HC2 Holdings, Inc. (formerly PTGi Holding, Inc.) — Form 10-Q
Reporting period: Three months ended March 31, 2014. The filing is by HC2 Holdings, Inc.; the company changed its name and ticker from PTGi/“PTGI” to HC2/“HCHC” on April 9, 2014. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Following the 2013 divestitures of BLACKIRON Data and substantially all North America Telecom, International Carrier Services (ICS) was the company’s continuing operating business and sole reportable operating segment. The remaining North America Telecom subsidiary, PTI, was still held for sale pending regulatory approvals. ICS had been reclassified from held for sale to held and used effective December 31, 2013.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Continuing-operations revenue | $43.4 | $58.8 |
| Cost of revenue | $41.1 | $55.5 |
| Gross profit / margin | $2.2 / 5.2% | $3.3 / 5.6% |
| SG&A | $6.2 | $8.8 |
| Operating loss | $(4.1) | $(5.5) |
| Loss from continuing operations | $(4.2) | $(5.6) |
| Net loss | $(4.9) | $(3.2) |
| Basic and diluted loss per share | $(0.34) | $(0.23) |
| Operating cash flow | $2.1 | $(1.4) |
- Reported revenue declined 26.3%; excluding currency effects, it fell 28.1%. Management attributed the decline primarily to lower domestic and international call terminations. A favorable currency effect added approximately $1.1 million to 2014 revenue.
- Cost of revenue declined with sales, but remained high at 94.8% of revenue versus 94.4% on a constant-currency comparison. SG&A fell, mainly from lower salaries and benefits and professional fees; lease termination costs partly offset the savings.
- Operating loss narrowed by $1.4 million, while net loss increased, reflecting a $0.8 million loss on sale of discontinued operations in 2014 and lower discontinued-operations income than in the prior-year period.
- Cash and equivalents were $13.0 million at March 31, up from $9.0 million at December 31, 2013. Current assets were $68.7 million and current liabilities $27.7 million. Stockholders’ equity was $52.2 million.
- Operating cash flow was positive despite the net loss, supported in part by decreases in prepaid expenses and receivables. Investing cash use was minimal; financing cash flow included $2.9 million from warrant and option exercises and $0.6 million of dividend-equivalent payments.
- The balance sheet reports no long-term debt balance. The filing lists $11.6 million of future operating lease payments, including $1.9 million due during the remainder of 2014. The company redeemed its debt in August 2013 following the North America Telecom sale.
Comparability, outlook and risks
- Comparisons require care: prior-year statements were retrospectively adjusted for discontinued operations. Q1 2013 continuing revenue of $58.8 million excludes discontinued businesses; separately, discontinued-operations revenue was $60.9 million in Q1 2013 versus $3.3 million in Q1 2014, with 2014 primarily reflecting PTI.
- Management said existing cash was expected to fund fixed obligations and operating needs for at least the next 12 months. No specific earnings or revenue guidance was provided.
- The company was evaluating strategic alternatives, including acquisitions, continued operation or expansion of telecommunications businesses, and selling or winding down existing operations. It stated that there was no assurance it would identify or complete a transaction. HGI-affiliated parties reported owning approximately 40.5% of the common stock, based on shares outstanding as of October 31, 2013.
- Management identified competition, pricing pressure, customer retention, ICS revenue and cash generation, liquidity, execution of cost reductions, access to capital, and completion of the PTI sale as risks. Approximately 42% of continuing revenue came from outside the U.S.; currency exposure was primarily to the British pound.
- The company was evaluating whether first-quarter shareholder acquisitions could limit use of its U.S. net operating loss carryforwards under Section 382. It reported $241 million of U.S. NOLs at December 31, 2013, of which $125 million was already subject to Section 382 limitations.
- Xplornet sued HC2 and other parties, alleging breaches relating to Canadian radio-spectrum licenses and claiming $50 million in damages. HC2 said it intended to defend the case vigorously and believed pending claims would not have a material adverse effect, while noting litigation outcomes are uncertain.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track ICS call volumes, pricing, revenue trends and cash generation, given the substantial year-over-year revenue decline.
- Confirm timing and conditions for regulatory approval and closing of the PTI sale, and monitor related escrow releases, indemnification claims and post-closing adjustments.
- Assess whether the $13.0 million cash balance and management’s 12-month liquidity assessment remain adequate, considering operating lease commitments and ongoing cash needs.
- Follow the Section 382 analysis and any resulting restrictions on the use of tax loss carryforwards.
- Monitor the $50 million Xplornet claim and other divestiture-related contingencies; the filing text does not provide a clear estimate of any potential loss exposure.
- Account for potential dilution: 18.6 million shares issuable upon warrant exercise were excluded from diluted loss per share as antidilutive; warrant terms included a July 1, 2014 expiration date.