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EX-4.2 - EXHIBIT 4.2 - HC2 HOLDINGS, INC.ex4_2.htm
EX-4.5 - EXHIBIT 4.5 - HC2 HOLDINGS, INC.ex4_5.htm
EX-4.4 - EXHIBIT 4.4 - HC2 HOLDINGS, INC.ex4_4.htm
EX-4.6 - EXHIBIT 4.6 - HC2 HOLDINGS, INC.ex4_6.htm
EX-4.3 - EXHIBIT 4.3 - HC2 HOLDINGS, INC.ex4_3.htm
EX-4.1 - EXHIBIT 4.1 - HC2 HOLDINGS, INC.ex4_1.htm
EX-10.2 - EXHIBIT 10.2 - HC2 HOLDINGS, INC.ex10_2.htm
EX-10.1 - EXHIBIT 10.1 - HC2 HOLDINGS, INC.ex10_1.htm
EX-32 - EXHIBIT 32 - HC2 HOLDINGS, INC.ex32.htm
EX-31 - EXHIBIT 31 - HC2 HOLDINGS, INC.ex31.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2015

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File No. 001-35210
 


HC2 HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 

 
Delaware
 
54-1708481
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
505 Huntmar Park Drive, Suite 325
   
Herndon, VA
 
20170
(Address of principal executive offices)
 
(Zip Code)
 
(703) 865-0700
(Registrant’s telephone number, including area code)
 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
     
Non-accelerated filer
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
Outstanding as of July 31, 2015
Common Stock, $0.001 par value
25,592,356



HC2 HOLDINGS, INC.
INDEX TO FORM 10-Q
 
   
Page No.
   
Part I. FINANCIAL INFORMATION
 
     
 
Item 1.
FINANCIAL STATEMENTS (UNAUDITED)
 
   
3
   
4
   
5
   
6
   
7
   
8
 
Item 2.
30
 
Item 3.
42
 
Item 4.
42
       
Part II. OTHER INFORMATION
 
   
 
Item 1.
44
 
Item1A.
44
 
Item 2.
44
 
Item 3.
44
 
Item 4.
44
 
Item 5.
44
 
Item 6.
44
45
46
 
2

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Services revenue
 
$
147,841
   
$
42,111
   
$
221,559
   
$
85,465
 
Sales revenue
   
133,141
     
54,475
     
261,231
     
54,475
 
Net revenue
   
280,982
     
96,586
     
482,790
     
139,940
 
Operating expenses:
                               
Cost of revenue - services
   
134,589
     
39,530
     
196,509
     
80,637
 
Cost of revenue - sales
   
110,909
     
43,330
     
221,445
     
43,330
 
Selling, general and administrative
   
26,476
     
14,032
     
49,529
     
20,236
 
Depreciation and amortization
   
5,236
     
344
     
10,242
     
554
 
Loss on sale or disposal of assets
   
498
     
447
     
971
     
367
 
Total operating expenses
   
277,708
     
97,683
     
478,696
     
145,124
 
Income (loss) from operations
   
3,274
     
(1,097
)
   
4,094
     
(5,184
)
Interest expense
   
(10,041
)
   
(1,012
)
   
(18,649
)
   
(1,013
)
Amortization of debt discount
   
(84
)
   
(576
)
   
(176
)
   
(576
)
Other income (expense), net
   
(4,937
)
   
1,665
     
(4,744
)
   
1,616
 
Foreign currency transaction gain (loss)
   
1,822
     
437
     
1,051
     
403
 
Loss from continuing operations before income (loss) from equity investees and income tax benefit (expense)
   
(9,966
)
   
(583
)
   
(18,424
)
   
(4,754
)
Income (loss) from equity investees
   
1,429
     
-
     
(1,259
)
   
-
 
Income tax benefit (expense)
   
(2,464
)
   
(1,946
)
   
3,369
     
(1,955
)
Loss from continuing operations
   
(11,001
)
   
(2,529
)
   
(16,314
)
   
(6,709
)
Gain (loss) from discontinued operations
   
(11
)
   
27
     
(20
)
   
44
 
Loss from sale of discontinued operations
   
-
     
-
     
-
     
(784
)
Net loss
   
(11,012
)
   
(2,502
)
   
(16,334
)
   
(7,449
)
Less: Net (income) loss attributable to noncontrolling interest
   
(204
)
   
(1,059
)
   
57
     
(1,059
)
Net loss attributable to HC2 Holdings, Inc.
   
(11,216
)
   
(3,561
)
   
(16,277
)
   
(8,508
)
Less: Preferred stock dividends and accretion
   
1,089
     
200
     
2,177
     
200
 
Net loss attributable to common stock and participating preferred stockholders
 
$
(12,305
)
 
$
(3,761
)
 
$
(18,454
)
 
$
(8,708
)
Basic loss per common share:
                               
Loss from continuing operations attributable to HC2 Holdings, Inc.
 
$
(0.48
)
 
$
(0.22
)
 
$
(0.74
)
 
$
(0.50
)
Gain (loss) from discontinued operations
   
-
     
-
     
-
     
-
 
Loss from sale of discontinued operations
   
-
     
-
     
-
     
(0.05
)
Net loss attributable to HC2 Holdings, Inc.
 
$
(0.48
)
 
$
(0.22
)
 
$
(0.74
)
 
$
(0.55
)
Diluted loss per common share:
                               
Loss from continuing operations attributable to HC2 Holdings, Inc.
 
$
(0.48
)
 
$
(0.22
)
 
$
(0.74
)
 
$
(0.50
)
Gain (loss) from discontinued operations
   
-
     
-
     
-
     
-
 
Loss from sale of discontinued operations
   
-
     
-
     
-
     
(0.05
)
Net loss attributable to HC2 Holdings, Inc.
 
$
(0.48
)
 
$
(0.22
)
 
$
(0.74
)
 
$
(0.55
)
Weighted average common shares outstanding:
                               
Basic
   
25,514
     
16,905
     
24,838
     
15,780
 
Diluted
   
25,514
     
16,905
     
24,838
     
15,780
 
 
 See accompanying notes to condensed consolidated financial statements.
 
3

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Net loss
 
$
(11,012
)
 
$
(2,502
)
 
$
(16,334
)
 
$
(7,449
)
Other comprehensive income (loss)
                               
Foreign currency translation adjustment
   
2,489
     
238
     
(1,872
)
   
(136
)
Unrealized gain (loss) on available-for-sale securities, net of tax
   
(2,327
)
   
-
     
(3,089
)
   
-
 
Less: Comprehensive (income) loss attributable to the noncontrolling interest
   
(204
)
   
(1,059
)
   
57
     
(1,059
)
Comprehensive income (loss) attributable to HC2 Holdings, Inc.
 
$
(11,054
)
 
$
(3,323
)
 
$
(21,238
)
 
$
(8,644
)
 
 See accompanying notes to condensed consolidated financial statements.
 
4

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)

   
June 30,
2015
   
December 31,
2014
 
Assets
 
   
 
Current assets:
 
   
 
Cash and cash equivalents
 
$
68,941
   
$
107,978
 
Short-term investments
   
12,265
     
4,867
 
Accounts receivable (net of allowance for doubtful accounts receivable of $2,345 and $2,760 at June 30, 2015 and December 31, 2014, respectively)
   
214,027
     
151,558
 
Costs and recognized earnings in excess of billings on uncompleted contracts
   
35,573
     
28,098
 
Deferred tax asset - current
   
1,701
     
1,701
 
Inventories
   
17,796
     
14,975
 
Prepaid expenses and other current assets
   
23,746
     
22,455
 
Assets held for sale
   
8,597
     
3,865
 
Total current assets
   
382,646
     
335,497
 
Restricted cash
   
7,188
     
6,467
 
Long-term investments
   
71,793
     
48,674
 
Property, plant and equipment, net
   
235,862
     
239,851
 
Goodwill
   
29,649
     
27,990
 
Other intangible assets, net
   
27,987
     
31,144
 
Deferred tax asset - long-term
   
20,998
     
15,811
 
Other assets
   
18,429
     
18,614
 
Total assets
 
$
794,552
   
$
724,048
 
Liabilities, temporary equity and stockholders' equity
               
Current liabilities:
               
Accounts payable
 
$
81,644
   
$
79,794
 
Accrued interconnection costs
   
31,551
     
9,717
 
Accrued payroll and employee benefits
   
19,222
     
20,023
 
Accrued expenses and other current liabilities
   
51,640
     
34,042
 
Billings in excess of costs and recognized earnings on uncompleted contracts
   
29,859
     
41,959
 
Accrued income taxes
   
912
     
512
 
Accrued interest
   
2,847
     
3,125
 
Current portion of long-term debt
   
12,752
     
10,444
 
Current portion of pension liability
   
6,037
     
5,966
 
Total current liabilities
   
236,464
     
205,582
 
Long-term debt
   
374,321
     
332,927
 
Pension liability
   
28,501
     
31,244
 
Other liabilities
   
7,754
     
1,617
 
Total liabilities
   
647,040
     
571,370
 
Commitments and contingencies (See Note 11)
               
Temporary equity (See Note 13)
               
Preferred stock, $0.001 par value – 20,000,000 shares authorized; Series A - 30,000 shares issued and outstanding at June 30, 2015 and December 31, 2014; Series A-1 - 10,000 and 11,000 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively; Series A-2 - 14,000  and 0 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively
   
53,013
     
39,845
 
Stockholders' equity:
               
Common stock, $0.001 par value – 80,000,000 shares authorized;  25,623,982 and 23,844,711 shares issued and 25,592,356 and 23,813,085 shares outstanding at June 30, 2015 and December 31, 2014, respectively
   
26
     
24
 
Additional paid-in capital
   
150,537
     
147,081
 
Accumulated deficit
   
(58,157
)
   
(41,880
)
Treasury stock, at cost – 31,626  shares at June 30, 2015 and December 31, 2014, respectively
   
(378
)
   
(378
)
Accumulated other comprehensive loss
   
(20,139
)
   
(15,178
)
Total HC2 Holdings, Inc. stockholders' equity before noncontrolling interest
   
71,889
     
89,669
 
Noncontrolling interest
   
22,610
     
23,164
 
Total stockholders' equity
   
94,499
     
112,833
 
Total liabilities, temporary equity and stockholders' equity
 
$
794,552
   
$
724,048
 
 
 See accompanying notes to condensed consolidated financial statements.
 
5

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
 
   
   
Common Stock
   
Additional Paid-In
   
Treasury
   
Retained Earnings (Accumulated
   
Accumulated Other Comprehensive
   
Non- controlling
 
   
Total
   
Shares
   
Amount
   
Capital
   
Stock
   
Deficit)
   
Income (Loss)
   
Interest
 
Balance as of December 31, 2013
 
$
54,409
     
14,226
   
$
14
   
$
98,598
   
$
(378
)
 
$
(29,773
)
 
$
(14,052
)
 
$
-
 
Share-based compensation expense
   
1,006
     
-
     
-
     
1,006
     
-
     
-
     
-
     
-
 
Proceeds from the exercise of warrants and stock options
   
14,368
     
4,786
     
5
     
14,363
     
-
     
-
     
-
     
-
 
Taxes paid in lieu of shares issued for share-based compensation
   
(41
)
   
-
     
-
     
(41
)
   
-
     
-
     
-
     
-
 
Preferred stock dividend and accretion
   
(200
)
                   
(200
)
   
-
     
-
     
-
     
-
 
Issuance of common stock
   
6,000
     
1,500
     
2
     
5,998
     
-
     
-
     
-
     
-
 
Acquisition of noncontrolling interest
   
58,012
     
-
     
-
     
-
     
-
     
-
     
-
     
58,012
 
Additional acquisition of noncontrolling interest
   
(13,399
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(13,399
)
Net (loss) income
   
(7,449
)
   
-
     
-
     
-
     
-
     
(8,508
)
   
-
     
1,059
 
Foreign currency translation adjustment
   
(136
)
   
-
     
-
     
-
     
-
     
-
     
(136
)
   
-
 
Balance as of June 30, 2014
 
$
112,570
     
20,512
   
$
21
   
$
119,724
   
$
(378
)
 
$
(38,281
)
 
$
(14,188
)
 
$
45,672
 

   
   
Common Stock
   
Additional Paid-In
   
Treasury
   
Accumulated
   
Accumulated Other Comprehensive
   
Non- controlling
 
   
Total
   
Shares
   
Amount
   
Capital
   
Stock
   
Deficit
   
Income (Loss)
   
Interest
 
Balance as of December 31, 2014
 
$
112,833
     
23,813
   
$
24
   
$
147,081
   
$
(378
)
 
$
(41,880
)
 
$
(15,178
)
 
$
23,164
 
Share-based compensation expense
   
4,599
     
-
     
-
     
4,599
     
-
     
-
     
-
     
-
 
Dividend paid to noncontrolling interest
   
(241
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(241
)
Preferred stock dividend and accretion
   
(2,177
)
   
-
     
-
     
(2,177
)
   
-
     
-
     
-
     
-
 
Issuance of common stock
   
-
     
5
     
-
     
-
     
-
     
-
     
-
     
-
 
Issuance of restricted stock
   
2
     
1,539
     
2
     
-
     
-
     
-
     
-
     
-
 
Conversion of preferred stock to common stock
   
1,000
     
235
     
-
     
1,000
     
-
     
-
     
-
     
-
 
Acquisition of noncontrolling interest
   
(222
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(222
)
Excess book value over fair value of purchased noncontrolling interest
   
-
     
-
     
-
     
34
     
-
     
-
     
-
     
(34
)
Net loss
   
(16,334
)
   
-
     
-
     
-
     
-
     
(16,277
)
   
-
     
(57
)
Foreign currency translation adjustment
   
(1,872
)
   
-
     
-
     
-
     
-
     
-
     
(1,872
)
   
-
 
Unrealized gain (loss) on available-for-sale securities, net of tax
   
(3,089
)
   
-
     
-
     
-
     
-
     
-
     
(3,089
)
   
-
 
Balance as of June 30, 2015
 
$
94,499
     
25,592
   
$
26
   
$
150,537
   
$
(378
)
 
$
(58,157
)
 
$
(20,139
)
 
$
22,610
 
 
 See accompanying notes to condensed consolidated financial statements.
 
6

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
Cash flows from operating activities:
 
   
 
Net loss
 
$
(16,334
)
 
$
(7,449
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
Provision for doubtful accounts receivable
   
201
     
(198
)
Share-based compensation expense
   
4,599
     
1,006
 
Depreciation and amortization
   
14,049
     
1,038
 
Amortization of deferred financing costs
   
696
     
262
 
(Gain) loss on sale or disposal of assets
   
971
     
1,760
 
(Gain) loss on sale of investments
   
(164
)
   
(437
)
Equity investment (income)/loss
   
1,259
     
-
 
Amortization of debt discount
   
176
     
576
 
Deferred income taxes
   
(4,881
)
   
1
 
Other, net
198
-
Unrealized foreign currency transaction (gain) loss on intercompany and foreign debt
   
(46
)
   
(125
)
Changes in assets and liabilities, net of acquisitions:
               
(Increase) decrease in accounts receivable
   
(61,495
)
   
11,936
 
(Increase) decrease in costs and recognized earnings in excess of billings on uncompleted contracts
   
(7,229
)
   
1,389
 
(Increase) decrease in inventories
   
(2,718
)
   
(2,503
)
(Increase) decrease in prepaid expenses and other current assets
   
(778
)
   
6,241
 
(Increase) decrease in other assets
   
379
     
929
 
Increase (decrease) in accounts payable
   
455
     
6,304
 
Increase (decrease) in accrued interconnection costs
   
21,041
     
(2,896
)
Increase (decrease) in accrued payroll and employee benefits
   
4
     
728
 
Increase (decrease) in accrued expenses and other current liabilities
   
16,739
     
(213
)
Increase (decrease) in billings in excess of costs and recognized earnings on uncompleted contracts
   
(12,119
)
   
(7,766
)
Increase (decrease) in accrued income taxes
   
1,500
     
(1,291
)
Increase (decrease) in accrued interest
   
(278
)
   
634
 
Increase (decrease) in other liabilities
   
(972
)
   
(856
)
Increase (decrease) in pension liability
   
(3,144
)
   
-
 
Net cash (used in) provided by operating activities
   
(47,891
)
   
9,070
 
Cash flows from investing activities:
               
Purchase of property, plant and equipment
   
(12,914
)
   
(663
)
Sale of property and equipment and other assets
   
1,002
     
80
 
Purchase of equity investments
   
(8,643
)
   
-
 
Sale of equity investments
   
1,026
     
-
 
Sale of assets held for sale
   
1,479
     
-
 
Purchase of available-for-sale securities
   
(10,857
)
   
-
 
Sale of available-for-sale securities
   
-
     
423
 
Investment in debt securities
   
(19,347
)
   
-
 
Cash paid for business acquisitions, net of cash acquired
   
-
     
(85,627
)
Purchase of noncontrolling interest
   
(222
)
   
(5,000
)
(Increase) decrease in restricted cash
   
(721
)
   
-
 
Net cash used in investing activities
   
(49,197
)
   
(90,787
)
Cash flows from financing activities:
               
Proceeds from long-term obligations
   
294,346
     
123,412
 
Principal payments on long-term obligations
   
(245,724
)
   
(57,703
)
Payment of fees on restructuring of debt
   
-
     
(812
)
Payment of deferred financing costs
   
(1,137
)
   
-
 
Proceeds from sale of common stock, net
   
-
     
6,000
 
Proceeds from sale of preferred stock, net
   
14,033
     
29,075
 
Proceeds from the exercise of warrants and stock options
   
-
     
14,368
 
Payment of dividends
   
(2,038
)
   
-
 
Payment of dividend equivalents
   
-
     
(551
)
Taxes paid in lieu of shares issued for share-based compensation
   
-
     
(41
)
Net cash provided by financing activities
   
59,480
     
113,748
 
Effects of exchange rate changes on cash and cash equivalents
   
(1,429
)
   
(197
)
Net change in cash and cash equivalents
   
(39,037
)
   
31,834
 
Cash and cash equivalents, beginning of period
   
107,978
     
8,997
 
Cash and cash equivalents, end of period
 
$
68,941
   
$
40,831
 
                 
Supplemental cash flow information:
               
Cash paid for interest
 
$
20,157
   
$
194
 
Cash paid for taxes
 
$
856
   
$
2,311
 
Preferred stock dividends and accretion
 
$
2,177
   
$
-
 
Non-cash investing and financing activities:
               
Purchases of property, plant and equipment under financing arrangements
 
$
1,808
   
$
-
 
Property, plant and equipment included in accounts payable
 
$
822
   
$
-
 
Conversion of preferred stock to common stock
 
$
1,000
   
$
-
 
 
 See accompanying notes to condensed consolidated financial statements.
 
7

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND BUSINESS

HC2 Holdings, Inc. (“HC2” and, together with its subsidiaries, the “Company”, “we” and “our”) is a diversified holding company which seeks to acquire and grow attractive businesses that we believe can generate long-term sustainable free cash flow and attractive returns. While the Company generally intends to acquire controlling equity interests in its operating subsidiaries, the Company may invest to a limited extent in a variety of debt instruments or minority equity interest positions. The Company’s shares of common stock trade on the NYSE MKT LLC under the symbol “HCHC”.

The Company currently has six reportable segments based on management’s organization of the enterprise—Manufacturing, Marine Services, Utilities, Telecommunications, Life Sciences and Other, which includes operations that do not meet the separately reportable segment thresholds.

Our Manufacturing segment includes Schuff International, Inc. (“Schuff”) and its wholly-owned subsidiaries, which primarily operate as integrated fabricators and erectors of structural steel and heavy steel plates with headquarters in Phoenix, Arizona. Schuff’s has operations in Arizona, Georgia, Texas, Kansas and California, with its construction projects primarily located in the aforementioned states. In addition, Schuff has construction projects in select international markets, primarily Panama through a Panamanian joint venture with Empresas Hopsa, S.A. that provides steel fabrication services.

Our Marine Services segment includes Global Marine Systems Limited (“GMSL”). GMSL is a leading provider of engineering and underwater services on submarine cables. In conjunction with the acquisition, approximately 3% of the Company’s interest in GMSL was purchased by a group of individuals, leaving the Company’s controlling interest at approximately 97%.

Our Utilities segment includes American Natural Gas (“ANG”), which is a premier distributor of natural gas motor fuel headquartered in the Northeast that designs, builds, owns, acquires, operates and maintains compressed natural gas fueling stations for transportation vehicles.

In our Telecommunications segment, we operate a telecommunications business including a network of direct routes and provide premium voice communication services for national telecom operators, mobile operators, wholesale carriers, prepaid operators, Voice over Internet Protocol (“VoIP”) service operators and Internet service providers (“ISPs”) from our International Carrier Services (“ICS”) business unit.

In our Life Sciences segment, we operate Pansend, LLC (“Pansend”), which has an 80% interest in Genovel Orthopedics, Inc., which seeks to develop products to treat early osteoarthritis of the knee, and a 61% interest in R2 Dermatology (f/k/a “GemDerm Aesthetics, Inc.”), which develops skin lightening technology.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting and Securities and Exchange Commission (“SEC”) regulations. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such principles and regulations. In the opinion of management, the financial statements reflect all adjustments (all of which are of a normal and recurring nature), which are necessary to present fairly the financial position, results of operations, cash flows and comprehensive income (loss) for the interim periods. The results for the Company’s three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s most recently filed Annual Report on Form 10-K.
 
8

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

Principles of Consolidation—The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and all other subsidiaries over which the Company exerts control. All intercompany profits, transactions and balances have been eliminated in consolidation. As of June 30, 2015, the Company has a 97% interest in GMSL, a 91% interest in Schuff, a 53% interest in ANG and a 100% interest in DMi, Inc. Through its subsidiary, Pansend, the Company has an 80% interest in Genovel Orthopedics, Inc. and a 61% interest in R2 Dermatology (f/k/a GemDerm Aesthetics, Inc.). The results of each of these entities are consolidated with the Company’s results from and after their respective acquisition dates based on guidance from the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 810, “Consolidation” (“ASC 810”). The remaining interests not owned by the Company are presented as a noncontrolling interest component of total equity. Schuff uses a 4-4-5 week quarterly cycle, which for the second quarter of 2015 ended on June 28, 2015.

Reclassification —Certain previous year amounts have been reclassified to conform with current year presentations related to the reporting of new balance sheet line items.

Newly Adopted Accounting Principles

In April 2014, an update was issued to the Presentation of Financial Statements Topic No. 205 and Property, Plant and Equipment Topic No. 360, Accounting Standards Update (“ASU”) 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which changes the criteria for reporting discontinued operations. The ASU revises the definition of a discontinued operation and expands the disclosure requirements. Entities should not apply the amendments to a component of an entity that is classified as held for sale before the effective date even if it is disposed of after the effective date. That is, the ASU must be adopted prospectively. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been previously reported in the financial statements. On January 1, 2015, the Company adopted this update, which did not have a material impact on the condensed consolidated financial statements.

New Accounting Pronouncements
 
In May 2015, the FASB issued ASU 2015-08, “Business Combinations Topic No. 805: Pushdown Accounting-Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update)”, which rescinds certain SEC guidance in order to confirm with ASU 2014-17, “Pushdown Accounting” (“ASU 2014-17”). ASU 2014-17 was issued in November 2014 and provides a reporting entity that is a business or nonprofit activity (an “acquiree”) the option to apply pushdown accounting to its separate financial statements when an acquirer obtains control of the acquiree. Early adoption is permitted. The Company’s effective date for adoption is January 1, 2016. The Company does not expect this accounting update to have a material effect on its consolidated financial statements in future periods, although that could change.

In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, which requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e., an asset) on the balance sheet. This ASU provides examples illustrating the balance sheet presentation of notes net of their related discounts and debt issuance costs. Further, the amendments require the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. The Company’s effective date for adoption is January 1, 2016. The Company does not expect this accounting update to have a material effect on its consolidated financial statements in future periods, although that could change.

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis”, which amends the consolidation requirements in ASC 810 and significantly changes the consolidation analysis required under U.S. GAAP relating to whether or not to consolidate certain legal entities. Early adoption is permitted. The Company’s effective date for adoption is January 1, 2016. The Company does not expect this accounting update to have a material effect on its consolidated financial statements in future periods, although that could change.

In January 2015, the FASB issued ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”, which eliminates the concept from U.S. GAAP the concept of an extraordinary item. Under the ASU, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. Early adoption is permitted. The Company’s effective date for adoption is January 1, 2016. The Company does not expect this accounting update to have a material effect on its consolidated financial statements in future periods, although that could change.
 
9

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
3. BUSINESS COMBINATIONS

The Company’s acquisitions were accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Estimates of fair value included in the condensed consolidated financial statements, in conformity with ASC No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”), represent the Company’s best estimates and valuations developed with the assistance of independent appraisers and, where such valuations have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The following estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.

Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. In accordance with ASC 805 “Business Combinations”, if additional information is obtained about these assets and liabilities within the measurement period (not to exceed one year from the date of acquisition), including finalization of asset appraisals, the Company will refine its estimates of fair value to allocate the purchase price more accurately.

Schuff

On May 29, 2014, the Company completed the acquisition of 2.5 million shares of common stock of Schuff, a steel fabrication and erection company and negotiated an agreement to purchase an additional 198,411 shares, representing an approximately 65% interest in Schuff. Schuff repurchased a portion of its outstanding common stock in June 2014, which had the effect of increasing the Company’s ownership interest to 70%. During the fourth quarter of 2014 and first quarter of 2015, the final results of a tender offer for all outstanding shares of Schuff were announced and various open-market purchases were made, which resulted in the acquisition of 815,843 shares and an increase in our ownership interest to 91%. The Company acquired Schuff to expand the business that it engages in and saw Schuff as an opportunity to enter the steel fabrication and erection market.

The table below summarizes the fair value of the Schuff assets acquired and liabilities assumed as of the acquisition date. The Company purchased 2.5 million shares of common stock of Schuff for $78.75 million. The purchase price of Schuff was valued at $31.50 per share which represented both the cash paid by the Company for its 60% interest, and the fair value of the noncontrolling interest of 40%.
 
10

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

The purchase price allocation is as follows (in thousands):
 
Cash and cash equivalents
 
$
(627
)
Investments
   
1,714
 
Accounts receivable
   
130,622
 
Costs and recognized earnings in excess of billings on uncompleted contracts
   
27,126
 
Prepaid expenses and other current assets
   
3,079
 
Inventories
   
14,487
 
Property and equipment, net
   
85,662
 
Goodwill
   
24,490
 
Trade names
   
4,478
 
Other assets
   
2,947
 
Total assets acquired
   
293,978
 
         
Accounts payable
   
37,621
 
Accrued payroll and employee benefits
   
11,668
 
Accrued expenses and other current liabilities
   
12,532
 
Billings in excess of costs and recognized earnings on uncompleted contracts
   
65,985
 
Accrued income taxes
   
1,202
 
Accrued interest
   
76
 
Current portion of long-term debt
   
15,460
 
Long-term debt
   
4,375
 
Deferred tax liability
   
7,693
 
Other liabilities
   
604
 
Noncontrolling interest
   
4,365
 
Total liabilities assumed
   
161,581
 
Enterprise value
   
132,397
 
Less fair value of noncontrolling interest
   
53,647
 
Purchase price attributable to controlling interest
 
$
78,750
 
 
The acquisition of Schuff resulted in goodwill of approximately $24.5 million. Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill was recognized as a new stand-alone reporting unit. Goodwill is not amortized and is not deductible for tax purposes.
 
Amortizable Intangible Assets

The trade name was valued using a relief from royalty methodology. An estimated 60% of revenue is generated from Schuff’s relationship with general contractors. Thus, a value of the Schuff trade name was calculated based on the present value of Schuff’s projected revenues for 15 years multiplied by 60%. The trade name was valued at $4.5 million and is being amortized over a 15 year life.

ASC 810 requires that transactions that result in an increase in ownership of a subsidiary be accounted for as equity transactions. The carrying amount of the noncontrolling interest is adjusted to reflect the controlling interest’s decreased ownership interest in the subsidiary’s net assets and any difference between the consideration paid by the parent to a noncontrolling interest holder (or contributed by the parent to the net assets of the subsidiary) and the adjustment to the carrying amount of the noncontrolling interest in the subsidiary is recognized directly in equity attributable to the controlling interest. Due to the increase of the Company’s ownership to 91% from the acquisition date through December 31, 2014, the Company recorded an adjustment of Schuff’s noncontrolling interest by $3.4 million and recorded as excess book value over fair value of purchased noncontrolling interest in the Company’s condensed consolidated statement of stockholders’ equity. In the six months ended June 30, 2015, the Company acquired an additional 6,800 shares of Schuff that resulted in less than $0.1 million of excess book value over fair value of purchased noncontrolling interest in the Company’s condensed consolidated statement of stockholders’ equity. The ownership interest of 91% did not change.
 
11

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

ANG

On August 1, 2014, the Company paid $15.5 million to acquire 15,500 shares of Series A Convertible Preferred Stock of ANG (the “ANG Preferred Stock”), representing an approximately 51% interest in ANG. The ANG Preferred Stock is convertible into 1,033,333 shares of common stock and also has voting rights. The noncontrolling interest represents 1,000,000 shares of common stock; thereby the Company has a controlling interest. The Company acquired ANG for its strong growth potential which is in line with the Company’s strategy to find businesses that it can operate to generate high returns and significant cash flow.

The table below summarizes the preliminary estimate of fair value of the ANG assets acquired and liabilities assumed as of the acquisition date. The purchase price of ANG was valued at $17.7 million which represented both the cash paid by the Company for its 51% interest ($15.5 million), and the fair value of the noncontrolling interest of 49%, which we determined to be $2.2 million.

The preliminary purchase price allocation is as follows (in thousands):

Cash and cash equivalents
 
$
15,704
 
Accounts receivable
   
306
 
Prepaid expenses and other current assets
   
31
 
Inventories
   
27
 
Property and equipment, net
   
1,921
 
Customer contracts
   
2,700
 
Trade names
   
6,300
 
Other assets
   
2
 
Total assets acquired
   
26,991
 
Accounts payable
   
49
 
Accrued payroll and employee benefits
   
5
 
Accrued expenses and other current liabilities
   
26
 
Billings in excess of costs and recognized earnings on uncompleted contracts
   
114
 
Current portion of long-term debt
   
34
 
Long-term debt
   
870
 
Deferred tax liability
   
3,530
 
Total liabilities assumed
   
4,628
 
Fair value of net assets acquired
   
22,363
 
Less purchase price
   
15,500
 
Less fair value of noncontrolling interest
   
2,189
 
Excess of fair value of net assets over purchase price
 
$
4,674
 
 
The acquisition of ANG resulted in an excess of the fair value of the net assets acquired over the purchase price of $4.7 million. The Company does not believe that the circumstances surrounding the transaction give rise to a bargain purchase. The existing shareholders of ANG continue to manage the day-to-day operations and own the noncontrolling interest. Accordingly, due to the related party nature of the transaction, management has recorded the excess of the fair value of the assets acquired over the purchase price in additional paid-in capital.
 
Amortizable Intangible Assets

The trade name was valued using a relief from royalty methodology. The value of the ANG trade name was calculated based on ANG’s projected revenues for 10 years. An estimated royalty of 4% (looking at other market participants) was calculated net of tax based upon those revenues and present valued over 10 years. The trade name was preliminarily valued at $6.3 million and will be amortized over a 10 year life. Customer contracts were valued using a multi-period excess earnings methodology. The value of the customer contracts ANG holds for its owned and operated facilities was calculated based on the present value of ANG’s net income from those contracts for 10 years. The customer contracts were preliminarily valued at $2.7 million and will be amortized over a 10 year life.
 
12

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
GMSL

On September 22, 2014, the Company completed the acquisition of Bridgehouse Marine Limited and its subsidiary, GMSL. The purchase price reflects an enterprise value of approximately $260 million, including assumed indebtedness of approximately $130 million leaving a net enterprise value of approximately $130 million. GMSL is a leading provider of engineering and underwater services on submarine cables. The Company acquired GMSL for its attractive valuation and strong cash position.

The table below summarizes the preliminary estimates of fair value of the GMSL assets acquired and liabilities assumed as of the acquisition date. The net enterprise value of GMSL was valued at $130.4 million which represented both the cash paid by the Company for its 97% interest, and the fair value of the noncontrolling interest of 3%.

The preliminary purchase price allocation is as follows (in thousands):
 
Cash and cash equivalents
 
$
62,555
 
Accounts receivable
   
26,183
 
Prepaid expenses and other current assets
   
9,886
 
Inventories
   
7,395
 
Restricted cash
   
4,682
 
Property and equipment, net
   
156,976
 
Customer contracts
   
7,796
 
Trade name
   
1,137
 
Developed technology
   
1,624
 
Investments
   
24,266
 
Other assets
   
7,482
 
Total assets acquired
   
309,982
 
Accounts payable
   
8,965
 
Accrued expenses and other current liabilities
   
34,767
 
Accrued income taxes
   
1,251
 
Current portion of long-term debt
   
8,140
 
Long-term debt
   
78,356
 
Pension liability
   
45,923
 
Deferred tax liability
   
1,013
 
Other liabilities
   
1,179
 
Total liabilities assumed
   
179,594
 
Enterprise value
   
130,388
 
Less fair value of noncontrolling interest
   
3,803
 
Purchase price attributable to controlling interest
 
$
126,585
 
 
The values for customer contracts, trade name, developed technology and investments are estimates and may change.

Amortizable Intangible Assets

Customer contracts were valued using a multi-period excess earnings methodology. Projected revenues and margins were used to forecast the earnings for each contract taking into consideration probabilities of contract renewals. Three customer contracts were preliminarily valued at £4.8 million ($7.8 million using the exchange rate in effect at the time of acquisition) and will be amortized over a 15 year life.
 
The trade name was valued using a relief from royalty methodology. Given an element of uncertainty surrounding the GMSL trade name, and consistent with likely market participant use, a probability of continuing use was applied to the projected revenue stream. The trade name was preliminarily valued £0.7 million ($1.1 million using the exchange rate in effect at the time of acquisition) and will be amortized over a 3 year life.
 
The developed technology was valued using a relief from royalty methodology. The fair value was estimated based on the revenue attributable to developed technology and the hypothetical royalties avoided by owning the technology as well as the current royalties earned, the revenue stream was adjusted for technology obsolescence, as the technology will decay over time and be replaced by new technologies. The developed technology was preliminarily valued £1.0 million ($1.6 million using the exchange rate in effect at the time of acquisition) and will be amortized over a 4 year life.
 
13

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
Investments (accounted for under the Equity Method)
 
Sino British Submarine Systems (“SBSS”) – This investment was valued using an income approach (income capitalization method) and market approach (guideline public company method) and weighted each 50-50 to arrive at an operating value. From there, debt was added and a 35% ‘discount for the lack of marketability’ was applied to arrive at a fair value. That fair value was multiplied by GMSL’s ownership percentage to arrive a fair value applicable to GMSL. The income approach used year end 2014 results as acquisition-date financials as projections were not available. The multiples applied under the market approach were based on EBITDA and revenue multiples for entities operating in the same industry. The valuation resulted in a preliminary fair value of £10.4 million ($16.9 million using the exchange rate in effect at the time of acquisition).

Huawei Marine Networks (“HMN”) – This investment was valued using a market approach (guideline public company method) and cost approach (book value of equity) and weighted each 50-50 to arrive at an operating value. There was no debt but a 30% ‘discount for the lack of marketability’ was applied to arrive at a fair value. That fair value was multiplied by GMSL’s ownership percentage to arrive a fair value applicable to GMSL. The multiples applied under the market approach were based on EBITDA and revenue multiples for entities operating in the same industry. The valuation resulted in a preliminary fair value of £4.3 million ($7.0 million using the exchange rate in effect at the time of acquisition).
 
International Cableship (“ICPL”) – This investment was valued using a cost approach (book value of equity) to arrive at an operating value. There was no debt but a 20% ‘discount for the lack of marketability’ was applied to arrive at a fair value. That fair value was multiplied by GMSL’s ownership percentage to arrive a fair value applicable to GMSL. The valuation resulted in a preliminary fair value of £2.8 million ($4.5 million using the exchange rate in effect at the time of acquisition).
 
Sembawang Cable Depot Pte Ltd (“SCDPL”) – This investment was valued using an income approach (income capitalization method) and market approach (guideline public company method) and weighted each 50-50 to arrive at an operating value. There was no debt, but a 20% ‘discount for the lack of marketability’ was applied to arrive at a fair value. That fair value was multiplied by GMSL’s ownership percentage to arrive a fair value applicable to GMSL. The income approach used year end 2014 results as acquisition-date financials as projections were not available. The multiples applied under the market approach were based on EBITDA and revenue multiples for entities operating in the same industry. The valuation resulted in a preliminary fair value of £0.7 million. ($1.1 million using the exchange rate in effect at the time of acquisition).
 
Other investments were preliminarily valued at £0.3 million. ($0.5 million using the exchange rate in effect at the time of acquisition). The fair value was determined to approximate carrying value.
 
Basis Differences – The total preliminary fair values of the named investments above was £18.2 million, while the carrying value (based on GMSL’s ownership percentage and using the balance sheets as of December 31, 2014) was £25.2 million. This resulted in a basis difference of £7.0 million ($11.4 million using the exchange rate in effect at the time of acquisition), of which the majority of was attributable to SBSS. This basis difference will be accreted up over a 10 year period which will result in the increase to the investment in SBSS.
 
Pro Forma Adjusted Summary

The results of operations for Schuff, ANG, and GMSL have been included in the consolidated financial statements subsequent to their acquisition dates.

The following schedule presents unaudited consolidated pro forma results of operations data as if the acquisitions had occurred on January 1, 2014. This information does not purport to be indicative of the actual results that would have occurred if the acquisitions had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands):
 
14

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
   
Three Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2014
 
Net revenue
 
$
212,518
   
$
406,108
 
Net income (loss) from continuing operations
   
6,489
     
12,645
 
Net income (loss) from discontinued operations
   
(52
)
   
(48
)
Gain (loss) from sale of discontinued operations
   
-
     
(784
)
Net income (loss) attributable to HC2 Holdings, Inc.
 
$
6,437
   
$
11,813
 
 
 All expenditures incurred in connection with the acquisitions were expensed and are included in selling, general and administrative expenses. The Company recorded net revenue and net income (loss) as follows (in thousands):
 
   
Three Months Ended June 30, 2015
   
Six Months Ended June 30, 2015
 
   
Net Revenue
   
Net Income (Loss)
   
Net Revenue
   
Net Income (Loss)
 
Schuff
 
$
130,985
   
$
5,889
   
$
257,851
   
$
9,086
 
ANG
   
1,368
     
(134
)
   
2,591
     
(247
)
GMSL
   
43,875
     
10,360
     
70,877
     
11,967
 
 
4. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following (in thousands):
 
   
June 30,
2015
   
December 31,
2014
 
Contract receivables:
 
   
 
Contracts in progress
 
$
129,326
   
$
105,071
 
Unbilled retentions
   
33,347
     
32,850
 
Trade receivables
   
53,433
     
16,202
 
Other receivables
   
266
     
195
 
Allowance for doubtful accounts
   
(2,345
)
   
(2,760
)
   
$
214,027
   
$
151,558
 
 
5. CONTRACTS IN PROGRESS

Costs and recognized earnings in excess of billings on uncompleted contracts and billings in excess of costs and recognized earnings on uncompleted contracts consist of the following (in thousands):
 
   
June 30,
2015
   
December 31,
2014
 
Costs incurred on contracts in progress
 
$
609,094
   
$
531,129
 
Estimated earnings
   
89,067
     
73,540
 
     
698,161
     
604,669
 
Less progress billings
   
692,447
     
618,530
 
   
$
5,714
   
$
(13,861
)
The above is included in the accompanying condensed consolidated balance sheet under the following captions:
               
Costs and recognized earnings in excess of billings on uncompleted contracts
   
35,573
     
28,098
 
Billings in excess of costs and recognized earnings on uncompleted contracts
   
(29,859
)
   
(41,959
)
   
$
5,714
   
$
(13,861
)
 
15

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
6. INVENTORIES

Inventories consist of the following (in thousands):
 
   
June 30,
2015
   
December 31,
2014
 
Raw materials
 
$
15,561
   
$
12,956
 
Work in process
   
1,690
     
1,779
 
Finished goods
   
545
     
240
 
   
$
17,796
   
$
14,975
 

7. INVESTMENTS

As of June 30, 2015, the Company had both short-term and long-term investments. The short-term investments are classified as available-for-sale securities and the change in value is recognized within accumulated other comprehensive income (loss). The fair market value is determined using quoted market prices (a Level I approach). See Note 14 – Fair Value of Financial Instruments for a description of Level I approach.  The long-term investments are comprised of three types of investments; those accounted for under the equity method of accounting, investments in debt securities accounted for as available-for-sale securities and investment in debt securities accounted for under the cost method.  For the debt securities, without quoted market prices, the fair values are calculated using other valuation methodologies (a Level II approach).
 
During the three and six months ended June 30, 2015, the Company recorded $1.4 million and ($1.3) million, respectively, of its share of the equity method investments’ net income (loss).
 
The long-term investments are as follows (in thousands):
 
Company
Investment
 
June 30, 2015
   
December 31, 2014
 
Equity Method
         
Global Cable Technology Ltd.
 Stock
 
$
-
   
$
49
 
SB Submarine Systems Co., Ltd.
 Stock
   
12,839
     
12,882
 
International Cableship Pte., Ltd.
 Stock
   
1,832
     
2,111
 
Sembawang Cable Depot Ptd., Ltd.
 Stock
   
992
     
808
 
Huawei Marine Systems Co., Ltd.
 Stock
   
11,777
     
10,087
 
Visser Smit Global Marine Partnership
 Stock
   
428
     
464
 
Novatel Wireless, Inc.
 11,473,799 shares and 1,593,583 warrants
   
16,599
     
13,419
 
Kaneland, LLC
 Stock
   
1,083
     
1,151
 
NerVve Technologies, Inc.
 885,286 shares of Series A-1 Preferred Stock
   
5,023
     
5,538
 
Benevir Biopharm, Inc.
 2,000 shares of Series A-1 Preferred Stock
   
1,623
     
1,915
 
Available-for-sale
 
               
Gaming Nation Acquisition Corporation
 Convertible Debt and Warrant
   
16,097
     
-
 
Cost Method
 
               
DTV America Corporation
 Convertible Debt
   
3,000
     
-
 
mParticle
 Convertible Debt
   
500
     
250
 
      
$
71,793
   
$
48,674
 
 
2015 Activity

Novatel Wireless, Inc. (“Novatel”)

In February 2015, the Company sold 586,095 shares of common stock and 293,047 warrants for $1.0 million which resulted in a gain of $0.2 million.

In March 2015, the Company exercised its warrants which converted into 3,824,600 shares of common stock for $8.6 million and also received a new warrant to purchase 1,593,583 shares of common stock at $5.50 per share.

The Company’s ownership increased to approximately 23% of Novatel’s common stock.

A basis difference, net of tax for the additional investment in March 2015 of $5.6 million consists of a trade name of $0.6 million (amortized over 15 years), a technology and customer intangible of $0.8 million (amortized over 7 years) and goodwill of $4.2 million.

DTV America Corporation (“DTV”)

In the first quarter of 2015, the Company purchased $3.0 million of convertible debt.
 
16

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
Gaming Nation Acquisition Corporation

In April 2015, the Company purchased $16.1 million of convertible debt.
 
8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2015 are as follows (in thousands):
 
   
Schuff
   
ICS
   
Other
   
Total
 
Balance as of December 31, 2014
 
$
24,612
   
$
3,378
   
$
-
   
$
27,990
 
Effect of change in foreign currency exchange rates
   
-
     
-
     
-
     
-
 
Acquisition of business
   
(122
)
   
-
     
1,781
     
1,659
 
Balance as of June 30, 2015
 
$
24,490
   
$
3,378
   
$
1,781
   
$
29,649
 
 
Amortizable Intangible Assets

Intangible assets subject to amortization consisted of the following (in thousands):
 
   
Schuff
   
GMSL
   
ANG
   
Pansend
   
Other
   
Corporate
   
Total
 
Trade names
 
   
   
   
   
   
   
 
Balance as of December 31, 2014
 
$
4,304
   
$
997
   
$
6,037
   
$
-
   
$
-
   
$
-
   
$
11,338
 
Effect of change in foreign currency exchange rates
   
-
     
13
     
-
     
-
     
-
     
-
     
13
 
Amortization
   
(149
)
   
(183
)
   
(315
)
   
-
     
-
     
-
     
(647
)
Acquisition of business
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Reclassification
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Balance as of June 30, 2015
 
$
4,155
   
$
827
   
$
5,722
   
$
-
   
$
-
   
$
-
   
$
10,704
 
                                                         
Customer relationships
                                                       
Balance as of December 31, 2014
 
$
-
   
$
7,333
   
$
4,881
   
$
-
   
$
-
   
$
-
   
$
12,214
 
Effect of change in foreign currency exchange rates
   
-
     
85
     
-
     
-
     
-
     
-
     
85
 
Amortization
   
-
     
(252
)
   
(213
)
   
-
     
-
     
-
     
(465
)
Acquisition of business
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Reclassification
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Balance as of June 30, 2015
 
$
-
   
$
7,166
   
$
4,668
   
$
-
   
$
-
   
$
-
   
$
11,834
 
                                                         
Developed technology
                                                       
Balance as of December 31, 2014
 
$
-
   
$
1,456
   
$
-
   
$
-
   
$
-
   
$
-
   
$
1,456
 
Effect of change in foreign currency exchange rates
   
-
     
19
     
-
     
-
     
-
     
-
     
19
 
Amortization
   
-
     
(197
)
   
-
     
-
     
(159
)
   
-
     
(356
)
Acquisition of business
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Reclassification
   
-
     
-
     
-
     
-
     
4,195
     
-
     
4,195
 
Balance as of June 30, 2015
 
$
-
   
$
1,278
   
$
-
   
$
-
   
$
4,036
   
$
-
   
$
5,314
 
                                                         
Other
                                                       
Balance as of December 31, 2014
 
$
-
   
$
-
   
$
-
   
$
114
   
$
6,000
   
$
22
   
$
6,136
 
Effect of change in foreign currency exchange rates
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Amortization
   
-
     
-
     
-
     
(1
)
   
-
     
-
     
(1
)
Acquisition of business/development
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Reclassification
   
-
     
-
     
-
     
-
     
(6,000
)
   
-
     
(6,000
)
Balance as of June 30, 2015
 
$
-
   
$
-
   
$
-
   
$
113
   
$
-
   
$
22
   
$
135
 
                                                         
Total amortizable intangible assets
                                                       
Balance as of December 31, 2014
 
$
4,304
   
$
9,786
   
$
10,918
   
$
114
   
$
6,000
   
$
22
   
$
31,144
 
Effect of change in foreign currency exchange rates
   
-
     
117
     
-
     
-
     
-
     
-
     
117
 
Amortization
   
(149
)
   
(632
)
   
(528
)
   
(1
)
   
(159
)
   
-
     
(1,469
)
Acquisition of business
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Reclassification
   
-
     
-
     
-
     
-
     
(1,805
)
   
-
     
(1,805
)
Balance as of June 30, 2015
 
$
4,155
   
$
9,271
   
$
10,390
   
$
113
   
$
4,036
   
$
22
   
$
27,987
 
 
17

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

9. LONG-TERM OBLIGATIONS

Long-term debt consists of the following (in thousands):
 
 
 
June 30,
2015
   
December 31,
2014
 
Senior Secured Notes collaterized by the Company's assets, with interest payable semi-yearly based on a fixed annual interest rate of 11% with principal due in 2019
 
$
300,000
   
$
250,000
 
Note payable collaterized by GMSL's assets, with
interest payable monthly at LIBOR plus 3.65% and principal payable monthly, maturing in 2019
   
14,531
     
16,732
 
Note payable collaterized by Schuff's real estate, with interest payable monthly at LIBOR plus 4% and principal payable monthly, maturing in 2019
   
4,323
     
4,635
 
Note payable collaterized by Schuff's equipment, with
interest payable monthly at LIBOR plus 4% and principal payable monthly, maturing in 2019
   
11,690
     
8,333
 
Line of credit collaterized by Schuff's HOPSA assets,  with interest payable monthly at 5.25% plus 1% of Special Interest Compensation Fund
   
1,250
     
-
 
Note payable collaterized by ANG's assets, with interest payable monthly at 5.5% and principal payable monthly, maturing in 2018
   
736
     
810
 
Obligations under capital leases
   
56,438
     
65,176
 
Other
   
24
     
30
 
   Subtotal
   
388,992
     
345,716
 
Original issue discount on Senior Secured Notes
   
(1,919
)
   
(2,345
)
   Subtotal
   
387,073
     
343,371
 
Less: Current portion of long-term obligations
   
(12,752
)
   
(10,444
)
Total long-term obligations
 
$
374,321
   
$
332,927
 
 
Aggregate debt maturities are as follows (in thousands):
 
2015
 
$
7,052
 
2016
   
11,793
 
2017
   
12,066
 
2018
   
15,203
 
2019
   
313,249
 
Thereafter
   
29,629
 
   
$
388,992
 
 
18

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
Aggregate maturities for the capital leases are as follows (in thousands):
 
2015
 
$
3,459
 
2016
   
6,900
 
2017
   
6,892
 
2018
   
10,602
 
2019
   
10,601
 
Thereafter
   
32,222
 
Total minimum principal & interest payments
   
70,676
 
Less: Amount representing interest
   
(14,238
)
Total capital lease obligations
 
$
56,438
 
 
The interest rates on the capital leases range from approximately 4% to 10.4%.
 
11% Senior Secured Notes due 2019

On November 20, 2014, the Company issued $250.0 million in aggregate principal amount of 11% Senior Secured Notes due 2019 (the “Existing Notes”). The Existing Notes were issued at 99.05% of par, which resulted in a discount of $2.4 million. The net proceeds from the issuance of the Existing Notes were used to pay off a senior secured credit facility which provided for a twelve month, floating interest rate term loan of $214 million and a delayed draw term loan of $36 million (the “September Credit Facility”) that was entered into in connection with the GMSL acquisition. On March 26, 2015, the Company issued $50.0 million in aggregate principal amount of 11% Senior Secured Notes due 2019 (the “New Notes” and together with the Existing Notes, the “11% Notes). The New Notes were issued at 100.5% of par, plus accrued interest from November 20, 2014, which resulted in a premium of $0.3 million. The 11% Notes were issued under an indenture dated November 20, 2014, by and among HC2, the guarantors party thereto and U.S. Bank National Association, a national banking association (“U.S. Bank”), as trustee (the “11% Notes Indenture”).

Maturity and Interest. The 11% Notes mature on December 1, 2019. The 11% Notes accrue interest at a rate of 11% per year. Interest on the 11% Notes is paid semi-annually on December 1 and June 1 of each year.

Ranking. The 11% Notes and the guarantees thereof will be HC2’s and certain of its direct and indirect domestic subsidiaries’ (the “Subsidiary Guarantors”) general senior secured obligations. The 11% Notes and the guarantees thereof will rank: (i) senior in right of payment to all of HC2’s and the Subsidiary Guarantors’ future subordinated debt; (ii) equal in right of payment with all of HC2’s and the Subsidiary Guarantors’ existing and future senior debt and effectively senior to all of its unsecured debt to the extent of the value of the collateral; and (iii) effectively subordinated to all liabilities of its non-guarantor subsidiaries.

Collateral. The 11% Notes and the guarantees thereof will be collateralized on a first-priority basis by substantially all of HC2’s assets and the assets of the Subsidiary Guarantors (except for certain “Excluded Assets,” and subject to certain “Permitted Liens,” each as defined in the 11% Notes Indenture). The 11% Notes 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 11% Notes Indenture.

Certain Covenants. The 11% Notes Indenture contains covenants limiting, among other things, the ability of HC2, and, in certain cases, HC2’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. HC2 is also required to maintain compliance with certain financial tests, including minimum liquidity and collateral coverage ratios. As of June 30, 2015, HC2 was in compliance with these covenants.

Redemption Premiums. The Company may redeem the 11% Notes at a redemption price equal to 100% of the principal amount of the 11% Notes plus a make-whole premium before December 1, 2016. The make-whole premium is the greater of (i) 1% of principal amount or (ii) the excess of the present value of redemption price at December 1, 2016 plus all required interest payments through December 1, 2016 over the principal amount. After December 1, 2016, the Company may redeem the 11% Notes at a redemption price equal to 100% of the principal amount plus accrued interest. The Company is required to make an offer to purchase the 11% Notes upon a change of control. The purchase price will equal 101% of the principal amount of the 11% Notes on the date of purchase plus accrued interest.
 
19

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
Terminated HC2 Credit Facilities

In 2014, the Company entered into (i) a senior secured credit facility providing for an eighteen month, floating interest rate term loan of $80 million (the “May Credit Facility”) to finance a portion of the acquisition of Schuff, (ii) a senior unsecured credit facility consisting of a term loan of $17 million (the “Novatel Acquisition Term Loan”) for the purpose of acquiring an ownership interest in Novatel Wireless, Inc. and (iii) the September Credit Facility to finance a portion of the acquisition of GMSL. The Company used a portion of the proceeds from the September Credit Facility to repay the May Credit Facility and the Novatel Acquisition Term Loan. The Company used the net proceeds from the issuance of the Existing Notes to repay the September Credit Facility.

Prior to the payoff of the May Credit Facility, the Company made partial principal payments according to covenants within the agreement that required that portions of escrows received and proceeds from the exercise of warrants be used to pay down the May Credit Facility. In connection with those partial prepayments, the Company wrote off $0.1 million of deferred financing costs and $0.2 million of original issue discount in the second quarter of 2014 to amortization of debt discount. In connection with those partial prepayments, the Company wrote off $0.1 million of deferred financing costs and $1.9 million of original issue discount in the third quarter of 2014 to loss on early extinguishment or restructuring of debt. In connection with the payoff of the remaining balance of the May Credit Facility, the Company incurred $0.9 million of prepayment premiums and wrote off $0.3 million of deferred financing costs and $2.5 million of original issue discount in the third quarter of 2014 to loss on early extinguishment or restructuring of debt. In connection with the payoff of the Novatel Acquisition Term Loan, the Company wrote off $0.4 million of deferred financing costs and $0.8 million of original issue discount in the third quarter of 2014 to loss on early extinguishment or restructuring of debt. In connection with the payoff of the September Credit Facility, the Company wrote off $0.5 million of deferred financing costs and $4.5 million of original issue discount, which is net of a credit for previous paid funding fees of $2.3 million during the fourth quarter of 2014 to loss on early extinguishment or restructuring of debt.

Schuff Credit Facilities

Schuff has a Credit and Security Agreement (“Schuff Facility”) with Wells Fargo Credit, Inc. (“Wells Fargo”), pursuant to which Wells Fargo agreed to advance up to a maximum amount of $50.0 million to Schuff. On October 21, 2014, Schuff amended the Schuff Facility, pursuant to which Wells Fargo allowed for the issuance of a note payable up to $10.0 million, collateralized by its machinery and equipment (“Real Estate (2) Term Advance (M&E)”) and the issuance of a note payable up to $5.0 million, collateralized by its real estate (“Real Estate (2) Term Advance (Working Capital)”). At June 30, 2015 and December 31, 2014, Schuff had borrowed $11.7 million and $8.4 million, respectively, under the Real Estate (2) Term Advance (M&E) and Real Estate (2) Term Advance (Working Capital). The Real Estate (2) Term Advance (M&E) and Real Estate (2) Term Advance (Working Capital) have a 5 year amortization period requiring monthly principal payments and a final balloon payment at maturity. The Real Estate (2) Term Advance (M&E) and Real Estate (2) Term Advance (Working Capital) have a floating interest rate of LIBOR plus 4.0% and require monthly interest payments.

On May 6, 2014, Schuff amended the Schuff Facility, pursuant to which Wells Fargo extended the maturity date of the Schuff Facility to April 30, 2019, lowered the interest rate charged in connection with borrowings under the line of credit and allowed for the issuance of a note payable totaling $5.0 million, collateralized by its real estate (“Real Estate Term Advance”). At June 30, 2015 and December 31, 2014, Schuff had borrowed $4.3 million and $4.6 million, respectively, under the Real Estate Term Advance. The Real Estate Term Advance has a 5 year amortization period requiring monthly principal payments and a final balloon payment at maturity. The Real Estate Term Advance has a floating interest rate of LIBOR plus 4.0% and requires monthly interest payments.

The Schuff Facility has a floating interest rate of LIBOR plus 3.00% (3.27% at June 30, 2015) and requires monthly interest payments. As of June 30, 2015 and December 31, 2014, Schuff had no amounts outstanding under the Schuff Facility. The Schuff Facility is secured by a first priority, perfected security interest in all of Schuff’s assets, excluding the real estate, and its present and future subsidiaries and a second priority, perfected security interest in all of Schuff’s real estate. The security agreements pursuant to which Schuff’s assets are pledged prohibit any further pledge of such assets without the written consent of the bank. The Schuff Facility contains various restrictive covenants. At June 30, 2015, the Company was in compliance with these covenants.

Schuff Hopsa Engineering, Inc. (“SHE”), a joint venture which Schuff consolidates, has a Line of Credit Agreement (“International LOC”) with Banco General, S.A. (“Banco General”) in Panama pursuant to which Banco General agreed to advance up to a maximum amount of $2.5 million. The line of credit is secured by a first priority, perfected security interest in the SHE’s property and plant. The interest rate is 5.25% plus 1% of the special interest compensation fund (“FECI”). The line of credit contains covenants that, among other things, limit the SHE’s ability to incur additional indebtedness, change its business, merge, consolidate or dissolve and sell, lease, exchange or otherwise dispose of its assets, without prior written notice.
 
20

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

There was $3.9 million in outstanding letters of credit issued and $46.1 million available under the Schuff Facility at June 30, 2015. At June 30, 2015, Schuff had $1.3 million in borrowings and no outstanding letters of credit issued under its International LOC. There was $1.2 million available under Schuff’s International LOC at June 30, 2015.

GMSL Credit Facility

GMSL established a term loan with DVB Bank in January 2014 (the “GMSL Facility”). This GMSL facility has a 4.5 year term and bears interest at the rate of 3.65% plus the USD LIBOR rate. As of June 30, 2015 and December 31, 2014, $14.5 million and $16.7 million, respectively, remained outstanding under the GMSL Facility. The GMSL Facility contains various restrictive covenants. At June 30, 2015, GMSL was in compliance with these covenants.

ANG Term Loan

ANG established a term loan with Signature Financial in October 2013. This term loan has a 5 year term and bears interest at the rate of 5.5%. As of June 30, 2015 and December 31, 2014, $0.7 million and $0.8 million, respectively, remained outstanding under this term loan.

GMSL Capital Leases

GMSL is a party to two leases to finance the use of two vessels: the Innovator (such applicable lease, the “Innovator Lease”) and the Cable Retriever (such applicable lease, the “Cable Lease,” and together with the Innovator Lease, the “GMSL Leases”). The Innovator Lease expires in 2018, subject to the Company’s ability to extend the Innovator Lease for four one-year periods through 2022. The principal amount thereunder bears interest at the rate of approximately 10.4%. The Cable Lease expires in 2023. The principal amount thereunder bears interest at the rate of approximately 4.0%.

As of June 30, 2015 and December 31, 2014, $56.4 million and $65.2 million, respectively, in aggregate principal amount remained outstanding under the GMSL Leases.

10. INCOME TAXES

Income Tax Benefit (Expense)

Income tax expense was $2.5 million and $1.9 million for the three months ended June 30, 2015 and 2014, respectively.  The tax expense resulted primarily from the projected expense as calculated under ASC 740 without applying a valuation allowance.  The June 30, 2014 expense was due primarily to the acquisition of Schuff.  Income tax benefit (expense) was $3.4 million and ($2.0) million for the six months ended June 30, 2015 and 2014, respectively.
 
Due to circumstances that could lead to wide variability in the Effective Tax Rate, the Company did not use the Annual Effective Tax Rate (“ETR”) approach of ASC 740-270 (formerly FIN 18) to calculate its Q2 2015 interim tax provision. As such, the Q2 tax provision was calculated using a discrete year-to-date approach, by applying the statutory tax rate to the sum of the year-to-date loss plus non-deductible items.

NOL Limitation

As of June 30, 2015, the Company had an estimated NOL carryforward in the amount of $60.1 million. This amount does not include 2015 activity. In the first quarter of 2014, substantial acquisitions of the Company's stock were reported by new beneficial owners of 5% or more of the Company’s common stock on Schedule 13D filings made with the SEC. On May 29, 2014, the Company issued 30,000 shares of Series A Convertible Participating Preferred Stock of the Company (the “Series A Preferred Stock”) and 1,500,000 shares of common stock to finance the acquisition of Schuff. During the second quarter the Company completed a Section 382 review. The conclusions of this review indicate that an ownership change had occurred as of May 29, 2014. The Company’s annual Section 382 base limit following the ownership change is estimated to be $2.2 million per year.

Unrecognized Tax Benefits

The Company follows the provision of ASC No. 740-10, “Income Taxes” which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative to certain tax planning strategies, including certain intercompany transactions as well as regulatory taxes. The amount of unrecognized tax benefits may change in the next 12 months, however, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.
 
21

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

Examinations

The Company conducts business globally, and as a result, the Company or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The open tax years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant tax period. Given the nature of tax audits there is a risk that disputes may arise. Tax years 2002 - 2014 remain open for examination.

11. COMMITMENTS AND CONTINGENCIES

Litigation

On November 6, 2014, a putative stockholder class action complaint challenging the tender offer by which HC2 Holdings, Inc. acquired approximately 721,000 of the issued and outstanding common shares of Schuff International, Inc. (“Schuff International”) was filed in the Court of Chancery of the State of Delaware, captioned Mark Jacobs v. Philip A. Falcone, Keith M. Hladek, Paul Voigt, Michael R. Hill, Rustin Roach, D. Ronald Yagoda, Phillip O. Elbert, HC2 Holdings, Inc., and Schuff International, Inc., Civil Action No. 10323 (the “Complaint”).  On November 17, 2014, a second lawsuit was filed in the Court of Chancery of the State of Delaware, captioned Arlen Diercks v. Schuff International, Inc. Philip A. Falcone, Keith M. Hladek, Paul Voigt, Michael R. Hill, Rustin Roach, D. Ronald Yagoda, Phillip O. Elbert, HC2 Holdings, Inc., Civil Action No. 10359.  On February 19, 2015, the court consolidated the actions (now designated as Schuff International, Inc. Stockholders Litigation) and appointed lead plaintiff and counsel.  The currently operative complaint is the November 6, 2014 Complaint filed by Mark Jacobs.  The Complaint alleges, among other things, that in connection with the tender offer, the individual members of the Schuff International board of directors and HC2 Holdings, the controlling stockholder of Schuff, breached their fiduciary duties to members of the plaintiff class.  The Complaint also purports to challenge a potential short-form merger based upon plaintiff’s expectation that the Company would cash out the remaining public stockholders of Schuff International following the completion of the tender offer.  Such a short-form merger has never been formally proposed or acted upon and as of June 30, 2015, approximately 342 thousand shares of Schuff International remain in public hands, representing approximately 9% of the outstanding shares of Schuff International.  The Complaint seeks rescission of the tender offer and/or compensatory damages, as well as attorney’s fees and other relief.  The defendants filed answers to the Complaint on July 30, 2015.  We believe that the allegations and claims set forth in the Complaint are without merit and intend to defend them vigorously.
 
On July 16, 2013, Plaintiffs Xplornet Communications Inc. and Xplornet Broadband, Inc. (“Xplornet”) initiated an action against Inukshuk Wireless Inc. (“Inukshuk”), Globility Communications Corporation (“Globility”), MIPPS Inc., Primus Telecommunications Canada Inc. and PTGi.  Xplornet alleges that it entered into an agreement to acquire certain licenses for radio spectrum in Canada from Globility.  Xplornet alleges that Globility agreed to sell Xplornet certain spectrum licenses in a Letter of Intent dated July 12, 2011 but then breached the Letter of Intent by selling the licenses to Inukshuk.  Xplornet then alleges that they reached an agreement with Inukshuk to purchase the licenses on June 26, 2012, but that Inukshuk breached that agreement by not completing the sale.  Xplornet alleges that, as a result of the foregoing, they have been damaged in the amount of $50 million.  On January 29, 2014, Globility, MIPPS Inc., and Primus Telecommunications Canada, Inc., demanded indemnification pursuant to the Equity Purchase Agreement among PTUS, Inc., PTCAN, Inc. Primus Telecommunications Group, Incorporated, Primus Telecommunications Holding, Inc., Lingo Holdings, Inc., and Primus Telecommunications International, Inc., dated as of May 10, 2013.  On February 14, 2014, the Company assumed the defense of this litigation while reserving all of its rights under the Equity Purchase Agreement.  On February 5, 2014, Globility, MIPPS Inc., and PTCI filed a Notice of Intent to Defend.  On February 18, 2014, Globility, MIPPS Inc., and PTCI filed a Demand for Particulars.  A Notice of Change of Solicitors to Hunt Partners LLP was filed on behalf of those same entities on April 1, 2014. On March 13, 2015, Inukshuk filed a cross claim against Globility, MIPPS, PTCI, and PTGi.  Inukshuk asserts that if Inukshuk is found liable to Xplornet, then Inukshuk is entitled to contribution and indemnity, compensatory damages, interest, and costs from the Company.  Inukshuk alleges that Globility represented and warranted that it owned the licenses at issue, that Globility held the licenses free and clear, and that no third party had any rights to acquire them.  Inukshuk claims breach of contract and misrepresentation if the Court finds that any of these representations are untrue.

On October 17, 2014, the Company moved for summary judgment against Xplornet arguing that there was no agreement between Globility and Xplornet to acquire the licenses at issue.  On June 5, 2015, Inukshuk also moved for summary judgment against Xplornet, similarly arguing that there was no agreement between Inukshuk and Xplornet to acquire the licenses in question.  The motions are set for hearing on October 7, 2015.
 
22

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
The Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company’s business, consolidated financial position, results of operations or cash flow. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its business, consolidated financial position, results of operations or cash flow.
 
Tax Matters
 
Currently, the Canada Revenue Agency (“CRA”) is auditing a subsidiary previously held by the Company. The Company intends to cooperate in audit matters. To date, CRA has not proposed any specific adjustments and the audit is ongoing.
 
12. SHARE-BASED COMPENSATION

On April 11, 2014, the Company’s Board of Directors adopted the HC2 Holdings, Inc. 2014 Omnibus Equity Award Plan (the “Omnibus Plan”), which was approved by our stockholders at the annual meeting of stockholders held on June 12, 2014. The Omnibus Plan provides that no further awards will be granted pursuant to the Company’s Management Compensation Plan, as amended (the “Prior Plan”). However, awards that had been previously granted pursuant to the Prior Plan will continue to be subject to and governed by the terms of the Prior Plan. As of June 30, 2015, there were 467,371 shares of the Company’s common stock underlying outstanding awards under the Prior Plan.

The Compensation Committee of the Board of Directors of the Company administers the Company’s Omnibus Plan and the Prior Plan and has broad authority to administer, construe and interpret the plans.

The Omnibus Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock based awards, performance compensation awards (including cash bonus awards) or any combination of the foregoing. The Company typically issues new shares of common stock upon the exercise of stock options, as opposed to using treasury shares. The Omnibus Plan authorizes the issuance of up to 5,000,000 shares of the Company’s common stock, subject to adjustment as provided in the Omnibus Plan.

The Company follows guidance which addresses the accounting for share-based payment transactions whereby an entity receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The guidance generally requires that such transactions be accounted for using a fair-value based method and share-based compensation expense be recorded, based on the grant date fair value, estimated in accordance with the guidance, for all new and unvested stock awards that are ultimately expected to vest as the requisite service is rendered.

There were 691,205 and 1,577,385 options granted during the six months ended June 30, 2015 and 2014, respectively. Of the total options granted during the six months ended June 30, 2015 and 2014, 169,697 and 1,568,864, respectively, of such options were granted to Philip Falcone, pursuant to anti-dilution provisions of a standalone option agreement entered in connection with Mr. Falcone’s appointment as Chairman, President and Chief Executive Officer of the Company, and not pursuant to the Omnibus Plan. The weighted average fair value at date of grant for options granted during the six months ended June 30, 2015 and 2014 was $3.16 and $1.39, respectively, per option. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions shown as a weighted average for the year:

   
Six Months Ended June 30,
 
   
2015
   
2014
 
Expected option life
 
5.25 years
   
6 years
 
Risk-free interest rate
   
1.49-1.68
%
   
2.31 - 2.73
%
Expected volatility
   
36.29-39.58
%
   
36.74% - 37.20
%
Dividend yield
   
0
%
   
0
%
 
23

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)
 
Total share-based compensation expense recognized by the Company during the three months ended June 30, 2015 and 2014 was $2.4 million and $0.8 million, respectively. Total share-based compensation expense recognized by the Company during the six months ended June 30, 2015 and 2014 was $4.6 million and $1.0 million, respectively.  Most of the Company’s stock awards vest ratably during the vesting period. The Company recognizes compensation expense for equity awards using the straight-line basis.

Restricted Stock

A summary of the Company’s restricted stock activity during the six months ended June 30, 2015 is as follows:
 
   
Shares
   
Weighted
Average
Grant Date
Fair Value
 
Unvested – December 31, 2014
   
338,702
   
$
4.26
 
Granted
   
1,539,114
   
$
9.14
 
Vested
   
(977,753
)
 
$
8.54
 
Forfeitures
   
-
   
$
-
 
Unvested – June 30, 2015
   
900,063
   
$
7.97
 
 
As of June 30, 2015, the unvested restricted stock represented $5.3 million of compensation expense that is expected to be recognized over the weighted average remaining vesting period of 1.1 years. The number of shares of unvested restricted stock expected to vest is 900,063.
 
Stock Options

A summary of the Company’s stock option activity during the six months ended June 30, 2015 is as follows:
 
   
Shares
   
Weighted
Average
Exercise Price
 
Outstanding – December 31, 2014
   
3,573,141
   
$
4.27
 
Granted
   
691,205
   
$
8.82
 
Exercised
   
-
   
$
-
 
Forfeitures
   
(4,335
)
 
$
2.79
 
Outstanding – June 30, 2015
   
4,260,011
   
$
5.01
 
Eligible for exercise
   
2,126,747
   
$
4.99
 
 
The following table summarizes the intrinsic values and remaining contractual terms of the Company’s stock options (in thousands):
 
   
Intrinsic
Value
   
Weighted
Average
Remaining
Life in Years
 
Options outstanding – June 30, 2015
 
$
15,674
     
9.2
 
Options exercisable – June 30, 2015
 
$
7,669
     
9.0
 
 
During the six months ended June 30, 2015, the intrinsic value of the exercised options was $0. As of June 30, 2015, the Company had 2,133,264 unvested stock options outstanding of which $2.5 million of compensation expense is expected to be recognized over the weighted average remaining vesting period of 1.0 year. The number of unvested stock options expected to vest is 2,133,264 shares, with a weighted average remaining life of 9.2 years, a weighted average exercise price of $5.01, and an intrinsic value of $15.7 million.
 
24

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED)

13. EQUITY

As of June 30, 2015 and December 31, 2014, there were 25,592,356 and 23,813,085 shares of common stock outstanding, respectively. As of June 30, 2015 and December 31, 2014, there were 54,000 and 41,000 shares of Preferred Stock outstanding, respectively.

Preferred and Common Stock

On May 29, 2014, the Company issued 30,000 shares of Series A Preferred Stock and 1,500,000 shares of common stock, the proceeds of which were used to pay for a portion of the purchase price for the acquisition of Schuff. On September 22, 2014, the Company issued 11,000 shares of Series A-1 Convertible Participating Preferred Stock of the Company (the “Series A-1 Preferred Stock”). Each share of Series A-1 Preferred Stock is convertible at a conversion price of $4.25. On January 5, 2015, the Company issued 14,000 shares of Series A-2 Convertible Participating Preferred Stock of the Company (together with the Series A Preferred Stock and Series A-1 Preferred Stock, the “Preferred Stock”). Each share of Series A-2 Preferred Stock is convertible at a conversion price of $8.25. In connection with the issuance of the Series A-2 Preferred Stock, the Company amended the certificates of designation governing the Series A Preferred Stock and Series A-1 Preferred Stock on January 5, 2015, which reflected the issuance of the Series A-2 Preferred Stock as a class of preferred stock which ranks at parity with the Series A Preferred Stock and Series A-1 Preferred Stock and made certain other changes to conform the terms of the Series A Preferred Stock and Series A-1 Preferred Stock to those of the Series A-2 Preferred Stock. The conversion prices for the Preferred Stock are subject to adjustments for dividends, certain distributions, stock splits, combinations, reclassifications, reorganizations, mergers, recapitalizations and similar events. The Preferred Stock will accrue a cumulative quarterly cash dividend at an annualized rate of 7.5%. The accrued value of the Preferred Stock will accrete quarterly at an annualized rate of 4% that will be reduced to 2% or 0% if the Company achieves specified rates of growth measured by increases in its net asset value.
 
The Company recorded a beneficial conversion feature on its Series A-1 Preferred Stock as a result of the fair market value of the Company’s common stock exceeding the conversion price. The Company recorded a $0.3 million beneficial conversion feature on its Series A-1 Preferred Stock which was calculated using the intrinsic value ($4.36—$4.25) multiplied by the number of convertible common shares ($11,000,000 / $4.25).

Each share of Preferred Stock may be converted by the holder into common stock at any time based on the then-applicable conversion price. On the seventh anniversary of the issue date of the Series A Preferred Stock, holders of the Preferred Stock shall be entitled to cause the Company to redeem the Preferred Stock at the accrued value per share plus accrued but unpaid dividends. Each share of Preferred Stock that is not so redeemed will be automatically converted into shares of common stock at the conversion price then in effect. Upon a change of control, holders of the Preferred Stock shall be entitled to cause the Company to redeem their Preferred Stock at a price per share equal to the greater of (i) the accrued value of the Preferred Stock, which amount would be multiplied by 150% in the event of a change in control occurring on or prior to the third anniversary of the issue date of the Series A Preferred Stock plus and accrued but unpaid dividends and (ii) the value that would be received if the share of Preferred Stock were converted into common stock immediately prior to the change of control.
 
The certificates of amendment related to the Company’s Preferred Stock (the “Prior Amendment”) did not become effective because they were filed without proper authorization of the stockholders of the Company.  The holders of the Series A Preferred Stock have agreed to release all claims against the Company relating to the ineffectiveness of the Prior Amendments, including the fact that the conversion price of the Series A Preferred Stock remains at $4.25. The release of claims was granted as payment in full of the purchase price of the $5.0 million of Notes issued to the holders of the Series A Preferred Stock. The Company recorded this payment to other income (expense), net. See Note 20, “Subsequent Events” for additional information surrounding this transaction.
 
At any time after the third anniversary of the issue date of the Series A Preferred Stock, the Company may redeem the Preferred Stock, in whole but not in part, at a price per share generally equal to 150% of the accrued value per share plus accrued but unpaid dividends. After the third anniversary of the issue date of the Series A Preferred Stock, the Company may force conversion of the Preferred Stock into common stock if the common stock’s thirty-day volume-weighted average price (“VWAP”) exceeds 150% of the then-applicable conversion price and the common stock’s daily VWAP exceeds 150% of the then-applicable conversion pric