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EX-32 - EXHIBIT 32 - HC2 HOLDINGS, INC.a2015-q3form10xqexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - HC2 HOLDINGS, INC.a2015-q3form10xqexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - HC2 HOLDINGS, INC.a2015-q3form10xqexhibit311.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________________________________________
FORM 10-Q
_________________________________________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 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 x 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 x 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
x
 
 
 
 
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 x

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 October 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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
Part II. OTHER INFORMATION
 
 
 
 
Item 1.
 
Item1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.

2

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




 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Services revenue
$
151,933

 
$
41,267

 
$
373,492

 
$
126,731

Sales revenue
125,534

 
138,166

 
386,765

 
192,642

Net revenue
277,467

 
179,433

 
760,257

 
319,373

Operating expenses:
 

 
 

 
 

 
 

Cost of revenue - services
138,099

 
39,464

 
334,608

 
120,101

Cost of revenue - sales
103,375

 
119,175

 
324,820

 
162,505

Selling, general and administrative
27,830

 
20,246

 
77,359

 
40,482

Depreciation and amortization
6,593

 
921

 
16,835

 
1,475

Gain on sale or disposal of assets
(1,957
)
 
(448
)
 
(986
)
 
(81
)
Lease termination costs
1,124

 

 
1,124

 

Total operating expenses
275,064

 
179,358

 
753,760

 
324,482

Income (loss) from operations
2,403

 
75

 
6,497

 
(5,109
)
Interest expense
(10,343
)
 
(2,103
)
 
(28,992
)
 
(3,116
)
Amortization of debt discount
(40
)
 
(805
)
 
(216
)
 
(1,381
)
Loss on early extinguishment or restructuring of debt

 
(6,947
)
 

 
(6,947
)
Other income (expense), net
1,216

 
(1,092
)
 
(3,528
)
 
524

Foreign currency transaction gain
1,099

 
170

 
2,150

 
573

Loss from continuing operations before income (loss) from equity investees and income tax benefit (expense)
(5,665
)
 
(10,702
)
 
(24,089
)
 
(15,456
)
Income (loss) from equity investees
535

 
(288
)
 
(724
)
 
(288
)
Income tax benefit (expense)
649

 
(4,515
)
 
4,018

 
(6,470
)
Loss from continuing operations
(4,481
)
 
(15,505
)
 
(20,795
)
 
(22,214
)
Loss from discontinued operations
(24
)
 
(106
)
 
(44
)
 
(62
)
Gain (loss) from sale of discontinued operations

 
663

 

 
(121
)
Net loss
(4,505
)
 
(14,948
)
 
(20,839
)
 
(22,397
)
Less: Net income attributable to noncontrolling interest
(65
)
 
(931
)
 
(8
)
 
(1,990
)
Net loss attributable to HC2 Holdings, Inc.
(4,570
)
 
(15,879
)
 
(20,847
)
 
(24,387
)
Less: Preferred stock dividends and accretion
1,035

 
1,004

 
3,212

 
1,204

Net loss attributable to common stock and participating preferred stockholders
$
(5,605
)
 
$
(16,883
)
 
$
(24,059
)
 
$
(25,591
)
 
 
 
 
 
 
 
 
Basic loss per common share:
 

 
 

 
 

 
 

Loss from continuing operations attributable to HC2 Holdings, Inc.
$
(0.22
)
 
$
(0.75
)
 
$
(0.96
)
 
$
(1.38
)
Gain (loss) from sale of discontinued operations

 
0.03

 

 
(0.01
)
Net loss attributable to HC2 Holdings, Inc.
$
(0.22
)
 
$
(0.72
)
 
$
(0.96
)
 
$
(1.39
)
 
 
 
 
 
 
 
 
Diluted loss per common share:
 

 
 

 
 

 
 

Loss from continuing operations attributable to HC2 Holdings, Inc.
$
(0.22
)
 
$
(0.75
)
 
$
(0.96
)
 
$
(1.38
)
Gain (loss) from sale of discontinued operations

 
0.03

 

 
(0.01
)
Net loss attributable to HC2 Holdings, Inc.
$
(0.22
)
 
$
(0.72
)
 
$
(0.96
)
 
$
(1.39
)
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
25,592

 
23,372

 
25,093

 
18,348

Diluted
25,592

 
23,372

 
25,093

 
18,348

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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(4,505
)
 
$
(14,948
)
 
$
(20,839
)
 
$
(22,397
)
Other comprehensive loss
 

 
 

 
 

 
 

Foreign currency translation adjustment
(6,126
)
 
(21
)
 
(7,998
)
 
(155
)
Unrealized loss on available-for-sale securities, net of tax
(2,008
)
 
(1,655
)
 
(5,097
)
 
(1,655
)
Less: Comprehensive income attributable to the noncontrolling interest
(65
)
 
(931
)
 
(8
)
 
(1,990
)
Comprehensive loss attributable to HC2 Holdings, Inc.
$
(12,704
)
 
$
(17,555
)
 
$
(33,942
)
 
$
(26,197
)
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)


 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
81,066

 
$
107,978

Short-term investments
3,625

 
4,867

Accounts receivable (net of allowance for doubtful accounts receivable of $1,576 and $2,760 at September 30, 2015 and December 31, 2014, respectively)
187,474

 
151,558

Costs and recognized earnings in excess of billings on uncompleted contracts
37,266

 
28,098

Deferred tax asset - current
1,701

 
1,701

Inventories
14,408

 
14,975

Prepaid expenses and other current assets
27,835

 
22,455

Assets held for sale
6,349

 
3,865

Total current assets
359,724

 
335,497

Restricted cash
7,196

 
6,467

Long-term investments
77,154

 
48,674

Property, plant and equipment, net
221,842

 
239,851

Goodwill
30,665

 
27,990

Other intangible assets, net
26,674

 
31,144

Deferred tax asset - long-term
23,571

 
15,811

Other assets
18,201

 
18,614

Total assets
$
765,027

 
$
724,048

Liabilities, temporary equity and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
65,573

 
$
79,794

Accrued interconnection costs
36,689

 
9,717

Accrued payroll and employee benefits
22,127

 
20,023

Accrued expenses and other current liabilities
48,338

 
34,042

Billings in excess of costs and recognized earnings on uncompleted contracts
20,045

 
41,959

Accrued income taxes
1,470

 
512

Accrued interest
11,567

 
3,125

Current portion of long-term debt
13,454

 
10,444

Current portion of pension liability

 
5,966

Total current liabilities
219,263

 
205,582

Long-term debt
374,404

 
332,927

Pension liability
27,664

 
31,244

Other liabilities
8,151

 
1,617

Total liabilities
629,482

 
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 September 30, 2015 and December 31, 2014; Series A-1 - 10,000 and 11,000 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively; Series A-2 - 14,000  and 0 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
53,403

 
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 September 30, 2015 and December 31,
   2014, respectively
26

 
24

Additional paid-in capital
151,662

 
147,081

Accumulated deficit
(62,727
)
 
(41,880
)
Treasury stock, at cost – 31,626  shares at September 30, 2015 and December 31, 2014
(378
)
 
(378
)
Accumulated other comprehensive loss
(28,273
)
 
(15,178
)
Total HC2 Holdings, Inc. stockholders' equity before noncontrolling interest
60,310

 
89,669

Noncontrolling interest
21,832

 
23,164

Total stockholders' equity
82,142

 
112,833

Total liabilities, temporary equity and stockholders' equity
$
765,027

 
$
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 Capital
 
Treasury Stock
 
Retained Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Non- controlling Interest
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance as of December 31, 2013
$
54,409

 
14,226

 
$
14

 
$
98,598

 
$
(378
)
 
$
(29,773
)
 
$
(14,052
)
 
$

Share-based compensation expense
1,724

 

 

 
1,724

 

 

 

 

Proceeds from the exercise of warrants and stock options
24,348

 
7,590

 
8

 
24,340

 

 

 

 

Taxes paid in lieu of shares issued for share-based compensation
(41
)
 

 

 
(41
)
 

 

 

 

Preferred stock dividends and accretion
(1,204
)
 
 

 
 

 
(1,204
)
 

 

 

 

Preferred stock beneficial conversion feature
659

 

 

 
659

 

 

 

 

Issuance of common stock
6,000

 
1,500

 
2

 
5,998

 

 

 

 

Issuance of restricted stock

 
342

 

 

 

 

 

 

Acquisition of noncontrolling interest
61,080

 

 

 

 

 

 

 
61,080

Excess of fair value of net assets over purchase price of acquired company
4,674

 

 

 
4,674

 

 

 

 

Net (loss) income
(22,397
)
 

 

 

 

 
(24,387
)
 

 
1,990

Foreign currency translation adjustment
(155
)
 

 

 

 

 

 
(155
)
 

Unrealized gain (loss) on available-for-sale securities
(1,655
)
 

 

 

 

 

 
(1,655
)
 

Balance as of September 30, 2014
$
127,442

 
23,658

 
$
24

 
$
134,748

 
$
(378
)
 
$
(54,160
)
 
$
(15,862
)
 
$
63,070






6

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)


 
 
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Retained Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Non- controlling Interest
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance as of December 31, 2014
$
112,833

 
23,813

 
$
24

 
$
147,081

 
$
(378
)
 
$
(41,880
)
 
$
(15,178
)
 
$
23,164

Share-based compensation expense
6,943

 

 

 
6,943

 

 

 

 

Dividend paid to noncontrolling interest
(1,038
)
 

 

 

 

 

 

 
(1,038
)
Preferred stock dividends and accretion
(3,212
)
 

 

 
(3,212
)
 

 

 

 

Preferred stock beneficial conversion feature
(375
)
 

 

 
(375
)
 

 

 

 

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
(259
)
 

 

 

 

 

 

 
(259
)
Excess book value over fair value of purchased noncontrolling interest

 

 

 
43

 

 

 

 
(43
)
Excess of fair value of net assets over purchase price of acquired company
182

 

 

 
182

 

 

 

 

Net (loss) income
(20,839
)
 

 

 

 

 
(20,847
)
 

 
8

Foreign currency translation adjustment
(7,998
)
 

 

 

 

 

 
(7,998
)
 

Unrealized gain (loss) on available-for-sale securities, net of tax
(5,097
)
 

 

 

 

 

 
(5,097
)
 

Balance as of September 30, 2015
$
82,142


25,592


$
26


$
151,662


$
(378
)

$
(62,727
)

$
(28,273
)

$
21,832

See accompanying notes to condensed consolidated financial statements.

7

HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)


 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(20,839
)
 
$
(22,397
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Provision for doubtful accounts receivable
325

 
(114
)
Share-based compensation expense
6,943

 
1,725

Depreciation and amortization
22,570

 
4,071

Amortization of deferred financing costs
1,030

 
288

Lease termination costs
1,124

 

(Gain) loss on sale or disposal of assets
(986
)
 
635

(Gain) loss on sale of investments
(399
)
 
(437
)
Equity investment (income)/loss
724

 
288

Amortization of debt discount
216

 
1,381

Unrealized (gain) loss on investments
(32
)
 

Loss on early extinguishment of debt

 
6,947

Deferred income taxes
(8,143
)
 
1

Other, net
225

 

Unrealized foreign currency transaction (gain) loss on intercompany and foreign debt
90

 
57

Changes in assets and liabilities, net of acquisitions:
 

 
 

(Increase) decrease in accounts receivable
(36,099
)
 
6,037

(Increase) decrease in costs and recognized earnings in excess of billings on uncompleted contracts
(9,253
)
 
522

(Increase) decrease in inventories
455

 
(1,984
)
(Increase) decrease in prepaid expenses and other current assets
(4,799
)
 
25,539

(Increase) decrease in other assets
1,483

 
1,558

Increase (decrease) in accounts payable
(15,675
)
 
1,751

Increase (decrease) in accrued interconnection costs
26,915

 
(2,618
)
Increase (decrease) in accrued payroll and employee benefits
2,936

 
3,055

Increase (decrease) in accrued expenses and other current liabilities
18,406

 
(3,785
)
Increase (decrease) in billings in excess of costs and recognized earnings on uncompleted contracts
(21,933
)
 
(7,695
)
Increase (decrease) in accrued income taxes
2,060

 
(2,198
)
Increase (decrease) in accrued interest
8,442

 
502

Increase (decrease) in other liabilities
(720
)
 
(1,371
)
Increase (decrease) in pension liability
(8,665
)
 

Net cash (used in) provided by operating activities
(33,599
)
 
11,758

Cash flows from investing activities:
 

 
 

Purchase of property, plant and equipment
(16,751
)
 
(4,064
)
Sale of property and equipment and other assets
4,994

 
3,696

Purchase of equity investments
(11,506
)
 
(15,363
)
Sale of equity investments
1,026

 

Sale of assets held for sale
1,479

 

Purchase of available-for-sale securities
(10,857
)
 
(3,277
)
Sale of available-for-sale securities
5,850

 
24

Investment in debt securities
(19,347
)
 
(250
)
Sale of investments

 
1,111

Cash paid for business acquisitions, net of cash acquired
(568
)
 
(163,510
)
Purchase of noncontrolling interest
(239
)
 
(6,978
)

8


Contribution by noncontrolling interest

 
15,500

Receipt of dividends from equity investees
2,448

 

(Increase) decrease in restricted cash
(727
)
 

Net cash used in investing activities
(44,198
)
 
(173,111
)
Cash flows from financing activities:
 

 
 

Proceeds from long-term obligations
425,527

 
492,068

Principal payments on long-term obligations
(379,037
)
 
(294,237
)
Payment of fees on restructuring of debt

 
(837
)
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

 
39,765

Proceeds from the exercise of warrants and stock options

 
24,344

Payment of dividends
(3,855
)
 
(750
)
Taxes paid in lieu of shares issued for share-based compensation

 
(41
)
Net cash provided by financing activities
55,531

 
266,312

Effects of exchange rate changes on cash and cash equivalents
(4,646
)
 
(2,217
)
Net change in cash and cash equivalents
(26,912
)
 
102,742

Cash and cash equivalents, beginning of period
107,978

 
8,997

Cash and cash equivalents, end of period
$
81,066

 
$
111,739

Supplemental cash flow information:
 

 
 

Cash paid for interest
$
21,445

 
$
2,388

Cash paid for taxes
$
1,701

 
$
7,761

Preferred stock accreting dividends and accretion
$
151

 
$
419

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
$
1,521

 
$

Conversion of preferred stock to common stock
$
1,000

 
$

See accompanying notes to condensed consolidated financial statements.

9

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 noncontrolling 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 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 our acquisition of GMSL, 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 service operators and Internet service providers from our International Carrier Services (“ICS”) business unit.

In our Life Sciences segment, we operate Pansend Life Sciences, LLC (“Pansend”, f/k/a Pansend, LLC), which has a 77% 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. Additionally, in August 2015, the Company purchased 180,415 shares of MediBeacon, Inc., Preferred Stock for $2.9 million for a total ownership of approximately 9%.

In February 2015, the Company sold 586,095 shares of Novatel Wireless, Inc. (“Novatel”) common stock and a warrant to purchase 293,047 shares of Novatel's common stock for $1.0 million which resulted in a gain of $0.2 million. In March 2015, the Company exercised a warrant to purchase 3,824,600 shares of Novatel's common stock for $8.6 million and also acquired a new warrant to purchase 1,593,583 shares of Novatel's 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.

In the first quarter of 2015, the Company purchased $3.0 million of convertible debt of DTV America Corporation (“DTV”) in aggregate. The convertible debt earned 10% interest. In addition, the Company acquired share purchase warrants, which are exercisable for 666,667 and 333,333 DTV's common shares until January 20, 2018 and March 6, 2018, respectively, at an exercise price of $2.00 per share. The principal balance and accrued interest of the convertible debt was automatically converted into 2,081,693 shares of common stock on June 30, 2015.

In April 2015, the Company purchased a $16.1 million convertible debenture (the "Debenture") of Gaming Nation, Inc. ("Gaming Nation"). The Debenture earns 6% interest in-kind and the principal and interest is convertible at the Company's option into Gaming Nation's common shares at a conversion price of $2.25. On June 9, 2015, the Debenture became convertible into 8,888,889 of Gaming Nation's common shares until June 9, 2017. In addition, the Company acquired a share purchase

10

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


warrant, which is exercisable for 28,126,068 of Gaming Nation's common shares until April 6, 2020 at varying exercise prices, commencing at $5.00 per share for the first 2 years. For the quarter ended September 30, 2015, the Company recorded a foreign currency translation loss of $1.2 million and unrealized loss on fair value of the Debenture of $2.6 million within other comprehensive income.

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 nine months ended September 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.

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 September 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 a 77% interest in Genovel Orthopedics, Inc. and a 61% interest in R2 Dermatology. 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 third quarter of 2015 ended on September 27, 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”) 2014-8, “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 September 2015, the FASB issued ASU 2015-16, “Business Combination Topic No. 805: Simplifying the Accounting for Measurement - Period Adjustments”, which requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. 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 August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest Subtopic No. 835-30: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line-of-credit arrangements as assets. 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.

11

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


In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers Topic No. 606: Deferral of the Effective Date”, which defers the effective date of the new revenue recognition standard by one year. Early adoption is permitted. The Company’s effective date for adoption is January 1, 2018. 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 July 2015, the FASB issued ASU 2015-11, “Inventory Topic No. 330: Simplifying the Measurement of Inventory”, which requires inventory within the scope of the ASU to be measured using the lower of cost and net realizable value. Inventory excluded from the scope of the ASU will continue to be measured at the lower of cost or market. Early adoption is permitted. The Company’s effective date for adoption is January 1, 2017. 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 May 2015, the FASB issued ASU 2015-8, “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 2015-3, “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 2015-2, “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 2015-1, “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.
 
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.


12

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


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 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 the nine months ended September 30, 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 our acquisition of an additional 816,414 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 $78.8 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%.

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

13

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


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 Schuff trade name was valued using a relief from royalty methodology. An estimated 60% of Schuff's 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 Schuff 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 of Schuff to 91% from the May 2014 acquisition date through December 31, 2014, the Company recorded an adjustment to Schuff’s noncontrolling interest of $3.4 million and recorded as the excess book value over the fair value of purchased noncontrolling interest in the Company’s condensed consolidated statement of stockholders’ equity. In the nine months ended September 30, 2015, the Company acquired an additional 7,371 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.

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 was 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 fair values 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 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
3,349

Total liabilities assumed
4,447

Fair value of net assets acquired
22,544


14

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


Less purchase price
15,500

Less fair value of noncontrolling interest
2,189

Excess of fair value of net assets over purchase price
$
4,855

 
The acquisition of ANG resulted in an excess of the fair value of the net assets acquired over the purchase price of $4.9 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 ANG 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 ANG trade name was valued at $6.3 million and is being 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 valued at $2.7 million and is being amortized over a 10 year life.
 
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 fair values of the GMSL assets acquired and liabilities assumed as of the acquisition date. The net enterprise value of GMSL was valued at $130 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 purchase price allocation is as follows (in thousands):
Cash and cash equivalents
$
62,555

Accounts receivable
26,183

Prepaid expenses and other current assets
22,111

Inventories
7,395

Restricted cash
4,682

Property and equipment, net
152,022

Customer contracts
8,121

Trade name
1,137

Developed technology
1,299

Goodwill
493

Investments
28,876

Other assets
7,482

Total assets acquired
322,356

Accounts payable
8,965

Accrued expenses and other current liabilities
46,992

Accrued income taxes
1,251

Current portion of long-term debt
8,140

Long-term debt
78,356


15

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


Pension liability
45,923

Deferred tax liability
1,163

Other liabilities
1,178

Total liabilities assumed
191,968

Enterprise value
130,388

Less fair value of noncontrolling interest
3,803

Purchase price attributable to controlling interest
$
126,585

 
The acquisition of GMSL resulted in goodwill of approximately $0.5 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.

After the June 30, 2015 financial statements were issued, we updated certain balance sheet items under the purchase price allocation. The carrying value of the property and equipment, net was reduced by $5.0 million, the carrying value of the investments was increased by $4.6 million and a deferred tax liability of $0.1 million was established on the developed technology intangible asset. These increases and decreases resulted in the creation of $0.5 million of goodwill.

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 valued at £5.0 million ($8.1 million using the exchange rate in effect at the time of acquisition) and are being amortized over a 15 year life.
The GMSL 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 GMSL trade name was valued at £0.7 million ($1.1 million using the exchange rate in effect at the time of acquisition) and is being 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 £0.8 million ($1.3 million using the exchange rate in effect at the time of acquisition) and is being amortized over a 4 year life.
 
GMSL's Joint Ventures (accounted for under the Equity Method)

S. B. Submarine Systems Co., Ltd. (“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 fair value of £9.7 million ($15.8 million using the exchange rate in effect at the time of acquisition).
Huawei Marine Networks Co., Ltd. – 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 fair value of £4.3 million ($7.0 million using the exchange rate in effect at the time of acquisition).
International Cableship Pte., Ltd. – 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

16

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


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 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. – 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 fair value of £0.7 million. ($1.1 million using the exchange rate in effect at the time of acquisition).
Other investments were 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 fair values of the named investments above was £17.5 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 £7.7 million ($12.5 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 9 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 of Schuff, ANG and GMSL had occurred on January 1, 2014. This information neither purports 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, except per share amounts): 
 
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2014
Net revenue
$
223,927

 
$
630,035

 
 
 
 
Net income (loss) from continuing operations
(11,009
)
 
1,636

Net income (loss) from discontinued operations
(3,067
)
 
(3,115
)
Gain (loss) from sale of discontinued operations
663

 
(121
)
Net income (loss) attributable to HC2
$
(13,413
)
 
$
(1,600
)
 
 
 
 
Per share amounts:
 
 
 
Income (loss) from continuing operations
$
(0.47
)
 
$
0.09

Income (loss) from discontinued operations
(0.13
)
 
(0.17
)
Gain (loss) from sale of discontinued operations
0.03

 
(0.01
)
Net income (loss) attributable to HC2
$
(0.57
)
 
$
(0.09
)
 
All expenditures incurred in connection with the acquisitions were expensed and are included in selling, general and administrative expenses. Transaction costs incurred in connection with the Schuff acquisition were $0.3 million during the nine months ended September 30, 3014. Transaction costs incurred in connection with the GMSL acquisition were $4.3 million during the nine months ended September 30, 2014. The Company recorded net revenue and net income (loss) as follows (in thousands):

17

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


 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
Net Revenue
 
Net Income (Loss)
 
Net Revenue
 
Net Income (Loss)
Schuff
$
137,706

 
$
3,491

 
$
192,182

 
$
6,065

ANG
460

 
(386
)
 
460

 
(386
)
 
4. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
Contract receivables:
 
 
 
Contracts in progress
$
116,353

 
$
105,071

Unbilled retentions
29,292

 
32,850

Trade receivables
43,235

 
16,202

Other receivables
170

 
195

Allowance for doubtful accounts
(1,576
)
 
(2,760
)
 
$
187,474

 
$
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):
 
September 30, 2015
 
December 31, 2014
Costs incurred on contracts in progress
$
636,345

 
$
531,129

Estimated earnings
96,953

 
73,540

 
733,298

 
604,669

Less progress billings
716,077

 
618,530

 
$
17,221


$
(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
37,266

 
28,098

Billings in excess of costs and recognized earnings on uncompleted contracts
20,045

 
41,959

 
$
17,221

 
$
(13,861
)
 
6. INVENTORIES

Inventories consist of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
Raw materials
$
12,294

 
$
12,956

Work in process
1,697

 
1,779

Finished goods
417

 
240

 
$
14,408

 
$
14,975


7. INVESTMENTS

As of September 30, 2015 and December 31, 2014, the fair value of the available for sale securities recorded within short-term investments was $2.6 million and $4.9 million, respectively. As of September 30, 2015, our cost basis in available for sale securities recorded within short-term investments was $6.0 million, on which the Company had unrealized losses on such securities of $3.4 million recorded in accumulated other comprehensive loss. As of December 31, 2014, our cost basis in

18

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


available for sale securities recorded within short-term investments was $2.4 million, on which the Company had unrealized gains on such securities of $2.5 million recorded in accumulated other comprehensive loss.

The Company's long-term investments are summarized as follows (in thousands):
September 30, 2015
 
Cost
 
Unrealized Gains
 
 Unrealized Losses
 
Carrying Value
Common Equity
 
 
 
 
 
 
 
 
Novatel Wireless, Inc.
 
$
11,430

 
$

 
$

 
$
11,430

DTV America Corporation
 
2,828

 
1,856

 

 
4,684

Total Common Equity
 
14,258

 
1,856

 

 
16,114

Preferred Equity
 
 
 
 
 
 
 
 
NerVve Technologies, Inc.
 
4,619

 

 

 
4,619

Benevir Biopharm, Inc.
 
1,429

 

 

 
1,429

MediBeacon, Inc.
 
2,842

 

 

 
2,842

Total Preferred Equity
 
8,890

 

 

 
8,890

GMSL Joint Ventures
 
 
 
 
 
 
 
 
S. B. Submarine Systems Co., Ltd.
 
17,680

 

 

 
17,680

International Cableship Pte., Ltd.
 
1,181

 

 

 
1,181

Sembawang Cable Depot Pte., Ltd.
 
1,011

 

 

 
1,011

Huawei Marine Networks Co., Ltd
 
14,351

 

 

 
14,351

Visser Smit Global Marine Partnership
 
430

 

 

 
430

Total GMSL Joint Ventures
 
34,653

 

 

 
34,653

Convertible Debt
 
 
 
 
 
 
 
 
Gaming Nation, Inc.
 
10,060

 

 
(3,398
)
 
6,662

mParticle
 
500

 

 

 
500

Total Convertible Debt
 
10,560

 

 
(3,398
)
 
7,162

Warrants
 
 
 
 
 
 
 
 
Novatel Wireless, Inc.
 
3,097

 

 

 
3,097

Gaming Nation, Inc
 
6,036

 

 
(443
)
 
5,593

DTV America Corporation
 
295

 
317

 

 
612

Total Warrants
 
9,428

 
317

 
(443
)
 
9,302

Other Equity
 
 
 
 
 
 
 
 
Kaneland, LLC
 
1,033

 

 

 
1,033

Total long-term investments
 
$
78,822

 
$
2,173

 
$
(3,841
)
 
$
77,154


19

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


December 31, 2014
 
Cost
 
Unrealized Gains
 
 Unrealized Losses
 
Carrying Value
Common Equity
 
 
 
 
 
 
 
 
Novatel Wireless, Inc.
 
10,462

 

 

 
10,462

Preferred Equity
 
 
 
 
 
 
 
 
NerVve Technologies, Inc.
 
5,538

 

 

 
5,538

Benevir Biopharm, Inc.
 
1,915

 

 

 
1,915

Total Preferred Equity
 
7,453

 

 

 
7,453

GMSL Joint Ventures
 
 
 
 
 
 
 
 
Global Cable Technology Ltd.
 
50

 

 

 
50

S. B. Submarine Systems Co., Ltd.
 
12,882

 

 

 
12,882

International Cableship Pte., Ltd.
 
2,111

 

 

 
2,111

Sembawang Cable Depot Pte., Ltd.
 
808

 

 

 
808

Huawei Marine Networks Co., Ltd
 
10,087

 

 

 
10,087

Visser Smit Global Marine Partnership
 
464

 

 

 
464

Total GMSL Joint Ventures
 
26,402

 

 

 
26,402

Convertible Debt
 
 
 
 
 
 
 
 
mParticle
 
250

 

 

 
250

Warrants
 
 
 
 
 
 
 
 
Novatel Wireless, Inc.
 
2,956

 

 

 
2,956

Other Equity
 
 
 
 
 
 
 
 
Kaneland, LLC
 
1,151

 

 

 
1,151

Total long-term investments
 
$
48,674

 
$

 
$

 
$
48,674


Summarized income statement information for our significant equity method investments for the nine months ended August 31, 2015 (which we record on a one month lag) is as follows (in thousands):
Net Revenue
 
$159,339
Gross Profit
 
40,736

Loss from continuing operations
 
(25,749
)
Net loss
 
(31,192
)

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill by reporting unit for the nine months ended September 30, 2015 are as follows (in thousands):
 
Schuff
 
GMSL
 
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
)
 
1,016

 

 
1,781

 
2,675

Balance as of September 30, 2015
$
24,490

 
$
1,016

 
$
3,378

 
$
1,781

 
$
30,665

 







20

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


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

 
(26
)
 

 

 

 

 
(26
)
Amortization
(224
)
 
(265
)
 
(472
)
 

 

 

 
(961
)
Acquisition of business

 

 

 

 

 

 

Reclassification

 

 

 

 

 

 

Balance as of September 30, 2015
$
4,080


$
706


$
5,565


$


$


$


$
10,351

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance as of December 31, 2014
$

 
$
7,333

 
$
4,881

 
$

 
$

 
$

 
$
12,214

Effect of change in foreign currency exchange rates

 
(155
)
 

 

 

 

 
(155
)
Amortization

 
(380
)
 
(325
)
 

 

 

 
(705
)
Acquisition of business

 

 

 

 

 

 

Reclassification

 

 

 

 

 

 

Balance as of September 30, 2015
$


$
6,798


$
4,556


$


$


$


$
11,354

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance as of December 31, 2014
$

 
$
1,456

 
$

 
$

 
$

 
$

 
$
1,456

Effect of change in foreign currency exchange rates

 
(37
)
 

 

 

 

 
(37
)
Amortization

 
(227
)
 

 

 
(638
)
 

 
(865
)
Acquisition of business