INNOVATE Corp.: Form 10-Q for the period ended Jun 30, 2024

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated annual audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 6, 2024 (the "2023 Annual Report") and the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section in our 2023 Annual Report as well as the section below entitled "Special Note Regarding Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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

Our Business and Our Operations

We are a diversified holding company with principal operations conducted through three operating platforms or reportable segments: Infrastructure ("DBMG"), Life Sciences ("Pansend"), and Spectrum, plus our Other segment, which includes businesses that do not meet the separately reportable segment thresholds.

For additional information on our business, refer to Note 1. Organization and Business to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Cyclical Patterns

Our segments' operations can be highly cyclical. Our volume of business in our Infrastructure segment may be adversely affected by declines or delays in projects, which may vary by geographic region. Project schedules, particularly in connection with large, complex, and longer-term projects can also create fluctuations in the services provided, which may adversely affect us in any 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; rising interest rates and inflation; and economic, 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

We continually evaluate strategic and business alternatives within our operating segments, which may include the following: operating, growing or acquiring additional assets or businesses related to current or historical operations; or winding down or selling our existing operations. In the longer-term, we may evaluate opportunities to acquire assets or businesses unrelated to our current or historical operations. In the event we were to enter into a strategic transaction to sell any of our existing operations, our intention is to use available proceeds from such transaction to address our capital structure at our Non-Operating Corporate and Spectrum segments.

In 2024, including subsequent to the second quarter end, as part of our strategic process, we engaged in several transactions that had or will have an effect on the results of operations and financial condition of our business and individual segments.

Rights Offering and Concurrent Private Placement

On March 8, 2024, the Company commenced a $19.0 million rights offering ("Rights Offering") for its common stock. Pursuant to the Rights Offering, the Company distributed to each holder of the Company’s common stock, Series A-3 Convertible Participating Preferred Stock, Series A-4 Convertible Participating Preferred Stock and the 2026 Convertible Notes as of March 6, 2024 (the “rights offering record date”), transferable subscription rights to purchase 0.2858 shares of the Company’s common stock at a price of $0.70 per whole share.

Per the concurrent investment agreement entered into with Lancer Capital (the "Investment Agreement"), the Rights Offering was backstopped by Lancer Capital, an investment fund led by Avram A. Glazer, the Chairman of the Board and the Company’s largest stockholder. Due to limitations on the common stock that can be issued to Lancer Capital under the rules of the New York Stock Exchange ("NYSE"), in lieu of exercising its subscription rights, pursuant to the Investment Agreement, Lancer Capital would purchase up to $19.0 million of the Company’s newly issued Series C Non-Voting Participating Convertible Preferred Stock (the “Series C Preferred Stock”), for an issue price of $1,000 per share. In connection with the backstop commitment, and as a result of limitations in the amount common equity that can be raised under the Company’s effective shelf registration statement on Form S-3, Lancer Capital also agreed to purchase an additional $16.0 million of Series C Preferred Stock in a private placement transaction ("Concurrent Private Placement") which was to close concurrently with the settlement of the Rights Offering. Lancer Capital did not receive any compensation or other consideration for entering into or consummating the Investment Agreement.

As the Rights Offering had not yet settled by March 28, 2024, in accordance with the Investment Agreement, Lancer Capital purchased $25.0 million of Series C Preferred Stock, referred to as the "equity advance." On April 24, 2024, the Company completed and closed on the Rights Offering and issued a total of 5,306,105 shares of common stock for $3.7 million. Based on the number of shares of common stock actually sold upon exercise of the rights to third party investors, there were no excess shares of Series C Preferred Stock purchased by Lancer Capital under the equity advance that the Company was required to redeem, and Lancer Capital purchased an additional approximately 6,286 Series C Preferred Stock for $6.3 million under the backstop commitment. In total, the Company received $35.0 million in aggregate gross proceeds related to the Rights Offering and Concurrent Private Placement and incurred $1.8 million in dealer manager fees and other related costs which have been capitalized into Additional paid in capital ("APIC"). INNOVATE expects to use the net proceeds from the Rights Offering for general corporate purposes, including debt service and for working capital. In addition, as a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, and consequently, on April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note.

Under the rules of the NYSE, because the shares purchased by Lancer Capital were greater than 20% of the Company's common stock outstanding before the issuance of the Series C Preferred Stock, those shares of Series C Preferred Stock were not allowed to be converted until stockholder approval of such issuance was obtained. On June 18, 2024, the Company held its annual shareholder meeting where Company's shareholder's approved the conversion of the Series C Preferred stock into common stock. As a result, approximately 31,286 Series C Preferred Stock, held by Lancer Capital, were converted into 44,693,895 of INNOVATE's common stock. See Note 15. Equity and Temporary Equity for additional information.

The Company waived its Tax Benefits Preservation Plan to permit persons exercising rights to acquire 4.9% or more of the outstanding common stock upon the exercise thereof without becoming an Acquiring Person (as defined in the Tax Benefits Preservation Plan).

INNOVATE expects to use the net proceeds from the Rights Offering for general corporate purposes, including debt service and for working capital. As a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, in the amount of the greater of $3.0 million or 12.5% of the net proceeds. On April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note.

Stockholders’ Rights Agreement - Tax Benefits Preservation Plan

On May 6, 2024, the Company terminated its Tax Benefits Preservation Plan entered into on April 1, 2023 (the “2023 Preservation Plan”) because the Company’s Board of Directors determined that the 2023 Preservation Plan was no longer necessary or desirable for the preservation of the Company’s ability to use its tax net operating losses and other certain tax assets. In connection with the termination of the 2023 Preservation Plan, the Company took routine actions to deregister the related preferred stock purchase rights under the Securities Exchange Act of 1934, and to delist the preferred stock purchase rights from the NYSE. These actions are administrative in nature and will have no effect on the Company’s common stock, which will continue to be listed on the NYSE.

Debt Obligations and Financing

In addition to the Rights Offering and Concurrent Private Placement at the Non-Operating Corporate segment discussed above, during 2024 thus far, we have refinanced some of our debt and obtained new capital financing at the subsidiary level. This financing helped us provide needed capital for our operations and the operations of our subsidiaries.

Infrastructure

DBMG and Banker Steel, jointly and severally, had a subordinated 4.0% note payable to Banker Steel's former owner, in which Donald Banker's family trust has a 25% interest, and jointly and severally also had a subordinated 8.0% note payable to Donald Banker's family trust, the latter of which was fully paid off in December 2023. During the six months ended June 30, 2024, DBMG made $5.0 million in scheduled payments on the 4.0% note. The 4.0% note matured on March 31, 2024 and was fully redeemed on April 2, 2024.

On June 28, 2024, DBM and UMB entered into the Third Amendment to the UMB Credit Agreement. The amendment adds an incremental separate term loan of $25.0 million to the existing credit facility, with the same interest rate as the Revolving Line with UMB and the same maturity date as the initial $78.0 million UMB term loan.

Life Sciences

R2 Technologies had various short-term notes with Lancer Capital, which expired on January 31, 2024, and effective January 31, 2024, a new 20% note with an aggregate original principal amount of $20.0 million was issued, which was comprised of all prior outstanding principal amounts and unpaid accrued interest of $2.6 million which was capitalized into the new principal balance.

The new 20% note also includes an exit fee payable upon the earliest of the maturity date, the acceleration date of the principal amount of the note, for any reason as defined in the agreement, or the date upon which any prepayment is made. As a result of the addition of the exit fee effective January 31, 2024, the transaction was determined to be an extinguishment of debt under ASC 470-50, Debt - Modifications and Extinguishments, and the exit fee payable to the existing lender of $2.2 million was included as a loss on debt extinguishment within Other income (expense), net in the Condensed Consolidated Statement of Operations. As of June 30, 2024, the accrued exit fee was $2.2 million and was included within Accrued liabilities on the Condensed Consolidated Balance Sheet.

Interest on the new note accrues at 20% per annum and is payable monthly in arrears, in cash or, if not paid in cash, accrued and unpaid interest is capitalized monthly into the principal balance. Interest expense related to the note(s) with Lancer Capital was $1.0 million and $0.7 million for the three months ended June 30, 2024 and 2023, respectively, and was $1.9 million and $1.2 million for the six months ended June 30, 2024 and 2023, respectively. In accordance with the note agreement, all unpaid accrued interest of $1.7 million which was incurred subsequent to January 31, 2024, was capitalized into the principal balance during the six months ended June 30, 2024, and there was no amount reflected within accrued interest payable as of June 30, 2024. As of December 31, 2023, accrued interest payable, which had not yet been capitalized into the principal balance, was $2.4 million.

The original maturity date of the new $20.0 million note was April 30, 2024, or within five business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing or has a change in control, as defined in the agreement, with an optional prepayment of the entire then-outstanding and unpaid principal and accrued interest upon five-days written notice to Lancer Capital. The note has subsequently been further extended to December 31, 2024. The exit fee as of June 30, 2024, as amended, is equal to 10.88% of the principal amount being repaid and increases by 0.17% each month thereafter until maturity. Beginning July 31, 2024, if all outstanding amounts pursuant to the note are not prepaid in full, an additional exit fee of $1.0 million will be payable, increasing by $1.0 million each month until maturity. The Company shall pay the additional exit fee on the earliest of the maturity date, the date of the acceleration of the principal amount of the note for any reason or, if any portion of the note is prepaid at any time, the date of such prepayment of the note. Refer to Note 11. Debt Obligations of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information on R2 Technologies' debt obligations.

Non-Operating Corporate

On May 6, 2024, the Company and MSD extended the maturity date of its Revolving Line of Credit from March 16, 2025 to May 16, 2025.

Subsequent to quarter end, we repurchased $2.9 million principal amount of our 2026 Convertible Notes at a market discount for $1.1 million, which is inclusive of accrued interest of $0.1 million.

Equity Method Investments

During the first quarter of 2024, MediBeacon issued to Pansend an aggregate $1.2 million of 12% convertible notes payable, increasing Pansend's total outstanding principal receivable to $10.9 million. During the second quarter of 2024, MediBeacon issued an aggregate $1.1 million of 12% convertible notes to Pansend, increasing the total outstanding principal due to Pansend to $12.0 million.

As a result of these note issuances by MediBeacon during the three and six months ended June 30, 2024, Pansend recognized $1.1 million and $2.3 million, respectively, of equity method losses which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero.

As of June 30, 2024, Pansend's carrying amount of its investment in MediBeacon remains at zero, inclusive of the $12.0 million in convertible notes which have been offset against recognized losses, and has cumulative unrecognized equity method losses relating to MediBeacon of $9.4 million.

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 six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023.

Results of Operations

The following table summarizes our results of operations (in millions):

Revenue: Revenue for the three months ended June 30, 2024 decreased $55.7 million to $313.1 million from $368.8 million for the three months ended June 30, 2023. Revenue for the six months ended June 30, 2024 decreased $58.4 million to $628.3 million from $686.7 million for the six months ended June 30, 2023. The decreases were driven by our Infrastructure segment, which was partially offset by increases at our Life Sciences and Spectrum segments. The decrease at our Infrastructure segment was primarily driven by the timing and size of projects at Banker Steel and DBMG's commercial structural steel fabrication and erection business, both of which had increased activity in the comparable period on certain large commercial construction projects that are now at or near completion in the current period. This was partially offset by an increase at the industrial maintenance and repair business as a result of an increase in project work. The increase at our Life Sciences segment was primarily due to incremental unit sales from the launch of the Glacial fx system in the second half of 2023 and an increase in Glacial Rx units sold compared to the prior year period. The increase at our Spectrum segment was primarily driven by network launches and expanded coverage with existing customers.

Income from operations: Income from operations for the three months ended June 30, 2024 increased $23.0 million to $28.8 million from $5.8 million for the three months ended June 30, 2023. The increase was due to a net increase in gross profit of $13.0 million, an increase in other operating income of $10.6 million and a decrease in depreciation and amortization of $1.2 million, which was partially offset by an increase in selling, general and administrative ("SG&A") expenses of $1.8 million. The increase in gross profit was primarily driven by our Infrastructure segment due to timing and size of projects that are now at or near completion in the current period, including the effect of changes in estimated costs to complete those projects recognized in the ordinary course of business, and, to a lesser extent, our Spectrum and Life Sciences segments. The overall increase in other operating income was driven by our Infrastructure segment primarily as a result of a gain on lease modification and a gain on the sale of various properties in the current period. The overall decrease in depreciation and amortization was primarily driven by our Infrastructure segment, as certain customer contract intangibles became fully amortized in the second quarter of 2023. The overall increase in SG&A expenses was primarily driven by our Infrastructure segment which saw increases in compensation-related expenses and accounting-related costs, which were partially offset by a decrease in legal and consulting fees, and facility-related expenses at our Infrastructure segment and a decrease in SG&A expenses at our Non-Operating Corporate segment primarily driven by decreases in compensation-related expenses, including reductions in bonus and stock compensation expense due to headcount changes, and a decrease in legal fees.

Income from operations for the six months ended June 30, 2024 increased $29.8 million to $31.6 million from $1.8 million for the six months ended June 30, 2023. The increase was due to a net increase in gross profit of $18.0 million, an increase in other operating income of $8.3 million, a decrease in depreciation and amortization of $3.1 million and a decrease in SG&A expenses of $0.4 million. The increase in gross profit was primarily driven by our Infrastructure segment due to timing and size of projects that are now at or near completion in the current period, including the effect of changes in estimated costs to complete those projects recognized in the ordinary course of business, and, to a lesser extent, our Spectrum and Life Sciences segments. The overall increase in other operating income was driven by our Infrastructure segment primarily as a result of a gain on lease modification and a gain on the sale of various properties in the current period, which was partially offset by a loss on disposal related to a plant closure in the first quarter of 2024. The overall decrease in depreciation and amortization was primarily driven by our Infrastructure segment, as certain customer contract intangibles became fully amortized in the second quarter of 2023. The overall decrease in SG&A was driven by unrepeated transaction expenses related to the sale of New Saxon's 19% investment in HMN in the comparable period, a decrease in compensation-related expenses at our Non-Operating Corporate and Spectrum segments, a decrease in consulting fees at our Non-Operating Corporate segment, a decrease in legal fees and facility-related expenses at our Infrastructure segment, and cost reduction initiatives at R2 Technologies, which was partially offset by an increase in compensation-related expenses at our Infrastructure segment.

Interest expense: Interest expense for the three months ended June 30, 2024 increased $0.2 million to $16.5 million from $16.3 million for the three months ended June 30, 2023. Interest expense for the six months ended June 30, 2024, increased $1.8 million to $33.7 million from $31.9 million for the six months ended June 30, 2023. The increases were primarily attributable to higher outstanding principal balances at our Non-Operating Corporate and Life Sciences segments as a result of new debt issued subsequent to the comparable period. This was partially offset by our Infrastructure segment due to a net decrease in outstanding principal balances.

Loss from equity investees: Loss from equity investees for the three months ended June 30, 2024 increased $0.8 million to $1.1 million from $0.3 million for the three months ended June 30, 2023. The increase in loss was due to an increase in losses from MediBeacon as a result of additional convertible note investments in MediBeacon by Pansend during the three months ended June 30, 2024, which increased Pansend's basis in MediBeacon by $1.1 million and Pansend recognized $1.1 million of equity method losses which were previously unrecognized. Pansend made no convertible note investments during the comparable period. The increase in loss from equity investees was partially offset by decrease in loss as a result of the partial sale of Triple Ring subsequent to the comparable period, which resulted in our investment in Triple Ring no longer being accounted for under the equity method of accounting. Thus, no equity method losses were recognized in the current period.

Loss from equity investees for the six months ended June 30, 2024 decreased $2.0 million to $2.3 million from $4.3 million for the six months ended June 30, 2023. The decrease in loss was primarily due to a reduction in losses from MediBeacon, primarily due to an unrepeated equity transaction with Huadong in the comparable period, which resulted in a $3.8 million increase in Pansend's basis in MediBeacon and a corresponding $3.8 million of additional equity method losses that were previously unrecognized. However, during the six months ended June 30, 2024, as a result of additional convertible note investments in MediBeacon by Pansend, Pansend's basis in MediBeacon increased by $2.3 million and Pansend recognized $2.3 million of equity method losses which were previously unrecognized. As of both June 30, 2024 and 2023, Pansend's net carrying amount of its investment in MediBeacon was zero, and Pansend had unrecognized losses from this investment. Additionally contributing to the decrease in equity loss was our previous investment in HMN, which was sold on March 6, 2023 and had losses for the approximately two months of ownership in 2023. Also contributing to the decrease in loss from equity investees was the partial sale of Triple Ring subsequent to the comparable period, which resulted in our investment in Triple Ring no longer being accounted for under the equity method of accounting. Thus, no equity method losses were recognized in the current period. Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on our equity investments.

Other income (expense), net: Other (expense) income, net for the six months ended June 30, 2024 decreased $17.8 million to an expense of $1.0 million from income of $16.8 million for the six months ended June 30, 2023. The decrease was primarily driven by the unrepeated gain on the sale of the equity investment in HMN of $12.2 million in the comparable period, an unrepeated $3.8 million equity investment step-up gain from an increase in Pansend's basis as a result of MediBeacon issuing $7.5 million of its preferred stock to Huadong in the comparable period as well as a $2.2 million loss on debt extinguishment at R2 Technologies in the current period. The decrease was partially offset by additional interest income earned at our Life Sciences segment as a result of additional investments in MediBeacon subsequent to the comparable period.

Income tax benefit (expense): Income tax expense for the three months ended June 30, 2024 decreased $3.7 million to a benefit of $2.5 million from an expense of $1.2 million for the three months ended June 30, 2023. Income tax expense for the six months ended June 30, 2024 decreased $1.3 million to $0.8 million from an expense of $2.1 million for the six months ended June 30, 2023. The decreases were primarily driven by the tax expense of INNOVATE Corp's U.S. consolidated group utilizing its remaining unlimited NOLs in 2024 and due to the Tax Cut and Jobs Act's 80 percent limitation on net operating losses incurred after 2017, resulting in the annual effective tax rate for the current period being applied to the U.S. consolidated group's 2024 year-to-date income as calculated under ASC 740. The annual effective tax rate calculated for the comparable period interim tax provision included an unrepeated $1.1 million tax benefit, consisting of a current tax expense of $4.4 million related to a foreign tax payment and a deferred tax benefit of $5.5 million related to the reversal of the deferred tax liability associated with the $11.3 million put option, both of which were related to the sale of New Saxon's 19% investment in HMN on March 6, 2023.

The Organization for Economic Cooperation and Development ("OECD") has announced an Inclusive Framework on Base Erosion and Profit Shifting including a Pillar Two Model to provide for a 15% global minimum tax on the earnings of multinational corporations with consolidated revenue over €750 million. Many jurisdictions have enacted Pillar Two legislation that will start to become effective in 2024. The OECD, and its member countries, continue to release new guidance and legislation on Pillar Two. Based on current enacted laws, Pillar Two is not expected to materially impact our effective tax rate or cash flows in the next year. We will continue to evaluate the impact on our financial position as new legislation or guidance is introduced which could change our current assessment.

Segment Results of Operations

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

Infrastructure Segment

Revenue: Revenue for the three months ended June 30, 2024 decreased $57.2 million to $305.2 million from $362.4 million for the three months ended June 30, 2023. Revenue for the six months ended June 30, 2024 decreased $61.0 million to $613.1 million from $674.1 million for the six months ended June 30, 2023. The decreases were primarily driven by the timing and size of projects at Banker Steel and DBMG's commercial structural steel fabrication and erection business, both of which had increased activity in the comparable period on certain large commercial construction projects that are now at or near completion in the current period. This was partially offset by an increase at the industrial maintenance and repair business as a result of an increase in project work.

Cost of revenue: Cost of revenue for the three months ended June 30, 2024 decreased $69.3 million to $243.5 million from $312.8 million for the three months ended June 30, 2023. Cost of revenue for the six months ended June 30, 2024 decreased $77.1 million to $506.6 million from $583.7 million for the six months ended June 30, 2023. The decreases were primarily driven by the decrease in revenues from the timing of project activity on certain large commercial construction projects and decreases in costs as they wind down and near completion in the current period at Banker Steel and DBMG's commercial structural steel fabrication and erection business, which was partially offset by an increase in costs associated with the industrial maintenance and repair business as a result of an increase in project work.

Selling, general and administrative: Selling, general and administrative expense for the three months ended June 30, 2024 increased $3.1 million to $33.8 million from $30.7 million for the three months ended June 30, 2023. The increase was primarily driven by an increase in compensation-related expenses and accounting-related costs, which was partially offset primarily by a decrease in legal and consulting fees, and facility-related expenses.

Selling, general and administrative expense for the six months ended June 30, 2024 increased $4.3 million to $64.7 million from $60.4 million for the six months ended June 30, 2023. The increase was primarily driven by an increase in compensation-related expenses, which was partially offset primarily by a decrease in legal fees and facility-related expenses.

Depreciation and amortization: Depreciation and amortization for the three months ended June 30, 2024 decreased $1.2 million to $2.9 million from $4.1 million for the three months ended June 30, 2023. Depreciation and amortization for the six months ended June 30, 2024 decreased $3.1 million to $5.9 million from $9.0 million for the six months ended June 30, 2023. The decreases were primarily driven by Banker Steel, as certain customer contract intangibles became fully amortized in the second quarter of 2023.

Other operating (income) loss: Other operating (income) loss for the three months ended June 30, 2024 increased $10.6 million to income of $10.5 million from a loss of $0.1 million for the three months ended June 30, 2023. Other operating income in three months ended June 30, 2024 related to a gain on lease modification and a gain on the sale of various properties in the current period.

Other operating (income) loss for the six months ended June 30, 2024 increased $8.9 million to income of $8.9 million from zero for the six months ended June 30, 2023. Other operating income in six months ended June 30, 2024 related to a gain on lease modification and a gain on the sale of various properties in the current period, which was partially offset by a loss related to a plant closure.

Life Sciences Segment

Revenue: Revenue for the three months ended June 30, 2024 increased $1.0 million to $1.7 million from $0.7 million for the three months ended June 30, 2023. Revenue for the six months ended June 30, 2024 increased $1.5 million to $2.7 million from $1.2 million for the six months ended June 30, 2023. The increases in revenue were attributable to R2 Technologies, primarily due to incremental unit sales from the launch of the Glacial fx system in the second half of 2023 and an increase in Glacial Rx units sold compared to the prior year period.

Cost of revenue: Cost of revenue for the three months ended June 30, 2024 increased $0.7 million to $1.1 million from $0.4 million for the three months ended June 30, 2023. Cost of revenue for the six months ended June 30, 2024 increased $0.8 million to $1.7 million from $0.9 million for the six months ended June 30, 2023. The increases in cost of revenue were attributable to R2 Technologies, primarily driven by the increases in revenue and changes in product mix.

Selling, general and administrative: Selling, general and administrative expense for the three months ended June 30, 2024 increased $0.4 million to $4.5 million from $4.1 million for the three months ended June 30, 2023. The increase was primarily driven by increases from R2 Technologies in sales commissions due to an increase in system sales and from Genovel as a result of timing of research and development costs.

Selling, general and administrative expense for the six months ended June 30, 2024 decreased $0.4 million to $8.0 million from $8.4 million for the six months ended June 30, 2023. The decrease was primarily driven by decreases in R2 Technologies general and administrative expenses as a result of continued cost reduction initiatives, which went into effect the second half of 2023, partially offset by increases in sales commissions at R2 Technologies due to an increase in system sales.

Spectrum Segment

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Revenue: Revenue for the three months ended June 30, 2024 increased $0.5 million to $6.2 million from $5.7 million for the three months ended June 30, 2023. Revenue for the six months ended June 30, 2024 increased $1.1 million to $12.5 million from $11.4 million for the six months ended June 30, 2023. The increases were primarily driven by network launches and expanded coverage with existing customers, which was partially offset by the termination of a number of smaller networks and individual markets subsequent to the comparable period.

Selling, general and administrative: Selling, general and administrative expense for the three months ended June 30, 2024 decreased $0.2 million to $1.8 million from $2.0 million for the three months ended June 30, 2023. Selling, general and administrative expense for the six months ended June 30, 2024 decreased $0.6 million to $3.7 million from $4.3 million for the six months ended June 30, 2023. The decreases were primarily driven by a decrease in salaries and benefits expense as a result of a reduction in headcount.

Other operating loss (income): Other operating loss (income) for the six months ended June 30, 2024 decreased $0.4 million to a loss of $0.1 million from income of $0.3 million for the six months ended June 30, 2023. Other income for the six months ended June 30, 2023 was comprised of reimbursements from the Federal Communications Commission (the "FCC") for certain station modification costs.

Non-Operating Corporate

Selling, general and administrative: Selling, general and administrative expenses for the three months ended June 30, 2024 decreased $1.0 million to $2.8 million from $3.8 million for the three months ended June 30, 2023, primarily driven by decreases in compensation-related expenses, including reductions in bonus and stock-based compensation expense due to headcount changes, and a decrease in legal fees.

Selling, general and administrative expenses for the six months ended June 30, 2024 decreased $1.8 million to $6.0 million from $7.8 million for the six months ended June 30, 2023, primarily driven by decreases in compensation-related expenses, including reductions in bonus and stock-based compensation expense due to headcount changes, and a decrease in consulting fees.

Other operating (income) loss: Other operating (income) loss for the six months ended June 30, 2024 increased to a loss of $0.2 million from zero for the six months ended June 30, 2023, primarily driven by lease termination costs for two leases the Company exited in the current period.

Loss from Equity Investees

Life Sciences: Loss from equity investees within our Life Sciences segment for the three months ended June 30, 2024 increased $0.8 million to $1.1 million from $0.3 million for the three months ended June 30, 2023. The increase in loss from equity investees was primarily due to an increase in losses from MediBeacon as a result of additional convertible note investments in MediBeacon by Pansend during the three months ended June 30, 2024, which increased Pansend's basis in MediBeacon by $1.1 million and Pansend recognized $1.1 million of equity method losses which were previously unrecognized. Pansend made no convertible note investments during the comparable period. The increase in loss from equity investees from MediBeacon was partially offset by a decrease in loss as a result of the partial sale of Triple Ring subsequent to the comparable period, which resulted in our investment in Triple Ring no longer being accounted for using the equity method of accounting and therefore no equity method losses for Triple Ring were recognized in the current period.

Loss from equity investees within our Life Sciences segment for the six months ended June 30, 2024 decreased $1.7 million to $2.3 million from $4.0 million for the six months ended June 30, 2023. The decrease in loss from equity investees was primarily due to a reduction in losses from MediBeacon, primarily due to an unrepeated equity transaction with Huadong in the comparable period, which resulted in a $3.8 million increase in Pansend's basis in MediBeacon and a corresponding $3.8 million of additional equity method losses that were previously unrecognized, whereas, during the six months ended June 30, 2024, as a result of additional convertible note investments in MediBeacon by Pansend, Pansend's basis in MediBeacon increased by $2.3 million and Pansend recognized $2.3 million of equity method losses which were previously unrecognized. As of both June 30, 2024 and 2023, Pansend's net carrying amount of its investment in MediBeacon was zero and Pansend had unrecognized losses from this investment. Also contributing to the decrease in loss from equity investees was the partial sale of Triple Ring subsequent to the comparable period, which resulted in our investment in Triple Ring no longer being accounted for under the equity method of accounting and therefore no equity method losses for Triple Ring were recognized in the current period.

Other: Loss from equity investees within our Other segment for the six months ended June 30, 2024 decreased $0.3 million to zero from a loss of $0.3 million for the six months ended June 30, 2023. Loss from equity investees for the six months ended June 30, 2023 was driven by our previous investment in HMN, which was sold on March 6, 2023 and had losses for the approximately two months of ownership in 2023.

Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, for additional information on our equity investments.

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.

The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss) attributable to INNOVATE Corp., excluding: discontinued operations, if applicable; depreciation and amortization; other operating (income) loss, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, (gains) losses on lease modifications, asset impairment expense and FCC reimbursements; interest expense; other (income) expense, net; income tax expense (benefit); non-controlling interest; share-based compensation expense; restructuring and exit costs; and acquisition and disposition costs.

Adjusted EBITDA by segment is summarized as follows:

The tables below provide reconciliations of net income (loss) attributable to INNOVATE Corp to Adjusted EBITDA for the three months ended June 30, 2024 and 2023:

(in millions)

(in millions)

Infrastructure: Net income from our Infrastructure segment for the three months ended June 30, 2024 increased $14.0 million to $21.0 million from $7.0 million for the three months ended June 30, 2023. Adjusted EBITDA from our Infrastructure segment for the three months ended June 30, 2024 increased $9.0 million to $32.5 million from $23.5 million for the three months ended June 30, 2023. The increase in Adjusted EBITDA was primarily driven by higher margins on certain large commercial construction projects that are now at or near completion in the current period at DBMG's commercial structural steel fabrication and erection business. This increase was partially offset by a decrease in margins at Banker Steel due to timing of completion of a large commercial construction project and an increase in recurring SG&A expenses primarily as a result of an increase in compensation-related expenses and accounting-related costs, partially offset by a decrease in legal and consulting fees.

Life Sciences: Net loss from our Life Sciences segment for the three months ended June 30, 2024 increased $0.9 million to $3.8 million from $2.9 million for the three months ended June 30, 2023. Adjusted EBITDA loss from our Life Sciences segment for the three months ended June 30, 2024 increased $0.9 million to $4.8 million from $3.9 million for the three months ended June 30, 2023. The increase in Adjusted EBITDA loss was primarily due to an increase in losses from MediBeacon as a result of additional convertible note investments in MediBeacon by Pansend during the three months ended June 30, 2024, which increased Pansend's basis in MediBeacon by $1.1 million and Pansend recognized $1.1 million of equity method losses which were previously unrecognized. Pansend made no convertible note investments during the comparable period. The increase in Adjusted EBITDA loss was partially offset by a decrease in loss as a result of the partial sale of Triple Ring subsequent to the comparable period, which resulted in our investment in Triple Ring no longer being accounted for using the equity method of accounting and, therefore, no equity method losses were recognized in the current period. Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, for additional information on our equity investments.

Spectrum: Net loss from our Spectrum segment for the three months ended June 30, 2024 decreased $0.3 million to $5.0 million from $5.3 million for the three months ended June 30, 2023. Adjusted EBITDA from our Spectrum segment for the three months ended June 30, 2024 increased $0.7 million to $1.5 million from $0.8 million for the three months ended June 30, 2023. The increase in Adjusted EBITDA was primarily due to an increase in revenue driven by network launches and expanded coverage with existing customers, which was partially offset by the termination of a number of smaller networks and individual markets subsequent to the comparable period.

Non-Operating Corporate: Net income (loss) from our Non-Operating Corporate segment for the three months ended June 30, 2024 increased $10.3 million to income of $2.1 million from a loss $8.2 million for the three months ended June 30, 2023. Adjusted EBITDA loss from our Non-Operating Corporate segment for the three months ended June 30, 2024 decreased $0.9 million to $2.5 million from $3.4 million for the three months ended June 30, 2023. The decrease in Adjusted EBITDA loss was primarily driven by a decrease in compensation-related expenses, due to headcount changes, and a decrease in legal fees.

Other and Eliminations: Net income (loss) from our Other segment and Eliminations for the three months ended June 30, 2024 increased $0.6 million to income of $0.1 million from a loss of $0.5 million for the three months ended June 30, 2023. Adjusted EBITDA loss from our Other segment for the three months ended June 30, 2024 decreased $0.5 million to zero from an Adjusted EBITDA loss of $0.5 million for the three months ended June 30, 2023. The decrease in Adjusted EBITDA loss was driven primarily by unrepeated severance related expense at TIC Holdco, Inc. in the previous period.

The tables below provide reconciliations of net income (loss) attributable to INNOVATE Corp to Adjusted EBITDA for the six months ended June 30, 2024 and 2023:

(in millions)

(in millions)

47

Infrastructure: Net income from our Infrastructure segment for the six months ended June 30, 2024 increased $16.4 million to $25.4 million from $9.0 million for the six months ended June 30, 2023. Adjusted EBITDA from our Infrastructure segment for the six months ended June 30, 2024 increased $11.0 million to $50.8 million from $39.8 million for the six months ended June 30, 2023. The increase in Adjusted EBITDA was primarily driven by higher margins on certain large commercial construction projects that are now at or near completion in the current period at DBMG's commercial structural steel fabrication and erection and the industrial maintenance and repair businesses, which was partially offset by a decrease in margins at Banker Steel due to timing of completion of a large commercial construction project and an increase in recurring SG&A, primarily as a result of compensation-related expenses.

Life Sciences: Net loss from our Life Sciences segment for the six months ended June 30, 2024 increased $2.6 million to $8.3 million from $5.7 million for the six months ended June 30, 2023. Adjusted EBITDA loss from our Life Sciences segment for the six months ended June 30, 2024 decreased $2.7 million to $9.0 million from $11.7 million for the six months ended June 30, 2023. The decrease in Adjusted EBITDA loss was primarily due to lower equity method losses recognized from our investment in MediBeacon primarily due to an unrepeated equity transaction with Huadong in the comparable period, which resulted in a $3.8 million increase in Pansend's basis in MediBeacon and a corresponding $3.8 million of additional equity method losses that were previously unrecognized, whereas, during the six months ended June 30, 2024, as a result of additional convertible note investments in MediBeacon by Pansend, Pansend's basis in MediBeacon increased by $2.3 million and Pansend recognized $2.3 million of equity method losses which were previously unrecognized. As of both June 30, 2024 and 2023, Pansend's net carrying amount of its investment in MediBeacon was zero and Pansend had unrecognized losses from this investment. Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, for additional information on our equity investments. Additionally contributing to the decrease in Adjusted EBITDA loss was R2 Technologies, driven by an increase in revenue primarily due to an increase in Glacial fx unit sales, which launched in the second half of 2023, an increase in Glacial Rx unit sales and a decrease in SG&A expenses as a result of cost reduction initiatives.

Spectrum: Net loss from our Spectrum segment for the six months ended June 30, 2024 decreased $0.5 million to $9.8 million from $10.3 million for the six months ended June 30, 2023. Adjusted EBITDA from our Spectrum segment for the six months ended June 30, 2024 increased $1.9 million to $3.1 million from $1.2 million for the six months ended June 30, 2023. The increase in Adjusted EBITDA was primarily due to an increase in revenue primarily driven by network launches and expanded coverage with existing customers, as well as a decrease in salaries and benefits expense. This was partially offset by the termination of a number of smaller networks and individual markets subsequent to the comparable period.

Non-Operating Corporate: Net loss from our Non-Operating Corporate segment for the six months ended June 30, 2024 decreased $9.7 million to $10.4 million from $20.1 million for the six months ended June 30, 2023. Adjusted EBITDA loss from our Non-Operating Corporate segment for the six months ended June 30, 2024 decreased $1.5 million to $5.4 million from $6.9 million for the six months ended June 30, 2023. The decrease in Adjusted EBITDA loss was primarily driven by decreases in compensation-related expenses, due to headcount changes, and a decrease in consulting fees.

Other and Eliminations: Net income from our Other segment and Eliminations for the six months ended June 30, 2024 decreased $8.1 million to $0.1 million from $8.2 million for the six months ended June 30, 2023. Adjusted EBITDA losses from our Other segment for the six months ended June 30, 2024 decreased $1.0 million to zero from an Adjusted EBITDA loss of $1.0 million for the six months ended June 30, 2023. The decrease in Adjusted EBITDA loss was driven primarily by unrepeated severance related expenses at TIC Holdco, Inc. in the previous period and our previous investment in HMN, which was sold on March 6, 2023 and had equity method losses for the approximately two months of ownership in 2023.

Backlog

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

Infrastructure Segment

As of June 30, 2024, DBMG's backlog was $822.7 million, consisting of $673.8 million under contracts or purchase orders and $148.9 million under letters of intent or notices to proceed. Approximately $364.1 million, representing 44.3% of DBMG’s backlog as of June 30, 2024, was attributable to five contracts, letters of intent, notices to proceed or purchase orders. If one or more of these projects terminate or reduce their scope, DBMG’s backlog could decrease substantially. DBMG includes an additional $7.1 million in its backlog that is not included in the remaining unsatisfied performance obligations disclosed in Note 3. Revenue and Contracts in Process. This additional backlog includes commitments under master service agreements that are estimated amounts of work to be performed based on customer communications, historic performance and knowledge of our customers' intentions.

Liquidity and Capital Resources

Short- and Long-Term Liquidity Considerations and Risks

Our Non-Operating Corporate segment consists of holding companies, and its liquidity needs are primarily for interest payments on its 2026 Senior Secured Notes, 2026 Convertible Notes, Revolving Line of Credit, CGIC Unsecured Note, and dividend payments on its Series A-3 and Series A-4 Preferred Stock and recurring operational expenses.

On a consolidated basis, as of June 30, 2024, we had $80.2 million of cash and cash equivalents, excluding restricted cash, compared to $80.8 million as of December 31, 2023. On a stand-alone basis, as of June 30, 2024, our Non-Operating Corporate segment had cash and cash equivalents, excluding restricted cash, of $43.6 million compared to $2.5 million as of December 31, 2023.

Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment, OTA broadcast station equipment, development of back-office systems, operating costs and expenses, and income taxes.

As of June 30, 2024, we had $698.0 million of principal indebtedness on a consolidated basis compared to $722.8 million as of December 31, 2023, a net decrease of $24.8 million, which was primarily due to a $25.0 million net decrease in debt at our Infrastructure segment and a $4.1 million decrease in debt at our Non-Operating Corporate segment, partially offset by the issuance of additional debt at R2 Technologies in principal amount of $4.3 million.

On a stand-alone basis, our Non-Operating Corporate segment indebtedness was $432.8 million and $436.9 million as of June 30, 2024 and December 31, 2023, respectively, a decrease of $4.1 million driven by a partial redemption payment of $4.1 million of the CGIC Unsecured Note on April 26, 2024. The June 30, 2024 indebtedness balance consists of the $330.0 million aggregate principal amount of 2026 Senior Secured Notes, $51.8 million aggregate principal amount of 2026 Convertible Notes, $31.0 million remaining principal amount of the CGIC Unsecured Note and $20.0 million aggregate principal amount drawn on our Revolving Line of Credit. Our Non-Operating Corporate segment is required to make semi-annual interest payments on the 2026 Senior Secured Notes and 2026 Convertible Notes on February 1st and August 1st of each year, quarterly interest payments on the Revolving Line of Credit, and monthly interest payments on the CGIC Unsecured Note. As described below, the interest rate on the CGIC Unsecured Note increased from 9.0% per annum to 16.0% per annum on May 9, 2024 and will increase from 16.0% per annum to 32.0% per annum on May 9, 2025.

We are required to make dividend payments on our outstanding Series A-3 and Series A-4 Preferred Stock on January 15th, April 15th, July 15th, and October 15th of each year.

Our Non-Operating Corporate segment received $2.8 million and $6.6 million in net tax sharing payments from our Infrastructure segment for the three and six months ended June 30, 2024, respectively. In addition, DBMG redeemed the intercompany $41.8 million DBMG Series A Preferred Stock from DBMGi on June 28, 2024 for $41.8 million in cash, which was remitted to INNOVATE Corp. DBM Global Intermediate Holdco Inc. ("DBMGi") is a 100% owned subsidiary of INNOVATE Corp. and all intercompany transactions are eliminated on consolidation.

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, finance 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.

Rights Offering and Concurrent Private Placement

On March 8, 2024, the Company commenced a $19.0 million rights offering ("Rights Offering") for its common stock. Pursuant to the Rights Offering, the Company distributed to each holder of the Company’s common stock, Series A-3 Convertible Participating Preferred Stock, Series A-4 Convertible Participating Preferred Stock and the 2026 Convertible Notes as of March 6, 2024 (the “rights offering record date”), transferable subscription rights to purchase 0.2858 shares of the Company’s common stock at a price of $0.70 per whole share.

Per the concurrent investment agreement entered into with Lancer Capital (the "Investment Agreement"), the Rights Offering was backstopped by Lancer Capital, an investment fund led by Avram A. Glazer, the Chairman of the Board and the Company’s largest stockholder. Due to limitations on the common stock that can be issued to Lancer Capital under the rules of the New York Stock Exchange ("NYSE"), in lieu of exercising its subscription rights, pursuant to the Investment Agreement, Lancer Capital would purchase up to $19.0 million of the Company’s newly issued Series C Non-Voting Participating Convertible Preferred Stock (the “Series C Preferred Stock”), for an issue price of $1,000 per share. In connection with the backstop commitment, and as a result of limitations in the amount common equity that can be raised under the Company’s effective shelf registration statement on Form S-3, Lancer Capital also agreed to purchase an additional $16.0 million of Series C Preferred Stock in a private placement transaction ("Concurrent Private Placement") which was to close concurrently with the settlement of the Rights Offering. Lancer Capital did not receive any compensation or other consideration for entering into or consummating the Investment Agreement.

As the Rights Offering had not yet settled by March 28, 2024, in accordance with the Investment Agreement, Lancer Capital purchased $25.0 million of Series C Preferred Stock, referred to as the "equity advance." On April 24, 2024, the Company completed and closed on the Rights Offering and issued a total of 5,306,105 shares of common stock. Based on the number of shares of common stock actually sold upon exercise of the rights to third party investors, there were no excess shares of Series C Preferred Stock purchased by Lancer Capital under the equity advance that the Company was required to redeem, and Lancer Capital purchased an additional approximately 6,286 Series C Preferred Stock for $6.3 million under the backstop commitment. In total, the Company received $35.0 million in aggregate gross proceeds related to the Rights Offering and Concurrent Private Placement and incurred $1.8 million in dealer manager fees and other related costs which have been capitalized into Additional paid in capital ("APIC"). INNOVATE expects to use the net proceeds from the Rights Offering for general corporate purposes, including debt service and for working capital. In addition, as a result of the closing of the Rights Offering and Concurrent Private Placement, a mandatory prepayment was required on the CGIC Unsecured Note, and consequently, on April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note.

Under the rules of the NYSE, because the shares purchased by Lancer Capital were greater than 20% of the Company's common stock outstanding before the issuance of the Series C Preferred Stock, those shares of Series C Preferred Stock were not allowed to be converted until stockholder approval of such issuance was obtained. On June 18, 2024, the Company held its annual shareholder meeting where Company's shareholder's approved the conversion of the Series C Preferred Stock into common stock. As a result, approximately 31,286 Series C Preferred Stock, held by Lancer Capital, were converted into 44,693,895 of INNOVATE's common stock. See Note 15. Equity and Temporary Equity for additional information.

The Company waived its Tax Benefits Preservation Plan to permit persons exercising rights to acquire 4.9% or more of the outstanding common stock upon the exercise thereof without becoming an Acquiring Person (as defined in the Tax Benefits Preservation Plan).

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

Capital Expenditures

Capital expenditures are set forth in the table below (in millions):

Indebtedness

Non-Operating Corporate

2026 Senior Secured Notes

On February 1, 2021, our Non-Operating Corporate segment repaid the senior secured notes that were due in 2021 and issued $330.0 million aggregate principal amount of 8.50% senior secured notes due February 1, 2026 (the "2026 Senior Secured Notes"). The 2026 Senior Secured Notes mature on February 1, 2026, and accrue interest at a rate of 8.50% per year, which interest is paid semi-annually on February 1st and August 1st of each year. For additional information on the terms and conditions of the 2026 Senior Secured Notes, including guarantees, ranking and collateral, refer to Note 11. Debt Obligations included in the Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K, which was filed with the SEC on March 6, 2024.

2026 Convertible Notes - Terms and Conditions

As of June 30, 2024, we had $51.8 million 2026 Convertible Notes outstanding. The 2026 Convertible Notes were issued under a separate indenture dated February 1, 2021, between the Company and U.S. Bank, as trustee (the "Convertible Indenture"). The 2026 Convertible Notes mature on August 1, 2026 unless earlier converted, redeemed or purchased. The 2026 Convertible Notes accrue interest at a rate of 7.5% per year, which interest is paid semi-annually on February 1st and August 1st of each year.

Subsequent to quarter end, in July 2024, we repurchased $2.9 million principal amount of our 2026 Convertible Notes at a market discount for $1.1 million, which is inclusive of accrued interest of $0.1 million.

For additional information on the terms and conditions of the 2026 Convertible Notes, including optional redemption, conversion rights guarantees, ranking and collateral, refer to Note 11. Debt Obligations included in the Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K, which was filed with the SEC on March 6, 2024.

Our debt contains customary events of default which could, subject to certain conditions, cause the 2026 Senior Secured Notes and the 2026 Convertible Notes to become immediately due and payable.

Revolving Line of Credit

We have a revolving credit agreement with MSD PCOF Partners IX, LLC ("MSD") which has a maximum commitment of $20.0 million ("Revolving Line of Credit"), of which $20.0 million had been drawn as of June 30, 2024. Interest on loans under the Revolving Line of Credit accrues at SOFR plus 5.75% and is payable quarterly. The Revolving Line of Credit also includes a commitment fee at a per annum rate of 1.0% calculated based off the actual daily amount of unused availability under the Revolving Line of Credit with MSD. The maturity date of the Revolving Line of Credit is March 16, 2025. The amount outstanding under the Revolving Line of Credit is subject to mandatory prepayment from the net cash proceeds from certain asset sales in excess of $10.0 million. On May 6, 2024, the Company and MSD extended the maturity date of its Revolving Line of Credit from March 16, 2025 to May 16, 2025.

For additional information on the terms and conditions of the Revolving Line of Credit, including guarantees and ranking and collateral, refer to Note 11. Debt Obligations included in the Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K, which was filed with the SEC on March 6, 2024.

CGIC Unsecured Note

On May 9, 2023, in connection with the redemption of the DBMGi Series A Preferred Stock, the Company issued a subordinated unsecured promissory note to CGIC in the principal amount of $35.1 million (the "CGIC Unsecured Note"). The CGIC Unsecured Note is due February 28, 2026, and bears interest at 9.0% per annum through May 8, 2024, 16.0% per annum from May 9, 2024 to May 8, 2025, and 32.0% per annum thereafter. As a result of the closing of the Rights Offering and Concurrent Private placement, a mandatory prepayment was required on the CGIC Unsecured Note, in the amount of the greater of $3.0 million or 12.5% of the net proceeds. On April 26, 2024, INNOVATE redeemed $4.1 million of the CGIC Unsecured Note. Refer to Note 15. Temporary Equity and Equity and to Note 11. Debt Obligations included in the Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K, which was filed with the SEC on March 6, 2024, as well as Note 15. Equity and Temporary Equity included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for additional details regarding the $4.1 million partial redemption.

Infrastructure

DBMG and Banker Steel, jointly and severally, had a subordinated 4.0% note payable to Banker Steel's former owner, in which Donald Banker's family trust has a 25% interest, and jointly and severally also had a subordinated 8.0% note payable to Donald Banker's family trust, the latter of which was fully paid off in December 2023. During the six months ended June 30, 2024, DBMG made $5.0 million in scheduled payments on the 4.0% note. The 4.0% note expired March 31, 2024 and was fully redeemed on April 2, 2024.

On June 28, 2024, DBM and UMB entered into the Third Amendment to the UMB Credit Agreement. The amendment adds an incremental separate term loan of $25.0 million to the existing credit facility, with the same interest rate as the Revolving Line with UMB and the same maturity date as the initial $78.0 million UMB term loan.

Refer to Note 11. Debt Obligations of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q which is incorporated herein by reference, for additional details regarding the indebtedness of our Infrastructure segment.

Life Sciences

As of June 30, 2024, our Life Sciences segment has aggregate principal outstanding debt of $21.7 million.

R2 Technologies had various short-term notes with Lancer Capital, which expired on January 31, 2024, and effective January 31, 2024, a new 20% note with an aggregate original principal amount of $20.0 million was issued, which was comprised of all prior outstanding principal amounts and unpaid accrued interest of $2.6 million which was capitalized into the new principal balance.

The new 20% note also includes an exit fee payable upon the earliest of the maturity date, the acceleration date of the principal amount of the note, for any reason as defined in the agreement, or the date upon which any prepayment is made. As a result of the addition of the exit fee effective January 31, 2024, the transaction was determined to be an extinguishment of debt under ASC 470-50 Debt - Modifications and Extinguishments, and the exit fee payable to the existing lender of $2.2 million was included as a loss on debt extinguishment within Other income (expense), net in the Condensed Consolidated Statement of Operations. The exit fee, as subsequently amended in the second quarter of 2024, is equal to 10.88% of the principal amount being repaid. As of June 30, 2024, the accrued exit fee was $2.2 million and was included within Accrued liabilities on the Condensed Consolidated Balance Sheet.

Interest on the note accrues at 20% per annum and is payable monthly in arrears, in cash or, if not paid in cash, accrued and unpaid interest is capitalized monthly into the principal balance. Interest expense related to the note(s) with Lancer Capital was $1.0 million and $0.7 million for the three months ended June 30, 2024 and 2023, respectively and was $1.9 million and $1.2 million for the six months ended June 30, 2024 and 2023, respectively. In accordance with the note agreement, all unpaid accrued interest of $1.7 million which was incurred subsequent to January 31, 2024, was capitalized into the principal balance during the six months ended June 30, 2024, and there was no amount reflected within accrued interest payable as of June 30, 2024. As of December 31, 2023, accrued interest payable, which had not yet been capitalized into the principal balance, was $2.4 million.

The original maturity date of the new $20.0 million note was April 30, 2024, or within five business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing or has a change in control, as defined in the agreement, with an optional prepayment of the entire then-outstanding and unpaid principal and accrued interest upon five-days written notice to Lancer Capital. The note has subsequently been further extended to December 31, 2024. The exit fee as of June 30, 2024, as amended, is equal to 10.88% of the principal amount being repaid and increases by 0.17% each month thereafter until maturity. Beginning July 31, 2024, if all outstanding amounts pursuant to the note are not prepaid in full, an additional exit fee of $1.0 million will be payable, increasing by $1.0 million each month until maturity. The Company shall pay the additional exit fee on the earliest of the maturity date, the date of the acceleration of the principal amount of the note for any reason or, if any portion of the note is prepaid at any time, the date of such prepayment of the note. Refer to Note 16. Related Parties in the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information on R2 Technologies' related party debt transactions.

Spectrum

As of June 30, 2024, our Spectrum segment has aggregate principal outstanding debt of $69.7 million.

Refer to Note 11. Debt Obligations of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional details regarding the indebtedness of our Infrastructure, Life Sciences and Spectrum segments.

Restrictive Covenants

The indenture governing the 2026 Senior Secured Notes dated February 1, 2021, by and among INNOVATE, the guarantors party thereto and U.S. Bank National Association, a national banking association, as trustee (the "Secured Indenture"), contains certain affirmative and negative covenants limiting, among other things, the ability of the Company, and, in certain cases, the Company’s subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock; make certain restricted payments; sell assets; engage in transactions with affiliates; or consolidate or merge with, or sell substantially all of its assets to, another person. These covenants are subject to a number of important exceptions and qualifications.

The Company is also required to comply with certain financial maintenance covenants, which are similarly subject to a number of important exceptions and qualifications. These covenants include maintenance of (1) liquidity and (2) collateral coverage.

The maintenance of liquidity covenant provides that the Company will not permit the aggregate amount of (i) all unrestricted cash and Cash Equivalents of the Company and the Subsidiary Guarantors, (ii) amounts available for drawing under revolving credit facilities and undrawn letters of credit of the Company and the Subsidiary Guarantors and (iii) dividends, distributions or payments that are immediately available to be paid to the Company by any of its Restricted Subsidiaries to be less than the Company’s obligation to pay interest for the next six months on the 2026 Senior Secured Notes and all other Debt, including Convertible Series A-3 and Series A-4 Preferred Stock mandatory cash dividends or any other mandatory cash pay Series A-3 and Series A-4 Preferred Stock but excluding any obligation to pay interest on Series A-3 and Series A-4 Preferred Stock or any other mandatory cash payments on Series A-3 and Series A-4 Preferred Stock which, in each case, may be paid by accretion or in-kind in accordance with its terms of the Company and its Subsidiary Guarantors. As of June 30, 2024, the Company was in compliance with this covenant.

The maintenance of collateral coverage provides that the certain subsidiaries' Collateral Coverage Ratio (as defined in the Secured Indenture as the ratio of (i) the Loan Collateral to (ii) Consolidated Secured Debt (each as defined therein)) calculated on a pro forma basis as of the last day of each fiscal quarter may not be less than 1.50 to 1.00. As of June 30, 2024, the Company was in compliance with this covenant.

The instruments governing the Company’s Series A-3 and Series A-4 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 Series A-3 and Series A-4 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 has conducted its operations in a manner that has resulted in compliance with the Secured Indenture; however, compliance with certain financial covenants for future periods may depend on the Company or one or more of the Company’s subsidiaries undertaking one or more non-operational transactions, such as the management of operating cash outflows, a monetization of assets, a debt incurrence or refinancing, the raising of equity capital, or similar transactions. If the Company is unable to remain in compliance and does not make alternate arrangements, an event of default would occur under the Company’s Secured Indenture which, among other remedies, could result in the outstanding obligations under the indenture becoming immediately due and payable and permitting the exercise of remedies with respect to the collateral. There is no assurance the Company will be able to complete any non-operational transaction it may undertake to maintain compliance with covenants under the Secured Indenture or, even if the Company completes any such transaction, that it will be able to maintain compliance for any subsequent period.

The UMB Term Loans and Revolving Line with UMB associated with our Infrastructure segment contain customary restrictive and financial covenants related to debt levels and performance, including a Fixed Charge Coverage Ratio covenant, as defined in the agreement.

As of June 30, 2024, we were in compliance with the covenants of our debt agreements.

Summary of Consolidated Cash Flows

The below table summarizes the cash provided by or used in our activities (in millions):

Operating Activities

Cash used in operating activities was $3.9 million for the six months ended June 30, 2024, as compared to $60.8 million for the six months ended June 30, 2023, an improvement of $56.9 million. Cash flows from operations are primarily influenced by changes in the timing of demand for services and by operating margins, but can also be affected by working capital needs associated with our operations. For the six months ended June 30, 2024, the improvement in operating cash flows was primarily due to an improvement in working capital cash flows at our Infrastructure segment, primarily from changes in contract-related assets and liabilities, accounts receivable and accounts payable, as well as from an increase in operating income primarily at our Infrastructure segment and improvements in operating cash flows at our Non-Operating Corporate and Other segments, driven by reductions in operating expenses.

Investing Activities

Cash used in investing activities was $0.7 million for the six months ended June 30, 2024, as compared to cash provided by investing activities of $46.7 million for the six months ended June 30, 2023, a decrease of $47.4 million. The decline was primarily driven by the $54.2 million of gross cash proceeds received in the prior period from the sale of New Saxon's 19% investment in HMN on March 6, 2023. For the six months ended June 30, 2024, proceeds from the disposal of PPE were $9.8 million which related to a plant closure at our Infrastructure segment, as compared to $0.3 million for the six months ended June 30, 2023. Capital expenditures for the six months ended June 30, 2024 were $8.7 million, as compared to $8.2 million for the six months ended June 30, 2023, an increase in cash used of $0.5 million primarily due to the purchase of land and new software implementation by our Infrastructure segment. Additionally, loans made by our Life Sciences segment to MediBeacon totaled $2.3 million for the six months ended June 30, 2024 as compared to none for the six months ended June 30, 2023.

Financing Activities

Cash provided by financing activities was $4.6 million for the six months ended June 30, 2024, as compared to cash used in financing activities of $37.3 million for the six months ended June 30, 2023, an improvement in financing cash flows of $41.9 million. The improvement was primarily driven by our Non-Operating Corporate segment, which received $33.2 million in net proceeds in the current period from the Rights Offering and Concurrent Private Placement. In addition, during the six months ended June 30, 2023, we made $15.9 million in distributions to non-controlling interests and redeemable non-controlling interests related to the sale of New Saxon's 19% investment in HMN on March 6, 2023, and dividend payments decreased by $1.0 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, due to the repurchase by our Corporate Segment of our DBMGi Series A Preferred Stock on May 9, 2023 from CGIC which was subsequently eliminated in consolidation. These improvements in financing cash flows were partially offset by a $28.0 million increase in net outflows from revolving credit line activity for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, which is comprised of a $35.0 million increase in net payments on our Infrastructure segment's Revolving Line with UMB, partially offset by a $7.0 million decrease in net repayments on our Non-Operating Corporate segment's Revolving Line of Credit. In addition, for the six months ended June 30, 2024, net cash inflows from other debt obligations increased by $12.6 million, primarily driven by the incremental separate term loan of $25.0 million at our Infrastructure segment, partially offset by a $4.1 million repayment on the CGIC Unsecured Note at our Corporate Non-Segment in the current period, an increase in net repayments on other debt obligations at our Infrastructure segment and a decrease in proceeds from other debt obligations at our Life Sciences segment.

Infrastructure

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 available funds, cash generated by operating activities and funds available under its bank credit facilities will be adequate to meet all funding requirements for its operating expenses, working capital needs, interest payments on debt and capital expenditures for the foreseeable future. However, DBMG may expand its operations through future acquisitions and may require additional equity or debt financing.

DBMG is required to make monthly or quarterly interest payments on all of its debt. Based upon the June 30, 2024 debt balance, DBMG anticipates that its interest payments will be approximately $2.5 million for each quarter of 2024.

Off- Balance Sheet Arrangements

We may enter into certain off-balance sheet arrangements in the ordinary course of business. Our off-balance sheet transactions may include, but are not limited to: leases that have not yet commenced, short-term leases, liabilities associated with non-cancelable operating leases with durations of less than twelve months, letter of credit obligations, surety, performance or payment bonds entered into in the normal course of business, and liabilities associated with multi-employer pension plans. Refer to Note 9. Leases, and Note 13. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for additional information on leases and letters of credit and performance and/or payment bonds, respectively.

New Accounting Pronouncements

For information on new accounting pronouncements, refer to Note 2. Summary of Significant Accounting Policies of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for additional information.

Critical Accounting Estimates

There have been no material changes in the Company’s critical accounting policies during the period ended June 30, 2024. For information about critical accounting policies and estimates, refer to “Critical Accounting Estimates” under Item 7 of our 2023 Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on March 6, 2024.

Related Party Transactions

For a discussion of our Related Party Transactions, refer to Note 16. Related Parties of our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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 stockholder 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 INNOVATE or the applicable subsidiary of INNOVATE, 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 our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 6, 2024 and the documents incorporated herein 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.

INNOVATE Corp. and Subsidiaries

Our actual results or other outcomes 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:

• the passing in 2023 of Mr. Barr, our former Chief Executive Officer, President and Director and the successful transition of his management responsibilities;
• 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 INNOVATE’s 2026 Senior Secured Notes, 2026 Convertible Notes, CGIC Unsecured Note and Revolving Line of Credit, the Certificates of Designation governing INNOVATE’s Series A-3 and Series A-4 Preferred Stock and all other subsidiary debt obligations as summarized in Note 11. Debt Obligations to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC March 6, 2024 and future financing agreements on our ability to operate our business and finance our pursuit of acquisition opportunities;
• our possible inability to generate sufficient liquidity, margins, earnings per share, cash flow and working capital from our operating segments;
• our dependence on certain key personnel;
• bank failures or other similar events that could adversely affect our and our customers' and vendors' liquidity and financial performance;
• our possible inability to hire and retain qualified executive management, sales, technical and other personnel;
• the potential for, and our ability to, remediate future material weaknesses in our internal controls over financial reporting;
• the impact of recent supply chain disruptions, labor shortages and increases in overall price levels, including in transportation costs;
• the impact of a higher interest rate environment;
• the effects related to or resulting from military actions in the Middle East, including Israel and the Gaza Strip, and Russia's military action in Ukraine, including the imposition of additional sanctions and export controls, as well as the broader impact to financial markets and the global macroeconomic and geopolitical environment;
• increased competition in the markets in which our operating segments conduct their businesses;
• 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 ability to effectively increase the size of our organization, if needed, and manage our growth;
• 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;
• the effect any interests our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved;
• uncertain global economic conditions in the markets in which our operating segments conduct their businesses;
• the impact of catastrophic events, including natural disasters, pandemic illness and the outbreak of war, or acts of terrorism;
• potential impacts on our business resulting from climate change, greenhouse gas regulations, and the impact of climate change-related changes in the frequency and severity of weather patterns;
• the impact of additional material charges associated with our oversight of acquired or target businesses and the integration of our financial reporting;
• tax consequences associated with our acquisition, holding and disposition of target companies and assets;
• our ability to remain in compliance with the listing standards of the New York Stock Exchange;
• the anticipated Reverse Stock Split may not result in a proportional increase in the per share price of our common stock;
• the ability of our operating segments to attract and retain customers;
• 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;
• our expectations and timing with respect to any strategic dispositions and sales of our operating subsidiaries, or businesses, including the shut-down of our Network business by our Spectrum segment, that we may make in the future 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; and
• our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all.

Infrastructure / DBM Global Inc.

Our actual results or other outcomes of DBMG, and, thus, our Infrastructure 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:

• 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;
• 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;
• uncertain timing and funding of new contract awards, as well as project cancellations;
• potential impediments and limitations on our ability to complete ordinary course acquisitions in anticipated time frames or at all;
• changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
• the impact of inflationary pressures;
• 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;
• risks associated with labor productivity, including performance of subcontractors that DBMG hires to complete projects;
• its ability to realize cost savings from expected performance of contracts, whether as a result of improper estimates, performance, or otherwise;
• its ability to settle or negotiate unapproved change orders and claims;
• fluctuating revenue resulting from a number of factors, including the cyclical nature of the individual markets in which our customers operate;
• our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all; 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.

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;
• governmental regulation in the healthcare industry; and
• our Life Science's segment possible inability to raise additional capital when needed or refinance its existing debt, on attractive terms, or at all.

Spectrum / HC2 Broadcasting Holdings Inc.

Our actual results or other outcomes of Broadcasting, and, thus, our Spectrum 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 Spectrum segment’s ability to operate in highly competitive markets and maintain market share;
• our Spectrum segment’s ability to effectively implement its business strategy or be successful in the operation of its business;
• our Spectrum segment's possible inability to raise additional capital when needed or refinance its existing debt, on attractive terms, or at all;
• new and growing sources of competition in the broadcasting industry; and
• FCC regulation of the television broadcasting industry.

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, except as required by applicable law.

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Interim 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 Interim Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2024, 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 Exchange Act 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 Exchange Act 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 quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there have been no material changes in our risk factors from those disclosed in Part 1, Item 1A of our Fiscal Year 2023 Form 10-K, which was filed with the SEC on March 6, 2024. See "Risk Factors" in Item 1A of Part I of such Fiscal Year 2023 Form 10-K for a complete description of the material risks we face.

Risks Relating to our Common Stock

We may not meet the continued listing requirements of the NYSE, which could result in a delisting of our common stock.

As previously reported, on February 26, 2024, we received a notification letter from the NYSE notifying us that the closing price for our common stock had been below $1.00 for the previous 30 consecutive trading days and that we therefore are “below criteria” for continued listing on the NYSE and subject to the procedures outlined in Sections 801 and 802 of the NYSE Listed Company Manual. The notification provided us with a cure period of six months, or until August 26, 2024, in which to regain compliance. To regain compliance, the closing price of our common stock must be at least $1.00 and the average closing price of our common stock over the preceding 30 trading days must be at least $1.00, and in such case, the NYSE will provide us with written confirmation of compliance.

The Company held its annual meeting of stockholders on June 18, 2024, where the Company’s stockholders approved a reverse stock split of the Company's common stock, par value $0.001 per share, at a ratio within a range of 1-for-2 and 1-for-10 and granted the Company’s Board of Directors the discretion to determine the timing and ratio of the split within such range. On July 4, 2024, the Company’s Board of Directors determined to effect the reverse stock split of the common stock at a 1-for-10 ratio (the “Reverse Stock Split”) and approved the filing of a certificate of amendment (the “Certificate of Amendment”) to the Second Amended and Restated Certificate of Incorporation of the Company to effect the Reverse Stock Split. The Company intends to file the Certificate of Amendment with the Delaware Secretary of State on August 8, 2024 to effect the Reverse Stock Split. The Reverse Stock Split should have the immediate effect of increasing the price of our common stock on the NYSE, therefore reducing the risk that our common stock could be delisted from the NYSE.

Although the Company expects the Reverse Stock Split to restore our compliance with the NYSE listing requirements, we can provide no assurance that it will have the expected result. If the NYSE delists our common stock from trading on its exchange for failure to meet NYSE listing standards for continued listing, an investor would likely find it significantly more difficult to dispose of or obtain our shares, and our ability to raise future capital through the sale of our shares or issue our shares as consideration in acquisitions could be severely limited. Additionally, we may not be able to list our common stock on another national securities exchange, which could result in our securities being quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.