Exela Technologies, Inc. - Quarter Report: 2018 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended March 31, 2018

 

Or

 

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: (844) 935-2832

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, Par Value $0.0001 per share		The Nasdaq Stock Market LLC

 

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

Emerging Growth Company o

 

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 May 7, 2018, the registrant had 152,379,013 shares of Common Stock outstanding.

 

 

Table of Contents

 

Exela Technologies, Inc.

 

Form 10-Q

 

For the quarterly period ended March 31, 2018

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements	1
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	1
Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017	2
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017	3
Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2018 and 2017	4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	5
Notes to the Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures about Market Risk	36
Item 4. Controls and Procedures	37
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	38
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3. Defaults Upon Senior Securities	39
Item 4. Mine Safety Disclosures	39
Item 5. Other Information	39
Item 6. Exhibits	39

 

Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2018 and December 31, 2017

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

 

		March 31,			December 31,
		2018			2017
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	26,882		$	39,000
Restricted cash		12,549			42,489
Accounts receivable, net of allowance for doubtful accounts of $4,077 and $3,725, respectively		238,680			229,704
Inventories, net		13,519			11,922
Prepaid expenses and other current assets		27,520			24,596
Total current assets		319,150			347,711
Property, plant and equipment, net		132,870			132,908
Goodwill		747,325			747,325
Intangible assets, net		438,929			464,984
Deferred income tax assets		9,171			9,019
Other noncurrent assets		18,490			12,891
Total assets		$	1,665,935		$	1,714,838
Liabilities and Stockholders’ Deficit
Liabilities
Current Liabilities
Accounts payable		$	77,194		$	81,263
Related party payables		14,172			14,445
Income tax payable		6,967			3,612
Accrued liabilities		31,805			49,383
Accrued compensation and benefits		49,738			46,925
Accrued Interest		23,795			55,102
Customer deposits		36,542			31,656
Deferred revenue		15,933			12,709
Obligation for claim payment		56,554			42,489
Current portion of capital lease obligations		14,785			15,611
Current portion of long-term debt		21,170			20,565
Total current liabilities		348,655			373,760
Long-term debt, net of current maturities		1,277,029			1,276,094
Capital lease obligations, net of current maturities		26,474			25,958
Pension liability		26,081			25,496
Deferred income tax liabilities		5,478			5,362
Long-term income tax liability		3,470			3,470
Other long-term liabilities		13,879			14,704
Total liabilities		1,701,066			1,724,844
Commitments and Contingencies (Note 9)
Stockholders’ deficit
Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 152,565,218 shares issued and 152,515,918 outstanding at March 31, 2018 and 150,578,451 shares issued and 150,529,151 outstanding at December 31, 2017		15			15
Preferred stock, par value of $0.0001 per shares; 20,000,000 shares authorized; 4,569,233 shares issued and outstanding at March 31, 2018 and 6,194,233 shares issued and outstanding at December 31, 2017		1			1
Additional paid in capital		482,018			482,018
Less:common stock held in treasury, at cost; 49,300 shares at March 31, 2018 and 49,300 shares at December 31, 2017		(249		)	(249		)
Equity based compensation		35,044			34,085
Accumulated deficit		(540,041		)	(514,628		)
Accumulated other comprehensive loss:
Foreign currency translation adjustment		(462		)	(194		)
Unrealized pension actuarial losses, net of tax		(11,457		)	(11,054		)
Total accumulated other comprehensive loss		(11,919		)	(11,248		)
Total stockholders’ deficit		(35,131		)	(10,006		)
Total liabilities and stockholders’ deficit		$	1,665,935		$	1,714,838

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three Months ended March 31, 2018 and 2017

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

(Unaudited)

 

		Three Months ended March 31,
		2018			2017
Revenue		$	393,167		$	218,260
Cost of revenue (exclusive of depreciation and amortization)		293,792			143,708
Selling, general and administrative expenses		45,595			35,581
Depreciation and amortization		38,019			21,320
Related party expense		1,105			2,385
Operating income (loss)		14,656			15,266
Other expense (income), net:
Interest expense, net		38,017			26,219
Sundry expense (income), net		(64		)	2,724
Other income, net		(3,328		)	—
Net loss before income taxes		(19,969		)	(13,677		)
Income tax (expense) benefit		(4,025		)	(2,004		)
Net loss		(23,994		)	(15,681		)
Cumulative dividends for Series A Preferred Stock		(914		)	—
Net loss attributable to common stockholders		$	(24,908	)	$	(15,681	)
Net loss per share - basic and diluted		(1.64		)	(2.45		)

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the Three Months ended March 31, 2018 and 2017

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

(Unaudited)

 

		Three Months ended March 31,
		2018			2017
Net loss		$	(23,994	)	$	(15,681	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(268		)	2,414
Unrealized pension actuarial gains (losses), net of tax		(403		)	(281		)
Comprehensive loss		$	(24,665	)	$	(13,548	)

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

For the Three Months ended March 31, 2018 and 2017

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

(Unaudited)

 

		Common Stock						Preferred Stock						Treasury Stock												Accumulated Other Comprehensive  Income (Loss)
		Shares			Amount			Shares			Amount			Shares			Amount			Additional Paid-in Capital			Equity-based  Compensation  Agreement			Foreign Currency Translation  Adjustment			Unrealized  Pension Actuarial Losses, net of tax			Accumulated Deficit			Total Stockholder’s Deficit
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			—			—			—			—			—			—			—			—			—			—
Balances at December 31, 2016, effect of reverse acquisition (refer to Note 3)		$	64,024,557		$	—		$	—		$	—		$	—		$	—		$	(57,389	)	$	27,342		$	(3,547	)	$	(12,339	)	$	(293,968	)	$	(339,901	)
Net loss January 1 to March 31, 2017																																(15,681		)	(15,681		)
Equity-based compensation																							310												310
Foreign currency translation adjustment																										2,414									2,414
Contribution from Shareholders																				20,538															20,538
Net realized pension actuarial gains, net of tax																													(281		)				(281		)
Balances at March 31, 2017		$	64,024,557		$	—		$	—		$	—		$	—		$	—		$	(36,851	)	$	27,652		$	(1,133	)	$	(12,620	)	$	(309,649	)	$	(332,601	)

 

		Common Stock					Preferred Stock					Treasury Stock											Accumulated Other Comprehensive  Income (Loss)
		Shares		Amount			Shares		Amount			Shares		Amount			Additional Paid-in Capital			Equity-based  Compensation  Agreement			Foreign Currency  Translation  Adjustment			Unrealized  Pension Actuarial  Losses, net of tax			Accumulated Deficit			Total Stockholder’s Deficit
Balances at December 31, 2017		150,529,151		$	15		6,194,233		$	1		49,300		$	(249	)	$	482,018		$	34,085		$	(194	)	$	(11,054	)	$	(514,628	)	$	(10,006	)
Implementation of ASU 2014-09 (Note 2)																													(1,419		)	(1,419		)
Net loss January 1 to March 31, 2018																													(23,994		)	(23,994		)
Equity-based compensation																				959												959
Foreign currency translation adjustment																							(268		)							(268		)
Net realized pension actuarial gains, net of tax																										(403		)				(403		)
Preferred shares converted to common		1,986,767					(1,625,000	)																								—
Balances at March 31, 2018		152,515,918		$	15		4,569,233		$	1		49,300		$	(249	)	$	482,018		$	35,044		$	(462	)	$	(11,457	)	$	(540,041	)	$	(35,131	)

 

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

 

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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)

 

		Three Months ended March 31,
		2018			2017
Cash flows from operating activities
Net loss		$	(23,994	)	$	(15,681	)
Adjustments to reconcile net loss
Depreciation and amortization		38,019			21,320
Debt discount and debt issuance cost amortization		2,595			3,474
Provision (recovery) for doubtful accounts		481			79
Deferred income tax benefit		835			627
Share-based compensation expense		959			310
Foreign currency remeasurement		(323		)	687
Gain on sale of Meridian		—			(251		)
Loss on sale of property, plant and equipment		253			272
Fair value adjustment for interest rate swap		(3,328		)	—
Change in operating assets and liabilities, net of effect from acquisitions
Accounts receivable		(10,876		)	(1,086		)
Prepaid expenses and other assets		(5,567		)	(3,720		)
Accounts payable and accrued liabilities		(18,864		)	1,928		(1)
Related party payables		(273		)	(3,690		)
Net cash provided by (used in) operating activities		(20,083		)	4,269		(1)
Cash flows from investing activities
Purchases of property, plant and equipment		(5,957		)	(2,045		)
Additions to internally developed software		(1,092		)	(2,528		)
Additions to outsourcing contract costs		(1,596		)	(3,989		)
Proceeds from sale of Meridian		—			4,381
Proceeds from sale of property, plant, and equipment		2			—
Net cash used in investing activities		(8,643		)	(4,181		)
Cash flows from financing activities
Change in bank overdraft		—			(210		)
Proceeds from financing obligations		1,863			3,008
Contribution from shareholders		—			20,538
Cash paid for equity issue costs		(7,500		)	—
Borrowings from revolver and swing-line loan		25,000			38,500
Repayments from revolver and swing line loan		(25,000		)	(38,500		)
Principal payments on long-term obligations		(7,750		)	(15,786		)
Net cash provided by (used in) financing activities		(13,387		)	7,550
Effect of exchange rates on cash		55			(44		)
Net increase (decrease) in cash and cash equivalents		(42,058		)	7,594		(1)
Cash, restricted cash, and cash equivalents
Beginning of period		81,489			34,253		(1)
End of period		$	39,431		$	41,847	(1)
Supplemental cash flow data:
Income tax payments, net of refunds received		$	1,053		$	(12	)
Interest paid		66,192			30,844
Noncash investing and financing activities:
Assets acquired through capital lease arrangements		4,432			68
Accrued capital expenditures		1,101			98

 

(1)         Balances for these items differ from previously reported balances due to the adoption of ASU no. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230), see Note 2.

 

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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.                            General

 

These condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements as of and for the year ended December 31, 2017 included in the Exela Technologies, Inc. (the “Company,” “Exela,” “we,” “our” or “us”) annual report on Form 10-K for such period.

 

The accompanying condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (“SEC”) Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These accounting principles require us to use estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from our estimates.

 

The condensed consolidated financial statements are unaudited, but in our opinion include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim period. The interim financial results are not necessarily indicative of results that may be expected for any other interim period or the fiscal year.

 

Net Loss per Share

 

Earnings per share (“EPS”) is computed by dividing net loss available to holders of the Company’s Common Stock 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 Stock 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 quarter ended March 31, 2018, shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), if converted would have resulted in an additional 5,586,344 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 included 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.

 

		Three Months ended March 31,
		2018			2017
Net loss attributable to common stock holders (A)		$	(24,908	)	$	(15,681	)
Weighted average common shares outstanding - basic and diluted (B)		152,140,117			64,024,557
Loss Per Share:
Basic and diluted (A/B)		$	(1.64	)	$	(2.45	)

 

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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)

 

2.                            Recently Adopted Accounting Pronouncements

 

Effective January 1, 2018 the Company adopted Accounting Standards Update (“ASU”) no. 2014-09, Revenue from Contracts with Customers (ASC 606). Under the update, revenue is 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. Subsequent updates have been issued primarily to provide implementation guidance related to the initial guidance issued in May 2014. The Company has adopted this standard using the modified retrospective approach applied to those contracts that were not completed as of January 1, 2018. The results for the reporting period beginning after January 1, 2018, are presented in accordance with the new standard, although historical information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods. The adoption of ASC 606 did not have a material impact on the Company’s financial position, results of operations and cash flows as of or for the period ended March 31, 2018, and we expect the impact of the adoption of the new standard will be immaterial to our results of operations on an ongoing basis. The cumulative effect of accounting change recognized was $1.4 million recorded as an increase to beginning balance of accumulated deficit, and a corresponding reduction to Accounts receivable, net. See Note 3 for additional disclosure.

 

Effective January 1, 2018, the Company adopted ASU no. 2016-15, (Topic 230): Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, 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. We applied the guidance retrospectively to all periods presented. Exela will reclassify a loss on extinguishment of debt from operating activities to financing activities in the third quarter of 2017 in the to be filed quarterly and annual statements ended September 30, 2018 and December 31, 2018, respectively. The adoption had no impact on the Company’s financial position, results of operations and cash flows for the quarter ended March 31, 2018.

 

Effective January 1, 2018, the Company adopted ASU no. 2016-16, Income Taxes Topic (740): Intra-Entity Transfers of Assets Other Than Inventory, 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. 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 adoption had no material impact on the Company’s financial position, results of operations and cash flows.

 

Effective January 1, 2018, the Company adopted ASU no. 2016-18, (Topic 230): Restricted Cash. Statement of Cash Flows: Restricted Cash. 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. We applied the guidance retrospectively to all periods presented. As a result of adopting the ASU no. 2016-18, restricted cash is included in the balances of restricted cash, cash and cash equivalents presented in the Statement of Cash Flows for the quarters ended March 31, 2018 and 2017. Adopting the standard increased the net change in cash and cash equivalents, which is reflected within operating cash flows, by less than $0.1 million for the period ended March 31, 2017. Total Cash and cash equivalents for the Beginning of period and End of period March 31, 2017 increased $25.9 million due to the inclusion of restricted cash.

 

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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)

 

Effective January 1, 2018, the Company adopted ASU no. 2017-01, (Topic 805): Business Combinations: Clarifying the Definition of a Business. 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 adoption had no material impact on the Company’s financial position, results of operations and cash flows.

 

Effective January 1, 2018, the Company adopted ASU no. 2017-07, (Topic 715): Compensation  Retirement Benefit; 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. The new standard requires retrospective application and allows a practical expedient that permits an employer to use the amounts disclosed in its pension plan footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation. Adoption of the standard resulted in only the service cost being recorded to Cost of revenue; see Note 8 for the related impact.

 

Effective January 1, 2018 the company adopted ASU no. 2017-09, (Topic 718): Compensation — Stock Compensation: 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. The amendments in this update will be applied on a prospective basis to an award modified on or after the adoption date. The adoption had no impact on the Company’s financial position, results of operations and cash flows.

 

Recently Issued Accounting Pronouncements

 

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. Since the issuance of the original standard, the FASB has issued a subsequent update that provides a practical expedient for land easements (ASU 2018-01). The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and early application is permitted. The Company is currently 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, 2019, and interim periods within those fiscal years. 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 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

 

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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)

 

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, 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 August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815); Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align the risk management activities and financial reporting for these hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

3.         Significant Accounting Policies

 

The information presented below supplements the Significant Accounting Policies information presented in our 2017 Form 10-K, including Revenue Recognition for the adoption of ASC 606, which became effective January 1, 2018. See our 2017 Form 10-K for a description of our significant accounting policies in effect prior to the adoption of the new accounting standard.

 

Revenue Recognition

 

We account for revenue in accordance with ASC 606. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our material sources of revenue are derived from contracts with customers, primarily relating to the provision of business and transaction processing services within each of our segments. We do not have any significant payment terms, as payment is received shortly after goods are delivered or services are provided.

 

Nature of Services

 

Our primary performance obligations are to stand ready to provide various forms of transaction processing services, consisting of a series of distinct services that are substantially the same and have the same pattern of transfer over time, and accordingly are combined into a single performance obligation. Our promise to our customers is typically to perform an unknown or unspecified quantity of tasks and the consideration received is contingent upon the customers’ use (i.e., number of transactions processed, requests fulfilled, etc.); as such, the total transaction price is variable. We allocate the variable fees to the single performance obligation charged to the distinct service period in which we have the contractual right to bill under the contract.

 

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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)

 

Disaggregation of Revenues

 

The following table disaggregates revenue from contracts by geographic region and by segment for the three months ended March 31, 2018, and 2017:

 

		Three months ended March 31,
		2018									2017
		ITPS			HS			LLPS			ITPS			HS			LLPS
United States		$	269,939		$	58,632		$	22,598		$	106,347		$	59,078		$	23,385
Europe		35,283			—			—			28,300			—			—
Other		6,715			—			—			1,150			—			—
Total		$	311,937		$	58,632		$	22,598		$	135,797		$	59,078		$	23,385

 

Contract Balances

 

The following table presents contract assets and contract liabilities recognized at March 31, 2018 and December 31, 2017:

 

		March 31,			December 31,
		2018			2017
Accounts Receivable, net		$	238,680		$	229,704
Deferred revenues		16,793			13,717
Costs to obtain and fulfill a contract		20,814			22,929
Customer deposits		36,542			31,656

 

Accounts receivable includes $34.3 million and $27.9 million as of March 31, 2018 and December 31, 2017, respectively, representing amounts not billed to customers. We have accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers.

 

Deferred revenues relate to payments received in advance of performance under a contract. A significant portion of this balance relates to service contracts where we received payments for upfront conversions/implementation type activities of which do not transfer a service to the customer but rather are used in fulfilling the related performance obligations that transfer over time. The advance consideration received from customers is deferred over the contract term. We recognized revenue of $7.1 million during the three months ended March 31, 2018 that had been deferred as of December 31, 2017.

 

Costs incurred to obtain and fulfill contract are deferred and expensed on a straight-line basis over the estimated benefit period, which is generally the contract term. We recognized $2.4 million of amortization for these costs in the first quarter of 2018 within depreciation and amortization expense. 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. Applying the practical expedient in ASC 340-40-25-4, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in Selling, general and administrative expenses. The effect of applying this practical expedient was not material.

 

Customer deposits consist primarily of amounts received from customers in advance for postage. The majority of the amounts recorded as of December 31, 2017 were used to pay for postage with the corresponding postage revenue being recognized during the quarter ended March 31, 2018.

 

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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)

 

Performance Obligations

 

At the inception of each contract, we assess the goods and services promised in our contracts and identify each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts. For the majority of our business and transaction processing service contracts, revenues are recognized as services are provided based on an appropriate input or output method, typically based on the related labor or transactional volumes.

 

Some of our contracts have multiple performance obligations, including contracts that combine software implementation services with post-implementation customer support. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we estimate our expected costs of satisfying a performance obligation and add an appropriate margin for that distinct good or service. We also use the adjusted market approach whereby we estimate the price that customers in the market would be willing to pay. In assessing whether to allocate variable consideration to a specific part of the contract, we consider the nature of the variable payment and whether it relates specifically to its efforts to satisfy a specific part of the contract. Certain of our software implementation performance obligations are satisfied at a point in time, typically when customer acceptance is obtained.

 

When evaluating the transaction price, we analyze, on a contract by contract basis, all applicable variable consideration. The nature of our contracts give rise to variable consideration, including volume discounts, contract penalties, and other similar items that generally decrease the transaction price. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We do not anticipate significant changes to our estimates of variable consideration.

 

We include reimbursements from customers, such as postage costs, in revenue, while the related costs are included in cost of revenue.

 

Transaction Price Allocated to the Remaining Performance Obligations

 

In accordance with optional exemptions available under ASC 606, we did not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less, and (2) contracts for which variable consideration relates entirely to an unsatisfied performance obligation, which comprise the majority of our contracts. We have certain contracts where we receive a fixed monthly fee in exchange for a series of distinct services that are substantially the same and have the same pattern of transfer over time. These contracts comprise substantially all of the amounts for which we expect to recognize revenue related to fixed consideration associated with remaining performance obligations in each of the future periods noted:

 

Estimated Remaining Fixed Consideration for Unsatisfied Performance Obligations
2018		213,796,515
2019		250,487,172
2020		119,914,305
2021		59,989,281
2022		34,163,699
2023 and thereafter		11,548,764
Total		$	689,899,736

 

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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)

 

4.                            Business Combination

 

On July 12, 2017, the Company consummated its business combination with SourceHOV and Novitex (the “Business Combination”) pursuant to the Business Combination Agreement and Consent, Waiver and Amendment to the Business Combination Agreement, dated February 21, 2017 and June 15, 2017. In connection with the Business Combination, the Company acquired debt facilities and issued notes totaling $1.4 billion (refer to Note 5 — Long Term Debt and Credit Facilities). 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.

 

Under ASC 805, Business Combinations, SourceHOV was deemed the accounting acquirer based on the following predominate factors: it has 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. 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 Holdings, Inc. 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:

 

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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)

 

Cash and equivalents		8,428
Accounts receivable		87,474
Inventory		1,245
Prepaid expenses & other		13,974
Property and equipment, net		60,657
Identifiable intangible Assets, net		251,060
Deferred charges and other assets		2,723
Other noncurrent assets		93
Goodwill, excess/deficient purchase price		406,060
Total assets		831,714
Total assets less goodwill		425,654
Liabilities and Equity
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		46,991
Other liabilities		2,226
Equity		676,656
Total liabilities and equity		831,714
Total liabilities less equity/purchase price		155,058

 

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 Management’s own assumptions about the inputs used in pricing the asset or liability at fair value.

 

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

 

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

 

Through the acquisition of SourceHOV and Novitex, we expect to realize revenue synergies, leverage brand awareness, strengthen margins, generate greater free cash flow, expand the existing Novitex sales channels, and increase utilization of 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.

 

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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 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 our consolidated revenues and net loss, respectively, for Novitex for the year ended December 31, 2017. These results are included in the ITPS segment.

 

Transaction Costs

 

The Company incurred approximately $60.0 million in advisory, legal, accounting and management fees in conjunction with the Business Combination as of December 31, 2017, excluding contract cancellation and advising fees to HGM of $23.0 million. Additionally, $7.6 million was incurred related to equity issuance costs and $40.9 million was incurred in debt issuance costs. No transaction costs were incurred in the three months ended March 31, 2018 and 2017.

 

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 June 2017, representatives of SourceHOV and HGM Group communicated the termination of certain executives and non-executive Novitex employees. There were no restructuring charges incurred in the three months ended March 31, 2018 and 2017.

 

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. As of July 12, 2017, 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 No severance expense was incurred or recognized for the three months ended March 31, 2018.

 

5.         Intangibles Assets and Goodwill

 

Intangibles

 

Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization and consists of the following:

 

		March 31, 2018
		Gross Carrying Amount			Accumulated Amortization			Intangible Assets, Net
Customer relationships		$	504,643		$	(149,576	)	$	355,067
Developed technology		89,077			(81,543		)	7,534
Trade names		13,100			(775		)	12,325
Outsource contract costs		40,996			(20,182		)	20,814
Internally developed software		30,762			(4,398		)	26,364
Trademarks		23,370			(6,927		)	16,443
Non compete agreements		1,350			(969		)	381
Intangibles, net		$	703,298		$	(264,370	)	$	438,928

 

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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)

 

		December 31, 2017
		Gross Carrying Amount			Accumulated Amortization			Intangible Assets, Net
Customer relationships		$	504,643		$	(135,962	)	$	368,681
Developed technology		89,076			(77,103		)	11,973
Trade names (b)		13,100			—			13,100
Outsource contract costs		40,456			(17,526		)	22,930
Internally developed software		28,254			(2,597		)	25,657
Trademarks		23,370			(1,446		)	21,924
Non compete agreements		1,350			(631		)	719
Intangibles, net		$	700,249		$	(235,265	)	$	464,984

 

(a) Amounts include intangibles acquired in the 2017 Business Combination.

 

(b) The carrying amount of trade names for 2017 is net of accumulated impairment losses of $39.3 million.

 

Goodwill

 

Goodwill by reporting segment consists of the following:

 

		Goodwill			Additions			Reductions			Currency translation adjustments			Goodwill (a)
ITPS		$	159,394		$	406,522	(b)	$	—		$	299		$	566,215
HC		86,786			—			—			—			86,786
LLPS		127,111			—			(32,787		)(c)	—			94,324
Balance as of December 31, 2017		$	373,291		$	406,522		$	(32,787	)	$	299		$	747,325
ITPS		566,215												566,215
HC		86,786												86,786
LLPS		94,324			—						—			94,324
Balance as of March 31, 2018		$	747,325		$	—		$	—		$	—		$	747,325

 

(a)         The carrying amount of goodwill for all periods presented is net of accumulated impairment losses of $137.9 million.

(b)         Addition to goodwill is due to the Novitex acquisition. Refer to Note 3.

(c)          The reduction in goodwill is due to $30.1 million for impairment recorded in the fourth quarter of 2017 and $2.7 million for the sale of Meridian Consulting Group, LLC in the first quarter of 2017.

 

6.    Long-Term Debt and Credit Facilities

 

Senior Secured Notes

 

On July 12, 2017, the Company issued $1.0 billion in aggregate principal amount of 10.0% First Priority Senior Secured Notes due 2023 with an OID of $22.5 million (the “Notes”).  The Notes are guaranteed by certain subsidiaries of the Company. The Notes bear interest at a rate of 10.0% per year.  The Company pays interest on the Notes on January 15 and July 15 of each year, commencing on January 15, 2018.  The Notes will mature on July 15, 2023.

 

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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)

 

Debt Refinancing

 

Upon the closing of the Business Combination on July 12, 2017, the $1,050.7 million outstanding balance of SourceHOV related debt facilities and the $420.5 million outstanding balance of Novitex debt facilities were paid off using proceeds from the Credit Agreement and issuance of the Notes.

 

In accordance with ASC 470 — Debt — Modifications and Extinguishments, as a result of certain lenders that participated in SourceHOV’s debt structure prior to the refinancing and the Company’s debt structure after the refinancing, it was determined that a portion of the refinancing of SourceHOV’s First lien secured term loan and Second lien secured term loan (“original term loans”) would be accounted for as a debt modification, and the remaining would be accounted for as an extinguishment. The Company incurred $28.9 million in debt issuance costs related to the new secured term loan, of which $2.8 million was third party costs. The Company expensed $1.1 million of costs related to the modified debt and capitalized the remaining $27.8 million. The Company wrote off $30.5 million of the unamortized issuance costs and discounts associated with the retirement of SourceHOV’s credit facilities. The Company has approximately $3.3 million and $3.5 million of remaining unamortized debt issuance costs and debt discounts, respectively, associated with the modified portion of the original term loans that will be amortized over the term of the new term loan, which are presented on the balance sheet as a contra-debt liability. The Company incurred a $5.0 million prepayment penalty related the Company’s original term loans that was recorded as a loss on extinguishment of debt.

 

The proceeds of the new debt financing were also used to pay fees and expenses incurred in connection with the Business Combination and for general corporate purposes.

 

Senior Credit Facilities

 

On July 12, 2017, the Company entered into a First Lien Credit Agreement with Royal Bank of Canada, Credit Suisse AG, Cayman Islands Branch, Natixis, New York Branch and KKR Corporate Lending LLC (the “Credit Agreement”) providing Exela Intermediate LLC, a wholly owned subsidiary of the Company, upon the terms and subject to the conditions set forth in the Credit Agreement, a (i) $350.0 million senior secured term loan maturing July 12, 2023 with an original issue discount (“OID”) of $7.0 million, and (ii) a $100.0 million senior secured revolving facility maturing July 12, 2022, none of which is currently drawn. As of March 31, 2018 and December 31, 2017, the Company had outstanding irrevocable letters of credit totaling approximately $20.6 million and $20.9 million, respectively, under the senior secured revolving facility.

 

The Credit Agreement provides for the following interest rates for borrowings under the senior secured term facility and senior secured revolving facility: at the Company’s option, either (1) an adjusted LIBOR, subject to a 1.0% floor in the case of term loans, or (2) a base rate, in each case plus an applicable margin. The initial applicable margin for the senior secured term facility is 7.5% with respect to LIBOR borrowings and 6.5% with respect to base rate borrowings. The initial applicable margin for the senior secured revolving facility is 7.0% with respect to LIBOR borrowings and 6.0% with respect to base rate borrowings. The applicable margin for borrowings under the senior secured revolving facility is subject to step-downs based on leverage ratios. The senior secured term loan is subject to amortization payments, commencing on the last day of the first full fiscal quarter of the Company following the closing date, of 0.6% of the aggregate principal amount for each of the first eight payments and 1.3% of the aggregate principal amount for payments thereafter, with any balance due at maturity.

 

Long-Term Debt Outstanding

 

As of March 31, 2018 and December 31, 2017, the following long-term debt instruments were outstanding:

 

16