Exela Technologies, Inc. - Quarter Report: 2017 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission File Number: 001-36788

 

EXELA TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (214) 740-6500

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	o
(Do not check if a smaller reporting company)		Emerging growth company	x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

As of November 8, 2017 there were 150,578,451 shares of common stock of the Company issued and outstanding.

 

 

Table of Contents

 

Exela Technologies, Inc.

 

Form 10-Q

 

For the quarterly period ended September 30, 2017

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements	3
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016	4
Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016	5
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the nine months ended September 30, 2017 and 2016	6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016	7
Notes to the Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3. Quantitative and Qualitative Disclosures about Market Risk	57
Item 4. Controls and Procedures	57
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	58
Item 1A. Risk Factors	58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3. Defaults Upon Senior Securities	58
Item 4. Mine Safety Disclosures	58
Item 5. Other Information	58

 

Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of September 30, 2017 and December 31, 2016

(in thousands of United States dollars except share and per share amounts)

 

		September 30,			December 31,
		2017			2016
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	27,368		$	8,361
Restricted cash		37,315			25,892
Accounts receivable, net of allowance for doubtful accounts of $3,942 and $3,219 respectively		227,704			138,421
Inventories, net		13,634			11,195
Prepaid expenses and other current assets		24,263			12,202
Total current assets		330,284			196,071
Property, plant and equipment, net		133,617			81,600
Goodwill		776,010			373,291
Intangible assets, net		514,873			298,739
Deferred income tax assets		7,880			9,654
Other noncurrent assets		15,573			10,131
Total assets		$	1,778,237		$	969,486
Liabilities and Stockholders’ Equity (Deficit)
Liabilities
Current liabilities
Accounts payable		$	82,676		$	42,212
Related party payables		14,474			9,344
Income tax payable		770			1,031
Accrued liabilities		75,259			29,492
Accrued compensation and benefits		52,955			31,200
Customer deposits		34,268			18,729
Deferred revenue		17,633			17,235
Obligation for claim payment		37,315			25,892
Current portion of capital lease obligations		15,246			6,507
Current portion of long-term debt		18,662			55,833
Total current liabilities		349,258			237,475
Long-term debt, net of current maturities		1,278,306			983,502
Capital lease obligations, net of current maturities		25,242			18,439
Pension liability		29,717			28,712
Deferred income tax liabilities		35,124			26,223
Long-term income tax liability		3,063			3,063
Other long-term liabilities		15,811			11,973
Total liabilities		1,736,521			1,309,387
Commitment and Contingencies
Stockholders’ equity (deficit)
Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 150,578,451 shares issued and outstanding at September 30, 2017 and 64,024,557 shares issued and outstanding at December 31, 2016;		15			—
Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized and 6,194,233 shares issued and outstanding at September 30, 2017 and no shares issued or outstanding at December 31, 2016		1			—
Additional paid in capital		482,018			(57,389		)
Equity-based compensation		31,788			27,342
Accumulated deficit		(455,976		)	(293,968		)
Accumulated other comprehensive loss:
Foreign currency translation adjustment		(2,291		)	(3,547		)
Unrealized pension actuarial losses, net of tax		(13,839		)	(12,339		)
Total accumulated other comprehensive loss		(16,130		)	(15,886		)
Total stockholders’ equity (deficit)		41,716			(339,901		)
Total liabilities and stockholders’ equity (deficit)		$	1,778,237		$	969,486

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Nine Months ended September 30, 2017 and 2016

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2017			2016			2017			2016
Revenue		$	338,393		$	186,373		$	766,035		$	577,527
Cost of revenue (exclusive of depreciation and amortization)		255,116			121,780			539,242			377,700
Gross profit		83,277			64,593			226,793			199,827
Selling, general and administrative expenses		102,048			30,829			172,626			95,385
Depreciation and amortization		28,052			18,761			70,779			58,463
Related party expense		26,892			2,448			31,733			7,372
Operating (loss) income		(73,715		)	12,555			(48,345		)	38,607
Other expense (income), net:
Interest expense, net		37,652			27,399			91,740			81,712
Loss on extinguishment of debt		35,512			—			35,512			—
Sundry expense (income), net		563			711			2,960			283
Net loss before income taxes		(147,442		)	(15,555		)	(178,557		)	(43,388		)
Income tax benefit		37,002			3,757			32,924			9,969
Net loss		$	(110,440	)	$	(11,798	)	$	(145,633	)	$	(33,419	)
Dividend equivalent on Series A Preferred Stock related to beneficial conversion feature		(16,375		)	—			(16,375		)	—
Cumulative dividends for Series A Preferred Stock		(1,225		)	—			(1,225		)	—
Net loss attributable to common stockholders		$	(128,040	)	$	(11,798	)	$	(163,233	)	$	(33,419	)
Earnings per share:
Basic and diluted		$	(0.92	)	$	(0.18	)	$	(1.76	)	$	(0.52	)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the Three Months and Nine Months ended September 30, 2017 and 2016

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2017			2016			2017			2016
Net loss		$	(110,440	)	$	(11,798	)	$	(145,633	)	$	(33,419	)
Other comprehensive loss, net of tax
Foreign currency translation adjustments		233			222			1,256			1,955
Unrealized pension actuarial (losses) gains, net of tax		(536		)	109			(1,500		)	469
Total other comprehensive loss, net of tax		$	(110,743	)	$	(11,467	)	$	(145,877	)	$	(30,995	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

For the Nine Months ended September 30, 2017 and 2016

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

																		Accumulated Other Comprehensive Loss
																		Foreign Currency			Unrealized Pension						Total
		Common Stock					Preferred Stock					Additional			Equity-Based			Translation			Actuarial Losses,			Accumulated			Stockholders’
		Shares		Amount			Shares		Amount			Paid in Capital			Compensation			Adjustment			net of tax			Deficit			Deficit
Balances at December 31, 2015 (as previously reported)		144,400		$	—		—		$	—		$	(57,389	)	$	20,256		$	(3,415	)	$	(5,076	)	$	(245,865	)	$	(291,489	)
Conversion of shares		63,880,157		6			—		—			(6		)	—			—			—			—			—
Balances at December 31, 2015, effect of reverse acquisition (refer to Note 2)		64,024,557		$	6		—		$	—		$	(57,395	)	$	20,256		$	(3,415	)	$	(5,076	)	$	(245,865	)	$	(291,489	)
Net loss January 1 to September 30, 2016																								(33,419		)	(33,419		)
Equity-based compensation															5,422												5,422
Foreign currency translation adjustment																		1,955									1,955
Net realized pension actuarial gains, net of tax																					469						469
Balances at September 30, 2016		64,024,557		$	6		—		$	—		$	(57,395	)	$	25,678		$	(1,460	)	$	(4,607	)	$	(279,284	)	$	(317,062	)

 

																		Accumulated Other Comprehensive Loss
																		Foreign Currency			Unrealized Pension						Total
		Common Stock					Preferred Stock					Additional			Equity-Based			Translation			Actuarial Losses,			Accumulated			Stockholders’
		Shares		Amount			Shares		Amount			Paid in Capital			Compensation			Adjustment			net of tax			Deficit			Equity
Balances at December 31, 2016 (as previously reported)		144,400		$	—		—		$	—		$	(57,389	)	$	27,342		$	(3,547	)	$	(12,339	)	$	(293,968	)	$	(339,901	)
Conversion of shares		63,880,157		6			—		—			(6		)	—			—			—			—			—
Balances at December 31, 2016, effect of reverse acquisition (refer to Note 2)		64,024,557		$	6		—		$	—		$	(57,395	)	$	27,342		$	(3,547	)	$	(12,339	)	$	(293,968	)	$	(339,901	)
Net loss January 1 to September 30, 2017																								(145,633		)	(145,633		)
Equity-based compensation															4,446												4,446
Foreign currency translation adjustment																		1,256									1,256
Net realized pension actuarial gains, net of tax																					(1,500		)				(1,500		)
Merger recapitalization		16,575,443		2								20,546															20,548
Shares issued to acquire Novitex (refer to Note 3)		30,600,000		3								244,797															244,800
Issuance\Conversion of Quinpario shares		12,093,331		1								22,358															22,359
Sale of common shares at July 12, 2017		18,757,942		3								130,860															130,863
Issuance of Series A Preferred Stock		—		—			9,194,233		1			73,553															73,554
Shares issued for advisory services and underwriting fees		3,609,375		—								28,573															28,573
Conversion of Series A Preferred Stock to common shares		3,667,803		—			(3,000,000	)	—			—															—
Shares issued for HandsOn Global Management contract termination fee		1,250,000										10,000															10,000
Equity issuance expenses												(7,649		)													(7,649		)
Adjustment for beneficial conversion feature of Series A Preferred Stock (refer to Note 2)												16,375												(16,375		)	—
Balances at September 30, 2017		150,578,451		$	15		6,194,233		$	1		$	482,018		$	31,788		$	(2,291	)	$	(13,839	)	$	(455,976	)	$	41,716

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months ended September 30, 2017 and 2016

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

		Nine Months ended September 30,
		2017			2016
Cash flows from operating activities
Net loss		$	(145,633	)	$	(33,419	)
Adjustments to reconcile net loss
Depreciation and amortization		70,779			58,463
Fees paid in stock		23,875			—
HGM contract termination fee paid in stock		10,000			—
Original issue discount and debt issuance cost amortization		9,684			10,183
Loss on extinguishment of debt		35,512			—
Provision (recovery) for doubtful accounts		451			(372		)
Deferred income tax benefit (expense)		(37,186		)	(9,092		)
Share-based compensation expense		4,446			5,422
Foreign currency remeasurement		777			172
Gain on sale of Meridian		(588		)	—
Loss on sale of property, plant and equipment		508			1,242
Change in operating assets and liabilities, net of effect from acquisitions:
Accounts receivable		(2,784		)	12,732
Related party receivable		—			(1,089		)
Prepaid expenses and other assets		189			(3,807		)
Accounts payable and accrued liabilities		37,316			4,227
Related party payables		4,936			(1,345		)
Net cash provided by operating activities		12,282			43,317
Cash flows from investing activities
Purchases of property, plant and equipment		(7,001		)	(4,971		)
Additions to internally developed software		(6,348		)	(7,207		)
Additions to outsourcing contract costs		(8,574		)	(11,015		)
Cash acquired in Transcentra acquisition		—			3,351
Proceeds from sale of Meridian		4,582			—
Cash acquired in Quinpario reverse merger		91			—
Cash paid in Novitex acquisition, net of cash received		(423,428		)	—
Proceeds from sale of property, plant and equipment		11			625
Net cash used in by investing activities		(440,667		)	(19,217		)
Cash flows from financing activities
Change in bank overdraft		(210		)	(1,541		)
Proceeds from issuance of common and preferred stock		204,417			—
Cash received from Quinpario		27,031			—
Proceeds from financing obligations		3,040			4,801
Contribution from Shareholders		20,548			—
Proceeds from new credit facility		1,320,500			—
Retirement of previous credit facilities		(1,055,736		)	—
Cash paid for debt issuance costs and debt discounts		(39,837		)	—
Cash paid for equity issue costs		(149		)	—
Borrowings from revolver and swing-line loan		72,600			53,200
Repayments on revolver and swing line loan		(72,500		)	(53,200		)
Principal payments on long-term obligations		(32,647		)	(35,247		)
Net cash provided by (used in) financing activities		447,057			(31,987		)
Effect of exchange rates on cash		335			(239		)
Net increase (decrease) in cash and cash equivalents		19,007			(8,126		)
Cash and cash equivalents
Beginning of period		8,361			16,619
End of period		$	27,368		$	8,493
Supplemental cash flow data:
Income tax payments, net of refunds received		$	2,673		$	2,798
Interest paid		60,347			79,828
Noncash investing and financing activities:
Assets acquired through capital lease arrangements		$	2,080		$	5,632
Leasehold improvements funded by lessor		74			1,016
Issuance of common stock as consideration for Novitex		244,800			—
Accrued capital expenditures		3,512			412
Dividend equivalent on Series A Preferred Stock		$	16,375		$	—
Liability assumed of Quinpario			4,672			—

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

1.    Description of the Business

 

Exela Technologies, Inc. (the “Company” or “Exela”) is a global provider of transaction processing solutions, enterprise information management, document management and digital business process services. The Company provides mission-critical information and transaction processing solutions services to clients across three major industry verticals: (1) Information & Transaction Processing, (2) Healthcare Solutions, and (3) Legal and Loss Prevention Services. The Company manages information and document driven business processes and offers solutions and services to fulfill specialized knowledge-based processing and consulting requirements, enabling clients to concentrate on their core competencies. Through its outsourcing solutions, the Company enables businesses to streamline their internal and external communications and workflows.

 

The Company was originally incorporated in Delaware on July 15, 2014 as a special purpose acquisition company under the name Quinpario Acquisition Corp 2 (“Quinpario”) for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Quinpario and one or more businesses or entities. On July 12, 2017 (the “Closing”), the Company consummated its business combination with SourceHOV Holdings, Inc. (“SourceHOV”) and Novitex Holdings, Inc. (“Novitex”) pursuant to the Business Combination Agreement and Consent, Waiver and Amendment to the Business Combination Agreement, dated February 21, 2017 and June 15, 2017, respectively (the “Business Combination”). In connection with the Closing, the Company changed its name from Quinpario Acquisition Corp 2 to Exela Technologies, Inc. Unless the context otherwise requires, the “Company” refers to the combined company and its subsidiaries following the Business Combination, “Quinpario” refers to the Company prior to the closing of the Business Combination, “SourceHOV” refers to SourceHOV prior to the Business Combination and “Novitex” refers to Novitex prior to the Business Combination. Refer to Note 3 for further discussion of the Business Combination.

 

2.              Basis of Presentation and Summary of Significant Accounting Policies

 

The following is a summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of the Company’s management, necessary for the fair presentation of the results of operations for the interim periods. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These interim financial statements should be read in conjunction with SourceHOV’s audited financial statements for the year ended December 31, 2016 included in the Proxy Statement of the Company filed with the SEC on June 26, 2017, as amended and supplemented.

 

8

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

The Business Combination has been accounted for as a reverse merger in accordance with U.S. GAAP. For accounting purposes, SourceHOV was deemed to be the accounting acquirer, Quinpario was the legal acquirer, and Novitex is considered the acquired company. In conjunction with the Business Combination, outstanding shares of SourceHOV were converted into common stock of the Company, par value $0.0001 per share, shown as a recapitalization, and the net assets of Quinpario were acquired at historical cost, with no goodwill or other intangible assets recorded. The consolidated assets, liabilities and results of operations prior to the Closing of the Business Combination (for the quarters ended September 30, 2017 and 2016 and the year ended December 31, 2016) are those of SourceHOV, and Quinpario’s assets and liabilities, which include net cash from the trust of $27.0 million and accrued fees payable of $4.8 million, and results of operations are consolidated with SourceHOV beginning on the Closing. The shares and corresponding capital amounts and earnings per share available to common stockholders, prior to the Business Combination, have been retroactively restated as shares reflecting the exchange ratio established in the Business Combination. The presented financial information for the quarter ended September 30, 2017 includes the financial information and activities for SourceHOV for the period July 1, 2017 to September 30, 2017 (92 days) as well as the financial information and activities of Novitex for the period July 13, 2017 to September 30, 2017 (80 days).

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, Consolidation and whether the Company is the primary beneficiary. Consolidation is required if both of these criteria are met.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 

Key estimates and judgments relied upon in preparing these consolidated financial statements include revenue recognition for multiple element arrangements, allowance for doubtful accounts, income taxes, depreciation, amortization, employee benefits, stock-based compensation, contingencies, goodwill, intangible assets, fair value of assets and liabilities acquired in acquisitions, and liability valuations. The Company regularly assesses these estimates and records changes in estimates in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.

 

9

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

Segment Reporting

 

The Company consists of the following three segments:

 

1.              Information & Transaction Processing Solutions (“ITPS”). ITPS provides industry solutions for banking and financial services, including lending solutions for mortgages and auto loans, and banking solutions for clearing, anti-money laundering, sanctions, and interbank cross-border settlement; property and casualty insurance solutions for origination, enrollments, claims processing, and benefits administration communications; public sector solutions for income tax processing, benefits administration, and record management; multi-industry solutions for payment processing and reconciliation, integrated receivables and payables management, document logistics and location services, records management and electronic storage of data, documents; and software, hardware, professional services and maintenance related to information and transaction processing automation, among others.

 

2.              Healthcare Solutions (“HS”). HS offerings include revenue cycle solutions, integrated accounts payable and accounts receivable, and information management for both the healthcare payer and provider markets. Payer service offerings include claims processing, claims adjudication and auditing services, enrollment processing and policy management, and scheduling and prescription management. Provider service offerings include medical coding and insurance claim generation, underpayment audit and recovery, and medical records management.

 

3.              Legal and Loss Prevention Services (“LLPS”). LLPS solutions include processing of legal claims for class action and mass action settlement administrations, involving project management support, notification and outreach to claimants, collection, analysis and distribution of settlement funds. Additionally, LLPS provides data and analytical services in the context of litigation consulting, economic and statistical analysis, expert witness services, and revenue recovery services for delinquent accounts receivable.

 

Restricted Cash

 

As part of the Company’s legal claims processing service, the Company holds cash for various settlement funds once the fund is in the wind down stage and claims have been paid. The cash is used to pay tax obligations and other liabilities of the settlement funds. The Company recorded an offsetting liability in obligation for claim payment in the consolidated balance sheets for the settlement funds received of $37.3 million and $25.9 million at September 30, 2017 and December 31, 2016, respectively. Of the total amount of settlement funds received, $19.2 million and $17.1 million were not subject to legal restrictions on use as of September 30, 2017 and December 31, 2016, respectively. The Company also maintains a collateral certificate of deposit account required by its insurance carrier for unsettled workers’ compensation claims. The Company records an offsetting liability in accrued compensation and benefits for these claims in the consolidated balance sheets.

 

Intangible Assets

 

Customer Relationships

 

Customer relationship intangible assets represent customer contracts and relationships obtained as part of acquired businesses. Customer relationship values are estimated by evaluating various factors including historical attrition rates, contractual provisions and customer growth rates, among others. The estimated average useful lives of customer relationships range from three to 16 years depending on the facts and circumstances. These intangible assets are primarily amortized based on undiscounted cash flows. The Company evaluates the remaining useful life of intangible assets on an annual basis to determine whether events and circumstances warrant a revision to the remaining useful life.

 

10

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

Trade Names

 

The Company has determined that its trade name intangible assets are indefinite-lived assets and therefore are not subject to amortization. The Company’s valuation of trade names at the reporting unit level utilizes the Relief-from-Royalty method that represents the present value of the future economic benefits generated by ownership of the trade names and approximates the amount that the Company would have to pay as a royalty to a third party to license such names.

 

Trademarks

 

The Company has determined that its trademark intangible assets resulting from acquisitions are definite-lived assets and therefore are subject to amortization. The Company amortizes trademarks on a straight-line basis over the estimated useful life, which is typically ten years. The Novitex trademarks acquired in connection with the Business Combination have an estimated useful life of 9.5 years.

 

Developed Technology

 

The Company has various developed technologies embedded in its technology platform.  Developed technology is an integral asset to the Company in providing solutions to customers and is recorded as an intangible asset. The Company amortizes developed technology on a straight-line basis over its estimated useful life, which is typically five years. Exela acquired internally developed software in the Business Combination called Connect Platform. Connect Platform has an estimated useful life of 5 years.

 

Capitalized Software Costs

 

The Company capitalizes certain costs incurred to develop software products to be sold, leased or otherwise marketed after establishing technological feasibility in accordance with ASC section 985-20, Software—Costs of Software to Be Sold, Leased, or Marketed, and the Company capitalizes costs to develop or purchase internal-use software in accordance with ASC section 350-40, Intangibles—Goodwill and Other— Internal-Use Software. Significant estimates and assumptions include determining the appropriate period over which to amortize the capitalized costs based on estimated useful lives and estimating the marketability of the commercial software products and related future revenues. The Company amortizes capitalized software costs on a straight-line basis over the estimated useful life, which is typically five years.

 

Outsourced Contract Costs

 

Costs of outsourcing contracts, including costs incurred for bid and proposal activities, are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract are deferred and expensed on a straight-line basis over the estimated contract life. These costs represent incremental external costs or certain specific internal costs that are directly related to the contract acquisition or transition activities and can be separated into two principal categories: contract commissions and transition/set-up costs. Examples of such capitalized costs include hourly labor and related fringe benefits and travel costs.

 

Non-compete agreements

 

The Company acquired certain non-compete agreements in connection with the Business Combination. These were related to four Novitex executives that were terminated following the acquisition. The Company has determined that the agreements have a definite useful life of one year.

 

11

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

Property, Plant and Equipment

 

Property, plant, and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method (which approximates the use of the assets) over the estimated useful lives of the assets. When any of these assets are sold or otherwise disposed of, the asset and related depreciation is relieved, and any gain or loss is included in the consolidated statements of operations for the period of sale or disposal. Leasehold improvements are amortized over the lease term or the useful life of the asset, whichever is shorter. Assets under capital leases are amortized over the lease term unless ownership is transferred by the end of the lease or there is a bargain purchase option, in which case assets are amortized normally on a straight-line basis over the useful life that would be assigned if the assets were owned. The amortization of these capital lease assets is recorded in depreciation expense in the consolidated statements of operations. Repair and maintenance costs are expensed as incurred.

 

Leases

 

Leases are classified as capital leases whenever the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under a capital lease are initially recognized as assets of the Company at their fair value at the inception of the lease, or if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the other long-term obligations in the consolidated balance sheets. Operating lease payments are initially recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which the economic benefits from the leased asset are consumed.

 

Stock-Based Compensation

 

The Company accounts for stock based compensation in accordance with ASC 718, “Compensation- Stock Compensation” (“ASC 718”); ASC 718 requires generally that all equity awards be accounted for at their “fair value.” This fair value is measured at the fair value of value of the awards at the grant date and recognized as compensation expense on a straight-line basis over the vesting period. The fair value of the awards on the grant date is determined using the Enterprise Value model. The expense resulting from share-based payments is recorded in general and administrative expense in the accompanying consolidated statements of operations. Refer to Note 13 - Stock-Based Compensation.

 

Revenue Recognition

 

The majority of the Company’s revenues are comprised of: (1) ITPS, (2) HS offerings, (3) LLPS solutions, or (4) some combination thereof. Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is probable. Delivery does not occur until services have been provided to the client, risk of loss has transferred to the client, and either client acceptance has been obtained, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in the client acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

 

ITPS revenues are primarily generated from a transaction-based pricing model for the various types of volumes processed, licensing and maintenance fees for technology sales, and a mix of fixed management fee and transactional revenue for document logistics and location services. HS revenues are primarily generated from a transaction-based pricing model for the various types of volumes processed for healthcare payers and providers. LLPS revenues are primarily based on time and materials pricing as well as through transactional services priced on a per item basis.

 

12

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

If a contract involves the provision of a single element, revenue is generally recognized when the product or service is provided and the amount earned is not contingent upon any future event. Revenue from time and materials arrangements is recognized as the services are performed.

 

Service arrangements are typically one to five year contracts that contain monthly service fees that are recognized as earned. Service revenues billed in advance are deferred and recognized on a straight-line basis over the service period. The Company recognizes variable rate revenues, including fees derived from the utilization of document management-related equipment and production of print services, when such services are rendered. Reimbursable expenses are recognized as earned when incurred. Sales commissions determined to be incremental direct costs incurred related to the successful acquisition of new client revenues are deferred and amortized over the length of the initial contract period. Customer incentive payments are deferred and recognized over the longer of the initial contract period or the period the customer is expected to benefit from payment of these up-front fees.

 

The Company records deferred revenue when it receives payments or invoices in advance of the delivery of products or the performance of services. The deferred revenue is recognized as earnings when underlying performance obligations are achieved.

 

The Company includes reimbursements from clients, such as postage costs, in revenue, while the related costs are included in cost of revenue in the consolidated statement of operations.

 

Multiple Element Arrangements

 

Certain of the Company’s revenue is generated from multiple element arrangements involving various combinations. The deliverables within these arrangements are evaluated at contract inception to determine whether they represent separate units of accounting, and if so, contract consideration is allocated to each deliverable based on relative selling price. The relative selling price of each deliverable within these arrangements is determined using vendor specific objective evidence of fair value, third-party evidence or best estimate of selling price. Revenue is then recognized in accordance with the appropriate revenue recognition guidance applicable to the respective elements.

 

If the multiple element arrangements criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized on a straight-line basis over the period of delivery or being deferred until the earlier of when such criteria are met or when the last element is delivered.

 

Beneficial Conversion Feature

 

The issuance of the Company’s Series A Perpetual Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) generated a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the beneficial conversion feature by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the Series A Preferred Stock. As a result of the occurrence of events meeting the definition of a “Fundamental Change” as defined in the Certificate of Designations, Preferences, Rights and Limitations of Series A Perpetual Convertible Preferred Stock of the Company during the period, the Company recognized the entire dividend equivalent of $16.4 million as of September 30, 2017.

 

13

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

Net Loss per Share

 

Earnings per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, using the more dilutive of the two-class method or if-converted method in periods of earnings. The two class method is an earnings allocation method that determines earnings per share for common shares and participating securities. As the Company experienced net losses for the periods presented, the impact of participating Series A Preferred Stock was calculated based on the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.

 

For the three and nine months ended September 30, 2017, shares of the Company’s Series A Preferred Stock, if converted would have resulted in an additional 7,573,066 shares of common stock outstanding, but were not included in the computation of diluted loss per share as their effects were anti-dilutive.

 

The Company has not considered the effect of 35,000,000 warrants sold in the Quinpario Initial Public Offering (“IPO”) in the calculation of net income (loss) per share. Warrants are considered anti-dilutive and excluded when the exercise price exceeds the average market value of the Company’s common stock price during the applicable period.

 

The components of basic and diluted EPS are as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2017			2016			2017			2016
Net loss attributable to common stockholders (A)		$	(128,040	)	$	(11,798	)	$	(163,233	)	$	(33,419	)
Weighted average common shares outstanding - basic and diluted (B)		138,895,681			64,024,557			92,512,729			64,024,557
Earnings Per Share:
Basic and diluted (A/B)		$	(0.92	)	$	(0.18	)	$	(1.76	)	$	(0.52	)

 

Recently Adopted Accounting Pronouncements

 

Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) no. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This amendment replaced the method of measuring inventories at lower of cost or market with a lower of cost and net realizable value method. The adoption had no material impact on the Company’s financial position, results of operations and cash flows.

 

Effective January 1, 2017, the Company adopted ASU no. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The ASU changes how companies account for certain aspects of equity-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard requires that all tax effects related to share-based payments be recorded as income tax expense or benefit in the income statement at settlement or expiration and, accordingly, excess tax benefits and tax deficiencies be presented as operating activities in the statement of cash flows. Upon adoption of this standard, the Company elected to continue its current practice of estimating expected forfeitures. The adoption had no material impact on the Company’s financial position, results of operations and cash flows.

 

14

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued ASU no. 2014-09, Revenue from Contracts with Customers (ASC 606). Under the update, revenue will be recognized based on a five-step model. The core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In July 2015, the FASB deferred the effective date by one year (ASU no. 2015-14). This ASU will be effective beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in ASC 605 (ASU 2016-11); 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12); and 5) technical corrections and improvements (ASU 2016-20). The new standard will be effective for us beginning January 1, 2018. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In February 2016, the FASB issued ASU no. 2016-02, Leases (842). This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In June 2016, the FASB issued ASU no. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In August 2016, the FASB issued ASU no. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230), which adds or clarifies guidance on the presentation and classification of eight specific types of cash receipts and cash payments in the statement of cash flows such as debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees, with the intent of reducing diversity in practice. For public entities, ASU 2016-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Entities must apply the guidance retrospectively to all periods presented unless retrospective application is impracticable. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

15

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

In October 2016, the FASB issued ASU no. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which eliminates the current prohibition on immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory, with the intent of reducing complexity and diversity in practice. Under ASU 2016-16, entities must recognize the income tax consequences when the transfer occurs rather than deferring recognition. For public entities, ASU 2016-16 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019, with early adoption permitted as of the beginning of a fiscal year (i.e., early adoption is permitted only in the first interim period). Entities must apply the guidance on a modified retrospective basis though a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.  The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In November 2016, the FASB issued ASU no. 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230). The ASU addresses diversity in practice that exists in the classification and presentation of changes in restricted cash and requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The ASU is effective beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In January 2017, the FASB issued ASU no. 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805). The ASU clarifies the definition of a business and provides guidance on evaluating as to whether transactions should be accounted for as acquisitions (or disposals) of assets or business combinations. The definition clarification as outlined in this ASU affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of the ASU are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In January 2017, the FASB issued ASU no. 2017-04, Intangibles  Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 of the goodwill impairment test that had required a hypothetical purchase price allocation. Rather, entities should apply the same impairment assessment to all reporting units and recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be effective prospectively for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2021, or those beginning after January 1, 2017 if early adopted. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In March 2017, the FASB issued ASU no. 2017-07, Compensation  Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments to this ASU require the service cost component of net periodic benefit cost be reported in the same income statement line or lines as other compensation costs for employees. The other components of net periodic benefit cost are required to be reported separately from service costs and outside a subtotal of income from operations. Only the service cost component is eligible for capitalization. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments should be applied retrospectively for the income statement presentations and prospectively for the capitalization of

 

16

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

service costs. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In May 2017, the FASB issued ASU no. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The amendments in this update will be applied on a prospective basis to an award modified on or after the adoption date. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

3.              Business Combination

 

On July 12, 2017, the Company consummated its business combination with SourceHOV and Novitex pursuant to the Business Combination Agreement and Consent, Waiver and Amendment to the Business Combination Agreement, dated February 21, 2017 and June 15, 2017, respectively. In connection with the Business Combination, the Company acquired debt facilities and issued notes totaling $1.4 billion (refer to Note 9 — Long Term Debt).  Proceeds from the acquired debt were used to refinance the existing debt of SourceHOV, settle the outstanding debt of Novitex, and pay fees and expenses incurred in connection with the Business Combination. Immediately following the Business Combination, there were 146,910,648 shares of common stock, 9,194,233 shares of Series A Preferred Stock, and 35,000,000 warrants outstanding. Refer to Note 14 — Stockholders’ Equity.

 

Under ASC 805, Business Combinations, SourceHOV was deemed the accounting acquirer based on the following predominate factors: its former owners have the largest portion of voting rights in the Company, the Board and Management has more individuals coming from SourceHOV than either Quinpario or Novitex, SourceHOV was the largest entity by revenue and by assets, and the headquarters was moved to the SourceHOV headquarters location.

 

17

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

The Company acquired 100% of the equity of Novitex pursuant to the Business Combination Agreement by issuing 30,600,000 shares of common stock of Exela to Novitex Parent, L.P., the sole stockholder of Novitex. Total value of equity for the transaction was $244.8 million. Additionally, as noted, the Company used proceeds from acquired debt to settle the outstanding debt of Novitex in the amount of $420.5 million, and pay transaction related costs and interest on behalf of Novitex in the amount of $10.3 million and $1.0 million, respectively, which was accounted for as part of consideration.

 

The acquired assets and assumed liabilities of Novitex were recorded at their estimated fair values.  The purchase price allocation for the Novitex business combination is preliminary and subject to change within the respective measurement period which will not extend beyond one year from the acquisition date. Measurement period adjustments will be recognized in the reporting period in which the adjustment amounts are determined.

 

The following table summarizes the consideration paid for Novitex and the preliminary fair value of the assets acquired and liabilities assumed at the acquisition date on July 12, 2017:

 

Assets acquired:
Cash and equivalents		$	8,428
Accounts receivable		87,474
Inventory		1,245
Prepaid expenses & other		13,974
Property, plant and equipment, net		60,657
Identifiable intangible Assets, net		251,060
Deferred charges and other assets		2,723
Other noncurrent assets		93
Goodwill		405,141
Total identifiable assets acquired		$	830,795
Liabilities Assumed:
Accounts payable		(29,444		)
Short-term borrowings and current portion of LT debt		(11,335		)
Accrued liabilities		(30,432		)
Advanced billings and customer deposits		(18,926		)
Long term debt		(15,704		)
Deferred taxes		(46,072		)
Other liabilities		(2,226		)
Total liabilities assumed		$	(154,139	)
Total Consideration		$	676,656

 

18

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

 

The identifiable intangible assets include customer relationships, non-compete agreements, internally developed software, and trademarks and trade names. Customer relationships and non-compete agreements were valued using the Income Approach, specifically the Multi-Period Excess Earnings method. Trademarks and trade names were valued using the Income Approach, specifically the Relief-from-Royalty method. Internally developed software was valued based on costs incurred related to Connect Platform. All of these intangibles acquired represent a Level 3 measurement as they are based on unobservable inputs reflecting the Company’s management’s own assumptions about the inputs used in pricing the asset or liability at fair value.

 

		Weighted Average Useful Life (in years)		Fair value
Trademark and trade name - Novitex		9.5		$	18,000
Customer relationships		16.0		230,000
Internally devleoped software - Connect Platform		5.0		1,710
Non-compete agreements		1.0		1,350
				$	251,060

 

As of September 30, 2017, the weighted-average useful life of total identifiable intangible assets acquired in the Business Combination, excluding goodwill, is 15.4 years.

 

The Company expects to realize revenue synergies, leverage, brand awareness, stronger margins, greater free cash flow generation, and expand the existing Novitex sales channels, and utilize the existing workforce. The Company also anticipates opportunities for growth through the ability to leverage additional future services and capabilities. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Novitex’s identifiable net assets assumed, and as a result, the Company has recorded goodwill in connection with this acquisition. The Company engaged a third party valuation firm to aid management in its analyses of the fair value of the assets and liabilities. All estimates, key assumptions, and forecasts were either provided by or reviewed by the Company. Approximately $14.0 million of the goodwill recorded was tax deductible, which was carried over from the tax basis of the seller. Since the acquisition date of July 12, 2017, $134.4 million of revenue and $5.0 million of net loss are included in consolidated revenues and net loss, respectively, for Novitex. These results are included in the ITPS segment.

 

Transaction Costs

 

The Company, incurred approximately $69.3 million in advisory, legal, accounting and management fees in conjunction with the Business Combination as of September 30, 2017. Additionally, $7.6 million was incurred related to equity issuance costs and $40.9 million was incurred in debt issuance costs.

 

Restructuring Charges

 

In February 2017, management performed a strategic review of human resources at Novitex for the purpose of assessing the business need for their employment and for the purpose of quantifying the synergies resulting from the acquisition. As a result, in July 2017, the Company communicated the termination of certain executives and non-executive Novitex employees.

 

The Company determined that costs associated with termination benefits should be accounted for separately from the acquisition, as a post-combination expense of the combined entity because the expense was incurred for the benefit of the combined entity. The Company recorded severance expense in the amount of $4.6 million related to the impacted executives and $0.1 million related to other terminations in the statement of operations for the three months ended September 30, 2017.

 

19