Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2017

 

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

 

For the transition period from            to            

 

Commission File Number: 001-36788

 

EXELA TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

47-1347291

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

2701 E. Grauwyler Rd.
Irving, TX

 

75061

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer

o

Accelerated filer

x

Non-accelerated filer

o

Smaller reporting company

o

(Do not check if a smaller reporting company)

Emerging growth company

x

 

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

 

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

 

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

 

 

 



Table of Contents

 

Exela Technologies, Inc.

 

Form 10-Q

 

For the quarterly period ended September 30, 2017

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

3

 

 

Condensed Consolidated Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

3

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the nine months ended September 30, 2017 and 2016

6

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

7

 

 

Notes to the Condensed Consolidated Financial Statements

8

 

 

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

37

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

57

 

 

Item 4. Controls and Procedures

57

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

58

 

 

Item 1A. Risk Factors

58

 

 

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

58

 

 

Item 3. Defaults Upon Senior Securities

58

 

 

Item 4. Mine Safety Disclosures

58

 

 

Item 5. Other Information

58

 



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of September 30, 2017 and December 31, 2016

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

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

27,368

 

$

8,361

 

Restricted cash

 

37,315

 

25,892

 

Accounts receivable, net of allowance for doubtful accounts of $3,942 and $3,219 respectively

 

227,704

 

138,421

 

Inventories, net

 

13,634

 

11,195

 

Prepaid expenses and other current assets

 

24,263

 

12,202

 

Total current assets

 

330,284

 

196,071

 

Property, plant and equipment, net

 

133,617

 

81,600

 

Goodwill

 

776,010

 

373,291

 

Intangible assets, net

 

514,873

 

298,739

 

Deferred income tax assets

 

7,880

 

9,654

 

Other noncurrent assets

 

15,573

 

10,131

 

Total assets

 

$

1,778,237

 

$

969,486

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

82,676

 

$

42,212

 

Related party payables

 

14,474

 

9,344

 

Income tax payable

 

770

 

1,031

 

Accrued liabilities

 

75,259

 

29,492

 

Accrued compensation and benefits

 

52,955

 

31,200

 

Customer deposits

 

34,268

 

18,729

 

Deferred revenue

 

17,633

 

17,235

 

Obligation for claim payment

 

37,315

 

25,892

 

Current portion of capital lease obligations

 

15,246

 

6,507

 

Current portion of long-term debt

 

18,662

 

55,833

 

Total current liabilities

 

349,258

 

237,475

 

Long-term debt, net of current maturities

 

1,278,306

 

983,502

 

Capital lease obligations, net of current maturities

 

25,242

 

18,439

 

Pension liability

 

29,717

 

28,712

 

Deferred income tax liabilities

 

35,124

 

26,223

 

Long-term income tax liability

 

3,063

 

3,063

 

Other long-term liabilities

 

15,811

 

11,973

 

Total liabilities

 

1,736,521

 

1,309,387

 

Commitment and Contingencies

 

 

 

 

 

Stockholders’ equity (deficit)

 

 

 

 

 

Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 150,578,451 shares issued and outstanding at September 30, 2017 and 64,024,557 shares issued and outstanding at December 31, 2016;

 

15

 

 

 

 

Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized and 6,194,233 shares issued and outstanding at September 30, 2017 and no shares issued or outstanding at December 31, 2016

 

1

 

 

 

 

Additional paid in capital

 

482,018

 

(57,389

)

Equity-based compensation

 

31,788

 

27,342

 

Accumulated deficit

 

(455,976

)

(293,968

)

Accumulated other comprehensive loss:

 

 

 

 

 

Foreign currency translation adjustment

 

(2,291

)

(3,547

)

Unrealized pension actuarial losses, net of tax

 

(13,839

)

(12,339

)

Total accumulated other comprehensive loss

 

(16,130

)

(15,886

)

Total stockholders’ equity (deficit)

 

41,716

 

(339,901

)

Total liabilities and stockholders’ equity (deficit)

 

$

1,778,237

 

$

969,486

 

 

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

 

3



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

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

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

(Unaudited)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Revenue

 

$

338,393

 

$

186,373

 

$

766,035

 

$

577,527

 

Cost of revenue (exclusive of depreciation and amortization)

 

255,116

 

121,780

 

539,242

 

377,700

 

Gross profit

 

83,277

 

64,593

 

226,793

 

199,827

 

Selling, general and administrative expenses

 

102,048

 

30,829

 

172,626

 

95,385

 

Depreciation and amortization

 

28,052

 

18,761

 

70,779

 

58,463

 

Related party expense

 

26,892

 

2,448

 

31,733

 

7,372

 

Operating (loss) income

 

(73,715

)

12,555

 

(48,345

)

38,607

 

Other expense (income), net:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

37,652

 

27,399

 

91,740

 

81,712

 

Loss on extinguishment of debt

 

35,512

 

 

35,512

 

 

Sundry expense (income), net

 

563

 

711

 

2,960

 

283

 

Net loss before income taxes

 

(147,442

)

(15,555

)

(178,557

)

(43,388

)

Income tax benefit

 

37,002

 

3,757

 

32,924

 

9,969

 

Net loss

 

$

(110,440

)

$

(11,798

)

$

(145,633

)

$

(33,419

)

Dividend equivalent on Series A Preferred Stock related to beneficial conversion feature

 

(16,375

)

 

(16,375

)

 

Cumulative dividends for Series A Preferred Stock

 

(1,225

)

 

(1,225

)

 

Net loss attributable to common stockholders

 

$

(128,040

)

$

(11,798

)

$

(163,233

)

$

(33,419

)

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.92

)

$

(0.18

)

$

(1.76

)

$

(0.52

)

 

 

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

 

4



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

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

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

(Unaudited)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net loss

 

$

(110,440

)

$

(11,798

)

$

(145,633

)

$

(33,419

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

233

 

222

 

1,256

 

1,955

 

Unrealized pension actuarial (losses) gains, net of tax

 

(536

)

109

 

(1,500

)

469

 

Total other comprehensive loss, net of tax

 

$

(110,743

)

$

(11,467

)

$

(145,877

)

$

(30,995

)

 

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

 

5



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

For the Nine Months ended September 30, 2017 and 2016

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Unrealized Pension

 

 

 

Total

 

 

 

Common Stock

 

Preferred Stock

 

Additional

 

Equity-Based

 

Translation

 

Actuarial Losses,

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid in Capital

 

Compensation

 

Adjustment

 

net of tax

 

Deficit

 

Deficit

 

Balances at December 31, 2015 (as previously reported)

 

144,400

 

$

 

 

$

 

$

(57,389

)

$

20,256

 

$

(3,415

)

$

(5,076

)

$

(245,865

)

$

(291,489

)

Conversion of shares

 

63,880,157

 

6

 

 

 

(6

)

 

 

 

 

 

Balances at December 31, 2015, effect of reverse acquisition (refer to Note 2)

 

64,024,557

 

$

6

 

 

$

 

$

(57,395

)

$

20,256

 

$

(3,415

)

$

(5,076

)

$

(245,865

)

$

(291,489

)

Net loss January 1 to September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,419

)

(33,419

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

5,422

 

 

 

 

 

 

 

5,422

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

1,955

 

 

 

 

 

1,955

 

Net realized pension actuarial gains, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

469

 

 

 

469

 

Balances at September 30, 2016

 

64,024,557

 

$

6

 

 

$

 

$

(57,395

)

$

25,678

 

$

(1,460

)

$

(4,607

)

$

(279,284

)

$

(317,062

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Unrealized Pension

 

 

 

Total

 

 

 

Common Stock

 

Preferred Stock

 

Additional

 

Equity-Based

 

Translation

 

Actuarial Losses,

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid in Capital

 

Compensation

 

Adjustment

 

net of tax

 

Deficit

 

Equity

 

Balances at December 31, 2016 (as previously reported)

 

144,400

 

$

 

 

$

 

$

(57,389

)

$

27,342

 

$

(3,547

)

$

(12,339

)

$

(293,968

)

$

(339,901

)

Conversion of shares

 

63,880,157

 

6

 

 

 

(6

)

 

 

 

 

 

Balances at December 31, 2016, effect of reverse acquisition (refer to Note 2)

 

64,024,557

 

$

6

 

 

$

 

$

(57,395

)

$

27,342

 

$

(3,547

)

$

(12,339

)

$

(293,968

)

$

(339,901

)

Net loss January 1 to September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(145,633

)

(145,633

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

4,446

 

 

 

 

 

 

 

4,446

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

1,256

 

 

 

 

 

1,256

 

Net realized pension actuarial gains, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,500

)

 

 

(1,500

)

Merger recapitalization

 

16,575,443

 

2

 

 

 

 

 

20,546

 

 

 

 

 

 

 

 

 

20,548

 

Shares issued to acquire Novitex (refer to Note 3)

 

30,600,000

 

3

 

 

 

 

 

244,797

 

 

 

 

 

 

 

 

 

244,800

 

Issuance\Conversion of Quinpario shares

 

12,093,331

 

1

 

 

 

 

 

22,358

 

 

 

 

 

 

 

 

 

22,359

 

Sale of common shares at July 12, 2017

 

18,757,942

 

3

 

 

 

 

 

130,860

 

 

 

 

 

 

 

 

 

130,863

 

Issuance of Series A Preferred Stock

 

 

 

9,194,233

 

1

 

73,553

 

 

 

 

 

 

 

 

 

73,554

 

Shares issued for advisory services and underwriting fees

 

3,609,375

 

 

 

 

 

 

28,573

 

 

 

 

 

 

 

 

 

28,573

 

Conversion of Series A Preferred Stock to common shares

 

3,667,803

 

 

(3,000,000

)

 

 

 

 

 

 

 

 

 

 

 

Shares issued for HandsOn Global Management contract termination fee

 

1,250,000

 

 

 

 

 

 

 

10,000

 

 

 

 

 

 

 

 

 

10,000

 

Equity issuance expenses

 

 

 

 

 

 

 

 

 

(7,649

)

 

 

 

 

 

 

 

 

(7,649

)

Adjustment for beneficial conversion feature of Series A Preferred Stock (refer to Note 2)

 

 

 

 

 

 

 

 

 

16,375

 

 

 

 

 

 

 

(16,375

)

 

Balances at September 30, 2017

 

150,578,451

 

$

15

 

6,194,233

 

$

1

 

$

482,018

 

$

31,788

 

$

(2,291

)

$

(13,839

)

$

(455,976

)

$

41,716

 

 

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

 

6



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months ended September 30, 2017 and 2016

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

(Unaudited)

 

 

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(145,633

)

$

(33,419

)

Adjustments to reconcile net loss

 

 

 

 

 

Depreciation and amortization

 

70,779

 

58,463

 

Fees paid in stock

 

23,875

 

 

HGM contract termination fee paid in stock

 

10,000

 

 

Original issue discount and debt issuance cost amortization

 

9,684

 

10,183

 

Loss on extinguishment of debt

 

35,512

 

 

Provision (recovery) for doubtful accounts

 

451

 

(372

)

Deferred income tax benefit (expense)

 

(37,186

)

(9,092

)

Share-based compensation expense

 

4,446

 

5,422

 

Foreign currency remeasurement

 

777

 

172

 

Gain on sale of Meridian

 

(588

)

 

Loss on sale of property, plant and equipment

 

508

 

1,242

 

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

 

 

 

 

 

Accounts receivable

 

(2,784

)

12,732

 

Related party receivable

 

 

(1,089

)

Prepaid expenses and other assets

 

189

 

(3,807

)

Accounts payable and accrued liabilities

 

37,316

 

4,227

 

Related party payables

 

4,936

 

(1,345

)

Net cash provided by operating activities

 

12,282

 

43,317

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(7,001

)

(4,971

)

Additions to internally developed software

 

(6,348

)

(7,207

)

Additions to outsourcing contract costs

 

(8,574

)

(11,015

)

Cash acquired in Transcentra acquisition

 

 

3,351

 

Proceeds from sale of Meridian

 

4,582

 

 

Cash acquired in Quinpario reverse merger

 

91

 

 

Cash paid in Novitex acquisition, net of cash received

 

(423,428

)

 

Proceeds from sale of property, plant and equipment

 

11

 

625

 

Net cash used in by investing activities

 

(440,667

)

(19,217

)

Cash flows from financing activities

 

 

 

 

 

Change in bank overdraft

 

(210

)

(1,541

)

Proceeds from issuance of common and preferred stock

 

204,417

 

 

Cash received from Quinpario

 

27,031

 

 

Proceeds from financing obligations

 

3,040

 

4,801

 

Contribution from Shareholders

 

20,548

 

 

Proceeds from new credit facility

 

1,320,500

 

 

Retirement of previous credit facilities

 

(1,055,736

)

 

Cash paid for debt issuance costs and debt discounts

 

(39,837

)

 

Cash paid for equity issue costs

 

(149

)

 

Borrowings from revolver and swing-line loan

 

72,600

 

53,200

 

Repayments on revolver and swing line loan

 

(72,500

)

(53,200

)

Principal payments on long-term obligations

 

(32,647

)

(35,247

)

Net cash provided by (used in) financing activities

 

447,057

 

(31,987

)

Effect of exchange rates on cash

 

335

 

(239

)

Net increase (decrease) in cash and cash equivalents

 

19,007

 

(8,126

)

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

8,361

 

16,619

 

End of period

 

$

27,368

 

$

8,493

 

Supplemental cash flow data:

 

 

 

 

 

Income tax payments, net of refunds received

 

$

2,673

 

$

2,798

 

Interest paid

 

60,347

 

79,828

 

Noncash investing and financing activities:

 

 

 

 

 

Assets acquired through capital lease arrangements

 

$

2,080

 

$

5,632

 

Leasehold improvements funded by lessor

 

74

 

1,016

 

Issuance of common stock as consideration for Novitex

 

244,800

 

 

Accrued capital expenditures

 

3,512

 

412

 

Dividend equivalent on Series A Preferred Stock

 

$

16,375

 

$

 

Liability assumed of Quinpario

 

 

4,672

 

 

 

 

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

 

7



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

1.    Description of the Business

 

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

 

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

 

2.              Basis of Presentation and Summary of Significant Accounting Policies

 

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

 

Basis of Presentation

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

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

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Segment Reporting

 

The Company consists of the following three segments:

 

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

 

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

 

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

 

Restricted Cash

 

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

 

Intangible Assets

 

Customer Relationships

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Trade Names

 

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

 

Trademarks

 

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

 

Developed Technology

 

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

 

Capitalized Software Costs

 

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

 

Outsourced Contract Costs

 

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

 

Non-compete agreements

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Property, Plant and Equipment

 

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

 

Leases

 

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

 

Stock-Based Compensation

 

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

 

Revenue Recognition

 

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

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

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

 

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

 

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

 

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

 

Multiple Element Arrangements

 

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

 

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

 

Beneficial Conversion Feature

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Net Loss per Share

 

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

 

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

 

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

 

The components of basic and diluted EPS are as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net loss attributable to common stockholders (A)

 

$

(128,040

)

$

(11,798

)

$

(163,233

)

$

(33,419

)

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

 

138,895,681

 

64,024,557

 

92,512,729

 

64,024,557

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share:

 

 

 

 

 

 

 

 

 

Basic and diluted (A/B)

 

$

(0.92

)

$

(0.18

)

$

(1.76

)

$

(0.52

)

 

Recently Adopted Accounting Pronouncements

 

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

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

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

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

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

 

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

 

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

 

3.              Business Combination

 

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

 

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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

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

 

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

 

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

 

Assets acquired:

 

 

 

Cash and equivalents

 

$

8,428

 

Accounts receivable

 

87,474

 

Inventory

 

1,245

 

Prepaid expenses & other

 

13,974

 

Property, plant and equipment, net

 

60,657

 

Identifiable intangible Assets, net

 

251,060

 

Deferred charges and other assets

 

2,723

 

Other noncurrent assets

 

93

 

Goodwill

 

405,141

 

Total identifiable assets acquired

 

$

830,795

 

Liabilities Assumed:

 

 

 

Accounts payable

 

(29,444

)

Short-term borrowings and current portion of LT debt

 

(11,335

)

Accrued liabilities

 

(30,432

)

Advanced billings and customer deposits

 

(18,926

)

Long term debt

 

(15,704

)

Deferred taxes

 

(46,072

)

Other liabilities

 

(2,226

)

Total liabilities assumed

 

$

(154,139

)

Total Consideration

 

$

676,656

 

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

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

 

 

 

Weighted Average Useful Life
(in years)

 

Fair value

 

Trademark and trade name - Novitex

 

9.5

 

$

18,000

 

Customer relationships

 

16.0

 

230,000

 

Internally devleoped software - Connect Platform

 

5.0

 

1,710

 

Non-compete agreements

 

1.0

 

1,350

 

 

 

 

 

$

251,060

 

 

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

 

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

 

Transaction Costs

 

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

 

Restructuring Charges

 

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

 

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

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

The Company does not expect to incur additional charges for these terminations in future periods. Severance charges associated with the terminations were included in Selling, general and administrative expenses on the consolidated statement of operations and were included in the ITPS segment. Of the total amount of restructuring charges, $2.1 million was shown as a liability as of September 30, 2017, which is included within Accrued compensation and benefits on the Condensed Consolidated Balance Sheets.

 

Pro-Forma Information

 

Following are the supplemental consolidated results of the Company on an unaudited pro forma basis, as if the acquisition had been consummated on January 1, 2016 for three months and nine months ended September 30, 2017 and 2016:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net Revenue

 

$

358,166

 

$

350,784

 

$

1,069,992

 

$

1,082,299

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

(47,098

)

(24,460

)

(64,304

)

(107,772

)

 

These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative of consolidated results of operations in future periods. The pro forma results include adjustments primarily related to purchase accounting adjustments. Acquisition costs and other non-recurring charges incurred are included in the earliest period presented.

 

Additionally, the pro forma results are inclusive of the acquisition of TransCentra by SourceHOV for the three and nine month periods ended September 30, 2016. These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative of the Company’s consolidated results of operations in future periods.

 

4.              Accounts Receivable

 

Accounts receivable, net consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

Billed receivables

 

$

195,437

 

$

116,148

 

Unbilled receivables

 

31,341

 

20,982

 

Other

 

4,868

 

4,510

 

Less: Allowance for doubtful accounts

 

(3,942

)

(3,219

)

 

 

$

227,704

 

$

138,421

 

 

Unbilled receivables represent balances recognized as revenue that have not been billed to the customer. The Company’s allowance for doubtful accounts is based on a policy developed by historical experience and management judgment. Adjustments to the allowance for doubtful accounts may occur based on market conditions or specific client circumstances.

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

5.              Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

Prepaids

 

$

22,923

 

$

10,906

 

Deposits

 

1,340

 

1,296

 

 

 

$

24,263

 

$

12,202

 

 

6.              Property, Plant and Equipment, Net

 

Property, plant, and equipment, which include assets recorded under capital leases, are stated at cost less accumulated depreciation and amortization, and consist of the following:

 

 

 

Estimated Useful

 

September 30,

 

December 31,

 

 

 

Lives (in Years)

 

2017

 

2016

 

Land

 

N/A

 

$

7,744

 

$

7,637

 

Buildings and improvements

 

7 - 40

 

18,450

 

16,989

 

Leasehold improvements

 

Lesser of the useful life or lease term

 

48,243

 

31,342

 

Vehicles

 

5 - 7

 

792

 

784

 

Machinery and equipment

 

5 - 15

 

62,242

 

23,297

 

Computer equipment and software

 

3 - 8

 

112,490

 

98,544

 

Furniture and fixtures

 

5 - 15

 

6,993

 

5,007

 

 

 

 

 

256,954

 

183,600

 

Less: Accumulated depreciation and amortization

 

 

 

(123,337

)

(102,000

)

Property, plant and equipment, net

 

 

 

$

133,617

 

$

81,600

 

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

7.              Intangibles Assets and Goodwill

 

Intangibles

 

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

 

 

 

September 30, 2017

 

 

 

Gross Carrying
Amount (a)

 

Accumulated
Amortization

 

Intangible
Asset, net

 

Customer relationships

 

504,643

 

(125,803

)

$

378,840

 

Developed technology

 

89,076

 

(72,806

)

16,270

 

Trade names

 

52,470

 

 

52,470

 

Outsource contract costs

 

37,144

 

(15,020

)

22,124

 

Internally developed software

 

24,799

 

(3,159

)

21,640

 

Trademarks

 

23,370

 

(898

)

22,472

 

Non-compete agreements

 

1,350

 

(293

)

1,057

 

 

 

$

732,852

 

$

(217,979

)

$

514,873

 

 

 

 

December 31, 2016

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Intangible
Asset, net

 

Customer relationships

 

$

274,643

 

$

(100,172

)

$

174,471

 

Developed technology

 

89,076

 

(59,539

)

29,537

 

Trade names

 

53,370

 

 

53,370

 

Outsource contract costs

 

27,619

 

(7,378

)

20,241

 

Internally developed software

 

16,742

 

(858

)

15,884

 

Trademarks

 

5,370

 

(134

)

5,236

 

 

 

$

466,820

 

$

(168,081

)

$

298,739

 

 


(a) Amounts include intangibles acquired in the Business Combination. Refer to Note 3.

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Goodwill

 

Goodwill by reporting segment consists of the following:

 

 

 

Goodwill

 

Additions

 

Reductions

 

Currency
translation
adjustments

 

Goodwill

 

ITPS

 

$

145,562

 

$

13,558

 

$

 

$

274

 

$

159,394

 

HS

 

86,786

 

 

 

 

86,786

 

LLPS

 

127,111

 

 

 

 

127,111

(a)

Balance as of December 31, 2016

 

$

359,459

 

$

13,558

 

$

 

$

274

 

$

373,291

 

ITPS

 

159,394

 

405,141

(c)

 

 

299

 

564,834

 

HS

 

86,786

 

 

 

 

 

 

 

86,786

 

LLPS

 

127,111

 

 

(2,721

)(b)

 

124,390

(a)

Balance as of September 30, 2017

 

$

373,291

 

$

405,141

 

$

(2,721

)

$

299

 

$

776,010

 

 


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

(b)    The reduction in goodwill is due to the sale of Meridian in Q1 2017.

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

 

The Company recorded $405.1 million of goodwill as a result of the allocation of the purchase price between assets acquired and liabilities assumed in the Business Combination. Of the total amount of goodwill recorded, $46.1 million of goodwill is associated with deferred tax liabilities recorded in connection with amortizable intangible assets acquired in the Business Combination.

 

8.              Accrued Liabilities and Other Long-Term Liabilities

 

Accrued liabilities consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

Accrued taxes (exclusive of income taxes)

 

$

7,521

 

$

3,309

 

Accrued lease exit obligations

 

2,474

 

3,949

 

Accrued professional and legal fees

 

12,821

 

8,289

 

Deferred rent

 

1,136

 

989

 

Accrued interest

 

30,405

 

8,459

 

Accrued transaction costs

 

19,250

 

2,750

 

Other accruals

 

1,652

 

1,747

 

 

 

$

75,259

 

$

29,492

 

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Other Long-term liabilities consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

Deferred revenue

 

$

447

 

$

235

 

Deferred rent

 

7,383

 

6,110

 

Accrued lease exit obligations

 

1,667

 

672

 

Accrued compensation expense

 

2,980

 

3,783

 

Other

 

3,334

 

1,173

 

 

 

$

15,811

 

$

11,973

 

 

9.              Long-Term Debt and Credit Facilities

 

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 (“OID”) of $7.0 million, and (ii) a $100.0 million senior secured revolving facility maturing July 12, 2022, none of which is currently drawn.

 

The Credit Agreement provides for the following interest rates for borrowings under the senior secured term facility and senior secured revolving facility: at the Company’s option, either (1) an adjusted LIBOR, subject to a 1.0% floor in the case of term loans, or (2) a base rate, in each case plus an applicable margin. The initial applicable margin for the senior secured term facility is 7.5% with respect to LIBOR borrowings and 6.5% with respect to base rate borrowings. The initial applicable margin for the senior secured revolving facility is 7.0% with respect to LIBOR borrowings and 6.0% with respect to base rate borrowings. The applicable margin for borrowings under the senior secured revolving facility is subject to step-downs based on leverage ratios. The senior secured term loan is subject to amortization payments, commencing on the last day of the first full fiscal quarter of the Company following the closing date, of 0.63% 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

 

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

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Debt Refinancing

 

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

 

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

 

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

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Long-Term Debt Outstanding

 

As of September 30, 2017 and December 31, 2016, the following long-term debt instruments were outstanding:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

First lien revolving credit facility (a)

 

$

 

$

63,337

 

First lien secured term loan (b)

 

 

687,884

 

Second lien secured term loan (c)

 

 

236,344

 

Transcentra revolving credit facility

 

 

5,000

 

Transcentra term loan

 

 

19,250

 

FTS unsecured term loan

 

 

15,911

 

Other (d)

 

18,104

 

11,609

 

First lien credit agreement (e)

 

309,540

 

 

Senior secured notes (f)

 

969,324

 

 

Senior secured revolving credit facility (g)

 

 

 

Total debt

 

1,296,968

 

1,039,335

 

Less: Current portion of long-term debt

 

(18,662

)

(55,833

)

Long-term debt, net of current maturities

 

$

1,278,306

 

$

983,502

 

 


(a)    Net of unamortized debt issuance costs of $2.3 million as of December 31, 2016

(b)    Net of unamortized original issue discount and debt issuance costs of $14.6 million and $14.2 million as of December 31, 2016

(c)     Net of unamortized original issue discount and debt issuance costs of $7.3 million and $6.3 million as of December 31, 2016

(d)    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

(e)     Net of unamortized original issue discount and debt issuance costs of $10.2 million and $30.2 million as of September 30, 2017

(f)      Net of unamortized original issue discount and debt issuance costs of $21.9 million and $8.8 million as of September 30, 2017

(g)     Debt issuance costs of $3.0 million were capitalized as an asset and will be amortized ratably over the term of the facility. Debt issuance costs are included in Other Non Current Assets on the balance sheet.

 

Credit Facilities

 

As of September 30, 2017 and December 31, 2016, the Company had outstanding irrevocable letters of credit totaling approximately $22.8 million and $9.3 million, respectively, under a revolving credit facility.

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

10.       Income Taxes

 

The Company applies an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods, as required under U.S. GAAP. The Company recorded an income tax benefit of $37.0 million and an income tax benefit of $3.8 million for the three months ended September 30, 2017 and 2016, respectively. The Company recorded an income tax benefit of $32.9 million and an income tax benefit of $10.0 million for the nine months ended September 30, 2017 and 2016, respectively.

 

The Company’s actual effective tax rate of 25.12% and 18.44% for the three and nine months ended September 30, 2017, respectively, differed from the expected U.S. statutory tax rate of 35.0%. The Company’s tax rate includes the tax effects related to the decrease of valuation allowance on a portion of the Company’s U.S. net operating loss (“NOL”) carryforwards. In connection with the acquisition of Novitex, the Company recognized an $11.5 million income tax benefit from the reversal of a portion of the Company’s U.S. federal and state valuation allowance on deferred tax assets. The Company determined that a portion of its pre-existing deferred tax assets are more-likely-than-not to be realized by the combined entity and a portion of the valuation allowance should be decreased.  However, based on tax law ordering rules, the reduction of valuation allowance on the Company’s pre-existing deferred tax assets was partially offset by an increase in valuation allowance on current year losses that are not more-likely-than-not to be realized.

 

The Company’s ETR of 23.29% and 22.98% for the three months and nine months ended September 30, 2016, respectively, differed from the expected U.S. statutory tax rate of 35.0%, and was impacted by permanent tax adjustments, foreign operations, FIN48 liability release due to statute of limitation expiration, and a valuation allowance against certain domestic and foreign deferred tax assets that are not more-likely-than-not to be realized.

 

As of September 30, 2017, 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, 2016.

 

11.       Employee Benefit Plans

 

German Pension Plan

 

The Company’s subsidiary in Germany provides pension benefits to retirees. Employees eligible for participation include all employees who started working for the Company 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.

 

U.K. Pension Plan

 

The Company’s subsidiary in the United Kingdom provides pension benefits to 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.

 

The German pension plan is an unfunded plan and therefore has no plan assets. The expected rate of return assumptions for plan assets relate solely to the UK plan and are based mainly on historical performance achieved over a long period of time (15 to 20 years) encompassing many business and economic cycles. The Company assumed a weighted average expected long-term rate on plan assets for the overall scheme of 5.16%.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Tax Effect on Accumulated Other Comprehensive Loss

 

As of September 30, 2017 and December 31, 2016, the Company recorded actuarial losses of $13.8 million and $12.3 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which is net of a deferred tax benefit of $2.2 million and $2.5 million, respectively.

 

Pension and Post Retirement Expense

 

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

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Service cost

 

$

2

 

$

3

 

$

6

 

$

9

 

Interest cost

 

585

 

667

 

1,708

 

2,001

 

Expected return on plan assets

 

(610

)

(656

)

(1,782

)

(1,968

)

Amortization:

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

(34

)

(35

)

(99

)

(105

)

Amortization of net loss

 

529

 

223

 

1,546

 

669

 

Net periodic benefit cost

 

$

472

 

$

202

 

$

1,379

 

$

606

 

 

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 $2.3 million and $2.0 million to its pension plans during the nine months ended September 30, 2017 and 2016, respectively. The Company has fully funded the pension plans for 2017 based on current plan provisions.

 

Executive Deferred Compensation Plan

 

The Company has individual arrangements with seven former executives in the U.S. which provide for fixed payments to be made to each individual beginning at age 65 and continuing for 20 years. This is an unfunded plan with payments to be made from operating cash of the Company. Benefit payments of $0.1 million were made for both three months ended September 30, 2017 and 2016, respectively. Benefit payments of $0.2 million were made during both nine months ended September 30, 2017 and 2016, respectively. There was an expense of $0.2 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively. The benefit for the nine months ended September 30, 2017 was $0.3 million with a corresponding expense for the nine months ended September 30, 2016 of $0.7 million. Benefit payments expected to be paid to plan participants during the remainder of 2017 are $0.1 million.

 

12. Commitments and Contingencies

 

Appraisal Demand

 

On September 21, 2017, former stockholders of our wholly-owned subsidiary 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 Business Combination Transaction, 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 shares at the time of the Business Combination; an order that SourceHOV pay that value to the petitioners, together with interest at the statutory rate; and an award of costs, attorneys’ fees, and other expenses.

 

On October 12, 2017, SourceHOV filed its answer to the petition and a verified list pursuant to 8 Del. C. § 262(f). At this early stage of the litigation, the Company is unable to predict the outcome of the Appraisal Action or estimate any loss or range of loss that may arise from the Appraisal Action.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

13. Fair Value Measurement

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

 

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, 2017 and December 31, 2016 due to the relative short maturity of these instruments. Management estimates the fair values of the secured term loan and secured notes at approximately 98.6% and 98.3% respectively, of the respective principal balance outstanding as of September 30, 2017. The carrying value approximates the fair value for the long-term debt. The Company acquired $11.7 million of other long term debt from Novitex (refer to Note 3), which primarily relates to the financing of equipment. 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 following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, 2017 and December 31, 2016:

 

 

 

Carrying

 

Fair

 

Fair Value Measurements

 

As of September 30, 2017

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Recurring and nonrecurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Acquisition contingent liability

 

$

721

 

$

721

 

$

 

$

 

$

721

 

Long-term debt

 

1,278,306

 

1,327,130

 

 

1,327,130

 

 

 

 

$

1,279,027

 

$

1,327,851

 

$

 

$

1,327,130

 

$

721

 

 

 

 

Carrying

 

Fair

 

Fair Value Measurements

 

As of December 31, 2016

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Recurring and nonrecurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Acquisition contingent liability

 

$

721

 

$

721

 

$

 

$

 

$

721

 

Long-term debt

 

983,502

 

$

1,009,913

 

 

1,009,913

 

 

 

 

 

$

984,223

 

$

1,010,634

 

$

 

$

1,009,913

 

$

721

 

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

The significant unobservable inputs used in the fair value of the Company’s acquisition contingent liabilities 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.

 

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

 

Balance as of January 1, 2016

 

$

1,513

 

Payments/Reductions

 

(792

)

Balance as of December 31, 2016

 

$

721

 

Payments/Reductions

 

 

Balance as of September 30, 2017

 

$

721

 

 

14.       Stock-Based Compensation

 

At Closing, SourceHOV had 24,535 restricted stock units (“RSUs”) outstanding under its 2013 Long Term Incentive Plan (“2013 Plan”). Simultaneous with the Closing, 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 the Company’s principal stockholder. In accordance with U.S. GAAP, the Company will continue to incur compensation expense related to the 9,880 unvested RSUs on a straight line basis until fully vested, as the recipients of the RSUs are employees of the Company. The Company incurred total compensation expense of $2.2 million and $4.4 million related to these awards for the three and nine months ended September 30, 2017, respectively.

 

The Company has not approved any incentive plans to grant awards of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and performance awards as of September 30, 2017.

 

Awards to Non-employees

 

At Closing, the Company issued 3,609,375 shares of common stock to advisors who are not affiliates of the Company at the Closing in exchange for services provided. The shares issued were fully vested at the Closing. The Company records equity instruments issued to non-employees as expense at the fair value.  For the three months ended September 30, 2017, the Company recorded expense related to these non-employee advisors of $28.6 million in Selling, general and administrative expense, based on the fair value of $8.00 per share.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

15. 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. At Closing, the Company had 146,910,648 shares of common stock outstanding, of which: a) 80,600,000 shares were issued to Ex-Sigma, b) 30,600,000 shares were issued to the sole shareholder of Novitex, c) 12,093,331 shares were issued to the stockholders of Quinpario who did not redeem their shares, d) 3,609,375 shares were issued to certain third party advisors involved in the Business Combination, and e) 16,358,389 shares were issued to holders as part of a secondary offering at $8.00 per share with an additional 2,399,553 bonus shares issued. Certain shareholders of Quinpario were offered 25% common stock bonuses if they executed conversion agreements within a specified time limit. Seven Quinpario shareholders returned the agreements and were awarded 841,876 additional shares.  As of September 30, 2017, there were no additional issuances of common stock other than the conversion of 3,000,000 shares of Series A Preferred Stock being converted into 3,667,803 shares of common stock. As of September 30, 2017, there were 150,578,451 shares of common stock issued and outstanding.

 

Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of Exela 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 Exela common stock are entitled to one vote per share on matters to be voted on by stockholders.  Holders of Exela 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.

 

Preferred Stock

 

The Company is authorized to issue 20,000,000 shares of Series A 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 the Closing, the Company issued 9,194,233 shares of Series A Preferred Stock. Refer to Note 3 for additional details about the Business Combination. The par value of the 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 Exela common stock (assuming a conversion price of $8.80 per share and a third anniversary expected liquidation preference of $10.75911 per the below). Due to  a Fundamental Change that occurred on August 1, 2017 as described in the beneficial conversion feature section of Note 2, preferred stockholders were able to convert their shares prior to the six month anniversary. Based on such assumed conversion rate, approximately 11,240,869 shares of Exela common stock would be issuable upon conversion of all of the shares of Series A Preferred Stock at the six month anniversary of the issue date.  As 3,000,000 shares of Series A Preferred Stock converted into 3,667,803 shares of common stock upon the occurrence of a fundamental change, as of September 30, 2017, an additional 7,573,066 shares of common stock as issuable upon conversion of the remaining 6,194,233 shares of Series A Preferred Stock.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Holders of the Series A Preferred Stock are entitled to receive cumulative dividends at a rate per annum of 10% of the Liquidation Preference per share of Series A Preferred Stock. 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.

 

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, 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.

 

Warrants

 

At September 30, 2017, there were a total of 35,000,000 warrants outstanding. As part of its IPO, Quinpario had issued 35,000,000 units including one share of common stock and one warrant. The warrants are traded on the OTC Bulletin Board as of September 30, 2017.

 

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 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 our 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.

 

16.    Related-Party Transactions

 

Leasing Transactions

 

Certain operating companies lease their operating facilities from HOV RE, LLC an affiliate through common interest held by certain shareholders. The rental expense for these operating leases was $0.2 million for both the three months ended September 30, 2017 and 2016, and $0.5 million for both the nine months ended September 30, 2017 and 2016.

 

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 approximately $0.1 million for both the three and nine months ended September 30, 2017, respectively.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Relationship with HandsOn Global Management

 

The Company incurred management fees to HandsOn Global Management (“HGM”), SourceHOV’s former owner, of $3.0 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively, and $6.0 million and $4.5 million for the nine months ended September 30, 2017 and 2016, respectively. The contract with HGM was terminated upon consummation of the Business Combination, and no fees were payable after July 12, 2017.

 

The Company incurred no reimbursable travel expenses to HGM for the three months ended September 30, 2017 and $0.2 million for the three months ended September 30, 2016, and $0.5 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively.

 

The Company incurred marketing fees to Rule 14, LLC, a portfolio company of HGM, of $0.1 million for both the three months ended September 30, 2017 and 2016, and $0.3 million for both the nine months ended September 30, 2017 and 2016, respectively.

 

The Company incurred contract cancellation and advising fees to HGM of $23.0 million, $10 million of which was paid by the issuance of 1,250,000 shares of common stock, for the three months ended September 30, 2017, relating to the Business Combination.

 

Relationship with HOV Services, Ltd.

 

HOV Services, Ltd., a former shareholder of SourceHOV who currently owns equity interest in the Company through Ex-Sigma, provides the Company data capture and technology services.

 

The expense recognized for these services was approximately $0.4 million for both the three months ended September 30, 2017 and 2016, respectively, and $1.3 million for both the nine months ended September 30, 2017 and 2016, respectively and is 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 affiliated companies. Funds managed by Apollo Global Management, LLC have the right to designate two of the Company’s directors. For both the three and nine months ended September 30, 2017 there were related party expenses of $0.2 million for services received from an Apollo affiliated company with a common Apollo designated director.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Receivable and Payable Balances with Affiliates

 

Receivable and Payable balances with affiliates as of September 30, 2017 and December 31, 2016 are as follows:

 

 

 

September 30,
2017

 

December 31,
2016

 

 

 

Payables

 

Payables

 

HOV Services, Ltd

 

$

463

 

$

352

 

Rule 14

 

44

 

134

 

HGM

 

13,516

 

8,858

 

Presidio

 

451

 

 

 

 

$

14,474

 

$

9,344

 

 

17.    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 gross profit. 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.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

Three months ended September 30, 2017

 

 

 

ITPS

 

HS

 

LLPS

 

Total

 

Revenue

 

260,019

 

56,405

 

21,969

 

338,393

 

Cost of revenue

 

204,602