedMarch 31, 2021 . The increase was largely due to the additional amortization and depreciation of assets obtained in the acquisition of Banker Steel in the second quarter of 2021, which contributed an additional$2.8 million of depreciation and amortization expense in the first quarter of 2022. Other operating income: Other operating income from our Infrastructure segment for the three months endedMarch 31, 2022 increased$0.6 million to$0.6 million from zero for the three months endedMarch 31, 2021 . The increase in other operating income was driven by an asset sale. 36 --------------------------------------------------------------------------------
Life Sciences Segment
Three Months Ended March
31,
Increase /
2022 2021 (Decrease)
Revenue $ 0.8 $ - $ 0.8
Cost of revenue 0.6 - 0.6
Selling, general and administrative 5.1 4.8 0.3
Depreciation and amortization 0.1 - 0.1
Loss from operations $ (5.0) $ (4.8) $ (0.2)
Revenue: Revenue from our Life Sciences segment for the three months ended March
31, 2022 increased $0.8 million to $0.8 million from zero for the three months
ended March 31, 2021 . The increase in revenue was attributable to R2, which
began the sale of its Glacial Rx products in the second quarter 2021 and its
Glacial Spa products in the first quarter 2022.
Cost of revenue: Cost of revenue from our Life Sciences segment for the three
months ended March 31, 2022 increased $0.6 million to $0.6 million from zero for
the three months ended March 31, 2021 . The increase in cost of revenue was
attributable to R2, which began the sale of its Glacial Rx products in the
second quarter 2021 and its Glacial Spa products in the first quarter 2022.
Selling, general and administrative: Selling, general and administrative
expenses from our Life Sciences segment for the three months ended March 31,
2022 increased $0.3 million to $5.1 million from $4.8 million for the three
months ended March 31, 2021 . The increase was driven by higher expenses at R2,
which increased spending from the comparable period as a result of increased
headcount across the organization, mainly to build out its sales team which was
partially offset by a decrease in professional fees.
Spectrum Segment
Three Months Ended March
31,
Increase /
2022 2021 (Decrease)
Revenue $ 9.8 $ 10.5 $ (0.7)
Cost of revenue 4.7 4.3 0.4
Selling, general and administrative 3.8 5.5 (1.7)
Depreciation and amortization 1.5 1.5 -
Other operating expense 0.2 0.4 (0.2)
Loss from operations $ (0.4) $ (1.2) $ 0.8
Revenue: Revenue from our Spectrum segment for the three months ended March 31,
2022 decreased $0.7 million to $9.8 million from $10.5 million for the three
months ended March 31, 2021 . The decrease was primarily driven by a decrease in
advertising revenues at the Azteca network as a result of a decreased footprint,
primarily in the Los Angeles market. This was partially offset by an increase in
station revenues as they launched new customers and increased the number of
operating stations.
Cost of revenue: Cost of revenue from our Spectrum segment for the three months
ended March 31, 2022 increased $0.4 million to $4.7 million from $4.3 million
for the three months ended March 31, 2021 . The overall increase was primarily
driven by costs associated with higher number of operating stations and an
increase in expenses at the Azteca network as a result of Program Licensing
Agreement royalty expense starting in the first quarter of 2022.
Selling, general and administrative: Selling, general and administrative expense
from our Spectrum segment for the three months ended March 31, 2022 decreased
$1.7 million to $3.8 million from $5.5 million for the three months ended March
31, 2021 . The overall decrease was primarily driven by a decrease in salaries
and severance expense.
Other operating expense: Other operating expense from our Spectrum segment for
the three months ended March 31, 2022 decreased $0.2 million to $0.2 million
from $0.4 million for the three months ended March 31, 2021 . The decrease in
other operating expense was primarily related to a decrease in asset
impairments, partially offset by a decrease in gains from FCC reimbursements.
37
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Non-operating Corporate
Three Months Ended March
31,
Increase /
2022 2021 (Decrease)
Selling, general and administrative
- - -
Loss from operations $ (5.7) $ (6.7) $ 1.0
Selling, general and administrative: Selling, general and administrative
expenses from our Non-operating Corporate segment for the three months ended
March 31, 2022 decreased $1.0 million to $5.7 million from $6.7 million for the
three months ended March 31, 2021 . The decrease was driven by decreases in legal
expenses and non-recurring costs related to the proxy contest in the comparable
period. This was partially offset by increased professional service fees due
mainly to timing, increased discretionary bonus due to the anticipated cash
versus equity split and increased stock compensation expense, as well as
additional expenses incurred in relation to the settlement with the Company's
former CEO.
Loss from Equity Investees
Three Months Ended March
31,
Increase /
2022 2021 (Decrease)
Life Sciences $ (1.0) $ (1.5) $ 0.5
Other 0.5 (0.6) 1.1
Loss from equity investees $ (0.5) $ (2.1) $ 1.6
Life Sciences: Loss from equity investees within our Life Sciences segment for
the three months ended March 31, 2022 decreased $0.5 million to $1.0 million
from $1.5 million for the three months ended March 31, 2021 . The increase in
loss was primarily due to higher equity method income recorded from our
investment in Triple Ring, which was partially offset by higher equity method
losses recorded from our in MediBeacon, which is getting ready to submit an IDE
application to the FDA, the first step toward receiving approval from the FDA to
commence its US Pivotal Study of the TGFR, which enables real-time, direct
monitoring of kidney function.
Other: Income from equity investees within our Other segment for the three
months ended March 31, 2022 increased $1.1 million to $0.5 million from a loss
of $0.6 million for the three months ended March 31, 2021 . The increase was
driven by the equity investment in HMN, which produced higher income the first
quarter of 2022 as compared to the first quarter of 2021, which is generally
attributable to the timing of project work.
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 discontinued operations; depreciation and amortization; Other operating (income) expense, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, asset impairment expense andFCC reimbursements; interest expense; other (income) expense, net; loss on early extinguishment or restructuring of debt; income tax (benefit) expense; noncontrolling interest; share-based compensation expense; non-recurring items; costs associated with the COVID-19 pandemic; and acquisition and disposition costs. 38 --------------------------------------------------------------------------------
(in millions) Three months ended March 31, 2022
Non-operating Other and
Infrastructure Life Sciences Spectrum Corporate Eliminations INNOVATE
Net (loss) attributable to INNOVATE
Corp. $ (12.4)
Less: Discontinued operations -
Net Income (loss) attributable to
INNOVATE Corp. , excluding discontinued
operations $ 6.1 $ (4.1) $ (3.4) $ (11.3) $ 0.3 $ (12.4)
Adjustments to reconcile net income
(loss) to Adjusted EBITDA:
Depreciation and amortization 5.3 0.1 1.5 - - 6.9
Depreciation and amortization (included
in cost of revenue) 3.7 - - - - 3.7
Other operating (income) expense (0.6) - 0.2 - - (0.4)
Interest expense 2.2 - 2.0 8.4 - 12.6
Other expense (income), net 0.1 0.1 1.5 (1.6) - 0.1
Income tax expense (benefit) 2.9 - - (1.3) - 1.6
Noncontrolling interest 0.6 (2.0) (0.6) - 0.3 (1.7)
Share-based compensation expense - 0.1 - 0.7 - 0.8
Acquisition and disposition costs 0.2 - 0.1 0.5 (0.5) 0.3
Adjusted EBITDA $ 20.5 $ (5.8) $ 1.3 $ (4.6) $ 0.1 $ 11.5
(in millions) Three months ended March 31, 2021
Non-operating Other and
Infrastructure Life Sciences Spectrum Corporate Eliminations INNOVATE
Net income attributable to INNOVATE
Corp. $ 12.6
Less: Discontinued operations 51.9
Net Income (loss) attributable to
INNOVATE Corp. , excluding discontinued
operations $ - $ (4.2) $ (4.4) $ (30.8) $ 0.1 $ (39.3)
Adjustments to reconcile net income
(loss) to Adjusted EBITDA:
Depreciation and amortization 2.4 - 1.5 - - 3.9
Depreciation and amortization (included
in cost of revenue) 2.3 - - - - 2.3
Other operating expense - - 0.4 - - 0.4
Interest expense 1.9 - 2.3 17.2 - 21.4
Loss on early extinguishment or
restructuring of debt - - 0.9 9.9 - 10.8
Other expense (income), net 0.2 - 0.4 (4.0) - (3.4)
Income tax expense - - - 1.1 - 1.1
Noncontrolling interest - (2.1) (0.5) - (1.1) (3.7)
Share-based compensation expense - 0.1 0.1 0.4 - 0.6
Nonrecurring items 0.2 - - 0.5 - 0.7
COVID-19 costs 3.9 - - - - 3.9
Acquisition and disposition costs 0.4 - 0.1 1.7 0.1 2.3
Adjusted EBITDA $ 11.3 $ (6.2) $ 0.8 $ (4.0) $ (0.9) $ 1.0
Infrastructure: Net income from our Infrastructure segment for the three months
ended March 31, 2022 increased $6.1 million to $6.1 million from zero for the
three months ended March 31, 2021 . Adjusted EBITDA from our Infrastructure
segment for the three months ended March 31, 2022 increased $9.2 million to
$20.5 million from $11.3 million for the three months ended March 31, 2021 . The
increase in Adjusted EBITDA can be attributed to the contribution from Banker
Steel, which was acquired in the second quarter of 2021 and increased profit as
a result of higher sales at the fabrication and erection business. The increase
was partially offset by lower margins in the industrial maintenance and repair
business and the construction modeling and detailing business as a result of the
completion of high margin project in prior year, as well as an increase in G&A
expenses due to the acquisition of Banker Steel.
Life Sciences: Net loss from our Life Sciences segment for the three months
ended March 31, 2022 decreased $0.1 million to $4.1 million from $4.2 million
for the three months ended March 31, 2021 . Adjusted EBITDA loss from our Life
Sciences segment for the three months ended March 31, 2022 decreased $0.4
million to $5.8 million from $6.2 million for the three months ended March 31,
2021 . The decrease in Adjusted EBITDA loss was primarily driven by higher equity
method income recorded from our investment in Triple Ring, which was partially
offset by higher equity method losses recorded from our investment in
MediBeacon, which is getting ready to submit an IDE application to the FDA, the
first step toward receiving approval from the FDA to commence its US Pivotal
Study of the TGFR, which enables real-time, direct monitoring of kidney
function.
39
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Spectrum: Net loss from our Spectrum segment for the three months ended March
31, 2022 decreased $1.0 million to $3.4 million from $4.4 million for the three
months ended March 31, 2021 . Adjusted EBITDA from our Spectrum segment for the
three months ended March 31, 2022 increased $0.5 million to $1.3 million from
$0.8 million for the three months ended March 31, 2021 . The overall increase in
Adjusted EBITDA was primarily driven by a decrease in salaries and severance
expenses and an increase in station revenues as they launched new customers.
This was partially offset by a decrease in advertising revenue at Network and an
increase in station costs as a result of new station builds.
Non-operating Corporate: Net loss from our Non-operating Corporate segment for
the three months ended March 31, 2022 decreased $19.5 million to $11.3 million
from $30.8 million for the three months ended March 31, 2021 . Adjusted EBITDA
loss from our Non-operating Corporate segment for the three months ended March
31, 2022 increased $0.6 million to $4.6 million from $4.0 million for the three
months ended March 31, 2021 . The increase in Adjusted EBITDA loss was driven by
increased professional service expenses mainly due to timing, increased
discretionary bonus due to the anticipated cash versus equity split, as well as
the settlement with the Company's former CEO. This was partially offset by
decreased legal expenses driven by the reduced legal activity in 2022.
Other and Eliminations: Net income from our Other and Eliminations segment for
the three months ended March 31, 2022 increased $0.2 million to $0.3 million
from $0.1 million for the three months ended March 31, 2021 . Adjusted EBITDA
from our Other segment for the three months ended March 31, 2022 increased $1.0
million to $0.1 million from an Adjusted EBITDA loss of $0.9 million for the
three months ended March 31, 2021 . The increase in Adjusted EBITDA for our Other
and Eliminations segment was primarily driven by the equity investment in HMN,
as it produced higher income than in the comparable period, which is generally
attributable to the timing of project work.
Three months ended March
(in millions): 31,
Increase /
2022 2021 (Decrease)
Infrastructure $ 20.5 $ 11.3 $ 9.2
Life Sciences (5.8) (6.2) 0.4
Spectrum 1.3 0.8 0.5
Non-Operating Corporate (4.6) (4.0) (0.6)
Other and Eliminations 0.1 (0.9) 1.0
Adjusted EBITDA $ 11.5 $ 1.0 $ 10.5
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
AtMarch 31, 2022 , DBMG's backlog was$1,382.9 million , consisting of$1,328.8 million under contracts or purchase orders and$54.1 million under letters of intent or notices to proceed. Approximately$729.3 million , representing 52.7% of DBMG's backlog atMarch 31, 2022 , was attributable to five contracts, letters of intent, notices to proceed or purchase orders. If one or more of these projects terminate or reduce their scope, DBMG's backlog could decrease substantially. DBMG includes an additional$15.8 million in its backlog that is not included in the remaining unsatisfied performance obligations noted in Note 4. Revenue. This 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, 2022 Convertible Notes and 2026 Convertible Notes, Revolving Credit Agreement, dividend payments on its Preferred Stock and recurring operational expenses. As ofMarch 31, 2022 , the Company had$26.4 million of cash and cash equivalents compared to$45.5 million as ofDecember 31, 2021 . On a stand-alone basis, as ofMarch 31, 2022 , the Non-Operating Corporate segment had cash and cash equivalents of$5.3 million compared to$22.0 million atDecember 31, 2021 .
Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment, OTA broadcast station equipment, development of back-office systems, operating costs and expenses, and income taxes.
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As of March 31, 2022 , the Company had $684.6 million of indebtedness on a
consolidated basis compared to $630.8 million as of December 31, 2021 , an
increase of $53.8 million , which was primarily due to a $60.0 million increase
in DBMG's Line of Credit to fund working capital requirements. On a stand-alone
basis, as of March 31, 2022 and December 31, 2021 , INNOVATE had indebtedness of
$390.0 million and $390.0 million , respectively.
INNOVATE's stand-alone debt consists of the $330.0 million aggregate principal
amount of 2026 Senior Secured Notes, $3.2 million aggregate principal amount of
2022 Convertible Notes, $51.8 million aggregate principal amount of 2026
Convertible Notes, and $5.0 million aggregate principal amount drawn on its 2024
Revolving Credit Agreement. INNOVATE is required to make semi-annual interest
payments on its 2026 Senior Secured Notes, 2022 Convertible Notes and 2026
Convertible Notes, and quarterly interest payments on its 2024 Revolving Credit
Agreement.
INNOVATE received
INNOVATE is required to make dividend payments on its outstanding Preferred
Stock on
We have financed our growth and operations to date, and expect to finance our future growth and operations, through public offerings and private placements of debt and equity securities, credit facilities, vendor financing, capital lease financing and other financing arrangements, as well as cash generated from the operations of our subsidiaries. In the future, we may also choose to sell assets or certain investments to generate cash. At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt service and operating leases) and other cash needs for our operations for at least the next twelve months from the issuance of the Condensed Consolidated Financial Statements through a combination of available cash and distributions from our subsidiaries. The ability of INNOVATE's subsidiaries to make distributions to INNOVATE is subject to numerous factors, including restrictions contained in each subsidiary's financing agreements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary's board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary's board of directors considers relevant. Although the Company believes, to the extent needed, that it will be able to raise additional equity capital, refinance indebtedness or preferred stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient to fund any cash needs that we are not able to satisfy with the funds on hand or expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on terms satisfactory to the Company, if at all. Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over the long-term. Our ability to sell assets and certain of our investments to meet our existing financing needs may also be limited by our existing financing instruments. In addition, the sale of assets or the Company's investments may also make the Company less attractive to potential investors or future financing partners. InSeptember 2018 , the Company entered into a 75-month lease for office space. As part of the agreement, INNOVATE was able to pay a lower security deposit and lease payments, and received favorable lease terms as consideration for landlord required cross default language in the event of default of the shared space leased byHarbinger Capital Partners , formerly a related party, in the same building. With the adoption of ASC 842, as ofJanuary 1, 2019 , this lease was recognized as a right of use asset and lease liability on the Condensed Consolidated Balance Sheets. DBMG's off-balance sheet arrangements atMarch 31, 2022 included letters of credit of$13.5 million under Credit and Security Agreements and performance bonds of$779.0 million . DBMG's contract arrangements with customers sometimes require DBMG to provide performance bonds to partially secure its obligations under its contracts. Bonding requirements typically arise in connection with private contracts and sometimes with respect to certain public work projects. DBMG's performance bonds are obtained through surety companies and typically cover the entire project price.
COVID-19 Expenditures
We have historically seen significant cost increases, primarily at our Infrastructure segment, driven by expenses associated with maintaining a safe work environment and while executing on its projects. During the three months endedMarch 31, 2021 ,$3.9 million of COVID-19 costs were incurred. Although the COVID-19 pandemic did not have a material impact on INNOVATE's liquidity for the three months endedMarch 31, 2022 , 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 and tax sharing agreement with DBMG, cash proceeds from completed and anticipated monetization's and other arrangements. 41 --------------------------------------------------------------------------------
Capital Expenditures
Capital expenditures for the periods ended
Three Months Ended March 31,
2022 2021
Infrastructure $ 2.9 $ 1.6
Life Sciences 0.1 0.2
Spectrum 1.6 1.4
Total $ 4.6 $ 3.2
Indebtedness
Non-Operating Corporate
2026 Senior Secured Notes Terms and Conditions
Maturity. The 2026 Senior Secured Notes mature on
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
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.
The Secured Indenture permits the Company, under specified circumstances, to
incur additional debt in the future that could equally and ratably share in the
collateral. The amount of such debt is limited by the covenants contained in the
Secured Indenture.
Events of Default. The Secured Indenture contains customary events of default
which could, subject to certain conditions, cause the 2026 Senior Secured Notes
to become immediately due and payable.
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--------------------------------------------------------------------------------2022 Convertible Notes Terms and Conditions
Maturity. The 2022 Convertible Notes mature on
Interest. The 2022 Convertible Notes accrue interest at a rate of 7.5% per year. Interest on the 2022 Convertible Notes is paid semi-annually onDecember 1 andJune 1 of each year.
Issue Price. The issue price of the 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 Secured Notes, to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries, including trade credit. Optional Redemption. The Company could not redeem the notes prior toJune 1, 2020 . From or afterJune 1, 2020 , 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 2022 Convertible Notes are convertible into shares of the Company's common stock based on a conversion rate of 234.2971 shares of common stock per$1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately$4.27 per share of the Company's common stock), at any time prior to the close of business on the business day immediately preceding the maturity date, in principal amounts of$1,000 or an integral multiple of$1,000 in excess thereof. In addition, following a Make-Whole Fundamental Change (as defined in the indenture governing the 2022 Convertible Notes) or the Company's delivery of a notice of redemption for the 2022 Convertible Notes, the Company will, in certain circumstances, increase the conversion rate for a holderwho elects to convert its 2022 Convertible Notes in connection with (i) such Make-Whole Fundamental Change or (ii) such notice of redemption. However, to comply with certain listing standards ofThe New York Stock Exchange , the Company will settle in cash its obligation to increase the conversion rate in connection with a Make-Whole Fundamental Change or redemption until it has obtained the requisite stockholder approval. Events of Default. The indenture governing the 2022 Convertible Notes contains customary events of default which could, subject to certain conditions, cause the 2022 Convertible Notes to become immediately due and payable.
2026 Convertible Notes Terms and Conditions
Maturity. The 2026 Convertible Notes mature on
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 onFebruary 1 andAugust 1 of each year.
Issue Price. The issue price of the 2026 Convertible Notes was 100% of par.
Ranking. The notes are the Company's general unsecured and unsubordinated obligations and will rank equally in right of payment with all of the Company's existing and future unsecured and unsubordinated indebtedness, and senior in right of payment to any of the Company's future indebtedness that is expressly subordinated to the notes. The notes will be effectively subordinated to all of the Company's existing and future secured indebtedness, including the Company's 2026 Senior Secured Notes, to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries, including trade credit. Optional Redemption. The Company may not redeem the notes prior toAugust 1, 2023 . On or afterAugust 1, 2023 , the Company may redeem for cash all of the notes if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (which need not be consecutive trading days) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. The redemption price will equal 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date. 43 -------------------------------------------------------------------------------- Conversion Rights. The 2026 Convertible Notes are convertible into shares of the Company's common stock based on an initial conversion rate of 234.2971 shares of common stock per$1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately$4.27 per share of the Company's common stock), at any time prior to the close of business on the business day immediately preceding the maturity date, in principal amounts of$1,000 or an integral multiple of$1,000 in excess thereof. In addition, following a Make-Whole Fundamental Change (as defined in the Convertible Indenture) or the Company's delivery of a notice of redemption for the 2026 Convertible Notes, the Company will, in certain circumstances, increase the conversion rate for a holderwho 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 ofThe New York Stock Exchange , the Company will settle in cash its obligation to increase the conversion rate in connection with a Make-Whole Fundamental Change or redemption until it has obtained the requisite stockholder approval.
Events of Default. The Convertible Indenture contains customary events of default which could, subject to certain conditions, cause the Convertible Notes to become immediately due and payable.
Revolving Credit Agreement
Lender.
Maturity: The Revolving Credit Agreement has a maturity date of
Ranking. Obligations under the Revolving Credit Agreement constitute a First-Out Debt, as defined in the Secured Indenture, and are secured on a pari passu basis with the 2026 Senior Secured Notes. Collateral: As provided under a Collateral Trust Joinder, the lender was added as a secured party to the Collateral Trust Agreement, and accordingly the pari passu obligations and commitments under the Revolving Credit Agreement are secured equally and ratably by the collateral of the Secured Notes.
Infrastructure
The UMB Term Loan and UMB Revolving Line associated with our Infrastructure segment contains customary restrictive and financial covenants related to debt levels and performance. As ofMarch 31, 2022 , DBMG was in compliance with all of the financial covenants to its debt agreements. See Note 9. Debt Obligations to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional details regarding the Company's indebtedness.
Restrictive Covenants
The indenture governing the 2026 Senior Secured Notes datedFebruary 1, 2021 , by and among INNOVATE, the guarantors party thereto andU.S. Bank National Association , a national banking association, as trustee (the "Secured Indenture"), contains certain affirmative and negative covenants limiting, among other things, the ability of the Company, and, in certain cases, the Company's subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock; make certain restricted payments; sell assets; engage in transactions with affiliates; or consolidate or merge with, or sell substantially all of its assets to, another person. These covenants are subject to a number of important exceptions and qualifications. The Company is also required to comply with certain financial maintenance covenants, which are similarly subject to a number of important exceptions and qualifications. These covenants include maintenance of (1) liquidity and (2) collateral coverage. The maintenance of liquidity covenant provides that the Company will not permit the aggregate amount of (i) all unrestricted cash and Cash Equivalents of the Company and the Subsidiary Guarantors, (ii) amounts available for drawing under revolving credit facilities and undrawn letters of credit of the Company and the Subsidiary Guarantors and (iii) dividends, distributions or payments that are immediately available to be paid to the Company by any of its Restricted Subsidiaries to be less than the Company's obligation to pay interest on the 2026 Senior Secured Notes and all other Debt, including Convertible Preferred Stock mandatory cash dividends or any other mandatory cash pay Preferred Stock but excluding any obligation to pay interest on Convertible Preferred Stock or any other mandatory cash pay Preferred Stock which, in each case, may be paid by accretion or in-kind in accordance with its terms of the Company and its Subsidiary Guarantors for the next six months. As ofMarch 31, 2022 , the Company was in compliance with this covenant. The maintenance of collateral coverage provides that the certain subsidiaries' Collateral Coverage Ratio (as defined in the Secured Indenture as the ratio of (i) the Loan Collateral to (ii) Consolidated Secured Debt (each as defined therein)) calculated on a pro forma basis as of the last day of each fiscal quarter may not be less than 1.50 to 1.00. As ofMarch 31, 2022 , the Company was in compliance with this covenant. The instruments governing the Company's Preferred Stock also limit the Company's and its subsidiaries ability to take certain actions, including, among other things, to incur additional indebtedness; issue additional Preferred Stock; engage in transactions with affiliates; and make certain restricted payments. These limitations are subject to a number of important exceptions and qualifications. 44
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The Company conducted its operations in a manner that resulted in compliance with the Secured Indenture; however, compliance with certain financial covenants for future periods may depend on the Company or one or more of the Company's subsidiaries undertaking one or more non-operational transactions, such as the management of operating cash outflows, a monetization of assets, a debt incurrence or refinancing, the raising of equity capital, or similar transactions. If the Company is unable to remain in compliance and does not make alternate arrangements, an event of default would occur under the Company's Secured Indenture which, among other remedies, could result in the outstanding obligations under the indenture becoming immediately due and payable and permitting the exercise of remedies with respect to the collateral. There is no assurance the Company will be able to complete any non-operational transaction it may undertake to maintain compliance with covenants under the Secured Indenture or, even if the Company completes any such transaction, that it will be able to maintain compliance for any subsequent period.
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