UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
xFORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2017March 31, 2020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 001-35210
hchc-20200331_g1.jpg
HC2 HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware54-1708481
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
450 Park Avenue, 30th Floor, New York, NY10022
(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 classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.001 per shareHCHCNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
N/A

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


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


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,"filer", "accelerated filer", "smaller reporting company", and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☐
Accelerated filerx☒
Non-accelerated filer
☐
Smaller reporting company
☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
☒
Emerging growth company ☐
Emerging Growth Company
☐
If an emerging growth company, that prepares its financial statements in accordance with U.S. GAAP, 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†standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act.  ☐
† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ý

As of October 31, 2017, 43,054,728April 30, 2020, 46,550,384 shares of common stock, par value $0.001, were outstanding.



HC2 HOLDINGS, INC.
INDEX TO FORM 10-Q



PART I. FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION
2
2
Condensed Consolidated Statements of Comprehensive (Loss) Income (Loss)
3
4
5
6
Notes to Condensed Consolidated Financial Statements
7
(1) Organization and Business
7
(2) Summary of Significant Accounting Policies
78
(3) Business CombinationsDiscontinued Operations
911
(4) Investments
Revenue
1112
(5) Business Combinations
(5)14
(6) Investments
15
(7) Fair Value of Financial Instruments
1518
(6)(8) Accounts Receivable
2122
(7)(9) Recoverable from Reinsurers
2123
(8)(10) Property, Plant and Equipment, net
2223
(9)(11) Goodwill and Intangibles, Net
Intangible Assets
2223
(10)(12) Life, Accident and Health Reserves
2325
(11)(13) Accounts Payable and Other Current Liabilities
2425
(12) Long-term(14) Debt Obligations
2426
(13)(15) Income Taxes
2627
(14)(16) Commitments and Contingencies
2627
(15) Employee Retirement Plans
(17) Share-based Compensation
2830
(16) Share-based Compensation
(18) Equity
2831
(17) Equity
(19) Related Parties
3032
(18) Related Parties
32
(19)(20) Operating Segment and Related Information
33
(20) Backlog
35
(21) Basic and Diluted Income (Loss) Per Common Share
35
(22) Subsequent Events
37
36
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
38
63
Item 4. Controls and Procedures
6360

PART II. OTHER INFORMATION

PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Legal Proceedings61
65
Item 1A.Risk Factors
Risk Factors61
65
Item 2.
6663
Item 3.
6663
Item 4.
Mine Safety Disclosures
6663
Item 5.Other Information
Other Information63
66
Item 6.Exhibits
Exhibits63
66




1
HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands,millions, except per share amounts)

PART I: FINANCIAL INFORMATION


Item 1. Financial Statements

 Three Months Ended March 31,
 20202019
Revenue$383.4  $362.5  
Life, accident and health earned premiums, net28.6  29.9  
Net investment income51.9  51.1  
Net realized and unrealized gains (losses) on investments(19.1) 5.5  
Net revenue444.8  449.0  
Operating expenses
Cost of revenue346.1  324.5  
Policy benefits, changes in reserves, and commissions72.4  52.7  
Selling, general and administrative52.3  46.9  
Depreciation and amortization0.6  0.3  
Other operating income0.2  (1.0) 
Total operating expenses471.6  423.4  
Income (loss) from operations(26.8) 25.6  
Interest expense(21.3) (18.8) 
Loss on early extinguishment or restructuring of debt(5.8) —  
Loss from equity investees(2.5) (5.9) 
Other income, net2.8  3.4  
(Loss) income from continuing operations before income taxes(53.6) 4.3  
Income tax benefit (expense)12.6  (4.0) 
(Loss) income from continuing operations(41.0) 0.3  
Loss from discontinued operations (including loss on disposal of $39.3 million)(60.0) (6.6) 
Net loss(101.0) (6.3) 
Net loss attributable to noncontrolling interest and redeemable noncontrolling interest17.9  3.5  
Net loss attributable to HC2 Holdings, Inc.(83.1) (2.8) 
Less: Preferred dividends, deemed dividends and repurchase gains0.4  (1.2) 
Net loss attributable to common stock and participating preferred stockholders$(83.5) $(1.6) 
(Loss) income per share - continuing operations
Basic:$(0.85) $0.08  
Diluted:$(0.85) $0.04  
Loss per share - discontinued operations
Basic:$(0.97) $(0.12) 
Diluted:$(0.97) $(0.09) 
Loss per share - Net loss attributable to common stock and participating preferred stockholders
Basic:$(1.82) $(0.03) 
Diluted:$(1.82) $(0.05) 
Weighted average common shares outstanding:
Basic:45.9  44.8  
Diluted:45.9  59.7  


  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Services revenue $210,698
 $245,064
 $643,596
 $624,545
Sales revenue 157,974
 133,474
 420,001
 379,729
Life, accident and health earned premiums, net 20,472
 19,967
 60,648
 59,939
Net investment income 16,287
 14,799
 48,530
 42,585
Net realized gains (losses) on investments 978
 (220) 2,854
 (2,677)
Net revenue 406,409
 413,084
 1,175,629
 1,104,121
Operating expenses        
Cost of revenue - services 196,488
 225,876
 606,079
 583,942
Cost of revenue - sales 128,185
 107,984
 341,672
 308,951
Policy benefits, changes in reserves, and commissions 17,393
 29,689
 79,323
 92,784
Selling, general and administrative 45,356
 36,902
 126,919
 107,493
Depreciation and amortization 7,896
 5,961
 22,588
 18,163
Other operating (income) expenses 526
 (182) (1,294) (794)
Total operating expenses 395,844
 406,230
 1,175,287
 1,110,539
Income (loss) from operations 10,565
 6,854
 342
 (6,418)
Interest expense (13,222) (10,719) (39,410) (31,614)
Gain on contingent consideration 6,320
 1,381
 6,001
 1,573
Income from equity investees 971
 335
 12,667
 3,153
Other expenses, net (97) (4,584) (8,112) (5,793)
Income (loss) from continuing operations before income taxes 4,537
 (6,733) (28,512) (39,099)
Income tax (expense) benefit (12,861) 1,334
 (16,167) 3,649
Net loss (8,324) (5,399) (44,679) (35,450)
Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 2,357
 841
 6,305
 2,365
Net loss attributable to HC2 Holdings, Inc. (5,967) (4,558) (38,374) (33,085)
Less: Preferred stock and deemed dividends from conversions 703
 2,948
 2,079
 5,061
Net loss attributable to common stock and participating preferred stockholders $(6,670) $(7,506) $(40,453) $(38,146)
         
Loss per Common Share     
 
Basic $(0.16) $(0.20) $(0.95) $(1.07)
Diluted $(0.16) $(0.20) $(0.95) $(1.07)
         
Weighted average common shares outstanding:        
Basic 43,013
 36,627
 42,555
 35,808
Diluted 43,013
 36,627
 42,555
 35,808














See notes to Condensed Consolidated Financial Statements
2
HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)millions)


 Three Months Ended March 31,
 20202019
Net loss$(101.0) $(6.3) 
Other comprehensive income (loss)
Foreign currency translation adjustment0.2  0.9  
Unrealized gains (losses) on available-for-sale securities(276.0) 148.2  
Disposition of subsidiary22.8  —  
Other comprehensive income (loss)(253.0) 149.1  
Comprehensive income (loss)(354.0) 142.8  
Comprehensive loss (income) attributable to noncontrolling interests and redeemable noncontrolling interests(8.9) 3.2  
Comprehensive income (loss) attributable to HC2 Holdings, Inc.$(362.9) $146.0  





  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Net loss $(8,324) $(5,399) $(44,679) $(35,450)
Other comprehensive income        
Foreign currency translation adjustment 548
 672
 3,897
 1,335
Unrealized gain on available-for-sale securities 16,158
 8,972
 47,134
 71,261
Other comprehensive income 16,706
 9,644
 51,031
 72,596
Comprehensive income 8,382
 4,245
 6,352
 37,146
Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 2,357
 841
 6,305
 2,365
Comprehensive income attributable to HC2 Holdings, Inc. $10,739
 $5,086
 $12,657
 $39,511









































See notes to Condensed Consolidated Financial Statements
3
HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands,millions, except share amounts)


March 31,December 31,
20202019
Assets
Investments:
Fixed maturity securities, available-for-sale at fair value$3,753.0  $4,028.9  
Equity securities72.4  92.5  
Mortgage loans142.2  183.5  
Policy loans18.9  19.1  
Other invested assets70.3  68.1  
Total investments4,056.8  4,392.1  
Cash and cash equivalents186.9  228.8  
Accounts receivable, net333.3  311.8  
Recoverable from reinsurers958.4  953.7  
Deferred tax asset2.2  2.7  
Property, plant and equipment, net223.4  223.7  
Goodwill112.0  112.5  
Intangibles, net220.1  221.7  
Assets held for sale—  323.3  
Other assets246.0  188.0  
Total assets$6,339.1  $6,958.3  
Liabilities, temporary equity and stockholders’ equity
Life, accident and health reserves$4,593.9  $4,567.1  
Annuity reserves235.4  236.4  
Value of business acquired215.1  221.1  
Accounts payable and other current liabilities334.4  306.2  
Deferred tax liability24.4  83.7  
Debt obligations686.0  773.6  
Liabilities held for sale—  153.9  
Other liabilities170.8  151.1  
Total liabilities6,260.0  6,493.1  
Commitments and contingencies
Temporary equity
Preferred stock10.3  10.3  
Redeemable noncontrolling interest8.3  11.3  
Total temporary equity18.6  21.6  
Stockholders’ equity
Common stock, $.001 par value—  —  
Shares authorized: 80,000,000 at March 31, 2020 and December 31, 2019;
Shares issued: 47,571,416 and 46,810,676 at March 31, 2020 and December 31, 2019;
Shares outstanding: 46,461,665 and 46,067,852 at March 31, 2020 and December 31, 2019, respectively
Additional paid-in capital282.7  281.1  
Treasury stock, at cost: 1,109,751 and 742,824 shares at March 31, 2020 and December 31, 2019, respectively(4.2) (3.3) 
Accumulated deficit(179.8) (96.7) 
Accumulated other comprehensive income (loss)(84.6) 168.7  
Total HC2 Holdings, Inc. stockholders’ equity14.1  349.8  
Noncontrolling interest46.4  93.8  
Total stockholders’ equity60.5  443.6  
Total liabilities, temporary equity and stockholders’ equity$6,339.1  $6,958.3  

  September 30, 2017 December 31, 2016
Assets 
 
Investments: 
 
Fixed maturities, available-for-sale at fair value $1,336,637
 $1,278,958
Equity securities, available-for-sale at fair value 49,046
 51,519
Mortgage loans 26,427
 16,831
Policy loans 18,038
 18,247
Other invested assets 91,461
 62,363
Total investments 1,521,609
 1,427,918
Cash and cash equivalents 130,791
 115,371
Accounts receivable, net 265,082
 267,598
Recoverable from reinsurers 530,679
 524,201
Deferred tax asset 436
 1,108
Property, plant and equipment, net 282,065
 286,458
Goodwill 96,990
 98,086
Intangibles, net 35,781
 39,722
Other assets 107,911
 74,814
Total assets $2,971,344
 $2,835,276
     
Liabilities, temporary equity and stockholders’ equity 
 
Life, accident and health reserves $1,683,568
 $1,648,565
Annuity reserves 245,053
 251,270
Value of business acquired 44,013
 47,613
Accounts payable and other current liabilities 295,096
 251,733
Deferred tax liability 14,042
 15,304
Long-term obligations 496,592
 428,496
Other liabilities 83,265
 92,871
Total liabilities 2,861,629
 2,735,852
Commitments and contingencies 
 
Temporary equity 
 
Preferred stock 26,281
 29,459
Redeemable noncontrolling interest 1,526
 2,526
Total temporary equity 27,807
 31,985
Stockholders’ equity 
 
Common stock, $.001 par value 43
 42
Shares authorized: 80,000,000 at September 30, 2017 and December 31, 2016;    
Shares issued: 43,382,926 and 42,070,675 at September 30, 2017 and December 31, 2016;    
Shares outstanding: 43,016,440 and 41,811,288 at September 30, 2017 and December 31, 2016, respectively    
Additional paid-in capital 248,235
 241,485
Treasury stock, at cost; 366,486 and 259,387 shares at September 30, 2017 and December 31, 2016, respectively (1,981) (1,387)
Accumulated deficit (212,652) (174,278)
Accumulated other comprehensive income (loss) 29,384
 (21,647)
Total HC2 Holdings, Inc. stockholders’ equity 63,029
 44,215
Noncontrolling interest 18,879
 23,224
Total stockholders’ equity 81,908
 67,439
Total liabilities, temporary equity and stockholders’ equity $2,971,344
 $2,835,276
















See notes to Condensed Consolidated Financial Statements
4
HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)millions)


Common StockAdditional
Paid-In
Capital		Treasury
Stock		Accumulated DeficitAccumulated Other Comprehensive Income (Loss)Total HC2 Stockholders' EquityNon-
controlling
Interest		Total Stockholders’ EquityTemporary Equity
SharesAmount
Balance as of December 31, 201946.1  $—  $281.1  $(3.3) $(96.7) $168.7  $349.8  $93.8  $443.6  $21.6  
Share-based compensation—  —  2.6  —  —  —  2.6  —  2.6  —  
Fair value adjustment of redeemable noncontrolling interest—  —  (4.1) —  —  —  (4.1) —  (4.1) 4.1  
Taxes paid in lieu of shares issued for share-based compensation(0.4) —  —  (0.9) —  —  (0.9) —  (0.9) —  
Preferred stock dividend—  —  (0.2) —  —  —  (0.2) —  (0.2) —  
Issuance of common stock0.8  —  —  —  —  —  —  —  —  —  
Transactions with noncontrolling interests—  —  3.3  —  —  —  3.3  (40.1) (36.8) (5.5) 
Net loss—  —  —  —  (83.1) —  (83.1) (15.0) (98.1) (2.9) 
Other comprehensive income (loss)—  —  —  —  —  (253.3) (253.3) 7.7  (245.6) 1.3  
Balance as of March 31, 202046.5  $—  $282.7  $(4.2) $(179.8) $(84.6) $14.1  $46.4  $60.5  $18.6  

Common StockAdditional Paid-In CapitalTreasury StockAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total HC2 Stockholders' EquityNon- controlling InterestTotal Stockholders’ EquityTemporary Equity
SharesAmount
Balance as of December 31, 201844.9  $—  $260.5  $(2.6) $(57.2) $(112.6) $88.1  $105.6  $193.7  $28.3  
Cumulative effect of accounting for leases (1)
—  —  —  —  (4.3) —  (4.3) (0.7) (5.0) (0.1) 
Share-based compensation—  —  2.5  —  —  —  2.5  —  2.5  —  
Fair value adjustment of redeemable noncontrolling interest—  —  0.2  —  —  —  0.2  —  0.2  (0.2) 
Taxes paid in lieu of shares issued for share-based compensation(0.2) —  —  (0.6) —  —  (0.6) —  (0.6) —  
Preferred stock dividend—  —  (0.3) —  —  —  (0.3) —  (0.3) —  
Issuance of common stock0.9  —  —  —  —  —  —  —  —  —  
Purchase of preferred stock by subsidiary—  —  1.7  —  —  —  1.7  —  1.7  (10.0) 
Transactions with noncontrolling interests—  —  (0.5) —  —  —  (0.5) (3.0) (3.5) —  
Other—  —  0.3  —  —  —  0.3  —  0.3  —  
Net loss—  —  —  —  (2.8) —  (2.8) (3.1) (5.9) (0.4) 
Other comprehensive income—  —  —  —  —  148.8  148.8  0.3  149.1  —  
Balance as of March 31, 201945.6  $—  $264.4  $(3.2) $(64.3) $36.2  $233.1  $99.1  $332.2  $17.6  

(1) See Note 2. Summary of Significant Accounting Policies for further information about adjustments resulting from the Company’s adoption of new accounting standards in 2019.






  Common Stock Additional
Paid-In
Capital		 Treasury
Stock		 Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total HC2 Stockholders' Equity Non-
controlling
Interest		Total Stockholders’ EquityTemporary Equity
  
  Shares Amount 
Balance as of December 31, 2016 41,811
 $42
 $241,485
 $(1,387) $(174,278) $(21,647) $44,215
 $23,224
 $67,439
 $31,985
Share-based compensation —
 —
 5,630
 —
 —
 —
 5,630
 —
 5,630
 —
Dividend paid to noncontrolling interests —
 —
 —
 —
 —
 —
 —
 (378) (378) —
Fair value adjustment of redeemable noncontrolling interest —
 —
 (673) —
 —
 —
 (673) —
 (673) 673
Exercise of stock options 135
 —
 486
 —
 —
 —
 486
 —
 486
 —
Taxes paid in lieu of shares issued for share-based compensation (107) —
 —
 (594) —
 —
 (594) —
 (594) —
Preferred stock dividend and accretion —
 —
 (1,562) —
 —
 —
 (1,562) —
 (1,562) —
Amortization of issuance costs and beneficial conversion feature —
 —
 (50) —
 —
 —
 (50) —
 (50) 50
Issuance of common stock 374
 —
 81
 —
 —
 —
 81
 —
 81
 —
Conversion of preferred stock to common stock 803
 1
 2,838
 —
 —
 —
 2,839
 —
 2,839
 (3,228)
Transactions with noncontrolling interests —
 —
 —
 —
 —
 —
 —
 —
 —
 665
Net loss —
 —
 —
 —
 (38,374) —
 (38,374) (3,967) (42,341) (2,338)
Other comprehensive income —

—

—

—
 —

51,031

51,031

—

51,031

—
Balance as of September 30, 2017 43,016

$43

$248,235

$(1,981) $(212,652)
$29,384

$63,029

$18,879

$81,908

$27,807


  Common Stock Additional
Paid-In
Capital		 Treasury
Stock		 Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total HC2 Stockholders' Equity Non-
controlling
Interest		Total Stockholders’ EquityTemporary Equity
  
  Shares Amount 
Balance as of December 31, 2015 35,250
 $35
 $209,477
 $(378) $(79,729) $(35,375) $94,030
 $23,494
 $117,524
 $55,741
Share-based compensation —
 —
 6,667
 —
 —
 —
 6,667
 —
 6,667
 —
Fair value adjustment of redeemable noncontrolling interest —
 —
 (99) —
 —
 —
 (99) —
 (99) 99
Exercise of stock options 2
 —
 —
 —
 —
 —
 —
 —
 —
 —
Taxes paid in lieu of shares issued for share-based compensation (201) —
 —
 (884) —
 —
 (884) —
 (884) —
Preferred stock dividend and accretion —
 —
 (2,386) —
 —
 —
 (2,386) —
 (2,386) —
Amortization of issuance costs and beneficial conversion feature —
 —
 (309) —
 —
 —
 (309) —
 (309) 309
Issuance of common stock 264
 —
 —
 —
 —
 —
 —
 —
 —
 —
Conversion of preferred stock to common stock 2,716
 3
 9,360
 —
 —
 —
 9,363
 —
 9,363
 (11,170)
Transactions with noncontrolling interests —
 —
 6,132
 —
 —
 —
 6,132
 4,029
 10,161
 —
Net loss —
 —
 —
 —
 (33,085) —
 (33,085) (1,137) (34,222) (1,228)
Other comprehensive income —
 —
 —
 —
 —

72,596
 72,596
 —

72,596

—
Balance as of September 30, 2016 38,031
 $38

$228,842

$(1,262) $(112,814)
$37,221

$152,025

$26,386

$178,411

$43,751









See notes to Condensed Consolidated Financial Statements
5
HC2 HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)millions)




Three Months Ended March 31,
20202019
Cash flows from operating activities
Net loss$(101.0) $(6.3) 
Less: Loss from discontinued operations, net of tax(60.0) (6.6) 
Loss (income) income from continuing operations(41.0) 0.3  
Adjustments to reconcile (loss) income to cash provided by continuing operating activities
Depreciation and amortization2.9  2.4  
Amortization of deferred financing costs and debt discount3.8  2.7  
Amortization of (discount) premium on investments2.0  1.6  
Loss on early extinguishment or restructuring of debt5.8  —  
Loss from equity investees2.5  5.9  
Deferred income taxes19.7  (0.6) 
Net realized and unrealized gains on investments18.3  (5.8) 
Other operating activities3.0  (0.4) 
Changes in assets and liabilities, net of acquisitions and disposition:
Accounts receivable(21.6) 50.8  
Recoverable from reinsurers(4.8) 1.9  
Other assets(53.7) (5.6) 
Life, accident and health reserves27.1  7.5  
Accounts payable and other current liabilities55.5  (24.9) 
Other liabilities16.6  (1.8) 
Cash provided by continuing operating activities36.1  34.0  
Cash (used in) provided by discontinued operating activities(0.8) 4.1  
Cash provided by operating activities35.3  38.1  
Cash flows from investing activities
Purchase of property, plant and equipment(6.1) (3.3) 
Disposal of property, plant and equipment0.5  1.0  
Purchase of investments(278.2) (257.9) 
Sale of investments175.0  199.0  
Maturities and redemptions of investments31.0  13.9  
Cash received from dispositions, net144.0  —  
Cash paid for acquisitions, net—  (6.0) 
Other investing activities0.9  (3.2) 
Cash provided by (used in) continuing investing activities67.1  (56.5) 
Cash used in discontinued investing activities(7.0) (1.9) 
Cash provided by (used in) investing activities60.1  (58.4) 
Cash flows from financing activities
Proceeds from debt obligations3.9  16.4  
Principal payments on debt obligations(101.3) (2.6) 
Cash paid by subsidiary to purchase HC2 preferred stock—  (8.3) 
Annuity receipts0.4  0.5  
Annuity surrenders(3.4) (4.4) 
Transactions with noncontrolling interests(42.5) (3.5) 
Other financing activities(2.9) (1.9) 
Cash used in continuing financing activities(145.8) (3.8) 
Cash used in discontinued financing activities(2.4) (2.6) 
Cash used in financing activities(148.2) (6.4) 
Effects of exchange rate changes on cash, cash equivalents and restricted cash0.5  0.1  
Net change in cash, cash equivalents and restricted cash(42.1) (26.2) 
Cash, cash equivalents and restricted cash, beginning of period230.4  321.3  
Cash, cash equivalents and restricted cash, end of period$188.3  $295.1  
Supplemental cash flow information:
Cash paid for interest$6.1  $3.3  
Cash paid for taxes, net of (refunds)$(0.1) $0.2  

  Nine Months Ended September 30,
  2017 2016
Cash flows from operating activities:    
Net loss $(44,679) $(35,450)
Adjustments to reconcile net loss to cash provided by operating activities:    
Provision for doubtful accounts receivable 108
 827
Share-based compensation expense 4,006
 6,667
Depreciation and amortization 26,423
 19,602
Amortization of deferred financing costs and debt discount / premium 4,203
 1,530
Amortization of discount / premium on investments 6,126
 8,966
Gain (loss) on sale or disposal of assets (3,368) 251
Lease termination costs 264
 179
Asset impairment expense 1,810
 —
Income from equity investees (12,667) (3,153)
Impairment of investments 6,112
 4,321
Net realized and unrealized (gains) losses on investments (2,881) 2,519
Gain on contingent consideration (6,001) (1,573)
Receipt of dividends from equity investees 917
 7,214
Deferred income taxes (669) (18,940)
Annuity benefits 6,519
 6,737
Other operating activities 3,131
 (224)
Changes in assets and liabilities, net of acquisitions:    
Accounts receivable 2,725
 (56,463)
Recoverable from reinsurers (6,478) (3,323)
Other assets (27,424) 52,462
Life, accident and health and annuity reserves 34,841
 45,265
Accounts payable and other current liabilities 45,650
 (12,625)
Other liabilities (1,561) 30,190
Cash provided by operating activities: 37,107
 54,979
Cash flows from investing activities:    
Purchase of property, plant and equipment (25,324) (21,689)
Disposal of property, plant and equipment 1,610
 6,411
Purchase of investments (231,881) (169,088)
Sale of investments 101,080
 72,188
Maturities and redemptions of investments 100,691
 53,663
Purchase of equity method investments (11,390) (10,203)
Cash paid for business acquisitions, net of cash acquired —
 (10,871)
Other investing activities (1,745) (483)
Cash used in investing activities: (66,959) (80,072)
Cash flows from financing activities:    
Proceeds from long-term obligations
108,469
 11,672
Principal payments on long-term obligations
(48,146) (11,441)
Annuity receipts 2,190
 2,522
Annuity surrenders (14,764) (15,562)
Transactions with noncontrolling interests 665
 5,837
Payment of dividends (2,763) (3,007)
Other financing activities (230) (884)
Cash provided by (used in) financing activities: 45,421
 (10,863)
Effects of exchange rate changes on cash and cash equivalents (149) (1,347)
Net change in cash and cash equivalents 15,420
 (37,303)
Cash and cash equivalents, beginning of period 115,371
 158,624
Cash and cash equivalents, end of period $130,791
 $121,321
     
Supplemental cash flow information:    
Cash paid for interest $24,601
 $21,491
Cash paid for taxes $11,113
 $13,469
Non-cash investing and financing activities:    
Property, plant and equipment included in accounts payable $547
 $1,542
Investments included in accounts payable $4,785
 $5,876
Conversion of preferred stock to common stock $4,433
 $10,853
Dividends payable to shareholders $500
 $800
Fair value of contingent assets assumed in other acquisitions $—
 $2,992
Fair value of deferred liabilities assumed in other acquisitions $—
 $2,589
Debt assumed in acquisitions $—
 $20,813



See notes to Condensed Consolidated Financial Statements

6

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



1. Organization and Business


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


The Company currently has seven7 reportable segments based on management’s organization of the enterprise - Construction, Marine Services, Energy, Telecommunications, Insurance, Life Sciences, Broadcasting, and Other, which includes businesses that do not meet the separately reportable segment thresholds.


1.Our Construction segment is comprised of DBM Global Inc. ("DBMG") and its wholly-owned subsidiaries. DBMG is a fully integrated detailer, Building Information Modelling ("BIM") modeler, detailer, fabricator and erector of structural steel and heavy steel plate. DBMG models, details, models, fabricates and erects structural steel for commercial and industrial construction projects such as high- and low-rise buildings and office complexes, hotels and casinos, convention centers, sports arenas, shopping malls, hospitals, dams, bridges, mines 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 GrayWolf, DBMG provides services including maintenance, repair, and installation to a diverse range of end markets in order to provide high-quality outage, turnaround, and new installation services to customers. Through Aitken Manufacturing, DBMG manufactures pollution control scrubbers, tunnel liners, pressure vessels, strainers, filters, separators and a variety of customized products. The Company maintains aan approximately 92% controlling interest in DBMG.


2.Our Marine Services segment is comprised of Global Marine Systems Limited ("GMSL"). GMSL is a leading provider of engineering and underwater services on submarine cables. The Company maintains a 95% equity interest in GMSL.

3.Our Energy segment is comprised of American Natural Energy Corp. (f/k/a American Natural Gas, Inc.) ("ANG"). ANG is a premier distributor of natural gas motor fuel. ANG designs, builds, owns, acquires, operates and maintains compressed natural gas fueling stations for transportation vehicles. The Company maintains effective control of, and a 49.99% ownershipan approximately 69% controlling interest in ANG.


4.3.Our Telecommunications segment is comprised of PTGi International Carrier Services, Inc. ("ICS"). ICS operates a telecommunications business including a network of direct routes and provides premium voice communication services for national telecommunications operators, mobile operators, wholesale carriers, prepaid operators, Voicevoice over Internet Protocol ("VOIP")internet protocol service operators and Internetinternet service providers from our International Carrier Services business unit.providers. ICS provides a quality service via direct routes and by forming strong relationships with carefully selected partners. The Company ownsmaintains a 100% ofinterest in ICS.


5.4.Our Insurance segment is comprised of Continental Insurance Group Ltd. ("CIG") and its wholly-owned subsidiary Continental General Insurance Company ("CGI" or the "Insurance Company"). CGI provides long-term care, life, annuity, and annuityother accident and health coverage that help protect policy and certificate holders from the financial hardships associated with illness, injury, loss of life, or income continuation. The Company ownsmaintains a 100% of the Insurance Company.interest in CIG.


6.5.Our Life Sciences segment is comprised of Pansend Life Sciences, LLC ("Pansend"). Pansend owns (i) anmaintains controlling interests of approximately 80% interest in Genovel Orthopedics, Inc. ("Genovel"), which seeks to develop products to treat early osteoarthritis of the knee (ii) a 74% interestand approximately 64% in R2 DermatologyTechnologies, Inc. ("R2"), which develops skin lightening technology,aesthetic and (iii) an 80% interest in BeneVir Biopharm, Inc. ("BeneVir"), which focuses on immunotherapymedical technologies for the treatment of solid tumors.skin. Pansend also invests in other early stage or developmental stage healthcare companies including a 50%an approximately 47% interest in MedibeaconMediBeacon Inc., and an investment in Triple Ring Technologies, Inc.


7.6.Our Broadcasting segment is comprised of HC2 Broadcasting Holdings Inc. ("HC2 Broadcasting") and its subsidiaries. HC2 Broadcasting strategically acquires and operates over-the-air broadcasting stations across the United States. In ouraddition, HC2 Broadcasting, 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 United States. The Company maintains an approximately 98% controlling interest in HC2 Broadcasting and an approximately 50% controlling interest in DTV America Corporation ("DTV") as well as approximately 10% proxy and voting rights from minority holders.

7.Our Other segment we invest in and grow developmental stage companies thatrepresents all other businesses or investments we believe have significant growth potential. Amongpotential or that do not meet the businesses includeddefinition of a segment individually or in thisthe aggregate. Included in the Other segment is the Company's 56% ownership interestformer Marine Services segment, which includes its holding company, Global Marine Holdings, LLC ("GMH"), in 704Gameswhich the Company ("704Games" f/k/a DMi, Inc.maintains approximately 73% controlling interest. GMH results include the current and prior year equity investment in Huawei Marine Networks Co., Limited (“HMN”), which owns licenses to create and distribute NASCAR® video games,its 49% equity method investment with Huawei Technologies Co., Ltd., and the Company's 72% interest in NerVve Technologies, Inc.discontinued operations of Global Marine Systems Limited ("NerVve"GMSL"), which provides analytics on broadcast TV, digital and social media online platforms..

7

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
2. Summary of Significant Accounting Policies


Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and all other subsidiaries over which the Company exerts control. All intercompany profits, transactions and balances have been eliminated in consolidation. As of March 31, 2020, the results of DBMG, GMH, ANG, ICS, CIG, Genovel, R2, and HC2 Broadcasting have been consolidated into the Company’s results based on guidance from the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" 810, Consolidation). The remaining interests not owned by the Company are presented as a noncontrolling interest component of total equity.

Basis of Presentation


The accompanying unaudited Condensed Consolidated Financial Statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been condensed or omitted pursuant to such rules and regulations. Certain prior amounts have been reclassified or combined to conform to the current year presentation. These reclassifications and combinations had no effect on previously reported net loss attributable to controlling interest or accumulated deficit.

These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statementsConsolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, filed with the SEC on March 9, 2017, as amended by amendment no.1, filed on March 28, 2017 (collectively "Form 10-K").16, 2020. The results of operations for the three and nine months ended September 30, 2017March 31, 2020 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2017.2020.

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED


Use of Estimates and Assumptions


The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.


AdjustmentsCOVID-19


DuringThere are many uncertainties regarding the second quarter of 2016,current coronavirus ("COVID-19") pandemic, and the Company identified an immaterial erroris closely monitoring the impact of the COVID-19 pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners and distribution channels. We are unable to predict the impact that COVID-19 will have on its financial position and operating results due to numerous uncertainties. The Company expects to continue to assess the evolving impact of the COVID-19 pandemic.

Statement of Cash Flows

The following table provides a reconciliation of cash and cash equivalents and restricted cash to amounts reported within the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows (in millions):
March 31,
20202019
Cash and cash equivalents, beginning of period$228.8  $315.9  
Restricted cash included in other assets1.6  5.4  
Total cash and cash equivalents and restricted cash$230.4  $321.3  
Cash and cash equivalents, end of period$186.9  $293.5  
Restricted cash included in other assets1.4  1.6  
Total cash and cash equivalents and restricted cash$188.3  $295.1  

Reclassification

Certain previous year amounts have been reclassified to conform with current year presentations, including:

•The reclassification of GMSL's results to discontinued operations. Further, the reclassification of prior period assets and liabilities have been classified as held for sale. See Note 3. Discontinued Operations for further information;

8

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
•As a result of the sale of GMSL, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of GMH and its calculation of depreciation expense forsubsidiaries as a separate segment. Formerly the twelve months ended December 31, 2015 and 2014Marine Services segment, these entities and the three months ended March 31, 2016 relatedinvestment in HMN have been reclassified to purchase accounting associated with the acquisitionOther segment. See Note 20. Operating Segment and Related Information for further information; and

•The restatement of DBMG in May 2014. This resulted in an excess depreciation expense being recorded in each of the periods noted. In addition, certain gains and losses on assets that were disposed of by DBMG were incorrectly recorded during the same periodsprior year Earnings per share as a result of these adjustments.the discontinued operations noted above. This includes presenting EPS for Net (loss) income from continuing operations, Net (loss) income from discontinuing operations, and Net (loss) income. See Note 21. Basic and Diluted Income Per Common Share for further details.


The Company corrected the cumulative effect of these adjustmentsAccounting Pronouncements Adopted in the second quarter of 2016, resulting in an immaterial net adjustment to net income (loss) attributable to common and participating preferred stockholders for the nine months ended September 30, 2016 of $1.3 million.Current Year

New Accounting Pronouncements


The Company has implemented all new accounting pronouncements that are in effect and that may impact its Condensed Consolidated Financial Statements andStatements. The Company does not believe that there are any other new accounting pronouncements issued since the filing of its 2019 Form 10-K that have been issued that mightwill have a material impact on its financial condition, results of operations or liquidity.


Accounting Pronouncements Earlyto be Adopted DuringSubsequent to December 31, 2020

Credit Loss Standard

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, was issued by FASB in June 2016. This standard is effective January 1, 2020 (with early adoption permitted), and will impact, at least to some extent, the Fiscal YearCompany's accounting and disclosure requirements for it's recoverable from reinsurers, accounts receivable, and mortgage loans. The FASB has voted to delay the effective date of ASU 2016-13 to January 1, 2023 for smaller reporting companies with a revised ASU in the fourth quarter of 2019. Currently, the Company continues to focus on developing models and procedures, with testing and refinement of models occurring in 2020 and 2021 with parallel testing to be performed in 2022. 


TestingAvailable for Goodwill Impairmentsale fixed maturity securities are not in scope of the new credit loss model, but will undergo targeted improvements to the current reporting model including the establishment of a valuation allowance for credit losses versus the current direct write down approach. The Company will continue to identify any other financial assets not excluded from scope.


In January 2017,The Company plans to use the FASB issuedmodified retrospective method which will include a cumulative effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. However, prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 2017-04, Intangibles - Goodwill310-39 for debt securities for which an other-than-temporary impairment ("OTTI") was recognized prior to the date of adoption. The Company does not currently expect to early adopt this standard and Other (Topic 350): Simplifyingis currently evaluating the Testimpact of this new accounting guidance on its Condensed Consolidated Financial Statements.

Outlined below are key areas of change, although there are other changes not noted below:

•Financial assets (or a group of financial assets) measured at amortized cost will be required to be presented at the net amount expected to be collected, with an allowance for Goodwill Impairment. Topic 350, Intangibles - Goodwill and Other (Topic 350), currently requires an entitycredit losses deducted from the amortized cost basis, resulting in a net carrying value that has not elected the private company alternative for goodwill to perform a two-step test to determinereflects the amount if any,the entity expects to collect on the financial asset at purchase.

•Credit losses relating to available for sale fixed maturity securities will be recorded through an allowance for credit losses, rather than reductions in the amortized cost of goodwill impairment. In Step 1, an entity compares the fairsecurities and is anticipated to increase volatility in the Company's Condensed Consolidated Statements of Operations. The allowance methodology recognizes that value may be realized either through collection of a reporting unit with its carrying amount, including goodwill. Ifcontractual cash flows or through the carryingsale of the security. Therefore, the amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of the goodwillallowance for that reporting unit. An impairment charge equalcredit losses will be limited to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value.

•The Company's Condensed Consolidated Statements of Operations will reflect the measurement of expected credit losses for newly recognized financial assets as well as the expected increases or decreases (including the reversal of previously recognized losses) of expected credit losses that goodwillhave taken place during the period. The measurement of expected credit losses is recorded, limited tobased on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the amount of goodwill allocated to that reporting unit. To address concerns over the cost and complexitycollectability of the two-step goodwill impairment test,reported amount.

•Disclosures will be required to include information around how the amendmentscredit loss allowance was developed, further details on information currently disclosed about credit quality of financing receivables and net investments in this ASU remove the second stepleases, and a rollforward of the test. An entity will now apply a one-step quantitative test and record the amount of goodwill impairmentallowance for credit losses for available for sale fixed maturity securities as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The Company elected to early adopt ASU 2017-04 effective March 31, 2017, resulting in no impact to the Condensed Consolidated Financial Statements.well as an aging analysis for securities that are past due.

New Accounting Pronouncements

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations, which clarifies the guidance in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which includes amendments for enhanced clarification of the guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Revenue from Contracts with Customers (Topic 606), which includes amendments of a similar nature to the items typically addressed in the technical corrections and improvements project. Lastly, in February 2017, the FASB issued ASU 2017-05, clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets to clarify the scope of ASC 610-20, Other Income - Gains and Losses from Derecognition of Nonfinancial Assets, and provide guidance on partial sales of nonfinancial assets. This ASU clarifies that the unit of account under ASU 610-20 is each distinct nonfinancial or in substance nonfinancial asset and that a financial asset that meets the definition of an "in substance nonfinancial asset" is within the scope of ASC 610-20. This ASU eliminates rules specifically addressing sales of real estate and removes exceptions to the financial asset derecognition model. The ASUs described above are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.

The Company anticipates adopting the new standard effective January 1, 2018. Although the Company is still in the process of evaluating the full impact of the new standard on its financial statements, at this stage of the process, it expects to apply the modified retrospective transition method and does not believe the adoption of ASU 2014-09 will have a significant impact on the amount or timing of its revenues.



9

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The Company anticipates a significant impact on the systems, processes and controls. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of items in scope and related cash flows are unchanged. Focus areas will include, but not be limited to: (i) updating procedures to reflect new guidance requiring establishment of allowance for credit losses on available for sale debt securities; (ii) establishing procedures to review reinsurance risk to include but not limited to review of reinsurer ratings, trust agreements where applicable and historical and current performance; (iii) establishing procedures to identify and review all remaining financial assets within scope; and (iv) developing, testing, and implementing controls for newly developed procedures, as well as for additional annual reporting requirements.
Material revenue streams were identified
Long-Duration Contracts

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB in August 2018 and representative contract/transaction types were sampled. Performance obligations identified within each material revenue stream were evaluatedis expected to determine whetherhave a significant impact on the obligations were satisfiedCompany’s Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements. The standard is effective January 1, 2021 (with early adoption permitted), and will impact, at least to some extent, Company's accounting and disclosure requirements for it's long-duration insurance contracts. The Company does not currently expect to early adopt this standard and is currently evaluating the impact of this new accounting guidance on its Condensed Consolidated Financial Statements.

Outlined below are key areas of change, although there are other changes not noted below:

•Cash flow assumptions must be reviewed at least annually and updated if necessary. The impact of these updates will be reported through net income. Current accounting policy requires the liability assumptions for long-duration contracts and limited payment contracts be locked in at contract inception, unless the contracts project a point in time or over time.  loss position which would allow the liability assumptions to be unlocked so that the loss could be recognized.

•The evaluationrate used to discount the liability projections is to be based on an A-rated asset with observable market inputs and duration consistent with the duration of miscellaneous revenue streams, updating internal controls and the related qualitative disclosures regardingliabilities. The discount rate is to be updated quarterly with the potential impact of the effectschange in the discount rate recognized through other comprehensive income. Current accounting policy allows the use of an expected investment yield (which is not required to be observable in the market) to discount the liability projections.

•Deferred acquisition costs for long-duration contracts are to be amortized in proportion to premiums, gross profits, or gross margins and those balances must be amortized on a constant-level basis over the expected life of the contract. Current accounting policiespolicy would amortize deferred acquisition costs based on revenue and profits. The Company does not have any deferred acquisition costs but VOBA amortization will follow this new guidance.

•Market risk benefits are to be measured at fair value and presented separately in the statement of financial position. Under current accounting policy benefit features that will meet the definition of market risk benefits are accounted for as embedded derivatives or insurance liabilities via the benefit ratio model. The Company does not have any benefit features that will be categorized as market risk benefits.

•Disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, VOBA, as well as information about significant inputs, judgments, assumptions, and methods used in measurement are required to be disclosed.

The Company anticipates that the requirement to update assumptions for liability for future policy benefits will increase volatility in the Company's Condensed Consolidated Statements of Operations while the requirement to update the discount rate will increase volatility in the Company's Condensed Consolidated Statements of Stockholders' Equity. The Company anticipates a comparisonsignificant impact on the systems, processes and controls. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the Company's Insurance segment and related cash flows are unchanged.

The FASB has voted to delay the Company’s current revenue recognition policies will continue duringeffective date of ASU 2018-12 to January 1, 2024 for smaller reporting companies with a revised ASU in the fourth quarter of 2017.

Instruments2019. Currently, the Company plans to focus on developing models and procedures through 2021, with down round feature

In July 2017,testing and refinement of models occurring in 2022 and parallel testing performed in 2023. The Company may choose one of two adoption methods for the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815), which changesliability for future policy benefits: (i) a modified retrospective transition method whereby the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classifiedentity will apply the amendments to contracts inforce as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existencebeginning of the earliest period presented on the basis of their existing carrying amounts adjusted for the removal of any related amounts in AOCI or (ii) a full retrospective transition method. Focus areas will include, but not be limited to: (i) determining an appropriate upper-medium grade fixed income instrument yield source from the market; (ii) establishing appropriate aggregation of liabilities; (iii) establishing liability models for each contract grouping identified that may be quickly updated to reflect current inforce listing and new discount rates on a quarterly basis; (iv) establishing appropriate best estimate assumptions with no provision for adverse deviation; (v) establishing procedures for annual review of assumptions including tracking of actual experience for enhanced reporting requirements; (vi) establishing new VOBA amortization that will align with new guidance for DAC amortization; and (vii) developing, testing, and implementing controls for newly developed procedures, as well as for additional annual reporting requirements. 

10

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). The new guidance removes the following exceptions from ASC 740, Income Taxes: (i) exception to the incremental approach for intraperiod tax allocation; (ii) exception for the recognition of a down round feature. For freestandingdeferred tax liability when an equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260method investment becomes a foreign subsidiary or a foreign subsidiary becomes an equity method investment, and (iii) exception to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction ofgeneral methodology for calculating income available to common shareholders in basic EPS. For the Company, ASU 2017-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoptiontaxes in an interim period.period when year-to-date losses exceed expected losses for the year. ASU 2019-12 also provides guidance to increase simplicity of Topic 740. This standard is effective January 1, 2021 for public business entities. Certain amendments should be applied retrospectively with cumulative-effect adjustments made to retained earnings, while other amendments should be applied prospectively. The Company is currently evaluating the implementation date and the impact of this amendment on its financial statements.


Subsequent Events


ASC 855, Subsequent Events ("ASC 855"), establishes general standards of accounting and disclosure ofrequires the Company to evaluate events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC 855 requires HC2 to evaluate events that occur after the balance date as of which HC2'sthe financial statements are issued, and to determine whether adjustments to or additional disclosures in the financial statements are necessary. HC2 has evaluated subsequent events through the date these financial statements were issued. See Note 22. Subsequent Events for the summary of the subsequent events.


3. Business CombinationsDiscontinued Operations


Construction Segment

On October 13, 2016, DBMG acquired the detailing and BIM management businessThe sale of PDC Global Pty Ltd. ("PDC"). The new businesses provide steel detailing, BIM modelling and BIM management services for industrial and commercial construction projects in Australia and North America. On November 1, 2016, DBMG acquired BDS VirCon ("BDS"). BDS provides steel detailing, rebar detailing and BIM modelling services for industrial and commercial projects in Australia, New Zealand, North America and Europe. The aggregate fair valueGMSL closed on February 28, 2020. As a result of the consideration paid in connection withsale, the acquisitionresults of PDCGMSL and BDS was $25.5 million, including $21.4 million in cash. Both transactionstransaction related expenses directly attributable to the sale were accounted forreported as business acquisitions.

Fair valuediscontinued operations. Summarized operating results of consideration transferred and its allocation among the identified assets acquired, liabilities assumed, intangibles and residual goodwilldiscontinued operations are summarized as follows (in thousands)millions):
Three Months Ended March 31,
20202019
Net revenue$17.3  $42.4  
Cost of revenue18.2  33.2  
Selling, general and administrative13.7  6.0  
Depreciation and amortization3.8  6.6  
Other operating expenses  —  0.6  
Loss from operations  (18.4) (4.0) 
Interest expense  (3.6) (3.5) 
Loss on sale of subsidiary(39.3) —  
Income from equity investees  0.5  1.0  
Other income (loss) 0.9  (0.1) 
Pre-tax loss from discontinued operations  (59.9) (6.6) 
Income tax benefit (expense) (0.1) —  
Loss from discontinued operations  $(60.0) $(6.6) 
Purchase price allocation  
Cash and cash equivalents $621
Accounts receivable, net 5,558
Costs and recognized earnings in excess of billings on uncompleted contracts 1,686
Property, plant and equipment, net 8,043
Goodwill 11,827
Intangibles 3,955
Other assets 1,209
Total assets acquired 32,899
Accounts payable and other current liabilities (5,924)
Billings in excess of costs and recognized earnings on uncompleted contracts (617)
Deferred tax liability (169)
Other liabilities (685)
Total liabilities assumed (7,395)
Total net assets acquired $25,504


Goodwill was determined basedThe Company recorded a $39.3 million loss on the residual differences between fair valuesale, inclusive of consideration transferredrecognizing a $31.3 million loss from the realization of AOCI. The Company expects to record and overall gain from the disposition of the Marine Segment upon the sale of 30% of its interests in HMN, anticipated to close during the second quarter of 2020.

The net proceeds from the sale of GMSL were used to permanently repay HC2’s $15.0 million 2019 Revolving Credit Agreement and redeem $76.9 million aggregate principal amount of HC2’s Senior Secured Notes, plus accrued and unpaid interest since December 1, 2019 (the last regularly scheduled interest payment date).

As a result of the mandatory redemption of $15.0 million on the secured revolving line of credit as a result of the sale of GMSL, the Company allocated interest of $0.2 million, and the value assignedamortization of deferred financing costs of $0.1 million for the three months ended March 31, 2020, associated with the principal prepayment from continuing operations to tangiblediscontinued operations on the Company’s Condensed Consolidated statement of operations.

As a result of the mandatory redemption of $76.9 million on the Senior Secured Notes as a result of the sale of GMSL, the Company allocated the pro-rata interest of $2.2 million, and intangiblethe pro-rata amortization of deferred financing costs and original issuance discount of $0.2 million and $0.1 million, respectively, for each of the three months ended March 31, 2020 and 2019, related to the Senior Secured Notes from continuing operations to discontinued operations on the Company’s Condensed Consolidated statement of operations.
11

Summarized assets and liabilities. Amongliabilities of the factors that contributed to goodwill was approximately $2.9 million assigneddiscontinued operations are as follows (in millions):
December 31,
2019
Assets
Other invested assets$16.9 
Cash and cash equivalents10.2 
Accounts receivable, net26.0 
Deferred tax asset— 
Property, plant and equipment, net 182.1 
Goodwill 14.3 
Intangibles, net 5.3 
Other assets 68.5 
Total assets held for sale $323.3 
Liabilities 
Accounts payable and other current liabilities $33.4 
Debt obligations 65.6 
Pension Liability 18.8 
Other liabilities 36.1 
Total liabilities held for sale $153.9 

For further details related to the assembledsale of GMSL, see note 5. Acquisitions, Dispositions, and trained workforce. Goodwill isDeconsolidations.

4. Revenue

Revenue from contracts with customers consist of the following (in millions):
Three Months Ended March 31,
 20202019
Revenue (1)
Construction$176.5  $192.1  
Energy10.4  5.1  
Telecommunications186.4  155.5  
Broadcasting10.1  9.8  
Total revenue  $383.4  $362.5  
(1) The Insurance segment does not amortized and is not deductible for tax purposes.have revenues in scope of ASC 606.


Accounts receivables, net from contracts with customers consist of the following (in millions):
March 31,December 31,
 20202019
Accounts receivables with customers
Construction$208.4  $199.2  
Energy22.4  31.1  
Telecommunications74.1  51.9  
Broadcasting7.1  8.5  
Total accounts receivables with customers$312.0  $290.7  


12

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Construction Segment
Acquisition
The following table disaggregates DBMG's revenue by market (in millions):
Three Months Ended March 31,
 20202019
Commercial$62.8  $59.4  
Convention2.4  28.7  
Healthcare8.0  8.8  
Industrial58.9  53.8  
Transportation16.3  18.1  
Leisure16.0  14.9  
Other12.1  8.4  
Total revenue from contracts with customers176.5  192.1  
Other revenue—  —  
Total Construction segment revenue$176.5  $192.1�� 

Contract assets and contract liabilities consisted of the following (in millions):
March 31,December 31,
 20202019
Contract assets$61.5  $50.6  
Contract liabilities$(69.6) $(50.6) 

The change in contract assets is a result of the recording of $19.0 million of costs in excess of billings driven by new commercial projects, offset by $8.1 million of costs in excess of billings transferred to date incurredreceivables from contract assets recognized at the beginning of the period. The change in contract liabilities is a result of periodic billing in excess of costs of $52.7 million driven largely by DMBG in connection with the acquisition of PDC and BDS were approximately $3.1 million whichnew commercial projects, offset by revenue recognized that was included in selling, general and administrative expenses. the contract liability balance at the beginning of the period in the amount of $33.7 million.

The acquisition costs were primarily relatedtransaction price allocated to legal, accounting and valuation services.remaining unsatisfied performance obligations consisted of the following (in millions):
PDC's and BDS' results were
 Within one yearWithin five yearsTotal
Commercial$145.4  $—  $145.4  
Convention19.2  —  19.2  
Healthcare44.8  —  44.8  
Industrial101.6  —  101.6  
Transportation67.5  —  67.5  
Leisure19.8  —  19.8  
Other67.3  —  67.3  
Remaining unsatisfied performance obligations$465.6  $—  $465.6  

DBMG includes an additional $19.9 million in its backlog that is not included in the remaining unsatisfied performance obligations noted above. This backlog represents commitments under master service agreements that are estimated amounts of work to be performed based on customer communications, historic experience and knowledge of our Condensed Consolidated Statements of Operations since their respective acquisition dates. Pro forma results of operations for the acquisition of PDC and BDS have not been presented because they are not material to our consolidated results of operations.customers' intentions.


Energy Segment

For the year ended December 31, 2016, ANG completed four acquisitions comprised of an aggregate of twenty-one fueling stations. The total fair value of the consideration transferred by ANG in connection with the acquisitions was $42.1 million, comprised of $39.2 million in cash and a $2.9 million 4.25% seller note, due in 2022. See Note 12. Long-term Obligations for further details. Two of the transactions were accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired was concentrated in a group of similar identifiable assets related to acquired stations.

For the transactions accounted for as a business combination, the fair value of consideration transferred was allocated among the identified assets acquired, liabilities assumed, intangibles and residual goodwill. For the two transactions accounted for as asset acquisitions the preliminary fair value of consideration transferred was preliminarily allocated based on the relative fair value (in thousands):
Purchase price allocation  
Accounts receivable $1,303
Property, plant and equipment, net 43,267
Goodwill 748
Intangibles 4,984
Other assets 79
Total assets acquired 50,381
Accounts payable and other current liabilities (898)
Deferred tax liability (7,086)
Total liabilities assumed (7,984)
Bargain purchase gain (340)
Total net assets acquired $42,057


The preliminary allocation of the fair value of the acquired businesses was based upon a preliminary valuation. Our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period. The primary areas of preliminary allocation of the fair values of consideration transferred that are not yet finalized relate to the fair values of certain property, plant and equipment, deferred tax liability, intangible assets acquired and the residual goodwill. We expect to complete the purchase price allocation for fiscal year 2016 acquisitions during fiscal year 2017.following table disaggregates ANG's revenue by type (in millions):

Three Months Ended March 31,
20202019
Volume-related$8.7  $4.8  
Total revenue from contracts with customers8.7  4.8  
RNG incentives0.1  0.3  
Alternative fuel tax credit1.4  —  
Other revenue0.2  —  
Total Energy segment revenue$10.4  $5.1  
Approximately $7.1 million of the fair value of consideration transferred has been provisionally assigned to customer contracts with an estimated useful life ranging between four and fifteen years. The multi-period excess earnings method was used to assign fair value to the acquired customer contracts.

Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities. Goodwill is not amortized and is not deductible for tax purposes.

Results of operations from the acquired stations since acquisition dates have been included in our Condensed Consolidated Statements of Operations. Pro forma results of operations for ANG's acquisitions have not been presented because they are not material to our consolidated results of operations.

Other Acquisitions

During the year ended December 31, 2016, we completed the acquisition of additional interests in and thereby control of NerVve and BeneVir, and acquired a 60% controlling interest in CWind Limited ("CWind") with an obligation to purchase the remaining 40% in equal amounts on September 30, 2016 and September 30, 2017 (based on agreed financial targets). The total consideration transferred for these acquisitions was $14.9 million, including $9.2 million in cash. On November 1, 2016, we completed the renegotiation of the deferred purchase obligation to purchase the outstanding 40% minority interest of CWind and purchased the remaining 40% on that date. All three transactions were accounted for as business acquisitions.
Results of operations from other acquisitions since the respective acquisition dates have been included in our Condensed Consolidated Statements of Operations. Pro forma results of operations for other acquisitions have not been presented because they are not material to our consolidated results of operations.



13

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Telecommunications Segment

ICS's revenues are predominantly derived from wholesale of international long distance minutes (in millions):

Three Months Ended March 31,
20202019
Termination of long distance minutes$186.4  $155.5  
Total revenue from contracts with customers186.4  155.5  
Other revenue—  —  
Total Telecommunications segment revenue$186.4  $155.5  

Broadcasting Segment

The following table summarizesdisaggregates the allocationBroadcasting segment's revenue by type (in millions):
Three Months Ended March 31,
20202019
Network advertising$5.0  $5.4  
Broadcast station3.5  2.7  
Network distribution1.0  1.5  
Other0.6  0.2  
Total revenue from contracts with customers10.1  9.8  
Other revenue—  —  
Total Broadcasting segment revenue$10.1  $9.8  

The transaction price allocated to remaining unsatisfied performance obligations consisted of $4.3 million, $6.5 million, and $0.4 million of network advertising, broadcasting station revenues, and other revenues, respectively, of which $4.7 million is expected to be recognized within one year and $6.5 million is expected to be recognized within five years.

5. Acquisitions, Dispositions, and Deconsolidations

Other Segment

Sale of GMSL

On January 30, 2020, the Company announced that, through its indirect subsidiary GMH in which the Company holds an approximately 73% controlling interest, the Company entered into a definitive agreement to sell 100% of the shares of GMSL to Trafalgar AcquisitionCo, Ltd. and an affiliate of J.F. Lehman & Company, LLC. The total base consideration was $250.0 million, subject to customary purchase price adjustments, working capital adjustments, and a potential earn-out of up to the fair value$12.5 million at such time, if any, if J.F. Lehman & Company, LLC and its investment affiliates achieve a specified multiple of identifiable assets acquired, liabilities assumed, intangibles and residual goodwill (in thousands):their invested capital.
Purchase price allocation  
Cash and cash equivalents $2,963
Restricted cash 3
Accounts receivable 6,400
Inventory 528
Property, plant and equipment, net 29,896
Goodwill 5,541
Intangibles 7,082
Other assets 2,051
Total assets acquired 54,464
Accounts payable and other current liabilities (11,180)
Deferred tax liability (2,819)
Long-term obligations (20,813)
Other liabilities (3)
Noncontrolling interest (815)
Total liabilities assumed (35,630)
Enterprise value 18,834
Less fair value of noncontrolling interest 3,889
Total net assets acquired $14,945

4. Investments

Fixed Maturity and Equity Securities Available-for-Sale


The following tables provide information relatingpurchase price is subject to investmentscustomary potential downward or upward post-closing adjustments based on net working capital, cash, unpaid transaction expenses, indebtedness and certain of the Company’s pre-closing paid capital expenditures. The SPA contains customary representations, warranties and covenants for a transaction of this nature. In connection with the closing of the transaction, the purchaser deposited (i) $1.25 million of the base price into an escrow fund for the purpose of securing certain indemnification obligations for losses payable in fixed maturitythe first twelve months after closing and equity securities (in thousands):(ii) $1.91 million of the base price into an escrow fund for the purpose of securing a purchase price adjustment, if any, in favor of purchaser. Following the closing, the purchaser shall pay an amount equal to $2.4 million on the earlier of December 31, 2020 and the date on which a cash collateralized bonding facility is released.

The transaction closed on February 28, 2020. GMH received approximately $144.0 million of net proceeds from the sale, of which $36.8 million and $5.5 million were paid to non-controlling interest holders and redeemable non-controlling interest holders, respectively. In addition, GMH held $3.1 million as reserves for transaction related costs and HC2 received net proceeds of approximately $98.6 million.

The Company recorded a $39.3 million loss on the sale, inclusive of recognizing a $31.3 million loss from the realization of AOCI. The Company expects to record an overall gain from the disposition of the Marine Segment upon the sale of the portion of New Saxon’s interest in HMN that represents 30% of HMN, anticipated to close during the second quarter of 2020.

See Note 3. Discontinued Operations for further details.
14
September 30, 2017 Amortized Cost Unrealized Gains Unrealized Losses 
Fair
Value
Fixed maturity securities        
U.S. Government and government agencies $15,318
 $407
 $(12) $15,713
States, municipalities and political subdivisions 378,057
 16,170
 (1,269) 392,958
Foreign government 6,343
 —
 (431) 5,912
Residential mortgage-backed securities 107,249
 4,765
 (1,173) 110,841
Commercial mortgage-backed securities 30,668
 434
 (3) 31,099
Asset-backed securities 125,777
 2,559
 (348) 127,988
Corporate and other 609,137
 44,592
 (1,603) 652,126
Total fixed maturity securities $1,272,549
 $68,927
 $(4,839) $1,336,637
Equity securities        
Common stocks $10,565
 $—
 $(3) $10,562
Perpetual preferred stocks 37,002
 1,510
 (28) 38,484
Total equity securities $47,567
 $1,510
 $(31) $49,046
December 31, 2016 Amortized Cost Unrealized Gains Unrealized Losses 
Fair
Value
Fixed maturity securities        
U.S. Government and government agencies $15,910
 $135
 $(95) $15,950
States, municipalities and political subdivisions 374,527
 4,408
 (3,858) 375,077
Foreign government 6,380
 —
 (402) 5,978
Residential mortgage-backed securities 136,126
 2,634
 (564) 138,196
Commercial mortgage-backed securities 48,715
 427
 (89) 49,053
Asset-backed securities 76,303
 1,934
 (572) 77,665
Corporate and other 600,458
 23,635
 (7,054) 617,039
Total fixed maturity securities $1,258,419
 $33,173
 $(12,634) $1,278,958
Equity securities        
Common stocks $16,236
 $—
 $(1,371) $14,865
Perpetual preferred stocks 37,041
 191
 (578) 36,654
Total equity securities $53,277
 $191
 $(1,949) $51,519



HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Sale of HMN

On October 30, 2019, the Company announced the sale of its stake in Huawei Marine Networks Co., Limited (“HMN”), its 49% joint venture with Huawei Technologies Co., Ltd., to Hengtong Optic-Electric Co Ltd. The Companyequity investment in HMN has investments in mortgage-backed securities ("MBS") that contain embedded derivatives (primarily interest-only MBS) that do not qualify for hedge accounting. The Company recorded the change in the fair value of these securities within Net realized gains (losses) on investments. These investments had a fair value of $12.1contributed $5.0 million and $15.2$12.7 million as of September 30, 2017 andin equity method income for the years ended December 31, 2016,2019 and 2018, respectively. The change in fair value related to these securities resulted in a gain of $0.6HMN contributed $1.5 million and zero loss$4.8 million in equity method losses for the three and nine months ended September 30, 2017, respectivelyMarch 31, 2020 and a net loss2019, respectively. The sale of approximately $0.1GMSL's interest values HMN at $285 million, and $2.4 millionGMH's 49% stake at approximately $140 million.

Under the terms of the SPA, the sale of New Saxon’s 49% interest in HMN will be affected in two tranches, with the sale of the portion of New Saxon’s interest in HMN that represents 30% of HMN, anticipated to close during the second quarter of 2020 (the "First HMN Close"). The remaining 19% interest of HMN is retained by New Saxon and subject to a put option agreement by New Saxon, exercisable starting on the second year anniversary of the closing date of the the First HMN Close at a price equal to the greater of the share price paid for the three30% interest or fair market value as of the two year anniversary date.

Energy Segment

On June 14, 2019, ANG acquired ampCNG's 20 natural gas fueling stations, located primarily in the Southeastern U.S. and nine monthsTexas, for cash consideration of $41.2 million. ANG’s network reach expanded to over 60 stations, making it one of the largest owners and operators of compressed natural gas stations in the country. Transaction was accounted for as asset acquisition.

To finance the acquisition, ANG entered into a term loan with M&T bank for $28.0 million and issued preferred stock and ten year warrants for common stock for $14.0 million. The preferred stock bears a 14% coupon and is mandatorily redeemable in four years. The warrants are exercisable at $0.001 per share of common stock and will represent 6% of ANG when exercised. ANG received $5.0 million of proceeds from CGI. Consequently, related preferred stock and warrants are eliminated in consolidation. Mandatorily redeemable preferred stock and warrants are recorded within Other liabilities.

Broadcasting Segment

During the year ended September 30, 2016, respectively.December 31, 2019 HC2 Broadcasting acquired a series of licenses for a total consideration of $71.4 million. All transactions were accounted for as asset acquisitions.


Maturities of
6. Investments

Fixed Maturity Securities Available-for-Sale


The following tables provide information relating to investments in fixed maturity securities (in millions):

March 31, 2020
Amortized
Cost
Unrealized
Gains		Unrealized
Losses
Fair
Value
U.S. Government and government agencies$7.5  $1.3  $—  $8.8  
States, municipalities and political subdivisions391.8  36.0  (0.4) 427.4  
Residential mortgage-backed securities60.0  3.2  (2.2) 61.0  
Commercial mortgage-backed securities112.5  0.7  (13.5) 99.7  
Asset-backed securities651.8  0.7  (111.3) 541.2  
Corporate and other2,600.4  199.3  (184.8) 2,614.9  
Total fixed maturity securities$3,824.0  $241.2  $(312.2) $3,753.0  

December 31, 2019Amortized
Cost		Unrealized
Gains		Unrealized
Losses
Fair
Value
U.S. Government and government agencies$7.0  $0.7  $—  $7.7  
States, municipalities and political subdivisions405.4  34.7  —  440.1  
Residential mortgage-backed securities63.0  4.5  (0.6) 66.9  
Commercial mortgage-backed securities108.2  1.8  (0.6) 109.4  
Asset-backed securities592.6  2.2  (17.0) 577.8  
Corporate and other2,569.1  273.1  (15.2) 2,827.0  
Total fixed maturity securities$3,745.3  $317.0  $(33.4) $4,028.9  

15

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The amortized cost and fair value of fixed maturity securities available-for-sale as of September 30, 2017March 31, 2020 are shown by contractual maturity in the table below (in thousands)millions). Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset and mortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date:
Amortized
Cost		Fair
Value
Corporate, Municipal, U.S. Government and Other securities
Due in one year or less$42.2  $42.2  
Due after one year through five years277.5  269.1  
Due after five years through ten years427.5  392.4  
Due after ten years2,252.5  2,347.4  
Subtotal2,999.7  3,051.1  
Mortgage-backed securities172.5  160.7  
Asset-backed securities651.8  541.2  
Total$3,824.0  $3,753.0  
  Amortized Cost 
Fair
 Value
Corporate, Municipal, U.S. Government and Other securities    
Due in one year or less $36,381
 $36,153
Due after one year through five years 95,783
 98,739
Due after five years through ten years 166,415
 171,875
Due after ten years 710,276
 759,942
Subtotal 1,008,855
 1,066,709
Mortgage-backed securities 137,917
 141,940
Asset-backed securities 125,777
 127,988
Total $1,272,549
��$1,336,637

Corporate and Other Fixed Maturity Securities


The tables below show the major industry types of the Company’s corporate and other fixed maturity securities (in thousands)millions):

 September 30, 2017 December 31, 2016March 31, 2020December 31, 2019
 Amortized Cost 
Fair
Value
 
% of
Total
 Amortized Cost Fair
Value		 % of
Total		Amortized
Cost		Fair
Value		% of
Total		Amortized
Cost		Fair
Value		% of
Total
Finance, insurance, and real estate $199,777
 $210,783
 32.3% $214,911
 $211,834
 34.3%Finance, insurance, and real estate$626.3  $585.6  22.4 %$632.2  $674.9  23.8 %
Transportation, communication and other services 181,389
 193,954
 29.7% 180,647
 189,163
 30.7%Transportation, communication and other services794.8  752.8  28.8 %785.7  855.2  30.3 %
Manufacturing 111,030
 120,060
 18.4% 112,644
 118,440
 19.2%Manufacturing707.2  782.1  29.9 %728.7  825.9  29.2 %
Other 116,941
 127,329
 19.6% 92,256
 97,602
 15.8%Other472.1  494.4  18.9 %422.5  471.0  16.7 %
Total $609,137
 $652,126
 100.0% $600,458
 $617,039
 100.0%Total$2,600.4  $2,614.9  100.0 %$2,569.1  $2,827.0  100.0 %

Other-Than-Temporary Impairments - Fixed Maturity and Equity Securities


A portion of certain other-than-temporary impairment ("OTTI")OTTI losses on fixed maturity securities is recognized in Accumulated Other Comprehensive Income ("AOCI"). For these securities the net amount which is recognized in the Condensed Consolidated Statements of Operations in the below line items, represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The Company recordedrecognized the following (in thousands)millions):

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Net realized gains (losses) on investments $—
 $—
 $—
 $163
Other expenses, net —
 1,473
 6,111
 2,451
Total Other-Than-Temporary Impairments $—
 $1,473
 $6,111
 $2,614
Three Months Ended March 31,
20202019
Net realized and unrealized gains on investments$0.8  $—  
Other income (expenses), net0.1  —  
Total other-than-temporary impairments$0.9  $—  


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale


The following table presents the total unrealized losses for the 139360 and 269139 fixed maturity and equity securities held by the Company as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (in thousands)millions):
March 31, 2020December 31, 2019
Fixed maturity securitiesUnrealized Losses% of
Total		Unrealized Losses% of
Total
Less than 20%$(58.0) 18.6 %$(32.6) 97.6 %
20% or more for less than six months(252.2) 80.8 %—  — %
20% or more for six months or greater(2.0) 0.6 %(0.8) 2.4 %
Total$(312.2) 100.0 %$(33.4) 100.0 %
  September 30, 2017 December 31, 2016
  Unrealized Losses 
% of
Total
 Unrealized Losses % of
Total
Fixed maturity and equity securities        
Less than 20% $(4,710) 96.7% $(10,069) 69.0%
20% or more for less than six months —
 —% (482) 3.3%
20% or more for six months or greater (160) 3.3% (4,032) 27.7%
Total $(4,870) 100.0% $(14,583) 100.0%


The determination of whether unrealized losses are "other-than-temporary" requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include (i) whether the unrealized loss is credit-driven or a result of changes in market interest rates, (ii) the extent to which fair value is less than cost basis, (iii) cash flow projections received from independent sources, (iv) historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases, (v) near-term prospects for improvement in the issuer and/or its industry, (vi) third party research and communications with industry specialists, (vii) financial models and forecasts, (viii) the continuity of dividend payments, maintenance of investment grade ratings and hybrid nature of certain investments, (ix) discussions with issuer management, and (x) ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value.


16

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The Company analyzes its MBS for OTTI each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan-to-collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data.


The Company believes it will recover its cost basis in the non-impaired securities with unrealized losses and that the Company has the ability to hold the securities until they recover in value. The Company neither intends to sell nor does it expect to be required to sell the securities with unrealized losses as of September 30, 2017.March 31, 2020. However, unforeseen facts and circumstances may cause the Company to sell fixed maturity and equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.


The following tables present the estimated fair values and gross unrealized losses for the 139360 and 269139 fixed maturity and equity securities held by the Company that have estimated fair values below amortized cost as of each of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The Company does not have any OTTI losses reported in AOCI. These investments are presented by investment category and the length of time the related fair value has remained below amortized cost (in thousands)millions):

September 30, 2017 Less than 12 months 12 months of greater Total
Fair
Value
 Unrealized Losses Fair
Value		 Unrealized Losses Fair
Value		 Unrealized Losses
Fixed maturity securities            
March 31, 2020March 31, 2020Less than 12 months12 months or greaterTotal
Fair
Value
Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
U.S. Government and government agencies $6,994
 $(12) $—
 $—
 $6,994
 $(12)U.S. Government and government agencies$0.2  $—  $—  $—  $0.2  $—  
States, municipalities and political subdivisions 62,682
 (1,269) —
 —
 62,682
 (1,269)States, municipalities and political subdivisions28.9  (0.4) —  —  28.9  (0.4) 
Foreign government —
 —
 5,913
 (431) 5,913
 (431)
Residential mortgage-backed securities 18,524
 (1,003) 10,429
 (170) 28,953
 (1,173)Residential mortgage-backed securities14.6  (1.6) 4.0  (0.6) 18.6  (2.2) 
Commercial mortgage-backed securities 1,132
 (3) —
 —
 1,132
 (3)Commercial mortgage-backed securities71.9  (13.5) 0.2  —  72.1  (13.5) 
Asset-backed securities 13,932
 (130) 6,178
 (218) 20,110
 (348)Asset-backed securities482.5  (109.1) 11.0  (2.2) 493.5  (111.3) 
Corporate and other 56,178
 (1,567) 883
 (36) 57,061
 (1,603)Corporate and other765.4  (181.9) 12.1  (2.9) 777.5  (184.8) 
Total fixed maturity securities $159,442
 $(3,984) $23,403
 $(855) $182,845
 $(4,839)Total fixed maturity securities$1,363.5  $(306.5) $27.3  $(5.7) $1,390.8  $(312.2) 
Equity securities            
Common stocks $10,282
 $(3) $—
 $—
 $10,282
 $(3)
Perpetual preferred stocks —
 —
 1,072
 (28) 1,072
 (28)
Total equity securities $10,282
 $(3) $1,072
 $(28) $11,354
 $(31)


HC2 HOLDINGS, INC.
December 31, 2019Less than 12 months12 months of greaterTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
U.S. Government and government agencies$0.3  $—  $—  $—  $0.3  $—  
States, municipalities and political subdivisions2.0  —  —  —  2.0  —  
Residential mortgage-backed securities2.3  —  8.2  (0.6) 10.5  (0.6) 
Commercial mortgage-backed securities58.1  (0.6) 0.2  —  58.3  (0.6) 
Asset-backed securities126.5  (1.5) 255.8  (15.5) 382.3  (17.0) 
Corporate and other169.6  (3.7) 177.4  (11.5) 347.0  (15.2) 
Total fixed maturity securities$358.8  $(5.8) $441.6  $(27.6) $800.4  $(33.4) 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

December 31, 2016 Less than 12 months 12 months of greater Total
 Fair
Value		 Unrealized Losses Fair
Value		 Unrealized Losses Fair
Value		 Unrealized Losses
Fixed maturity securities            
U.S. Government and government agencies $4,392
 $(95) $—
 $—
 $4,392
 $(95)
States, municipalities and political subdivisions 207,740
 (3,858) —
 —
 207,740
 (3,858)
Foreign government 5,978
 (402) —
 —
 5,978
 (402)
Residential mortgage-backed securities 54,385
 (564) —
 —
 54,385
 (564)
Commercial mortgage-backed securities 13,159
 (89) —
 —
 13,159
 (89)
Asset-backed securities 12,443
 (572) —
 —
 12,443
 (572)
Corporate and other 147,653
 (3,022) 3,579
 (4,032) 151,232
 (7,054)
Total fixed maturity securities $445,750
 $(8,602) $3,579
 $(4,032) $449,329
 $(12,634)
Equity securities            
Common stocks $14,585
 $(1,371) $—
 $—
 $14,585
 $(1,371)
Perpetual preferred stocks 20,464
 (578) —
 —
 20,464
 (578)
Total equity securities $35,049
 $(1,949) $—
 $—
 $35,049
 $(1,949)


As of September 30, 2017,March 31, 2020, investment grade fixed maturity securities (as determined by nationally recognized rating agencies) represented approximately 44.5%77.5% of the gross unrealized loss and 69.4%88.0% of the fair value. As of December 31, 2016,2019, investment grade fixed maturity securities represented approximately 54.5%68.3% of the gross unrealized loss and 83.0%81.8% of the fair value.

Certain risks are inherent in connection with fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.


Other Invested AssetsEquity securities


Carrying values of other invested assets accounted for under cost andThe following tables provide information relating to investments in equity method are as follows (in thousands):
  September 30, 2017 December 31, 2016
  Cost
Method		 Equity Method Fair Value Cost
Method		 Equity Method Fair
Value
Common Equity $—
 $1,298
 $7,056
 $138
 $1,047
 $—
Preferred Equity 2,484
 15,710
 —
 2,484
 9,971
 —
Derivatives 3,097
 —
 2,164
 3,097
 —
 3,813
Limited Partnerships —
 733
 —
 —
 1,116
 —
Joint Ventures —
 58,919
 —
 —
 40,697
 —
Total $5,581
 $76,660
 $9,220
 $5,719
 $52,831
 $3,813

The Company recognized a gain of zero and a loss of $1.6 million on changes in thesecurities measured at fair value of investments accounted for under ASC 815, Derivatives and Hedging ("ASC 815") during the three and nine months ended September 30, 2017, respectively and a gain of zero and $2.7 million in the fair value of an equity security accounted under ASC 825, Financial Instruments for the three and nine months ended September 30, 2017, respectively.

The Company recognized losses of $0.3 million and $1.9 million on changes in the fair value of investments accounted for under ASC 815 during the three and nine months ended September 30, 2016, respectively.

Summarized financial information for subsidiaries not consolidated for the nine months ended September 30, 2017 is as follows (information for two of the investees is reported on a one month lag, in thousands)(in millions):

Net revenue $369,336
Gross profit $109,543
Income (loss) from continuing operations $(10,118)
Net income (loss) $(31,453)
   
Current assets $317,786
Noncurrent assets $189,278
Current liabilities $197,855
Noncurrent liabilities $152,879
March 31,December 31,
Equity securities20202019
Common stock$9.7  $10.5  
Perpetual preferred stock62.7  82.0  
Total equity securities$72.4  $92.5  



17

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Net investment income
Net Investment Income


The major sources of net investment income were as follows (in thousands)millions):
Three Months Ended March 31,
20202019
Fixed maturity securities, available-for-sale at fair value$45.6  $43.6  
Equity securities1.0  2.5  
Mortgage loans5.4  3.7  
Policy loans0.3  0.3  
Other invested assets—  1.2  
Gross investment income52.3  51.3  
External investment expense(0.4) (0.2) 
Net investment income$51.9  $51.1  
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Fixed maturity securities, available-for-sale at fair value $14,951
 $14,033
 $44,426
 $40,388
Equity securities, available-for-sale at fair value 578
 430
 1,827
 1,526
Mortgage loans 447
 120
 1,475
 155
Policy loans 289
 312
 878
 876
Other invested assets 68
 129
 75
 302
Gross investment income 16,333
 15,024
 48,681
 43,247
External investment expense (46) (225) (151) (662)
Net investment income $16,287
 $14,799
 $48,530
 $42,585


Net Realized Gains (Losses)realized and unrealized gains (losses) on Investmentsinvestments


The major sources of net realized and unrealized gains (losses)and losses on investments were as follows (in thousands)millions):

Three Months Ended March 31,
20202019
Realized gains on fixed maturity securities$3.7  $0.8  
Realized losses on fixed maturity securities(0.6) (1.7) 
Realized gains on equity securities—  0.1  
Realized losses on equity securities—  (0.9) 
Realized gains on mortgage loans0.1  —  
Net unrealized gains (losses) on equity securities(21.7) 7.4  
Net unrealized gains (losses) on derivative instruments0.2  (0.2) 
Impairment loss(0.8) —  
Net realized and unrealized gains (losses)$(19.1) $5.5  

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Realized gains on fixed maturity securities $125
 $455
 $3,510
 $1,663
Realized losses on fixed maturity securities (42) —
 (959) (2,338)
Realized gains on equity securities 265
 154
 375
 438
Realized losses on equity securities —
 —
 (31) (352)
Net realized gains (losses) on derivative instruments 630
 (829) (41) (1,925)
Impairment loss —
 —
 —
 (163)
Net realized gains (losses) $978
 $(220) $2,854
 $(2,677)

5.7. Fair Value of Financial Instruments


Assets by Hierarchy Level


Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands)millions):

September 30, 2017   Fair Value Measurement Using:
Total Level 1 Level 2 Level 3
March 31, 2020March 31, 2020Fair Value Measurement Using:
TotalLevel 1Level 2Level 3
Assets        Assets
Fixed maturity securities        Fixed maturity securities  
U.S. Government and government agencies $15,713
 $5,115
 $10,598
 $—
U.S. Government and government agencies  $8.8  $5.5  $3.3  $—  
States, municipalities and political subdivisions 392,958
 —
 387,066
 5,892
States, municipalities and political subdivisions  427.4  —  418.4  9.0  
Foreign government 5,912
 —
 5,912
 —
Residential mortgage-backed securities 110,841
 —
 93,060
 17,781
Residential mortgage-backed securities  61.0  —  48.0  13.0  
Commercial mortgage-backed securities 31,099
 —
 18,797
 12,302
Commercial mortgage-backed securities  99.7  —  65.5  34.2  
Asset-backed securities 127,988
 —
 14,823
 113,165
Asset-backed securities  541.2  —  255.7  285.5  
Corporate and other 652,126
 2,148
 618,480
 31,498
Corporate and other  2,614.9  31.9  2,414.3  168.7  
Total fixed maturity securities 1,336,637
 7,263
 1,148,736
 180,638
Total fixed maturity securities  3,753.0  37.4  3,205.2  510.4  
Equity securities        Equity securities  
Common stocks 10,562
 8,192
 —
 2,370
Common stocks  9.7  6.3  —  3.4  
Perpetual preferred stocks 38,484
 9,858
 22,525
 6,101
Perpetual preferred stocks  62.7  4.4  20.1  38.2  
Total equity securities 49,046
 18,050
 22,525
 8,471
Total equity securities  72.4  10.7  20.1  41.6  
Derivatives 2,164
 —
 —
 2,164
Common stocks - fair value option 7,056
 7,056
 —
 —
Total assets accounted for at fair value $1,394,903
 $32,369
 $1,171,261
 $191,273
Total assets accounted for at fair value$3,825.4  $48.1  $3,225.3  $552.0  

Liabilities
Embedded derivative$0.7  $—  $—  $0.7  
Other3.7  —  —  3.7  
Total liabilities accounted for at fair value$4.4  $—  $—  $4.4  
18
Liabilities        
Warrant liability $3,091
 $—
 $—
 $3,091
Contingent liability 5,409
 —
 —
 5,409
Other 1,326
 —
 —
 1,326
Total liabilities accounted for at fair value $9,826
 $—
 $—
 $9,826


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED


December 31, 2019Fair Value Measurement Using:
TotalLevel 1Level 2Level 3
Assets
Fixed maturity securities
U.S. Government and government agencies$7.7  $4.8  $2.9  $—  
States, municipalities and political subdivisions440.1  —  440.1  —  
Residential mortgage-backed securities66.9  —  57.7  9.2  
Commercial mortgage-backed securities109.4  —  74.8  34.6  
Asset-backed securities577.8  —  27.2  550.6  
Corporate and other2,827.0  46.5  2,669.5  111.0  
Total fixed maturity securities4,028.9  51.3  3,272.2  705.4  
Equity securities
Common stocks10.5  7.1  —  3.4  
Perpetual preferred stocks82.0  5.0  22.8  54.2  
Total equity securities92.5  12.1  22.8  57.6  
Total assets accounted for at fair value$4,121.4  $63.4  $3,295.0  $763.0  
December 31, 2016   Fair Value Measurement Using:
 Total Level 1 Level 2 Level 3
Assets        
Fixed maturity securities        
U.S. Government and government agencies $15,950
 $5,140
 $10,778
 $32
States, municipalities and political subdivisions 375,077
 —
 369,387
 5,690
Foreign government 5,978
 —
 5,978
 —
Residential mortgage-backed securities 138,196
 —
 82,242
 55,954
Commercial mortgage-backed securities 49,053
 —
 6,035
 43,018
Asset-backed securities 77,665
 —
 4,448
 73,217
Corporate and other 617,039
 2,020
 594,653
 20,366
Total fixed maturity securities 1,278,958
 7,160
 1,073,521
 198,277
Equity securities        
Common stocks 14,865
 10,290
 —
 4,575
Perpetual preferred stocks 36,654
 9,312
 27,342
 —
Total equity securities 51,519
 19,602
 27,342
 4,575
Derivatives 3,813
 —
 —
 3,813
Total assets accounted for at fair value $1,334,290
 $26,762
 $1,100,863
 $206,665

Liabilities
Embedded Derivatives$3.0  $—  $—  $3.0  
Other4.8  —  —  4.8  
Total liabilities accounted for at fair value$7.8  $—  $—  $7.8  
Liabilities        
Warrant liability $4,058
 $—
 $—
 $4,058
Contingent liability 11,411
 —
 —
 11,411
Other 816
 —
 —
 816
Total liabilities accounted for at fair value $16,285
 $—
 $—
 $16,285


The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 or between other levels, at the beginning fair value for the reporting period in which the changes occur. There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2017. The Company transferred $1.1 million of corporate and other bonds and $0.5 million of preferred stock from Level 1 into Level 2 during the nine months ended September 30, 2016, reflecting the level of market activity in these instruments. There were no transfers between Level 1 and Level 2 during the three months ended September 30, 2016.

Availability of secondary market activity and consistency of pricing from third-party sources impacts the Company's ability to classify securities as Level 2 or Level 3. The Company’s assessment resulted in a net transfer into Level 3 of $22.5 million and out of Level 3 of $57.0 million, primarily related to structured securities, during the three and nine months ended September 30, 2017, respectively.

The Company’s assessment resulted in a net transfer out of Level 3 of $0.6$119.5 million andprimarily related to corporate securities during the three months ended March 31, 2020. The Company’s assessment resulted in a net transfer intoout of Level 3 of $2.4$104.9 million primarily related to corporate securities during the three and nine months ended September 30, 2016, respectively.March 31, 2019.


The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below:


Fixed Maturity Securities. The fair values of the Company’s publicly-traded fixed maturity securities are generally based on prices obtained from independent pricing services. Prices from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. In some cases, the Company receives prices from multiple pricing services for each security, but ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs.


If the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity, non-binding broker quotes are used, if available. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information from the pricing service or broker with an internally developed valuation, however, this occurs infrequently. Internally developed valuations or non-binding broker quotes are also used to determine fair value in circumstances where vendor pricing is not available. These estimates may use significant unobservable inputs, which reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset. Pricing service overrides, internally developed valuations and non-binding broker quotes are generally based on significant unobservable inputs and are reflected as Level 3 in the valuation hierarchy.


The inputs used in the valuation of corporate and government securities include, but are not limited to, standard market observable inputs which are derived from, or corroborated by, market observable data including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer.


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED


For structured securities, valuation is based primarily on matrix pricing or other similar techniques using standard market inputs including spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, rating, weighted average coupon, weighted average maturity, average delinquency rates, geographic region, debt-service coverage ratios and issuance-specific information including, but not limited to: collateral type, payment terms of the underlying assets, payment priority within the tranche, structure of the security, deal performance and vintage of loans.


19

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
When observable inputs are not available, the market standard valuation techniques for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value but that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs are sometimes based in large part on management judgment or estimation, and cannot be supported by reference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other market participants would use when pricing such securities.


The fair values of private placement securities are primarily determined using a discounted cash flow model. In certain cases, these models primarily use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 3. For certain private fixed maturities, the discounted cash flow model may also incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the security. To the extent management determines that such unobservable inputs are not significant to the price of a security, a Level 2 classification is made. Otherwise, a Level 3 classification is used.


Equity Securities. The balance consists principally of common and preferred stock of publicly and privately traded companies. The fair values of publicly traded equity securities are primarily based on quoted market prices in active markets and are classified within Level 1 in the fair value hierarchy. The fair values of preferred equity securities, for which quoted market prices are not readily available, are based on prices obtained from independent pricing services and these securities are generally classified within Level 2 in the fair value hierarchy. The fair value of common stock of privately held companies was determined using unobservable market inputs, including volatility and underlying security values and was classified as Level 3.


Cash Equivalents. The balance consists of money market instruments, which are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. Various time deposits carried as cash equivalents are not measured at estimated fair value and, therefore, are excluded from the tables presented.


Derivatives. The balance consists of common stock purchase warrants and call options. The fair values of the call options are primarily based on quoted market prices in active markets and are classified within Level 1 in the fair value hierarchy. Depending on the terms, the common stock warrants were valued using either Black-Scholes analysis or Monte Carlo Simulation. Fair value was determined using unobservable market inputs, including volatility and underlying security values. As such, the common stock purchase warrants were classified as Level 3.

Warrant Liability. The balance represents warrants issued in connection with the acquisition of the Insurance business and recorded within other liabilities on the Consolidated Balance Sheets. Fair value was determined using the Monte Carlo Simulation because the adjustments for exercise price and warrant shares represent path dependent features; the exercise price from comparable periods needs to be known to determine whether a subsequent sale of shares occurs at a price that is lower than the then current exercise price. The analysis entails a Geometric Brownian Motion based simulation of 100 unique price paths of the Company's stock for each combination of assumptions. Fair value was determined using unobservable market inputs, including volatility, and a range of assumptions regarding a possibility of an equity capital raise each year and the expected size of future equity capital raises. The present value of a given simulated scenario was based on intrinsic value at expiration discounted to the valuation date, taking into account any adjustments to the exercise price or warrant shares issuable. The average present value across all 100 independent price paths represents the estimate of fair value for each combination of assumptions. Therefore, the warrant liability was classified as Level 3.

Contingent Liability. The balance represents the present value of the estimated obligation pursuant to the acquisition of the Insurance business. Fair value was determined using unobservable market inputs, including probability of rate increases as approved by state regulators. The liability was classified as Level 3.


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Level 3 Measurements and Transfers


The following tables summarize changes to the Company’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for the three and nine months ended September 30, 2017March 31, 2020 and 2016, respectively2019 (in thousands)millions):
   Total realized/unrealized gains (losses) included in         
 Balance at June 30, 2017Net earnings (loss)Other comp. income (loss)Purchases and issuancesSales and settlementsTransfer to Level 3 Transfer out of Level 3 Balance at September 30, 2017
Assets                
Fixed maturity securities                
States, municipalities and political subdivisions $7,511
 $(3) $(100) $116
 $—
 $—
 $(1,632) $5,892
Residential mortgage-backed securities 18,486
 21
 22
 —
 (921) 1,041
 (868) 17,781
Commercial mortgage-backed securities 3,754
 (4) 1
 —
 (69) 8,620
 —
 12,302
Asset-backed securities 119,598
 97
 572
 15,780
 (23,947) 1,065
 —
 113,165
Corporate and other 20,539
 (5) (1,202) 4,310
 (15) 9,294
 (1,423) 31,498
Total fixed maturity securities 169,888

106

(707)
20,206

(24,952)
20,020

(3,923)
180,638
Equity securities                
Common stocks 2,090
 —
 —
 —
 —
 280
 —
 2,370
Perpetual preferred stocks —
 —
 —
 —
 —
 6,101
 —
 6,101
Total equity securities 2,090
 —
 —
 —
 —
 6,381
 —
 8,471
Derivatives 2,155
 9
 —
 —
 —
 —
 —
 2,164
Total financial assets $174,133
 $115
 $(707) $20,206
 $(24,952) $26,401
 $(3,923) $191,273

    Total realized/unrealized (gains) losses included in          
 Balance at June 30, 2017Net (earnings) lossOther comp. (income) lossPurchases and issuancesSales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at September 30, 2017
Liabilities                
Warrant liability $4,091
 $(1,000) $—
 $—
 $—
 $—
 $—
 $3,091
Contingent liability 11,730
 (6,321) —
 —
 —
 —
 —
 5,409
Other 1,042
 284
 —
 —
 —
 —
 —
 1,326
Total financial liabilities $16,863
 $(7,037) $—
 $—
 $—
 $—
 $—
 $9,826
Total realized/unrealized gains (losses) included in
Balance at
December 31, 2019		Net earnings
(loss)		Other comp.
income (loss)		Purchases and
issuances		Sales and
settlements		Transfer to
Level 3		Transfer out of
Level 3		Balance at
March 31, 2020
Assets
Fixed maturity securities
States, municipalities and political subdivisions$—  $0.1  $(1.0) $—  $—  $9.9  $—  $9.0  
Residential mortgage-backed securities9.2  —  (1.9) —  (0.7) 6.8  (0.4) 13.0  
Commercial mortgage-backed securities34.6  —  (5.3) —  (0.2) 5.1  —  34.2  
Asset-backed securities550.6  —  (93.3) 60.0  (51.5) —  (180.3) 285.5  
Corporate and other111.0  (0.1) (13.0) 32.7  (1.3) 40.7  (1.3) 168.7  
Total fixed maturity securities705.4  —  (114.5) 92.7  (53.7) 62.5  (182.0) 510.4  
Equity securities
Common stocks3.4  —  —  —  —  —  —  3.4  
Perpetual preferred stocks54.2  —  (16.0) —  —  —  —  38.2  
Total equity securities57.6  —  (16.0) —  —  —  —  41.6  
Total financial assets$763.0  $—  $(130.5) $92.7  $(53.7) $62.5  $(182.0) $552.0  

20
   Total realized/unrealized gains (losses) included in         
 Balance at December 31, 2016Net earnings (loss)Other comp. income (loss)Purchases and issuancesSales and settlementsTransfer to Level 3 Transfer out of Level 3 Balance at September 30, 2017
Assets                
Fixed maturity securities                
U.S. Government and government agencies $32
 $—
 $—
 $—
 $(17) $—
 $(15) $—
States, municipalities and political subdivisions 5,690
 (2) (144) 344
 —
 1,636
 (1,632) 5,892
Residential mortgage-backed securities 55,954
 (720) 901
 3,465
 (7,283) 3,203
 (37,739) 17,781
Commercial mortgage-backed securities 43,018
 111
 76
 —
 (10,083) 8,620
 (29,440) 12,302
Asset-backed securities 73,217
 1,147
 880
 97,051
 (48,461) 1,065
 (11,734) 113,165
Corporate and other 20,366
 (3,329) 3,670
 12,244
 (4,133) 10,606
 (7,926) 31,498
Total fixed maturity securities 198,277
 (2,793) 5,383
 113,104
 (69,977) 25,130
 (88,486) 180,638
Equity securities                
Common stocks 4,576
 (2,842) 356
 —
 —
 280
 —
 2,370
Perpetual preferred stocks —
 —
 —
 —
 —
 6,101
 —
 6,101
Total equity securities 4,576
 (2,842) 356
 —
 —
 6,381
 —
 8,471
Derivatives 3,813
 (1,649) —
 —
 —
 —
 —
 2,164
Total financial assets $206,666
 $(7,284) $5,739
 $113,104
 $(69,977) $31,511
 $(88,486) $191,273


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Total realized/unrealized (gains) losses included in
Balance at
December 31, 2019		Net earnings
(loss)		Other comp.
income (loss)		Purchases and
issuances		Sales and
settlements		Transfer to
Level 3		Transfer out of
Level 3		Balance at
March 31, 2020
Liabilities
Embedded derivative$3.0  $(2.3) $—  $—  $—  $—  $—  $0.7  
Other4.8  (1.1) —  —  —  —  —  3.7  
Total financial liabilities$7.8  $(3.4) $—  $—  $—  $—  $—  $4.4  

Total realized/unrealized gains (losses) included in
Balance at
December 31, 2018		Net earnings
(loss)		Other comp.
income (loss)		Purchases and
issuances		Sales and
settlements		Transfer to
Level 3		Transfer out of
Level 3		Balance at
March 31, 2019
Assets
Fixed maturity securities
Residential mortgage-backed securities19.0  —  0.1  —  (0.3) —  (5.7) 13.1  
Commercial mortgage-backed securities58.2  —  1.6  2.4  (0.4) —  —  61.8  
Asset-backed securities478.2  —  13.3  48.6  (73.6) 5.6  —  472.1  
Corporate and other85.0  —  8.5  4.6  (4.6) 105.0  —  198.5  
Total fixed maturity securities640.4  —  23.5  55.6  (78.9) 110.6  (5.7) 745.5  
Equity securities
Common stocks5.9  0.2  —  —  —  —  —  6.1  
Perpetual preferred stocks55.3  (0.2) —  —  —  —  —  55.1  
Total equity securities61.2  —  —  —  —  —  —  61.2  
Total financial assets$701.6  $—  $23.5  $55.6  $(78.9) $110.6  $(5.7) $806.7  
Total realized/unrealized (gains) losses included in
Balance at
December 31, 2018		Net earnings
(loss)		Other comp.
income (loss)		Purchases and
issuances		Sales and
settlements		Transfer to
Level 3		Transfer out of
Level 3		Balance at
March 31, 2019
Liabilities
Embedded derivatives$8.4  $(2.3) $—  $—  $—  $—  $—  $6.1  
Other3.5  (0.8) —  —  —  —  —  2.7  
Total financial liabilities$11.9  $(3.1) $—  $—  $—  $—  $—  $8.8  
    Total realized/unrealized (gains) losses included in          
 Balance at December 31, 2016Net (earnings) lossOther comp. (income) lossPurchases and issuancesSales and settlements Transfer to Level 3 Transfer out of Level 3 Balance at September 30, 2017
Liabilities                
Warrant liability $4,058
 $(967) $—
 $—
 $—
 $—
 $—
 $3,091
Contingent liability 11,411
 (6,002) —
 —
 —
 —
 —
 5,409
Other 816
 510
 —
 —
 —
 —
 —
 1,326
Total financial liabilities $16,285
 $(6,459) $—
 $—
 $—
 $—
 $—
 $9,826
    Total realized/unrealized gains (losses) included in          
 Balance at June 30, 2016Net earnings (loss)Other comp. income (loss)Purchases and issuancesSales and settlementsTransfer to Level 3Transfer out of Level 3Balance at September 30, 2016
Assets                
Fixed maturity securities                
U.S. Government and government agencies $58
 $—
 $—
 $—
 $(26) $—
 $—
 $32
States, municipalities and political subdivisions 5,864
 102
 3
 —
 —
 —
 —
 5,969
Residential mortgage-backed securities 62,289
 (422) 525
 —
 (2,973) 8,686
 (8,105) 60,000
Commercial mortgage-backed securities 57,563
 (269) (19) —
 (7,378) 2,629
 (2,247) 50,279
Asset-backed securities 54,217
 85
 1,454
 10,337
 (720) 1,387
 (16) 66,744
Corporate and other 16,661
 (108) 550
 7,899
 (1,145) —
 (2,969) 20,888
Total fixed maturity securities 196,652
 (612) 2,513
 18,236
 (12,242) 12,702
 (13,337) 203,912
Equity securities               —
Common stocks 4,826
 —
 —
 —
 —
 —
 —
 4,826
Total equity securities 4,826
 —
 —
 —
 —
 —
 —
 4,826
Derivatives 5,318
 (94) (694) 230
 (48) —
 —
 4,712
Contingent asset 2,813
 (89) —
 —
 —
 —
 —
 2,724
Total financial assets $209,609
 $(795) $1,819
 $18,466
 $(12,290) $12,702
 $(13,337) $216,174
    Total realized/unrealized (gains) losses included in          
 Balance at June 30, 2016Net (earnings) lossOther comp. (income) lossPurchases and issuancesSales and settlementsTransfer to Level 3Transfer out of Level 3Balance at September 30, 2016
Liabilities                
Warrant liability $2,772
 $739
 $—
 $—
 $—
 $—
 $—
 $3,511
Contingent liability 2,218
 (1,470) —
 —
 —
 —
 —
 748
Other —
 —
 —
 1,490
 —
 —
 —
 1,490
Total financial liabilities $4,990

$(731)
$—

$1,490

$—

$—

$—

$5,749

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

    Total realized/unrealized gains (losses) included in          
 Balance at December 31, 2015Net earnings (loss)Other comp. income (loss)Purchases and issuancesSales and settlementsTransfer to Level 3Transfer out of Level 3Balance at September 30, 2016
Assets                
Fixed maturity securities                
U.S. Government and government agencies $73
 $—
 $2
 $—
 $(43) $—
 $—
 $32
States, municipalities and political subdivisions 5,659
 302
 8
 —
 —
 —
 —
 5,969
Residential mortgage-backed securities 79,019
 (2,105) 910
 —
 (10,988) 16,569
 (23,405) 60,000
Commercial mortgage-backed securities 60,525
 (760) 920
 —
 (12,394) 9,779
 (7,791) 50,279
Asset-backed securities 27,653
 140
 2,176
 43,405
 (14,742) 13,808
 (5,696) 66,744
Corporate and other 13,944
 50
 479
 8,499
 (1,206) 2,091
 (2,969) 20,888
Total fixed maturity securities 186,873
 (2,373)
4,495

51,904

(39,373)
42,247

(39,861)
203,912
Equity securities               —
Common stocks 4,932
 —
 (106) —
 —
 —
 —
 4,826
Total equity securities 4,932
 —

(106)
—

—

—

—

4,826
Derivatives 4,211
 (1,119) 1,438
 230
 (48) —
 —
 4,712
Contingent asset —
 (268) —
 2,992
 —
 —
 —
 2,724
Total financial assets $196,016
 $(3,760)
$5,827

$55,126

$(39,421)
$42,247

$(39,861)
$216,174
    Total realized/unrealized (gains) losses included in          
 Balance at December 31, 2015Net (earnings) lossOther comp. (income) lossPurchases and issuancesSales and settlementsTransfer to Level 3Transfer out of Level 3Balance at September 30, 2016
Liabilities                
Warrant liability $4,332
 $(821) $—
 $—
 $—
 $—
 $—
 $3,511
Contingent liability —
 (1,841) —
 2,589
 —
 —
 —
 748
Other —
 —
 —
 1,490
 —
 —
 —
 1,490
Total financial liabilities $4,332
 $(2,662) $—
 $4,079
 $—
 $—
 $—
 $5,749


Internally developed fair values of Level 3 assets represent less than 1% of the Company’s total assets. Any justifiable changes in unobservable inputs used to determine internally developed fair values would not have a material impact on the Company’s financial position.


21

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
Fair Value of Financial Instruments Not Measured at Fair Value

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments, which were not measured at fair value on a recurring basis. The table excludes carrying amounts for cash and cash equivalents, accounts receivable, costs and recognized earnings in excess of billings, accounts payable accrued expenses, billings in excess of costs and recognized earnings, and other current liabilities, and other assets and liabilities approximate fair value due to relatively short periods to maturity (in thousands)millions):

September 30, 2017     Fair Value Measurement Using:
Carrying Value Estimated Fair Value Level 1 Level 2 Level 3
March 31, 2020March 31, 2020Fair Value Measurement Using:
Carrying ValueEstimated Fair ValueLevel 1Level 2Level 3
Assets          Assets
Mortgage loans $26,427
 $26,428
 $—
 $—
 $26,428
Mortgage loans$142.2  $142.3  $—  $—  $142.3  
Policy loans 18,038
 18,038
 —
 18,038
 —
Policy loans18.9  18.9  —  18.9  —  
Other invested assets 5,581
 3,617
 —
 —
 3,617
Total assets not accounted for at fair value $50,046
 $48,083
 $—
 $18,038
 $30,045
Total assets not accounted for at fair value$161.1  $161.2  $—  $18.9  $142.3  
Liabilities          Liabilities
Annuity benefits accumulated (1)
 $245,054
 $242,153
 $—
 $—
 $242,153
Annuity benefits accumulated (1)
$232.5  $229.8  $—  $—  $229.8  
Long-term obligations (2)
 447,624
 455,432
 —
 455,432
 —
Long-term obligations (2)
684.6  675.9  —  675.9  —  
Total liabilities not accounted for at fair value $692,678
 $697,585
 $—
 $455,432
 $242,153
Total liabilities not accounted for at fair value$917.1  $905.7  $—  $675.9  $229.8  


HC2 HOLDINGS, INC.
December 31, 2019Fair Value Measurement Using:
Carrying ValueEstimated Fair ValueLevel 1Level 2Level 3
Assets
Mortgage loans$183.5  $183.5  $—  $—  $183.5  
Policy loans19.1  19.1  —  19.1  —  
Total assets not accounted for at fair value$202.6  $202.6  $—  $19.1  $183.5  
Liabilities
Annuity benefits accumulated (1)
$233.9  $231.0  $—  $—  $231.0  
Long-term obligations (2)
772.0  768.9  —  768.9  —  
Total liabilities not accounted for at fair value$1,005.9  $999.9  $—  $768.9  $231.0  
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

December 31, 2016     Fair Value Measurement Using:
 Carrying Value Estimated Fair Value Level 1 Level 2 Level 3
Assets          
Mortgage loans $16,831
 $16,832
 $—
 $—
 $16,832
Policy loans 18,247
 18,247
 —
 18,247
 —
Other invested assets 5,719
 4,597
 —
 —
 4,597
Total assets not accounted for at fair value $40,797
 $39,676
 $—
 $18,247
 $21,429
Liabilities          
Annuity benefits accumulated (1)
 $251,270
 $249,372
 $—
 $—
 $249,372
Long-term obligations (2)
 378,780
 376,081
 —
 376,081
 —
Total liabilities not accounted for at fair value $630,050
 $625,453
 $—
 $376,081
 $249,372
(1)Excludes life contingent annuities in the payout phase.
(2) Excludes certain lease obligations accounted for under ASC 840, 842, Leases.


Mortgage Loans on Real Estate. The fair value of mortgage loans on real estate is estimated by discounting cash flows, both principal and interest, using current interest rates for mortgage loans with similar credit ratings and similar remaining maturities. As such, inputs include current treasury yields and spreads, which are based on the credit rating and average life of the loan, corresponding to the market spreads. The valuation of mortgage loans on real estate is considered Level 3 in the fair value hierarchy.


Policy Loans. The policy loans are reported at the unpaid principal balance and carry a fixed interest rate. The Company determined that the carrying value approximates fair value because (i) policy loans present no credit risk as the amount of the loan cannot exceed the obligation due upon the death of the insured or surrender of the underlying policy; (ii) there is no active market for policy loans (i.e., there is no commonly available exit price to determine the fair value of policy loans in the open market); (iii) policy loans are intricately linked to the underlying policy liability and, in many cases, policy loan balances are recovered through offsetting the loan balance against the benefits paid under the policy; and (iv) policy loans can be repaid by policyholders at any time, and this prepayment uncertainty reduces the potential impact of a difference between amortized cost (carrying value) and fair value. The valuation of policy loans is considered Level 2 in the fair value hierarchy.

Other Invested Assets. The balance primarily includes common stock purchase warrants. The fair values were derived using Black-Scholes analysis using unobservable market inputs, including volatility and underlying security values; therefore, the common stock purchase warrants were classified as Level 3.

Annuity Benefits Accumulated. The fair value of annuity benefits was determined using the surrender values of the annuities and classified as Level 3.


Long-term Obligations. The fair value of the Company’s long-term obligations was determined using Bloomberg Valuation Service BVAL. The methodology combines direct market observations from contributed sources with quantitative pricing models to generate evaluated prices and classified as Level 2.


6.8. Accounts Receivable, net


Accounts receivable, net consist of the following (in thousands)millions):
March 31,December 31,
 20202019
Contracts in progress$170.7  $177.8  
Trade receivables81.9  60.6  
Unbilled retentions61.2  53.9  
Other receivables21.1  21.0  
Allowance for doubtful accounts(1.6) (1.5) 
Total accounts receivable, net$333.3  $311.8  

22
  September 30, 2017 December 31, 2016
Contracts in progress $122,457
 $121,666
Unbilled retentions 42,714
 35,069
Trade receivables 103,554
 113,380
Other receivables 383
 1,102
Allowance for doubtful accounts (4,026) (3,619)
Total accounts receivable $265,082
 $267,598

7. Recoverable from Reinsurers

The following table presents information for the Company's recoverable from reinsurers (in thousands):
    September 30, 2017 December 31, 2016
Reinsurer A.M. Best Rating Amount % of Total Amount % of Total
Loyal American Life Insurance Co (Cigna) A- $141,427
 26.6% $139,269
 26.5%
Great American Life Insurance Co A 48,597
 9.2% 46,965
 9.0%
Hannover Life Reassurance Co A+ 340,655
 64.2% 337,967
 64.5%
Total   $530,679
 100.0% $524,201
 100.0%


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

9. Recoverable from Reinsurers
8.
Recoverable from reinsurers consists of the following (in millions):
March 31, 2020December 31, 2019
ReinsurerA.M. Best RatingAmount% of TotalAmount% of Total
Munich American Reassurance CompanyA+$354.3  37.0 %$347.6  36.4 %
Hannover Life Reassurance Company of AmericaA+320.6  33.5 %323.3  33.9 %
Loyal American Life Insurance CompanyA148.6  15.5 %147.5  15.5 %
Great American Life Insurance CompanyA57.2  6.0 %56.2  5.9 %
ManhattanLife Assurance Company of AmericaB+46.2  4.8 %47.0  4.9 %
Other31.5  3.2 %32.1  3.4 %
Total$958.4  100.0 %$953.7  100.0 %

10. Property, Plant and Equipment, net


Property, plant and equipment consistconsists of the following (in thousands)millions):
March 31,December 31,
 20202019
Equipment, furniture and fixtures, and software$215.5  $212.8  
Building and leasehold improvements41.0  40.1  
Land36.5  36.8  
Construction in progress5.6  4.8  
Plant and transportation equipment5.1  5.2  
303.7  299.7  
Less: Accumulated depreciation80.3  76.0  
Total$223.4  $223.7  
  September 30, 2017 December 31, 2016
Land $23,376
 $21,006
Building and leasehold improvements 28,255
 31,713
Plant and transportation equipment 5,087
 5,551
Cable-ships and submersibles 174,057
 169,034
Equipment, furniture and fixtures, and software 110,918
 101,421
Construction in progress 26,111
 19,889
  367,804
 348,614
Less: Accumulated depreciation 85,739
 62,156
  $282,065
 $286,458


Depreciation expense was $9.1$6.8 million and $7.5$5.9 million for the three months ended September 30, 2017March 31, 2020 and 2016,2019, respectively. These amounts included $1.3$2.3 million and $2.2 million of depreciation expense within cost of revenue for each of the three months ended September 30, 2017 and 2016.

Depreciation expense was $25.9 million and $21.4 million for the nine months ended September 30, 2017 and 2016, respectively. These amounts included $3.8 million and $3.0 million of depreciation expenserecognized within cost of revenue for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively. For

11. Goodwill and Intangibles, net

HC2 is required to assess goodwill and indefinite-intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company considered the nine months ended September 30, 2016,current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units. Further, the Company correctedassessed the cumulative effectcurrent market capitalization, forecasts and the amount of an adjustment related to purchase accounting associated withheadroom in the acquisition of DBMG in May 2014. See Note 2 for further details.2019 impairment test.


As of September 30, 2017 and December 31, 2016, total net book value of equipment under capital leases consisted of $46.5 million and $51.0 million of cable-ships and submersibles, respectively.

In June 2017, we recorded an impairment of $1.2 million in connection with our Other segment, driven by NerVve, where computer software and other fixed assets were written down to zero as a result of deterioratedthis assessment, the Company determined that a “triggering event” had occurred relative to its Broadcasting segment and, as required, performed a quantitative analysis, with the assistance of a third-party valuation firm, of the value of the Broadcasting reporting unit and its indefinite-lived intangible assets. Based on the analysis, the Company determined that the fair value of the Broadcasting reporting unit and the related indefinite-lived intangible assets continue to exceed their carrying values and were not impaired as of March 31, 2020.

Determining the fair value of the Broadcasting reporting unit and indefinite-lived intangible assets requires significant judgment and estimates by management, utilizing the income-approach, which utilizes several key inputs, including future cash flows consistent with management’s strategic plans, sales growth rates and a discount rate, amongst others. Estimating sales growth rates requires significant judgment by management in areas such as future economic conditions, growth rates, pricing, and consumer tastes and preferences. Given the inherent uncertainties in estimating the future impacts of the COVID-19 pandemic on global macroeconomic conditions and interest rates in general and on the Broadcasting business, conditions. Thisactual results may differ from management’s current estimates and could have an adverse impact on one or more of the assumptions used in our quantitative models related to the Broadcasting reporting unit, resulting in potential impairment charges in subsequent periods. As of March 31, 2020, while the fair value of the Broadcasting reporting unit declined, the fair value of the Broadcasting reporting unit continued to exceed its carrying value.
23

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
The COVID-19 pandemic could cause a further and sustained decline in the value of our reporting units or other triggering event that could cause the Company to perform a goodwill impairment test and result in an impairment charge is includedbeing recorded in Other operating (income) expenses in our Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017.a future period.

9. Goodwill and Intangibles, net


Goodwill


The changes in the carrying amount of goodwill by segment arewas as follows (in thousands)millions):
 ConstructionEnergyBroadcastingTotal
Balance at December 31, 2019$89.0  $2.1  $21.4  $112.5  
Translation(0.5) —  —  (0.5) 
Balance at March 31, 2020$88.5  $2.1  $21.4  $112.0  
 ConstructionMarine Services Energy Telecom Insurance Life Sciences Other Total
Balance at December 31, 2016 $36,317
 $2,468
 $2,631
 $3,378
 $47,290
 $3,620
 $2,382
 $98,086
Measurement period adjustment —
 —
 (509) —
 —
 —
 —
 (509)
Impairments —
 —
 —
 —
 —
 —
 (587) (587)
Balance at September 30, 2017 $36,317
 $2,468
 $2,122
 $3,378
 $47,290
 $3,620
 $1,795
 $96,990


An interim goodwill impairment evaluation was performed on each reporting unit as of September 30, 2017. On an annual basis, the Company performs a step 0 analysis. After considering all quantitative and qualitative factors, other than noted below, the Company has determined that it is more likely than not that the reporting units' fair values exceed carrying values as of the period end.

During the second quarter of 2017, the Company concluded that a step 1 test of goodwill for the Other segment was necessary. This conclusion was based on certain indicators of impairment related to NerVve's deteriorated business conditions. The Company estimated the fair value of the NerVve reporting unit, using the income approach, at an implied fair value of goodwill of $0 and an impairment charge of $0.6 million. This impairment charge is included in Other operating (income) expenses in our Consolidated Statements of Operations for the nine months ended September 30, 2017.

Indefinite-lived Intangible Assets


The acquisitioncarrying amount of the Insurance Company resulted in state licenses which are considered indefinite-lived intangible assets not subject to amortization. In addition, the consolidation of BeneVir in 2016 resulted in the recording of an in-process research and development intangible asset not subject to amortization. Balances of these assets as of September 30, 2017 were as follows:follows (in millions):
March 31,December 31,
20202019
FCC licenses$136.6  $136.2  
State licenses2.5  2.5  
Total$139.1  $138.7  
  Total
State licenses $2,450
Developed technology 6,392
Total $8,842

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED


Definite Lived Intangible Assets


The gross carrying amount and accumulated amortization of amortizable intangible assets by major intangible asset class iswere as follows:follows (in millions):
Weighted-Average Original Useful LifeMarch 31, 2020December 31, 2019
Gross Carrying AmountAccumulated AmortizationNetGross Carrying AmountAccumulated AmortizationNet
Trade names 13 Years$24.2  $(7.1) $17.1  $24.2  $(6.6) $17.6  
Customer relationships10 Years48.3  (14.1) 34.2  48.6  (13.1) 35.5  
Channel sharing arrangements35 Years27.2  (1.1) 26.1  27.2  (0.9) 26.3  
Other7 Years5.6  (2.0) 3.6  5.5  (1.9) 3.6  
Total$105.3  $(24.3) $81.0  $105.5  $(22.5) $83.0  
  Weighted-Average Original Useful Life September 30, 2017 December 31, 2016
   Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net
Trade names 9 Years $13,011
 $(4,235) $8,776
 $13,004
 $(3,113) $9,891
Customer relationships 12 Years 20,865
 (4,057) 16,808
 20,865
 (2,194) 18,671
Developed technology 5 Years 4,739
 (4,192) 547
 4,739
 (3,197) 1,542
Other 3 Years 966
 (158) 808
 787
 (11) 776
Total   $39,581
 $(12,642) $26,939
 $39,395
 $(8,515) $30,880


Amortization expense for amortizabledefinite lived intangible assets was $2.0 million and $3.1 million for the three months ended September 30, 2017March 31, 2020 and 2016 was $1.4 million and $0.9 million, respectively, and $4.1 million and $2.8 million for the nine months ended September 30, 2017 and 2016,2019, respectively, and was included in Depreciation and amortization in theour Condensed Consolidated Statements of Operations.


Excluding the impact of any future acquisitions, dispositions or change in foreign currency, the Company estimates the annual amortization expense of amortizable intangible assets for the next five fiscal years will be as follows:follows (in millions):

2020$6.0  
20217.8  
20227.6  
20237.5  
20247.0  
Thereafter45.1  
Total$81.0  


24
Fiscal Year Estimated Amortization Expense
2018 $(3,254)
2019 $(3,001)
2020 $(2,879)
2021 $(2,698)
2022 $(2,610)


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
10.12. Life, Accident and Health Reserves


Life, accident and health reserves consist of the following (in thousands)millions):
March 31,December 31,
20202019
Long-term care insurance reserves$4,231.0  $4,201.6  
Traditional life insurance reserves170.6  173.4  
Other accident and health insurance reserves192.3  192.1  
Total life, accident and health reserves$4,593.9  $4,567.1  
  September 30, 2017 December 31, 2016
Long-term care insurance reserves $1,442,586
 $1,407,848
Traditional life insurance reserves 100,076
 102,077
Other accident and health insurance reserves 140,906
 138,640
Total life, accident and health reserves $1,683,568
 $1,648,565


The following table sets forth changes in the liability for claims for the portion of our long-term care insurance reserves (in millions):

Three Months Ended March 31,
20202019
Beginning balance$761.3  $738.7  
Less: recoverable from reinsurers
(131.0) (136.4) 
Beginning balance, net630.3  602.3  
Incurred related to insured events of:
Current year68.9  62.4  
Prior years(13.3) (36.0) 
Total incurred55.6  26.4  
Paid related to insured events of:
Current year(0.6) (0.6) 
Prior years(42.8) (36.4) 
Total paid(43.4) (37.0) 
Interest on liability for policy and contract claims5.6  5.3  
Ending balance, net648.1  597.0  
Add: recoverable from reinsurers
136.2  136.4  
Ending balance$784.3  $733.4  

The Insurance segment experienced a favorable claims reserve development of $13.3 million and $36.0 million for the three months ended March 31, 2020 and 2019, respectively. There was favorable development with claim terminations and care transitions for claims incurred prior to 2020 that created the sufficiency within the three months ended March 31, 2020. Due to favorable development in scopethe estimates for benefits remaining during the three months ended March 31, 2019, experience in the first quarter of 2020 has been less favorable than in 2019, it is too early to determine if this trend will be persistent or is the result of normal volatility in claims activity from period to period.

13. Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consist of the ASU 2015-09 disclosure requirementsfollowing (in thousands)millions):
March 31,December 31,
 20202019
Accounts payable$147.4  $134.6  
Accrued expenses and other current liabilities51.3  75.2  
Accrued interconnection costs69.6  43.5  
Accrued payroll and employee benefits35.1  39.6  
Accrued interest24.7  11.3  
Accrued income taxes6.3  2.0  
Total accounts payable and other current liabilities$334.4  $306.2  

25
  Nine Months Ended September 30,
  2017 2016
Beginning balance $226,970
 $208,150
Less: recoverable from reinsurers 
 (97,858) (94,041)
Beginning balance, net 129,112
 114,109
Incurred related to insured events of:    
Current year 44,611
 39,258
Prior years (1,449) (243)
Total incurred 43,162
 39,015
Paid related to insured events of:    
Current year (4,054) (3,965)
Prior years (30,505) (28,379)
Total paid (34,559) (32,344)
Interest on liability for policy and contract claims 3,639
 3,239
Ending balance, net 141,354
 124,019
Add: recoverable from reinsurers 
 115,176
 95,098
Ending balance $256,530
 $219,117



HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

For the nine months ended September 30, 2017, the reserve was sufficient by $1.4 million, while for the same period last year, the reserve was sufficient by $0.2 million. The reserve sufficiency is being driven by claim terminations as the result of policyholder deaths that released significant reserves which is attributable to the normal volatility in the reserves, due to the number of claims that are currently open.

11. Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consist of the following (in thousands):
  September 30, 2017 December 31, 2016
Accounts payable $70,180
 $66,792
Accrued interconnection costs 96,481
 93,661
Accrued payroll and employee benefits 33,981
 28,668
Accrued interest 14,723
 3,056
Accrued income taxes 9,271
 3,983
Accrued expenses and other current liabilities 70,460
 55,573
Total accounts payable and other current liabilities $295,096
 $251,733

12. Long-term14. Debt Obligations


Long-termDebt obligations consist of the following (in thousands)millions):
  September 30, 2017 December 31, 2016
HC2    
11.0% Senior Secured Notes, due in 2019
$400,000

$307,000
HC22    
11.0% Senior Secured Bridge Note, due in 2019 (the "11.0% Bridge Notes") —
 35,000
GMSL    
Notes payable and revolving lines of credit, various maturity dates 16,912
 17,522
LIBOR plus 3.65% Notes, due in 2019 —
 3,026
Obligations under capital leases 48,968
 49,717
DBMG    
LIBOR plus 2.5% Notes, due in 2018 and 2019 7,414
 9,439
ANG    
5.5% Term Loan, due in 2018 376
 501
4.5% Note due in 2022 (1)
 12,727
 13,343
5.04% Term Loan due in 2022 13,717
 —
4.25% Seller Note, due in 2022 2,463
 2,796
LIBOR plus 3.0% Pioneer Demand Note 933
 —
Other 246
 75
Total 503,756
 438,419
Issuance discount or premium and deferred financing costs, net (7,164) (9,923)
Total long-term obligations $496,592
 $428,496
March 31,December 31,
20202019
Construction
LIBOR plus 5.85% Note, due 2023$75.6  $77.0  
LIBOR plus 1.50% Line of Credit49.7  48.9  
Obligations under finance leases0.2  0.2  
Energy
LIBOR plus 3.0% Term Loan due in 202326.3  27.1  
5.00% Term Loan due in 202210.9  11.2  
4.50% Note due in 20229.9  10.2  
Other, various maturity dates3.0  2.4  
Broadcasting
8.50% Note due 202039.3  36.2  
10.50% Note due 202042.5  42.5  
Other, various maturity dates5.1  7.9  
Obligations under finance leases1.2  1.4  
Non-Operating Corporate
11.50% Senior Secured Notes, due 2021393.0  470.0  
7.50% Convertible Senior Notes, due 202255.0  55.0  
LIBOR plus 6.75% Line of Credit(1)
—  15.0  
Total711.7  805.0  
Issuance discount, net and deferred financing costs(25.7) (31.4) 
Total debt obligations$686.0  $773.6  
(1) ANG refinancedOn April 16, 2020, HC2 drew $10.0 million on its 2020 Revolving Credit Agreement. HC2 intends to use the proceeds for general corporate purposes.

Aggregate finance lease and consolidated all three of its loans with Pioneer duringdebt payments, including interest are as follows (in millions):

Finance LeasesDebtTotal
2020$1.0  $178.0  $179.0  
20210.5  459.0  459.5  
2022—  76.7  76.7  
2023—  93.8  93.8  
2024—  11.3  11.3  
Thereafter—  7.5  7.5  
Total minimum principal & interest payments1.5  826.3  827.8  
Less: Amount representing interest(0.1) (116.0) (116.1) 
Total aggregate finance lease and debt payments$1.4  $710.3  $711.7  

The interest rates on the first quarter of 2017.finance leases range from approximately 2.0% to 11.5%.


HC2 and HC22 11.0%Senior Secured NotesBroadcasting


In January 2017,February 2020, Broadcasting amended its agreement governing its privately placed note funded by MSD Partners, L.P., increasing the Company issued an additional $55.0 million in aggregate principal amount of its 11.0% Senior Secured Notes due 2019 (the "11.0% Notes"). HC2balance to $39.3 million. The proceeds were used a portion ofto repay principal and interest on existing debt.

Non-Operating Corporate

In March 2020, with the cash proceeds from the issuance to repay all $35.0sale of GMSL, HC2 fully repaid its $15.0 million in outstanding aggregate principal amountsecured revolving line of HC22's 11.0% Bridge Notes.credit with MSD PCOF Partners IX, LLC (the "2019 Revolving Credit Agreement")


In March 2020 HC2 entered into a new $15.0 million secured revolving credit agreement (the “2020 Revolving Credit Agreement”). The 2020 Revolving Credit Agreement matures in June 2017,2021. Loans under the Company issued an additional $38.0 millionRevolving Credit Agreement bear interest at a per annum rate equal to, at HC2's option, one, two or three month LIBOR plus a margin of aggregate principal amount of6.75%.

In March 2020, with the 11.0% Notes to investment funds affiliated with three institutional investors in a private placement offering. The Company expects to use the netcash proceeds from the issuancesale of GMSL, HC2 redeemed $76.9 million of its 11.50% senior secured notes due 2021 (the "Senior Secured Notes") at a price equal to 104.5% of the Notes for working capital forprincipal amount plus accrued interest through the Company and its subsidiaries, for general corporate purposes, as well as the financing of acquisitions and investments. 

redemption date.

26

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED


Since November 2014,For the Company has issued an aggregate of $400.0three months ended March 31, 2020, HC2 recognized $0.4 million of its 11.0% Notes  pursuantand $5.4 million in extinguishment loss related to the indenture dated November 20, 2014, byrepayments of 2019 Revolving Credit Agreement and among HC2, the guarantors party thereto and U.S. Bank National Association, a national banking association, as trustee (the "11.0% Notes Indenture"). The 11.0% Notes Indenture contains certain covenants limiting, among other things, the abilityredemption of the Company and certain subsidiaries of the Company to incur additional indebtedness; create liens; engageSenior Secured Notes, respectively, which were included in sale-leaseback transactions; pay dividendsLoss on early extinguishment or make distributions in respect of capital stock and 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.  The 11.0% Notes Indenture also includes two maintenance covenants: (1) a liquidity covenant; and (2) a collateral coverage covenant. The 11.0% Notes Indenture contains customary events of default. The Company was in compliance with all covenants for the period. For additional information about the 11.0% Notes and 11.0% Notes Indenture please see our Form 10-K. 

DBMG Credit Facilities

DBMG has a Credit and Security Agreement ("DBMG Facility") with Wells Fargo Credit, Inc. ("Wells Fargo"), pursuant to which Wells Fargo agreed to advance up to a maximum amount of $50.0 million to DBMG, including up to $14.5 million of letters of credit. The DBMG Facility has a floating interest rate based on LIBOR plus 2.0%, requires monthly interest payments, and matures in 2019. The DBMG Facility is secured by a first priority, perfected security interest in all of DBMG’s and its present and future subsidiaries' assets, excluding real estate, and a second priority, perfected security interest in all of DBMG’s real estate. The security agreements pursuant to which DBMG’s assets are pledged prohibit any further pledge of such assets without the written consent of the bank. The DBMG Facility contains various restrictive covenants. At September 30, 2017, DBMG was in compliance with these covenants.

On May 6, 2014, DBMG entered into an amendment to the DBMG Facility, pursuant to which Wells Fargo extended the maturity date of the DBMG Facility to April 30, 2019, lowered the interest rate charged in connection with borrowings under the DBMG Facility, all as disclosed above, and allowed for the issuance of additional loans in the form of notes totaling up to $5.0 million, secured by its real estate as a separate tranche under the DBMG Facility ("Real Estate Term Advance"). At September 30, 2017, DBMG had borrowed $2.9 million under the Real Estate Term Advance. The Real Estate Term Advance has a five year amortization period requiring monthly principal payments and a final balloon payment at maturity. The Real Estate Term Advance has a floating interest rate of LIBOR plus 2.5%, as amended in February 2017, and requires monthly interest payments.

The DBMG Facility allows for the issuance by DBMG of additional loans in the form of notes of up to $10.0 million, secured by its machinery and equipment ("Real Estate Term Advance (M&E)") and the issuance of a note payable of up to $5.0 million, secured by its real estate ("Real Estate Term Advance (Working Capital)"), each as separate tranchesrestructuring of debt under the DBMG Facility. At September 30, 2017 there was $4.5 million outstanding under the Real Estate Term Advance (M&E) and no borrowings outstanding under the Real Estate Term Advance (Working Capital).in our Condensed Consolidated Statements of Operations.


In February 2017, DBMG decreased the floating interest rates of the DBMG Facility to LIBOR plus 2.0% and the Real Estate Term Advance to LIBOR plus 2.5%. DBMG also increased the amount of availability for letters of credit under the DBMG Facility to support increased bonding requirements for anticipated larger projects that will be part of this year's backlog. As of September 30, 2017, DBMG had $8.8 million in outstanding letters of credit issued under the DBMG Facility, of which zero has been drawn.

GMSL Capital Leases

GMSL is a party to two leases to finance the use of two vessels: the Innovator (the "Innovator Lease") and the Cable Retriever (the "Cable Lease," and together with the Innovator Lease, the "GMSL Leases"). The Innovator Lease was restructured effective May 31, 2016, extending the lease to 2025. The principal amount thereunder bears interest at the rate of approximately 10.4%. The Cable Lease expires in 2023. The principal amount thereunder bears interest at the rate of approximately 4.0%.

As of September 30, 2017, $49.0 million in aggregate principal amount remained outstanding under the GMSL Leases.

ANG Term Loan

In January 2017, ANG refinanced and consolidated all three of its loans with Pioneer into a new term loan. The $12.7 million in aggregate principal balance outstanding bears fixed interest at a fixed rate annually equal to 4.5% and matures in 2022. The agreement with Pioneer also includes a revolving demand note for $1.0 million with an annual renewal provision that bears interest at monthly LIBOR plus 3.0% (the "Pioneer Revolving Demand Note").

In May 2017, ANG entered into a term loan with M&T Bank. The loan bears fixed interest annually at 5.04% and matures in 2022. During the third quarter 2017, ANG refinanced the note to increase the term loan by $2.5 million. As of September 30, 2017, ANG had $13.7 million in aggregate principal outstanding under the loan.

In September 2017, ANG increased the availability under the 2017 the Pioneer Revolving Demand Note to $1.5 million. As of September 30, 2017, there was $0.9 million drawn under the Pioneer Revolving Demand Note.

For additional information on the Company’s long-term obligations, see Note 13. Long-term Obligations in the Company’s Form 10-K.


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

13.15. Income Taxes


Income Tax (Expense) BenefitExpense

The Company used the Annual Effective Tax Rate ("ETR") approach of ASC 740-270, Interim Reporting,, to calculate its 20172020 interim tax provision.

Income tax was a benefit of $12.6 million and an expense of $12.9 million and a benefit of $1.3$4.0 million for the three months ended September 30, 2017March 31, 2020 and 2016,2019, respectively. The income tax expense recorded September 30, 2017 relates to increase in profitability of the Insurance Segment and the mix of income and losses by taxpaying entities, including the Insurance segment.

The income tax benefit recorded for September 30, 2016the three months ended March 31, 2020 primarily relates to a one-time, discrete tax benefit from the carryback of net operating losses at the Insurance segment as a result of the enactment of the CARES Act on March 27, 2020. The CARES Act was enacted during the first quarter of 2020 and includes several provisions which were applicable to the Company, including the ability to carryback Federal net operating losses generated in tax years beginning in 2018-2020, the removal of the 80% taxable income limitation for which we expected to obtain benefits fromnet operating loss deductions for tax years beginning before January 1, 2021, and a temporary increase in the future.

Incomeinterest limitation from 30% to 50% for tax was an expenseyears beginning in 2019 and 2020. We have included the impact of $16.2 million and athese provisions in our overall tax benefit of $3.6 million for the ninethree months ended September 30, 2017 and 2016, respectively. The income tax expense recorded for September 30, 2017 relates to the projected expense as calculated under ASC 740 for taxpaying entities.March 31, 2020. Additionally, the tax benefits associated with losses generated by the HC2 Holdings, Inc. U.S. consolidated income tax return and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized prior to expiration.

The income tax benefitexpense recorded for September 30, 2016March 31, 2019 relates to the projected expense as calculated under ASC 740 for taxpaying entities and because no benefit is recognized on the losses generated for which we expected to obtain benefits from inof the future basedHC2 U.S. tax consolidated group and the losses of their subsidiaries as valuation allowances are recorded on our weighting of all positive and negative evidence that existed at the time. This benefit was partially offset by a valuation allowance recorded against the deferred tax assets of the Insurance segment during the first quarter of 2016.these companies.


NOL Limitation

As of December 31, 2016, the Company has a U.S. net operating loss carryforward available to reduce future taxable income in the amount of $95.3 million, of which $77.8 million is subject to an annual limitation under Section 382 of the Internal Revenue Code. Additionally, the Company has $21.6 million of U.S. net operating loss carryforwards from its subsidiaries that do not qualify to be included in the HC2 Holdings, Inc. U.S. consolidated income tax return.

Unrecognized Tax Benefits

The Company follows the provision of ASC 740-10, Income Taxes,, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative to certain tax planning strategies, including certain intercompany transactions as well as regulatory taxes.

Examinations

The Company conducts business globally, and as a result, the Company or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The open tax years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant tax period. Given the nature of tax audits there is a risk that disputes may arise. Tax years 20062002 - 20162019 remain open for examination.

14.
16. Commitments and Contingencies


Future minimum purchase obligations as of December 31, 2019 were as follows (in millions):

2020$86.3  
20213.3  
20220.2  
20230.2  
20240.2  
Thereafter—  
Total obligations$90.2  

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HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
As of December 31, 2019, undiscounted cash flows for finance and operating leases are as follows (in millions):

Operating LeasesFinance
Leases
2020$15.1  $1.0  
202113.4  0.7  
202210.9  0.1  
20238.8  —  
20246.6  —  
Thereafter8.2  —  
Total future lease payments63.0  1.8  
Less: Present values(9.3) (0.1) 
Total lease liability balance$53.7  $1.7  

Litigation


The Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company’s Condensed Consolidated Financial Statements. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its Condensed Consolidated Financial Statements. The Company records a liability in its Condensed Consolidated Financial Statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary for its Condensed Consolidated Financial Statements not to be misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in its Condensed Consolidated Financial Statements.



HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

CGI Producer Litigation

On November 28, 2016, Continental General Insurance Company ("CGI"),Based on a subsidiaryreview of the Company, Great American Financial Resource, Inc. ("GAFRI"), American Financial Group, Inc.,current facts and CIGNA Corporation were servedcircumstances with counsel in each of the matters disclosed, management has provided for what is
believed to be a putative class action complaint filed by John Fastrich and Universal Investment Services, Inc. in The United States District Court forreasonable estimate of loss exposure. While acknowledging the Districtuncertainties of Nebraska alleging breach of contract, tortious interference with contract and unjust enrichment. The plaintiffs contend that they were agents of record under various CGI policies and that CGI allegedly instructed policyholders to switch to other CGI products and caused the plaintiffs to lose commissions, renewals, and overrides on policies that were replaced. The complaint also alleges breach of contract claims relating to allegedly unpaid commissions related to premium rate increases implemented on certain long-term care insurance policies. Finally, the complaint alleges breach of contract claims related to vesting of commissions. On August 21, the Court dismissed the plaintiffs’ tortious interference with contract claim. CGIlitigation, management believes that the remaining allegationsultimate outcome of litigation will not have a material effect on its financial position and claims set forth in the complaint are without merit and intends to vigorouslywill defend against them. itself vigorously.

Further, the Company and CGI are seeking defense costs and indemnification for plaintiffs’ claims from GAFRI and Continental General Corporation ("CGC") under the terms of an Amended and Restated Stock Purchase Agreement ("SPA") related to the Company’s acquisition of CGI in December 2015.  GAFRI and CGC rejected CGI’s demand for defense and indemnification and, on January 18, 2017, the Company and CGI filed a Complaint against GAFRI and CGC in the Superior Court of Delaware seeking a declaratory judgment to enforce their indemnification rights under the SPA.  On February 23, 2017, Great American answered CGI’s complaint, denying the allegations.  The dispute is ongoing and CGI will continue to pursue its right to a defense and indemnity under the SPA.


VAT assessment


On February 20, 2017, and on August 15, 2017, the Company's subsidiary, ICS, received notices from Her Majesty’s Revenue and Customs office in the U.K. (the "HMRC") indicating that it was required to pay certain Value-Added Taxes ("VAT") for the 2015 and 2016 tax years.  ICS disagrees with HMRC’s assessments on technical and factual grounds and intends to dispute the assessed liabilities and vigorously defend its interests. We do not believe the assessment to be probable and expect to prevail based on the facts and merits of our existing VAT position.


DBMG Class Action


On November 6, 2014, a putative stockholder class action complaint challenging the tender offer by which HC2 acquired approximately 721,000 of the issued and outstanding common shares of DBMG was filed in the Court of Chancery of the State of Delaware, captioned Mark Jacobs v. Philip A. Falcone, Keith M. Hladek, Paul Voigt, Michael R. Hill, Rustin Roach, D. Ronald Yagoda, Phillip O. Elbert, HC2 Holdings, Inc., and Schuff International, Inc., Civil Action No. 10323 (the "Complaint"). On November 17, 2014, a second lawsuit was filed in the Court of Chancery of the State of Delaware, captioned Arlen Diercks v. Schuff International, Inc. Philip A. Falcone, Keith M. Hladek, Paul Voigt, Michael R. Hill, Rustin Roach, D. Ronald Yagoda, Phillip O. Elbert, HC2 Holdings, Inc., Civil Action No. 10359. On February 19, 2015, the court consolidated the actions (now designated as Schuff International, Inc. Stockholders Litigation) and appointed lead plaintiff and counsel. The currently operative complaint is the Complaint filed by Mark Jacobs. The Complaint alleges, among other things, that in connection with the tender offer, the individual members of the DBMG Board of Directors and HC2, the now-controlling stockholder of DBMG, breached their fiduciary duties to members of the plaintiff class. The Complaint also purports to challenge a potential short-form merger based upon plaintiff’s expectation that the Company would cash out the remaining public stockholders of DBMG following the completion of the tender offer. The Complaint seeks rescission of the tender offer and/or compensatory damages, as well as attorney’s fees and other relief. The defendants filed answers to the Complaint on July 30, 2015. On February 24, 2017,November 15, 2019, the parties agreed tofiled definitive documentation in support of a framework for the potential settlement of the litigation.

On February 28, 2017, the Court entered an order vacating the current scheduling order and directing the parties to submit a stipulation of settlement or status report to the Court by April 21, 2017. In late March 2017, plaintiff’s counsel took three depositions to assess the fairness of the potential settlement framework. From April 2017 to June 2017, plaintiff’s counsel continued to analyze the potential settlement framework and the facts and claims in the litigation. On July 17, 2017, plaintiff’s counsel submitted a status report to the Court stating that plaintiff’s counsel had determined to proceed with the prosecution of the action and had delivered a draft amended complaint to defendants.

On July 20, 2017, plaintiff’s counsel submitted a status report to the Court stating that the parties had agreed to reengage in discussions regarding a possibleproposed settlement of the action. On August 31, 2017, plaintiff’s counsel submitted a status report to the Court stating thatJanuary 14, 2020, plaintiff had provided defendants with a settlement proposal and the parties intended to continue settlement negotiations.

On September 29, 2017, plaintiff’s counsel submitted a status report to the Court stating that plaintiff anticipated receiving a settlement counterproposal from defendants and would evaluate the proposal before determining whether to continue potential settlement negotiations or file thefiled an amended complaint restating and proceed with briefingelaborating on defendants’ motions to dismiss and opposition to plaintiff’s class certification motion.

On October 31, 2017, plaintiff’s counsel submitted a status report to the Court stating that defendants provided plaintiff with a counterproposal to plaintiff’s settlement proposal.  Plaintiff and his counsel are evaluating the counterproposal and together with the defendants and their counsel intend to submit another status report to the Court by November 30, 2017.

To date, no amended complaint has been filedclaims raised in the actionComplaint. The Amended Complaint seeks compensatory and settlement negotiations are continuing. There can be no assurance that a settlement will be finalized or that the Court would approve such a settlement even if the parties were to enter into a settlement stipulation or agreement.rescissory damages, as well as attorney’s fees and other relief.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

On February 13, 2020, the Court held a settlement hearing to consider the proposed settlement and certain objections filed by two current DBMG stockholders. The Court expressed concerns about certain terms of the proposed settlement and the parties requested additional time to evaluate potential modifications to the proposed settlement. On May 8, 2020, the parties filed with the Court a revised settlement agreement for all claims relating to the Amended Complaint (the “Revised Settlement Framework”).
Global Marine Dispute

The Revised Settlement Framework provides for a settlement payment of $35.95 per share to a fund for the benefit of the former DBMG stockholders who tendered their shares in the 2014 tender offer other than stockholders who were defendants in the action or their immediate family members, officers of DBMG, or directors or officers of HC2 (the “Tendered Stockholders”). The proposed settlement payment to the Tendered Stockholders applies to approximately 568,550 shares and totals approximately $20.4 million. The Revised Settlement Framework provides that the amount received by the Tendered Stockholders will be reduced by the per share amount of any fee award to lead plaintiff’s counsel. HC2’s D&O insurers have agreed to contribute approximately $12.4 million of this approximately $20.4 million settlement payment, and DBMG has agreed to fund the remaining approximately $8.1 million either through cash on hand or borrowing from a third-party lender.
GMSL
The Revised Settlement Framework also provides that HC2 will fund two types of payments to the current owners of the 289,902 shares of DBMG common stock not owned by HC2 or its affiliates (the “public DBMG stockholders”). The first payment of $2.51 per share, or $0.7 million total, is in dispute with Alcatel-Lucent Submarine Networks Limited ("ASN")intended to offset the indirect burden that the public DBMG stockholders arguably bear (by virtue of their approximately 7.52% ownership of DBMG) from DBMG’s funding of the approximately $8.1 million portion of the settlement payment to the Tendered Stockholders. The second payment of $1.00 per share, or $289,902 total, represents consideration for a full release of claims from the public DBMG stockholders related to the action and the implementation of the Revised Settlement Framework. In sum, the Revised Settlement Framework provides that HC2 would fund payments of $3.51 per share, or $1.0 million total, to the public DBMG stockholders.

If approved, the Revised Settlement Framework would result in a Marine Installation Contract betweenglobal settlement of the action and the certification of a non-opt-out plaintiff class consisting of any and all record and beneficial owners of outstanding shares of DBMG common stock who held such stock at any time during May 12, 2014 through and including the close of business on May 8, 2020, and including, among others, their successors.

The Revised Settlement Framework also provides for a release of claims by the plaintiff class in favor of a broad group of released defendant parties relating to, among other things, the action, the 2014 tender offer, all claims relating to HC2’s decision not to close a short-form merger shortly after the 2014 tender offer, and the implementation and funding of the Revised Settlement Framework.

Although the parties dated March 11, 2016are seeking approval of Revised Settlement Framework, there can be no assurance that the Delaware Courts will approve the revised or any other settlement proposed by the parties. If a settlement cannot be reached, the Company believes it has meritorious defenses and intends to vigorously defend this matter.

Non-Operating Corporate

Stockholder Litigation

On April 10, 2020, a purported stockholder of the Company filed a class action complaint in the Delaware Court of Chancery captioned Tera v. HC2 Holdings Inc., et al., C.A. No. 2020-0275-JRS (the "ASN Contract"“Stockholder Litigation”). UnderThe complaint alleges that the ASN Contract, GMSL's obligationsCompany’s consent revocation materials (i) contain misleading disclosures relating to the Certificates of Designation, (ii) fail to disclose that a majority of the Board may approve the nominees set forth by Percy Rockdale LLC and certain of its affiliates (collectively, “Percy Rockdale”), for purposes of the Certificates of Designation such that the Percy Rockdale nominees would be considered “Continuing Directors” (as defined in the Certificates of Designation) and (iii) inaccurately state that electing the Percy Rockdale nominees will cause a Change of Control (as defined in the Certificates of Designation) under the Certificates of Designation because it will lead to a person or group obtaining the power to elect a majority of the members of the Board. The complaint seeks (i) a declaration requiring the Board to approve the Percy Rockdale nominees for purposes of the Certificates of Designation, (ii) a declaration that the Board breached its fiduciary duties by issuing misleading disclosures and (iii) an injunction requiring the Board to issue additional disclosures relating to the Change of Control provisions in the Certificates of Designation. On April 19, 2020, the plaintiff amended his complaint to allege that the Supplement to the Consent Revocation Statement, filed with the SEC on April 17, 2020, contained misleading disclosures relating to the Certificates of Designation. The amended complaint seeks, among other remedies, (i) a declaration that the Board breached its fiduciary duties by issuing misleading disclosures; (ii) a declaration that, if a Change of Control could be deemed to occur under the Certificates of Designation, that such Change of Control provisions are invalid and unenforceable under Delaware law; (iii) an injunction requiring the defendants to issue corrective disclosures; and (iv) an order enjoining the Board from relying upon consent revocations received to date. On April 20, 2020, the Court of Chancery granted the plaintiff’s motion for expedited proceedings.

On April 15, 2020, the Board (with Mr. Falcone recusing himself because he is not an Independent Director) determined to approve the Percy Rockdale nominees, solely and specifically for the purposes of deeming them Continuing Directors pursuant to the Certificates of Designation, to avoid triggering, and to render inapplicable, such prong of the Change of Control definition. On April 17, 2020 and April 21, 2020, each of the holder of the Series A Preferred Stock and the holder of the Series A-2 Preferred Stock, respectively, and, in each case, entitled to give a waiver, agreed that such holder will not seek to exercise its right to require the Company to redeem the shares of such Series A Preferred Stock or Series A-2 Preferred Stock, as applicable, if such redemption right were to install and bury an optical fiber cable in Prudhoe Bay, Alaska.  As of the date hereof, neither party has commenced legal proceedings.  Pursuant to the ASN Contract any such dispute would be governed by English law and would be required to be brought in the English courts in London.  ASN has alleged that GMSL committed material breaches of the ASN Contract, which entitles ASN to terminate the ASN Contract, take over the work themselves, and claim damages for their losses arisingarise as a result of the breaches.  The alleged material breaches include failureoutcome of the Consent Solicitation based on one of the Change of Control prongs of the Certificate of Designation (which prong may require the Company to use appropriate equipmentmake an offer to redeem the Preferred Stock if any person or “group” (within the meaning of Rules 13d-3 and procedures13d-5 under the Exchange Act) obtains the power to performelect a majority of the workmembers of the Board). Therefore, in light of the foregoing, if the Percy Rockdale nominees become a majority of the Board pursuant to Percy Rockdale’s consent solicitation, the Company will not be required to offer to redeem the shares of the Series A Preferred Stock and failure to accurately estimate the amountSeries A-2 Preferred Stock. On April 23, 2020, the parties agreed that the waiver and
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HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
additional disclosures, combined with the prior disclosures and approval of weather downtime needed.  ASN has indicated to GMSL it has incurred $30 million in damagesPercy Rockdale’s nominees as Continuing Directors, mooted the need for expedition and $1.2 million in liquidated damagesa preliminary injunction hearing, and the parties informed the court that the plaintiff was withdrawing its request for expedition and a preliminary injunction. In exchange for the period from September 2016plaintiff agreeing to October 2016, plus interest and costs. GMSL believes that it has not breachedwithdraw its request for preliminary injunction, the terms and conditionsparties agreed to allow plaintiff to reserve the right to challenge the validity of the contract and also believesconsent revocations received prior to the mooting actions in the event that ASN has not properly terminatedPercy Rockdale loses the contract in a manner that would allow it to make a claim. However, ASN has ceased making payments to GMSL and as of September 30, 2017, the total sum of GMSL invoices raised and issued are $17.0 million, of which $8.1 million were settled by ASNconsent solicitation and the balancenumber of $8.9 million remains at risk. We believe thatrevocations received prior to the allegations and claims by ASN are without merit, and that ASN is required to make all payments under unpaid invoices and we intend to defend our interests vigorously.mooting actions were determinative of the outcome of the consent solicitation.


Tax Matters


Currently, the Canada Revenue Agency ("CRA") is auditing a subsidiary previously held by the Company. The Company intends to cooperate in audit matters. To date, CRA has not proposed any specific adjustments and the audit is ongoing.


15. Employee Retirement Plans

The following table presents the components of Net periodic benefit cost for the periods presented (in thousands):
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Service cost - benefits earning during the period $—
 $17
 $—
 $52
Interest cost on projected benefit obligation 1,403
 1,878
 4,209
 5,633
Expected return on assets (1,921) (1,991) (5,764) (5,974)
Foreign currency gain (loss) 7
 3
 22
 9
Net periodic benefit cost (income) $(511) $(93) $(1,533) $(280)

The Company previously disclosed in its financial statements for the year ended December 31, 2016 that it expected to contribute $8.8 million to its pension plans in 2017. As of September 30, 2017, $3.0 million of contributions have been made. Due to current funding levels, the Company does not anticipate contributing further funds to its pension plans in 2017.
16.17. Share-based Compensation

On April 11, 2014, HC2’s Board of Directors adopted the HC2 Holdings, Inc. Omnibus Equity Award Plan (the "2014 Plan"), which was originally approved at the annual meeting of stockholders held on June 12, 2014. On April 21, 2017, the Board of Directors, subject to stockholder approval, adopted the Amended and Restated 2014 Omnibus Equity Award Plan (the "Restated 2014 Plan"). The Restated 2014 Plan was approved by HC2's stockholders at the annual meeting of stockholders held on June 14, 2017. Subject to adjustment as provided in the Restated 2014 Plan, the Restated 2014 Plan authorizes the issuance of 3,500,000 shares of common stock of HC2, plus any shares that again become available for awards under the 2014 Plan, plus any shares that again become available for awards under the Restated 2014 Plan.

The Restated 2014 Plan provides that no further awards will be granted pursuant to the 2014 Plan. However, awards previously granted under the 2014 Plan will continue to be subject to and governed by the terms of the 2014 Plan. The Compensation Committee of HC2's Board of Directors administers the 2014 Plan and the Restated 2014 Plan and has broad authority to administer, construe and interpret the plans.

The Restated 2014 Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock based awards, performance compensation awards (including cash bonus awards) or any combination of the foregoing. The Company typically issues new shares of common stock upon the exercise of stock options, as opposed to using treasury shares.

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


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED


The Company granted 331,616 and 1,506,8480 options during the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively. Of the total options granted during the nine months ended September 30, 2016, 6,848 options were granted to Philip Falcone, pursuant to a standalone option agreement entered in connection with Mr. Falcone’s appointment as Chairman, President and Chief Executive Officer of the Company, and not pursuant to the Omnibus Plan. The anti-dilution protection provision contained in such standalone option agreement was canceled in April 2016 and replaced with an award consisting solely of 1,500,000 premium stock options issued under the Omnibus Plan.

The weighted average fair value at date of grant for options granted during the nine months ended September 30, 2017, and 2016 was $2.72 and $1.09, respectively, per option. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions shown as a weighted average for the year:
  Nine Months Ended September 30,
  2017 2016
Expected option life (in years) 0.39 - 6.10
 4.70 - 6.00
Risk-free interest rate 1.11 - 2.22%
 1.27 - 1.35%
Expected volatility 47.04 - 48.29%
 39.58 - 55.58%
Dividend yield —% —%


Total share-based compensation expense recognized by the CompanyHC2 and its subsidiaries under all equity compensation arrangements was $1.4$1.5 million and $1.8$1.3 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively. Total share-based compensation expense recognized by the Company and its subsidiaries under all equity compensation arrangements was $4.0 million and $6.7 million for the nine months ended September 30, 2017 and 2016,2019, respectively.


All grants are time based and vest either immediately or over a period of up to 3 years.established at grant. The Company recognizes compensation expense for equity awards, reduced by actual forfeitures, using the straight-line basis.


Restricted Stock


A summary of HC2’s restricted stock activity is as follows:
SharesWeighted Average Grant Date Fair Value
Unvested - December 31, 20192,213,775  $5.12  
Granted—  $—  
Vested(1,063,434) $5.27  
Forfeited(68,629) $5.10  
Unvested - March 31, 20201,081,712  $4.98  
  Shares Weighted Average Grant Date Fair Value
Unvested - December 31, 2016 115,921
 $5.59
Granted 1,061,794
 $5.64
Vested (317,663) $5.37
Unvested - September 30, 2017 860,052
 $5.73


As of September 30, 2017,At March 31, 2020, the total unrecognized stock-based compensation expense related to unvested restricted stock represented $4.0 million ofwas $3.7 million. The unrecognized compensation expense thatcost is expected to be recognized over the remaining weighted average remaining vesting period of approximately 2.21.1 years. The number of shares of unvested restricted stock expected to vest is 860,052.


Stock Options


A summary of HC2’s stock option activity is as follows:
SharesWeighted Average Exercise Price
Outstanding - December 31, 20197,067,592  $6.52  
Granted—  $—  
Exercised—  $—  
Forfeited—  $—  
Expired—  $—  
Outstanding - March 31, 20207,067,592  $6.52  
Eligible for exercise6,885,584  $6.55  
  Shares Weighted Average Exercise Price
Outstanding - December 31, 2016 6,829,097
 $6.58
Granted 331,616
 $5.50
Exercised (134,539) $3.53
Forfeited —
 $—
Expired (36,318) $9.00
Outstanding - September 30, 2017 6,989,856
 $6.57
     
Eligible for exercise 5,344,697
 $5.85


As of September 30, 2017,At March 31, 2020, the intrinsic value and average remaining life of the Company's outstanding options were $3.2 million0 and approximately 7.45.01 years, and intrinsic value and average remaining life of the Company's exercisable options were $3.2 million0 and approximately 7.14.9 years.


As of September 30, 2017,At March 31, 2020, total unrecognized stock-based compensation expense related to unvested stock options outstanding represented $1.6 million ofwas $0.5 million. The unrecognized compensation expense and arecost is expected to be recognized over the remaining weighted average remaining vesting period of 1.70.96 years. There are 1,645,159182,008 unvested stock options expected to vest, with a weighted average remaining life of 8.47.36 years, a weighted average exercise price of $8.90,$5.45, and an intrinsic value of zero.0.



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HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

18. Equity
17. Equity


Series A Preferred Stock, Series A-1 Preferred Stock and Series A-2 Preferred Stock


The Company’s preferred shares authorized, issued and outstanding consisted of the following:
March 31,December 31,
20202019
Preferred shares authorized, $0.001 par value20,000,000  20,000,000  
Series A shares issued and outstanding6,375  6,375  
Series A-2 shares issued and outstanding4,000  4,000  
  September 30, 2017 December 31, 2016
Preferred shares authorized, $0.001 par value 20,000,000
 20,000,000
Series A shares issued and outstanding 12,500
 14,808
Series A-1 shares issued and outstanding —
 1,000
Series A-2 shares issued and outstanding 14,000
 14,000


Preferred Share Activity
In connection with the issuance
CGI Purchase

On January 11, 2019, CGI purchased 10,000 shares of Series A-2 Preferred Stock, which are convertible into a total of 1,426,534 shares of the Series A Convertible Preferred Stock, the Company adoptedCompany's common stock, for a Certificatetotal consideration of Designation of Series A Convertible Participating Preferred Stock adopted on May 29, 2014 (the "Series A Certificate"). In connection with the issuance of the Series A-1 Preferred Stock on September 22, 2014, the Company adopted the Certificate of Designation of Series A-1 Convertible Participating Preferred Stock (the "Series A-1 Certificate")$8.3 million. The shares and also amended and restated the Series A Certificate. In connection with the issuance ofdividends accrued related to the Series A-2 Preferred Stock on January 5, 2015, the Company adopted the Certificate of Designation of Series A-2 Convertible Participating Preferred Stock (the "Series A-2 Certificate") and also amended and restated the Series A Certificate and the Series A-1 Certificate. On August 10, 2015, the Company adopted certain Certificates of Correction of the Certificates of Amendment to the Certificates of Designation of the Series A Certificate, the Series A-1 Certificate and the Series A-2 Certificate, and on June 24, 2016 the Company adopted certain amendments to the Series A-1 Certificate of Designation.owned by CGI are eliminated in consolidation. The Series A Certificate, the Series A-1 Certificate and the Series A-2 Certificate together, as amended, are referred to as the "Certificates of Designation."

The following summary of the terms of the Preferred Stock and the Certificates of Designation is qualified in its entirety by the complete terms of the Certificates of Designation.

Dividends. The Preferred Stock accrues a cumulative quarterly cash dividend at an annualized rate of 7.50%. The accrued value of the Preferred Stock will accrete quarterly at an annualized rate of 4.00% that is reduced to 2.00% or 0.00% if the Company achieves specified rates of growth measured by increases in its net asset value; provided, that the accreting dividend rate will be 7.25% in the event that (i) the daily volume weighted average price ("VWAP") of the common stock is less than a certain threshold amount, (ii) the common stock is not registered under Section 12(b) of the Securities Exchange Act of 1934, as amended, (iii) following May 29, 2015, the common stock is not listed on certain national securities exchanges or (iv) the Company is delinquent in the payment of any cash dividends. The Preferred Stock is also entitled to participate in cash and in-kind distributions to holders of shares of common stock on an as-converted basis.

Optional Conversion. Each share of Preferred Stock may be converted by the holder into common stock at any time based on the then applicable conversion price. Pursuant to the Series A Certificate, each share of Series A Preferred Stock is currently convertiblewere purchased at a conversion pricediscount of $4.25. Pursuant to the Series A-1 Certificate, each share of Series A-1 Preferred Stock is currently convertible at a conversion price of $4.25. Pursuant to the Series A-2 Certificate, each share of Series A-2 Preferred Stock is currently convertible at a conversion price of $7.80. Such conversion prices are subject to adjustment for dividends, certain distributions, stock splits, combinations, reclassifications, reorganizations, mergers, recapitalizations and similar events, as well as in connection with issuances of equity or equity-linked or other comparable securities by the Company at a price per share (or with a conversion or exercise price or effective issue price) that is below the applicable conversion price (which adjustment shall be made on a weighted average basis).

Redemption by the Holders / Automatic Conversion. On May 29, 2021, holders of the Preferred Stock are entitled to cause the Company to redeem the Preferred Stock at the accrued value per share plus accrued but unpaid dividends (to the extent not included in the accrued value of Preferred Stock). Each share of Preferred Stock that is not so redeemed will be automatically converted into shares of common stock at the conversion price then in effect. Upon a change of control (as defined in the Certificates of Designation) holders of the Preferred Stock are entitled to cause the Company to redeem their Preferred Stock at a price per share of Preferred Stock equal to the greater of (i) the accrued value of the Preferred Stock,$1.7 million, which amount would be multiplied by 150% in the event of a change of control occurring on or prior to May 29, 2017, plus any accrued and unpaid dividends (to the extent not included in the accrued value of Preferred Stock), and (ii) the value that would be received if the share of Preferred Stock were converted into common stock immediately prior to the change of control.

Redemption by the Company. At any time after May 29, 2017, the Company may redeem the Preferred Stock, in whole but not in part, at a price per share generally equal to 150% of the original accrued value or on that date, plus accrued but unpaid dividends (to the extent not included in the accrued value of Preferred Stock), subject to the holder’s right to convert prior to such redemption.

Forced Conversion. After May 29, 2017, the Company may force conversion of the Preferred Stock into common stock if the common stock’s thirty-day VWAP exceeds 150% of the then-applicable Conversion Price and the common stock’s daily VWAP exceeds 150% of the then applicable Conversion Price for at least twenty trading days out of the thirty trading day period used to calculate the thirty-day VWAP. In the event of a forced conversion, the holders of Preferred Stock will have the ability to elect cash settlement in lieu of conversion if certain market liquidity thresholds for the common stock are not achieved.


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Liquidation Preference. The Series A Preferred Stock ranks at parity with the Series A-1 Preferred Stock and the Series A-2 Preferred Stock. In the event of any liquidation, dissolution or winding up of the Company (any such event, a "Liquidation Event"), the holders of Preferred Stock are entitled to receive per share the greater of (i) the accrued value of the Preferred Stock, which amount would be multiplied by 150% in the event of a Liquidation Event occurring on or prior to May 29, 2017, plus any accrued and unpaid dividends (to the extent not included in the accrued value of Preferred Stock), and (ii) the value that would be received if the share of Preferred Stock were converted into common stock immediately prior to such occurrence. The Preferred Stock will rank junior to any existing or future indebtedness but senior to the common stock and any future equity securities other than any future senior or pari-passu preferred stock issued in compliance with the Certificates of Designation.
Voting Rights. Except as required by applicable law, the holders of the shares of each series of Preferred Stock are entitled to vote on an as-converted basis with the holders of the other series of Preferred Stock (on an as-converted basis) and holders of the Company’s common stock on all matters submitted to a vote of the holders of common stock. Certain series of Preferred Stock are entitled to vote with the holders of certain other series of Preferred Stock on certain matters, and separately as a class on certain limited matters. Subject to maintenance of certain ownership thresholds by the initial purchasers of the Series A Preferred Stock and the initial purchasers of the Series A-1 Preferred Stock (collectively, the "Series A and Series A-1 Preferred Purchasers"), the holders of the shares of Preferred Stock also have the right to vote shares of Preferred Stock as a separate class for at least one director, as discussed below under "Board Rights."

Consent Rights. For so long as any of the Preferred Stock is outstanding, consent of the holders of shares representing at least 75% of certain of the Preferred Stock then outstanding is required for certain material actions.

Board Rights. For so long as the Series A and Series A-1 Preferred Purchasers own at least a 15% interest in the Company on an as-converted basis and at least 80% of the shares of Preferred Stock issued to the Series A and Series A-1 Preferred Purchasers on an as-converted basis, the Series A and Series A-1 Preferred Purchasers will have the right to appoint and elect (voting as a separate class) a percentage of HC2's Board of Directors that is no more than 5% less than the Series A and Series A-1 Preferred Purchasers’ as-converted equity percentage of the common stock (but no fewer than one director). One such elected director (as designated by the holders of shares representing at least 75% of the Preferred Stock then outstanding) shall be entitled to be a member of each committee of the board of directors of the Company, provided, that such director membership on any such committee will be dependent upon such director meeting the qualification, and if applicable, independence criteria deemed necessary to so comply in accordance with any listing requirements of the exchanges on which the Company’s capital stock is then listed. For so long as the Director Election Condition is satisfied, if a specified breach event shall occur with respect to the Preferred Stock (defined for such purposes to include the failure to timely pay required dividends for two or more consecutive quarters or the occurrence and continuation of certain breaches of covenants contained in the Certificates of Designation), the holders of the Preferred Stock shall be entitled to appoint the number of additional directors to the board of directors of the Company that will cause a majority of the board of directors to be comprised of directors appointed by the holders of the Preferred Stock and independent directors until the cure of such specified breach event.

Participation Rights. Pursuant to the securities purchase agreements entered into with the initial purchasers of the Series A Preferred Stock, the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, subject to meeting certain ownership thresholds, certain purchasers of the Series A Preferred Stock, the Series A-1 Preferred Stock and the Series A-2 Preferred Stock are entitled to participate, on a pro-rata basis in accordance with their ownership percentage, determined on an as-converted basis, in issuances of equity and equity linked securities by the Company. In addition, subject to meeting certain ownership thresholds, certain initial purchasers of the Series A Preferred Stock, the Series A-1 Preferred Stock and the Series A-2 Preferred Stock will be entitled to participate in issuances of preferred securities and in debt transactions of the Company.

Preferred Share Conversions

DG Conversion

On May 2, 2017, the Company entered into an agreement with DG Value Partners, LP and DG Value Partners II Master Funds LP, holders (collectively, "DG Value") of the Company's Series A Preferred Stock and Series A-1 Preferred Stock, to convert and exchange all of DG Value's 2,308 shares of Series A Preferred Stock and 1,000 shares of Series A-1 Preferred Stock into a total of 803,469 shares of the Company's common stock. 17,500 shares of common stock issued in the conversion were issued as consideration for the agreement by DG Value to convert its Preferred Stock. The fair value of the 17,500 shares was $0.1 million on the date of issuance and was recorded within the Preferred stock anddividends, deemed dividends, from conversionand repurchase gains line item of the Condensed Consolidated Statements of Operations as a deemed dividend.

Luxor and Corrib Conversions


On August 2, 2016, the Company entered into separate agreements with each of Corrib Master Fund, Ltd. ("Corrib"), then a holder of 1,000 shares of Series A Preferred Stock, and certain investment entities managed by Luxor Capital Group, LP ( "Luxor"), that together then held 9,000 shares of Series A-1 Preferred Stock, that govern their respective Preferred Share Conversions.Stock. In the Corrib Preferred Share Conversion (i) Corrib converted 1,000 shares of Series A Preferred Stock into 238,492 shares of the Company’s common stock, and (ii) in consideration of Corrib making such conversion, HC2 issued 15,318 newly issued shares of common stock to Corrib (such shares, the "Corrib Conversion Share Consideration"). In the Luxor Preferred Share Conversion, (i) Luxor converted 9,000 shares of Series A-1 Preferred Stock into 2,119,765 shares of the common stock and (ii) in consideration of Luxor making such conversion, HC2 issued 136,149 newly issued shares of common stock to Luxor (such shares, the "Luxor Conversion Share Consideration" and, togetherconjunction with the Corrib Conversion Share Consideration,conversions, the "Conversion Share Consideration"). The fair value of the Conversion Share Consideration was $0.7 million on the date of issuance and was recorded within Preferred stock and deemed dividends from conversion line item of the Consolidated Statements of Operations as a deemed dividend.


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The Company also agreed to provide the following two forms of additional consideration for as long as the Preferred Stock remained entitled to receive dividend payments (the "Additional Share Consideration").:


•The Company agreed that in the event that Corrib and Luxor would have been entitled to any Participating Dividends payable, had they not converted the Preferred Stock (as defined in the respective Series A and Series A-1 Certificate of Designation), after the date of their Preferred Share conversion, then the Company will issue to Corrib and Luxor, on the date such Participating Dividends become payable by the Company, in a transaction exempt from the registration requirements of the Securities Act the number of shares of common stock equal to (a) the value of the Participating Dividends Corrib or Luxor would have received pursuant to Sections (2)(c) and (2)(d) of the respective Series A and Series A-1 Certificate of Designation, divided by (b) the Thirty Day VWAP (as defined in the respective Series A and Series A-1 Certificate of Designation) for the period ending two business days prior to the underlying event or transaction that would have entitled Corrib or Luxor to such Participating Dividend had Corrib’s or Luxor’s Preferred Stock remain unconverted.


Further, the•The Company agreed that it will issue to Corrib and Luxor, on each quarterly anniversary commencing May 29, 2017 (or, if later, the date on which the corresponding dividend payment is made to the holders of the outstanding Preferred Stock), through and until the Maturity Date (as defined in the respective Series A and Series A-1 Certificate of Designation), in a transaction exempt from the registration requirements of the Securities Act the number of shares of common stock equal to (a) 1.875% the Accrued Value (as defined in the respective Series A and Series A-1 Certificate of Designation) of Corrib’s or Luxor’s Preferred Stock as of the Closing Date (as defined in applicable Voluntary Conversion Agreements) divided by (b) the Thirty Day VWAP (as defined in the respective Series A and Series A-1 Certificate of Designation) for the period ending two business days prior to the applicable Dividend Payment Date (as defined in the respective Series A and Series A-1 Certificate of Designation).


For the ninethree months ended September 30, 2017, 10,139March 31, 2020, 77,794 and 1,1418,752 shares of the Company's common stock have been issued to Luxor and Corrib, respectively, in conjunction with the Conversion agreement.


The fair value of the Additional Share Consideration was valued by the Company at $1.5$0.2 million on the date of issuance and was recorded within Preferred stock and deemed dividends from conversion line item of the Condensed Consolidated Statements of Operations as a deemed dividend.


Hudson Bay Conversion
31


HC2 HOLDINGS, INC.
On October 7, 2016, the Company entered into an agreement with Hudson Bay Absolute Return Credit Opportunities Master Fund, LTD. ("Hudson") to convert and exchange all of Hudson's 12,500 shares of the Company's Series A Convertible Participating Preferred Stock into a total of 3,751,838 shares of the Company's common stock.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Pursuant to the terms of the Series A Voluntary Conversion Agreement, HC2 and Hudson mutually agreed that on the closing date of the voluntary conversion, (i) Hudson voluntarily converted 12,499 of the 12,500 shares of Series A Preferred Stock it held into 2,980,912 shares of HC2’s common stock pursuant to the terms of the Certificate of Designation of Series A Convertible Participating Preferred Stock (the "Series A Certificate of Designation"), with such amount representing the number of shares of common stock into which the 12,499 shares of Series A Preferred Stock held by Hudson convertible pursuant to the terms of the Series A Certificate of Designation and (ii) in consideration of the conversion referenced in clause (i) above, the Company issued to the Series A holder in exchange for the single remaining share of Series A Preferred Stock held, in an exchange transaction exempt from the registration requirements of the Securities Act of 1933 and all of the rules and regulations promulgated thereunder (the "Securities Act") under Section 3(a)(9) of the Securities Act, 770,926 shares of common stock. The fair value of the 770,926 shares was $4.4 million on the date of issuance and was recorded within Preferred stock and deemed dividends from conversion line item of the Consolidated Statements of Operations as a deemed dividend.

Preferred Share Dividends


During 2017,the three months ended March 31, 2020 and 2019, HC2's Board of Directors declared cash dividends with respect to HC2’s issued and outstanding Preferred Stock, excluding Preferred Stock owned by CGI which is eliminated in consolidation, as presented in the following table (in thousands)millions):

2020
Declaration DateMarch 31, 2020
Holders of Record DateMarch 31, 2020
Payment DateApril 15, 2020
Total Dividend$0.2 

2019
Declaration DateMarch 31, 2019
Holders of Record DateMarch 31, 2019
Payment DateApril 15, 2019
Total Dividend$0.2 

Declaration Date March 31, 2017
 June 30, 2017
 September 30, 2017
Holders of Record Date March 31, 2017
 June 30, 2017
 September 30, 2017
Payment Date April 17, 2017
 July 17, 2017
 October 16, 2017
Total Dividend $563
 $500
 $500

18.19. Related Parties


HC2

In January 2015, the Company entered into a services agreement (the "Services Agreement") with Harbinger Capital Partners ("HCP"), a related party of the Company, with respect to the provision of services that may include providing office space and operational support and each party making available their respective employees to provide services as reasonably requested by the other party, subject to any limitations contained in applicable employment agreements and the terms of the Services Agreement. The Company recognized $1.2expenses of $0.7 million and $1.0 million and income of expenses under the Services Agreement0 and $0.1 million for each of the three months ended September 30, 2017March 31, 2020 and 2016, respectively,2019, respectively.

Three Months Ended March 31,
20202019
Corporate
Other (1)
TotalCorporate
Other (1)
Total
Allocated to HC2 by HCP
Office space$0.5  $0.2  $0.7  $0.7  $0.2  $0.9  
Administrative salaries and benefits—  —  —  0.1  —  0.1  
Other shared overhead—  —  —  —  —  —  
Total Expenses0.5  0.2  0.7  0.8  0.2  1.0  
Charged back to HCP by HC2
Administrative salaries and benefits—  —  —  —  —  —  
Other shared overhead—  —  —  0.1  —  0.1  
Total Income—  —  —  0.1  —  0.1  
Net related party activity$0.5  $0.2  $0.7  $0.7  $0.2  $0.9  

(1) Other in the above table represent certain entities within our Broadcasting, Life Sciences and $3.1 million and $2.7 million of expenses for the nine months ended September 30, 2017 and 2016, respectively.Insurance segments.


32

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Other
GMSL

The parent companyGMH''s subsidiary GMSL, prior to its sale in February 2020, had transactions with several of GMSL, Global Marine Holdings, LLC, incurred management fees of $0.1 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $0.5 million for each of the nine months ended September 30, 2017 and 2016, respectively.

GMSL also has investments in various entities for which it exercises significant influence.its equity method investees. A summary of transactions with such entitiesequity method investees and balances outstanding are as follows (in thousands):millions). Such activity is reclassified to discontinued operations as a result of the sale of GMSL. See note 3. Discontinued Operations for further information:

 Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
 2017 2016 2017 201620202019
Net revenue $4,174
 $14,409
 $16,271
 $25,904
Net revenue$0.7  $2.0  
Operating expenses $1,258
 $945
 $6,089
 $3,102
Operating expenses$—  $0.6  
Interest expense $351
 $377
 $1,047
 $1,130
Interest expense$0.1  $0.3  
Dividends $2,027
 $—
 $2,659
 $418
  September 30, 2017 December 31, 2016
Accounts receivable $3,975
 $2,644
Long-term obligations $35,300
 $34,766
Accounts payable $2,375
 $2,760


March 31,December 31,
20202019
Accounts receivable$—  $1.2  
Debt obligations$—  $22.5  
Accounts payable$—  $0.1  
Dividends$—  $4.5  
Life Sciences


R2 accrued $2.0Pansend has an investment in Triple Ring Technologies, Inc. ("Triple Ring"). Various subsidiaries of HC2 utilize the services of Triple Ring, incurring $0.7 million related to a milestone. Ofand 0 in services for the $2.0 million, $1.5 million will be paid to Blossom Innovations, LLC, a related party.three months ended March 31, 2020 and 2019, respectively.



19.
20. Operating Segment and Related Information


The Company currently has two1 primary reportable geographic segments - United States and United Kingdom.States. The Company has seven7 reportable operating segments based on management’s organization of the enterprise - Construction, Marine Services, Energy, Telecommunications, Insurance, Life Sciences, Broadcasting, Other, and a non-operatingNon-operating Corporate segment. Net revenue and long-lived assets by geographic segment is reported on the basis of where the entity is domiciled. All inter-segment revenues are eliminated.

As a result of the sale of GMSL, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of GMH and its subsidiaries as a separate segment. Formerly the Marine Services segment, these entities and the investment in HMN have been reclassified to the Other segment. In addition, as GMSL is a discontinued operation as of March 31, 2020, all operating results of GMSL have been reclassified to Discontinued operations. This has been reflected in the tables below for both the current and historical periods presented.

The Company has no single customer representingCompany's revenue concentrations of 10% and greater are as follows:
Three Months Ended March 31,
 Segment20202019
Customer ATelecommunications*11.5%
* Less than 10% of its revenues.revenue concentration


Summary information with respect to the Company’s geographic and operating segments is as follows (in thousands)millions):
 Three Months Ended March 31,
 20202019
Net revenue
Construction$176.5  $192.1  
Energy10.4  5.1  
Telecommunications186.4  155.5  
Insurance63.8  88.8  
Broadcasting10.1  9.8  
Eliminations (*)
(2.4) (2.3) 
Total net revenue$444.8  $449.0  
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Net Revenue by Geographic Region        
United States $358,743
 $272,395
 $1,039,252
 $768,849
United Kingdom 42,233
 139,981
 112,958
 332,318
Other 5,433
 708
 23,419
 2,954
Total $406,409
 $413,084
 $1,175,629
 $1,104,121
(*) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the three months ended March 31, 2020 and 2019 which are related to entities under common control which are eliminated or are reclassified in consolidation.


33

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 Three Months Ended March 31,
 20202019
Income (loss) from operations
Construction$2.6  $5.7  
Energy1.7  (0.4) 
Telecommunications0.1  0.6  
Insurance(12.6) 34.4  
Life Sciences(3.2) (1.8) 
Broadcasting(2.9) (3.3) 
Other(1.0) (0.1) 
Non-operating Corporate(9.1) (7.2) 
Eliminations (*)
(2.4) (2.3) 
Total income (loss) from operations$(26.8) $25.6  
(*) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the three months ended March 31, 2020 and 2019 which are related to transactions between entities under common control which are eliminated or are reclassified in consolidation.
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Net revenue        
Construction $151,697
 $129,551
 $403,325
 $372,964
Marine Services 42,817
 50,653
 123,382
 116,298
Energy 3,919
 1,664
 12,301
 4,151
Telecommunications 167,881
 194,411
 520,214
 508,248
Insurance 37,737
 34,546
 112,032
 99,847
Other 2,358
 2,259
 4,375
 2,613
Total net revenue 406,409
 413,084
 1,175,629
 1,104,121
         
Income (loss) from operations        
Construction 12,198
 12,339
 25,911
 35,421
Marine Services (181) 4,794
 (1,726) (214)
Energy (1,161) 149
 (1,784) 59
Telecommunications 1,374
 2,218
 5,023
 3,434
Insurance 17,476
 (338) 20,704
 (5,916)
Life Sciences (6,437) (2,538) (13,167) (7,282)
Other (1,383) (2,318) (7,164) (6,583)
Non-operating Corporate (11,321) (7,452) (27,455) (25,337)
Total income (loss) from operations 10,565
 6,854
 342
 (6,418)
         
Interest expense (13,222) (10,719) (39,410) (31,614)
Gain on contingent consideration 6,320
 1,381
 6,001
 1,573
Income from equity investees 971
 335
 12,667
 3,153
Other expenses, net (97) (4,584) (8,112) (5,793)
Income (loss) from continuing operations before income taxes 4,537
 (6,733) (28,512) (39,099)
Income tax (expense) benefit (12,861) 1,334
 (16,167) 3,649
Net loss (8,324) (5,399) (44,679) (35,450)
Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 2,357
 841
 6,305
 2,365
Net loss attributable to HC2 Holdings, Inc. (5,967) (4,558) (38,374) (33,085)
Less: Preferred stock and deemed dividends from conversions 703
 2,948
 2,079
 5,061
Net loss attributable to common stock and participating preferred stockholders $(6,670) $(7,506) $(40,453) $(38,146)

A reconciliation of the Company's consolidated segment operating income to consolidated earnings before income taxes is as follows (in millions):
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Depreciation and Amortization        
Construction $1,314
 $431
 $4,194
 $1,263
Marine Services 6,221
 5,554
 16,561
 16,793
Energy 1,247
 582
 3,876
 1,479
Telecommunications 94
 144
 285
 389
Insurance (1)
 (1,319) (1,162) (3,440) (2,902)
Life Sciences 50
 32
 129
 87
Other 272
 380
 933
 1,054
Non-operating Corporate 17
 —
 50
 —
Total $7,896
 $5,961
 $22,588
 $18,163
 Three Months Ended March 31,
 20202019
Income (loss) from operations$(26.8) $25.6  
Interest expense(21.3) (18.8) 
Loss on early extinguishment or restructuring of debt(5.8) —  
Loss from equity investees(2.5) (5.9) 
Other income, net2.8  3.4  
(Loss) income from continuing operations(53.6) 4.3  
Income tax benefit (expense)12.6  (4.0) 
(Loss) income from continuing operations(41.0) 0.3  
Loss from discontinued operations (including loss on disposal of $39.3 million)(60.0) (6.6) 
Net loss(101.0) (6.3) 
Net loss attributable to noncontrolling interest and redeemable noncontrolling interest17.9  3.5  
Net loss attributable to HC2 Holdings, Inc.(83.1) (2.8) 
Less: Preferred dividends, deemed dividends and repurchase gains0.4  (1.2) 
Net loss attributable to common stock and participating preferred stockholders$(83.5) $(1.6) 

 Three Months Ended March 31,
 20202019
Depreciation and Amortization
Construction$2.6  $3.9  
Energy2.1  1.4  
Telecommunications0.1  0.1  
Insurance (*)
(5.9) (6.5) 
Broadcasting1.7  1.4  
Total$0.6  $0.3  
(1)(*) Balance representsincludes amortization of negative VOBA, which increases net income.

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Capital Expenditures (2)
        
Construction $2,517
 $1,506
 $9,729
 $5,317
Marine Services 3,463
 5,682
 8,195
 9,480
Energy 2,099
 103
 6,540
 5,420
Telecommunications 7
 254
 47
 574
Insurance —
 —
 383
 —
Life Sciences 197
 14
 395
 144
Other 4
 27
 17
 38
Non-operating Corporate 18
 214
 18
 219
Total $8,305
 $7,800
 $25,324
 $21,192
 Three Months Ended March 31,
 20202019
Capital Expenditures (*)
Construction$2.3  $2.6  
Energy1.0  0.1  
Insurance0.1  0.2  
Broadcasting2.7  0.4  
Total$6.1  $3.3  
(2)(*) The above capital expenditures exclude assets acquired under terms of capital lease and vendor financing obligations.


34

HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

March 31,December 31,
 20202019
Investments
Construction$0.9  $0.9  
Insurance4,090.0  4,423.0  
Life Sciences21.0  22.0  
Other42.9  43.1  
Eliminations(98.0) (96.9) 
Total$4,056.8  $4,392.1  

March 31,December 31,
 20202019
Total Assets
Construction$557.3  $530.4  
Energy144.1  142.8  
Telecommunications123.4  89.3  
Insurance5,264.4  5,611.9  
Life Sciences24.8  28.4  
Broadcasting257.7  257.9  
Other44.2  366.3  
Non-operating Corporate20.7  27.2  
Eliminations(97.5) (95.9) 
Total$6,339.1  $6,958.3  

  September 30, December 31,
  2017 2016
Investments    
Construction $1,050
 $—
Marine Services 57,870
 40,698
Insurance 1,468,738
 1,407,996
Life Sciences 19,087
 13,067
Other 5,071
 6,778
Eliminations (30,207) (40,621)
Total $1,521,609
 $1,427,918
  September 30, December 31,
  2017 2016
Property, Plant and Equipment—Net    
United States $140,892
 $136,905
United Kingdom 134,867
 141,946
Other 6,306
 7,607
Total $282,065
 $286,458
  September 30, December 31,
  2017 2016
Total Assets    
Construction $299,727
 $295,246
Marine Services 291,464
 275,660
Energy 86,892
 84,602
Telecommunications 123,257
 125,965
Insurance 2,101,706
 2,027,059
Life Sciences 32,711
 28,868
Other 11,900
 10,914
Non-operating Corporate 53,894
 27,583
Eliminations (30,207) (40,621)
Total $2,971,344
 $2,835,276

20. Backlog

DBMG includes projects in backlog which consist of awarded contracts, letters of intent, notices to proceed and purchase orders obtained. At September 30, 2017, DBMG's backlog was $656.1 million, consisting of $483.4 million under contracts or purchase orders and $172.7 million under letters of intent or notices to proceed. Approximately $408.1 million, representing 62.2% of DBMG’s backlog at September 30, 2017, was attributable to five contracts, letters of intent, notices to proceed or purchase orders. If one or more of these projects terminate or reduce their scope, DBMG’s backlog could decrease substantially.

DBMG’s backlog at December 31, 2016 was $503.5 million, consisting of $441.1 million under contracts or purchase orders and $62.4 million under letters of intent or notices to proceed.

21. Basic and Diluted LossIncome Per Common Share


Earnings per share ("EPS") is calculated using the two-class method, which allocates earnings among common stock and participating securities to calculate EPS when an entity's capital structure includes either two or more classes of common stock or common stock and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. As such, shares of any unvested restricted stock of the Company are considered participating securities. The dilutive effect of options and their equivalents (including non-vested stock issued under stock-based compensation plans), is computed using the "treasury" method.method as this measurement was determined to be more dilutive between the two available methods in each period.


The Company had no0 dilutive common share equivalents during the three and nine months ended September 30, 2017 and 2016,March 31, 2020 due to the results of operations being a loss from continuing operations and discontinued operations, net of tax. The Company issued a warrant, Preferred Stock, as well as outstanding stock options and unvested RSUs granted under the Prior Plan and Omnibus Plan, each of which were potentially dilutive but were excluded from the calculation of diluted loss per common share due to their antidilutive effect.



HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The following table presents a reconciliation of net income (loss) used in basic and diluted EPS calculations (in thousands,millions, except per share amounts):
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Net loss attributable to common stock and participating preferred stockholders $(6,670) $(7,506) $(40,453) $(38,146)
         
Earnings allocable to common shares:        
Numerator for basic and diluted earnings per share        
Participating shares at end of period:        
Weighted-average Common stock outstanding 43,013
 36,627
 42,555
 35,808
         
Percentage of loss allocated to:        
Common Stock 100% 100% 100% 100%
Preferred Stock —% —% —% —%
         
Loss attributable to common shares - basic and diluted        
Net Loss $(6,670)
$(7,506) $(40,453) $(38,146)
         
Denominator for basic and diluted earnings per share        
Weighted average common shares outstanding - basic and diluted 43,013
 36,627
 42,555
 35,808
         
Basic and Diluted earnings per share        
Net loss attributable to common stock and participating preferred stockholders - basic and diluted $(0.16) $(0.20) $(0.95) $(1.07)

22. Subsequent Events

The Company evaluated subsequent events from September 30, 2017 through November 8, 2017, the date the Condensed Consolidated Financial Statements were issued, and noted the following:

Fugro

In October 2017, Global Marine Group, an operating subsidiary of the Company, announced that it had entered into an agreement with Fugro N.V. ("Fugro") under which, subject to closing conditions, GMSL will acquire Fugro's trenching and cable lay services business. The purchase consideration, valued at approximately $73 million, consists of the issuance to a subsidiary of Fugro of a 23.6% equity interest in Global Marine Holdings LLC (the parent company of GMSL) valued at $65 million, and an obligation of GMSL to pay Fugro $7.5 million within one year pursuant to a secured loan to be incurred by GMSL from a subsidiary of Fugro, which loan bears interest, payable quarterly, at 4% per annum through December 31, 2017, and at 10% per annum thereafter, and matures 365 days following the Acquisition. One of the assets acquired, a Q1400 Trenching System, will serve as collateral security for the repayment of the loan pursuant to the terms of a lien agreement.

DTV Holdings
In June 2017, HC2 announced an agreement to enter into a series of transactions that, once completed, will result in HC2 and its subsidiaries owning over 50% of the shares of common stock of DTV America Corporation ("DTV"). Approval by the Federal Communications Commission ("FCC") was received on October 31, 2017.
Mako Communications

In September 2017, HC2 announced that a subsidiary of the Company agreed to enter into an agreement with Mako Communications, LLC and certain of its affiliates ("Mako") to purchase all the assets in connection with Mako’s ownership and operation of LPTV stations that,once completed, will result in HC2 acquiring 38 operating stations in 28 cities. Approval by the FCC was received on October 26, 2017.

Three Angels Broadcasting Network, Inc.

In October 2017, the Company entered into an asset purchase agreement with Three Angels Broadcasting Network, Inc. to purchase all of its assets in connection with its ownership and operation of Class A Low Power Television ("LPTV") stations that, if approved by the FCC, will result in HC2 acquiring 14 operating stations for a total consideration of $9.6 million.




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HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Three Months Ended March 31,
 20202019
Amounts attributable to HC2 common and participating preferred stockholders
Loss from continuing operations$(41.0) $0.3  
Net loss attributable to noncontrolling interest and redeemable noncontrolling interest2.6  2.4  
Loss (income) from continuing operations attributable to the Company(38.4) 2.7  
Less: Preferred dividends, deemed dividends and repurchase gains0.4  (1.2) 
(Loss) income from continuing operations attributable to HC2 common stockholders(38.8) 3.9  
Loss from discontinued operations (including loss on disposal of $39.3 million)(60.0) (6.6) 
Net loss attributable to noncontrolling interest and redeemable noncontrolling interest15.3  1.1  
Loss from discontinued operations, net of tax and noncontrolling interest$(44.7) $(5.5) 
Net loss attributable to common stock and participating preferred stockholders$(83.5) $(1.6) 
Earnings allocable to common shares:
Participating shares at end of period:
Weighted-average common stock outstanding45.9  44.8  
Unvested restricted stock—  0.4  
Preferred stock (as-converted basis)—  2.2  
Total45.9  47.4  
Percentage of (loss) income allocated to:
Common stock100.0 %94.5 %
Unvested restricted stock— %0.8 %
Preferred stock— %4.6 %
Numerator for earnings per share, basic:
Net (loss) income from continuing operations attributable to common stock, basic$(38.8) $3.7  
Net loss from discontinued operations attributable to common stock, basic and diluted$(44.7) $(5.2) 
Net loss attributable to common stock and participating preferred stockholders, basic and diluted$(83.5) $(1.5) 
Earnings allocable to common shares, diluted:
Numerator for earnings per share, diluted
Effect of assumed shares under treasury stock method for stock options and restricted shares and if-converted method for convertible instruments$—  $(1.6) 
Net (loss) income from continuing operations attributable to common stock, diluted$(38.8) $2.1  
Net (loss) income from discontinued operations attributable to common stock, diluted$(44.7) $(5.2) 
Net loss attributable to common stock and participating preferred stockholders, diluted$(83.5) $(3.1) 
Denominator for basic and dilutive earnings per share:
Weighted average common shares outstanding - basic45.9  44.8  
Effect of assumed shares under treasury stock method for stock options and restricted shares and if-converted method for convertible instruments—  14.9  
Weighted average common shares outstanding - diluted45.9  59.7  
(Loss) income per share - continuing operations
Basic:$(0.85) $0.08  
Diluted:$(0.85) $0.04  
Loss per share - Discontinued operations
Basic:$(0.97) $(0.12) 
Diluted:$(0.97) $(0.09) 
Loss per share - Net loss attributable to common stock and participating preferred stockholders
Basic:$(1.82) $(0.03) 
Diluted:$(1.82) $(0.05) 
Humana


In November 2017, CGI entered into a Stock Purchase Agreement (the “SPA”) with Humana, Inc., a publicly traded company incorporated in Delaware (“Humana”). Pursuant to the SPA, CGI agreed to acquire Kanawha Insurance Company (“KIC”), Humana’s long-term care insurance subsidiary (the “Transaction”). The obligation of each party to consummate the Transaction is subject to customary closing conditions, including, among others, Humana furnishing certain audited financial statements of the business to be acquired, receipt of regulatory approvals by the South Carolina and Texas insurance departments, customary conditions relating to the accuracy of the other party’s representations and warranties (subject to certain materiality exceptions) and the other party having performed in all material respects its obligations under the SPA.

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Debt


HC2 HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
22. Subsequent Events

Construction

On or about November 9, 2017, the Company expects to sign a $75 million bridge loan to finance acquisitions in the low power broadcast television distribution market. Once completed, the Company will file an 8-K which will include the final terms of the loan.

Dividends

AsMay 4, 2020, HC2 announced on November 1, 2017, DBMGthat its Construction segment will pay a cash dividend of $1.29$15.0 million, or $3.89 per share on November 29, 2017share. As the largest stockholder of DBM Global Inc., HC2 expects to stockholders of record at the close of business on November 15, 2017. HC2 is expected to received $4.5receive approximately $13.9 million of the $5.0 milliontotal dividend payout.




Life Sciences

On April 16, 2020, R2 received $10.0 million in funding from Huadong Medicine Company Limited as part of Huadong's $30.0 million Series B equity investment in R2. These funds will be used to commercialize R2's revolutionary CryoAesthetic technology which promises physicians a new way to lighten, brighten and rejuvenate skin. This investment represents the second tranche of Huadong's investment at an approximate post-money valuation of $90.0 million and reduces Pansend's ownership by 7.8% to 56.1%.

Corporate

On April 16, 2020, HC2 drew $10.0 million on its 2020 Revolving Credit Agreement. HC2 intends to use the proceeds for general corporate purposes.



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ITEM 2. Management's DiscussionMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and Analysisanalysis of Financial Conditionour financial condition and Resultsresults of Operations

This "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of HC2 Holdings, Inc. ("HC2," "we," "us," "our" and, collectivelyoperations together with its subsidiaries, the "Company") should be readinformation in conjunction with our unaudited Condensed Consolidated Financial Statements and the notes thereto included herein, as well as ourannual audited Consolidated Financial Statements and the notes thereto, each of which are contained in our Form 10-K.Item 8 entitled "Financial Statements and Supplementary Data," and other financial information included herein. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section in ourthis Quarterly ReportsReport on Form 10-Q and in our Annual Report on Form 10-K for the quarterly periodsyear ended MarchDecember 31, 2017 filed with the SEC on May 10, 2017 and June 30, 2017 filed with the SEC on August 9, 2017, and our Form 10-K,2019, filed with the SEC on March 9, 2017,16, 2020, as well as the section below entitled "Special Note Regarding Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.


Unless the context otherwise requires, in this Annual Report on Form 10-K, "HC2" means HC2 Holdings, Inc. and the "Company," "we" and "our" mean HC2 together with its consolidated subsidiaries. "U.S. GAAP" means accounting principles accepted in the United States of America.

Our Business


We are a diversified holding company with principal operations conducted through seven operating platforms or reportable segments: Construction ("DBMG"), Marine Services ("GMSL"), Energy ("ANG"), Telecommunications ("ICS"), Insurance ("CIG"), Life Sciences ("Pansend"), Broadcasting, and Other, which includes businesses that do not meet the separately reportable segment thresholds.


Certain previous year amounts have been reclassified to conform with current year presentations, including:

•The reclassification of GMSL's results to discontinued operations. Further, the reclassification of prior period assets and liabilities have been classified as held for sale;

•As a result of the sale of GMSL, and in accordance with ASC 280, the Company no longer considers the results of operations and Balance Sheets of GMH and its subsidiaries as a separate segment. Formerly the Marine Services segment, these entities and the investment in HMN have been reclassified to the Other segment.

•The restatement of Earnings per share in the prior period, as a result of the discontinued operations noted above. This includes presenting EPS for Net (loss) income from continuing operations, Net (loss) income from discontinuing operations, and Net (loss) income.

We continually evaluate acquisition opportunities, as well as monitor a variety of key indicators of our underlying platform companies in order to maximize stakeholder value. These indicators include, but are not limited to, revenue, cost of revenue, operating profit, Adjusted EBITDA and free cash flow. Furthermore, we work very closely with our subsidiary platform executive management teams on their operations and assist them in the evaluation and diligence of asset acquisitions, dispositions and any financing or operational needs at the subsidiary level. We believe that this close relationship allows us to capture synergies within the organization across all platforms and strategically position the Company for ongoing growth and value creation.


The potential for additional acquisitions and new business opportunities, while strategic, may result in acquiring assets unrelated to our current or historical operations. As part of any acquisition strategy, we may raise capital in the form of debt and/or equity securities (including preferred stock) or a combination thereof. We have broad discretion and experience in identifying and selecting acquisition and business combination opportunities and the industries in which we seek such opportunities. Many times, we face significant competition for these opportunities, including from numerous companies with a business plan similar to ours. As such, there can be no assurance that any of the past or future discussions we have had or may have with candidates will result in a definitive agreement and, if they do, what the terms or timing of any potential agreement would be. As part of our acquisition strategy, we may utilize a portion of our available cash to acquire interests in possible acquisition targets. Any securities acquired are marked to market and may increase short-term earnings volatility as a result.


We believe our track record, our platform and our strategy will enable us to deliver strong financial results, while positioning our Company for long-term growth. We believe the unique alignment of our executive compensation program, with our objective of increasing long-term stakeholder value, is paramount to executing our vision of long-term growth, while maintaining our disciplined approach. Having designed our business structure to not only address capital allocation challenges over time, but also maintain the flexibility to capitalize on opportunities during periods of market volatility, we believe the combination thereof positions us well to continue to build long-term stakeholder value.


Our Operations


Refer to Note 1. Organization and Business to our unaudited Condensed Consolidated Financial Statementsincluded elsewhere in this Report on Form 10-Q for additional information.


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Seasonality and Cyclical Patterns
 
Our industrysegments' operations can be highly cyclical and subject to seasonal patterns. Our volume of business in our Construction and Marine Services segmentssegment may be adversely affected by declines or delays in projects, which may vary by geographic region. Project schedules, particularly in connection with large, complex, and longer-term projects can also create fluctuations in the services provided, which may adversely affect us in a given period.


For example, in connection with larger, more complicated projects, the timing of obtaining permits and other approvals may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on such projects when they move forward.


Examples of other items that may cause our results or demand for our services to fluctuate materially from quarter to quarter include: weather or project site conditions, financial condition of our customers and their access to capital; margins of projects performed during any particular period; economic, and political and market conditions on a regional, national or global scale.


Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period.




Recent Developments


Marine ServicesCOVID-19 Impact on our Business


Net revenue within our Marine Services segment can fluctuate depending onOn March 11, 2020, the season. Revenues are relatively stable for our Marine Services maintenance business asWorld Health Organization declared the core driver is the annual contractual obligation. However, this is not the case with our installation business (other than for long-term charter arrangements), in which revenues show a degree of seasonality.  Revenues in our Marine Services installation business are driven by our customers’ need for new cable installations.  Generally, weather downtime, and the additional costs related to downtime, is a significant factor in customers determining their installation schedules, and most installations are therefore scheduled for the warmer months.  As a result, installation revenues are generally lower towards the endoutbreak of the fourth quarternovel coronavirus ("COVID-19") a pandemic resulting in action from federal, state and throughout the first quarter, as most business is concentrated in the northern hemisphere.

Other than as described above our businesses are not materiallylocal governments that has significantly affected by seasonality.

Recent Developments

Acquisitions
Fugro

In October 2017, GMSL, an operating subsidiaryvirtually all facets of the Company, announced that it had entered into an agreement with Fugro N.V. ("Fugro") under which, subject to closing conditions, GMSL will acquire Fugro's trenchingU.S. and cable lay services business.global economies. The purchase consideration, valued at approximately $73 million, consists of the issuance to a subsidiary of Fugro of a 23.6% equity interest in Global Marine Holdings LLC (the parent company of GMSL) valued at $65 million,U.S. federal and an obligation of GMSL to pay Fugro $7.5 million within one year pursuant to a secured loan to be incurred by GMSL from a subsidiary of Fugro, which loan bears interest, payable quarterly, at 4% per annum through December 31, 2017,various state governments, have implemented enhanced screenings, quarantine requirements, and at 10% per annum thereafter, and matures 365 days following the Acquisition. One of the assets acquired, a Q1400 Trenching System, will serve as collateral security for the repayment of the loan pursuant to the terms of a lien agreement.

Once completed, the acquisition of this business will significantly enhance GMSL's comprehensive portfolio of integrated service offerings, immediately enabling GMSL to complete additional packages of work in direct response to market demands. The acquisition, which GMSL believes will be accretive, will provide GMSL with highly capable employees and proven assets with a history of delivering complex engineering projects to customers around the world.

DTV Holdings
In June 2017, HC2 announced an agreement to enter into a series of transactions that, once completed, will result in HC2 and its subsidiaries owning over 50% of the shares of common stock of DTV America Corporation ("DTV"). Approval by the Federal Communications Commission ("FCC") was received on October 31, 2017.
DTV is an aggregator and operator of low power television ("LPTV") licenses and stations across the United States. DTV currently owns and operates 52 LPTV stations in more than 40 cities. DTV’s distribution platform currently provides carriage for more than 30 television broadcast networks, including QVC, Accuweather, American Sports Network (Sinclair), GetTV (Sony), MyNet (Fox), Telemundo (NBC), CoziTV (NBC), NewsMax, Azteca, Estrella TV and Cheddar. DTV maintains a focus on technological innovation. DTV exclusively adopted Internet Protocol (IP) as a transport to provide Broadcast-as-a-Service, making it the only adopter of all IP-transport to the home.

Mako Communications

In September 2017, HC2 announced that a subsidiary of the Company agreed to enter into an agreement with Mako Communications, LLC and certain of its affiliates ("Mako") to purchase all the assetstravel restrictions in connection with Mako’s ownershipthe COVID-19 outbreak.

The Company’s top priority is to protect its employees and operationtheir families, and those of LPTV stations that,once completed, willthe Company’s customers. The Company is taking precautionary measures as directed by health authorities and the local government, including changing operational procedures as necessary, providing additional protective gear and cleaning to protect them, which has resulted and may continue to result in HC2 acquiring 38 operating stations in 28 cities. Approvaldisruptions to and increased costs of the Company’s operations. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have affected the way we conduct our operations. There is no certainty that such measures will be sufficient to mitigate the risks posed by the FCC was receivedvirus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.

The extent of the impact of COVID-19 on October 26, 2017.

Mako is a family ownedour operational and operated business headquartered in Corpus Christi, Texas, that has been acquiring, building,financial performance will depend on future developments, including, but not limited to, the duration and maintaining Class Aspread of the outbreak and LPTV stations all acrossrelated travel advisories and restrictions, and its impact to the United States since 2000.

Three Angels Broadcasting Network, Inc.

In October 2017, the Company entered into an asset purchase agreement with Three Angels Broadcasting Network, Inc. to purchaseU.S. and global financial markets, all of its assetswhich are highly uncertain and cannot be predicted. Preventing the effects from and responding to this market disruption if any other public health threat, related or otherwise, may further increase costs of our business and may have a material adverse effect on our business, financial condition, and results of operations.

We continue to monitor the rapidly evolving situation and guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plans. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of COVID-19 on our results of operations, financial condition, or cash flows in connection with its ownership and operation of Class A Low Power Television ("LPTV") stationsthe future. However, we do expect that if approved by the FCC, will result in HC2 acquiring 14 operating stations forit could have a total consideration of $9.6 million.



Humana

In November 2017, CGI entered into a Stock Purchase Agreement (the “SPA”) with Humana, Inc., a publicly traded company incorporated in Delaware (“Humana”). Pursuant to the SPA, CGI agreed to acquire Kanawha Insurance Company (“KIC”), Humana’s long-term care insurance subsidiary (the “Transaction”). The obligation of each party to consummate the Transaction is subject to customary closing conditions, including, among others, Humana furnishing certain audited financial statements of the business to be acquired, receipt of regulatory approvals by the South Carolina and Texas insurance departments, customary conditions relating to the accuracy of the other party’s representations and warranties (subject to certain materiality exceptions) and the other party having performed in all material respects its obligations under the SPA.

Debt Issuance

The Company has issued an aggregate of $400.0 million of its 11.0% Notes pursuant to the indenture dated November 20, 2014, by and among HC2, the guarantors party thereto and U.S. Bank National Association, a national banking association, as trustee (the "11.0% Notes Indenture").

In January 2017, the Company issued an additional $55.0 million in aggregate principal amount of its 11.0% Senior Secured Notes due 2019 (the "11.0% Notes"). HC2 used a portion of the proceeds from the issuance to repay all $35.0 million in outstanding aggregate principal amount of HC22’s 11.0% Bridge Note due 2019.

In June 2017, the Company issued an additional $38.0 million of aggregate principal amount of the 11.0% Notes to investment funds affiliated with three institutional investors in a private placement offering (the "June 2017 Notes"). The Company expects to use the net proceeds from the issuance of the June 2017 Notes for working capital for the Company and its subsidiaries, general corporate purposes,adverse impact on our future revenue growth as well as the financingour overall profitability and may lead to revised payment terms with certain of acquisitions and investments.our customers.

On or about November 9, 2017, the Company expects to sign a $75 million bridge loan to finance acquisitions in the low power broadcast television distribution market. Once completed, the Company will file an 8-K which will include the final terms of the loan.

Dividends


During the three months ended September 30, 2017, March 31, 2020, particularly the month of March, the effects of COVID-19 and the related actions undertaken in the U.S. to attempt to control its spread, specifically impacting certain of our segments as follows:
39


Construction

DBMG is dependent on its workforce to carry out its services. Developments resulting from governmental responses to COVID-19 such as social distancing and shelter-in-place directives have impacted, and will continue to impact, DBMG’s ability to deploy its workforce in its facilities and project sites efficiently. The nature of DBMG’s business does not permit alternative workforce arrangements in its facilities and project sites such as remote work schemes to be implemented effectively, and as a result of potential workforce disruptions, DBMG may experience delays or suspensions of projects, however there have not been material impacts during the three months ended March 31, 2020. DBMG may also experience disruptions in the supply chain depending on the spread of COVID-19 and related governmental orders. These delays, suspensions, and impacts to supply chain, may negatively impact DBMG’s results of operations, cash flows or financial condition. This could cause the timing of revenue to be delayed and possibly impact earnings and backlog. Persistent delays, suspensions or cancellations of projects under contract may occur while governments implement policies designed to respond to the COVID-19 pandemic. Any such continued loss or suspension of projects under contract may negatively impact the DBMG’s results of operations, cash flows or financial condition.

Insurance

Our Insurance segment has been impacted by the COVID-19 pandemic, including multiple reductions in target interest rates by the Board of Governors of the Federal Reserve System, and significant market volatility, driving actual and projected results of our business operations as well as our views on potential effectiveness of certain prudent and feasible tax planning strategies. The Company’s March 31, 2020 loss reflected in earnings is primarily impacted by the Insurance segment's unrealized losses on investments of $21.5 million, included in the Net realized and unrealized gains (loss) on investments line, primarily driven by equity and derivative mark to market adjustments. The impact on other comprehensive income was $355.5 million of unrealized losses on fixed maturity securities. Both of these were largely attributable to market factors caused by the COVID-19 crisis. Future recovery of losses will largely depend upon market reaction to additional COVID-19 stimulus packages, interest rates and timing and manner in which the economy is reopened. These unrealized losses are considered temporary in nature, as we have the ability to hold these securities to maturity.

Broadcasting

As a result of COVID-19, our Broadcasting segment has experienced adverse effects on its advertising business because of weakness in the advertising market as advertisers seek to reduce their own costs in response to the pandemic’s impact on their businesses. We are not able to predict when or whether advertising budgets and the advertising market generally, will return or be comparable to historical levels.

In addition, COVID-19 could impact our Broadcasting segment’s business, financial condition and results of operations in a number of other ways, including, but not limited to:

•negative impact on our broadcast station revenue, as many of our customers also rely on advertising revenues and might be negatively affected by COVID-19;
•slow-down of our ability to build out additional broadcast television stations, as illness, social distancing, and other pandemic-related precautions may result in equipment delivery delays and labor shortages, including the availability of tower crews, an already limited, highly-specialized work force necessary to install broadcast equipment;
•negative impact on our network distribution revenues, as consumers may seek to reduce discretionary spending by cutting back or foregoing subscriptions to cable television or other multichannel video programming distributors;
•negative impact on our financial condition or our ability to fund operations or future investment opportunities due to an increase in the cost or difficulty in obtaining debt or equity financing, or refinancing our debt in the future, or our ability to comply with our covenants;
•impairments of our programming inventory, goodwill and other indefinite-lived intangible assets, and other long-lived assets; and
•increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online activity.

The magnitude of the impact on our Broadcasting segment will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19. Even after COVID-19 has subsided, we may experience materially adverse impacts to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.

For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company's liquidity and capital resources, see "Part II-Item 1A-Risk Factors."

Debt Obligations

In March 2020, with the proceeds received from the sale of GMSL, the Company repaid $15.0 million of its 2019 Revolving Credit Agreement and $76.9 million of its Senior Secured Notes.

40

On April 16, 2020 the Company drew $10.0 million on its 2020 Revolving Credit Agreement. The proceeds from the draw are for general corporate purposes.

Dividends

HC2 received $2.0$0.5 million in dividends from our Telecommunications segment. Duringsegment during the ninethree months ended September 30, 2017, March 31, 2020.

HC2 received $13.5 million and $6.0$1.8 million in dividends from our Construction and Telecommunications segments, respectively.

Under a tax sharing agreement, DBMG reimburses HC2 for use of its net operating losses. Duringmanagement fees during the ninethree months ended September 30, 2017,March 31, 2020.

On May 4, 2020 HC2 received $5.0 million from DBMG under this tax sharing agreement.

As announced on November 1, 2017, DBMGthat its Construction segment will pay a cash dividend of $1.29$15.0 million, or $3.89 per share on November 29, 2017share. As the largest stockholder of DBM Global Inc., HC2 expects to stockholders of record at the close of business on November 15, 2017. HC2 is expected to received $4.5receive approximately $13.9 million of the $5.0 milliontotal dividend payout.


Preferred Share ConversionOther


In May 2017,On April 16, 2020, R2 received $10 million in funding from Huadong Medicine Company Limited as part of Huadong's $30 million Series B equity investment in R2. These funds will be used to commercialize R2's revolutionary CryoAesthetic technology which promises physicians a new way to lighten, brighten and rejuvenate skin. This investment represents the Company entered intosecond tranche of Huadong's investment at an agreement with DG Value Partners, LPapproximate post-money valuation of $90 million and DG Value Partners II Master Funds LP, holders (collectively, "DG Value") of the Company's Series A and Series A-1 Convertible Participating Preferred Stock,reduces Pansend's ownership by 7.8% to convert and exchange all of DG Value's 2,308 shares of Series A and 1,000 shares of Series A-1 Convertible Participating Preferred Stock into a total of 803,469 shares of the Company's common stock.56.1%.


41



Financial Presentation Background


In the below section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant to U.S. GAAP and SEC disclosure rules, the Company’s results of operations for the three and nine months ended September 30, 2017March 31, 2020 as compared to the three and nine months ended September 30, 2016.March 31, 2019.




Results of Operations


Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016.

Presented below is a disaggregatedThe following table that summarizes our results of operations and a comparison of the change between the periods presented (in thousands)millions):
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Net revenue            
Construction $151,697
 $129,551
 $22,146
 $403,325
 $372,964
 $30,361
Marine Services 42,817
 50,653
 (7,836) 123,382
 116,298
 7,084
Energy 3,919
 1,664
 2,255
 12,301
 4,151
 8,150
Telecommunications 167,881
 194,411
 (26,530) 520,214
 508,248
 11,966
Insurance 37,737
 34,546
 3,191
 112,032
 99,847
 12,185
Other 2,358
 2,259
 99
 4,375
 2,613
 1,762
Total net revenue 406,409
 413,084
 (6,675) 1,175,629
 1,104,121
 71,508
             
Income (loss) from operations            
Construction 12,198
 12,339
 (141) 25,911
 35,421
 (9,510)
Marine Services (181) 4,794
 (4,975) (1,726) (214) (1,512)
Energy (1,161) 149
 (1,310) (1,784) 59
 (1,843)
Telecommunications 1,374
 2,218
 (844) 5,023
 3,434
 1,589
Insurance 17,476
 (338) 17,814
 20,704
 (5,916) 26,620
Life Sciences (6,437) (2,538) (3,899) (13,167) (7,282) (5,885)
Other (1,383) (2,318) 935
 (7,164) (6,583) (581)
Non-operating Corporate (11,321) (7,452) (3,869) (27,455) (25,337) (2,118)
Total income (loss) from operations 10,565
 6,854
 3,711
 342
 (6,418) 6,760
             
Interest expense (13,222) (10,719) (2,503) (39,410) (31,614) (7,796)
Gain on contingent consideration 6,320
 1,381
 4,939
 6,001
 1,573
 4,428
Income from equity investees 971
 335
 636
 12,667
 3,153
 9,514
Other expenses, net (97) (4,584) 4,487
 (8,112) (5,793) (2,319)
Income (loss) from continuing operations before income taxes 4,537
 (6,733) 11,270
 (28,512) (39,099) 10,587
Income tax (expense) benefit (12,861) 1,334
 (14,195) (16,167) 3,649
 (19,816)
Net loss (8,324) (5,399) (2,925) (44,679) (35,450) (9,229)
Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 2,357
 841
 1,516
 6,305
 2,365
 3,940
Net loss attributable to HC2 Holdings, Inc. (5,967) (4,558) (1,409) (38,374) (33,085) (5,289)
Less: Preferred stock and deemed dividends from conversions 703
 2,948
 (2,245) 2,079
 5,061
 (2,982)
Net loss attributable to common stock and participating preferred stockholders $(6,670) $(7,506) $836
 $(40,453) $(38,146) $(2,307)


 Three Months Ended March 31,
 20202019Increase / (Decrease)
Net revenue
Construction$176.5  $192.1  $(15.6) 
Energy10.4  5.1  5.3  
Telecommunications186.4  155.5  30.9  
Insurance63.8  88.8  (25.0) 
Broadcasting10.1  9.8  0.3  
Eliminations (1)
(2.4) (2.3) (0.1) 
Total net revenue444.8  449.0  (4.2) 
Income (loss) from operations
Construction2.6  5.7  (3.1) 
Energy1.7  (0.4) 2.1  
Telecommunications0.1  0.6  (0.5) 
Insurance(12.6) 34.4  (47.0) 
Life Sciences(3.2) (1.8) (1.4) 
Broadcasting(2.9) (3.3) 0.4  
Other(1.0) (0.1) (0.9) 
Non-operating Corporate(9.1) (7.2) (1.9) 
Eliminations (1)
(2.4) (2.3) (0.1) 
Total income (loss) from operations(26.8) 25.6  (52.4) 
Interest expense(21.3) (18.8) (2.5) 
Loss on early extinguishment or restructuring of debt(5.8) —  (5.8) 
Loss from equity investees(2.5) (5.9) 3.4  
Other income, net2.8  3.4  (0.6) 
(Loss) income from continuing operations(53.6) 4.3  (57.9) 
Income tax benefit (expense)12.6  (4.0) 16.6  
(Loss) income from continuing operations(41.0) 0.3  (41.3) 
Loss from discontinued operations (including loss on disposal of $39.3 million)(60.0) (6.6) (53.4) 
Net loss(101.0) (6.3) (94.7) 
Net loss attributable to noncontrolling interest and redeemable noncontrolling interest17.9  3.5  14.4  
Net loss attributable to HC2 Holdings, Inc.(83.1) (2.8) (80.3) 
Less: Preferred dividends, deemed dividends, and repurchase gains0.4  (1.2) 1.6  
Net loss attributable to common stock and participating preferred stockholders$(83.5) $(1.6) $(81.9) 
Three months ended September 30, 2017 compared to(1) The Insurance segment revenues are inclusive of realized and unrealized gains and net investment income for the three months ended September 30, 2016March 31, 2020 and 2019, which are related to transactions between entities under common control which are eliminated or are reclassified in consolidation.


Net revenue:revenue: Net revenue for the three months ended September 30, 2017March 31, 2020 decreased $6.7$4.2 million to $406.4$444.8 million from $413.1$449.0 million for the three months ended September 30, 2016. ThisMarch 31, 2019. The decrease in revenue was due to our Telecommunications segment driven by a reductionour Insurance segment, net of eliminations, largely driven by unrealized losses resulting from unfavorable market movements in wholesale traffic volumesvalues for preferred stock holdings, partially offset by an increase in gains recognized on fixed maturities, and our Marine ServicesConstruction segment, primarily driven by a reduction in revenue contributionlower revenues from telecom installation revenues. The decrease wasour structural steel fabrication and erection business. These were largely offset by increases at our ConstructionTelecommunications segment, largely dueattributed to contribution from large complex projects gaining momentumchanges in the Western region,customer mix and additional revenues from the acquisitions of PDC and BDS, which were acquiredfluctuations in the fourth quarter of 2016.wholesale traffic volumes.


42

Income (loss) from operations:operations: Income (loss) from operations for the three months ended September 30, 2017 increased $3.7March 31, 2020 decreased $52.4 million to $10.6a loss of $26.8 million from $6.9income of $25.6 million for the three months ended September 30, 2016.March 31, 2019. The increasedecrease in operations was primarily driven by our Insurance segment fromlargely driven by a decreasedecline in reserves, largelyrevenues, due to conditional non-forfeiture options ("CNFO") electionsunrealized losses from unfavorable market movements in values for common and terminations exceeding plan. This was partially offset by our Marine Services segment driven by decreases in revenue, and our Life Sciences segmentpreferred stock holdings as a result of additional researchthe COVID-19 pandemic, partially offset by an increase in gains recognized on certain fixed maturities. Further adding to the decrease was an increase in policy benefits, changes in reserves, and commissions due to non-recurring favorable claims activity recognized in the comparable period along with unfavorable claims activity and reserves development expenses at R2 Dermatology Inc. ("R2") and BeneVir Biopharm, Inc. ("BeneVir").in the current quarter.


Interest expense:expense: Interest expense for the three months ended September 30, 2017March 31, 2020 increased $2.5 million to $13.2$21.3 million from $10.7$18.8 million for the three months ended September 30, 2016.March 31, 2019. The increase was driven by the netlargely attributable to an increase in the aggregate principal amount of debt at our 11.0% Notes compared to the previous period.Broadcasting segment.




GainLoss on contingent consideration: Gainearly extinguishment or restructuring of debt: Loss on continent considerationearly extinguishment or restructuring of debt for the three months ended September 30, 2017 increased $4.9 million to $6.3 million from $1.4 million for the three months ended September 30, 2016. The increaseMarch 31, 2020 was $5.8 million. This was driven by the reduction to the contingency reserve established by the Companywrite-off of deferred financing costs and original issuance discount related to the Insurance acquisition as$15.0 million pay down of the 2019 Revolving Credit Agreement and the $76.9 million redemption of the Senior Secured Notes at a result of changes in interest rate expectations.4.5% premium.


IncomeLoss from equity investees: IncomeLoss from equity investees for the three months ended September 30, 2017 increased $0.6March 31, 2020 decreased $3.4 million to $1.0$2.5 million from $0.3$5.9 million for the three months ended September 30, 2016.March 31, 2019. The increasedecrease in incomeloss was largely driven by Inseego, as the Company did not recognize losses from our investment in the current period as our basis in this investment is zero, partially offset bydue to lower equity method losses recorded from our equity investment in MediBeacon asHMN.

Income tax benefit (expense): Income tax benefit (expense) was a resultbenefit of our increased ownership$12.6 million and additional expenses following successful completionan expense of certain development and clinical milestones and a reduction in income from our equity interests in Huawei Marine Networks ("HMN"), which had a strong quarter in the comparable period.

Other expenses, net: Other expense, net for the three months ended September 30, 2017 decreased $4.5 million to $0.1 million from $4.6$4.0 million for the three months ended September 30, 2016. The decrease was driven by a prior year impairment related to one fixed maturity securityMarch 31, 2020 and the step-down acquisition loss from our consolidation of NerVve in August 2016. These expenses were not repeated in the current period.

Income tax (expense) benefit: Income tax benefit (expense) was an expense of $12.9 million and a benefit of $1.3 million for the three months ended September 30, 2017 and 2016,2019, respectively. The income tax expense recorded for September 30, 2017 relates primarily to the appreciation of investments and the mix of income and losses by taxpaying entities, including the Insurance segment, which generated income in the third quarter of 2017 as a result of the release in reserves. The income tax benefit recorded for September 30, 2016 related to losses generated for which we expected to obtain benefits from in the future.
Preferred stock dividends and deemed dividends from conversions: Preferred stock dividends and deemed dividends for the three months ended September 30, 2017 decreased $2.2 millionMarch 31, 2020 primarily relates to $0.7 million from $2.9 million for the three months ended September 30, 2016. In the comparable period, the Company issued deemed dividends which were used to induce conversion of shares held by Corrib Master Fund, Ltd. and certain investment entities managed by Luxor Capital Group, LP, which were not repeated in the current period. In addition to the decrease in deemed dividends, conversions during the nine months ended September 30, 2017 and 2016 reduced the preferred share dividends paid on a quarterly basis.

Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016

Net revenue: Net revenue for the nine months ended September 30, 2017 increased $71.5 million to $1,175.6 million from $1,104.1 million for the nine months ended September 30, 2016. All segments recognized increased revenues during the nine months ended September 30, 2017. The Construction segment was a major driver of the increase, largely due to revenuesone-time, discrete tax benefit from the acquisitionscarry back of PDC and BDS. In addition, we had growth innet operating losses at the Insurance segment due to an increase in net investment income and net gains realized from sales of fixed maturity and equity securities, our Telecommunications segment as a result of growth in wholesale traffic volumes and an increase in revenue in our Marine Services segment driven by offshore power installation revenues. Further adding to the increase was our Energy segment as a result of Compressed Natural Gas ("CNG") sales from new fueling stations acquired or developed after the third quarter of 2016.
Income (loss) from operations: Income (loss) from operations for the nine months ended September 30, 2017 increased $6.8 million to income of $0.3 million from a loss of $6.4 million for the nine months ended September 30, 2016. The increase was from the Insurance Segment and the release of reserves, offset in part by our Construction segment due to project delays associated with design changes on certain existing projects in backlog and our Life Sciences segment as a result of additional research and development expenses at R2 and BeneVir.

Interest expense: Interest expense for the nine months ended September 30, 2017 increased $7.8 million to $39.4 million from $31.6 million for the nine months ended September 30, 2016. The increase was attributable to the net increaseenactment of the aggregate principal amount of our 11.0% Notes compared to the previous period and the portion of original issue discount and deferred financing fees expensed in the 2017 period through the refinancing date of our 11.0% Bridge Note.

GainCARES Act on contingent consideration: Gain on contingent consideration for the nine months ended September 30, 2017 increased $4.4 million to $6.0 million from $1.6 million for the nine months ended September 30, 2016. The increase was driven by the reduction to the contingency reserve established by the Company related to the Insurance acquisition as a result of changes in interest rate expectations.

Income from equity investees: Income from equity investees for the nine months ended September 30, 2017 increased $9.5 million to $12.7 million from $3.2 million for the nine months ended September 30, 2016. The increase in income was driven by Inseego, as the Company did not recognize losses from our investment in the current period as our basis in this investment is zero, and our Marine Services segment, principally from its equity interests in HMN, which realized a significant increase in earnings compared to the prior period. This was partially offset by our investment in MediBeacon as a result of our increased ownership and additional expenses following successful completion of development and clinical milestones.

Other expenses, net: Other expense, net for the nine months ended September 30, 2017 increased $2.3 million to $8.1 million compared to $5.8 million for the nine months ended September 30, 2016. The increase is attributable to an increase in impairment expense in 2017, driven by impairments of one fixed maturity security and our original investment in DTV, and an increase foreign currency transaction expense largely driven by our Marine Services segment, offset by a prior year impairment related to one fixed maturity security.



Income tax (expense) benefit: Income tax (expense) benefit was an expense of $16.2 million and a benefit of $3.6 million for the nine months ended September 30, 2017 and 2016, respectively. The income tax expense recorded for the nine months ended September 30, 2017 relates to the projected expense as calculated under ASC 740 for taxpaying entities.March 27, 2020. Additionally, the tax benefits associated with losses generated by the HC2 Holdings, Inc. U.S. consolidated income tax return and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized prior to expiration. The income tax benefitexpense recorded for the ninethree months ended September 30, 2016March 31, 2019 relates to the projected expense as calculated under ASC 740 for taxpaying entities and because no benefit is recognized on the losses generated for which we expected to obtain benefits from inof the future basedHC2 U.S. tax consolidated group and the losses of their subsidiaries as valuation allowances are recorded on our weighting of all positive and negative evidence that existed at the time. This benefit was partially offset by a valuation allowance recorded against the deferred tax assets of these companies.

Loss from discontinued operations (including loss on disposal of $39.3 million): Loss from discontinued operations for the Insurance segment duringthree months ended March 31, 2020 increased $53.4 million to $60.0 million from $6.6 million for the first quarterthree months ended March 31, 2019. The increase in loss was largely driven by the $39.3 million loss on the sale of 2016.GMSL. Also contributing to the increase in loss was a $9.0 million increase in net loss from the discontinued entity, GMSL. The company did not recognize a tax benefit in discontinued operations from the loss on sale of GMSL and its subsidiaries due to the application of the UK Substantial Shareholder Exception, which exempt capital gains and losses from taxation.

Preferred stockdividends, deemed dividends, and repurchase gains: Preferred dividends, and deemed dividends, from conversions: Preferred stock dividends and deemed dividendsrepurchase gains for the ninethree months ended September 30, 2017March 31, 2020 decreased $3.0$1.6 million to $2.1a loss of $0.4 million from $5.1compared to a gain of $1.2 million for the ninethree months ended September 30, 2016. InMarch 31, 2019.  The decrease was largely driven by the comparable period,Insurance segment's 2019 purchase of 10,000 shares of the Company incurred deemed dividends which were used to induce conversion of shares held by Corrib Master Fund, Ltd. and certain investment entities managed by Luxor Capital Group, LP. These deemed dividends were not repeated in the current period. In addition to the decrease in deemed dividends, conversions during the nine months ended September 30, 2017 and 2016 reduced the preferred share dividends paid onCompany's Series A-2 Preferred Stock at a quarterly basis.$1.7 million discount.


Segment Results of Operations


In the Company's Condensed Consolidated Financial Statements, other operating (income) expense includes (i) (gain) loss on sale or disposal of assets, (ii) lease termination costs, and (iii) asset impairment expense.expense, (iv) accretion of asset retirement obligations, and (v) FCC reimbursements. Each table summarizes the results of operations of our operating segments and compares the amount of the change between the periods presented (in thousands)millions).


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Construction Segment
Three Months Ended March 31,
20202019Increase / (Decrease)
Net revenue$176.5  $192.1  $(15.6) 
Cost of revenue151.2  162.8  (11.6) 
Selling, general and administrative19.9  19.8  0.1  
Depreciation and amortization  2.6  3.9  (1.3) 
Other operating (income) expense 0.2  (0.1) 0.3  
Income from operations  $2.6  $5.7  $(3.1) 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Net revenue $151,697
 $129,551
 $22,146
 $403,325
 $372,964
 $30,361
      

      
Cost of revenue 123,304
 105,246
 18,058
 329,782
 302,993
 26,789
Selling, general and administrative expenses 14,395
 11,558
 2,837
 43,346
 34,251
 9,095
Depreciation and amortization 1,314
 431
 883
 4,194
 1,262
 2,932
Other operating (income) expense 486
 (23) 509
 92
 (963) 1,055
Income from operations $12,198
 $12,339
 $(141) $25,911
 $35,421
 $(9,510)


Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016

Net revenue:Net revenue from our Construction segment for the three months ended September 30, 2017 increased $22.1March 31, 2020 decreased $15.6 million to $151.7$176.5 million from $129.6$192.1 million for the three months ended September 30, 2016.March 31, 2019. The increasedecrease was largely dueprimarily driven by lower revenues from our structural steel fabrication and erection business, attributable to contribution froma reduction in the scale of project work under execution as large, complex projects which began gaining momentum during the third quarter of 2017, primarilyunderway in the Western region, and additional revenues from the acquisitions of PDC and BDSprior period were effectively complete in the fourth quarter of 2016.

Netcurrent period. This was partially offset by an increase in revenue from our Construction segment for the nine months ended September 30, 2017 increased $30.4 million to $403.3 million from $373.0 million for the nine months ended September 30, 2016. The increase was largelyat GrayWolf due to the acquisitions of PDC and BDSincreased project work in the fourth quarter of 2016.current period.


Cost of revenue:Cost of revenue from our Construction segment for the three months ended September 30, 2017 increased $18.1March 31, 2020 decreased $11.6 million to $123.3$151.2 million from $105.2$162.8 million for the three months ended September 30, 2016.March 31, 2019. The increasedecrease was largely due toprimarily driven by the timing of project work under execution and change in backlog mix, including a reduction in large complexcommercial construction projects which increased costs relative to revenues when compared to the previous periods and additional costs from the acquisitions of PDC and BDS in the fourth quarter of 2016.

Cost of revenue from our Construction segment for the nine months ended September 30, 2017 increased $26.8 million to $329.8 million from $303.0 million for the nine months ended September 30, 2016. The increasecurrent period. This was attributable to additional costs from the acquisitions of PDC and BDS in the fourth quarter of 2016 and better than bid performance in the 2016 comparable period.

Selling, general and administrative expenses: Selling, general and administrative expenses from our Construction segment for the three months ended September 30, 2017 increased $2.8 million to $14.4 million from $11.6 million for the three months ended September 30, 2016. Selling, general and administrative expenses from our Construction segment for the nine months ended September 30, 2017 increased $9.1 million to $43.3 million from $34.3 million for the nine months ended September 30, 2016. The increases were due primarily to the additional operatingpartially offset by costs associated with the acquisitions of PDC and BDS in the fourth quarter of 2016.increased project work at GrayWolf.




Depreciation and amortization:amortization: Depreciation and amortization from our Construction segment for the three months ended September 30, 2017 increased $0.9March 31, 2020 decreased $1.3 million to $1.3$2.6 million from $0.4$3.9 million for the three months ended September 30, 2016. Depreciation and amortization from our Construction segment for the nine months ended September 30, 2017 increased $2.9 million, to $4.2 million from $1.3 million for the nine months ended September 30, 2016. This increase was due primarily to the expense associated with the assets acquired through the acquisitions of BDS and PDC in the fourth quarter of 2016. For the nine months ended September 30, 2017, the increase was further affected by a re-class entry which was recorded in the prior year. See Note 2 to our Condensed Consolidated Financial Statements for further details.

Other operating (income) expense: For the three months ended September 30, 2017, we recorded an expense of $0.5 million compared with no income or expense for the three months ended September 30, 2016. Other operating (income) expense from our Construction segment for the nine months ended September 30, 2017 increased by $1.1 million to expense of $0.1 million from income of $1.0 million for the nine months ended September 30, 2016. The increases in expenses were primarily driven by a reduction in gains recognized on the sale of assets sold when compared to the prior periods.

Marine Services Segment
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Net revenue $42,817
 $50,653
 $(7,836) $123,382
 $116,298
 $7,084
      

      
Cost of revenue 32,475
 35,616
 (3,141) 97,772
 85,383
 12,389
Selling, general and administrative expenses 4,302
 4,690
 (388) 14,026
 14,345
 (319)
Depreciation and amortization 6,221
 5,553
 668
 16,561
 16,794
 (233)
Other operating income —
 —
 —
 (3,251) (10) (3,241)
Income (loss) from operations $(181) $4,794
 $(4,975) $(1,726) $(214) $(1,512)

Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016

Net revenue: Net revenue from our Marine Services segment for the three months ended September 30, 2017 decreased $7.8 million to $42.8 million from $50.7 million for the three months ended September 30, 2016.March 31, 2019. The decrease was driven by a reduction in revenue contribution from telecom installation revenues when comparedprimarily related to the prior period, partially offset by increased contribution from offshore power revenues.

Net revenue from our Marine Services segment for the nine months ended September 30, 2017 increased $7.1 million to $123.4 million from $116.3 million for the nine months ended September 30, 2016. The increases were largely driven by revenue contribution from offshore power installation, partially offset by a decrease in telecom installation revenues when comparedfull depreciation and amortization of assets that took place subsequent to the prior periods.comparable period.


Cost of revenue: Cost of revenue from our Marine Services segment for the three months ended September 30, 2017 decreased $3.1 million to $32.5 million from $35.6 million for the three months ended September 30, 2016. The decrease was driven by the change in revenues.

Cost of revenue from our Marine Services segment for the nine months ended September 30, 2017 increased $12.4 million to $97.8 million from $85.4 million for the nine months ended September 30, 2016. The increase was driven by the increases in revenues and additional costs incurred from ongoing offshore power installation and repair projects as a result of project challenges and delays, primarily in the second quarter of 2017.

Depreciation and amortization: Depreciation and amortization from our Marine Services segment for the three months ended September 30, 2017 increased $0.7 million, to $6.2 million from $5.6 million for the three months ended September 30, 2016. This was driven by an increase in depreciable assets compared to the prior period, largely from a CWind vessel purchase.

Other operating income: Other operating income from our Marine Services segment for the nine months ended September 30, 2017 increased $3.2 million to $3.3 million income from zero compared to the nine months ended September 30, 2016, driven by the current period gain on the sale of a maintenance vessel.



Energy Segment
Three Months Ended March 31,
20202019Increase / (Decrease)
Net revenue$10.4  $5.1  $5.3  
Cost of revenue5.0  3.2  1.8  
Selling, general and administrative1.6  0.9  0.7  
Depreciation and amortization2.1  1.4  0.7  
Income (loss) from operations $1.7  $(0.4) $2.1  
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Net revenue $3,919
 $1,664
 $2,255
 $12,301
 $4,151
 $8,150
      

      
Cost of revenue 2,935
 635
 2,300
 7,770
 1,570
 6,200
Selling, general and administrative expenses 873
 299
 574
 2,400
 1,042
 1,358
Depreciation and amortization 1,247
 581
 666
 3,876
 1,480
 2,396
Other operating expense 25
 —
 25
 39
 —
 39
Income (loss) from operations $(1,161) $149
 $(1,310) $(1,784) $59
 $(1,843)


Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016

Net revenue: Net revenue from our Energy segment for the three months ended September 30, 2017March 31, 2020 increased $2.3$5.3 million to $3.9$10.4 million from $1.7$5.1 million for the three months ended September 30, 2016. Net revenue from our Energy segment for the nine months ended September 30, 2017 increased $8.2 million to $12.3 million from $4.2 million for the nine months ended September 30, 2016.March 31, 2019. The increases wereincrease was primarily driven by acquisitions in 2016, which added fueling stations, and from additional developed stations commissioned subsequenthigher volume-related revenues attributable to the comparable periods. Thisinclusion of the acquired ampCNG stations, which was partially offsetacquired in June 2019. Additionally, the increase was driven by AFTC revenue related to CNG sales recognized in the utilization of tax creditscurrent period. The AFTC had not yet been renewed for 2019 in the comparable periods, which expired on December 31, 2016 and were not renewed in 2017.period.


Cost of revenue: Cost of revenue from our Energy segment for the three months ended September 30, 2017March 31, 2020 increased $2.3$1.8 million to $2.9$5.0 million from $0.6$3.2 million for the three months ended September 30, 2016. CostMarch 31, 2019. The increase was due to the overall growth in volume of revenue from our Energy segment for the nine months ended September 30, 2017 increased $6.2 million to $7.8 million from $1.6 million for the nine months ended September 30, 2016. The increases weregasoline gallons delivered and higher commodity and utility costs driven by an increase in CNG supply and utilities expenses from the new stations acquired or developed subsequent to the comparable periods, along with increased station down time and repair and maintenance expenses associated with the integrationacquisition of acquired stations from Constellation CNG and Questar Fueling Company.ampCNG stations.


Selling, general and administrative expenses:administrative: Selling, general and administrative expenses from our Energy segment for the three months ended September 30, 2017March 31, 2020 increased $0.6$0.7 million to $0.9$1.6 million from $0.3$0.9 million for the three months ended September 30, 2016. Selling, general and administrative expenses from ourMarch 31, 2019. The increase was driven by the overall growth of the Energy segment for the nine months ended September 30, 2017 increased $1.4 millionas it continues to $2.4 million from $1.0 million for the nine months ended September 30, 2016. The increases were driven primarily by an increase in operating expenses due to growth in the number of stations.its national footprint.


Depreciation and amortization: Depreciation and amortization from our Energy segment for the three months ended September 30, 2017March 31, 2020 increased $0.7 million to $1.2$2.1 million from $0.6$1.4 million for the three months ended September 30, 2016. DepreciationMarch 31, 2019. The increase was due to additional depreciation and amortization from our Energy segment for the nine months ended September 30, 2017 increased $2.4 million to $3.9 million from $1.5 million for the nine months ended September 30, 2016. The increases were primarily due to newacquisition of ampCNG stations acquired and developed subsequent to the third quarter of 2016.completed in June 2019.



44

Telecommunications Segment
Three Months Ended March 31,
20202019Increase / (Decrease)
Net revenue$186.4  $155.5  $30.9  
Cost of revenue184.3  152.3  32.0  
Selling, general and administrative1.9  2.5  (0.6) 
Depreciation and amortization0.1  0.1  —  
Income from operations  $0.1  $0.6  $(0.5) 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Net revenue $167,881
 $194,411
 $(26,530) $520,214
 $508,248
 $11,966
      

      
Cost of revenue 164,336
 190,260
 (25,924) 508,306
 498,558
 9,748
Selling, general and administrative expenses 2,062
 1,947
 115
 6,585
 5,687
 898
Depreciation and amortization 94
 145
 (51) 285
 390
 (105)
Other operating (income) expense 15
 (159) 174
 15
 179
 (164)
Income from operations $1,374
 $2,218
 $(844) $5,023
 $3,434
 $1,589


Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016

Net revenue: revenue: Net revenue from our Telecommunications segment for the three months ended September 30, 2017 decreased $26.5March 31, 2020 increased $30.9 million to $167.9$186.4 million from $194.4$155.5 million for the three months ended September 30, 2016.March 31, 2019. The decrease was due primarilyincrease can be attributed to changes in our customer mix and fluctuations in wholesale traffic volumes.volumes, which can result in variability across periods.


Net revenue from our Telecommunications segment for the nine months ended September 30, 2017 increased $12.0 million to $520.2 million from $508.2 million for the nine months ended September 30, 2016. The increase was due primarily to growth in wholesale traffic volumes driven by new routing and growing relationships with existing customers.



Cost of revenue:Cost of revenue from our Telecommunications segment for the three months ended September 30, 2017 decreased $25.9March 31, 2020 increased $32.0 million to $164.3$184.3 million from $190.3$152.3 million for the three months ended September 30, 2016. The decrease was due primarily to fluctuations in wholesale traffic volumes.

Cost of revenue from our Telecommunications segment for the nine months ended September 30, 2017 increased $9.7 million to $508.3 million from $498.6 million for the nine months ended September 30, 2016.March 31, 2019. The increase was directly correlated to the growthfluctuations in wholesale trafficvoice termination volumes, partially offset by the segment's increased focusin addition to a slight reduction in margin mix attributed to market pressures on lower cost termination.call termination rates.


Selling, general and administrative: Selling, general and administrative expenses from our Telecommunications segment for the ninethree months ended September 30, 2017 increased $0.9March 31, 2020 decreased $0.6 million to $6.6$1.9 million from $5.7$2.5 million for the ninethree months ended September 30, 2016.March 31, 2019. The increasedecrease was primarily due primarily to an increasea decrease in salariescompensation expense due to a lower headcount and commission expense as a result of improved sales force performance, as well as from an increasereductions in operational support costs.bad debt expense.


Insurance Segment
Three Months Ended March 31,
20202019Increase / (Decrease)
Life, accident and health earned premiums, net$28.5  $29.8  $(1.3) 
Net investment income54.3  53.0  1.3  
Net realized and unrealized gains (loss) on investments(19.0) 6.0  (25.0) 
Net revenue63.8  88.8  (25.0) 
Policy benefits, changes in reserves, and commissions72.4  52.7  19.7  
Selling, general and administrative9.9  8.2  1.7  
Depreciation and amortization(5.9) (6.5) 0.6  
(Loss) income from operations (1)
$(12.6) $34.4  $(47.0) 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Life, accident and health earned premiums, net $20,472
 $19,967
 $505
 $60,648
 $59,939
 $709
Net investment income 16,287
 14,799
 1,488
 48,530
 42,585
 5,945
Net realized gains (losses) on investments 978
 (220) 1,198
 2,854
 (2,677) 5,531
Net revenue 37,737
 34,546
 3,191
 112,032
 99,847
 12,185
      

     

Policy benefits, changes in reserves, and commissions17,393
 29,689
 (12,296) 79,323
 92,784
 (13,461)
Selling, general and administrative 4,187
 6,356
 (2,169) 15,445
 15,881
 (436)
Depreciation and amortization (1,319) (1,161) (158) (3,440) (2,901) (539)
Income (loss) from operations $17,476
 $(338) $17,814
 $20,704
 $(5,917) $26,621

Three(1) The Insurance segment revenues are inclusive of realized and nineunrealized gains and net investment income for the three months ended September 30, 2017 comparedMarch 31, 2020 and 2019. Such adjustments are related to transactions between entities under common control which are eliminated or are reclassified in consolidation.

Life, accident and health earned premiums, net: Life, accident and health earned premiums, net from our Insurance segment for the three and nine months ended September 30, 2016March 31, 2020 decreased $1.3 million to $28.5 million from $29.8 million for the three months ended March 31, 2019. The decrease was primarily related to run-off of the closed blocks of business.


Net investment income: Net investment income from our Insurance segment for the three months ended September 30, 2017March 31, 2020 increased $1.5$1.3 million to $16.3$54.3 million from $14.8$53.0 million for the three months ended September 30, 2016. Net investment income from our Insurance segment forMarch 31, 2019. The increase was due to the nine months ended September 30, 2017 increased $5.9 million to $48.5 million from $42.6 million for the nine months ended September 30, 2016. The increases were primarily driven by an increasedeployment of cash held in money market accounts into fixed maturity securities and mortgage loans largelyoffset by decline in dividend income from investment of premium proceeds.a reduction in preferred stock holdings.


Net realized and unrealized gains (losses)(loss) on investments:Net realized and unrealized gains (losses)(loss) on investments from our Insurance segment for the three months ended September 30, 2017 increased $1.2March 31, 2020 decreased $25.0 million to a $1.0loss of $19.0 million gain from a $0.2gain of $6.0 million loss for the three months ended September 30, 2016.March 31, 2019. The changedecrease was due to the timing of sales of fixed maturity and equity securities and mark to market adjustments of interest only bonds.

Net realized gains (losses) on investments from our Insurance segment for the nine months ended September 30, 2017 increased $5.5 million to a $2.9 million gain from a $2.7 million loss for the nine months ended September 30, 2016. The change was due to the timing of sales of fixed maturity and equity securities, reduction of realizeddriven by unrealized losses from prior period, and mark tounfavorable market adjustmentsmovements in values for preferred stock holdings as a result of interest only bonds.the COVID-19 pandemic, partially offset by an increase in gains recognized on fixed maturities.


Policy benefits, changes in reserves, and commissions:commissions: Policy benefits, changes in reserves, and commissions from our Insurance segment for the three months ended September 30, 2017 decreased $12.3March 31, 2020 increased $19.7 million to $17.4$72.4 million from $29.7$52.7 million for the three months ended September 30, 2016.March 31, 2019. The decreaseincrease was driven by the decrease in reserves in large part due to conditional non-forfeiture options ("CNFO") electionsnon-recurring favorable claims activity recognized in the comparable period along with unfavorable claims activity and terminations exceeding plan as a result of rate increases approved earlierreserves development in 2017.the current quarter.


Policy benefits, changes in reserves, and commissions for the nine months ended September 30, 2017 decreased $13.5 million to $79.3 million from $92.8 million for the nine months ended September 30, 2016. The decrease was primarily due to certain implemented long term care rate increases, which generated significant CNFO activity during the nine months ended September 30, 2017. This was not experienced during the nine months ended September 30, 2016 significantly reducing the increase in reserves from the prior year.

Selling, general and administrative: Selling, general and administrative expenses from our Insurance segment for the three months ended September 30, 2017 decreased $2.2March 31, 2020 increased $1.7 million to $4.2$9.9 million from $6.4$8.2 million for the three months ended September 30, 2016.March 31, 2019. The increase was driven by increases in headcount to support the growth of the segment, additional premium taxes, and miscellaneous software expenses.
45


Depreciation and amortization: Depreciation and amortization from our Insurance segment for the three months ended March 31, 2020 decreased $0.6 million to $5.9 million from $6.5 million for the three months ended March 31, 2019. The decrease was driven by a reduction in negative VOBA amortization largely attributabledue to lower taxes, licenses and fees, and lower transition spend withpolicy terminations for the conclusion of the transition services agreement with Great AmericanLTC policies acquired in the first quarter of 2017.2018.




Life Sciences Segment
Three Months Ended March 31,
20202019Increase / (Decrease)
Selling, general and administrative$3.2  $1.8  $1.4  
Loss from operations  $(3.2) $(1.8) $(1.4) 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Selling, general and administrative expenses $6,387
 $2,506
 $3,881
 $13,038
 $7,195
 $5,843
Depreciation and amortization 50
 32
 18
 129
 87
 42
Loss from operations $(6,437) $(2,538) $(3,899) $(13,167) $(7,282) $(5,885)


Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016

Selling, general and administrative expenses:: Selling, general and administrative expenses from our Life Sciences segment for the three months ended September 30, 2017March 31, 2020 increased $3.9$1.4 million to $6.4$3.2 million from $2.5$1.8 million for the three months ended September 30, 2016. March 31, 2019. The increase was driven by higher expenses at R2 Technologies, which increased spending from the comparable period to ramp up efforts to achieve commercialization of its products.

Broadcasting
Three Months Ended March 31,
20202019Increase / (Decrease)
Net revenue$10.1  $9.8  $0.3  
Cost of revenue5.6  6.2  (0.6) 
Selling, general and administrative5.7  6.4  (0.7) 
Depreciation and amortization1.7  1.4  0.3  
Other operating income  —  (0.9) 0.9  
Loss from operations  $(2.9) $(3.3) $0.4  

Net revenue: Net revenue from our Broadcasting segment for the three months ended March 31, 2020 increased $0.3 million to $10.1 million from $9.8 million for the three months ended March 31, 2019. The increase was primarily driven by higher station revenues as our broadcasting segment grew the number of its operating stations, partially offset by a decrease in advertising revenues at the Azteca network driven by the negative impact of the COVID-19 pandemic.

Cost of revenue: Cost of revenue from our Broadcasting segment for the three months ended March 31, 2020 decreased $0.6 million to $5.6 million from $6.2 million for the three months ended March 31, 2019. The overall decrease was primarily driven by cost reductions at Network, partially offset by increased cost of revenues associated with the higher number of operating stations.

Selling, general and administrative: Selling, general and administrative expenses from our Life Sciences segment for the nine months ended September 30, 2017 increased $5.8 million to $13.0 million from $7.2 million for the nine months ended September 30, 2016. The increases were primarily due to progress driven increases in clinical expenses and research and development at R2 and BeneVir.

Other Segment
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Net revenue $2,358
 $2,259
 $99
 $4,375
 $2,613
 $1,762
             
Cost of revenue 1,623
 2,103
 (480) 4,121
 4,388
 (267)
Selling, general and administrative expenses 1,846
 2,096
 (250) 4,674
 3,756
 918
Depreciation and amortization 272
 378
 (106) 933
 1,052
 (119)
Other operating expense —
 —
 —
 1,811
 —
 1,811
Loss from operations $(1,383) $(2,318) $935
 $(7,164) $(6,583) $(581)

Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016

Net revenue: Net revenue from our OtherBroadcasting segment for the three months ended September 30, 2017 increased $0.1March 31, 2020 decreased $0.7 million to $2.4$5.7 million from $2.3$6.4 million for the three months ended September 30, 2016.March 31, 2019. The comparable revenue for the third quarter can be attributeddecrease was primarily due to the timing of the release of both the 2017lower stock-based compensation, acquisition, legal and 2016 version of the NASCAR® console games.other overhead expenses.


Net revenueDepreciation and amortization: Depreciation and amortization from our Other segment for the nine months ended September 30, 2017 increased $1.8 million, to $4.4 million from $2.6 million for the nine months ended September 30, 2016. The increases were primarily driven by an increase in mobile game sales as a result of the NASCAR® Heat mobile game release in June 2017 and additional 2017 console game sales from the NASCAR® Heat Evolutiongame, which was released in September 2016. These sales significantly outperformed the sales of its predecessor NASCAR® '15 console game in the prior period.

Cost of revenue: Cost of revenue from our OtherBroadcasting segment for the three months ended September 30, 2017 decreased $0.5March 31, 2020 increased $0.3 million to $1.6$1.7 million from $2.1$1.4 million for the three months ended September 30, 2016.March 31, 2019. The decreaseincrease was driven by a reduction in distribution fees from 704Games' largest distributor, and a decrease in development fees for our console game as there were one time fees incurred in 2016additional amortization of fixed assets which were not repeatedacquired subsequent to the comparable period.

Other operating income: Other operating income from our Broadcasting segment for the three months ended March 31, 2020 decreased $0.9 million to zero from income of $0.9 million for the three months ended March 31, 2019. The change was primarily due to losses from the disposal of fixed assets in the current period.


Cost of revenue from our Other segment for the nine months ended September 30, 2017 decreased $0.3 million to $4.1 million from $4.4 million for the nine months ended September 30, 2016.The decrease was driven by a reduction in distribution fees from 704Games' largest distributor, and a decrease in development fees for our console game as there were one time fees incurred in 2016 which were not repeated in the current period. The decrease was partially offset by an increase in NASCAR® royalty expenses as a result of higher revenue in 2017 compared to 2016.

Other
Three Months Ended March 31,
20202019Increase / (Decrease)
Selling, general and administrative$1.0  $0.1  $0.9  
Loss from operations  $(1.0) $(0.1) $(0.9) 

Selling, general and administrative:administrative: Selling, general and administrative expenses from our Other segment for the three months ended September 30, 2017 decreased $0.3March 31, 2020 increased $0.9 million to $1.8$1.0 million from $2.1$0.1 million for the three months ended September 30, 2016. The decrease was mainly driven by cost saving measures implemented at 704Games during the third quarter of 2017.

Selling, general and administrative expenses from our Other segment for the nine months ended September 30, 2017 increased $0.9 million to $4.7 million from $3.8 million for the nine months ended September 30, 2016.March 31, 2019. The increase was driven by an increase in costs associated with NerVve, which was consolidatedthe sale of the Company's equity investment in August 2016, and increased salary and benefits expenses at 704Games.HMN, expected to close in the second quarter of 2020.


Other operating expense: Other operating expense from our Other segment for the nine months ended September 30, 2017 was an expense of $1.8 million driven by impairment expense of NerVve's goodwill and property, plant and equipment.

46



Non-operating Corporate
Three Months Ended March 31,
20202019Increase / (Decrease)
Selling, general and administrative$9.1  $7.2  $1.9  
Loss from operations  $(9.1) $(7.2) $(1.9) 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Selling, general and administrative expenses $11,304
 $7,452
 $3,852
 $27,405
 $25,337
 $2,068
Depreciation and amortization 17
 —
 17
 50
 —
 50
Loss from operations $(11,321) $(7,452) $(3,869) $(27,455) $(25,337) $(2,118)


Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016

Selling, general and administrative expenses:: Selling, general and administrative expenses from our Non-operating Corporate segment for the three months ended September 30, 2017March 31, 2020 increased $3.9$1.9 million to $11.3$9.1 million from $7.5$7.2 million for the three months ended September 30, 2016.March 31, 2019. The increase was primarily attributable to bonus related compensationdriven by legal costs incurred associated with the increase in Net Asset Value ("NAV") atconsent revocation, acquisition costs, and the endannual stockholder meeting related to the current board solicitation matter with certain stockholders of the quarter, from compensation related expenses associated with some senior management changes we announced during the quarter, and acquisition related costs which increased compared to the previous period as a result of increased acquisition activity.

Selling, general and administrative expenses from our Non-operating Corporate segment for the nine months ended September 30, 2017 increased $2.1 million to $27.4 million from $25.3 million for the nine months ended September 30, 2016. The increaseCompany. This was attributable to bonus related compensation associated with the increase in NAV at the end of the period, from compensation related expenses associated with some senior management changes we announced during the quarter, and acquisition related costs which increased compared to the previous period as a result of increased activity. These increases were partially offset by a reduction in share-based compensation expense as a result of equity awards which fully vested in the first quarter of 2016 and minimal grants of such equity awards in 2016 and professional fees related to the restatement of 2014 results in 2016, which were not presentreduced overhead costs in the current period.


The HC2 Compensation Committee established annual salary, cash and equity-based bonus arrangements for certain HC2 executive employees. In determining the amounts payable pursuant to such cash and equity-based bonus arrangements for these employees, the Company has historically measured the growth in the Company’s NAV in accordance with a formula established by HC2’s Compensation Committee (“Compensation NAV”). The Compensation NAV is generally determined by dividing the end of year Compensation NAV per share by the beginning year Compensation NAV per share and subtracting 1 from this amount (the “NAV Return”), and then subtracting the required threshold return rate from the NAV Return.  

For the nine months ended September 30, 2017, underlying performance of the Compensation NAV increased 24.0% as compared to an increase of less than 1% for the comparable period.  Because the NAV Return did not exceed the required threshold return rate for the twelve months ended December 31, 2015, the 2016 beginning year Compensation NAV per share was equal to the 2015 end of year Compensation NAV per share. A Compensation NAV bonus was not accrued for in respect of the nine months ended September 30, 2016, because the NAV Return did not exceed the required threshold return rate.

Income (loss)Loss from Equity InvestmentsInvestees
Three Months Ended March 31,
20202019Increase / (Decrease)
Life Sciences$(1.0) $(1.1) $0.1  
Other(1.5) (4.8) 3.3  
Loss from equity investees  $(2.5) $(5.9) $3.4  
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Marine Services $2,839
 $3,778
 $(939) $17,094
 $11,240
 $5,854
Life Sciences (1,840) (520) (1,320) (4,342) (1,235) (3,107)
Other (28) (2,923) 2,895
 (85) (6,852) 6,767
Income from equity investments $971
 $335
 $636
 $12,667
 $3,153
 $9,514


Three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016

Marine Services: Income from equity investments in our Marine Services segment for the three months ended September 30, 2017 decreased $0.9 million to $2.8 million from $3.8 million for the three months ended September 30, 2016. The decrease in income was driven by a reduction in income from our equity interests in HMN due to timing of projects in the period.

Income from equity investments in our Marine Services segment for the nine months ended September 30, 2017 increased $5.9 million to $17.1 million from $11.2 million for the nine months ended September 30, 2016. The increase in income was primarily driven by strong performance from our equity interest in HMN in the first quarter of 2017.

Life Sciences: Other: Loss from equity investments from our Life Sciences segment for the three months ended September 30, 2017 increased $1.3 million to a loss of $1.8 million from a loss of $0.5 million for the three months ended September 30, 2016. Loss from equity investments from our Life Sciences segment for the nine months ended September 30, 2017 increased $3.1 million to a loss of $4.3 million from a loss of $1.2 million for the nine months ended September 30, 2016. The increases were largely due to higher equity method losses recorded from our investment in MediBeacon as a result of our increased ownership and additional expenses following successful completion of development and clinical milestones.


Other: Loss from equity investments frominvestees within our Other segment for the three months ended September 30, 2017March 31, 2020 decreased $2.9$3.3 million when compared to $1.5 million from $4.8 million for the three months ended September 30, 2016. Loss from equity investments from our Other segment for the nine months ended September 30, 2017 decreased $6.8 million when compared to the nine months ended September 30, 2016.March 31, 2019. The changedecrease was driven by Inseego,the equity investment in HMN, as the Company did not recognizejoint venture produced less losses from our investmentthan in the currentprior period, as our basis in this investmentwhich is zero.generally attributable to timing of turnkey project work.


Non-GAAP Financial Measures and Other Information


Adjusted EBITDA


Adjusted EBITDA is not a measurement recognized under U.S. GAAP. In addition, other companies may define Adjusted EBITDA differently than we do, which could limit its usefulness.


Management believes that Adjusted EBITDA provides investors with meaningful information for gaining an understanding of our results as it is frequently used by the financial community to provide insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation, amortization and the other items listed in the definition of Adjusted EBITDA below can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a company’s ability to service debt. While management believes that non-U.S. GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our U.S. GAAP financial results. Using Adjusted EBITDA as a performance measure has inherent limitations as an analytical tool as compared to net income (loss) or other U.S. GAAP financial measures, as this non-GAAP measure excludes certain items, including items that are recurring in nature, which may be meaningful to investors. As a result of the exclusions, Adjusted EBITDA should not be considered in isolation and does not purport to be an alternative to net income (loss) or other U.S. GAAP financial measures as a measure of our operating performance. Adjusted EBITDA excludes the results of operations and any consolidating eliminations of our Insurance segment.


The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss) as adjusted for depreciation and amortization; amortizationOther operating (income) expense, which is inclusive of equity method fair value adjustments at acquisition; (gain) loss on sale or disposal of assets;assets, lease termination costs;costs, and FCC reimbursements; asset impairment expense; interest expense; net gain (loss) on contingent consideration; loss on early extinguishment or restructuring of debt; gain (loss) on sale of subsidiaries; other (income) expense, net; foreign currency transaction (gain) loss included in cost of revenue; income tax (benefit) expense; (gain) loss from discontinued operations; noncontrolling interest; bonus to be settled in equity; share-based compensation expense; discontinued operations; non-recurring items; and acquisition and disposition costs.

47
Three months ended September 30, 2017 compared to the three months ended September 30, 2016



Our Adjusted EBITDA was $9.8 million and $18.2 million for the three months ended September 30, 2017 and 2016, respectively. The decrease was primarily due to our Marine Services segment, driven by decreases in telecom installation revenues, a reduction in equity method income, and increased losses from our Life Sciences segment, as our early stage companies continue to develop their businesses and meet major milestones.
(in millions)Three months ended March 31, 2020
Core Operating SubsidiariesEarly Stage & OtherNon-operating CorporateHC2
ConstructionEnergyTelecomLife SciencesBroadcastingOther and Eliminations
Net loss attributable to HC2 Holdings, Inc.$(83.1) 
Less: Net income attributable to HC2 Holdings Insurance segment—  
Less: Consolidating eliminations attributable to HC2 Holdings Insurance segment(1.6) 
Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance segment$(0.1) $0.6  $0.6  $(3.2) $(6.2) $(42.1) $(31.1) $(81.5) 
Adjustments to reconcile net income (loss) to Adjusted EBITDA:
Depreciation and amortization2.6  2.1  0.1  —  1.7  —  —  6.5  
Depreciation and amortization (included in cost of revenue)2.3  —  —  —  —  —  —  2.3  
Other operating (income) expenses0.2  —  —  —  —  —  —  0.2  
Interest expense2.2  1.2  —  —  3.2  —  14.7  21.3  
Other (income) expense, net0.2  (0.4) (0.4) —  1.3  (0.6) (1.8) (1.7) 
Loss on early extinguishment of debt—  —  —  —  —  —  5.8  5.8  
Income tax (benefit) expense0.2  —  —  —  —  —  (0.4) (0.2) 
Noncontrolling interest—  0.3  —  (1.0) (1.1) (16.1) —  (17.9) 
Share-based payment expense—  —  —  —  0.1  —  1.4  1.5  
Discontinued Operations—  —  —  —  —  56.3  3.8  60.1  
Non-recurring items1.3  —  —  —  —  —  1.4  2.7  
Acquisition and disposition costs0.1  —  0.1  —  —  0.9  1.2  2.3  
Adjusted EBITDA$9.0  $3.8  $0.4  $(4.2) $(1.0) $(1.6) $(5.0) $1.4  
Total Core Operating Subsidiaries$13.2  



(in millions)Three months ended March 31, 2019
Core Operating SubsidiariesEarly Stage & OtherNon-operating CorporateHC2
ConstructionEnergyTelecomLife SciencesBroadcastingOther and Eliminations
Net loss attributable to HC2 Holdings, Inc.$(2.8) 
Less: Net income attributable to HC2 Holdings Insurance segment33.8  
Less: Consolidating eliminations attributable to HC2 Holdings Insurance segment(2.3) 
Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance Segment$2.1  $(0.6) $0.6  $(2.6) $(4.4) $(5.8) $(23.6) $(34.3) 
Adjustments to reconcile net income (loss) to Adjusted EBITDA:
Depreciation and amortization3.9  1.4  0.1  —  1.4  —  —  6.8  
Depreciation and amortization (included in cost of revenue)2.1  —  —  —  —  —  —  2.1  
Other operating (income) expenses(0.1) —  —  —  (0.9) —  —  (1.0) 
Interest expense2.5  0.4  —  —  1.6  —  14.2  18.7  
Other (income) expense, net—  0.1  —  —  0.1  —  —  0.2  
Gain on sale and deconsolidation of subsidiary—  —  —  —  —  (0.8) (2.7) (3.5) 
Income tax (benefit) expense1.0  —  —  —  —  —  2.3  3.3  
Noncontrolling interest0.1  (0.3) —  (0.3) (0.6) (2.4) —  (3.5) 
Share-based payment expense—  —  —  —  —  —  1.1  1.1  
Discontinued operations—  —  —  —  0.2  4.1  2.5  6.8  
Non-recurring items—  —  —  —  —  —  —  —  
Acquisition and disposition costs0.8  —  0.1  —  0.1  —  0.1  1.1  
Adjusted EBITDA$12.4  $1.0  $0.8  $(2.9) $(2.5) $(4.9) $(6.1) $(2.2) 
Total Core Operating Subsidiaries$14.2  
48

  Three Months Ended September 30, 2017
  Core Operating Subsidiaries Early Stage & Other   HC2
 ConstructionMarine Services Energy Telecom Life SciencesOther and EliminationsNon-operating Corporate 
Net (loss) attributable to HC2 Holdings, Inc.               $(5,967)
Less: Net Income attributable to HC2 Holdings Insurance Segment               4,280
Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance Segment $7,082
 $844
 $(939) $1,348
 $(6,760) $(600) $(11,222) (10,247)
Adjustments to reconcile net income (loss) to Adjusted EBITDA:                
Depreciation and amortization 1,314
 6,221
 1,247
 94
 50
 272
 17
 9,215
Depreciation and amortization (included in cost of revenue) 1,293
 —
 —
 —
 —
 —
 —
 1,293
Amortization of equity method fair value adjustment at acquisition —
 (573) —
 —
 —
 —
 —
 (573)
(Gain) loss on sale or disposal of assets 486
 —
 25
 —
 —
 —
 —
 511
Lease termination costs —
 —
 —
 15
 —
 —
 —
 15
Interest expense 238
 1,021
 262
 14
 —
 1
 11,686
 13,222
Net loss on contingent consideration —
 —
 —
 —
 —
 —
 (6,320) (6,320)
Other (income) expense, net (165) 888
 277
 12
 (10) (118) (718) 166
Foreign currency (gain) loss (included in cost of revenue) —
 (238) —
 —
 —
 —
 —
 (238)
Income tax (benefit) expense 4,481
 (137) —
 —
 —
 —
 (4,746) (402)
Noncontrolling interest 558
 43
 (763) —
 (1,506) (689) —
 (2,357)
Bonus to be settled in equity —
 —
 —
 —
 —
 —
 765
 765
Share-based payment expense —
 394
 179
 —
 71
 19
 718
 1,381
Non-recurring items —
 —
 —
 —
 —
 —
 —
 —
Acquisition Costs 1,501
 300
 —
 —
 —
 —
 1,564
 3,365
Adjusted EBITDA $16,788
 $8,763
 $288
 $1,483
 $(8,155) $(1,115) $(8,256) $9,796
                 
Total Core Operating Subsidiaries $27,322
              

  Three Months Ended September 30, 2016
  Core Operating Subsidiaries Early Stage & Other   HC2
 ConstructionMarine Services Energy Telecom Life SciencesOther and EliminationsNon-operating Corporate 
Net (loss) attributable to HC2 Holdings, Inc.               $(4,558)
Less: Net (loss) attributable to HC2 Holdings Insurance Segment               (2,189)
Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance Segment $6,962
 $8,696
 $27
 $1,796
 $(2,285) $(8,160) $(9,404) (2,368)
Adjustments to reconcile net income (loss) to Adjusted EBITDA:               

Depreciation and amortization 431
 5,554
 582
 144
 32
 380
 4
 7,127
Depreciation and amortization (included in cost of revenue) 1,321
 —
 —
 —
 —
 —
 —
 1,321
Amortization of equity method fair value adjustment at acquisition —
 (329) —
 —
 —
 —
 —
 (329)
(Gain) loss on sale or disposal of assets (23) —
 —
 —
 —
 —
 —
 (23)
Lease termination costs —
 —
 —
 (159) —
 —
 —
 (159)
Interest expense 304
 1,328
 119
 —
 —
 —
 8,969
 10,720
Net gain on contingent consideration —
 (1,381) —
 —
 —
 —
 —
 (1,381)
Other (income) expense, net (12) (632) (24) 422
 (2) 3,892
 835
 4,479
Foreign currency (gain) loss (included in cost of revenue) —
 (283) —
 —
 —
 —
 —
 (283)
Income tax (benefit) expense 4,672
 96
 —
 —
 —
 —
 (7,851) (3,083)
Noncontrolling interest 411
 465
 27
 —
 (770) (974) —
 (841)
Share-based payment expense —
 546
 3
 —
 128
 37
 1,088
 1,802
Non-recurring items —
 —
 —
 —
 —
 —
 173
 173
Acquisition Costs 429
 —
 —
 —
 —
 —
 648
 1,077
Adjusted EBITDA $14,495
 $14,060
 $734
 $2,203
 $(2,897) $(4,825) $(5,538) $18,232
                 
Total Core Operating Subsidiaries $31,492
              



Construction: Adjusted EBITDANet income (loss) from our Construction segment for the three months ended September 30, 2017 increased $2.3March 31, 2020 decreased $2.2 million to $16.8a loss of $0.1 million from $14.5income $2.1 million for the three months ended September 30, 2016. The increase was largely due to contribution from large complex projects which began gaining momentum during the third quarter of 2017, primarily in the Western region, and from the acquisitions of PDC and BDS in the fourth quarter of 2016. This was partially offset by better-than-bid performance on commercial projects in the West region recognized in the comparable period.

Marine Services: March 31, 2019. Adjusted EBITDA income from our Marine ServicesConstruction segment for the three months ended September 30, 2017March 31, 2020 decreased $5.3$3.4 million to $8.8$9.0 million from $14.1$12.4 million for the three months ended September 30, 2016.March 31, 2019. The decrease was driven byin Adjusted EBITDA can be attributed to the timing of project work under execution and change in backlog mix, including a reduction in revenue contribution from telecom installation revenues, and from a reductionlarge commercial construction projects in equity methodthe current period. This was partially offset by increased project work at GrayWolf over the comparable period.

Energy: Net income largely from a decline in joint venture income in HMN when compared to the prior period.

Energy: Adjusted EBITDA income(loss) from our Energy segment for the three months ended September 30, 2017 decreased $0.4March 31, 2020 increased by $1.2 million to $0.3income of $0.6 million from $0.7a loss of $0.6 million for the three months ended September 30, 2016 attributable to increased station down time and repair and maintenance expenses associated with the integration of acquired stations from Constellation CNG and Questar Fueling Company.

Telecommunications:March 31, 2019. Adjusted EBITDA from our Energy segment for the three months ended March 31, 2020 increased $2.8 million to $3.8 million from $1.0 million for the three months ended March 31, 2019. The increase in Adjusted EBITDA was primarily driven by higher volume-related revenues from the acquisition of ampCNG stations in June 2019 and the AFTC recognized in the current period which had not yet been renewed in the comparable period. Partially offsetting these increases were higher selling, general and administrative expenses as a result of the acquisition of the ampCNG stations.

Telecommunications: Net income from our Telecommunications segment was of $0.6 million for the three months ended March 31, 2020, unchanged from the three months ended March 31, 2019. Adjusted EBITDA from our Telecommunications segment for the three months ended September 30, 2017March 31, 2020 decreased $0.7$0.4 million to $1.5$0.4 million from $2.2$0.8 million for the three months ended September 30, 2016.March 31, 2019. The decrease in Adjusted EBITDA was primarily due primarily to fluctuations ina contraction of wholesale call traffic terminated,termination margin as a result of the continued decline in the international long distance market, partially offset by the continued focus on higher margin wholesale traffic mix, improved operational efficiencies,a decrease in compensation expense due to headcount decreases and customer relationships across the platform.reductions in bad debt expense.


Life Sciences: Net loss from our Life Sciences segment for the three months ended March 31, 2020 increased $0.6 million to a loss of $3.2 million from a loss of of $2.6 million for the three months ended March 31, 2019. Adjusted EBITDA loss from our Life Sciences segment for the three months ended September 30, 2017March 31, 2020 increased $5.3$1.3 million to $8.2$4.2 million from $2.9 million due to a progress-driven increase in costs at early-stage consolidating subsidiaries, principally R2, and an increase in equity method losses recorded for MediBeacon as a result of increased expenses following ongoing and successful completion of development and clinical milestones.

Other and Eliminations: Adjusted EBITDA loss from the Other segment and eliminations for the three months ended September 30, 2017 decreased $3.7 million to $1.1 million from $4.8 million for the three months ended September 30, 2016.March 31, 2019. The increase in Adjusted EBITDA loss was primarily driven by higher expenses at R2 Technologies, which increased spending from the comparable period to ramp up efforts to achieve commercialization of its products. This was partially offset by fewer expenses at the Pansend holding company and Genovel.

Broadcasting: Net loss from our Broadcasting segment for the three months ended March 31, 2020 increased $1.8 million to a loss of $6.2 million from a loss of $4.4 million for the three months ended March 31, 2019. Adjusted EBITDA loss from our Broadcasting segment for the three months ended March 31, 2020 decreased $1.5 million to $1.0 million from $2.5 million for the three months ended March 31, 2019. The decrease in Adjusted EBITDA loss was dueprimarily driven by increased revenue from broadcast stations, as well as cost reductions at Network, partially offset by increased cost of revenues associated with the higher number of operating stations, and a decrease in advertising revenues at the Azteca network driven by the negative impact of the COVID-19 pandemic.

Other and Eliminations: Net loss from our Other and Eliminations segment for the three months ended March 31, 2020 increased $36.3 million to a loss of $42.1 million from a loss of $5.8 million for the three months ended March 31, 2019. Adjusted EBITDA loss from our Other and Eliminations segment for the three months ended March 31, 2020 decreased $3.3 million to $1.6 million from $4.9 million for the three months ended March 31, 2019. The decrease in EBITDA loss for Other and Eliminations was driven by a reduction in losses recognizedfor the HMN investment, which is generally attributable to the timing of turnkey project work.

Non-operating Corporate: Net loss from our equity method investments, principally Inseego, as the Company did not recognize losses from our investment inNon-operating Corporate segment for the three months ended September 30, 2017 as our basis in this investment is zero. This was further decreased by lower losses at 704Games asMarch 31, 2020 increased $7.5 million to a resultloss of $31.1 million from a reduction in distribution fees from 704Games' largest distributor and a decrease in development feesloss of $23.6 million for our console game driven by a one time fee incurred in 2016 which was not repeated in the current period.

Non-operating Corporate: three months ended March 31, 2019. Adjusted EBITDA loss from our Non-operating Corporate segment for the three months ended September 30, 2017 increased $2.7March 31, 2020 decreased $1.1 million to $8.3$5.0 million from $5.5$6.1 million for the three months ended September 30, 2016.March 31, 2019. The increase was attributable to bonus related compensation associated with the increasedecrease in NAV at the end of the period, from compensation related expenses associated with some senior management changes we announced during the quarter.

Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016

Our Adjusted EBITDA loss was $31.1 million and $33.7 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease was primarily due to our Life Sciences segment as our early stage companies continue to develop their businesses and meet major milestones, offset by our Other segment driven by our equity investment in Inseego, as the Company did not recognize losses from our investment in the current period as our basis in this investment is zero.




Nine Months Ended September 30, 2017


Core Operating Subsidiaries
Early Stage & Other


HC2
 ConstructionMarine Services
Energy
Telecom
Life SciencesOther and EliminationsNon-operating Corporate
Net (loss) attributable to HC2 Holdings, Inc.





















$(38,374)
Less: Net Income attributable to HC2 Holdings Insurance Segment





















3,683
Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance Segment
$14,464

$8,943

$(2,001)
$4,910

$(14,276)
$(9,787)
$(44,310)
(42,057)
Adjustments to reconcile net income (loss) to Adjusted EBITDA:























Depreciation and amortization
4,194

16,561

3,876

285

129

933

50

26,028
Depreciation and amortization (included in cost of revenue)
3,835

—

—

—

—

—

—

3,835
Amortization of equity method fair value adjustment at acquisition
—

(1,223)
—

—

—

—

—

(1,223)
Asset impairment expense
—

—

—

—

—

1,810

—

1,810
(Gain) loss on sale or disposal of assets
93

(3,500)
39

—

—

—

—

(3,368)
Lease termination costs
—

249

—

15

—

—

—

264
Interest expense
619

3,363

552

37

—

2,408

32,431

39,410
Net loss on contingent consideration
—

—

—

—

—

—

(6,001)
(6,001)
Other (income) expense, net
(158)
2,443

1,652

77

(25)
2,800

(460)
6,329
Foreign currency (gain) loss (included in cost of revenue)
—

(131)
—

—

—

—

—

(131)
Income tax (benefit) expense
9,792

239

12

—

—

—

(9,112)
931
Noncontrolling interest
1,190

381

(2,002)
—

(3,208)
(2,666)
—

(6,305)
Bonus to be settled in equity
—

—

—

—

—

—

1,350

1,350
Share-based payment expense
—

1,133

361

—

239

66

2,207

4,006
Non-recurring items —
 —
 —
 —
 —
 —
 —
 —
Acquisition costs
2,447

300

—

—

—

—

3,425

6,172
Adjusted EBITDA
$36,476

$28,758

$2,489

$5,324

$(17,141)
$(4,436)
$(20,420)
$31,050

























Total Core Operating Subsidiaries
$73,047























Nine Months Ended September 30, 2016
  Core Operating Subsidiaries Early Stage & Other   HC2
 ConstructionMarine Services Energy Telecom Life SciencesOther and EliminationsNon-operating Corporate 
Net (loss) attributable to HC2 Holdings, Inc.               $(33,085)
Less: Net (loss) attributable to HC2 Holdings Insurance Segment               (11,978)
Net Income (loss) attributable to HC2 Holdings, Inc., excluding Insurance Segment $20,710
 $8,780
 $68
 $4,007
 $(2,991) $(21,264) $(30,417) (21,107)
Adjustments to reconcile net income (loss) to Adjusted EBITDA:                
Depreciation and amortization 1,263
 16,793
 1,479
 389
 87
 1,050
 4
 21,065
Depreciation and amortization (included in cost of revenue) 3,048
 —
 —
 —
 —
 —
 —
 3,048
Amortization of equity method fair value adjustment at acquisition —
 (1,046) —
 —
 —
 —
 —
 (1,046)
(Gain) loss on sale or disposal of assets (963) (10) —
 —
 —
 —
 —
 (973)
Lease termination costs —
 —
 —
 179
 —
 —
 —
 179
Interest expense 917
 3,683
 142
 —
 —
 1
 26,871
 31,614
Net gain on contingent consideration —
 (1,573) —
 —
 —
 —
 —
 (1,573)
Other (income) expense, net (88) 383
 (399) (574) (3,223) 9,888
 (311) 5,676
Foreign currency (gain) loss (included in cost of revenue) —
 (1,970) —
 —
 —
 —
 —
 (1,970)
Income tax (benefit) expense 12,641
 (756) —
 —
 —
 —
 (21,481) (9,596)
Noncontrolling interest 1,240
 510
 249
 —
 (2,302) (2,062) —
 (2,365)
Share-based payment expense —
 1,307
 107
 —
 184
 238
 4,833
 6,669
Non-recurring items —
 —
 —
 —
 —
 —
 1,513
 1,513
Acquisition costs 428
 266
 27
 18
 —
 —
 1,821
 2,560
Adjusted EBITDA $39,196
 $26,367
 $1,673
 $4,019
 $(8,245) $(12,149) $(17,166) $33,694
                 
Total Core Operating Subsidiaries $71,255
              



Construction: Adjusted EBITDA income from our Construction segment for the nine months ended September 30, 2017 decreased $2.7 million to $36.5 million from $39.2 million for the nine months ended September 30, 2016. The decrease was due in part to project delays associated with design changes on certain existing projects in backlog for the first nine months of 2017, as well as better-than bid performance on commercial projectsseverance payments made in the comparable period.

Marine Services: Adjusted EBITDA income from our Marine Services segment for the nine months ended September 30, 2017 increased $2.4 million to $28.8 million from $26.4 million for the nine months ended September 30, 2016. The increase was primarily driven by increases in equity method income through our joint venture investment in HMN largely in the first quarter of 2017.

Energy: Adjusted EBITDA income from our Energy segment for the nine months ended September 30, 2017 increased $0.8 million to $2.5 million from $1.7 million for the nine months ended September 30, 2016 due to the impact of sales from stations acquired and commissioned subsequent to the comparable period, offset in part by the utilization of tax credits in the comparable periods, which expired on December 31, 2016 and were not renewed in 2017.

Telecommunications: Adjusted EBITDA income from our Telecommunications segment for the nine months ended September 30, 2017 increased $1.3 million to $5.3 million from $4.0 million for the nine months ended September 30, 2016. The increase was due to the Company’s focus on the wholesale traffic termination mix that maximizes margin contribution.

Life Sciences: Adjusted EBITDA loss from our Life Sciences segment for the nine months ended September 30, 2017 increased $8.9 million to a loss of $17.1 million from a loss of $8.2 million due to a progress driven increase in costs at R2, and an increase in equity method losses recorded for MediBeacon as a result of increased expenses following successful completion of development and clinical milestones.

Other and Eliminations: Adjusted EBITDA loss from the Other segment and eliminations for the nine months ended September 30, 2017 decreased $7.7 million to $4.4 million from $12.1 million for the nine months ended September 30, 2016. The decrease in loss was due to a reduction in losses recognized from our equity method investments, principally Inseego, as the Company did not recognize losses from our investment in the nine months ended September 30, 2017 as our basis in this investment is zero.

Non-operating Corporate: Adjusted EBITDA loss from our Non-operating Corporate segment for the nine months ended September 30, 2017 increased $3.3 million to $20.4 million from $17.2 million for the nine months ended September 30, 2016. The increase was attributable to bonus related compensation associated with the increase in NAV at the end of the period and from compensation related expenses associated with some senior management changes we announced during the quarter.reduced overhead expenses.


49

(in millions):Three months ended March 31,
20202019Increase / (Decrease)
Construction$9.0  $12.4  $(3.4) 
Energy3.8  1.0  2.8  
Telecommunications0.4  0.8  (0.4) 
Total Core Operating Subsidiaries13.2  14.2  (1.0) 
Life Sciences(4.2) (2.9) (1.3) 
Broadcasting(1.0) (2.5) 1.5  
Other and Eliminations(1.6) (4.9) 3.3  
Total Early Stage and Other(6.8) (10.3) 3.5  
Non-Operating Corporate(5.0) (6.1) 1.1  
Adjusted EBITDA$1.4  $(2.2) $3.6  

Adjusted Operating Income - Insurance


Adjusted Operating Income ("Insurance AOI") and Pre-tax Adjusted Operating Income (“Pre-tax Insurance AOI”) for the Insurance segment ("Insurance AOI") is aare non-U.S. GAAP financial measuremeasures frequently used throughout the insurance industry and is anare economic measuremeasures the Insurance segment uses to evaluate its financial performance. Management believes that Insurance AOI and Pre-tax Insurance AOI measures provide investors with meaningful information for gaining an understanding of certain results and providesprovide insight into an organization’s operating trends and facilitates comparisons between peer companies. However, Insurance AOI hasand Pre-tax Insurance AOI have certain limitations, and we may not calculate it the same as other companies in our industry. It should, therefore, be read together with the Company's results calculated in accordance with U.S. GAAP.
 
Similarly to Adjusted EBITDA, using Insurance AOI and Pre-tax Insurance AOI as a performance measure hasmeasures have inherent limitations as an analytical tool as compared to income (loss) from operations or other U.S. GAAP financial measures, as thisthese non-U.S. GAAP measure excludesmeasures exclude certain items, including items that are recurring in nature, which may be meaningful to investors. As a result of the exclusions, Insurance AOI and Pre-tax Insurance AOI should not be considered in isolation and doesdo not purport to be an alternative to income (loss) from operations or other U.S. GAAP financial measures as a measuremeasures of our operating performance.


Management defines Insurance AOI as Net income (loss) for the Insurance segment adjusted to exclude the impact of net investment gains (losses), including OTTI losses recognized in operations; asset impairment; intercompany elimination; non-recurring items;gain on bargain purchase; gain on reinsurance recaptures; and acquisition costs. Management defines Pre-tax Insurance AOI as Insurance AOI adjusted to exclude the impact of income tax (benefit) expense recognized during the current period. Management believes that Insurance AOI provides aand Pre-tax Insurance AOI provide meaningful financial metricmetrics that helpshelp investors understand certain results and profitability. While these adjustments are an integral part of the overall performance of the Insurance segment, market conditions impacting these items can overshadow the underlying performance of the business. Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of our operations.



The table below shows the adjustments made to the reported Net income (loss) of the Insurance segment to calculate Insurance AOI and Pre-tax Insurance AOI (in thousands)millions). Refer to the analysis of the fluctuations within the results of operations section:

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 Increase / (Decrease) 2017 2016 Increase / (Decrease)
Net Income (loss) - Insurance segment $4,282
 $(2,189) $6,471
 $3,685
 $(11,978) $15,663
Effect of investment (gains) losses (978) 220
 (1,198) (2,854) 2,677
 (5,531)
Asset impairment expense —
 —
 —
 3,364
 —
 3,364
Acquisition costs 422
 269
 153
 1,158
 269
 889
Insurance AOI $3,726
 $(1,700) $5,426
 $5,353
 $(9,032) $14,385
Three months ended March 31,
20202019Increase / (Decrease)
Net income - Insurance segment$—  $33.8  $(33.8) 
Effect of investment losses (gains) (1)
19.0  (6.0) 25.0  
Acquisition costs—  0.2  (0.2) 
Insurance AOI19.0  28.0  (9.0) 
Income tax expense (benefit)(12.4) 0.7  (13.1) 
Pre-tax Insurance AOI$6.6  $28.7  $(22.1) 

Three(1) The Insurance segment revenues are inclusive of realized and nineunrealized gains and net investment income for the three months ended September 30, 2017 comparedMarch 31, 2020 and 2019. Such adjustments are related to transactions between entities under common control which are eliminated or are reclassified in consolidation.

50

Net income for the three and nine months ended September 30, 2016

OurMarch 31, 2020 decreased $33.8 million to zero from $33.8 million for the three months ended March 31, 2019. Pre-tax Insurance AOI for the three months ended September 30, 2017March 31, 2020 decreased $22.1 million to $6.6 million from $28.7 million for three months ended March 31, 2019. The decrease was primarily driven by non-recurring favorable claims activity recognized in the comparable period and 2016 was incomeadditional unfavorable claims activity and reserve developments in the current year. Additionally, the Insurance segment incurred larger expenses due to increases in headcount and other overhead to support the growth of $3.7 millionthe segment, additional premium taxes, and amiscellaneous software expenses.

Backlog

Projects in backlog consist of awarded contracts, letters of intent, notices to proceed, change orders, and purchase orders obtained. Backlog increases as contract commitments are obtained, decreases as revenues are recognized and increases or decreases to reflect modifications in the work to be performed under the contracts. Backlog is converted to sales in future periods as work is performed or projects are completed. Backlog can be significantly affected by the receipt or loss of $1.7individual contracts.

Construction Segment

At March 31, 2020, DBMG's backlog was $485.5 million, respectively. Our Insurance AOI for the nine months ended September 30, 2017consisting of $401.0 million under contracts or purchase orders and 2016$84.5 million under letters of intent or notices to proceed. Approximately $108.0 million, representing 22.3% of DBMG’s backlog at March 31, 2020, was incomeattributable to five contracts, letters of $5.4 million and a lossintent, notices to proceed or purchase orders. If one or more of $9.0 million, respectively. The increases were primarily due to higher net investment income and a reduction in insurance benefits, due to reserves released and athese projects terminate or reduce their scope, DBMG’s backlog could decrease in SG&A expenses driven by the termination of the Transition Services Agreement in early 2017. The increase was partially offset by an increase in tax expense due to higher operating profits, as a result of reserve releases, and increased taxable investment gains in the year.substantially.


Liquidity and Capital Resources


Short- and Long-Term Liquidity Considerations and Risks


HC2 is a holding company and its liquidity needs are primarily for interest payments on its 11.0%Senior Secured Notes, and2020 Revolving Credit Agreement, 7.5% convertible notes due 2022 (the "Convertible Notes"), dividend payments on its Preferred Stock. HC2 also has liquidity needs related toStock and recurring operational expenses. 


As of September 30, 2017,March 31, 2020, the Company had $130.8$186.9 million of cash and cash equivalents compared to $115.4$228.8 million as of December 31, 2016.2019. On a stand-alone basis, as of September 30, 2017,March 31, 2020, HC2 had cash and cash equivalents of $48.5$3.6 million compared to $21.7$11.6 million at December 31, 2016.2019. At September 30, 2017,March 31, 2020, cash and cash equivalents in our Insurance segment was $30.0$122.3 million compared to $24.5$170.5 million at December 31, 2016.2019.


Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment and subsea cable equipment, fueling stations, network equipment (such as switches, related transmission equipment and capacity), and service infrastructure, liabilities associated with insurance products, development of back-office systems, operating costs and expenses, and income taxes.

As of September 30, 2017,March 31, 2020, the Company had $503.8$711.7 million of indebtedness on a consolidated basis compared to $438.4$805.0 million as of December 31, 2016.2019. On a stand-alone basis, as of September 30, 2017,March 31, 2020 and December 31, 2019, HC2 had $400.0indebtedness of $448.0 million of indebtedness compared to $307.0and $540.0 million, as of December 31, 2016.respectively.


All of HC2's stand-alone debt consists of the 11.0%$393.0 million aggregate principal amount of the Senior Secured Notes and the $55.0 million aggregate principal amount of the Convertible Notes. HC2 is required to make semi-annual interest payments on its outstanding 11.0%Senior Secured Notes and Convertible Notes. Subsequent to March 31, 2020, HC2 drew $10.0 million on June 1st and December 1st of each year.  its 2020 Revolving Credit Agreement. HC2 is required to make quarterly interest payments on its 2020 Revolving Credit Agreement.

HC2 is required to make dividend payments on ourits outstanding Preferred Stock on January 15th, April 15th, July 15th, and October 15th of each year.


During the three months ended September 30, 2017, HC2 received $2.0$0.5 million in dividends from our Telecommunications segment.

Duringsegment during the ninethree months ended September 30, 2017, March 31, 2020.

HC2 received $13.5 million and $6.0$1.8 million in dividends from our Construction and Telecommunications segments, respectively.

Under a tax sharing agreement, DBMG reimburses HC2 for use of its Net Operating Losses. Duringnet management fees during the ninethree months ended September 30, 2017,March 31, 2020.

On May 4, 2020 HC2 received $5.0 million from DBMG under this tax sharing agreement.

As announced on November 1, 2017, DBMGthat its Construction segment will pay a cash dividend of $1.29$15.0 million, or $3.89 per share on November 29, 2017share. As the largest stockholder of DBM Global Inc., HC2 expects to stockholders of record at the close of business on November 15, 2017. HC2 is expected to received $4.5receive approximately $13.9 million of the $5.0 milliontotal dividend payout.


We have financed our growth and operations to date, and expect to finance our future growth and operations, through public offerings and private placements of debt and equity securities, credit facilities, vendor financing, capital lease financing and other financing arrangements, as well as cash generated from the operations of our subsidiaries. In the future, we may also choose to sell assets or certain investments to generate cash.


51

At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt servicesservice and operating leases) and other cash needs for our operations for at least the next twelve months through a combination of distributions from our subsidiaries and from raising of additional debt or equity, refinancing of certain of our indebtedness or Preferred Stock,preferred stock, other financing arrangements and/or the sale of assets and certain investments. Historically, we have chosen to reinvest cash and receivables into the growth of

our various businesses, and therefore have not kept a large amount of cash on hand at the holding company level, a practice which we expect to continue in the future. The ability of HC2’s subsidiaries to make distributions to HC2 is subject to numerous factors, including restrictions contained in each subsidiary’s financing agreements, regulatory requirements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary’s board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary’s board of directors considers relevant. Our ability to sell assets and certain of our investments to meet our existing financing needs may also be limited by our existing financing instruments. Although the Company believes that it will be able to raise additional equity capital, refinance indebtedness or Preferred Stock,preferred stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient to fund any cash needs that we are not able to satisfy with the funds expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on terms satisfactory to the Company if at all. Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over the long-term. In addition, the sale of assets or the Company’s investments may also make the Company less attractive to potential investors or future financing partners.


Although the COVID-19 pandemic did not have a material impact on the HC2’s liquidity in the first quarter of 2020, management believes the continuation of the pandemic and its related effect on the U.S. and global economies could introduce added pressure on the Company’s liquidity position and financial performance. Our sources of liquidity are primarily from the dividends from our operating subsidiaries, tax sharing agreement with DBMG, cash proceeds from completed and anticipated monetization’s and other arrangements.

Additionally, in response to the COVID-19 pandemic, our corporate staff has begun working remotely and many of our key vendors, and consultants have similarly begun to work remotely. As a result of such remote work arrangements, certain operational, reporting, accounting and other processes may slow, which could result in longer time to execute critical business functions.

Indebtedness


See Note 12. Long-term14. Debt Obligations and Note 22. Subsequent Events, to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a description of our long-term debt.


On or about November 9, 2017, the Company expects to sign a $75 million bridge loan to finance acquisitions in the low power broadcast television distribution market. Once completed, the Company will file an 8-K which will include the final terms of the loan.

Restrictive Covenants

The 11.0%indenture governing the Senior Secured Notes Indenturedated November 20, 2018, by and among HC2, the guarantors party thereto and U.S. Bank National Association, a national banking association ("U.S. Bank"), as trustee (the "Secured Indenture"), contains certain affirmative and negative covenants limiting, among other things, the ability of the Company, and, in certain subsidiaries ofcases, the CompanyCompany’s subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock andstock; 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 11.0% Notes IndentureCompany is also includes tworequired to comply with certain financial maintenance covenants:covenants, which are similarly subject to a number of important exceptions and qualifications. These covenants include maintenance of (1) a liquidity covenant;liquidity; (2) collateral coverage; (3) secured net leverage ratio; and (2) a collateral(4) fixed charge coverage covenant. ratio.


The maintenance of liquidity covenant provides that the Company will not permit the aggregate amount of (i) all unrestricted cash and cash equivalents of the Company and the subsidiary guarantorsSubsidiary Guarantors, (ii) amounts available for drawing under revolving credit facilities and undrawn letters of credit of the 11.0% Notes (the "Guarantors")Company and the Subsidiary Guarantors and (iii) dividends, distributions or payments that are immediately available to be paid to the Company by any of its Restricted Subsidiaries to be less than the Company’s obligationsobligation to pay interest on the 11.0%Senior Secured Notes and all other debt, including Convertible Preferred Stock mandatory cash dividends or any other mandatory cash pay Preferred Stock but excluding any obligation to pay interest on Convertible Preferred Stock or any other mandatory cash pay Preferred Stock which, in each case, may be paid by accretion or in-kind in accordance with its terms of the Company and theits Subsidiary Guarantors plus mandatory cash dividends on the Company’s Preferred Stock, for the next (i) six months if our collateral coverage ratio is greater than 2.0x or (ii) 12 months if our collateral coverage ratio is less than 2.0x.months. As of September 30, 2017, our collateral coverage ratio was greater than 2.0x and therefore the liquidity covenant requires the Company to maintain 6 months of debt service and preferred dividend obligations. If the collateral coverage ratio subsequently becomes lower than 2:1 in the future, the maintenance of liquidity requirement under the 11.0% Notes will be increased back to 12 months of debt service and preferred dividend obligations. As of September 30, 2017,March 31, 2020, the Company was in compliance with this covenant.


The maintenance of collateral coverage covenant provides that the Company’sCompany's Collateral Coverage Ratio (defined(as defined in the 11.0% NotesSecured Indenture as the ratio of (i) the Loan Collateral to (ii) Consolidated Secured Debt (each as defined therein)) calculated on a pro forma basis as of the last day of each fiscal quarter may not be less than 1.25:1.1.50 to 1.00. As of September 30, 2017,March 31, 2020, the Company was in compliance with this covenant.


The maintenance of secured net leverage ratio provides that the Company’s Secured Net Leverage Ratio (as defined in the Secured Indenture) as of any date of determination calculated on a pro forma basis after accounting for the net proceeds from any Asset Sale which the Company has determined to apply to the repayment of any Debt to exceed 7.75 to 1.00. As of March 31, 2020, the Company was in compliance with this covenant. 

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The maintenance of fixed charge coverage ratio provides that commencing with the fiscal year ending December 31, 2020, that the Company will not permit the Fixed Charge Coverage Ratio (as defined in the Secured Indenture) calculated as of the last day of each fiscal year of the Company to be less than 1.00 to 1.00 or that the Company’s “HC2 Corporate Overhead” (as defined in the Secured Indenture) in any fiscal year not exceed the sum of $29.0 million for such fiscal year. As of March 31, 2020, the Company was in compliance.

The instruments governing the Company’s Preferred Stock also limit the Company’s and its subsidiaries ability to take certain actions, including, among other things, to incur additional indebtedness; issue additional Preferred Stock; engage in transactions with affiliates; and make certain restricted payments.  These limitations are subject to a number of important exceptions and qualifications.



The Company intends to conduct its operations in a manner that will result in continued compliance with the Secured Indenture; however, compliance with certain financial covenants for future periods may depend on the Company or one or more of the Company’s subsidiaries undertaking one or more non-operational transactions, such as the management of operating cash outflows, a monetization of assets, a debt incurrence or refinancing, the raising of equity capital, or similar transactions. If the Company is unable to remain in compliance and does not make alternate arrangements, an event of default would occur under the Company’s Secured Indenture which, among other remedies, could result in the outstanding obligations under the indenture becoming immediately due and payable and permitting the exercise of remedies with respect to the collateral. There is no assurance the Company will be able to complete any non-operational transaction it may undertake to maintain compliance with covenants under the Secured Indenture or, even if the Company completes any such transaction, that it will be able to maintain compliance for any subsequent period.

Summary of Consolidated Cash Flows


PresentedThe below is a table that summarizes the cash provided by or used in our continuing operating, investing and financing activities and the amount of the respective increases or decreases in cash provided by (used in) those activitieschanges between the fiscal periods (in thousands)millions):
Three Months Ended March 31,Increase / (Decrease)
20202019
Operating activities$36.1  $34.0  $2.1  
Investing activities67.1  (56.5) 123.6  
Financing activities(145.8) (3.8) (142.0) 
Effect of exchange rate changes on cash and cash equivalents0.5  0.1  0.4  
Net decrease in cash, cash equivalents and restricted cash$(42.1) $(26.2) $(15.9) 
  Nine Months Ended September 30,Increase / (Decrease)
  2017 2016 
Operating activities $37,107
 $54,979
 $(17,872)
Investing activities (66,959) (80,072) 13,113
Financing activities 45,421
 (10,863) 56,284
Effect of exchange rate changes on cash and cash equivalents (149) (1,347) 1,198
Net increase (decrease) in cash and cash equivalents $15,420
 $(37,303) $52,723

Operating Activities


Cash provided by operating activities totaled $37.1was $36.1 million for the ninethree months ended September 30, 2017March 31, 2020 as compared to $55.0cash provided by operating activities of $34.0 million for the ninethree months ended September 30, 2016.March 31, 2019. The $17.9$2.1 million decreasechange was the result of decreases inthe working capital largely drivenimprovements in our Construction and Energy segments. Our Construction segment benefited from increased billings in excess of costs on new projects, while our Energy segment benefited from AFTC related collections in the current period. These increases were offset by the Company'sworking capital declines in our Telecommunication and Insurance segments. Our Telecommunication segment experienced a decline due to the timing of vendor payments and receivables collections, and payments on trade related activity when comparedwhile our Insurance segment recorded a large tax receivable during the current quarter as a result of the CARES Act, refer to the previous period, and a decrease in cash received from equity investments driven by our Marine Services segment.Note 15. Income Taxes for further detail.


Investing Activities


Cash provided by investing activities was $67.1 million for the three months ended March 31, 2020 as compared to cash used in investing activities of $56.5 million for the three months ended March 31, 2019. The $123.6 million change was a result of the sale of GMSL, in which $144.0 million in cash was received, partially offset by cash used from net investing activity at our Insurance segment.

Financing Activities

Cash used in investingfinancing activities totaled $67.0was $145.8 million for the ninethree months ended September 30, 2017 as compared to $80.1 million for the nine months ended September 30, 2016. The $13.1 million decrease was driven by our Insurance segment, due to redeployment of cash in 2016 into fixed maturity securities subsequent to the acquisition of the Insurance Company in December 2015, and cash paid for business acquisitions in the comparable period which were not repeated during the nine months ended September 30, 2017.

Financing Activities

Cash provided by financing activities totaled $45.4 million for the nine months ended September 30, 2017March 31, 2020 as compared to cash used in financing activities of $10.9$3.8 million for the ninethree months ended September 30, 2016.March 31, 2019. The $56.3$142.0 million change was driven by additional borrowings under our 11% Notes offset by repaymentlargely a result of the 11.0% Bridge Note, comparedprincipal payments on debt obligations at our Corporate segment of $95.4 million and payments to minority shareholders at our Other segment of $42.5 million, both from proceeds received from the prior period, during which we had no significant borrowings or repaymentssale of the 11% Notes.GMSL.

Other Invested Assets

Carrying values of other invested assets accounted for under cost and equity method are as follows (in thousands):
53
  September 30, 2017 December 31, 2016
  Cost
Method		 Equity Method Fair Value Cost
Method		 Equity Method Fair
Value
Common Equity $—
 $1,298
 $7,056
 $138
 $1,047
 $—
Preferred Equity 2,484
 15,710
 —
 2,484
 9,971
 —
Derivatives 3,097
 —
 2,164
 3,097
 —
 3,813
Limited Partnerships —
 733
 —
 —
 1,116
 —
Joint Ventures —
 58,919
 —
 —
 40,697
 —
Total $5,581
 $76,660
 $9,220
 $5,719
 $52,831
 $3,813


Construction


Cash Flows


Cash flows from operating activities are the principal source of cash used to fund DBMG’s operating expenses, interest payments on debt, and capital expenditures. DBMG's short-term cash needs are primarily for working capital to support operations including receivables, inventories, and other costs incurred in performing its contracts. DBMG attempts to structure the payment arrangements under its contracts to match costs incurred under the project. To the extent it is able to bill in advance of costs incurred, DBMG generates working capital through billings in excess of costs and recognized earnings on uncompleted contracts. DBMG relies on its credit facilities to meet its working capital needs. DBMG believes that its existing borrowing availability together with cash from operations will be adequate to meet all funding requirements for its operating expenses, interest payments on debt, and capital expenditures, and dividends for the foreseeable future.


DBMG is required to make monthly or quarterly interest payments on all of its debt. Based upon the September 30, 2017March 31, 2020 debt balance, DBMG anticipates that its interest payments will be approximately $0.2$2.4 million each quarter.quarter of 2020.




DBMG believes that its available funds, cash generated by operating activities and funds available under its bank credit facilities will be sufficient to fund its capital expenditures and its working capital needs. However, DBMG may expand its operations through future acquisitions and may require additional equity or debt financing. Market volatility resulting from the COVID-19 pandemic or other factors could adversely impact our ability to access capital as and when needed.

Marine Services

Cash Flows

Cash flows from operating activities are the principal source of cash used to fund GMSL’s operating expenses, interest payments on debt, and capital expenditures. GMSL's short-term cash needs are primarily for working capital to support operations including receivables, inventories, and other costs incurred in performing its contracts. GMSL attempts to structure the payment arrangements under its contracts to match costs incurred under the project. To the extent it is able to bill in advance of costs incurred, GMSL generates working capital through billings in excess of costs and recognized earnings on uncompleted contracts. GMSL believes that its existing borrowing availability together with cash from operations will be adequate to meet all funding requirements for its operating expenses, interest payments on debt and capital expenditures for the foreseeable future.

GMSL is required to make monthly and quarterly interest and principal payments depending on the structure of each individual debt agreement.

Market Environment

GMSL earns revenues in a variety of currencies including the U.S. dollar, the Singapore dollar and the British pound. The exchange rates between the U.S. dollar, the Singapore dollar and the British pound have fluctuated in recent periods and may fluctuate substantially in the future. Any material appreciation or depreciation of these currencies against each other may have a negative impact on GMSL's results of operations and financial condition.


Insurance


Cash flows


CIG’s principal cash inflows from its operating activities relate to its premiums, annuity deposits and insurance, investment product fees and other income. CIG’s principal cash inflows from its invested assets result from investment income and the maturity and sales of invested assets. The primary liquidity concern with respect to these cash inflows relates to the risk of default by debtors and interest rate volatility. Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash inflows and current cash and equivalents on hand include selling short-term investments or fixed maturity securities.


CIG's principal cash outflows relate to the payment of claims liabilities, interest credited and operating expenses. CIG’s management believes its current sources of liquidity are adequate to meet its cash requirements for the next 12 months.


Market environment


As of September 30, 2017,March 31, 2020, CIG was in a position to hold any investment security showing an unrealized loss until recovery, provided it remains comfortable with the credit of the issuer. CIG does not rely on short-term funding or commercial paper and to date it has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeable future. CIG projects its reserves to be sufficient and believes its current capital base is adequate to support its business. Due to the COVID-19 pandemic, CIG performed adverse stress testing of investments and reserves which still yielded results in ending the year with a Risk-Based Capital (" RBC") well above regulatory minimums.


Dividend Limitations


CIG's insurance subsidiary is subject to Texas statutory provisions that restrict the payment of dividends. The dividend limitationsmaximum amount of dividends which can be paid to stockholders by life insurance companies domiciled in the State of Texas without prior approval of the Insurance Commissioner is the greater of 10% of surplus as regards to policyholders or net gain on CIG areoperations as of the preceding year end, but only to the extent of earned surplus as of the preceding year end. The maximum amount of dividends payable in 2020 and 2019 without prior approval was $0 based on statutory financial results and regulatory approval. Statutory accounting practices differ in certain respects from accounting principles used in financial statements prepared in conformity with U.S. GAAP. Significant differences includeearned deficit.

In addition to the treatment of deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes.

The ability of CIG’s insurance subsidiary to pay dividends and to make such other payments is limited by applicable laws and regulations of the states in which its subsidiary is domiciled, which subject its subsidiary to significant regulatory restrictions. Theselimitations noted above, laws and regulations require, among other things,items, that the CIG’s insurance subsidiary to maintain minimum solvency requirements, andwhich may limit the amount of dividends this subsidiary can pay.

Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength in the form of its subsidiary Risk-Based Capital ("RBC")RBC ratio. CIG monitors its insurance subsidiary's compliance with the RBC requirements specified by the National Association of Insurance Commissioners. As of DecemberMarch 31, 2016,2020, CIG’s insurance subsidiary exceedsexceeded the minimum RBC requirements. CIG’s insurance subsidiary paid no dividends to CIG in fiscal year 2016 and has further agreed with its state regulator to not pay dividends for three years following the completion of the acquisition on December 24, 2015.



54


Insurance Companies Capital Contributions
Other


The Company has an agreement with the Texas Department of Insurance ("TDOI"(“TDOI”) that, for fivetwo years following the acquisition, the Companyfrom August 9, 2018, CIG will contribute to Continental General Insurance Company ("CGI"CGI cash or marketable securities acceptable to the "Insurance Company")TDOI to the extent required for CGI’s total adjusted capital to be not less than 450% of CGI’s authorized control level risk-based capital and for three years from August 9, 2020, CIG will contribute to CGI cash or marketable securities acceptable to the TDOI to the extent required for CGI’s total adjusted capital to be not less than 400% of CGI’s authorized control level risk-based capital (each as defined under Texas law and reported in CGI’s statutory statements filed with the TDOI).


Additionally, CGI entered into a capital maintenance agreement with Great American Financial Resources, Inc. ("Great American").American. Under the agreement, if the applicable acquired company’s total adjusted capital reported in its annual statutory financial statements is less than 400% of its authorized control level risk-based capital, Great American has agreed to pay cash or assets to the applicable acquired company as required to eliminate such shortfall (after giving effect to any capital contributions made by the Company or its affiliates since the date of the relevant annual statutory financial statement). Great American’s obligation to make such payments is capped at $35.0 million under the capital maintenance agreement. The capital maintenance agreementagreements will remain in effect from January 1, 2016 to January 1, 2021 or until payments by Great American under the applicable agreement equal the applicable cap. Pursuant to the purchase agreement, the Company is required to indemnify Great American for the amount of any payments made by Great American under the capital maintenance agreement.agreements.


Asset Liability Management


CIG’s insurance subsidiary maintains investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as long-term care insurance, are matched with investments such as long-term fixed maturity securities. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. The types of assets in which CIG may invest are influenced by state laws, which prescribe qualified investment assets applicable to insurance companies. Within the parameters of these laws, CIG invests in assets giving consideration to four primary investment objectives: (i) maintain robust absolute returns; (ii) provide reliable yield and investment income; (iii) preserve capital and (iv) provide liquidity to meet policyholder and other corporate obligations. The Insurance segment’s investment portfolio is designed to contribute stable earnings and balance risk across diverse asset classes and is primarily invested in high quality fixed income securities. In addition, at any given time, CIG’s insurance subsidiary could hold cash, highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals.

Investments


At September 30, 2017March 31, 2020 and December 31, 2016,2019, CIG’s investment portfolio is comprised of the following (in thousands)millions):

 September 30, 2017 December 31, 2016March 31, 2020December 31, 2019
 Fair Value Percent Fair Value PercentFair ValuePercentFair ValuePercent
U.S. Government and government agencies $15,713
 1.1% $15,950
 1.1%U.S. Government and government agencies$8.8  0.2 %$7.7  0.2 %
States, municipalities and political subdivisions 392,958
 26.8% 375,077
 26.6%States, municipalities and political subdivisions427.4  10.4 %440.1  9.9 %
Foreign government 5,912
 0.4% 5,978
 0.4%
Residential mortgage-backed securities 110,841
 7.5% 138,196
 9.8%Residential mortgage-backed securities61.0  1.5 %66.9  1.5 %
Commercial mortgage-backed securities 31,099
 2.1% 49,053
 3.5%Commercial mortgage-backed securities99.7  2.4 %109.4  2.5 %
Asset-backed securities 127,988
 8.7% 77,665
 5.5%Asset-backed securities541.2  13.2 %577.8  13.1 %
Corporate and other 651,540
 44.4% 617,039
 44.0%
Corporate and other (*)
Corporate and other (*)
2,654.9  64.9 %2,866.8  64.8 %
Common stocks (*)
 40,769
 2.8% 53,892
 3.8%
Common stocks (*)
24.8  0.6 %25.6  0.6 %
Perpetual preferred stocks 38,484
 2.6% 36,654
 2.6%
Perpetual preferred stocks (*)
Perpetual preferred stocks (*)
100.5  2.5 %118.9  2.7 %
Mortgage loans 26,427
 1.8% 16,831
 1.2%Mortgage loans142.2  3.5 %183.5  4.1 %
Policy loans 18,038
 1.2% 18,247
 1.3%Policy loans18.9  0.5 %19.1  0.4 %
Other invested assets 8,969
 0.6% 3,415
 0.2%Other invested assets10.6  0.3 %7.2  0.2 %
Total $1,468,738
 100.0% $1,407,997
 100.0%Total$4,090.0  100.0 %$4,423.0  100.0 %
(*) Balance includes fair value of certain securities held by the Company, which are either eliminated on consolidation or reported within Other invested assets.in consolidation.



55


Credit Quality


Insurance statutes regulate the type of investments that CIG is permitted to make and limit the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, and CIG's business and investment strategy, CIG generally seeks to invest in (i) securities rated investment grade by established nationally recognized statistical rating organizations (each, a nationally recognized statistical rating organization ("NRSRO")), (ii) U.S. Government and government-sponsored agency securities, or (iii) securities of comparable investment quality, if not rated.


The following table summarizes the credit quality, by NRSRO rating, of CIG's fixed income portfolio (in thousands)millions):

March 31, 2020December 31, 2019
Fair ValuePercentFair ValuePercent
AAA, AA, A$1,879.2  49.6 %$1,954.9  48.1 %
BBB1,671.6  44.1 %1,834.5  45.1 %
Total investment grade3,550.8  93.7 %3,789.4  93.2 %
BB179.4  4.7 %210.7  5.2 %
B16.5  0.4 %18.0  0.4 %
CCC, CC, C37.7  1.0 %37.9  0.9 %
D8.6  0.2 %12.7  0.3 %
Total non-investment grade242.2  6.3 %279.3  6.8 %
Total$3,793.0  100.0 %$4,068.7  100.0 %

  September 30, 2017 December 31, 2016
  Fair Value Percent Fair Value Percent
AAA, AA, A $710,626
 53.2% $738,509
 57.8%
BBB 434,602
 32.5% 382,555
 29.9%
Total investment grade 1,145,228
 85.7% 1,121,064
 87.7%
BB 35,760
 2.7% 37,093
 2.9%
B 8,760
 0.7% 20,214
 1.6%
CCC, CC, C 29,686
 2.2% 35,021
 2.7%
D 12,591
 0.9% 17,075
 1.3%
NR 104,026
 7.8% 48,491
 3.8%
Total non-investment grade 190,823
 14.3% 157,894
 12.3%
Total $1,336,051
 100.0% $1,278,958
 100.0%

Foreign Currency

Foreign currency fluctuations can impact our financial results. During the three months ended September 30, 2017 and 2016, approximately 11.7% and 34.1% respectively, of our net revenue from continuing operations was derived from sales and operations outside the U.S. During the nine months ended September 30, 2017 and 2016, approximately 11.6% and 30.4% respectively, of our net revenue from continuing operations was derived from sales and operations outside the U.S. The reporting currency for our Condensed Consolidated Financial Statements is the United States dollar ("USD"). The local currency of each country is the functional currency for each of our respective entities operating in that country.

In the future, we expect to continue to derive a portion of our net revenue and incur a portion of our operating costs from outside the U.S., and therefore changes in exchange rates may continue to have a significant, and potentially adverse, effect on our results of operations. Our risk of loss regarding foreign currency exchange rate risk is caused primarily by fluctuations in the USD/British pound sterling ("GBP") exchange rate. Changes in the exchange rate of USD relative to the GBP could have an adverse impact on our future results of operations. We have agreements with certain subsidiaries for repayment of a portion of the investments and advances made to these subsidiaries. As we anticipate repayment in the foreseeable future, we recognize the unrealized gains and losses in foreign currency transaction gain (loss) on the Condensed Consolidated Financial Statements. The exposure of our income from operations to fluctuations in foreign currency exchange rates is reduced in part because a majority of the costs that we incur in connection with our foreign operations are also denominated in local currencies.

We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of operations of our foreign subsidiaries into USD using the average exchange rate during the reporting period. Changes in foreign exchange rates affect the reported profits and losses and cash flows of our international subsidiaries and may distort comparisons from year to year. By way of example, when the USD strengthens compared to the GBP, there could be a negative or positive effect on the reported results for our Telecommunications segment, depending upon whether such businesses are operating profitably or at a loss. More profits in GBP are required to generate the same amount of profits in USD and a greater loss in GBP to generate the same amount of loss in USD, and vice versa. For instance, when the USD weakens against the GBP, there is a positive effect on reported profits and a negative effect on reported losses.

Off-Balance Sheet Arrangements

DBMG


DBMG’s off-balance sheet arrangements at September 30, 2017March 31, 2020 included letters of credit of $8.8$9.1 million under Credit and Security Agreements and performance bonds of $278.4$127.1 million.

DBMG’s contract arrangements with customers sometimes require DBMG to provide performance bonds to partially secure its obligations under its contracts. Bonding requirements typically arise in connection with public works projects and sometimes with respect to certain private contracts. DBMG’s performance bonds are obtained through surety companies and typically cover the entire project price.




New Accounting Pronouncements


For a discussion of our New Accounting Pronouncements, refer to Note 2. Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.


Critical Accounting Policies


There have been no significantmaterial changes in ourthe Company’s critical accounting policies sinceduring the quarter ended March 31, 2020. For information about critical accounting policies, refer to “Critical Accounting Policies” under Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.


Related Party Transactions


For a discussion of our Related Party Transactions, refer to Note 18.19. Related Partiesto our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.


Corporate Information


HC2, a Delaware corporation, was incorporated in 1994. The Company’s executive offices are located at 450 Park Avenue, 30th Floor, New York, NY, 10022. The Company’s telephone number is (212) 235-2690. Our Internet address is www.hc2.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 SEC. The information on or accessible through our website is not a part of this Quarterly Report on Form 10-Q.


56

Special Note Regarding Forward-Looking Statements


This Quarterly Report on Form 10-Q contains or incorporates a number of "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on current expectations, and are not strictly historical statements. In some cases, you can identify forward-looking statements by terminology such as "if," "may," "should," "believe," "anticipate," "future," "forward," "potential," "estimate," "opportunity," "goal," "objective," "growth," "outcome," "could," "expect," "intend," "plan," "strategy," "provide," "commitment," "result," "seek," "pursue," "ongoing," "include" or in the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties and are not guarantees of performance, results, or the creation of shareholderstockholder value, although they are based on our current plans or assessments which we believe to be reasonable as of the date hereof.


Factors that could cause actual results, events and developments to differ include, without limitation: the ability of our subsidiaries (including, target businesses following their acquisition) to generate sufficient net income and cash flows to make upstream cash distributions, capital market conditions, our and our subsidiaries’ ability to identify any suitable future acquisition opportunities, efficiencies/cost avoidance, cost savings, income and margins, growth, economies of scale, combined operations, future economic performance, conditions to, and the timetable for, completing the integration of financial reporting of acquired or target businesses with HC2 or the applicable subsidiary of HC2, completing future acquisitions and dispositions, litigation, potential and contingent liabilities, management’s plans, changes in regulations and taxes.


We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.


Forward-looking statements are not guarantees of performance. You should understand that the following important factors, in addition to those discussed under the section entitled "Risk Factors" in this Quarterlyour Annual Report on Form 10-K for the year ended December 31, 2019, and in the documents incorporated by reference, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. You should also understand that many factors described under one heading below may apply to more than one section in which we have grouped them for the purpose of this presentation. As a result, you should consider all of the following factors, together with all of the other information presented herein, in evaluating our business and that of our subsidiaries.


HC2 Holdings, Inc. and Subsidiaries


ActualOur actual results or other outcomes may differ from those expressed or implied by forward-looking statements contained or incorporated herein due to a variety of important factors, including, without limitation, the following:


•the effect of the recent novel coronavirus (“COVID-19”) pandemic and related governmental responses on our business, financial condition and results of operations;
•limitations on our ability to successfully identify any strategic acquisitions or business opportunities and to compete for these opportunities with others who have greater resources;
•our possible inability to generate sufficient liquidity, margins, earnings per share, cash flow and working capital from our operating segments;
•the impact of catastrophic events including natural disasters, pandemic illness and the outbreak of war or acts of terrorism;
•our dependence on distributions from our subsidiaries to fund our operations and payments on our obligations;
•the impact on our business and financial condition of our substantial indebtedness and the significant additional indebtedness and other financing obligations we may incur;
•the impact of covenants in the Indenture governing HC2’s Notes, the Certificates of Designation governing theHC2’s Preferred Stock the 11.0% Notes Indenture, the Credit and Security Agreement governing the DBMG Facility, the CWind line of credit with Barclays, the ANG term loans and notes with Signature Financial,


M&T Bank and Pioneer Savings Bank,all other subsidiary debt obligations as summarized in Note 14. Debt Obligations and future financing agreements on our ability to operate our business and finance our pursuit of acquisition opportunities;
•our dependence on certain key personnel, in particular, our Chief Executive Officer, Philip Falcone;
the potential for, and our ability to, remediate future material weaknesses in our internal controls over financial reporting;
•uncertain global economic conditions in the markets in which our operating segments conduct their businesses;
•the ability of our operating segments to attract and retain customers;
•increased competition in the markets in which our operating segments conduct their businesses;
•our expectations regarding the timing, extent and effectiveness of our cost reduction initiatives and management’s ability to moderate or control discretionary spending;
•management’s plans, goals, forecasts, expectations, guidance, objectives, strategies and timing for future operations, acquisitions, synergies, asset dispositions, fixed asset and goodwill impairment charges, tax and withholding expense, selling, general and administrative expenses, product plans, performance and results;
•management’s assessment of market factors and competitive developments, including pricing actions and regulatory rulings;
•the impact of additional material charges associated with our oversight of acquired or target businesses and the integration of our financial reporting;
•the impact of expending significant resources in considering acquisition targets or business opportunities that are not consummated;
•our expectations and timing with respect to our ordinary course acquisition activity and whether such acquisitions are accretive or dilutive to stockholders;
57

•our expectations and timing with respect to any strategic dispositions and sales of our operating subsidiaries including GMSL, or businesses that we may make in the future and the effect of any such dispositions or sales on our results of operations;
•our expectations and timing with respect to any strategic dispositions and sales of our operating subsidiaries or businesses that we may make in thefuture and the effect of any such dispositions or sales on our results of operations;
•the possibility of indemnification claims arising out of divestitures of businesses;
•tax consequences associated with our acquisition, holding and disposition of target companies and assets;
•the effect any interests our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved;
the impact on the holders of HC2’s common stock if we issue additional shares of HC2 common stock or preferred stock;
the impact of decisions by HC2’s significant stockholders, whose interest may differ from those of HC2’s other stockholders, or their ceasing to remain significant stockholders;
•our ability to effectively increase the size of our organization, if needed, and manage our growth;
•the potential for, and our ability to, remediate future material weaknesses in our internal controls over financial reporting;
•our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all; and
•our possible inability to hire and retain qualified executive management, sales, technical and other personnel.


Construction / DBM Global Inc.


ActualOur actual results or other outcomes of DBMG, f/k/a Schuff International,DBM Global, Inc. and its wholly-owned subsidiaries ("DBMG"), and, thus, our Construction segment, may differ from those expressed or implied by forward-looking statements contained or incorporated herein due to a variety of important factors, including, without limitation, the following:


•our ability to maintain efficient staffing and productivity as well as delays and cancellations as a result of the COVID-19 pandemic;
•its ability to realize cost savings from expected performance of contracts, whether as a result of improper estimates, performance, or otherwise;
•potential impediments and limitations on our ability to complete ordinary course acquisitions in anticipated time frames or at all;
•uncertain timing and funding of new contract awards, as well as project cancellations;
•cost overruns on fixed-price or similar contracts or failure to receive timely or proper payments on cost-reimbursable contracts, whether as a result of improper estimates, performance, disputes, or otherwise;
•risks associated with labor productivity, including performance of subcontractors that DBMG hires to complete projects;
•its ability to settle or negotiate unapproved change orders and claims;
•changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
•adverse impacts from weather affecting DBMG’s performance and timeliness of completion of projects, which could lead to increased costs and affect the quality, costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
•fluctuating revenue resulting from a number of factors, including the cyclical nature of the individual markets in which our customers operate;
•adverse outcomes of pending claims or litigation or the possibility of new claims or litigation, and the potential effect of such claims or litigation on DBMG’s business, financial condition, results of operations or cash flow; and
•lack of necessary liquidity to provide bid, performance, advance payment and retention bonds, guarantees, or letters of credit securing DBMG’s obligations under bids and contracts or to finance expenditures prior to the receipt of payment for the performance of contracts.


Marine ServicesEnergy / Global Marine Systems LimitedANG Holdings, Inc.


ActualOur actual results or other outcomes of Global Marine Systems Limited ("GMSL"),ANG, and, thus, our Marine ServicesEnergy segment, may differ from those expressed or implied by forward-looking statements contained or incorporated herein due to a variety of important factors, including, without limitation, the following:


•reductions in demand for our products as a result of the possibilityCOVID-19 pandemic;
•automobile and engine manufacturers’ limited production of global recession or market downturn with a reduction in capital spending withinoriginally manufactured natural gas vehicles and engines for the targeted market segmentsmarkets in which ANG participates;
•environmental regulations and programs mandating the use of cleaner burning fuels;
•competition from oil and gas companies, retail fuel providers, industrial gas companies, natural gas utilities and other organizations;
•the infrastructure for natural gas vehicle fuels;
•the safety and environmental risks of natural gas fueling operations and vehicle conversions;
•our Energy segment’s ability to implement its business operates;plan in a regulated environment;
project implementation issues•the adoption, modification or repeal in environmental, tax, government regulations, and possible subsequent overruns;other programs and incentives that encourage the use of clean fuel and alternative vehicles;
risks associated with operating outside of core competencies when moving into different market segments;•demand for natural gas vehicles;
possible loss•advances in other alternative vehicle fuels or severe damage to marine assets;technologies, or improvements in gasoline, diesel or hybrid engines; and
vessel equipment aging or reduced reliability;•increases, decreases and general volatility in oil, gasoline, diesel and natural gas prices.
risks associated with operating two joint ventures in China;
risks related to noncompliance with a wide variety of anti-corruption laws;
58



changes to the local laws and regulatory environment in different geographical regions;
loss of key senior employees;
difficulties attracting enough skilled technical personnel;
foreign exchange rate risk;
liquidity risk; and
potential for financial loss arising from the failure by customers to fulfill their obligations as and when these obligations come due.

Telecommunications / PTGi International Carrier Services, Inc.


ActualOur actual results or other outcomes of PTGi International Carrier Services, Inc. ("ICS"), and, thus, our Telecommunications segment, may differ from those expressed or implied by forward-looking statements contained or incorporated herein due to a variety of important factors, including, without limitation, the following:


•our expectations regarding increased competition, pricing pressures and usage patterns with respect to ICS’s product offerings;
•significant changes in ICS’s competitive environment, including as a result of industry consolidation, and the effect of competition in its markets, including pricing policies;
•its compliance with complex laws and regulations in the U.S. and internationally;
•further changes in the telecommunications industry, including rapid technological, regulatory and pricing changes in its principal markets; and
•an inability of ICS’sICS’ suppliers to obtain credit insurance on ICS in determining whether or not to extend credit.


Insurance / Continental Insurance Group Ltd.


ActualOur actual results or other outcomes of Continental Insurance Group Ltd. ("CIG"), the parent operating company of CGI (and the formerly separate operating subsidiary UTA,Continental General Insurance Company ("CGI"), which merged into CGI on December 31, 2016), and together comprise our Insurance segment, may differ from those expressed or implied by forward-looking statements contained or incorporated herein due to a variety of important factors, including, without limitation, the following:


•our ability to timely collect premiums resulting from impacts of regulations responding to the COVID-19 pandemic;
•our Insurance segment’s ability to maintain statutory capital and maintain or improve itstheir financial strength;
•our Insurance segment’s reserve adequacy, including the effect of changes to accounting or actuarial assumptions or methodologies;
•the accuracy of our Insurance segment’s assumptions and estimates regarding future events and ability to respond effectively to such events, including mortality, morbidity, persistency, expenses, interest rates, tax liability, business mix, frequency of claims, severity of claims, contingent liabilities, investment performance, and other factors related to its business and anticipated results;
•availability, affordability and adequacy of reinsurance and credit risk associated with reinsurance;
•extensive regulation and numerous legal restrictions on our Insurance segment;
•our Insurance segment’s ability to defend itself against litigation, inherent in the insurance business (including class action litigation) and respond to enforcement investigations or regulatory scrutiny;
•the performance of third parties, including distributors and technology service providers, and providers of outsourced services;
•the impact of changes in accounting and reporting standards;
•our Insurance segment’s ability to protect its intellectual property;
•general economic conditions and other factors, including prevailing interest and unemployment rate levels and stock and credit market performance which may affect, among other things, our Insurance segment’s ability to access capital resources and the costs associated therewith, the fair value of our Insurance segment’s investments, which could result in impairments and OTTI,other-than-temporary impairments, and certain liabilities;
•our Insurance segment’s exposure to any particular sector of the economy or type of asset through concentrations in its investment portfolio;
•the ability to increase sufficiently, and in a timely manner, premiums on in-force long-term care insurance policies and/or reduce in-force benefits, as may be required from time to time in the future (including as a result of our Insurance segment’s failure to obtain any necessary regulatory approvals or unwillingness or inability of policyholders to pay increased premiums);
•other regulatory changes or actions, including those relating to regulation of financial services affecting, among other things, regulation of the sale, underwriting and pricing of products, and minimum capitalization, risk-based capital and statutory reserve requirements for our Insurance segment, and our Insurance segment’s ability to mitigate such requirements;
•our Insurance segment’s ability to effectively implement its business strategy or be successful in the operation of its business;
•our Insurance segment’s ability to retain, attract and motivate qualified employees;
•interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems;
•medical advances, such as genetic research and diagnostic imaging, and related legislation; and
•the occurrence of natural or man-made disasters or a pandemic.


Life Sciences / Pansend Life Sciences, LLC

Our actual results or other outcomes of Pansend Life Sciences, LLC, and, thus, our Life Sciences segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:

•our Life Sciences segment’s ability to invest in development stage companies;
•our Life Sciences segment’s ability to develop products and treatments related to its portfolio companies;
•medical advances in healthcare and biotechnology; and
•governmental regulation in the healthcare industry.

59

Broadcasting / HC2 Broadcasting Holdings Inc.

Our actual results or other outcomes of HC2 Broadcasting Holdings Inc., and, thus, our Broadcasting segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:

•our ability to attract advertisers during the COVID-19 pandemic;
•our Broadcasting segment’s ability to integrate our recent and pending broadcasting acquisitions;
•our Broadcasting segment’s ability to operate in highly competitive markets and maintain market share;
•our Broadcasting segment’s ability to effectively implement its business strategy or be successful in the operation of its business;
•new and growing sources of competition in the broadcasting industry; and
•FCC regulation of the television broadcasting industry.

Other

Our actual results or other outcomes of our Other segment may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:

•our Other segment’s ability to operate in highly competitive markets and maintain market share;
•our Other segment’s ability to effectively implement its business strategy or be successful in the operation of its business; and
•risks associated with our equity method investment that operates in China (i.e., Huawei Marine Systems Co. Limited, a Hong Kong holding company with a Chinese operating subsidiary);

We caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this document. Neither we nor any of our subsidiaries undertake any duty or responsibility to update any of these forward-looking statements to reflect events or circumstances after the date of this document or to reflect actual outcomes.outcomes, except as required by applicable law.




Item 3. Quantitative and Qualitative Disclosures About Market RiskITEM 4. CONTROLS AND PROCEDURES


Market Risk Factors

Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. We are exposed to market risk with respect to our investments and foreign currency exchange rates. Through DBMG, we have market risk exposure from changes in interest rates charged on its borrowings and from adverse changes in steel prices. Through GMSL and ANG, we have market risk exposure from changes in interest rates charged on their respective borrowings. We do not use derivative financial instruments to mitigate a portion of the risk from such exposures.

Equity Price Risk

HC2 is exposed to market risk primarily through changes in fair value of available-for-sale fixed maturity and equity securities. HC2 follows an investment strategy approved by the HC2 Board of Directors which sets certain restrictions on the amount of securities that HC2 may acquire and its overall investment strategy.

Market prices for fixed maturity and equity securities are subject to fluctuation, as a result, and consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. Because HC2’s fixed maturity and equity securities are classified as available-for-sale, the hypothetical decline would not affect current earnings except to the extent that the decline reflects OTTI.

A means of assessing exposure to changes in market prices is to estimate the potential changes in market values on the fixed maturity and equity securities resulting from a hypothetical decline in equity market prices. As of September 30, 2017, assuming all other factors are constant, we estimate that a 10.0%, 20.0%, and 30.0% decline in equity market prices would have an $138.6 million, $277.1 million, and $415.7 million adverse impact on HC2’s portfolio of fixed maturity and equity securities, respectively.

Foreign Currency Exchange Rate Risk

DBMG, GMSL and ICS are exposed to market risk from foreign currency price changes that could have a significant and potentially adverse impact on gains and losses as a result of translating the operating results and financial position of our international subsidiaries into USD.

We translate the local currency statements of operations of our foreign subsidiaries into USD using the average exchange rate during the reporting period. Changes in foreign exchange rates affect the reported profits and losses and cash flows of our international subsidiaries and may distort comparisons from year to year. For example, when the USD strengthens compared to the GBP, there could be a negative or positive effect on the reported results for our Telecommunications segment, depending upon whether such businesses are operating profitably or at a loss. More profits in GBP are required to generate the same amount of profits in USD and, similarly, a greater loss in GBP is required to generate the same amount of loss in USD, and vice versa. For instance, when the USD weakens against the GBP, there is a positive effect on reported profits and a negative effect on reported losses.

Interest Rate Risk

GMSL, DBMG, and ANG are exposed to the market risk from changes in interest rates through their borrowings, which bear variable rates based on LIBOR. Changes in LIBOR could result in an increase or decrease in interest expense recorded. A 100, 200, and 300 basis point increase in LIBOR based on our floating rate borrowings outstanding as of September 30, 2017 of $25.3 million, would result in an increase in the recorded interest expense of $0.3 million, $0.5 million, and $0.8 million per year.

Commodity Price Risk

DBMG is exposed to the market risk from changes in the price of steel. For large orders the risk is mitigated by locking the general contractors into the price at the mill at the time work is awarded. In the event of a subsequent price increase by the mill, DBMG has the ability to pass the higher costs on to the general contractor. DBMG does not hedge or enter into any forward purchasing arrangements with the mills. The price negotiated at the time of the order is the price paid by DBMG.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures


Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the "Exchange Act") as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017,March 31, 2020, our disclosure controls and procedures were effective. Disclosure controls and procedures mean our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time


periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.


Changes in Internal Control over Financial Reporting


There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2017,March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




60

PART II

Item
ITEM 1. Legal ProceedingsLEGAL PROCEEDINGS


The Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company’s Condensed Consolidated Financial Statements. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its Condensed Consolidated Financial Statements. The Company records a liability in its Condensed Consolidated Financial Statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary for the Condensed Consolidated Financial Statements not to be misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in its Condensed Consolidated Financial Statements. See Note 14.16. Commitments and Contingencies to our unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.


Item 1A. Risk Factors


Other than disclosednoted below, there have been no additional material changes to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, filed with the SEC on March 9, 2017,16, 2020.


UtilitiesRisks Related to our Businesses


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 are expected 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, and the effects are difficult to assess or predict with meaningful precision both generally and specifically as to our businesses. 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 adoption, modificationpandemic 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 repealincreased unemployment that has occurred or may occur in environmental, tax, government regulations,the future, which could cause its ultimate customers and potential customers to postpone or reduce spending on its 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 programscommercial restrictions and incentivesclosure of schools and non-essential businesses, and these measures may remain in place for a significant period of time.

The Company’s top priority is to protect its employees and their families, and those of the Company’s customers. The Company is taking precautionary measures as directed by health authorities and the local government, including changing operational procedures as necessary, providing additional protective gear and cleaning to protect them, which has resulted and may continue to result in disruptions to and increased costs of the Company’s operations.

Individually and collectively, the consequences of the COVID-19 pandemic could adversely impact its 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. The extent that encourage the useCOVID-19 pandemic adversely affects the Company’s business, financial condition, results of clean fueloperations, cash flows and alternative vehicles,liquidity, it may impact our business.

Programs and regulations thatalso have the effect of encouragingheightening many of the useother risks described in this “Risk Factors” section, such as those relating to the Company’s level of CNGindebtedness, 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 Construction 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 vehicle fuelresult of potential workforce disruptions, DBMG may experience delays or suspensions of projects, however there have not been material impacts during the three months ended March 31, 2020. 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. likely will cause the timing of revenue and possibly impact earnings and backlog. Persistent delays, suspensions or cancellations of projects under contract may occur while governments implement policies designed to respond to the COVID-19 pandemic. Any such continued loss or suspension of projects under contract may negatively impact the DBMG’s results of operations, cash flows or financial condition.

Risks Related to the Insurance Segment

Our Insurance segment may incur increased losses under insurance policies that it has written including group life insurance, individual life insurance, and annuities, which may result in increased death claims due to COVID-19 mortality. Our Insurance segment has not written or does not retain any risk for workers’ compensation, short-term disability, general liability, surety, director and officer liability, and employment practices liability which are key insurance liabilities that may be directly impacted by COVID-19.

Our Insurance segment does not actively issue or market new policies, therefore there is no potential disruptions to brokers or agents that would have an impact on operations.

In addition, our insurance segment relies on timely collections of premiums due from our customers. Regulatory requirements applicable to our Insurance segment to extend premium grace periods (e.g., FL Memorandum OIR – 20-04M), potential delays in obtaining rate increase approvals for the long-term care liabilities, and increased demands for cash surrender values for life and annuity liabilities may negatively impacted our cash flows and result of operations.

Risks related to our 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 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 Hangzhou Huasheng Investment Management Co., Ltd. (“Hangzhou”) which in turn could result in Hangzhou determining not to purchase the final $10.0 million of preferred stock for R2, and 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 Science segment is highly uncertain and subject to change and could expire orwill depend on future developments, which cannot be repealed or amended as a result of changes in federal, state or local political, social or economic conditions. For example,accurately predicted, including the resultsduration of the recent U.S. presidential election have created increased uncertainty regardingpandemic, additional or modified government actions, new information that will emerge concerning the futureseverity and impact of these programsCOVID-19 and regulations. In particular, the Volumetric Excise Tax Credit (the "VETC"), which expired on December 31, 2016actions taken to contain or address its impact in the short and long term, among others.

Risks related to our Broadcasting Segment

Our Broadcasting segment has been, and may notcontinue to be, availableimpacted by the COVID-19 pandemic in any subsequent period, provided a tax credit worth $0.50 per gasoline gallon equivalentnumerous ways. Broadcasting is dependent on advertising revenue, and numerous advertisers have reduced or suspended their purchase of compressed natural gas, or diesel gallon equivalenttelevision advertising time, primarily due to the cessation of liquefied natural gas, whichlocal consumer business activity mandated by state governors. Many of the top industries that are heavy television advertisers have suffered 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 subsidiary ANG claimed for a portion of its fuel sales each year.  The VETC tax credit had been used as an incentive for fleet operatorsspectrum lease clients. These clients pay us lease fees to adopt natural gas vehicles, as it helped offset the incremental cost of a natural gas vehicle versus a similar gas- or diesel-powered version. The termination, modification or repeal of federal, state and local government tax credits, rebates, grants and similar programs and incentives that promote the use of CNG as a vehicle fuel and various government programs that make available grant funds for the purchase and construction of natural gas vehicles and stations may have an adverse impactair their programming on our business.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.


Demand for natural gas vehicles may decline with advances in other alternative technologies and fuels, or with improvements in gasoline, diesel or hybrid engines.
The market for CNG vehicles may diminish with technological advances in gasoline, diesel or other alternative fuels that may be considered more cost-effective or otherwise more advantageous than CNG. Operators may perceive an inability to timely recover the additional costs of natural gas vehicles if CNG fuel is not offered at a lower price than gasoline and diesel. In addition, the adoption of CNG as a fuel for vehicle may beCOVID-19 pandemic has slowed or limited if the low prices and over-supply of gasoline and diesel continue or deteriorate further or if natural gas prices increases without corresponding increases in prices of gasoline and diesel. Advances or improvements in fuel efficiency also may offer more economical choice and deter consumersdown our ability to convert their vehicles to natural gas. Growth in the use of electric commercial vehicles likewise may reduce demand for natural gas vehicles and renewable diesel, hydrogenbuild out our additional television stations. Illness, social distancing, and other alternative fuels may provepandemic-related precautions have resulted in equipment delivery delays and labor shortages, including the availability of tower crews, an already limited, highly-specialized and thinly-stretched work force necessary to be more economical alternatives to gasolineinstall our broadcast antennas and diesel than natural gas, which could have an adverse impactrelated equipment. We depend on operational stations for our business.revenue, and delays in completing our station builds will directly result in delays in monetizing those stations.


If there are advances in other alternative vehicle fuels or technologies, or if there are improvements in gasoline, diesel or hybrid engines, demand for natural gas vehicles may decline.
Technological advances in the production, delivery and use of gasoline, diesel or other alternative fuels that are, or are perceived to be, cleaner, more cost-effective, more readily available or otherwise more attractive than CNG, may slow or limit adoption of natural gas vehicles. For example, advances in gasoline and diesel engine technology, including efficiency improvements and further development of hybrid engines, may offer a cleaner, more cost-effective option and make fleet customers less likely to convert their vehicles to natural gas. Additionally, technological advances related to ethanol or biodiesel, which are used as an additive to, or substitute for gasoline and diesel fuel, may slow the need to diversify fuels and affect the growth of the natural gas vehicle fuel market.
Further, use of electric commercial vehicles, or the perception that such vehicles may soon be widely available and provide satisfactory performance at an acceptable cost, may reduce demand for natural gas vehicles. In addition, renewable diesel, hydrogen and other alternative fuels may prove to be cleaner, more cost-effective alternatives to gasoline and diesel than natural gas. Advances in technology that reduce demand for natural gas as a vehicle fuel or the failure of natural gas vehicle technology to advance at an equal pace could slow or curtail the growth of natural gas vehicle purchases or conversions, which would have an adverse effect on our business.


Increases, decreases and general volatility in oil, gasoline, diesel and natural gas prices could adversely affect our business.
In recent years, the prices of oil, gasoline, diesel and natural gas have been volatile, and this volatility may continue. Additionally, prices for crude oil in recent years have been low, due in part to over-production and increased supply without a corresponding increase in demand. Market adoption of CNG (which can be delivered in the form of CNG) as vehicle fuels could be slowed or limited if the low prices and over-supply of gasoline and diesel, today’s most prevalent and conventional vehicle fuels, continue or worsen, or if the price of natural gas increases without equal and corresponding increases in prices of gasoline and diesel. Any of these circumstances could decrease the market's perception of a need for alternative vehicle fuels generally and could cause the success or perceived success of our industry and our business to materially suffer. In addition, low gasoline and diesel prices contribute to the differential between the cost of natural gas vehicles and gasoline or diesel-powered vehicles. Generally, natural gas vehicles cost more initially than gasoline or diesel powered vehicles, as the components needed for a vehicle to use natural gas add to the vehicle’s base cost. Operators seek to recover the additional costs of acquiring or converting to natural gas vehicles over time through the lower costs of fueling natural gas vehicles; however, operators may perceive an inability to timely recover these additional costs if we do not offer CNG fuel at prices lower than gasoline and diesel. Our ability to offerrefinance our customers an attractive pricing advantage for CNG and maintain an acceptable margin on our sales becomes more difficult if prices of gasoline and diesel decrease or if prices of natural gas increase. These pricing conditions exacerbate the cost differential between natural gas vehicles and gasoline or diesel powered vehicles, whichshort term debt may lead operators to delay or refrain from purchasing or converting to natural gas vehicles at all. Any of these outcomes would decrease our potential customer base and harm our business prospects. Further, fluctuations in natural gas prices affect the cost to us of the natural gas commodity. High natural gas prices adversely impact our operating margins in cases where we cannot pass the increased costs through to our customers. Conversely, lower natural gas prices reduce our revenue in cases where the commodity cost is passed through to our customers. As a result, these fluctuations in natural gas prices can have a significant and adverse impact on our operating results.
Factors that can cause fluctuations in gasoline, diesel and natural gas prices include, among others, changes in supply and availability of crude oil and natural gas, government regulations and political conditions, inventory levels, consumer demand, price and availability of other alternative fuels, weather conditions, negative publicity surrounding drilling, production or importing techniques and methods for oil or natural gas, economic conditions and the price of foreign imports.
With respect to natural gas supply and use as a vehicle fuel, there have been recent efforts to place new regulatory requirements on the production of natural gas by hydraulic fracturing of shale gas reservoirs and other means and on transporting, dispensing and using natural gas. Hydraulic fracturing and horizontal drilling techniques have resulted in a substantial increase in the proven natural gas reserves in the United States. Any changes in regulations that make it more expensive or unprofitable to produce natural gas through these techniques or others, as well as any changesbe compromised to the regulations relatingextent COVID-19 disrupts our access to transporting, dispensing or using natural gas, could lead to increased natural gas prices.the high-yield debt markets.

If pricing conditions worsen, or if all or some combination of factors causing further volatility in natural gas, oil and diesel prices were to occur, our business and our industry would be materially harmed.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


None.


Item 3. Defaults upon Senior Securities


None.


ItemITEM 4. Mine Safety DisclosuresMINE SAFETY DISCLOSURES


Not applicable.


ItemITEM 5. Other InformationOTHER INFORMATION


NoneNone.


ItemITEM 6. Exhibits and Financial Statement ScheduleEXHIBITS


(a) Exhibits (see Exhibit Index in the below page)




Please note that the agreements included as exhibits to this Form 10-Q are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about HC2 Holdings, Inc. or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time.

Exhibit
Number		Description
Exhibit
Number
2.1		Description
10.1^
4.1		Employment
31.1
31.2
32*
32.1*
101The following materials from the registrant’s Quarterly Report on Form 10-Q for the fiscal quarterthree months ended September 30, 2017,March 31, 2020, formatted in extensible business reporting language (XBRL); (i) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017Mach 31, 2020 and 20162019, (iii) Condensed Consolidated Balance Sheets at September 30, 2017March 31, 2020 and 2016,December 31, 2019, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, (v) Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, and (vi) Notes to Condensed Consolidated Financial Statements (filed herewith).

*These certifications are being "furnished" and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
^Indicates management contract or compensatory plan or arrangement.




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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HC2 Holdings, Inc.
Date:May 11, 2020
Date: November 8, 2017By:By:/s/S/ Michael J. Sena
Michael J. Sena
Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)



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