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Exela Technologies, Inc. - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


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

For the quarterly period ended September 30, 2019

Or

   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)


Delaware

47-1347291

(State of or other Jurisdiction
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

 

 

2701 E. Grauwyler Rd.
Irving, TX

75061

(Address of Principal Executive
Offices)

(Zip Code)

 

Registrant's Telephone Number, Including Area Code: (844) 935-2832

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

 

 

 

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, Par Value $0.0001 per share

XELA

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    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes   No 

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    

Accelerated Filer     

Non-Accelerated Filer     

Smaller Reporting Company   

 

Emerging Growth Company    

 

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. 

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

As of November 11, 2019 the registrant had 150,698,864 shares of Common Stock outstanding.

 

 

 

Table of Contents

Exela Technologies, Inc.

Form 10-Q

For the quarterly period ended September 30, 2019

TABLE OF CONTENTS

 

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Condensed Consolidated Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 

1

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 

2

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 

3

 

 

Condensed Consolidated Statements of Stockholders’ Deficit for the nine months ended September 30, 2019 and 2018 

4

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 

6

 

 

Notes to the Condensed Consolidated Financial Statements 

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

30

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

43

 

 

Item 4. Internal Controls and Procedures 

43

 

 

PART II — OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

44

 

 

Item 1A. Risk Factors 

45

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

45

 

 

Item 3. Defaults Upon Senior Securities 

45

 

 

Item 4. Mine Safety Disclosures 

45

 

 

Item 5. Other Information 

45

 

 

Item 6. Exhibits 

46

 

 

Table of Contents

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of September 30, 2019 and December 31, 2018

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2019

    

2018

 

Assets

 

 

  

 

 

  

 

Current assets

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

10,312

 

$

25,615

 

Restricted cash

 

 

4,913

 

 

18,239

 

Accounts receivable, net of allowance for doubtful accounts of $7,021 and $4,359, respectively

 

 

260,438

 

 

270,812

 

Related party receivables

 

 

42

 

 

 —

 

Inventories, net

 

 

16,996

 

 

16,220

 

Prepaid expenses and other current assets

 

 

22,695

 

 

25,015

 

Total current assets

 

 

315,396

 

 

355,901

 

Property, plant and equipment, net of accumulated depreciation of $171,913 and $154,060, respectively

 

 

119,469

 

 

132,986

 

Operating lease right-of-use assets, net

 

 

93,352

 

 

 —

 

Goodwill

 

 

609,458

 

 

708,258

 

Intangible assets, net

 

 

374,445

 

 

407,021

 

Deferred income tax assets

 

 

15,830

 

 

16,225

 

Other noncurrent assets

 

 

13,557

 

 

19,391

 

Total assets

 

$

1,541,507

 

$

1,639,782

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity (Deficit)

 

 

  

 

 

  

 

Liabilities

 

 

  

 

 

  

 

Current liabilities

 

 

 

 

 

 

 

Accounts payables

 

$

93,815

 

$

99,853

 

Related party payables

 

 

274

 

 

7,735

 

Income tax payable

 

 

 —

 

 

1,996

 

Accrued liabilities

 

 

60,994

 

 

66,008

 

Accrued compensation and benefits

 

 

51,819

 

 

54,583

 

Accrued interest

 

 

24,602

 

 

49,071

 

Customer deposits

 

 

30,161

 

 

34,235

 

Deferred revenue

 

 

17,368

 

 

16,504

 

Obligation for claim payment

 

 

43,267

 

 

56,002

 

Current portion of finance lease liabilities

 

 

15,172

 

 

17,498

 

Current portion of operating lease liabilities

 

 

26,604

 

 

 —

 

Current portion of long-term debts

 

 

37,237

 

 

29,237

 

Total current liabilities

 

 

401,313

 

 

432,722

 

Long-term debt, net of current maturities

 

 

1,367,583

 

 

1,306,423

 

Finance lease liabilities, net of current portion

 

 

24,159

 

 

26,738

 

Pension liabilities

 

 

26,667

 

 

25,269

 

Deferred income tax liabilities

 

 

12,677

 

 

11,212

 

Long-term income tax liabilities

 

 

2,892

 

 

3,024

 

Operating lease liabilities, net of current portion

 

 

71,661

 

 

 —

 

Other long-term liabilities

 

 

7,866

 

 

15,400

 

Total liabilities

 

 

1,914,818

 

 

1,820,788

 

Commitments and Contingencies (Note 10)

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

Stockholders' equity (deficit)

 

 

  

 

 

  

 

Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 153,486,011 shares issued and 150,698,864 shares outstanding at September 30, 2019 and 152,692,140 shares issued and 150,142,955 shares outstanding at December 31, 2018

 

 

15

 

 

15

 

Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized; 4,419,233 shares issued and outstanding at September 30, 2019 and 4,569,233 shares issued and outstanding at December 31, 2018

 

 

 1

 

 

 1

 

Additional paid in capital

 

 

482,018

 

 

482,018

 

Less: common stock held in treasury, at cost; 2,787,147 shares at September 30, 2019 and 2,549,185 shares December 31, 2018

 

 

(10,949)

 

 

(10,342)

 

Equity-based compensation

 

 

48,411

 

 

41,731

 

Accumulated deficit

 

 

(876,043)

 

 

(678,563)

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(7,786)

 

 

(6,565)

 

Unrealized pension actuarial losses, net of tax

 

 

(8,978)

 

 

(9,301)

 

Total accumulated other comprehensive loss

 

 

(16,764)

 

 

(15,866)

 

Total stockholders’ deficit

 

 

(373,311)

 

 

(181,006)

 

Total liabilities and stockholders’ deficit

 

$

1,541,507

 

$

1,639,782

 

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

 

1

Table of Contents

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2019 and 2018

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

Revenue

 

$

372,917

 

$

383,030

 

$

1,166,841

 

$

1,186,579

Cost of revenue (exclusive of depreciation and amortization)

 

 

291,222

 

 

295,936

 

 

896,110

 

 

903,682

Selling, general and administrative expenses

 

 

50,372

 

 

44,913

 

 

151,884

 

 

137,231

Depreciation and amortization

 

 

27,114

 

 

35,041

 

 

82,326

 

 

109,428

Impairment of goodwill and other intangible assets

 

 

99,682

 

 

 —

 

 

99,682

 

 

 —

Related party expense

 

 

1,405

 

 

759

 

 

3,454

 

 

3,267

Operating income (loss)

 

 

(96,878)

 

 

6,381

 

 

(66,615)

 

 

32,971

Other expense (income), net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

39,747

 

 

38,339

 

 

117,778

 

 

114,883

Debt modification and extinguishment costs

 

 

 —

 

 

1,067

 

 

1,404

 

 

1,067

Sundry expense (income), net

 

 

(10)

 

 

(2,571)

 

 

1,028

 

 

(4,961)

Other expense (income), net

 

 

581

 

 

(781)

 

 

4,965

 

 

(4,813)

Net loss before income taxes

 

 

(137,196)

 

 

(29,673)

 

 

(191,790)

 

 

(73,205)

  Income tax (expense) benefit

 

 

3,769

 

 

733

 

 

(5,689)

 

 

(4,911)

Net loss

 

$

(133,427)

 

$

(28,940)

 

$

(197,479)

 

$

(78,116)

Cumulative dividends for Series A Preferred Stock

 

 

(884)

 

 

(914)

 

 

(2,712)

 

 

(2,742)

Net loss attributable to common stockholders

 

$

(134,311)

 

$

(29,854)

 

$

(200,191)

 

$

(80,858)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.89)

 

$

(0.20)

 

$

(1.33)

 

$

(0.53)

 

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

 

2

Table of Contents

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the Three and Nine Months Ended September 30, 2019 and 2018

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

Net Loss

 

$

(133,427)

 

$

(28,940)

 

$

(197,479)

 

$

(78,116)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(2,325)

 

 

(2,492)

 

 

(1,221)

 

 

(3,639)

Unrealized pension actuarial gains (losses), net of tax

 

 

291

 

 

140

 

 

323

 

 

363

Total other comprehensive loss, net of tax

 

$

(135,461)

 

$

(31,292)

 

$

(198,377)

 

$

(81,392)

 

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 Stockholders’ Deficit

For the Nine Months Ended September 30, 2019 and 2018

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other
Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

Pension

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

Actuarial

 

 

 

 

Total

 

 

Common Stock

 

Preferred Stock

 

Treasury Stock

 

Additional

 

Equity-Based

 

Translation

 

Losses,

 

Accumulated

 

Stockholders'

 

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Paid in Capital

  

Compensation

  

Adjustment

  

net of tax

  

Deficit

  

Deficit

Balances at January 1, 2018

 

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 4)

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,418)

 

 

(1,418)

Net loss January 1, 2018 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)

 

$

(540,040)

 

$

(35,130)

Net loss April 1, 2018 to June 30, 2018

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(25,182)

 

 

(25,182)

Equity-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,936

 

 

 —

 

 

 —

 

 

 —

 

 

1,936

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(879)

 

 

 —

 

 

 —

 

 

(879)

Net realized pension actuarial gains, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

626

 

 

 —

 

 

626

Shares repurchased

 

(768,693)

 

 

 —

 

 —

 

 

 —

 

768,693

 

 

(3,479)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,479)

Balances at June 30, 2018

 

151,747,225

 

$

15

 

4,569,233

 

 

 1

 

817,993

 

$

(3,728)

 

$

482,018

 

$

36,980

 

$

(1,341)

 

$

(10,831)

 

$

(565,222)

 

$

(62,108)

Net loss July 1, 2018 to September 30, 2018

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(28,940)

 

 

(28,940)

Equity-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,365

 

 

 —

 

 

 —

 

 

 —

 

 

1,365

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,492)

 

 

 —

 

 

 —

 

 

(2,492)

Net realized pension actuarial gains, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

140

 

 

 —

 

 

140

Stock options exercised

 

126,922

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

256

 

 

 —

 

 

 —

 

 

 —

 

 

256

Shares repurchased

 

(225,504)

 

 

 —

 

 —

 

 

 —

 

225,504

 

 

(1,420)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,420)

Balances at September 30, 2018

 

151,648,643

 

$

15

 

4,569,233

 

 

 1

 

1,043,497

 

$

(5,148)

 

$

482,018

 

$

38,601

 

$

(3,833)

 

$

(10,691)

 

$

(594,162)

 

$

(93,199)

 

4

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other
Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

Pension

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

Actuarial

 

 

 

 

Total

 

 

Common Stock

 

Preferred Stock

 

Treasury Stock

 

Additional

 

Equity-Based

 

Translation

 

Losses,

 

Accumulated

 

Stockholders'

 

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Paid in Capital

  

Compensation

  

Adjustment

  

net of tax

  

Deficit

  

Deficit

Balances at January 1, 2019

 

150,142,955

 

$

15

 

4,569,233

 

$

 1

 

2,549,185

 

$

(10,342)

 

$

482,018

 

$

41,731

 

$

(6,565)

 

$

(9,301)

 

$

(678,563)

 

$

(181,006)

Net loss January 1, 2019 to March 31, 2019

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(29,907)

 

 

(29,907)

Equity-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,798

 

 

 —

 

 

 —

 

 

 —

 

 

2,798

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,392

 

 

 —

 

 

 —

 

 

3,392

Net realized pension actuarial gains, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(224)

 

 

 —

 

 

(224)

Balances at March 31, 2019

 

150,142,955

 

 

15

 

4,569,233

 

 

 1

 

2,549,185

 

 

(10,342)

 

 

482,018

 

 

44,529

 

 

(3,173)

 

 

(9,525)

 

 

(708,470)

 

 

(204,947)

Net loss April 1, 2019 to June 30, 2019

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(34,146)

 

 

(34,146)

Equity-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,661

 

 

 —

 

 

 —

 

 

 —

 

 

2,661

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,288)

 

 

 —

 

 

 —

 

 

(2,288)

Net realized pension actuarial gains, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

256

 

 

 —

 

 

256

RSUs vested

 

102,092

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Shares repurchased

 

(237,962)

 

 

 —

 

 —

 

 

 —

 

237,962

 

 

(607)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(607)

Balances at June 30, 2019

 

150,007,085

 

 

15

 

4,569,233

 

 

 1

 

2,787,147

 

 

(10,949)

 

 

482,018

 

 

47,190

 

 

(5,461)

 

 

(9,269)

 

 

(742,616)

 

 

(239,071)

Net loss July 1, 2019 to September 30, 2019

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(133,427)

 

 

(133,427)

Equity-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,444

 

 

 —

 

 

 —

 

 

 —

 

 

1,444

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,325)

 

 

 —

 

 

 —

 

 

(2,325)

Net realized pension actuarial gains, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

291

 

 

 —

 

 

291

RSUs vested

 

508,390

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Witholding of employee taxes on vested RSUs

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(223)

 

 

 —

 

 

 —

 

 

 —

 

 

(223)

Preferred shares converted to common

 

183,389

 

 

 —

 

(150,000)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balances at September 30, 2019

 

150,698,864

 

$

15

 

4,419,233

 

$

 1

 

2,787,147

 

$

(10,949)

 

$

482,018

 

$

48,411

 

$

(7,786)

 

$

(8,978)

 

$

(876,043)

 

$

(373,311)

 

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

 

 

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Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

For the Nine Months Ended September 30, 2019 and 2018

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2019

    

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(197,479)

 

$

(78,116)

 

Adjustments to reconcile net loss

 

 

 

 

 

 

 

Depreciation and amortization

 

 

82,326

 

 

109,428

 

Original issue discount and debt issuance cost amortization

 

 

8,730

 

 

8,062

 

Debt modification and extinguishment costs

 

 

1,049

 

 

 —

 

Impairment of goodwill and other intangible assets

 

 

99,682

 

 

 —

 

Provision for doubtful accounts

 

 

4,402

 

 

2,470

 

Deferred income tax provision

 

 

1,632

 

 

(3,689)

 

Share-based compensation expense

 

 

6,903

 

 

4,516

 

Foreign currency remeasurement

 

 

(173)

 

 

(2,040)

 

Loss (gain) on sale of assets

 

 

(191)

 

 

1,835

 

Fair value adjustment for interest rate swap

 

 

4,965

 

 

(5,456)

 

Change in operating assets and liabilities, net of effect from acquisitions

 

 

 

 

 

  

 

Accounts receivable

 

 

3,501

 

 

(6,374)

 

Prepaid expenses and other assets

 

 

2,377

 

 

(5,770)

 

Accounts payable and accrued liabilities

 

 

(43,861)

 

 

(23,457)

 

Related party payables

 

 

(7,502)

 

 

(3,689)

 

Net cash used in operating activities

 

 

(33,639)

 

 

(2,280)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

  

 

 

  

 

Purchase of property, plant and equipment

 

 

(10,797)

 

 

(14,077)

 

Additions to internally developed software

 

 

(5,074)

 

 

(3,080)

 

Additions to outsourcing contract costs

 

 

(14,304)

 

 

(5,427)

 

Cash paid in acquisition, net of cash received

 

 

(5,000)

 

 

(6,513)

 

Proceeds from sale of assets

 

 

360

 

 

1,095

 

Net cash used in investing activities

 

 

(34,815)

 

 

(28,002)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

  

 

 

  

 

Third party debt modification and extinguishment costs

 

 

355

 

 

1,067

 

Repurchases of common stock

 

 

(3,480)

 

 

(4,899)

 

Borrowings from other loans

 

 

1,728

 

 

3,068

 

Cash paid for equity issuance costs

 

 

 —

 

 

(7,500)

 

Net borrowings under factoring arrangement

 

 

(494)

 

 

 —

 

Cash paid for withholding taxes on vested RSUs

 

 

(223)

 

 

 —

 

Proceeds from senior secured term loans

 

 

29,850

 

 

30,000

 

Cash paid for debt issuance costs

 

 

(362)

 

 

(1,094)

 

Borrowings from senior secured revolving facility

 

 

130,500

 

 

30,000

 

Repayments on senior secured revolving facility

 

 

(91,500)

 

 

(30,000)

 

Principal payments on finance lease obligations

 

 

(13,598)

 

 

(12,594)

 

Principal repayments on senior secured term loans and other loans

 

 

(12,922)

 

 

(9,053)

 

Net cash provided by (used in) financing activities

 

 

39,854

 

 

(1,005)

 

Effect of exchange rates on cash

 

 

(29)

 

 

(554)

 

Net decrease in cash and cash equivalents

 

 

(28,629)

 

 

(31,842)

 

Cash, restricted cash, and cash equivalents

 

 

 

 

 

 

 

Beginning of period

 

 

43,854

 

 

81,489

 

End of period

 

$

15,225

 

$

49,647

 

 

 

 

 

 

 

 

 

Supplemental cash flow data:

 

 

 

 

 

 

 

Income tax payments, net of refunds received

 

$

6,981

 

$

5,296

 

Interest paid

 

 

131,773

 

 

136,396

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Assets acquired through right-of-use arrangements

 

 

9,352

 

 

9,318

 

Leasehold improvements funded by lessor

 

 

 —

 

 

1,565

 

Accrued capital expenditures

 

 

1,083

 

 

1,994

 


 

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 or unless otherwise noted)

(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, 2018 included in the Exela Technologies, Inc. (the "Company," "Exela," "we," "our" or "us") annual report on Form 10-K for such period (the “2018 Form 10-K”).

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, par value $0.0001 per share (“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 the Company’s Series A Convertible Preferred Stock (“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 nine months ended September 30, 2019 outstanding shares of the Series A Preferred Stock, if converted would have resulted in an additional 5,402,954 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 was originally incorporated July 12, 2017 as a special purpose acquisition company under the name Quinpario Acquisition Corp 2 (“Quinpario”). 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 September 30, 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

Net loss attributable to common stockholders (A)

 

$

(134,311)

 

$

(29,854)

 

$

(200,191)

 

$

(80,858)

Weighted average common shares outstanding - basic and diluted (B)

 

 

150,207,483

 

 

151,663,670

 

 

150,140,577

 

 

152,010,290

Loss Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted (A/B)

 

$

(0.89)

 

$

(0.20)

 

$

(1.33)

 

$

(0.53)

 

 

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2.    New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) no. 2016-02, Leases (ASC 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 Company adopted this guidance effective January 1, 2019, under the modified retrospective transition method provided by ASU 2018-11 with the following practical expedients below:

·

Not to record the leases with an initial term of 12 months or less on the balance sheet; and

·

Not to reassess the (1) definition of a lease, (2) lease classification, and (3) initial direct costs for existing leases during transition.

The adoption had a material impact on the Company's unaudited consolidated balance sheets, but did not have a material impact on the Company's unaudited consolidated income statements and unaudited consolidated statements of cash flows. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged. See Note 5 for relevant disclosures.

 

Effective January 1, 2019, the Company adopted ASU no. 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 ASU 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 ASU 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. The adoption had no impact on the Company's financial position, results of operations, and cash flows for the three and nine months ended September 30, 2019.

 

Effective January 1, 2019, the Company adopted 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 adoption had no impact on the Company's financial position, results of operations, and cash flows for the three and nine months ended September 30, 2019.

 

Effective January 1, 2019, the Company adopted ASU no. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU address a narrow-scope financial reporting issue related to the tax effects that may become “stranded” in accumulated other comprehensive income (“AOCI”) as a result of the Tax Cuts and Jobs Act (“TCJA”). An entity may elect to reclassify the income tax effects of the TCJA on items within AOCI to retained earnings. The adoption had no impact on the Company's financial position, results of operations, and cash flows for the three and nine months ended September 30, 2019.

 

Effective January 1, 2019, the Company adopted ASU no. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting to amend the accounting for share-based payment awards issued to nonemployees. Under the revised guidance, the accounting for awards issued to nonemployees will be

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Table of Contents

similar to the model for employee awards, except the ASU allows an entity to elect on an award-by-award basis to use the contractual term as the expected term assumption in the option pricing model, and the cost of the grant is recognized in the same period(s) and in the same manner as if the grantor had paid cash. The adoption had no impact on the Company's financial position, results of operations, and cash flows for the three and nine months ended September 30, 2019.

 

Recently Issued Accounting Pronouncements

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 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 August 2018, the FASB issued ASU no. 2018-13, Fair Value Measurement (Topic 820); which changes the fair value measurement disclosure requirements of ASC 820. The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting. The FASB used the guidance in the Concepts Statement to improve the effectiveness of ASC 820’s disclosure requirements. The objective of the disclosure requirements in this subtopic is to provide users of financial statements with information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. The ASU includes but is not limited to the valuation techniques and inputs that a reporting entity uses to arrive at its measures of fair value, including judgments and assumptions that the entity makes, the uncertainty in the fair value measurements as of the reporting date, and how changes in fair value measurements affect an entity’s performance and cash flows. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. 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 2018, the FASB issued ASU no. 2018-15, Intangibles, Goodwill, and Other - Internal Use Software (Subtopic 350-40): Customer's accounting for implementation costs incurred in a Cloud Computing Arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The guidance is effective for fiscal years beginning after December 15, 2019, 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. Business Combinations

 

Asterion

 

On April 10, 2018, Exela completed the acquisition of Asterion International Group (“Asterion,” the “Asterion Business Combination”), a well-established provider of technology driven business process outsourcing, document management

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and business process automation across Europe. The purchase price was approximately $19.5 million. The acquisition comes with minimal customer overlap and is strategic to expanding Exela’s European business.

 

The acquired assets and assumed liabilities of Asterion were recorded at their estimated fair values. The following table summarizes the consideration paid for Asterion and the fair value of the assets acquired and liabilities assumed at the acquisition date on April 10, 2018:

 

 

 

 

Assets Acquired:

    

 

 

Cash and cash equivalents

 

$

5,595

Accounts receivable

 

 

25,740

Other current assets

 

 

2,282

Inventories, net

 

 

1,137

Property, plant, and equipment, net

 

 

4,747

Deferred income tax assets

 

 

6,316

Other noncurrent assets

 

 

522

Intangible assets, net

 

 

3,525

Goodwill

 

 

1,493

Total identifiable assets acquired

 

$

51,357

Liabilities Assumed:

 

 

 

Accounts payable

 

$

(5,596)

Income tax payable

 

 

(5)

Accrued liabilities

 

 

(6,593)

Accrued compensation and benefits

 

 

(7,079)

Deferred revenue

 

 

(880)

Current portion of long term debt

 

 

(994)

Customer deposits

 

 

(462)

Pension liabilities

 

 

(7,135)

Other long-term liabilities

 

 

(1,324)

Deferred income tax liabilities

 

 

(1,171)

Capital lease obligations, net of current maturities

 

 

(650)

Total liabilities assumed

 

$

(31,889)

Total Consideration

 

$

19,468

 

The majority of identifiable intangible assets consisted of customer relationships. Customer relationships were valued using the Income Approach, specifically the Multi-Period Excess Earnings method. This intangible acquired represents a Level 3 measurement as it is based on unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset at fair value.

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

    

Useful Life (in years)

    

Fair Value

Customer Relationships

 

9.5

 

$

3,516

 

Through the acquisition of Asterion, the Company expects to leverage brand awareness, strengthen margins, and expand the existing Asterion sales channels. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Asterion’s identifiable net assets assumed, and as a result, the Company has recorded goodwill in connection with this acquisition. For the three and nine months ended September 30, 2019 the Company recognized $17.0 million and $56.8 million in revenue related to Asterion in the Consolidated Statement of Operations.

4.     Significant Accounting Policies

The information presented below supplements the Significant Accounting Policies information presented in our 2018 Form 10-K, including Revenue Recognition for the adoption of ASC 606 (ASU 2014-09: Revenue from Contracts with Customers), which became effective January 1, 2018. See our 2018 Form 10-K for a description of our significant accounting policies in effect prior to the adoption of the new accounting standard.

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Table of Contents

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 related to the provision of business and transaction processing services within each of our segments. We do not have any significant extended 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 business 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.

Disaggregation of Revenues

The following tables disaggregate revenue from contracts by geographic region and by segment for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

2019

 

2018

 

 

 

ITPS

 

 

HS

 

 

LLPS

 

 

ITPS

 

 

HS

 

 

LLPS

United States

 

$

229,492

 

$

62,132

 

$

18,806

 

$

248,055

 

$

56,776

 

$

18,941

Europe

 

 

55,836

 

 

 —

 

 

 —

 

 

52,602

 

 

 —

 

 

 —

Other

 

 

6,651

 

 

 —

 

 

 —

 

 

6,656

 

 

 —

 

 

 —

Total

 

$

291,979

 

$

62,132

 

$

18,806

 

$

307,313

 

$

56,776

 

$

18,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2019

 

2018

 

  

 

ITPS

 

 

HS

 

 

LLPS

 

 

ITPS

 

 

HS

 

 

LLPS

United States

 

$

718,936

 

$

186,915

 

$

54,217

 

$

782,870

 

$

171,722

 

$

65,476

Europe

 

 

186,337

 

 

 —

 

 

 —

 

 

146,242

 

 

 —

 

 

 —

Other

 

 

20,436

 

 

 —

 

 

 —

 

 

20,269

 

 

 —

 

 

 —

Total

 

$

925,709

 

$

186,915

 

$

54,217

 

$

949,381

 

$

171,722

 

$

65,476

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Contract Balances

The following table presents contract assets and contract liabilities recognized at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Accounts receivable, net

 

$

260,438

 

$

270,812

Deferred revenues

 

 

17,782

 

 

16,940

Costs to obtain and fulfill a contract

 

 

24,212

 

 

18,624

Customer deposits

 

 

30,161

 

 

34,235

 

Accounts receivable, net includes $37.6 million and $39.5 million as of September 30, 2019 and December 31, 2018, 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 maintenance contracts or other service contracts where we received payments for upfront conversions or implementation activities 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 $12.8 million during the nine months ended September 30, 2019 that had been deferred as of December 31, 2018.

Costs incurred to obtain and fulfill contracts are deferred and expensed on a straight-line basis over the estimated benefit period. We recognized $8.4 million of amortization for these costs in the first nine months of 2019 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, 2018 were used to pay for postage with the corresponding postage revenue being recognized during the nine months ended September 30, 2019.

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.

Certain 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

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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 non-cancellable 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, with the corresponding remaining performance obligations as of September 30, 2019 in each of the future periods below:

 

 

 

 

Estimated Remaining Fixed Consideration for Unsatisfied
Performance Obligations

 

    

 

 

Remainder of 2019

 

$

17,335

2020

 

 

52,951

2021

 

 

42,443

2022

 

 

31,951

2023

 

 

27,775

2024 and thereafter

 

 

54,159

Total

 

$

226,614

 

 

 

 

5.     Leases

The following table summarizes the impact of the changes made to the January 1, 2019 consolidated balance sheet for the adoption of the new accounting standard pertaining to leases. The prior periods have not been restated and have been reported under the accounting standard in effect for those periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

Balance at

 

 

December 31,

 

Impact of

 

January 1,

 

 

2018

 

Lease Standard

 

2019

Total assets

 

$

1,639,782

 

$

102,651

 

$

1,742,433

Total current liabilities

 

 

432,722

 

 

25,304

 

 

458,026

Total long-term liabilities

 

 

1,820,788

 

 

79,703

 

 

1,900,491

The increase in total assets and total liabilities at September 30, 2019 from December 31, 2018 was primarily due to the impact from the adoption of the new accounting standard pertaining to lease arrangements. See Note 2 for additional information on the impact of the adoption of this standard.

The Company determines if a contract is, or contains, a lease at contract inception. Operating leases are included in operating lease right-of-use ("ROU") assets, current portion of operating lease liabilities and operating lease liabilities, net of current portion in the Company's unaudited consolidated balance sheets. Finance leases are included in property

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and equipment, current portion of finance lease obligations and finance lease obligations, net of current portion in the Company's unaudited consolidated balance sheets.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In addition, ROU assets include initial direct costs incurred by the lessee as well as any lease payments made at or before the commencement date, and exclude lease incentives. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of one year or less are generally not included in ROU assets and liabilities.

Operating lease ROU assets and operating lease liabilities are recorded on the consolidated balance sheet as follows:

 

 

 

 

 

 

    

September 30,

 

 

2019

Balance sheet location:

 

 

 

Operating Lease

 

 

 

Operating lease right-of-use assets, net

 

$

93,352

Current portion of operating lease liabilities

 

 

26,604

Operating lease liabilities, net of current portion

 

 

71,661

Finance Lease

 

 

 

  Finance lease right-of-use assets, net (included in property, plant and equipment, net)

 

 

28,394

Current portion of finance lease liabilities

 

 

15,172

Finance lease liabilities, net of current portion

 

 

24,159

As of September 30, 2019, weighted-average remaining lease term of operating leases and finance leases was 4.89 years and 3.41 years, respectively. The weighted-average discount rate for operating leases and finance leases was 10.39% and 8.84%, respectively.

The interest on financing lease liabilities for the three and nine months ended September 30, 2019 was $0.9 million and $2.5 million, respectively. The amortization expense on finance lease right-of-use assets for the three and nine months ended September 30, 2019 was $3.7 and $10.7 million, respectively.

The following table summarizes maturities of finance and operating lease liabilities based on lease term as of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance

 

Operating

 

    

Leases

    

Leases

Remainder of 2019

 

$

6,554

 

$

8,469

2020

 

 

14,931

 

 

24,803

2021

 

 

11,587

 

 

19,707

2022

 

 

5,470

 

 

15,651

2023

 

 

2,847

 

 

11,721

2024 and thereafter

 

 

4,120

 

 

23,244

Total lease payments

 

 

45,509

 

 

103,595

Less: Imputed interest

 

 

6,178

 

 

5,380

Present value of lease liabilities

 

$

39,331

 

$

98,265

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At December 31, 2018, the Company had the following future minimum payments due under non-cancelable leases:

 

 

 

 

 

 

 

 

 

 

Finance

 

Operating

 

 

 

Leases

    

Leases

2019

 

$

20,080

 

$

38,057

2020

 

 

11,851

 

 

29,346

2021

 

 

9,018

 

 

22,239

2022

 

 

4,169

 

 

16,782

2023

 

 

2,244

 

 

12,302

2024 and thereafter

 

 

3,617

 

 

18,874

Total minimum lease payments

 

$

50,979

 

$

137,600

Less: imputed interest

 

 

6,743

 

 

 

Total net minimum lease payments

 

 

44,236

 

 

 

Less: Current portion of obligations under finance leases

 

 

17,498

 

 

 

Long-term portion of obligations under finance leases

 

$

26,738

 

 

 

 

Consolidated rental expense for all operating leases was $83.8 million for the year ended December 31, 2018. Consolidated rental expense for all operating leases was $19.0 million and $56.4 million for the three and nine months ended September 30, 2019, respectively.

The following table summarizes the cash paid and related right-of-use operating finance or operating lease recognized for the nine months ended September 30, 2019.

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

    

 

September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

 

$

28,831

Financing cash flows from finance leases

 

 

13,598

Right-of-use lease assets obtained in the exchange for lease liabilities:

 

 

 

Operating leases

 

 

3,894

Finance leases

 

 

9,352

 

6.     Intangibles Assets and Goodwill

Intangible Assets

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

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

Gross Carrying

 

 

 

Intangible

 

    

Amount (a)

    

Amortization

    

Asset, net

Customer relationships

 

$

507,901

 

$

(226,123)

 

$

281,778

Developed technology

 

 

89,053

 

 

(86,966)

 

 

2,087

Trade names  (b)

 

 

8,400

 

 

(3,100)

 

 

5,300

Outsource contract costs

 

 

60,514

 

 

(36,303)

 

 

24,212

Internally developed software

 

 

41,971

 

 

(9,956)

 

 

32,015

Trademarks

 

 

23,378

 

 

(23,370)

 

 

 8

Non compete agreements

 

 

1,350

 

 

(1,350)

 

 

 —

Assembled workforce

 

 

4,473

 

 

(839)

 

 

3,634

Purchased software

 

 

26,749

 

 

(1,337)

 

 

25,412

Intangibles, net

 

$

763,789

 

$

(389,344)

 

$

374,445

 

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December 31, 2018

 

 

Gross Carrying

 

 

 

Intangible

 

    

Amount (a)

    

Amortization

    

Asset, net

Customer relationships

 

$

507,905

 

$

(190,666)

 

$

317,239

Developed technology

 

 

89,053

 

 

(85,967)

 

 

3,086

Trade names  (c)

 

 

9,400

 

 

(3,100)

 

 

6,300

Outsource contract costs

 

 

46,342

 

 

(27,719)

 

 

18,623

Internally developed software

 

 

36,820

 

 

(6,278)

 

 

30,542

Trademarks

 

 

23,379

 

 

(23,370)

 

 

 9

Non compete agreements

 

 

1,350

 

 

(1,350)

 

 

 —

Assembled workforce

 

 

4,473

 

 

 —

 

 

4,473

Purchased software

 

 

26,749

 

 

 —

 

 

26,749

Intangibles, net

 

$

745,471

 

$

(338,450)

 

$

407,021


(a)

Amounts include intangible assets acquired in business combinations and asset acquisitions.  

(b)

The carrying amount of trade names for September 30, 2019 is net of accumulated impairment losses of $44.1 million, of which $1.0 million was recognized in the nine months ended September 30, 2019.

(c)

The carrying amount of trade names for 2018 is net of accumulated impairment losses of $43.1 million, of which $3.7 million was recognized in 2018.

Goodwill and other indefinite-lived assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. We conduct our annual goodwill and indefinite-lived assets impairment tests on October 1st of each year, or more frequently if indicators of impairment exist. The Company utilizes the Income Approach, specifically the Relief-from-Royalty method, to determine the fair value of the indefinite-lived assets. The Company uses a combination of the Guideline Public Company Method of the Market Approach and the Discounted Cash Flow Method of the Income Approach to determine the reporting unit fair value for goodwill impairment.  

During the three months ended September 30, 2019, the Company made an evaluation based on factors such as changes in the Company’s growth rate and recent trends in the Company’s market capitalization, and concluded that a triggering event for an interim impairment analysis had occurred in the third quarter of 2019. As part of the assessment, it was determined that the increase in the discount rate applied in the valuation was required to reflect current market dynamics and company-specific risk. This higher discount rate, in conjunction with revised long-term projections, resulted in lower than previously projected long-term future cash flows for the reporting units which reduced the estimated fair value to below carrying value. As a result of the interim impairment assessment, the Company recorded an impairment charge to goodwill and trade names of $98.7 million, including taxes, and $1.0 million, respectively. The impairment charges are included within Impairment of goodwill and other intangible assets in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019.

Goodwill

The Company’s operating segments are significant strategic business units that align its products and services with how it manages its business, approach the markets and interacts with its clients. The Company is organized into three segments: ITPS, HS, and LLPS (See Note 15).

Goodwill by reporting segment consists of the following:

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Currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation

 

 

 

 

    

Goodwill

 

 

Additions

 

 

Reductions

 

 

Adjustments

 

 

Goodwill (a)

ITPS

 

$

566,215

 

$

5,580

(c)

$

 —

 

$

(220)

 

$

571,575

HS

 

 

86,786

 

 

 —

 

 

 —

 

 

 —

 

 

86,786

LLPS

 

 

94,324

 

 

 —

 

 

(44,427)

(b)

 

 —

 

 

49,897

Balance as of December 31, 2018

 

$

747,325

 

$

5,580

 

$

(44,427)

 

$

(220)

 

$

708,258

ITPS

 

 

571,575

 

 

 —

 

 

(90,361)

(d)

 

(118)

 

 

481,096

HS

 

 

86,786

 

 

 —

 

 

 —

 

 

 —

 

 

86,786

LLPS

 

 

49,897

 

 

 —

 

 

(8,321)

(e)

 

 —

 

 

41,576

Balance as of September 30, 2019

 

$

708,258

 

$

 —

 

$

(98,682)

 

$

(118)

 

$

609,458


(a)

The goodwill amount for all periods presented is net of accumulated impairment losses of $167.9 million.

(b)

The reduction in goodwill is due to $44.4 million, including taxes, for impairment recorded in the fourth quarter of 2018.

(c)

Addition to goodwill due to the acquisition of Asterion and immaterial acquisitions in the third and fourth quarters of 2018.

(d)

The reduction in goodwill is due to $90.4 million, including taxes, for impairment recorded in the third quarter of 2019.

(e)

The reduction in goodwill is due to $8.3 million, including taxes, for impairment recorded in the third quarter of 2019.

 

 

 

 

7.     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 original issue discount (“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.

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 OID of $7.0 million, and (ii) a $100.0 million senior secured revolving facility maturing July 12, 2022. As of September 30, 2019 and December 31, 2018, the Company had outstanding irrevocable letters of credit totaling approximately $21 million and $20.6 million, respectively, under the senior secured revolving facility.

The Credit Agreement provided 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.

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Term Loan Repricing

On July 13, 2018, Exela successfully repriced the $343.4 million of term loans outstanding under its senior secured credit facilities (the “Repricing”). The Repricing was accomplished pursuant to a First Amendment to First Lien Credit Agreement (the “First Amendment”), dated as of July 13, 2018, by and among the Company’s subsidiaries Exela Intermediate Holdings LLC, Exela Intermediate, LLC, each “Subsidiary Loan Party” listed on the signature pages thereto, Royal Bank of Canada, as administrative agent, and each of the lenders party thereto, whereby the Company borrowed $343.4 million of refinancing term loans (the “Repricing Term Loans”) to refinance the Company’s existing senior secured term loans.

In accordance with ASC 470 -- Debt -- Modifications and Extinguishments, as a result of certain lenders that participated in Exela's debt structure prior to the Repricing and Exela's debt structure after the Repricing, it was determined that a portion of the refinancing of Exela's senior secured credit facilities would be accounted for as a debt modification, and the remaining would be accounted for as an extinguishment. The Company incurred $1.0 million in new debt issuance costs related to the refinancing, of which $1.0 million was expensed pursuant to modification accounting. The proportion of debt that was extinguished resulted in a write off of previously recognized debt issue costs of $0.1 million. Additionally, for the new lenders who exceeded the 10% test, less than $0.1 million was recorded as additional debt issue costs. All unamortized costs and discounts will be amortized over the life of the new term loan using the effective interest rate of the term loan.

The Repricing Term Loans will bear interest at a rate per annum of, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans. The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the Credit Agreement.  The Repricing Term Loans will mature on July 12, 2023, the same maturity date as the prior senior secured term loans.

2018 Incremental Term Loans

On July 13, 2018, the Company successfully borrowed an additional $30.0 million pursuant to incremental term loans (the “2018 Incremental Term Loans”) under the First Amendment. The proceeds of the 2018 Incremental Term Loans were used by the Company for general corporate purposes and to pay fees and expenses in connection with the First Amendment. The interest rates applicable to the Incremental Term Loans are the same as those for the Repricing Term Loans.

The Company may voluntarily repay the Repricing Term Loans and the 2018 Incremental Term Loans (collectively, the “Term Loans”) at any time, without prepayment premium or penalty, except in connection with a repricing event as described in the following sentence, subject to customary “breakage” costs with respect to LIBOR rate loans.  Any refinancing of the Term Loans through the issuance of certain debt or any repricing amendment, in either case, that constitutes a “repricing event” applicable to the Term Loans resulting in a lower yield occurring at any time during the first six months after July 13, 2018 will be accompanied by a 1.00% prepayment premium or fee, as applicable.

Other than as described above, the terms, conditions and covenants applicable to the Repricing Term Loans and the 2018 Incremental Term Loans are consistent with the terms, conditions and covenants that were applicable to the existing senior secured term loans under the Credit Agreement. The Repricing and issuance of the 2018 Incremental Term Loans resulted in a partial debt extinguishment, for which Exela recognized $1.1 million in debt extinguishment costs in the third quarter of 2018.

2019 Incremental Term Loan

 

On April 16, 2019, the Company successfully borrowed an additional $30.0 million pursuant to incremental term loans (the “2019 Incremental Term Loans”) under the Second Amendment to First Lien Credit Agreement (the “Second

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Amendment”). The proceeds of the 2019 Incremental Term Loans were used to replace the cash spent for acquisitions, pay related fees, expenses and related borrowings and for general corporate purposes.

 

The 2019 Incremental Term Loans will bear interest at a rate per annum that is the same as the Company’s Repricing  Term Loans under the senior credit facility. The 2019 Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Term Loans.

 

The Company may voluntarily repay the 2019 Incremental Term Loans at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans.

 

Other than as described above, the terms, conditions and covenants applicable to the 2019 Incremental Term Loans are consistent with the terms, conditions and covenants that are applicable to the Repricing Term Loans and 2018 Incremental Term Loans under the Credit Agreement and which are described in the registrant’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on July 18, 2017 and July 17, 2018. The Repricing and issuance of the 2018 and 2019 Incremental Term Loans resulted in a partial debt extinguishment, for which Exela recognized $1.4 million in debt extinguishment costs in the second quarter of 2019.

Long-Term Debt Outstanding

As of September 30, 2019 and December 31, 2018, the following long-term debt instruments were outstanding:

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Other (a)

 

$

23,904

 

$

25,321

First lien credit agreement (b)

 

 

364,068

 

 

335,896

Senior secured notes (c)

 

 

977,848

 

 

974,443

Revolver

 

 

39,000

 

 

 —

Total debt

 

 

1,404,820

 

 

1,335,660

Less: Current portion of long-term debt

 

 

(37,237)

 

 

(29,237)

Long-term debt, net of current maturities

 

$

1,367,583

 

$

1,306,423


(a)

Other debt represents the Company’s outstanding loan balances associated with various hardware and software purchases along with loans entered into by subsidiaries of the Company.

(b)

Net of unamortized original issue discount and debt issuance costs of $6.9 million and $20.1 million as of September 30, 2019 and $8.3 million and $24.5 million as of December 31, 2018.

(c)

Net of unamortized debt discount and debt issuance costs of $15.8 million and $6.3 million as of September 30, 2019 and $18.2 million and $7.3 million as of December 31, 2018.

 

 

 

8.     Income Taxes

The Company applies an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods, as required under GAAP. The Company recorded an income tax benefit of $3.8 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively. The Company recorded an income tax expense of $5.7 million and $4.9 million for the nine months ended September 30, 2019 and 2018, respectively.

 

The Company's ETR of (2.7%) and (3.0%) for the three and nine months ended September 30, 2019 differed from the expected U.S. statutory tax rate of 21.0% and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s deferred tax assets on U.S. disallowed interest expense carryforward’s created by the provisions of The Tax Cuts and Jobs Act (“TCJA”).

For the three and nine months ended September 30, 2018, the Company’s ETR of 2.5% and (6.7%) differed from the expected U.S. statutory tax rate of 21.0%, and was primarily impacted by permanent tax adjustments, state and local

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current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s U.S. disallowed interest expense carryforward’s created by the provisions of the TCJA.

As of September 30, 2019, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2018. The Company's valuation allowances have increased by approximately $28.8 million from December 31, 2018 to September 30, 2019 due largely to effects of TCJA relating to interest expense.

9.     Employee Benefit Plans

 

German Pension Plan

The Company’s subsidiary in Germany provides pension benefits to certain retirees. Employees eligible for participation include all employees who started working for the Company or its predecessors prior to September 30, 1987 and have finished a qualifying period of at least 10 years. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan. The German pension plan is an unfunded plan and therefore has no plan assets.  

U.K. Pension Plan

The Company’s subsidiary in the United Kingdom provides pension benefits to certain retirees and eligible dependents. Employees eligible for participation included all full-time regular employees who were more than three years from retirement prior to October 2001. A retirement pension or a lump-sum payment may be paid dependent upon length of service at the mandatory retirement age. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan.

Norway Pension Plan

The Company’s subsidiary in Norway provides pension benefits to eligible retirees and eligible dependents. Employees eligible for participation include all employees who were more than three years from retirement prior to March 2018. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan. 

Asterion Pension Plan

The Company acquired certain pension benefit obligations to eligible retirees and eligible dependents in 2018 pursuant to the Asterion Business Combination. Employees eligible for participation included all full-time regular employees who were more than three years from retirement prior to July 2003. A retirement pension or a lump-sum payment may be paid dependent upon length of service at the mandatory retirement age. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. As there are no active employees for this plan there are no earned pension entitlements and actuarial assumptions are only measured when assumptions are changed.

Tax Effect on Accumulated Other Comprehensive Loss

As of September 30, 2019 and December 31, 2018 the Company recorded actuarial losses of $8.9 million and $9.3 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which are net of a deferred tax benefit of $1.7 million.

Pension Expense

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The components of the net periodic benefit cost are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

Service cost

 

$

23

 

$

27

 

$

68

 

$

56

Interest cost

 

 

592

 

 

569

 

 

1,777

 

 

1,686

Expected return on plan assets

 

 

(612)

 

 

(701)

 

 

(1,837)

 

 

(2,076)

Amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

25

 

 

(34)

 

 

76

 

 

(102)

Amortization of net (gain) loss

 

 

406

 

 

433

 

 

1,218

 

 

1,294

Net periodic benefit cost

 

$

434

 

$

294

 

$

1,302

 

$

858

 

Upon adopting ASU no. 2017-07 as described in Note 2, the Company now records pension interest cost within Interest expense, net. Expected return on plan assets, amortization of prior service costs, and amortization of net losses are recorded within Other income, net. Service cost is recorded within Cost of revenue.

Employer Contributions

The Company’s funding of employer contributions is based on governmental requirements and differs from those methods used to recognize pension expense. The Company made contributions of $2.2 million and $2.3 million to its pension plans during the nine months ended September 30, 2019 and 2018, respectively. The Company has funded the pension plans with the required contributions for 2019 based on current plan provisions.

 

10.     Commitments and Contingencies

Appraisal Demand

On September 21, 2017, former stockholders of SourceHOV Holdings, Inc. (“SourceHOV”), who allege combined ownership of 10,304 shares of SourceHOV common stock, filed a petition for appraisal pursuant to 8 Del. C. § 262 in the Delaware Court of Chancery, captioned Manichaean Capital, LLC, et al. v. SourceHOV Holdings, Inc., C.A. No. 2017-0673-JRS (the "Appraisal Action"). The Appraisal Action arises out of the acquisition of SourceHOV and Novitex Holdings, Inc., by Quinpario in July 2017 (“Novitex Business Combination”), which gave rise to appraisal rights pursuant to 8 Del. C. § 262. In the Appraisal Action, the petitioners seek, among other things, a determination of the fair value of their SourceHOV shares at the time of the Novitex Business Combination.

On October 12, 2017, SourceHOV filed its answer to the petition and a verified list pursuant to 8 Del. C. § 262(f). The Court conducted a trial in June 2019, the parties submitted post-trial briefs in August 2019, and final arguments were held in October 2019. The Court’s decision remains pending, but is expected by the end of January 2020. The parties and their experts have offered competing valuations of the SourceHOV shares as of the date of the Novitex Business Combination. SourceHOV argues the value was no more than $1,633.85 per share and the petitioners argue the value was at least $5,079.28 per share. Interest accrues on the value of the shares from the date of the Business Combination, resulting in a potential range of values based on the respective proposals of approximately $19.6 million to $61.0 million as of September 30, 2019. The Company believes the petitioners’ claims of value of the SourceHOV shares are without merit and will continue to defend its position vigorously.

The Court may determine a fair value that is above or below the values indicated by the parties and their experts. At this stage of the litigation, the Company is unable to predict the outcome of the Appraisal Action or estimate what the Court will determine the fair value of SourceHOV common stock to be as of the date of the Novitex Business Combination.  As a result of the Appraisal Action, 4,570,734 shares of our Common Stock issued to Ex-Sigma 2 LLC, our principal stockholder, will be forfeited at such time as the PIPE Financing (as defined in and pursuant to the terms of the Consent, Waiver and Amendment, dated June 15, 2017) is repaid.

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11.   Fair Value Measurement

Assets and Liabilities Measured at Fair Value

The carrying amount of assets and liabilities including cash and cash equivalents, accounts receivable and accounts payable approximated their fair value as of September 30, 2019, and December 31, 2018, due to the relative short maturity of these instruments. Management estimates the fair values of the secured term loan and secured notes at approximately 59.5% and 55.0% respectively, of the respective principal balance outstanding as of September 30, 2019. The fair value is substantially less than the carrying value for the long-term debt. Other debt represents the Company's outstanding loan balances associated with various hardware and software purchases along with loans entered into by subsidiaries of the Company and as such, the cost incurred would approximate fair value. Property and equipment, intangible assets, capital lease obligations, and goodwill are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the respective asset is written down to its fair value.

The Company determined the fair value of its long-term debt using Level 2 inputs including the recent issue of the debt, the Company’s credit rating, and the current risk-free rate. The Company’s contingent liabilities related to prior acquisitions are re-measured each period and represent a Level 2 measurement as it is based on using an earn out method based on the agreement terms.

The Company determined the fair value of the interest rate swap using Level 2 inputs. The Company uses closing prices as provided by a third party institution.

The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2019, and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair

 

Fair Value Measurements

As of September 30, 2019

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Recurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,367,583

 

$

769,403

 

$

 —

 

$

769,403

 

$

 —

Interest rate swap liability

 

 

1,128

 

 

1,128

 

 

 —

 

 

1,128

 

 

 —

Acquisition contingent liability

 

$

721

 

$

721

 

$

 —

 

$

 —

 

$

721

Nonrecurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

609,458

 

 

609,458

 

 

 —

 

 

 —

 

 

609,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Fair

 

Fair Value Measurements

As of December 31, 2018

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Recurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,306,423

 

$

1,316,306

 

$

 —

 

$

1,316,306

 

$

 —

Interest rate swap asset

 

 

3,836

 

 

3,836

 

 

 —

 

 

3,836

 

 

 —

Acquisition contingent liability

 

$

721

 

$

721

 

$

 —

 

$

 —

 

$

721

Nonrecurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

708,258

 

 

708,258

 

 

 —

 

 

 —

 

 

708,258

 

The significant unobservable inputs used in the fair value of the Company’s acquisition contingent liability are the discount rate, growth assumptions, and revenue thresholds. Significant increases (decreases) in the discount rate would have resulted in a lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a higher (lower) fair value measurement. For all significant unobservable inputs used in the fair value measurement of the Level 3 liabilities, a change in one of the inputs would not necessarily result in a directionally similar change in the other based on the current level of billings.

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The following table reconciles the beginning and ending balances of net assets and liabilities classified as Level 3 for which a reconciliation is required:

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Balance as of Beginning of Period

 

$

721

 

$

721

Payments/Reductions

 

 

 —

 

 

 —

Balance as of End of Period

 

$

721

 

$

721

 

During the three months ended September 30, 2019, goodwill impairment charges totaling $98.7 million, including taxes, were recognized within our ITPS and LLPS segments (See Note 6).

 

12.   Stock-Based Compensation

At closing of the Novitex Business Combination, SourceHOV had 24,535 restricted stock units (“RSUs”) outstanding under its 2013 Long Term Incentive Plan ("2013 Plan"). Simultaneous with the closing of the Novitex Business Combination, the 2013 Plan, as well as all vested and unvested RSUs under the 2013 Plan, were assumed by Ex-Sigma LLC (“Ex-Sigma”), an entity formed by the former SourceHOV equity holders, which is also indirectly the Company's principal stockholder. In accordance with GAAP, the Company continues to incur compensation expense related to the 9,880 unvested RSUs as of July 12, 2017 on a straight-line basis until fully vested, as the recipients of the RSUs are employees of the Company. Subject to continuous employment and other terms of the 2013 Plan, all remaining unvested RSUs with an initial vesting period of three or four years vested in April 2019. As of September 30, 2019, because all shares vested in April 2019, there are no nonvested shares related to the 2013 Plan.

Exela 2018 Stock Incentive Plan

On January 17, 2018, Exela’s 2018 Stock Incentive Plan (the “2018 Plan”) became effective. The 2018 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, and other stock-based compensation to eligible participants. The Company is authorized to issue up to 8,323,764 shares of Common Stock under the 2018 Plan.

Restricted Stock Unit Grants

Restricted stock unit awards generally vest ratably over a one to two year period. Restricted stock units are subject to forfeiture if employment terminates prior to vesting and are expensed ratably over the vesting period.

A summary of the status of restricted stock units related to the 2018 Plan as of September 30, 2019 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

Number

 

Average Grant

 

Contractual Life

 

Aggregate

 

    

of Shares

    

Date Fair Value

    

(Years)

    

Intrinsic Value

Balance as of December 31, 2018

 

893,297

 

$

5.86

 

0.76

 

$

5,239

Shares granted

 

268,607

 

 

 

 

 

 

 

 

Shares forfeited

 

(151,067)

 

 

 

 

 

 

 

 

Shares vested

 

(610,482)

 

 

 

 

 

 

 

 

Balance as of September 30, 2019

 

400,355

 

$

2.12

 

1.43

 

$

849

 

The majority of the RSUs that vested in the three months ended September 30, 2019 were net-share settled such that the Company withheld shares with value equivalent to the employee’s minimum statutory obligation for applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were 194,010 shares and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payment for the employee’s tax obligations to taxing authorities were $0.2 million and is reflected as a financing activity within the Condensed Consolidated Statements of Cash flows.

 

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Options

Under the 2018 Plan, stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying stock at the grant date. The vesting period for each option award is established on the grant date, and the options generally expire 10 years from the grant date. Options granted under the 2018 Plan generally require no less than a two or four year ratable vesting period. Stock option activity in the first nine months of 2019 is summarized in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

Average Remaining

 

 

 

 

 

 

 

Average

 

Vesting Period

 

Aggregate

 

    

Outstanding

    

Exercise Price

    

(Years)

    

Intrinsic Value

Balance as of December 31, 2018

 

3,570,300

 

$

6.06

 

2.92

 

$

9,590

Granted

 

2,050,600

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

Forfeited

 

(618,200)

 

 

 

 

 

 

 

 

Expired

 

 —

 

 

 

 

 

 

 

 

Balance as of September 30, 2019

 

5,002,700

 

$

4.13

 

2.74

 

$

9,864

 

As of September 30, 2019, there was approximately $7.5 million of total unrecognized compensation expense related to non-vested awards for the 2018 Plan, which will be recognized over the respective service period.

Stock-based compensation expense is recorded within Selling, general, and administrative expenses. The Company incurred total compensation expense of $1.4 million and $6.9 million related to plan awards for the three and nine months ended September 30, 2019 and $1.6 million and $4.5 million related to plan awards for the three and nine months ended September 30, 2018.

 

13.   Stockholders’ Equity

The following description summarizes the material terms and provisions of the securities that the Company has authorized.

Common Stock

The Company is authorized to issue 1,600,000,000 shares of Common Stock. Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of Common Stock possess all voting power for the election of Exela's directors and all other matters requiring stockholder action and will at all times vote together as one class on all matters submitted to a vote of Exela stockholders. Holders of Common Stock are entitled to one vote per share on matters to be voted on by stockholders.  Holders of Common Stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the board of directors in its discretion out of funds legally available therefor and shall share equally on a per share basis in such dividends and distributions. The holders of the Common Stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the Common Stock. In August 2019, 150,000 shares of Series A Preferred Stock were converted into 183,389 shares of Common Stock. As of September 30, 2019 and December 31, 2018, there were 153,486,011 and 152,692,140 shares of Common Stock issued, respectively. As of September 30, 2019 and December 31, 2018, there were 150,698,864 and 150,142,955 shares outstanding, respectively. 

Preferred Stock

The Company is authorized to issue 20,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At September 30, 2019 and December 31, 2018, the Company had 4,419,233 shares and 4,569,233 shares of Series A Preferred Stock outstanding, respectively. The par value of Series A Preferred Stock is $0.0001 per share. Each share of Series A Preferred Stock will be convertible at the holder's option, at any time after the six-month anniversary and prior to the third anniversary of the issue date, initially into 1.2226 shares of Common Stock.

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Holders of the Series A Preferred Stock will be entitled to receive cumulative dividends at a rate per annum of 10% of the Liquidation Preference per share of Series A Preferred Stock, paid or accrued quarterly in arrears. From the issue date until the third anniversary of the issue date, the amount of all accrued but unpaid dividends on the Series A Preferred Stock will be added to the Liquidation Preference without any action by the Company’s board of directors. For the three months ended September 30, 2019 and 2018 this amount was $0.9 million as reflected on the Consolidated Statement of Operations. For the nine months ended September 30, 2019 and 2018 this amount was $2.7 million as reflected on the Consolidated Statement of Operations.  The cumulative accrued but unpaid dividends of the Series A Preferred Stock since their inception on July 12, 2017 is $8.9 million. The per share averages of cumulative preferred dividends for the three and nine months ended September 30, 2019 and 2018 are $0.2.

Following the third anniversary of the issue date, dividends on the Series A Preferred Stock will be accrued by adding to the Liquidation Preference or paid in cash, or a combination thereof. In addition, holders of the Series A Preferred Stock will participate in any dividend or distribution of cash or other property paid in respect of the Common Stock pro rata with the holders of the Common Stock (other than certain dividends or distributions that trigger an adjustment to the conversion rate, as described in the Certificate of Designations), as if all shares of Series A Preferred Stock had been converted into Common Stock immediately prior to the date on which such holders of the Common Stock became entitled to such dividend or distribution.

Treasury Stock

On November 8, 2017, the Company's board of directors authorized a share buyback program (the "Share Buyback Program"), pursuant to which the Company was authorized to purchase, from time to time, up to 5,000,000 shares of its Common Stock through various means, including, open market transactions and privately negotiated transactions. The decision as to whether to purchase any shares and the timing of purchases was based on the price of the Company's Common Stock, general business and market conditions and other investment considerations and factors. The Share Buyback Program did not obligate the Company to purchase any shares and has expired. The Company purchased 237,962 shares during the nine months ended September 30, 2019 under the Share Buyback Program. No shares were repurchased during the three months ended September 30, 2019. As of September 30, 2019, a total of 2,787,147 shares had been repurchased under the Share Buyback Program and are held in treasury stock. The Company records treasury stock using the cost method.

Warrants

At September 30, 2019 there were 34,988,302 warrants outstanding. As part of its IPO, Quinpario had issued 35,000,000 units including one share of common stock and one warrant of which 34,988,302 have been separated from the original unit and 11,698 warrants remain an unseparated part of the originally issued units. The warrants are traded on the OTC Bulletin Board as of September 30, 2019.

Each warrant entitles the holder to purchase one-half of one share of Common Stock at a price of $5.75 per half share  ($11.50 per whole share). Warrants may be exercised only for a whole number of shares of Common Stock. No fractional shares will be issued upon exercise of the warrants. Each warrant is currently exercisable and will expire July 12, 2022 (five years after the completion of the Novitex Business Combination), or earlier upon redemption.

The Company may call the warrants for redemption at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption, if, and only if, the last sales price of shares of Common Stock equals or exceeds $24.00 per share for any 20 trading days within a 30 trading day period (the “30-day trading period”) ending three business days before we send the notice of redemption, and if, and only if, there is a current registration statement in effect with respect to the shares of Common Stock underlying such warrants commencing five business days prior to the 30-day trading period and continuing each day thereafter until the date of redemption.

 

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14.   Related-Party Transactions

Operating Facility Leases

Certain operating companies lease their operating facilities from HOV RE, LLC and HOV Services Limited, which are affiliates under common control with Ex-Sigma. The rental expense for these operating leases was $0.1 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $0.3 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively.

 

Consulting Agreement

The Company receives services from Oakana Holdings, Inc. The Company and Oakana Holdings, Inc. are related through a family relationship between certain shareholders and the president of Oakana Holdings, Inc. The expense recognized for these services was $0.1 million for the three months ended September 30, 2019 and 2018, respectively. The expense recognized for these services was $0.1 million for the nine months ended September 30, 2019 and 2018, respectively.

The Company received consulting services from Shadow Pond, LLC. Shadow Pond, LLC is wholly owned and controlled by Vik Negi, our Executive Vice President Treasury and Business Affairs. The consulting arrangement was established to compensate Mr. Negi for his services to the Company prior to becoming an employee. The expense recognized for these services was $0.1 million for the nine months ended September 30, 2018. This consulting arrangement with Shadow Pond, LLC terminated on April 1, 2018 and Mr. Negi continues to provide services as an employee of the Company. As such, there were no additional expenses for the three months ended September 30, 2018 and for the three and nine months ended September 30, 2019.

Relationship with HandsOn Global Management

Pursuant to a master agreement dated January 1, 2015 between Rule 14, LLC and a subsidiary of the Company, the Company incurs marketing fees to Rule 14, LLC, a portfolio company of HandsOn Fund 4 I, LLC (“HGM”). Similarly, the Company is party to ten master agreements with entities affiliated with HGM's managed funds, each of which were entered into during 2015 and 2016. Each master agreement provides the Company with free use of certain technology and includes a reseller arrangement pursuant to which the Company is entitled to sell these services to third parties. Any revenue earned by the Company in such third-party sale is shared 75%/25% with each of HGM's venture affiliates in favor of the Company. The brands Zuma, Athena, Peri, BancMate, Spring, Jet, Teletype, CourtQ and Rewardio are part of the HGM managed funds. The Company has the license to use and resell such brands, as described therein. The fee relating to these agreements was $0.2 million for the three months ended September 30, 2019 and 2018, respectively. The Company incurred fees relating to these agreements of $0.3 million and $0.6 million for the nine  months ended September 30, 2019 and 2018, respectively.

Relationship with HOV Services, Ltd.

HOV Services, Ltd. provides the Company data capture and technology services. HOV Services, Ltd is an indirect equity holder of Ex-Sigma. The expense recognized for these services was $0.4 million for the three months ended September 30, 2019 and 2018, respectively, and $1.1 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively. These expenses are included in cost of revenue in the consolidated statements of operations.

Relationship with Apollo Global Management, LLC

The Company provides services to and receives services from certain Apollo Global Management, LLC (“Apollo”) affiliated companies. Funds managed by Apollo have the right to designate two of the Company’s directors. On November 18, 2014, one of the Company's subsidiaries entered into a master services agreement with an indirect wholly owned subsidiary of Apollo. Pursuant to this master services agreement, the Company provides printer supplies and maintenance services, including toner maintenance, training, quarterly business review and printer procurement. The

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Company recognized revenue of $0.1 million in our consolidated statements of operations from Apollo affiliated companies under this agreement for the three months ended September 30, 2019 and 2018, respectively. The company recognized revenue of $0.4 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively, in our consolidated statements of operations from Apollo affiliated companies under this agreement.

 

On January 18, 2017, one of the Company’s subsidiaries entered into a master purchase and professional services agreement with Caesars Enterprise Services, LLC ("Caesars"). Caesars is controlled by investment funds affiliated with Apollo. Pursuant to this master purchase and professional services agreement, the Company provides managed print services to Caesars, including general equipment operation, supply management, support services and technical support. The Company recognized revenue of approximately $1.1 million in our consolidated statements of operations from Caesars under this master purchase and professional services agreement for the three months ended September, 2019 and 2018, respectively. The Company recognized revenue of approximately $3.3 million and $3.1 million in our consolidated statements of operations from Caesars under this master purchase and professional services agreement for the nine months ended September 30, 2019 and 2018, respectively.

 

On May 5, 2017, one of the Company’s subsidiaries entered into a master services agreement with ADT LLC. ADT LLC is controlled by investment funds affiliated with Apollo. Pursuant to this master services agreement, the Company provides ADT LLC with mailroom and onsite mail delivery services at an ADT LLC office location and managed print services, including supply management, equipment maintenance and technical support services. The Company recognized revenue of $0.3 million and $0.2 million in our consolidated statements of operations from ADT LLC under this master services agreement for the three months ended September 30, 2019 and 2018, respectively. The Company recognized revenue of $0.9 million and $0.4 million in our consolidated statements of operations from ADT LLC under this master services agreement for the nine months ended September 30, 2019 and 2018, respectively.

 

On July 20, 2017, one of the Company’s subsidiaries entered into a master services agreement with Diamond Resorts Centralized Services Company. Diamond Resorts Centralized Services Company is controlled by investment funds affiliated with Apollo. Pursuant to this master services agreement, the Company provides commercial print and promotional product procurement services to Diamond Resorts Centralized Services Company, including sourcing, inventory management and fulfillment services. The Company recognized revenue of $1.4 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively, from Diamond Resorts Centralized Services Company under this master services agreement. The Company recognized revenue of $4.0 million and $4.9 million for the nine months ended September 30, 2019 and 2018, respectively, and related party expense of $0.1 million for the nine months ended September 30, 2019 and 2018, respectively, from Diamond Resorts Centralized Services Company under this master services agreement.

In April 2016, one of the Company’s subsidiaries entered into a master services agreement with Presidio Networked Solutions Group, LLC ("Presidio Group"), a wholly owned subsidiary of Presidio, Inc., a portion of which is owned by affiliates of Apollo. Pursuant to this master services agreement, Presidio Group provides the Company with employees, subcontractors, and/or goods and services. For the three months ended September 30, 2019 and 2018 there were related party expenses of $0.4 million and $0.2 million, respectively, for this service. For the nine months ended September 30, 2019 and 2018 there were related party expenses of $0.7 million and $0.5 million, respectively, for this service.

In June 2019, one of the Company’s subsidiaries entered into a master lease agreement with Presidio Technology Capital, LLC ("Presidio Capital"), a wholly owned subsidiary of Presidio, Inc., a portion of which is owned by affiliates of Apollo. Pursuant to this master lease agreement, Presidio Capital provides the Company certain equipment on finance lease. The Company recorded a finance lease liability of $1.0 million for this lease. As of September 30, 2019 total finance lease liability of the Company included $1.0 million pertaining to this lease.

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Payable and Receivable Balances with Affiliates

 

Payable and receivable balances with affiliates as of September 30, 2019 and December 31, 2018 are as follows below. As of December 31, 2018 there were no related party receivables.

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2019

    

2018

 

 

Receivable

 

Payable

 

Payable

HOV Services, Ltd

 

$

 —

 

$

23

 

$

405

Rule 14

 

 

 —

 

 

198

 

 

127

HGM

 

 

42

 

 

 —

 

 

6,998

Apollo affiliated company

 

 

 —

 

 

53

 

 

205

 

 

$

42

 

$

274

 

$

7,735

 

 

15. Segment and Geographic Area Information

 

The Company’s operating segments are significant strategic business units that align its products and services with how it manages its business, approach the markets and interacts with its clients. The Company is organized into three segments: ITPS, HS, and LLPS.

ITPS: The ITPS segment provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning and distribution to customers primarily in the financial services, commercial, public sector and legal industries.

HS: The HS segment operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets.

LLPS: The LLPS segment provides a broad and active array of legal services in connection with class action, bankruptcy labor, claims adjudication and employment and other legal matters.

The chief operating decision maker reviews operating segment revenue and cost of revenue. The Company does not allocate Selling, general, and administrative expenses, depreciation and amortization, interest expense and sundry, net. The Company manages assets on a total company basis, not by operating segment, and therefore asset information and capital expenditures by operating segments are not presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2019

 

    

ITPS

    

HS

    

LLPS

    

Total

Revenue

 

$

291,979

 

$

62,132

 

$

18,806

 

$

372,917

Cost of revenue

 

 

239,388

 

 

40,973

 

 

10,861

 

 

291,222

Selling, general and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

50,372

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

27,114

Impairment of goodwill and other intangible assets

 

 

 

 

 

 

 

 

 

 

 

99,682

Related party expense

 

 

 

 

 

 

 

 

 

 

 

1,405

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

39,747

Debt modification and extinguishment costs

 

 

 

 

 

 

 

 

 

 

 

 —

Sundry income, net

 

 

 

 

 

 

 

 

 

 

 

(10)

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

581

Net loss before income taxes

 

 

 

 

 

 

 

 

 

 

$

(137,196)

 

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Three months ended September 30, 2018

 

    

ITPS

    

HS

    

LLPS

    

Total

Revenue

 

$

307,313

 

$

56,776

 

$

18,941

 

$

383,030

Cost of revenue

 

 

246,492

 

 

36,919

 

 

12,525

 

 

295,936

Selling, general and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

44,913

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

35,041

Related party expense

 

 

 

 

 

 

 

 

 

 

 

759

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

38,339

Debt modification and extinguishment costs

 

 

 

 

 

 

 

 

 

 

 

1,067

Sundry income, net

 

 

 

 

 

 

 

 

 

 

 

(2,571)

Other income, net

 

 

 

 

 

 

 

 

 

 

 

(781)

Net loss before income taxes

 

 

 

 

 

 

 

 

 

 

$

(29,673)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

    

ITPS

    

HS

    

LLPS

    

Total

Revenue

 

$

925,709

 

$

186,915

 

$

54,217

 

$

1,166,841

Cost of revenue

 

 

743,557

 

 

119,816

 

 

32,737

 

 

896,110

Selling, general and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

151,884

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

82,326

Impairment of goodwill and other intangible assets

 

 

 

 

 

 

 

 

 

 

 

99,682

Related party expense

 

 

 

 

 

 

 

 

 

 

 

3,454

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

117,778

Debt modification and extinguishment costs

 

 

 

 

 

 

 

 

 

 

 

1,404

Sundry expense, net

 

 

 

 

 

 

 

 

 

 

 

1,028

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

4,965

Net loss before income taxes

 

 

 

 

 

 

 

 

 

 

$

(191,790)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

    

ITPS

    

HS

    

LLPS

    

Total

Revenue

 

$

949,381

 

$

171,722

 

$

65,476

 

$

1,186,579

Cost of revenue

 

 

752,796

 

 

111,135

 

 

39,751

 

 

903,682

Selling, general and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

137,231

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

109,428

Related party expense

 

 

 

 

 

 

 

 

 

 

 

3,267

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

114,883

Debt modification and extinguishment costs

 

 

 

 

 

 

 

 

 

 

 

1,067

Sundry income, net

 

 

 

 

 

 

 

 

 

 

 

(4,961)

Other income, net

 

 

 

 

 

 

 

 

 

 

 

(4,813)

Net loss before income taxes

 

 

 

 

 

 

 

 

 

 

$

(73,205)

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10‑Q. Among other things, the condensed consolidated financial statements include more detailed information regarding the basis of presentation for the financial data than included in the following discussion. Amounts in thousands of United States dollars.

Forward Looking Statements

Certain statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report are not historical facts but are forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are accompanied by words such as “may”, “should”, “would”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “seem”, “seek”, “continue”, “future”, “will”, “expect”, “outlook” or other similar words, phrases or expressions. These forward-looking statements include statements regarding our industry, future events, estimated or anticipated future results and benefits, future opportunities for Exela, and other statements that are not historical facts. These statements are based on the current expectations of Exela management and are not predictions of actual performance. These statements are subject to a number of risks and uncertainties regarding Exela’s businesses and actual results may differ materially. The factors that may affect our results include, among others: the impact of political and economic conditions on the demand for our services; the impact of a data or security breach; the impact of competition or alternatives to our services on our business pricing and other actions by competitors; our ability to address technological development and change in order to keep pace with our industry and the industries of our customers; the impact of terrorism, natural disasters or similar events on our business; the effect of legislative and regulatory actions in the United States and internationally; the impact of operational failure due to the unavailability or failure of third-party services on which we rely; the effect of intellectual property infringement; and other factors discussed in this quarterly report and our Annual Report on Form 10‑K for the year ended December 31, 2018 (our “Annual Report”) under the heading “Risk Factors” as supplemented by risk factors described in Part II, “Item 1A. Risk Factors” of our quarterly report for the quarter ended September 30, 2019, and otherwise identified or discussed in this quarterly report. You should consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on such statements, which speak only as of the date of this quarterly report. It is impossible for us to predict new events or circumstances that may arise in the future or how they may affect us. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this quarterly report. We are not including the information provided on the websites referenced herein as part of, or incorporating such information by reference into, this quarterly report. In addition, forward-looking statements provide Exela’s expectations, plans or forecasts of future events and views as of the date of this quarterly report. Exela anticipates that subsequent events and developments may cause Exela’s assessments to change. These forward-looking statements should not be relied upon as representing Exela’s assessments as of any date subsequent to the date of this quarterly report.

Overview

Exela is a business process automation (“BPA”) leader, leveraging a global footprint and proprietary technology to provide digital transformation solutions enhancing quality, productivity, and end-user experience. With decades of expertise operating mission-critical processes, Exela serves a growing roster of more than 4,000 customers throughout 50 countries, including over 60% of the Fortune 100. With foundational technologies spanning information management, workflow automation, and integrated communications, Exela’s software and services include multi-industry department solution suites addressing finance and accounting, human capital management, and legal management, as well as industry-specific solutions for banking, healthcare, insurance, and public sectors. Through cloud-enabled platforms, built on a configurable stack of automation modules, and over 22,000 employees operating in 23 countries, Exela rapidly deploys integrated technology and operations as an end-to-end digital journey partner.

 

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History

We are a former blank check company that completed our initial public offering on January 22, 2015. In July 2017, Exela Technologies, Inc. (“Exela”), formerly known as Quinpario Acquisition Corp. 2 (“Quinpario”), completed its acquisition of SourceHOV Holdings, Inc. (“SourceHOV”) and Novitex Holdings, Inc. (“Novitex”) pursuant to the business combination agreement dated February 21, 2017 (“Novitex Business Combination”). In conjunction with the completion of the Novitex Business Combination, Quinpario was renamed as Exela Technologies, Inc.

The Novitex Business Combination was accounted for as a reverse merger for which SourceHOV was determined to be the accounting acquirer. Outstanding shares of SourceHOV were converted into equity in a newly formed entity that acquired our common shares, presented as a recapitalization, and the net assets of Quinpario were acquired at historical cost, with no goodwill or other intangible assets recorded. The acquisition of Novitex was treated as a business combination under ASC 805 and was accounted for using the acquisition method.  The strategic combination of SourceHOV and Novitex formed Exela, which is one of the largest global providers of information processing solutions based on revenues.

Our Segments

Our three reportable segments are Information & Transaction Processing Solutions (“ITPS”), Healthcare Solutions (“HS”), and Legal & Loss Prevention Services (“LLPS”). These segments are comprised of significant strategic business units that align our transaction processing solutions and enterprise information management products and services with how we manage our business, approach our key markets and interact with our customers based on their respective industries.

ITPS:  Our largest segment, ITPS, provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning and distribution to customers primarily in the financial services, commercial, public sector and legal industries. Our major customers include the top 10 U.S. banks, 7 of the top 10 U.S. insurance companies, 4 of the top 5 U.S. telecom companies, over 40 utility companies, and over 400 state and local government entities. Our ITPS offerings enable companies to increase availability of working capital, reduce turnaround times for application processes, increase regulatory compliance and enhance consumer engagement.

HS:  Our HS segment operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets. We serve the top 5 healthcare insurance payers and over 900 healthcare providers.

LLPS:  Our LLPS segment provides a broad and active array of support services in connection with class action, bankruptcy, labor, claims adjudication and employment and other legal matters. Our customer base consists of corporate counsel, government attorneys, and law firms.

Acquisitions

On April 10, 2018, Exela completed the acquisition of Asterion International Group (“Asterion”), a well-established provider of technology driven business process outsourcing, document management and BPA across Europe. Asterion currently serves over 250 key customers in Europe from 13 operating locations and 30 customer sites. The purchase price was approximately $19.5 million. The acquisition comes with minimal customer overlap and is strategic to expand Exela’s pro forma combined European business to over $200.0 million in annual revenue. This acquisition not only enables Asterion’s customers to access Exela’s full suite of BPA solutions but also strategically positions Exela to expand its existing revenue base through a broader portfolio of offerings with a larger European presence.

Revenues

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

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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.

People

We draw on the business and technical expertise of our talented and diverse global workforce to provide our customers with high-quality services. Our business leaders bring a strong diversity of experience in our industry and a track record of successful performance and execution.

Costs associated with our employees represent the most significant expense for our business. We incurred personnel costs of $175.6 million and $168.8 million for the three months ended September 30, 2019 and 2018, respectively. We incurred personnel costs of $534.7 million and $516.5 million for the nine months ended September 30, 2019 and 2018, respectively. The majority of our personnel costs are variable and incurred only while we are providing our services.

Key Performance Indicators

We use a variety of operational and financial measures to assess our performance. Among the measures considered by our management are the following:

·

Revenue by segment;

·

EBITDA; and

·

Adjusted EBITDA

Revenue by segment

We analyze our revenue by comparing actual monthly revenue to internal projections and prior periods across our operating segments in order to assess performance, identify potential areas for improvement, and determine whether our segments are meeting management’s expectations.

 

EBITDA and Adjusted EBITDA

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus taxes, interest expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus optimization and restructuring charges, including severance and retention expenses; transaction and integrations costs; other non-cash charges, including non-cash compensation, (gain) or loss from sale or disposal of assets, and impairment charges; and management fees and expenses. See ‘‘—Other Financial Information (Non-GAAP Financial Measures)’’ for more information and a reconciliation of EBITDA and Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

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Results of Operations

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

 

 

 

 

    

2019

    

2018

    

Change

    

% Change

Revenue:

 

 

  

 

 

  

 

 

  

 

 

  

ITPS

 

$

291,979

 

$

307,313

 

$

(15,334)

 

 

-4.99%

HS

 

 

62,132

 

 

56,776

 

 

5,356

 

 

9.43%

LLPS

 

 

18,806

 

 

18,941

 

 

(135)

 

 

-0.71%

Total revenue

 

 

372,917

 

 

383,030

 

 

(10,113)

 

 

-2.64%

Cost of revenue (exclusive of depreciation and amortization):

 

 

  

 

 

  

 

 

  

 

 

  

ITPS

 

 

239,388

 

 

246,492

 

 

(7,104)

 

 

-2.88%

HS

 

 

40,973

 

 

36,919

 

 

4,054

 

 

10.98%

LLPS

 

 

10,861

 

 

12,525

 

 

(1,664)

 

 

-13.29%

Total cost of revenues

 

 

291,222

 

 

295,936

 

 

(4,714)

 

 

-1.59%

Selling, general and administrative expenses

 

 

50,372

 

 

44,913

 

 

5,459

 

 

12.15%

Depreciation and amortization

 

 

27,114

 

 

35,041

 

 

(7,927)

 

 

-22.62%

Impairment of goodwill and other intangible assets

 

 

99,682

 

 

 —

 

 

99,682

 

 

100.00%

Related party expense

 

 

1,405

 

 

759

 

 

646

 

 

85.11%

Operating income (loss)

 

 

(96,878)

 

 

6,381

 

 

(103,259)

 

 

-1618.23%

Interest expense, net

 

 

39,747

 

 

38,339

 

 

1,408

 

 

3.67%

Debt modification and extinguishment costs

 

 

 —

 

 

1,067

 

 

(1,067)

 

 

-100.00%

Sundry expense (income), net

 

 

(10)

 

 

(2,571)

 

 

2,561

 

 

-99.61%

Other expense (income), net

 

 

581

 

 

(781)

 

 

1,362

 

 

-174.39%

Net loss before income taxes

 

 

(137,196)

 

 

(29,673)

 

 

(107,523)

 

 

362.36%

Income tax benefit (expense)

 

 

3,769

 

 

733

 

 

3,036

 

 

414.19%

Net loss

 

$

(133,427)

 

$

(28,940)

 

$

(104,487)

 

 

361.05%

 

Revenue

Our ITPS, HS, and LLPS segments constituted 78.3%, 16.7%, and 5.0% of total revenue, respectively, for the three months ended September 30, 2019, compared to 80.2%, 14.8%, and 5.0%, respectively, for the three months ended September 30, 2018. The revenue changes by reporting segment were as follows:

 

ITPS— The decrease was primarily attributable to a decline of $15.6 million related to certain statements of work from one customer in the enterprise solutions business. This was partially offset by 2018 acquisitions and ramp up of new customers.

 

HS— The increase was primarily attributable to ramp up of new customers and acquisitions.

 

LLPS— Revenues remained flat for the comparable quarters.

 

Cost of Revenue

The cost of revenue changes by operating segment was as follows:

 

ITPS— Despite the decrease in postage pass through revenue in the current year and the exit of a low margin contract in the prior year, cost of revenue relative to revenue has increased by 1.8% over the prior year due to cost inflation and other factors.

 

HS— The increase primarily corresponded with the related revenue increase.

 

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LLPS— The decrease was primarily attributable to cost rationalization within the group.

 

Selling, General and Administrative Expenses

For the three months ended September 30, 2019, SG&A was $5.5 million higher than the three months ended September 30, 2018, mainly driven by higher legal and professional fees during the quarter.

Depreciation & Amortization

Amortization expenses were $7.9 million lower for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018, as a result of accelerated trade name write off during the financial year 2018. The accelerated trade name write off ended on December 31, 2018.

Impairment of Goodwill and Other Intangible Assets

Impairment of goodwill and other intangible assets for the three months ended September 30, 2019 was $99.7 million. During the three months ended September 30, 2019, the Company made an evaluation based on factors such as changes in the Company’s growth rate and recent trends in the Company’s market capitalization, and concluded that a triggering event for an interim impairment analysis had occurred in the third quarter of 2019. As a result of the interim impairment assessment, the Company recorded an impairment charge to goodwill and trade names of $98.7 million, including taxes, and $1.0 million, respectively.

Related Party Expenses

Related party expenses remained materially consistent with the prior year period.

Interest Expense

The Company pays interest on a semi-annual basis in the first and third quarters of each year; as such, interest expense remained materially consistent with the prior year period.

Sundry Expense (Income)

The increase of $2.6 million over the prior year period was primarily attributable to foreign currency transaction losses associated with exchange rate fluctuations.

Other Income

The decrease of $1.4 million over the prior year period is primarily attributable to an interest rate swap entered into in 2017. The interest rate swap was not designated as a hedge. As such, changes in the fair value of this derivative instrument are recorded directly in earnings. For the three months ended September 30, 2019, the fair value of the interest swap decreased $0.6 million and for the three months ended September 30, 2018, the fair value increased $0.8 million resulting in a net change of $1.4 million.

Income Tax (Expense) Benefit

We had an income tax benefit of $3.8 million for the three months ended September 30, 2019, compared to an income tax benefit of $0.7 million for the three months ended September 30, 2018. The change in the income tax benefit was primarily attributable to our change in judgment related to the realizability of certain deferred tax assets. The change in the effective tax rate for the three months ended September 30, 2019, resulted from permanent tax adjustments and valuation allowances, including valuation allowances against disallowed interest expense deferred tax assets that are not more-likely-than-not to be realized.

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Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

 

 

 

 

 

    

2019

    

2018

    

Change

    

% Change

Revenue:

 

 

  

 

 

  

 

 

  

 

 

  

ITPS

 

$

925,709

 

$

949,381

 

$

(23,672)

 

 

-2.49%

HS

 

 

186,915

 

 

171,722

 

 

15,193

 

 

8.85%

LLPS

 

 

54,217

 

 

65,476

 

 

(11,259)

 

 

-17.20%

Total revenue

 

 

1,166,841

 

 

1,186,579

 

 

(19,738)

 

 

-1.66%

Cost of revenue (exclusive of depreciation and amortization:

 

 

  

 

 

  

 

 

  

 

 

  

ITPS

 

 

743,557

 

 

752,796

 

 

(9,239)

 

 

-1.23%

HS

 

 

119,816

 

 

111,135

 

 

8,681

 

 

7.81%

LLPS

 

 

32,737

 

 

39,751

 

 

(7,014)

 

 

-17.64%

Total cost of revenues

 

 

896,110

 

 

903,682

 

 

(7,572)

 

 

-0.84%

Selling, general and administrative expenses

 

 

151,884

 

 

137,231

 

 

14,653

 

 

10.68%

Depreciation and amortization

 

 

82,326

 

 

109,428

 

 

(27,102)

 

 

-24.77%

Impairment of goodwill and other intangible assets

 

 

99,682

 

 

 —

 

 

99,682

 

 

100.00%

Related party expense

 

 

3,454

 

 

3,267

 

 

187

 

 

5.72%

Operating income (loss)

 

 

(66,615)

 

 

32,971

 

 

(99,586)

 

 

-302.04%

Interest expense, net

 

 

117,778

 

 

114,883

 

 

2,895

 

 

2.52%

Debt modification and extinguishment costs

 

 

1,404

 

 

1,067

 

 

337

 

 

31.58%

Sundry expense (income), net

 

 

1,028

 

 

(4,961)

 

 

5,989

 

 

-120.72%

Other expense (income), net

 

 

4,965

 

 

(4,813)

 

 

9,778

 

 

-203.16%

Net loss before income taxes

 

 

(191,790)

 

 

(73,205)

 

 

(118,585)

 

 

161.99%

Income tax expense

 

 

(5,689)

 

 

(4,911)

 

 

(778)

 

 

15.84%

Net loss

 

$

(197,479)

 

$

(78,116)

 

$

(119,363)

 

 

152.80%

 

Revenue

Our ITPS, HS, and LLPS segments constituted 79.3%, 16.0%, and 4.7% of total revenue, respectively, for the nine months ended September 30, 2019, compared to 80.0%, 14.5%, and 5.5%, respectively, for the nine months ended September 30, 2018. The revenue changes by reporting segment were as follows:

 

ITPS— The decrease was primarily attributable to a decline of $55.6 million related to certain statements of work from one customer in the enterprise solutions business. The decrease was offset by an increase due to 2018 acquisitions and ramp up of new customers.

 

HS— The increase was primarily attributable to ramp up of new customers and acquisitions, offset by a decline in volume from a single customer who lost a contract from one of its customers.

 

LLPS— Revenues decreased due to a decline in legal claims administration services of $8.6 million.

 

Cost of Revenue

The cost of revenue changes by operating segment was as follows:

 

ITPS— Despite the decrease in postage pass through revenue in the current year and the exit of a low margin contract in the prior year, cost of revenue relative to revenue has increased by 1.0% over the prior year due to cost inflation and other factors.

 

HS— The increases primarily corresponded with the related revenue increase.

 

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LLPS— The decrease was primarily attributable to a corresponding decrease in revenue in legal claims administration services.

 

Selling, General and Administrative Expenses

For the nine months ended September 30, 2019, SG&A was $14.7 million higher than the nine months ended September 30, 2019, mainly driven by higher stock compensation expense related to the equity awards granted to certain employees in the second half of 2018. The increase was also driven by higher legal, professional fee and higher investments in sales and strategy teams to drive the growth of the Company.

Depreciation & Amortization

Amortization expenses were $27.1 million lower for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, as a result of accelerated trade name write off during the financial year 2018. The accelerated trade name write off ended on December 31, 2018.

Impairment of Goodwill and Other Intangible Assets

Impairment of goodwill and other intangible assets for the nine months ended September 30, 2019 was $99.7 million. During the three months ended September 30, 2019, the Company made an evaluation based on factors such as changes in the Company’s growth rate and recent trends in the Company’s market capitalization, and concluded that a triggering event for an interim impairment analysis had occurred in the third quarter of 2019. As a result of the interim impairment assessment, the Company recorded an impairment charge to goodwill and trade names of $98.7 million, including taxes, and $1.0 million, respectively.

Related Party Expenses

Related party expenses remained flat as compared with the prior year period.

Interest Expense

The Company pays interest on a semi-annual basis in the first and third quarters of each year; as such, interest expense remained materially consistent with the prior year period.

Sundry Expense (Income)

The increase of $6.0 million over the prior year period was primarily attributable to foreign currency transaction losses associated with exchange rate fluctuations.

Other Income

The decrease of $9.8 million over the prior year period is primarily attributable to an interest rate swap entered into in 2017. The interest rate swap was not designated as a hedge. As such, changes in the fair value of this derivative instrument are recorded directly in earnings. For the nine months ended September 30, 2019, the fair value of the interest swap decreased $5.0 million and for the nine months ended September 30, 2018, the fair value increased $4.8 million, for a net decrease of $9.8 million.

Income Tax (Expense) Benefit

We had an income tax expense of $5.7 million for the nine months ended September 30, 2019, compared to an income tax expense of $4.9 million for the nine months ended September 30, 2018. The change in the income tax expense was primarily attributable to our change in judgment related to the realizability of certain deferred tax assets. The change in the effective tax rate for the nine months ended September 30, 2019, resulted from permanent tax

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adjustments and valuation allowances, including valuation allowances against disallowed interest expense deferred tax assets that are not more-likely-than-not to be realized.

Other Financial Information (Non-GAAP Financial Measures)

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus taxes, interest expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus optimization and restructuring charges, including severance and retention expenses; transaction and integrations costs; other non-cash charges, including non-cash compensation, (gain) or loss from sale or disposal of assets, and impairment charges; and management fees and expenses.

We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. Additionally, our credit agreement requires us to comply with certain EBITDA related metrics. Refer to ‘‘—Liquidity and Capital Resources—Credit Facility.’’

Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations as our board of directors and management use EBITDA and Adjusted EBITDA to assess our financial performance, because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. Net loss is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. You should not consider EBITDA and Adjusted EBITDA in isolation or as substitutes for an analysis of our results as reported under GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

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Three Months ended September 30, 2019 compared to the Three Months ended September 30, 2018

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the three months ended September 30, 2019 and 2018. 2018 reconciliation items between EBITDA and Adjusted EBITDA have been adjusted for comparability purposes in the table below. EBITDA and Adjusted EBITDA for the three months ended September 30, 2018 remains unchanged.

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

    

2019

    

2018

Net Loss

 

$

(133,427)

 

$

(28,940)

Taxes

 

 

(3,769)

 

 

(733)

Interest Expense

 

 

39,747

 

 

38,339

Depreciation and Amortization

 

 

27,114

 

 

35,041

EBITDA

 

 

(70,335)

 

 

43,707

Optimization and restructuring expenses (1) 

 

 

16,848

 

 

16,506

    Process transformation

 

 

15,694

 

 

15,048

    Customer transformation

 

 

 1

 

 

 —

    Mergers and acquisitions

 

 

1,153

 

 

1,458

Transaction and integration costs (2) 

 

 

1,155

 

 

220

Non-cash equity compensation (3) 

 

 

1,444

 

 

1,621

Other charges including non-cash (4) 

 

 

9,193

 

 

5,788

Loss (Gain) on sale of assets (5)

 

 

(22)

 

 

769

Debt modification and extinguishment costs

 

 

 —

 

 

1,067

(Gain)/Loss on derivative instruments (6)

 

 

580

 

 

(781)

Impairment of goodwill and other intangible assets

 

 

99,682

 

 

 —

Adjusted EBITDA

 

$

58,545

 

$

68,898


1.

Adjustment represents net salary and benefits associated with positions, current vendor expenses and existing lease contracts that are part of the on-going savings and productivity improvement initiatives in process transformation, customer transformation and post-merger or acquisition integration.

2.

Represents costs incurred related to transactions for completed or contemplated transactions during the period.

3.

Represents the non-cash charges related to restricted stock units and options granted by Ex-Sigma and Exela to our employees that vested during the year.

4.

Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase accounting and other non-cash charges. Other charges include severance, retention bonus, facility consolidation and other transition costs.

5.

Represents a loss/(gain) recognized on the disposal of property, plant, and equipment and other assets.

6.

Represents the impact of changes in the fair value of an interest rate swap entered into during the fourth quarter of 2017.

 

EBITDA and Adjusted EBITDA

EBITDA was negative $70.3 million for the three months ended September 30, 2019, compared to $43.7 million for the three months ended September 30, 2018. The decrease in EBITDA for the three months ended September 30, 2019 was primarily attributable to the higher net loss and a $99.7 million impairment of goodwill and trade name.  Adjusted EBITDA was $58.5 million for the three months ended September 30, 2019, compared to $68.9 million for the three months ended September 30, 2018. The decrease in Adjusted EBITDA for the three months ended September 30, 2019 was primarily due to higher net loss. Foreign currency losses during the period impacted adversely as it is not part of adjustments to EBITDA or Adjusted EBITDA.

Nine Months ended September 30, 2019 compared to the Nine Months ended September 30, 2018

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the nine months months ended September 30, 2019 and 2018. 2018

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reconciliation items between EBITDA and Adjusted EBITDA have been adjusted for comparability purposes in the table below. EBITDA and Adjusted EBITDA for the nine months ended September 30, 2018 remains unchanged.

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

Net Loss

 

$

(197,479)

 

$

(78,116)

Taxes

 

 

5,689

 

 

4,911

Interest expense

 

 

117,778

 

 

114,883

Depreciation and amortization

 

 

82,326

 

 

109,428

EBITDA

 

 

8,314

 

 

151,106

Optimization and restructuring expenses (1) 

 

 

59,217

 

 

35,128

    Process transformation

 

 

55,197

 

 

33,671

    Customer transformation

 

 

103

 

 

 —

    Mergers and acquisitions

 

 

3,917

 

 

1,458

Transaction and integration costs (2) 

 

 

4,193

 

 

2,097

Non-cash equity compensation (3) 

 

 

6,903

 

 

4,516

Other charges including non-cash (4) 

 

 

16,975

 

 

17,302

Loss on sale of assets (5)

 

 

404

 

 

1,434

Loss on business disposals (6)

 

 

 —

 

 

720

Debt modification and extinguishment costs

 

 

1,404

 

 

1,067

(Gain)/Loss on derivative instruments (7)

 

 

4,965

 

 

(4,813)

Impairment of goodwill and other intangible assets

 

 

99,682

 

 

 —

Adjusted EBITDA

 

$

202,057

 

$

208,558


1.

Adjustment represents net salary and benefits associated with positions, current vendor expenses and existing lease contracts that are part of the on-going savings and productivity improvement initiatives in process transformation, customer transformation and post-merger or acquisition integration.

2.

Represents costs incurred related to transactions for completed or contemplated transactions during the period.

3.

Represents the non-cash charges related to restricted stock units and options granted by Ex-Sigma and Exela to our employees that vested during the year.

4.

Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase accounting and other non-cash charges. Other charges include severance, retention bonus, facility consolidation and other transition costs.

5.

Represents a loss recognized on the disposal of property, plant, and equipment and other assets.

6.

Represents a loss recognized on the disposal of business.

7.

Represents the impact of changes in the fair value of an interest rate swap entered into during the fourth quarter of 2017.

 

EBITDA and Adjusted EBITDA

EBITDA was $8.3 million for the nine months ended September 30, 2019, compared to $151.1 million for the nine months ended September 30, 2018. The decrease in EBITDA for the nine months ended September 30, 2019 was primarily attributable to the higher net loss and a $99.7 million impairment of goodwill and trade name. Adjusted EBITDA was $202.1 million for the nine months ended September 30, 2019, compared to $208.6 million for the nine months ended September 30, 2018. The decrease in Adjusted EBITDA for the nine months ended September 30, 2019, was primarily due to a higher net loss. Foreign currency losses during the period impacted adversely as it is not part of adjustments to EBITDA or Adjusted EBITDA.

Liquidity and Capital Resources

Overview

Our primary source of liquidity is cash generated from operating activities, supplemented as necessary on a short-term basis by borrowings against our senior secured revolving credit facility. We believe our current level of cash

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and short-term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business.

We currently expect to spend approximately $40.0 to $45.0 million on total capital expenditures over the next twelve months. We believe that our operating cash flow and available borrowings under our credit facility will be sufficient to fund our operations for at least the next twelve months.

On July 13, 2018, Exela successfully repriced the $343.4 million of term loans outstanding under our senior secured credit facilities (the “Repricing Term Loans”). The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the First Lien Credit Agreement (the “Credit Agreement”).

On July 13, 2018, the Company borrowed a further $30.0 million pursuant to incremental term loans under the Credit Agreement. On April 16, 2019, the Company borrowed an additional $30.0 million pursuant to incremental term loans under the Credit Agreement. The proceeds of these incremental term loans (collectively, the “Incremental Term Loans”) were used to replace the cash spent for acquisitions, pay related fees, expenses and related borrowings and for general corporate purposes.

The Repricing Term Loans and the Incremental Term Loans bear interest at a rate per annum consisting of, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans. The Repricing Term Loans and the Incremental Term Loans will mature on July 12, 2023.

At September 30, 2019, cash and cash equivalents totaled $15.2 million and we had availability of $40.0 million under our senior secured revolving credit facility.

The Company is pursuing a debt reduction and liquidity improvement initiative that contemplates the pursuit of the sale of certain non-core businesses that are not central to the Company’s long-term strategic vision. The disposition of those businesses would reduce indebtedness and enhance the Company’s ability to focus on its core businesses. The Company has retained financial advisors to assist with the sale of select assets. As part of the initiative, the Company is also seeking to take steps in the near term to increase its liquidity to approximately $125.0 million to $150.0 million, which would allow it to increase its overall financial flexibility.  The Company expects to use the net proceeds from the initiative for the repayment of debt, with a target reduction of $150.0 to $200.0 million. The Company has set a two-year timetable for completion of the initiative. There can be no assurance that the initiative or any particular element of the initiative will be consummated or will achieve its desired result.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

Change

    

% Change

Cash flow from operating activities

 

$

(33,639)

 

$

(2,280)

 

$

(31,359)

 

 

1375.39%

Cash flow used in investing activities

 

 

(34,815)

 

 

(28,002)

 

 

(6,813)

 

 

24.33%

Cash flows (used in) provided by financing activities

 

 

39,854

 

 

(1,005)

 

 

40,859

 

 

-4065.57%

Subtotal

 

 

(28,600)

 

 

(31,287)

 

 

2,687

 

 

-8.59%

Effect of exchange rates on cash

 

 

(29)

 

 

(554)

 

 

525

 

 

-94.77%

Net increase/(decrease) in cash

 

 

(28,629)

 

 

(31,842)

 

 

3,213

 

 

-10.09%

 

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Analysis of Cash Flow Changes between the Nine Months Ended September 30, 2019 and September 30, 2018

Operating Activities—The decrease of $31.4 million in cash flows from operating activities for the nine months ended September 30, 2019 was primarily due to higher cash inflows in 2018 due to receipt of settlement funds for the legal business, higher gross profits, changes in accounts payable and accrued liabilities, and a decrease in related party payables in 2019. The decrease was offset by higher cash flows from accounts receivable in 2019.  

Investing Activities—The decrease of $6.8 million in cash used in investing activities was primarily due to higher outsourcing contract costs of $9.0 million for the nine months ended September 30, 2019 due to the ramp of new revenue and $2.0 million higher cash paid for developing internal software. The increase was offset by a $3.0 million decrease in cash paid for adding property, plant and equipment and lower cash paid for acquisitions.

Financing Activities—The increase of $40.9 million in cash provided by financing activities was primarily due to draw down of $39.0 million from the senior secured revolving facility in third quarter of 2019 to fund the semi-annual interest payment on the senior secured notes.

Indebtedness

In connection with the Novitex Business Combination, we acquired debt facilities and issued notes totaling $1.4 billion. Proceeds from the indebtedness were used to pay off credit facilities existing immediately before the Novitex Business Combination.

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, (i) a $350.0 million senior secured term loan maturing July 12, 2023 with an original issue discount of $7.0 million, and (ii) a $100.0 million senior secured revolving facility maturing July 12, 2022. The Credit Agreement provided 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 was 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 was 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.

Senior Secured Notes

Senior secured notes of $1.0 billion due July 2023 were also issued as part of the Novitex Business Combination. The notes bear interest at a rate of 10.0% per year. We pay interest on the notes on January 15 and July 15 of each year, commencing on January 15, 2018. The notes are guaranteed by subsidiary guarantors pursuant to a supplemental indenture.

Term Loan Repricing

On July 13, 2018, Exela successfully repriced the $343.4 million of term loans outstanding under its senior secured credit facilities (the “Repricing”). The Repricing was accomplished pursuant to a First Amendment to First Lien Credit Agreement (the “First Amendment”), dated as of July 13, 2018, by and among Exela Intermediate Holdings LLC, the Company, each “Subsidiary Loan Party” listed on the signature pages thereto, Royal Bank of Canada, as

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administrative agent, and each of the lenders party thereto, whereby the Company borrowed $343.4 million of refinancing term loans (the “Repricing Term Loans”) to refinance the Company’s existing senior secured term loans.

The Repricing Term Loans will bear interest at a rate per annum of, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans.  The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the First Lien Credit Agreement. The Repricing Term Loans will mature on July 12, 2023, the same maturity date as the prior senior secured term loans. As of September 30, 2019, the interest rate applicable for the Repricing Term Loans was 8.85%.

Incremental Term Loans

On July 13, 2018, the Company successfully borrowed an additional $30.0 million pursuant to incremental term loans (the “2018 Incremental Term Loans”) under the First Amendment to the Credit Agreement. The proceeds of the 2018 Incremental Term Loans were used by the Company for general corporate purposes and to pay fees and expenses in connection with the First Amendment.

On April 16, 2019, the Company successfully borrowed a further $30.0 million pursuant to incremental term loans (the “2019 Incremental Term Loans”, and, together with the 2018 Incremental Terms Loans, the “Incremental Term Loans”) under the Second Amendment to the Credit Agreement. The proceeds of the 2019 Incremental Term Loans were used to replace the cash spent for acquisitions, pay related fees, expenses and related borrowings for general corporate purposes.

 

The Incremental Term Loans bear interest at a rate per annum that is the same as the Repricing Term Loans.  The Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Repricing Term Loans.

 

The Company may voluntarily repay the Repricing Term Loans and the Incremental Term Loans (collectively, the “Term Loans”) at any time, without prepayment premium or penalty, except in connection with a repricing event as described in the following sentence, subject to customary “breakage” costs with respect to LIBOR rate loans. Any refinancing of the Term Loans through the issuance of certain debt or any repricing amendment, in either case, that constitutes a “repricing event” applicable to the Term Loans resulting in a lower yield occurring at any time during the first six months after July 13, 2018, will be accompanied by a 1.0% prepayment premium or fee, as applicable.

 Other than as described above, the terms, conditions and covenants applicable to the Incremental Term Loans are consistent with the terms, conditions and covenants that were applicable to the Repricing Term Loans under the Credit Agreement and which are described in the registrant’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on July 18, 2017 and July 17, 2018.

 

Letters of Credit

As of September 30, 2019 and December 31, 2018, we had outstanding irrevocable letters of credit totaling approximately $21.0 million and $20.6 million, respectively, under the revolving credit facility.

Potential Future Transactions

We may, from time to time, explore and evaluate possible strategic transactions, which may include joint ventures, as well as business acquisitions or the acquisition or disposition of assets.  In order to pursue certain of these opportunities, additional funds will likely be required. There can be no assurance that we will enter into additional strategic transactions or alliances, nor do we know if we will be able to obtain the necessary financing for transactions that require additional funds on favorable terms, if at all.

 

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Off Balance Sheet Arrangements

At September 30, 2019 we had no material off balance sheet arrangements, except letters of credit described above under Liquidity and Capital Resources. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

At September 30, 2019, we had $1,404.9 million of debt outstanding, with a weighted average interest rate of 9.5%. Interest is calculated under the terms of our credit agreement based on the greatest of certain specified base rates plus an applicable margin that varies based on certain factors. Assuming no change in the amount outstanding, the impact on interest expense of a 1% increase or decrease in the assumed weighted average interest rate would be approximately $14.0 million per year. In order to mitigate interest rate fluctuations with respect to term loan borrowings under the Credit Agreement, in November 2017, we entered into a three year one-month LIBOR interest rate swap contract with a notional amount of $347.8 million, which at the time was the remaining principal balance of the term loan. The swap contract swaps out the floating rate interest risk related to the LIBOR with a fixed interest rate of 1.9275% effective January 12, 2018.

The interest rate swap, which is used to manage our exposure to interest rate movements and other identified risks, was not designated as a hedge. As such, changes in the fair value of the derivative are recorded directly to other income as a loss of $5.0 million and a gain of $5.5 million for the nine months ended September 30, 2019 and 2018, respectively.

Foreign Currency Risk

We are exposed to foreign currency risks that arise from normal business operations. These risks include transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location’s functional currency. Contracts are denominated in currencies of major industrial countries.

Market Risk

We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.

Item 4. Internal Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s  rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the

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effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a‑15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting described in our 10-K as of December 31, 2018.

Notwithstanding such material weaknesses in internal control over financial reporting, our management, including our CEO and CFO, has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Quarterly Report, in conformity with U.S. generally accepted accounting principles.

 

Remediation

 

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we began implementing a remediation plan to address the material weaknesses mentioned above. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter-ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Appraisal Demand

On September 21, 2017, former stockholders of SourceHOV Holdings, Inc. (“SourceHOV”), who allege combined ownership of 10,304 shares of SourceHOV common stock, filed a petition for appraisal pursuant to 8 Del. C. § 262 in the Delaware Court of Chancery, captioned Manichaean Capital, LLC, et al. v. SourceHOV Holdings, Inc., C.A. No. 2017-0673-JRS (the "Appraisal Action"). The Appraisal Action arises out of the acquisition of SourceHOV and Novitex Holdings, Inc., by Quinpario in July 2017 (“Novitex Business Combination”), which gave rise to appraisal rights pursuant to 8 Del. C. § 262. In the Appraisal Action, the petitioners seek, among other things, a determination of the fair value of their SourceHOV shares at the time of the Novitex Business Combination.

On October 12, 2017, SourceHOV filed its answer to the petition and a verified list pursuant to 8 Del. C. § 262(f). The Court conducted a trial in June 2019, the parties submitted post-trial briefs in August 2019, and final arguments were held in October 2019. The Court’s decision remains pending, but is expected by the end of January 2020. The parties and their experts have offered competing valuations of the SourceHOV shares as of the date of the Novitex Business Combination. SourceHOV argues the value was no more than $1,633.85 per share and the petitioners argue the value was at least $5,079.28 per share. Interest accrues on the value of the shares from the date of the Business Combination, resulting in a potential range of values based on the respective proposals of approximately $19.6 million to $61.0 million as of September 30, 2019. The Company believes the petitioners’ claims of value of the SourceHOV shares are without merit and will continue to defend its position vigorously.

The Court may determine a fair value that is above or below the values indicated by the parties and their experts. At this stage of the litigation, the Company is unable to predict the outcome of the Appraisal Action or estimate what the Court will determine the fair value of SourceHOV common stock to be as of the date of the Novitex Business Combination. As a result of the Appraisal Action, 4,570,734 shares of our Common Stock issued to Ex-Sigma 2 LLC, our principal stockholder, will be forfeited at such time as the PIPE Financing (as defined in and pursuant to the terms of the Consent, Waiver and Amendment, dated June 15, 2017) is repaid.

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Other

We are, from time to time, involved in other legal proceedings, inquiries, claims and disputes, which arise in the ordinary course of business. Although our management cannot predict the outcomes of these matters, our management believes these actions will not have a material, adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2018, which could materially affect our business, financial condition and/or operating results. The risks described in these Risk Factors are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On November 8, 2017, the Company’s board of directors authorized a share buyback program (the “Share Buyback Program”), pursuant to which the Company was authorized to purchase, from time to time, up to 5,000,000 shares of its Common Stock through various means, including, open market transactions and privately negotiated transactions. The decision as to whether to purchase any shares and the timing of purchases were based on the price of the Company’s Common Stock, general business and market conditions and other investment considerations and factors. The Share Buyback Program did not obligate the Company to purchase any shares and has expired. We purchased 2,499,885 shares under the Share Buyback Program during 2018 at an average share price of $4.71. No shares were repurchased during the three months ended September 30, 2019. Share repurchases for the nine months ended September 30, 2019 were 237,962 at an average share price of $2.74. As of September 30, 2019,  a total of 2,787,147 shares had been repurchased under the Share Buyback Program. The Company records treasury stock using the cost method.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

Item 5. Other Information.

None.

 

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Item 6. Exhibits.

 

 

 

Exhibit No.

    

Description

 

 

 

2.1

 

Business Combination Agreement, dated as of February 21, 2017, by and among Quinpario Acquisition Corp. 2, Quinpario Merger Sub I, Inc., Quinpario Merger Sub II, Inc., Novitex Holdings, Inc., SourceHOV Holdings, Inc., Novitex Parent, L.P, HOVS LLC and HandsOn Fund 4 I, LLC (3)

3.1

 

Restated Certificate of Incorporation, dated July 12, 2017 (4)

3.2

 

Second Amended and Restated Bylaws, dated November 6, 2019.

4.1

 

Specimen Common Stock Certificate (1)

4.2

 

Specimen Warrant Certificate (1)

4.3

 

Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant (1)

4.4

 

Indenture, dated July 12, 2017, by and among Exela Intermediate LLC and Exela Finance Inc. as Issuers, the Subsidiary Guarantors set forth therein and Wilmington Trust, National Association, as Trustee (4)

4.5

 

First Supplemental Indenture, dated July 12, 2017, by and among Exela Intermediate LLC and Exela Finance Inc., as Issuers, the Subsidiary Guarantors set forth therein and Wilmington Trust, National Association, as Trustee (4)

10.1

 

First Amendment to First Lien Credit Agreement, dated as of July 13, 2018, by and among Exela Intermediate Holdings LLC, Exela Intermediate, LLC, each Subsidiary Loan Party listed on the signature pages thereto, Royal Bank of Canada, as administrative agent, and each of the lenders party thereto. (2)

10.2

 

Exela Technologies Inc. 2018 Stock Incentive Plan.(6)

10.3

 

Form of Option Grant Notice and Agreement under the Exela Technologies Inc. 2018 Stock Incentive Plan. (6)

10.4

 

Form of Restricted Stock Unit Grant and Agreement under the Exela Technologies Inc. 2018 Stock Incentive Plan. (6)

10.5

 

Second Amendment to First Lien Credit Agreement, dated as of April, 17, 2019, by and among Exela Intermediate Holdings LLC, Exela Intermediate, LLC, each Subsidiary Loan Party listed on the signature pages thereto, Royal Bank of Canada, as administrative agent, and each of the lenders party thereto. (5)

10.6

 

Exela Technologies, Inc. Executive Officer Annual Bonus Plan.

31.1

 

Certification of the Principal Executive Officer required by Rule 13a‑14(a) and Rule 15d‑14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002

31.2

 

Certification of the Principal Financial and Accounting Officer required by Rule 13a‑14(a) and Rule 15d‑14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002

32.1

 

Certification of the Principal Executive Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

32.2

 

Certification of the Principal Financial and Accounting Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase


(1)

Incorporated by reference to the Registrant’s Registration Statement on Form S‑1 (SEC File No. 333‑198988).

(2)

Incorporated by reference to the Registrants’ Current Report on Form 8‑K, filed on July 13, 2018.

(3)

Incorporated by reference to the Registrant’s Current Report on Form 8‑K, filed on February 22, 2017.

(4)

Incorporated by reference to the Registrants’ Current Report on Form 8‑K, filed on July 18, 2017.

(5)

Incorporated by reference to the Registrants’ Current Report on Form 8‑K, filed on April 17, 2019.

(6)

Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on May 10, 2019.

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SIGNATURES

Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 12th day of November, 2019.

 

 

 

 

EXELA TECHNOLOGIES, INC.

 

 

 

 

By:

/s/ Ronald Cogburn

 

 

Ronald Cogburn

 

 

Chief Executive Officer (Principal Executive Officer)

 

 

 

 

 

 

 

By:

/s/ James G. Reynolds

 

 

James G. Reynolds

 

 

Chief Financial Officer (Principal Financial and Accounting Officer)

 

47