hchc-20211231
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 2021
OR
Commission File No. 001-35210
INNOVATE CORP.(Exact name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
(212) 235-2690
(Registrant’s telephone number, including area code)
_____________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, par value $0.001 per share VATE New York Stock Exchange
Preferred Stock Purchase Rights N/A New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ Nox
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. Yesx No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The aggregate market value of INNOVATE’s common stock held by non-affiliates of the registrant as of June 30, 2021 was approximately $193.7 million, based on the closing sale price of the Common Stock on such date.
As of February 28, 2022, 77,836,748 shares of common stock, par value $0.001, were outstanding.
Documents Incorporated by Reference:
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the registrant's 2022 Annual Meeting of Stockholders are incorporated by reference into Part III.
INNOVATE CORP.
INDEX TO FORM 10-K
Part I
Item 1. Business 2
Item 1A. Risk Factors 16
Item 1B. Unresolved Staff Comments 43
Item 2. Properties 43
Item 3. Legal Proceedings 43
Item 4. Mine Safety Disclosures 45
Part II
Item 6. [Reserved] 45
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 67
Item 8. Financial Statements and Supplementary Data 67
Item 9A. Controls and Procedures 67
Item 9B. Other Information 68
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 68
Part III
Item 10. Directors, Executive Officers and Corporate Governance 68
Item 11. Executive Compensation 68
Item 14. Principal Accountant Fees and Services 69
Part IV
Item 15. Exhibits, Financial Statement Schedules 69
SIGNATURES
1
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, in this Annual Report on Form 10-K, "INNOVATE," means INNOVATE Corp. and the "Company," "we" and "our" mean INNOVATE together with its consolidated subsidiaries.
This Annual Report on Form 10-K contains forward-looking statements. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Special Note Regarding Forward-Looking Statements."
General
INNOVATE is a diversified holding company that has a portfolio of subsidiaries in a variety of operating segments. We seek to grow these businesses so that they can generate long-term sustainable free cash flow and attractive returns in order to maximize value for all stakeholders. As of December 31, 2021, our three operating platforms or reportable segments, based on management’s organization of the enterprise, are Infrastructure, Life Sciences and Spectrum, plus our Other segment, which includes businesses that do not meet the separately reportable segment thresholds.
Our principal operating subsidiaries include the following assets:
(i)DBM Global Inc. ("DBMG") (Infrastructure), a family of companies providing fully integrated structural and steel construction services;
(ii)Pansend Life Sciences, LLC ("Pansend") (Life Sciences), our subsidiary focused on supporting healthcare and biotechnology product development;
(iii)HC2 Broadcasting Holdings Inc. and its subsidiaries ("Broadcasting") (Spectrum), a strategic operator of Over-The-Air ("OTA") broadcasting stations across the United States ("U.S.") and Puerto Rico. In addition, Spectrum, through its wholly-owned subsidiary, HC2 Network Inc. ("Network"), operates Azteca America, a Spanish-language broadcast network offering high quality Hispanic content to a diverse demographic across the U.S.; and
(iv)Other, which represents all other businesses or investments that do not meet the definition of a segment individually or in the aggregate.
We expect to focus on operating and managing our portfolio of companies and building value in Infrastructure, Life Sciences and Spectrum in the future. We believe these segments are well positioned to take advantage of current trends in today’s economy and that there is opportunity to build value organically and inorganically in these three segments. We may consider opportunities outside of these businesses in the longer term to acquire and invest in businesses with attractive assets that we consider to be undervalued or fairly valued.
Overall Business Strategy
We continually evaluate strategic and business alternatives within our operating segments, which may include the following: operating, growing or acquiring additional assets or businesses related to current or historical operations; or winding down or selling our existing operations. In the longer-term, we may evaluate opportunities to acquire assets or businesses unrelated to our current or historical operations. We have generally pursued either controlling positions in durable, cash-flow generating businesses, assets that will enhance our current businesses in Infrastructure, Life Sciences and Spectrum or companies we believe exhibit substantial growth potential, which may be unrelated to the Company’s then-current operating segments. In connection with any such acquisition, we may choose to actively assemble or re-assemble a company’s management team to ensure the appropriate expertise is in place to execute the operating objectives of such business. We view ourselves as strategic and financial partners and seek to align our management teams’ incentives with our goal of delivering sustainable long-term value to our stakeholders.
As part of any acquisition strategy, we may raise capital in the form of debt or equity securities (including preferred stock) or a combination thereof. We have broad discretion in selecting a business strategy for the Company. If we elect to pursue an acquisition, while we intend to focus on Infrastructure, Life Science and Spectrum, we may exercise our broad discretion to identify and select an industry and the possible acquisition or business combination opportunity unrelated to our current operating segments. In connection with evaluating these strategic and business alternatives, we may at any time be engaged in ongoing discussions with respect to possible acquisitions, business combinations and debt or equity securities offerings of widely varying sizes. There can be no assurance that any of these discussions will result in a definitive agreement and, if they do, what the terms or timing of any agreement would be.
Our strategic process includes a continual evaluation of our existing businesses which may include a sale of businesses or operating segments. We consider many factors as we go through our evaluation, which include but are not limited to market factors and opportunity, growth prospects and internal needs. In connection with evaluating these strategic and business alternatives, we may at any time be engaged in ongoing discussions with respect to possible dispositions, mergers and public offerings of widely varying sizes. There can be no assurance that any of these discussions will result in a definitive agreement and if they do, what the terms or timing of any agreement would be.
2
Competition
From a strategic perspective, we encounter competition for acquisition and business opportunities from other entities having similar business objectives, such as strategic investors and private equity firms, which could lead to higher prices for acquisition targets. Many of these entities are well established and have extensive experience identifying and executing transactions directly or through affiliates. Our financial resources and human resources may be relatively limited when contrasted with many of these competitors which may place us at a competitive disadvantage. Competitive conditions affecting our operating businesses are described in the discussions below.
Employees
As of December 31, 2021, we had approximately 3,902 employees, including the employees of our operating businesses as described in more detail below. We consider our relations with our employees to be satisfactory.
Our Operating Subsidiaries
Infrastructure Segment (DBMG)
DBM Global Inc. is a fully integrated Industrial Construction, Structural Steel, and Facility Maintenance provider, primarily through its subsidiary, Schuff Steel Company ("SSC"), who provides 3D Building Information Modeling ("BIM"), detailing, fabrication, and erection of structural steel and heavy steel plate, and heavy mechanical and facility maintenance services. DBMG provides these services on commercial, industrial, and infrastructure construction projects such as high- and low-rise buildings and office complexes, hotels and casinos, convention centers, sports arenas and stadiums, shopping malls, hospitals, dams, bridges, mines, metal processing, refineries, pulp and paper mills, and power plants. DBMG also fabricates trusses and girders and specializes in the fabrication and erection of large-diameter water pipe and water storage tanks. Through its Aitken business ("Aitken"), DBMG manufactures tunnel liners, pressure vessels, strainers, filters, separators and a variety of customized products. Through its GrayWolf Industrial business ("GrayWolf"), DBMG also provides integrated solutions for digital engineering, modeling and detailing, construction, heavy equipment installation and facility services including maintenance, repair, and installation to a diverse range of end markets. Through its Banker Steel business (“Banker”), DBMG provides full-service fabricated structural steel and erection services primarily for the East Coast and Southeast commercial and industrial construction market, in addition to full design-assist services. Headquartered in Phoenix, Arizona, DBMG has domestic operations in Alabama, Arizona, California, Florida, Georgia, Kansas, Kentucky, New Jersey, New York, Oregon, South Carolina, Texas, Utah, Virginia, and Washington with construction projects primarily located in the aforementioned states. In addition, through its DBM Vircon business (“DBM Vircon”), DBMG also has international operations located in Australia, Canada, India, New Zealand, the Philippines, Thailand, and the United Kingdom, providing steel detailing, rebar detailing, BIM modeling, and BIM management services.
DBMG’s results of operations are affected primarily by (i) the level of commercial, industrial and infrastructure construction as well as the need for mechanical and maintenance services in its principal markets; (ii) its ability to win project contracts; (iii) the number and complexity of project changes requested by customers or general contractors; (iv) its success in utilizing its resources at or near full capacity; and (v) its ability to complete contracts on a timely and cost-effective basis. The level of commercial, industrial and infrastructure construction activity is related to several factors, including local, regional and national economic conditions, interest rates, availability of financing, and the supply of existing facilities relative to demand.
Strategy
DBMG’s objective is to achieve and maintain a leading position in the geographic regions and project segments that it serves by providing timely, high-quality services to its customers. DBMG pursues this objective with a strategy comprised of the following components:
•Pursue Large, Value-Added Design-Build Projects: DBMG’s unique ability to offer design-build services, a full range of steel construction services and project management capabilities makes it a preferred partner for complex, design-build fabrication projects in the geographic regions it serves. This capability often enables DBMG to bid against fewer competitors in a less traditional, more negotiated selection process on these kinds of projects, thereby offering the potential for higher margins while providing overall cost savings and project flexibility and efficiencies to its customers;
•Expand and Diversify Revenue Base: DBMG is seeking to expand and diversify its revenue base by leveraging its long-term relationships with national and multi-national construction and engineering firms, national and regional accounts, original equipment manufacturers ("OEMs"), industrial owners, and other customers. DBMG also intends to continue to grow its operations by targeting smaller projects that carry higher margins and less risk of large margin fluctuations. DBMG believes that continuing to diversify its revenue base by completing smaller projects--such as low-rise office buildings, healthcare facilities and other commercial and industrial structures--could reduce the impact of periodic adverse market or economic conditions, as well as the margin slippage that may accompany larger projects;
•Emphasize Innovative Services: DBMG focuses its BIM modeling, digital engineering, design-build, engineering, detailing, fabrication, erection, and construction expertise on larger, more complex projects, where it typically experiences less competition and more advantageous negotiated contract opportunities. DBMG has extensive experience in providing services requiring complex BIM modeling, detailing, fabrication and erectiontechniques and other unusual project needs, such as BIM coordination, specialized transportation, steel treatment or specialty coating applications, piping, machinery rigging and setting, deep foundations, and specialty welding. These service capabilities have enabled DBMG to address such design-sensitive projects as stadiums and uniquely designed hotels and casinos;
3
•Diversify Customer and Product Base: Although DBMG seeks to achieve a leading share of the geographic and product markets in which it traditionally competes, it also seeks to diversify its product offerings and geographic markets through acquisition. By expanding theportfolio of products offered and geographic markets served, DBMG believes that it will be able to offer more value-added services to existing and new potential customers, as well as to reduce the impact of periodic adverse market or economic conditions; and,
•Ensure Project Delivery Success through Predictive Technologies: DBMG uses resources including data analytics, modeling and detailing, laser scan to BIM, and augmented and virtual reality to provide fully integrated solutions for a project’s lifecycle from design through to fabrication and construction, as well as providing mechanical and facility services. DBMG is thus able to deliver optimal value and reliable outcomes that are on schedule and on budget across a wide variety of services and geographic regions.
Services and Customers
DBMG consists of five business units spread across diverse markets: SSC (steel fabrication and erection), Banker (steel fabrication and erection), DBM Vircon (steel detailing, rebar detailing, bridge detailing, BIM modeling services and BIM management services), the Aitken product line (manufacturing of equipment for the oil and gas industry), and GrayWolf (steel fabrication and erection, specialty facility maintenance, repair, and installation services, as well as management of smaller structural steel projects, leveraging subcontractors). For the year ended December 31, 2021 revenues were as follows (in millions):
Revenue % of Total Revenue
The majority of DBMG's business is in North America, but DBM Vircon provides detailing services on five continents, and SSC provides fabricated steel to Canada and other select countries. In 2021, DBMG's two largest customers represented approximately 23.4% of revenues. In 2020, DBMG’s two largest customers represented approximately 18.6% of revenues.
DBMG’s size gives it the production capacity to complete large-scale, demanding projects, with typical utilization per facility ranging from 62% - 82% and a sales pipeline that includes over $1,876 million in potential revenue generation. DBMG believes it has benefited from being one of the largest players in a market that is highly fragmented across many small firms.
DBMG achieves a highly efficient and cost-effective construction process by focusing on collaborating with all project participants and utilizing its extensive digital engineering, design-build and design-assist capabilities with its clients. Additionally, DBMG has in-house fabrication and erection capabilities combined with access to a network of subcontractors for smaller projects in order to provide high-quality solutions for its customers. DBMG offers a range of services across a broad geography through its fifteen fabrication shops in the United States and thirty-five sales and management facilities located in the United States, Australia, Canada, India, New Zealand, the Philippines, Thailand and the UK.
DBMG operates with minimal bonding requirements, with a current balance of 57% of DBMG's backlog (out of a total backlog of $1,580.9 million) as of December 31, 2021, and bonding is reduced as projects are billed rather than upon completion. DBMG has limited its raw material cost exposure by securing fixed prices from mills at contract bid as well as by utilizing its purchasing power as one of the largest domestic buyers of wide flange beams in the United States.
SSC offers a variety of services to its customers which it believes enhances its ability to obtain and successfully complete projects. These services fall into six distinct groups: design-assist/design-build, pre-construction design and budgeting, steel management, fabrication, erection, and BIM:
•Design-Assist/Design-Build: Using the latest technology and BIM, DBMG works to provide clients with cost-effective steel designs. The end result is turnkey-ready, structural steel solutions for its diverse client base;
•Pre-Construction Design and Budgeting: Clients who contact DBMG in the early stages of planning can receive a DBMG-performed analysis of the structure and cost breakdown. Both of these tools allow clients to accurately plan and budget for any upcoming project;
•Steel Management: Using DBMG’s proprietary Steel Integrated Management System ("SIMS"), DBMG can track any piece of steel and instantly know its location. Additionally, DBMG can help clients manage steel subcontracts, providing clients with savings on raw steel purchases and giving them access to a variety of DBMG-approved subcontractors;
•Fabrication: Through its six fabrication shops in Arizona, California, Kansas, and Utah, SSC has one of the highest fabrication capacities in the United States, with over 1.1 million square feet under roof and a maximum annual fabrication capacity of approximately 256,000 tons;
4
•Erection: Named the top steel erector in the United States for 2007, 2008, 2011, and from 2013-2020 and the second top steel erector for 2021 by Engineering News-Record, SSC knows how to add value to its projects through the safe and efficient erection of steel structures; and
•BIM: DBMG uses BIM on every project to manage its role efficiently. Additionally, DBMG’s use of SIMS in conjunction with its BIM platform Visualizer allows for real-time reporting on a project’s progress and an information-rich model review.
Aitken is a manufacturer of equipment used in the oil, gas, petrochemical and pipeline industries. Aitken supplies the following products both nationwide and internationally:
•Strainers: Temporary cone and basket strainers, tee-type strainers, vertical and horizontal permanent line strainers and fabricated duplex strainers;
•Measurement Equipment: Orifice meter tubes, orifice plates, orifice flanges, seal pots, flow nozzles, Venturi tubes, low loss tubes and straightening vanes; and
•Major Products: Spectacle blinds, paddle blinds, drip rings, bleed rings, and test inserts, ASME vessels, launchers and pipe spools.
DBM Vircon provides steel detailing, rebar detailing, BIM modeling and BIM management services for industrial and infrastructure and commercial construction projects in Australia, New Zealand, Europe and North America.
•Steel Detailing: Utilizing industry leading technologies, DBM Vircon provides steel detailing services which include: shop drawings, erection plans, anchor bolt drawings, connection sketches, DSTV files for cutting and drilling, DXF files for plate work, field bolt lists, specialist reports and advance bill of material and piping;
•Rebar Detailing: These services, including rebar detailing and estimating, are delivered by a staff experienced in rebar installation and familiar with the construction practices and constructability issues that arise on project sites. Deliverables include: field placement/shop drawings, field and/or phone support, 2D and 3D modeling, connection sketches, bar listing in ASA format, DGN files, and complete rebar estimating;
•BIM Modeling: Through multidisciplinary teams, DBM Vircon creates highly accurate, scaled virtual models of each structural component. These independent models and data are integrated and standardized to produce a single 3D model simulation of the entire structure using DBM Vircon’s proprietary application, Visualizer. This integrated model contains complete information for all functional requirements of a project, including procurement and logistics, financial modeling, claims and litigation, fabrication, construction support and asset management;
•BIM Management: DBM Vircon is an industry leading provider of BIM management consultancy services ("BIM Management"), with clients ranging from government, industry organizations and general construction contractors. BIM Management of all project participants’ input, use and development of the applicable model is integral to ensuring that the model remains the single point of reference. DBM Vircon’s BIM Management service includes the governing of process and workflow management, which is a collection of defined model uses, workflows, and modeling methods used to achieve specific, repeatable and reliable information results from the model. The way the model is created and shared, and the sequencing of its application, impacts the effective and efficient use of BIM for desired project outcomes and decision support; and
•Bridge Steel Detailing: Utilizing industry leading technologies, DBM Vircon, through its wholly owned subsidiary, Candraft Detailing, provides steel detailing services for bridges which include: shop drawings, erection plans, anchor bolt drawings, connection sketches, DSTV files for cutting and drilling, DXF files for plate work, field bolt lists, specialist reports and advance bill of material and piping.
GrayWolf provides services including steel fabrication, steel management, maintenance, repair, erection, and installation to a diverse range of end markets in order to provide high-quality outage, turnaround, and new installation services to customers. GrayWolf provides the following services through its two major brands: GrayWolf Integrated Construction (formerly Titan Contracting, Titan Fabricators, and Inco Services), and Milco National Constructors.
•Specialty mechanical contracting services: GrayWolf offers specialty mechanical contracting services to the power, petrochemical, refining and other industrial markets. Its services including plant maintenance, specialty welding, equipment rigging, and mechanical construction to customers in the power, industrial, petrochemical, water treatment, and refining markets at a national level;
•Specialty construction solutions for processing markets: Customers in the pulp and paper, metals, mining and minerals, and petrochemical markets utilize GrayWolf’s specialized solutions including plant maintenance, process piping, equipment, and tank and vessel fabrication and erection that are catered to the needs and specifications of the customer’s industry;
•Turnarounds, tank construction, and piping services: GrayWolf offers services including plant maintenance, specialty welding, piping systems, and tanks and vessels construction to the power, pulp and paper, refining, petrochemical, and water treatment markets in the Midwest, Mid-Atlantic, Southeast, and West Coast;
5
•Custom steel fabrication and erection: GrayWolf offers engineering, design, fabrication, modularization, erection and additional services to the heavy commercial and industrial markets in the Southwest, Midwest, Gulf Coast and Southeast; and
•Structural steel management: GrayWolf provides turn-key steel fabrication and erection services with expertise in project management. Leveraging such strengths, GrayWolf uses its relationships with reliable subcontractors and erectors, along with state-of-the-art management systems, to deliver excellence to clients.
Banker Steel provides full-service fabricated structural steel and erection services primarily for the East Coast and Southeast commercial and industrial construction market in addition to full design-assist services. Banker Steel offers a variety of services to its customers, which it believes enhances its ability to obtain and successfully complete projects. These services fall into four distinct groups: design-assist/design-build, pre-construction design and budgeting, fabrication, and erection:
•Design-Assist/Design-Build: Using the latest technology, Banker Steel helps developers plan, schedule, model and price projects from start to finish resulting in cost-effective steel designs;
•Pre-Construction/Design and Budgeting: Clients who contact Banker Steel in the early stages of planning can receive a detailed analysis of the structure and cost breakdown. Both of these tools allow clients to accurately plan and budget for any upcoming project;
•Fabrication: Through its five fabrication shops in Florida, New Jersey, South Carolina and Virginia, Banker Steel has maximum annual fabrication capacity of approximately 189,000 tons with over 0.5 million square feet of space; typically focusing on complex, non-commoditized jobs with intensive fabrication requirements; and
•Erection: Banker offers a full suite of erection services including horizontal and vertical erection services.
Suppliers
DBMG currently purchases its steel from a variety of domestic and foreign steel producers but is not dependent on any one producer. During the year ended December 31, 2021, DBMG, through SSC and Bankers, purchased approximately 52% of the total value of steel and steel components purchased from two domestic steel vendors. See Item 1A - Risk Factors - "Risks Related to the Infrastructure segment" elsewhere in this document for discussion on DBMG’s reliance on suppliers of steel and steel components.
Sales and Distributions
DBMG obtains contracts through competitive bidding or negotiation, which generally are fixed-price, cost-plus, unit cost, or time and material arrangements. Bidding and negotiations require DBMG to estimate the costs of the project up front, with most projects typically lasting from one to twelve months. However, large and more complex projects can often last two years or more.
Marketing
General managers along with sales managers lead DBMG’s sales and marketing efforts. Each general manager is primarily responsible for sales, estimating, and marketing efforts in defined geographic areas. In addition, DBMG employs full-time project estimators and chief estimators. DBMG’s sales representatives build and maintain relationships with general contractors, architects, engineers, OEMs, industrial owners, and other potential sources of business to identify potential new projects. DBMG generates future project reports to track the weekly progress of new opportunities. DBMG’s sales efforts are further supported by most of its executive officers, engineering, and strategic sales and marketing personnel, who have substantial experience in the design, detailing, modeling, fabrication, industrial construction, maintenance, and erection of structural steel and heavy steel plate.
DBMG competes for new project opportunities through its relationships and interaction with its active and prospective customer base which provides valuable current market information and sales opportunities. In addition, DBMG is often contacted by governmental agencies in connection with public construction projects, and by large private-sector project owners, general contractors and engineering firms in connection with new building projects such as manufacturing and industrial plants, data centers, warehouse and distribution centers, and other industrial and commercial facilities.
Upon selection of projects to bid or price, DBMG’s estimating departments review and prepare projected costs of shop, field, detail drawing preparation and crane hours, steel and other raw materials, and other costs. With respect to bid projects, a formal bid is prepared detailing the specific services and materials DBMG plans to provide, along with payment terms and project completion timelines. Upon acceptance, DBMG’s bid proposal is finalized in a definitive contract.
6
Competition
The principal geographic and product markets DBMG serves are highly competitive, and this intense competition is expected to continue. DBMG competes with other contractors for commercial, industrial and specialty projects on a local, regional, or national basis. Continued service within these markets requires substantial resources and capital investment in equipment, technology and skilled personnel, and certain of DBMG’s competitors have financial and operating resources greater than DBMG. Competition also places downward pressure on DBMG’s contract prices and margins. The principal competitive factors within the industry are price, timeliness of project completion, quality, reputation, and the desire of customers to utilize specific contractors with whom they have favorable relationships and prior experience. While DBMG believes that it maintains a competitive advantage with respect to many of these factors, failure to continue to do so or to meet other competitive challenges could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.
Employees
As of December 31, 2021, DBMG employed approximately 3,794 people across the globe, including the U.S., Canada, Australia, New Zealand, India, the Philippines, Thailand, and the UK. The number of persons DBMG employs on an hourly basis fluctuates directly in relation to the amount of business DBMG performs. Certain of the fabrication and erection personnel DBMG employs are represented by the United Steelworkers of America, the International Association of Bridge, Structural, Ornamental and Reinforcing Iron Workers Union, the Ironworkers Union, the International Union of Operating Engineers, and the Texas Ironworkers Union. DBMG is a party to several separate collective bargaining agreements with these unions in certain of its current operating regions, which expire (if not renewed) at various times in the future. Approximately 27% of DBMG’s employees are covered under various collective bargaining agreements. As of December 31, 2021, most of DBMG’s collective bargaining agreements are subject to automatic annual or other renewal unless either party elects to terminate the agreement on the scheduled expiration date. DBMG considers its relationship with its employees to be satisfactory and, other than sporadic and unauthorized work stoppages of an immaterial nature, none of which have been related to its own labor relations, DBMG has not experienced a work stoppage or other labor disturbance.
DBMG strategically utilizes third-party fabrication and erection subcontractors on many of its projects and also subcontracts detailing services from time to time when its management determines that this would be economically beneficial (and/or when DBMG requires additional capacity for such services). DBMG’s inability to engage fabrication, erection and detailing subcontractors on favorable terms could limit its ability to complete projects in a timely manner or compete for new projects, which could have a material adverse effect on its operations.
Legal, Environmental and Insurance
DBMG is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to DBMG or that the resolution of any such matter will not have a material adverse effect upon DBMG or the Company’s business, consolidated financial position, results of operations or cash flows. Neither DBMG nor the Company believes that any of such pending claims and legal proceedings will have a material adverse effect on its (or the Company’s) business, consolidated financial position, results of operations or cash flows.
DBMG’s operations and properties are affected by numerous federal, state and local environmental protection laws and regulations, such as those governing discharges to air and water and the handling and disposal of solid and hazardous wastes. These laws and regulations have become increasingly stringent and compliance with these laws and regulations has become increasingly complex and costly. There can be no assurance that such laws and regulations or their interpretation will not change in a manner that could materially and adversely affect DBMG’s operations. Certain environmental laws, such as CERCLA (the Comprehensive Environmental Response, Compensation, and Liability Act) and its state law counterparts, provide for strict and joint and several liability for investigation and remediation of spills and other releases of toxic and hazardous substances. These laws may apply to conditions at properties currently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or other contamination attributable to an entity or its predecessors come to be located. Although DBMG has not incurred any material environmental related liability in the past and believes that it is in material compliance with environmental laws, there can be no assurance that DBMG, or entities for which it may be responsible, will not incur such liability in connection with the investigation and remediation of facilities it currently operates (or formerly owned or operated) or other locations in a manner that could materially and adversely affect its operations.
DBMG maintains commercial general liability insurance in the amount of $2.0 million per occurrence and $4.0 million in the aggregate. In addition, DBMG maintains umbrella coverage limits of $75.0 million. DBMG also maintains insurance against property damage caused by fire, flood, explosion and similar catastrophic events that may result in physical damage or destruction of its facilities and property. DBMG maintains professional liability insurance in the amount of $10.0 million for professional services related to our work in steel erection and fabrication projects.
All policies are subject to various deductibles and coverage limitations. Although DBMG’s management believes that its insurance is adequate for its present needs, there can be no assurance that it will be able to maintain adequate insurance at premium rates that management considers commercially reasonable, nor can there be any assurance that such coverage will be adequate to cover all claims that may arise.
7
Life Sciences Segment (Pansend Life Sciences, LLC)
Our Life Sciences segment is comprised of Pansend Life Sciences, LLC ("Pansend"). Pansend maintains controlling interests of approximately 80% in Genovel Orthopedics, Inc. ("Genovel"), which seeks to develop products to treat early osteoarthritis of the knee and approximately 56% in R2 Technologies, Inc. ("R2"), which develops aesthetic and medical technologies for the skin. Pansend also invests in other early stage or developmental stage healthcare companies including an approximately 47% interest in MediBeacon Inc. ("MediBeacon"), and an approximately 26% interest in Triple Ring Technologies, Inc ("Triple Ring").
R2 Technologies, Inc.
R2 develops and commercializes breakthrough aesthetic medical and non-medical devices in the aesthetic dermatology market. Founded in 2014 by Pansend and Blossom Innovations, LLC, R2 exclusively licenses intellectual property developed at Massachusetts General Hospital and Harvard Medical School.
Skin lightening and brightening is a large and fast-growing segment of aesthetic dermatology. Current lightening products and/or procedures may be ineffective, unpredictable or even harmful, and patients often must compensate for lack of efficacy by using makeup or concealers. R2 has developed breakthrough CryoAesthetic technologies that uniquely deliver treatments that provide patients skin lightening, brightening, skin tone evening and reduction or elimination of hyperpigmentation and inflammation. R2’s patented CryoModulation technology uses controlled cooling to suppress melanin, inflammation and discomfort by precisely controlling time and temperature to deliver an effective treatment with little social downtime.
In 2019, R2 closed its Series B “Commercialization” round with its strategic partner, Huadong Medicine Company, Ltd., (“Huadong”) and, in exchange for a staged $30 million investment, entered into an exclusive distribution agreement with Huadong for the Asia-Pacific region. As a part of this agreement, R2 will receive a share of the residual profits from such sales.
In 2021, Pansend invested $15 million in R2's Series C Preferred Stock at a post-money valuation of $150 million for R2.
R2 currently has three products in various stages of commercialization and development:
1.Glacial Rx – Launched in the first quarter of 2021 in the United States after receiving U.S. Food and Drug Administration (“FDA”) clearance for use in dermatologic procedures for the removal of benign lesions of the skin and for use when cooling is intended for the temporary reduction of pain, swelling, inflammation, and hematoma from minor surgical procedures. When used with R2 Dermabrasion Tips, the intended use includes general dermabrasion, scar revision, acne scar revision and tattoo removal. The Glacial Rx system effectively and comfortably addresses these conditions, leaving the skin with a smoother and brighter appearance with little downtime for the patient. The Glacial Rx system is sold to dermatologists and plastic surgeons and operated by trained healthcare professionals.
2.Glacial Spa – Launching in the first half of 2022 in China after receiving China Non-Medical Classification, the Glacial Spa is a cooling experience used to even skin tone, and brighten and lighten skin. The Glacial Spa system will be sold by Huadong’s existing sales force to spas and is intended to be operated by a trained aesthetician.
3.Glacial AI – Currently undergoing research and development, the Glacial AI is an autonomous, robotic cooling device focused on whole-body skin lightening and brightening.
MediBeacon, Inc.
MediBeacon is developing a proprietary non-invasive real-time monitoring system for the evaluation of kidney function. Current methods to evaluate kidney function are indirect estimates that may be inaccurate and are not real-time. Chronic kidney disease is estimated to affect more than 850 million people worldwide.
MediBeacon’s Transdermal GFR Measurement System (“TGFR”), which uses an optical skin sensor combined with Lumitrace, a proprietary agent that glows in the presence of light, will be the first non-invasive system to enable real-time, direct monitoring of kidney function at point-of-care. On October 22, 2018, the FDA granted Breakthrough Device designation to the TGFR for the measurement of Glomerular Filtration Rate (“GFR”) in patients with impaired or normal kidney function. Under the Breakthrough Device program, the FDA works with companies to expedite regulatory review in order to give patients more timely access to innovative diagnostic and therapeutic technologies. MediBeacon is expected to begin its U.S. pivotal study in the second half of 2022.
8
In 2019, MediBeacon closed its Series B financing round with its strategic partner, Huadong, providing Huadong with exclusive rights to MediBeacon’s portfolio of assets in Greater China in exchange for a staged $30 million investment. Further, Huadong will be responsible for funding clinical trials, commercial and regulatory activities in 25 countries in the Asia-Pacific region, including Greater China. In exchange, MediBeacon will receive royalty payments on net sales of the TGFR system. As of December 31, 2021, MediBeacon has received $15 million from Huadong at a pre-money valuation of approximately $300 million. Contingent upon the regulatory approval of the TGFR system by the FDA, Huadong will make a second $15 million investment at a pre-money valuation of approximately $400 million. In 2020, Huadong amended its commercial agreement to provide an additional $20 million prepayment of future China royalties over the next two years to pursue Class 1 status in China, allowing the device to immediately enter the Chinese hospital system. As of December 31, 2021, MediBeacon has received approximately $17.1 million to include China in MediBeacon's global pivotal study.
MediBeacon is also exploring additional clinical applications of the patented Lumitrace technology, including:
1.Gastrointestinal permeability, which has the potential to transform management of autoimmune and inflammatory diseases, including Crohn’s disease. Grants from the Bill and Melinda Gates Foundation, in collaboration with scientists at Washington University School of Medicine in St. Louis and the Mayo Clinic, have supported MediBeacon’s research in this area. The first in-human clinical studies were recently completed to study the feasibility of fluorescent tracer agent-based systems to quantify the permeability of the gastrointestinal tract in patients with active Crohn’s disease.
2.Ocular angiography, which has the potential to diagnose and monitor vasculature leakage in the eye, a key factor in diagnosing and monitoring various diseases, including macular degeneration, diabetic retinopathy and retinal vasculitis while avoiding current potential clinical side effects such as allergic reactions, nausea and vomiting. MediBeacon was the recipient of a Small Business Innovation Research grant supported by the National Eye Institute of the National Institutes of Health (NIH). With this support, MediBeacon is pursuing research into the use of a MediBeacon fluorescent tracer agent to visualize vasculature in the eye, having recently received FDA approval in 2020 to begin clinical studies.
3.Surgical visualization feasibility, which has the potential to be used in open, laparoscopic and robotic surgeries to identify critical structures, tumor margins and blood flow in tissues in real-time. Clinical research in this area is still underway.
Genovel Orthopedics, Inc.
Genovel is a medical device company developing novel partial and total knee replacements for the treatment of osteoarthritis of the knee based on patented technology developed at New York University School of Medicine.
Triple Ring Technologies
Triple Ring is a research and development engineering company specializing in medical devices, homeland security, imaging sensors, optics, fluidics, robotics and mobile healthcare.
Spectrum Segment (HC2 Broadcasting Holdings Inc.)
HC2 Broadcasting Holdings Inc., ("HC2B" and together with its subsidiaries, "Broadcasting"), a majority-owned subsidiary of INNOVATE, is an owner and operator of broadcast TV stations throughout the U.S. and an avenue for high-end content providers to deliver their product OTA to more homes and, ultimately, mobile devices. Broadcasting’s stations are interconnected to an internet protocol network backbone, which allows Broadcasting to monitor and operate the stations remotely, resulting in significant cost efficiencies.
As of December 31, 2021, Broadcasting operated approximately 246 stations, including 3 Full-Power stations, 53 Class A stations and 190 LPTV stations. Broadcasting stations are collectively able to broadcast over 1,500 sub-channels and reach 103 markets in the U.S. and Puerto Rico, including 34 of the top 35 markets. HC2B has approximately 100 stations concentrated in the top 35 markets. Broadcasting also owns approximately 19 construction permits for broadcast stations, a portion of which may be selectively built and licensed over the next 24 months, increasing Broadcasting’s footprint to approximately 110 markets.
Broadcasting includes Azteca America. Azteca America airs Spanish language programming targeting U.S. Hispanics. The majority of the network’s programming is provided by TV Azteca, S.A.B. de C.V. ("TV Azteca"), Mexico’s second largest broadcast network, under a multi-year Programming Licensing Agreement ("PLA"). As of December 31, 2021, Azteca America was carried on approximately 88 Broadcasting stations. Broadcasting has employees in the U.S. and contracted employees in Mexico under a Broadcast Services Agreement ("BSA") with TV Azteca dedicated to the operations of Azteca America.
Operating Broadcast Stations
Below are Broadcasting’s operating stations as of December 31, 2021, listed by call sign and market rank:
Market Market Rank (a) Station Service
New York, NY 1 W28ES-D LPTV Station
WKOB-LD LPTV Station
9
Los Angeles, CA 2 KHIZ-LD LPTV Station
KSKJ-CD Class A Station
Chicago, IL 3 W31EZ-D LPTV Station
WPVN-CD Class A Station
Philadelphia, PA 4 W25FG-D LPTV Station
WDUM-LD LPTV Station
WPSJ-CD Class A Station
WZPA-LD LPTV Station
Dallas - Ft. Worth, TX 5 K07AAD-D LPTV Station
KHPK-LD LPTV Station
KJJM-LD LPTV Station
KNAV-LD LPTV Station
KODF-LD LPTV Station
KPFW-LD LPTV Station
Houston, TX 6 KBMN-LD LPTV Station
KEHO-LD LPTV Station
KUGB-CD Class A Station
KUVM-CD Class A Station
KUVM-LD LPTV Station
San Francisco - Oakland - San Jose, CA 7 KEMO-TV Full-Power Station
KQRO-LD LPTV Station
Atlanta, GA 8 WDWW-LD LPTV Station
WUEO-LD LPTV Station
WUVM-LP LPTV Station
WYGA-CD Class A Station
Boston, MA 10 WLEK-LD LPTV Station
Phoenix - Prescott, AZ 11 K12XP-D LPTV Station
KPDF-CD Class A Station
KTVP-LD LPTV Station
Tampa - St Petersburg - Sarasota, FL 12 W16DQ-D LPTV Station
W31EG-D LPTV Station
WTAM-LD LPTV Station
WXAX-CD Class A Station
Seattle, WA 13 KUSE-LD LPTV Station
Minneapolis - St. Paul, MN 14 K28PQ-D LPTV Station
K33LN-D Class A Station
KJNK-LD LPTV Station
KMBD-LD LPTV Station
KMQV-LD LPTV Station
KWJM-LD LPTV Station
Detroit, MI 15 WDWO-CD Class A Station
WUDL-LD LPTV Station
Miami - Ft. Lauderdale, FL 16 W16CC-D LPTV Station
Denver, CO 17 KRDH-LD LPTV Station
Orlando - Daytona Beach - Melbourne, FL 18 WATV-LD LPTV Station
WFEF-LD LPTV Station
Cleveland - Akron - Canton, OH 19 KONV-LD LPTV Station
WEKA-LD LPTV Station
WQDI-LD LPTV Station
WUEK-LD LPTV Station
Sacramento - Stockton - Modesto, CA 20 K04QR-D LPTV Station
K12XJ-D LPTV Station
KAHC-LD LPTV Station
KBIS-LD LPTV Station
KBTV-CD Class A Station
KFKK-LD LPTV Station
KFMS-LD LPTV Station
10
KFTY-LD LPTV Station
St. Louis, MO 21 K25NG-D Class A Station
K35OY-D LPTV Station
KBGU-LD LPTV Station
KPTN-LD LPTV Station
W09DL-D LPTV Station
WLEH-LD LPTV Station
WODK-LD LPTV Station
Portland, OR 22 KOXI-CD Class A Station
Charlotte, NC 23 W15EB-D Class A Station
WHEH-LD LPTV Station
WVEB-LD LPTV Station
Pittsburgh, PA 24 WJMB-CD Class A Station
WKHU-CD Class A Station
WMVH-CD Class A Station
WWKH-CD Class A Station
WWLM-CD Class A Station
Indianapolis, IN 25 WQDE-LD LPTV Station
WSDI-LD LPTV Station
WUDZ-LD LPTV Station
Baltimore, MD 26 WQAW-LP LPTV Station
Raleigh - Durham - Fayetteville, NC 27 WIRP-LD LPTV Station
WNCB-LD LPTV Station
San Diego, CA 28 KSKT-CD Class A Station
Nashville, TN 29 WCTZ-LD LPTV Station
WKUW-LD LPTV Station
Columbus, OH 30 WDEM-CD Class A Station
San Antonio, TX 31 K17MJ-D LPTV Station
K25OB-D LPTV Station
KISA-LD LPTV Station
KOBS-LD LPTV Station
KSAA-LP LPTV Station
KSSJ-LD LPTV Station
KVDF-CD Class A Station
Kansas City, MO 32 KAJF-LD LPTV Station
KCMN-LD LPTV Station
KQML-LD LPTV Station
Hartford - New Haven, CT 33 WRNT-LD LPTV Station
WTXX-LD LPTV Station
Salt Lake City, UT 34 KBTU-LD LPTV Station
Milwaukee, WI 35 WTSJ-LD LPTV Station
West Palm Beach - Ft. Pierce, FL 36 WDOX-LD LPTV Station
WWCI-CD Class A Station
WXOD-LD LPTV Station
Las Vegas, NV 39 K36NE-D Class A Station
KEGS-LD LPTV Station
KHDF-CD Class A Station
KNBX-CD Class A Station
KVPX-LD LPTV Station
Austin, TX 41 KGBS-CD Class A Station
KVAT-LD LPTV Station
Jacksonville, FL 42 WJXE-LD LPTV Station
WKBJ-LD LPTV Station
WODH-LD LPTV Station
WRCZ-LD LPTV Station
Oklahoma City, OK 43 KBZC-LD LPTV Station
KOHC-CD Class A Station
11
KTOU-LD LPTV Station
Albuquerque - Santa Fe, NM 45 KQDF-LP LPTV Station
KWPL-LD LPTV Station
Birmingham - Anniston - Tuscaloosa, AL 47 WUDX-LD LPTV Station
WUOA-LD LPTV Station
New Orleans, LA 50 WQDT-LD LPTV Station
WTNO-LP Class A Station
Ft. Myers - Naples, FL 51 WGPS-LD LPTV Station
Memphis, TN 53 KPMF-LD LPTV Station
W15EA-D Class A Station
WPED-LD LPTV Station
WQEK-LD LPTV Station
WQEO-LD LPTV Station
Buffalo, NY 54 WVTT-CD Class A Station
WWHC-LD LPTV Station
Richmond - Petersburg, VA 55 WFWG-LD LPTV Station
WUDW-LD LPTV Station
WWBK-LD LPTV Station
Mobile, AL - Pensacola, FL 56 WEDS-LD LPTV Station
WWBH-LP LPTV Station
Fresno - Visalia, CA 57 K17JI-D Class A Station
KZMM-CD Class A Station
Tulsa, OK 60 KUOC-LD LPTV Station
KZLL-LD LPTV Station
Little Rock - Pine Bluff, AR 61 K23OW-D LPTV Station
KENH-LD LPTV Station
KWMO-LD LPTV Station
Flint - Saginaw - Bay City, MI 67 W35DQ-D LPTV Station
WFFC-LD LPTV Station
Des Moines - Ames, IA 69 KAJR-LD LPTV Station
KCYM-LD LPTV Station
KRPG-LD LPTV Station
Wichita - Hutchinson, KS 71 KFVT-LD LPTV Station
Omaha, NE 73 KAJS-LD LPTV Station
KQMK-LD LPTV Station
Springfield, MO 74 KCNH-LD LPTV Station
KFKY-LD LPTV Station
Charleston - Huntington, WV 76 WOCW-LD LPTV Station
Huntsville - Decatur - Florence, AL 77 W34EY-D Class A Station
Madison, WI 79 W23BW-D Class A Station
WZCK-LD LPTV Station
Rochester, NY 80 WGCE-CD Class A Station
Paducah, KY - Cape Girardeau, MO - Harrisburg, IL 82 W29CI-D Class A Station
Charleston, SC 83 WBSE-LD LPTV Station
Waco - Temple - Bryan, TX 84 KAXW-LD LPTV Station
KZCZ-LD LPTV Station
Shreveport, LA 86 K36MU-D LPTV Station
Champaign - Springfield - Decatur, IL 87 W23EW-D LPTV Station
WCQA-LD LPTV Station
WEAE-LD LPTV Station
Chattanooga, TN 89 WYHB-CD Class A Station
Savannah, GA 90 WDID-LD LPTV Station
WUET-LD LPTV Station
Cedar Rapids - Waterloo - Iowa City, IA 91 K17MH-D LPTV Station
KFKZ-LD LPTV Station
Harlingen - Weslaco - Brownsville - McAllen, TX 92 KAZH-LP LPTV Station
KNWS-LD LPTV Station
12
KRZG-CD Class A Station
Baton Rouge, LA 93 K27NB-D LPTV Station
K29LR-D LPTV Station
South Bend - Elkhart, IN 96 KPDS-LD LPTV Station
Ft. Smith - Fayetteville - Springdale - Rogers, AR 98 KAJL-LD LPTV Station
KFLU-LD LPTV Station
Greenville - New Bern - Washington, NC 100 W35DW-D LPTV Station
Boise, ID 103 K17ED-D LPTV Station
K31FD-D Class A Station
KBKI-LD LPTV Station
KFLL-LD LPTV Station
Reno, NV 104 K07AAI-D LPTV Station
Evansville, IN 105 WDLH-LD LPTV Station
WEIN-LD LPTV Station
WELW-LD LPTV Station
Tallahassee, FL - Thomasville, GA 107 W21EL-D LPTV Station
Lincoln - Hastings - Kearney, NE 108 KIUA-LD LPTV Station
Ft. Wayne, IN 109 W25FH-D LPTV Station
W30EH-D LPTV Station
WCUH-LD LPTV Station
WFWC-CD Class A Station
WODP-LD LPTV Station
Augusta, GA - Aiken, SC 110 WIEF-LD LPTV Station
Tyler - Longview- Nacogdoches, TX 113 KBJE-LD LPTV Station
KCEB Full-Power Station
KDKJ-LD LPTV Station
KKPD-LD LPTV Station
KPKN-LD LPTV Station
Eugene, OR 116 K06QR-D LPTV Station
KORY-CD Class A Station
Yakima - Pasco - Richland - Kennewick, WA 118 K28QK-D LPTV Station
K33EJ-D Class A Station
Fargo - Valley City, ND 119 K15MR-D LPTV Station
Lafayette, LA 120 K21OM-D LPTV Station
Macon, GA 121 W28EU-D LPTV Station
WJDO-LD LPTV Station
Peoria - Bloomington, IL 122 W27EQ-D LPTV Station
Santa Barbara - San Luis Obispo, CA 123 KDFS-CD Class A Station
KLDF-CD Class A Station
KQMM-CD Class A Station
KSBO-CD Class A Station
KVMM-CD Class A Station
KZDF-LD LPTV Station
Montgomery - Selma, AL 125 WDSF-LD LPTV Station
WQAP-LD LPTV Station
Bakersfield, CA 126 KTLD-CD Class A Station
KXBF-LD LPTV Station
Wilmington, NC 127 WQDH-LD LPTV Station
La Crosse - Eau Claire, WI 128 W23FC-D LPTV Station
Columbus, GA - Opelika - Auburn, AL 129 W29FD-D LPTV Station
W31EU-D LPTV Station
Corpus Christi, TX 130 K21OC-D LPTV Station
K32OC-D LPTV Station
KCCX-LD LPTV Station
KYDF-LD LPTV Station
Amarillo, TX 134 KAUO-LD LPTV Station
KLKW-LD LPTV Station
13
Palm Springs, CA 140 K21DO-D Class A Station
Lubbock, TX 141 K32OV-D LPTV Station
KNKC-LD LPTV Station
Topeka, KS 146 K35KX-D LPTV Station
Joplin, MO - Pittsburg, KS 153 KPJO-LD LPTV Station
KRLJ-LD LPTV Station
Biloxi-Gulfport, MS 155 W33EG-D LPTV Station
Quincy, IL - Hannibal, MO - Keokuk, IA 173 WVDM-LD LPTV Station
Jackson, TN 175 WYJJ-LD LPTV Station
Bowling Green, KY 179 WCZU-LD LPTV Station
WKUT-LD LPTV Station
Puerto Rico NA W20EJ-D LPTV Station
W27DZ-D LPTV Station
WOST Full-Power Station
WQQZ-CD Class A Station
WWKQ-LD LPTV Station
(a) Rankings are based on the relative size of a station’s Designated Market Area ("DMA") among the 210 generally recognized DMAs in the United States as estimated by Nielsen Media Research as of December 31, 2021.
Broadcast Operations
Broadcasting carries more than 70 networks on its stations, distributing content across the U.S. Broadcasting provides free OTA programming to television viewing audiences in the communities it serves. The programming Broadcasting distributes includes networks targeting shopping, weather, sports and entertainment programming, as well as religious networks and networks targeting select ethnic groups.
Revenues
Broadcasting generates broadcast station revenue and network advertising revenue from its operations. Broadcast station revenue is generated primarily from the sale of television airtime in return for a fixed fee or a portion of the related ad sales. In a typical broadcast station revenue agreement, the owner of a station makes available, for a fee, airtime on a station subchannel to a third party. The third party broadcasts during that airtime and collects revenue from advertising aired during such content. Broadcast station revenue is recognized over the life of the contract. The fees charged can be fixed or variable and the contracts that the Company enters into are generally short-term in nature. Variable fees are usage/sales-based and are recognized as revenue when the subsequent usage occurs.
Network advertising revenue is generated primarily from the sale of television airtime for advertisements or paid programming. Network advertising inventory is sold in the upfront and scatter markets and is offered at market rates, based on a number of factors such as available inventory, network programming and ratings, and economic conditions. In the upfront market, advertisers buy advertising time for the upcoming season. In the scatter market, advertisers buy advertising time close to when the commercials will be run and varies quarter over quarter. In some cases, the network advertising sales are subject to impressions guarantees that require the Broadcasting to provide additional advertising time if the guaranteed audience levels are not achieved. Network advertising revenue is recognized when advertising spots are aired, and as impression guarantees, if any, are achieved. Impressions are defined as the number of times that an advertisement is viewed by users. The achievement of performance guarantees is based on audience viewership from an independent research company. If there is a guarantee to deliver a targeted audience number of impressions, revenues are recognized based on the proportion of the audience impressions delivered to the total guaranteed in the contract.
For the local inventory, Broadcasting sells national spot advertising and local advertising. National spot advertising represents time sold to advertisers that advertise in more than one DMA. Local advertising revenue is generated from local merchants and service providers. National and local advertising spots are generally sold without guaranteed ratings, and revenue is recognized when spots are aired.
Network distribution revenue consists of fees charged and payments received from cable, satellite and other multiple video program distribution (“MVPD”) systems for their retransmission of our network content. Broadcasting’s network is aired on MVPDs pursuant to multi-year carriage agreements that provide for the level of carriage that the Company’s network will receive. Carriage of the network is generally determined by package, such as whether the network is included in the more widely distributed, general entertainment packages offered or lesser-distributed, specialized packages, such as U.S. Hispanic-targeted or Spanish language package. Network distribution revenue is determined on the contractual rate-per-subscriber negotiated in the agreements, the average number of subscribers that receive content, and the market demand for the content that Broadcasting provides. Network distribution fees received from MVPDs are recognized as revenue in the period that services are provided.
Strategy
Broadcasting’s strategy includes the following initiatives:
•Broadcasting is principally designed to be a nationwide OTA distribution platform, targeting the growing number of OTA households in the U.S.;
14
•Broadcasting's vision is to capitalize on the opportunities to bring valuable content to more viewers over-the-air and to position itself for the changing media landscape and to take advantage of the technology advances rapidly underway in the industry;
•As of December 31, 2021, 232 operating stations are connected to Broadcasting's cloud-based IP backbone and can be operated and monitored remotely, allowing for substantial cost savings and operating efficiencies. In 2018, FCC deregulation in TV broadcasting eliminated the need for full time employees and studio facilities in markets where Broadcasting operates Full-Power and Class A stations, thus allowing Broadcasting to operate these stations remotely at greater cost efficiency;
•Broadcasting's major focus is to attract the highest quality content providers looking for nationwide distribution. With its national footprint and cloud-based infrastructure, Broadcasting also expects to realize premium pricing for content distribution;
•Broadcasting's growing revenue source is from providing national carriage to content providers. Carriage contracts pricing is in part determined by the signal contour of the broadcast station and the number of OTA TV households in a given market, as well as market supply and demand; and,
•As an anchor network tenant, Azteca America is distributed on the Broadcasting platform in 60+ markets.
New Broadcast TV Technology: ATSC 3.0
In 2017, the FCC approved ATSC 3.0, next generation broadcast standards defining how television signals are broadcast and interpreted. ATSC 3.0 is an enhancement to previous broadcast standards, providing enhanced picture and audio quality, mobility, addressability, increased capacity, and IP connectivity. ATSC 3.0 will offer a platform to merge linear programming and non-TV data services alongside OTA and over-the-top ("OTT"). Among the many emerging opportunities will be hyper-local news, weather, and traffic; dynamic ad insertion; geographic and demographic targeted advertising; customizable content; better measurement and analytics; the ability to share data with devices connected to the Internet; flexibility to add streams as needed; an ultra-high definition picture quality with enhanced immersive audio; and connectivity to automobiles. In addition, ATSC 3.0 will provide new emergency capabilities including advanced alerting functions which can relay evacuation routes and device wake-up features. Many of these features will be available to mobile devices.
Employees
As of December 31, 2021, Broadcasting employed approximately 55 people across the U.S.
See Note 17. Operating Segment and Related Information for additional detail regarding our Segment's operations and financial information.
Environmental Regulation and Laws
Our operations and properties, including those of DBMG, are subject to a wide variety of increasingly complex and stringent foreign, federal, state and local environmental laws and regulations, including those concerning emissions into the air, discharge into waterways, generation, storage, handling, treatment and disposal of waste materials and health and safety of employees. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Some environmental laws provide for strict, joint and several liability for remediation of spills and other releases of hazardous substances, as well as damage to natural resources. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. These laws and regulations may also expose us to liability for the conduct of or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such acts were performed.
Compliance with federal, state and local provisions regulating the discharge of materials into the environment or relating to the protection of the environment has not had a material impact on our capital expenditures, earnings or competitive position. Based on our experience to date, we do not currently anticipate any material adverse effect on our business or consolidated financial position, results of operations or cash flows as a result of future compliance with existing environmental laws and regulations. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of existing laws and regulations, may require additional expenditures by us, which may be material. Accordingly, there can be no assurance that we will not incur significant environmental compliance costs in the future.
Corporate Information
INNOVATE, a Delaware corporation, was incorporated in 1994. The Company’s executive offices are located at 295 Madison Avenue, 12th Floor, New York, NY, 10017. The Company’s telephone number is (212) 235-2690. Our Internet address is www.innovatecorp.com. We make available free of charge through our Internet website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (the "SEC"). The information on our website is not a part of this Annual Report on Form 10-K.
The information required by this item relating to our executive officers, directors and code of conduct is set forth in Item 10. Information relating to our Audit Committee and Audit Committee Financial Expert will be set forth in our 2022 Proxy Statement under the Caption "Board Committees" and is incorporated herein by reference.
15
ITEM 1A. RISK FACTORS
Summary of Risk Factors
Investing in our common stock involves a high degree of risk. These risks are discussed more fully below and include, but are not limited to, the following, any of which could have a material adverse effect on our financial condition, results of operations and cash flows:
Risks Related to the COVID-19 Pandemic
•The COVID-19 pandemic and its effects on our liquidity, business, financial condition and results of operations.
Risks Related to Our Businesses
•The ability of our subsidiaries to make distributions, our principal source of revenue
•Our levels of indebtedness, financing arrangements and other obligations
•Restrictive covenants in our debt and preferred stock instruments
•Ability to meet working capital requirements
•Dependence on key personnel and ability to attract and retain skilled personnel
•Impact of supply chain delays and disruptions
•Impact of inflationary pressures
•Constraints in the labor market and increases in labor costs
•Any identified material weaknesses in our internal controls
•Foreign exchange rate volatility
•Changes in United States trade policy
•Impact of competition on our business
•Impact of any potential future acquisitions and ability to manage future growth and the incurrence of substantial costs in connection with acquisitions
•Cyber-attacks and other privacy or data security incidents
•Stability and security of our information technology systems
•Ability to fully utilize net operating loss and other tax carryforwards
•Presentation of corporate opportunities by certain current and former directors and officers and the impact of related party transactions
•Our status as a non-investment company
•Impact of potential litigation
•Deterioration of global economic conditions and the impact of operating globally
•Compliance costs related to our acquired businesses
•Ability of our development stage companies to produce revenues or income
•Adverse tax impact of our acquisitions or dispositions
•Lack of sole control in joint venture investments
•Ability to protect our intellectual property
•Potential dilution of our current stockholders
•Status as a “smaller reporting company”
•Impact of our recently reconstituted board and change in management
Risks Related to the Infrastructure segment
•Unpredictability in timing of DBMG’s construction contracts and payments thereunder
•Impact of construction contract pricing terms, including fixed-price and cost-plus pricing
•Termination or cancellation of construction projects
•Increased concentration of construction projects in backlog
•Ability to realize revenue value reported in backlog
•Ability to meet contractual schedule or performance requirements
•Modification or termination of government contracts
•Reliability of subcontractors and third-party vendors
•Volatility in the supply and demand for steel and steel components
•Dependability of steel component suppliers
•Intense competition in construction markets
•Ability of customers to receive applicable regulatory and environmental approvals
•Impact of failure to obtain or maintain required licenses
•Impact of bonding and letter of credit capacity
•Variability in liquidity over time
•Exposure to professional liability, product liability, warranty and other claims
•Impact of environmental compliance costs
•Labor disruptions that would interfere with operations
•Ability to maintain safe work environment
16
Risks related to the Life Sciences segment
•Significant fluctuations in Pansend's operating results
•High levels of competition in the life sciences space
•Reliance on third parties for sales, marketing, manufacturing and/or distribution
•Limited current and historical operating revenue
•Impact of a failure to obtain or maintain necessary FDA (or foreign equivalent) clearances and approvals
•Risks associated with the misuse by customers, physicians and technicians of Pansend's products
•Pansend's limited manufacturing experience
•Competition for skilled technical professional personnel
•Obsolescence of Pansend's products
•Ability of Pansend to effectively protect its intellectual property and the impact of a failure to do so
•Patient satisfaction with R2's procedures
•Impact of third party intellectual property infringement claims
Risks related to the Spectrum segment
•Effectiveness of our operations in a highly competitive market
•Impact of FCC regulations, including with respect to broadcasting licenses, or Congressional legislation
Risk Factors
The following risk factors and the forward-looking statements elsewhere herein should be read carefully in connection with evaluating the business of the Company and its subsidiaries. A wide range of events and circumstances could materially affect our overall performance, the performance of particular businesses and our results of operations, and therefore, an investment in us is subject to risks and uncertainties. In addition to the important factors affecting specific business operations and the financial results of those operations identified elsewhere in this Annual Report on Form 10-K, the following important factors, among others, could adversely affect our operations. While each risk is described separately below, some of these risks are interrelated, and it is possible that certain risks could trigger the applicability of other risks described below. Also, the risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us, or that are currently deemed immaterial, could also potentially impair our overall performance, the performance of particular businesses and our results of operations. These risk factors may be amended, supplemented or superseded from time to time in filings and reports that we file with the SEC in the future.
To the extent that the COVID-19 pandemic adversely affects the Company’s business, financial condition, results of operations, cash flows and liquidity, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to the Company’s level of indebtedness, its ability to comply with the financial covenants contained in the agreements that govern the Company’s indebtedness and volatility of the Company’s common stock price.
Risks Related to the COVID-19 Pandemic
Our business, operating results and financial condition may be adversely impacted by COVID-19.
We are monitoring and continue to assess the ongoing effects of the COVID-19 pandemic on our businesses and operations. We operate in a number of industries and geographies that have been and are expected to continue to be impacted materially by the COVID-19 pandemic. The scope of the effects of the COVID-19 pandemic and its related economic impact on our businesses depends on many factors beyond our control. While the full extent to which the COVID-19 pandemic may adversely impact our results is uncertain, the adverse impact of the COVID-19 pandemic may be material to our businesses.
The pandemic has resulted in a widespread health crisis that is adversely affecting the economies and financial markets of many countries. During the COVID-19 pandemic and even after it has subsided, the Company may continue to experience adverse impacts to the Company’s business as a result of the pandemic’s global economic impact, including any recession, economic downturn, government spending cuts, tightening of credit markets or increased unemployment that has occurred or may occur in the future, which could cause our ultimate customers and potential customers to postpone or reduce spending on our products or put downward pressure on prices. In addition, the illness, incapacitation or death due to COVID-19 of any key personnel of our businesses can have a material impact on our financial condition and results of operations.
Many governments have implemented policies intended to stop or slow the further spread of COVID-19, such as shelter-in-place orders, travel bans, declarations of states of emergency, business closures, manufacturing and other commercial restrictions and closure of schools and non-essential businesses. While many countries have begun lifting restrictions, there could be additional restrictions enacted in the future in response to changes in the ongoing pandemic.
17
COVID-19 has continued to cause supply chain challenges related to labor shortages and supply chain disruptions, which may create significant delays in our ability to complete projects or deliver products. The receipt of material from impacted areas has been slowed or disrupted and our suppliers are expected to face similar challenges in fulfilling orders. In addition, reductions in the number of ocean carrier voyages, ocean freight capacity issues, congestion at major international gateways and other economic factors continue to persist worldwide due to COVID-19 and worldwide supply impacts as there is much greater demand for shipping and reduced capacity and equipment, which has resulted in recent price increases per shipping container. In addition, in the United States, trucking costs have risen dramatically due to driver shortages and increased labor costs, as well as new federal and state safety, environmental and labor regulations. These changes, as well as COVID-19 related state and local restrictions on domestic trucking and the operation of distribution centers, may disrupt our supply chain, which may result in a delay in the completion of our projects and cause us to incur significant additional costs. Although we may attempt to pass on certain of these increased costs to our customers, we may not be able to pass all of these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost increases. These supply chain disruptions and transportation challenges could have a material adverse effect on our results of operations or financial condition.
The Company’s top priority has been to protect our employees and their families, and those of the Company’s customers. The Company is taking precautionary measures as directed by health authorities and local governments, including changing operational procedures as necessary, providing additional protective gear and cleaning to protect personnel and customers, which has resulted and may continue to result in disruptions to and increased costs of the Company’s operations. We may take further action as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our operations. As the vaccine rollout has commenced, certain employees have begun to return to the office, either full-time or part-time. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, including any new strains of the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.
Individually and collectively, the consequences of the COVID-19 pandemic could adversely impact the Company's business, financial condition, results of operations, cash flows and liquidity. The extent to which the COVID-19 pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates due to inherent uncertainties regarding the duration and further spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Infrastructure Segment
DBMG is dependent on its workforce to carry out its services. Developments resulting from governmental responses to COVID-19, such as social distancing and shelter-in-place directives, have impacted, and will continue to impact, DBMG’s ability to deploy its workforce in its facilities and project sites efficiently. The nature of DBMG’s business does not permit alternative workforce arrangements in its facilities and project sites such as remote work schemes to be implemented effectively, and as a result of potential workforce disruptions, DBMG may experience delays or suspensions of projects. During the years ended December 31, 2021 and 2020, $8.6 million and $19.4 million of COVID-19 related expenses were incurred, respectively. The majority of these expenses related to payroll costs for safety and cleaning procedures in DBMG's shops and in the field, and personal protective equipment for employees. DBMG may also experience disruptions in the supply chain depending on the spread of COVID-19 and related governmental orders. These delays, suspensions, and impacts to supply chain, may negatively impact DBMG’s results of operations, cash flows or financial condition. This could cause the timing of revenue to be delayed and possibly impact earnings and backlog. Persistent delays, suspensions or cancellations of projects under contract may occur while governments implement policies designed to respond to the COVID-19 pandemic. Any such continued loss or suspension of projects under contract may negatively impact DBMG’s results of operations, cash flows or financial condition.
Life Sciences Segment
Our Life Sciences segment may be adversely disrupted by the effects of the COVID-19 pandemic. For example, requirements to implement COVID-19 operational measures at clinical trial sites may result in clinical studies in some locations being delayed. Such delays may slow progress towards regulatory clearances and approval of our products in the U.S. and globally. In addition, stay-in-place orders of governmental authorities have impacted the ability of our employees to continue to conduct research and development activities despite our work-from-home policies. Disruptions in the availability of semiconductors, our labor force and in the labor force of our suppliers may also lead to delays in our manufacturing scale up, which in turn could result in delays in our product launch plans and ultimate customer adoption of our products. In the event that we are unable to achieve anticipated regulatory clearances or commence certain clinical trials in a timely manner due to the ongoing pandemic, we could fail to achieve the final milestones under our stock purchase agreements with Huadong Medicine Company Limited (“Huadong”) which in turn could result in Huadong determining not to purchase the final $15.0 million of preferred stock for MediBeacon, and our inability to continue our operations.
The ultimate impact of the COVID-19 pandemic on the business operations of our Life Sciences segment is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including the duration of the pandemic, additional or modified government actions, new information that will emerge concerning the severity and impact of COVID-19 and the actions taken to contain or address its impact in the short and long term, among others.
18
Spectrum Segment
Our Spectrum segment has been, and may continue to be, impacted by the COVID-19 pandemic in several ways. Spectrum is dependent on advertising revenue, and, earlier in the pandemic, numerous advertisers reduced or suspended their purchase of television advertising time, primarily due to the cessation of local consumer business activity mandated by state governors, much of which has subsided. Many of the top industries that are heavy television advertisers suffered earlier in the pandemic from these business shut downs, including the significant industry sectors relating to travel, entertainment and theme parks, auto sales, all consumer retail, casual dining and quick serve restaurants. We may also be indirectly impacted by the slow-down in television advertising by our spectrum lease clients. These clients pay us lease fees to air their programming on our television stations, and many of them rely on advertising revenue from those television stations to pay such spectrum lease fees. Losses in our clients’ advertising revenue could expose us to consequential loss of broadcast station revenue.
Risks Related to Our Businesses
INNOVATE is a holding company and its only material assets are its cash on hand, equity interests in its operating subsidiaries and its other investments. As a result, INNOVATE’s principal source of revenue and cash flow is distributions from its subsidiaries and its subsidiaries may be limited by law and by contract in making distributions to INNOVATE.
As a holding company, INNOVATE's assets are its cash and cash equivalents, the equity interests in its subsidiaries and other investments. As of December 31, 2021, we had $22.0 million in cash and cash equivalents at the corporate level at INNOVATE.
INNOVATE’s principal source of revenue and cash flow is distributions from its subsidiaries. Thus, its ability to service its debt, including the $330.0 million in aggregate principal amount of 8.50% Senior Secured Notes due 2026 (the "Secured Notes"), $3.2 million aggregate principal amount of 7.50% convertible senior notes due 2022 (the "2022 Convertible Notes"), $51.8 million aggregate principal of 7.50% convertible senior notes due 2026 (the "2026 Convertible Notes", and, together with the 2022 Convertible Notes, the "Convertible Notes"), and $15.0 million secured revolving credit agreement (the “Revolving Credit Agreement”), of which $5.0 million was drawn as of December 31, 2021, and to finance future acquisitions, is dependent on the ability of its subsidiaries to generate sufficient net income and cash flows to make upstream cash distributions to INNOVATE. INNOVATE’s subsidiaries are separate legal entities, and although they may be wholly-owned or controlled by INNOVATE, they have no obligation to make any funds available to INNOVATE, whether in the form of loans, dividends, distributions or otherwise. The ability of INNOVATE’s subsidiaries to distribute cash to it is and will remain subject to, among other things, restrictions that are contained in its subsidiaries’ financing agreements, availability of sufficient funds and applicable state laws and regulatory restrictions. For instance, DBMG is a borrower under credit facilities that restrict their ability to make distributions or loans to INNOVATE. Specifically, DBMG is party to credit agreements that include certain financial covenants that can limit the amount of cash available to make upstream dividend payments to INNOVATE. For additional information, See Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".
Claims of creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of INNOVATE’s subsidiaries to distribute dividends or other payments to INNOVATE could be limited in any way, our ability to grow, pursue business opportunities or make acquisitions that could be beneficial to our businesses, or otherwise fund and conduct our business could be materially limited. In addition, if INNOVATE depends on distributions and loans from its subsidiaries to make payments on INNOVATE’s debt, and if such subsidiaries were unable to distribute or loan money to INNOVATE, INNOVATE could default on its debt, which would permit the holders of such debt to accelerate the maturity of the debt which may also accelerate the maturity of other debt of ours with cross-default or cross-acceleration provisions.
To service our indebtedness and other obligations, we will require a significant amount of cash.
Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations, including under our outstanding indebtedness, and our obligations under our outstanding shares of preferred stock, could harm our business, financial condition and results of operations. Our ability to make payments on and to refinance our indebtedness and outstanding preferred stock and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control. For a description of our and our subsidiaries' indebtedness, see Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 9. Debt Obligations, of the "Notes to Consolidated Financial Statements."
If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us and our subsidiaries to pay our indebtedness or make mandatory redemption payments with respect to our outstanding shares of preferred stock, or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness or redeem the preferred stock, on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on us.
19
In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness or redeem the preferred stock will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt or financings related to the redemption of our preferred stock could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments or preferred stock may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness or dividend payments on our outstanding shares of preferred stock would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness or otherwise raise capital on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service and other obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations.
The agreements governing our indebtedness and Certificates of Designation for our outstanding shares of preferred stock contain various covenants that limit our discretion in the operation of our business and/or require us to meet financial maintenance tests and other covenants. The failure to comply with such tests and covenants could have a material adverse effect on us.
The agreements governing our indebtedness and the Certificates of Designation for our outstanding shares of preferred stock contain, and any of our other future financing agreements may contain, covenants imposing operating and financial restrictions on our businesses.
The indentures governing our outstanding senior secured notes and convertible notes contain, and any future indentures may contain various covenants, including those that restrict our ability to, among other things, the ability of the Company, and, in certain cases, the Company’s subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock; make certain restricted payments; sell assets; engage in transactions with affiliates; or consolidate or merge with, or sell substantially all of its assets to, another person. These covenants are subject to a number of important exceptions and qualifications.
The debt facilities at our subsidiaries contain similar covenants applicable to each respective subsidiary. These covenants may limit our ability to effectively operate our businesses. For example, DBMG has an indemnity agreement with its surety bond provider that also contains covenants on retention of capital requirements for DBMG, which may limit the amount of dividends DBMG may pay to its stockholders.
In addition, the indenture governing our 2026 Senior Secured Notes dated February 1, 2021, by and among INNOVATE, the guarantors party thereto and U.S. Bank National Association, a national banking association, as trustee (the "Secured Indenture") requires that we meet certain financial tests, including a collateral coverage ratio and minimum liquidity test. Our ability to satisfy these tests may be affected by factors and events beyond our control, and we may be unable to meet such tests in the future.
Any failure to comply with the restrictions in the agreements governing our indentures, or any agreement governing other indebtedness we could incur, may result in an event of default under those agreements. Such default may allow the creditors to accelerate the related debt, which acceleration may trigger cross-acceleration or cross-default provisions in other debt. If any of these risks were to occur, our business and operations could be materially and adversely affected.
The Certificates of Designation provide the holders of our preferred stock with consent and voting rights with respect to certain of the matters referred to above, in addition to certain corporate governance rights. These restrictions may interfere with our ability to obtain financings or to engage in other business activities, which could have a material adverse effect on our business and operations.
We have significant indebtedness and other financing arrangements and could incur additional indebtedness and other obligations, which could adversely affect our business and financial condition.
We have a significant amount of indebtedness and outstanding shares of preferred stock. As of December 31, 2021, our total outstanding indebtedness was $630.8 million and the accrued value of our outstanding preferred stock has a combined redemption value of $16.1 million with a current fair value as of December 31, 2021 of $18.8 million. We may not generate enough cash flow to satisfy our obligations under such indebtedness and other arrangements. This significant amount of indebtedness poses risks such as risk of inability to repay such indebtedness, as well as:
•increased vulnerability to general adverse economic and industry conditions;
•higher interest expense if interest rates increase on our floating rate borrowings are not effective to mitigate the effects of these increases;
•our Secured Notes are secured by substantially all of INNOVATE’s assets and those of certain of INNOVATE’s subsidiaries that have guaranteed the Secured Notes, including certain equity interests in our other subsidiaries and other investments, as well as certain intellectual property and trademarks, and those assets cannot be pledged to secure other financings;
•certain assets of our subsidiaries are pledged to secure their indebtedness, and those assets cannot be pledged to secure other financings;
•our having to divert a significant portion of our cash flow from operations to payments on our indebtedness and other arrangements, thereby reducing the availability of cash to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes;
•limiting our ability to obtain additional financing, on terms we find acceptable, if needed, for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;
20
•limiting our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate or to take advantage of market opportunities; and
•placing us at a competitive disadvantage compared to our competitors that have less debt and fewer other outstanding obligations.
In addition, it is possible that we may need to incur additional indebtedness or enter into additional financing arrangements in the future in the ordinary course of business. The terms of the Secured Indenture and our subsidiaries’ other financing arrangements allow us to incur additional debt and issue additional shares of preferred stock, subject to certain limitations. If additional indebtedness is incurred or equity is issued, the risks described above could intensify. In addition, our inability to maintain certain leverage ratios could result in acceleration of a portion of our debt obligations and could cause us to be in default if we are unable to repay the accelerated obligations.
We have experienced significant historical, and may experience significant future, operating losses and net losses, which may hinder our ability to meet working capital requirements or service our indebtedness, and we cannot assure you that we will generate sufficient cash flow from operations to meet such requirements or service our indebtedness.
We cannot assure you that we will recognize net income in future periods. If we cannot generate net income or sufficient operating profitability, we may not be able to meet our working capital requirements or service our indebtedness. Our ability to generate sufficient cash for our operations will depend upon, among other things, the future financial and operating performance of our operating business, which will be affected by prevailing economic and related industry conditions and financial, business, regulatory and other factors, many of which are beyond our control. We recognized net loss attributable to INNOVATE of $227.5 million in 2021 and net loss attributable to INNOVATE of $92.0 million in 2020, and have incurred net losses in prior periods.
We cannot assure you that our business will generate cash flow from operations in an amount sufficient to fund our liquidity needs. If our cash flows and capital resources are insufficient, we may be forced to reduce or delay capital expenditures, sell assets and/or seek additional capital or financings. Our ability to obtain future financings will depend on the condition of the capital markets and our financial condition at such time. Any financings could be at high interest rates and may require us to comply with covenants in addition to, or more restrictive than, covenants in our current financing documents, which could further restrict our business operations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such disposition may not be adequate to meet our obligations. We recognized cash flow uses from continuing operating activities of $6.5 million in 2021 and $55.2 million in 2020.
We are dependent on Wayne Barr, Jr., our President and Chief Executive Officer, and certain other key personnel, the loss or distraction of whom may adversely affect our financial condition or results of operations.
We believe that the future success of INNOVATE and its operating subsidiaries depends and will depend to a significant extent upon the performance of Wayne Barr, Jr., our President and Chief Executive Officer ("CEO"), who has served as a director of INNOVATE since January 2014, as Lead Director during March 2020, as interim CEO from June 2020 to November 2020 and as President and CEO of INNOVATE since November 2020, as well as the services of other key personnel at INNOVATE and its operating subsidiaries, which may consist of a relatively small number of individuals that possess sales, marketing, engineering, financial, technical and other skills that are critical to the operation of our businesses. The executive management teams that lead our subsidiaries are also highly experienced and possess extensive skills in their relevant industries. The ability to retain key personnel is important to our success and future growth. Competition for these professionals can be intense, and we may not be able to retain and motivate our existing officers and senior employees, and continue to compensate such individuals competitively. The unexpected loss of the services of one or more of these individuals, whether due to competition, distraction caused by personal matters or otherwise, could have a detrimental effect on the financial condition or results of operations of our businesses, and could hinder the ability of such businesses to effectively compete in the various industries in which we operate.
We and our subsidiaries may not be able to attract and/or retain additional skilled personnel.
We may not be able to attract new personnel, including management and technical and sales personnel, necessary for future growth, or replace lost personnel. In particular, the activities of some of our operating subsidiaries require personnel with highly specialized skills. Competition for the best personnel in our businesses can be intense. Our financial condition and results of operations could be materially adversely affected if we are unable to attract and/or retain qualified personnel.
21
We may identify material weaknesses in our internal control over financial reporting which could adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2021 and 2020, management concluded that our internal control over financial reporting was effective.
In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act of 2002, (the "Sarbanes-Oxley Act") reveals or we otherwise identify one or more material weaknesses or significant deficiencies, the correction of any such material weakness or significant deficiency could require additional remedial measures including additional personnel which could be costly and time-consuming. If a material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures), our management will be unable to report favorably as of such future period year-end to the effectiveness of our control over financial reporting. If we are unable to assert that our internal control over financial reporting is effective in any future period, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the trading price of our common stock and potentially subject us to additional and potentially costly litigation and governmental inquiries/investigations.
Prolonged inflation could result in higher costs and decreased margins and earnings.
A majority of our products are manufactured and sold inside of the United States, which increases our exposure to, among other things, domestic inflation and fuel price increases. Recent inflationary pressures have resulted in increased interest rates, fuel, wages, freight and container expenses and other costs which, if they continue for a prolonged period, may adversely affect our results of operations. If our costs remain subject to continuing significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operation.
Overall tightening of the labor market increases in labor costs or any possible labor unrest may adversely affect our business and results of operations.
Our business requires a substantial number of personnel. Any failure to retain stable and dedicated labor by us may lead to disruption to our business operations. Although we have not experienced any labor shortages to date, we have observed an overall tightening and increasingly competitive labor market. We have experienced, and expect to continue to experience, increases in labor costs due to increases in salary and wages, social benefits and employee headcount. We compete with other companies in our industry and other labor-intensive industries for labor, and we may not be able to offer competitive remuneration and benefits compared to them. If we are unable to manage and control our labor costs, our business, financial condition and results of operations may be materially and adversely affected.
Fluctuations in the exchange rate of the U.S. dollar and in foreign currencies may adversely impact our results of operations and financial condition.
We conduct various operations outside the United States. As a result, we face exposure to movements in currency exchange rates. These exposures include but are not limited to:
•re-measurement gains and losses from changes in the value of foreign denominated assets and liabilities;
•translation gains and losses on foreign subsidiary financial results that are translated into U.S. dollars, our functional currency, upon consolidation; and
•planning risk related to changes in exchange rates between the time we prepare our annual and quarterly forecasts and when actual results occur.
Because we face significant competition for acquisition and business opportunities, including from numerous companies with a business plan similar to ours, it may be difficult for us to fully execute our business strategy. Additionally, our subsidiaries also operate in highly competitive industries, limiting their ability to gain or maintain their positions in their respective industries.
We expect to encounter intense competition for acquisition and business opportunities from both strategic investors and other entities having a business objective similar to ours, such as private investors (which may be individuals or investment partnerships), blank check companies, and other entities, domestic and international, competing for the type of businesses that we may acquire. Many of these competitors possess greater technical, human and other resources, or more local industry knowledge, or greater access to capital, than we do, and our financial resources may be relatively limited when contrasted with those of many of these competitors. These factors may place us at a competitive disadvantage in successfully completing future acquisitions and investments.