HC2 Holdings Inc
Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-KxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended December 31, 2017OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.Commission File No. 001-35210 HC2 HOLDINGS, INC.(Exact name of registrant as specified in its charter)Delaware 54-1708481(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)450 Park Avenue, 30th Floor, New York, NY 10022(Address of principal executive offices) (Zip Code)(212) 235-2690(Registrant’s telephone number, including area code)_____________________________________________________________________________________________________________________Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, par value $0.001 per share New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:N/A_____________________________________________________________________________________________________________________Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). Yes x No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants’knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. Seethe definitions of "large accelerated filer, " "accelerated filer", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ☐Accelerated filerxNon-accelerated filer ☐Smaller reporting company ☐ Emerging Growth Company ☐If an emerging growth company company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ýThe aggregate market value of HC2’s common stock held by non-affiliates of the registrant as of June 30, 2017 was approximately $239,529,238, based on the closing sale price ofthe Common Stock on such date.As of February 28, 2018, 44,225,695 shares of common stock, par value $0.001, were outstanding.Documents Incorporated by Reference:Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the registrant's 2018 Annual Meeting of Stockholders areincorporated by reference into Part III. Part I Item 1.Business 2Item 1A.Risk Factors 19Item 1B.Unresolved Staff Comments 54Item 2.Properties 54Item 3.Legal Proceedings 54Item 4.Mine Safety Disclosures 56 Part II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 57Item 6.Selected Financial Data 59Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 60Item 7A.Quantitative and Qualitative Disclosures about Market Risk 90Item 8.Financial Statements and Supplementary Data 91Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 91Item 9A.Controls and Procedures 91Item 9B.Other Information 93 Part III Item 10.Directors, Executive Officers and Corporate Governance 94Item 11.Executive Compensation 94Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 94Item 13.Certain Relationships and Related Transactions, and Director Independence 94Item 14.Principal Accountant Fees and Services 94 Part IV Item 15.Exhibits, Financial Statement Schedules 95Item 16.Form 10-K Summary 101PART IITEM 1. BUSINESSUnless the context otherwise requires, in this Annual Report on Form 10-K, "HC2," means HC2 Holdings, Inc. and the "Company," "we" and "our" mean HC2 together with itsconsolidated subsidiaries.This Annual Report on Form 10-K contains forward looking statements. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations - SpecialNote Regarding Forward-Looking Statements."GeneralHC2 is a diversified holding company that seeks opportunities to acquire and grow businesses that can generate long-term sustainable free cash flow and attractive returns in orderto maximize value for all stakeholders. As of December 31, 2017, our seven reportable operating segments based on management’s organization of the enterprise includedConstruction (f/k/a Manufacturing), Marine Services, Energy (f/k/a Utilities), Telecommunications, Insurance, Life Sciences and Other.Our principal operating subsidiaries include the following assets:(i)DBM Global Inc. ("DBMG") (Construction), a family of companies providing fully integrated structural and steel construction services;(ii)Global Marine Systems Limited ("GMSL") (Marine Services), a leading provider of engineering and underwater services on submarine cables;(iii)American Natural Gas ("ANG") (Energy), a compressed natural gas fueling company;(iv)PTGi-International Carrier Services Inc. ("ICS") (Telecommunications), a provider of internet-based protocol and time-division multiplexing access and transport of long-distance voice minutes;(v)Continental Insurance Group Ltd. ("CIG") (Insurance), a platform for our run-off long-term care and life and annuity business, through its insurance company,Continental General Insurance Company ("CGI" or the "Insurance Company");(vi)Pansend Life Sciences, Ltd. ("Pansend") (Life Sciences), our subsidiary focused on supporting healthcare and biotechnology product development; and(vii)Other, including controlling interests in 704Games Company (f/k/a DMi, Inc.) ("704Games"), which owns licenses to create and distribute NASCAR® video games andHC2 Broadcasting Holdings Inc. ("Broadcasting"), which strategically acquires broadcasting assets across the United States. In addition, Other includes noncontrollinginterests in various investments.We expect to continue to focus on acquiring and investing in businesses with attractive assets that we consider to be undervalued or fairly valued, and growing our acquiredbusinesses.Overall Business StrategyWe evaluate strategic and business alternatives, which may include the following: acquiring assets or businesses unrelated to our current or historical operations; operating, growingor acquiring additional assets or businesses related to our current or historical operations; or winding down or selling our existing operations. We generally pursue either controllingpositions in durable, cash-flow generating businesses or companies we believe exhibit substantial growth potential. We may choose to actively assemble or re-assemble acompany’s management team to ensure the appropriate expertise is in place to execute the operating objectives of such business. We view ourselves as strategic and financialpartners and seek to align our management teams’ incentives with our goal of delivering sustainable long-term value to our stakeholders.As part of any acquisition strategy, we may raise capital in the form of debt or equity securities (including preferred stock) or a combination thereof. We have broad discretion inselecting a business strategy for the Company. If we elect to pursue an acquisition, we have broad discretion in identifying and selecting both the industry and the possibleacquisition or business combination opportunity. We have not identified a specific industry to focus on and there can be no assurance that we will, or we will be able to, identify orsuccessfully complete any such transaction. In connection with evaluating these strategic and business alternatives, we may at any time be engaged in ongoing discussions withrespect to possible acquisitions, business combinations and debt or equity securities offerings of widely varying sizes. There can be no assurance that any of these discussions willresult in a definitive agreement and if they do, what the terms or timing of any agreement would be.CompetitionFrom a strategic perspective, HC2 encounters competition for acquisition and business opportunities from other entities having similar business objectives, such as strategicinvestors and private equity firms, which could lead to higher prices for acquisition targets. Many of these entities are well established and have extensive experience identifying andexecuting transactions directly or through affiliates. Our financial resources and human resources may be relatively limited when contrasted with many of these competitors whichmay place us at a competitive disadvantage. Finally, managing rapid growth could create higher corporate expenses, as compared to many of our competitors who may be at adifferent stage of growth, which could affect our ability to compete for strategic opportunities. Competitive conditions affecting our operating businesses are described in thediscussions below.2EmployeesAs of December 31, 2017, we had approximately 3,358 employees, including the employees of our operating businesses as described in more detail below. We consider ourrelations with our employees to be satisfactory.Our Operating SubsidiariesConstruction Segment (DBMG)DBM Global Inc., is a fully integrated Building Information Modelling ("BIM") modeler, detailer, fabricator, and erector of structural steel and heavy steel plate. DBMG details,models, fabricates and erects structural steel for commercial and industrial construction projects such as high- and low-rise buildings and office complexes, hotels and casinos,convention centers, sports arenas and stadiums, shopping malls, hospitals, dams, bridges, mines and power plants. DBMG also fabricates trusses and girders and specializes in thefabrication and erection of large-diameter water pipe and water storage tanks. Through its Aitken business ("Aitken"), DBMG manufactures pollution control scrubbers, tunnelliners, pressure vessels, strainers, filters, separators and a variety of customized products. Headquartered in Phoenix, Arizona, DBMG has operations in Arizona, California,Georgia, Kansas, Texas, and Utah with construction projects primarily located in the aforementioned states. The Company maintains a 92% controlling interest in DBMG.DBMG’s results of operations are affected primarily by (i) the level of commercial and industrial construction in its principal markets; (ii) its ability to win project contracts; (iii) thenumber and complexity of project changes requested by customers or general contractors; (iv) its success in utilizing its resources at or near full capacity; and (v) its ability tocomplete contracts on a timely and cost-effective basis. The level of commercial and industrial construction activity is related to several factors, including local, regional and nationaleconomic conditions, interest rates, availability of financing, and the supply of existing facilities relative to demand.StrategyDBMG’s objective is to achieve and maintain a leading position in the geographic regions and project segments that it serves by providing timely, high-quality services to itscustomers. DBMG pursues this objective with a strategy comprised of the following components:•Pursue Large, Value-Added Design-Build Projects: DBMG’s unique ability to offer design-build services, a full range of steel construction services and projectmanagement capabilities makes it a preferred partner for complex, design-build fabrication projects in the geographic regions it serves. This capability often enablesDBMG to bid against fewer competitors in a less traditional, more negotiated selection process on these kinds of projects, thereby offering the potential for highermargins while providing overall cost savings and project flexibility and efficiencies to its customers;•Expand and Diversify Revenue Base: DBMG is seeking to expand and diversify its revenue base by leveraging its long-term relationships with national and multi-nationalconstruction and engineering firms, national and regional accounts and other customers. DBMG also intends to continue to grow its operations by targeting smallerprojects that carry higher margins and less risk of large margin fluctuations. DBMG believes that continuing to diversify its revenue base by completing smaller projects -such as low-rise office buildings, healthcare facilities and other commercial and industrial structures - could reduce the impact of periodic adverse market or economicconditions, as well as the margin slippage that may accompany larger projects;•Emphasize Innovative Services: DBMG focuses its BIM modelling, design-build, engineering, detailing, fabrication and erection expertise on larger, more complexprojects, where it typically experiences less competition and more advantageous negotiated contract opportunities. DBMG has extensive experience in providing servicesrequiring complex BIM modelling, detailing, fabrication and erection techniques and other unusual project needs, such as BIM coordination, specialized transportation,steel treatment or specialty coating applications. These service capabilities have enabled DBMG to address such design-sensitive projects as stadiums and uniquelydesigned hotels and casinos; and•Diversify Customer and Product Base: Although DBMG seeks to achieve a leading share of the geographic and product markets in which it traditionally competes, it alsoseeks to diversify its product offerings and geographic markets through acquisition. By expanding the portfolio of products offered and geographic markets served,DBMG believes that it will be able to offer more value-added services to existing and new potential customers, as well as to reduce the impact of periodic adverse marketor economic conditions.3Services and CustomersDBMG operates primarily within the over $600 billion non-residential construction industry, which serves a diverse set of end markets.DBMG consists of five business units spread across diverse steel markets: Schuff Steel Company ("SSC") (steel fabrication and erection), Schuff Steel Management Company("SSMC") (management of smaller projects, leveraging subcontractors), PDC Global Pty Ltd. ("PDC") (steel detailing, BIM modelling and BIM management services), BDSVirCon ("BDS") (steel detailing, rebar detailing and BIM modelling services) and the Aitken product line ("Aitken") (manufacturing of equipment for the oil and gas industry). Forthe fiscal year ended December 31, 2017 revenues were as follows: Revenue % of RevenueSSC $521.7 90.1%SSMC 29.7 5.1%PDC 14.8 2.6%BDS 7.6 1.3%Aitken 5.2 0.9% $579.0 100.0%The majority of DBMG's business is in North America, but PDC and BDS provide detailing services on five continents, and SSC provides fabricated steel to Canada and otherselect countries. In 2017, DBMG's two largest customers represented approximately 38.0% of revenues. In 2016, the same customers represented approximately 17.0% ofrevenues.DBMG’s size gives it the production capacity to complete large-scale, demanding projects, with typical utilization per facility ranging from 70%-90% and a sales pipeline thatincludes over $586 million in potential revenue generation. DBMG believes it has benefited from being one of the largest players in a market that is highly-fragmented across manysmall firms.DBMG achieves a highly-efficient and cost-effective construction process by focusing on collaborating with all project participants and utilizing its extensive design-build anddesign-assist capabilities with its clients. Additionally, DBMG has in-house fabrication and erection combined with access to a network of subcontractors for smaller projects inorder to provide high-quality solutions for its customers. DBMG offers a range of services across a broad geography through its nine fabrication shops in the United States and 20sales and management facilities located in the United States, Australia, Canada, India, New Zealand, the Philippines and the UK.DBMG operates with minimal bonding requirements, with the current balance of less than 40% of DBMG's backlog (out of a total backlog of $723.4 million) as of December 31,2017, and bonding is reduced as projects are billed, rather than upon completion. DBMG has limited its raw material cost exposure by securing fixed prices from mills at contractbid, as well as by utilizing its purchasing power as one of the largest domestic buyers of wide flange beams in the United States.DBMG offers a variety of services to its customers which it believes enhances its ability to obtain and successfully complete projects. These services fall into six distinct groups:design-assist/design-build, pre-construction design and budgeting, steel management, fabrication, erection, and BIM:•BIM: DBMG uses BIM on every project to manage its role efficiently. Additionally DBMG’s use of SIMS in conjunction with BIM allows for real-time reporting on aproject’s progress and an information-rich model review.•Design-Assist/Design-Build: Using the latest technology and BIM, DBMG works to provide clients with cost-effective steel designs. The end result is turnkey-ready,structural steel solutions for its diverse client base.•Pre-Construction Design and Budgeting: Clients who contact DBMG in the early stages of planning can receive a DBMG-performed analysis of the structure and costbreakdown. Both of these tools allow clients to accurately plan and budget for any upcoming project.•Steel Management: Using DBMG’s proprietary Schuff Steel Integrated Management System ("SIMS"), DBMG can track any piece of steel and instantly know itslocation. Additionally, DBMG can help clients manage steel subcontracts, providing clients with savings on raw steel purchases and giving them access to a variety ofDBMG-approved subcontractors.•Fabrication: Through its nine fabrication shops in California, Arizona, Texas, Kansas, Georgia, and Utah, DBMG has one of the highest fabrication capacities in theUnited States, with over 1.3 million square feet under roof and a maximum annual fabrication capacity of approximately 318,000 tons.•Erection: Named the top steel erector in the United States for 2007, 2008, 2011, 2013, 2014, 2015, 2016, and 2017 by Engineering News-Record, DBMG knows how toadd value to its projects through the safe and efficient erection of steel structures.SSMC provides turn-key steel fabrication and erection services with expertise in project management. Leveraging such strengths, SSMC uses its relationships with reliablesubcontractors and erectors, along with state-of-the-art management systems, to deliver excellence to clients.4Aitken is a manufacturer of equipment used in the oil, gas, petrochemical and pipeline industries. Aitken supplies the following products both nationwide and internationally:•Strainers: Temporary cone and basket strainers, tee-type strainers, vertical and horizontal permanent line strainers and fabricated duplex strainers.•Measurement Equipment: Orifice meter tubes, orifice plates, orifice flanges, seal pots, flow nozzles, Venturi tubes, low loss tubes and straightening vanes.•Major Products: Spectacle blinds, paddle blinds, drip rings, bleed rings, and test inserts, ASME vessels, launchers and pipe spools.PDC provides steel detailing, BIM modelling and BIM management services for industrial and commercial construction projects in Australia and North America.•Steel Detailing: Utilizing industry leading technologies, PDC provides steel detailing services which include: shop drawings, erection plans, anchor bolt drawings,connection sketches, DSTV files for cutting and drilling, DXF files for plate work, field bolt lists, specialist reports and advance bill of material and piping.•BIM Modelling: Through multidisciplinary teams, PDC creates highly accurate, scaled virtual models of each structural component. These independent models and dataare integrated and standardized to produce a single 3D model simulation of the entire structure. This integrated model contains complete information for all functionalrequirements of a project, including procurement and logistics, financial modelling, claims and litigation, fabrication, construction support and asset management.•BIM Management: PDC is an industry leading provider of BIM management consultancy services ("BIM Management"), with clients ranging from government, industryorganizations and general construction contractors. BIM Management of all project participants’ input, use and development of the applicable model is integral to ensuringthat the model remains the single point of reference. PDC’s BIM Management service includes the governing of process and workflow management, which is a collectionof defined model uses, workflows, and modelling methods used to achieve specific, repeatable and reliable information results from the model. The way the model iscreated and shared, and the sequencing of its application, impacts the effective and efficient use of BIM for desired project outcomes and decision support.•Bridge Steel Detailing: Utilizing industry leading technologies, PDC, through its wholly owned subsidiary Candraft Detailing, provides steel detailing services forbridges which include: shop drawings, erection plans, anchor bolt drawings, connection sketches, DSTV files for cutting and drilling, DXF files for plate work, field boltlists, specialist reports and advance bill of material and piping.BDS provides steel- and rebar detailing and BIM modelling services for industrial and commercial projects in Australia, New Zealand, North America and Europe.•Steel Detailing: Utilizing industry leading technologies, BDS provides steel detailing services, including: shop drawings, erection plans, anchor bolt drawings, connectionsketches, DSTV files for cutting and drilling, DXF files for plate work, field bolt lists, specialist reports, advance bill of material and piping.•BIM modelling: Through multidisciplinary teams, BDS creates highly accurate, scaled virtual models of each structural component. These independent models and dataare integrated and standardized to produce a single 3D model simulation of the entire structure. This integrated model contains complete information for all functionalrequirements of a project, including procurement and logistics, financial modelling, claims and litigation, fabrication, construction support and asset management.•Rebar Detailing: These services, including rebar detailing and estimating, are delivered by a staff experienced in rebar installation and familiar with the constructionpractices and constructibility issues that arise on project sites. Deliverables include: field placement/shop drawings, field and/or phone support, 2D and 3D modelling,connection sketches, bar listing in ASA format, DGN files, and complete rebar estimating.SuppliersDBMG currently purchases its steel from a variety of domestic and foreign steel producers but is not dependent on any one producer. During the year ended December 31, 2017,DBMG purchased approximately 50% of the total value of steel and steel components purchased from two domestic steel vendors. See Item 1A - Risk Factors - "Risks Related tothe Construction segment" elsewhere in this document for discussion on DBMG’s reliance on suppliers of steel and steel components.Sales and DistributionsDBMG obtains contracts through competitive bidding or negotiation, which generally are fixed-price, cost-plus, or unit cost arrangements. Bidding and negotiations require DBMGto estimate the costs of the project up front, with most projects typically lasting from one to 12 months. However, large and more complex projects can often last two years or more.5MarketingSales managers lead DBMG’s sales and marketing efforts. Each sales manager is primarily responsible for estimating sales and marketing efforts in defined geographic areas. Inaddition, DBMG employs full-time project estimators and chief estimators. DBMG’s sales representatives build and maintain relationships with general contractors, architects,engineers and other potential sources of business to identify potential new projects. DBMG generates future project reports to track the weekly progress of new opportunities.DBMG’s sales efforts are further supported by most of its executive officers and engineering personnel, who have substantial experience in the design, detailing, modelling,fabrication and erection of structural steel and heavy steel plate.DBMG competes for new project opportunities through its relationships and interaction with its active and prospective customer base which provides valuable current marketinformation and sales opportunities. In addition, DBMG is often contacted by governmental agencies in connection with public construction projects, and by large private-sectorproject owners, general contractors and engineering firms in connection with new building projects such as plants, warehouse and distribution centers, and other industrial andcommercial facilities.Upon selection of projects to bid or price, DBMG’s estimating division reviews and prepares projected costs of shop, field, detail drawing preparation and crane hours, steel andother raw materials, and other costs. With respect to bid projects, a formal bid is prepared detailing the specific services and materials DBMG plans to provide, along with paymentterms and project completion timelines. Upon acceptance, DBMG’s bid proposal is finalized in a definitive contract.CompetitionThe principal geographic and product markets DBMG serves are highly competitive, and this intense competition is expected to continue. DBMG competes with other contractorsfor commercial, industrial and specialty projects on a local, regional, or national basis. Continued service within these markets requires substantial resources and capital investmentin equipment, technology and skilled personnel, and certain of DBMG’s competitors have financial and operating resources greater than DBMG. Competition also placesdownward pressure on DBMG’s contract prices and margins. The principal competitive factors within the industry are price, timeliness of project completion, quality, reputation,and the desire of customers to utilize specific contractors with whom they have favorable relationships and prior experience. While DBMG believes that it maintains a competitiveadvantage with respect to many of these factors, failure to continue to do so or to meet other competitive challenges could have a material adverse effect on DBMG’s results ofoperations, cash flows or financial condition.EmployeesAs of December 31, 2017, DBMG employed approximately 2,665 people across the globe, including the U.S., Canada, Australia, New Zealand, India, Philippines, Thailand, andthe UK. The number of persons DBMG employs on an hourly basis fluctuates directly in relation to the amount of business DBMG performs. Certain of the fabrication anderection personnel DBMG employs are represented by the United Steelworkers of America and the International Association of Bridge, Structural, Ornamental and ReinforcingIron Workers Union. DBMG is a party to several separate collective bargaining agreements with these unions in certain of its current operating regions, which expire (if notrenewed) at various times in the future. Approximately 24% of DBMG’s employees are covered under various collective bargaining agreements. As of December 31, 2017, most ofDBMG’s collective bargaining agreements are subject to automatic annual or other renewal unless either party elects to terminate the agreement on the scheduled expiration date.DBMG considers its relationship with its employees to be satisfactory and, other than sporadic and unauthorized work stoppages of an immaterial nature, none of which have beenrelated to its own labor relations, DBMG has not experienced a work stoppage or other labor disturbance. DBMG strategically utilizes third-party fabrication and erection subcontractors on many of its projects and also subcontracts detailing services from time to time when itsmanagement determines that this would be economically beneficial (and/or when DBMG requires additional capacity for such services). DBMG’s inability to engage fabrication,erection and detailing subcontractors on favorable terms could limit its ability to complete projects in a timely manner or compete for new projects, which could have a materialadverse effect on its operations.Legal, Environmental and InsuranceDBMG is subject to other claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that theoutcome of any such matter will be decided favorably to DBMG or that the resolution of any such matter will not have a material adverse effect upon DBMG or the Company’sbusiness, consolidated financial position, results of operations or cash flows. Neither DBMG nor the Company believes that any of such pending claims and legal proceedings willhave a material adverse effect on its (or the Company’s) business, consolidated financial position, results of operations or cash flows.DBMG’s operations and properties are affected by numerous federal, state and local environmental protection laws and regulations, such as those governing discharges to air andwater and the handling and disposal of solid and hazardous wastes. These laws and regulations have become increasingly stringent and compliance with these laws and regulationshas become increasingly complex and costly. There can be no assurance that such laws and regulations or their interpretation will not change in a manner that could materially andadversely affect DBMG’s operations. Certain environmental laws, such as CERCLA (the Comprehensive Environmental Response, Compensation, and Liability Act) and its statelaw counterparts, provide for strict and joint and several liability for investigation and remediation of spills and other releases of toxic and hazardous substances. These laws mayapply to conditions at properties currently or formerly owned or operated by an entity or its predecessors, as well as to conditions at properties at which wastes or othercontamination attributable to an entity or its predecessors come to be located. Although DBMG has not incurred any material environmental related liability in the past and believesthat it is in material compliance6with environmental laws, there can be no assurance that DBMG, or entities for which it may be responsible, will not incur such liability in connection with the investigation andremediation of facilities it currently operates (or formerly owned or operated) or other locations in a manner that could materially and adversely affect its operations.DBMG maintains commercial general liability insurance in the amount of $1.0 million per occurrence and $2.0 million in the aggregate. In addition, DBMG maintains umbrellacoverage limits of $50.0 million. DBMG also maintains insurance against property damage caused by fire, flood, explosion and similar catastrophic events that may result inphysical damage or destruction of its facilities and property. DBM maintains professional liability insurance in the amount of $5.0 million for professional services related to ourwork in steel erection and fabrication projects.All policies are subject to various deductibles and coverage limitations. Although DBMG’s management believes that its insurance is adequate for its present needs, there can be noassurance that it will be able to maintain adequate insurance at premium rates that management considers commercially reasonable, nor can there be any assurance that such coveragewill be adequate to cover all claims that may arise.Marine Services Segment (GMSL)Global Marine Services Limited is a global offshore engineering company focused on specialist subsea services across three market sectors, namely telecommunications, offshorepower, and oil and gas.Strategy OverviewGMSL is a leading independent operator in the subsea cable installation and maintenance markets. GMSL aims to maintain its leading market position in the telecommunicationsmaintenance segment and seeks opportunities to grow its installation activities in the three market sectors (telecommunications, offshore power, and oil and gas) while capitalizingon high market growth in the offshore power sector through expansion of its installation and maintenance services in that sector. In order to accomplish these goals, GMSL hasdeveloped a comprehensive strategy which includes:•Developing opportunities in the offshore power market;•Diversifying the business by pursuing growth within its three market segments (telecommunications, offshore power, and oil and gas), which it believes will strengthenits quality of earnings and reduce exposure to one particular market segment;•Retaining and building its leading position in telecommunications maintenance and installation;•Working to develop convergence of its maintenance services across all three market segments; and•Pursuing targeted mergers and acquisitions, joint ventures, partnerships and opportunities to build a larger operating platform that can benefit from increased operatingefficiencies.GMSL has a highly experienced management team with a proven track record and has demonstrated the ability to enter new markets and generate returns for investors. The seniormanagement team has in excess of 70 years combined experience within the telecommunications, oil and gas, and offshore power segments.Telecommunications: GMSL provides maintenance and installation services to its global telecommunications customers. GMSL has a long, well-established reputation in thetelecommunications sector and is a leading provider of subsea services in the industry. It operates in a mature market and is the largest independent provider in the maintenancesegment. GMSL provides vessels on standby to repair fiber optic telecommunications cables in defined geographic zones, and its maintenance business is provided throughcontracts with consortia of up to 60 global telecommunications providers. Typically, GMSL enters into five- to seven-year contracts to provide maintenance services to cablesystems that are located in specific geographical areas. These contracts provide highly stable, predictable and recurring revenue and earnings. Additionally, GMSL providesinstallation of cable systems, including route planning, mapping, route engineering, cable-laying, trenching and burial. GMSL’s installation business is project-based, with contractstypically lasting one to five months.Offshore Power: As a result of the expiration of the Prysmian Non-Compete Agreement in November 2015, GMSL has been able to recommence bidding for projects in the high-growth, high-margin offshore power market. Given that renewable energy production is predicted to grow over the next decade, with a substantial proportion of that energy to beharvested offshore, GMSL believes it is well-positioned to capitalize on this anticipated growth of the offshore alternative energy market in construction, as well as operations andmaintenance, with a strong presence in Northern Europe and Asia (especially China). GMSL’s management believes the offshore wind farm operations and maintenance sub-sectorrepresents a significant opportunity for GMSL and, through its acquisition of CWind in 2016, GMSL is developing strategies to realize that opportunity.Oil and Gas: GMSL provides installation, maintenance and repair of fiber optic communication and power infrastructure to offshore platforms, through which it realizes highermargins than in its other segments due to operational complexity. Its primary activities include providing power from shore, enabling fiber-based communication between platformsand shore-based systems and installing permanent reservoir monitoring systems that allow customers to monitor subsea seismic data. The majority of GMSL’s oil and gas businessis contracted on a project-by-project basis with major energy producers or Tier I engineering, procurement and construction ("EPC") contractors.7GMSL’s track record in these types of projects includes the following:•Experimental UK farm, Blythe, for Shell;•London Array Ltd: inter-array cables for London Array project;•RWE: export cables for Gwynt y Mor project;•C-Power: inter-array cables for Thornton Bank project (Belgium);•Dong Energy: Inter-array cables for Horns Rev project, Denmark (three phases);•Vattenfall: export cables for Kentish Flats project;•EON/Shell: power and fiber optic cables for Blythe project; and•Gode Wind: largest German wind farm to date.Services and/or ProductsGMSL is a pioneer in the subsea cable industry, having laid the first subsea cable in the 1850s and installed the first transatlantic fiber optic cable (TAT-8) in 1988. Over the last 30years, GMSL estimates that it has installed approximately 300,000 kilometers of cable, which its management believes represents almost a quarter of all the fiber optic cable on theglobal seabed today. GMSL is positioned as a global independent market leader in subsea cable installation and maintenance services and derives approximately 50% of its totalrevenue from long-term, recurring maintenance contracts. GMSL has started a new phase of growth through applying its capabilities to the rapidly expanding offshore power sectorinto which GMSL re-entered in November 2015 (see "Offshore Power" above), while retaining a leading position in the telecommunications sector. As a result of this growth,GMSL has major offices in the United Kingdom and Singapore, with presence in Bermuda, Canada, China, Indonesia and the Philippines. See "Item 1A - Risk Factors - RisksRelated to GMSL for further details. GMSL derives a significant amount of its revenues from sales to customers outside of the United States, which poses additional risks,including economic, political and other uncertainties" for a description of risks attendant to such foreign operations.Fleet OverviewGMSL operates one of the largest specialist cable laying fleets in the world, consisting of eight vessels (five owned, three operated through long-term leases) and 17 crew transfervessels operated by its wholly-owned subsidiary, CWind, as of December 31, 2017. The average age of the GMSL fleet is 20 years and the CWind fleet is 4 years. Each cablevessel is equipped with specialist inspection, burial, and survey equipment. By providing oil and gas, offshore power, and telecommunications installation as well astelecommunications maintenance, GMSL can retain vessels throughout their asset lives by cascading them through different uses as they age, as older vessels can or should only beused to provide specified services. This provides a significant competitive advantage because GMSL can retain vessels for longer and reduce the frequency of capital expenditurerequirements with a longer depreciation period. GMSL’s fleet is operated by GMSL employees or long-term contractors.Fleet DetailsVessels Ownership Lease Expiry Age Flag Base PortMaintenance - GMSL Innovator DYVI Cableship AS May-25 21 UK Victoria, CanadaWave Sentinel GMSL N/A 21 UK Portland, UKCable Retriever ICPL Jan-23 19 Singapore Batangas, PhilippinesPacific Guardian GMSL N/A 33 UK Curacao Installation – GMSL Sovereign GMSL N/A 25 UK Portland, UKNetworker GMSL N/A 16 Panama Batam, IndonesiaCS Recorder Maersk N/A 17 UK Blyth, UKGlobal Symphony GMSL N/A 6 UK Montrose, UK Offshore – CWind Argocat CWind Limited N/A 7 UK Maldon, UKAlliance 50% CWind Limited N/A 6 UK Maldon, UKEndeavour CWind Limited N/A 5 UK Maldon, UKAdventure CWind Limited N/A 5 UK Maldon, UKFulmar CWind Limited N/A 4 UK Colchester, UKArtimus CWind Limited N/A 3 UK Colchester, UKBuzzard CWind Limited N/A 5 UK London, UKChallenger CWind Limited N/A 5 UK Bideford, UKResolution CWind Limited N/A 4 UK Southampton, UKSword CWind Limited N/A 3 UK Ramsgate, UK8Spirit CWind Limited N/A 2 UK Colchester, UKEndurance CWind Limited N/A 4 UK Maldon, UKTempest CWind Limited N/A 2 UK Ramsgate, UKTornado CWind Limited N/A 2 UK Ramsgate, UKTyphoon TOW CWind Limited N/A 2 UK Ramsgate, UKHurricane TOW CWind Limited N/A 2 UK Ramsgate, UKCWind Phantom CWind Limited N/A 1 UK Maldon, UKProduct Research and DevelopmentOver the years, GMSL has provided many important innovations to the subsea cable market. One such innovation was GEOCABLE, GMSL’s proprietary GeographicalInformation System (GIS), which GMSL believes to be the largest cable database in the market and was developed specifically to meet the needs of the cable industry.GEOCABLE is an important tool for any vendor planning subsea cable installation, and GMSL sells data from GEOCABLE to third-party customers.In addition to GEOCABLE, GMSL also develops and owns (in a consortium with other industry participants) intellectual property associated with the Universal Joint, a productwhich easily and effectively links together cables from different manufacturers. The Universal Joint has gained such prevalence in the industry that new fiber optic cables may becertified to meet the specifications of the Universal Joint, which is a service provided by GMSL among others, so that any subsea cable manufacturer can ensure compatibility of itssubsea cables with other existing subsea cables as well as with the standardized equipment on cable repair vessels. GMSL benefits from its sales of the Universal Joint, andproceeds from GMSL-sponsored training of jointing skills, but GMSL also enjoys the industry leadership and brand enhancement that come with the creation of an industry leadingproduct.Intellectual PropertyGMSL is not dependent on any specific intellectual property, but it does vigorously protect its interests in its intellectual property and closely monitors industry changes.CustomersGMSL’s customer base is made up primarily of large, established companies. Contract lengths vary and are largely dependent on the type of services provided. Maintenance andrepair contracts tend to be long-term (5-7 years), with a relatively high level of expected renewal rates, and the customer is typically a consortium of different cable owners such asnational, regional and international telecommunication companies and others who have an ownership interest in the subsea cables covered by the maintenance contract. GMSLcharges a standing fee for cost of vessels plus margin, paid in advance proportionally by each member, and an additional daily call out fee for repairs paid by the specific cableowner(s). Four maintenance vessels are engaged on GMSL’s three current long-term telecommunications maintenance contracts with ACMA (Atlantic Cable MaintenanceAgreement), SEAIOCMA (South East Asia and Indian Ocean Cable Maintenance Agreement), and NAZ (North American Zone). Installation contracts tend to be much shorterterm (30-150 days), and the counterparty tends to be a single client. Contracts are typically bid for on a fixed-sum basis with an initial upfront payment plus subsequent installmentsproviding working capital support. Due to the added complexity of cable installation as opposed to maintenance, GMSL generally realizes higher margins on its installationcontracts in the offshore power and oil and gas sectors.Sales and DistributionsIn the telecommunications cable market, cable maintenance is most often accomplished by zone maintenance contracts in which a consortium of telecommunications operators orcable owners contract with a maintenance provider like GMSL, over a long-term period of approximately five to seven years. GMSL has three cable maintenance agreements,providing a steady, high-quality source of revenue. These maintenance contracts are usually re-awarded to incumbent providers unless there are significant performance issues,which may mean that GMSL will not be required to expend extra capital to retain these contracts, although no assurance can be given that GMSL will be able to renew any specificcontract. GMSL constantly has a focused sales plan to build relationships with current and potential customers at regional and corporate offices and readily leverages HuaweiTechnologies’ large sales organization.MarketingGMSL also has a focused sales and marketing plan to create relationships with major participants in the offshore power and oil and gas industries. Despite the prevailing low oilprice market conditions, GMSL hopes to use its expertise in installing Permanent Reservoir Monitoring ("PRM") systems to forge new contacts with both the end users of PRMservices, such as oil majors, and the PRM suppliers themselves. Additionally GMSL is pursuing a strategy of specialization in installing the small power and fiber optic cables thatits competitors in the oil and gas and offshore power sectors find unprofitable and lack installation experience in.9CompetitionGMSL is one of the few companies that provide subsea cable installation and maintenance services on a worldwide basis. GMSL competes for contracts with companies that haveworldwide operations, as well as numerous others operating locally in various areas. There are a number of industry participants, mainly Asian based, who focus primarily on theircountries of origin. Competition for GMSL’s services historically has been based on vessel availability, location of or ability to deploy these vessels and associated subseaequipment, quality of service and price. The relative importance of these factors can vary depending on the customer or specific project as well as also over time based on theprevailing market conditions. The ability to develop, train and retain skilled engineering personnel is also an important competitive factor in GMSL’s markets.GMSL believes that its ability to provide a wide range of subsea cable installation and maintenance services in the telecommunications, oil and gas and offshore power sectors on aworldwide basis enables it to compete effectively in the industry in which it operates. However, in some cases involving projects that require less sophisticated vessel and subseaequipment, smaller companies may be able to bid for contracts at prices uneconomical to GMSL. In addition, GMSL’s competitors generally have the capability to move theirvessels to locations in which GMSL operates with relative ease, which may impact competition in the markets it serves.Management and EmployeesAs of December 31, 2017, GMSL employed 413 people. GMSL’s employees are not formally represented by any labor union or other trade organization, although the majority ofthe seafarers are members of an established trade union. GMSL considers relations with its employees to be satisfactory and it has never experienced a work stoppage or strike.GMSL regularly uses independent consultants and contractors to perform various professional services in different areas of the business, including in its installation and fleetoperations and in certain administrative functions. Dick Fagerstal is a 3% interest holder, chairman and chief executive officer of Global Marine Holdings LLC, the parent holdingcompany of Global Marine Holdings Limited, and he is the executive chairman of GMSL. Mr. Fagerstal previously served in an executive capacity for companies operating invarious industries, including energy, marine services, and their related infrastructure.Legal, Environmental and InsuranceGMSL is from time to time subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guaranteethat the outcome of any such matter will be decided favorably to GMSL or that the resolution of any such matter will not have a material adverse effect upon GMSL’s business,consolidated financial position, results of operations or cash flows. GMSL does not believe that any of such pending claims and legal proceedings will have a material adverse effecton its business, consolidated financial position, results of operations or cash flows.GMSL has various kinds of insurance coverage including protection and indemnity, hull and machinery, war risk, and property insurances, directors and officers liability insurance,contract warranty insurance for the maintenance contracts, and all other necessary corporate insurances. GMSL’s liability is capped and insured under each of its installationcontracts.Energy Segment (American Natural Gas)ANG is a premier retailer of compressed natural gas ("CNG") that designs, builds, owns, operates and maintains natural gas fueling stations for the transportation industry. ANG’sprincipal business is supplying CNG for light-, medium- and heavy-duty vehicles.ANG focuses its efforts on customers in a variety of markets, including heavy-duty trucking, airports, refuse, industrial, institutional energy users and government fleets. ANGseeks to retain its customers by offering state-of-the-art fueling stations with exemplary service levels.Market for Natural Gas as an Alternative Fuel for VehiclesAs of December 31, 2017, the U.S. Department of Energy estimates that there were approximately 1,672 CNG fueling stations in the United States and over 150,000 natural gasvehicles on American roads, including 39,500 heavy-duty vehicles (such as tractors, refuse trucks and buses), 25,800 medium-duty vehicles (such as delivery vans and shuttles)and 87,000 light-duty vehicles (such as passenger cars, sport utility vehicles, trucks and vans).ANG believes that natural gas is an attractive alternative to gasoline and diesel for use as a vehicle fuel in the United States as it is plentiful, domestically produced, cleaner andgenerally cheaper than gasoline or diesel. Historically, oil, gasoline, and diesel prices have been highly volatile, while natural gas prices have generally been stable and lower thanthe cost of oil, gasoline and diesel on an energy equivalent basis. ANG also expects increasingly stringent air quality regulations, expanding initiatives by fleet operators to lowergreenhouse gas emissions and increase fuel diversity and additional regulations mandating low carbon fuels, all of which supports increased market adoption of natural gas as analternative to gasoline and diesel as a vehicle fuel. ANG believes these factors support current opportunities to market natural gas as a vehicle fuel in the United States.10Benefits of Natural Gas FuelDomestic and Plentiful Supply: Technological advances in natural gas drilling and production have unlocked vast natural gas reserves. The U.S. is now the number one producer ofnatural gas in the world, with proven, abundant and growing reserves of natural gas.Less Expensive: Due to the abundance of natural gas, the cost of natural gas in the U.S. is less than the cost of crude oil, on an energy equivalent basis.ANG believes that natural gas used as a transportation fuel will remain cheaper than gasoline and diesel for the foreseeable future. In addition, because the price of the commodity(natural gas) makes up a smaller portion of the cost of a gasoline gallon equivalent (GGE) of CNG relative to the commodity portion of the cost of gallon of diesel or gasoline, theprice of CNG is less sensitive to increases in the underlying commodity cost.Cleaner: Natural gas contains less carbon than any other fossil fuel and thus, produces fewer carbon dioxide emissions when burned. The California Air Resources Board("CARB") has concluded that a CNG fueled vehicle emits 20 to 29 percent fewer greenhouse gas ("GHG") emissions than a comparable gasoline or diesel-fueled vehicle on a well-to-wheel basis. Additionally, a study from Argonne National Laboratory, a research laboratory operated by the University of Chicago for the U.S. Department of Energy, indicatesthat natural gas vehicles produce at least 13 to 21 percent fewer GHG emissions than comparable gasoline and diesel-fueled vehicles. In addition, ANG is working towardssupplying its stations with renewable natural gas ("RNG"), which offers 115% fewer greenhouse gases over diesel.Safer: As reported by NGV America, CNG is relatively safer than gasoline and diesel because it dissipates into the air when spilled or in the event of a vehicle accident. Whenreleased, CNG is less combustible than gasoline or diesel as it ignites only at relatively high temperatures. The fuel tanks and systems used in natural gas vehicles are subjected to anumber of federally required safety tests, such as fire, environmental hazard, burst pressures, and crash testing, according to the U.S. Department of Transportation NationalHighway Traffic Safety Administration. In addition, CNG is stored in above ground tanks, thus reducing the risk of soil or groundwater contamination. Currently, over 150,000vehicles in the U.S. and 15.2 million worldwide, fuel safely with natural gas.Natural Gas VehiclesNatural gas vehicles use internal combustion engines similar to those used in gasoline or diesel powered vehicles. A natural gas vehicle uses sealed storage cylinders to hold CNG,specially designed fuel lines to deliver natural gas to the engine, and an engine tuned to run on natural gas. Natural gas fuels have higher octane content than gasoline or diesel, andthe acceleration and other performance characteristics of natural gas vehicles are similar to those of gasoline or diesel powered vehicles of the same weight and engine class. Naturalgas vehicles running on CNG are refueled using a hose and nozzle to create an airtight seal with the gas tank. For heavy-duty vehicles, spark ignited natural gas vehicles haveproven to operate more quietly than diesel powered vehicles. Natural gas vehicles typically cost more than gasoline or diesel powered vehicles, primarily due to the higher cost ofthe storage systems that hold the CNG.Virtually any car, truck, bus or other vehicle is capable of being manufactured or modified to run on natural gas. Approximately 50 different manufacturers in the U.S. produce 100models of heavy-, medium- and light-duty natural gas vehicles and engines. These vehicles include long-haul tractors, refuse trucks, regional tractors, transit buses, cement trucks,delivery trucks, vocational work trucks, school buses, shuttles, passenger sedans, pickup trucks and cargo and passenger vans. ANG expects that additional models and types ofnatural gas vehicles will become available as natural gas becomes more widely accepted as a vehicle fuel in the U.S.Products and ServicesCNG Sales: ANG sells CNG through fueling stations located on properties owned or leased by ANG. At these CNG fueling stations, ANG procures natural gas from local utilitiesor third-party marketers under standard, floating-rate or locked-in rate arrangements and then compresses and dispenses it into customers vehicles. ANG's CNG fueling stationsales are made primarily through contracts with customers. Under these contracts, pricing is principally determined on a cost-plus basis, which is calculated by adding a margin tothe utility price for natural gas. As a result, CNG total sales revenues increase or decrease as a result of an increase or decrease in the price of natural gas. The balance of ANG’sCNG fueling station sales are public sales based on prevailing market conditions.O&M Services: ANG performs operate and maintain ("O&M") services for CNG stations that are owned by their customers. For these services, ANG generally charges either amonthly or per-GGE fee or time and material fee based on the volume of CNG dispensed at the station and the customers' goals and objectives.Site Development: ANG builds state-of-the-art fueling stations, either serving as general contractor or supervising qualified third-party contractors, for themselves or theircustomers. ANG has also acquired existing stations (that ANG did not build) from third parties. Equipment for a CNG station typically consists of dryers, compressors, dispensersand storage tanks.Thirty of ANG’s fueling stations have separate public access areas for retail customers. The fill rate at each of the public stations has comparable dispensing rates equivalent totraditional gasoline and diesel fueling stations.11Sales and MarketingANG focuses its sales and marketing efforts within the continental United States and targets such efforts primarily through direct sales. ANG’s sales and marketing group staysinformed of proposed and newly adopted regulations in order to provide education on the value of natural gas as a vehicle fuel to current and potential customers.Key Markets and CustomersANG targets customers in a variety of markets, such as trucking, airports, refuse, public transit and food and beverage distributors. In 2017, approximately 65% of ANG’srevenues from CNG sales came from customers with multi-year contracts based on committed fueling volumes.Trucking and Food and Beverage Distributors: ANG believes that heavy-duty trucking represents one of the greatest opportunities for natural gas to be used as a vehicle fuel in theUnited States. Fleets with high-mileage trucks consume significant amounts of fuel and can benefit from the lower cost of natural gas. A number of shippers, manufacturers,retailers and other truck fleet operators have started to adopt natural gas fueled trucks to move their freight.Bulktransporter: Refuse haulers are increasingly adopting trucks that run on CNG to realize operating savings and to address their customers’ demands for reduced emissions andquieter performance. ANG serves several large independent waste haulers in the northeast. ANG believes that refuse companies are ideal customers as they can be served bycentralized fueling infrastructure supported by a consistent monthly volume of fuel. Despite the uncertainty spurred by the current climate of changing environmental winds and lowoil prices, there is continued interest in natural gas as a transportation fuel in the US Class 8 market. US and Canadian natural gas Class 8 truck retail sales remained consistent androse 9% year-to-date through November 2017.Corporate Information; Acquisitions and DivestituresANG was originally formed in 2011. In August 2014, HC2 acquired a 51% interest in ANG. In October 2014, ANG acquired Northville Natural Gas, which owned three stationsin Indiana. In May 2016 ANG acquired Southwestern Energy NGV Services, LLC, which included two stations in Arkansas. In September 2016 ANG purchased the assets ofAmerican CNG, Inc. and K&K SWD #1, LLC, which was comprised of one station in Arkansas. In December 2016 ANG acquired Questar Fueling Company and ConstellationCNG, LLC. These acquisitions further expanded ANG’s network by adding 17 stations in Arizona, California, Utah, Colorado, Texas, Kansas, Indiana and Ohio.ANG intends to continue to pursue additional acquisitions, divestitures, partnerships and investments as ANG becomes aware of opportunities that it believes will increase itscompetitive advantage, take advantage of industry developments, or enhance their market position.Tax IncentivesFrom October 2012 through December 2016, ANG has been eligible to receive the Alternative Fuels Excise Tax Credit ("AFETC") (f/k/a VETC), of $0.50 per GGE of CNG soldas vehicle fuel. In addition, other U.S. federal and state government tax incentives are available to offset the cost of acquiring natural gas vehicles, converting vehicles to use naturalgas or construct natural gas fueling stations. As of the date of this filing, the US Congress passed its omnibus budget for 2018, which included a retroactive AFETC credit throughDecember 31, 2017 and will provide a net of approximately $2.6 million in income to ANG, to be recorded in 2018.Grant ProgramsANG continues to seek out and apply for, and help its fleet customers apply for federal, state and regional grant programs. These programs provide funding for natural gas vehicleconversions and purchases, natural gas fueling station construction and vehicle fuel sold.CompetitionThe market for vehicle fuels is highly competitive. The biggest competition for CNG is gasoline and diesel, as the vast majority of vehicles in the United States are powered bygasoline and diesel. Many of the producers and sellers of gasoline and diesel fuels are large entities that have significantly greater resources than ANG possesses. ANG alsocompetes with suppliers of other alternative vehicle fuels, including ethanol, biodiesel and hydrogen fuels, as well as providers of hybrid and electric vehicles. New technologiesand improvements to existing technologies may make alternatives other than natural gas more attractive to the market, or may slow the development of the market for natural gas as avehicle fuel if such advances are made with respect to oil and gas usage.A significant number of established businesses, including oil and gas companies, alternative vehicle and alternative fuel companies, natural gas utilities and their affiliates, industrialgas companies, truck stop and fuel station operators, fuel providers and other organizations have entered or are planning to enter the market for natural gas and other alternatives foruse as vehicle fuels. Many of these current and potential competitors have substantially greater financial, marketing, research and other resources than ANG has. Several natural gasutilities and their affiliates own and operate public access CNG stations that compete with ANG’s stations.12Government Regulation and Environmental MattersCertain aspects of ANG’s operations are subject to regulation under federal, state, local and foreign laws. If ANG were to violate these laws or if the laws were to change, it couldhave a material adverse effect on ANG’s business, financial condition and results of operations. Regulations that significantly affect ANG’s operations are described below.CNG Stations: To construct a CNG fueling station, ANG must satisfy permitting and other requirements and either ANG or a third-party contractor must be licensed as a generalengineering contractor. Each CNG fueling station must be constructed in accordance with federal, state, NFPA-52 and local regulations pertaining to station design, environmentalhealth, accidental release prevention, above-ground storage tanks, hazardous waste and hazardous materials. ANG is also required to register with certain state agencies as aretailer/wholesaler of CNG.ANG believes it is in material compliance with environmental laws and regulations and other known regulatory requirements. Compliance with these regulations has not had amaterial effect on ANG’s capital expenditures, earnings or competitive position; however, new laws or regulations or amendments to existing laws or regulations to make themmore stringent, such as more rigorous air emissions requirements, proposals to make waste materials subject to more stringent and costly handling, disposal and clean-uprequirements or regulations of greenhouse gas emissions, could require ANG to undertake significant capital expenditures in the future.Telecommunications Segment (PTGi-International Carrier Services, Inc.)Services and CustomersICS business unit provides customers with internet-protocol-based and time-division multiplexing ("TDM") access and transport of long-distance voice minutes.NetworkGeneral: ICS operates a global telecommunications network consisting of international gateway and domestic switching and related peripheral equipment, and carrier-grade routersand switches for Internet and circuit-based services. To ensure high-quality communications services, ICS’s network employs digital switching and fiber optic technologies,incorporates the use of Voice-over-Internet Protocol protocols and SS7/C7 signaling, and is supported by comprehensive network monitoring and technical support services.Switching Systems: ICS’s network makes use of a carrier-grade international gateway and domestic switch system, Internet routers and media gateways in the U.S and points ofpresence throughout the world via third party interconnections.Foreign Carrier Agreements: In selected countries where competition with the traditional Post Telegraph and Telecommunications companies ("PTTs") is limited, ICS has enteredinto foreign carrier agreements with PTTs or other service providers that permit ICS to provide traffic into, and receive return traffic from, these countries.Network Management and Control: ICS owns and operates network management systems in Herndon, Virginia which are used to monitor and control ICS's switching systems,global data network, and other digital transmission equipment used in ICS's network. Additional network monitoring, network management, and traffic management services aresupported from ICS's contingent Network Management Center located in Guatemala City, Guatemala. The network management control centers are constantly online.Sales and MarketingICS markets its services through a variety of sales channels, as summarized below:•Trade Shows: ICS attends industry trade shows around the globe throughout the year. At each trade show ICS markets to both existing and potential new customersthrough prearranged meetings, social gatherings and networking; and•Business Development: ICS's world class sales team focuses on developing ICS’s business potential around the globe through ongoing communication and face-to-facemeetings.Management Information and Billing SystemsICS operates management information, network and customer billing systems supporting the functions of network and traffic management, customer service and customer billing.For financial reporting, ICS consolidates information from each of ICS's markets into a single database.ICS believes that its financial reporting and billing systems are generally adequate to meet its business needs. However, in the future, ICS may determine that it needs to investadditional capital to purchase hardware and software, license more specialized software and increase its capacity.13CompetitionICS faces significant competition as it attempts to win the business of other telecommunications carriers and resellers. ICS competes on the basis of price, service quality, financialstrength, relationship and presence. Sales of wholesale long-distance voice minutes are generated by connecting one telecommunications operator to another and charging a fee to doso.Government RegulationICS is subject to varying degrees of regulation in each of the jurisdictions in which it operates. Local laws and regulations, and the interpretation of such laws and regulations, differamong those jurisdictions. There can be no assurance that; (1) future regulatory, judicial and legislative changes will not have a material adverse effect on it; (2) domestic orinternational regulators or third parties will not raise material issues with regard to its compliance or noncompliance with applicable regulations; or (3) regulatory activities will nothave a material adverse effect on it.Regulation of the telecommunications industry continues to change rapidly in many jurisdictions. Privatization, deregulation, changes in regulation, consolidation, and technologicalchange have had, and will continue to have, significant effects on the industry. Although we believe that continuing deregulation with respect to portions of the telecommunicationsindustry will create opportunities for firms such as us, there can be no assurance that deregulation and changes in regulation will be implemented in a manner that would benefitICS.The regulatory frameworks in certain jurisdictions in which we provide services as of December 31, 2017 are described below:United StatesIn the United States, ICS's services are subject to the provisions of the Communications Act of 1934, as amended (the "Communications Act"), and other federal laws, rules, andorders of the Federal Communications Commission ("FCC") regulations, and the applicable laws and regulations of the various states.ICS's interstate telecommunications services are subject to various specific common carrier telecommunications requirements set forth in the Communications Act and the FCC’srules and orders, including operating, reporting and fee requirements. Both federal and state regulatory agencies have broad authority to impose monetary and other penalties on ICSfor violations of regulatory requirements.International Service RegulationThe FCC has jurisdiction over common carrier services linking points in the U.S. to points in other countries, and ICS provides such services. Providers of such internationalcommon carrier services must obtain authority from the FCC under Section 214 of the Communications Act. ICS has obtained the authorizations required to use, on a facilities andresale basis, various transmission media for the provision of international switched services and international private line services on a non-dominant carrier basis. The FCC isconsidering a number of possible changes to its rules governing international common carriers. We cannot predict how the FCC will resolve those issues or how its decisions willaffect ICS's international business. FCC rules permit non-dominant carriers such as ICS to offer some services on a detariffed basis, where competition can provide consumers withlower rates and choices among carriers and services.On November 29, 2012, the FCC released an order removing the requirement for facilities-based U.S. carriers, like ICS, with operating agreements with dominant foreign carriers,to abide by the FCC’s International Settlements Policy by following uniform accounting rates, an even split in settlement rates, and proportionate return of traffic, for agreementswith carriers on all remaining U.S.-international routes with the exception of Cuba, thereby allowing carriers to negotiate market-based arrangements on those routes. TheNovember 29, 2012 order also adopted a requirement for U.S. carriers to provide information about any above-benchmark settlement rates to the FCC on an as-needed basis inconnection with an investigation or competition problems on selected routes or review of high consumer rates on either multiple or selected routes. ICS may take advantage of thesemore flexible arrangements with non-dominant foreign carriers, and the greater pricing flexibility that may result, but ICS may also face greater price competition from otherinternational service carriers. On November 9, 2015, the FCC issued a Public Notice indicating that it has begun the process of including Cuba within the liberalized settlementspolicy established in 2012. In January 2016 the FCC’s International Bureau removed Cuba from the "exclusion list" applicable to international Section 214 authorizations, which isintended to facilitate the provision of facilities-based competition between the United States and Cuba. In February 2016, the FCC formally proposed to remove certain non-discrimination requirements for traffic along the US-Cuba route. We cannot predict the actions the FCC will take in the future or their potential effect on international terminationrates, costs, or revenues.Domestic Service RegulationWith respect to ICS's domestic U.S. telecommunications services, ICS is considered a non-dominant interstate carrier subject to regulation by the FCC. FCC rules provide ICSsignificant authority to initiate or expand its domestic interstate operations, but ICS is required to obtain FCC approval to assume control of another telecommunications carrier or itsassets, to transfer control of ICS's operations to another entity, or to discontinue service. ICS is also required to file various reports and pay various fees and assessments to theFCC and various state commissions. Among other things, interstate common carriers must offer service on a nondiscriminatory basis at just and reasonable rates. The FCC hasjurisdiction to hear complaints regarding ICS's compliance or non-compliance with these and other requirements of the Communications Act and the FCC’s rules. Among otherregulations, ICS is subject to the Communications Assistance for Law Enforcement Act ("CALEA") and associated FCC regulations which require telecommunications carriers toconfigure their networks to facilitate law enforcement authorities to perform electronic surveillance.14On November 8, 2013, the FCC released an order related to the completion of calls to rural areas. The order applies recordkeeping, retention and reporting obligations to certainproviders of retail long-distance voice service. The rules require those providers to collect and retain information on long-distance call attempts such as, but not limited to, the callednumber, the date and time of the call, and the use of an intermediate provider. The order also prohibits false audible ringing (the premature triggering of audible ring tones to thecaller before the call setup request has reached the terminating service provider). While ICS is not directly subject to these rules, ICS may function as an intermediate provider withinthe meaning of these rules, which may require ICS to provide information to its customers regarding calls that it carries on their behalf. We do not expect the costs of providing thatinformation to be material.Interstate and international telecommunications carriers are required to contribute to the federal Universal Service Fund ("USF"). Carriers providing wholesale telecommunicationsservices are not required to contribute with respect to services sold to customers that provide a written certification that the customers themselves will make the requiredcontributions. If the FCC or the USF Administrator were to determine that the USF reporting for the Company, including ICS, is not accurate or in compliance with FCC rules, ICScould be subject to additional contributions, as well as to monetary fines and penalties. In addition, the FCC is considering revising its USF contribution mechanisms and theservices considered when calculating the contribution. ICS cannot predict the outcome of these proceedings or their potential effect on ICS's contribution obligations. Some changesto the USF under consideration by the FCC may affect certain entities more than others, and we may be disadvantaged as compared to ICS's competitors as a result of FCCdecisions regarding USF. In addition, the FCC may extend the obligation to contribute to the USF to certain services that ICS offers but that are not currently assessed USFcontributions. FCC rules require providers that originate interstate or intrastate traffic on or destined for the public switched telephone network ("PSTN") to transmit the telephone numberassociated with the calling party to the next provider in the call path. Intermediate providers, such as ICS, must pass calling party number ("CPN") or charge number ("CN")signaling information they receive from other providers unaltered, to subsequent providers in the call path. While ICS believes that it is in compliance with this rule, to the extent thatit passes traffic that does not have appropriate CPN or CN information, ICS could be subject to fines, cease and desist orders, or other penalties. Insurance Segment (Continental Insurance Group Ltd.)On December 24, 2015, we completed the acquisitions of United Teacher Associates Insurance Company ("UTA") and Continental General Insurance Company ("CGI") (togetherthe "Insurance Company") for aggregate consideration of approximately $18.6 million. The operations of the Insurance Company were consolidated into the insurance operatingsegment, CIG.The Insurance Company filed applications with the Ohio Department of Insurance ("ODOI") and the Texas Department of Insurance ("TDOI") to redomesticate CGI from Ohio toTexas. In conjunction with the redomestication, the Insurance Company filed a request with the TDOI to merge UTA and CGI (with CGI as the surviving entity), which wasapproved as of December 31, 2016.StrategyCIG currently provides long-term care, life and annuity coverage to approximately 88,000 individuals through CGI. The benefits provided by CIG's insurance operations helpprotect policy and certificate holders from the financial hardships associated with illness, injury, loss of life, or income discontinuation.CIG has a concentrated focus on long-term care insurance and is committed to the continued delivery to its policy and certificate holders of the best-practices services established byCIG's insurance operations to its policy and certificate holders. Through investments in technology, a commitment to attracting, developing and retaining best-in-class insuranceprofessionals, a dedication to continuing process improvements, and a focus on strategic growth, we believe CIG is well equipped to maintain and improve the level of serviceprovided to its customers and assume a leading role in the long-term care industry.CIG’s plan is to leverage its existing platform and industry expertise to identify strategic growth opportunities for managing closed blocks of long-term care business. Growthopportunities are expected to come from:•Future acquisitions of long-term care businesses and/or closed blocks of long-term care policies;•Reinsurance arrangements; and•Third party administration arrangements.ProductsLong-Term Care InsuranceCIG's long-term care insurance products pay a benefit that is either a specified daily indemnity amount or reimbursement of actual charges up to a daily maximum for long-term careservices provided in the insured’s home or in assisted living or nursing facilities. Benefits begin after a waiting period, usually 90 days or less, and are generally paid for a period ofthree years, six years, or lifetime.Substantially all of the in-force long-term care insurance policies were sold after 1995, with all sales then being discontinued in January 2010. Policies were issued in all statesexcept for New York, with Texas being the largest issue state with over 20% of the business. The existing block of policies includes both individual and group products, but allindividuals were individually underwritten. CIG's long-term care insurance products were sold on a guaranteed renewable basis which allows us to re-price in-force policies, subjectto regulatory approval. As part of15CIG's strategy for its long-term care insurance business, management has been implementing, and expects to continue to pursue, significant premium rate increases on its blocks ofbusiness as actuarially justified. Premium rates vary by age and are based on assumptions concerning morbidity, mortality, persistency, administrative expenses, and investmentyields. CIG develops its assumptions based on its own claims and persistency experience and published industry tables.Life Insurance and AnnuitiesCIG's life insurance products include Traditional, Term, Universal, and Interest Sensitive Life Insurance. Its annuity products include Flexible and Single Premium DeferredAnnuities. CIG's life insurance business provides a personal financial safety net for individuals and their families. These products provide protection against financial hardship afterthe death of an insured. Some of these products also offer a savings element that can help accumulate funds to meet future financial needs. Annuities are long-term retirement savinginstruments that benefit from income accruing on a tax-deferred basis. The issuer of the annuity collects premiums, credits interest or earnings on the policy and pays out a benefitupon death, surrender or annuitization. All life insurance and annuity products are closed to new business. The life insurance products were issued with both full and simplifiedunderwriting.CustomersCIG's long-term care insurance policies were marketed and sold to individuals between 1986 and 2010 for the purpose of providing defined levels of protection against thesignificant and escalating costs of long-term care services provided in the insured’s home or in assisted living or nursing facilities. Though CIG no longer actively markets newlong-term care insurance products, it continues to service and receive net renewal premiums on its in-force block of approximately 88,000 lives.Employees and OperationsAs of December 31, 2017, CIG employed 99 people full-time, the majority of whom are employed on a salaried basis with some on an hourly basis. Besides two remote employeesworking in California and Indiana, all other employees work out of the home office located in Austin, Texas. CIG considers its relations with its employees to be satisfactory andhas never experienced a work stoppage or other labor disturbance. All operating centers maintain a cost effective and efficient operating model.Transition Services and Administrative Services AgreementUpon the purchase of the Insurance Company on December 24, 2015 a transition services agreement "(the "Transition Services Agreement") was entered into with the prior owner,Great American Financial Resources ("Great American") in Cincinnati, Ohio, pursuant to which Great American agreed to continue to perform certain business functions such asIT, finance, investment, and accounting for a period of 12 to 16 months to allow us time to secure the resources needed to take over those duties. IT, finance, investment andaccounting roles were filled and/or outsourced in fiscal year 2016, and services received under the Transition Services Agreement ended on March 31, 2017. Simultaneously, anAdministrative Services Agreement (the "Administrative Services Agreement") was entered into with Great American, pursuant to which Great American Life Insurance Company("GALIC") agreed to continue to administer the Insurance Company’s life and annuity businesses for a period of no less than five years.ReinsuranceCIG reinsures a significant portion of its insurance business with unaffiliated reinsurers. In a reinsurance transaction, a reinsurer agrees to indemnify another insurer for part or allof its liability under a policy or policies it has issued for an agreed upon premium. CIG participates in reinsurance activities in order to minimize exposure to significant risks, limitlosses, and provide additional capacity for future growth. CIG also obtains reinsurance to meet certain capital requirements.Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse CIG for the ceded amount in the event a claim is paid. Cessions under reinsurance agreements donot discharge CIG's obligations as the primary insurer. In the event that reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurancerecoverable balances could become uncollectible. CIG's amounts recoverable from reinsurers represent receivables from and/or reserves ceded to reinsurers.Reserves for Policy Contracts and BenefitsThe applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their outstandingpolicies. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to besufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specifiedmortality and morbidity tables, interest rates, and methods of valuation required for statutory accounting.CIG calculates reserves in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which calculations can differ from thosespecified by the laws of the various states and reported in the statutory financial statements. These differences result from the use of mortality and morbidity tables and interestassumptions which CIG believes are more representative of the expected experience for these policies than those required for statutory accounting purposes and also result fromdifferences in actuarial reserving methods.16The assumptions CIG uses to calculate its reserves are intended to represent an estimate of experience for the period that policy benefits are payable. If actual experience is morefavorable than our reserve assumptions, then reserves should be adequate to provide for future benefits and expenses. If experience is less favorable than the reserve assumptions,additional reserves may be required. The key experience assumptions include claim incidence rates, claim resolution rates, mortality and morbidity rates, policy persistency, interestrates, crediting spreads, and premium rate increases. CIG periodically reviews its experience and updates its policy reserves and reserves for all claims incurred, as it believesappropriate.The statements of income include the annual change in reserves for future policy and contract benefits. The change reflects a normal accretion for premium payments and interestbuildup and decreases for policy terminations such as lapses, deaths, and benefit payments. If policy reserves using best estimate assumptions as of the date of a test for lossrecognition are higher than existing policy reserves net of any deferred acquisition costs, the increase in reserves necessary to recognize the deficiency is also included in the changein reserves for future policy and contract benefits.For further discussion of reserves, refer to "Risk Factors" contained herein in Item 1A, "Critical Accounting Estimates" and the discussion of segment operating results included in"Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Note 2. Summary of Significant Accounting Policies, ofthe "Notes to Consolidated Financial Statements".InvestmentsCIG manages its cash and invested assets using an approach that is intended to balance quality, diversification, asset/liability matching, liquidity needs and investment return. Thegoals of the investment process are to optimize after-tax, risk-adjusted investment income and after-tax, risk-adjusted total return while managing the assets and liabilities on a cashflow and duration basis. CIG’s liabilities are primarily supported by investments in investment grade, fixed maturity securities reflected on the Company’s consolidated balancesheets.Under the Transition Services Agreement, American Money Management, a subsidiary of American Financial Group, agreed to continue to perform investment managementservices related to the Insurance Company for a period of 12 to 16 months, which ended in 2017.The Company filed an Investment Management Agreement Form D application with the TDOI to appoint CIG, an affiliate, as investment manager effective January 1, 2017. TheTDOI issued a "no action" letter dated December 19, 2016 with regard to the Form D application.RegulationCIG's insurance company subsidiary is subject to regulations in the jurisdictions where it does business. In general, the insurance laws of the various states establish regulatoryagencies with broad administrative powers governing, among other things, premium rates, solvency standards, licensing of insurers, agents and brokers, trade practices, forms ofpolicies, maintenance of specified reserves and capital for the protection of policyholders, deposits of securities for the benefit of policyholders, investment activities andrelationships between insurance subsidiaries and their parents and affiliates. Material transactions between insurance subsidiaries and their parents and affiliates generally mustreceive prior approval of the applicable insurance regulatory authorities and be disclosed. In addition, while differing from state to state, these regulations typically restrict themaximum amount of dividends that may be paid by an insurer to its shareholders in any twelve-month period without advance regulatory approval. Such limitations are generallybased on net earnings or statutory surplus.The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), among other things, established a Federal Insurance Office ("FIO") within theU.S. Treasury. The Dodd-Frank Act requires the promulgation of regulations for the FIO to carry out its mandate to focus on systemic risk oversight. The FIO gatheredinformation regarding the insurance industry and submitted a report to Congress in December 2013. The report concluded that a hybrid approach to regulation, involving acombination of state and federal government action, could improve the U.S. insurance system by attaining uniformity, efficiency and consistency, particularly with respect tosolvency and market conduct regulation. The FIO has issued additional reports since that time on various aspects of the insurance sector and insurance regulation. Legislativeproposals currently before Congress, as well as a 2017 report from the Trump Administration, call for refinements of the FIO’s mission including more coordination with stateregulators. We cannot predict the extent to which any of these matters might result in changes to the current state-based system of insurance industry regulation or ultimately impactthe Company’s operations.Most states have created insurance guaranty associations that assess solvent insurers to pay claims of insurance companies that become insolvent. Financial impact of annualguaranty assessments for CGI has not been material.CompetitionCIG competes with financial services firms with respect to the acquisition of insurance companies and/or blocks of insurance businesses through merger, stock purchase, orreinsurance transactions or otherwise.17Life Sciences Segment (Pansend Life Sciences, LLC )Pansend focuses on the development of innovative technologies and products in the healthcare industry. As of December 31, 2017, Pansend has invested in the following fivecompanies:•BeneVir Biopharm, Inc. ("BeneVir"), a development stage company focused on the development of a patent-protected oncolytic virus, BV-2711, for the treatment of solidcancer tumors. BeneVir’s pre-clinical pipeline consists of oncolytic viruses delivered locally or systemically. Once inside tumors, the viruses are designed to selectivelydestroy cancer cells, evade elimination by the immune system, and activate multiple classes of anti-tumor immune cells. This multi-mechanistic approach builds upon keyelements of both oncolytic virus and immune-checkpoint inhibitor approaches to cancer treatment and is designed to block the major methods that tumors use to subvertthe immune system. BeneVir holds an exclusive worldwide license for BV-2711, a patent-protected novel compound;•R2 Dermatology, Incorporated ("R2"), a company developing medical devices for the treatment of aesthetic and medical skin conditions. In July 2017, R2 receivednotification from the United States Food and Drug Administration of market clearance of R2's second generation device, the R2 Dermal Cooling System. The R2 DermalCooling System is a cryosurgical instrument intended for use in dermatologic procedures for the removal of benign lesions of the skin, based on exclusive licensing rightsto a novel technology developed at Massachusetts General Hospital and Harvard Medical School;•Genovel Orthopedics, Inc. ("Genovel"), a company developing novel partial and total knee replacements for the treatment of osteoarthritis of the knee based on patent-protected technology invented at New York University School of Medicine;•MediBeacon, Inc. ("MediBeacon"), a company developing a proprietary non-invasive real-time monitoring system for the evaluation of kidney function. This system(known as the MediBeacon Optical Renal Function Monitor system) uses an optical skin sensor combined with a proprietary agent that glows in the presence of light. Itwill be the first and only, non-invasive system to enable real-time, direct monitoring of renal function at point-of-care. On March 2, 2017, MediBeacon announced thesuccessful completion of a real-time, point of care renal function clinical study on subjects with impaired kidney function at Washington University in St. Louis. On June8, 2016, MediBeacon announced the completion of the acquisition of Mannheim Pharma & Diagnostics, a life science company based in Mannheim, Germany. Recently,MediBeacon announced a collaborative research project with scientists at Washington University School of Medicine in St. Louis, Missouri in a research project aimed atimproving the understanding of childhood malnutrition and its related problems, including stunted growth. The work is funded by a Grand Challenges Explorations PhaseII grant from the Bill & Melinda Gates Foundation to Washington University. It is a follow-up grant to work carried out through a Phase I Grand ChallengesExplorations Award made in 2014. MediBeacon was also recently the recipient of a Small Business Innovation Research grant supported by the National Eye Institute ofthe National Institutes of Health (NIH). With this support, MediBeacon is pursuing research into the use of a MediBeacon fluorescent tracer agent to visualize vasculaturein the eye. The focus of the NIH-supported project is to determine if a specific proprietary MediBeacon tracer agent when administered has the potential to provideadditional clinical value versus the existing standard of care; and•Triple Ring Technologies, a research and development engineering company specializing in medical devices, homeland security, imaging sensors, optics, fluidics, roboticsand mobile healthcare.Other Businesses and InvestmentsHC2's Other segment is comprised of of controlling interests in the following entities:•704Games f/k/a DMi, Inc. owns licenses to create and distribute NASCAR® video games 704Games has released three NASCAR® console games, and multipleNASCAR® mobile games.•Broadcasting strategically acquires broadcast assets across the United States. Broadcasting's vision is to capitalize on the opportunities to bring valuable content to moreviewers over-the-air and position the Company for a changing media landscape.In addition, Other includes noncontrolling interests in various investments. See Note 20. Operating Segment and Related Information for additional detail regarding our operating segments and financial information by geographic area.Environmental Regulation and LawsOur operations and properties, including those of DBMG and GMSL, are subject to a wide variety of increasingly complex and stringent foreign, federal, state and localenvironmental laws and regulations, including those concerning emissions into the air, discharge into waterways, generation, storage, handling, treatment and disposal of wastematerials and health and safety of employees. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminalprosecution. Some environmental laws provide for strict, joint and several liability for remediation of spills and other releases of hazardous substances, as well as damage to naturalresources. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. These laws andregulations may also expose us to liability for the conduct of or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such actswere performed.18Compliance with federal, state and local provisions regulating the discharge of materials into the environment or relating to the protection of the environment has not had a materialimpact on our capital expenditures, earnings or competitive position. Based on our experience to date, we do not currently anticipate any material adverse effect on our business orconsolidated financial position, results of operations or cash flows as a result of future compliance with existing environmental laws and regulations. However, future events, suchas changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of existing lawsand regulations, may require additional expenditures by us, which may be material. Accordingly, there can be no assurance that we will not incur significant environmentalcompliance costs in the future.Corporate InformationHC2, a Delaware corporation was incorporated in 1994. The Company’s executive offices are located at 450 Park Avenue, 30th Floor, New York, NY, 10022. The Company’stelephone number is (212) 235-2690. Our Internet address is www.hc2.com. We make available free of charge through our Internet website our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended,as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (the "SEC"). Theinformation on our website is not a part of this Annual Report on Form 10-K.The information required by this item relating to our executive officers, directors and code of conduct is set forth below. Information relating to beneficial ownership reportingcompliance will be set forth in our 2018 Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference.Information relating to our Audit Committee and Audit Committee Financial Expert will be set forth in our 2018 Proxy Statement under the Caption "Board Committees" and isincorporated herein by reference.ITEM 1A. RISK FACTORSThe following risk factors and the forward-looking statements elsewhere herein should be read carefully in connection with evaluating the business of the Company and itssubsidiaries. A wide range of events and circumstances could materially affect our overall performance, the performance of particular businesses and our results of operations, andtherefore, an investment in us is subject to risks and uncertainties. In addition to the important factors affecting specific business operations and the financial results of thoseoperations identified elsewhere in this Annual Report on Form 10-K, the following important factors, among others, could adversely affect our operations. While each risk isdescribed separately below, some of these risks are interrelated and it is possible that certain risks could trigger the applicability of other risks described below. Also, the risks anduncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us, or that are currently deemed immaterial, could alsopotentially impair our overall performance, the performance of particular businesses and our results of operations. These risk factors may be amended, supplemented or supersededfrom time to time in filings and reports that we file with the SEC in the future.Risks Related to Our BusinessesHC2 is a holding company and its only material assets are its cash in hand, equity interests in its operating subsidiaries and its other investments. As a result, HC2’sprincipal source of revenue and cash flow is distributions from its subsidiaries and its subsidiaries may be limited by law and by contract in making distributions to HC2.As a holding company, HC2's assets are its cash and cash equivalents, the equity interests in its subsidiaries and other investments. As of December 31, 2017, we had $29.4 millionin cash and cash equivalents at the corporate level at HC2.HC2’s principal source of revenue and cash flow is distributions from its subsidiaries. Thus, its ability to service its debt, including the $400 million in aggregate principal amountof 11.0% Senior Secured Notes due 2019 (the "11.0% Notes"), and to finance future acquisitions is dependent on the ability of its subsidiaries to generate sufficient net income andcash flows to make upstream cash distributions to HC2. HC2’s subsidiaries are separate legal entities, and although they may be wholly-owned or controlled by HC2, they have noobligation to make any funds available to HC2, whether in the form of loans, dividends, distributions or otherwise. The ability of HC2’s subsidiaries to distribute cash to it are andwill remain subject to, among other things, restrictions that are contained in its subsidiaries’ financing agreements, availability of sufficient funds and applicable state laws andregulatory restrictions. For instance, each of DBMG and GMSL are borrowers under credit facilities that restrict their ability to make distributions or loans to HC2. Specifically,DBMG is party to credit agreements that include certain financial covenants that can limit the amount of cash available to make upstream dividend payments to HC2. For additionalinformation, See Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of operations - Liquidity and Capital Resources."Claims of creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extentthe ability of HC2’s subsidiaries to distribute dividends or other payments to HC2 could be limited in any way, our ability to grow, pursue business opportunities or makeacquisitions that could be beneficial to our businesses, or otherwise fund and conduct our business could be materially limited. In addition, if HC2 depends on distributions andloans from its subsidiaries to make payments on HC2’s debt, and if such subsidiaries were unable to distribute or loan money to HC2, HC2 could default on its debt, which wouldpermit the holders of such debt to accelerate the maturity of the debt which may also accelerate the maturity of other debt of ours with cross-default or cross-acceleration provisions.19To service our indebtedness and other obligations, we will require a significant amount of cash.Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations, including under our outstanding indebtedness, andour obligations under our outstanding shares of preferred stock, could harm our business, financial condition and results of operations. Our ability to make payments on and torefinance our indebtedness and outstanding preferred stock and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in thefuture. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control. For a descriptionof our and our subsidiaries indebtedness, see Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 13. Debt Obligations, ofthe "Notes to Consolidated Financial Statements."If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us and our subsidiaries to payour indebtedness or make mandatory redemption payments with respect to our outstanding shares of preferred stock, or to fund our other liquidity needs, we may need to refinanceall or a portion of our indebtedness or redeem the preferred stock, on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital,any of which could have a material adverse effect on us.In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness orredeem the preferred stock will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt or financings related to theredemption of our preferred stock could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.The terms of existing or future debt instruments or preferred stock may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments ofinterest and principal on our outstanding indebtedness or dividend payments on our outstanding shares of preferred stock would likely result in a reduction of our credit rating,which could harm our ability to incur additional indebtedness or otherwise raise capital on commercially reasonable terms or at all. Our inability to generate sufficient cash flow tosatisfy our debt service and other obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could bematerial, on our business, financial condition and results of operations.The agreements governing our indebtedness and Certificate of Designations for our outstanding shares of preferred stock contain various covenants that limit ourdiscretion in the operation of our business and/or require us to meet financial maintenance tests and other covenants. The failure to comply with such tests and covenantscould have a material adverse effect on us.The agreements governing our indebtedness and the Certificate of Designations for our outstanding shares of preferred stock contain, and any of our other future financingagreements may contain, covenants imposing operating and financial restrictions on our businesses.The indenture governing the 11.0% Notes dated November 20, 2014, by and among HC2, the guarantors party thereto and U.S. Bank National Association, a national bankingassociation ("U.S. Bank"), as trustee (the "11.0% Notes Indenture"), contain, and any future indentures may contain, various covenants, including those that restrict our ability to,among other things:•incur liens on our property, assets and revenue;•borrow money, and guarantee or provide other support for the indebtedness of third parties;•redeem or repurchase our capital stock;•prepay, redeem or repurchase certain of our indebtedness, including our preferred stock;•enter into certain change of control transactions;•make investments in entities that we do not control, including joint ventures;•enter into certain asset sale transactions, including divestiture of certain Company assets and divestiture of capital stock of wholly-owned subsidiaries;•enter into certain transactions with affiliates;•enter into secured financing arrangements; and•enter into sale and leaseback transactions.The debt facilities at our subsidiaries contain similar covenants applicable to each respective subsidiary. These covenants may limit our ability to effectively operate our businesses.For example, Broadcasting’s Bridge Loan includes financial covenants requiring the Company to maintain a (i) minimum consolidated collateral ratio and (ii) minimum liquiditylevel. In addition, DBMG has an indemnity agreement with its surety bond provider that also contains covenants on retention of capital and working capital requirements forDBMG, which may limit the amount of dividends DBMG may pay to its shareholders.In addition, the 11.0% Notes Indenture requires that we meet certain financial tests, including a collateral coverage ratio and minimum liquidity test. Our ability to satisfy these testsmay be affected by factors and events beyond our control, and we may be unable to meet such tests in the future.Any failure to comply with the restrictions in the agreements governing our indentures, or any agreement governing other indebtedness we could incur, may result in an event ofdefault under those agreements. Such default may allow the creditors to accelerate the related debt, which acceleration may trigger cross-acceleration or cross-default provisions inother debt. If any of these risks were to occur, our business and operations could be materially and adversely affected.20The Certificates of Designation provide the holders of our preferred stock with consent and voting rights with respect to certain of the matters referred to above, in addition tocertain corporate governance rights. These restrictions may interfere with our ability to obtain financings or to engage in other business activities, which could have a materialadverse effect on our business and operations.We have significant indebtedness and other financing arrangements and could incur additional indebtedness and other obligations, which could adversely affect ourbusiness and financial condition.We have a significant amount of indebtedness and outstanding shares of preferred stock. As of December 31, 2017, our total outstanding indebtedness was $593.2 million and theaccrued value of our outstanding preferred stock was $26.7 million. We may not generate enough cash flow to satisfy our obligations under such indebtedness and otherarrangements. In addition, in February 2018, Broadcasting borrowed $42.0 million in principal amount of Bridge Loans (as defined below). This significant amount of indebtednessposes risks such as risk of inability to repay such indebtedness, as well as:•increased vulnerability to general adverse economic and industry conditions;•higher interest expense if interest rates increase on our floating rate borrowings are not effective to mitigate the effects of these increases;•our 11.0% Notes are secured by substantially all of HC2’s assets and those of certain of HC2’s subsidiaries that have guaranteed the 11.0% Notes, including certainequity interests in our other subsidiaries and other investments, as well as certain intellectual property and trademarks, and those assets cannot be pledged to secure otherfinancings;•certain assets of our subsidiaries are pledged to secure their indebtedness, and those assets cannot be pledged to secure other financings;•our having to divert a significant portion of our cash flow from operations to payments on our indebtedness and other arrangements, thereby reducing the availability ofcash to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes;•limiting our ability to obtain additional financing, on terms we find acceptable, if needed, for working capital, capital expenditures, expansion plans and other investments,which may limit our ability to implement our business strategy;•limiting our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate or to take advantage of market opportunities; and•placing us at a competitive disadvantage compared to our competitors that have less debt and fewer other outstanding obligations.In addition, it is possible that we may need to incur additional indebtedness or enter into additional financing arrangements in the future in the ordinary course of business. Theterms of the 11.0% Notes Indenture and our subsidiaries’ other financing arrangements allow us to incur additional debt and issue additional shares of preferred stock, subject tocertain limitations. If additional indebtedness is incurred or equity is issued, the risks described above could intensify. In addition, our inability to maintain certain leverage ratioscould result in acceleration of a portion of our debt obligations and could cause us to be in default if we are unable to repay the accelerated obligations.We have experienced significant historical, and may experience significant future, operating losses and net losses, which may hinder our ability to meet working capitalrequirements or service our indebtedness, and we cannot assure you that we will generate sufficient cash flow from operations to meet such requirements or service ourindebtedness.We cannot assure you that we will recognize net income in future periods. If we cannot generate net income or sufficient operating profitability, we may not be able to meet ourworking capital requirements or service our indebtedness. Our ability to generate sufficient cash for our operations will depend upon, among other things, the future financial andoperating performance of our operating business, which will be affected by prevailing economic and related industry conditions and financial, business, regulatory and other factors,many of which are beyond our control. We recognized a net loss attributable to HC2 of $49.7 million in 2017, a net loss of $105.4 million in 2016, a net loss of $39.9 million in2015, and have incurred net losses in prior periods.We cannot assure you that our business will generate cash flow from operations in an amount sufficient to fund our liquidity needs. If our cash flows and capital resources areinsufficient, we may be forced to reduce or delay capital expenditures, sell assets and/or seek additional capital or financings. Our ability to obtain future financings will depend onthe condition of the capital markets and our financial condition at such time. Any financings could be at high interest rates and may require us to comply with covenants in additionto, or more restrictive than, covenants in our current financing documents, which could further restrict our business operations. In the absence of such operating results andresources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our obligations. We may not be able to consummatethose dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such disposition may not be adequate to meet our obligations. Werecognized cash flows from operating activities of $6.1 million in 2017, $79.1 million in 2016, and ($27.9) million in 2015.We are dependent on certain key personnel, the loss of which may adversely affect our financial condition or results of operations.HC2 and its operating subsidiaries depend, and will continue to depend in the foreseeable future, on the services of HC2’s and our operating subsidiary teams, in particular, ourChief Executive Officer, Philip Falcone, and other key personnel, which may consist of a relatively small number of individuals that possess sales, marketing, engineering, financial,technical and other skills that are critical to the operation of our businesses. The executive management teams that lead our subsidiaries are also highly experienced and possessextensive skills in their relevant industries. The ability to retain key personnel is important to our success and future growth. Competition for these professionals can be intense, andwe may not be able to retain and motivate our existing officers and senior employees, and continue to compensate such individuals competitively. The unexpected loss of theservices of one or more of these individuals could have a detrimental effect on the financial condition21or results of operations of our businesses, and could hinder the ability of such businesses to effectively compete in the various industries in which we operate.We and our subsidiaries may not be able to attract and/or retain additional skilled personnel.We may not be able to attract new personnel, including management and technical and sales personnel, necessary for future growth, or replace lost personnel. In particular, theactivities of some of our operating subsidiaries, such as GMSL and CGI require personnel with highly specialized skills. Competition for the best personnel in our businesses canbe intense. Our financial condition and results of operations could be materially adversely affected if we are unable to attract and/or retain qualified personnel.We may identify material weaknesses in our internal control over financial reporting which could adversely affect our ability to report our financial condition and results ofoperations in a timely and accurate manner.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a materialmisstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2017 and 2016, management concluded that ourinternal control over financial reporting was effective.In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals or we otherwise identify one or more material weaknesses or significant deficiencies, thecorrection of any such material weakness or significant deficiency could require additional remedial measures including additional personnel which could be costly and time-consuming. If a material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time toevaluate and confirm the effectiveness of the corrections or related new procedures), our management will be unable to report favorably as of such future period year-end to theeffectiveness of our control over financial reporting. If we are unable to assert that our internal control over financial reporting is effective in any future period, we could loseinvestor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the trading price of our common stock and potentially subjectus to additional and potentially costly litigation and governmental inquiries/investigations.Fluctuations in the exchange rate of the U.S. dollar and in foreign currencies may adversely impact our results of operations and financial condition.We conduct various operations outside the United States, primarily in the United Kingdom. As a result, we face exposure to movements in currency exchange rates. Theseexposures include but are not limited to:•re-measurement gains and losses from changes in the value of foreign denominated assets and liabilities;•translation gains and losses on foreign subsidiary financial results that are translated into U.S. dollars, our functional currency, upon consolidation; and•planning risk related to changes in exchange rates between the time we prepare our annual and quarterly forecasts and when actual results occur.Material modifications of U.S. laws and regulations and existing trade agreements by the U.S. Presidential Administration could adversely affect our business, financialcondition and results of operations.There have been, and may continue to be, significant changes in U.S. laws and regulations and existing international trade agreements, including the North American Free TradeAgreement and the Trans-Pacific Partnership, by the U.S. Presidential Administration that could affect a wide variety of industries and businesses, including those businesses weown and operate. It remains unclear what impact these changes may have on our business, and what the administration will do further, if anything, with respect to existing laws,regulations or trade agreements. If the Presidential Administration continues to materially modify U.S. laws and regulations and international trade agreements, our business,financial condition and results of operations could be adversely affected.Because we face significant competition for acquisition and business opportunities, including from numerous companies with a business plan similar to ours, it may bedifficult for us to fully execute our business strategy. Additionally, our subsidiaries also operate in highly competitive industries, limiting their ability to gain or maintain theirpositions in their respective industries.We expect to encounter intense competition for acquisition and business opportunities from both strategic investors and other entities having a business objective similar to ours,such as private investors (which may be individuals or investment partnerships), blank check companies, and other entities, domestic and international, competing for the type ofbusinesses that we may acquire. Many of these competitors possess greater technical, human and other resources, or more local industry knowledge, or greater access to capital,than we do, and our financial resources may be relatively limited when contrasted with those of many of these competitors. These factors may place us at a competitive disadvantagein successfully completing future acquisitions and investments.In addition, while we believe that there are numerous target businesses that we could potentially acquire or invest in, our ability to compete with respect to the acquisition of certaintarget businesses that are sizable will be limited by our available financial resources. We may need to obtain additional financing in order to consummate future acquisitions andinvestment opportunities and cannot assure you that any additional financing22will be available to us on acceptable terms, or at all, or that the terms of our existing financing arrangements will not limit our ability to do so. This inherent competitive limitationgives others an advantage in pursuing acquisition and investment opportunities.Furthermore, our subsidiaries also face competition from both traditional and new market entrants that may adversely affect them as well, as discussed below in the risk factorsrelated to DBMG, GMSL, ANG, ICS, the Insurance Company, and Other.Future acquisitions or business opportunities could involve unknown risks that could harm our business and adversely affect our financial condition and results ofoperations.We are a diversified holding company that owns interests in a number of different businesses. We have in the past, and intend in the future, to acquire businesses or makeinvestments, directly or indirectly through our subsidiaries, that involve unknown risks, some of which will be particular to the industry in which the investment or acquisitiontargets operate, including risks in industries with which we are not familiar or experienced. There can be no assurance our due diligence investigations will identify every matter thatcould have a material adverse effect on us or the entities that we may acquire. We may be unable to adequately address the financial, legal and operational risks raised by suchinvestments or acquisitions, especially if we are unfamiliar with the relevant industry, which can lead to significant losses on material investments. The realization of any unknownrisks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the investments or acquisitions, which could adverselyaffect our financial condition and liquidity. In addition, our financial condition, results of operations and the ability to service our debt may be adversely impacted depending on thespecific risks applicable to any business we invest in or acquire and our ability to address those risks.We rely on information systems to conduct our businesses, and failure to protect these systems against security breaches and otherwise to implement, integrate, upgrade andmaintain such systems in working order could have a material adverse effect on our results of operations, cash flows or financial condition.The efficient operation of our businesses is dependent on computer hardware and software systems. For instance, HC2 and its subsidiaries rely on information systems to processcustomer orders, manage inventory and accounts receivable collections, purchase products, manage accounts payable processes, track costs and operations, maintain clientrelationships and accumulate financial results. Despite our implementation of industry-accepted security measures and technology, our information systems are vulnerable to andhave been in the past subject to computer viruses, malicious codes, unauthorized access, phishing efforts, denial-of-service attacks and other cyber attacks and we expect to besubject to similar attacks in the future as such attacks become more sophisticated and frequent. There can be no assurance that our cyber-security measures and technology willadequately protect us from these and other risks, including external risks such as natural disasters and power outages and internal risks such as insecure coding and human error.Attacks perpetrated against our information systems could result in loss of assets and critical information, theft of intellectual property or inappropriate disclosure of confidentialinformation and could expose us to remediation costs and reputational damage. In addition, the unexpected or sustained unavailability of the information systems or the failure ofthese systems to perform as anticipated for any reason, including cyber-security attacks and other intentional hacking, could subject us to legal claims if there is loss, disclosure ormisappropriation of or access to our customers’ information and could result in service interruptions, safety failures, security violations, regulatory compliance failures, an inabilityto protect information and assets against intruders, sensitive data being lost or manipulated and could otherwise disrupt our businesses and result in decreased performance,operational difficulties and increased costs, any of which could adversely affect our business, results of operations, financial condition or liquidity.We intend to increase our operational size in the future, and may experience difficulties in managing growth.We have adopted a business strategy that contemplates that we will expand our operations, including future acquisitions or other business opportunities, and as a result, we arerequired to increase our level of corporate functions, which may include hiring additional personnel to perform such functions and enhancing our information technology systems.Any future growth may increase our corporate operating costs and expenses and impose significant added responsibilities on members of our management, including the need toidentify, recruit, maintain and integrate additional employees and implement enhanced informational technology systems. Our future financial performance and our ability to competeeffectively will depend, in part, on our ability to manage any future growth effectively.We may not be able to fully utilize our net operating loss and other tax carryforwards.Our ability to utilize our NOL and other tax carryforward amounts to reduce taxable income in future years may be limited for various reasons. As a result of the enactment of theTCJA (as defined below), the NOL deduction for NOLs arising in tax years after December 31, 2017, will be limited to 80% of taxable income, although they can be carriedforward indefinitely. NOLs that arose prior to the years beginning January 1, 2018 are still subject to the same carryforward periods. In addition, our ability to fully utilize theseU.S. tax assets can be adversely affected by "ownership changes" within the meaning of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"). Anownership change is generally defined as a greater than 50% increase in equity ownership by "5% shareholders" (as that term is defined for purposes of Sections 382 and 383 ofthe Code) in any three-year period.In 2014, substantial acquisitions of our common stock were reported by new beneficial owners on Schedule 13D filings made with the SEC, and we issued shares of our preferredstock, which are convertible into a substantial number of shares of our common stock. During the second quarter of 2014, we completed a Section 382 review. The conclusions ofthis review indicated that an ownership change had occurred as of May 29, 2014.23As a result of our common stock offering in November 2015, we triggered another ownership change, imposing an additional limitation on the use of our NOL carryforwardamounts. This ownership change may impact the timing of our ability to use these losses. There can be no assurance that future ownership changes would not further negativelyimpact our NOL carryforward amounts because any future annual Section 382 limitation will ultimately depend on the value of our equity as determined for these purposes and theamount of unrealized gains immediately prior to such ownership change.We may incur additional tax liabilities related to our operations.On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the "TCJA") making significant changes to the Internal RevenueCode. Most of the provisions of the TCJA went into effect on January 1, 2018. The TCJA includes a number of provisions that are expected to impact our operating results, cashflows, and financial condition, including reducing the U.S. federal corporate tax rate from 35% to 21%, changing the taxation of foreign earnings, allowing for immediate expensingof qualified assets, repealing the Section 199 deduction, creating a new limitation on deductible interest expense, and changing the rules related to uses and limitation of NOLs fortax years beginning after December 31, 2017.We have restated certain of our financial statements in the past and may be required to do so in the future, which may lead to additional risks and uncertainties, includingshareholder litigation and loss of investor confidence.The preparation of financial statements in accordance with GAAP involves making estimates, judgments, interpretations and assumptions that affect reported amounts of assets,liabilities, revenues, expenses and income. These estimates, judgments, interpretations and assumptions are often inherently imprecise or uncertain, and any necessary revisions toprior estimates, judgments, interpretations or assumptions could lead to a restatement of our financial statements. For example, in March 2016, we restated certain of our historicalfinancial statements. Any such restatement or correction may be highly time consuming, may require substantial attention from management and significant accounting costs, mayresult in adverse regulatory actions by the SEC or NYSE, may result in stockholder litigation, may cause us to fail to meet our reporting obligations, and may cause investors to loseconfidence in our reported financial information, leading to a decline in our stock price.Our officers, directors, stockholders and their respective affiliates may have a pecuniary interest in certain transactions in which we are involved, and may also compete withus.While we have adopted a code of ethics applicable to our officers and directors reasonably designed to promote the ethical handling of actual or apparent conflicts of interestbetween personal and professional relationships, we have neither adopted a policy that expressly prohibits our directors, officers, stockholders or affiliates from having a direct orindirect pecuniary interest in any transaction to which we are a party or in which we have an interest nor do we have a policy that expressly prohibits any such persons fromengaging for their own account in business activities of the types conducted by us. We have in the past engaged in transactions in which such persons have an interest and, subjectto the terms of any applicable covenants in financing arrangements or other agreements we may enter into from time to time, may in the future enter into additional transactions inwhich such persons have an interest. In addition, such parties may have an interest in certain transactions such as strategic partnerships or joint ventures in which we are involved,and may also compete with us.In the course of their other business activities, certain of our current and future directors and officers may become aware of business and acquisition opportunities that maybe appropriate for presentation to us as well as the other entities with which they are affiliated. Such directors and officers are not required to and may therefore not presentotherwise attractive business or acquisition opportunities to us.Certain of our current and future directors and officers may become aware of business and acquisition opportunities which may be appropriate for presentation to us as well as theother entities with which they are or may be affiliated. Due to those directors’ and officers’ affiliations with other entities, they may have obligations to present potential businessand acquisition opportunities to those entities, which could cause conflicts of interest. Moreover, as permitted by Delaware law, our Certificate of Incorporation contains a provisionthat renounces our expectation to certain corporate opportunities that are presented to our current and future directors that serve in capacities with other entities. Accordingly, ourdirectors and officers may not present otherwise attractive business or acquisition opportunities to us of which they may become aware.We may suffer adverse consequences if we are deemed an investment company and we may incur significant costs to avoid investment company status.We believe we are not an investment company as defined by the Investment Company Act of 1940, and have operated our business in accordance with such view. If the SEC or acourt were to disagree with us, we could be required to register as an investment company. This would subject us to disclosure and accounting rules geared toward investment,rather than operating, companies; limit our ability to borrow money, issue options, issue multiple classes of stock and debt, and engage in transactions with affiliates; and require usto undertake significant costs and expenses to meet the disclosure and other regulatory requirements to which we would be subject as a registered investment company.We are subject to litigation in respect of which we are unable to accurately assess our level of exposure and which, if adversely determined, may have a material adverse effecton our financial condition and results of operations.We are currently, and may become in the future, party to legal proceedings that are considered to be either ordinary or routine litigation incidental to our current or prior businessesor not material to our financial position or results of operations. We also are currently, or may become in the future, party to legal proceedings with the potential to be material to ourfinancial position or results of operations. There can be no assurance24that we will prevail in any litigation in which we may become involved, or that our insurance coverage will be adequate to cover any potential losses. To the extent that we sustainlosses from any pending litigation which are not reserved or otherwise provided for or insured against, our business, results of operations, cash flows and/or financial conditioncould be materially adversely affected. See Item 3, "Legal Proceedings."Deterioration of global economic conditions could adversely affect our business.The global economy and capital and credit markets have experienced exceptional turmoil and upheaval over the past several years. Many major economies worldwide enteredsignificant economic recessions in recent times and continue to experience economic weakness, with the potential for another economic downturn to occur. Ongoing concerns aboutthe systemic impact of potential long-term and widespread recession and potentially prolonged economic recovery, volatile energy costs, geopolitical issues, the availability, cost andterms of credit, consumer and business confidence and demand, and substantially increased unemployment rates have all contributed to increased market volatility and diminishedexpectations for many established and emerging economies, including those in which we operate. These general economic conditions could have a material adverse effect on ourcash flow from operations, results of operations and overall financial condition.The availability, cost and terms of credit also have been and may continue to be adversely affected by illiquid markets and wider credit spreads. Concern about the stability of themarkets generally, and the strength of counterparties specifically, has led many lenders and institutional investors to reduce credit to businesses and consumers. These factors haveled to a decrease in spending by businesses and consumers over the past several years, and a corresponding slowdown in global infrastructure spending.Continued uncertainty in the U.S. and international markets and economies and prolonged stagnation in business and consumer spending may adversely affect our liquidity andfinancial condition, and the liquidity and financial condition of our customers, including our ability to access capital markets and obtain capital lease financing to meet liquidityneeds.We are subject to risks associated with our international operations.We operate in international markets, and may in the future consummate additional investments in or acquisitions of foreign businesses. Our international operations are subject to anumber of risks, including:•political conditions and events, including embargo;•restrictive actions by U.S. and foreign governments;•the imposition of withholding or other taxes on foreign income, tariffs or restrictions on foreign trade and investment;•adverse tax consequences;•limitations on repatriation of earnings and cash;•currency exchange controls and import/export quotas;•nationalization, expropriation, asset seizure, blockades and blacklisting;•limitations in the availability, amount or terms of insurance coverage;•loss of contract rights and inability to adequately enforce contracts;•political instability, war and civil disturbances or other risks that may limit or disrupt markets, such as terrorist attacks, piracy and kidnapping;•outbreaks of pandemic diseases or fear of such outbreaks;•fluctuations in currency exchange rates, hard currency shortages and controls on currency exchange that affect demand for our services and our profitability;•potential noncompliance with a wide variety of anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act of 1977 (the "FCPA"), and similarnon-U.S. laws and regulations, including the U.K. Bribery Act 2010 (the "Bribery Act");•labor strikes and shortages;•changes in general economic and political conditions;•adverse changes in foreign laws or regulatory requirements; and•different liability standards and legal systems that may be less developed and less predictable than those in the United States.If we are unable to adequately address these risks, we could lose our ability to operate in certain international markets and our business, financial condition or results of operationscould be materially adversely affected.The U.S. Departments of Justice, Commerce, Treasury and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose againstcompanies for violations of export controls, the FCPA, and other federal statutes, sanctions and regulations, including those established by the Office of Foreign Assets Control("OFAC") and, increasingly, similar or more restrictive foreign laws, rules and regulations. By virtue of these laws and regulations, and under laws and regulations in otherjurisdictions, including the European Union and the United Kingdom, we may be obliged to limit our business activities, we may incur costs for compliance programs and we maybe subject to enforcement actions or penalties for noncompliance.In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant agencies to continue toincrease these activities. A violation of these laws, sanctions or regulations could materially adversely affect our business, financial condition or results of operations.25The Company has compliance policies in place for its employees with respect to FCPA, OFAC, the Bribery Act and similar laws. Our operating subsidiaries also have relevantcompliance policies in place for their employees, which are tailored to their operations. However, there can be no assurance that our employees, consultants or agents, or those ofour subsidiaries or investees, will not engage in conduct for which we may be held responsible. Violations of the FCPA, the Bribery Act, the rules and regulations established byOFAC and other laws, sanctions or regulations may result in severe criminal or civil penalties, and we may be subject to other liabilities, which could materially adversely affect ourbusiness, financial condition or results of operations.Furthermore, significant developments stemming from the change in the U.S. Presidential Administration could have a material adverse effect on us. The U.S. PresidentialAdministration has expressed antipathy towards existing trade agreements, like NAFTA, and proposed restrictions on free trade generally and significant increases on tariffs ongoods imported into the United States, particularly from China. Further changes in U.S. social, political, regulatory and economic conditions or in laws and policies governingforeign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell products, and any negative sentiments towards theUnited States as a result of such changes, could adversely affect our business. In addition, negative sentiments towards the United States among non-U.S. customers and amongnon-U.S. employees or prospective employees could adversely affect sales or hiring and retention, respectively.We may be required to expend substantial sums in order to bring the companies we have acquired or may acquire in the future, into compliance with the various reportingrequirements applicable to public companies and/or to prepare required financial statements, and such efforts may harm our operating results or be unsuccessful altogether.The Sarbanes-Oxley Act of 2002, (the "Sarbanes-Oxley Act") requires our management to assess the effectiveness of the internal control over financial reporting for the companieswe acquire and our external auditor to attest to, and report on the internal control over financial reporting, for these companies. In order to comply with the Sarbanes-Oxley Act, wewill need to implement or enhance internal control over financial reporting at acquired companies and evaluate the internal controls. We do not conduct a formal evaluation ofcompanies’ internal control over financial reporting prior to an acquisition. We may be required to hire additional staff and incur substantial costs to implement the necessary newinternal controls at the companies we acquire. Any failure to implement required internal controls, or difficulties encountered in their implementation, could harm our operatingresults or increase the risk of material weaknesses in internal controls, which could, if not remediated, adversely affect our ability to report our financial condition and results ofoperations in a timely and accurate manner.We face certain risks associated with the acquisition or disposition of businesses and lack of control over certain of our investments.In pursuing our corporate strategy, we may acquire, dispose of or exit businesses or reorganize existing investments. The success of this strategy is dependent upon our ability toidentify appropriate opportunities, negotiate transactions on favorable terms and ultimately complete such transactions.In the course of our acquisitions, we may not acquire 100% ownership of certain of our operating subsidiaries or we may face delays in completing certain acquisitions, including inacquiring full ownership of certain of our operating companies. Once we complete acquisitions or reorganizations there can be no assurance that we will realize the anticipatedbenefits of any transaction, including revenue growth, operational efficiencies or expected synergies. If we fail to recognize some or all of the strategic benefits and synergiesexpected from a transaction, goodwill and intangible assets may be impaired in future periods. The negotiations associated with the acquisition and disposition of businesses couldalso disrupt our ongoing business, distract management and employees or increase our expenses.In addition, we may not be able to integrate acquisitions successfully and we could incur or assume unknown or unanticipated liabilities or contingencies, which may impact ourresults of operations. If we dispose of or otherwise exit certain businesses, there can be no assurance that we will not incur certain disposition related charges, or that we will be ableto reduce overhead related to the divested assets.In the ordinary course of our business, we evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives or that no longer fit with ourbroader strategy. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner,which could delay the accomplishment of our strategic objectives, or we may dispose of a business at a price or on terms which are less than we had anticipated. In addition, there isa risk that we sell a business whose subsequent performance exceeds our expectations, in which case our decision would have potentially sacrificed enterprise value.In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:•the difficulty of integrating acquired products, services or operations;•difficulties in maintaining uniform standards, controls, procedures and policies;•the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;•difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities; and•the effect of and potential expenses under the labor, environmental and other laws and regulations of various jurisdictions to which the business acquired is subject.We also own a minority interest in a number of entities, such as Inseego Corp. ("Inseego", f/k/a Novatel Wireless, Inc.), MediBeacon and Triple Ring Technologies, Inc., overwhich we do not exercise, or have only limited, management control and we are therefore unable to direct or manage the business to realize the anticipated benefits that we canachieve through full integration.26We have incurred substantial costs in connection with our prior acquisitions and expect to incur substantial costs in connection with any other transaction we complete inthe future, which may increase our indebtedness or reduce the amount of our available cash and could adversely affect our financial condition, results of operations andliquidity.We have incurred substantial costs in connection with our prior acquisitions and expect to incur substantial costs in connection with any other transactions we complete in the future.These costs may increase our indebtedness or reduce the amount of cash otherwise available to us for acquisitions, business opportunities and other corporate purposes. There is noassurance that the actual costs associated with any such acquisitions will not exceed our estimates. Once an acquisition is consummated, we may continue to incur additional materialcharges reflecting additional costs associated with our investments and the integration of HC2 and our subsidiaries' acquisitions in fiscal quarters subsequent to the quarter in whichsuch investments and acquisitions were consummated.Our development stage companies may never produce revenues or income.We have made investments in and own a majority stake in a number of development stage companies, primarily in our Life Sciences segment. Each of these companies is at an earlystage of development and is subject to all business risks associated with a new enterprise, including constraints on their financial and personnel resources, lack of established credit,the need to establish meaningful and beneficial vendor and customer relationships and uncertainties regarding product development and future revenues. We anticipate that many ofthese companies will continue to incur substantial additional operating losses for at least the next several years and expect their losses to increase as research and developmentefforts expand. There can be no assurance as to when or whether any of these companies will be able to develop significant sources of revenue or that any of their respectiveoperations will become profitable, even if any of them is able to commercialize any products. As a result, we may not realize any returns on our investments in these companies.We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not consummated, which couldmaterially adversely affect subsequent attempts to locate and acquire or invest in another business.We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting and execution of relevant agreements, disclosure documents andother instruments with respect to such transaction will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys andother advisors. If a decision is made not to consummate a specific acquisition, business opportunity or financing and capital market transaction, the costs incurred up to that point forthe proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may failto consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and resultin a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.Our participation in current or any future joint investment could be adversely affected by our lack of sole decision-making authority, our reliance on a partner’s financialcondition and disputes between us and the relevant partners.We have, indirectly through our subsidiaries, formed joint ventures, and may in the future engage in similar joint ventures with third parties. For example, GMSL operates variousjoint ventures outside of the United States. In such circumstances, we may not be in a position to exercise significant decision-making authority if we do not own a substantialmajority of the equity interests of such joint venture or otherwise have contractual rights entitling us to exercise such authority. These ventures may involve risks not present were athird party not involved, including the possibility that partners might become insolvent or fail to fund their share of required capital contributions. In addition, partners may haveeconomic or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.Disputes between us and partners may result in litigation or arbitration that would increase our costs and expenses and divert a substantial amount of management’s time and effortaway from our businesses. We may also, in certain circumstances, be liable for the actions of our third-party partners which could have a material adverse effect on us.There may be tax consequences associated with our acquisition, investment, holding and disposition of target companies and assets.We may incur significant taxes in connection with effecting acquisitions of, or investments in, holding, receiving payments from, operating or disposing of target companies andassets. Our decision to make a particular acquisition, sell a particular asset or increase or decrease a particular investment may be based on considerations other than the timing andamount of taxes owed as a result thereof. We remain liable for certain tax obligations of certain disposed companies, and we may be required to make material payments inconnection therewith.We and our subsidiaries rely on trademark, copyright, trade secret, contractual restrictions and patent rights to protect our intellectual property and proprietary rights and ifthese rights are impaired, then our ability to generate revenue and our competitive position may be harmed.If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be harmed. In addition, defending ourintellectual property rights might entail significant expense. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated throughadministrative process or litigation. While we have some U.S. patents and pending U.S. patent applications, we may be unable to obtain patent protection for the technology coveredin our patent applications. In addition, our existing patents and any patents issued in the future may not provide us with competitive advantages, or may be successfully challengedby third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark,copyright and trade secret protection may not be available to us in every country in which we operate.27The laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights maybe inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. In addition, some ofour operating subsidiaries may use trademarks which have not been registered and may be more difficult to protect.We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringementof our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us anddivert the efforts of our technical and management personnel.We may issue additional shares of common stock or preferred stock, which could dilute the interests of our stockholders and present other risks.Our certificate of incorporation, as amended (the "Certificate of Incorporation"), authorizes the issuance of up to 80,000,000 shares of common stock and 20,000,000 shares ofpreferred stock.As of December 31, 2017, HC2 has 44,570,004 issued and 44,190,826 outstanding shares of its common stock, and 26,500 shares of preferred stock issued and outstanding.However, the Certificate of Incorporation authorizes our board of directors (the "HC2 Board of Directors"), from time to time, subject to limitations prescribed by law and anyconsent rights granted to holders of outstanding shares of preferred stock, to issue additional shares of preferred stock having rights that are senior to those afforded to the holdersof our common stock. We also have reserved shares of common stock for issuance pursuant to our broad-based equity incentive plans, upon exercise of stock options and otherequity-based awards granted thereunder, and pursuant to other equity compensation arrangements.We may issue shares of common stock or additional shares of preferred stock to raise additional capital, to complete a business combination or other acquisition, to capitalize newbusinesses or new or existing businesses of our operating subsidiaries or pursuant to other employee incentive plans, any of which could dilute the interests of our stockholders andpresent other risks.The issuance of additional shares of common stock or preferred stock may, among other things:•significantly dilute the equity interest and voting power of all other stockholders;•subordinate the rights of holders of our outstanding common stock and/or preferred stock if preferred stock is issued with rights senior to those afforded to holders of ourcommon stock and/or preferred stock;•trigger an adjustment to the price at which all or a portion of our outstanding preferred stock converts into our common stock, if such stock is issued at a price lower thanthe then-applicable conversion price;•entitle our existing holders of preferred stock to purchase a portion of such issuance to maintain their ownership percentage, subject to certain exceptions;•call for us to make dividend or other payments not available to the holders of our common stock; and•cause a change in control of our company if a substantial number of shares of our common stock are issued and/or if additional shares of preferred stock havingsubstantial voting rights are issued.The issuance of additional shares of common stock or preferred stock, or perceptions in the market that such issuances could occur, may also adversely affect the prevailing marketprice of our outstanding common stock and impair our ability to raise capital through the sale of additional equity securities.Future sales of substantial amounts of our common stock by holders of our preferred stock or other significant stockholders may adversely affect the market price of ourcommon stock.As of December 31, 2017, the holders of our outstanding preferred stock had certain rights to convert their Preferred Stock into approximately 4.8 million shares of our commonstock.Pursuant to a second amended and restated registration rights agreement, dated January 5, 2015, entered into in connection with the issuance of the preferred stock (the "RegistrationRights Agreement"), we have granted registration rights to the purchasers of our preferred stock and certain of their transferees with respect to HC2 common stock held by themand common stock underlying the preferred stock. This Registration Rights Agreement allows these holders, subject to certain conditions, to require us to register the sale of theirshares under the federal securities laws. Furthermore, the shares of our common stock held by these holders, as well as other significant stockholders, may be sold into the publicmarket under Rule 144 of the Securities Act of 1933, as amended.Future sales of substantial amounts of our common stock into the public market whether by holders of the preferred stock, by other holders of substantial amounts of our commonstock or by us, or perceptions in the market that such sales could occur, may adversely affect the prevailing market price of our common stock and impair our ability to raise capitalthrough the sale of additional equity securities.28Price fluctuations in our common stock could result from general market and economic conditions and a variety of other factors.The trading price of our common stock may be highly volatile and could be subject to fluctuations in response to a number of factors beyond our control, including:•actual or anticipated fluctuations in our results of operations and the performance of our competitors;•reaction of the market to our announcement of any future acquisitions or investments;•the public’s reaction to our press releases, our other public announcements and our filings with the SEC;•changes in general economic conditions; and•actions of our equity investors, including sales of our common stock by significant shareholders.Risks Related to American Natural GasThe adoption, modification or repeal in environmental, tax, government regulations, and other programs and incentives that encourage the use of clean fuel and alternativevehicles, may impact our business.Programs and regulations that have the effect of encouraging the use of CNG as a vehicle fuel are subject to change, and could expire or be repealed or amended as a result ofchanges in federal, state or local political, social or economic conditions. In particular, the AFETC provided a tax credit worth $0.50 per gasoline gallon equivalent of compressednatural gas, or diesel gallon equivalent of liquefied natural gas, which our subsidiary ANG claimed for a portion of its fuel sales each year. The AFETC tax credit has been used asan incentive for fleet operators to adopt natural gas vehicles, as it helped offset the incremental cost of a natural gas vehicle versus a similar gas- or diesel-powered version. Thetermination, modification or repeal of federal, state and local government tax credits, rebates, grants and similar programs and incentives that promote the use of CNG as a vehiclefuel and various government programs that make available grant funds for the purchase and construction of natural gas vehicles and stations may have an adverse impact on ourbusiness. As of the date of this filing, the U.S. Congress passed its omnibus budget for 2018, which included a retroactive AFETC credit through December 31, 2017, and willprovide a net of approximately $2.6 million in income to ANG, to be recorded in 2018 which may not be renewed in the future.Demand for natural gas vehicles may decline with advances in other alternative technologies and fuels, or with improvements in gasoline, diesel or hybrid engines. The market for CNG vehicles may diminish with technological advances in gasoline, diesel or other alternative fuels that may be considered more cost-effective or otherwise moreadvantageous than CNG. Operators may perceive an inability to timely recover the additional costs of natural gas vehicles if CNG fuel is not offered at a lower price than gasolineand diesel. In addition, the adoption of CNG as a fuel for vehicle may be slowed or limited if the low prices and over-supply of gasoline and diesel continue or deteriorate further orif natural gas prices increases without corresponding increases in prices of gasoline and diesel. Advances or improvements in fuel efficiency also may offer more economical choiceand deter consumers to convert their vehicles to natural gas. Growth in the use of electric commercial vehicles likewise may reduce demand for natural gas vehicles and renewablediesel, hydrogen and other alternative fuels may prove to be more economical alternatives to gasoline and diesel than natural gas, which could have an adverse impact on ourbusiness.If there are advances in other alternative vehicle fuels or technologies, or if there are improvements in gasoline, diesel or hybrid engines, demand for natural gas vehiclesmay decline. Technological advances in the production, delivery and use of gasoline, diesel or other alternative fuels that are, or are perceived to be, cleaner, more cost-effective, more readilyavailable or otherwise more attractive than CNG, may slow or limit adoption of natural gas vehicles. For example, advances in gasoline and diesel engine technology, includingefficiency improvements and further development of hybrid engines, may offer a cleaner, more cost-effective option and make fleet customers less likely to convert their vehicles tonatural gas. Additionally, technological advances related to ethanol or biodiesel, which are used as an additive to, or substitute for gasoline and diesel fuel, may slow the need todiversify fuels and affect the growth of the natural gas vehicle fuel market. Further, use of electric commercial vehicles, or the perception that such vehicles may soon be widely available and provide satisfactory performance at an acceptable cost, mayreduce demand for natural gas vehicles. In addition, renewable diesel, hydrogen and other alternative fuels may prove to be cleaner, more cost-effective alternatives to gasoline anddiesel than natural gas. Advances in technology that reduce demand for natural gas as a vehicle fuel or the failure of natural gas vehicle technology to advance at an equal pace couldslow or curtail the growth of natural gas vehicle purchases or conversions, which would have an adverse effect on our business.Increases, decreases and general volatility in oil, gasoline, diesel and natural gas prices could adversely affect our business. In recent years, the prices of oil, gasoline, diesel and natural gas have been volatile, and this volatility may continue. Additionally, prices for crude oil in recent years have been low,due in part to over-production and increased supply without a corresponding increase in demand. Market adoption of CNG (which can be delivered in the form of CNG) as vehiclefuels could be slowed or limited if the low prices and over-supply of gasoline and diesel, today’s most prevalent and conventional vehicle fuels, continue or worsen, or if the priceof natural gas increases without equal and corresponding increases in prices of gasoline and diesel. Any of these circumstances could decrease the market's perception of a need foralternative vehicle fuels generally and could cause the success or perceived success of our industry and our business to materially suffer. In addition, low gasoline and diesel pricescontribute to the differential between the cost of natural gas vehicles and gasoline or diesel-powered vehicles. Generally, natural gas vehicles cost more initially than gasoline ordiesel powered vehicles, as the components needed for a vehicle to29use natural gas add to the vehicle’s base cost. Operators seek to recover the additional costs of acquiring or converting to natural gas vehicles over time through the lower costs offueling natural gas vehicles; however, operators may perceive an inability to timely recover these additional costs if we do not offer CNG fuel at prices lower than gasoline anddiesel. Our ability to offer our customers an attractive pricing advantage for CNG and maintain an acceptable margin on our sales becomes more difficult if prices of gasoline anddiesel decrease or if prices of natural gas increase. These pricing conditions exacerbate the cost differential between natural gas vehicles and gasoline or diesel powered vehicles,which may lead operators to delay or refrain from purchasing or converting to natural gas vehicles at all. Any of these outcomes would decrease our potential customer base andharm our business prospects. Further, fluctuations in natural gas prices affect the cost to us of the natural gas commodity. High natural gas prices adversely impact our operatingmargins in cases where we cannot pass the increased costs through to our customers. Conversely, lower natural gas prices reduce our revenue in cases where the commodity cost ispassed through to our customers. As a result, these fluctuations in natural gas prices can have a significant and adverse impact on our operating results. Factors that can cause fluctuations in gasoline, diesel and natural gas prices include, among others, changes in supply and availability of crude oil and natural gas, governmentregulations and political conditions, inventory levels, consumer demand, price and availability of other alternative fuels, weather conditions, negative publicity surrounding drilling,production or importing techniques and methods for oil or natural gas, economic conditions and the price of foreign imports. With respect to natural gas supply and use as a vehicle fuel, there have been recent efforts to place new regulatory requirements on the production of natural gas by hydraulicfracturing of shale gas reservoirs and other means and on transporting, dispensing and using natural gas. Hydraulic fracturing and horizontal drilling techniques have resulted in asubstantial increase in the proven natural gas reserves in the United States. Any changes in regulations that make it more expensive or unprofitable to produce natural gas throughthese techniques or others, as well as any changes to the regulations relating to transporting, dispensing or using natural gas, could lead to increased natural gas prices. If pricing conditions worsen, or if all or some combination of factors causing further volatility in natural gas, oil and diesel prices were to occur, our business and our industrywould be materially harmed.Automobile and engine manufacturers currently produce few originally manufactured natural gas vehicles and engines for the markets in which ANG participates, whichmay adversely impact the adoption of CNG as a vehicle fuel.Limited availability of natural gas vehicles and engine sizes of such vehicles restricts their wide scale introduction and narrows ANG’s potential customer base. This, in turn, has alimiting effect on the results of operations. Due to the limited supply of natural gas vehicles, ANG’s ability to promote certain of the services contemplated by ANG’s business planmay be restricted, even if there is demand.ANG faces intense competition from oil and gas companies, retail fuel providers, industrial gas companies, natural gas utilities, and other organizations that have fargreater resources and brand awareness than ANG has.A significant number of established businesses, including oil and gas companies, natural gas utilities, industrial gas companies, station owners and other organizations have entered,or are planning to enter, the natural gas fuels market. Many of these current and potential competitors have substantially greater financial, marketing, research and other resourcesthan ANG. Natural gas utilities continue to own and operate natural gas fueling stations. Utilities in Michigan, Illinois, New Jersey, North Carolina and Georgia have also recentlymade efforts to invest in the natural gas vehicle fuel space. ANG expects competition to intensify in the near term in the market for natural gas vehicle fuel as the use of natural gasvehicles and the demand for natural gas vehicle fuel increases. Increased competition will lead to amplified pricing pressure, reduced operating margins and fewer expansionopportunities. ANG’s failure to compete successfully would adversely affect ANG’s business and financial results, even if ANG is successful in implementing its business plan.The infrastructure to support gasoline and diesel consumption is vastly more developed than the infrastructure for natural gas vehicle fuels.Gasoline and diesel fueling stations and service infrastructure are widely available in the United States. For natural gas vehicle fuels to achieve more widespread use in the UnitedStates, they will require a promotional and educational effort and the development and supply of more natural gas vehicles and fueling stations. This will require significantcontinued effort by us, as well as government and clean air groups. In addition, ANG may face resistance from oil companies and other vehicle fuel companies.Risks Related to the Insurance SegmentOur acquisitions of the Insurance Companies are subject to certain post-closing adjustments.In December 2015, pursuant to the SPA between us, Great American Financial Resources, Inc. ("GAFRI") and Continental General Corp. ("CGC," and together with GreatAmerican, the "Seller Parties"), we purchased all of the issued and outstanding shares of common stock of UTA and CGI, as well as all assets owned by the Seller Parties or theiraffiliates that are used exclusively or primarily in the business of the Insurance Companies, subject to certain exceptions. On December 31, 2016, UTA merged into and with CGI,with CGI being the survivor ("Merger").Pursuant to the purchase agreement, the Company also agreed to pay to the Seller Parties, on an annual basis with respect to the years 2015 through 2019, the amount, if any, bywhich the Insurance Companies’ cash flow testing and premium deficiency reserves decrease from the amount of such reserves as of December 31, 2014, up to $13.0 million. Thebalance is calculated based on the annual fluctuation of the statutory cash flow testing and premium deficiency reserves following each of the Insurance Companies' filings with itsdomiciliary insurance regulator30of its annual statutory statements for each calendar year ending December 31, 2015 through and including December 31, 2019. The Company did not set up a contingent liability atacquisition primarily due to the following factors: (i) reduced confidence that treasury rates will increase to historical averages over the near term; (ii) uncertainty around futureoperating expenses historically performed by the Seller Parties; and (iii) the increase in the premium deficiency reserve as reported at December 31, 2015 of approximately $8.0million. Because the balance is cumulative over the period at issue, a decrease of approximately $8.0 million is required before any obligation existed to the Seller Parties under theearn-out).If our Insurance segment is unable to retain, attract and motivate qualified employees, its results of operations and financial condition may be adversely impacted and it mayincur additional costs to recruit replacement and additional personnel.Our Insurance segment is highly dependent on its senior management team and other key personnel for the operation and development of its business. Our Insurance segment facesintense competition in retaining and attracting key employees including actuarial, finance, legal, risk, compliance and other professionals.CGI comprises the core of our insurance business segment. Our Insurance segment will endeavor to retain key personnel we believe are necessary for the success of the business.As we do not currently have substantial insurance company holdings, we also expect that our Insurance segment will add headcount as we continue to fill out the platform and growthe Insurance segment.Any failure to attract and retain key members of our Insurance segment’s management team or other key personnel going forward could have a material adverse effect on ourInsurance segment’s business, financial condition and results of operations.The amount of statutory capital our Insurance segment has and the amount of statutory capital that it must hold to maintain its financial strength and meet otherrequirements can vary significantly from time to time and is sensitive to a number of factors outside of our Insurance segment’s control.Our Insurance segment is subject to regulations that provide minimum capitalization requirements based on risk-based capital ("RBC") formulas for life and health insurancecompanies. The RBC formula for life and health insurance companies establishes capital requirements relating to insurance, business, asset, interest rate, and certain other risks.In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including the following: the amount of statutory incomeor losses generated by our Insurance segment (which are sensitive to equity market and credit market conditions), the amount of additional capital our Insurance segment must holdto support business growth, changes in reserve requirements applicable to our Insurance segment, our Insurance segment’s ability to secure capital market solutions to providereserve relief, changes in equity market levels, the value of certain fixed-income and equity securities in its investment portfolio, the credit ratings of investments held in its portfolio,changes in interest rates, credit market volatility, changes in consumer behavior, as well as changes to the National Association of Insurance Commissioners’ ("NAIC") RBCformula. Many of these factors are outside of our Insurance segment’s control. The financial strength of our Insurance segment is significantly influenced by its statutory surplusamounts and capital adequacy ratios.Additionally, in connection with the consummation of the acquisition and as updated by the Merger, the Company agreed with the TDOI that, for five years following the closing ofthe transaction, it will contribute to CGI cash or marketable securities acceptable to the TDOI to the extent required for CGI’s total adjusted capital to be not less than 400% ofCGI’s authorized control level risk-based capital (each as defined under Texas law and reported in CGI’s statutory statements filed with the TDOI). Any such contributions couldaffect HC2’s liquidity.Our Insurance segment’s results and financial condition may be negatively affected should actual performance differ from management’s assumptions and estimates.Our Insurance segment makes certain assumptions and estimates regarding mortality, morbidity (i.e., frequency and severity of claims, including claim termination rates and benefitutilization rates), health care experience (including type of care and cost of care), persistency (i.e., the probability that a policy or contract will remain in-force from one period to thenext), future premium increases, expenses, interest rates, tax liability, business mix, frequency of claims, contingent liabilities, investment performance and other factors related to itsbusiness and anticipated results. The long-term profitability of our Insurance segment’s insurance products depends upon how our Insurance segment’s actual experience compareswith its pricing and valuation assumptions and estimates. For example, if morbidity rates are higher than underlying pricing assumptions, our Insurance segment could be requiredto make greater payments under its long-term care insurance policies than currently projected, and such amounts could be significant. Likewise, if mortality rates are lower than ourInsurance segment’s pricing assumptions, our Insurance segment could be required to make greater payments and thus establish additional reserves under both its long-term careinsurance policies and annuity contracts and such amounts could be significant. Conversely, if mortality rates are higher than our Insurance segment’s pricing and valuationassumptions, our Insurance segment could be required to make greater payments under its life insurance policies than currently projected.The above-described assumptions and estimates incorporate assumptions about many factors, none of which can be predicted with certainty. Our Insurance segment’s actualexperiences, as well as changes in estimates, are used to prepare our Insurance segment’s consolidated statements of operations. To the extent our Insurance segment’s actualexperience and changes in estimates differ from original estimates, our Insurance segment’s business, operations and financial condition may be materially adversely affected.31The calculations our Insurance segment uses to estimate various components of its balance sheet and consolidated statements of operations are necessarily complex and involveanalyzing and interpreting large quantities of data. Our Insurance segment currently employs various techniques for such calculations including engaging third-party studies andfrom time to time will develop and implement more sophisticated administrative systems and procedures capable of facilitating the calculation of more precise estimates.However, assumptions and estimates involve judgment, and by their nature are imprecise and subject to changes and revisions over time. Accordingly, our Insurance segment’sresults may be adversely affected from time to time, by actual results differing from assumptions, by changes in estimates, and by changes resulting from implementing moresophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.If our Insurance segment’s reserves for future policy claims are inadequate as a result of deviations from management’s assumptions and estimates or other reasons, ourInsurance segment may be required to increase reserves, which could have a material adverse effect on its results of operations and financial condition.Our Insurance segment calculates and maintains reserves for estimated future payments of claims to policyholders and contract holders in accordance with U.S. GAAP andstatutory accounting practices. These reserves are released as those future obligations are paid, experience changes or policies lapse. The reserves reflect estimates and actuarialassumptions with regard to future experience. These estimates and actuarial assumptions involve the exercise of significant judgment. Our Insurance segment’s future financialresults depend significantly on the extent to which actual future experience is consistent with the assumptions and methodologies used in pricing our Insurance segment’s insuranceproducts and calculating reserves. Small changes in assumptions or small deviations of actual experience from assumptions can have material impacts on reserves, results ofoperations and financial condition.Because these factors are not known in advance and have the potential to change over time, they are difficult to accurately predict and inherently uncertain, which means that ourInsurance segment cannot determine with precision the ultimate amounts it will pay for actual claims or the timing of those payments. In addition, our Insurance segment includesassumptions for anticipated (but not yet filed) future premium rate increases in its determination of loss recognition testing of long-term care insurance reserves under U.S. GAAPand asset adequacy testing of statutory long-term care insurance reserves. Our Insurance segment may not be able to realize these anticipated results in the future as a result of itsinability to obtain required regulatory approvals or other factors. In this event, our Insurance segment would have to increase its long-term care insurance reserves by amounts thatcould be material. Moreover, our Insurance segment may not be able to mitigate the impact of unexpected adverse experience by increasing premiums and/or other charges topolicyholders (when it has the right to do so) or alternatively by reducing benefits.The risk that our Insurance segment’s claims experience may differ significantly from its pricing assumptions is significant for its long-term care insurance products. Long-term careinsurance policies provide for long-duration coverage and, therefore, actual claims experience will emerge over many years after pricing and locked-in valuation assumptions havebeen established. For example, changes in the economy, socio-demographics, behavioral trends (e.g., location of care and level of benefit use) and medical advances, among otherfactors, may have a material adverse impact on future loss trends. Moreover, long-term care insurance does not have as extensive of a claims experience history as life insurance,and as a result, our Insurance segment’s ability to forecast future claim costs for long-term care insurance is more limited than for life insurance.For long-duration contracts (such as long-term care policies), loss recognition occurs when, based on current expectations as of the measurement date, the existing contract liabilitiesplus the present value of future premiums (including reasonably expected rate increases) are not expected to cover the present value of future claims payments, related settlement andmaintenance costs, and unamortized acquisition costs. Our Insurance segment regularly reviews its reserves and associated assumptions as part of its ongoing assessment ofbusiness performance and risks. If our Insurance segment concludes that its reserves are insufficient to cover actual or expected policy and contract benefits and claim payments as aresult of changes in experience, assumptions or otherwise, our Insurance segment would be required to increase its reserves and incur charges in the period in which suchdetermination is made. The amounts of such increases may be significant and thus could materially adversely affect our Insurance segment’s results of operations and financialcondition and may require additional capital in our Insurance segment’s businesses.Insurers that have issued or reinsured long-term care insurance policies have recognized, and may recognize in the future, substantial losses in order to strengthen reserves forliabilities to policyholders in respect of such policies. Such losses may be due to the effect of changes in assumptions of future investment yields, changes in claims, expense,persistency assumptions or other factors. Our Insurance segment is subject to similar risks that adverse changes in any of its reserve assumptions in future periods could result inadditional loss recognition in respect of its business.Our Insurance segment’s inability to increase premiums on in-force long-term care insurance policies by sufficient amounts or in a timely manner may adversely affect ourInsurance segment’s results of operations and financial condition.The success of our Insurance segment’s strategy for its run-off long-term care insurance business assumes our Insurance segment’s ability to obtain significant price increases, aswarranted and actuarially justified based on its experience on its in-force block of long-term care insurance policies. The adequacy of our Insurance segment’s current long-term careinsurance reserves also depends significantly on this assumption and our Insurance segment’s ability to successfully execute its in-force management plan through increasedpremiums as anticipated.32Although the terms of our Insurance segment’s long-term care insurance policies permit our Insurance segment to increase premiums during the premium-paying period, theseincreases generally require regulatory approval, which often have long lead times to obtain and may not be obtained in all relevant jurisdictions or for the full amounts requested. Inaddition, some states are considering adopting long-term care insurance rate increase legislation, which would further limit increases in long-term care insurance premium rates,beyond the rate stability legislation previously adopted in certain states.Such long-term care insurance rate increase legislation would adversely impact our Insurance segment’s ability to achieve anticipated rate increases. Our Insurance segment canneither predict how policyholders, competitors and regulators may react to any rate increases, nor whether regulators will approve regulated rate increases. If our Insurance segmentis not able to increase rates to the extent it currently anticipates, our Insurance segment may be required to establish additional reserves and make greater payments under long-termcare insurance policies than it currently projects.Our Insurance segment is highly regulated and subject to numerous legal restrictions and regulations.Our Insurance segment conducts its business throughout the United States, excluding New York State. Our Insurance segment is subject to government regulation in each of thestates in which it conducts business. Such regulation is vested in state agencies having broad administrative, and in some instances discretionary, authority with respect to manyaspects of our Insurance segment’s business, which may include, among other things, premium rates and increases thereto, privacy, claims denial practices, policy forms,reinsurance reserve requirements, acquisitions, mergers, and capital adequacy, and is concerned primarily with the protection of policyholders and other customers as opposed toother stakeholders. At any given time, a number of financial and/or market conduct examinations of our Insurance segment may be ongoing. From time to time, regulators raiseissues during examinations or audits of our Insurance segment that could, if determined adversely, have a material impact on our Insurance segment.Under insurance guaranty fund laws in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred byinsolvent companies. Our Insurance segment cannot predict the amount or timing of any such future assessments.Although our Insurance segment’s business is subject to regulation in each state in which it conducts business, in many instances the state regulatory models emanate from theNAIC. State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws andregulations, or in interpretations thereof, are often made for the benefit of the consumer and at the expense of the insurer and, thus, could have a material adverse effect on ourInsurance segment’s business, operations and financial condition.Our Insurance segment is also subject to the risk that compliance with any particular regulator’s interpretation of a legal or accounting issue may not result in compliance withanother regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. There is further risk that any particular regulator’s interpretation of a legalor accounting issue may change over time to our Insurance segment’s detriment, or that changes to the overall legal or market environment, even absent any change of interpretationby a particular regulator, may cause our Insurance segment to change its views regarding the actions it should take from a legal risk management perspective, which couldnecessitate changes to our Insurance segment’s practices that may, in some cases, limit its ability to grow and improve profitability.Some of the NAIC pronouncements, particularly as they affect accounting issues, take effect automatically in the various states without affirmative action by the states. Statutes,regulations, and interpretations may be applied with retroactive impact, particularly in areas such as accounting and reserve requirements.At the federal level, bills are routinely introduced in both chambers of the U.S. Congress which could affect life insurers. In the past, Congress has considered legislation that wouldimpact insurance companies in numerous ways, such as providing for an optional federal charter for insurance companies or a federal presence in insurance regulation, pre-emptingstate law in certain respects regarding the regulation of reinsurance, increasing federal oversight in areas such as consumer protection and solvency regulation, and other matters.Currently, the U.S. federal government does not directly regulate the business of insurance. However, Dodd-Frank established the FIO within the Department of the Treasury,which has the authority to participate in the negotiations of international insurance agreements with foreign regulators for the U.S., as well as to collect information about theinsurance industry and recommend prudential standards. On December 12, 2013, the FIO issued a report, mandated by Dodd-Frank, which, among other things, urged the states tomodernize and promote greater uniformity in insurance regulation. The report raised the possibility of a greater role for the federal government if states do not achieve greateruniformity in their laws and regulations. We cannot predict whether any such legislation or regulatory changes will be adopted, or what impact they will have on our business,financial condition or results of operations.Federal legislation and administrative policies can significantly and adversely affect insurance companies, including policies regarding financial services regulation, securitiesregulation, derivatives regulation, pension regulation, health care regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct and indirect federalregulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies.Our Insurance segment cannot predict whether, or in what form, reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect our Insurancesegment or whether these effects will be material.33Other types of regulation that could affect our Insurance segment include insurance company investment laws and regulations, state statutory accounting practices, antitrust laws,minimum solvency requirements, federal privacy laws, insurable interest laws, federal anti-money laundering and anti-terrorism laws. Our Insurance segment cannot predict whatform any future changes in these or other areas of regulation affecting the insurance industry might take or what effect, if any, such proposals might have on our Insurance segmentif enacted into law.Our Insurance segment’s reinsurers could fail to meet assumed obligations or be subject to adverse developments that could materially adversely affect our Insurancesegment’s business, financial condition and results of operations.Our Insurance segment cedes material amounts of insurance and transfers related assets and certain liabilities to other insurance companies through reinsurance. However,notwithstanding the transfer of related assets and certain liabilities, our Insurance segment remains liable with respect to ceded insurance should any reinsurer fail to meet theobligations it has assumed. Accordingly, our Insurance segment bears credit risk with respect to its reinsurers. Our Insurance segment currently cedes material reinsuranceobligations to Loyal American Life Insurance Company ("Loyal") (rated A- by A.M. Best), Hannover Life Reassurance Company ("Hannover") (rated A+ by A.M. Best) andGALIC (rated A by A.M. Best). The failure, insolvency, inability or unwillingness of a reinsurer, including Loyal, Hannover or GALIC, to pay under the terms of its reinsuranceagreement with our Insurance segment could materially adversely affect our Insurance segment’s business, financial condition and results of operations.Reinsurers are currently facing many challenges regarding illiquid credit or capital markets, investment downgrades, rating agency downgrades, deterioration of general economicconditions and other factors negatively impacting the financial services industry generally. If such events cause a reinsurer to fail to meet its obligations, our Insurance segment’sbusiness, financial condition and results of operations could be materially adversely affected.Our Insurance segment’s financial condition or results of operations could be adversely impacted if its assumptions regarding the fair value and future performance of itsinvestments differ from actual experience.Our Insurance segment makes assumptions regarding the fair value and expected future performance of its investments. For example, our Insurance segment expects that itsinvestments in residential and commercial mortgage-backed securities will continue to perform in accordance with their contractual terms, based on assumptions that our Insurancesegment believes are industry standard and those that a reasonable market participant would use in determining the current fair value and the performance of the underlying assets. Itis possible that the underlying collateral of these investments will perform more poorly than current market expectations and that such reduced performance may lead to adversechanges in the cash flows on our Insurance segment’s holdings of these types of securities. This could lead to potential future other-than-temporary impairments within ourInsurance segment’s portfolio of mortgage-backed and asset-backed securities.In addition, expectations that our Insurance segment’s investments in corporate securities and/or debt obligations will continue to perform in accordance with their contractual termsare based on evidence gathered through its normal credit surveillance process. It is possible that issuers of the corporate securities in which our Insurance segment has invested willperform more poorly than current expectations. Such events may lead our Insurance segment to recognize potential future other-than-temporary impairments within its portfolio ofcorporate securities and may also have an adverse effect on its liquidity and ability to meet its obligations. It is also possible that such unanticipated events would lead our Insurancesegment to dispose of certain of those holdings and recognize the effects of any market movements in its financial statements. Furthermore, actual values may differ from ourInsurance segment’s assumptions. Such events could result in a material change in the value of our Insurance segment’s investments, business, operations and financial condition.Interest rate fluctuations and withdrawal demands in excess of assumptions could negatively affect our Insurance segment’s business, financial condition and results ofoperations.Our Insurance segment’s business is sensitive to interest rate fluctuations, volatility and the low interest rate environment. For the past several years interest rates have remained athistorically low levels. In order to meet policy and contractual obligations, our Insurance segment must earn a sufficient return on invested assets. A prolonged period of historicallylow rates or significant changes in interest rates could expose our Insurance segment to the risk of not achieving sufficient return on invested assets by not achieving anticipatedinterest earnings, or of not earning anticipated spreads between the interest rate earned on investments and the credited interest rates paid on outstanding policies and contracts.Additionally, a prolonged period of low interest rates may lengthen liability maturity, thus increasing the need for a re-investment of assets at yields that are below the amountsrequired to support guarantee features of outstanding contracts.Both rising and declining interest rates can negatively affect our Insurance segment’s interest earnings and spread income (the difference between the returns our Insurance segmentearns on its investments and the amounts that it must credit to policyholders and contract holders). While our Insurance segment develops and maintains asset liability managementprograms and procedures designed to mitigate the effect on interest earnings and spread income in rising or falling interest rate environments, no assurance can be given thatchanges in interest rates will not materially adversely affect its business, financial condition and results of operations.An extended period of declining interest rates or a prolonged period of low interest rates may cause our Insurance segment to change its long-term view of the interest rates that ourInsurance segment can earn on its investments. Such a change would cause our Insurance segment to change the long-term interest rate that it assumes in its calculation of insuranceassets and liabilities under U.S. GAAP. This revision would result in increased reserves and other unfavorable consequences. In addition, while the amount of statutory reserves isnot directly affected by34changes in interest rates, additional statutory reserves may be required as the result of an asset adequacy analysis, which is altered by rising or falling interest rates and wideningcredit spreads.Some of our products, principally traditional whole life insurance and deferred annuities expose us to the risk that changes in interest rates will reduce our "spread," or the differencebetween the amounts we are required to pay under our contracts to policyholders and the rate of return we are able to earn on our investments intended to support obligations underthe contracts. Spread is an integral component of our Insurance Company's net income.As interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from investments that have matured, prepaid, been sold, or called at lower yields, reducingour investment margin. Our fixed income bond portfolio is exposed to interest rate risk as a significant portion of the portfolio is callable. Lowering interest crediting rates can helpoffset decreases in investment margins on some of our products.Our Insurance segment is subject to financial disintermediation risks in rising interest rate environments.Our Insurance segment offers certain products that allow policyholders to withdraw their funds under defined circumstances. In order to meet such funding obligations, ourInsurance segment manages its liabilities and configures its investment portfolios so as to provide and maintain sufficient liquidity to support expected withdrawal demands andcontract benefits and maturities. However, in order to provide necessary long-term returns, a certain portion of its assets are relatively illiquid. There can be no assurance that actualwithdrawal demands will match its estimated withdrawal demands.As interest rates increase, our Insurance segment is exposed to the risk of financial disintermediation through a potential increase in the number of withdrawals. Disintermediationrisk refers to the risk that policyholders may surrender their contracts in a rising interest rate environment, requiring our Insurance segment to liquidate assets in an unrealized lossposition. If our Insurance segment experiences unexpected withdrawal activity, whether as a result of financial strength downgrades or otherwise, it could exhaust its liquid assetsand be forced to liquidate other assets, possibly at a loss or on other unfavorable terms, which could have a material adverse effect on our Insurance segment’s business, financialcondition and results of operations.Additionally, our Insurance segment may experience spread compression, and a loss of anticipated earnings, if credited interest rates are increased on renewing contracts in an effortto decrease or manage withdrawal activity.Our Insurance segment is subject to cyber-attacks and other privacy or data security incidents. If we are unable to prevent or contain the effects of any such attacks, we maysuffer exposure to substantial liability, reputational harm, loss of revenue or other damages.Our business depends on our clients’ and customers’ willingness to entrust us with their sensitive personal information. Our Insurance segment and certain of our other businessesretain confidential information in their computer systems, and rely on commercial technologies to maintain the security of those systems. Nevertheless, computer systems may bevulnerable to physical break-ins, computer viruses or malware, programming errors, attacks by third parties or similar disruptive problems. We may be the target of computerviruses or other malicious codes, unauthorized access, cyber-attacks or other computer-related penetrations. Despite the implementation of network security measures, our serverscould be subject to physical and electronic break-ins, and similar disruptions from unauthorized tampering with our computer systems. Anyone who is able to circumvent thesesecurity measures and penetrate our and our subsidiaries’ computer systems could access, view, misappropriate, alter, or delete any information in the systems, including personallyidentifiable customer information and proprietary business information. In addition, an increasing number of states require that customers be notified of unauthorized access, use, ordisclosure of their information. Any compromise of the security of our Insurance segment’s computer systems that results in inappropriate access, use, or disclosure of personallyidentifiable customer information could damage our Insurance segment’s reputation in the marketplace, subject our Insurance segment to significant civil and criminal liability, andrequire our Insurance segment to incur significant technical, legal, and other expenses.There have been large scale cyber-attacks and other cyber-security breaches within the insurance industry. As we increase the amount of personal information that we store andshare digitally, our exposure to data security and related cyber-security risks increases, including the risk of undetected attacks, damage, loss or unauthorized access ormisappropriation of proprietary or personal information, and the cost of attempting to protect against these risks also increases. In addition, while we have certain standards for allvendors that provide us services, our vendors, and in turn, their own service providers, may become subject to the same type of security breaches. Finally, our offices may bevulnerable to security incidents or security attacks, acts of vandalism or theft, misplaced or lost data, human error or similar events that could negatively affect our systems and ourcustomers’ and clients’ data.The costs to eliminate or address security threats and vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and couldresult in interruptions, delays, or cessation of service and loss of existing or potential customers.In addition, breaches of our security measures and the unauthorized dissemination of sensitive personal information or proprietary information or confidential information about us,our customers or other third-parties could expose our customers’ private information and our customers to the risk of identity theft, any of which could adversely affect ourbusiness, results of operations, financial condition or liquidity.35Our Insurance segment’s investments are subject to market, credit, legal and regulatory risks that could be heightened during periods of extreme volatility or disruption infinancial and credit markets.Our Insurance segment’s invested assets are subject to risks of credit defaults and changes in market values. Periods of extreme volatility or disruption in the financial and creditmarkets could increase these risks.Stressed conditions, volatility and disruptions in financial asset classes or various markets, including global capital markets, can have an adverse effect on us, in part because wehave a large investment portfolio and our insurance liabilities are sensitive to changing market factors. Global market factors, including interest rates, credit spreads, equity prices,real estate markets, foreign currency exchange rates, consumer spending, business investment, government spending, the volatility and strength of the capital markets, deflation andinflation, all affect our financial condition, as well as the volume, profitability and results of our business operations, either directly or by virtue of their impact on the business andeconomic environment generally and on general levels of economic activity, employment and customer behavior specifically. Disruptions in one market or asset class can alsospread to other markets or asset classes. Upheavals in the financial markets can also affect our financial condition (including our liquidity and capital levels) as a result ofmismatched impacts on the value of our assets and our liabilities.The value of our Insurance segment’s mortgage-backed investments depends in part on the financial condition of the borrowers and tenants for the properties underlying thoseinvestments, as well as general and specific circumstances affecting the overall default rate.Significant continued financial and credit market volatility, changes in interest rates, credit spreads, credit defaults, real estate values, market illiquidity, declines in equity prices, actsof corporate malfeasance, ratings downgrades of the issuers or guarantors of these investments, and declines in general economic conditions, either alone or in combination, couldhave a material adverse impact on our Insurance segment’s results of operations, financial condition, or cash flows through realized losses, other-than-temporary impairments,changes in unrealized loss positions, and increased demands on capital. In addition, market volatility can make it difficult for our Insurance segment to value certain of its assets,especially if trading becomes less frequent.Also, in the event of extreme prolonged market events, such as the global credit crisis, we could incur significant capital and/or operating losses due to, among other reasons, lossesincurred in our general account and as a result of the impact on us of guarantees, capital maintenance obligations and/or collateral requirements associated with our affiliatedreinsurers and other similar arrangements. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility, which may also increase thecost.Valuations may include assumptions or estimates that may have significant period-to-period changes that could have an adverse impact on our Insurance segment’s results ofoperations or financial condition. Moreover, difficult conditions in the global capital markets and the economy may continue to raise the possibility of legislative, judicial, regulatoryand other governmental actions.Credit spreads could adversely affect our Insurance segment’s investment portfolio and financial position.Our exposure to credit spreads primarily relates to market price volatility and cash flow variability associated with changes in such spreads. Market price volatility can make itdifficult to value certain of our securities if trading becomes less frequent. In such case, valuations may include assumptions or estimates that may have significant period-to-periodchanges, which could have a material adverse effect on our results of operations or financial condition. If there is a resumption of significant volatility in the markets, it could causechanges in credit spreads and defaults and a lack of pricing transparency which, individually or in tandem, could have a material adverse effect on our results of operations, financialcondition, liquidity or cash flows.Significant volatility or disruption in credit markets could have a material adverse effect on our Insurance segment’s investment portfolio, and, as a result, our Insurance segment’sbusiness, financial condition and results of operations. Changes in interest rates and credit spreads could cause market price and cash flow variability in the fixed incomeinstruments in our Insurance segment’s investment portfolio. Significant volatility and lack of liquidity in the credit markets could cause issuers of the fixed-income securities in ourInsurance segment’s investment portfolio to default on either principal or interest payments on these securities.Concentration of our Insurance segment’s investment portfolio in any particular economic sector or asset type may increase our Insurance segment’s exposure to risk ifthat area of concentration experiences events that cause underperformance.Our Insurance segment’s investment portfolio may be concentrated in areas, such as particular industries, groups of related industries, asset classes or geographic areas thatexperience events that cause underperformance of the investments. While our Insurance segment seeks to mitigate this risk through portfolio diversification, if our Insurancesegment’s investment portfolio is concentrated in any areas that experience negative events or developments, the impact of those negative events may have a disproportionate effecton our Insurance segment’s portfolio, which may have an adverse effect on the performance of our Insurance segment’s investment portfolio.Our Insurance segment may be required to increase its valuation allowance against its deferred tax assets, which could materially adversely affect our Insurance segment’scapital position, business, operations and financial condition.Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.Deferred tax assets, in essence, represent future savings of taxes that would otherwise be paid in cash. The realization of the deferred tax assets is dependent upon the generation ofsufficient future taxable income, including capital gains. If it is36determined that the deferred tax assets cannot be realized, a deferred tax valuation allowance must be established, with a corresponding charge to net income.If future events differ from our Insurance segment’s current forecasts, the valuation allowance may need to be increased from the current amount, which could have a materialadverse effect on our Insurance segment’s capital position, business, operations and financial condition.Financial services companies are frequently the targets of litigation, including class action litigation, which could result in substantial judgments.Our Insurance segment operates in an industry in which various practices are subject to scrutiny and potential litigation, including class actions. Civil jury verdicts have beenreturned against insurers and other financial services companies involving sales, underwriting practices, product design, product disclosure, administration, denial or delay ofbenefits, charging excessive or impermissible fees, recommending unsuitable products to customers, breaching fiduciary or other duties to customers, refund or claims practices,alleged agent misconduct, failure to properly supervise representatives, relationships with agents or other persons with whom the insurer does business, payment of sales or othercontingent commissions, and other matters. For example, a class action lawsuit was filed against CGI in November 2016 alleging breach of contract, tortious interference withcontract and unjust enrichment in relation to the introduction of new products to existing policyholders and the replacement of in-force policies. Such lawsuits can result in theaward of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive or non-economic compensatory damages. In some states,juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages, which creates the potential for unpredictable materialadverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits,financial services companies have made material settlement payments.Companies in the financial services industry are sometimes the target of law enforcement investigations and the focus of increased regulatory scrutiny.The financial services industry, including insurance companies, is sometimes the target of law enforcement and regulatory investigations relating to the numerous laws andregulations that govern such companies. Some financial services companies have been the subject of law enforcement or other actions resulting from such investigations. Resultingpublicity about one company may generate inquiries into or litigation against other financial services companies, even those who do not engage in the business lines or practices atissue in the original action. It is impossible to predict the outcome of such investigations or actions, whether they will expand into other areas not yet contemplated, whether theywill result in changes in insurance regulation, whether activities currently thought to be lawful will be characterized as unlawful, or the impact, if any, of such scrutiny on thefinancial services and insurance industry or our Insurance segment.Our Insurance segment is dependent on the performance of others under the Administrative Services Agreement and on an ongoing basis as part of its business.Our Insurance segment is dependent on the performance of third parties as part of its business. In the near term, our Insurance segment will depend on the Seller Parties of theInsurance Companies, under the Administrative Services Agreement, for the performance of certain administrative services with respect to our Insurance segment’s life insuranceand annuity business.In addition, various other third parties provide services to our Insurance segment or are otherwise involved in our Insurance segment’s business operations, on an ongoing basis.For example, our Insurance segment’s operations are dependent on various technologies, some of which are provided and/or maintained by certain key outsourcing partners andother parties.Any failure by any of the Seller Parties or such other third-party providers to provide such services could have a material adverse effect on our Insurance segment’s business orfinancial results.Our Insurance segment also depends on other parties that may default on their obligations to our Insurance segment due to bankruptcy, insolvency, lack of liquidity, adverseeconomic conditions, operational failure, fraud, or other reasons. Such defaults could have a material adverse effect on our Insurance segment’s financial condition and results ofoperations. In addition, certain of these other parties may act, or be deemed to act, on behalf of our Insurance segment or represent our Insurance segment in various capacities.Consequently, our Insurance segment may be held responsible for obligations that arise from the acts or omissions of these other parties.If our Insurance segment does not maintain an effective outsourcing strategy or third-party providers do not perform as contracted, our Insurance segment may experienceoperational difficulties, increased costs and a loss of business that could have a material adverse effect on its results of operations. In addition, our Insurance segment’s reliance onthird-party service providers that it does not control does not relieve our Insurance segment of its responsibilities and requirements. Any failure or negligence by such third-partyservice providers in carrying out their contractual duties may result in our Insurance segment becoming liable to parties who are harmed and may result in litigation. Any litigationrelating to such matters could be costly, expensive and time-consuming, and the outcome of any such litigation may be uncertain. Moreover, any adverse publicity arising from suchlitigation, even if the litigation is not successful, could adversely affect the reputation and sales of our Insurance segment and its products.37Our Insurance segment’s ability to grow depends in large part upon the continued availability of capital.Our Insurance segment’s long-term strategic capital requirements will depend on many factors, including acquisition activity, our Insurance segment’s ability to manage the run-offof in-force insurance business, our Insurance segment’s accumulated statutory earnings and the relationship between our Insurance segment’s statutory capital and surplus andvarious elements of required capital. To support its capital requirements and/or finance future acquisitions, our Insurance segment may need to increase or maintain statutory capitaland surplus through financings, which could include debt or equity financing arrangements and/or other surplus relief transactions. Adverse market conditions have affected andcontinue to affect the availability and cost of capital from external sources. We are not obligated to, and may choose not to or be unable to, provide financing or make any futurecapital contribution to CGI. Consequently, financing, if available at all, may be available only on terms that are not favorable to our Insurance segment.New accounting rules, changes to existing accounting rules, or the grant of permitted accounting practices to competitors could negatively impact our Insurance segment.Our Insurance segment is required to comply with U.S. GAAP. A number of organizations are instrumental in the development and interpretation of U.S. GAAP such as the SEC,FASB, and the American Institute of Certified Public Accountants. U.S. GAAP is subject to constant review by these organizations and others in an effort to address emergingaccounting rules and issue interpretative accounting guidance on a continual basis. Our Insurance segment can give no assurance that future changes to U.S. GAAP will not have anegative impact on our Insurance segment.The application of U.S. GAAP to insurance businesses and investment portfolios, like our Insurance segment’s, involves a significant level of complexity and requires a number offactors and judgments. U.S. GAAP includes the requirement to carry certain investments and insurance liabilities at fair value. These fair values are sensitive to various factorsincluding, but not limited to, interest rate movements, credit spreads, and various other factors. Because of this, changes in these fair values may cause increased levels of volatilityin our Insurance segment’s financial statements.In addition, our Insurance segment is required to comply with statutory accounting principles ("SAP"). SAP and various components of SAP (such as actuarial reservingmethodology) are subject to ongoing review by the NAIC and its task forces and committees as well as state insurance departments in an effort to address emerging issues andotherwise improve financial reporting. Various proposals are currently or have previously been pending before committees and task forces of the NAIC, some of which, if enacted,would negatively affect our Insurance segment. The NAIC is also currently working to reform state regulation in various areas, including comprehensive reforms relating to lifeinsurance reserves and the accounting for such reserves.Our Insurance segment cannot predict whether or in what form reforms will be enacted and, if so, whether the enacted reforms will positively or negatively affect our Insurancesegment. In addition, the NAIC Accounting Practices and Procedures manual provides that state insurance departments may permit insurance companies domiciled therein to departfrom SAP by granting them permitted accounting practices. Our Insurance segment cannot predict whether or when the insurance departments of the states of domicile of itscompetitors may permit them to utilize advantageous accounting practices that depart from SAP, the use of which is not permitted by the insurance department of CGI’s state ofdomicile (Texas). With respect to regulations and guidelines, states sometimes defer to the interpretation of the insurance department of the state of domicile. Neither the action of thedomiciliary state nor action of the NAIC is binding on a state. Accordingly, a state could choose to follow a different interpretation. Our Insurance segment can give no assurancethat future changes to SAP or components of SAP or the grant of permitted accounting practices to its competitors will not have a negative impact on our Insurance segment.Our Insurance segment is exposed to the risks of natural and man-made catastrophes, pandemics and malicious and terrorist acts that could materially adversely affect ourInsurance segment’s business, financial condition and results of operations.Natural and man-made catastrophes, pandemics and malicious and terrorist acts present risks that could materially adversely affect our Insurance segment’s operations and results.No assurance can be given that there are not risks that have not been predicted or protected against that could have a material adverse effect on our Insurance segment. A natural orman-made catastrophe, pandemic or malicious or terrorist act could materially adversely affect the mortality or morbidity experience of our Insurance segment or its reinsurers.Claims arising from such events could have a material adverse effect on our Insurance segment’s business, operations and financial condition, either directly or as a result of theireffect on its reinsurers or other counterparties. While our Insurance segment has taken steps to identify and manage these risks, such risks cannot be predicted with certainty, norfully protected against even if anticipated.In addition, such events could result in a decrease or halt in economic activity in large geographic areas, adversely affecting the administration of our Insurance segment’s businesswithin such geographic areas and/or the general economic climate, which in turn could have an adverse effect on our Insurance segment’s business, operations and financialcondition. The possible macroeconomic effects of such events could also adversely affect our Insurance segment’s asset portfolio.Future acquisition transactions may not be financially beneficial to our Insurance segment.In the future, our Insurance segment may pursue acquisitions of insurance companies and/or blocks of insurance businesses through merger, stock purchase or reinsurancetransactions or otherwise. Lines of business that may be acquired include but are not limited to, standalone long-term care, life and annuity products, life and annuity products withlong-term care and critical illness features, and supplemental health products.38There can be no assurance that the performance of the companies or blocks of business acquired will meet our Insurance segment’s expectations, or that any of these acquisitionswill be financially advantageous for our Insurance segment. The evaluation and negotiation of potential acquisitions, as well as the integration of an acquired business or portfolio,could result in a substantial diversion of management resources. Acquisitions could involve numerous additional risks such as potential losses from unanticipated litigation, levels ofclaims or other liabilities and exposures, an inability to generate sufficient revenue to offset acquisition costs and financial exposures in the event that the sellers of the acquiredentities or blocks of business are unable or unwilling to meet their indemnification, reinsurance and other obligations to our Insurance segment (if any such obligations are in place).Our Insurance segment’s ability to manage its growth through acquisitions will depend, in part, on its success in addressing these risks. Any failure to effectively implement ourInsurance segment’s acquisition strategies could have a material adverse effect on our Insurance segment’s business, financial condition or results of operations.Our Insurance segment may be unable to execute acquisition transactions in accordance with its strategy.The market for acquisitions of life or health insurers and blocks of like businesses is highly competitive, and there can be no assurance that our Insurance segment will be able toidentify acquisition targets at acceptable valuations, or that any such acquisitions will ultimately achieve projected returns. In addition, insurance is a highly regulated industry andmany acquisition transactions are subject to approval of state insurance regulatory authorities, and therefore involve heightened execution risk.On October 7, 2013, the New York State Department of Financial Services announced that Philip A. Falcone, now our Chairman, President and Chief Executive Officer, hadcommitted not to exercise control, within the meaning of New York insurance law, of a New York-licensed insurer for seven years (the "NYDFS Commitment"). Mr. Falcone,who at the time of the NYDFS Commitment was the Chief Executive Officer and Chairman of the Board of HRG Group Inc. ("HGI"), also committed not to serve as an officer ordirector of certain insurance company subsidiaries and related subsidiaries of HGI or to be involved in any investment decisions made by such subsidiaries, and agreed to recusehimself from participating in any vote of the board of HGI relating to the election or appointment of officers or directors of such companies. However, it was also noted that in theevent compliance with the NYDFS Commitment proves impracticable, including in the context of merger, acquisition or similar transactions, then the terms of the NYDFSCommitment may be reconsidered and modified or withdrawn to the extent determined to be appropriate by the NYDFS Insurance regulatory authorities may consider the NYDFSCommitment in the course of a review of any prospective acquisition of an insurance company or block of insurance business by us or our Insurance segment, increasing the riskthat any such transaction may be disapproved, or that regulatory conditions will be applied to the consummation of such an acquisition which may adversely affect the economicbenefits anticipated to be derived by us and/or our Insurance segment from such transaction.Our Insurance segment’s investment portfolio is subject to various risks that may result in realized investment losses. In particular, decreases in the fair value of fixedmaturity securities may significantly reduce the value of our investments, and as a result, our financial condition may suffer.We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of their obligations under these securities could reduce ourinvestment income and realized investment gains or result in the recognition of investment losses. The value of our investments may be materially adversely affected by increases ininterest rates, downgrades in the bonds included in our portfolio and by other factors that may result in the recognition of other-than-temporary impairments. Each of these eventsmay cause us to reduce the carrying value of our investment portfolio.The fair value of fixed maturities and the related investment income fluctuates depending on general economic and market conditions. The fair value of these investments generallyincreases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us will generally increase or decrease in line with changesin market interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backedsecurities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. The impact of value fluctuations affects our consolidated financialstatements, as a large portion of our fixed maturities are classified as available-for- sale, with changes in fair value reflected in our stockholders’ equity (accumulated othercomprehensive income or loss). No similar adjustment is made for liabilities to reflect a change in interest rates. Therefore, interest rate fluctuations and economic conditions couldadversely affect our stockholders’ equity, total comprehensive income and/or cash flows. All of our fixed maturities are subject to credit risk. If any of the issuers of our fixedmaturities suffer financial setbacks, the ratings on the fixed maturities could fall (with a concurrent fall in fair value) and, in a worst-case scenario, the issuer could default on itsfinancial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.Unanticipated increases in policyholder withdrawals or surrenders could negatively impact liquidity.A primary liquidity concern is the risk of unanticipated or extraordinary policyholder withdrawals or surrenders. We track and manage liabilities and attempt to align our investmentportfolio to maintain sufficient liquidity to support anticipated withdrawal demands. However, withdrawal and surrender levels may differ from anticipated levels for a variety ofreasons, including changes in economic conditions, changes in policyholder behavior or financial needs, or changes in our claims-paying ability. Any of these occurrences couldadversely affect our liquidity, profitability and financial condition.While we own a significant amount of liquid assets, we could exhaust all sources of liquidity and be forced to obtain additional financing or liquidate assets, perhaps on unfavorableterms, if we experience unanticipated withdrawal or surrender activity. The availability of additional39financing will depend on a variety of factors, such as market conditions, the availability of credit in general or more specifically in the insurance industry, the strength or weaknessof the capital markets, the volume of trading activities, our credit capacity, and the perception of our long- or short-term financial prospects if we incur large realized or unrealizedinvestment losses or if the level of business activity declines due to a market downturn. If we are forced to dispose of assets on unfavorable terms, it could have an adverse effect onour liquidity, results of operations and financial condition.Risks Related to the Construction segmentDBMG’s business is dependent upon major construction contracts, the unpredictable timing of which may result in significant fluctuations in its cash flow due to the timingof receipt of payment under such contracts.DBMG’s cash flow is dependent upon obtaining major construction contracts primarily from general contractors and engineering firms responsible for commercial and industrialconstruction projects, such as high- and low-rise buildings and office complexes, hotels and casinos, convention centers, sports arenas, shopping malls, hospitals, dams, bridges,mines and power plants. The timing of or failure to obtain contracts, delays in awards of contracts, cancellations of contracts, delays in completion of contracts, or failure to obtaintimely payment from DBMG’s customers, could result in significant periodic fluctuations in cash flows from DBMG’s operations. In addition, many of DBMG’s contracts requireit to satisfy specific progress or performance milestones in order to receive payment from the customer. As a result, DBMG may incur significant costs for engineering, materials,components, equipment, labor or subcontractors prior to receipt of payment from a customer. Such expenditures could have a material adverse effect on DBMG’s results ofoperations, cash flows or financial conditionThe nature of DBMG’s primary contracting terms for its contracts, including fixed-price and cost-plus pricing, could have a material adverse effect on DBMG’s results ofoperations, cash flows or financial condition.DBMG’s projects are awarded through a competitive bid process or are obtained through negotiation, in either case generally using one of two types of contract pricing approaches:fixed-price or cost-plus pricing. Under fixed-price contracts, DBMG performs its services and executes its projects at an established price, subject to adjustment only for changeorders approved by the customer, and, as a result, it may benefit from cost savings but be unable to recover any cost overruns. If DBMG does not execute such a contract withincost estimates, it may incur losses or the project may be less profitable than expected. Historically, the majority of DBMG’s contracts have been fixed-price arrangements. Therevenue, cost and gross profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:•failure to properly estimate costs of materials, including steel and steel components, engineering services, equipment, labor or subcontractors;•costs incurred in connection with modifications to a contract that may be unapproved by the customer as to scope, schedule, and/or price;•unanticipated technical problems with the structures, equipment or systems we supply;•unanticipated costs or claims, including costs for project modifications, customer-caused delays, errors or changes in specifications or designs, or contract termination;•changes in the costs of materials, engineering services, equipment, labor or subcontractors;•changes in labor conditions, including the availability and productivity of labor;•productivity and other delays caused by weather conditions;•failure to engage necessary suppliers or subcontractors, or failure of such suppliers or subcontractors to perform;•difficulties in obtaining required governmental permits or approvals;•changes in laws and regulations; and•changes in general economic conditions.Under cost-plus contracts, DBMG receives reimbursement for its direct labor and material cost, plus a specified fee in excess thereof, which is typically a fixed rate per hour, anoverall fixed fee, or a percentage of total reimbursable costs, up to a maximum amount, which is an arrangement that may protect DBMG against cost overruns. If DBMG is unableto obtain proper reimbursement for all costs incurred due to improper estimates, performance issues, customer disputes, or any of the additional factors noted above for fixed-pricecontracts, the project may be less profitable than expected.Generally, DBMG’s contracts and projects vary in length from 1 to 24 months, depending on the size and complexity of the project, project owner demands and other factors. Theforegoing risks are exacerbated for projects with longer-term durations because there is an increased risk that the circumstances upon which DBMG based its original estimates willchange in a manner that increases costs. In addition, DBMG sometimes bears the risk of delays caused by unexpected conditions or events. To the extent there are future costincreases that DBMG cannot recover from its customers, suppliers or subcontractors, the outcome could have a material adverse effect on DBMG’s results of operations, cashflows or financial condition.Furthermore, revenue and gross profit from DBMG’s contracts can be affected by contract incentives or penalties that may not be known or finalized until the later stages of thecontract term. Some of DBMG’s contracts provide for the customer’s review of its accounting and cost control systems to verify the completeness and accuracy of the reimbursablecosts invoiced. These reviews could result in reductions in reimbursable costs and labor rates previously billed to the customer.40The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extentrequired, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts in progress. Due to the various estimates inherent inDBMG’s contract accounting, actual results could differ from those estimates.DBMG’s billed and unbilled revenue may be exposed to potential risk if a project is terminated or canceled or if DBMG’s customers encounter financial difficulties.DBMG’s contracts often require it to satisfy or achieve certain milestones in order to receive payment for the work performed. As a result, under these types of arrangements,DBMG may incur significant costs or perform significant amounts of services prior to receipt of payment. If the ultimate customer does not proceed with the completion of theproject or if the customer or contractor under which DBMG is a subcontractor defaults on its payment obligations, DBMG may face difficulties in collecting payment of amountsdue to it for the costs previously incurred. If DBMG is unable to collect amounts owed to it, this could have a material adverse effect on DBMG’s results of operations, cash flowsor financial condition.DBMG may be exposed to additional risks as it obtains new significant awards and executes its backlog, including greater backlog concentration in fewer projects, potentialcost overruns and increasing requirements for letters of credit, each of which could have a material adverse effect on DBMG’s results of operations, cash flows or financialcondition.As DBMG obtains new significant project awards, these projects may use larger sums of working capital than other projects and DBMG’s backlog may become concentratedamong a smaller number of customers. Approximately $461.5 million, representing 63.8%, of DBMG’s backlog at December 31, 2017 was attributable to five contracts, letters ofintent, notices to proceed or purchase orders. If any significant projects such as these currently included in DBMG’s backlog or awarded in the future were to have material costoverruns, or be significantly delayed, modified or canceled, DBMG’s results of operations, cash flows or financial position could be adversely impacted.Moreover, DBMG may be unable to replace the projects that it executes in its backlog. Additionally, as DBMG converts its significant projects from backlog into activeconstruction, it may face significantly greater requirements for the provision of letters of credit or other forms of credit enhancements which exceed its current credit facilities.We can provide no assurance that DBMG would be able to access such capital and credit as needed or that it would be able to do so on economically attractive terms.DBMG may not be able to fully realize the revenue value reported in its backlog, a substantial portion of which is attributable to a relatively small number of large contractsor other commitments.As of December 31, 2017, DBMG had a backlog of work to be completed of approximately $723.4 million ($483.9 million under contracts or purchase orders and $239.5 millionunder letters of intent). Backlog develops as a result of new awards, which represent the revenue value of new project commitments received by DBMG during a given period,including legally binding commitments without a defined scope.Commitments may be in the form of written contracts, letters of intent, notices to proceed and purchase orders. New awards may also include estimated amounts of work to beperformed based on customer communication and historic experience and knowledge of our customers’ intentions. Backlog consists of projects which have either not yet beenstarted or are in progress but are not yet complete. In the latter case, the revenue value reported in backlog is the remaining value associated with work that has not yet beencompleted, which increases or decreases to reflect modifications in the work to be performed under a given commitment. The revenue projected in DBMG’s backlog may not berealized or, if realized, may not be profitable as a result of poor contract terms or performance.Due to project terminations, suspensions or changes in project scope and schedule, we cannot predict with certainty when or if DBMG’s backlog will be performed. From time totime, projects are canceled that appeared to have a high certainty of going forward at the time they were recorded as new awards. In the event of a project cancellation, DBMGtypically has no contractual right to the total revenue reflected in its backlog. Some of the contracts in DBMG’s backlog provide for cancellation fees or certain reimbursements inthe event customers cancel projects. These cancellation fees usually provide for reimbursement of DBMG’s out-of-pocket costs, costs associated with work performed prior tocancellation, and, to varying degrees, a percentage of the profit DBMG would have realized had the contract been completed. Although DBMG may be reimbursed for certain costs,it may be unable to recover all direct costs incurred and may incur additional unrecoverable costs due to the resulting under-utilization of DBMG’s assets. Approximately $461.5million, representing 63.8%, of DBMG’s backlog at December 31, 2017 was attributable to five contracts, letters of intent, notices to proceed or purchase orders. If one or more ofthese large contracts or other commitments are terminated or their scope reduced, DBMG's backlog could decrease substantially.DBMG’s failure to meet contractual schedule or performance requirements could have a material adverse effect on DBMG’s results of operations, cash flows or financialcondition.In certain circumstances, DBMG guarantees project completion by a scheduled date or certain performance levels. Failure to meet these schedule or performance requirements couldresult in a reduction of revenue and additional costs, and these adjustments could exceed projected profit. Project revenue or profit could also be reduced by liquidated damageswithheld by customers under contractual penalty provisions, which can be substantial and can accrue on a daily basis. Schedule delays can result in costs exceeding our projectionsfor a particular project. Performance41problems for existing and future contracts could cause actual results of operations to differ materially from those previously anticipated and could cause us to suffer damage to ourreputation within our industry and our customer base.DBMG’s government contracts may be subject to modification or termination, which could have a material adverse effect on DBMG’s results of operations, cash flows orfinancial condition.DBMG is a provider of services to U.S. government agencies and is therefore exposed to risks associated with government contracting. Government agencies typically canterminate or modify contracts to which DBMG is a party at their convenience, due to budget constraints or various other reasons. As a result, DBMG’s backlog may be reduced orit may incur a loss if a government agency decides to terminate or modify a contract to which DBMG is a party. DBMG is also subject to audits, including audits of internal controlsystems, cost reviews and investigations by government contracting oversight agencies. As a result of an audit, the oversight agency may disallow certain costs or withhold apercentage of interim payments. Cost disallowances may result in adjustments to previously reported revenue and may require DBMG to refund a portion of previously collectedamounts. In addition, failure to comply with the terms of one or more of our government contracts or government regulations and statutes could result in DBMG being suspendedor debarred from future government projects for a significant period of time, possible civil or criminal fines and penalties, the risk of public scrutiny of our performance, andpotential harm to DBMG’s reputation, each of which could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition. Other remedies thatgovernment agencies may seek for improper activities or performance issues include sanctions such as forfeiture of profit and suspension of payments.In addition to the risks noted above, legislatures typically appropriate funds on a year-by-year basis, while contract performance may take more than one year. As a result, contractswith government agencies may be only partially funded or may be terminated, and DBMG may not realize all of the potential revenue and profit from those contracts.Appropriations and the timing of payment may be influenced by, among other things, the state of the economy, competing political priorities, curtailments in the use of governmentcontracting firms, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures.DBMG is exposed to potential risks and uncertainties associated with its reliance on subcontractors and third-party vendors to execute certain projects.DBMG relies on third-party suppliers, especially suppliers of steel and steel components, and subcontractors to assist in the completion of projects. To the extent these partiescannot execute their portion of the work and are unable to deliver their services, equipment or materials according to the agreed-upon contractual terms, or DBMG cannot engagesubcontractors or acquire equipment or materials, DBMG’s ability to complete a project in a timely manner may be impacted. Furthermore, when bidding or negotiating forcontracts, DBMG must make estimates of the amounts these third parties will charge for their services, equipment and materials. If the amount DBMG is required to pay for third-party goods and services in an effort to meet its contractual obligations exceeds the amount it has estimated, DBMG could experience project losses or a reduction in estimatedprofit.Any increase in the price of, or change in supply and demand for, the steel and steel components that DBMG utilizes to complete projects could have a material adverse effecton DBMG’s results of operations, cash flows or financial condition.The prices of the steel and steel components that DBMG utilizes in the course of completing projects are susceptible to price fluctuations due to supply and demand trends, energycosts, transportation costs, government regulations, duties and tariffs, changes in currency exchange rates, price controls, general economic conditions and other unforeseencircumstances. Although DBMG may attempt to pass on certain of these increased costs to its customers, it may not be able to pass all of these cost increases on to its customers.As a result, DBMG’s margins may be adversely impacted by such cost increases.DBMG’s dependence on suppliers of steel and steel components makes it vulnerable to a disruption in the supply of its products.DBMG purchases a majority of the steel and steel components utilized in the course of completing projects from several domestic and foreign steel producers and suppliers. DBMGgenerally does not have long-term contracts with its suppliers. An adverse change in any of the following could have a material adverse effect on DBMG’s results of operations orfinancial condition:•its ability to identify and develop relationships with qualified suppliers;•the terms and conditions upon which it purchases products from its suppliers, including applicable exchange rates, transport costs and other costs, its suppliers’willingness to extend credit to it to finance its inventory purchases and other factors beyond its control;•financial condition of its suppliers;•political instability in the countries in which its suppliers are located;•its ability to import products;•its suppliers’ noncompliance with applicable laws, trade restrictions and tariffs;•its inability to find replacement suppliers in the event of a deterioration of the relationship with current suppliers; or•its suppliers’ ability to manufacture and deliver products according to its standards of quality on a timely and efficient basis.Intense competition in the markets DBMG serves could reduce DBMG’s market share and earnings.The principal geographic and product markets DBMG serves are highly competitive, and this intense competition is expected to continue. DBMG competes with other contractorsfor commercial, industrial and specialty projects on a local, regional, or national basis. Continued service within42these markets requires substantial resources and capital investment in equipment, technology and skilled personnel, and certain of DBMG’s competitors have financial and operatingresources greater than DBMG. Competition also places downward pressure on DBMG’s contract prices and margins. Among the principal competitive factors within the industryare price, timeliness of completion of projects, quality, reputation, and the desire of customers to utilize specific contractors with whom they have favorable relationships and priorexperience.While DBMG believes that it maintains a competitive advantage with respect to these factors, failure to continue to do so or to meet other competitive challenges could have amaterial adverse effect on DBMG’s results of operations, cash flows or financial condition.DBMG’s customers’ ability to receive the applicable regulatory and environmental approvals for projects and the timeliness of those approvals could adversely affectDBMG’s business.The regulatory permitting process for DBMG’s projects requires significant investments of time and money by DBMG’s customers and sometimes by DBMG. There are noassurances that DBMG’s customers or DBMG will obtain the necessary permits for these projects. Applications for permits may be opposed by governmental entities, individualsor special interest groups, resulting in delays and possible non-issuance of the permits.DBMG’s failure to obtain or maintain required licenses may adversely affect its business.DBMG is subject to licensure and holds licenses in each of the states in the United States in which it operates and in certain local jurisdictions within such states. While we believethat DBMG is in material compliance with all contractor licensing requirements in the various jurisdictions in which it operates, the failure to obtain, loss or revocation of anylicense or the limitation on any of DBMG’s primary services thereunder in any jurisdiction in which it conducts substantial operations could prevent DBMG from conductingfurther operations in such jurisdiction and have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.Volatility in equity and credit markets could adversely impact DBMG due to its impact on the availability of funding for DBMG’s customers, suppliers and subcontractors.Some of DBMG’s ultimate customers, suppliers and subcontractors have traditionally accessed commercial financing and capital markets to fund their operations, and theavailability of funding from those sources could be adversely impacted by volatile equity or credit markets. The unavailability of financing could lead to the delay or cancellation ofprojects or the inability of such parties to pay DBMG or provide needed products or services and thereby have a material adverse effect on DBMG’s results of operations, cashflows or financial condition.DBMG’s business may be adversely affected by bonding and letter of credit capacity.Certain of DBMG’s projects require the support of bid and performance surety bonds or letters of credit. A restriction, reduction, or termination of DBMG’s surety bondagreements or letter of credit facilities could limit its ability to bid on new project opportunities, thereby limiting new awards, or to perform under existing awards.DBMG is vulnerable to significant fluctuations in its liquidity that may vary substantially over time.DBMG’s operations could require the utilization of large sums of working capital, sometimes on short notice and sometimes without assurance of recovery of the expenditures.Circumstances or events that could create large cash outflows include losses resulting from fixed-price contracts, environmental liabilities, litigation risks, contract initiation orcompletion delays, customer payment problems, professional and product liability claims and other unexpected costs. There is no guarantee that DBMG’s facilities will be sufficientto meet DBMG’s liquidity needs or that DBMG will be able to maintain such facilities or obtain any other sources of liquidity on attractive terms, or at all.DBMG’s projects expose it to potential professional liability, product liability, warranty and other claims.DBMG’s operations are subject to the usual hazards inherent in providing engineering and construction services for the construction of often large commercial industrial facilities,such as the risk of accidents, fires and explosions. These hazards can cause personal injury and loss of life, business interruptions, property damage and pollution andenvironmental damage. DBMG may be subject to claims as a result of these hazards. In addition, the failure of any of DBMG’s products to conform to customer specificationscould result in warranty claims against it for significant replacement or rework costs, which could have a material adverse effect on DBMG’s results of operations, cash flows orfinancial condition.Although DBMG generally does not accept liability for consequential damages in its contracts, should it be determined liable, it may not be covered by insurance or, if covered, thedollar amount of these liabilities may exceed applicable policy limits. Any catastrophic occurrence in excess of insurance limits at project sites involving DBMG’s products andservices could result in significant professional liability, product liability, warranty or other claims against DBMG. Any damages not covered by insurance, in excess of insurancelimits or, if covered by insurance, subject to a high deductible, could result in a significant loss for DBMG, which may reduce its profits and cash available for operations. Theseclaims could also make it difficult for DBMG to obtain adequate insurance coverage in the future at a reasonable cost. Additionally, customers or subcontractors that have agreed toindemnify DBMG against such losses may refuse or be unable to pay DBMG.43DBMG may experience increased costs and decreased cash flow due to compliance with environmental laws and regulations, liability for contamination of the environmentor related personal injuries.DBMG is subject to environmental laws and regulations, including those concerning emissions into the air, discharge into waterways, generation, storage, handling, treatment anddisposal of waste materials and health and safety.DBMG’s fabrication business often involves working around and with volatile, toxic and hazardous substances and other highly regulated pollutants, substances or wastes, forwhich the improper characterization, handling or disposal could constitute violations of U.S. federal, state or local laws and regulations and laws of other countries, and result incriminal and civil liabilities. Environmental laws and regulations generally impose limitations and standards for certain pollutants or waste materials and require DBMG to obtainpermits and comply with various other requirements. Governmental authorities may seek to impose fines and penalties on DBMG, or revoke or deny issuance or renewal ofoperating permits for failure to comply with applicable laws and regulations. DBMG is also exposed to potential liability for personal injury or property damage caused by anyrelease, spill, exposure or other accident involving such pollutants, substances or wastes. In connection with the historical operation of our facilities, substances which currently areor might be considered hazardous may have been used or disposed of at some sites in a manner that may require us to make expenditures for remediation.The environmental, health and safety laws and regulations to which DBMG is subject are constantly changing, and it is impossible to predict the impact of such laws andregulations on DBMG in the future. We cannot ensure that DBMG’s operations will continue to comply with future laws and regulations or that these laws and regulations will notcause DBMG to incur significant costs or adopt more costly methods of operation.Additionally, the adoption and implementation of any new regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, DBMG’s customers’equipment and operations could significantly impact demand for DBMG’s services, particularly among its customers for industrial facilities.Any expenditures in connection with compliance or remediation efforts or significant reductions in demand for DBMG’s services as a result of the adoption of environmentalproposals could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.DBMG is and will likely continue to be involved in litigation that could have a material adverse effect on DBMG’s results of operations, cash flows or financial condition.DBMG has been and may be, from time to time, named as a defendant in legal actions claiming damages in connection with fabrication and other products and services DBMGprovides and other matters. These are typically claims that arise in the normal course of business, including employment-related claims and contractual disputes or claims forpersonal injury or property damage which occur in connection with services performed relating to project or construction sites. Contractual disputes normally involve claims relatingto the timely completion of projects or other issues concerning fabrication and other products and services DBMG provides. There can be no assurance that any of DBMG’spending contractual, employment-related personal injury or property damage claims and disputes will not have a material effect on DBMG’s future results of operations, cash flowsor financial condition.Work stoppages, union negotiations and other labor problems could adversely affect DBMG’s business.A portion of DBMG’s employees are represented by labor unions, and 24% of DBMG’s employees are covered under collective bargaining agreements that expire in less than oneyear, but are currently being renegotiated. A lengthy strike or other work stoppage at any of its facilities could have a material adverse effect on DBMG’s business. There is inherentrisk that ongoing or future negotiations relating to collective bargaining agreements or union representation may not be favorable to DBMG. From time to time, DBMG also hasexperienced attempts to unionize its non-union facilities. Such efforts can often disrupt or delay work and present risk of labor unrest.DBMG’s employees work on projects that are inherently dangerous, and a failure to maintain a safe work site could result in significant losses.DBMG often works on large-scale and complex projects, frequently in geographically remote locations. Such involvement often places DBMG’s employees and others near largeequipment, dangerous processes or highly regulated materials. If DBMG or other parties fail to implement appropriate safety procedures for which they are responsible or if suchprocedures fail, DBMG’s employees or others may suffer injuries. In addition to being subject to state and federal regulations concerning health and safety, many of DBMG’scustomers require that it meet certain safety criteria to be eligible to bid on contracts, and some of DBMG’s contract fees or profits are subject to satisfying safety criteria. Unsafework conditions also have the potential of increasing employee turnover, project costs and operating costs. The failure to comply with safety policies, customer contracts orapplicable regulations could subject DBMG to losses and liability and could result in a variety of administrative, civil and criminal enforcement measures.44Risks Related to the Marine Services segmentGMSL may be unable to maintain or replace its vessels as they age.The expense of maintaining, repairing and upgrading GMSL’s vessels typically increases with age, and after a period of time the cost necessary to satisfy required marinecertification standards may not be economically justifiable. There can be no assurance that GMSL will be able to maintain its fleet by extending the economic life of its existingvessels, or that its financial resources will be sufficient to enable it to make the expenditures necessary for these purposes. In addition, the supply of second-hand replacementvessels is relatively limited and the costs associated with acquiring a newly constructed vessel are high. In the event that GMSL was to lose the use of any of its vessels for asustained period of time, its financial performance would be adversely affected.The operation and leasing of seagoing vessels entails the possibility of marine disasters, including damage or destruction of vessels due to accident, the loss of vessels due topiracy or terrorism, damage or destruction of cargo and similar events that may cause a loss of revenue from affected vessels and damage GMSL’s business reputation,which may in turn lead to loss of business.The operation of seagoing vessels entails certain inherent risks that may adversely affect GMSL’s business and reputation, including:•damage or destruction of a vessel due to marine disaster such as a collision or grounding;•the loss of a vessel due to piracy and terrorism;•compliance with laws and regulations governing the discharge of oil, hazardous substances, ballast water and other substances;•cargo and property losses or damage as a result of the foregoing or less drastic causes such as human error, mechanical failure and bad weather;•environmental accidents as a result of the foregoing;•the availability of insurance at reasonable rates; and•business interruptions and delivery delays caused by mechanical failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weatherconditions.Any of these circumstances or events could substantially increase GMSL’s operating costs, as for example, the cost of substituting or replacing a vessel, or lower its revenues bytaking vessels out of operation permanently or for periods of time. The involvement of GMSL’s vessels in a disaster or delays in delivery or damages or loss of cargo may harm itsreputation as a safe and reliable vessel operator and cause it to lose business.GMSL’s operations are subject to complex laws and regulations, including environmental laws and regulations that result in substantial costs and other risks.GMSL does business with clients in the oil and natural gas industry, which is extensively regulated by U.S. federal, state, tribal, and local authorities, and corresponding foreigngovernmental authorities. Legislation and regulations affecting the oil and natural gas industry are under constant review for amendment or expansion, raising the possibility ofchanges that may become more stringent and, as a result, may affect, among other things, the pricing or marketing of crude oil and natural gas production. Noncompliance withstatutes and regulations and more vigorous enforcement of such statutes and regulations by regulatory agencies may lead to substantial administrative, civil, and criminal penalties,including the assessment of natural resource damages, the imposition of significant investigatory and remedial obligations, and may also result in the suspension or termination ofour operations.Global Marine has material obligations under the Global Marine Pension Plan and related Recovery Plan.In order to satisfy the requirements of Section 226 of the Pensions Act of 2004 (UK) ("UK Pensions Act 2004"), GMSL is a party to the Global Marine Pension Plan RecoveryPlan, dated as of March 28, 2014 (the "Recovery Plan"). The Recovery Plan addresses GMSL’s pension funding shortfall, which (on the basis of U.S. GAAP accountingestimates) was approximately $18.6 million as of December 31, 2017, by requiring GMSL to make certain scheduled fixed monthly contributions, certain variable annual profit-related contributions and certain variable dividend-related contributions to the pension plan. The variable dividend-related contributions require GMSL to pay cash contributions tothe underfunded pension plan equal to 50% of any dividend payments made to its shareholder, which reduces the amount of cash available for GMSL to make upstream dividendpayments to us.However the Global Marine Pension Plan must be valued on a triennial basis, and all valuations are dependent upon the prevailing market conditions and the actuarial methods andassumptions used as well as the expected pension liabilities at the valuation date. The next valuation is due for the Global Marine Pension Plan position as of December 31, 2016,and the valuation report will be published in 2018. There are various risks which could adversely affect the next valuation of the Global Marine Pension Plan and, consequently, theobligations of GMSL to fund the plan, such as a significant adverse change in the market value of the pension plan assets, an increase in pension liabilities, longer life expectancy ofplan members, a change in the discount rate or inflation rate used by the actuary or if the trustees of the plan recommend a material change to the investment strategy. Any increasein the deficit may result in a need for GMSL to increase its pension contributions, which would reduce the amount of cash available for GMSL to make upstream dividendpayments to us. While we expect the trustees of the pension plan to renegotiate the Recovery Plan on at least a triennial basis or to dispense with the Recovery Plan if and when thefunding shortfall has been eliminated, we can make no assurances in relation to this.45Under the UK Pensions Act 2004, The Pensions Regulator may issue a contribution notice to us or any employer in the UK pension plan or any person who is connected with or isan associate of any such employer where The Pensions Regulator is of the opinion that the relevant person has been a party to an act, or a deliberate failure to act, which had as itsmain purpose (or one of its main purposes) the avoidance of pension liabilities. Under the UK Pensions Act 2008, The Pensions Regulator has the power to issue a contributionnotice to any person where The Pensions Regulator is of the opinion that such person has been a party to an act, or a deliberate failure to act, which has a materially detrimentaleffect on a pension plan without sufficient mitigation having been provided. If The Pensions Regulator determines that any of the employers participating in the Global MarinePension Plan are "insufficiently resourced" or a "service company", it may impose a financial support direction requiring such employer or any person associated or connected (seebelow) with that employer to put in place financial support.The Pensions Regulator can only issue a contribution notice or financial support direction where it believes it is reasonable to do so. The terms "associate" and "connected person"are broadly defined in the UK Insolvency Act (1986) and would cover, among others, GMSL, its subsidiaries and others deemed to be "shadow directors". Liabilities imposedunder a contribution notice or financial support direction may be up to the difference between the value of the assets of the plan and the cost of buying out the benefits of membersand other beneficiaries. If GMSL or its connected or associated parties are the recipient of a contribution notice or financial support direction this could have an effect on our cashflow.In practice, the risk of a contribution notice being imposed may restrict our ability to restructure or undertake certain corporate activities relating to GMSL without first seekingagreement of the trustees of the Global Marine Pension Plan and, possibly, the approval of The Pensions Regulator. Additional security may also need to be provided to the trusteesbefore certain corporate activities can be undertaken (such as the payment of an unusual dividend from GMSL) and any additional funding required by the Global Marine PensionPlan may have an adverse effect on our financial condition and the results of our operations.Litigation, enforcement actions, fines or penalties could adversely impact GMSL’s financial condition or results of operations and damage its reputation.GMSL’s business is subject to various international laws and regulations that could lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claimsand damages. In addition, improper conduct by GMSL’s employees or agents could damage its reputation and lead to litigation or legal proceedings that could result in significantawards or settlements to plaintiffs and civil or criminal penalties, including substantial monetary fines. Such events could lead to an adverse impact on GMSL’s financial conditionor results of operations, if not mitigated by its insurance coverage.As a result of any ship or other incidents, litigation claims, enforcement actions and regulatory actions and investigations, including, but not limited to, those arising from personalinjury, loss of life, loss of or damage to personal property, business interruption losses or environmental damage to any affected coastal waters and the surrounding area, may beasserted or brought against various parties including GMSL. The time and attention of GMSL’s management may also be diverted in defending such claims, actions andinvestigations. GMSL may also incur costs both in defending against any claims, actions and investigations and for any judgments, fines or civil or criminal penalties if such claims,actions or investigations are adversely determined and not covered by its insurance policies.Currency exchange rate fluctuations may negatively affect GMSL’s operating results.The exchange rates between the US dollar, the Singapore dollar, the Euro and the GBP have fluctuated in recent periods and may fluctuate substantially in the future. Accordingly,any material fluctuation of the exchange rate of the US Dollar against the Euro, GBP and Singapore dollar could have a negative impact on GMSL’s results of operations andfinancial condition.There are risks inherent in foreign joint ventures and investments, such as adverse changes in currency values and foreign regulations.The joint ventures in which GMSL has operating activities or interests that are located outside the United States are subject to certain risks related to the indirect ownership anddevelopment of, or investment in, foreign subsidiaries, including government expropriation and nationalization, adverse changes in currency values and foreign exchange controls,foreign taxes, U.S. taxes on the repatriation of funds to the United States, and other laws and regulations, any of which may have a material adverse effect on GMSL’s investments,financial condition, results of operations, or cash flows.GMSL derives a significant amount of its revenues from sales to customers outside of the United States, which poses additional risks, including economic, political and otheruncertainties.GMSL’s non-U.S. sales are significant in relation to consolidated sales. GMSL believes that non-U.S. sales will remain a significant percentage of its revenue. In addition, sales ofits products to customers operating in foreign countries that experience political/economic instability or armed conflict could result in difficulties in delivering and installing completeseismic energy source systems within those geographic areas and receiving payment from these customers. Furthermore, restrictions under the FCPA, the Bribery Act, or similarlegislation in other countries, or trade embargoes or similar restrictions imposed by the United States or other countries, could limit GMSL’s ability to do business in certain foreigncountries. These factors could materially adversely affect GMSL’s results of operations and financial condition.46Further deterioration of economic opportunities in the oil and gas sector could adversely affect the financial growth of GMSL.The oil and gas market has experienced an exceptional upheaval since early 2014 with the price of oil falling dramatically and this economic weakness could continue into theforeseeable future. Oil prices can be very volatile and are subject to international supply and demand, political developments, increased supply from new sources and the influenceof OPEC in particular. The major operators are reviewing their overall capital spending and this trend is likely to reduce the size and number of projects carried out in the mediumterm as the project viability comes under greater scrutiny. This is especially true of offshore oil and gas industry, which is our focus in the oil and gas space as it is a relativelyexpensive method of drilling for oil and natural gas. Ongoing concerns about the systemic impact of lower oil prices and the continued uncertainty of possible reductions in long-term capital expenditure could have a material adverse effect on the planned growth of GMSL and eventually curtail the anticipated cash flow and results from operations.Delay or inability to obtain appropriate certifications for our vessels may result in us being unable to win new contracts and fulfill our obligations under our existingcontracts.Our customers require that our vessels are inspected and certified by a recognized independent third party in order for us to be able to participate in tenders for their projects. Inaddition, we are required under our contracts with our customers to maintain such certifications. Each of our vessels is certified by the American Bureau of Shipping ("ABS"). TheABS’s certification process generally involves regularly scheduled extensive vessel surveys by marine engineers evaluating the integrity and seaworthiness of our vessels. If we areunable to maintain or obtain these certifications, we may be unable to service our customers under our existing contracts and may not be eligible to participate in future tenders,which could have an adverse effect on our business, financial condition or results of operations.GMSL’s business is dependent on capital spending by our customers, and reductions in capital spending could have a material adverse effect on our business, consolidatedresults of operations, and consolidated financial condition.Our business is directly affected by changes in capital expenditures by our customers, and further reductions in their capital spending could reduce demand for our services andproducts and have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. Some of the items that may impact ourcustomer’s capital spending include:•oil and natural gas prices, including volatility of oil and natural gas prices and expectations regarding future prices;•the inability of our customers to access capital on economically advantageous terms;•technological advances that make subsea cable communications less attractive or obsolete;•the consolidation of our customers;•customer personnel changes; and•adverse developments in the business or operations of our customers, including write-downs of reserves and borrowing base reductions under customer credit facilities.As a result of the decreases in oil and natural gas prices, many of our customers in this industry reduced capital spending in 2016 and 2017. While customer budgets are slowlyincreasing in response to improved market conditions, any prolonged further reduction in commodity prices may result in further capital budget reductions in the future.Some of our customers require bids for contracts in the form of long-term, fixed pricing contracts that may require us to assume additional risks associated with cost over-runs, operating cost inflation, labor availability and productivity, supplier and contractor pricing and performance, and potential claims for liquidated damages.Some of our customers may require bids for contracts in the form of long-term, fixed pricing contracts that may require us to provide integrated project management services outsideour normal discrete business to act as project managers as well as service providers, and may require us to assume additional risks associated with cost over-runs. These customersmay provide us with inaccurate information. These issues may also result in cost over-runs, delays, and project losses.GMSL’s operations require us to comply with a number of United States and international regulations, violations of which could have a material adverse effect on ourbusiness, consolidated results of operations, and consolidated financial condition.Our operations require us to comply with a number of United States and international regulations. For example, our operations in countries outside the United States are subject tothe United States Foreign Corrupt Practices Act (FCPA), which prohibits United States companies and their agents and employees from providing anything of value to a foreignofficial for the purposes of influencing any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person or corporateentity, or obtain any unfair advantage. Our activities create the risk of unauthorized payments or offers of payments by our employees, agents, or joint venture partners that could bein violation of anti-corruption laws, even though some of these parties are not subject to our control. We have internal control policies and procedures and have implemented trainingand compliance programs for our employees and agents with respect to the FCPA. However, we cannot assure that our policies, procedures, and programs always will protect usfrom reckless or criminal acts committed by our employees or agents. Allegations of violations of applicable anti-corruption laws have resulted and may in the future result ininternal, independent, or government investigations. Violations of anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities,which could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. The age of GMSL’s fleet vessels may restrict usfrom doing business with certain customers.47Certain of our existing and potential customers have policies regarding the minimum acceptable original build age of vessels for use on their projects. Our vessels have an averageoriginal build age of approximately 26 years as of December 31, 2017. Two of our ten vessels have original build ages of over 30 years, and such policies may preclude us fromparticipating in tenders for new contracts at all or without producing third party feasibility studies of our vessels. Any trend towards restricting the operation of vessels with olderoriginal build ages, either from our customers or under the regulations in the jurisdictions in which a particular vessel operates, could have an adverse effect on our business,financial condition or results of operations, particularly as our vessels continue to age.Vessel construction, upgrade, refurbishment and repair projects are subject to risks, including delays and cost overruns, which could have an adverse impact on ouravailable cash resources and results of operations.GMSL expects to incur significant new construction and/or upgrade, refurbishment and repair expenditures for our vessel fleet from time to time, particularly in light of the agingnature of our vessels and requests for upgraded equipment from our customers. Some of these expenditures may be unplanned. Vessel construction, upgrade, refurbishment andrepair projects may be subject to the risks of delay or cost overruns, including delays or cost overruns resulting from any one or more of the following:•unexpectedly long delivery times for, or shortages of, key equipment, parts or materials;•shortages of skilled labor and other shipyard personnel necessary to perform the work;•shipyard delays and performance issues;•failures or delays of third-party equipment vendors or service providers;•unforeseen increases in the cost of equipment, labor and raw materials, particularly steel;•work stoppages and other labor disputes;•unanticipated actual or purported change orders;•disputes with shipyards and suppliers;•design and engineering problems;•latent damages or deterioration to equipment and machinery in excess of engineering estimates and assumptions;•financial or other difficulties at shipyards;•interference from adverse weather conditions;•difficulties in obtaining necessary permits or in meeting permit conditions; and•customer acceptance delays.Significant cost overruns or delays could materially affect our financial condition and results of operations.Additionally, capital expenditures for vessel upgrade, refurbishment and repair projects could materially exceed our planned capital expenditures. The failure to complete such aproject on time, or the inability to complete it in accordance with our design specifications, may, in some circumstances, result in loss of revenues, penalties and/or delay, as well asrenegotiation or cancellation of one or more contracts. In the event of termination of one of these contracts, we may not be able to secure a replacement contract on as-favorableterms. Moreover, our vessels undergoing upgrade, refurbishment and repair will typically not earn revenue during periods when they are out of service.Liability for cleanup costs, natural resource damages, and other damages arising as a result of environmental laws could be substantial and could have a material adverseeffect on our liquidity, consolidated results of operations, and consolidated financial condition.We are exposed to claims under environmental requirements and carry insurance in accordance with international shipping agreements. In the United States and many foreignsubsidiaries, environmental requirements and regulations typically impose strict liability. Strict liability means that in some situations we could be exposed to liability for cleanupcosts, natural resource damages, and other damages as a result of our conduct that was lawful at the time it occurred or the conduct of prior operators or other third parties.Liability for damages arising as a result of environmental laws could be substantial and could have a material adverse effect on our liquidity, consolidated results of operations, andconsolidated financial condition.A revocation or modification of Opinion rulings by the Customs and Border Patrol (CBP) of the Jones Act could result in restrictions on GMSL’s services to U.S. Coastalareas in the United States.GMSL is subject to U.S. cabotage laws that impose certain restrictions on the ownership and operation of vessels in the U.S. coastwise trade (i.e., the transportation of passengersand merchandise between points in the United States), including the transportation of cargo. These laws are principally contained in 46 U.S.C. § 50501 and 46 U.S.C. Chapter 551and related regulations and are commonly referred to collectively as the "Jones Act." Subject to limited exceptions, the Jones Act requires that vessels engaged in U.S. coastwisetrade be built in the United States, registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S. citizens within the meaning of the JonesAct. Should GMSL be required to comply with the U.S. citizenship requirements of the Jones Act, it may be prohibited from operating its vessels in the U.S. coastwise trade.A portion of GMSL’s operations may be conducted in the U.S. coastal areas, possibly extending to cable laying and repair activities on the US continental shelf. Subject to limitedexceptions, the Jones Act requires that vessels engaged in U.S. coastwise trade be built in the United States, registered under the U.S. flag, manned by predominantly U.S. crews,and owned and operated by U.S. citizens within the meaning of the Jones48Act. Under existing rules, the Jones Act exempts certain foreign construction vessels working in the offshore oil and gas sector delivering repair materials for pipelines andplatforms, which may include work performed by GMSL U.S. coastal areas. In 2017, the U.S. Customs and Border Protection (CBP) requested comments for a proposal to extendthe Jones Act restrictions to vessels supplying equipment to offshore facilities in the U.S. coastwise trade, which, if adopted, could prohibit GMSL from directly operating in U.S.coastal areas. Such a new interpretation would attempt to extend the Jones Act to include previously exempted foreign construction vessels working in the offshore oil and gassector delivering repair materials for pipelines and platforms, and also to cable vessels laying and repair cables. Any such revocation or modification of Opinion rulings by the CBPof the Jones Act, if adopted, could have an adverse effect on GMSL’s business.In May 2017, CPB withdrew its proposal to amend the Jones Act in a way that would have made a bulk of international offshore construction vessels banned from working in U.S.waters in the offshore oil and gas industry. The CPB stated, "Based on the many substantive comments CBP received, both supporting and opposing the proposed action, andCBP’s further research on the issue, we conclude that the Agency’s notice of proposed modification and revocation of the various ruling letters relating to the Jones Act should bereconsidered. Accordingly, CBP is withdrawing its proposed action relating to the modification of HQ 101925 and revision of rulings determining certain articles are vesselequipment under T.D. 49815(4), as set forth in the January 18, 2017 notice.There are risks inherent in foreign joint ventures and investments, such as adverse changes in currency values and foreign regulations.The joint ventures in which GMSL has operating activities or interests that are located outside the United States are subject to certain risks related to the indirect ownership anddevelopment of, or investment in, foreign subsidiaries. These risks include government expropriation and nationalization, adverse changes in currency values and foreign exchangecontrols, foreign taxes, U.S. taxes on the repatriation of funds to the United States, and other laws and regulations, any of which may have a material adverse effect on GMSL’sinvestments, financial condition, results of operations, or cash flows. In particular, given our investments in joint ventures in China, there are also substantial uncertainties regardingthe interpretation, application and enforcement of China’s laws and regulations. The effectiveness of newly enacted laws, regulations or amendments in China may be delayed,resulting in detrimental reliance by foreign investors. Furthermore, new laws and regulations that affect existing and proposed future businesses in China may also be appliedretroactively. The unpredictability of the interpretation and application of existing and new China laws and regulations may raise additional challenges for us as our joint ventures inChina develop and grow. Our failure to understand these laws or an unforeseen change in a law, or the application thereof, may have a material adverse effect on GMSL’sinvestments, financial condition, results of operations, or cash flows.Risks Related to our Telecommunications segmentOur Telecommunications segment is substantially smaller than some of our major competitors, whose marketing and pricing decisions, and relative size advantage couldadversely affect our ability to attract and to retain customers. These major competitors are likely to continue to cause significant pricing pressures that could adversely affectICS’s net revenues, results of operations and financial condition.The carrier services telecommunications industry is significantly influenced by the marketing and pricing decisions of the larger business participants. The rapid development of newtechnologies, services and products has eliminated many of the traditional distinctions among wireless, cable, Internet, local and long distance communication services. We facemany competitors in this market, including telephone companies, cable companies, wireless service providers, satellite providers, application and device providers. ICS facescompetition for its voice trading services from telecommunication services providers’ traditional processes and new companies. Once telecommunication services providers haveestablished business relationships with competitors to ICS, it could be extremely difficult to convince them to utilize our services. These competitors may be able to develop servicesor processes that are superior to ICS’s services or processes, or that achieve greater industry acceptance.Many of our competitors are significantly larger than us and have substantially greater financial, technical and marketing resources, larger networks, a broader portfolio of serviceofferings, greater control over network and transmission lines, stronger name recognition and customer loyalty and long-standing relationships with our target customers. As aresult, our ability to attract and retain customers may be adversely affected. Many of our competitors enjoy economies of scale that result in low cost structures for transmission andrelated costs that could cause significant pricing pressures within the industry.Our ability to compete effectively will depend on, among other things, our network quality, capacity and coverage, the pricing of our products and services, the quality of ourcustomer service, our development of new and enhanced products and services, the reach and quality of our sales and distribution channels and our capital resources. It will alsodepend on how successfully we anticipate and respond to various factors affecting our industry, including new technologies and business models, changes in consumer preferencesand demand for existing services, demographic trends and economic conditions. While growth through acquisitions is a possible strategy for ICS, there are no guarantees that anyacquisitions will occur, nor are there any assurances that any acquisitions by ICS would improve the financial results of its business. If we are not able to respond successfully tothese competitive challenges, we could experience reduced revenues.ICS suppliers may not be able to obtain credit insurance on ICS, which could have a material adverse effect on ICS’s business.ICS makes purchases from its suppliers, who may rely on the ability to obtain credit insurance on ICS in determining whether or not to extend short-term credit to ICS in the formof accounts receivables. To the extent that these suppliers are unable to obtain such insurance they may be unwilling to extend credit. In early 2016, two significant insurers of thistype of credit, Euler and Coface, determined that they will not insure ICS credit, and that the existing policies on its credit were cancelled based on their analysis of the financialcondition of HC2, including its49indebtedness levels, recent net losses and negative cash flow. As a result, we expect ICS’s suppliers to find it difficult to obtain credit insurance on ICS, which could have a materialadverse effect on ICS’s business, financial condition, results of operations and prospects.Any failure of ICS’s physical infrastructure, including undetected defects in technology, could lead to significant costs and disruptions that could reduce its revenue andharm its business reputation and financial results.ICS depends on providing customers with highly reliable service. ICS must protect its infrastructure and any collocated equipment from numerous factors, including:•human error;•physical or electronic security breaches;•fire, earthquake, flood and other natural disasters;•water damage;•power loss; and•terrorism, sabotage and vandalism.Problems at one or more of ICS’s exchange delivery points, whether or not within ICS’s control, could result in service interruptions or significant equipment damage. Any loss ofservices, equipment damage or inability to terminate voice calls or supply Internet capacity could reduce the confidence of the members and customers and could consequentlyimpair ICS’s ability to obtain and retain customers, which would adversely affect both ICS’s ability to generate revenues and its operating results.ICS’s positioning in the marketplace and intense domestic and international competition in these services places a significant strain on our resources, which if not managedeffectively could result in operational inefficiencies and other difficulties.To manage ICS’s market positioning effectively, we must continue to implement and improve its operational and financial systems and controls, invest in critical networkinfrastructure to expand its coverage and capacity, maintain or improve its service quality levels, purchase and utilize other transmission facilities, evolve its support and billingsystems and train and manage its employee base. If we inaccurately forecast the movement of traffic onto ICS’s network, we could have insufficient or excessive transmissionfacilities and disproportionate fixed expenses. As we proceed with the development of our ICS business, operational difficulties could arise from additional demand placed oncustomer provisioning and support, billing and management information systems, product delivery and fulfillment, support, sales and marketing, administrative resources, networkinfrastructure, maintenance and upgrading. For instance, we may encounter delays or cost-overruns or suffer other adverse consequences in implementing new systems whenrequired.If ICS is not able to operate a cost-effective network, we may not be able to grow our ICS business successfully.Our business’s long-term success depends on our ability to design, implement, operate, manage, maintain and upgrade a reliable and cost-effective network infrastructure. Inaddition, we rely on third-party equipment and service vendors to expand and manage ICS’s global network through which it provides its services. If we fail to generate additionaltraffic on ICS’s network, if we experience technical or logistical impediments to the development of necessary aspects of ICS’s network or the migration of traffic and customersonto ICS’s network, or if we experience difficulties with third-party providers, we may not achieve desired economies of scale or otherwise be successful in growing our ICSbusiness.Our telecommunications network infrastructure has several vulnerabilities and limitations. Our telecommunications network is the source of most of ICS’s revenues and any damages to or loss of our equipment or any problem with or limitation of ICS’s network whetheraccidental or otherwise, including network, hardware and software failures may result in a reduction in the number of our customers or usage level by our customers, our inability toattract new customers or increased maintenance costs, all of which would have a negative impact on our results of operations. The development and operation of our network issubject to problems and technological risks, including:•physical damage;•power surges or outages;•capacity limitations;•software defects as well as hardware and software obsolescence;•breaches of security, whether by computer virus, break-in or otherwise;•denial of access to our sites for failure to obtain required municipal or other regulatory approvals; and•other factors which may cause interruptions in service or reduced capacity for our customers. Our operations also rely on a stable supply of utilities service. We cannot assure you that future supply instability will not impair our ability to procure required utility services in thefuture, which could adversely impact our business, financial condition and results of operations.50ICS may be unable to maintain or expand its network in a timely manner or without undue cost.Our ability to achieve our strategic objectives will depend in large part upon the successful, timely and cost effective expansion of our network. Factors that could affect such build-out include: •municipal or regional political events or local rulings;•our ability to obtain permits to use public rights of way;•state municipal elections and change of local government administration;•our ability to generate cash flow or to obtain future financing necessary for such build-out;•unforeseen delays, costs or impediments relating to the granting of municipal and state permits for our build-out; and•delays or disruptions resulting from physical damage, power loss, defective equipment or the failure of third party suppliers or contractors to meet their obligations in atimely and cost−effective manner; and regulatory and political risks, such as the revocation or termination of our concessions, the temporary seizure or permanentexpropriation of assets, import and export controls, political instability, changes in the regulation of telecommunications and any future restrictions or easing of restrictionson the repatriation of profits or on foreign investment.Although we believe that our cost estimates and expansion schedule are reasonable, we cannot assure you that the actual construction costs or time required to complete the build-out will not substantially exceed our current estimates. Any significant cost overrun or delay could hinder or prevent the successful implementation of our business plan, includingthe development of a significantly larger customer base, and result in revenues and net income being less than expected.Changes in the regulatory framework under which we operate could adversely affect our business prospects or results of operations.Our domestic operations are subject to regulation by federal and state agencies, and our international operations are regulated by various foreign governments and internationalbodies. These regulatory regimes may restrict or impose conditions on our ability to operate in designated areas and to provide specified products or services. We are frequentlyrequired to maintain licenses for our operations and conduct our operations in accordance with prescribed standards. We are from time to time involved in regulatory and othergovernmental proceedings or inquiries related to the application of these requirements. It is impossible to predict with any certainty the outcome of pending federal and stateregulatory proceedings relating to our operations, or the reviews by federal or state courts of regulatory rulings. Moreover, new laws or regulations or changes to the existingregulatory framework could affect how we manage our wireline and wireless networks, impose additional costs, impair revenue opportunities, and potentially impede our ability toprovide services in a manner that would be attractive to us and our customers.Service interruptions due to natural disasters or unanticipated problems with our network infrastructure could result in customer loss. Natural disasters or unanticipated problems with our network infrastructure could cause interruptions in the services we provide. The failure of a switch and our back-up systemwould result in the interruption of service to the customers served by that switch until necessary repairs are completed or replacement equipment is installed. The successfuloperation of our network and its components is highly dependent upon our ability to maintain the network and its components in reliable enough working order to provide sufficientquality of service to attract and maintain customers. Any damage or failure that causes interruptions in our operations or lack of adequate maintenance of our network could result inthe loss of customers and increased maintenance costs that would adversely impact our results of operations and financial condition. We have backup data for our key information and data processing systems that could be used in the event of a catastrophe or a failure of our primary systems, and have establishedalternative communication networks where available. However, we cannot assure you that our business activities would not be materially disrupted if there were a partial orcomplete failure of any of these primary information technology systems or communication networks. Such failures could be caused by, among other things, software bugs,computer virus attacks or conversion errors due to system upgrading. In addition, any security breach caused by unauthorized access to information or systems, or intentionalmalfunctions or loss or corruption of data, software, hardware or other computer equipment, could have a material adverse effect on our business, results of operations and financialcondition.Our insurance coverage may not adequately cover losses resulting from the risks for which we are insured. We maintain insurance policies for our network facilities and all of our corporate assets. This insurance coverage protects us in the event we suffer losses resulting from theft, fraud,natural disasters or other similar events or from business interruptions caused by such events. In addition, we maintain insurance policies for our directors and officers. We cannotassure you however, that such insurance will be sufficient or will adequately cover potential losses. We could be adversely affected if major suppliers fail to provide needed equipment and services on a timely or cost-efficient basis or are unwilling to provide us credit onfavorable terms or at all. We rely on a few strategic suppliers and vendors to provide us with equipment, materials and services that we need in order to expand and to operate our business. There are alimited number of suppliers with the capability of providing the network equipment and platforms that our operations and expansion plans require or the services that we require tomaintain our extensive and geographically widespread networks. In addition, because the supply of network equipment and platforms requires detailed supply planning and thisequipment is technologically complex,51it would be difficult for us to replace the suppliers of this equipment. Suppliers of cables that we need to extend and maintain our networks may suffer capacity constraints ordifficulties in obtaining the raw materials required to manufacture these cables. We also depend on network installation and maintenance services providers, equipment suppliers, call centers, collection agencies and sales agents, for network infrastructure, andservices to satisfy our operating needs. Many suppliers rely heavily on labor; therefore, any work stoppage or labor relations problems affecting our suppliers could adversely affectour operations. Suppliers may, among other things, extend delivery times, raise prices and limit supply due to their own shortages and business requirements. Similarly,interruptions in the supply of telecommunications equipment for networks could impede network development and expansion. If these suppliers fail to deliver products and serviceson a timely and cost-efficient basis that satisfies our demands or are unwilling to sell to us on favorable credit terms or at all, we could experience disruptions, which could have anadverse effect on our business, financial condition and results of operations.Risks related to our Other segmentWe may not be able to successfully integrate Broadcasting's recent acquisitions into our business, or realize the anticipated benefits of these acquisitions.Following the completion of Broadcasting’s recent and pending acquisitions, the integration of these businesses into our operations may be a complex and time-consuming processthat may not be successful. For example, prior to the completion of Broadcasting’s acquisition of Azteca America, we did not operate a Spanish-language broadcast networkproviding original content to the Hispanic audience in the United States. In addition, Broadcasting’s pending and completed acquisitions during 2017 expanded Broadcasting'snetwork to 113 operating stations, including three full-power stations (inclusive of the channel-share agreement for KEMO-TV in San Francisco), 27 Class A stations and 83LPTV stations, in over 80 markets across the United States. In addition, the acquisitions increased Broadcasting’s construction permits to 475, allowing for further build-out ofcoverage across the United States. This may add complexity to effectively overseeing, integrating and operating these assets.Even if we successfully integrate these assets into our business and operations, there can be no assurance that we will realize the anticipated benefits and operating synergies. TheCompany's estimates regarding the earnings, operating cash flow, capital expenditures and liabilities resulting from these acquisitions may prove to be incorrect. For example, withany past or future acquisition, there is the possibility that:•we may not have implemented company policies, procedures and cultures, in an efficient and effective manner;•we may not be able to successfully reduce costs, increase advertising revenue or audience share;•we may fail to retain and integrate employees and key personnel of the acquired business and assets;•our management may be reassigned from overseeing existing operations by the need to integrate the acquired business;•we may encounter unforeseen difficulties in extending internal control and financial reporting systems at the newly acquired business;•we may fail to successfully implement technological integration with the newly acquired business or may exceed the capabilities of our technology infrastructure andapplications;•we may not be able to generate adequate returns;•we may encounter and fail to address risks or other problems associated with or arising from our reliance on the representations and warranties and relatedindemnities, if any, provided to us by the sellers of acquired companies and assets;•we may suffer adverse short-term effects on operating results through increased costs and may incur future impairments of goodwill associated with the acquiredbusiness;•we may be required to increase our leverage and debt service or to assume unexpected liabilities in connection with our acquisitions; and•we may encounter unforeseen challenges in entering new markets in which we have little or no experience.The occurrence of any of these events or our inability generally to successfully implement our acquisition and investment strategy would have an adverse effect, which could bematerial, on our business, financial condition and results of operations.Our broadcasting business conducted by Broadcasting operates in highly competitive markets and our ability to maintain market share and generate operating revenuesdepends on how effectively we compete with existing and new competition.Broadcasting's broadcast stations compete for audiences and advertising revenue with other broadcast stations as well as with other media such as the Internet and radio.Broadcasting also faces competition from (i) local free over-the-air broadcast television and radio stations; (ii) telecommunication companies; (iii) cable and satellite system operatorsand cable networks; (iv) print media providers such as newspapers, direct mail and periodicals; (v) internet search engines, internet service providers, websites, and mobileapplications; and (vi) other emerging technologies including mobile television. Some of Broadcasting's current and potential competitors have greater financial and other resourcesthan Broadcasting does and so may be better placed to extend audience reach and expand programming.In addition, cable companies and others have developed national advertising networks in recent years that increase the competition for national advertising. Over the past decade,cable television programming services, other emerging video distribution platforms and the Internet have captured increasing market share. Cable providers, direct broadcast satellitecompanies and telecommunication companies are developing new technology that allows them to transmit more channels on their existing equipment to highly targeted audiences,reducing the cost of creating channels and potentially leading to the division of the television industry into ever more specialized niche markets. The decreased cost of creatingchannels may also encourage new competitors to enter Broadcasting's markets and compete with us for advertising revenue. In addition,52technologies that allow viewers to digitally record, store and play back television programming may decrease viewership of commercials as recorded by media measurementservices and, as a result, lower Broadcasting's advertising revenues. Furthermore, technological advancements and the resulting increase in programming alternatives, such as cabletelevision, direct broadcast satellite systems, pay-per-view, home video and entertainment systems, video-on-demand, mobile video and the Internet have also created new types ofcompetition to television broadcast stations and will increase competition for household audiences and advertisers. We cannot provide any assurances that we will remaincompetitive with these developing technologies.Broadcasting's inability to successfully respond to new and growing sources of competition in the broadcasting industry could have an adverse effect on Broadcasting's business,financial condition and results of operations.The FCC could implement regulations or the U.S. Congress could adopt legislation that might have a significant impact on the operations of the stations we own and thestations we provide services to or the television broadcasting industry as a whole.The FCC regulates Broadcasting's broadcasting business. We must often times obtain the FCC’s approval to obtain, renew, assign or modify, a license, purchase a new station, sellan existing station or transfer the control of one of Broadcasting's subsidiaries that hold a license. Broadcasting's FCC licenses are critical to Broadcasting's operations; we cannotoperate without them. We cannot be certain that the FCC will renew these licenses in the future or approve new acquisitions in a timely manner, if at all. If licenses are not renewedor acquisitions are not approved, we may lose revenue that we otherwise could have earned and this would have an adverse effect on Broadcasting's business, financial conditionand results of operations.In addition, Congress and the FCC may, in the future, adopt new laws, regulations and policies regarding a wide variety of matters (including, but not limited to, technologicalchanges in spectrum assigned to particular services) that could, directly or indirectly, materially and adversely affect the operation and ownership of Broadcasting's broadcastproperties.Broadcasting Licenses are issued by, and subject to the jurisdiction of the Federal Communications Commission ("FCC"), pursuant to the Communications Act of 1934, asamended (the "Communications Act"). The Communications Act empowers the FCC, among other actions, to issue, renew, revoke and modify broadcasting licenses;determine stations’ frequencies, locations and operating power; regulate some of the equipment used by stations; adopt other regulations to carry out the provisions of theCommunications Act and other laws, including requirements affecting the content of broadcasts; and to impose penalties for violation of its regulations, including monetaryforfeitures, short-term renewal of licenses and license revocation or denial of license renewals.License Renewals. Broadcast television licenses are typically granted for standard terms of eight years. Most licenses for commercial and noncommercial TV broadcast stations,Class A TV broadcast stations, television translators and Low Power Television ("LPTV") broadcast stations are scheduled to expire between 2020 and 2022; however, theCommunications Act requires the FCC to renew a broadcast license if the FCC finds that the station has served the public interest, convenience and necessity and, with respect tothe station, there have been no serious violations by the licensee of either the Communications Act or the FCC’s rules and regulations and there have been no other violations by thelicensee of the Communications Act or the FCC’s rules and regulations that, taken together, constitute a pattern of abuse. The Company has no pending renewal applications. Astation remains authorized to operate while its license renewal application is pending.License Assignments. The Communications Act requires prior FCC approval for the assignment or transfer of control of an FCC licensee. Third parties may oppose the Company’sapplications to assign, transfer or acquire broadcast licenses.Full Power and Class A Station Regulations. The Communications Act and FCC rules and regulations limit the ability of individuals and entities to have certain official positions orownership interests, known as "attributable" interests, above specific levels in full power broadcast stations as well as in other specified mass media entities. Many of these limits donot apply to Class A stations, television translators and LPTV authorizations. In seeking FCC approval for the acquisition of a broadcast television station license, the acquiringperson or entity must demonstrate that the acquisition complies with applicable FCC ownership rules or that a waiver of the rules is in the public interest. Additionally, theCommunications Act and FCC regulations prohibit ownership of a broadcast station license by any corporation with more than 25 percent of its stock owned or voted by non-U.S.persons, their representatives or any other corporation organized under the laws of a foreign country. The FCC’s rules require licensees to file ownership reports at several reportingperiods, including an upcoming biennial ownership report filing deadline of March 2, 2018. The FCC has also adopted regulations concerning children’s television programming,commercial limits, local issues and programming, political files, sponsorship identification, equal employment opportunity requirements and other requirements for full power andClass A broadcast television stations. The FCC’s rules require operational full-power and Class A stations to file periodic reports demonstrating compliance with these regulations.Low Power Television and TV Translator Authorizations. LPTV stations and TV Translators have "secondary spectrum priority" to full-service television stations. The secondarystatus of these authorizations prohibits LPTV and TV Translator stations from causing interference to the reception of existing or future full-service television stations and requiresthem to accept interference from existing or future full-service television stations and other primary licensees. LPTV and TV Translator licensees are subject to fewer regulatoryobligations than full-power and Class A licensees, and there no limit on the number of LPTV stations that may be owned by any one entity.The 600 MHz Incentive Auction and the Post-Auction Relocation Process. The FCC concluded a two-sided auction process for 600 MHz band spectrum (the "600 MHz IncentiveAuction") on April 13, 2017. The auction process allowed eligible full-power and Class A broadcast television licensees to sell some or all of their spectrum usage rights inexchange for compensation; the FCC would pay reasonable expenses for the remaining, non-participating full-power and Class A stations to relocate to the remaining "in-core"portion of the 600 MHz band. Several of our53stations will relocate to new channel assignments and will receive funding from the 600 MHz Band Broadcaster Relocation Fund. Congress has not protected LPTV and TVtranslator stations in the 600 MHz Incentive Auction and these stations are currently ineligible for relocation funding; however, legislation is currently pending in Congress that mayprovide supplemental funds for broadcaster relocation that would expand the amounts available to full-power and Class A stations and extend eligibility to certain LPTV stations. The outcome of this legislative effort is not yet known. Regardless of whether or not additional funding become available to cover the cost of relocating previously ineligiblestations, LPTV and TV translator stations will eventually be required to relocate from the "out-of-core" portion of the 600 MHz band (i.e., channels 38-51) and are required underthe rules to mitigate interference to any relocated full-power or Class A station in the in-core band (or cease operations). The FCC has created a priority filing window for LPTVand TV translator stations licensed and operating as of April 13, 2017, and some of our LPTV and TV translator stations will find new channel assignments as a result of thisspecial displacement window. But some LPTV and TV translator stations displaced as a result of the 600 MHz Incentive Auction will not be capable of finding an alternate channelassignment and will be forced to discontinue operations. Obscenity and Indecency Regulations. Federal law and FCC regulations prohibit the broadcast of obscene material on television at any time and the broadcast of indecent materialbetween the hours of 6:00 a.m. and 10:00 p.m. local time. The FCC investigates complaints of broadcasts of prohibited obscene or indecent material and can assess fines of up to$350,000 per incident for violation of the prohibition against obscene or indecent broadcasts and up to $3,300,000 for any continuing violation based on any single act or failure toact. The FCC may also revoke or refuse to renew a broadcast station license based on a serious violation of the agency’s obscenity and indecency rules.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur corporate headquarters facility is located in New York, New York. We lease administrative, technical and sales office space in various locations in the countries in which weoperate. DBMG is headquartered in Phoenix, Arizona; GMSL is headquartered in Chelmsford, United Kingdom; ANG is headquartered in Saratoga Springs, NY, and leases landfor fueling stations across the U.S.; ICS is headquartered in Herndon, Virginia, and CIG is headquartered in Austin, Texas. As of December 31, 2017, total leased spaceapproximates 742,186 square feet, and land leased for fueling stations of 1,065,508 square feet. Total annual lease costs are approximately $7.9 million. The operating leases expireat various times, with the longest commitment expiring in 2027. In addition, DBMG owns operations, administrative and sales offices located throughout the United States totalingapproximately 1,522,417 square feet. We believe that our present administrative, technical and sales office facilities are adequate for our anticipated operations and that similar spacecan be obtained readily as needed.We own substantially all of the equipment required for our businesses which includes cable-ships and submersibles (used in our Marine Services segment), steel machinery andequipment (used in our Construction segment), and communications equipment (used in our Telecommunications segment), except that we lease certain vessels (as described underthe "Business - Marine Services Segment" section). See Note 9. Property, Plant, and Equipment, net, for additional detail regarding our property and equipment.ITEM 3. LEGAL PROCEEDINGSLitigationThe Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that theoutcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company’sConsolidated Financial Statements. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its ConsolidatedFinancial Statements. The Company records a liability in its Consolidated Financial Statements for these matters when a loss is known or considered probable and the amount canbe reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If amatter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to theextent necessary for its Consolidated Financial Statements not to be misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in itsConsolidated Financial Statements.54CGI Producer LitigationOn November 28, 2016, Continental General Insurance Company ("CGI"), a subsidiary of the Company, Great American Financial Resource, Inc. ("GAFRI"), American FinancialGroup, Inc., and CIGNA Corporation were served with a putative class action complaint filed by John Fastrich and Universal Investment Services, Inc. in The United StatesDistrict Court for the District of Nebraska alleging breach of contract, tortious interference with contract and unjust enrichment. The plaintiffs contend that they were agents ofrecord under various CGI policies and that CGI allegedly instructed policyholders to switch to other CGI products and caused the plaintiffs to lose commissions, renewals, andoverrides on policies that were replaced. The complaint also alleges breach of contract claims relating to allegedly unpaid commissions related to premium rate increasesimplemented on certain long-term care insurance policies. Finally, the complaint alleges breach of contract claims related to vesting of commissions. On August 21, 2017 the Courtdismissed the plaintiffs’ tortious interference with contract claim. CGI believes that the remaining allegations and claims set forth in the complaint are without merit and intends tovigorously defend against them. The case has been set for voluntary mediation, which occurred on January 26, 2018. Meanwhile, the Court has stayed discovery pending the outcome of the mediation. OnFebruary 12, 2018, the parties notified the Court that mediation did not resolve the case and that the parties’ discussions regarding a possible settlement of the action were stillongoing. The Court ordered the parties to submit a status report regarding the status of their settlement negotiations to the Court in advance of the upcoming status conferencescheduled on March 22, 2018.Further, the Company and CGI are seeking defense costs and indemnification for plaintiffs’ claims from GAFRI and Continental General Corporation ("CGC") under the terms ofan Amended and Restated Stock Purchase Agreement ("SPA") related to the Company’s acquisition of CGI in December 2015. GAFRI and CGC rejected CGI’s demand fordefense and indemnification and, on January 18, 2017, the Company and CGI filed a Complaint against GAFRI and CGC in the Superior Court of Delaware seeking a declaratoryjudgment to enforce their indemnification rights under the SPA. On February 23, 2017, Great American answered CGI’s complaint, denying the allegations. The dispute isongoing and CGI will continue to pursue its right to a defense and indemnity under the SPA.VAT assessmentOn February 20, 2017, and on August 15, 2017, the Company's subsidiary, ICS, received notices from Her Majesty’s Revenue and Customs office in the U.K. (the "HMRC")indicating that it was required to pay certain Value-Added Taxes ("VAT") for the 2015 and 2016 tax years. ICS disagrees with HMRC’s assessments on technical and factualgrounds and intends to dispute the assessed liabilities and vigorously defend its interests. We do not believe the assessment to be probable and expect to prevail based on the factsand merits of our existing VAT position.DBMG Class ActionOn November 6, 2014, a putative stockholder class action complaint challenging the tender offer by which HC2 acquired approximately 721,000 of the issued and outstandingcommon shares of DBMG was filed in the Court of Chancery of the State of Delaware, captioned Mark Jacobs v. Philip A. Falcone, Keith M. Hladek, Paul Voigt, Michael R. Hill,Rustin Roach, D. Ronald Yagoda, Phillip O. Elbert, HC2 Holdings, Inc., and Schuff International, Inc., Civil Action No. 10323 (the "Complaint"). On November 17, 2014, asecond lawsuit was filed in the Court of Chancery of the State of Delaware, captioned Arlen Diercks v. Schuff International, Inc. Philip A. Falcone, Keith M. Hladek, Paul Voigt,Michael R. Hill, Rustin Roach, D. Ronald Yagoda, Phillip O. Elbert, HC2 Holdings, Inc., Civil Action No. 10359. On February 19, 2015, the court consolidated the actions (nowdesignated as Schuff International, Inc. Stockholders Litigation) and appointed lead plaintiff and counsel. The currently operative complaint is the Complaint filed by Mark Jacobs. The Complaint alleges, among other things, that in connection with the tender offer, the individual members of the DBMG Board of Directors and HC2, the now-controllingstockholder of DBMG, breached their fiduciary duties to members of the plaintiff class. The Complaint also purports to challenge a potential short-form merger based uponplaintiff’s expectation that the Company would cash out the remaining public stockholders of DBMG following the completion of the tender offer. The Complaint seeks rescissionof the tender offer and/or compensatory damages, as well as attorney’s fees and other relief. The defendants filed answers to the Complaint on July 30, 2015.On February 24, 2017, the parties agreed to a framework for the potential settlement of the litigation. Plaintiff advised defendants on June 7, 2017 that plaintiff was not proceedingwith the February 2017 potential settlement framework. The parties have been exploring alternative frameworks for a potential settlement. There can be no assurance that asettlement will be finalized or that the Court would approve such a settlement even if the parties were to enter into a settlement stipulation or agreement. If a settlement cannot bereached, the Company believes it has meritorious defenses and intends to vigorously defend this matter.55Global Marine DisputeGMSL is in dispute with Alcatel-Lucent Submarine Networks Limited ("ASN") related to a Marine Installation Contract between the parties, dated March 11, 2016 (the "ASNContract"). Under the ASN Contract, GMSL's obligations were to install and bury an optical fiber cable in Prudhoe Bay, Alaska. As of the date hereof, neither party hascommenced legal proceedings. Pursuant to the ASN Contract any such dispute would be governed by English law and would be required to be brought in the English courts inLondon. ASN has alleged that GMSL committed material breaches of the ASN Contract, which entitles ASN to terminate the ASN Contract, take over the work themselves, andclaim damages for their losses arising as a result of the breaches. The alleged material breaches include failure to use appropriate equipment and procedures to perform the work andfailure to accurately estimate the amount of weather downtime needed. ASN has indicated to GMSL it has incurred $30 million in damages and $1.2 million in liquidated damagesfor the period from September 2016 to October 2016, plus interest and costs. GMSL believes that it has not breached the terms and conditions of the contract and also believes thatASN has not properly terminated the contract in a manner that would allow it to make a claim. However, ASN has ceased making payments to GMSL and as of December 31,2017, the total sum of GMSL invoices raised and issued are $17.0 million, of which $8.1 million were settled by ASN and the balance of $8.9 million remains at risk. We believethat the allegations and claims by ASN are without merit, and that ASN is required to make all payments under unpaid invoices and we intend to defend our interests vigorously.Tax MattersCurrently, the Canada Revenue Agency ("CRA") is auditing a subsidiary previously held by the Company. The Company intends to cooperate in audit matters. To date, CRA hasnot proposed any specific adjustments and the audit is ongoing.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.56PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESCommon StockHC2 common stock began trading on the New York Stock Exchange ("NYSE") under the ticker symbol "PTGI" on June 23, 2011. On April 9, 2014 in connection with our namechange, we changed the ticker symbol of our common stock from "PTGI" to "HCHC". On December 29, 2014, HC2 common stock began to trade on the NYSE MKT LLC("NYSE MKT") under the same ticker symbol "HCHC". On May 16, 2017 HC2 common stock began to trade on the NYSE under the same ticker symbol "HCHC".The following table provides the intra-day high and low sales prices for HC2's common stock as reported by the NYSE MKT and NYSE, as applicable, for each quarterly periodfor the last two fiscal years. Common Stock High Low2017 1st Quarter $7.27 $5.352nd Quarter $6.38 $5.063rd Quarter $6.50 $4.304th Quarter $6.12 $4.782016 1st Quarter $5.29 $3.252nd Quarter $4.81 $3.293rd Quarter $5.49 $4.064th Quarter $6.07 $3.80Holders of Common StockAs of February 28, 2018, HC2 had approximately 3,775 holders of record of its common stock. This number does not include stockholders for whom shares were held in"nominee" or "street" name.DividendsHC2 paid no dividends on its common stock in 2017 or 2016, and the HC2 Board of Directors has no current intention of paying any dividends on HC2 common stock in the nearfuture. The payment of dividends, if any, in the future is within the discretion of the HC2 Board of Directors and will depend on our earnings, our capital requirements, financialcondition, the ability to comply with the requirements of the law and agreements governing our and our subsidiaries indebtedness. The 11.0% Notes Indenture contains covenantsthat, among other things, limit or restrict our ability to make certain restricted payments, including the payment of cash dividends with respect to HC2’s common stock. The DBMGFacility and the GMSL Facility contain similar covenants applicable to DBMG and GMSL, respectively. See Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Liquidity and Capital Resources and Note 13. Debt Obligations to our consolidated financial statements for more detail concerning our 11.0%Notes and other financing arrangements. Moreover, dividends may be restricted by other arrangements entered into in the future by us.Issuer Purchases of Equity SecuritiesHC2 did not repurchase any of its equity securities in the year ended December 31, 2017.Stock Performance GraphThe following graph compares the cumulative total returns on our common stock during the period from December 31, 2012 to December 31, 2017, to the Standard & Poor’sMidcap 400 Index and the iShares S&P Global Telecommunications Sector Index. The comparison assumes $100 was invested on December 31, 2012 in the common stock ofHC2 as well as the indices and assumes further that all dividends were reinvested. HC2’s common stock began trading on the OTC Bulletin Board on July 1, 2009, on the NYSEon June 23, 2011, on the OTCQB on November 18, 2013, on the NYSE MKT on December 29, 2014, and on the NYSE on May 16, 2017.57 December 31, 2012 December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017HC2 Holdings, Inc. (HCHC) $100.00 $44.21 $130.76 $82.05 $91.98 $92.29Standard & Poor’s Midcap 400 Index(^MID) $100.00 $131.57 $142.34 $137.06 $162.73 $186.25iShares S&P GlobalTelecommunications Sector IndexFund (IXP) $100.00 $121.27 $119.79 $119.73 $126.35 $134.76The performance graph will not be deemed to be incorporated by reference by means of any general statement incorporating by reference this Form 10-K into any filing under theSecurities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that HC2 specifically incorporates such information by reference, andshall not otherwise be deemed filed under such acts.58ITEM 6. SELECTED FINANCIAL DATAThe selected consolidated financial data set forth below should be read in conjunction with (i) Item 7 - Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, (ii) our consolidated audited annual financial statements and the notes thereto, each of which are contained in Item 8 - Financial Statements and Supplementary Dataand (iii) the information described below under "Discontinued Operations."Statement of Operations Data (in thousands, except per share amounts): Years Ended December 31, 2017 2016 2015 2014 2013Net revenue $1,634,123 $1,558,126 $1,120,806 $547,438 $230,686Income (loss) from operations (1,132) (1,421) 713 (13,991) (39,136)Loss from continuing operations (50,491) (97,431) (35,741) (11,686) (17,612)Income (loss) from discontinued operations — — (21) (146) 129,218Net income (loss) (50,491) (97,431) (35,762) (11,832) 111,606Net income (loss) attributable to HC2 Holdings, Inc. (46,911) (94,549) (35,565) (14,391) 111,606Net income (loss) attributable to common stock and participating preferredstockholders (49,678) (105,398) (39,850) (16,440) 111,606 Interest expense (55,098) (43,375) (39,017) (12,347) (8)Income tax (expense) benefit (10,740) (51,638) 10,882 22,869 7,442 Per Share Data: Income (loss) per common share: Basic loss per share $(1.16) $(2.83) $(1.50) $(0.82) $(1.25)Diluted loss per share $(1.16) $(2.83) $(1.50) $(0.83) $7.95Weighted average common shares outstanding: Basic 42,824 37,260 26,482 19,729 14,047Diluted 42,824 37,260 26,482 19,729 14,047Dividends declared per basic weighted average common shares outstanding $— $— $— $— $8.58Balance Sheet Data (in thousands): As of December 31, 2017 2016 2015 2014 2013Cash and cash equivalents $97,885 $115,371 $158,624 $107,978 $8,997Total assets $3,217,691 $2,835,276 $2,742,512 $712,163 $87,680Total debt obligations $593,172 $428,496 $371,876 $335,531 $—Total liabilities $3,001,664 $2,735,852 $2,569,247 $563,919 $33,271Total HC2 Holdings, Inc. stockholders’ equity, before noncontrolling interest $73,171 $44,215 $94,030 $79,187 $54,409Cash Flow and Related Data (in thousands): Years Ended December 31, 2017 2016 2015 2014 2013Net cash (used in) provided by operating activities $6,142 $79,148 $(27,914) $5,744 $(20,315)Purchases of property, plant and equipment $(31,925) $(29,048) $(21,324) $(5,819) $(12,577)Depreciation and amortization $36,569 $28,863 $32,455 $11,069 $23,96459Discontinued Operations Data In 2012 and 2013, we reclassified several segments as discontinued operations. Accordingly, revenue, costs, and expenses of the discontinued operations have been excluded fromthe respective captions in the consolidated statements of operations. As it pertains to ICS, we reclassified ICS’s operations as a continuing operation effective as of the fourthquarter of 2013; accordingly, the revenue, costs and expenses are now included in the respective captions in the consolidated statements of operations. The net operating results ofthe discontinued operations have been reported, net of applicable income taxes as income or loss, as applicable, from discontinued operations. There have been no reclassificationsof any of our subsidiaries as discontinued operations in 2014, 2015 or 2016 in the consolidated statement of operations. The following provides information about the operationsthat are classified as discontinued operations in the consolidated statement of operations for certain prior periods.ICS. During the second quarter of 2012, the HC2 Board of Directors committed to dispose of ICS and as a result classified ICS as a discontinued operation. In December 2013,based on management’s assessment of the requirements under ASC No. 360, "Property, Plant and Equipment" ("ASC 360"), it was determined that ICS no longer met the criteriaof a held for sale asset. On February 11, 2014, the HC2 Board of Directors officially ratified management’s December 2013 assessment, and reclassified ICS from held for sale toheld and used, effective December 31, 2013. As a result, the Company has applied retrospective adjustments for 2012 to reflect the effects of the Company’s decision to cease itssale process of ICS that occurred as of December 31, 2013.BLACKIRON Data. In the second quarter of 2013, the Company sold its BLACKIRON Data segment.North America Telecom. In the third quarter of 2013, the Company completed the initial closing of the sale of its North America Telecom segment. In conjunction with the initialclosing, the Company redeemed its outstanding debt. Because the debt was required to be repaid as a result of the sale of North America Telecom, the interest expense and loss onearly extinguishment or restructuring of debt of HC2 Holdings, Inc. has been allocated to discontinued operations. The closing of the sale of Primus Telecommunications, Inc.("PTI") (the remaining portion of the North America Telecom segment subject to the applicable purchase agreement) was completed on July 31, 2014. Prior to the closing, PTI hadbeen included in discontinued operations as a result of being held for sale.Summarized operating results of the discontinued operations are as follows (in thousands): Years Ended December 31, 2017 2016 2015 2014 2013Net revenue $— $— $— $7,530 $132,515Operating expenses — — 38 7,610 119,392Income (loss) from operations — — (38) (80) 13,123Interest expense — — — (17) (11,362)Loss on early extinguishment or restructuring of debt — — — — (21,124)Other income (expense), net — — 4 (60) (51)Foreign currency transaction loss — — — — (378)Loss before income tax (expense) benefit — — (34) (157) (19,792)Income tax (expense) benefit — — 13 132 171Loss from discontinued operations $— $— $(21) $(25) $(19,621)ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis of our financial condition and results of operations together with the information in our consolidated annual audited financialstatements and the notes thereto, each of which are contained in Item 8 entitled "Financial Statements and Supplementary Data," and other financial information included herein.Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors"section 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 differmaterially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.Unless the context otherwise requires, in this Annual Report on Form 10-K, "HC2" means HC2 Holdings, Inc. and the "Company," "we" and "our" mean HC2 together with itsconsolidated subsidiaries. "U.S. GAAP" means accounting principles accepted in the United States of America.Our BusinessWe are a diversified holding company with principal operations conducted through seven operating platforms or reportable segments: Construction ("DBMG"), Marine Services("GMSL"), Energy ("ANG"), Telecommunications ("ICS"), Insurance ("CIG"), Life Sciences ("Pansend"), and Other, which includes businesses that do not meet the separatelyreportable segment thresholds.We continually evaluate acquisition opportunities and monitor a variety of key indicators of our underlying platform companies in order to maximize stakeholder value. Theseindicators include, but are not limited to, revenue, cost of revenue, operating profit, Adjusted EBITDA and free cash flow. Furthermore, we work very closely with our subsidiaryplatform executive management teams on their operations and assist them in the evaluation and diligence of asset acquisitions, dispositions and any financing or operational needs atthe subsidiary level. We believe60that this close relationship allows us to capture synergies within the organization across all platforms and strategically position the Company for ongoing growth and value creation.The potential for additional acquisitions and new business opportunities, while strategic, may result in acquiring assets unrelated to our current or historical operations. As part ofany acquisition strategy, we may raise capital in the form of debt and/or equity securities (including preferred stock) or a combination thereof. We have broad discretion andexperience in identifying and selecting acquisition and business combination opportunities and the industries in which we seek such opportunities. Many times, we face significantcompetition for these opportunities, including from numerous companies with a business plan similar to ours. As such, there can be no assurance that any of the past or futurediscussions we have had or may have with candidates will result in a definitive agreement and, if they do, what the terms or timing of any potential agreement would be. As part ofour acquisition strategy, we may utilize a portion of our available cash to acquire interests in possible acquisition targets. Any securities acquired are marked to market and mayincrease short-term earnings volatility as a result.We believe our track record, our platform and our strategy will enable us to deliver strong financial results, while positioning our Company for long-term growth. We believe theunique alignment of our executive compensation program, with our objective of increasing long-term stakeholder value, is paramount to executing our vision of long-term growth,while maintaining our disciplined approach. Having designed our business structure to not only address capital allocation challenges over time, but also maintain the flexibility tocapitalize on opportunities during periods of market volatility, we believe the combination thereof positions us well to continue to build long-term stakeholder value.Our OperationsRefer to Note 1. Organization and Business to our Consolidated Financial Statements included elsewhere in this Report on Form 10-K for additional information.Seasonality Our industry can be highly cyclical and subject to seasonal patterns. Our volume of business in our Construction and Marine Services segments may be adversely affected bydeclines or delays in projects, which may vary by geographic region. Project schedules, particularly in connection with large, complex, and longer-term projects can also createfluctuations in the services provided, which may adversely affect us in a given period.For example, in connection with larger, more complicated projects, the timing of obtaining permits and other approvals may be delayed, and we may need to maintain a portion ofour 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, financialcondition of our customers and their access to capital; margins of projects performed during any particular period; economic, and political and market conditions on a regional,national or global scale.Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period.Marine ServicesNet revenue within our Marine Services segment can fluctuate depending on the season. Revenues are relatively stable for our Marine Services maintenance business as the coredriver is the annual contractual obligation. However, this is not the case with our installation business (other than for long-term charter arrangements), in which revenues show adegree of seasonality. Revenues in our Marine Services installation business are driven by our customers’ need for new cable installations. Generally, weather downtime, and theadditional costs related to downtime, is a significant factor in customers determining their installation schedules, and most installations are therefore scheduled for the warmermonths. As a result, installation revenues are generally lower towards the end of the fourth quarter and throughout the first quarter, as most business is concentrated in the northernhemisphere.Other than as described above, our businesses are not materially affected by seasonality.61Recent DevelopmentsAcquisitionsFugroOn November 30, 2017 GMSL acquired 5 assets and 19 employees and contractors based in Aberdeen, Scotland from Fugro N.V. The fair value of the purchase consideration was$87.2 million and comprised of 23.6% share in GMH LLC and a short-term loan of $7.5 million from Fugro N.V. The decision to acquire the business was made to support theoverall group strategy of growing the Offshore Power and Oil & Gas businesses. The transaction was accounted for as a business acquisition.Kanawha Insurance CompanyIn November 2017, the Insurance Company entered into a Stock Purchase Agreement (the "SPA") with Humana, Inc., a publicly traded company incorporated in Delaware("Humana"). Pursuant to the SPA, the Insurance Company agreed to acquire Kanawha Insurance Company ("KIC"), Humana’s long-term care insurance subsidiary (the"Transaction"). The obligation of each party to consummate the Transaction is subject to customary closing conditions, including, among others, Humana furnishing certain auditedfinancial statements of the business to be acquired, receipt of regulatory approvals by the South Carolina and Texas insurance departments, customary conditions relating to theaccuracy of the other party’s representations and warranties (subject to certain materiality exceptions) and the other party having performed in all material respects its obligationsunder the SPA.DTV America CorporationIn November 2017, we closed a series of transactions that resulted in HC2 and its subsidiaries owning over 50% of the shares of common stock of DTV for a total consideration of$17.7 million. DTV is an aggregator and operator of low power television ("LPTV") licenses and stations across the United States. DTV currently owns and operates 52 LPTVstations in more than 40 cities. DTV’s distribution platform currently provides carriage for more than 30 television broadcast networks. The Company’s mission is to aggregateheavily discounted broadcast spectrum and build out profitable broadcast TV operations on its scalable, all-IP platform.Mako Communications, LLCIn November 2017, a wholly-owned subsidiary of Broadcasting, closed on a transaction with Mako Communications, LLC and certain of its affiliates ("Mako") to purchase all theassets in connection with Mako’s ownership and operation of LPTV stations that resulted in HC2 acquiring 38 operating stations in 28 cities, for a total consideration of $28.4million. Mako is a family owned and operated business headquartered in Corpus Christi, Texas, that has been acquiring, building, and maintaining Class A and LPTV stations allacross the United States since 2000. The transaction was accounted for as business acquisition.Three Angels Broadcasting Network, Inc.In December 2017, a wholly-owned subsidiary of Broadcasting closed on a transaction with with Three Angels Broadcasting Network, Inc. to purchase all of its assets inconnection with its ownership and operation of Class A stations that resulted in HC2 acquiring 14 operating stations for a total consideration of $9.6 million.Azteca AmericaIn November 2017, a wholly-owned subsidiary of Broadcasting, acquired Azteca America, a Spanish-language broadcast network, from affiliates of TV Azteca, S.A.B. de C.V.("Azteca") (AZTECACPO.MX) (Latibex:XTZA). In addition, a wholly-owned subsidiary of Broadcasting signed a definitive acquisition agreement with Northstar Media, LLC("Northstar"), a licensee of numerous broadcast television licenses in the United States. Under the agreement with Northstar, a wholly-owned subsidiary of Broadcasting was toacquire Northstar’s broadcast television stations, which carry Azteca America programming. The total consideration accrued by the Company as of December 31, 2017, and to bepaid pending the close of the Northstar acquisition, was $33.0 million. In February 2018, a wholly-owned subsidiary of Broadcasting closed on the acquisition of Northstar'sbroadcast television stations. The total consideration paid in February 2018 was $33.0 million.Signed Purchase AgreementsPrior to December 31, 2017, wholly-owned subsidiaries of Broadcasting had signed purchase agreements to acquire additional stations, subject to FCC approval and closingconditions, for a total consideration of $8.3 million. As of March 14, 2018, a portion of the transactions received FCC approval and closed for a total consideration of $4.6 million. Subsequent to December 31, 2017, wholly-owned subsidiaries of Broadcasting had signed purchase agreements to acquire additional broadcasting assets, subject to FCC approvaland closing conditions, for a total consideration of $8.7 million.62CandraftIn November 2017, DBMG acquired Candraft, one of the premier bridge infrastructure detailing and modeling companies in North America. Candraft has an extensive track recordof successful projects across the United States and Canada which will provide DBMG with greater depth and expertise in bridge detailing and broader exposure to the infrastructuresector. The total consideration paid was $3.3 million.Mountain States SteelIn December 2017, DBMG acquired Mountain States Steel, a structural steel fabricator founded in 1949, that has a modern fabrication facility located on approximately 32 acres inLindon, Utah. The total consideration paid was $14.5 million.Debt IssuanceIn January 2017, the Company issued an additional $55.0 million in aggregate principal amount of its 11.0% Notes due 2019. HC2 used a portion of the proceeds from the issuanceto repay all $35.0 million in outstanding aggregate principal amount of HC22’s 11.0% bridge note due 2019.In June 2017, the Company issued an additional $38.0 million of aggregate principal amount of the 11.0% Notes to investment funds affiliated with three institutional investors in aprivate placement offering (the "June 2017 Notes"), in order to begin funding acquisitions and general working capital needs.The Company has issued an aggregate of $400.0 million of its 11.0% Notes pursuant to the indenture dated November 20, 2014, by and among HC2, the guarantors party theretoand U.S. Bank National Association, a national banking association, as trustee (the "11.0% Notes Indenture").On November 9, 2017, Broadcasting entered into a $75.0 million Bridge Loan (the "Bridge Loan") to finance acquisitions in the broadcast television distribution market.Broadcasting borrowed $45.0 million of principal amount of the Bridge Loan on the same day. On December 15, 2017, Broadcasting borrowed an additional $15.0 million ofprincipal amount of the Bridge loan.On February 4, 2018, Broadcasting entered into a First Amendment to the Bridge Loan to add an additional $27.0 million in principal borrowing capacity to the Bridge Loan.On February 6, 2018, Broadcasting borrowed $42.0 million in principal amount of Bridge Loans, the net proceeds of which will be used to finance certain acquisitions, to pay fees,costs and expenses relating to the Bridge Loans, and for general corporate purposes. The total aggregate principal amount of the Bridge Loans outstanding after the February 6,2018 the total borrowing under the Bridge Loan was $102.0 million. DividendsDuring the three months ended December 31, 2017, HC2 received $4.5 million and $2.0 million in dividends from our Construction and Telecommunications segments,respectively. During the year ended December 31, 2017, HC2 received $18.4 million and $8.0 million in dividends from our Construction and Telecommunications segments,respectively.Tax Sharing AgreementUnder a tax sharing agreement, DBMG reimburses HC2 for use of its net operating losses. During the three months ended December 31, 2017, HC2 received $5.0 million fromDBMG under this tax sharing agreement. During the year ended December 31, 2017, HC2 received $10.0 million from DBMG under this tax sharing agreement.Preferred Share ConversionIn May 2017, the Company entered into an agreement with DG Value Partners, LP and DG Value Partners II Master Funds LP, holders (collectively, "DG Value") to convert andexchange all of DG Value's 2,308 shares of Series A and 1,000 shares of Series A-1 Convertible Participating Preferred Stock into a total of 803,469 shares of the Company'scommon stock.Financial Presentation BackgroundIn 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 SECdisclosure rules, the Company’s results of operations for the year ended December 31, 2017 as compared to the year ended December 31, 2016, and for the year ended December31, 2016 as compared to the year ended December 31, 2015.63Results of OperationsYear ended December 31, 2017 compared to the year ended December 31, 2016, and the year ended December 31, 2016 compared to the year ended December 31, 2015Presented below is a disaggregated table that summarizes our results of operations and a comparison of the change between the periods presented (in thousands): Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Net revenue Construction $578,989 $502,658 $513,770 $76,331 $(11,112)Marine Services 169,453 161,864 134,926 7,589 26,938Energy 16,415 6,430 6,765 9,985 (335)Telecommunications 701,898 735,043 460,355 (33,145) 274,688Insurance 151,577 142,457 2,865 9,120 139,592Other 15,791 9,674 2,125 6,117 7,549Total net revenue 1,634,123 1,558,126 1,120,806 75,997 437,320 Income (loss) from operations Construction 37,177 49,639 42,114 (12,462) 7,525Marine Services (880) (323) 10,898 (557) (11,221)Energy (2,770) (330) (888) (2,440) 558Telecommunications 6,359 4,150 238 2,209 3,912Insurance 25,353 (812) (176) 26,165 (636)Life Sciences (17,202) (10,389) (6,404) (6,813) (3,985)Other (9,299) (5,756) (6,198) (3,543) 442Non-operating Corporate (39,870) (37,600) (38,871) (2,270) 1,271Total income (loss) from operations (1,132) (1,421) 713 289 (2,134) Interest expense (55,098) (43,375) (39,017) (11,723) (4,358)Gain (loss) on contingent consideration 11,411 (8,929) — 20,340 (8,929)Income from equity investees 17,840 10,768 (1,499) 7,072 12,267Other expenses, net (12,772) (2,836) (6,820) (9,936) 3,984Loss from continuing operations before income taxes (39,751)(45,793) (46,623) 6,042 830Income tax (expense) benefit (10,740) (51,638) 10,882 40,898 (62,520)Loss from continuing operations (50,491)(97,431) (35,741) 46,940 (61,690)Loss from discontinued operations — — (21) — 21Net loss (50,491)(97,431) (35,762) 46,940 (61,669)Less: Net loss attributable to noncontrolling interest and redeemablenoncontrolling interest 3,580 2,882 197 698 2,685Net loss attributable to HC2 Holdings, Inc. (46,911)(94,549) (35,565) 47,638 (58,984)Less: Preferred stock and deemed dividends from conversions 2,767 10,849 4,285 (8,082) 6,564Net loss attributable to common stock and participating preferred stockholders $(49,678)$(105,398) $(39,850) $55,720 $(65,548)Net revenue: Net revenue for the year ended December 31, 2017 increased $76.0 million to $1,634.1 million from $1,558.1 million for the year ended December 31, 2016. Allsegments except for our Telecommunication segment recognized increased revenues during the year ended December 31, 2017. The Construction segment was a major driver of theincrease, largely due to contribution from large complex projects which have brought in greater revenue when compared to the previous period and additional revenues from BDSand PDC, both of which were acquired in the fourth quarter of 2016. Also contributing to the increase in revenues was our Energy segment, which experienced increasedCompressed Natural Gas ("CNG") sales from new fueling stations acquired or developed during 2016 which have incurred a full year of operations in 2017. Further, growth in theInsurance segment was primarily driven by an increase in the asset base for both fixed maturity securities and mortgage loans and yield improvements for fixed maturity securitieswhen compared to the previous period. Finally, increased revenues from our Marine Services segment were driven by higher offshore power installation revenues. These increaseswere offset by decreases in revenues from our Telecommunications segment as a result of a decrease in wholesale traffic volumes as the segment has been focused on a wholesaletraffic termination mix that maximizes margin contribution.64Net revenue for the year ended December 31, 2016 increased $437.3 million to $1,558.1 million from $1,120.8 million for the year ended December 31, 2015. This increase wasdue primarily to our Telecommunications segment, as a result of growth in wholesale traffic volumes, the addition of revenues associated with our Insurance Company which wasacquired in December 2015, and an increase in revenue in our Marine Services segment driven by increased maintenance revenues as a result of the CWind acquisition.Loss from operations: Loss from operations for the year ended December 31, 2017 decreased $0.3 million to $1.1 million from $1.4 million for the year ended December 31, 2016.The decrease in loss was driven by the Insurance segment's release of reserves, offset in part by our Construction segment due primarily to better-than-bid performance on large,commercial projects in backlog in the comparable period that was not repeated in 2017, and our Life Sciences segment as a result of research and development expenses at R2 andBeneVir.Income (loss) from operations: Income (loss) from operations for the year ended December 31, 2016 decreased $2.1 million to a loss of $1.4 million from income of $0.7 millionfor the year ended December 31, 2015. The decrease was due primarily to a reduction in operating incomeof our Marine Services segment, primarily due to unutilized vessel costs due to timing of projects, and losses from telecommunications installation projects, and an increase inoperating loss in our Life Sciences segment due to increased research and development costs. This was partially offset by an increase in operating profit in our Constructionsegment driven by higher margins through continued focus on more complex projects and an increase in operating profit of our Telecommunications segment driven by higherrevenues.Interest expense: Interest expense for the year ended December 31, 2017 increased $11.7 million to $55.1 million from $43.4 million for the year ended December 31, 2016. Theincrease was attributable to the net increase of the aggregate principal amount of our 11.0% Notes compared to the previous period and the portion of original issue discount anddeferred financing fees expensed in the 2017 period through the refinancing date of our 11.0% Bridge Note. In addition, in the fourth quarter of 2017, Broadcasting borrowed anaggregate principal of $60 million of senior secured debt, further increasing original issue discount, deferred financing fees expense, and interest expense for the year endedDecember 31, 2017 when compared to the previous year.Interest expense for the year ended December 31, 2016 increased $4.4 million to $43.4 million from $39.0 million for the year ended December 31, 2015. The increase wasprimarily due to the full year impact of the increase in the amount of our 11.0% Notes outstanding when compared to the same period last year, and additional debt assumed as aresult of the CWind acquisition.Gain (loss) on contingent consideration: Gain (loss) on contingent consideration for the year ended December 31, 2017 increased $20.3 million to a gain of $11.4 million from aloss of $8.9 million for the year ended December 31, 2016. The increase was driven by the reduction to the contingency reserve established by the Company related to the InsuranceCompany acquisition as a result of changes in tax law enacted at the end of 2017 and changes in interest rate expectations.Net loss on contingent consideration: Net loss on contingent consideration for the year ended December 31, 2016 was $8.9 million largely driven by a contingency reserveestablished by the Company related to the Insurance acquisition, offset by a gain recognized by our Marine segment related to settlement of contingent consideration upon thepurchase of the remaining interest of CWind.Income from equity investees: Income from equity investees for the year ended December 31, 2017 increased $7.0 million to $17.8 million from $10.8 million for the year endedDecember 31, 2016. The increase in income was driven by Inseego, as the Company did not recognize losses from our investment in the current period as our basis in thisinvestment is zero, and our Marine Services segment, principally from its equity interests in HMN, which realized a significant increase in earnings compared to the prior period.This was partially offset by our investment in MediBeacon as a result of our increased ownership and additional expenses following successful completion of development andclinical milestones.Income from equity investees for the year ended December 31, 2016 increased $12.3 million to income of $10.8 million from a loss of $1.5 million for the year ended December 31,2015. The increase in income was driven by growth in joint venture income in our Marine Services segment, principally from its equity interests in HMN and S.B. SubmarineSystems ("SBSS") which have increased income through sustained growth in the period, and by our Other segment as a result of a reduction in our share of losses recognized fromour Inseego (f/k/a Novatel Wireless) investment. This was offset in part by our Life Sciences segment driven by increased losses of our equity investment in MediBeacon.Other expenses, net: Other expense, net for the year ended December 31, 2017 increased $9.9 million to $12.8 million from $2.8 million for the year ended December 31,2016. The increase is attributable to an increase in impairment expense in 2017, driven by impairments of one fixed maturity security, warrant shares in a publicly traded company,and our original investment in DTV, and an increase foreign currency transaction expense largely driven by our Marine Services segment. The increases were offset by a prior yearimpairment related to one fixed maturity security.Other expense, net for the year ended December 31, 2016 decreased $4.0 million to $2.8 million compared to $6.8 million for the year ended December 31, 2015. The decrease inexpense was partly driven by net gains on step acquisitions, net gain on mark to market adjustments of derivative instruments, an increase in foreign currency transaction gains andthe one-time settlement payment to our preferred holders in 2015, partially offset by impairments of investments.65Income tax (expense) benefit: Income tax expense was $10.7 million and $51.6 million for the years ended December 31, 2017 and 2016, respectively. The amount recordedprimarily relates to the valuation allowance position in which the losses of the HC2 consolidated US group are not benefited for tax purposes. In addition, deferred tax benefits arealso not recognized for the Insurance Company given the valuation allowance position. The tax benefits associated with losses generated by certain businesses that do not qualify tobe included in the HC2 Holdings, Inc. U.S. consolidated income tax return have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that thelosses will be utilized prior to expiration. See Note 14. Income Taxes for further information regarding the impact of the Tax Cuts and Jobs Act on our income tax provision for theyear ended December 31, 2017.Income tax benefit (expense) was an expense of $51.6 million and a benefit of $10.9 million for the year ended December 31, 2016 and 2015, respectively. The amount recordedprimarily relates to the establishment of valuation allowances on the deferred tax assets of the HC2 Holdings, Inc. U.S. consolidated filing group and Insurance Company throughcontinuing operations. Additionally, the tax benefits associated with losses generated by certain businesses that do not qualify to be included in the HC2 Holdings, Inc. U.S.consolidated income tax return have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized prior to expiration.Preferred stock dividends and deemed dividends from conversions: Preferred stock dividends and deemed dividends for the year ended December 31, 2017 decreased $8.1 millionto $2.8 million from $10.8 million for the year ended December 31, 2016. In the comparable period, certain preferred shareholders were incentivised to convert their Preferred Stockinto the Company's common stock. The deemed dividend incentives associated with such conversions were not repeated in the current period. In addition to the decrease in deemeddividends conversions during the two year period ending December 31, 2017 and 2016 reduced the preferred share dividends paid on a quarterly basis.Preferred stock dividends and deemed dividends for the year ended December 31, 2016 increased $6.6 million to $10.8 million from $4.3 million for the year ended December 31,2015. The increase is a result of inducements to certain preferred shareholders for the conversion of their Preferred Stock into the Company's common stock.Segment Results of OperationsIn the Company's Consolidated Financial Statements, other operating (income) expense includes (i) (gain) loss on sale or disposal of assets, (ii) lease termination costs and (iii) assetimpairment expense. Each table summarizes the results of operations of our operating segments and compares the amount of the change between the periods presented (inthousands).Construction Segment Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Net revenue $578,989 $502,658 $513,770 $76,331 $(11,112) Cost of revenue 478,009 399,972 430,133 78,037 (30,161)Selling, general and administrative expenses 57,928 49,490 39,249 8,438 10,241Depreciation and amortization 5,583 1,894 2,016 3,689 (122)Other operating income 292 1,663 258 (1,371) 1,405Income from operations $37,177 $49,639 $42,114 (12,462) 7,525Net revenue: Net revenue from our Construction segment for the year ended December 31, 2017 increased $76.3 million to $579.0 million from $502.7 million for the year endedDecember 31, 2016. The increase was due primarily to contribution from large complex projects which have brought in greater revenue when compared to the previous periods andadditional revenues from BDS and PDC, both of which were acquired in the fourth quarter of 2016.Net revenue from our Construction segment for the year ended December 31, 2016 decreased $11.1 million to $502.7 million from $513.8 million for the year ended December 31,2015. The decrease was primarily due to softness in industrial market opportunities, particularly impacting the Gulf Coast region, as well as from the delayed start of several large-scale commercial projects in the Southwest and Pacific regions, which were in the design phase.Cost of revenue: Cost of revenue from our Construction segment for the year ended December 31, 2017 increased $78.0 million to $478.0 million from $400.0 million for the yearended December 31, 2016. The increase was driven by the increases in revenues.Cost of revenue from our Construction segment for the year ended December 31, 2016 decreased $30.2 million to $400.0 million from $430.1 million for the year ended December31, 2015. The decrease was primarily due to decrease in revenues and better than bid performance on large commercial projects completed in 2016.66Selling, general and administrative expenses: Selling, general and administrative expenses from our Construction segment for the year ended December 31, 2017 increased $8.4million to $57.9 million from $49.5 million for the year ended December 31, 2016. The increase was due primarily to the additional operating costs associated with the acquisitionsof BDS and PDC.Selling, general and administrative expenses from our Construction segment for the year ended December 31, 2016 increased $10.2 million to $49.5 million from $39.2 million forthe year ended December 31, 2015. The increase was due primarily to acquisition expenses, higher compensation expense and professional fees.Depreciation and amortization: Depreciation and amortization from our Construction segment for the year ended December 31, 2017 increased $3.7 million to $5.6 million from$1.9 million for the year ended December 31, 2016. This increase was due primarily to the expense associated with the assets acquired through the acquisitions of BDS and PDC.Depreciation and amortization from our Construction segment for the year ended December 31, 2016 decreased $0.1 million to $1.9 million from $2.0 million for the year endedDecember 31, 2015.Other operating income: For the year ended December 31, 2017, we recorded an expense of $0.3 million compared with expense of $1.7 million for the year ended December 31,2016. The decreases in expenses were primarily driven by a reduction in gains recognized on the sale of assets sold when compared to the prior periods.Other operating income from our Construction segment for the year ended December 31, 2016 increased by $1.4 million to an expense of $1.7 million from an expense of $0.3million for the year ended December 31, 2015. The increase was primarily driven by an increased loss on disposal of assets held for sale in the current year when compared to theyear ended December 31, 2015.Marine Services Segment Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Net revenue $169,453 $161,864 $134,926 $7,589 $26,938 Cost of revenue 129,093 121,687 92,959 7,406 28,728Selling, general and administrative expenses 21,593 18,501 11,889 3,092 6,612Depreciation and amortization 22,898 22,008 18,771 890 3,237Other operating (income) expense (3,251) (9) 409 (3,242) (418)Loss from operations $(880) $(323) $10,898 (557) (11,221)Net revenue: Net revenue from our Marine Services segment for the year ended December 31, 2017 increased $7.6 million to $169.5 million from $161.9 million for the year endedDecember 31, 2016. The increase was largely driven by revenue contribution from offshore power installation and telecom maintenance, partially offset by a decrease in telecominstallation revenues when compared to the prior period.Net revenue from our Marine Services segment for the year ended December 31, 2016 increased $26.9 million to $161.9 million from $134.9 million for the year ended December31, 2015. The increase is due primarily to increased maintenance contract revenues driven by the addition of offshore power installation, repair, maintenance and service revenues asa result of the acquisition of CWind in February 2016.Cost of revenue: Cost of revenue from our Marine Services segment for the year ended December 31, 2017 increased $7.4 million to $129.1 million from $121.7 million for theyear ended December 31, 2016. The increase was driven by the increase in revenues, additional costs incurred from ongoing offshore power installation and repair projects as aresult of project challenges and delays, primarily in the second quarter of 2017, and from an increase in unutilized installation vessels costs due to the timing of project work duringthe year.Cost of revenue from our Marine Services segment for the year ended December 31, 2016 increased $28.7 million to $121.7 million from $93.0 million for the year endedDecember 31, 2015. The increase in cost of revenue was due partly to the addition of resource and vessel costs of CWind, an increase in unutilized installation vessel costs due tothe timing of project work during the year, and losses on telecom installation projects which resulted from administrative delays by the customers and adverse weather conditionsarriving earlier in the season.Selling, general and administrative expenses: Selling, general and administrative expenses from our Marine Services segment for the year ended December 31, 2017 increased $3.1million to $21.6 million from $18.5 million for the year ended December 31, 2016 driven by acquisition costs related to the November 2017 acquisition of the Fugro trenching andcable-laying business.Selling, general and administrative expenses from our Marine Services segment for the year ended December 31, 2016 increased $6.6 million to $18.5 million from $11.9 millionfor the year ended December 31, 2015. The increase was due primarily to the addition of selling, general and administrative expenses of CWind.67Depreciation and amortization: Depreciation and amortization from our Marine Services segment for the year ended December 31, 2016 increased $3.2 million, to $22.0 millionfrom $18.8 million for the year ended December 31, 2015. The increase was due primarily to the acquired CWind assets.Other operating (income) expense: Other operating income from our Marine Services segment for the year ended December 31, 2017 increased $3.3 million, driven by the sale of avessel in 2017.Energy Segment Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Net revenue $16,415 $6,430 $6,765 $9,985 $(335) Cost of revenue 10,273 2,553 3,871 7,720 (1,318)Selling, general and administrative expenses 3,594 1,958 2,147 1,636 (189)Depreciation and amortization 5,071 2,249 1,635 2,822 614Other operating expense 247 — — 247 —Loss from operations $(2,770) $(330) $(888) $(2,440) $558Net revenue: Net revenue from our Energy segment for the year ended December 31, 2017 increased $10.0 million to $16.4 million from $6.4 million for the year ended December31, 2016. The increase was primarily driven by increased CNG sales from stations acquired in late 2016 and developed in 2017. This was partially offset by the utilization of taxcredits in the comparable period, which expired on December 31, 2016 and as of December 31, 2017 were not renewed. See Note 23. Subsequent Events for updated detailsregarding the tax credits as a result of legislation passed in 2018.Adoption of ASU 2014-09 will have an impact on 704Games' results of operations. As the Company is adopting ASU 2014-09 utilizing the modified retrospective approach, theCompany will recognize previously deferred revenue in retained earnings on January 1, 2018, and going forward, software revenues, which were previously deferred, will berecognized upon sale to the customer.Net revenue from our Energy segment for the year ended December 31, 2016 decreased $0.3 million to $6.4 million from $6.8 million for the year ended December 31, 2015. Thedecrease was driven by a reduction in design and build project revenues, which was largely offset by an increase in CNG sales volumes, resulting largely from the inclusion of salesfrom newly developed and acquired stations.Cost of revenue: Cost of revenue from our Energy segment for the year ended December 31, 2017 increased $7.7 million to $10.3 million from $2.6 million for the year endedDecember 31, 2016. The increase was driven by an increase in CNG supply, utility and other station operating expenses from the newly acquired or developed stations, combinedwith the impact of station down time associated with the integration upgrade of stations and repair and maintenance expenses associated with the acquired stations fromConstellation CNG and Questar Fueling Company in December 2016.Cost of revenue from our Energy segment for the year ended December 31, 2016 decreased $1.3 million to $2.6 million from $3.9 million for the year ended December 31, 2015.The decrease was due primarily to the reduction in design and build project revenues, which typically generate higher cost of revenue and lower margin than recurring revenuesgenerated through compressed natural gas sales from our network of owned, operated and maintained stations.Selling, general and administrative expenses: Selling, general and administrative expenses from our Energy segment for the year ended December 31, 2017 increased $1.6 millionto $3.6 million from $2.0 million for the year ended December 31, 2016. The increases were driven primarily by an increase in operating expenses to support the growth in thenumber of stations.Selling, general and administrative expenses from our Energy segment for the year ended December 31, 2016 decreased $0.1 million to $2.0 million from $2.1 million for the yearended December 31, 2015, driven by slightly lower salary costs.Depreciation and amortization: Depreciation and amortization from our Energy segment for the year ended December 31, 2017 increased $2.9 million to $5.1 million from $2.2million for the year ended December 31, 2016. The increases were primarily due to the expense from stations acquired in late 2016 and developed in 2017.Depreciation and amortization from our Energy segment for the year ended December 31, 2016 increased $0.6 million to $2.2 million from $1.6 million for the year endedDecember 31, 2015. The increase was primarily due to the increase in the number of natural gas fueling stations placed in service.68Telecommunications Segment Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Net revenue $701,898 $735,043 $460,355 $(33,145) $274,688 Cost of revenue 685,936 721,219 451,697 (35,283) 269,522Selling, general and administrative expenses 9,034 8,280 6,769 754 1,511Depreciation and amortization 371 507 417 (136) 90Other operating expense 198 887 1,234 (689) (347)Income from operations $6,359 $4,150 $238 $2,209 $3,912Net revenue: Net revenue from our Telecommunications segment for the year ended December 31, 2017 decreased $33.1 million to $701.9 million from $735.0 million for the yearended December 31, 2016. The decrease was due primarily to decreases in wholesale traffic volumes as the segment is focused on a wholesale traffic termination mix thatmaximizes margin contribution.Net revenue from our Telecommunications segment for the year ended December 31, 2016 increased $274.7 million to $735.0 million from $460.4 million for the year endedDecember 31, 2015. The increase was due primarily to growth in wholesale traffic volumes driven by the changing regulatory environment throughout the European marketcombined with continued business growth in the Middle East region.Cost of revenue: Cost of revenue from our Telecommunications segment for the year ended December 31, 2017 decreased $35.3 million to $685.9 million from $721.2 million forthe year ended December 31, 2016. The decrease was driven primarily by the decrease in revenues and focus on a wholesale traffic termination mix that maximizes margincontribution.Cost of revenue from our Telecommunications segment for the year ended December 31, 2016 increased $269.5 million to $721.2 million from $451.7 million for the year endedDecember 31, 2015. The increase is directly correlated to the growth in wholesale traffic volumes.Selling, general and administrative: Selling, general and administrative expenses from our Telecommunications segment for the year ended December 31, 2017 increased $0.7million to $9.0 million from $8.3 million for the year ended December 31, 2016. The increase was due primarily to an increase in salaries and commission expense as a result ofimproved margin contribution, as well as from an increase in operational support costs.Selling, general and administrative expenses from our Telecommunications segment for the year ended December 31, 2016 increased $1.5 million to $8.3 million from $6.8 millionfor the year ended December 31, 2015. The increase was due primarily to a higher bonus and commission expense as a result of improved sales force performance, as well as froman increase in operational support costs.Other operating expense: Other operating (income) expense from our Telecommunications segment for the year ended December 31, 2017 decreased $0.7 million to $0.2 millionfrom $0.9 million for the year ended December 31, 2016. This was driven by lease termination costs in the prior year which were not repeated in 2017.Other operating (income) expense from our Telecommunications segment for the year ended December 31, 2016 decreased $0.3 million to $0.9 million from $1.2 million for theyear ended December 31, 2015. In 2015, the Telecommunications segment recognized a lease impairment on a legacy switch site recorded in fiscal year 2015 that was no longer ineffect for the corresponding period for 2016. This was offset by lease termination costs incurred during the period.69Insurance Segment Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Life, accident and health earned premiums, net $80,524 $79,406 $1,578 $1,118 $77,828Net investment income 66,070 58,032 1,031 8,038 57,001Net realized and unrealized gains on investments 4,983 5,019 256 (36) 4,763Net revenue 151,577 142,457 2,865 9,120 139,592 Policy benefits, changes in reserves, and commissions 108,695 123,182 2,245 (14,487) 120,937Selling, general and administrative 21,902 21,456 794 446 20,662Depreciation and amortization (4,373) (3,769) 2 (604) (3,771)Other operating expense — 2,400 — (2,400) 2,400Income (loss) from operations $25,353 $(812) $(176) $26,165 $(636)The balances presented in 2015 reflect eight days of the Insurance segment as CGI was acquired on December 24, 2015.Net investment income: Net investment income from our Insurance segment for the year ended December 31, 2017 increased $8.0 million to $66.1 million from $58.0 million forthe year ended December 31, 2016. The increase was primarily driven by an increase in the asset base for both fixed maturity securities and mortgage loans and yield improvementsfor fixed maturity securities when compared to the previous period.Net investment income from our Insurance segment for the year ended December 31, 2016 increased $57.0 million to $58.0 million. The $58.0 million of net investment income forthe year ended December 31, 2016 was primarily driven by interest income, net of amortization of the discount or premium of $54.7 million, and dividends of $2.3 million.Policy benefits, changes in reserves, and commissions: Policy benefits, changes in reserves, and commissions for the year ended December 31, 2017 decreased $14.5 million to$108.7 million from $123.2 million for the year ended December 31, 2016. Policy benefits, changes in reserves and commission for the period ending December 31, 2017decreased primarily due to the reserves released of $14.0 million as a result of higher CNFO activity in 2017.Policy benefits, changes in reserves, and commissions for the year ended December 31, 2016 increased $120.9 million to $123.2 million. which consisted of benefit expenses andreserve changes for long-term care, life and annuity policies, and renewal commissions paid to agents. The reserve has increased during the period due primarily to the interestearned on the beginning reserve balances plus premiums received during period exceeding benefits paid out during the periods.Other operating expense: Other operating expense from our Insurance segment for the year ended December 31, 2016 was $2.4 million driven by the write off of state licenses in2016 due to the merger of UTA and CGI.Life Sciences Segment Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Selling, general and administrative expenses $17,016 $10,265 $6,383 $6,751 $3,882Depreciation and amortization 186 124 21 62 103Loss from operations $(17,202) $(10,389) $(6,404) $(6,813) $(3,985)Selling, general and administrative expenses: Selling, general and administrative expenses from our Life Sciences segment for the year ended December 31, 2017 increased $6.8million to $17.0 million from $10.3 million for the year ended December 31, 2016. The increases were primarily due to progress driven increases in clinical expenses and researchand development at R2 and BeneVir and increases in compensation expense as a result of these companies increased operational needs to meet company-specific regulatory andproduct commercialization objectives.Selling, general and administrative expenses from our Life Sciences segment for the year ended December 31, 2016 increased $3.9 million to $10.3 million from $6.4 million for theyear ended December 31, 2015. The increase was primarily due to progress driven increases in clinical expenses, research and development, and payroll and benefits at R2, and theimpact of BeneVir as a consolidating entity during the three months ended March 31, 2016 as a result of HC2's additional investment.70Other Segment Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Net revenue $15,791 $9,674 $2,125 $6,117 $7,549 Cost of revenue 9,758 8,610 3,963 1,148 4,647Selling, general and administrative expenses 12,014 5,340 2,426 6,674 2,914Depreciation and amortization 1,508 1,480 1,934 28 (454)Other operating (income) expense 1,810 — — 1,810 —Loss from operations $(9,299) $(5,756) $(6,198) $(3,543) $442Net revenue: Net revenue from our Other segment for the year ended December 31, 2017 increased $6.1 million, to $15.8 million from $9.7 million for the year ended December31, 2016. Increased revenues were driven by Broadcasting's acquisitions in the fourth quarter of 2017 and from the increase in sales revenues from 704Games sales of itsNASCAR® Heat 2 and mobile app games.Net revenue from our Other segment for the year ended December 31, 2016 increased $7.5 million, to $9.7 million from $2.1 million for the year ended December 31, 2015. Theincrease was primarily driven by the release of the NASCAR® Heat Evolution game in September 2016.While not material to the Company, the adoption of ASU 2014-09 will have an impact on 704Games' results of operations. As the Company is adopting ASU 2014-09 utilizing themodified retrospective approach, the Company will recognize previously deferred revenue in retained earnings on January 1, 2018, and going forward, software revenues, whichwere previously deferred, will be recognized upon sale to the customer.Cost of revenue: Cost of revenue from our Other segment for the year ended December 31, 2017 increased $1.1 million to $9.8 million from $8.6 million for the year endedDecember 31, 2016. The increase in costs of revenue were driven by the increase in costs associated with Broadcasting's acquisitions in the fourth quarter of 2017, and theincreased sales from 704Games.Cost of revenue from our Other segment for the year ended December 31, 2016 increased $4.6 million to $8.6 million from $4.0 million for the year ended December 31, 2015. Theincrease was primarily driven by an increase in royalties, disc manufacturing, and game development costs related to the NASCAR® Heat Evolution game.Selling, general and administrative: Selling, general and administrative expenses from our Other segment for the year ended December 31, 2017 increased $6.7 million to $12.0million from $5.3 million for the year ended December 31, 2016. The increase was driven by operational costs of Broadcasting's acquisitions in the fourth quarter of 2017.Selling, general and administrative expenses from our Other segment for the year ended December 31, 2016 increased $2.9 million to $5.3 million from $2.4 million for the yearended December 31, 2015.The increase was due to compensation, marketing and advertising expenses associated with the release of console and PC versions of the NASCAR®Heat Evolution game.Other operating (income) expense: Other operating (income) expense from our Other segment for the year ended December 31, 2017 was an expense of $1.8 million driven byimpairment expense of NerVve's goodwill and property, plant and equipment.Non-operating Corporate Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Selling, general and administrative expenses $39,799 $37,600 $38,869 $2,199 $(1,269)Depreciation and amortization 71 — — 71 —Other operating expense — — 2 — (2)Loss from operations $(39,870) $(37,600) $(38,871) $(2,270) $1,271Selling, general and administrative expenses: Selling, general and administrative expenses from our Non-operating Corporate segment for the year ended December 31, 2017increased $2.2 million to $39.8 million from $37.6 million for the year ended December 31, 2016. The increase was attributable to bonus related compensation associated with thegrowth in Net Asset Value ("NAV") at the end of the period, compensation related expenses associated with senior management changes announced during the year, andacquisition related costs which increased compared to the previous period as a result of broadcasting related purchases.Selling, general and administrative expenses from our Non-operating Corporate segment for the year ended December 31, 2016 decreased $1.3 million to $37.6 million from $38.9million for the year ended December 31, 2015. The decrease was primarily attributable to a reduction in acquisition related expenses and share-based payment expense, partiallyoffset by an increase in bonus expense and costs associated with continued71growth in the Company, including headcount-driven increases in payroll and rent expense, and increased professional fees.The HC2 Compensation Committee establishes annual salary, cash and equity-based bonus arrangements for certain HC2 executive employees on an annual basis. In determiningthe amounts payable pursuant to such cash and equity-based bonus arrangements for these employees, the Company has historically measured the growth in the Company’s NAVin accordance with a formula established by HC2’s Compensation Committee ("Compensation NAV"). The Compensation NAV is generally determined by dividing the end ofyear Compensation NAV per share by the beginning year Compensation NAV per share and subtracting 1 from this amount (the "NAV Return"), and then subtracting the requiredthreshold return rate from the NAV Return. HC2’s accrual for these bonus compensation expenses as of December 31, 2017, 2016 and 2015, resulted in an increase in expense recognized of $5.8 million between December31, 2017 and 2016, and $4.7 million between December 31, 2016 and 2015. These increases reflect the underlying performance and growth in the Compensation NAV, which hasgrown approximately 50.0% and 34.7% in 2017 and 2016, respectively.For the year ended December 31, 2016, underlying performance of the Compensation NAV increased 34.7% as compared to an increase of less than 1% for the comparableperiod. Because the NAV Return did not exceed the required threshold return rate for the twelve months ended December 31, 2015, the 2016 beginning year Compensation NAVper share was equal to the 2015 end of year Compensation NAV per share. Income (loss) from Equity Investments Years Ended December 31, Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Marine Services $23,593 $20,007 $13,437 $3,586 $6,570Life Sciences (5,668) (2,024) (891) (3,644) (1,133)Other (85) (7,215) (14,045) 7,130 6,830Income (loss) from equity investments $17,840 $10,768 $(1,499) $7,072 $12,267Marine Services: Income from equity investments in our Marine Services segment for the year ended December 31, 2017 increased $3.6 million to $23.6 million from $20.0 millionfor the year ended December 31, 2016. The increase in income was primarily driven by strong performance from our equity interest in HMN in 2017.Income from equity investments in our Marine Services segment for the year ended December 31, 2016 increased $6.6 million to $20.0 million from $13.4 million for the yearended December 31, 2015. The increase in income was due to growth in GMSL's joint venture income, principally HMN and SBSS, which had increased income through sustainedgrowth.Life Sciences: Loss from equity investments from our Life Sciences segment for the year ended December 31, 2017 increased $3.6 million to a loss of $5.7 million from a loss of$2.0 million for the year ended December 31, 2016. The increases were largely due to higher equity method losses recorded from our investment in MediBeacon as a result of ourincreased ownership and additional expenses following successful completion of development and clinical milestones.Loss from equity investments from our Life Sciences segment for the year ended December 31, 2016 increased $1.1 million to a loss of $2.0 million from a loss of $0.9 million forthe year ended December 31, 2015. The increase was due to higher equity method losses recorded from our investment in MediBeacon as a result of our additional investment in2016 compared to the prior year, as well as an increase in MediBeacon expenses following successful completion of developmental milestones, offset in part by a reduction inequity method loss of our investment in BeneVir, which we began to consolidate on February 1, 2016.Other: Loss from equity investments from our Other segment for the year ended December 31, 2017 decreased $7.1 million to a loss of $0.1 million from a loss of $7.2 millionwhen compared to the year ended December 31, 2016. The change was driven by Inseego, as the Company did not recognize losses from our investment in the current period asour basis in this investment is zero.Loss from equity investments from our Other segment for the year ended December 31, 2016 decreased $6.8 million to $7.2 million from $14.0 million for the year endedDecember 31, 2015. The change was driven by Inseego, as the Company did not recognize losses from our investment in the fourth quarter of 2016 as our basis in this investmentis zero, as well as by a decrease in equity losses related to NerVve, prior to its consolidation on August 17, 2016.72Non-GAAP Financial Measures and Other InformationAdjusted EBITDAAdjusted 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 itsusefulness.Management believes that Adjusted EBITDA provides investors with meaningful information for gaining an understanding of our results as it is frequently used by the financialcommunity to provide insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation, amortization and theother items listed in the definition of Adjusted EBITDA below can differ greatly between organizations as a result of differing capital structures and tax strategies. AdjustedEBITDA 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 toolas 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, whichmay be meaningful to investors. As a result of the exclusions, Adjusted EBITDA should not be considered in isolation and does not purport to be an alternative to net income (loss)or other U.S. GAAP financial measures as a measure of our operating performance. Adjusted EBITDA excludes the results of operations of our Insurance segment.The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss), excluding the Insurance segment, as adjusted for depreciation and amortization; amortizationof equity method fair value adjustments at acquisition; (gain) loss on sale or disposal of assets; lease termination costs; asset impairment expense; interest expense; net gain (loss) oncontingent consideration; loss on early extinguishment or restructuring of debt; other (income) expense, net; foreign currency transaction (gain) loss included in cost of revenue;income tax (benefit) expense; (gain) loss from discontinued operations; noncontrolling interest; bonus to be settled in equity; share-based compensation expense; non-recurringitems; and acquisition costs.(in thousands):Year ended December 31, 2017Core Operating SubsidiariesEarly Stage and OtherHC2 ConstructionMarineServicesEnergyTelecomLife SciencesOther andEliminationsNon-operatingCorporateNet loss attributable to HC2 Holdings, Inc.$(46,911)Less: Net Income attributable to HC2 Holdings Insurance Segment7,066Net Income (loss) attributable to HC2 Holdings, Inc., excluding InsuranceSegment$23,624$15,173$(516)$6,163$(18,098)$(18,005)$(62,318)(53,977)Adjustments to reconcile net income (loss) to Adjusted EBITDA:Depreciation and amortization5,58322,8985,0713711861,5087135,688Depreciation and amortization (included in cost of revenue)5,254——————5,254Amortization of equity method fair value adjustment at acquisition—(1,594)—————(1,594)Asset impairment expense—————1,810—1,810(Gain) loss on sale or disposal of assets292(3,500)247181———(2,780)Lease termination costs—249—17———266Interest expense9764,3921,18141—4,37344,13555,098Net gain on contingent consideration——————(11,411)(11,411)Other (income) expense, net(41)2,6831,488149(17)6,541(92)10,711Foreign currency gain (included in cost of revenue)—(79)—————(79)Income tax (benefit) expense10,679203(4,243)7(820)(1,129)(10,185)(5,488)Noncontrolling interest1,941260(681)—(3,936)(1,164)—(3,580)Bonus to be settled in equity——————4,1304,130Share-based compensation expense—1,527364—3192792,7545,243Non-recurring items — — — — — — — —Acquisition costs3,2801,815———2,6483,76411,507Adjusted EBITDA$51,588$44,027$2,911$6,929$(22,366)$(3,139)$(29,152)$50,798Total Core Operating Subsidiaries$105,45573(in thousands):Year Ended December 31, 2016 Core Operating Subsidiaries Early Stage and Other HC2 ConstructionMarineServices Energy Telecom Life SciencesOther andEliminationsNon-operatingCorporate Net loss attributable to HC2 Holdings, Inc. $(94,549)Less: Net loss attributable to HC2 Holdings Insurance Segment (14,028)Net Income (loss) attributable to HC2 Holdings, Inc., excluding InsuranceSegment $28,002 $17,447 $7 $1,435 $(7,646) $(24,800) $(94,966) (80,521)Adjustments to reconcile net income (loss) to Adjusted EBITDA: Depreciation and amortization 1,892 22,007 2,248 504 124 1,480 9 28,264Depreciation and amortization (included in cost of revenue) 4,370 — — — — — — 4,370Amortization of equity method fair value adjustment at acquisition — (1,371) — — — — — (1,371)(Gain) loss on sale or disposal of assets 1,663 (9) — 708 — — — 2,362Lease termination costs — — — 179 — — — 179Interest expense 1,239 4,774 211 — — 1,164 35,987 43,375Net loss (gain) on contingent consideration — (2,482) — — — — 11,411 8,929Other (income) expense, net (163) (2,424) (8) (87) (3,213) 9,987 (1,277) 2,815Foreign currency gain (included in cost of revenue) — (1,106) — — — — — (1,106)Income tax (benefit) expense 18,727 1,394 (535) 2,803 1,558 3,250 11,245 38,442Noncontrolling interest 1,834 974 (4) — (3,111) (2,575) — (2,882)Bonus to be settled in equity — — — — — — 2,503 2,503Share-based compensation expense — 1,682 597 — 251 273 5,545 8,348Non-recurring items — — — — — — 1,513 1,513Acquisition costs 2,296 290 27 18 — — 2,312 4,943Adjusted EBITDA $59,860 $41,176 $2,543 $5,560 $(12,037) $(11,221) $(25,718) $60,163 Total Core Operating Subsidiaries $109,139 Construction: Net Income from our Construction segment for the year ended December 31, 2017 decreased $4.4 million to $23.6 million compared to $28.0 million for the yearended December 31, 2016. Adjusted EBITDA income from our Construction segment for the year ended December 31, 2017 decreased $8.3 million to $51.6 million from $59.9million for the year ended December 31, 2016. The decrease was due in part to project delays associated with design changes on certain existing projects in backlog for 2017, aswell as better-than bid performance on commercial projects in the comparable period.Marine Services: Net Income from our Marine Services segment for the year ended December 31, 2017 decreased $2.3 million to $15.2 million compared to $17.4 million for theyear ended December 31, 2016. Adjusted EBITDA income from our Marine Services segment for the year ended December 31, 2017 increased $2.9 million to $44.0 million from$41.2 million for the year ended December 31, 2016. The increase was primarily driven by increases in equity method income through our joint venture investment in HMN in2017.Energy: Net Loss from our Energy segment for the year ended December 31, 2017 decreased $0.4 million to $0.5 million compared to zero for the year ended December 31, 2016.Adjusted EBITDA income from our Energy segment for the year ended December 31, 2017 increased $0.5 million to $2.9 million from $2.5 million for the year ended December31, 2016 due to the impact of sales from stations acquired and commissioned subsequent to the comparable period, offset in part by the utilization of tax credits in the comparableperiods, which expired on December 31, 2016 and were not renewed in 2017.Telecommunications: Net Income from our Telecommunications segment for the year ended December 31, 2017 increased $4.7 million to $6.2 million compared to $1.4 million forthe year ended December 31, 2016. Adjusted EBITDA income from our Telecommunications segment for the year ended December 31, 2017 increased $1.3 million to $6.9 millionfrom $5.6 million for the year ended December 31, 2016. The increase was due to the Company’s focus on the wholesale traffic termination mix that maximizes margincontribution.Life Sciences: Net Loss from our Life Sciences segment for the year ended December 31, 2017 increased $10.5 million to $18.1 million compared to $7.6 million for the year endedDecember 31, 2016. Adjusted EBITDA loss from our Life Sciences segment for the year ended December 31, 2017 increased $10.4 million to a loss of $22.4 million from a lossof $12.0 million due to a progress driven increase in costs at R2, and an increase in equity method losses recorded for MediBeacon, both as a result of increased expenses followingsuccessful completion of development and clinical milestones.Other and Eliminations: Net Loss from our Other segment for the year ended December 31, 2017 decreased $6.8 million to $18.0 million compared to $24.8 million for the yearended December 31, 2016. Adjusted EBITDA loss from the Other segment and eliminations for the year ended December 31, 2017 decreased $8.1 million to $3.1 million from$11.2 million for the year ended December 31, 2016. The decrease in loss was due to a reduction in losses recognized from our equity method investments, principally Inseego, asthe Company did not recognize74losses from our investment in the year ended December 31, 2017 as our basis in this investment is zero.Non-operating Corporate: Net Loss from our Corporate segment for the year ended December 31, 2017 decreased $32.6 million to $62.3 million compared to $95.0 million for theyear ended December 31, 2016.Adjusted EBITDA loss from our Non-operating Corporate segment for the year ended December 31, 2017 increased $3.4 million to $29.2 millionfrom $25.7 million for the year ended December 31, 2016. The increase was attributable to bonus related compensation associated with the increase in Compensation NAV at theend of the period and from compensation related expenses associated with senior management changes during the year. Years Ended December 31, Increase /(in thousands): 2017 2016 (Decrease)Construction $51,588 $59,860 $(8,272)Marine Services 44,027 41,176 2,851Energy 2,911 2,543 368Telecommunications 6,929 5,560 1,369Total Core Operating Subsidiaries 105,455 109,139 (3,684) Life Sciences (22,366) (12,037) (10,329)Other and Eliminations (3,139) (11,221) 8,082Total Early Stage and Other (25,505) (23,258) (2,247) Non-Operating Corporate (29,152) (25,718) (3,434)Adjusted EBITDA $50,798 $60,163 $(9,365)Our Adjusted EBITDA was $50.8 million and $60.2 million for the years ended December 31, 2017 and 2016, respectively. The $9.4 million decrease was primarily due to ourLife Sciences segment as our early stage companies continue to develop their businesses and meet major milestones and our Construction segment driven by better than bidperformance in 2016 which was not repeated in the current year and project delays associated with design changes on certain existing projects in backlog for 2017. These decreaseswere offset by our Other segment driven by our equity investment in Inseego, as the Company did not recognize losses from our investment in the current period as our basis in thisinvestment is zero.Adjusted Operating Income - InsuranceAdjusted Operating Income for the Insurance segment ("Insurance AOI") is a non-U.S. GAAP financial measure frequently used throughout the insurance industry and is aneconomic measure the Insurance segment uses to evaluate its financial performance. Management believes that Insurance AOI measures provide investors with meaningfulinformation for gaining an understanding of certain results and provides insight into an organization’s operating trends and facilitates comparisons between peer companies.However, Insurance AOI has certain limitations and we may not calculate it the same as other companies in our industry. It should therefore be read together with the Company'sresults calculated in accordance with U.S. GAAP. Similarly to Adjusted EBITDA, using Insurance AOI as a performance measure has inherent limitations as an analytical tool as compared to income (loss) from operations or otherU.S. GAAP financial measures, as this non-U.S. GAAP measure excludes certain items, including items that are recurring in nature, which may be meaningful to investors. As aresult of the exclusions, Insurance AOI should not be considered in isolation and does not purport to be an alternative to income (loss) from operations or other U.S. GAAPfinancial measures as a measure of our operating performance.Management defines Insurance AOI as Net income (loss) for the Insurance segment adjusted to exclude the impact of net investment gains (losses), including OTTI lossesrecognized in operations; asset impairment; intercompany elimination; non-recurring items; and acquisition costs. Management believes that Insurance AOI provides a meaningfulfinancial metric that helps investors understand certain results and profitability. While these adjustments are an integral part of the overall performance of the Insurance segment,market conditions impacting these items can overshadow the underlying performance of the business. Accordingly, we believe using a measure which excludes their impact iseffective in analyzing the trends of our operations.75The table below shows the adjustments made to the reported Net income (loss) of the Insurance segment to calculate Insurance AOI (in thousands). Refer to the analysis of thefluctuations within the results of operations section: Years Ended December 31, 2017 2016 Increase / (Decrease)Net income (loss) - Insurance segment $7,066 $(14,028) $21,094Net realized and unrealized gains on investments (4,983) (5,019) 36Asset impairment 3,364 2,400 964Acquisition costs 2,535 714 1,821Insurance AOI $7,982 $(15,933) $23,915Our Insurance AOI for the years ended December 31, 2017 and 2016 was income of $8.0 million and a loss of $15.9 million, respectively. The increases were primarily due toreduction in insurance benefits due to reserves released, higher net investment income and net gains realized from the sales of fixed maturity and equity securities and a and adecrease in SG&A expenses driven by the termination of the Transition Services Agreement in early 2017. The increase was partially offset by an increase in tax expense dueto higher operating profits, as a result of reserve releases, and increased taxable investment gains in the year.BacklogProjects in backlog consist of awarded contracts, letters of intent, notices to proceed, change orders, and purchase orders obtained. Backlog increases as contract commitments areobtained, 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 infuture periods as work is performed or projects are completed. Backlog can be significantly affected by the receipt or loss of individual contracts.Construction SegmentAt December 31, 2017, DBMG's backlog was $723.4 million, consisting of $483.9 million under contracts or purchase orders and $239.5 million under letters of intent or noticesto proceed. Approximately $461.5 million, representing 63.8% of DBMG’s backlog at December 31, 2017, was attributable to five contracts, letters of intent, notices to proceed orpurchase orders. If one or more of these projects terminate or reduce their scope, DBMG’s backlog could decrease substantially.DBMG’s backlog at December 31, 2016 was $503.5 million, consisting of $441.1 million under contracts or purchase orders and $62.4 million under letters of intent or notices toproceed.Marine Services SegmentAt December 31, 2017, GMSL's backlog stood at $445.3 million, inclusive of $342.1 million of signed contracts and customer-approved change orders and $103.2 million of on-site repair estimates associated with its long-term maintenance contracts. Approximately $274.0 million, representing 80.1% of GMSL’s signed contracts and customer-approvedchange orders and $377.0 million, representing 84.7% of GMSL's total backlog at December 31, 2017 was attributable to three multi-year telecom maintenance contracts which willnaturally burn through to revenue as the contracts run off. Our reported backlog may not be converted to revenue in any particular period and actual revenue may not equal ourbacklog. Therefore, our backlog may not be indicative of the level of our future revenues.At December 31, 2016, GMSL's backlog stood at $349.9 million, inclusive of $271.3 million of signed contracts and customer-approved change orders and $78.7 million of on-siterepair estimates associated with its long-term maintenance contracts.Liquidity and Capital ResourcesShort- and Long-Term Liquidity Considerations and RisksHC2 is a holding company and its liquidity needs are primarily for interest payments on its 11.0% Notes, dividend payments on its Preferred Stock and recurring operationalexpenses. As of December 31, 2017, the Company had $97.9 million of cash and cash equivalents compared to $115.4 million as of December 31, 2016. On a stand-alone basis, as ofDecember 31, 2017, HC2 had cash and cash equivalents of $29.4 million compared to $21.7 million at December 31, 2016. At December 31, 2017, cash and cash equivalents inour Insurance segment was $25.2 million compared to $24.5 million at December 31, 2016.Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel constructionequipment and subsea cable equipment, fueling stations, network equipment (such as switches, related transmission equipment and capacity), and service infrastructure, liabilitiesassociated with insurance products, development of back-office systems, operating costs and expenses, and income taxes. 76As of December 31, 2017, the Company had $601.1 million of indebtedness on a consolidated basis compared to $438.4 million as of December 31, 2016. On a stand-alone basis,as of December 31, 2017, HC2 had $400.0 million of indebtedness compared to $307.0 million as of December 31, 2016.On November 9, 2017, HC2 Broadcasting Holdings Inc., a subsidiary of HC2, entered into a $75.0 million bridge loan (the "Bridge Loan") pari pasu with the 11.0% SeniorSecured Notes. The Bridge Loan is guaranteed by HC2 and each of the other guarantors of the 11.0% Notes and ranks pari passu to, and is equally and ratably secured with HC2'sexisting 11.0% Notes. HC2 Broadcasting Holdings Inc. borrowed $45.0 million of principal amount of the Bridge Loan on the same day and an additional $15.0 million ofprincipal on December 15, 2017.All of HC2's stand-alone debt consists of the 11.0% Notes. HC2 is required to make semi-annual interest payments on its outstanding 11.0% Notes on June 1st and December 1st ofeach year. HC2 is required to make dividend payments on our outstanding Preferred Stock on January 15th, April 15th, July 15th, and October 15th of each year.During the three months ended December 31, 2017, HC2 received $4.5 million and $2.0 million in dividends from our Construction and Telecommunications segments,respectively. During the year ended December 31, 2017, HC2 received $18.4 million and $8.0 million in dividends from our Construction and Telecommunications segments,respectively.Under a tax sharing agreement, DBMG reimburses HC2 for use of its net operating losses. During the year ended December 31, 2017, HC2 received $10.0 million from DBMGunder this tax sharing agreement.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 equitysecurities, credit facilities, vendor financing, capital lease financing and other financing arrangements, as well as cash generated from the operations of our subsidiaries. In the future,we may also choose to sell assets or certain investments to generate cash.At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt services and operating leases) and other cashneeds for our operations for at least the next twelve months through a combination of distributions from our subsidiaries and from raising of additional debt or equity, refinancing ofcertain of our indebtedness or Preferred Stock, other financing arrangements and/or the sale of assets and certain investments. Historically, we have chosen to reinvest cash andreceivables into the growth of our various businesses, and therefore have not kept a large amount of cash on hand at the holding company level, a practice which we expect tocontinue in the future. The ability of HC2’s subsidiaries to make distributions to HC2 is subject to numerous factors, including restrictions contained in each subsidiary’s financingagreements, regulatory requirements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary’s board of directors, which mustconsider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual,legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary’s board of directors considers relevant. Our ability to sell assets and certain ofour investments to meet our existing financing needs may also be limited by our existing financing instruments. Although the Company believes that it will be able to raiseadditional equity capital, refinance indebtedness or Preferred Stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient tofund any cash needs that we are not able to satisfy with the funds expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on termssatisfactory to the Company if at all. Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over the long-term. In addition, the sale of assets or the Company’s investments may also make the Company less attractive to potential investors or future financing partners.Capital ExpendituresCapital expenditures for the years ended December 31, 2017, 2016 and 2015 are set forth in the table below (in thousands): Years Ended December 31, 2017 2016 2015Construction $11,684 $8,243 $4,969Marine Services 10,519 12,231 10,651Energy 8,569 7,211 4,750Telecommunications 48 831 449Insurance 597 128 —Life Sciences 465 195 271Other 25 45 234Non-operating corporate 18 164 —Total $31,925 $29,048 $21,324The above capital expenditures exclude assets acquired under terms of capital lease and vendor financing obligations.77Insurance Companies Capital ContributionsIn connection with the acquisition of Insurance Companies in December 2015, the Company contributed approximately $33.0 million of additional assets to the InsuranceCompanies, as required by the acquisition agreement governing the purchase. The contribution was made for the purpose of satisfying the reserve release amount of $13.0 millionand offsetting the impact on the acquired companies’ statutory capital and surplus of the election to be made by the Company and Seller Parties pursuant to Section 338(h)(10) ofthe Internal Revenue Code in connection with the transaction as soon as possible after closing.The Company has an agreement with the Texas Department of Insurance ("TDOI") that, for five years following the acquisition, the Company will contribute to CGI cash ormarketable securities acceptable to the TDOI to the extent required for CGI’s total adjusted capital to be not less than 400% of CGI’s authorized control level risk-based capital(each as defined under Texas law and reported in CGI’s statutory statements filed with the TDOI).Additionally, CGI entered into a capital maintenance agreement with Great American. Under the agreement, if the applicable acquired company’s total adjusted capital reported in itsannual statutory financial statements is less than 400% of its authorized control level risk-based capital, Great American has agreed to pay cash or assets to the applicable acquiredcompany as required to eliminate such shortfall (after giving effect to any capital contributions made by the Company or its affiliates since the date of the relevant annual statutoryfinancial statement). Great American’s obligation to make such payments is capped at $35.0 million under the capital maintenance agreement. The capital maintenance agreementswill remain in effect from January 1, 2016 to January 1, 2021 or until payments by Great American under the applicable agreement equal the applicable cap. Pursuant to thepurchase agreement, the Company is required to indemnify Great American for the amount of any payments made by Great American under the capital maintenance agreements.IndebtednessSee Note 13. Debt Obligations, to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a description of our debt.On November 9, 2017, Broadcasting entered into a $75 million bridge loan (the "Bridge Loan") to finance acquisitions in the low power broadcast television distribution market.Broadcasting borrowed $45 million of principal amount of Bridge Loans on the same day. On December 15, 2017, Broadcasting borrowed an additional $15 million of principalamount of Bridge Loans.On February 4, 2018, Broadcasting entered into a First Amendment to the Credit Agreement of an additional $27.0 million in principal amount of Bridge loans.On February 6, 2018, Broadcasting borrowed $42.0 million in principal amount of Bridge Loans, the net proceeds of which were or will be used to finance certain acquisitions, topay fees, costs and expenses relating to the Bridge Loans, and for general corporate purposes. The total aggregate principal amount of the Bridge Loans outstanding after theFebruary 6, 2018 borrowing was $102.0 million.Restrictive Covenants The 11.0% Notes Indenture contains certain covenants limiting, among other things, the ability of the Company and certain subsidiaries of the Company to incur additionalindebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock and make certain restricted payments; sell assets;engage in transactions with affiliates; or consolidate or merge with, or sell substantially all of its assets to, another person. These covenants are subject to a number of importantexceptions and qualifications. The 11.0% Notes Indenture also includes two maintenance covenants: (1) a liquidity covenant; and (2) a collateral coverage covenant. The liquidity covenant provides that the Company will not permit the aggregate amount of all unrestricted cash and cash equivalents of the Company and the subsidiary guarantorsof the 11.0% Notes (the "Guarantors") to be less than the Company’s obligations to pay interest on the 11.0% Notes and all other debt of the Company and the Guarantors, plusmandatory cash dividends on the Company’s Preferred Stock, for the next (i) six months if our collateral coverage ratio is greater than 2.0x or (ii) 12 months if our collateralcoverage ratio is less than 2.0x. As of December 31, 2017, our collateral coverage ratio was greater than 2.0x and therefore the liquidity covenant requires the Company to maintain6 months of debt service and preferred dividend obligations. If the collateral coverage ratio subsequently becomes lower than 2:1 in the future, the maintenance of liquidityrequirement under the 11.0% Notes will be increased back to 12 months of debt service and preferred dividend obligations. As of December 31, 2017, the Company was incompliance with this covenant.The collateral coverage covenant provides that the Company’s Collateral Coverage Ratio (defined in the 11.0% Notes Indenture as the ratio of (i) the Loan Collateral to (ii)Consolidated Secured Debt (each as defined therein)) calculated on a pro forma basis as of the last day of each fiscal quarter may not be less than 1.25:1. As of December 31, 2017,the Company was in compliance with this covenant.The instruments governing the Company’s Preferred Stock also limit the Company’s and its subsidiaries ability to take certain actions, including, among other things, to incuradditional indebtedness; issue additional Preferred Stock; engage in transactions with affiliates; and make certain restricted payments. These limitations are subject to a number ofimportant exceptions and qualifications.78Summary of Consolidated Cash FlowsPresented below is a table that summarizes the cash provided or used in our activities and the amount of the respective increases or decreases in cash provided by (used in) thoseactivities between the fiscal periods (in thousands): Years Ended December 31,Increase / (Decrease) 2017 2016 2015 2017 comparedto 2016 2016 comparedto 2015Operating activities $6,142 $79,148 $(27,914) $(73,006) $107,062Investing activities (139,253) (140,218) (18,914) 965 (121,304)Financing activities 115,341 18,788 102,693 96,553 (83,905)Effect of exchange rate changes on cash and cash equivalents 284 (971) (5,219) 1,255 4,248Net increase (decrease) in cash and cash equivalents $(17,486) $(43,253) $50,646 $25,767 $(93,899)Operating ActivitiesCash provided by operating activities totaled $6.1 million for the year ended December 31, 2017 as compared to $79.1 million for the year ended December 31, 2016. The $73.0million decrease was the result of an decrease in working capital largely due to contracts in progress driven by the ramp up of significant projects in our Construction segment, anincrease in cash used from interest paid for our long term obligations driven by increase in our 11.0% senior secured debt, and a net decrease in dividends received from equityinvestees when compared to the prior period.Cash provided by operating activities totaled $79.1 million for fiscal 2016 as compared to cash used of $27.9 million for fiscal 2015. The $107.1 million increase was the result anincrease in working capital, driven by increases in insurance reserves from premiums collected in 2016, net increase on contracts in progress and a reduction in accounts payable.Investing ActivitiesCash used in investing activities totaled $139.3 million for the year ended December 31, 2017 as compared to $140.2 million for the year ended December 31, 2016. The activity,while remaining consistent, was driven by an increase in net cash used from purchases and sales of investments, fully offset by an increase in cash provided by maturities andredemptions of investments. Further, there was an increase in net cash used in the purchase and disposal of property, plant and equipment, partially offset by a decrease in cash paidfor business acquisitions when compared to 2016.Cash used in investing activities during fiscal 2016 was $140.2 million compared to $18.9 million during fiscal 2015, primarily driven by a $106.1 million increase in cash paid foracquisitions and an increase in net investment activity primarily due to the purchase of investments in our Insurance segment.Financing ActivitiesCash provided by financing activities totaled $115.3 million for the year ended December 31, 2017 as compared to cash provided by financing activities of $18.8 million for the yearended December 31, 2016. The $96.6 million change was driven by an increase in proceeds from debt obligations borrowings of $130.5 million largely driven by our Corporate,Construction, and Other segments. This was partially offset by an increase of $29.3 million in principal payments on long term obligations largely driven by the repayment of the$35 million 11.0% Bridge Note.Cash provided by financing activities during fiscal 2016 was $18.8 million compared to $102.7 million during fiscal 2015, primarily driven by a $68.0 million decrease in proceedsfrom the issuance of equity securities and an increase of $21.0 million in payments on annuity surrenders.79Contractual ObligationsThe obligations set forth in the table below reflect the contractual payments of principal and interest that existed as of December 31, 2017 (in thousands): Payments Due By Period Total Less than 1 year 1-3 years 3-5 years More than 5 yearsLife, accident and health liabilities (1) $1,199,180 $78,862 $108,222 $96,956 $915,140Annuities (1) 243,157 25,835 40,759 32,877 143,686Operating leases 76,536 16,679 30,526 16,782 12,549Capital leases 58,519 10,211 20,198 20,083 8,027Purchase Obligations 126,944 124,418 2,426 54 46Debt obligations 644,837 144,440 468,804 12,492 19,101Total contractual obligations $2,349,173 $248,286 $563,364 $160,152 $1,093,967(1) Net of reinsurance recoverable.Other Invested AssetsCarrying values of other invested assets accounted for under cost and equity method are as follows (in thousands): December 31, 2017 December 31, 2016 Cost Method Equity Method Fair Value Cost Method Equity Method Fair ValueCommon Equity $— $1,484 $— $138 $1,047 $—Preferred Equity 2,484 14,197 — 2,484 9,971 —Derivatives 422 — 260 3,097 — 3,813Limited Partnerships — — — — 1,116 —Joint Ventures — 66,572 — — 40,697 —Total $2,906 $82,253 $260 $5,719 $52,831 $3,813ConstructionCash FlowsCash 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 tostructure 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 generatesworking 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. DBMGbelieves that its existing borrowing availability together with cash from operations will be adequate to meet all funding requirements for its operating expenses, interest payments ondebt and capital expenditures for the foreseeable future.DBMG is required to make monthly or quarterly interest payments on all of its debt. Based upon the December 31, 2017 debt balance, DBMG anticipates that its interest paymentswill be approximately $0.1 million each quarter.DBMG believes that its available funds, cash generated by operating activities and funds available under its bank credit facilities will be sufficient to fund its capital expendituresand its working capital needs. However, DBMG may expand its operations through future acquisitions and may require additional equity or debt financing.80Marine ServicesCash FlowsCash flows from operating activities are the principal source of cash used to fund GMSL’s operating expenses, interest payments on debt, and capital expenditures. GMSL's short-term cash needs are primarily for working capital to support operations including receivables, inventories, and other costs incurred in performing its contracts. GMSL attempts tostructure the payment arrangements under its contracts to match costs incurred under the project. To the extent it is able to bill in advance of costs incurred, GMSL generatesworking capital through billings in excess of costs and recognized earnings on uncompleted contracts. GMSL believes that its existing borrowing availability together with cashfrom operations will be adequate to meet all funding requirements for its operating expenses, interest payments on debt and capital expenditures for the foreseeable future.GMSL is required to make monthly and quarterly interest and principal payments depending on the structure of each individual debt agreement.Market EnvironmentGMSL earns revenues in a variety of currencies including the U.S. dollar, the Singapore dollar and the British pound. The exchange rates between the U.S. dollar, the Singaporedollar and the British pound have fluctuated in recent periods and may fluctuate substantially in the future. Any material appreciation or depreciation of these currencies against eachother may have a negative impact on GMSL's results of operations and financial condition.InsuranceCash flowsCIG’s principal cash inflows from its operating activities relate to its premiums, annuity deposits and insurance, investment income and other income. CIG’s principal cash inflowsfrom its invested assets result from investment income and the maturity and sales of invested assets. The primary liquidity concern with respect to these cash inflows relates to therisk of default by debtors and interest rate volatility. Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash inflows and current cash andequivalents on hand include selling short-term investments or fixed maturity securities.CIG's principal cash outflows relate to the payment of claims liabilities, interest credited and operating expenses. CIG’s management believes its current sources of liquidity areadequate to meet its cash requirements for the next 12 months.Market environmentAs of December 31, 2017, CIG was in a position to hold any investment security showing an unrealized loss until recovery, provided it remains comfortable with the credit of theissuer. CIG does not rely on short-term funding or commercial paper and to date it has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeablefuture. CIG projects its reserves to be sufficient and believes its current capital base is adequate to support its business.Dividend LimitationsCIG's insurance subsidiary is subject to Texas statutory provisions that restrict the payment of dividends. The dividend limitations on CIG are based on statutory financial resultsand regulatory approval. Statutory accounting practices differ in certain respects from accounting principles used in financial statements prepared in conformity with U.S. GAAP.Significant differences include the treatment of deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes.The ability of CIG’s insurance subsidiary to pay dividends and to make such other payments is limited by applicable laws and regulations of the states in which its subsidiary isdomiciled, which subject its subsidiary to significant regulatory restrictions. These laws and regulations require, among other things, CIG’s insurance subsidiary to maintainminimum solvency requirements and limit the amount of dividends this subsidiary can pay. Along with solvency regulations, the primary driver in determining the amount ofcapital used for dividends is the level of capital needed to maintain desired financial strength in the form of its subsidiary Risk-Based Capital ("RBC") ratio. CIG monitors itsinsurance subsidiary's compliance with the RBC requirements specified by the National Association of Insurance Commissioners. As of December 31, 2017, CIG’s insurancesubsidiary exceeds the minimum RBC requirements. CIG’s insurance subsidiary paid no dividends to CIG in fiscal year 2017 and has further agreed with its state regulator to notpay dividends for three years following the completion of the acquisition on December 24, 2015.OtherThe Company has an agreement with the Texas Department of Insurance ("TDOI") that, for five years following the acquisition, the Company will contribute to ContinentalGeneral Insurance Company ("CGI" or the "Insurance Company") cash or marketable securities acceptable to the TDOI to the extent required for CGI’s total adjusted capital to benot less than 400% of CGI’s authorized control level risk-based capital (each as defined under Texas law and reported in CGI’s statutory statements filed with the TDOI).81Additionally, CGI entered into a capital maintenance agreement with Great American Financial Resources, Inc. ("Great American"). Under the agreement, if the acquired company’stotal adjusted capital reported in its annual statutory financial statements is less than 400% of its authorized control level risk-based capital, Great American has agreed to pay cash orassets to the acquired company as required to eliminate such shortfall (after giving effect to any capital contributions made by the Company or its affiliates since the date of therelevant annual statutory financial statement). Great American’s obligation to make such payments is capped at $35.0 million under the capital maintenance agreement. The capitalmaintenance agreement will remain in effect from January 1, 2016 to January 1, 2021 or until payments by Great American under the agreement equal the cap. Pursuant to thepurchase agreement, the Company is required to indemnify Great American for the amount of any payments made by Great American under the capital maintenance agreement.Asset Liability ManagementCIG’s insurance subsidiary maintains investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities withlonger durations, such as long-term care insurance, are matched with investments such as long-term fixed maturity securities. Shorter-term liabilities are matched with fixed maturitysecurities that have short- and medium-term fixed maturities. The types of assets in which CIG may invest are influenced by state laws, which prescribe qualified investment assetsapplicable to insurance companies. Within the parameters of these laws, CIG invests in assets giving consideration to four primary investment objectives: (i) maintain robustabsolute returns; (ii) provide reliable yield and investment income; (iii) preserve capital and (iv) provide liquidity to meet policyholder and other corporate obligations. The Insurancesegment’s investment portfolio is designed to contribute stable earnings and balance risk across diverse asset classes and is primarily invested in high quality fixed incomesecurities. In addition, at any given time, CIG’s insurance subsidiary could hold cash, highly liquid, high-quality short-term investment securities and other liquid investment gradefixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals.InvestmentsAt December 31, 2017 and December 31, 2016, CIG’s investment portfolio is comprised of the following (in thousands): December 31, 2017 December 31, 2016 Fair Value Percent Fair Value PercentU.S. Government and government agencies $15,722 1.1% $15,950 1.1%States, municipalities and political subdivisions 395,450 26.5% 375,077 26.6%Foreign government 5,998 0.4% 5,978 0.4%Residential mortgage-backed securities 104,895 7.0% 138,196 9.8%Commercial mortgage-backed securities 30,405 2.0% 49,053 3.5%Asset-backed securities 147,926 9.9% 77,665 5.5%Corporate and other 641,788 42.9% 617,039 44.0%Common stocks (*) 38,780 2.6% 53,892 3.8%Perpetual preferred stocks 42,572 2.9% 36,654 2.6%Mortgage loans 52,109 3.5% 16,831 1.2%Policy loans 17,944 1.2% 18,247 1.3%Other invested assets — —% 3,415 0.2%Total $1,493,589 100.0% $1,407,997 100.0%(*) Balance includes fair value of certain securities held by the Company, which are either eliminated on consolidation or reported within Other invested assets.82Credit QualityInsurance statutes regulate the type of investments that CIG is permitted to make and limit the amount of funds that may be used for any one type of investment. In light of thesestatutes and regulations, and CIG's business and investment strategy, CIG generally seeks to invest in (i) securities rated investment grade by established nationally recognizedstatistical rating organizations (each, a nationally recognized statistical rating organization ("NRSRO")), (ii) U.S. Government and government-sponsored agency securities, or (iii)securities of comparable investment quality, if not rated.The following table summarizes the credit quality, by NRSRO rating, of CIG's fixed income portfolio (in thousands): December 31, 2017 December 31, 2016 Fair Value Percent Fair Value PercentAAA, AA, A $724,973 54.0% $738,509 57.8%BBB 415,635 31.0% 382,555 29.9%Total investment grade 1,140,608 85.0% 1,121,064 87.7%BB 60,339 4.5% 37,093 2.9%B 7,636 0.6% 20,214 1.6%CCC, CC, C 25,575 1.9% 35,021 2.7%D 14,990 1.1% 17,075 1.3%NR 93,036 6.9% 48,491 3.8%Total non-investment grade 201,576 15.0% 157,894 12.3%Total $1,342,184 100.0% $1,278,958 100.0%Foreign CurrencyForeign currency fluctuations can impact our financial results. During the years ended December 31, 2017, 2016, and 2015, approximately 11.5%, 28.4%, and 36.4% respectively,of our net revenue from continuing operations was derived from sales and operations outside the U.S. The reporting currency for our Consolidated Financial Statements is theUnited States dollar ("USD"). The local currency of each country is the functional currency for each of our respective entities operating in that country.In the future, we expect to continue to derive a portion of our net revenue and incur a portion of our operating costs from outside the U.S., and therefore changes in exchange ratesmay continue to have a significant, and potentially adverse, effect on our results of operations. Our risk of loss regarding foreign currency exchange rate risk is caused primarily byfluctuations in the USD/British pound sterling ("GBP") exchange rate. Changes in the exchange rate of USD relative to the GBP could have an adverse impact on our future resultsof operations. We have agreements with certain subsidiaries for repayment of a portion of the investments and advances made to these subsidiaries. As we anticipate repayment inthe foreseeable future, we recognize the unrealized gains and losses in foreign currency transaction gain (loss) on the Consolidated Financial Statements. The exposure of ourincome from operations to fluctuations in foreign currency exchange rates is reduced in part because certain of the costs that we incur in connection with our foreign operations arealso denominated in local currencies.We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the localcurrency statements of operations of our foreign subsidiaries into USD using the average exchange rate during the reporting period. Changes in foreign exchange rates affect thereported profits and losses and cash flows of our international subsidiaries and may distort comparisons from year to year. By way of example, when the USD strengthenscompared to the GBP, there could be a negative or positive effect on the reported results for our Telecommunications segment, depending upon whether such businesses areoperating profitably or at a loss. More profits in GBP are required to generate the same amount of profits in USD and a greater loss in GBP to generate the same amount of loss inUSD, and vice versa. For instance, when the USD weakens against the GBP, there is a positive effect on reported profits and a negative effect on reported losses.Off-Balance Sheet ArrangementsDBMGDBMG’s off-balance sheet arrangements at December 31, 2017 included letters of credit of $8.8 million under Credit and Security Agreements and performance bonds of $289.9million.DBMG’s contract arrangements with customers sometimes require DBMG to provide performance bonds to partially secure its obligations under its contracts. Bondingrequirements typically arise in connection with public works projects and sometimes with respect to certain private contracts. DBMG’s performance bonds are obtained throughsurety companies and typically cover the entire project price.83New Accounting PronouncementsFor a discussion of our New Accounting Pronouncements, refer to Note 2. Summary of Significant Accounting Policies to our Consolidated Financial Statements included in thisAnnual Report on Form 10-K.Critical Accounting PoliciesThe preparation of financial statements in accordance with generally accepted accounting principles in the U.S. GAAP requires the use of estimates and assumptions that have animpact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental disclosures including information about contingencies, risk andfinancial condition.Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties and potentially yield materially different results under differentassumptions or conditions. Given current facts and circumstances, we believe that our estimates and assumptions are reasonable, adhere to GAAP and are consistently applied. Ourselection and disclosure of our critical accounting policies and estimates has been reviewed with our Audit Committee. Following is a review of the more significant assumptionsand estimates and the accounting policies and methods used in the preparation of our consolidated financial statements. For all of these estimates, we caution that future events rarelydevelop exactly as forecast, and the best estimates routinely require adjustment. See Note 2. Summary of Significant Accounting Policies, to the Notes to Consolidated FinancialStatements which discusses the significant accounting policies that we have adopted.Fair Value MeasurementsIn determining the estimated fair value of our investments, fair values are based on unadjusted quoted prices for identical investments in active markets that are readily and regularlyobtainable. When such quoted prices are not available, fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical investments, orother observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiringmanagement judgment are used to determine the estimated fair value of investments. The methodologies, assumptions and inputs utilized are described in Note 2. Summary ofSignificant Accounting Policies. Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. Ourability to sell investments, or the price ultimately realized for investments, depends upon the demand and liquidity in the market and increases the use of judgment in determining theestimated fair value of certain investments.Valuation of fixed maturity securities Fixed maturity securities are classified as available for sale and are carried at fair value with changes in fair value recorded in accumulated other comprehensive income (loss) withinshareholders' equity. Fair value is defined as the price at which an asset could be exchanged in an orderly transaction between market participants at the balance sheet date.Determining fair value for a financial instrument requires management judgment. The degree of judgment involved generally correlates to the level of pricing readily observable inthe markets. Financial instruments with quoted prices in active markets or with market observable inputs to determine fair value, such as public securities, generally require lessjudgment. Conversely, private placements including more complex securities that are traded infrequently are typically measured using pricing models that require more judgment asto the inputs and assumptions used to estimate fair value. There may be a number of alternative inputs to select based on an understanding of the issuer, the structure of the securityand overall market conditions. In addition, these factors are inherently variable in nature as they change frequently in response to market conditions. See Note 5. Fair Value ofFinancial Instruments for a discussion of our fair value measurements, the procedures performed by management to determine that the amounts represent appropriate estimates.Typically, the most significant input in the measurement of fair value is the market interest rate used to discount the estimated future cash flows of the instrument. Such market ratesare derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset.Assessment of "other-than-temporary" impairments on fixed maturity securitiesCertain fixed maturity securities with a fair value below amortized cost are carried at fair value with changes in fair value recorded in accumulated other comprehensive income. Forthese investments, we have determined that the decline in fair value below its amortized cost is temporary. To make this determination, we evaluated the expected recovery in valueand our intent to sell or the likelihood of a required sale of the fixed maturity prior to an expected recovery. In making this evaluation, we considered a number of general andspecific factors including the regulatory, economic and market environments, length of time and severity of the decline, and the financial health and specific near term prospects ofthe issuer. If we subsequently determine that the excess of amortized cost over fair value is other-than-temporary for any or all of these fixed maturity securities, the amount recorded inaccumulated other comprehensive income would be reclassified to shareholders' net income as an impairment loss.84Income TaxesOur annual tax rate is based on our income, statutory tax rates, exchange rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Taxlaws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our taxexpense and in evaluating our tax positions including evaluating uncertainties under ASC 740.We review our tax positions quarterly and adjust the balances as new information becomes available. Deferred income tax assets represent amounts available to reduce income taxespayable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as fromnet operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from allsources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily onestimates. To provide insight, we use our historical experience and our short and long-range business forecasts. We believe it is more likely than not that a portion of the deferredincome tax assets may expire unused and have established a valuation allowance against them. Although realization is not assured for the remaining deferred income tax assets, webelieve it is more likely than not the deferred tax assets will be fully recoverable within the applicable statutory expiration periods. However, deferred tax assets could be reduced inthe near term if our estimates of taxable income are significantly reduced. See Note 14. Income Taxes, to the "Notes to Consolidated Financial Statements" for further information.Goodwill and Intangible AssetsGoodwill and intangible assets deemed to have indefinite lives are not amortized but rather are tested at least annually for impairment, or more often if events or changes incircumstances indicate that more likely than not the carrying amount of the asset may not be recoverable. Goodwill is tested for impairment at the reporting unit level. A reportingunit represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a two-stepquantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carryingamount, including goodwill.We may elect not to perform the qualitative assessment for some or all reporting units and perform a two-step quantitative impairment test. Fair value is determined based ondiscounted cash flow analyses. The discounted estimates of future cash flows include significant management assumptions such as revenue growth rates, operating margins,weighted average cost of capital, and future economic and market conditions. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. Theamount of the impairment is the difference between the carrying value of the goodwill and the "implied" fair value, which is calculated as if the reporting unit had just been acquiredand accounted for as a business combination.The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance, economic conditions,market conditions, and cost of capital. Inherent in estimating the future cash flows are uncertainties beyond our control, such as capital markets. The actual cash flows could differmaterially from management's estimates due to changes in business conditions, operating performance, and economic conditions.See also note 10. Goodwill and Intangibles, net, to the Consolidated Financial Statements for additional information on goodwill and intangible assets.New Accounting Pronouncements to be Adopted Subsequent to December 31, 2017Recognition and Measurement of Financial Assets and Financial LiabilitiesIn January 2016,the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 2016-01, Financial Instruments-Overall: Recognition andMeasurement of Financial Assets and Financial Liabilities, as amended by ASU 2018-03, Financial Instruments-Overall: Technical Corrections and Improvements, issued inFebruary 2018 on the recognition and measurement of financial instruments. The new guidance is effective for fiscal years beginning after December 15, 2017, including interimperiods within those fiscal years. Early adoption is permitted for the instrument-specific credit risk provision. The new guidance changes the current accounting guidance related to(i) the classification and measurement of certain equity investments, (ii) the presentation of changes in the fair value of financial liabilities measured under the fair value option thatare due to instrument-specific credit risk, and (iii) certain disclosures associated with the fair value of financial instruments. Additionally, there will no longer be a requirement toassess equity securities for impairment since such securities will be measured at fair value through net income. The Company has assessed the population of financial instrumentsthat are subject to the new guidance and has determined that the most significant impact will be the requirement to report changes in fair value in net income each reporting period forall equity securities currently classified as available for sale. The Company utilized a modified retrospective approach to adopt the new guidance effective January 1, 2018. Theexpected impact related to the change in accounting for equity securities will be approximately $1.1 million of net unrealized investment gains, net of income tax, which will bereclassified from AOCI to retained earnings.85Revenue RecognitionIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in RevenueRecognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflectsthe consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts withCustomers (Topic 606): Principal Versus Agent Considerations, which clarifies the guidance in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue fromContracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses ofintellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,which includes amendments for enhanced clarification of the guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Revenuefrom Contracts with Customers (Topic 606), which includes amendments of a similar nature to the items typically addressed in the technical corrections and improvements project.Lastly, in February 2017, the FASB issued ASU 2017-05, clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets to clarify thescope of ASC 610-20, Other Income - Gains and Losses from Derecognition of Nonfinancial Assets, and provide guidance on partial sales of nonfinancial assets. This ASUclarifies that the unit of account under ASU 610-20 is each distinct nonfinancial or in substance nonfinancial asset and that a financial asset that meets the definition of an "insubstance nonfinancial asset" is within the scope of ASC 610-20. This ASU eliminates rules specifically addressing sales of real estate and removes exceptions to the financial assetderecognition model. The ASUs described above are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reportingperiod.The Company adopted the new standard effective January 1, 2018 and is using the modified retrospective approach, which requires applying the new standard to all existingcontracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We havecompleted our evaluation of the standard’s impact on our revenue streams, including updating internal controls and the related qualitative disclosures regarding the potential impactof the effects of the accounting policies and a comparison to the Company’s current revenue recognition policies.The adoption of this standard is not expected to have a material impact on our consolidated financial statements.Instruments with down round featureIn July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815), whichchanges the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financialinstruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexedto an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument(or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equityclassified financial instruments, ASU 2017-11 requires entities that present Earnings Per Share ("EPS") in accordance with ASC Topic 260 to recognize the effect of the downround feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. For the Company, ASU 2017-11is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.The Company is currently evaluating the implementation date and the impact of this amendment on its financial statements.Related Party TransactionsFor a discussion of our Related Party Transactions, refer to Note 19. Related Parties to our Consolidated Financial Statements included elsewhere in this Annual Report on Form10-K.Corporate InformationHC2, a Delaware corporation, was incorporated in 1994. The Company’s executive offices are located at 450 Park Avenue, 30th Floor, New York, NY, 10022. The Company’stelephone number is (212) 235-2690. Our Internet address is www.hc2.com. We make available free of charge through our Internet website our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended,as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information accessible through our website is not a part of this AnnualReport on Form 10-K.86Special Note Regarding Forward-Looking StatementsThis Annual Report on Form 10-K contains or incorporates a number of "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, asamended, 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 somecases, 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 thenegative 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 shareholder 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 theiracquisition) to generate sufficient net income and cash flows to make upstream cash distributions, capital market conditions, our and our subsidiaries’ ability to identify any suitablefuture acquisition opportunities, efficiencies/cost avoidance, cost savings, income and margins, growth, economies of scale, combined operations, future economic performance,conditions to, and the timetable for, completing the integration of financial reporting of acquired or target businesses with HC2 or the applicable subsidiary of HC2, completingfuture acquisitions and dispositions, litigation, potential and contingent liabilities, management’s plans, changes in regulations and taxes.We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.Forward-looking statements are not guarantees of performance. You should understand that the following important factors, in addition to those discussed under the section entitled"Risk Factors" in this Annual Report and in the documents incorporated by reference, could affect our future results and could cause those results or other outcomes to differmaterially 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 morethan 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 otherinformation presented herein, in evaluating our business and that of our subsidiaries.HC2 Holdings, Inc. and SubsidiariesOur 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:•limitations on our ability to successfully identify any strategic acquisitions or business opportunities and to compete for these opportunities with others who have greaterresources;•our possible inability to generate sufficient liquidity, margins, EPS, cash flow and working capital from our operating segments;•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 mayincur;•the impact of covenants in the Certificates of Designation governing HC2’s preferred stock, the indenture governing the notes, the Credit and Security Agreementgoverning the DBM Global Facility (as defined herein), the CWind Limited line of credit with Barclays, the ANG term loans and notes with Signature Financial, PioneerSavings Bank and M&T Bank, the Broadcasting Bridge Loan and future financing agreements on our ability to operate our business and finance our pursuit of acquisitionopportunities;•our dependence on certain key personnel, in particular, our Chief Executive Officer, Philip Falcone;•uncertain global economic conditions in the markets in which our operating segments conduct their businesses;•the ability of our operating segments to attract and retain customers;•increased competition in the markets in which our operating segments conduct their businesses;•our expectations regarding the timing, extent and effectiveness of our cost reduction initiatives and management’s ability to moderate or control discretionary spending;•management’s plans, goals, forecasts, expectations, guidance, objectives, strategies and timing for future operations, acquisitions, synergies, asset dispositions, fixed assetand goodwill impairment charges, tax and withholding expense, selling, general and administrative expenses, product plans, performance and results;•management’s assessment of market factors and competitive developments, including pricing actions and regulatory rulings;•the impact of additional material charges associated with our oversight of acquired or target businesses and the integration of our financial reporting;•the impact of expending significant resources in considering acquisition targets or business opportunities that are not consummated;•our expectations and timing with respect to our ordinary course acquisition activity and whether such acquisitions are accretive or dilutive to shareholders;•our expectations and timing with respect to any strategic dispositions and sales of our operating subsidiaries or businesses that we may make in the future and the effect ofany such dispositions or sales on our results of operations;•the possibility of indemnification claims arising out of divestitures of businesses;•tax consequences associated with our acquisition, holding and disposition of target companies and assets;•the effect any interests our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved;87•our ability to effectively increase the size of our organization, if needed, and manage our growth;•the potential for, and our ability to, remediate future material weaknesses in our internal controls over financial reporting;•our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all; and•our possible inability to hire and retain qualified executive management, sales, technical and other personnel.Construction / DBM Global Inc.Our actual results or other outcomes of DBM Global, Inc. and its wholly-owned subsidiaries ("DBMG"), and thus, our Construction segment, may differ from those expressed orimplied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:•its ability to realize cost savings from expected performance of contracts, whether as a result of improper estimates, performance, or otherwise;•potential impediments and limitations on our ability to complete ordinary course acquisitions in anticipated time frames or at all;•uncertain timing and funding of new contract awards, as well as project cancellations;•cost overruns on fixed-price or similar contracts or failure to receive timely or proper payments on cost-reimbursable contracts, whether as a result of improper estimates,performance, disputes, or otherwise;•risks associated with labor productivity, including performance of subcontractors that DBMG hires to complete projects;•its ability to settle or negotiate unapproved change orders and claims;•changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;•adverse impacts from weather affecting DBMG’s performance and timeliness of completion of projects, which could lead to increased costs and affect the quality, costsor availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;•fluctuating revenue resulting from a number of factors, including the cyclical nature of the individual markets in which our customers operate;•adverse outcomes of pending claims or litigation or the possibility of new claims or litigation, and the potential effect of such claims or litigation on DBMG’s business,financial condition, results of operations or cash flow; and•lack of necessary liquidity to provide bid, performance, advance payment and retention bonds, guarantees, or letters of credit securing DBMG’s obligations under bidsand contracts or to finance expenditures prior to the receipt of payment for the performance of contracts.Marine Services / Global Marine Systems LimitedOur actual results or other outcomes of Global Marine Systems Limited ("GMSL"), and thus, our Marine Services segment, may differ from those expressed or implied byforward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:•its ability to realize cost savings from expected performance of contracts, whether as a result of improper estimates, performance, or otherwise;•the possibility of global recession or market downturn with a reduction in capital spending within the targeted market segments in which the business operates;•project implementation issues and possible subsequent overruns;•risks associated with operating outside of core competencies when moving into different market segments;•possible loss or severe damage to marine assets;•vessel equipment aging or reduced reliability;•risks associated with operating two joint ventures in China (i.e., Huawei Marine Systems Co. Limited, a Hong Kong holding company with a Chinese operatingsubsidiary and SB Submarine Systems Co. Ltd.);•risks related to noncompliance with a wide variety of anti-corruption laws;•changes to the local laws and regulatory environment in different geographical regions;•loss of key senior employees;•difficulties attracting enough skilled technical personnel;•foreign exchange rate risk;•liquidity risk; and•potential for financial loss arising from the failure by customers to fulfill their obligations as and when these obligations come due.Energy / ANG Holdings, Inc.Our actual results or other outcomes of ANG, and thus, our Energy segment, may differ from those expressed or implied by forward-looking statements contained herein due to avariety of important factors, including, without limitation, the following:•automobile and engine manufacturers’ limited production of originally manufactured natural gas vehicles and engines for the markets in which ANG participates;•environmental regulations and programs mandating the use of cleaner burning fuels;•competition from oil and gas companies, retail fuel providers, industrial gas companies, natural gas utilities and other organizations;•the infrastructure for natural gas vehicle fuels;•the safety and environmental risks of natural gas fueling operations and vehicle conversions;88•our Energy segment’s ability to implement its business plan in a regulated environment;•the adoption, modification or repeal in environmental, tax, government regulations, and other programs and incentives that encourage the use of clean fuel and alternativevehicles;•demand for natural gas vehicles;•advances in other alternative vehicle fuels or technologies, or improvements in gasoline, diesel or hybrid engines; and•increases, decreases and general volatility in oil, gasoline, diesel and natural gas prices.Telecommunications / PTGi International Carrier Services, Inc.Our actual results or other outcomes of PTGi International Carrier Services, Inc. ("ICS"), and thus, our Telecommunications segment, may differ from those expressed or impliedby forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:•our expectations regarding increased competition, pricing pressures and usage patterns with respect to ICS’s product offerings;•significant changes in ICS’s competitive environment, including as a result of industry consolidation, and the effect of competition in its markets, including pricingpolicies;•its compliance with complex laws and regulations in the U.S. and internationally;•further changes in the telecommunications industry, including rapid technological, regulatory and pricing changes in its principal markets; and•an inability of ICS’ suppliers to obtain credit insurance on ICS in determining whether or not to extend credit.Insurance / Continental Insurance Group Ltd.Our actual results or other outcomes of Continental Insurance Group Ltd. ("CIG"), the parent operating company of Continental General Insurance Company ("CGI"), and togethercomprise our Insurance 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 Insurance segment’s ability to maintain statutory capital and maintain or improve their financial strength;•our Insurance segment’s reserve adequacy, including the effect of changes to accounting or actuarial assumptions or methodologies;•the accuracy of our Insurance segment’s assumptions and estimates regarding future events and ability to respond effectively to such events, including mortality,morbidity, persistency, expenses, interest rates, tax liability, business mix, frequency of claims, severity of claims, contingent liabilities, investment performance, and otherfactors related to its business and anticipated results;•availability, affordability and adequacy of reinsurance and credit risk associated with reinsurance;•extensive regulation and numerous legal restrictions on our Insurance segment;•our Insurance segment’s ability to defend itself against litigation, inherent in the insurance business (including class action litigation) and respond to enforcementinvestigations or regulatory scrutiny;•the performance of third parties, including distributors and technology service providers, and providers of outsourced services;•the impact of changes in accounting and reporting standards;•our Insurance segment’s ability to protect its intellectual property;•general economic conditions and other factors, including prevailing interest and unemployment rate levels and stock and credit market performance which may affect,among other things, our Insurance segment’s ability to access capital resources and the costs associated therewith, the fair value of our Insurance segment’s investments,which could result in impairments and other-than-temporary impairments, and certain liabilities;•our Insurance segment’s exposure to any particular sector of the economy or type of asset through concentrations in its investment portfolio;•the ability to increase sufficiently, and in a timely manner, premiums on in-force long-term care insurance policies and/or reduce in-force benefits, as may be required fromtime to time in the future (including as a result of our Insurance segment’s failure to obtain any necessary regulatory approvals or unwillingness or inability ofpolicyholders to pay increased premiums);•other regulatory changes or actions, including those relating to regulation of financial services affecting, among other things, regulation of the sale, underwriting andpricing of products, and minimum capitalization, risk-based capital and statutory reserve requirements for our Insurance segment, and our Insurance segment’s ability tomitigate such requirements;•our Insurance segment’s ability to effectively implement its business strategy or be successful in the operation of its business;•our Insurance segment’s ability to retain, attract and motivate qualified employees;•interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive dataresiding on such systems;•medical advances, such as genetic research and diagnostic imaging, and related legislation; and•the occurrence of natural or man-made disasters or a pandemic.Life Sciences / Pansend Life Sciences, LLC89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-lookingstatements contained herein due to a variety of important factors, including, without limitation, the following:•our Life Sciences segment’s ability to invest in development stage companies;•our Life Sciences segment’s ability to develop products and treatments related to its portfolio companies;•medical advances in healthcare and biotechnology; and•governmental regulation in the healthcare industry.Other / 704Games Company and HC2 Broadcasting Holdings Inc.Our actual results or other outcomes of 704Games Company and HC2 Broadcasting Holdings Inc., and thus, our Other segment, may differ from those expressed or implied byforward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:•our Other segment’s ability to integrate our recent and pending broadcasting acquisitions;•our Other segment’s ability to operate in highly competitive markets and maintain market share;•our Other segment’s ability to effectively implement its business strategy or be successful in the operation of its business;•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 oursubsidiaries 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 reflectactual outcomes.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMarket Risk FactorsMarket risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity pricesand equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. We are exposed tomarket risk with respect to our investments and foreign currency exchange rates. Through DBMG, we have market risk exposure from changes in interest rates charged on itsborrowings and from adverse changes in steel prices. Through GMSL and ANG, we have market risk exposure from changes in interest rates charged on their respectiveborrowings. We do not use derivative financial instruments to mitigate a portion of the risk from such exposures.Equity Price RiskHC2 is exposed to market risk primarily through changes in fair value of available-for-sale fixed maturity and equity securities. HC2 follows an investment strategy approved by theHC2 Board of Directors which sets certain restrictions on the amount of securities that HC2 may acquire and its overall investment strategy.Market prices for fixed maturity and equity securities are subject to fluctuation, as a result, and consequently the amount realized in the subsequent sale of an investment maysignificantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of theinvestee, the relative price of alternative investments and general market conditions. Because HC2’s fixed maturity and equity securities are classified as available-for-sale, thehypothetical decline would not affect current earnings except to the extent that the decline reflects OTTI.A means of assessing exposure to changes in market prices is to estimate the potential changes in market values on the fixed maturity and equity securities resulting from ahypothetical decline in equity market prices. As of December 31, 2017, assuming all other factors are constant, we estimate that a 10.0%, 20.0%, and 30.0% decline in equity marketprices would have an $138.8 million, $277.6 million, and $416.4 million adverse impact on HC2’s portfolio of fixed maturity and equity securities, respectively.90Foreign Currency Exchange Rate RiskDBMG, GMSL and ICS are exposed to market risk from foreign currency price changes that could have a significant and potentially adverse impact on gains and losses as a resultof translating the operating results and financial position of our international subsidiaries into USD.We translate the local currency statements of operations of our foreign subsidiaries into USD using the average exchange rate during the reporting period. Changes in foreignexchange rates affect the reported profits and losses and cash flows of our international subsidiaries and may distort comparisons from year to year. For example, when the USDstrengthens compared to the GBP, there could be a negative or positive effect on the reported results for our Telecommunications segment, depending upon whether suchbusinesses are operating profitably or at a loss. More profits in GBP are required to generate the same amount of profits in USD and, similarly, a greater loss in GBP is required togenerate the same amount of loss in USD, and vice versa. For instance, when the USD weakens against the GBP, there is a positive effect on reported profits and a negative effecton reported losses.Interest Rate RiskGMSL, DBMG, ANG and Broadcasting are exposed to the market risk from changes in interest rates through their borrowings, which bear variable rates based on LIBOR.Changes in LIBOR could result in an increase or decrease in interest expense recorded. A 100, 200, and 300 basis point increase in LIBOR based on our floating rate borrowingsoutstanding as of December 31, 2017 of $111.2 million, would result in an increase in the recorded interest expense of $1.1 million, $2.2 million, and $3.3 million per year.Commodity Price RiskDBMG is exposed to the market risk from changes in the price of steel. For large orders the risk is mitigated by locking the general contractors into the price at the mill at the timework is awarded. In the event of a subsequent price increase by the mill, DBMG has the ability to pass the higher costs on to the general contractor. DBMG does not hedge or enterinto any forward purchasing arrangements with the mills. The price negotiated at the time of the order is the price paid by DBMG.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe report of the independent registered public accounting firm and financial statements listed in the accompanying index are included in Item 15 of this report. See Index to theconsolidated financial statements on page F-1 of this Form 10-K.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as definedin 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, ourChief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2017, our disclosure controls and procedures were effective. Disclosure controls andprocedures 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 theExchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, 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 accumulatedand communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding requireddisclosure.Management’s Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.The Company's internal control over financial reporting is designed to provide reasonable assurance as to the reliability of its financial reporting and the preparation of financialstatements for external purposes in accordance with U.S. GAAP. Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occurand not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statementpreparation. Further, the evaluation of the effectiveness of internal control over financial reporting described below was made as of a specific date, and continued effectiveness infuture periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures maydecline.91Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. This assessment was based on updated criteria for effectiveinternal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control-Integrated Framework (2013).Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.Auditor Attestation ReportOur independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which is on page F-3 of thisreport.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2017, that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.92ITEM 9B. OTHER INFORMATIONNone.93PART IIIThe information required by Part III will be provided in our definitive proxy statement for our 2018 annual meeting of stockholders ("2018 Proxy Statement"), which isincorporated herein by reference.ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation regarding this item will be set forth in our 2018 Proxy Statement, including under the captions entitled "Information Regarding Directors", "Analysis of Our Directorsin Light of Our Business", "Certain Legal Proceedings Affecting Mr. Falcone", "Code of Conduct", "Section 16(a) Beneficial Ownership Reporting Compliance", "BoardCommittees" and "Executive Officers", and is incorporated herein by reference.Code of ConductWe have adopted a Code of Conduct applicable to all directors, officers and employees, including the CEO, senior financial officers and other persons performing similar functions.The Code of Conduct is a statement of business practices and principles of behavior that support our commitment to conducting business in accordance with the highest standardsof business conduct and ethics. Our Code of Conduct covers, among other things, compliance resources, conflicts of interest, compliance with laws, rules and regulations, internalreporting of violations and accountability for adherence to the Code of Conduct. A copy of the Code of Conduct is available under the "Investor Relations-Corporate Governance"section of our website at www.hc2.com. Any amendment of the Code of Conduct or any waiver of its provisions for a director or executive officer must be approved by the Boardor a duly authorized committee thereof. We intend to post on our website all disclosures that are required by law or the rules of the NYSE concerning any amendments to, orwaivers from, any provision of the Code of Conduct.ITEM 11. EXECUTIVE COMPENSATIONThe information regarding this item will be set forth under the captions entitled "Compensation Discussion and Analysis," "Compensation Committee Report," "CompensationCommittee Interlocks and Insider Participation," "Compensation Tables," and "Employment Arrangements and Potential Payments upon Termination or Change of Control" in our2018 Proxy Statement and is incorporated herein by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSInformation regarding this item will be set forth under the captions entitled "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation PlanInformation" in our 2018 Proxy Statement and is incorporated herein by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEInformation regarding this item will be set forth under the captions entitled "Board of Directors" and "Transactions with Related Persons" in our 2018 Proxy Statement and isincorporated herein by reference.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESInformation regarding principal accountant fees and services will be set forth under the caption entitled "Independent Registered Public Accounting Firm Fees" in our 2018 ProxyStatement and is incorporated herein by reference.94PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE(a) List of Documents Filed1) Financial Statements and SchedulesThe financial statements as set forth under Item 8 of this Annual Report on Form 10-K are incorporated herein.2) Financial Statement SchedulesSchedule I - Summary of Investments - Other than Investments in Related PartiesSchedule II- Condensed Financial Information of the RegistrantSchedule III - Supplementary Insurance InformationSchedule IV - ReinsuranceSchedule V - Valuation and Qualifying AccountsAll other schedules have been omitted since they are either not applicable or the information is contained within the accompanying consolidated financial statements.(b) Exhibit IndexThe following is a list of exhibits filed as part of this Annual Report on Form 10-K.95ExhibitNumber Description 2.1 Sale and Purchase Agreement, dated September 22, 2014, by and between Global Marine Holdings, LLC and the Sellers party thereto (incorporated by reference toExhibit 2.1 to HC2 Holdings, Inc.’s ("HC2") Current Report on Form 8-K, filed on September 26, 2014) (File No. 001-35210). 2.2 Amended and Restated Stock Purchase Agreement, dated as of December 24, 2015, by and among HC2, Continental General Corporation and Great AmericanFinancial Resources, Inc. (incorporated by reference to Exhibit 2.1 to HC2’s Current Report on Form 8-K, filed on December 28, 2015)(File No. 001-35210). 2.3# Business Purchase Agreement, dated as of October 11, 2017, by and among Fugro N.V., Global Marine Systems Limited and Global Marine Holdings LLC(incorporated by reference to Exhibit 2.1 to HC2's Current Report on Form 8-K, filed on October 12, 2017) (File No. 001-35210). 2.4# Warranty and Indemnity Agreement, dated as of October 11, 2017, by and among Fugro N.V., Global Marine Systems Limited and Global Marine Holdings LLC(incorporated by reference to Exhibit 2.2 to HC2's Current Report on Form 8-K, filed on October 12, 2017) (File No. 001-35210). 2.5# Stock Purchase Agreement, dated as of November 6, 2017, by and between Humana, Inc. and Continental General Insurance Company (incorporated by reference toExhibit 2.1 to HC2's Current Report on Form 8-K, filed on November 7, 2017) (File No. 001-35210). 2.6# Fourth Amended and Restated Limited Liability Company Agreement of Global Marine Holdings, LLC, dated as of November 30, 2017, by and among GlobalMarine Holdings, LLC and the Members party thereto (incorporated by reference to Exhibit 2.1 to HC2's Current Report on Form 8-K, filed on November 30,2017) (File No. 001-35210). 2.7# Vendor Loan Agreement, dated as of November 30, 2017, by and between Fugro Financial Resources B.V. and Global Marine Systems Limited (incorporated byreference to Exhibit 2.2 to HC2's Current Report on Form 8-K, filed on November 30, 2017) (File No. 001-35210). 2.8# Transitional Services and Framework Services Agreement, dated as of November 30, 2017, by and between Fugro N.V. and Global Marine Systems Limited(incorporated by reference to Exhibit 2.3 to HC2's Current Report on Form 8-K, filed on November 30, 2017) (File No. 001-35210). 3.1 Second Amended and Restated Certificate of Incorporation of HC2 (incorporated by reference to Exhibit 3.1 to HC2’s Form 8-A, filed on June 20, 2011)(File No. 001-35210). 3.2 Certificate of Ownership Merging PTGI Name Change, Inc. into Primus Telecommunications Group, Incorporated (incorporated by reference to Exhibit 3.1 toHC2’s Current Report on Form 8-K, filed on October 18, 2013) (File No. 001-35210). 3.3 Certificate of Ownership and Merger Merging HC2 Name Change, Inc. into PTGI Holding, Inc. (incorporated by reference to Exhibit 3.1 to HC2’s Current Reporton Form 8-K, filed on April 11, 2014) (File No. 001-35210). 3.4 Certificate of Amendment to Second Amended and Restated Certificate of Incorporation of HC2 (incorporated by reference to Exhibit 3.1 to HC2’s Current Reporton Form 8-K, filed on June 18, 2014) (File No. 001-35210). 3.5 Third Amended and Restated Bylaws of HC2 (incorporated by reference to Exhibit 3.1 to HC2's Current Report on Form 8-K, filed on June 14, 2017) (File No.001-35210). 4.1 Indenture, dated as of November 20, 2014, by and among HC2, the guarantors party thereto and U.S. Bank National Association (incorporated by reference toExhibit 4.1 to HC2’s Current Report on Form 8-K, filed on November 21, 2014) (File No. 001-35210). 4.2 Certificate of Amendment to the Certificate of Designation of Series A Convertible Participating Preferred Stock of HC2 (incorporated by reference to Exhibit 4.2 toHC2’s Current Report on Form 8-K, filed on January 9, 2015) (File No. 001-35210). 4.3 Certificate of Amendment to the Certificate of Designation of Series A-1 Convertible Participating Preferred Stock of HC2 (incorporated by reference to Exhibit 4.3to HC2’s Current Report on Form 8-K, filed on January 9, 2015) (File No. 001-35210). 4.4 Certificate of Designation of Series A-2 Convertible Participating Preferred Stock of HC2 (incorporated by reference to Exhibit 4.1 to HC2’s Current Report onForm 8-K, filed on January 9, 2015) (File No. 001-35210). 4.5 Certificate of Correction of the Certificate of Amendment to the Certificate of Designation of Series A Convertible Participating Preferred Stock of HC2, filed onJanuary 5, 2015 (incorporated by reference to Exhibit 4.1 on HC2’s Quarterly Report on Form 10-Q, filed on August 10, 2015) (File No. 001-35210). 4.6 Certificate of Correction of the Certificate of Amendment to the Certificate of Designation of Series A Convertible Participating Preferred Stock of HC2, filed onJanuary 5, 2015 (incorporated by reference to Exhibit 4.2 on HC2’s Quarterly Report on Form 10-Q, filed on August 10, 2015) (File No. 001-35210). 4.7 Certificate of Correction of the Certificate of Amendment to the Certificate of Designation of Series A Convertible Participating Preferred Stock of HC2, filed onMay 29, 2014 (incorporated by reference to Exhibit 4.3 on HC2’s Quarterly Report on Form 10-Q, filed on August 10, 2015) (File No. 001-35210). 96ExhibitNumber Description 4.8 Certificate of Correction of the Certificate of Amendment to the Certificate of Designation of Series A-1 Convertible Participating Preferred Stock of HC2, filed onJanuary 5, 2015 (incorporated by reference to Exhibit 4.4 on HC2’s Quarterly Report on Form 10-Q, filed on August 10, 2015) (File No. 001-35210). 4.9 Certificate of Correction of the Certificate of Amendment to the Certificate of Designation of Series A-1 Convertible Participating Preferred Stock of HC2, filed onSeptember 22, 2014 (incorporated by reference to Exhibit 4.5 on HC2’s Quarterly Report on Form 10-Q, filed on August 10, 2015) (File No. 001-35210). 4.10 Certificate of Correction of the Certificate of Amendment to the Certificate of Designation of Series A-2 Convertible Participating Preferred Stock of HC2, filed onJanuary 5, 2015 (incorporated by reference to Exhibit 4.6 on HC2’s Quarterly Report on Form 10-Q, filed on August 10, 2015) (File No. 001-35210). 4.11 Warrant Agreement, dated as of December 24, 2015, between HC2 and Great American Financial Resources, Inc. (incorporated by reference to Exhibit 4.1 to HC2’sCurrent Report on Form 8-K, filed on December 28, 2015) (File No. 001-35210) 4.12 11% Senior Secured Bridge Note due 2019, dated as of December 16, 2016, among HC2 Holdings 2, Inc., as the issuer, HC2 as guarantor, and certain otherguarantors party thereto (incorporated by reference to Exhibit 4.1 to HC2’s Current Report on Form 8-K, filed December 20, 2016) (File No. 001-35210). 4.13 Amended and Restated Certificate of Designation of Series A-1 Convertible Participating Preferred Stock of HC2 (incorporated by reference to Exhibit 10.1 onHC2’s Quarterly Report on Form 10-Q, filed on August 9, 2016) (File No. 001-35210). 4.14# Credit Agreement, dated as of November 9, 2017, among HC2 Broadcasting Holdings Inc., certain other guarantors party thereto, Jefferies Finance LLC and theLenders (incorporated by reference to Exhibit 4.1 to HC2's Current Report on Form 8-K, filed on November 9, 2017) (File No. 001-35210). 4.15 First Amendment to Credit Agreement, dated as of February 4, 2018, among HC2 Broadcasting Holdings Inc., Jefferies Finance LLC and the Lenders (incorporatedby reference to Exhibit 4.1 to HC2's Current Report on Form 8-K, filed on February 6, 2018) (File No. 001-35210). 10.1 Stock Purchase Agreement, dated May 12, 2014, by and between HC2 and SAS Venture LLC (incorporated by reference to Exhibit 10.1 to HC2’s Current Reporton Form 8-K, filed on May 13, 2014) (File No. 001-35210). 10.2^ Employment Agreement, dated May 21, 2014, by and between HC2 and Philip Falcone (incorporated by reference to Exhibit 10.2 on HC2’s Quarterly Report onForm 10-Q, filed on August 11, 2014) (File No. 001-35210). 10.3 Securities Purchase Agreement, dated as of May 29, 2014, by and among HC2 and affiliates of Hudson Bay Capital Management LP, Benefit Street Partners L.L.C.and DG Capital Management, LLC (the "Purchasers") (incorporated by reference to Exhibit 10.1 to HC2’s Current Report on Form 8-K, filed on June 4, 2014) (FileNo. 001-35210). 10.4^ HC2 2014 Omnibus Equity Award Plan (incorporated by reference to Exhibit A to HC2’s Definitive Proxy Statement, filed on April 30, 2014) (File No. 001-35210). 10.5^ 2014 HC2 Executive Bonus Plan (incorporated by reference to Exhibit 10.1 to HC2’s Current Report on Form 8-K, filed on June 18, 2014) (File No. 001-35210). 10.6 Second Amended and Restated Credit and Security Agreement, dated as of August 14, 2013, by and among DBMG, as Borrower, and Wells Fargo Credit, Inc.(incorporated by reference to Exhibit 10.12 on HC2’s Quarterly Report on Form 10-Q, filed on August 11, 2014) (File No. 001-35210). 10.7 Amendment to Second Amended and Restated Credit and Security Agreement, dated as of September 24, 2013, by and among DBMG, as Borrower, and WellsFargo Credit, Inc. (incorporated by reference to Exhibit 10.13 on HC2’s Quarterly Report on Form 10-Q, filed on August 11, 2014) (File No. 001-35210). 10.8 Second Amendment to Second Amended and Restated Credit and Security Agreement, dated as of February 3, 2014, by and among DBMG, as Borrower, andWells Fargo Credit, Inc. (incorporated by reference to Exhibit 10.14 on HC2’s Quarterly Report on Form 10-Q, filed on August 11, 2014) (File No. 001-35210). 10.9 Third Amendment to Second Amended and Restated Credit and Security Agreement, dated as of May 5, 2014, by and among DBMG, as Borrower, and WellsFargo Credit, Inc. (incorporated by reference to Exhibit 10.15 on HC2’s Quarterly Report on Form 10-Q, filed on August 11, 2014) (File No. 001-35210). 10.10 Fourth Amendment to Second Amended and Restated Credit and Security Agreement, dated as of September 26, 2014, by and among DBMG, as Borrower, andWells Fargo Credit, Inc. (incorporated by reference to Exhibit 10.7 on HC2’s Quarterly Report on Form 10-Q, filed on November 10, 2014) (File No. 001-35210). 10.11 Fifth Amendment to Second Amended and Restated Credit and Security Agreement, dated as of October 21, 2014, by and among DBMG, as Borrower, and WellsFargo Credit, Inc. (incorporated by reference to Exhibit 10.9.6 on HC2's Annual Report on Form 10-K, filed on March 16, 2015) (File No. 001-35210). 10.12 Sixth Amendment to Second Amended and Restated Credit and Security Agreement, dated as of January 23, 2015, by and among DBMG, as Borrower, and WellsFargo Credit, Inc. (incorporated by reference to Exhibit 10.14 to HC2's Annual Report on Form 10-K, filed on March 15, 2016) (File No.001-35210). 97ExhibitNumber Description 10.13 Seventh Amendment to Second Amended and Restated Credit and Security Agreement, dated as of February 19, 2015, by and among DBMG, as Borrower, andWells Fargo Credit, Inc. (incorporated by reference to Exhibit 10.1.1 on HC2’s Quarterly Report on Form 10-Q, filed on May 11, 2015) (File No. 001-35210). 10.14 Eighth Amendment to Second Amended and Restated Credit and Security Agreement, dated as of June 15, 2015, by and among DBMG, as Borrower, and WellsFargo Credit, Inc. (incorporated by reference to Exhibit 10.16 to HC2's Annual Report on Form 10-K, filed on March 15, 2016) (File No. 001-35210). 10.15 Securities Purchase Agreement, dated as of September 22, 2014, by and among HC2 and affiliates of DG Capital Management, LLC and Luxor Capital Partners, LP(incorporated by reference to Exhibit 10.3 to HC2’s Current Report on Form 8-K, filed on September 26, 2014) (File No. 001-35210). 10.16 Securities Purchase Agreement, dated as of January 5, 2015, by and among HC2 and the purchasers thereto (incorporated by reference to Exhibit 10.1 on HC2’sCurrent Report on Form 8-K, filed on January 9, 2015) (File No. 001-35210). 10.17 Second Amended and Restated Registration Rights Agreement, dated as of January 5, 2015, by and among HC2 Holdings, the initial purchasers of the Series APreferred Stock, the initial purchasers of the Series A-1 Preferred Stock and the purchasers of the Series A-2 Preferred Stock (incorporated by reference to Exhibit10.2 on HC2’s Current Report on Form 8-K, filed on January 9, 2015) (File No. 001-35210). 10.18 Secured Loan Agreement, dated as of January 20, 2014, by and among Global Marine Systems (Vessels) Limited, as Borrower, Global Marine Systems Limited, asGuarantor, and DVB Bank SE Nordic Branch, as Lender (incorporated by reference to Exhibit 10.8 on HC2’s Quarterly Report on Form 10-Q, filed onNovember 10, 2014) (File No. 001-35210). 10.19 Supplemental Charter Agreement, dated as of March 21, 2012, by and among Global Marine Systems Limited, as Charterer, and International Cableship PTE LTD,as Owner (incorporated by reference to Exhibit 10.9.1 on HC2’s Quarterly Report on Form 10-Q, filed on November 10, 2014) (File No. 001-35210). 10.20 Bareboat Charter, dated as of September 24, 1992, between International Cableship Pte Ltd and Global Marine Systems Limited (as successor-in-interest to Cable &Wireless (Marine) Ltd) (incorporated by reference to Exhibit 10.9.2 on HC2’s Quarterly Report on Form 10-Q, filed on November 10, 2014) (File No. 001-35210). 10.21 Deed of Covenant, dated as of March 14, 2006, by and among Global Marine Systems Limited, as Mortgagee, and DYVI Cable Ship, as Mortgagor (incorporatedby reference to Exhibit 10.10.1 on HC2’s Quarterly Report on Form 10-Q, filed on November 10, 2014) (File No. 001-35210). 10.22 Bareboat Charter, dated as of March 14, 2006, between DYVI Cable Ship AS and Global Marine Systems Limited (incorporated by reference to Exhibit 10.10.2 onHC2’s Quarterly Report on Form 10-Q, filed on November 10, 2014) (File No. 001-35210). 10.23 Mortgage, dated as of March 14, 2006, of DYVI Cable Ship AS, as mortgagor, in favor of Global Marine Systems Limited, as mortgagee (incorporated byreference to Exhibit 10.10.3 on HC2’s Quarterly Report on Form 10-Q, filed on November 10, 2014) (File No. 001-35210). 10.24 Consent and Waiver, dated as of October 9, 2014 to Securities Purchase Agreement, dated as of May 29, 2014, by and among HC2 and affiliates of Hudson BayCapital Management LP, Benefit Street Partners L.L.C. and DG Capital Management, LLC (incorporated by reference to Exhibit 10.14 on HC2’s Quarterly Reporton Form 10-Q, filed on November 10, 2014) (File No. 001-35210). 10.25 Consent, Waiver and Amendment, dated as of September 22, 2014 to Securities Purchase Agreement, dated as of May 29, 2014, by and among HC2 and affiliatesof Hudson Bay Capital Management LP, Benefit Street Partners L.L.C. and DG Capital Management, LLC (incorporated by reference to Exhibit 10.15 on HC2’sQuarterly Report on Form 10-Q, filed on November 10, 2014) (File No. 001-35210). 10.26^ Reformed and Clarified Option Agreement, dated October 26, 2014, by and between HC2 and Philip Falcone (incorporated by reference to Exhibit 10.18.1 onHC2's Annual Report on Form 10-K, filed on March 16, 2015) (File No. 001-35210). 10.27^ Form of Option Agreement (Additional Time Contingent Option) by and between HC2 and Philip Falcone (incorporated by reference to Exhibit 10.18.2 on HC2'sAnnual Report on Form 10-K, filed on March 16, 2015) (File No. 001-35210). 10.28^ Form of Option Agreement (Contingent Option) by and between HC2 and Philip Falcone (incorporated by reference to Exhibit 10.18.3 on HC2's Annual Report onForm 10-K, filed on March 16, 2015) (File No. 001-35210). 10.29^ Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.1 on HC2’s Current Report on Form 8-K, filed on September 22,2014) (File No. 001-35210) 10.30^ Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 on HC2’s Current Report on Form 8-K, filed on September 22, 2014) (FileNo. 001-35210) 10.31^ Employment Agreement, dated October 1, 2014, by and between HC2 and Paul Voigt (incorporated by reference to Exhibit 10.2 on HC2’s Quarterly Report onForm 10-Q, filed on May 11, 2015) (File No. 001-35210). 10.32^ Employment Agreement, dated May 20, 2015, by and between HC2 and Michael Sena (incorporated by reference to Exhibit 10.2 on HC2’s Quarterly Report onForm 10-Q, filed on August 10, 2015) (File No. 001-35210). 10.33^ Non-Qualified Stock Option Award Agreement dated April 18, 2016, by and between HC2 and Philip A. Falcone (incorporated by reference to Exhibit 10.1 onHC2’s Quarterly Report on Form 10-Q, filed on May 9, 2016) (File No. 001-35210). 98ExhibitNumber Description 10.34 Voluntary Conversion Agreement, dated August 2, 2016, by and among HC2 and Luxor Capital Group, LP, as investment manager of the exchanging entities,holders of the Company’s Series A-1 Convertible Participating Preferred Stock, par value $0.01 per share (incorporated by reference to Exhibit 10.2 on HC2’sQuarterly Report on Form 10-Q, filed on August 9, 2016) (File No. 001-35210). 10.35 Voluntary Conversion Agreement, dated August 2, 2016, by and between HC2 and Corrib Master Fund, Ltd., a holder of the Company’s Series A ParticipatingPreferred Stock, par value ($0.01 per share) (incorporated by reference to Exhibit 10.3 on HC2’s Quarterly Report on Form 10-Q, filed on August 9, 2016) (FileNo. 001-35210). 10.36^ Form of Employee Nonqualified Option Award Agreement (incorporated by reference to Exhibit 10.4 on HC2’s Quarterly Report on Form 10-Q, filed on August 9,2016) (File No. 001-35210). 10.37 Voluntary Conversion Agreement, dated as of October 7, 2016, by and between Hudson Bay Absolute Return Credit Opportunities Master Fund, LTD. and HC2(incorporated by reference to Exhibit 10.1 on HC2’s Current Report on Form 8-K, filed on October 11, 2016) (File No. 001-35210). 10.38^ Revised Form of Indemnification Agreement of HC2 (incorporated by reference to Exhibit 10.1 on HC2’s Quarterly Report on Form 10-Q, filed on November 9,2016) (File No. 001-35210). 10.39 Registration Rights Agreement, dated as of August 2, 2016, by and between Luxor Capital Group, LP and HC2 (incorporated by reference to Exhibit 10.2 on HC2’sQuarterly Report on Form 10-Q, filed on August 9, 2016) (File No. 001-35210). 10.40 Registration Rights Agreement, dated as of August 2, 2016, by and between Corrib Master Fund, Ltd. and HC2 (incorporated by reference to Exhibit 10.3 onHC2’s Quarterly Report on Form 10-Q, filed on August 9, 2016) (File No. 001-35210). 10.41^ Independent Consulting Services Agreement, effective as of July 1, 2016 and dated as of July 11, 2016, by and between Wayne Barr, Jr. and HC2 (incorporated byreference to Exhibit 10.1 on HC2’s Current Report on Form 8-K, filed on July 14, 2016) (File No. 001-35210). 10.42^ Separation and Release Agreement, dated January 5, 2017, by and between HC2 and Keith Hladek (incorporated by reference to Exhibit 10.1 to HC2's CurrentReport on Form 8-K, filed on January 9, 2017) (File No. 001-35210). 10.43^ Employment Agreement, dated February 26, 2016, by and between HC2 and Paul L. Robinson (incorporated by reference to Exhibit 10.55 to HC2's Annual Reporton Form 10-K, filed on March 9, 2017) (File No. 001-35210). 10.44^ Employment Agreement, dated March 1, 2015, by and between HC2 and Suzi R. Herbst (incorporated by reference to Exhibit 10.54 to HC2's Annual Report onForm 10-K, filed on March 9, 2017) (File No. 001-35210). 10.45 Voluntary Conversion Agreement dated as of May 2, 2017, by and among DG Value Partners, LP, DG Value Partners II Master Fund, LP and HC2 Holdings, Inc.(incorporated by reference to Exhibit 10.1 to HC2's Current Report on Form 8-K, filed on May 8, 2017) (File No. 001-35210). 10.46^ Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to HC2's Current Report on Form 8-K, filed on June 14, 2017) (FileNo. 001-35210). 10.47 Securities Purchase Agreement dated as of June 27, 2017 among DTV Holding Inc., John N. Kyle II, Kristina C. Bruni, King Forward, Inc., Equity Trust Co FBOJohn N. Kyle, Tiger Eye Licensing L.L.C., Bella Spectra Corporation, Kim Ann Dagen and Michael S. Dagen, Trustees of the Kim Ann Dagen Revocable LivingTrust Agreement dated March 2, 1999, Madison Avenue Ventures, LLC, Paul Donner, Reeves Callaway, Don Shalhub, Shalhub Medical Investments PA, TipiSha, LLC, Luis O. Suau, Irwin Podhajser and Humberto Garriga (incorporated by reference to Exhibit 10.1 to HC2's Current Report on Form 8-K, filed on June 28,2017) (File No. 001-35210). 10.48 Investor Rights Agreement dated as of June 27, 2017 between DTV Holding Inc., DTV America Corporation and other signatories party thereto (incorporated byreference to Exhibit 10.2 to HC2's Current Report on Form 8-K, filed on June 28, 2017) (File No. 001-35210). 10.49 Asset Purchase Agreement dated as of June 27, 2017 among DTV Holding Inc., King Forward, Inc., Tiger Eye Broadcasting Corporation, Tiger Eye LicensingL.L.C. and Bella Spectra Corporation (incorporated by reference to Exhibit 10.3 to HC2's Current Report on Form 8-K, filed on June 28, 2017) (File No. 001-35210). 10.50 Amended and Restated Secured Note dated December 23, 2016 (incorporated by reference to Exhibit 10.4 to HC2's Current Report on Form 8-K, filed on June 28,2017) (File No. 001-35210). 10.51 Asset Purchase Agreement dated as of September 8, 2017 among HC2 LPTV Holdings, Inc., HC2 Holdings, Inc., Mako Communications, LLC, MintzBroadcasting, Nave Broadcasting, LLC, Tuck Properties, Inc., Lawrence Howard Mintz and Sean Mintz (incorporated by reference to Exhibit 10.1 to HC2's CurrentReport on Form 8-K, filed on September 14, 2017) (File No. 001-35210). 10.52^ Employment Agreement dated as of September 11, 2017, by and between HC2 and Joseph Ferraro (incorporated by reference to Exhibit 10.1 to HC2's QuarterlyReport on Form 10-Q, filed on November 8, 2017) (File No. 001-35210). 21.1 Subsidiaries of HC2 (filed herewith). 23.1 Consent of BDO USA, LLP, an independent registered public accounting firm (filed herewith). 99ExhibitNumber Description 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (filed herewith). 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (filed herewith). 32.1* Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (furnished herewith). 101 The following materials from the registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, formatted in extensible business reportinglanguage (XBRL); (i) Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015, (ii) Consolidated Statements ofComprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015, (iii) Consolidated Balance Sheets at December 31, 2017 and 2016,(iv) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015, (v) Consolidated Statements of Cash Flows for theyears ended December 31, 2017, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements (filed herewith).*These certifications are being "furnished" and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subjectto the liability of that section. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities ExchangeAct of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.^Indicates management contract or compensatory plan or arrangement.#Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and theCompany agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule and/orexhibit upon request.100ITEM 16. FORM 10-K SUMMARYNone.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.HC2 HOLDINGS, INC.By: /S/ PHILIP A. FALCONE Philip A. FalconeChairman, Presidentand Chief Executive Officer(Principal Executive Officer) Date: March 14, 2018POWER OF ATTORNEYEach of the officers and directors of HC2 Holdings, Inc., whose signature appears below, in so signing, also makes, constitutes and appoints each of Philip A. Falcone and MichaelJ. Sena, and each of them, his true and lawful attorneys-in-fact, with full power and substitution, for him in any and all capacities, to execute and cause to be filed with the SEC anyand all amendments to this Annual Report on Form 10-K, with exhibits thereto and other documents connected therewith and to perform any acts necessary to be done in order tofile such documents, and hereby ratifies and confirms all that said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacitiesand on the dates indicated.Signature Title Date /S/ PHILIP A. FALCONE Director and Chairman, President and Chief Executive Officer (Principal ExecutiveOfficer) March 14, 2018Philip A. Falcone /S/ MICHAEL J. SENA Chief Financial Officer (Principal Financial and Accounting Officer) March 14, 2018Michael J. Sena /S/ WAYNE BARR, JR. Director March 14, 2018Wayne Barr, Jr. /S/ ROBERT LEFFLER Director March 14, 2018Robert Leffler /S/ LEE HILLMAN Director March 14, 2018Lee Hillman /S/ WARREN H. GFELLER Director March 14, 2018Warren H. Gfeller 101HC2 HOLDINGS, INC.INDEX TO FINANCIAL STATEMENTS AND SCHEDULEReports of Independent Registered Public Accounting FirmsF-2Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015F-4Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015F-5Consolidated Balance Sheets as of December 31, 2017 and 2016F-6Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015F-7Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015F-9Notes to Consolidated Financial StatementsF-11(1) Organization and BusinessF-11(2) Summary of Significant Accounting PoliciesF-11(3) Business CombinationsF-22(4) InvestmentsF-26(5) Fair Value of Financial InstrumentsF-30(6) Accounts ReceivableF-35(7) InventoryF-35(8) Recoverable from ReinsurersF-35(9) Property, Plant and Equipment, netF-36(10) Goodwill and Other Intangible AssetsF-36(11) Life, Accident and Health ReservesF-38(12) Accounts Payable and Other Current LiabilitiesF-38(13) Debt ObligationsF-39(14) Income TaxesF-43(15) Commitments and ContingenciesF-46(16) Employee Retirement PlansF-48(17) Share-based CompensationF-55(18) EquityF-56(19) Related PartiesF-59(20) Operating Segment and Related InformationF-60(21) Quarterly Results of Operations (Unaudited)F-63(22) Basic and Diluted Income (Loss) Per Common ShareF-64(23) Subsequent EventsF-64Schedule I - Summary of Investments - Other Than Investments in Related PartiesF-66Schedule II - Condensed Financial Information of the Registrant (Registrant Only)F-67Schedule III - Supplementary Insurance InformationF-70Schedule IV - ReinsuranceF-71Schedule V - Valuation and Qualifying AccountsF-72F-1Report of Independent Registered Public Accounting FirmShareholders and Board of DirectorsHC2 Holdings, Inc.New York, NYOpinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of HC2 Holdings, Inc. (the “Company”) and subsidiaries as of December 31, 2017 and 2016, the relatedconsolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, andthe related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, theconsolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017 and 2016, and the results oftheir operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the UnitedStates of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control overfinancial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”) and our report dated March 14, 2018 expressed an unqualified opinion thereon.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financialstatements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required tobe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commissionand the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement, whether due to error or fraud.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performingprocedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financialstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of theconsolidated financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ BDO USA, LLPWe have served as the Company's auditor since 2011.New York, NYMarch 14, 2018F-2Report of Independent Registered Public Accounting FirmShareholders and Board of DirectorsHC2 Holdings, Inc.New York, NYOpinion on Internal Control over Financial ReportingWe have audited HC2 Holdings, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Companymaintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of theCompany and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flowsfor each of the three years in the period ended December 31, 2017, and the related notes and schedules and our report dated March 14, 2018 expressed an unqualified opinionthereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on theCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respectto the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controlbased on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate./s/ BDO USA, LLPNew York, NYMarch 14, 2018F-3HC2 HOLDINGS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)PART I: FINANCIAL INFORMATIONItem 1. Financial Statements Years Ended December 31, 2017 2016 2015Revenue $1,482,546 $1,415,669 $1,117,941Life, accident and health earned premiums, net 80,524 79,406 1,578Net investment income 66,070 58,032 1,031Net realized and unrealized gains on investments 4,983 5,019 256Net revenue 1,634,123 1,558,126 1,120,806Operating expenses Cost of revenue 1,313,069 1,254,041 982,623Policy benefits, changes in reserves, and commissions 108,695 123,182 2,245Selling, general and administrative 182,880 152,890 108,527Depreciation and amortization 31,315 24,493 24,796Other operating (income) expenses (704) 4,941 1,902Total operating expenses 1,635,255 1,559,547 1,120,093Income (loss) from operations (1,132) (1,421) 713Interest expense (55,098) (43,375) (39,017)Gain (loss) on contingent consideration 11,411 (8,929) —Income (loss) from equity investees 17,840 10,768 (1,499)Other expenses, net (12,772) (2,836) (6,820)Loss from continuing operations before income taxes (39,751) (45,793) (46,623)Income tax (expense) benefit (10,740) (51,638) 10,882Loss from continuing operations (50,491) (97,431) (35,741)Loss from discontinued operations — — (21)Net loss (50,491) (97,431) (35,762)Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 3,580 2,882 197Net loss attributable to HC2 Holdings, Inc. (46,911) (94,549) (35,565)Less: Preferred stock and deemed dividends from conversions 2,767 10,849 4,285Net loss attributable to common stock and participating preferred stockholders $(49,678) $(105,398) $(39,850) Basic and diluted loss per common share Loss from continuing operations $(1.16) $(2.83) $(1.50)Loss from discontinued operations — — —Basic and diluted loss per share $(1.16) $(2.83) $(1.50) Weighted average common shares outstanding: Basic and diluted 42,824 37,260 26,482See notes to Consolidated Financial StatementsF-4HC2 HOLDINGS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(in thousands) Years Ended December 31, 2017 2016 2015Net loss $(50,491) $(97,431) $(35,762)Other comprehensive income (loss) Foreign currency translation adjustment 7,857 (4,911) (8,591)Unrealized gain (loss) on available-for-sale securities 55,556 21,245 (8,029)Actuarial loss on pension plan (78) (2,606) (512)Other comprehensive income (loss) 63,335 13,728 (17,132)Comprehensive income (loss) 12,844 (83,703) (52,894)Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 3,580 2,882 197Comprehensive income (loss) attributable to HC2 Holdings, Inc. $16,424 $(80,821) $(52,697)See notes to Consolidated Financial StatementsF-5HC2 HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share amounts) December 31, 2017 2016Assets Investments: Fixed maturity securities, available-for-sale at fair value $1,340,626 $1,278,958Equity securities, available-for-sale at fair value 47,500 51,519Mortgage loans 52,109 16,831Policy loans 17,944 18,247Other invested assets 85,419 62,363Total investments 1,543,598 1,427,918Cash and cash equivalents 97,885 115,371Accounts receivable, net 322,446 267,598Recoverable from reinsurers 526,337 524,201Deferred tax asset 1,661 1,108Property, plant, and equipment, net 374,660 286,458Goodwill 131,741 98,086Intangibles, net 117,105 39,722Other assets 102,258 74,814Total assets $3,217,691 $2,835,276 Liabilities, temporary equity and stockholders’ equity Life, accident and health reserves $1,693,961 $1,648,565Annuity reserves 243,156 251,270Value of business acquired 42,969 47,613Accounts payable and other current liabilities 347,492 251,733Deferred tax liability 10,740 15,304Debt obligations 593,172 428,496Other liabilities 70,174 92,871Total liabilities 3,001,664 2,735,852Commitments and contingencies Temporary equity Preferred stock 26,296 29,459Redeemable noncontrolling interest 1,609 2,526Total temporary equity 27,905 31,985Stockholders’ equity Common stock, $.001 par value 44 42Shares authorized: 80,000,000 at December 31, 2017 and December 31, 2016; Shares issued: 44,570,004 and 42,070,675 at December 31, 2017 and December 31, 2016; Shares outstanding: 44,190,826 and 41,811,288 at December 31, 2017 and December 31, 2016, respectively Additional paid-in capital 254,685 241,485Treasury stock, at cost; 379,178 and 259,387 shares at December 31, 2017 and December 31, 2016, respectively (2,057) (1,387)Accumulated deficit (221,189) (174,278)Accumulated other comprehensive income (loss) 41,688 (21,647)Total HC2 Holdings, Inc. stockholders’ equity 73,171 44,215Noncontrolling interest 114,951 23,224Total stockholders’ equity 188,122 67,439Total liabilities, temporary equity and stockholders’ equity $3,217,691 $2,835,276See notes to Consolidated Financial StatementsF-6HC2 HOLDINGS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands) Common Stock AdditionalPaid-InCapital TreasuryStock AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) Total HC2Stockholders'Equity Non-controllingInterestTotalStockholders’EquityTemporaryEquity Shares Amount Balance as of December 31, 2014 23,813 $24 $141,948 $(378) $(44,164) $(18,243) $79,187 $25,208 $104,395 $43,849Dividend to noncontrolling interest — — — — — — — (1,835) (1,835) —Share-based compensation expense — — 11,102 — — — 11,102 — 11,102 —Preferred stock dividend and accretion — — (4,285) — — — (4,285) — (4,285) —Amortization of issuance costs andbeneficial conversion feature — — (375) — — — (375) — (375) (420)Issuance of common stock foracquisition of business 1,007 1 5,380 — — — 5,381 — 5,381 —Issuance of common stock 9,9981053,779———53,789—53,789—Issuance of preferred stock — — — — — — — — — 14,033Conversion of preferred stock tocommon stock 432 1,839 — — — 1,839 — 1,839 (839)Transactions with noncontrollinginterests ——89———89(475)(386)(89)Net loss — — — — (35,565) — (35,565) 596 (34,969) (793)Other comprehensive loss —————(17,132)(17,132)—(17,132)—Balance as of December 31, 2015 35,250 $35 $209,477 $(378) $(79,729) $(35,375) $94,030 $23,494 $117,524 $55,741Dividend to noncontrolling interest — — — — — —(759) (759) —Share-based compensation expense — — 8,348 — — — 8,348— 8,348 —Fair value adjustment of redeemablenoncontrolling interest — — (489) — — — (489)— (489) 489Exercise of stock options 2 — 8 — — — 8— 8 —Taxes paid in lieu of shares issued forshare-based compensation (228) — — (1,009) — — (1,009) — (1,009) —Preferred stock dividend and accretion — — (2,948) — — — (2,948) — (2,948) —Amortization of issuance costs andbeneficial conversion feature — — (608) — — — (608) — (608) 608Issuance of common stock 269 — — — — — —— — —Conversion of preferred stock tocommon stock 6,518 7 21,365 — — — 21,372— 21,372 (23,768)Transactions with noncontrollinginterests — — 6,332 — — — 6,332 1,951 8,283 335Net loss — — — — (94,549) — (94,549)(1,462) (96,011) (1,420)Other comprehensive income —————13,72813,728—13,728—Balance as of December 31, 2016 41,811 $42 $241,485 $(1,387) $(174,278) $(21,647) $44,215 $23,224 $67,439 $31,985F-7HC2 HOLDINGS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands) Common Stock AdditionalPaid-InCapital TreasuryStock AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) Total HC2Stockholders'Equity Non-controllingInterestTotalStockholders’EquityTemporaryEquity Shares Amount Balance as of December 31, 2016 41,811 $42 $241,485 $(1,387) $(174,278) $(21,647) $44,215 $23,224 $67,439 $31,985Dividend to noncontrolling interests — — — — — — — (756) (756) —Share-based compensation — — 7,305 — — — 7,305 — 7,305 —Fair value adjustment of redeemablenoncontrolling interest — — (1,126) — — — (1,126) — (1,126) 1,126Exercise of stock options 135 — 486 — — — 486 — 486 —Taxes paid in lieu of shares issued forshare-based compensation (120) — — (670) — — (670) — (670) —Preferred stock dividend and accretion — — (2,063) — — — (2,063) — (2,063) —Amortization of issuance costs andbeneficial conversion feature — — (65) — — — (65) — (65) 65Issuance of common stock foracquisition of business 1,006 1 4,993 — — — 4,994 — 4,994 —Issuance of common stock 555 — 269 — — — 269 — 269 —Conversion of preferred stock tocommon stock 803 1 2,665 — — — 2,666 — 2,666 (3,228)Transactions with noncontrollinginterests — — 736 — — — 736 93,353 94,089 667Net loss — — — — (46,911) — (46,911) (870) (47,781) (2,710)Other comprehensive income —————63,33563,335—63,335—Balance as of December 31, 2017 44,190$44$254,685$(2,057) $(221,189)$41,688$73,171$114,951$188,122$27,905See notes to Consolidated Financial StatementsF-8HC2 HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Years Ended December 31, 2017 2016 2015Cash flows from operating activities: Net loss $(50,491) $(97,431) $(35,762)Adjustments to reconcile net loss to cash provided by (used in) operating activities: Provision for doubtful accounts receivable 127 2,862 99Share-based compensation expense 5,243 8,348 11,102Depreciation and amortization 36,569 28,863 32,455Amortization of deferred financing costs and debt discount 6,121 3,253 1,420Amortization of (discount) premium on investments 8,032 11,373 301(Gain) loss on sale or disposal of assets (2,780) 2,362 170Lease termination costs 266 179 1,185Asset impairment expense 1,810 2,400 547(Income) loss from equity investees (17,840) (10,768) 1,499Impairment of investments 9,969 4,322 —Net realized (gains) losses on investments (5,149) (2,528) 6,053Net gain (loss) on contingent consideration (11,411) 8,929 —Receipt of dividends from equity investees 4,668 8,723 4,647Deferred income taxes (10,453) 27,136 (13,102)Annuity benefits 8,674 8,962 —Other operating activities 7,576 (878) 5,451Changes in assets and liabilities, net of acquisitions: Accounts receivable (47,073) (55,907) (60,720)Recoverable from reinsurers (2,136) (1,947) —Other assets (23,471) 46,757 8,063Life, accident and health reserves 45,261 56,338 608Accounts payable and other current liabilities 54,373 11,905 36,216Other liabilities (11,743) 15,895 (28,146)Cash provided by (used in) operating activities: 6,142 79,148 (27,914)Cash flows from investing activities: Purchase of property, plant and equipment (31,925) (29,048) (21,324)Disposal of property, plant and equipment 1,981 8,824 5,034Purchase of investments (341,859) (229,738) (51,598)Sale of investments 157,198 89,392 12,248Maturities and redemptions of investments 143,331 97,375 —Purchase of equity method investments (10,590) (10,203) (3,000)Cash paid for business acquisitions, net of cash acquired (57,828) (66,346) 39,726Other investing activities 439 (474) —Cash used in investing activities: (139,253) (140,218) (18,914)Cash flows from financing activities: Proceeds from debt obligations 186,856 56,058 54,042Principal payments on debt obligations (51,596) (22,252) (19,287)Annuity receipts 2,885 3,399 78Annuity surrenders (19,539) (21,654) —Proceeds from sale of preferred stock, net — — 14,033Proceeds from sale of common stock, net — — 53,975Transactions with noncontrolling interests 677 6,167 (475)Change in restricted cash — — 6,014Payment of dividends (3,641) (4,220) (5,687)Net cash received for contingent consideration — 2,335 —Taxes paid in lieu of shares issued for share-based compensation (670) (1,009) —Other financing activities 369 (36) —Cash provided by financing activities: 115,341 18,788 102,693Effects of exchange rate changes on cash and cash equivalents 284 (971) (5,219)Net change in cash and cash equivalents (17,486) (43,253) 50,646Cash and cash equivalents, beginning of period 115,371 158,624 107,978Cash and cash equivalents, end of period $97,885 $115,371 $158,624 F-9HC2 HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)Supplemental cash flow information: Cash paid for interest $47,634 $39,193 $39,451Cash paid for taxes $19,164 $20,859 $1,134Non-cash investing and financing activities: Purchases of property, plant and equipment under financing arrangements $— $— $1,808Property, plant and equipment included in accounts payable $1,396 $1,581 $911Investments included in accounts payable $6,323 $2,494 $—Conversion of preferred stock to common stock $4,433 $28,534 $1,839Deemed dividend from conversion of preferred stock $532 $6,867 $—Dividends payable to shareholders $500 $1,322 $1,005Business acquisition through the issuance of common stock, debt and warrants $20,148 $— $11,591Issuance of debt obligations $— $— $5,000Fair value of contingent assets assumed in other acquisitions $— $2,992 $—Fair value of deferred liabilities assumed in other acquisitions $— $2,995 $—Debt assumed in acquisitions $2,480 $20,813 $—See notes to Consolidated Financial StatementsF-10HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Organization and BusinessHC2 Holdings, Inc. ("HC2" and, together with its subsidiaries, the "Company", "we" and "our") is a diversified holding company which seeks to acquire and grow attractivebusinesses that we believe can generate long-term sustainable free cash flow and attractive returns. While the Company generally intends to acquire controlling equity interests in itsoperating subsidiaries, the Company may invest to a limited extent in a variety of debt instruments or noncontrolling equity interest positions. The Company’s shares of commonstock trade on the NYSE under the symbol "HCHC".The Company currently has seven reportable segments based on management’s organization of the enterprise - Construction, Marine Services, Energy, Telecommunications,Insurance, Life Sciences, and Other, which includes businesses that do not meet the separately reportable segment thresholds.1.Our Construction segment is comprised of DBM Global Inc. ("DBMG") and its wholly-owned subsidiaries. DBMG is a fully integrated Building Information Modelling("BIM") modeler, detailer, fabricator and erector of structural steel and heavy steel plate. DBMG models, details, fabricates and erects structural steel for commercial and industrialconstruction projects such as high- and low-rise buildings and office complexes, hotels and casinos, convention centers, sports arenas, shopping malls, hospitals, dams, bridges,mines and power plants. DBMG also fabricates trusses and girders and specializes in the fabrication and erection of large-diameter water pipe and water storage tanks. ThroughAitken, DBMG manufactures pollution control scrubbers, tunnel liners, pressure vessels, strainers, filters, separators and a variety of customized products. The Company maintainsapproximately 92% controlling interest in DBMG.2.Our Marine Services segment is comprised of Global Marine Systems Limited ("GMSL"). GMSL is a leading provider of engineering and underwater services onsubmarine cables. GMSL aims to maintain its leading market position in the telecommunications maintenance segment and seeks opportunities to grow its installation activities inthe three market sectors (telecommunications, offshore power, and oil and gas) while capitalizing on high market growth in the offshore power sector through expansion of itsinstallation and maintenance services in that sector. The Company maintains approximately 73% controlling interest in GMSL.3.Our Energy segment is comprised of American Natural Gas ("ANG"). ANG is a premier distributor of natural gas motor fuel. ANG designs, builds, owns, acquires,operates and maintains compressed natural gas fueling stations for transportation vehicles. The Company maintains approximately 68% controlling interest in ANG.4.Our Telecommunications segment is comprised of PTGi International Carrier Services, ("ICS"). ICS operates a telecommunications business including a network of directroutes and provides premium voice communication services for national telecommunications operators, mobile operators, wholesale carriers, prepaid operators, voice over internetprotocol service operators and internet service providers. ICS provides a quality service via direct routes and by forming strong relationships with carefully selected partners. TheCompany maintains 100% interest in ICS.5.Our Insurance segment is comprised of Continental General Insurance Company ("CGI" or the "Insurance Company"). CGI provides long-term care, life and annuitycoverage that help protect policy and certificate holders from the financial hardships associated with illness, injury, loss of life, or income continuation. The Company maintains100% interest in CGI.6.Our Life Sciences segment is comprised of Pansend Life Sciences, LLC ("Pansend"). Pansend maintains controlling interest of (i) approximately 80% interest in GenovelOrthopedics, Inc. ("Genovel"), which seeks to develop products to treat early osteoarthritis of the knee, (ii) approximately 74% interest in R2 Dermatology Inc. ("R2"), whichdevelops skin lightening technology, and (iii) approximately 80% interest in BeneVir Biopharm, Inc. ("BeneVir"), which focuses on immunotherapy for the treatment of solidtumors. Pansend also invests in other early stage or developmental stage healthcare companies including a 50% interest in Medibeacon Inc., and an investment in Triple RingTechnologies, Inc.7.In our Other segment, we invest in and grow developmental stage companies that we believe have significant growth potential. Among the businesses included in thissegment is the Company's 56% controlling interest in 704Games Company ("704Games" f/k/a DMi, Inc.), which owns licenses to create and distribute NASCAR® video games; a100% ownership of HC2 Broadcasting Holdings, Inc. ("Broadcasting"), which strategically acquires broadcast assets across the United States. Broadcasting maintainsapproximately 50% controlling interest in DTV America Corporation ("DTV").2. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and all other subsidiaries over which the Company exerts control. Allintercompany profits, transactions and balances have been eliminated in consolidation. As of December 31, 2017, the results of DBMG, GMSL, ANG, ICS, CGI, Genovel, R2,BeneVir, Broadcasting, and 704Games have been consolidated into the Company’s results based on guidance from the Financial Accounting Standards Board ("FASB")Accounting Standards Codification ("ASC" 810, Consolidation. The remaining interests not owned by the Company are presented as a noncontrolling interest component of totalequity.F-11HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDCash and Cash EquivalentsCash and cash equivalents are comprised principally of amounts in money market accounts, operating accounts, certificates of deposit, and overnight repurchase agreements withoriginal maturities of three months or less.AcquisitionsThe Company’s acquisitions are accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed berecognized at their estimated fair values as of the acquisition date. Estimates of fair value included in the Consolidated Financial Statements, in conformity with ASC 820, FairValue Measurements and Disclosures, represent the Company’s best estimates and valuations developed, when needed, with the assistance of independent appraisers or, wheresuch valuations have not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The following estimates andassumptions are inherently subject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that theestimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities, and residual amounts will be allocatedto goodwill. In accordance with ASC 805 Business Combinations ("ASC 805"), if additional information is obtained about the initial estimates of the fair value of the assetsacquired and liabilities assumed within the measurement period (not to exceed one year from the date of acquisition), including finalization of asset appraisals, the Company willrefine its estimates of fair value to allocate the purchase price more accurately.InvestmentsThe Company determines the appropriate classification of investments in fixed maturity and equity securities at the acquisition date and re-evaluates the classification at each balancesheet date. Substantially all of our investments in equity and fixed maturity securities are classified as available-for-sale.The Company utilizes the equity method to account for investments when it possesses the ability to exercise significant influence, but not control, over the operating and financialpolicies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumptionmay be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company applies the equity method toinvestments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock. In applying the equitymethod, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by its proportionate share of the net earnings orlosses and other comprehensive income of the investee. The Company records dividends or other equity distributions as reductions in the carrying value of the investment. In theevent that net losses of the investee reduce the carrying amount to zero, additional net losses may be recorded if other investments in the investee are at-risk, even if the Companyhas not committed to provide financial support to the investee. Such additional equity method losses, if any, are based upon the change in the Company's claim on the investee’sbook value.Fixed maturity securities, available-for-sale at fair value include bonds and redeemable preferred stocks. The Company carries these investments at fair value with net unrealizedgains or losses, net of tax and related adjustments, reported as a component of Accumulated Other Comprehensive Income (Loss) ("AOCI").Equity securities, available-for-sale at fair value include investments in common stock and non-redeemable preferred stock. The Company carries these investments at fair valuewith net unrealized gains or losses, net of tax and related adjustments, reported as a component of AOCI.Mortgage loans are carried at amortized unpaid balances, net of provisions for estimated losses. Interest income is accrued on the principal amount of the loan based on the loan'scontractual interest rate.Policy loans are stated at current unpaid principal balances. Policy loans are collateralized by the cash surrender value of the policy. Interest income is recorded as earned using thecontractual interest rate.Other invested assets include (i) common stock of publicly traded companies accounted for using the equity method; (ii) common and preferred stock of privately held companiesaccounted for using the equity or cost method; (ii) limited partnerships and joint ventures accounted for using the equity method; (iii) equity purchase warrants and call optionsaccounted for as a derivative (as discussed below); and, (iv) equity purchase warrants accounted for under the cost method.Premiums and discounts on fixed maturity securities are amortized using the interest method; mortgage-backed securities are amortized over a period based on estimated futureprincipal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations. Dividends onequity securities are recognized when declared. When the Company sells a security, the difference between the sale proceeds and amortized cost (determined based on specificidentification) is reported as a realized investment gain or loss. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheetdate, a provision for impairment is charged to earnings (included in realized gains (losses) on investments) and the cost basis of that investment isF-12HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDreduced. If the Company can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will have to sell the security beforerecovery of its amortized cost basis, then the other-than-temporary impairment is separated into two components: (i) the amount related to credit losses (recorded in earnings) and(ii) the amount related to all other factors (recorded in AOCI). The credit-related portion of an other-than-temporary impairment is measured by comparing a security’s amortizedcost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge. If the Company intends to sell an impaired security, or it ismore likely than not that it will be required to sell the security before recovery, an impairment charge to earnings is recorded to reduce the amortized cost of that security to fairvalue.DerivativesEquity purchase warrants, equity call options and the Company's issued warrant to purchase its common stock qualify as a derivative under ASC 815, Derivatives and Hedging. Allof such derivative instruments are recognized as either assets or liabilities at fair value. Subsequent changes in fair value are recognized within earnings.Fair Value MeasurementsGeneral accounting principles for Fair Value Measurements and Disclosures define fair value as the exchange price that would be received for an asset or paid to transfer a liability(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. These principlesalso establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value anddescribes three levels of inputs that may be used to measure fair value:Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. Active markets are defined as having the following characteristics for the measuredasset/liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying substantially among market makers, (iv) narrow bid/ask spreads and (v) most informationpublicly available. The Company’s Level 1 financial instruments consist primarily of publicly traded equity securities and highly liquid government bonds for which quoted marketprices in active markets are available.Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or market standard valuationtechniques and assumptions with significant inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in themarket. The Company’s Level 2 financial instruments include corporate and municipal fixed maturity securities, mortgage-backed non-affiliated common stocks priced usingobservable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding brokerquotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2.Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the related assets or liabilities. Level 3 assets and liabilitiesinclude those whose value is determined using market standard valuation techniques. When observable inputs are not available, the market standard techniques for determining theestimated fair value of certain securities that trade infrequently, and therefore have little transparency, rely on inputs that are significant to the estimated fair value and that are notobservable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on managementjudgment or estimation and cannot be supported by reference to market activity. Even though unobservable, management believes these inputs are based on assumptions deemedappropriate given the circumstances and consistent with what other market participants would use when pricing similar assets and liabilities. For the Company’s invested assets, thiscategory primarily includes private placements, asset-backed securities, and to a lesser extent, certain residential and commercial mortgage-backed securities, among others. Pricesare determined using valuation methodologies such as discounted cash flow models and other similar techniques. Non-binding broker quotes, which are utilized when pricingservice information is not available, are reviewed for reasonableness based on the Company’s understanding of the market, and are generally considered Level 3. Under certaincircumstances, based on its observations of transactions in active markets, the Company may conclude the prices received from independent third-party pricing services or brokersare not reasonable or reflective of market activity. In those instances, the Company would apply internally developed valuation techniques to the related assets or liabilities.Other than transactions described within Note 3. Business Combinations, the Company did not have any significant nonrecurring fair value measurements of non-financial assetsand liabilities in 2017 or 2016.In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fairvalue hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessmentof the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.The Company may utilize information from third parties, such as pricing services and brokers, to assist in determining the fair value for certain assets and liabilities; however,management is ultimately responsible for all fair values presented in the Company’s financial statements. This includes responsibility for monitoring the fair value process, ensuringobjective and reliable valuation practices and pricing of assets and liabilities, and approving changes to valuation methodologies and pricing sources. The selection of the valuationtechnique(s) to apply considers the definition of an exit price and the nature of the asset or liability being valued and significant expertise and judgment is required.F-13HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDAccounts ReceivableAccounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Our allowance for doubtful accounts considers historical experience, theage of certain receivable balances, credit history, current economic conditions and other factors that may affect the counterparty’s ability to pay.InventoryInventory is valued at the lower of cost or net realizable value under the first-in, first-out method. Provision for obsolescence is made where appropriate and is charged to cost ofrevenue in the consolidated statements of operations. Short-term work in progress on contracts is stated at cost less foreseeable losses. These costs include only direct labor andexpenses incurred to date and exclude any allocation of overhead. The policy for long-term work in progress contracts is disclosed within the Revenue and Cost Recognitionaccounting policy.ReinsurancePremium revenue and benefits are reported net of the amounts related to reinsurance ceded to and assumed from other companies. Expense allowances from reinsurers are includedin other operating and general expenses. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies.Accounting for Income TaxesWe recognize deferred tax assets and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred tax assets and liabilities aredetermined based on the difference between the financial statement bases and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. If necessary, deferred tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. Wemust make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance. The additionalguidance provided by ASC 740, Income Taxes ("ASC 740"), clarifies the accounting for uncertainty in income taxes recognized in the financial statements. Expected outcomes ofcurrent or anticipated tax examinations, refund claims and tax-related litigation and estimates regarding additional tax liability (including interest and penalties thereon) or refundsresulting therefrom will be recorded based on the guidance provided by ASC 740 to the extent applicable.At December 31, 2017, our U.S. and foreign companies have significant deferred tax assets resulting from tax loss carryforwards. The foreign deferred tax assets with minorexceptions are fully offset with valuation allowances. Additionally, the deferred tax assets generated by certain businesses that do not qualify to be included in the HC2 U.S.consolidated income tax return have been reduced by a full valuation allowance. Based on consideration of both positive and negative evidence, we determined that it was morelikely than not that the net deferred tax assets of the HC2 U.S. consolidated filing group and the Insurance Company's’ will not be realized. Therefore, a full valuation allowancewas maintained against the HC2 U.S. consolidated filing group’s and Insurance Company's net deferred tax assets as of December 31, 2017. The appropriateness and amount ofthese valuation allowances are based on cumulative history of losses and our assumptions about the future taxable income of each affiliate and the timing of the reversal of deferredtax assets and liabilities.Property, Plant and EquipmentProperty, plant and equipment are stated at cost less accumulated depreciation, which is provided on the straight-line method over the estimated useful lives of the assets. Costincludes major expenditures for improvements and replacements which extend useful lives or increase capacity of the assets as well as expenditures necessary to place assets intoreadiness for use. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Cost includesfinance costs incurred prior to the asset being available for use. Expenditures for maintenance and repairs are expensed as incurred.Costs for internal use software that are incurred in the preliminary project stage and in the post-implementation stage are expensed as incurred. Costs incurred during the applicationdevelopment stage are capitalized and amortized over the estimated useful life of the software, beginning when the software project is ready for its intended use, over the estimateduseful life of the softwareDepreciation is determined on a straight-line basis over the estimated useful lives of the assets, which range from 5 to 40 years for buildings and leasehold improvements, up to 35years for cable-ships and submersibles, 3 to 15 years for equipment, furniture and fixtures, and 3 to 20 years for plant and transportation equipment. Plant includes equipment onthe cable-ships that is portable and can be moved around the fleet and computer equipment. Leasehold improvements are amortized over the lives of the leases or estimated usefullives of the assets, whichever is shorter. Assets under construction are not depreciated until they are complete and available for use.When assets are sold or otherwise retired, the costs and accumulated depreciation are removed from the books and the resulting gain or loss is included in operating results.Property, plant and equipment that have been included as part of the assets held for sale are no longer depreciated from the time that they are classified as such. The Companyperiodically evaluates the carrying value of its property, plant and equipment based upon the estimated cash flows to be generated by the related assets. If impairment is indicated, aloss is recognized.F-14HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDGoodwill and Other Intangible AssetsUnder ASC 350, Intangibles - Goodwill and Other ("ASC 350"), goodwill and indefinite lived intangible assets are not amortized but are reviewed annually for impairment, ormore frequently, if impairment indicators arise. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to the provisions of ASC 360,Property, plant, and equipment ("ASC 360").In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350, Intangibles - Goodwilland Other (Topic 350), currently requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, ofgoodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unitexceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of the goodwill for that reporting unit. An impairmentcharge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount ofgoodwill allocated to that reporting unit. To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this ASU remove thesecond step of the test. An entity will now apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount overits fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwillimpairment. The Company elected to early adopt ASU 2017-04 effective March 31, 2017, resulting in no impact to the Consolidated Financial Statements.Goodwill impairment is tested at least annually (October 1st) or when factors indicate potential impairment using a two-step process that begins with a qualitative evaluation of eachreporting unit. If such test indicates potential for impairment, a one-step quantitative test is performed and if there is excess of a reporting unit's carrying amount over its fair value,impairment is recorded, not to exceed the total amount of goodwill allocated to the reporting unit.Estimating the fair value of a reporting unit requires various assumptions including projections of future cash flows, perpetual growth rates and discount rates. The assumptionsabout future cash flows and growth rates are based on the Company’s assessment of a number of factors, including the reporting unit’s recent performance against budget,performance in the market that the reporting unit serves, and industry and general economic data from third-party sources. Discount rate assumptions are based on an assessment ofthe risk inherent in those future cash flows. Changes to the underlying businesses could affect the future cash flows, which in turn could affect the fair value of the reporting unit.Intangible assets not subject to amortization consist of certain licenses. Such indefinite lived intangible assets are tested for impairment annually, or more frequently if events orchanges in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of an intangible asset with its carrying amount.If the carrying amount of the intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to the excess.Intangible assets subject to amortization consists of certain trade names, customer contracts and developed technology. These finite lived intangible assets are amortized based ontheir estimated useful lives. Such assets are subject to the impairment provisions of ASC 360, wherein impairment is recognized and measured only if there are events andcircumstances that indicate that the carrying amount may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected toresult from the use of the asset group. An impairment loss is recorded if after determining that it is not recoverable, the carrying amount exceeds the fair value of the asset.In addition to the foregoing, the Company reviews its goodwill and intangible assets for possible impairment whenever events or circumstances indicate that the carrying amounts ofassets may not be recoverable. The factors that the Company considers important, and which could trigger an impairment review, include, but are not limited to: a more likely thannot expectation of selling or disposing all, or a portion, of a reporting unit; a significant decline in the market value of our common stock or debt securities for a sustained period; amaterial adverse change in economic, financial market, industry or sector trends; a material failure to achieve operating results relative to historical levels or projected future levels;and significant changes in operations or business strategy.Active License Holdings. As of December 31, 2017, Broadcasting and its subsidiaries held 294 Active television broadcast licenses issued by the FCC, which are included inIntangibles, net in the consolidated financial statements. The weighted average renewal period for these licenses was 2.96 years.Valuation of Long-lived AssetsThe Company reviews long-lived assets for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. In making suchevaluations, the Company compares the expected undiscounted future cash flows to the carrying amount of the assets. If the total of the expected undiscounted future cash flows isless than the carrying amount of the assets, the Company is required to make estimates of the fair value of the long-lived assets in order to calculate the impairment loss equal to thedifference between the fair value and carrying value of the assets.The Company makes significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as determining asset groups and estimating futurecash flows, remaining useful lives, discount rates and growth rates. The resulting undiscounted cash flows are projected over an extended period of time, which subjects thoseassumptions and estimates to an even larger degree of uncertainty. While the Company believes that its estimates are reasonable, different assumptions could materially affect thevaluation of the long-lived assets. The Company derives future cash flow estimates from its historical experience and its internal business plans, which include consideration ofindustryF-15HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDtrends, competitive actions, technology changes, regulatory actions, available financial resources for marketing and capital expenditures and changes in its underlying cost structure.The Company makes assumptions about the remaining useful life of its long-lived assets. The assumptions are based on the average life of its historical capital asset additions andits historical asset purchase trend. In some cases, due to the nature of a particular industry in which the company operates, the Company may assume that technology changes insuch industry render all associated assets, including equipment, obsolete with no salvage value after their useful lives. In certain circumstances in which the underlying assets couldbe leased for an additional period of time or salvaged, the Company includes such estimated cash flows in its estimate.The estimate of the appropriate discount rate to be used to apply the present value technique in determining fair value was the Company’s weighted average cost of capital which isbased on the effective rate of its debt obligations at the current market values (for periods during which the Company had debt obligations) as well as the current volatility andtrading value of the Company’s common stock.Value of Business Acquired ("VOBA")VOBA is a liability that reflects the estimated fair value of in-force contracts in a life insurance company acquisition less the amount recorded as insurance contract liabilities. Itrepresents the portion of the purchase price that is allocated to the value of the rights to receive future cash flows from the business in force at the acquisition date. A VOBA liability(negative asset) occurs when the estimated fair value of in-force contracts in a life insurance company acquisition is less than the amount recorded as insurance contract liabilities.Amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends. VOBAamortization are reported within depreciation and amortization in the accompanying consolidated statements of operations.The VOBA balance is also periodically evaluated for recoverability to ensure that the unamortized portion does not exceed the expected recoverable amounts. At each evaluationdate, actual historical gross profits are reflected, and estimated future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimatedfuture gross profits requires that the amortization rate be revised ("unlocking") retroactively to the date of the policy or contract issuance. The cumulative unlocking adjustment isrecognized as a component of current period amortization.Annuity Benefits AccumulatedAnnuity receipts and benefit payments are recorded as increases or decreases in annuity benefits accumulated rather than as revenue and expense. Increases in this liability (primarilyinterest credited) are charged to expense and decreases for charges are credited to annuity policy charges revenue. Reserves for traditional fixed annuities are generally recorded atthe stated account value.Life, Accident and Health ReservesLiabilities for future policy benefits under traditional life, accident and health policies are computed using the net level premium method. Computations are based on the originalprojections of investment yields, mortality, morbidity and surrenders and include provisions for unfavorable deviations unless a loss recognition event (premium deficiency) occurs.Claim reserves and liabilities established for accident and health claims are modified as necessary to reflect actual experience and developing trends.For long-duration contracts (such as traditional life and long-term care insurance policies), loss recognition occurs when, based on current expectations as of the measurement date,existing contract liabilities plus the present value of future premiums (including reasonably expected rate increases) are not expected to cover the present value of future claimspayments and related settlement and maintenance costs (excluding overhead) as well as unamortized acquisition costs. If a block of business is determined to be in loss recognition,a charge is recorded in earnings in an amount equal to the excess of the present value of expected future claims costs and unamortized acquisition costs over existing reserves plusthe present value of expected future premiums (with no provision for adverse deviation). The charge is recorded as an additional reserve (if unamortized acquisition costs have beeneliminated).In addition, reserves for traditional life and long-term care insurance policies are subject to adjustment for loss recognition charges that would have been recorded if the unrealizedgains from securities had actually been realized. This adjustment is included in unrealized gains (losses) on marketable securities, a component of AOCI.Presentation of Taxes CollectedThe Company reports a value-added tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between the Company and a customer ona net basis (excluded from revenues).Foreign Currency TransactionsForeign currency transactions are transactions denominated in a currency other than a subsidiary’s functional currency. A change in the exchange rates between a subsidiary’sfunctional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of thetransaction. That increase or decrease in expected functional currency cash flows is reported by the Company as a foreign currency transaction gain (loss). The primary componentof the Company’s foreign currencyF-16HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDtransaction gain (loss) is due to agreements in place with certain subsidiaries in foreign countries regarding intercompany transactions. The Company anticipates repayment of thesetransactions in the foreseeable future, and recognizes the realized and unrealized gains or losses on these transactions that result from foreign currency changes in the period inwhich they occur as foreign currency transaction gain (loss).Foreign Currency TranslationThe assets and liabilities of the Company’s foreign subsidiaries are translated at the exchange rates in effect on the reporting date. Income and expenses are translated at the averageexchange rate during the period. The net effect of such translation gains and losses are reflected within AOCI in the stockholders’ equity section of the consolidated balance sheets.Deferred Financing CostsThe Company capitalizes certain expenses incurred in connection with its debt and line of credit obligations and amortizes them over the term of the respective debt agreement. Theamortization expense of the deferred financing costs is included in interest expense on the consolidated statements of operations. If the Company extinguishes portions of its debtprior to the maturity date, deferred financing costs are charged to expense on a pro-rata basis and are included in loss on early extinguishment or restructuring of debt on theconsolidated statements of operations. Subsequent to our early adoption of ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (see "New AccountingPronouncements") effective on December 31, 2015, we reclassified our deferred financing costs to debt obligations and aggregate them with the original issue discount on theconsolidated balance sheets. Previously the Company's deferred financing costs had been included in other assets.Use of EstimatesThe preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptionsaffect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts ofnet revenue and expenses during the reporting period. Actual results may differ from these estimates. Significant estimates include allowance for doubtful accounts receivable, theextent of progress towards completion on contracts, contract revenue and costs on long-term contracts, valuation of certain investments and the insurance reserves, marketassumptions used in estimating the fair values of certain assets and liabilities, the calculation used in determining the fair value of HC2’s stock options required by ASC 718,Compensation - Stock Compensation ("ASC 718"), income taxes and various other contingencies.Estimates of fair value represent the Company’s best estimates developed with the assistance of independent appraisals or various valuation techniques and, where the foregoinghave not yet been completed or are not available, industry data and trends and by reference to relevant market rates and transactions. The estimates and assumptions are inherentlysubject to significant uncertainties and contingencies beyond the control of the Company. Accordingly, the Company cannot provide assurance that the estimates, assumptions, andvalues reflected in the valuations will be realized, and actual results could vary materially.Revenue and Cost RecognitionDBMGDBMG performs its services primarily under fixed-price contracts and recognizes revenues and costs from construction projects using the percentage of completion method. Underthis method, revenue is recognized based upon either the ratio of the costs incurred to date to the total estimated costs to complete the project or the ratio of tons fabricated to date tototal estimated tons. Revenue recognition begins when work has commenced. Costs include all direct material and labor costs related to contract performance, subcontractor costs,indirect labor, and fabrication plant overhead costs, which are charged to contract costs as incurred. Revenues relating to changes in the scope of a contract are recognized when theCompany and customer or general contractor have agreed on both the scope and price of changes, the work has commenced, it is probable that the costs of the changes will berecovered and that realization of revenue exceeding the costs is assured beyond a reasonable doubt. Revisions in estimates during the course of contract work are reflected in theaccounting period in which the facts requiring the revision become known. Provisions for estimated losses on uncompleted contracts are made in the period a loss on a contractbecomes determinable.Construction contracts with customers generally provide that billings are to be made monthly in amounts which are commensurate with the extent of performance under thecontracts. Contract receivables arise principally from the balance of amounts due on progress billings on jobs under construction. Retentions on contract receivables are amounts dueon progress billings, which are withheld until the completed project has been accepted by the customer.Costs and recognized earnings in excess of billings on uncompleted contracts primarily represent revenue earned under the percentage of completion method which has not beenbilled. Billings in excess of related costs and recognized earnings on uncompleted contracts represent amounts billed on contracts in excess of the revenue allowed to be recognizedunder the percentage of completion method on those contracts.F-17HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDGMSLGMSL generates revenue by providing maintenance services for subsea telecommunications cabling. GMSL also generates revenues from the design and installation of subseacables under contracts. GMSL also provides installation, maintenance and repair of fiber optic communication and power infrastructure to offshore oil and gas platforms and installsinter-array power cables for use in offshore wind farms and in the offshore wind market.Telecommunication/MaintenanceGMSL provides vessels on standby to repair fiber optic telecommunications cables in defined geographic zones, and its maintenance business is provided through contracts withconsortia of approximately 60 global telecommunications providers. Typically, GMSL enters into five to seven years contracts to provide maintenance to cable systems that arelocated in specific geographical areas. Revenue from these maintenance agreements is recognized on a straight line basis unless the pattern of costs associated with repairs indicatesotherwise.Telecommunications/Installation GMSL provides installation of cable systems including route planning, mapping, route engineering, cable laying, and trenching and burial. GMSL’s installation business is project-based with fixed price contracts typically lasting one to five months. Revenue is recognized on a time apportioned basis over the length of installation.Charter hireRentals from short-term operating leases in respect of vessels are recognized as revenue on a straight line basis over the term of the lease.Oil and GasGMSL provides installation, maintenance and repair of fiber optic communication and power infrastructure to offshore platforms. Its primary activities include providing powerfrom shore, enabling fiber-based communication between platforms and shore-based systems and installing permanent reservoir monitoring systems which allow customers tomonitor subsea seismic data. The majority of GMSL’s oil and gas business is contracted on a project-by-project basis with major energy producers or tier I engineering,procurement and construction (EPC) contractors. Revenue is recognized as time and costs are incurred.A loss is recognized immediately if the expected costs during any contract exceed expected revenues. Amounts billed in advance of revenue recognition are recorded as deferredrevenue.InsuranceUnearned premiums represent that portion of premiums written, which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurancecompanies or written through various underwriting organizations, unearned premiums are based on information received from such companies and organizations. For traditionallife, accident and health products, premiums are recognized as revenue when legally collectible from policyholders. For interest-sensitive life and universal life products, premiumsare recorded in a policyholder account, which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage andcontract expenses.ICSNet revenue is derived from carrying a mix of business, residential and carrier long-distance traffic, data and Internet traffic. For certain voice services, net revenue is earned basedon the number of minutes during a call, and is recorded upon completion of a call. Revenue for a period is calculated from information received through the Company’s networkswitches. Customized software has been designed to track the information from the switch and analyze the call detail records against stored detailed information about revenue rates.This software provides the Company the ability to do a timely and accurate analysis of revenue earned in a period. Net revenue represents gross revenue, net of allowance fordoubtful accounts receivable, service credits and service adjustments. Cost of revenue includes network costs that consist of access, transport and termination costs. The majority ofthe Company’s cost of revenue is variable, primarily based upon minutes of use, with transmission and termination costs being the most significant expense.PensionsGMSL operates various pension schemes comprising both defined benefit plans and defined contribution plans. GMSL also makes contributions on behalf of employees who aremembers of the Merchant Navy Officers Pension Fund ("MNOPF").For the defined benefit plans and the MNOPF plan, the amounts charged to income (loss) from operations are the current service costs and the gains and losses on settlements andcurtailments. These are included as part of staff costs. Past service costs are recognized immediately if the benefits have vested. If the benefits have not vested immediately, the costsare recognized over the period vesting occurs. The interest costsF-18HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDand expected return of assets are shown as a net amount and included in interest income and other income (expense). Actuarial gains and losses are recognized immediately in theconsolidated statements of operations.Defined benefit plans are funded with the assets of the plan held separately from those of GMSL, in separate trustee administered funds. Pension plan assets are measured at fairvalue and liabilities are measured on an actuarial basis using the projected unit method discounted at a rate of equivalent currency and term to the plan liabilities. The actuarialvaluations are obtained annually.For the defined contribution plans, the amount charged to income (loss) from operations in respect of pension costs is the contributions payable in the period. Differences betweencontributions payable in the period and contributions actually paid are shown as either accruals or prepayments in the consolidated balance sheets.Share-Based CompensationThe Company accounts for share-based compensation issued to employees in accordance with the provisions of ASC 718 and to non-employees pursuant to ASC 505-50, Equity-based payments to non-employees. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for using a fair-value based method. The Company records share-based compensation expense for all new and unvested stock options that are ultimately expected to vest as the requisite service isrendered. The Company issues new shares of common stock upon the exercise of stock options.The Company elected to adopt the alternative transition method for calculating the tax effects of share-based compensation. The alternative transition method includes simplifiedmethods to determine the beginning balance of the APIC pool related to the tax effects of share-based compensation and to determine the subsequent impact on the APIC pool andthe statement of cash flows of the tax effects of share-based awards that were fully vested and outstanding upon the adoption of ASC 718.The Company uses a Black-Scholes option valuation model to determine the grant date fair value of share-based compensation under ASC 718. The Black-Scholes modelincorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield. The expected term of an award is noless than the option vesting period and is based on the Company’s historical experience. Expected volatility is based upon the historical volatility of the Company’s stock price. Therisk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term similar to the option’s expected life. The Company uses a dividendyield of zero in the Black-Scholes option valuation model as it does not anticipate paying cash dividends in the foreseeable future that do not contain anti-dilution provisionsrequiring the adjustment of exercise prices and option shares. Share-based compensation is recorded net of expected forfeitures.Concentration of Credit RiskFinancial instruments that potentially subject the Company to concentration of credit risk principally consist of trade accounts receivable. The Company performs ongoing creditevaluations of its customers but generally does not require collateral to support customer receivables. The Company maintains its cash with high quality credit institutions, and itscash equivalents are in high quality securities.Income (Loss) Per Common ShareBasic income (loss) per common share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) percommon share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock and related income fromcontinuing operations, net of tax. Potential common stock, computed using the treasury stock method or the if-converted method, includes options, warrants, restricted stock,restricted stock units and convertible preferred stock.In periods when the Company generates income, the Company calculates basic Earnings Per Share ("EPS") using the two-class method, pursuant to ASC No. 260, Earnings PerShare. The two-class method is required as the shares of the Company’s preferred stock qualify as participating securities, having the right to receive dividends should dividends bedeclared on common stock. Under this method, earnings for the period are allocated to the common stock and preferred stock to the extent that each security may share in earningsas if all of the earnings for the period had been distributed. The Company does not use the two-class method in periods when it generates a loss as the holders of the preferred stockdo not participate in losses.ReclassificationCertain previous year amounts have been reclassified to conform with current year presentations, as related to the reporting of new balance sheet line items.F-19HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDAdjustmentsDuring the second quarter of 2016, the Company identified an immaterial error in its calculation of depreciation expense for the twelve months ended December 31, 2015 and 2014and the three months ended March 31, 2016 related to purchase accounting associated with the acquisition of DBMG in May 2014. This resulted in an excess depreciation expensebeing recorded in each of the periods noted. In addition, certain gains and losses on assets that were disposed of by DBMG were incorrectly recorded during the same periods as aresult of these adjustments. The net impact of these adjustments to net income would have been an increase of $0.7 million and a decrease of $0.2 million for the twelve monthsended December 31, 2015 and 2014, respectively, and an increase of $0.8 million for the year ended December 31, 2016. The Company determined to correct the cumulative effect of these adjustments in the second quarter of 2016, which resulted in a net adjustment to net income (loss) attributable tocommon and participating preferred stockholders for the year ended December 31, 2016 of $1.3 million. Accounting PronouncementsThe Company has implemented all new accounting pronouncements that are in effect and that may impact its Consolidated Financial Statements and does not believe that there areany other new accounting pronouncements that have been issued that might have a material impact on its financial condition, results of operations or liquidity.Accounting Pronouncements Early Adopted During the Fiscal YearTesting for Goodwill ImpairmentIn January 2017, the FASB issued Accounting Standards Updates ("ASU") 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for GoodwillImpairment. Topic 350, Intangibles - Goodwill and Other (Topic 350), currently requires an entity that has not elected the private company alternative for goodwill to perform atwo-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. Ifthe carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of the goodwillfor that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill isrecorded, limited to the amount of goodwill allocated to that reporting unit. To address concerns over the cost and complexity of the two-step goodwill impairment test, theamendments in this ASU remove the second step of the test. An entity will now apply a one-step quantitative test and record the amount of goodwill impairment as the excess of areporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optionalqualitative assessment of goodwill impairment. The Company elected to early adopt ASU 2017-04 effective March 31, 2017, resulting in no impact to the Consolidated FinancialStatements.New Accounting Pronouncements to be Adopted Subsequent to December 31, 2017Reporting Comprehensive IncomeIn February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from AOCI. The newguidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years and should be applied either in the period of adoption orretrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate or law in U.S. Tax Reform is recognized. Early adoption ispermitted. Current GAAP guidance requires that the effect of a change in tax laws or rates on deferred tax liabilities or assets to be included in income from continuing operations inthe reporting period that includes the enactment date, even if the related income tax effects were originally charged or credited directly to AOCI. The new guidance allows areclassification of AOCI to retained earnings for stranded tax effects resulting from U.S. Tax Reform. Also, the new guidance requires certain disclosures about stranded taxeffects. The Company is currently in the process of evaluating the impact of this guidance on our consolidated financial statements and expects minimal impact. Accounting for Measurement of Credit Losses on Financial InstrumentsIn June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidancerequires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by deducting an allowance for credit losses from the amortizedcost basis of the financial assets. For available-for-sale debt securities, the new guidance aligns the income statement recognition of credit losses with the reporting period in whichchanges occur by recording credit losses through an allowance rather than a write-down and allowing subsequent reversals in credit loss estimates to be recognized in currentincome. The measurement of expected credit losses will be based on historical experience, current conditions and reasonable and supportable forecasts. An entity must use judgmentin determining the relevant information and estimation methods that are appropriate in its circumstances. This ASU is effective for fiscal years, and interim periods within thosefiscal years, beginning after December 15, 2019. The guidance should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the firstreporting period in which the guidance is effective. For certain assets, a prospective transition approach is required. The Company expects to adopt this ASU in its ConsolidatedFinancial Statements beginning January 1, 2020 and is currently unable to quantify the impact of adopting this guidance. The ultimate impact will depend on the Company’sinvestment portfolio at the time the new standard is adopted.F-20HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDAccounting for LeasesIn February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a leaseliability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern ofexpense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Amodified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative periodpresented in the consolidated financial statements, with certain practical expedients available. The Company has started evaluating its lease arrangements to determine the impact ofthis amendment on the financial statements. The evaluation includes an extensive review of the leases, which are primarily related to our vessels and office space. Additionally, theCompany has begun tracking separate accounting records for leases entered into starting January 1, 2017 under the new guidance to facilitate future implementation. In January2018, the FASB issued ASU 2018-01, Leases (Topic 842) - Land Easement Practical Expedient for Transition to Topic 842, which provides an optional transition practicalexpedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 840. Theeffective date and transition requirements for ASU 2018-01 are the same as ASU 2016-02. Early adoption is permitted. The Company expects to adopt this and related ASUs in itsConsolidated Financial Statements beginning January 1, 2019 and is currently in the process of evaluating the impact of this guidance on its consolidated financial statements. Theultimate impact will depend on the Company’s lease portfolio at the time the new standard is adopted.Recognition and Measurement of Financial Assets and Financial LiabilitiesIn January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, as amended byASU 2018-03, Financial Instruments-Overall: Technical Corrections and Improvements, issued in February 2018 on the recognition and measurement of financial instruments.The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the instrument-specific credit risk provision. The new guidance changes the current accounting guidance related to (i) the classification and measurement of certain equity investments, (ii) thepresentation of changes in the fair value of financial liabilities measured under the fair value option that are due to instrument-specific credit risk, and (iii) certain disclosuresassociated with the fair value of financial instruments. Additionally, there will no longer be a requirement to assess equity securities for impairment since such securities will bemeasured at fair value through net income. The Company has assessed the population of financial instruments that are subject to the new guidance and has determined that the mostsignificant impact will be the requirement to report changes in fair value in net income each reporting period for all equity securities currently classified as available for sale. TheCompany utilized a modified retrospective approach to adopt the new guidance effective January 1, 2018. The expected impact related to the change in accounting for equitysecurities will be approximately $1.1 million of net unrealized investment gains, net of income tax, which will be reclassified from AOCI to retained earnings.Revenue RecognitionIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in RevenueRecognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflectsthe consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts withCustomers (Topic 606): Principal Versus Agent Considerations, which clarifies the guidance in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue fromContracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an update on identifying performance obligations and accounting for licenses ofintellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,which includes amendments for enhanced clarification of the guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Revenuefrom Contracts with Customers (Topic 606), which includes amendments of a similar nature to the items typically addressed in the technical corrections and improvements project.Lastly, in February 2017, the FASB issued ASU 2017-05, clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets to clarify thescope of ASC 610-20, Other Income - Gains and Losses from Derecognition of Nonfinancial Assets, and provide guidance on partial sales of nonfinancial assets. This ASUclarifies that the unit of account under ASU 610-20 is each distinct nonfinancial or in substance nonfinancial asset and that a financial asset that meets the definition of an "insubstance nonfinancial asset" is within the scope of ASC 610-20. This ASU eliminates rules specifically addressing sales of real estate and removes exceptions to the financial assetderecognition model. The ASUs described above are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reportingperiod.The Company adopted the new standard effective January 1, 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts notyet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We have completed ourevaluation of the standard’s impact on our revenue streams, including updating internal controls and the related qualitative disclosures regarding the potential impact of the effects ofthe accounting policies and a comparison to the Company’s current revenue recognition policies.While not material to the Company, the adoption of ASU 2014-09 will have an impact on 704Games' results of operations. As the Company is adopting ASU 2014-09 utilizing themodified retrospective approach, the Company will recognize previously deferred revenue in retained earnings on January 1, 2018, and going forward, software revenues, whichwere previously deferred, will be recognized upon sale to the customer.F-21HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDThe adoption of this standard did not have a material impact on our consolidated financial statements as of the adoption date. The Company expects to expand its qualitativedisclosures within the notes to the consolidated financial statements.Instruments with down round featureIn July 2017, the FASB issued ASU 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815), whichchanges the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financialinstruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexedto an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument(or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equityclassified financial instruments, ASU 2017-11 requires entities that present EPS in accordance with ASC Topic 260 to recognize the effect of the down round feature when it istriggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. For the Company, ASU 2017-11 is effective for fiscalyears, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company iscurrently evaluating the implementation date and the impact of this amendment on its financial statements.3. Business CombinationsConstruction SegmentOn November 1, 2017, DBMG consummated the acquisition of 100% of shares of North American operations of Candraft VSI ("Candraft"). Candraft is a premier bridgeinfrastructure detailing and modeling company. On December 1, 2017, DBMG consummated the acquisition of the assets from Mountain States Steel, Inc. ("MSS") includinginventory, machinery & equipment, real estate, employees and certain intangible assets. MSS is a premier custom structural steel fabricator for constructions projects includingbridges, stadiums and power plants. The aggregate fair value of the consideration paid in connection with the acquisitions of Candraft and MSS was $17.8 million, including $16.3million in cash. Both transactions were accounted for as business acquisitions.On October 13, 2016, DBMG acquired the detailing and BIM management business of PDC Global Pty Ltd. ("PDC"). The new businesses provide steel detailing, BIM modellingand BIM management services for industrial and commercial construction projects in Australia and North America. On November 1, 2016, DBMG acquired BDS VirCon("BDS"). BDS provides steel detailing, rebar detailing and BIM modelling services for industrial and commercial projects in Australia, New Zealand, North America and Europe.The aggregate fair value of the consideration paid in connection with the acquisitions of PDC and BDS was $25.5 million, including $21.4 million in cash. Both transactions wereaccounted for as business acquisitions.Fair value of consideration transferred and its allocation among the identified assets acquired, liabilities assumed, intangibles and residual goodwill are summarized as follows (inthousands): December 31,Purchase price allocation 2017 2016Cash and cash equivalents $— $621Accounts receivable 448 5,558Property, plant and equipment 12,730 8,043Goodwill 2,290 11,827Intangibles 1,608 3,955Other assets 909 2,895Total assets acquired 17,985 32,899Accounts payable and other current liabilities (28) (5,924)Deferred tax liability — (169)Other liabilities (167) (1,302)Total liabilities assumed (195) (7,395)Total net assets acquired $17,790 $25,504Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities.Among the factors that contributed to goodwill was approximately $1.5 million and $2.9 million assigned to the assembled and trained workforce for 2017 and 2016, respectively.Goodwill is not amortized and is not deductible for tax purposes.Acquisition costs incurred by DMBG in connection with the 2017 and 2016 acquisitions were approximately $3.3 million and $2.3 million, respectively, which were included inselling, general and administrative expenses. The acquisition costs were primarily related to legal, accounting and valuation services.F-22HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDResults of acquired businesses were included in our Consolidated Statements of Operations since their respective acquisition dates. Pro forma results of operations have not beenpresented because they are not material to our consolidated results of operations.Marine Services SegmentOn November 30, 2017 GMSL acquired 5 assets and 19 employees and contractors based in Aberdeen, Scotland from Fugro N.V. The fair value of the purchase consideration was$87.2 million and comprised of 23.6% share in GMH LLC and a short-term loan of $7.5 million to Fugro N.V. The decision to acquire was made to support the overall groupstrategy of growing the Power and Oil & Gas businesses. The transaction was accounted for as business acquisition.The limited liability company agreement of GMH was amended and restated upon consummation of the Acquisition to reflect such issuance and to provide the Fugro Member withcertain rights, including the right to designate two out of the up to seven members of its board of directors, the right to approve certain actions outside the ordinary course ofbusiness, certain "tag-along" rights to participate in sales of membership units by other members and, after five years and subject to the Fugro Member first offering its membershipunits to the other members at a price based upon independent valuations, the right to cause GMHL to be put up for sale in a process led by an investment banking firm.During the year ended December 31, 2016, GMSL acquired a 60% controlling interest in CWind Limited ("CWind") with an obligation to purchase the remaining 40% in equalamounts on September 30, 2016 and September 30, 2017 (based on agreed financial targets). The total consideration transferred for these acquisitions was $7.8 million. OnNovember 1, 2016, GMSL completed the renegotiation of the deferred purchase obligation to purchase the outstanding 40% minority interest of CWind and purchased theremaining 40% on that date. Transaction was accounted for as business acquisition.Fair value of consideration transferred and its allocation among the identified assets acquired, liabilities assumed, intangibles, and residual goodwill are summarized as follows (inthousands): December 31,Purchase price allocation 2017 2016Cash and cash equivalents $2,212 $1,188Accounts receivable — 6,397Property, plant and equipment 73,320 28,273Goodwill 11,783 1,334Intangibles — 690Other assets 596 2,542Total assets acquired 87,911 40,424Accounts payable and other current liabilities (676) (10,891)Deferred tax liability — (123)Debt obligations — (20,813)Noncontrolling interest — (815)Total liabilities assumed (676) (32,642)Total net assets acquired $87,235 $7,782Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities.Goodwill is not amortized and is not deductible for tax purposes.Acquisition costs incurred by GMSL in connection with the 2017 and 2016 acquisitions were approximately $1.8 million and $0.3 million, respectively, which were included inselling, general and administrative expenses. The acquisition costs were primarily related to legal, accounting and valuation services.Results of acquired businesses were included in our Consolidated Statements of Operations since their respective acquisition dates. Pro forma results of operations are alsopresented because the Fugro acquisition was material to our consolidated results of operations.Energy SegmentFor the year ended December 31, 2016, ANG completed four acquisitions comprised of an aggregate of twenty-one fueling stations. The total fair value of the considerationtransferred by ANG in connection with the acquisitions was $42.1 million, comprised of $39.2 million in cash and a $2.9 million 4.25% seller note, due in 2022. See Note 13. DebtObligations for further details. Two of the transactions were accounted for as asset acquisitions because substantially all of the fair value of the gross assets acquired wereconcentrated in a group of similar identifiable assets related to acquired stations.F-23HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDFor the transactions accounted for as a business combination, the fair value of consideration transferred was allocated among the identified assets acquired, liabilities assumed,intangibles and residual goodwill. For the two transactions accounted for as asset acquisitions the preliminary fair value of consideration transferred was preliminarily allocatedbased on the relative fair value (in thousands):Purchase price allocation December 31, 2016Accounts receivable $1,303Property, plant and equipment, net 40,758Goodwill 748Intangibles 4,984Other assets 79Total assets acquired 47,872Accounts payable and other current liabilities (897)Deferred tax liability (4,578)Total liabilities assumed (5,475)Bargain purchase gain (340)Total net assets acquired $42,057Approximately $5.0 million of the fair value of consideration transferred has been provisionally assigned to customer contracts with an estimated useful life ranging between fourand fifteen years. The multi-period excess earnings method was used to assign fair value to the acquired customer contracts.Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities.Goodwill is not amortized and is not deductible for tax purposes.Results of operations from the acquired stations since acquisition dates have been included in our Consolidated Statements of Operations. Pro forma results of operations forANG's acquisitions have not been presented because they are not material to our consolidated results of operations.Other AcquisitionsDuring the year ended December 31, 2017, Broadcasting and its subsidiaries completed a series of transactions for a total consideration of $91.2 million (in thousands): DTV Mako Azteca Other TotalCash $13,467 $18,192 $— $12,104 $43,763Accounts payable — — 33,000 — 33,000Equity — 4,994 — — 4,994Debt obligations 2,405 5,250 — — 7,655Fair value of previously held interest 1,780 — — — 1,780Fair value of consideration $17,652 $28,436 $33,000 $12,104 $91,192DTVIn November 2017, we closed a series of transactions that resulted in HC2 and its subsidiaries owning over 50% of the shares of common stock of DTV for a total consideration of$17.7 million. DTV is an aggregator and operator of Low Power Television ("LPTV") licenses and stations across the United States. DTV currently owns and operates 52 LPTVstations in more than 40 cities. DTV’s distribution platform currently provides carriage for more than 30 television broadcast networks. DTV maintains a focus on technologicalinnovation. DTV exclusively adopted Internet Protocol (IP) as a transport to provide Broadcast-as-a-Service, making it the only adopter of all IP-transport to the home. Thetransaction was accounted for as business acquisition.MakoIn November 2017, a wholly-owned subsidiary of Broadcasting, closed on a transaction with Mako Communications, LLC and certain of its affiliates ("Mako") to purchase all theassets in connection with Mako’s ownership and operation of LPTV stations that resulted in HC2 acquiring 38 operating stations in 28 cities, for a total consideration of $28.4million. Mako is a family owned and operated business headquartered in Corpus Christi, Texas, that has been acquiring, building, and maintaining Class A and LPTV stations allacross the United States since 2000. The transaction was accounted for as business acquisition.F-24HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDAztecaIn November 2017, a wholly-owned subsidiary of Broadcasting acquired Azteca America, a Spanish-language broadcast network, from affiliates of TV Azteca, S.A.B. de C.V.("Azteca") (AZTECACPO.MX) (Latibex:XTZA). As part of the bifurcated transaction structure, a wholly-owned subsidiary of Broadcasting signed a definitive acquisitionagreement with Northstar Media, LLC ("Northstar"), a licensee of numerous broadcast television licenses in the United States. Under the agreement with Northstar, a wholly-owned subsidiary of Broadcasting will acquire Northstar’s broadcast television stations, which carry Azteca America programming. The total consideration accrued by theCompany as of December 31, 2017 pending the close of the Northstar acquisition was $33.0 million. In February 2018, a wholly-owned subsidiary of Broadcasting closed on theacquisition of Northstar's broadcast television stations and funded the $33.0 million consideration balance. The transaction was accounted for as business acquisition.OtherIn November and December of 2017, a wholly-owned subsidiary of Broadcasting closed three additional acquisitions for a total consideration of $12.1 million. All threetransactions were accounted as asset acquisitions.During the year ended December 31, 2016, we completed the acquisition of additional interests in and thereby control of NerVve and BeneVir. The total consideration transferredfor these acquisitions was $7.2 million, including $1.4 million in cash. Both transactions were accounted for as business acquisitions. The following table summarizes the allocation of the purchase price to the fair value of identifiable assets acquired, liabilities assumed, intangibles and residual goodwill (inthousands): December 31,Purchase price allocation 2017 2016Cash and cash equivalents $61 $1,775Restricted cash — 3Accounts receivable 9,134 3Property, plant and equipment 12,097 1,623Goodwill 20,678 4,207Intangibles 81,016 6,392Other assets 1,290 37Total assets acquired 124,276 14,040Accounts payable and other current liabilities (8,036) (289)Deferred tax liability (6,072) (2,696)Debt obligations (4,480) —Other liabilities — (3)Total liabilities assumed (18,588) (2,988)Enterprise value 105,688 11,052Less fair value of noncontrolling interest 14,496 3,889Total net assets acquired $91,192 $7,163Debt obligations includes $2.0 million note with CGI, which is eliminated on the Consolidated Balance Sheet.The following table summarizes acquired intangible assets (in thousands): December 31, 2017 2016FCC licenses $76,490 $—Developed technology — 6,392Trade name 208 —Other 4,318 —Total intangibles $81,016 $6,392Goodwill was determined based on the residual differences between fair value of consideration transferred and the value assigned to tangible and intangible assets and liabilities.Goodwill is not amortized and is not deductible for tax purposes.Results of operations from other acquisitions since respective acquisition dates have been included in our Consolidated Statements of Operations.F-25HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDPro Forma Adjusted SummaryDisclosure of proforma information under ASC 805 related to the Azteca acquisition has not been provided as it would be impracticable to do so. After making every reasonableeffort to do so, the Company is unable to obtain reliable historical GAAP financial statements for Azteca. Amounts would require estimates so significant as to render the disclosureirrelevant.The following schedule presents unaudited consolidated pro forma results of operations data as if the acquisition of Fugro had occurred on January 1, 2016. This information doesnot purport to be indicative of the actual results that would have occurred if the acquisitions had actually been completed on the date indicated, nor is it necessarily indicative of thefuture operating results or the financial position of the combined company (in thousands): Years Ended December 31, 2017 2016Net revenue $1,674,688 $1,596,275Net income (loss) from continuing operations $(41,098) $(69,230)Net income (loss) attributable to HC2 Holdings, Inc. $(48,256) $(118,235)4. InvestmentsFixed Maturity and Equity Securities Available-for-SaleThe following tables provide information relating to investments in fixed maturity and equity securities (in thousands):December 31, 2017 Amortized Cost Unrealized Gains Unrealized Losses FairValueFixed maturity securities U.S. Government and government agencies $15,283 $470 $(31) $15,722States, municipalities and political subdivisions 377,549 18,953 (1,052) 395,450Foreign government 6,331 — (333) 5,998Residential mortgage-backed securities 101,974 4,185 (1,264) 104,895Commercial mortgage-backed securities 30,152 269 (16) 30,405Asset-backed securities 145,479 2,610 (163) 147,926Corporate and other 589,803 51,891 (1,464) 640,230Total fixed maturity securities $1,266,571 $78,378 $(4,323) $1,340,626Equity securities Common stocks $4,938 $116 $(126) $4,928Perpetual preferred stocks 40,902 1,735 (65) 42,572Total equity securities $45,840 $1,851 $(191) $47,500December 31, 2016 Amortized Cost Unrealized Gains Unrealized Losses FairValueFixed maturity securities U.S. Government and government agencies $15,910 $135 $(95) $15,950States, municipalities and political subdivisions 374,527 4,408 (3,858) 375,077Foreign government 6,380 — (402) 5,978Residential mortgage-backed securities 136,126 2,634 (564) 138,196Commercial mortgage-backed securities 48,715 427 (89) 49,053Asset-backed securities 76,303 1,934 (572) 77,665Corporate and other 600,458 23,635 (7,054) 617,039Total fixed maturity securities $1,258,419 $33,173 $(12,634) $1,278,958Equity securities Common stocks $16,236 $— $(1,371) $14,865Perpetual preferred stocks 37,041 191 (578) 36,654Total equity securities $53,277 $191 $(1,949) $51,519The Company has investments in mortgage-backed securities ("MBS") that contain embedded derivatives (primarily interest-only MBS) that do not qualify for hedge accounting.The Company recorded the change in the fair value of these securities within Net realized gains (losses) on investments. These investments had a fair value of $12.3 million, $15.2million, and $21.0 million as of December 31, 2017, 2016, and 2015 respectively. The change in fair value related to these securities resulted in a gain of $0.9 million, a loss of $1.2million, and a loss of $0.3 million for the years ended December 31, 2017, 2016, and 2015 respectively.F-26HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDMaturities of Fixed Maturity Securities Available-for-SaleThe amortized cost and fair value of fixed maturity securities available-for-sale as of December 31, 2017 are shown by contractual maturity in the table below (in thousands). Actualmaturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset andmortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date: Amortized Cost Fair ValueCorporate, Municipal, U.S. Government and Other securities Due in one year or less $19,306 $19,017Due after one year through five years 103,803 106,178Due after five years through ten years 153,927 159,615Due after ten years 711,930 772,590Subtotal 988,966 1,057,400Mortgage-backed securities 132,126 135,300Asset-backed securities 145,479 147,926Total $1,266,571 $1,340,626Corporate and Other Fixed Maturity SecuritiesThe tables below show the major industry types of the Company’s corporate and other fixed maturity securities (in thousands): December 31, 2017 December 31, 2016 Amortized Cost FairValue % ofTotal Amortized Cost Fair Value % ofTotalFinance, insurance, and real estate $191,234 $203,735 31.8% $214,911 $211,834 34.3%Transportation, communication and other services 186,114 201,802 31.5% 180,647 189,163 30.7%Manufacturing 100,942 111,391 17.4% 112,644 118,440 19.2%Other 111,513 123,302 19.3% 92,256 97,602 15.8%Total $589,803 $640,230 100.0% $600,458 $617,039 100.0%Other-Than-Temporary Impairments - Fixed Maturity and Equity SecuritiesA portion of certain other-than-temporary impairment ("OTTI") losses on fixed maturity securities is recognized in AOCI. For these securities the net amount, which is recognizedin the Consolidated Statements of Operations in the below line items, represents the difference between the amortized cost of the security and the net present value of its projectedfuture cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost isrecognized in AOCI. The Company recorded the following (in thousands): Years Ended December 31, 2017 2016 2015Net realized gains (losses) on investments $— $163 $—Other expenses, net 6,550 2,451 —Total Other-Than-Temporary Impairments $6,550 $2,614 $—Unrealized Losses for Fixed Maturity and Equity Securities Available-for-SaleThe following table presents the total unrealized losses for the 126, 269, and 528 fixed maturity and equity securities held by the Company as of December 31, 2017, 2016, and2015, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (in thousands): December 31, 2017 December 31, 2016 December 31, 2015 UnrealizedLosses % ofTotal UnrealizedLosses % ofTotal UnrealizedLosses % ofTotalFixed maturity and equity securities Less than 20% $(4,230) 93.7% $(10,069) 69.0% $(5,667) 52.2%20% or more for less than six months (174) 3.9% (482) 3.3% — —%20% or more for six months or greater (110) 2.4% (4,032) 27.7% (5,198) 47.8%Total $(4,514) 100.0% $(14,583) 100.0% $(10,865) 100.0%F-27HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDThe determination of whether unrealized losses are "other-than-temporary" requires judgment based on subjective as well as objective factors. Factors considered and resourcesused by management include (i) whether the unrealized loss is credit-driven or a result of changes in market interest rates, (ii) the extent to which fair value is less than cost basis,(iii) cash flow projections received from independent sources, (iv) historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases, (v) near-term prospects for improvement in the issuer and/or its industry, (vi) third party research and communications with industry specialists, (vii) financial models and forecasts, (viii)the continuity of dividend payments, maintenance of investment grade ratings and hybrid nature of certain investments, (ix) discussions with issuer management, and (x) ability andintent to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value.The Company analyzes its MBS for OTTI each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of theMBS market, cash flow projections (which reflect loan-to-collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cashflows inherent in security ratings and analysis of historical payment data.The Company believes it will recover its cost basis in the non-impaired securities with unrealized losses and that the Company has the ability to hold the securities until they recoverin value. The Company neither intends to sell nor does it expect to be required to sell the securities with unrealized losses as of December 31, 2017. However, unforeseen facts andcircumstances may cause the Company to sell fixed maturity and equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality andliquidity guidelines.The following tables present the estimated fair values and gross unrealized losses for the 126, 269, and 528 fixed maturity and equity securities held by the Company that haveestimated fair values below amortized cost as of each of December 31, 2017, 2016, and 2015, respectively. The Company does not have any OTTI losses reported in AOCI. Theseinvestments are presented by investment category and the length of time the related fair value has remained below amortized cost (in thousands):December 31, 2017 Less than 12 months 12 months of greater Total FairValue UnrealizedLosses Fair Value UnrealizedLosses Fair Value UnrealizedLossesFixed maturity securities U.S. Government and government agencies $5,044 $(17) $2,199 $(14) $7,243 $(31)States, municipalities and political subdivisions 32,939 (834) 10,757 (218) 43,696 (1,052)Foreign government — — 5,999 (333) 5,999 (333)Residential mortgage-backed securities 5,139 (546) 16,150 (718) 21,289 (1,264)Commercial mortgage-backed securities 5,053 (12) 1,003 (4) 6,056 (16)Asset-backed securities 19,771 (64) 3,963 (99) 23,734 (163)Corporate and other 18,478 (824) 19,433 (640) 37,911 (1,464)Total fixed maturity securities $86,424 $(2,297) $59,504 $(2,026) $145,928 $(4,323)Equity securities Common stocks $1,057 $(126) $— $— $1,057 $(126)Perpetual preferred stocks 1,614 (13) 1,048 (52) 2,662 (65)Total equity securities $2,671 $(139) $1,048 $(52) $3,719 $(191)December 31, 2016 Less than 12 months 12 months of greater Total Fair Value UnrealizedLosses Fair Value UnrealizedLosses Fair Value UnrealizedLossesFixed maturity securities U.S. Government and government agencies $4,392 $(95) $— $— $4,392 $(95)States, municipalities and political subdivisions 207,740 (3,858) — — 207,740 (3,858)Foreign government 5,978 (402) — — 5,978 (402)Residential mortgage-backed securities 54,385 (564) — — 54,385 (564)Commercial mortgage-backed securities 13,159 (89) — — 13,159 (89)Asset-backed securities 12,443 (572) — — 12,443 (572)Corporate and other 147,653 (3,022) 3,579 (4,032) 151,232 (7,054)Total fixed maturity securities $445,750 $(8,602) $3,579 $(4,032) $449,329 $(12,634)Equity securities Common stocks $14,585 $(1,371) $— $— $14,585 $(1,371)Perpetual preferred stocks 20,464 (578) — — 20,464 (578)Total equity securities $35,049 $(1,949) $— $— $35,049 $(1,949)F-28HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDDecember 31, 2015 Less than 12 months 12 months of greater Total Fair Value UnrealizedLosses Fair Value Unrealized Losses Fair Value UnrealizedLossesFixed maturity securities U.S. Government and government agencies $15,409 $(49) $— $— $15,409 $(49)States, municipalities and political subdivisions 294,105 (1,227) — — 294,105 (1,227)Residential mortgage-backed securities 77,695 (588) — — 77,695 (588)Commercial mortgage-backed securities 44,618 (96) — — 44,618 (96)Asset-backed securities 22,550 (51) — — 22,550 (51)Corporate and other 466,293 (7,537) — — 466,293 (7,537)Total fixed maturity securities $920,670$(9,548)$—$—$920,670$(9,548)Equity securities Common stocks $13,657 $(1,311) $— $— $13,657 $(1,311)Perpetual preferred stocks 7,378 (6) — — 7,378 (6)Total equity securities $21,035$(1,317)$—$—$21,035$(1,317)As of December 31, 2017, investment grade fixed maturity securities (as determined by nationally recognized rating agencies) represented approximately 7.3% of the grossunrealized loss and 10.4% of the fair value. As of December 31, 2016, investment grade fixed maturity securities represented approximately 54.5% of the gross unrealized loss and83.0% of the fair value. As of December 31, 2015, investment grade fixed maturity securities represented approximately 33.2% of the gross unrealized loss and 88.3% of the fairvalue.Certain risks are inherent in connection with fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factorsand risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.Other Invested AssetsCarrying values of other invested assets accounted for under cost and equity method are as follows (in thousands): December 31, 2017 December 31, 2016 Cost Method Equity Method Fair Value Cost Method Equity Method FairValueCommon Equity $— $1,484 $— $138 $1,047 $—Preferred Equity 2,484 14,197 — 2,484 9,971 —Derivatives 422 — 260 3,097 — 3,813Limited Partnerships — — — — 1,116 —Joint Ventures — 66,572 — — 40,697 —Total $2,906 $82,253 $260 $5,719 $52,831 $3,813Summarized financial information for equity method investees not consolidated for the years ended December 31, 2017, 2016, and 2015 is as follows (information for two of theinvestees is reported on a one month lag, in thousands): Years Ended December 31, 2017 2016 2015Net revenue $481,528 $558,180 $502,122Gross profit $122,103 $164,853 $103,236Income (loss) from continuing operations $7,597 $51,690 $(18,743)Net income (loss) $(17,530) $(11,123) $(36,873) Current assets $357,329 $285,466 $256,372Noncurrent assets $188,319 $278,766 $219,434Current liabilities $227,229 $184,068 $169,002Noncurrent liabilities $161,014 $131,587 $132,934F-29HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDNet Investment IncomeThe major sources of net investment income were as follows (in thousands): Years Ended December 31, 2017 2016 2015Fixed maturity securities, available-for-sale at fair value $59,403 $54,685 $964Equity securities, available-for-sale at fair value 2,620 2,263 93Mortgage loans 2,474 491 —Policy loans 1,150 1,173 18Other invested assets 628 321 —Gross investment income 66,275 58,933 1,075External investment expense (205) (901) (44)Net investment income $66,070 $58,032 $1,031Net Realized and Unrealized Gains (Losses) on InvestmentsThe major sources of net realized gains (losses) on investments were as follows (in thousands): Years Ended December 31, 2017 2016 2015Realized gains on fixed maturity securities $4,393 $4,868 $256Realized losses on fixed maturity securities (1,045) (2,367) —Realized gains on equity securities (566) 4,525 —Realized losses on equity securities 981 (352) —Net unrealized and realized gains (losses) on derivative instruments 1,220 (1,492) —Impairment loss — (163) —Net realized gains (losses) $4,983 $5,019 $2565. Fair Value of Financial InstrumentsAssets by Hierarchy LevelAssets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):December 31, 2017 Fair Value Measurement Using: Total Level 1 Level 2 Level 3Assets Fixed maturity securities U.S. Government and government agencies $15,722 $5,094 $10,628 $—States, municipalities and political subdivisions 395,450 — 389,439 6,011Foreign government 5,998 — 5,998 —Residential mortgage-backed securities 104,895 — 90,283 14,612Commercial mortgage-backed securities 30,405 — 18,248 12,157Asset-backed securities 147,926 — 14,184 133,742Corporate and other 640,230 2,098 611,844 26,288Total fixed maturity securities 1,340,626 7,192 1,140,624 192,810Equity securities Common stocks 4,928 4,771 — 157Perpetual preferred stocks 42,572 7,665 28,470 6,437Total equity securities 47,500 12,436 28,470 6,594Derivatives 260 — — 260Total assets accounted for at fair value $1,388,386 $19,628 $1,169,094 $199,664Liabilities Warrant liability $3,826 $— $— $3,826Other 944 — — 944Total liabilities accounted for at fair value $4,770 $— $— $4,770F-30HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDDecember 31, 2016 Fair Value Measurement Using: Total Level 1 Level 2 Level 3Assets Fixed maturity securities U.S. Government and government agencies $15,950 $5,140 $10,778 $32States, municipalities and political subdivisions 375,077 — 369,387 5,690Foreign government 5,978 — 5,978 —Residential mortgage-backed securities 138,196 — 82,242 55,954Commercial mortgage-backed securities 49,053 — 6,035 43,018Asset-backed securities 77,665 — 4,448 73,217Corporate and other 617,039 2,020 594,653 20,366Total fixed maturity securities 1,278,958 7,160 1,073,521 198,277Equity securities Common stocks 14,865 10,290 — 4,575Perpetual preferred stocks 36,654 9,312 27,342 —Total equity securities 51,519 19,602 27,342 4,575Derivatives 3,813 — — 3,813Total assets accounted for at fair value $1,334,290 $26,762 $1,100,863 $206,665Liabilities Warrant liability $4,058 $— $— $4,058Contingent liability 11,411 — — 11,411Other 816 — — 816Total liabilities accounted for at fair value $16,285 $— $— $16,285The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certainfinancial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period inwhich the changes occur. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2017. The Company transferred $1.1 million of corporate andother bonds and $0.5 million of preferred stock from Level 1 into Level 2 during the year ended December 31, 2016, reflecting the level of market activity in these instruments.Availability of secondary market activity and consistency of pricing from third-party sources impacts the Company's ability to classify securities as Level 2 or Level 3. TheCompany’s assessment resulted in a net transfer out of Level 3 of $62.9 million and into of Level 3 of $3.3 million, primarily related to structured securities, during the years endedDecember 31, 2017 and 2016, respectively.The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring basis are summarized below:Fixed Maturity Securities. The fair values of the Company’s publicly-traded fixed maturity securities are generally based on prices obtained from independent pricing services.Prices from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. Insome cases, the Company receives prices from multiple pricing services for each security, but ultimately uses the price from the pricing service highest in the vendor hierarchy basedon the respective asset type. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, asthey are primarily based on observable pricing for similar assets and/or other market observable inputs.If the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity, non-binding broker quotes are used,if available. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information from the pricing serviceor broker with an internally developed valuation, however, this occurs infrequently. Internally developed valuations or non-binding broker quotes are also used to determine fairvalue in circumstances where vendor pricing is not available. These estimates may use significant unobservable inputs, which reflect the Company’s assumptions about the inputsthat market participants would use in pricing the asset. Pricing service overrides, internally developed valuations and non-binding broker quotes are generally based on significantunobservable inputs and are reflected as Level 3 in the valuation hierarchy.The inputs used in the valuation of corporate and government securities include, but are not limited to, standard market observable inputs which are derived from, or corroboratedby, market observable data including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues thatincorporate the credit quality and industry sector of the issuer.F-31HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDFor structured securities, valuation is based primarily on matrix pricing or other similar techniques using standard market inputs including spreads for actively traded securities,spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, rating, weighted average coupon, weighted average maturity, averagedelinquency rates, geographic region, debt-service coverage ratios and issuance-specific information including, but not limited to: collateral type, payment terms of the underlyingassets, payment priority within the tranche, structure of the security, deal performance and vintage of loans.When observable inputs are not available, the market standard valuation techniques for determining the estimated fair value of certain types of securities that trade infrequently, andtherefore have little or no price transparency, rely on inputs that are significant to the estimated fair value but that are not observable in the market or cannot be derived principallyfrom or corroborated by observable market data. These unobservable inputs are sometimes based in large part on management judgment or estimation, and cannot be supported byreference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent withwhat other market participants would use when pricing such securities.The fair values of private placement securities are primarily determined using a discounted cash flow model. In certain cases, these models primarily use observable inputs with adiscount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account,among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflectedwithin Level 3. For certain private fixed maturity securities, the discounted cash flow model may also incorporate significant unobservable inputs, which reflect the Company’s ownassumptions about the inputs market participants would use in pricing the security. To the extent management determines that such unobservable inputs are not significant to theprice of a security, a Level 2 classification is made. Otherwise, a Level 3 classification is used.Equity Securities. The balance consists principally of common and preferred stock of publicly and privately traded companies. The fair values of publicly traded equity securities areprimarily based on quoted market prices in active markets and are classified within Level 1 in the fair value hierarchy. The fair values of preferred equity securities, for which quotedmarket prices are not readily available, are based on prices obtained from independent pricing services and these securities are generally classified within Level 2 in the fair valuehierarchy. The fair value of common stock of privately held companies was determined using unobservable market inputs, including volatility and underlying security values andwas classified as Level 3.Cash Equivalents. The balance consists of money market instruments, which are generally valued using unadjusted quoted prices in active markets that are accessible for identicalassets and are primarily classified as Level 1. Various time deposits carried as cash equivalents are not measured at estimated fair value and, therefore, are excluded from the tablespresented.Derivatives. The balance consists of common stock purchase warrants and call options. The fair values of the call options are primarily based on quoted market prices in activemarkets and are classified within Level 1 in the fair value hierarchy. Depending on the terms, the common stock warrants were valued using either Black-Scholes analysis or MonteCarlo Simulation. Fair value was determined using unobservable market inputs, including volatility and underlying security values. As such, the common stock purchase warrantswere classified as Level 3.Warrant Liability. The balance represents warrants issued in connection with the acquisition of the Insurance business and recorded within other liabilities on the ConsolidatedBalance Sheets. Fair value was determined using the Monte Carlo Simulation because the adjustments for exercise price and warrant shares represent path dependent features; theexercise price from comparable periods needs to be known to determine whether a subsequent sale of shares occurs at a price that is lower than the then current exercise price. Theanalysis entails a Geometric Brownian Motion based simulation of 100 unique price paths of the Company's stock for each combination of assumptions. Fair value was determinedusing unobservable market inputs, including volatility, and a range of assumptions regarding a possibility of an equity capital raise each year and the expected size of future equitycapital raises. The present value of a given simulated scenario was based on intrinsic value at expiration discounted to the valuation date, taking into account any adjustments to theexercise price or warrant shares issuable. The average present value across all 100 independent price paths represents the estimate of fair value for each combination of assumptions.Therefore, the warrant liability was classified as Level 3.Contingent Liability. The balance represents the present value of the estimated obligation pursuant to the acquisition of the Insurance business. Fair value was determined usingunobservable market inputs, including probability of rate increases as approved by state regulators. The liability was classified as Level 3.F-32HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDLevel 3 Measurements and TransfersThe following tables summarize changes to the Company’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for the years endedDecember 31, 2017 and 2016, respectively (in thousands): Total realized/unrealized gains(losses) included in Balance at December 31,2016Net earnings (loss)Other comp. income (loss)Purchasesand issuancesSales and settlementsTransfer to Level 3Transfer outof Level 3 Balance at December31, 2017Assets Fixed maturity securities U.S. Government and government agencies $32 $— $— $— $(17) $— $(15) $—States, municipalities and political subdivisions 5,690 (113) (143) 573 — 1,636 (1,632) 6,011Residential mortgage-backed securities 55,954 (370) 1,169 3,465 (8,964) 3,203 (39,845) 14,612Commercial mortgage-backed securities 43,018 (314) 345 — (10,072) 8,620 (29,440) 12,157Asset-backed securities 73,217 1,151 1,495 149,163 (80,615) 1,065 (11,734) 133,742Corporate and other 20,366 (3,361) 3,776 12,741 (7,914) 10,606 (9,926) 26,288Total fixed maturity securities 198,277 (3,007) 6,642 165,942 (107,582) 25,130 (92,592) 192,810Equity securities Common stocks 4,575 (3,151) 232 — — 281 (1,780) 157Perpetual preferred stocks — — 336 — — 6,101 — 6,437Total equity securities 4,575 (3,151) 568 — — 6,382 (1,780) 6,594Derivatives 3,813 (1,588) — — (1,965) — — 260Total financial assets $206,665 $(7,746) $7,210 $165,942 $(109,547) $31,512 $(94,372) $199,664 Total realized/unrealized(gains) losses included in Balance atDecember 31,2016Net(earnings) lossOther comp. (income) lossPurchases and issuancesSales and settlementsTransfer to Level 3Transfer outof Level 3 Balance atDecember 31,2017Liabilities Warrant liability $4,058 $(232) $— $— $— $— $— $3,826Contingent liability 11,411 (11,411) — — — — — —Other 816 128 — — — — — 944Total financial liabilities $16,285 $(11,515) $— $— $— $— $— $4,770 Total realized/unrealized gains(losses) included in Balance atDecember 31,2015Net earnings (loss)Other comp. income (loss)Purchasesand issuancesSales and settlementsTransfer to Level 3Transfer outof Level 3Balance at December 31,2016Assets Fixed maturity securities U.S. Government and government agencies $73 $— $2 $— $(43) $— $— $32States, municipalities and political subdivisions 5,659 401 (370) — — — — 5,690Residential mortgage-backed securities 79,019 (1,928) 1,374 — (14,656) 16,878 (24,733) 55,954Commercial mortgage-backed securities 60,525 (958) 275 — (21,548) 12,515 (7,791) 43,018Asset-backed securities 27,653 963 1,413 59,379 (23,457) 14,426 (7,160) 73,217Corporate and other 13,944 16 (1,610) 13,369 (4,475) 2,091 (2,969) 20,366Total fixed maturity securities 186,873 (1,506)1,08472,748(64,179)45,910(42,653)198,277Equity securities —Common stocks 4,932 — (357) — — — — 4,575Total equity securities 4,932 —(357)————4,575Derivatives 4,211 (580) — 230 (48) — — 3,813Contingent asset — (156) — 2,992 (2,836) — — —Total financial assets $196,016 $(2,242)$727$75,970$(67,063)$45,910$(42,653)$206,665F-33HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED Total realized/unrealized(gains) losses included in Balance atDecember 31,2015Net(earnings)lossOther comp.(income) lossPurchases andissuancesSales andsettlementsTransfer toLevel 3Transfer out ofLevel 3Balance atDecember 31,2016Liabilities Warrant liability $4,332 $(274) $— $— $— $— $— $4,058Contingent liability — 8,773 — 2,995 (357) — — 11,411Other — (674) — 1,490 — — — 816Total financial liabilities $4,332 $7,825 $— $4,485 $(357) $— $— $16,285Internally developed fair values of Level 3 assets represent less than 1% of the Company’s total assets. Any justifiable changes in unobservable inputs used to determine internallydeveloped fair values would not have a material impact on the Company’s financial position.Fair Value of Financial Instruments Not Measured at Fair Value The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments, which were not measured at fair value on a recurring basis. Thetable excludes carrying amounts for cash, accounts receivable, costs and recognized earnings in excess of billings, accounts payable, accrued expenses, billings in excess of costsand recognized earnings, and other current assets and liabilities approximate fair value due to relatively short periods to maturity (in thousands):December 31, 2017 Fair Value Measurement Using: Carrying Value Estimated FairValue Level 1 Level 2 Level 3Assets Mortgage loans $52,109 $52,110 $— $— $52,110Policy loans 17,944 17,944 — 17,944 —Other invested assets 2,906 3,757 — — 3,757Total assets not accounted for at fair value $72,959 $73,811 $— $17,944 $55,867Liabilities Annuity benefits accumulated (1) $243,156 $240,361 $— $— $240,361Debt obligations (2) 544,211 552,413 — 552,413 —Total liabilities not accounted for at fair value $787,367 $792,774 $— $552,413 $240,361December 31, 2016 Fair Value Measurement Using: Carrying Value Estimated FairValue Level 1 Level 2 Level 3Assets Mortgage loans $16,831 $16,832 $— $— $16,832Policy loans 18,247 18,247 — 18,247 —Other invested assets 5,719 4,597 — — 4,597Total assets not accounted for at fair value $40,797 $39,676 $— $18,247 $21,429Liabilities Annuity benefits accumulated (1) $251,270 $249,372 $— $— $249,372Debt obligations (2) 378,780 376,081 — 376,081 —Total liabilities not accounted for at fair value $630,050 $625,453 $— $376,081 $249,372(1) Excludes life contingent annuities in the payout phase.(2) Excludes certain lease obligations accounted for under ASC 840, Leases.Mortgage Loans on Real Estate. The fair value of mortgage loans on real estate is estimated by discounting cash flows, both principal and interest, using current interest rates formortgage loans with similar credit ratings and similar remaining maturities. As such, inputs include current treasury yields and spreads, which are based on the credit rating andaverage life of the loan, corresponding to the market spreads. The valuation of mortgage loans on real estate is considered Level 3 in the fair value hierarchy.Policy Loans. The policy loans are reported at the unpaid principal balance and carry a fixed interest rate. The Company determined that the carrying value approximates fair valuebecause (i) policy loans present no credit risk as the amount of the loan cannot exceed the obligation due upon the death of the insured or surrender of the underlying policy; (ii)there is no active market for policy loans (i.e., there is no commonly available exit price to determine the fair value of policy loans in the open market); (iii) policy loans areintricately linked to the underlying policy liability and, in many cases, policy loan balances are recovered through offsetting the loan balance against the benefits paid under thepolicy; and (iv) policy loans can be repaid by policyholders at any time, and this prepayment uncertainty reduces the potential impact of a difference between amortized cost(carrying value) and fair value. The valuation of policy loans is considered Level 2 in the fair value hierarchy.F-34HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDOther Invested Assets. The balance primarily includes common stock purchase warrants. The fair values were derived using Black-Scholes analysis using unobservable marketinputs, including volatility and underlying security values; therefore, the common stock purchase warrants were classified as Level 3.Annuity Benefits Accumulated. The fair value of annuity benefits was determined using the surrender values of the annuities and classified as Level 3.Debt Obligations. The fair value of the Company’s debt obligations was determined using Bloomberg Valuation Service BVAL. The methodology combines direct marketobservations from contributed sources with quantitative pricing models to generate evaluated prices and classified as Level 2.6. Accounts ReceivableAccounts receivable consists of the following (in thousands): December 31, 2017 2016Contracts in progress $167,809 $121,666Trade receivables 106,937 113,380Unbilled retentions 50,957 35,069Other receivables 476 1,102Allowance for doubtful accounts (3,733) (3,619)Total accounts receivable $322,446 $267,5987. InventoryInventory is recognized in the consolidated balance sheets within Other assets, and consists of the following (in thousands): December 31, 2017 2016Raw materials and consumables $11,832 $8,572Work in process 696 850Finished goods 211 226 $12,739 $9,6488. Recoverable from ReinsurersRecoverable from reinsurers consists of the following (in thousands): December 31, 2017 December 31, 2016Reinsurer A.M. Best Rating Amount % of Total Amount % of TotalHannover Life Reassurance Co A+ $336,852 64.0% $337,967 64.5%Loyal American Life Insurance Co (Cigna) A- 140,552 26.7% 139,269 26.5%Great American Life Insurance Co A 48,933 9.3% 46,965 9.0%Total $526,337 100.0% $524,201 100.0%F-35HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED9. Property, Plant, and Equipment, netProperty, plant, and equipment consists of the following (in thousands): December 31, 2017 2016Land $30,313 $21,006Building and leasehold improvements 34,632 31,713Plant and transportation equipment 6,631 5,551Cable-ships and submersibles 251,840 169,034Equipment, furniture and fixtures, and software 127,409 101,421Construction in progress 19,927 19,889 470,752 348,614Less: Accumulated depreciation 96,092 62,156 $374,660 $286,458Depreciation expense was $35.8 million, $28.9 million, and $26.8 million for the years ended December 31, 2017, 2016, and 2015, respectively. These amounts included $5.3million, $4.4 million, and $7.9 million of depreciation expense within cost of revenue for the years ended December 31, 2017, 2016, and 2015, respectively. For the year endedDecember 31, 2016, the Company corrected the cumulative effect of an adjustment related to purchase accounting associated with the acquisition of DBMG in May 2014. See Note2 for further details.As of December 31, 2017 and December 31, 2016, total net book value of equipment under capital leases consisted of $45.3 million and $51.0 million of cable-ships, submersibles,and equipment.In June 2017, the NerVve recorded an impairment of $1.2 million. Computer software and other fixed assets were written down to zero as a result of deteriorated businessconditions. This impairment charge is included in Other operating (income) expenses in our Consolidated Statements of Operations for the year ended December 31, 2017.10. Goodwill and Intangibles, netGoodwillThe changes in the carrying amount of goodwill by segment are as follows (in thousands): ConstructionMarineServices Energy Telecom Insurance Life Sciences Other TotalBalance at December 31, 2015 $24,490 $1,134 $1,374 $3,378 $29,021 $— $1,781 $61,178Reclassification — — — — — — 14 14Acquisitions 11,827 1,334 1,257 — 18,269 3,620 587 36,894Balance at December 31, 2016 $36,317 $2,468 $2,631 $3,378 $47,290 $3,620 $2,382 $98,086Measurement period adjustment — — (509) — — — — (509)Acquisitions 2,290 11,783 — — — — 20,678 34,751Impairments — — — — — — (587) (587)Balance at December 31, 2017 $38,607 $14,251 $2,122 $3,378 $47,290 $3,620 $22,473 $131,741On an annual basis, the Company performs it's Goodwill impairment review. After considering all quantitative and qualitative factors, other than noted below, the Company hasdetermined that it is more likely than not that the reporting units' fair values exceed carrying values as of the period end.During the second quarter of 2017, the Company concluded that a step 1 test of goodwill for NerVve was necessary. This conclusion was based on certain indicators of impairmentrelated to NerVve's deteriorated business conditions. The Company estimated the fair value of the NerVve reporting unit, using the income approach, at an implied fair value ofgoodwill of $0 and an impairment charge of $0.6 million was recorded. This impairment charge is included in Other operating (income) expenses in our Consolidated Statements ofOperations for the year ended December 31, 2017.F-36HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDIndefinite-lived Intangible AssetsThe acquisition of the Insurance Company resulted in state licenses which are considered indefinite-lived intangible assets not subject to amortization. The consolidation of BeneVirin 2016 resulted in the recording of developed technology not subject to amortization.Indefinite-lived intangible assets consists of the following (in thousands): December 31, 2017 2016State licenses $2,450 $2,450FCC licenses 76,490 —Developed technology 6,392 6,392Total $85,332 $8,842In 2017, Broadcasting and its subsidiaries strategically acquired broadcast assets across the United States resulting in the recording of FCC licenses. As long as the Company actswithin the requirements and constraints of the regulatory authorities, the renewal and extension of these licenses is reasonably certain at minimal costs. Accordingly we haveconcluded that FCC licenses are indefinite-lived intangible assets.In 2016, the Insurance Company filed applications with the ODOI and the TDOI to redomesticate CGI from Ohio to Texas. In conjunction with the redomestication, the InsuranceCompanies filed a request with the TDOI to merge the two companies (with CGI as the surviving entity), which was approved as of December 31, 2016. As a result of the mergerthe Company recorded a $2.4 million impairment to the indefinite-lived state licenses in 2016. The impairment was included within Asset impairment expense in the ConsolidatedStatement of Operations.The consolidation of BeneVir in 2016 resulted in the recording of an in-process research and development intangible asset not subject to amortization valued at $6.4 million.Definite Lived Intangible AssetsThe gross carrying amount and accumulated amortization of amortizable intangible assets by major intangible asset class is as follows (in thousands): Weighted-AverageOriginal Useful Life December 31, 2017 December 31, 2016 Gross CarryingAmount AccumulatedAmortization Net Gross CarryingAmount AccumulatedAmortization NetTrade names 11 Years $13,981 $(4,527) $9,454 $13,004 $(3,113) $9,891Customer relationships 12 Years 21,657 (4,681) 16,976 20,865 (2,194) 18,671Developed technology 4 Years 3,823 (3,601) 222 4,739 (3,197) 1,542Other 4 Years 5,374 (253) 5,121 787 (11) 776Total $44,835 $(13,062) $31,773 $39,395 $(8,515) $30,880Amortization expense for amortizable intangible assets was $5.4 million, $3.8 million, and $4.4 million for the years ended December 31, 2017, 2016, and 2015 respectively, andwas included in Depreciation and amortization in the Consolidated Statements of Operations.VOBAVOBA is amortized in relation to the projected future premium of the acquired long-term care blocks of business and recorded amortization increases net income for the respectiveperiod. Total negative amortization recorded for the years ended December 31, 2017, 2016, and 2015 was $4.6 million, $3.9 million and $0.1 million, respectively.Excluding the impact of any future acquisitions or change in foreign currency, the Company estimates annual amortization of amortizable intangible assets and VOBA for the nextfive fiscal years will be as follows (in thousands): EstimatedAmortizationExpense VOBA2018 $4,160 $(2,475)2019 3,887 (2,458)2020 3,762 (2,555)2021 3,575 (2,539)2022 3,470 (2,522)Thereafter 12,919 (30,420)Total $31,773 $(42,969)F-37HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED11. Life, Accident and Health ReservesLife, accident and health reserves consist of the following (in thousands): December 31, 2017 2016Long-term care insurance reserves $1,453,442 $1,407,848Other accident and health insurance reserves 140,568 138,640Traditional life insurance reserves 99,951 102,077Total life, accident and health reserves $1,693,961 $1,648,565The following table sets forth changes in the liability for claims for the portion of our long-term care insurance reserves in scope of the ASU 2015-09 disclosure requirements (inthousands): Years Ended December 31, 2017 2016Beginning balance $226,970 $208,150Less: recoverable from reinsurers (97,858) (94,041)Beginning balance, net 129,112 114,109Incurred related to insured events of: Current year 55,371 54,521Prior years (1,254) 631Total incurred 54,117 55,152Paid related to insured events of: Current year (6,678) (8,097)Prior years (38,578) (36,457)Total paid (45,256) (44,554)Interest on liability for policy and contract claims 4,872 4,405Ending balance, net 142,845 129,112Add: recoverable from reinsurers 100,611 97,858Ending balance $243,456 $226,970The Company experienced favorable claims reserve development of $1.3 million in 2017 and unfavorable claims reserve development of $0.6 million in 2016.12. Accounts Payable and Other Current LiabilitiesAccounts payable and other current liabilities consist of the following (in thousands): December 31, 2017 2016Accounts payable $119,236 $66,792Accrued expenses and other current liabilities 99,489 55,573Accrued interconnection costs 73,383 93,661Accrued payroll and employee benefits 44,312 28,668Accrued interest 4,636 3,056Accrued income taxes 6,436 3,983Total accounts payable and other current liabilities $347,492 $251,733F-38HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED13. Debt ObligationsDebt obligations consist of the following (in thousands): December 31, 2017 2016Corporate 11.0% Senior Secured Notes due in 2019$400,000 $307,000Construction LIBOR plus 2.5% Notes due in 2018 and 2019 6,738 9,439LIBOR plus 2.0% Line of Credit 19,670 —Marine Services Notes payable and revolving lines of credit, various maturity dates 23,748 17,522LIBOR plus 3.65% Notes, due in 2019 — 3,026Obligations under capital leases 48,500 49,717Energy 4.5% Note due in 2022 (1) 12,454 13,3435.04% Term Loan due in 2022 13,706 —4.25% Seller Note due in 2022 2,336 2,796LIBOR plus 3.0% Pioneer Demand Note 1,031 —Other 996 576Life Sciences Notes due in 2018 1,750 —Other 11.0% Senior Secured Bridge Note, due in 2019 (the "11.0% Bridge Notes") — 35,000LIBOR plus applicable margin Bridge Note, due in 2018(2) 60,000 —Notes payable, various maturity dates 10,189 —Total 601,118 438,419Issuance discount, net and deferred financing costs (7,946) (9,923)Debt obligations $593,172 $428,496(1) ANG refinanced and consolidated all three of its loans with Pioneer during the first quarter of 2017.(2) On February 6, 2018, Broadcasting borrowed $42.0 million in principal amount of Bridge Loans.Aggregate capital lease and debt payments, including interest are as follows (in thousands): Capital Leases Debt Total2018 $10,211 $144,440 $154,6512019 9,996 459,570 469,5662020 10,202 9,234 19,4362021 10,045 6,415 16,4602022 10,038 6,077 16,115Thereafter 8,027 19,101 27,128Total minimum principal & interest payments 58,519 644,837 703,356Less: Amount representing interest (9,562) (92,676) (102,238)Total aggregate capital lease and debt payments $48,957 $552,161 $601,118The interest rates on the capital leases range from approximately 4% to 10.4%.F-39HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDCorporate and OtherHC2 and HC22On November 20, 2014, HC2 issued $250.0 million in aggregate principal amount of 11.0% Senior Secured Notes due 2019 (the "November 2014 Notes"). The November 2014Notes were issued at a price of 99.05% of principal amount, which resulted in a discount of $2.4 million. The net proceeds from the issuance of the November 2014 Notes wereused to repay a senior secured credit facility, which had provided for a twelve-month, floating interest rate term loan of $214 million and a delayed draw term loan of $36 million,entered into in connection with the Company's acquisition of GMSL. On March 26, 2015, HC2 issued an additional $50.0 million in aggregate principal amount of 11.0% SeniorSecured Notes due 2019 (the "March 2015 Notes"). The March 2015 Notes were issued at a price of 100.5% of principal amount, plus accrued interest from November 20, 2014,which resulted in a premium of $0.3 million. On August 5, 2015, HC2 issued an additional $5.0 million aggregate principal amount of its 11.0% Senior Secured Notes due 2019(the "August 2015 Notes"). The August 2015 Notes were issued in consideration for a release of claims by holders of the Preferred Stock discussed below (see Note 18. Equity foradditional information). On December 24, 2015, the Company issued an additional $2.0 million aggregate principal amount of its 11.0% Senior Secured Notes due 2019. All of the11.0% Senior Secured Notes due 2019 (collectively, the "11.0% Notes") were issued under an indenture dated November 20, 2014, by and among HC2, the guarantors partythereto and U.S. Bank National Association, a national banking association ("U.S. Bank"), as trustee (the "11.0% Notes Indenture").On December 16, 2016, HC2 Holdings 2, Inc. (‘‘HC2 2’’), a wholly-owned subsidiary, issued a $35.0 million aggregate principal 11.0% bridge note due December 1, 2019, underthe same terms as the 11.0% Senior Secured Notes, to Jefferies LLC in a private placement. The 11.0% bridge note was guaranteed by HC2 and each of the other guarantors of the11.0% Notes and ranked pari passu to, and was equally and ratably secured with HC2's existing 11.0% Notes.In January 2017, the Company issued an additional $55.0 million in aggregate principal amount of its 11.0% Notes. HC2 used a portion of the proceeds from the issuance to repayall $35.0 million in outstanding aggregate principal amount of HC22's 11.0% bridge note.In June 2017, the Company issued an additional $38.0 million of aggregate principal amount of its 11.0% Notes to investment funds affiliated with three institutional investors in aprivate placement offering. BroadcastingOn November 9, 2017, Broadcasting entered into a $75.0 million bridge loan (the "Bridge Loan") pari pasu with the 11.0% Senior Secured Notes. The Bridge Loan is guaranteedby HC2 and each of the other guarantors of the 11.0% Notes and ranks pari passu to, and is equally and ratably secured with HC2's existing 11.0% Notes. The Bridge Loan wasused to finance acquisitions in the broadcast television distribution market.The Company entered into the Bridge Loan to provide short term funding to invest in certain broadcasting assets permitted pursuant to the terms of the Bridge Loan and for generalcorporate purposes, as provided therein. The Bridge Loan matures one year from the original issuance. Given the short term nature of the Bridge Loan, management’s, original andcurrent, intent is to refinance the Bridge Loan prior to maturity. Although the Company believes that it will be able to raise additional equity capital, refinance indebtedness(including, without limitation, the Bridge Loan) or Preferred Stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient tofund any cash needs that we are not able to satisfy with the funds expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on termssatisfactory to the Company, or at all. Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over thelong-term. In addition, the sale of assets or the Company’s investments may also make the Company less attractive to potential investors or future financing partners.Broadcasting borrowed $45.0 million of principal amount of the Bridge Loan on the same day at LIBOR plus applicable margin. On December 15, 2017, Broadcasting borrowed anadditional $15.0 million of principal amount at LIBOR plus applicable margin.On February 4, 2018, Broadcasting entered into a First Amendment to the Bridge Loan to extend the Agreement to add an additional $27.0 million in principal borrowing capacityto the existing credit agreement.On February 6, 2018, Broadcasting borrowed $42.0 million in principal amount of the Bridge Loan at LIBOR plus applicable margin, the net proceeds of which were or will beused to finance certain acquisitions, to pay fees, costs and expenses relating to the Bridge Loan, and for general corporate purposes.Senior Secured Notes IndentureAs of December 31, 2017 HC2 has issued an aggregate of $400.0 million of its 11.0% Notes, and Broadcasting issued an aggregate of $60.0 million LIBOR plus 7.50% notes,both pursuant to the indenture dated November 20, 2014, by and among HC2, the guarantors party thereto and U.S. Bank National Association, a national banking association, astrustee (the "11.0% Notes Indenture").The 11.0% Notes Indenture contains certain covenants limiting, among other things, the ability of the Company and certain subsidiaries of the Company to incur additionalindebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock and make certain restricted payments; sell assets;engage in transactions with affiliates; or consolidate or merge with, or sellF-40HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDsubstantially all of its assets to, another person. The 11.0% Notes Indenture also includes two maintenance covenants: (1) a liquidity covenant; and (2) a collateral coveragecovenant. The 11.0% Notes Indenture contains customary events of default. The Company was in compliance with all covenants for the period.Maturity and Interest. The 11.0% Notes mature on December 1, 2019. The 11.0% Notes accrue interest at a rate of 11.0% per year. Interest on the Senior Secured Notes are paidsemi-annually on December 1st and June 1st of each year.Ranking. The 11.0% Notes and the guarantees thereof are HC2’s and certain of its direct and indirect domestic subsidiaries’ (the "Subsidiary Guarantors") general senior securedobligations. The 11.0% Notes and the guarantees thereof rank: (i) senior in right of payment to all of HC2’s and the Subsidiary Guarantors’ future subordinated debt; (ii) equal inright of payment with all of HC2’s and the Subsidiary Guarantors’ existing and future senior debt and effectively senior to all of the Company's unsecured debt to the extent of thevalue of the collateral; and (iii) effectively subordinated to all liabilities of its non-guarantor subsidiaries.Collateral. The 11.0% Notes and the guarantees thereof are collateralized on a first-priority basis by substantially all of HC2’s assets and the assets of the Subsidiary Guarantors(except for certain "Excluded Assets," and subject to certain "Permitted Liens," each as defined in the 11.0% Notes Indenture). The 11.0% Notes Indenture and the 11.0% BridgeNote permit the Company, under specified circumstances, to incur additional debt that could equally and ratably share in the collateral. The amount of such debt is limited by thecovenants contained in the 11.0% Notes Indenture and the 11.0% Bridge Note.Certain Covenants. The 11.0% Notes contain covenants limiting, among other things, the ability of HC2 and, in certain cases, HC2’s subsidiaries, to incur additional indebtednessor issue certain types of redeemable equity interests; create liens; engage in sale-leaseback transactions; pay dividends; make distributions in respect of capital stock and make certainother 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 aresubject to a number of important exceptions and qualifications. HC2 is also required to maintain compliance with certain financial tests, including minimum liquidity and collateralcoverage ratios. As of December 31, 2017, HC2 was in compliance with these covenants.Redemption Premiums. Until November 30, 2018 may redeem the 11.0% Notes at a redemption price equal to 105.50% of the principal amount plus accrued and unpaid interest.Beginning December 1, 2018, HC2 may redeem the 11.0% Notes at a redemption price equal to 100% plus accrued and unpaid interest. HC2 is required to make an offer topurchase the 11.0% Notes upon a change of control at a purchase price equal to 101% of the principal amount of the 11.0% Notes on the date of purchase plus accrued and unpaidinterest. The 11.0% Bridge Note may be redeemed at any time at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest.ConstructionDBMG Credit FacilitiesDBMG has a Credit and Security Agreement ("DBMG Facility") with Wells Fargo Credit, Inc. ("Wells Fargo"). DBMG entered into the Third Amendment with Wells FargoCredit, Inc. ("Wells Fargo") on November 6, 2017, which amends and restates the Second Amended and Restated Credit Agreement in its entirety. Pursuant to the agreement, WellsFargo agreed to advance up to a maximum amount of $50.0 million to DBMG, including up to $14.5 million of letters of credit (the "Revolving Line"). The Revolving Line has afloating interest rate based on LIBOR plus 2.0%, requires monthly interest payments, and matures in April 2019.The amended DBMG Facility allows for the issuance by DBMG of additional loans in the form of notes of up to $10.0 million ("Real Estate Term Advance"), at LIBOR plus 2.5%and the issuance of a note payable of up to $15.0 million, ("Real Estate Term Advance 2") at LIBOR plus 2.5%, each as separate tranches of debt under the DBMG Facility.The DBMG Facility is secured by a first priority, perfected security interest in all of DBMG’s and its present and future subsidiaries' assets, excluding real estate, and a secondpriority, perfected security interest in all of DBMG’s real estate. The security agreements pursuant to which DBMG’s assets are pledged prohibit any further pledge of such assetswithout the written consent of the bank. The DBMG Facility contains various restrictive covenants. At December 31, 2017, DBMG was in compliance with these covenants.As of December 31, 2017, DBMG had drawn $19.7 million under the Revolving Line and had $8.8 million in outstanding letters of credit issued under the DBMG Facility, ofwhich zero has been drawn. At December 31, 2017 there was $2.7 million outstanding under the Real Estate Term Advance and $4.0 million borrowings outstanding under theReal Estate Term Advance 2.Marine ServicesGMSL Credit FacilityGMSL established a $20.0 million term loan with DVB Bank in January 2014 (the "GMSL Facility"). The GMSL Facility has a 4.5 year term and bears interest at the rate of USDLIBOR plus 3.65% rate. As of December 31, 2017 and 2016, zero and $3.0 million, respectively, remained outstanding under the GMSL Facility. The GMSL Facility containsvarious restrictive covenants. At December 31, 2017, GMSL was in compliance with these covenants.F-41HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDFugro AcquisitionAs part of the Fugro trenching business acquisition, GMSL issued to Fugro a $7.5 million secured loan, which bears interest, payable quarterly, at 4% per annum through January11, 2018, and at 10% per annum thereafter, and matures 363 days following the acquisition. One of the assets acquired, a Q1400 Trenching System, serves as collateral security forthe repayment of the loan pursuant to the terms of a lien agreement.CWind Credit FacilitiesGMSL acquired CWind in February 2016 and assumed liability for all of CWind's outstanding loans. CWind currently maintains 14 notes payable related to its vessels, withmaturities ranging between 2020 and 2024 and interest rates varying between 7.50% and 7.62%. The initial aggregate principle amount outstanding under all 14 notes was GBP16.3 million.CWind also has two revolving lines of credit, one based in the UK and one based in Germany with an aggregate capacity of GBP 1.5 million and an interest rate of 2.0% overBarclays' Base Rate of 0.5%.In U.S. dollars, CWind had total borrowings of $16.2 million as of December 31, 2017.GMSL Capital LeasesGMSL is a party to two leases to finance the use of two vessels: the Innovator (the "Innovator Lease") and the Cable Retriever (the "Cable Lease," and together with the InnovatorLease, the "GMSL Leases"). The Innovator Lease was restructured effective May 31, 2016, extending the lease to 2025. The principal amount thereunder bears interest at the rate ofapproximately 10.4%. The Cable Lease expires in 2023. The principal amount thereunder bears interest at the rate of approximately 4.0%.As of December 31, 2017, $48.5 million in aggregate principal amount remained outstanding under the GMSL Leases.EnergyM&T Term LoanIn May 2017, ANG entered into a term loan with M&T Bank for $12.0 million. The loan bears fixed interest annually at 5.04% and matures in 2022. During the third quarter 2017,ANG drew on the term loan for an additional $2.5 million at 4.85%. As of December 31, 2017, ANG had $13.7 million in aggregate principal outstanding under the loan.Pioneer Term LoanOn June 13, 2016, ANG entered into a delayed draw term note for $6.5 million with Pioneer Savings Bank ("Pioneer"). The note included an interest only provision for the firstyear. The interest rate on this loan was LIBOR plus 3.0% for the first year and a fixed rate of 4.3% thereafter. The agreement with Pioneer also includes a revolving demand notefor $1.0 million with an annual renewal provision and interest at monthly LIBOR plus 3.0%. On September 19, 2016 ANG entered into a term note for $2.5 million with Pioneer.The interest rate on this loan was 4.3%. On December 12, 2016 ANG entered into a term note for $4.5 million with Pioneer. The interest rate on this loan was 4.7%.In January 2017, ANG refinanced and consolidated all three of its loans with Pioneer into a new term loan. The principal balance outstanding bears fixed interest at a fixed rateannually equal to 4.5% and matures in 2022. The agreement with Pioneer also includes a revolving demand note for $1.0 million with an annual renewal provision that bears interestat monthly LIBOR plus 3.0% (the "Pioneer Demand Note"). In September 2017, ANG increased the availability under the Pioneer Demand Note to $1.5 million. As of December31, 2017, there was $12.5 million aggregate principal outstanding under the Pioneer term loan and $1.0 million drawn under the Pioneer Demand Note.Signature Term LoanANG established a term loan with Signature Financial in October 2013. This term loan has a five year term and bears interest at the rate of 5.5% per annum. As of December 31,2017, $0.3 million remained outstanding under this term loan.Seller NoteOn August 5, 2016, ANG entered into a six year seller note for $3.0 million with the seller of a station, maturing on February 1, 2022. The interest rate on this seller note is a fixedrate of 4.25%. Interest was pre-paid for the first month of the loan. As of December 31, 2017, $2.3 million remained outstanding under this seller note.F-42HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDCovenantsAs of December 31, 2017, ANG did not meet covenants for the debt service coverage ratio with Pioneer and the fixed charge coverage ratio with M&T Bank. ANG continues topay applicable recurring principal and interest payments, and there has not been any default in the payment of principal or interest in either of the loans. As of March 14, 2018waivers from both Pioneer and M&T were received, covering the period of this report. Management expects to be in compliance with both covenants in subsequent periods.Life SciencesR2 NotesOn December 7, 2017 R2 issued secured convertible notes for $1.25 million and other notes for $0.5 million to its licensors in satisfaction for amounts owed as part of a milestonepayment, together with interest accruing on the unpaid principal balance at a rate of 11% per year. The $1.25 million principal balance matures on December 7, 2018 and the $0.5million principal balance matures on or before June 1, 2018.14. Income TaxesThe provisions (benefits) for income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands): Years Ended December 31, 2017 2016 2015Current: Federal $17,426 $20,937 $361State 3,183 2,103 1,215Foreign 584 1,462 644Subtotal Current 21,193 24,502 2,220Deferred: Federal (9,461) 26,735 (12,604)State 175 444 (99)Foreign (1,167) (43) (399)Subtotal Deferred (10,453) 27,136 (13,102)Income tax (benefit) expense$10,740$51,638 $(10,882)The US and foreign components of income (loss) from continuing operations before income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows (inthousands): Years Ended December 31, 2017 2016 2015US $(56,288) $(71,626) $(66,038)Foreign 16,537 25,833 19,415Loss from continuing operations before income taxes $(39,751)$(45,793) $(46,623)The provision for (benefit from) income taxes differed from the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes due to thefollowing items for the years ended December 31, 2017, 2016 and 2015 (in thousands): Years Ended December 31, 2017 2016 2015Tax provision (benefit) at federal statutory rate $(13,914) $(16,027) $(16,318)Permanent differences 500 1,635 (272)State tax (net of federal benefit) 2,374 1,843 1,068Foreign rate differential (1,461) 1,504 287Foreign withholding taxes (net of federal) — — 1,229Executive and stock compensation 565 1,439 1,044Adjustment to net operating losses (7,574) — (1,104)Increase (decrease) in valuation allowance 6,263 57,830 2,949Transaction costs 2,258 1,189 473Tax credits generated/utilized (155) (386) (185)Transition to U.S. Tax Cuts and Jobs Act 21,079 — —Outside basis difference 1,144 2,655 —Other (339) (44) (53)Income tax (benefit) expense $10,740 $51,638 $(10,882)F-43HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDOn December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the "TCJA"), making significant changes to the Internal RevenueCode. Changes include, but are not limited to, reducing the federal corporate tax rate from 35% to 21%, creating a new limitation on deductible interest expense, eliminating thecorporate alternative minimum tax (AMT), 100% expensing for certain business assets, repealing the Sec. 199 deduction, changing the rules related to uses and limitation of NOLsfor tax years beginning after December 31, 2017 and a one-time transition tax on the mandatory deemed repatriation of foreign earnings.The write down adjustment of deferred tax assets due to the rate change and reversal of deferred tax liabilities associated with unremitted earnings had no impact to the income taxprovision due to the Company’s valuation allowance position for the HC2 U.S. consolidated filing group and for the Insurance Company. Similarly, for the other entities notincluded in the HC2 U.S. consolidated filing group with a full valuation allowance, the write down adjustment of deferred tax assets due to the rate change had no impact to theincome tax provision. There are certain non-consolidated entities in a net deferred tax liability position for which the re-measurement of deferred taxes resulted in a tax benefit beingrecorded. In connection with the one-time transition tax on the mandatory deemed repatriation of foreign earnings, the Company is utilizing existing NOL carryforwards to settle thetoll charge so there is no income tax provision impact.As a result of the enactment of TCJA on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP insituations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting forcertain income tax effects of the TCJA. SAB 118 provides that the measurement period is complete when a company’s accounting is complete, but should not extend beyond oneyear from the enactment date.The Company has made a reasonable estimate of the impact to income taxes incurred. However, these estimates are incomplete because information has yet to be fully prepared oranalyzed relating to the impact to our projections of future taxable income used in and analyzing realizability of the Insurance Company's deferred tax assets. There are specificinsurance industry provisions, including changes in computations of life insurance reserves, amortization of policy acquisition expenses, and modifications to net operating loss("NOLs") provisions. Provisional estimates have been included in our future taxable income projections for these insurance industry specific provisions to reflect application of thenew tax law.There are modifications to the determination of the tax basis of life insurance reserves and the change in the tax basis reserves as of January 1, 2018 will be spread over eight taxyears (the "transition liability"). Although we have not completed our analysis of contract level reserve calculations, based upon the work completed, we have made a reasonableestimate of the transition liability and its impact on the deferred income tax balances. The estimate will be revised in the period that we have completed our analysis of the impact ofthe modifications on our life insurance reserves.For the year ended December 31, 2016, the Company’s effective tax rate was unfavorably impacted by the establishment of valuation allowances totaling $57.8 million, primarilyattributed to management’s conclusion that it was more-likely-than-not that the deferred tax assets of our HC2 U.S. consolidated group and the Insurance Company would not berealized.Deferred income taxes reflect the net income tax effect of temporary differences between the basis of assets and liabilities for financial reporting purposes and for income taxpurposes. Net deferred tax balances are comprised of the following as of December 31, 2017 and 2016 (in thousands): December 31, 2017 2016Deferred tax assets $210,250 $257,231Valuation allowance (133,504) (138,044)Deferred tax liabilities (85,825) (133,383)Net deferred taxes $(9,079)$(14,196)F-44HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED December 31, 2017 2016Allowance for bad debt $223 $151Basis difference in intangibles (11,623) (11,924)Equity investments 5,650 6,877Net operating loss carryforwards 49,018 43,080Basis difference in fixed assets (2,851) (8,616)Deferred compensation 14,046 11,375Foreign tax credit 1,190 1,190Capital loss carryforwards 2,194 1,381Insurance company investments (59,307) (86,811)Foreign earnings — (11,748)UK trading loss carryforward 49,690 50,151Unrealized gain/loss in OCI 102 3,930Insurance claims and reserves 57,030 95,883Value of insurance business acquired ("VOBA") 9,071 16,712Start-up cost 1,240 1,778Deferred Acquisition Costs 5,739 5,248Other 3,013 5,191Valuation allowance (133,504) (138,044)Total deferred taxes $(9,079) $(14,196)Deferred tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.Deferred tax assets in essence represent future savings of taxes that would otherwise be paid in cash. The realization of the deferred tax assets is dependent upon the generation ofsufficient future taxable income, including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established, with acorresponding charge to net income.In accordance with ASC 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment are not more likely-than-not realizable. These judgments arebased on projections of future income or loss and other positive and negative evidence by individual tax jurisdiction. Changes in industry and economic conditions and thecompetitive environment may impact these projections. In accordance with ASC 740, during each reporting period the Company assesses the likelihood that its deferred tax assetswill be realized and determines if adjustments to its valuation allowances are appropriate.Management evaluated the need to maintain the valuation allowance against the deferred taxes of the HC2 Holdings, Inc. U.S. consolidated tax group ("the group") for each of thereporting periods based on the positive and negative evidence available. The objective negative evidence evaluated was the group’s historical operating results over the prior three-year period. The group is in a cumulative three year loss as of December 31, 2017 and is forecasting losses in the near future, which provide negative evidence that is difficult toovercome and would require a substantial amount of objectively verifiable positive evidence of future income to support the realizability of the group’s deferred tax assets. Whilepositive evidence exists by way of unrealized gains in the Company’s investments, management concluded that the negative evidence now outweighs the positive evidence. Thus, itis more likely than not that the group’s U.S. deferred tax assets will not be realized.Management evaluated the need to maintain the valuation allowance against the deferred taxes of the Insurance Company for each of the reporting periods. Included in thisassessment was the Insurance Company’s historical operating results over the prior three-year period. Additional positive and negative evidence was considered including thetiming of the reversal of the deferred tax assets and liabilities, and projections of future income from the runoff of the insurance business. During 2017, the Insurance Companymoved from a cumulative loss position over the previous three years to a cumulative income position for the first time since the Insurance Company established a full valuationallowance. Based on the weight of the positive and negative evidence, Management concluded that it is more likely than not that the Insurance Company’s net deferred tax assetswill not be realized. Management continues to evaluate the Insurance Company’s cumulative income position and income trend as well as future projections of sustained profitabilityand whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part). Valuation allowances have been maintained against deferred tax assets of the European entities, including GMSL’s UK non-tonnage tax trading losses, and losses generated bycertain businesses that do not qualify to be included in the HC2 Holdings, Inc. U.S. consolidated income tax return.On December 24, 2015, the Company completed its acquisition of the long-term care and life insurance businesses, United Teacher Associates Insurance Company ("UTA") andCGI, pursuant to an agreement ("Stock Purchase Agreement") with subsidiaries of American Financial Group, Inc. ("AFG"). The Company made a joint election with AFG underSection 338(h)(10) to treat the stock purchase as an asset purchase for U.S. Federal income tax purposes. The Company's resulting step-down in the tax basis of the invested assetsof UTA and CGI (primarily fixed income securities) is reflected in the above deferred tax liability of $99.6 million for differences between the fair value and tax basis of theinsurance company investments. The Company estimates that none of the goodwill that was recorded will be deductible for income tax purposes.F-45HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDAs of December 31, 2017, the Company had foreign operating loss carryforwards of approximately $295.1 million. Of the foreign NOLs, $221.2 million were generated byGMSL’s historical non-tonnage tax operations.At December 31, 2017, the Company has U.S. net operating loss carryforwards available to reduce future taxable income in the amount of $100.4 million, of which $77.8 million issubject to an annual limitation under Section 382 of the Internal Revenue Code. Additionally, the Company has $108.3 million of U.S. net operating loss carryforwards from itssubsidiaries that do not qualify to be included in the HC2 U.S. consolidated income tax return.Pursuant to the rules under Section 382, the Company believes that it underwent an ownership change on May 29, 2014. This conclusion is based on an analysis of Schedule 13Dand Schedule 13G filings over the prior three years made with the SEC and the impact resulting from the May 29 preferred stock issuance. Due to the Section 382 limit resultingfrom the ownership change, approximately $146.2 million of the Company’s net operating losses will expire unused. The $146.2 million in expiring NOLs have been derecognizedin the consolidated financial statements as of December 31, 2014. The remaining pre-change NOL’s of $46.1 million recorded in the consolidated financial statements are subject toan annual limitation under IRC Sec. 382 of approximately $2.3 million.On November 4, 2015, HC2 issued 8,452,500 shares of its stock in a primary offering which the Company believes resulted in a Section 382 ownership change resulting in anadditional annual limitation to the cumulative NOL carryforward of the HC2 U.S. consolidated tax group. The amount of the annual limitation is based on a number of factors,including the value of HC2’s stock and the amount of unrealized gains on the date of the ownership change.The Company follows the provision of ASC 740 which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financialstatements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative tocertain tax planning strategies, including certain intercompany transactions as well as regulatory taxes.The Company did not have any unrecognized tax benefits as of December 31, 2017, 2016 and 2015, related to uncertain tax positions.The Company conducts business globally, and as a result, HC2 or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various stateand foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. Tax years 2002-2017 remain open forexamination.The Company is currently under examination in various domestic and foreign tax jurisdictions. The open tax years contain matters that could be subject to differing interpretations ofapplicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant taxperiod. Given the nature of tax audits, there is a risk that disputes may arise.15. Commitments and ContingenciesFuture minimum lease payments under purchase obligations and non-cancellable operating leases are as follows (in thousands): PurchaseObligations OperatingLeases2018 $124,418 $16,6792019 1,323 16,2222020 1,103 14,3042021 27 11,4172022 27 5,365Thereafter 46 12,549Total obligations $126,944 $76,536The Company has contractual obligations to utilize an external vendor for certain customer support functions and to utilize network facilities from certain carriers with terms greaterthan one year.The Company’s expense under operating leases was $11.6 million, $5.3 million and $5.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.F-46HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDLitigationThe Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that theoutcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company’sConsolidated Financial Statements. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its ConsolidatedFinancial Statements. The Company records a liability in its Consolidated Financial Statements for these matters when a loss is known or considered probable and the amount canbe reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If amatter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to theextent necessary for its Consolidated Financial Statements not to be misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in itsConsolidated Financial Statements.CGI Producer LitigationOn November 28, 2016, CGI, a subsidiary of the Company, Great American Financial Resource, Inc. ("GAFRI"), American Financial Group, Inc., and CIGNA Corporation wereserved with a putative class action complaint filed by John Fastrich and Universal Investment Services, Inc. in The United States District Court for the District of Nebraska allegingbreach of contract, tortious interference with contract and unjust enrichment. The plaintiffs contend that they were agents of record under various CGI policies and that CGIallegedly instructed policyholders to switch to other CGI products and caused the plaintiffs to lose commissions, renewals, and overrides on policies that were replaced. Thecomplaint also alleges breach of contract claims relating to allegedly unpaid commissions related to premium rate increases implemented on certain long-term care insurance policies.Finally, the complaint alleges breach of contract claims related to vesting of commissions. On August 21, 2017 the Court dismissed the plaintiffs’ tortious interference with contractclaim. CGI believes that the remaining allegations and claims set forth in the complaint are without merit and intends to vigorously defend against them. The case has been set for voluntary mediation, which occurred on January 26, 2018. Meanwhile, the Court has stayed discovery pending the outcome of the mediation. OnFebruary 12, 2018, the parties notified the Court that mediation did not resolve the case and that the parties’ discussions regarding a possible settlement of the action were stillongoing. The Court ordered the parties to submit a status report regarding the status of their settlement negotiations to the Court in advance of the upcoming status conferencescheduled on March 22, 2018.Further, the Company and CGI are seeking defense costs and indemnification for plaintiffs’ claims from GAFRI and Continental General Corporation ("CGC") under the terms ofan Amended and Restated Stock Purchase Agreement ("SPA") related to the Company’s acquisition of CGI in December 2015. GAFRI and CGC rejected CGI’s demand fordefense and indemnification and, on January 18, 2017, the Company and CGI filed a Complaint against GAFRI and CGC in the Superior Court of Delaware seeking a declaratoryjudgment to enforce their indemnification rights under the SPA. On February 23, 2017, Great American answered CGI’s complaint, denying the allegations. The dispute isongoing and CGI will continue to pursue its right to a defense and indemnity under the SPA.VAT assessmentOn February 20, 2017, and on August 15, 2017, the Company's subsidiary, ICS, received notices from Her Majesty’s Revenue and Customs office in the U.K. (the "HMRC")indicating that it was required to pay certain Value-Added Taxes ("VAT") for the 2015 and 2016 tax years. ICS disagrees with HMRC’s assessments on technical and factualgrounds and intends to dispute the assessed liabilities and vigorously defend its interests. We do not believe the assessment to be probable and expect to prevail based on the factsand merits of our existing VAT position.DBMG Class ActionOn November 6, 2014, a putative stockholder class action complaint challenging the tender offer by which HC2 acquired approximately 721,000 of the issued and outstandingcommon shares of DBMG was filed in the Court of Chancery of the State of Delaware, captioned Mark Jacobs v. Philip A. Falcone, Keith M. Hladek, Paul Voigt, Michael R. Hill,Rustin Roach, D. Ronald Yagoda, Phillip O. Elbert, HC2 Holdings, Inc., and Schuff International, Inc., Civil Action No. 10323 (the "Complaint"). On November 17, 2014, asecond lawsuit was filed in the Court of Chancery of the State of Delaware, captioned Arlen Diercks v. Schuff International, Inc. Philip A. Falcone, Keith M. Hladek, Paul Voigt,Michael R. Hill, Rustin Roach, D. Ronald Yagoda, Phillip O. Elbert, HC2 Holdings, Inc., Civil Action No. 10359. On February 19, 2015, the court consolidated the actions (nowdesignated as Schuff International, Inc. Stockholders Litigation) and appointed lead plaintiff and counsel. The currently operative complaint is the Complaint filed by Mark Jacobs. The Complaint alleges, among other things, that in connection with the tender offer, the individual members of the DBMG Board of Directors and HC2, the now-controllingstockholder of DBMG, breached their fiduciary duties to members of the plaintiff class. The Complaint also purports to challenge a potential short-form merger based uponplaintiff’s expectation that the Company would cash out the remaining public stockholders of DBMG following the completion of the tender offer. The Complaint seeks rescissionof the tender offer and/or compensatory damages, as well as attorney’s fees and other relief. The defendants filed answers to the Complaint on July 30, 2015.On February 24, 2017, the parties agreed to a framework for the potential settlement of the litigation. Plaintiff advised defendants on June 7, 2017 that plaintiff was not proceedingwith the February 2017 potential settlement framework. The parties have been exploring alternative frameworks for a potential settlement. There can be no assurance that asettlement will be finalized or that the Court would approve such a settlement even if the parties were to enter into a settlement stipulation or agreement. If a settlement cannot bereached, the Company believes it has meritorious defenses and intends to vigorously defend this matter.F-47HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDGlobal Marine DisputeGMSL is in dispute with Alcatel-Lucent Submarine Networks Limited ("ASN") related to a Marine Installation Contract between the parties, dated March 11, 2016 (the "ASNContract"). Under the ASN Contract, GMSL's obligations were to install and bury an optical fiber cable in Prudhoe Bay, Alaska. As of the date hereof, neither party hascommenced legal proceedings. Pursuant to the ASN Contract any such dispute would be governed by English law and would be required to be brought in the English courts inLondon. ASN has alleged that GMSL committed material breaches of the ASN Contract, which entitles ASN to terminate the ASN Contract, take over the work themselves, andclaim damages for their losses arising as a result of the breaches. The alleged material breaches include failure to use appropriate equipment and procedures to perform the work andfailure to accurately estimate the amount of weather downtime needed. ASN has indicated to GMSL it has incurred $30 million in damages and $1.2 million in liquidated damagesfor the period from September 2016 to October 2016, plus interest and costs. GMSL believes that it has not breached the terms and conditions of the contract and also believes thatASN has not properly terminated the contract in a manner that would allow it to make a claim. However, ASN has ceased making payments to GMSL and as of December 31,2017, the total sum of GMSL invoices raised and issued are $17.0 million, of which $8.1 million were settled by ASN and the balance of $8.9 million remains at risk. We believethat the allegations and claims by ASN are without merit, and that ASN is required to make all payments under unpaid invoices and we intend to defend our interests vigorously.Tax MattersCurrently, the Canada Revenue Agency ("CRA") is auditing a subsidiary previously held by the Company. The Company intends to cooperate in audit matters. To date, CRA hasnot proposed any specific adjustments and the audit is ongoing.16. Employee Retirement PlansHC2The Company sponsors a 401(k) employee benefit plan (the "401(k) Plan") that covers substantially all United States based employees. Employees may contribute amounts to the401(k) Plan not to exceed statutory limitations. The 401(k) Plan provides an employer matching contribution in cash of 50% of the first 6% of employee annual salary contributionscapped at $6,000.The matching contribution made during each of the years ended December 31, 2017, 2016 and 2015 was $0.1 million.DBMGCertain of DBMG’s fabrication and erection workforce are subject to collective bargaining agreements. DBMG contributes to union-sponsored, multi-employer pension plans.Contributions are made in accordance with negotiated labor contracts. The passage of the Multi-Employer Pension Plan Amendments Act of 1980 (the "Act") may, under certaincircumstances, cause DBMG to become subject to liabilities in excess of contributions made under collective bargaining agreements. Generally, liabilities are contingent upon thetermination, withdrawal, or partial withdrawal from the plans. Under the Act, liabilities would be based upon DBMG’s proportionate share of each plan’s unfunded vested benefits.DBMG made contributions to the California Ironworkers Field Pension Trust ("Field Pension") of $7.0 million and $6.9 million during the years ended December 31, 2017 and2016, respectively. DBMG’s funding policy is to make monthly contributions to the plan. DBMG’s employees represent less than 5% of the participants in the Field Pension. Asof December 31, 2017, DBMG has not undertaken to terminate, withdraw, or partially withdraw from the Field Pension.To replace DBMG's funding into the Steelworkers Pension Trust, DBMG agreed to make profit share contributions to the Union 401(k) defined contribution retirement savingsplan (the "Union 401k") beginning on April 1, 2012. Union steelworkers are eligible for the profit share contributions after completing a probationary period (640 hours of work)and are 100% vested in the profit share contributions three years from the date of hire. Union steelworkers are not required to make contributions to the Union 401(k) to receive theprofit share contributions. Profit share contributions are made for each hour worked by each eligible union steelworker at a rate of $0.55 per hour. Profit share contributionsamounted to approximately $0.1 million and $0.1 million for the years ended December 31, 2017 and 2016, respectively.DBMG maintains a 401(k) retirement savings plan which covers eligible employees and permits participants to contribute to the plan, subject to Internal Revenue Code restrictionsand which features matching contributions of 100% of the first 1%, and 50% of the next 5% of employee annual salary contributions. The matching contributions for the yearsended December 31, 2017 and 2016 was $1.4 million and $1.1 million, respectively.GMSLGMSL has established a number of pension schemes and contribute to other pension schemes around the world covering many of its employees. The principal funds are those inthe UK comprising The Global Marine Systems Pension Plan, The Global Marine Personal Pension Plan (established in 2008), and Global Marine Systems (Guernsey) PensionPlan. A small number of employees are members of the MNOPF, a centralized defined benefit scheme to which the GMSL contributes.F-48HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDThe Global Marine Systems Pension Plan, the Global Marine Systems (Guernsey) Pension Plan and the MNOPF are defined benefit plans with assets held in separate trusteeadministered funds. However as the Global Marine Systems (Guernsey) Pension Plan, which operates both a Career Average Re-valued Earnings ("CARE") defined benefitsection and a defined contribution section is small with few members, the scheme is accounted for as defined contribution type plan. The Global Marine Personal Pension Plan ispredominantly of the money purchase type.The Global Marine Systems Pension Plan was a hybrid, exempt approved, occupational pension scheme for the majority of staff, which provides pension and death in servicebenefits. The defined benefit section of the Plan provided final salary benefits up to December 31, 2003 and CARE benefits from January 1, 2004. In 2008 the defined contributionsection was closed to new contributions and all the accumulated funds attributable to the defined contribution members were transferred to a Contracted in Money Purchase Scheme("CIMP") set up by GMSL. These funds were held on behalf of the defined contribution members and were all transferred to the Global Marine Personal Pension plan of eachmember on or before June 30, 2009. From August 31, 2006 the defined benefit section of the Scheme closed to future accrual and active members were offered membership of theexisting defined contribution section (with some enhanced benefits).Global Marine Systems Pension Plan - Defined Benefit SectionThe defined benefit section of the Global Marine Systems Plan (prior to its closure on August 31, 2006) was contributory, with employees contributing between 5% and 8%(depending on their age) and the employer contributing at a rate of 9.2% of pensionable salary plus deficit contributions of $1.4 million per year.The defined benefit section of the Global Marine Systems Pension Plan is funded by the payment of contributions determined with the advice of qualified independent actuaries onthe basis of triennial valuations using the projected unit method. The most recent full actuarial valuation was conducted as of December 31, 2013 for the purpose of determining thefunding requirements of the plan. The main assumptions used were that Retail Price Inflation would be 3.7% per year, Consumer Price Inflation would be 2.7% per year, the rate ofreturn on investments (pre-retirement) would be would be 5.5% per year, the rate of return on investments (post-retirement) would be 4.5% per year, with pensions increasing by3% per year. At the actuarial valuation date the market value of the defined benefit section’s assets amounted to $146.7 million. On a statutory funding objective basis the value ofthese assets covered the value of technical provisions by 74%.As per the agreement reached in August 2016 between the Trustees and the Company it was agreed that contributions are payable by the Group as follows:•$0.4 million payable every month during calendar year 2018•$0.6 million payable every month during calendar years 2019 to May 2021 inclusive;•Profit-related component. The Company will pay 10% of profits after tax before dividends. This will be paid up to two years following the year end to enable budgetingand cash flow control•Dividend-related component. The Company will pay a cash sum equal to 50% of any future dividend payments.Global Marine Personal Pension PlanThis is a defined contribution pension scheme and is contributory from the employee; the rate of contributions is split as follows: •ex-CARE employees contributing between 2.5% and 7.5% and the employer contributing at a matching rate plus an additional 5% fixed contributions; and•defined contribution employees contributing between 2% and 7.5% and the employer contributing at a matching rate.For the years ended December 31, 2017 and 2016, GMSL made matching contributions of $3.0 million and $1.4 million, respectively.MNOPFThe MNOPF is funded by the payment of contributions determined with the advice of qualified independent actuaries on the basis of triennial valuations using the projected unitmethod. The most recent available full actuarial valuation was conducted as at March 31, 2015 for the purpose of determining the funding requirements of the plan. The mainassumptions used were that Retail Price Inflation would be 3.1% per year, Consumer Price Inflation would be 2.1% per year, the rate of return on investments (pre-retirement)would be 4.75% per year, the rate of return on investments (post-retirement) would be 2.6% per year and with pensions increasing (where relevant) by 2.9% per year.At the actuarial valuation date the market value of the total assets in the scheme amounted to $3.6 billion of which 0.08% ($2.8 million) relates to the Global Marine Systems Group.On an on-going basis the value of these assets, together with the deficit contributions receivable of $394 million, covered the value of pensioner liabilities, preserved pensionliabilities for former employees and the value of benefits for active members based on accrued service and projected salaries, to the extent of 99.7%.Following the March 31, 2015 actuarial valuation, contributions are payable by the Group as follows: •Maintain employer contributions to 20% of pensionable salaries to September 30, 2016, and then no more contributions thereafter.F-49HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDGlobal Marine Systems (Guernsey) Pension PlanThe defined benefit section of the Guernsey Scheme is contributory, with employees contributing between 5% and 8% (depending on their age), the employer ceased contributingafter July 2004. The defined contribution section is also contributory, with employees contributing between 2% and 7.5% (depending on their age and individual choice) and theemployer contributing at a matching rate. The defined benefit section of the Guernsey Scheme is funded by the payment of contributions determined with the advice of qualifiedindependent actuaries on the basis of triennial valuations using the projected unit method.The most recent full actuarial valuation was conducted as of December 31, 2013 for the purpose of determining the funding requirements of the plan. The principal actuarialassumptions used by the actuary were investment returns of 5.3% per year pre-retirement, 4.4% per year post-retirement, inflation of 3.7% per year and pension increases of3.3% per year.At the valuation date the market value of the assets amounted to $3.0 million. The results show a past service shortfall of $0.2 million corresponding to a funding ratio of 93%.Following the December 31, 2013 actuarial valuation, contributions are as follows: •Seven annual contributions of less than $0.1 million from December 31, 2014 to 2020.Collectively hereafter, the defined benefit plans will be referred to as the "Plans".Obligations and Funded StatusFor all company sponsored defined benefit plans and our portion of the MNOPF, the benefit obligation is the "projected benefit obligation," the actuarial present value, as of ourDecember 31 measurement date, of all benefits attributed by the pension benefit formula to employee service rendered to that date. The amount of benefit to be paid depends on anumber of future events incorporated into the pension benefit formula, including estimates of the average life of employees/survivors and average years of service rendered. It ismeasured based on assumptions concerning future interest rates and future employee compensation levels.The following table presents this reconciliation and shows the change in the projected benefit obligation for the Plans for the period from December 31, 2015 through December 31,2017 (in thousands):Projected benefit obligation at December 31, 2015 $197,600Service cost - benefits earning during the period 15Interest cost on projected benefit obligation 6,659Contributions 8Actuarial loss 30,121Benefits paid (5,564)Foreign currency (gain) loss (36,240)Projected benefit obligation at December 31, 2016 192,599Service cost - benefits earning during the period —Interest cost on projected benefit obligation 5,670Contributions —Actuarial loss 2,704Benefits paid (9,949)Foreign currency (gain) loss 17,636Projected benefit obligation at December 31, 2017 $208,660F-50HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDThe following table presents the change in the value of the assets of the Plans for the period from December 31, 2015 through December 31, 2017 and the plans’ funded status atDecember 31, 2017 (in thousands):Fair value of plan assets at December 31, 2015 $172,511Actual return on plan assets 34,354Benefits paid (5,564)Contributions 1,376Foreign currency gain (loss) (31,905)Fair value of plan assets at December 31, 2016 170,772Actual return on plan assets 10,392Benefits paid (9,949)Contributions 3,056Foreign currency gain (loss) 15,847Fair value of plan assets at December 31, 2017 190,118Unfunded status at end of year $18,542Amounts recognized in the consolidated balance sheets within Other assets and Other liabilities at December 31, 2017 and 2016 are listed below (in thousands): December 31, 2017 2016Pension Asset $28 $192Pension Liability 18,570 22,019Net amount recognized $18,542 $21,827The accumulated benefit obligation for the Plans represents the actuarial present value of benefits based on employee service and compensation as of a certain date and does notinclude an assumption about future compensation levels. As of December 31, 2017 contributions of $12.6 million were due to be payable to the Plans.Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive IncomePeriodic Benefit CostsThe aggregate net pension cost recognized in the consolidated statements of operations was a benefit of $2.1 million for the year ended December 31, 2017, and cost of $2.2 millionand $0.4 million for the years ended December 31, 2016 and 2015, respectively.The following table presents the components of net periodic benefit cost are as follows (in thousands): Years Ended December 31, 2017 2016 2015Service cost - benefits earning during the period $— $15 $61Interest cost on projected benefit obligation 5,670 6,659 7,330Expected return on assets (7,763) (7,063) (7,507)Actuarial loss 75 2,830 512Foreign currency loss (87) (225) (12)Net pension (benefit) cost $(2,105) $2,216 $384Of the amounts presented above, income of $2.1 million has been included in cost of revenue and gain of $0.1 million included in other comprehensive income for the year endedDecember 31, 2017, and cost of $0.4 million has been included in cost of revenue and gain of $2.6 million included in other comprehensive income for the year endedDecember 31, 2016.In determining the net periodic pension cost for the Plans, GMSL used the following weighted average assumptions: the pension increase assumption is that for benefits increasingwith RPI limited to 5% per year, to which the majority of the Plan’s liabilities relate. The Group employs a building block approach in determining the long-term rate of return ofpension plan assets. Historical markets are studied and assets with higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles.The overall expected rate of return on assets is then derived by aggregating the expected return for each asset class over the actual asset allocation for the Plans as of December 31,2017.F-51HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED Years Ended December 31, 2017 2016 2015Discount rate 2.60% 2.85% 3.75%Rate of compensation increases (MNOPF only) NA N/A 4.55%Rate of future RPI inflation 3.15% 3.20% 3.05%Rate of future CPI inflation 2.05% 2.10% 1.95%Pension increases in payment 3.00% 3.05% 2.90%Long-term rate of return on assets 4.01% 3.17% 4.50%Other Changes in Benefit Obligations Recognized in Other Comprehensive IncomeThe following tables present the after-tax changes in benefit obligations recognized in comprehensive income and the after-tax prior service credits that were amortized from AOCIinto net periodic costs are as follows (in thousands): Years Ended December 31, 2017 2016 2015Net loss (gain) $2,320 $2,216 $—Total recognized in net periodic benefit cost and other comprehensive income (loss) $2,320 $2,216 $384 Years Ended December 31, 2017 2016Actuarial (gain) loss $75 $2,830Total recognized in other comprehensive (income) loss $75 $2,830There is zero estimated loss for pension benefits to be amortized from AOCI into net periodic benefit cost in fiscal year 2018.Estimated Future Benefit PaymentsExpected benefit payments are estimated using the same assumptions used in determining the Plan’s benefit obligation at December 31, 2017. Because benefit payments will dependon future employment and compensation levels, average years employed, average life spans, and payment elections, among other factors, changes in any of these factors couldsignificantly affect these expected amounts. The following table provides expected benefit payments under our pension and post-retirement plans (in thousands): Expected BenefitPayments2018 $6,1752019 6,3442020 6,5192021 6,6982022 6,882Thereafter 37,351Total $69,969Aggregate expected contributions in the coming fiscal year are expected to be $3.8 million.Plan Assets - Description of plan assets and investment objectivesThe assets of the Plans consist primarily of private and public equity, government and corporate bonds, among others. The asset allocations of the Plans are maintained to meetregulatory requirements where applicable. Any contributions to the Plans are made to a pension trust for the benefit of plan participants.The principal investment objectives are to ensure the availability of funds to pay pension benefits as they become due under a broad range of future economic scenarios, to maximizelong-term investment return with an acceptable level of risk based on our pension and post-retirement obligations, and to be broadly diversified across and within the capital marketsto insulate asset values against adverse experience in any one market. Each asset class has broadly diversified characteristics. Substantial biases toward any particular investing styleor type of security are sought to be avoided by managing the aggregation of all accounts with portfolio benchmarks. Asset and benefit obligation forecasting studies are conductedperiodically, generally every two to three years, or when significant changes have occurred in market conditions, benefits, participantF-52HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDdemographics or funded status. Decisions regarding investment policy are made with an understanding of the effect of asset allocation on funded status, future contributions andprojected expenses.The plans’ weighted-average asset targets and actual allocations as a percentage of plan assets, including the notional exposure of future contracts by asset categories atDecember 31, 2017, are as follows: Target December 31, 2017Liability hedging 36.1% 51.2%Equities 20.5% 16.6%Hedge funds 24.5% 23.8%Corporate bonds 13.9% 7.5%Property 5.0% 0.9%Total 100.0% 100.0%Investment ValuationGMSL’s plan investments related to the Global Marine Systems Pension Plan consist of the following (in thousands): December 31, 2017 2016Equities $38,568 $47,623Liability Hedging Assets 66,723 40,635Hedge Funds 46,405 47,068Corporate Bonds 25,736 24,492Property 8,798 7,544Other 623 205Total market value of assets 186,853 167,567Present value of liabilities (205,423) (189,586)Net pension liability $(18,570) $(22,019)GMSL’s plan investments related to the MNOPF consist of the following (in thousands): December 31, 2017 2016Equities $294 $526Liability Hedging Assets 1,861 1,641Hedge Funds 457 519Corporate Bonds 507 519Property 146 —Total market value of assets 3,265 3,205Present value of liabilities (3,237) (3,013)Net pension asset (liability) $28 $192Investments are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants atthe measurement date. Generally, investments are valued based on information provided by fund managers to our trustee as reviewed by management and its investment advisers.Investments in securities traded on a national securities exchange are valued at the last reported sales price on the last business day of the year. If no sale was reported on that date,they are valued at the last reported bid price. Investments in securities not traded on a national securities exchange are valued using pricing models, quoted prices of securities withsimilar characteristics or discounted cash flows. Over-the-counter (OTC) securities and government obligations are valued at the bid price or the average of the bid and asked priceon the last business day of the year from published sources where available and, if not available, from other sources considered reliable. Depending on the types and contractualterms of OTC derivatives, fair value is measured using a series of techniques, such as Black-Scholes option pricing model, simulation models or a combination of various models.Alternative investments, including investments in private equities, private bonds, limited partnerships, hedge funds, real assets and natural resources, do not have readily availablemarket values. These estimated fair values may differ significantly from the values that would have been used had a ready market for these investments existed, and such differencescould be material. Private equity, private bonds, limited partnershipF-53HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDinterests, hedge funds and other investments not having an established market are valued at net asset values as determined by the investment managers, which management hasdetermined approximates fair value. Private equity investments are often valued initially based upon cost; however, valuations are reviewed utilizing available market data todetermine if the carrying value of these investments should be adjusted. Such market data primarily includes observations of the trading multiples of public companies consideredcomparable to the private companies being valued. Investments in real assets funds are stated at the aggregate net asset value of the units of these funds, which management hasdetermined approximates fair value. Real assets and natural resource investments are valued either at amounts based upon appraisal reports prepared by appraisers or at amounts asdetermined by an internal appraisal performed by the investment manager, which management has determined approximates fair value.Purchases and sales of securities are recorded as of the trade date. Realized gains and losses on sales of securities are determined on the basis of average cost. Interest income isrecognized on the accrual basis. Dividend income is recognized on the ex-dividend date.The following table sets forth by level, within the fair value hierarchy, the pension assets and liabilities at fair value for the Global Marine Systems Pension Plan (in thousands):As of December 31, 2017 Fair Value Measurement Using: Level 1 Level 2 TotalEquities $— $38,568 $38,568Liability Hedging Assets — 66,723 66,723Hedge Funds — 46,405 46,405Corporate Bonds — 25,736 25,736Property — 8,798 8,798Other 243 380 623Total Plan Net Assets $243$186,610$186,853As of December 31, 2016 Fair Value Measurement Using: Level 1 Level 2 TotalEquities $— $47,623 $47,623Liability Hedging Assets — 40,635 40,635Hedge Funds — 47,068 47,068Corporate Bonds — 24,492 24,492Property — 7,544 7,544Other (37) 242 205Total Plan Net Assets $(37) $167,604 $167,567The following table sets forth by level, within the fair value hierarchy, the pension assets and liabilities at fair value for the MNOPF (in thousands):As of December 31, 2017 Fair Value Measurement Using: Level 3 TotalEquities $294 $294Hedge Funds 457 457Corporate Bonds 507 507Liability Hedging Assets 1,861 1,861Property 146 146Total Plan Net Assets $3,265 $3,265As of December 31, 2016 Fair Value Measurement Using: Level 3 TotalEquities $525 $525Hedge Funds 519 519Corporate Bonds 519 519Liability Hedging Assets 1,641 1,641Total Plan Net Assets $3,204 $3,204F-54HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDThe table below set forth a summary of changes in the fair value of the Level 3 pension assets for the period from December 31, 2015 through December 31, 2017 for the MNOPF(in thousands):Balance at December 31, 2015 $2,937Actual return on plan assets 972Contributions 20Benefits paid (150)Foreign currency gain (loss) (575)Balance at December 31, 2016 3,204Actual return on plan assets (68)Contributions —Benefits paid (157)Foreign currency gain (loss) 286Balance at December 31, 2017 $3,26517. Share-based CompensationOn April 11, 2014, HC2’s Board of Directors adopted the HC2 Holdings, Inc. Omnibus Equity Award Plan (the "2014 Plan"), which was originally approved at the annualmeeting of stockholders held on June 12, 2014. On April 21, 2017, the Board of Directors, subject to stockholder approval, adopted the Amended and Restated 2014 OmnibusEquity Award Plan (the "Restated 2014 Plan"). The Restated 2014 Plan was approved by HC2's stockholders at the annual meeting of stockholders held on June 14, 2017. Subjectto adjustment as provided in the Restated 2014 Plan, the Restated 2014 Plan authorizes the issuance of 3,500,000 shares of common stock of HC2, plus any shares that againbecome available for awards under the 2014 Plan, plus any shares that again become available for awards under the Restated 2014 Plan.The Restated 2014 Plan provides that no further awards will be granted pursuant to the 2014 Plan. However, awards previously granted under the 2014 Plan will continue to besubject to and governed by the terms of the 2014 Plan. The Compensation Committee of HC2's Board of Directors administers the 2014 Plan and the Restated 2014 Plan and hasbroad authority to administer, construe and interpret the plans.The Restated 2014 Plan provides for the grant of awards of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards,restricted stock units, other stock based awards, performance compensation awards (including cash bonus awards) or any combination of the foregoing. The Company typicallyissues new shares of common stock upon the exercise of stock options, as opposed to using treasury shares.The Company follows guidance which addresses the accounting for share-based payment transactions whereby an entity receives employee services in exchange for either equityinstruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Theguidance generally requires that such transactions be accounted for using a fair-value based method and share-based compensation expense be recorded, based on the grant date fairvalue, estimated in accordance with the guidance, for all new and unvested stock awards that are ultimately expected to vest as the requisite service is rendered.The Company granted 331,616 and 1,506,848 options during the years ended December 31, 2017 and 2016, respectively. Of the total options granted during the year endedDecember 31, 2016, 6,848 options were granted to Philip Falcone, pursuant to a standalone option agreement entered in connection with Mr. Falcone’s appointment as Chairman,President and Chief Executive Officer of the Company, and not pursuant to the Omnibus Plan. The anti-dilution protection provision contained in such standalone option agreementwas canceled in April 2016 and replaced with an award consisting solely of 1,500,000 premium stock options issued under the Omnibus Plan.The weighted average fair value at date of grant for options granted during the years ended December 31, 2017, and 2016 was $2.72 and $1.09, respectively, per option. The fairvalue of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions shown as a weighted average for theyear: Years Ended December 31, 2017 2016 2015Expected option life (in years) 0.39 - 6.10 4.70 - 6.00 4.80 - 5.50Risk-free interest rate 1.11 - 2.22% 1.27 - 1.35% 1.49 - 1.73%Expected volatility 47.04 - 48.29% 39.58 - 55.58% 36.29 - 53.83%Dividend yield —% —% —%Total share-based compensation expense recognized by the Company and its subsidiaries under all equity compensation arrangements was $5.2 million, $8.3 million and $11.1million for the years ended December 31, 2017 and 2016 and 2015, respectively. All grants are time based and vest either immediately or over a period of up to 4 years. TheCompany recognizes compensation expense for equity awards, reduced by actual forfeitures, using the straight-line basis.F-55HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDRestricted StockA summary of HC2’s restricted stock activity is as follows: Shares Weighted AverageGrant Date FairValueUnvested - December 31, 2015 790,688 $8.14Granted 301,040 $3.89Vested (959,196) $7.17Forfeited (16,611) $5.03Unvested - December 31, 2016 115,921 $5.59Granted 1,847,473 $5.41Vested (374,988) $5.64Forfeited — $—Unvested - December 31, 2017 1,588,406 $5.36As of December 31, 2017, the unvested restricted stock represented $7.5 million of compensation expense that is expected to be recognized over the weighted average remainingvesting period of approximately 3.0 years. The number of shares of unvested restricted stock expected to vest is 1,588,406.Stock OptionsA summary of HC2’s stock option activity is as follows: Shares Weighted AverageExercise PriceOutstanding - December 31, 2015 5,361,285 $5.48Granted 1,506,848 $10.49Exercised (2,000) $4.06Forfeited (2,800) $4.06Expired (34,236) $6.68Outstanding - December 31, 2016 6,829,097 $6.58Granted 331,616 $5.50Exercised (134,539) $3.53Forfeited — $—Expired (36,318) $9.00Outstanding - December 31, 2017 6,989,856 $6.57 Eligible for exercise 5,742,604 $5.93As of December 31, 2017, intrinsic value and average remaining life of the Company's outstanding options were $5.6 million and approximately 7.1 years, and intrinsic value andaverage remaining life of the Company's exercisable options were $5.5 million and approximately 6.8 years.As of December 31, 2017, unvested stock options outstanding represented $1.2 million of compensation expense and are expected to be recognized over the weighted averageremaining vesting period of 1.7 years. There are 1,247,252 unvested stock options expected to vest, with a weighted average remaining life of 8.5 years, a weighted average exerciseprice of $9.51, and an intrinsic value of $0.1 million.18. EquityNovember 2015 Public Offering of Common Stock by the CompanyOn November 4, 2015, the Company entered into an underwriting agreement relating to the issuance and sale of 7,350,000 shares of the Company’s common stock in a publicoffering (the "November 2015 Offering"). In addition, on November 5, 2015 the underwriter in the November 2015 Offering exercised its option to purchase an additional1,102,500 shares of common stock from the Company. The total number of shares sold by the Company in the November 2015 Offering was 8,452,500 shares. The November2015 Offering closed on November 9, 2015. The net proceeds to the Company from the November 2015 Offering, after deducting underwriting discounts and commissions andoffering expenses, were approximately $54.7 million.F-56HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDSeries A Preferred Stock, Series A-1 Preferred Stock and Series A-2 Preferred StockThe Company’s preferred shares authorized, issued and outstanding consisted of the following: December 31, 2017 2016Preferred shares authorized, $0.001 par value 20,000,000 20,000,000Series A shares issued and outstanding 12,500 14,808Series A-1 shares issued and outstanding — 1,000Series A-2 shares issued and outstanding 14,000 14,000In connection with the issuance of the Series A Convertible Preferred Stock, the Company adopted a Certificate of Designation of Series A Convertible Participating PreferredStock adopted on May 29, 2014 (the "Series A Certificate"). In connection with the issuance of the Series A-1 Preferred Stock on September 22, 2014, the Company adopted theCertificate of Designation of Series A-1 Convertible Participating Preferred Stock (the "Series A-1 Certificate") and also amended and restated the Series A Certificate. Inconnection with the issuance of the Series A-2 Preferred Stock on January 5, 2015, the Company adopted the Certificate of Designation of Series A-2 Convertible ParticipatingPreferred Stock (the "Series A-2 Certificate") and also amended and restated the Series A Certificate and the Series A-1 Certificate. On August 10, 2015, the Company adoptedcertain Certificates of Correction of the Certificates of Amendment to the Certificates of Designation of the Series A Certificate, the Series A-1 Certificate and the Series A-2Certificate, and on June 24, 2016 the Company adopted certain amendments to the Series A-1 Certificate of Designation. The Series A Certificate, the Series A-1 Certificate and theSeries A-2 Certificate together, as amended, are referred to as the "Certificates of Designation."The following summary of the terms of the Preferred Stock and the Certificates of Designation is qualified in its entirety by the complete terms of the Certificates of Designation.Dividends. The Preferred Stock accrues a cumulative quarterly cash dividend at an annualized rate of 7.50%. The accrued value of the Preferred Stock will accrete quarterly at anannualized rate of 4.00% that is reduced to 2.00% or 0.00% if the Company achieves specified rates of growth measured by increases in its net asset value; provided, that theaccreting dividend rate will be 7.25% in the event that (i) the daily volume weighted average price ("VWAP") of the common stock is less than a certain threshold amount, (ii) thecommon stock is not registered under Section 12(b) of the Securities Exchange Act of 1934, as amended, (iii) following May 29, 2015, the common stock is not listed on certainnational securities exchanges or (iv) the Company is delinquent in the payment of any cash dividends. The Preferred Stock is also entitled to participate in cash and in-kinddistributions to holders of shares of common stock on an as-converted basis.Optional Conversion. Each share of Preferred Stock may be converted by the holder into common stock at any time based on the then applicable conversion price. Pursuant to theSeries A Certificate, each share of Series A Preferred Stock is currently convertible at a conversion price of $4.25. Pursuant to the Series A-2 Certificate, each share of Series A-2Preferred Stock is currently convertible at a conversion price of $7.75. Such conversion prices are subject to adjustment for dividends, certain distributions, stock splits,combinations, reclassifications, reorganizations, mergers, recapitalizations and similar events, as well as in connection with issuances of equity or equity-linked or other comparablesecurities by the Company at a price per share (or with a conversion or exercise price or effective issue price) that is below the applicable conversion price (which adjustment shallbe made on a weighted average basis).Redemption by the Holders / Automatic Conversion. On May 29, 2021, holders of the Preferred Stock are entitled to cause the Company to redeem the Preferred Stock at theaccrued value per share plus accrued but unpaid dividends (to the extent not included in the accrued value of Preferred Stock). Each share of Preferred Stock that is not so redeemedwill be automatically converted into shares of common stock at the conversion price then in effect. Upon a change of control (as defined in the Certificates of Designation) holdersof the Preferred Stock are entitled to cause the Company to redeem their Preferred Stock at a price per share of Preferred Stock equal to the greater of (i) the accrued value of thePreferred Stock, which amount would be multiplied by 150% in the event of a change of control occurring on or prior to May 29, 2017, plus any accrued and unpaid dividends (tothe extent not included in the accrued value of Preferred Stock), and (ii) the value that would be received if the share of Preferred Stock were converted into common stockimmediately prior to the change of control.Redemption by the Company. At any time after May 29, 2017, the Company may redeem the Preferred Stock, in whole but not in part, at a price per share generally equal to 150%of the original accrued value or on that date, plus accrued but unpaid dividends (to the extent not included in the accrued value of Preferred Stock), subject to the holder’s right toconvert prior to such redemption.Forced Conversion. After May 29, 2017, the Company may force conversion of the Preferred Stock into common stock if the common stock’s thirty-day VWAP exceeds 150% ofthe then-applicable Conversion Price and the common stock’s daily VWAP exceeds 150% of the then applicable Conversion Price for at least twenty trading days out of the thirtytrading day period used to calculate the thirty-day VWAP. In the event of a forced conversion, the holders of Preferred Stock will have the ability to elect cash settlement in lieu ofconversion if certain market liquidity thresholds for the common stock are not achieved.Liquidation Preference. The Series A Preferred Stock ranks at parity with the Series A-1 Preferred Stock and the Series A-2 Preferred Stock. In the event of any liquidation,dissolution or winding up of the Company (any such event, a "Liquidation Event"), the holders of Preferred Stock are entitled to receive per share the greater of (i) the accrued valueof the Preferred Stock, which amount would be multiplied by 150% in theF-57HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDevent of a Liquidation Event occurring on or prior to May 29, 2017, plus any accrued and unpaid dividends (to the extent not included in the accrued value of Preferred Stock), and(ii) the value that would be received if the share of Preferred Stock were converted into common stock immediately prior to such occurrence. The Preferred Stock will rank junior toany existing or future indebtedness but senior to the common stock and any future equity securities other than any future senior or pari-passu preferred stock issued in compliancewith the Certificates of Designation.Voting Rights. Except as required by applicable law, the holders of the shares of each series of Preferred Stock are entitled to vote on an as-converted basis with the holders of theother series of Preferred Stock (on an as-converted basis) and holders of the Company’s common stock on all matters submitted to a vote of the holders of common stock. Certainseries of Preferred Stock are entitled to vote with the holders of certain other series of Preferred Stock on certain matters, and separately as a class on certain limited matters. Subjectto maintenance of certain ownership thresholds by the initial purchasers of the Series A Preferred Stock and the initial purchasers of the Series A-1 Preferred Stock (collectively, the"Series A and Series A-1 Preferred Purchasers"), the holders of the shares of Preferred Stock also have the right to vote shares of Preferred Stock as a separate class for at least onedirector, as discussed below under "Board Rights."Consent Rights. For so long as any of the Preferred Stock is outstanding, consent of the holders of shares representing at least 75% of certain of the Preferred Stock thenoutstanding is required for certain material actions.Participation Rights. Pursuant to the securities purchase agreements entered into with the initial purchasers of the Series A Preferred Stock, the Series A-1 Preferred Stock and theSeries A-2 Preferred Stock, subject to meeting certain ownership thresholds, certain purchasers of the Series A Preferred Stock, the Series A-1 Preferred Stock and the Series A-2Preferred Stock are entitled to participate, on a pro-rata basis in accordance with their ownership percentage, determined on an as-converted basis, in issuances of equity and equitylinked securities by the Company. In addition, subject to meeting certain ownership thresholds, certain initial purchasers of the Series A Preferred Stock, the Series A-1 PreferredStock and the Series A-2 Preferred Stock will be entitled to participate in issuances of preferred securities and in debt transactions of the Company.Preferred Share ConversionsDG ConversionOn May 2, 2017, the Company entered into an agreement with DG Value Partners, LP and DG Value Partners II Master Funds LP, holders (collectively, "DG Value") of theCompany's Series A Preferred Stock and Series A-1 Preferred Stock, to convert and exchange all of DG Value's 2,308 shares of Series A Preferred Stock and 1,000 shares ofSeries A-1 Preferred Stock into a total of 803,469 shares of the Company's common stock. 17,500 shares of common stock issued in the conversion were issued as considerationfor the agreement by DG Value to convert its Preferred Stock. The fair value of the 17,500 shares was $0.1 million on the date of issuance and was recorded within Preferred stockand deemed dividends from conversion line item of the Consolidated Statements of Operations as a deemed dividend.Luxor and Corrib ConversionsOn August 2, 2016, the Company entered into separate agreements with each of Corrib Master Fund, Ltd. ("Corrib"), then a holder of 1,000 shares of Series A Preferred Stock,and certain investment entities managed by Luxor Capital Group, LP ( "Luxor"), that together then held 9,000 shares of Series A-1 Preferred Stock, that govern their respectivePreferred Share Conversions. In the Corrib Preferred Share Conversion (i) Corrib converted 1,000 shares of Series A Preferred Stock into 238,492 shares of the Company’scommon stock, and (ii) in consideration of Corrib making such conversion, HC2 issued 15,318 newly issued shares of common stock to Corrib (such shares, the "CorribConversion Share Consideration"). In the Luxor Preferred Share Conversion, (i) Luxor converted 9,000 shares of Series A-1 Preferred Stock into 2,119,765 shares of the commonstock and (ii) in consideration of Luxor making such conversion, HC2 issued 136,149 newly issued shares of common stock to Luxor (such shares, the "Luxor Conversion ShareConsideration" and, together with the Corrib Conversion Share Consideration, the "Conversion Share Consideration"). The fair value of the Conversion Share Consideration was$0.7 million on the date of issuance and was recorded within Preferred stock and deemed dividends from conversion line item of the Consolidated Statements of Operations as adeemed dividend.The Company also agreed to provide the following two forms of additional consideration for as long as the Preferred Stock remained entitled to receive dividend payments (the"Additional Share Consideration").The Company agreed that in the event that Corrib and Luxor would have been entitled to any Participating Dividends payable, had they not converted the Preferred Stock (asdefined in the respective Series A and Series A-1 Certificate of Designation), after the date of their Preferred Share conversion, then the Company will issue to Corrib and Luxor,on the date such Participating Dividends become payable by the Company, in a transaction exempt from the registration requirements of the Securities Act the number of shares ofcommon stock equal to (a) the value of the Participating Dividends Corrib or Luxor would have received pursuant to Sections (2)(c) and (2)(d) of the respective Series A and SeriesA-1 Certificate of Designation, divided by (b) the Thirty Day VWAP (as defined in the respective Series A and Series A-1 Certificate of Designation) for the period ending twobusiness days prior to the underlying event or transaction that would have entitled Corrib or Luxor to such Participating Dividend had Corrib’s or Luxor’s Preferred Stock remainunconverted.F-58HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDFurther, the Company agreed that it will issue to Corrib and Luxor, on each quarterly anniversary commencing May 29, 2017 (or, if later, the date on which the correspondingdividend payment is made to the holders of the outstanding Preferred Stock), through and until the Maturity Date (as defined in the respective Series A and Series A-1 Certificate ofDesignation), in a transaction exempt from the registration requirements of the Securities Act the number of shares of common stock equal to (a) 1.875% the Accrued Value (asdefined in the respective Series A and Series A-1 Certificate of Designation) of Corrib’s or Luxor’s Preferred Stock as of the Closing Date (as defined in applicable VoluntaryConversion Agreements) divided by (b) the Thirty Day VWAP (as defined in the respective Series A and Series A-1 Certificate of Designation) for the period ending two businessdays prior to the applicable Dividend Payment Date (as defined in the respective Series A and Series A-1 Certificate of Designation).For the year ended December 31, 2017, 44,555 and 5,013 shares of the Company's common stock have been issued to Luxor and Corrib, respectively, in conjunction with theConversion agreement.The fair value of the Additional Share Consideration was valued by the Company at $1.5 million on the date of issuance and was recorded within Preferred stock and deemeddividends from conversion line item of the Consolidated Statements of Operations as a deemed dividend.Hudson Bay ConversionOn October 7, 2016, the Company entered into an agreement with Hudson Bay Absolute Return Credit Opportunities Master Fund, LTD. ("Hudson") to convert and exchange allof Hudson's 12,500 shares of the Company's Series A Convertible Participating Preferred Stock into a total of 3,751,838 shares of the Company's common stock.Pursuant to the terms of the Series A Voluntary Conversion Agreement, HC2 and Hudson mutually agreed that on the closing date of the voluntary conversion, (i) Hudsonvoluntarily converted 12,499 of the 12,500 shares of Series A Preferred Stock it held into 2,980,912 shares of HC2’s common stock pursuant to the terms of the Certificate ofDesignation of Series A Convertible Participating Preferred Stock (the "Series A Certificate of Designation"), with such amount representing the number of shares of commonstock into which the 12,499 shares of Series A Preferred Stock held by Hudson convertible pursuant to the terms of the Series A Certificate of Designation and (ii) in considerationof the conversion referenced in clause (i) above, the Company issued to the Series A holder in exchange for the single remaining share of Series A Preferred Stock held, in anexchange transaction exempt from the registration requirements of the Securities Act of 1933 and all of the rules and regulations promulgated thereunder (the "Securities Act")under Section 3(a)(9) of the Securities Act, 770,926 shares of common stock. The fair value of the 770,926 shares was $4.4 million on the date of issuance and was recorded withinPreferred stock and deemed dividends from conversion line item of the Consolidated Statements of Operations as a deemed dividend.Preferred Share DividendsDuring 2017, HC2's Board of Directors declared cash dividends with respect to HC2’s issued and outstanding Preferred Stock, as presented in the following table (in thousands):2017Declaration Date March 31, 2017 June 30, 2017 September 30, 2017 December 31, 2017Holders of Record Date March 31, 2017 June 30, 2017 September 30, 2017 December 31, 2017Payment Date April 17, 2017 July 17, 2017 October 16, 2017 January 16, 2018Total Dividend $563 $500 $500 $5002016Declaration Date March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016Holders of Record Date March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016Payment/Accrual Date April 15, 2016 July 15, 2016 October 15, 2016 January 15, 2017Total Dividend $988 $988 $800 $56319. Related PartiesHC2 In January 2015, the Company entered into a services agreement (the "Services Agreement") with Harbinger Capital Partners, a related party of the Company, with respect to theprovision of services that may include providing office space and operational support and each party making available their respective employees to provide services as reasonablyrequested by the other party, subject to any limitations contained in applicable employment agreements and the terms of the Services Agreement. The Company recognized $3.6million and $3.1 million of expenses under the Services Agreement for the years ended December 31, 2017 and 2016, respectively.F-59HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDGMSLIn November 2017, GMSL, acquired the trenching a cable lay services business from Fugro N.V. ("Fugro"). As part of the transaction, Fugro became a 23.6% holder of GMSL'sparent, Global Marine Holdings, LLC ("GMH"). GMSL, in the normal course of business, incurred expenses with Fugro for various survey and other contractual services. For theyear ended December 31, 2017, GMSL recognized $1.7 million of expenses for such services with Fugro.The parent company of GMSL, GMH, incurred management fees of $0.7 million for each of the years ended December 31, 2017 and 2016, respectively.GMSL has investments in various entities for which it exercises significant influence. A summary of transactions with such entities and balances outstanding are as follows (inthousands): Years Ended December 31, 2017 2016Net revenue $25,183 $28,127Operating expenses $7,350 $7,272Interest expense $1,395 $1,498Dividends $4,383 $2,200 December 31, 2017 2016Accounts receivable $8,654 $2,644Debt obligations $35,289 $34,766Accounts payable $1,925 $2,760 Life SciencesR2 incurred $2.0 million related to a milestone. Of the $2.0 million, $1.5 million was associated with Blossom Innovations, LLC, a related party.OtherAs part of the acquisition of DTV, a wholly-owned subsidiary of Broadcasting, issued $2.4 million in Senior Secured Promissory Notes ("Notes") to the sellers of DTV, suchnotes constituting a portion of the consideration delivered in connection with the transaction. Subsequent to the transaction, the sellers of the Notes entered into consultingagreements with DTV.20. Operating Segment and Related InformationThe Company currently has two primary reportable geographic segments - United States and United Kingdom. The Company has seven reportable operating segments based onmanagement’s organization of the enterprise - Construction, Marine Services, Energy, Telecommunications, Insurance, Life Sciences, Other, and a non-operating Corporatesegment. Net revenue and long-lived assets by geographic segment is reported on the basis of where the entity is domiciled. All inter-segment revenues are eliminated. TheCompany has no single customer representing greater than 10% of its revenues.Summary information with respect to the Company’s geographic and operating segments is as follows (in thousands): Years Ended December 31, 2017 2016 2015Net Revenue by Geographic Region United States $1,447,065 $1,115,337 $712,498United Kingdom 158,257 417,933 395,917Other 28,801 24,856 12,391Total $1,634,123 $1,558,126 $1,120,806F-60HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED Years Ended December 31, 2017 2016 2015Net revenue Construction $578,989 $502,658 $513,770Marine Services 169,453 161,864 134,926Energy 16,415 6,430 6,765Telecommunications 701,898 735,043 460,355Insurance 151,577 142,457 2,865Other 15,791 9,674 2,125Total net revenue 1,634,123 1,558,126 1,120,806 Income (loss) from operations Construction 37,177 49,639 $42,114Marine Services (880) (323) 10,898Energy (2,770) (330) (888)Telecommunications 6,359 4,150 238Insurance 25,353 (812) (176)Life Sciences (17,202) (10,389) (6,404)Other (9,299) (5,756) (6,198)Non-operating Corporate (39,870) (37,600) (38,871)Total income (loss) from operations (1,132) (1,421) 713 Interest expense (55,098) (43,375) (39,017)Gain (loss) on contingent consideration 11,411 (8,929) —Income from equity investees 17,840 10,768 (1,499)Other expenses, net (12,772) (2,836) (6,820)Income (loss) from continuing operations before income taxes (39,751) (45,793) (46,623)Income tax (expense) benefit (10,740) (51,638) 10,882Income (loss) from continuing operations (50,491) (97,431) (35,741)Loss from discontinued operations — — (21)Net loss (50,491) (97,431) (35,762)Less: Net loss attributable to noncontrolling interest and redeemable noncontrolling interest 3,580 2,882 197Net loss attributable to HC2 Holdings, Inc. (46,911) (94,549) (35,565)Less: Preferred stock and deemed dividends from conversions 2,767 10,849 4,285Net loss attributable to common stock and participating preferred stockholders $(49,678) $(105,398) $(39,850) Years Ended December 31, 2017 2016 2015Depreciation and Amortization Construction $5,583 $1,892 $2,016Marine Services 22,898 22,007 18,771Energy 5,071 2,248 1,635Telecommunications 371 504 417Insurance (1) (4,373) (3,771) 2Life Sciences 186 124 21Other 1,508 1,489 —Non-operating Corporate 71 — 1,934Total $31,315 $24,493 $24,796(1) Balance represents amortization of negative VOBA, which increases net income.F-61HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED Years Ended December 31, 2017 2016 2015Capital Expenditures (2) Construction $11,684 $8,243 $4,969Marine Services 10,519 12,231 10,651Energy 8,569 7,211 4,750Telecommunications 48 831 449Insurance 597 128 —Life Sciences 465 195 271Other 25 45 234Non-operating Corporate 18 164 —Total $31,925 $29,048 $21,324(2) The above capital expenditures exclude assets acquired under terms of capital lease and vendor financing obligations. December 31, 2017 2016Investments Construction $250 $—Marine Services 66,322 40,698Insurance 1,493,589 1,407,996Life Sciences 17,771 13,067Other 1,518 6,778Eliminations (35,852) (40,621)Total $1,543,598 $1,427,918 December 31, 2017 2016Property, Plant, and Equipment, net United States $162,788 $136,905United Kingdom 204,866 141,946Other 7,006 7,607Total $374,660 $286,458 December 31, 2017 2016Total Assets Construction $342,806 $295,246Marine Services 389,500 275,660Energy 83,607 84,602Telecommunications 114,445 125,965Insurance 2,117,045 2,027,059Life Sciences 31,485 28,868Other 139,364 10,914Non-operating Corporate 35,291 27,583Eliminations (35,852) (40,621)Total $3,217,691 $2,835,276F-62HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED21. Quarterly Results of Operations (Unaudited)The following is a tabulation of the unaudited quarterly results of operations for the years ended December 31, 2017 and 2016 (in thousands, except per share amounts): Quarters Ended March 31, 2017 June 30, 2017 September 30, 2017 December 31, 2017Revenue $354,542 $340,383 $368,672 $418,949Other Revenue 36,026 38,269 37,737 39,545Net revenue 390,568 378,652 406,409 458,494Cost of revenue 314,414 308,664 324,673 365,318Other operating expenses 75,182 81,183 71,171 94,650Income (loss) from operations 972 (11,195) 10,565 (1,474) Net loss attributable to common stock and participating preferred stockholders $(15,079) $(18,704) $(6,670) $(9,225) Weighted average common shares outstanding-basic and diluted 41,948 42,691 43,013 43,623 Basic and Diluted income (loss) per common share: Net income (loss) attributable to HC2 Holdings, Inc. $(0.36) $(0.44) $(0.16) $(0.21) Quarters Ended March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016Revenue $302,606 $323,131 $378,538 $411,394Other revenue 29,138 36,162 34,546 42,611Net revenue 331,744 359,293 413,084 454,005Cost of revenue 274,550 284,483 333,860 361,148Other operating expenses 76,567 68,832 72,370 87,737Income (loss) from operations (19,373) 5,978 6,854 5,120 Income (loss) from continuing operations attributable to HC2 Holdings, Inc. -common holders (31,531) 891 (7,506) (67,252)Income (loss) from continuing operations attributable to HC2 Holdings, Inc. -preferred holders — — — —Net loss attributable to common stock and participating preferred stockholders $(31,531) $891 $(7,506) $(67,252) Weighted average common shares outstanding-basic and diluted 35,262 35,518 36,627 41,570 Basic income (loss) per common share: Income (loss) from continuing operations attributable to HC2 Holdings, Inc. -common holders $(0.89) $0.02 $(0.20) $(1.62)Income (loss) from continuing operations attributable to HC2 Holdings, Inc. -preferred holders — — — —Net income (loss) attributable to HC2 Holdings, Inc. $(0.89) $0.02 $(0.20) $(1.62) Diluted income (loss) per common share: Income (loss) from continuing operations attributable to HC2 Holdings, Inc. -common holders $(0.89) $0.02 $(0.20) $(1.62)Income (loss) from continuing operations attributable to HC2 Holdings, Inc. -preferred holders — — — —Net income (loss) attributable to HC2 Holdings, Inc. $(0.89) $0.02 $(0.20) $(1.62)Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not agree with per shareamounts for the year.F-63HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED22. Basic and Diluted Loss Per Common ShareEPS is calculated using the two-class method, which allocates earnings among common stock and participating securities to calculate EPS when an entity's capital structure includeseither two or more classes of common stock or common stock and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities. As such, shares of any unvested restricted stock of the Company are considered participating securities.The dilutive effect of options and their equivalents (including non-vested stock issued under stock-based compensation plans), is computed using the "treasury" method.The Company had no dilutive common share equivalents during the years ended December 31, 2017, 2016 and 2015, due to the results of operations being a loss from continuingoperations, net of tax. The Company issued a warrant, Preferred Stock, as well as outstanding stock options and unvested RSUs granted under the Prior Plan and Omnibus Plan,each of which were potentially dilutive but were excluded from the calculation of diluted loss per common share due to their antidilutive effect.The following table presents a reconciliation of net income (loss) used in basic and diluted EPS calculations (in thousands, except per share amounts): Years Ended December 31, 2017 2016 2015Loss from continuing operations attributable to common stock and participating preferred stockholders $(49,678) $(105,398) $(39,829)Loss from discontinued operations — — (21)Net loss attributable to common stock and participating preferred stockholders $(49,678) $(105,398) $(39,850) Earnings allocable to common shares: Numerator for basic and diluted EPS Participating shares at end of period: Weighted-average Common stock outstanding - basic and diluted 42,824 37,260 26,482 Percentage of loss allocated to: Common Stock 100% 100% 100%Preferred Stock —% —% —% Loss attributable to common shares - basic and diluted: Loss from continuing operations $(49,678) $(105,398) $(39,829)Loss from discontinued operations — — (21)Net Loss $(49,678) $(105,398) $(39,850) Denominator for basic and diluted EPS Weighted average common shares outstanding - basic and diluted 42,824 37,260 26,482 Basic and Diluted EPS Net loss attributable to common stock and participating preferred stockholders - basic and diluted $(1.16) $(2.83)$(1.50)23. Subsequent EventsThe Company evaluated subsequent events from December 31, 2017 through March 14, 2018, the date the Consolidated Financial Statements were issued, and noted the following:On February 4, 2018, Broadcasting entered into a First Amendment to the Bridge Loan, which amends the existing Bridge Loan, to add an additional $27.0 million in principalborrowing capacity to the existing credit agreement.On February 6, 2018, Broadcasting borrowed $42.0 million in principal amount of the Bridge Loan, the net proceeds of which will be used to finance certain acquisitions, to payfees, costs and expenses relating to the Bridge Loans, and for general corporate purposes. The total aggregate principal amount of the Bridge Loan outstanding after the February 6,2018 borrowing was $102.0 million.On February 7, 2018, a wholly-owned subsidiary of Broadcasting closed on the acquisition of Northstar's broadcast television stations. The total consideration paid in February2018 was $33.0 million.F-64HC2 HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUEDPrior to December 31, 2017, wholly owned subsidiaries of Broadcasting had signed purchase agreements, which are subject to FCC approval and closing conditions, for a totalconsideration of $8.3 million. As of March 14, 2018, a portion of the transactions received FCC approval and closed for a total consideration of $4.6 million. Subsequent to December 31, 2017, wholly-owned subsidiaries of Broadcasting had signed purchase agreements to acquire broadcasting assets, subject to FCC approval andclosing conditions, for a total consideration of $8.7 million.In February 2018, the United States Congress passed its omnibus budget for 2018, which included a retroactive Alternative Fuel Excise Tax credit through December 31, 2017 andwill provide approximately $2.6 million in net income to ANG, to be recorded in 2018.F-65HC2 HOLDINGS, INC.SCHEDULE ISummary of investments - other than investments in related partiesDecember 31, 2017(in thousands) Amortized Cost Fair Value Amount at whichshown in thebalance sheetFixed maturity securities Bonds United States Government and government agencies and authorities $15,283 $15,722 $15,722States, municipalities and political subdivisions 377,549 395,450 395,450Foreign governments 6,331 5,999 5,999Public utilities 117,782 128,058 128,058Convertibles and bonds with warrants attached 7,499 7,409 7,409All other corporate bonds 742,127 787,988 787,988Total fixed maturity securities 1,266,571 1,340,626 1,340,626Equity securities Industrial, miscellaneous and all other 4,938 4,928 4,928Nonredeemable preferred stocks 40,902 42,572 42,572Total equity securities 45,840 47,500 47,500Mortgage loans 52,109 52,110 52,109Policy loans 17,944 17,944 17,944Other invested assets 74,775 243,416 85,419Total investments $1,457,239 $1,701,596 $1,543,598F-66HC2 HOLDINGS, INC.SCHEDULE IICondensed Financial Information of the Registrant (Registrant Only)BALANCE SHEETS(in thousands) December 31, 2017 2016Assets Cash and cash equivalents $29,433 $21,722Other current assets 558 422Total current assets 29,991 22,144Investment in subsidiaries 500,634 380,308Other assets 5,301 5,440Total assets $535,926 $407,892 Liabilities Accounts payable $689 $977Accrued and other current liabilities 21,370 13,255Total current liabilities 22,059 14,232Intercompany payable 15,567 3,974Debt obligations 393,825 299,466Other liabilities 5,008 16,546Total liabilities 436,459 334,218 Temporary equity Preferred stock 26,296 29,459 Stockholders’ equity Common stock 44 42Additional paid-in capital 254,685 241,485Treasury stock (2,057) (1,387)Accumulated deficit (221,189) (174,278)Accumulated other comprehensive income (loss) 41,688 (21,647)Total stockholders’ equity 73,171 44,215Total liabilities, temporary equity and stockholders’ equity $535,926 $407,892F-67HC2 HOLDINGS, INC.SCHEDULE IICondensed Financial Information of the Registrant (Registrant Only)STATEMENTS OF OPERATIONS(in thousands) For the years ended December 31, 2017 2016 2015Revenue $— $— $—Operating expenses General and administrative 39,799 37,615 38,410Depreciation and amortization 71 9 —Total operating expenses 39,870 37,624 38,410Loss from operations (39,870) (37,624) (38,410)Interest expense (44,136) (35,987) (33,793)Gain (loss) on contingent consideration 11,411 (11,411) —Equity in net income (loss) of subsidiaries 15,407 441 26,879Other income (expense) 91 1,277 (4,736)Loss before income taxes (57,097) (83,304) (50,060)Tax (benefit) expense (10,186) 11,245 (14,495)Net loss $(46,911) $(94,549) $(35,565)F-68HC2 HOLDINGS, INC.SCHEDULE IICondensed Financial Information of the Registrant (Registrant Only)STATEMENTS OF CASH FLOWS(in thousands) December 31, 2017 2016 2015Net cash used by operating activities $(32,905) $(21,231) $(31,601)Cash flows from investing activities: Contributions to subsidiaries (24,112) (22,428) (62,356)Return of capital from subsidiaries 13,245 31,112 —Cash paid for business acquisitions, net of cash acquired (2,600) — —Other investing activity (136) (164) (400)Net cash provided by (used in) investing activities (13,603) 8,520 (62,756)Cash flows from financing activities: Proceeds from debt obligations 91,676 — 50,250Principal payments on debt obligations (35,000) — —Proceeds from sale of common stock, net — — 53,975Proceeds from sale of preferred stock, net — — 14,033Purchase of noncontrolling interest (29) (1,348) —Advances (to) from affiliates — — 5,000Payment of dividends (2,126) (4,220) (4,066)Proceeds from the exercise of warrants and stock options 486 8 —Taxes paid in lieu of shares issued for share-based compensation (670) (1,009) —Other financing activity (118) (77) (1,298)Net cash provided by (used in) financing activities 54,219 (6,646) 117,894Net change in cash and cash equivalents 7,711 (19,357) 23,537Cash and cash equivalents at beginning of period 21,722 41,079 17,542Cash and cash equivalents at end of period $29,433 $21,722 $41,079F-69HC2 HOLDINGS, INC.SCHEDULE IIISupplementary Insurance Information(in thousands) As of and for the years ended December 31, 2017 2016 2015Insurance Company Deferred policy acquisition cost $— $— $—Future policy benefits, losses, claims and loss expenses $1,937,117 $1,899,835 $1,852,790Unearned premiums $— $— $—Net earned premiums $80,524 $79,406 $1,578Net investment income $66,070 $58,032 $1,025Benefits, claims, losses $24,293 $15,667 $1,293Amortization of deferred policy acquisition cost $— $— $—Other operating expenses $23,195 $23,147 $318Net written premiums (excluding life) $72,522 $70,597 $1,399F-70HC2 HOLDINGS, INC.SCHEDULE IVReinsurance(in thousands)2017 Gross Amount Ceded to othercompanies Assumed fromother companies Net Amount Percentage ofamount assumed tonetLife insurance in force $720,192 $(467,660) $34,336 $286,868 12.0%Premiums: Life insurance $12,160 $(4,567) $409 $8,002 5.1%Accident and health insurance 197,981 (129,874) 4,415 72,522 6.1%Total premiums $210,141 $(134,441) $4,824 $80,524 6.0%2016 Gross Amount Ceded to othercompanies Assumed fromother companies Net Amount Percentage ofamount assumed tonetLife insurance in force $764,884 $(494,987) $36,270 $306,167 11.8%Premiums: Life insurance $13,255 $(4,856) $410 $8,809 4.7%Accident and health insurance 212,041 (145,905) 4,461 70,597 6.3%Total premiums $225,296 $(150,761) $4,871 $79,406 6.1%2015 Gross Amount Ceded to othercompanies Assumed fromother companies Net Amount Percentage ofamount assumed tonetLife insurance in force $820,217 $(531,908) $37,779 $326,088 11.6%Premiums: Life insurance $262 $(91) $8 $179 4.5%Accident and health insurance 9,323 (8,080) 156 1,399 11.2%Total premiums $9,585 $(8,171) $164 $1,578 10.4%F-71HC2 HOLDINGS, INC.SCHEDULE VValuation and Qualifying Accounts(in thousands)Activity in the Company’s allowance accounts for the years ended December 31, 2017, 2016 and 2015 was as follows: Doubtful Accounts Receivable Balance atBeginning of Period Charged toCosts and Expenses Deductions Other Balance atEnd of Period2015 $2,760 $99 $(2,065) $— $7942016 $794 $2,862 $(37) $— $3,6192017 $3,619 $127 $(13) $— $3,733 Deferred Tax Asset Valuation Balance atBeginning of Period Charged toCosts and Expenses Deductions Other Balance atEnd of Period2015 $68,983 $(879) $— $— $68,1042016 $68,104 $57,830 $— $12,110 $138,0442017 $138,044 $6,263 $— $(10,803) $133,504F-72Exhibit 21.1SUBSIDIARIES OF THE REGISTRANTSubsidiaryJurisdiction of OrganizationDBM Global Inc. (92.48%)DelawareHC2 Holdings 2, Inc.DelawareHC2 International Holding, Inc.DelawareSchuff Merger Sub, Inc.DelawareSubsidiaries of DBM Global Inc., HC2 Holdings 2, Inc. and HC2 International Holding, Inc., are listed below. All subsidiaries are wholly-owned by theirrespective parent, except where otherwise indicated.SUBSIDIARIES OF DBM GLOBAL INC.SubsidiaryJurisdiction of OrganizationDBM Global-North America Inc.DelawareAddison Structural Services, Inc.FloridaQuincy Joist CompanyDelawareAitken Manufacturing Inc.DelawareOn-Time Steel Management Holding, Inc.DelawareSchuff Steel Management Company - Colorado LLCDelawareSchuff Steel Management Company - Southeast LLCDelawareSchuff Steel Management Company - Southwest, Inc.DelawarePDC Services (USA) Inc.DelawareSchuff Steel CompanyDelawareSchuff Steel - Atlantic, LLCFloridaSSRW JV LLC (50%)DelawareSchuff Steel Company - Panama S. de R.L.PanamaDBM Global Holdings Inc.DelawareDBM Vircon Services LTD (f/k/a PDC Services (Canada) LTD)British Columbia, CanadaDBMG International PTE LTDSingaporeBDS Steel Detailers (UK) LtdUnited KingdomBDS Steel Detailers (USA) Inc.ArizonaDBMG Singapore PTE LTDSingaporeBDS Vircon Co. LTDThailandPDC Asia Pacific Inc.PhilippinesDBM Global (Australia) Pty LtdAustraliaBDS Global Detailing Pty LtdAustraliaBDS Steel Detailers (Australia) Pty LtdAustraliaBDS Steel Detailers (NZ) LtdNew ZealandPDC Operations (Australia) Pty LtdAustraliaSchuff Premier Services LLCDelawareSUBSIDIARIES OF HC2 HOLDINGS 2, INC.SubsidiaryJurisdiction of Organization704 Games Company (f/k/a DMi, Inc.) (56.33%)DelawareANG Holdings, Inc. (67.7%)DelawareAmerican Natural Gas, LLCNew YorkANG Region 1, LLC (f/k/a Questar Fueling Company)DelawareANG Region 2, LLC (f/k/a Constellation CNG, LLC)DelawareContinental Insurance Group Ltd.DelawareContinental LTC Inc.DelawareContinental General Insurance CompanyTexasGlobal Marine Holdings, LLC (73.82%)DelawareGlobal Marine Holdings LimitedUnited KingdomGlobal Marine Systems LimitedUnited KingdomCWind LimitedUnited KingdomCWind 247 GmbHGermanyGlobal Cable Technology LimitedUnited KingdomGlobal Marine Search LimitedUnited KingdomSubsidiaryJurisdiction of OrganizationGlobal Marine Systems (Americas) Inc.DelawareGlobal Marine Systems (Bermuda) LimitedBermudaGlobal Marine Systems (Depots) LimitedCanadaGlobal Marine Systems (Investments) LimitedUnited KingdomGlobal Marine Systems (Netherlands) BVNetherlandsGlobal Marine Systems (Vessels) LimitedUnited KingdomGlobal Marine Systems (Vessels II) LimitedUnited KingdomGlobal Marine Systems Oil & Gas LimitedUnited KingdomGlobal Marine Systems Pension Trustee LimitedUnited KingdomGMS Guernsey Pensions Plans LimitedGuernseyGMSG LimitedGuernseyGMSL Employee Benefit TrustUnited KingdomRed Sky Subsea LimitedUnited KingdomVibro-Einspultechnik Duker - and Wasserbau GmbHGermanyGlobal Marine Cable Systems Pte LimitedSingaporeHC2 Broadcasting Holdings Inc.DelawareHC2 Broadcasting Inc.DelawareHC2 Broadcasting License Inc.DelawareDTV America Corporation (50.06%)DelawareHC2 LPTV Holdings, Inc.DelawareHC2 Network Inc.DelawareHC2 Station Group, Inc.DelawareNerVve Technologies, Inc. (72.35%)DelawarePansend Life Sciences, LLCDelawareBenevir Biopharm, Inc. (80.26%)DelawareGenovel Orthopedics, Inc. (80%)DelawareMediBeacon, Inc. (50.06%)DelawareR2 Dermatology Incorporated (73.85%)DelawareSUBSIDIARIES OF HC2 INTERNATIONAL HOLDING, INC.SubsidiaryJurisdiction of OrganizationArbinet CorporationDelawareArbinet-thexchange LtdUnited KingdomPTGi-ICS Holdings LimitedUnited KingdomPTGi International Carrier Services LtdUnited KingdomHC2 Europe BVThe NetherlandsHC2 S.R.L. in LiquidazioneItalyPTGi International Carrier Services, Inc.DelawarePTGI-ICS OPS RO S.R.L.RomaniaHC2 International, Inc.DelawarePrimus Telecommunications El Salvador SA de C.V.El SalvadorThe St. Thomas & San Juan Telephone Company, Inc.U.S. Virgin IslandsExhibit 23.1Consent of Independent Registered Public Accounting FirmHC2 Holdings, Inc.New York, New YorkWe hereby consent to the incorporation by reference in the Registration Statements on Form S3 (No. 333-217274, No. 333-213107, No. 333-207266, and No.333-207470) and Form S-8 (No. 333-218835 and No. 333-198727) of HC2 Holdings, Inc. of our reports dated March 14, 2018, relating to the consolidatedfinancial statements and financial statement schedules presented in Item 15, and the effectiveness of HC2 Holdings, Inc.’s internal control over financialreporting, which appear in this Form 10-K./s/ BDO USA, LLPNew York, NYMarch 14, 2018Exhibit 31.1CERTIFICATIONSI, Philip A. Falcone, certify that:1. I have reviewed this Annual Report on Form 10-K of HC2 Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Dated: March 14, 2018By:/s/ Philip A. Falcone Name:Philip A. Falcone Title:Chairman, President and Chief Executive Officer (Principal Executive Officer)Exhibit 31.2CERTIFICATIONSI, Michael J. Sena, certify that:1. I have reviewed this Annual Report on Form 10-K of HC2 Holdings, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Dated: March 14, 2018By:/s/ Michael J. Sena Name:Michael J. Sena Title:Chief Financial Officer (Principal Financial and Accounting Officer)Exhibit 32.1CERTIFICATIONPursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted), Philip A.Falcone, the Chairman, President and Chief Executive Officer (Principal Executive Officer) of HC2 Holdings, Inc. (the “Company”), and Michael J. Sena, theChief Financial Officer (Principal Financial and Accounting Officer) of the Company, each hereby certifies that, to the best of his knowledge:1. The Company’s Annual Report on Form 10-K for the year ended December 31, 2017, to which this Certification is attached as Exhibit 32 (the“Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of theperiod covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report.Dated: March 14, 2018 /s/ Philip A. Falcone /s/ Michael J. SenaPhilip A. Falcone Michael J. SenaChairman, President and Chief Executive Officer(Principal Executive Officer) Chief Financial Officer (Principal Financial and AccountingOfficer)

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