UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-K/A

Amendment No. 1



(Mark One)    

ý

 

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

For the fiscal year ended December 31, 2017

or

o

 

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

For the transition period from                                   to                                  

Commission File Number: 001-36788



EXELA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)



Delaware
(State of or other Jurisdiction
Incorporation or Organization)
  47-1347291
(I.R.S. Employer
Identification No.)

2701 E. Grauwyler Rd.
Irving, TX

(Address of Principal Executive Offices)

 

75061
(Zip Code)

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

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

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



          Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes    ý No

          Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes    ý No

          Indicate by check mark whether the Registrant (1) has filed all reports required 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. ý Yes    o No

          Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). ý Yes    o No

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

          Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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 ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

Emerging growth company o

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

          The aggregate market value of the Registrant's voting common equity held by non-affiliates of the Registrant, computed by reference to the price at which such voting common equity was last sold as of June 30, 2017, was approximately $201,313,414.72 (based on a closing price of $9.92). As a result, the Registrant is an accelerated filer as of December 31, 2017. For purposes of this computation, shares of the voting common equity beneficially owned by each executive officer and director of the Registrant disclosed in the Registrant's Definitive Proxy Statement on Schedule 14A, filed with the SEC on June 26, 2017 were deemed to be owned by affiliates of the Registrant as of June 30, 2017. Such determination should not be deemed an admission that such executive officers and directors are, in fact, affiliates of the Registrant or affiliates as of the date of this Annual Report on Form 10-K. As of March 16, 2018, the Registrant had 152,565,218 shares of Common Stock outstanding.

   



EXPLANATORY NOTE

        Exela Technologies, Inc. (the "Company") files this Amendment No. 1 ("Amendment No. 1") to its Annual Report on Form 10-K filed on March 16, 2018 for the fiscal year ended December 31, 2017 (the "Original 10-K") to provide an amended report of its independent registered public accounting firm that includes a reference to Schedule II of Part III, Item 15, "Exhibits and Financial Statement Schedules" excluded in a previously filed version.

        In accordance with applicable Securities and Exchange Commission ("SEC") rules and as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Amendment No. 1 includes new certifications from the Company's Principal Executive Officer and Principal Financial Officer dated as of the date of filing of Amendment No. 1.

        This Amendment No. 1 consists solely of the preceding cover page, this explanatory note, Part II, Item 8, "Financial Statements and Supplementary Data," in its entirety, Part III, Item 15, "Exhibits and Financial Statement Schedules," in its entirety, the signature page, and the new certifications from the Company's Principal Executive Officer and Principal Financial Officer and does not change any of the financial statements contained herein.

        Amendment No. 1 speaks as of the date of the Original 10-K, does not reflect events that may have occurred after the date of the Original 10-K and does not modify or update in any way the disclosures made in the Original 10-K, except as described above. Amendment No. 1 should be read in conjunction with the Original 10-K and with the Company's subsequent filings with the SEC.

PART II

   

Item 8.

 

Financial Statements and Supplementary Data

 
3


PART III


 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 
56

2



PART II

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The information in response to this item is included in our consolidated financial statements, together with the report thereon of KPMG LLP, in Item 15 of this Annual Report on Form 10-K/A under the heading "Exhibits and Financial Statement Schedules."


FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The following financial statements and schedules are included herein:

Report of Independent Registered Public Accounting Firm

    4  

Consolidated Balance Sheets as of December 31, 2017 and 2016

   
5
 

Consolidated Statements of Operations for the years ended December 31, 2017, 2016, and 2015

   
6
 

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016, and 2015

   
7
 

Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2017, 2016, and 2015

   
8
 

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015

   
11
 

Notes to the Consolidated Financial Statements

   
12
 

3


Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Exela Technologies, Inc.:

Opinion on the Consolidated Financial Statements

        We have audited the accompanying consolidated balance sheets of Exela Technologies, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, stockholders' deficit, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

        These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

        We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

GRAPHIC

We have served as the Company's auditor since 2013.

Dallas, Texas
March 16, 2018

4



Exela Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets

For the years ended December 31, 2017 and 2016

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

 
  December 31,  
 
  2017   2016  

Assets

             

Current assets

             

Cash and cash equivalents

  $ 39,000   $ 8,361  

Restricted cash

    42,489     25,892  

Accounts receivable, net of allowance for doubtful accounts of $3,725 and $3,219 respectively

    229,704     138,421  

Inventories, net

    11,922     11,195  

Prepaid expenses and other current assets

    24,596     12,202  

Total current assets

    347,711     196,071  

Property, plant and equipment, net

    132,908     81,600  

Goodwill

    747,325     373,291  

Intangible assets, net

    464,984     298,739  

Deferred income tax assets

    9,019     9,654  

Other noncurrent assets

    12,891     10,131  

Total assets

  $ 1,714,838   $ 969,486  

Liabilities and Stockholders' Equity (Deficit)

             

Liabilities

             

Current liabilities

             

Accounts payable

  $ 81,263   $ 42,212  

Related party payables

    14,445     9,344  

Income tax payable

    3,612     1,031  

Accrued liabilities

    104,485     29,492  

Accrued compensation and benefits

    46,925     31,200  

Customer deposits

    31,656     18,729  

Deferred revenue

    12,709     17,235  

Obligation for claim payment

    42,489     25,892  

Current portion of capital lease obligations

    15,611     6,507  

Current portion of long-term debt

    20,565     55,833  

Total current liabilities

    373,760     237,475  

Long-term debt, net of current maturities

    1,276,094     983,502  

Capital lease obligations, net of current maturities

    25,958     18,439  

Pension liability

    25,496     28,712  

Deferred income tax liabilities

    5,362     26,223  

Long-term income tax liability

    3,470     3,063  

Other long-term liabilities

    14,704     11,973  

Total liabilities

    1,724,844     1,309,387  

Commitment and Contingencies(Note 12)

             

Stockholders' equity (deficit)

             

Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 150,578,451 shares issued and 150,529,151 outstanding at December 31, 2017 and 64,024,557 shares issued and outstanding at December 31, 2016;

    15     6  

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

    1      

Additional paid in capital

    482,018     (57,395 )

Less: common stock held in treasury, at cost; 49,300 shares at December 31, 2017 and no shares at December 31, 2016

    (249 )    

Equity-based compensation

    34,085     27,342  

Accumulated deficit

    (514,628 )   (293,968 )

Accumulated other comprehensive loss:

             

Foreign currency translation adjustment

    (194 )   (3,547 )

Unrealized pension actuarial losses, net of tax

    (11,054 )   (12,339 )

Total accumulated other comprehensive loss

    (11,248 )   (15,886 )

Total stockholders' deficit

    (10,006 )   (339,901 )

Total liabilities and stockholders' deficit

  $ 1,714,838   $ 969,486  

   

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

5



Exela Technologies, Inc. and Subsidiaries

Consolidated Statement of Operations

For the years ended December 31, 2017, 2016 and 2015

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

 
  Year ended December 31,  
 
  2017   2016   2015  

Revenue

  $ 1,152,324   $ 789,926   $ 805,232  

Cost of revenue (exclusive of depreciation and amortization)

    829,143     519,121     559,846  

Selling, general and administrative expenses

    220,955     130,437     120,691  

Depreciation and amortization

    98,890     79,639     75,408  

Impairment of goodwill and other intangible assets

    69,437          

Related party expense

    33,431     10,493     8,977  

Operating (loss) income

    (99,532 )   50,236     40,310  

Other expense (income), net:

                   

Interest expense, net

    128,489     109,414     108,779  

Loss on extinguishment of debt

    35,512          

Sundry expense, net

    2,295     712     3,247  

Other income, net

    (1,297 )        

Net loss before income taxes

    (264,531 )   (59,890 )   (71,716 )

Income tax benefit

    60,246     11,787     26,812  

Net loss

  $ (204,285 ) $ (48,103 ) $ (44,904 )

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

    (16,375 )        

Cumulative dividends for Series A Preferred Stock

    (2,489 )        

Net loss attributable to common stockholders

  $ (223,149 ) $ (48,103 ) $ (44,904 )

Loss per share:

                   

Basic and diluted

  $ (2.08 ) $ (0.75 ) $ (0.70 )

   

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

6



Exela Technologies, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

For the years ended December 31, 2017, 2016 and 2015

(in thousands of United States dollars)

 
  Years ended December 31,  
 
  2017   2016   2015  

Net Loss

  $ (204,285 ) $ (48,103 ) $ (44,904 )

Other comprehensive income (loss), net of tax

                   

Foreign currency translation adjustments

    3,353     (132 )   (1,990 )

Unrealized pension actuarial gains (losses), net of tax

    1,285     (7,263 )   3,655  

Total other comprehensive loss, net of tax

  $ (199,647 ) $ (55,498 ) $ (43,239 )

   

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

7


Exela Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
December 31, 2017, 2016 and 2015
(in thousands of United States dollars except share and per share amounts)

 
   
   
   
   
   
   
   
   
  Accumulated
Other
Comprehensive
Loss
   
   
 
 
   
   
   
   
   
   
   
   
   
  Unrealized
Pension
Actuarial
Losses,
net of tax
   
   
 
 
  Common Stock   Preferred Stock   Treasury Stock    
   
  Foreign
Currency
Translation
Adjustment
   
   
 
 
  Additional
Paid in Capital
  Equity-Based
Compensation
  Accumulated
Deficit
  Total
Stockholders'
Deficit
 
 
  Shares   Amount   Shares   Amount   Shares   Amount  

Balances at January 1, 2015 (as previously reported)

    144,400   $       $       $   $ (57,389 ) $ 12,134   $ (1,425 ) $ (8,731 ) $ (200,961 ) $ (256,372 )

Conversion of shares

    63,880,157     6                     (6 )                    

Balances at January 1, 2015, effect of reverse acquisition (refer to Note 2)

    64,024,557   $ 6       $       $   $ (57,395 ) $ 12,134   $ (1,425 ) $ (8,731 ) $ (200,961 ) $ (256,372 )

Net loss January 1 to December 31, 2015

                                            (44,904 )   (44,904 )

Equity-based compensation

                                8,122                 8,122  

Foreign currency translation adjustment

                                    (1,990 )           (1,990 )

Net realized pension actuarial gains, net of tax

                                        3,655         3,655  

Balances at December 31, 2015

    64,024,557   $ 6                   $ (57,395 ) $ 20,256   $ (3,415 ) $ (5,076 ) $ (245,865 ) $ (291,489 )

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

8


Exela Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit (Continued)
December 31, 2017, 2016 and 2015
(in thousands of United States dollars except share and per share amounts)

 
   
   
   
   
   
   
  Accumulated Other Comprehensive Loss  
 
   
   
   
   
   
   
   
   
   
  Unrealized
Pension
Actuarial
Losses,
net of tax
   
   
 
 
  Common Stock   Preferred Stock   Treasury Stock    
   
  Foreign
Currency
Translation
Adjustment
   
   
 
 
  Additional
Paid in Capital
  Equity-Based
Compensation
  Accumulated
Deficit
  Total
Stockholders'
Deficit
 
 
  Shares   Amount   Shares   Amount   Shares   Amount  

Balances at January 1, 2016

    64,024,557   $ 6                   $ (57,395 ) $ 20,256   $ (3,415 ) $ (5,076 ) $ (245,865 ) $ (291,489 )

Net loss January 1 to December 31, 2016

                                            (48,103 )   (48,103 )

Equity-based compensation

                                7,086                   7,086  

Foreign currency translation adjustment

                                    (132 )           (132 )

Net realized pension actuarial gains, net of tax

                                        (7,263 )       (7,263 )

Balances at December 31, 2016

    64,024,557   $ 6                   $ (57,395 ) $ 27,342   $ (3,547 ) $ (12,339 ) $ (293,968 ) $ (339,901 )

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

9


Exela Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit (Continued)
December 31, 2017, 2016 and 2015
(in thousands of United States dollars except share and per share amounts)

 
   
   
   
   
   
   
  Accumulated Other Comprehensive Loss  
 
   
   
   
   
   
   
   
   
   
  Unrealized
Pension
Actuarial
Losses,
net of tax
   
   
 
 
  Common Stock   Preferred Stock   Treasury Stock    
   
  Foreign
Currency
Translation
Adjustment
   
   
 
 
  Additional
Paid in Capital
  Equity-Based
Compensation
  Accumulated
Deficit
  Total
Stockholders'
Deficit
 
 
  Shares   Amount   Shares   Amount   Shares   Amount  

Balances at January 1, 2017

    64,024,557   $ 6       $       $   $ (57,395 ) $ 27,342   $ (3,547 ) $ (12,339 ) $ (293,968 ) $ (339,901 )

Net loss January 1 to December 31, 2017

                                                                (204,285 )   (204,285 )

Equity-based compensation

                                              6,743                       6,743  

Foreign currency translation adjustment

                                                    3,353                 3,353  

Net realized pension actuarial gains, net of tax

                                                          1,285           1,285  

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 )    

Treasury stock purchases

    (49,300 )                     49,300     (249 )                                 (249 )

Balances at December 31, 2017

    150,529,151   $ 15     6,194,233   $ 1     49,300   $ (249 ) $ 482,018   $ 34,085   $ (194 ) $ (11,054 ) $ (514,628 ) $ (10,006 )

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

10



Exela Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2017, 2016 and 2015

(in thousands of United States dollars unless otherwise stated)

 
  Years ended December 31,  
 
  2017   2016   2015  

Cash flows from operating activities

                   

Net loss

  $ (204,285 ) $ (48,103 ) $ (44,904 )

Adjustments to reconcile net loss

                   

Depreciation and amortization

    98,890     79,639     75,408  

Fees paid in stock

    23,875          

HGM contract termination fee paid in stock

    10,000          

Original issue discount and debt issuance cost amortization

    12,280     13,684     12,974  

Loss on extinguishment of debt

    35,512          

Impairment of goodwill and other intangible assets

    69,437          

Provision (recovery) for doubtful accounts

    500     756     1,105  

Deferred income tax benefit

    (66,723 )   (15,729 )   (27,177 )

Share-based compensation expense

    6,743     7,086     8,122  

Foreign currency remeasurement

    1,382     193     150  

Gain on sale of Meridian

    (588 )        

Loss on sale of property, plant and equipment

    987     2,245     632  

Fair value adjustment of swap derivative

    (1,297 )        

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

                   

Accounts receivable

    (4,832 )   20,801     11,583  

Prepaid expenses and other assets

    2,628     4,969     892  

Accounts payable and accrued liabilities

    52,953     5,544     (28,644 )

Related party payables

    4,907     (2,427 )   (2,703 )

Net cash provided by operating activities

    42,369     68,658     7,438  

Cash flows from investing activities

                   

Purchase of property, plant and equipment

    (14,440 )   (7,926 )   (10,669 )

Additions to internally developed software

    (7,843 )   (13,017 )   (3,279 )

Additions to outsourcing contract costs

    (10,992 )   (14,636 )   (7,882 )

Cash paid for TransCentra

            (12,810 )

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 )        

Other acquisitions, net of cash received

    (369 )        

Proceeds from sale of property, plant and equipment

    25     626     208  

Net cash used in investing activities

    (452,374 )   (31,602 )   (34,432 )

Cash flows from financing activities

                   

Change in bank overdraft

    (210 )   (1,331 )   938  

Proceeds from issuance of stock

    204,417          

Cash received from Quinpario

    27,031          

Repurchase of Common Stock

    (249 )        

Proceeds from financing obligation

    3,116     5,429     5,554  

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

    (39,837 )        

Cash paid for equity issue costs

    (149 )        

Borrowings from revolver and swing-line loan

    72,600     53,700     157,400  

Repayments from revolver and swing line loan

    (72,500 )   (53,200 )   (108,800 )

Principal payments on long-term obligations

    (39,316 )   (47,853 )   (33,474 )

Net cash provided by (used in) financing activities

    440,215     (43,255 )   21,618  

Effect of exchange rates on cash

    429     (2,059 )   (672 )

Net increase (decrease) in cash and cash equivalents

    30,639     (8,258 )   (6,048 )

Cash and cash equivalents

                   

Beginning of period

    8,361     16,619     22,667  

End of period

  $ 39,000   $ 8,361   $ 16,619  

Supplemental cash flow data:

                   

Income tax payments, net of refunds received

  $ 5,711   $ 3,771   $ 1,784  

Interest paid

    69,622     96,166     87,302  

Noncash investing and financing activities:

                   

Assets acquired through capital lease arrangements

    6,973     11,925     6,021  

Leasehold improvements funded by lessor

    146     5,186     665  

Issuance of common stock as consideration for Novitex

    244,800          

Accrued capital expenditures

    1,621     580     878  

Dividend equivalent on Series A Preferred Stock

    16,375          

Liability assumed of Quinpario

    4,672          

   

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

11


1. Description of the Business

Organization

        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 customers across three major industry segments: (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 customers 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 consolidated financial statements and related notes to the consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). The 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 periods.

        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 and liabilities as of December 31, 2016, and results of operations for the years ended December 31, 2016 and 2015 are those of SourceHOV. 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 holders of the Company's Common Stock, prior to

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the Business Combination, have been retroactively restated as shares reflecting the exchange ratio established in the Business Combination. The presented financial information for the year ended December 31, 2017 includes the financial information and activities for SourceHOV for the period January 1, 2017 to December 31, 2017 (365 days) as well as the financial information and activities of Novitex for the period July 13, 2017 to December 31, 2017 (172 days).

Principles of Consolidation

        The accompanying consolidated financial statements and related notes to the 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.

        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, equity-based compensation, contingencies, goodwill, intangible assets, fair value of assets and liabilities acquired in acquisitions, and asset 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.

Segment Reporting

        The Company consists of the following three segments:

        1.    Information & Transaction Processing Solutions ("ITPS").    ITPS provides industry-specific 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; industry-agnostic 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.

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        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.

Cash and Cash Equivalents

        Cash and cash equivalents include cash deposited with financial institutions and liquid investments with original maturity dates equal to or less than three months. All bank deposits and money market accounts are considered cash and cash equivalents. The Company holds cash and cash equivalents at major financial institutions, which often exceed Federal Deposit Insurance Corporation insured limits. Historically, the Company has not experienced any losses due to such bank depository concentration.

        Certificates of deposit and fixed deposits whose original maturity is greater than three months and is one year or less are classified as short-term investments and certificates of deposit and fixed deposits whose maturity is greater than one year at the balance sheet date are classified as non-current assets in the consolidated balance sheets. The purchase of any certificates of deposit or fixed deposits that are classified as short-term investments or non-current assets appear in the investing section of the consolidated statements of cash flows.

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 has recorded an offsetting liability for the settlement funds received, which is included in Obligation for claim payment in the consolidated balance sheets of $42.5 million and $25.9 million at December 31, 2017 and December 31, 2016, respectively. Of the total amount of settlement funds received, $22.9 million and $17.1 million were not subject to legal restrictions on use as of December 31, 2017 and December 31, 2016, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

        Accounts receivable are carried at the original invoice amount less an estimate made for doubtful accounts. Revenue that has been earned but remains unbilled at the end of the period is recorded as a component of accounts receivable, net. The Company specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends, and changes in customer payment terms and collection trends when evaluating the adequacy of its allowance for doubtful accounts. The Company writes off accounts receivable balances against the allowance for doubtful accounts, net of any amounts recorded in deferred revenue, when it becomes probable that the receivable will not be collected.

Inventories

        Inventories are valued using the lower of cost and net realizable value method and include the cost of raw materials, labor, and purchased subassemblies. Cost is determined using the weighted average method. Net Inventory as of December 31, 2017 and 2016 were $11.9 million and $11.2 million, respectively.

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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 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.

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 4 to 16 years depending on 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.

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 performed a quantitative analysis as part of the annual impairment test on October 1, 2017, and recorded an impairment charge. Subsequently, late in the fourth quarter of 2017, the Company implemented a strategy to transition to a unified Exela brand beginning in 2018. As a result, the Company performed a quantitative analysis as of December 31, 2017, and recorded another impairment charge. 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 has historically amortized trademarks on a straight-line basis over the estimated useful life, which is typically 10 years. As part of the impairment analysis completed as of December 31, 2017, and due to the Company's strategy to transition to a unified Exela brand beginning in 2018, the Company reduced the estimated useful lives of its trademarks and will amortize the trademarks over a one year period.

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 the estimated useful life, which is typically 5-8.5 years.

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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 term, which is typically 1-5 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 term. 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.

Impairment of Indefinite-Lived Assets

        The Company conducts its annual indefinite-lived assets impairment tests on October 1st of each year for its indefinite-lived trade names, or more frequently if indicators of impairment exist. When performing the impairment test, the Company has the option of performing a qualitative or quantitative assessment to determine if an impairment has occurred. A quantitative assessment requires comparison of fair value of the asset to its carrying value. The Company utilizes the Income Approach, specifically the Relief-from-Royalty method, which has the basic tenet that a user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. Refer to Note 7—Intangibles Assets and Goodwill for additional discussion of impairment of trade names.

Impairment of Long-Lived Assets

        The Company reviews the recoverability of its long-lived assets, including finite-lived trade names, trademarks, customer relationships, developed technology, capitalized software costs, outsourced contract costs and property, plant and equipment, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The primary measure of fair value is based on discounted cash flows based in part on the financial results and the expectation of future performance.

        The Company did not record any material impairment related to its property, plant, and equipment, customer relationships, trademarks, developed technology, capitalized software, or outsourced contract costs for the years ended December 31, 2017, 2016, and 2015.

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Goodwill

        Goodwill represents the excess purchase price over tangible and intangible assets acquired less liabilities assumed arising from business combinations. Goodwill is generally allocated to reporting units based upon relative fair value (taking into consideration other factors such as synergies) when an acquired business is integrated into multiple reporting units. The Company's reporting units are at the operating segment level, which discrete financial information is prepared and regularly reviewed by management. When a business within a reporting unit is disposed of, goodwill is allocated to the disposed business using the relative fair value method.

        The Company conducts its annual goodwill impairment tests on October 1st of each year, or more frequently if indicators of impairment exist. When performing the annual impairment test, the Company has the option of performing a qualitative or quantitative assessment to determine if an impairment has occurred. If a qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would be required to perform a quantitative impairment analysis for goodwill. The quantitative analysis requires a comparison of fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company uses a combination of the Guideline Public Company Method of the Market Approach and the Discounted Cash Flow Method of the Income Approach to determine the reporting unit fair value. Refer to Note 7—Intangibles Assets and Goodwill for additional discussion of impairment of goodwill.

Derivative Instruments and Hedging Activities

        As required by ASC 815—Derivatives and Hedging, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

        The Company's objective in using interest rate derivatives is to manage its exposure to variable interest rates related to its term loan under the Credit Agreement. In order to accomplish this objective, in November 2017, the Company entered into a three year, one-month LIBOR interest rate contract with a notional amount of $347.8 million. The contract will mitigate the variable interest rate risk related to the LIBOR with a fixed interest rate paid semi-annually starting January 12, 2018.

        The following table summarizes the Company's interest rate swap positions as of December 31, 2017:

 
   
  December 31, 2017  
Effective
date
  Maturity
date
  (In Millions)
Notional Amount
  Weighted Average
Interest Rate
 
1/12/2018   1/12/2021   $ 347.8     1.9725 %

        The interest rate swap, which is used to manage the Company's exposure to interest rate movements and other identified risks, was not designated as a hedge. As such, the change in the fair value of the derivative is recorded directly in earnings and was $1.3 million for the year ended December 31, 2017.

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Benefit Plan Accruals

        The Company has defined benefit plans in the U.K and Germany, under which participants earn a retirement benefit based upon a formula set forth in the plan. The Company records expense related to this plan using actuarially determined amounts that are calculated under the provisions of ASC 715, Compensation—Retirement Benefits. Key assumptions used in the actuarial valuations include the discount rate, the expected rate of return on plan assets and the rate of increase in future compensation levels. Refer to Note 11—Employee Benefit Plans.

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 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 14—Stock-Based Compensation.

Revenue Recognition

        The majority of the Company's revenues are comprised of: (1) ITPS, (2) HS offerings, (3) LLPS solutions, and (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 customer, risk of loss has transferred to the customer, and either customer acceptance has been obtained, customer acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in the customer 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 under service arrangements 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 under service arrangements from a transaction-based pricing model for the various types of volumes processed for healthcare payers and providers. LLPS revenues are primarily based on a time and materials pricing as well as through transactional services priced on a per item basis.

        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.

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        Sales commissions determined to be incremental direct costs incurred related to the successful acquisition of new customer revenues are deferred and amortized over the length of the initial contract period.

        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 into earnings when underlying performance obligations are achieved.

        The Company includes reimbursements from customers, 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 ("VSOE") 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.

Research and Development

        Research and development costs are expensed as incurred. Research and development costs expensed for the years ended December 31, 2017, 2016, and 2015 were $2.3 million, $2.3 million, and $1.7 million, respectively.

Advertising

        Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2017, 2016, and 2015, were $0.7 million, $1.1 million, and $0.8 million, respectively.

Income Taxes

        The Company accounts for income taxes by using the asset and liability method. The Company accounts for income taxes regarding uncertain tax positions and recognized interest and penalties related to uncertain tax positions in income tax benefit/ (expense) in the consolidated statements of operations.

        Deferred income taxes are recognized on the tax consequences of temporary differences by applying enacted statutory tax rates applicable in future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, as determined under tax laws and rates. A valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax assets will not be realized. Due to numerous ownership changes, the Company is subject to limitations on existing net operating losses under Section 382 of the Internal Revenue Code (the Code). Accordingly, valuation allowances have been established against a portion of the net operating losses to reflect estimated Section 382 limitations. The Company also considered the realizability of net operating losses not limited by Section 382. The Company did not consider future book income as a source of taxable income when assessing if a portion of the deferred tax assets are more likely than not to be realized. However, scheduling the reversal of existing deferred tax liabilities

19


indicated that only a portion of the deferred tax assets are likely to be realized. Therefore, partial valuation allowances were established against a portion of the Company's deferred tax assets. In the event the Company determines that it would be able to realize deferred tax assets that have valuation allowances established, an adjustment to the deferred tax assets would be recognized as component of income tax expense through continuing operations.

        The Company engages in transactions (i.e. acquisitions) in which the tax consequences may be subject to uncertainty and examination by the varying taxing authorities. Significant judgment is required by the Company in assessing and estimating the tax consequences of these transactions. While the Company's tax returns are prepared and based on the Company's interpretation of tax laws and regulations, in the normal course of business the tax returns are subject to examination by the various taxing authorities. Such examinations may result in future assessments of additional tax, interest and penalties. For purposes of the Company's income tax provision, a tax benefit is not recognized if the tax position is not more likely than not to be sustained based solely on its technical merits. Considerable judgment is involved in determining which tax positions are more likely than not to be sustained. Refer to Note 10—Income Taxes for further information.

Loss Contingencies

        The Company reviews the status of each significant matter, if any, and assess its potential financial exposure considering all available information including, but not limited to, the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to loss contingencies, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to its pending claims and litigation, and may revise its estimates. These revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial position. The Company's liabilities exclude any estimates for legal costs not yet incurred associated with handling these matters.

Operations

        A portion of the Company's labor and operations is situated outside of the United States in India and other locations. The carrying value of long-lived assets that are situated outside of the United States is approximately $26.2 million and $26.3 million as of December 31, 2017 and 2016, respectively.

Foreign Currency Translation

        The functional currency for the Company's production operations located in India, Philippines, China, and Mexico is the United States dollar. Included in other expense as "Sundry expense (income), net" in the consolidated statements of operations are net exchange losses of $2.3 million, $0.7 million, and $3.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.

        The Company has determined all other international subsidiaries' functional currency is the local currency. These assets and liabilities are translated at exchange rates in effect at the balance sheet date while income and expense amounts are translated at average exchange rates during the period. The resulting foreign currency translation adjustments are disclosed as a separate component of other comprehensive loss.

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Beneficial Conversion Feature

        The Company's Series A Perpetual Convertible Preferred Stock, par value $0.0001 per share (the "Series A Preferred Stock") contains 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 December 31, 2017.

Net Loss per Share

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

        For the year ended December 31, 2017, shares of the Company's Series A Convertible Preferred Stock ("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 included the effect of 35,000,000 warrants sold in the Quinpario Initial Public Offering ("IPO") in the calculation of net income (loss) per share. Warrants are considered anti-dilutive and excluded when the exercise price exceeds the average market value of the Company's Common Stock price during the applicable period.

        The components of basic and diluted EPS are as follows:

 
  Year Ended December 31,  
 
  2017   2016   2015  

Net loss attributable to common stockholders (A)

  $ (223,149 ) $ (48,103 ) $ (44,904 )

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

    107,068,262     64,024,557     64,024,557  

Loss Per Share:

                   

Basic and diluted (A/B)

  $ (2.08 ) $ (0.75 ) $ (0.70 )

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Business Combinations

        The Company includes the results of operations of the businesses acquired as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.

Fair Value Measurements

        The Company records the fair value of assets and liabilities in accordance with ASC 820, Fair Value Measurement ("ASC 820"). ASC 820 defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

        In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels, which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

        Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities.

        Level 2—quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

        Level 3—unobservable inputs reflecting Management's own assumptions about the inputs used in pricing the asset or liability at fair value.

        Refer to Note 13—Fair Value Measurement for further discussion.

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.

        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

22


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. The Company early adopted ASU 2017-04 as of October 1, 2017. The Company conducted its annual impairment test for 2017 and recorded an impairment loss for goodwill under the provisions of ASU 2017-04.

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. Subsequent updates have been issued primarily to provide implementation guidance related to the initial guidance issued in May 2014. The guidance is effective for annual reporting periods beginning after December 15, 2017 and may be adopted using either (a) a full retrospective method, whereby comparative periods would be restated to present the impact of the new standard, with the cumulative effect of applying the standard recognized as of the earliest period presented, or (b) a modified retrospective method, under which comparative periods would not be restated and the cumulative effect of applying the standard would be recognized at the date of initial adoption, January 1, 2018. The Company is adopting this standard in the first quarter of fiscal 2018 and will use the modified retrospective approach. The Company is evaluating the impact of the new revenue recognition standard and has assigned internal resources and engaged a third party service provider to assist in its evaluation. As part of its preliminary evaluation, the Company is assessing the impact of capitalizing and amortizing incremental costs associated with obtaining and fulfilling customer contracts, specifically set-up costs and commission and incentive payments. Under the updated guidance, the Company anticipates that these payments will be deferred on the Company's consolidated balance sheets and amortized over the estimated useful life which can include anticipated renewals of the original contract. Currently, these payments are deferred and amortized over the contract term. The Company also currently believes ASC 606 will impact the Company's accounting for arrangements that include variable consideration and multiple performance obligations. While the Company continues to assess the potential impacts of the new standard, including the areas described above, it does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements and related notes.

        In February 2016, the FASB issued ASU no. 2016-02, Leases (842) This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Since the issuance of the original standard, the FASB has issued a subsequent update that provides a practical expedient for land easements (ASU 2018-01). The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years and early application is permitted. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.

        In June 2016, the FASB issued ASU no. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in

23


the amortized cost basis of the securities. The standard will be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

        In August 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, 2017 and interim periods within those fiscal years. Entities must apply the guidance retrospectively to all periods presented unless retrospective application is impracticable. The Company is adopting this standard in the first quarter of fiscal 2018 and is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.

        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 beginning after December 15, 2017 including interim reporting periods within those annual periods. 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 adopting this standard in the first quarter of fiscal 2018 and is currently 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, 2017, and interim periods within those fiscal years. The Company is adopting this standard in the first quarter of fiscal 2018 and is currently 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, 2017, and interim periods within those annual periods. The Company is adopting this standard in the first quarter of fiscal 2018 and would apply this standard for business combinations consummated subsequent to January 1, 2018.

        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

24


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, 2017, and interim periods within those annual periods. The amendments should be applied retrospectively for the income statement presentations and prospectively for the capitalization of service costs. The Company is adopting this standard in the first quarter of fiscal 2018 and is currently 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 annual periods beginning after December 15, 2017, and interim periods within those annual periods. 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 adopting this standard in the first quarter of fiscal 2018.

        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, 2018. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

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

Concentration of Credit Risk

        Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables. The Company maintains its cash and cash equivalents and certain other financial instruments with highly rated financial institutions and limits the amount of credit exposure with any one financial institution. From time to time, the Company assesses the credit worthiness of its customers. Credit risk on trade receivables is minimized because of the large number of entities comprising the Company's customer base and their dispersion across many industries and geographic areas. The Company generally has not experienced any material losses related to receivables from any individual customer or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for

25


collection losses is believed by management to be probable in the Company's accounts receivable, net. The Company does not have any significant customers that account for 10% or more of the total consolidated revenues.

3. Business Combinations

        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 and Credit Facilities). Proceeds from the acquired debt were used to refinance the existing debt of SourceHOV, settle the outstanding debt of Novitex, and pay fees and expenses incurred in connection with the Business Combination. Immediately following the Business Combination, there were 146,910,648 shares of Common Stock, 9,194,233 shares of Series A Preferred Stock, and 35,000,000 warrants outstanding. Refer to Note 15—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.

        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 fair value of the assets acquired and liabilities assumed at the acquisition date on July 12, 2017. Certain estimated values for the acquisition, including goodwill, intangible assets, property, plant and equipment, and deferred income taxes, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed. The purchase price was allocated based on information available at acquisition date. During the fourth quarter of 2017, the Company recorded

26


measurement period adjustments which increased goodwill by $0.9 million, primarily related to updated information related to income taxes.

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

    406,060  

Total identifiable assets acquired

  $ 831,714  

Liabilities assumed:

       

Accounts payable

    (29,444 )

Short-term borrowings and current portion of long-term debt

    (11,335 )

Accrued liabilities

    (30,432 )

Advanced billings and customer deposits

    (18,926 )

Long term debt

    (15,704 )

Deferred taxes

    (46,991 )

Other liabilities

    (2,226 )

Total liabilities assumed

  $ (155,058 )

Total consideration

  $ 676,656  

        The identifiable intangible assets include customer relationships, non-compete agreements, internally developed software, and a trademark. Customer relationships and non-compete agreements were valued using the Income Approach, specifically the Multi-Period Excess Earnings method. The trademark was 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—Novitex

    9.5   $ 18,000  

Customer relationships

    16.0     230,000  

Internally developed software—Connect Platform

    5.0     1,710  

Non-compete agreements

    1.0     1,350  

        $ 251,060  

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

        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 solutions and capabilities. These factors, among others, contributed to a

27


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, $292.1 million of revenue and $17.5 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 $60.0 million in advisory, legal, accounting and management fees in conjunction with the Business Combination as of December 31, 2017, excluding contract cancellation and advising fees to HGM of $23.0 million described in Note 16. 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. As of July 12, 2017, the Company recorded severance expense in the amount of $4.6 million related to the impacted executives and $0.1 million related to other terminations in the statement of operations.

        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.

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:

 
  December 31,  
 
  2017   2016  

Net Revenue

  $ 1,456,225   $ 1,333,089  

Net Loss

  $ (121,172 ) $ (121,232 )

        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 in 2016 for the year ended December 31, 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.

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4. Accounts Receivable

        Accounts receivable, net consist of the following:

 
  December 31,  
 
  2017   2016  

Billed receivables

  $ 199,201   $ 116,148  

Unbilled receivables

    28,449     20,982  

Other

    5,779     4,510  

Less: Allowance for doubtful accounts

    (3,725 )   (3,219 )

  $ 229,704   $ 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 customer circumstances.

5. Prepaid Expenses and Other Current Assets

        Prepaid expenses and other current assets consist of the following:

 
  December 31,  
 
  2017   2016  

Prepaids

  $ 22,869   $ 10,906  

Deposits

    1,727     1,296  

  $ 24,596   $ 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:

 
   
  December 31,  
 
  Estimated
Useful Lives
(in Years)
 
 
  2017   2016  

Land

  N/A   $ 7,744   $ 7,637  

Buildings and improvements

  7 - 40     18,726     16,989  

Leasehold improvements

  3 - 12     51,257     31,342  

Vehicles

  5 - 7     870     784  

Machinery and equipment

  5 - 15     62,249     23,297  

Computer equipment and software

  3 - 8     116,580     98,544  

Furniture and fixtures

  5 - 15     7,136     5,007  

        264,562     183,600  

Less: Accumulated depreciation and amortization

        (131,654 )   (102,000 )

Property, plant and equipment, net

      $ 132,908   $ 81,600  

        Depreciation expense related to property, plant and equipment was $31.7 million, $22.8 million, and $27.4 million for the years ended December 31, 2017, 2016, and 2015, respectively.

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7. Intangibles Assets and Goodwill

Intangibles

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

 
  December 31, 2017  
 
  Gross Carrying
Amount(a)
  Accumulated
Amortization
  Intangible
Asset, net
 

Customer relationships

  $ 504,643   $ (135,962 ) $ 368,681  

Developed technology

    89,076     (77,103 )   11,973  

Trade names(b)

    13,100         13,100  

Outsource contract costs

    40,456     (17,526 )   22,930  

Internally developed software

    28,254     (2,597 )   25,657  

Trademarks

    23,370     (1,446 )   21,924  

Non compete agreements

    1,350     (631 )   719  

  $ 700,249   $ (235,265 ) $ 464,984  

 

 
  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. See Note 3—Business Combinations.

(b)
The carrying amount of trade names for 2017 is net of accumulated impairment losses of $39.3 million. The carrying amount of trade names includes $10.0 million of indefinite-lived trade names that are not amortizable.

        In connection with the completion of the annual impairment test as of October 1, 2017, the Company recorded an impairment charge to trade names of $6.3 million. Additionally, later in the fourth quarter of 2017, subsequent to the annual impairment test, the Company implemented a one year strategy to transition to a unified Exela brand beginning in 2018. As a result, the Company performed a quantitative analysis of its trade names as of December 31, 2017, and recorded an additional impairment charge of $33.0 million. As part of the impairment analysis completed on December 31, 2017, the Company reconsidered the estimated useful lives of certain trade names and trademarks, and reduced the estimated useful life to one year. The fair value of the trade names was determined using the Relief from Royalty Method of the Income Approach. The impairment charges resulted in decreases to the carrying values of the ITPS, HS, and LLPS trade names of $23.1 million, $9.6 million, and $6.6 million, respectively, and are included within Impairment of intangible assets in the consolidated statement of operations for the year ended December 31, 2017. The Company did not record any impairment related to its trade names for the year ended December 31, 2016.

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        Aggregate amortization expense related to intangibles was $67.2 million, $56.8 million, and $48.0 million for the years ended December 31, 2017, 2016, and 2015, respectively.

        Estimated intangibles amortization expense for the next five years and thereafter consists of the following:

 
  Estimated
Amortization
Expense
 

2018

  $ 102,865  

2019

    59,953  

2020

    51,441  

2021

    43,616  

2022

    39,658  

Thereafter

    157,451  

  $ 454,984  

Goodwill

        Goodwill by reporting segment consists of the following:

 
  Goodwill   Additions   Reductions   Currency
translation
adjustments
  Goodwill(a)  

ITPS

  $ 145,562   $ 13,558   $   $ 274   $ 159,394  

HS

    86,786                 86,786  

LLPS

    127,111                 127,111  

Balance as of December 31, 2016

  $ 359,459   $ 13,558   $   $ 274   $ 373,291  

ITPS

  $ 159,394   $ 406,522 (c) $   $ 299   $ 566,215  

HS

    86,786                 86,786  

LLPS

    127,111         (32,787) (b)       94,324  

Balance as of December 31, 2017

  $ 373,291   $ 406,522   $ (32,787 ) $ 299   $ 747,325  

(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 $30.1 million for impairment recorded in the fourth quarter of 2017 and $2.7 million for the sale of Meridian Consulting Group, LLC in the first quarter of 2017. Refer to Note 2—Basis of Presentation and Summary of Significant Accounting Policies for details of the impairment of goodwill.

(c)
Addition to goodwill is primarily the result of the Business Combination, which resulted in $406.1 million of goodwill. Refer to Note 3—Business Combinations.

        The Company recorded $406.1 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, $47.0 million of goodwill is associated with net deferred tax liabilities recorded in connection with amortizable intangible assets acquired in the Business Combination. As of the annual impairment testing date in 2017, due to a decline in revenues and operations for the LLPS reporting unit, the Company recorded an impairment charge of $30.1 million to the reporting unit's goodwill. No impairment charges were recorded for the year ended December 31, 2016.

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8. Accrued Liabilities and Other Long-Term Liabilities

        Accrued liabilities consist of the following:

 
  December 31,  
 
  2017   2016  

Accrued taxes (exclusive of income taxes)

  $ 9,310   $ 3,309  

Accrued lease exit obligations

    2,207     3,949  

Accrued professional and legal fees

    16,529     8,289  

Deferred rent

    1,204     989  

Accrued interest

    55,102     8,459  

Accrued transaction costs

    18,232     2,750  

Other accruals

    1,901     1,747  

  $ 104,485   $ 29,492  

        Other Long-term liabilities consist of the following:

 
  December 31,  
 
  2017   2016  

Deferred revenue

  $ 424   $ 235  

Deferred rent

    7,112     6,110  

Accrued lease exit obligations

    1,144     672  

Accrued compensation expense

    2,776     3,783  

Other

    3,248     1,173  

  $ 14,704   $ 11,973  

9. Long-Term Debt and Credit Facilities

Senior Secured Notes

        Upon the closing of the Business Combination on July 12, 2017, the Company issued $1.0 billion in aggregate principal amount of 10.0% First Priority Senior Secured Notes due 2023 (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.

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 recorded $7.0 million of original issue discount as part of the refinancing. 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

32


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.

Senior Credit Facilities

        On July 12, 2017, the Company entered into a First Lien Credit Agreement with Royal Bank of Canada, Credit Suisse AG, Cayman Islands Branch, Natixis, New York Branch and KKR Corporate Lending LLC (the "Credit Agreement") providing Exela Intermediate LLC, a wholly owned subsidiary of the Company, upon the terms and subject to the conditions set forth in the Credit Agreement, (i) a $350.0 million senior secured term loan maturing July 12, 2023 with an original issue discount of $7.0 million, and (ii) a $100.0 million senior secured revolving facility maturing July 12, 2022, 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 0.6% of the aggregate principal amount for each of the first eight payments and 1.3% of the aggregate principal amount for payments thereafter, with any balance due at maturity. As of December 31, 2017 the interest rate applicable for the first lien senior secured term loan was 9.064%.

33


Long-Term Debt Outstanding

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

 
  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)

    17,534     11,609  

First lien credit agreement(e)

    308,825      

Senior secured notes(f)

    970,300      

Senior secured revolving credit facility(g)

         

Total debt

    1,296,659     1,039,335  

Less: Current portion of long-term debt

    (20,565 )   (55,833 )

Long-term debt, net of current maturities

  $ 1,276,094   $ 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 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 $9.9 million and $29.1 million as of December 31, 2017.

(f)
Net of unamortized debt discount and debt issuance costs of $21.2 million and $8.5 million as of December 31, 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.

34


        As of December 31, 2017, maturities of long-term debt are as follows:

 
  Maturity  

2018

  $ 20,565  

2019

    12,547  

2020

    19,190  

2021

    19,865  

2022

    17,555  

Thereafter

    1,275,625  

Total long-term debt

    1,365,347  

Less: Unamortized discount and debt issuance costs

    (68,688 )

  $ 1,296,659  

        As of December 31, 2017 and 2016, the Company had outstanding irrevocable letters of credit totaling approximately $20.9 million and $9.3 million, respectively, under a revolving credit facility.

10. Income Taxes

        The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable.

        For financial reporting purposes, income/ (loss) before income taxes includes the following components:

 
  Year Ended December 31,  
 
  2017   2016   2015  

United States

  $ (279,822 ) $ (71,171 ) $ (79,054 )

Foreign

    15,291     11,281     7,338  

  $ (264,531 ) $ (59,890 ) $ (71,716 )

        The provision for federal, state, and foreign income taxes consists of the following:

 
  Year Ended December 31,  
 
  2017   2016   2015  

Federal

                   

Current

  $ (722 ) $   $ (63 )

Deferred

    (59,425 )   (8,961 )   (27,931 )

State

                   

Current

    1,405     830     1,203  

Deferred

    (7,176 )   (2,740 )   (2,696 )

Foreign

                   

Current

    5,794     3,112     (774 )

Deferred

    (122 )   (4,028 )   3,449  

Income Tax Benefit

  $ (60,246 ) $ (11,787 ) $ (26,812 )

35


        The differences between income taxes expected by applying the U.S. federal statutory tax rate of 35% and the amount of income taxes provided are as follows:

 
  Year Ended December 31,  
 
  2017   2016   2015  

Tax at statutory rate

  $ (92,586 ) $ (20,962 ) $ (25,101 )

Add (deduct)

                   

State income taxes

    (4,219 )   1,483     905  

Foreign income taxes

    (565 )   (1,356 )   2,654  

Nondeductible transaction costs

    27,311          

Nondeductible goodwill impairment

    10,497          

Permanent differences

    438     4,405     (172 )

Changes in valuation allowance

    (6,159 )   6,075     (6,880 )

Unremitted earnings

        1,686      

Changes in U.S. tax rates

    (4,784 )        

Deemed mandatory repatriation

    7,441          

Other

    2,380     (3,118 )   1,782  

Income Tax Benefit

  $ (60,246 ) $ (11,787 ) $ (26,812 )

        The Tax Cuts and Jobs Act ("TCJA") was signed by the President of the United States and enacted into law on December 22, 2017. The TCJA significantly changes U.S. tax law by reducing the U.S. corporate income tax rate to 21.0% from 35.0%, adopting a territorial tax regime, creating new taxes on certain foreign sourced earnings and imposing a one-time transition tax on the undistributed earnings of certain non-U.S. subsidiaries.

        Accounting Standards Codification Topic 740, Income Taxes ("ASC 740") requires companies to account for the tax effects of changes in income tax rates and laws in the period in which legislation is enacted (December 22, 2017). ASC 740 does not specifically address accounting and disclosure guidance in connection with the income tax effects of the TCJA. Consequently, on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), to address the application of ASC 740 in the reporting period that includes the date the TCJA was enacted. SAB 118 allows companies a reasonable period of time to complete the accounting for the income tax effects of the TCJA.

        At December 31 2017, the Company has not completed the accounting for the income tax effects of the TCJA. However, pursuant to SAB 118, the Company has made provisional estimates of the effects of existing deferred tax assets and liabilities and the one-time transition tax. The Company recognized a $9.4 million provisional tax benefit to Continuing Operations on revaluing its existing net deferred tax liability at the reduced corporate tax rate of 21.0%. Also, the Company determined that a $9.1 million provisional tax was due on estimated earnings and profits subject to the deemed mandatory repatriation. However, a payable was not recorded by the Company since the Company's net operating loss carryforward at December 31, 2017 can be used to offset the mandatory repatriation tax.

        The TCJA subjects US stockholders to tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. Pursuant to FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, the Company can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in subsequent periods or recognize the tax expense related to GILTI as a period cost in the year the tax is incurred. The GILTI provisions are complex and the Company expects additional clarification and interpretive guidance to be released by the Treasury subsequent to the issuance of the Company's annual financial statements. The Company has not elected an accounting policy related to GILTI but will continue evaluating the application of the GILTI provisions during the SAB 118 measurement period.

36


        The provisional tax effects reflected in the financial statements are subject to change due to, among other things, additional analysis and receipt of final data as well as the release of new authoritative and interpretive guidance. The Company expects to complete its accounting for the effects of the TCJA after the filing of the U.S. federal consolidated and state tax returns in 2018.

        The components of deferred income tax liabilities and assets are as follows:

 
  Year Ended December 31,  
 
  2017   2016  

Deferred income tax liabilities:

             

Book over tax basis of intangible and fixed assets

  $ (113,844 ) $ (108,419 )

Unremitted foreign earnings

        (1,686 )

Other, net

  $ (2,684 ) $ (7,781 )

Total deferred income tax liabilities

    (116,528 )   (117,886 )

Deferred income tax assets:

   
 
   
 
 

Allowance for doubtful accounts and receivable adjustments

  $ 1,401   $ 2,112  

Inventory

    1,807     3,076  

Accrued liabilities

    9,586     9,554  

Net operating loss and tax credit carryforwards

    196,633     232,226  

Tax deductible goodwill

    3,862     6,806  

Other, net

    15,518     18,364  

Total deferred income tax assets

  $ 228,807   $ 272,138  

Valuation allowance

   
(108,622

)
 
(170,821

)

Total net deferred income tax assets (liabilities)

  $ 3,657   $ (16,569 )

        Gross deferred tax assets are reduced by valuation allowances to the extent the Company determines it is not more-likely-than-not the deferred tax assets are expected to be realized. At December 31, 2017, the Company recognized $108.6 million of valuation allowances against gross deferred tax assets primarily related to net operating loss and tax credit carryforwards. Of this amount, approximately $84.6 million and $8.7 million of the total valuation allowance was related to U.S. federal and state limitations on the utilization of net operating loss carryforwards due to numerous changes in ownership. The remaining $15.3 million of the valuation allowance was related to non-limited U.S. federal and non-US net operating losses and tax credits that are not expected to be realizable. In connection with the Novitex acquisition, the Company recorded additional taxable temporary differences that provided support for reducing $14.0 million of valuation allowance established in the prior period, and resulted in an income tax benefit. The remaining reduction in the valuation allowance attributable to net deferred tax liabilities acquired in the Novitex acquisition was offset by an increase in valuation allowance on current year losses that are not more-likely-than-not to be realized.

        The net change during the year in the total valuation allowance was a decrease of $62.2 million primarily related to the revaluation of deferred tax assets and liabilities at the reduced corporate rate of 21.0%. The reduction of net deferred tax assets due to the rate revaluation also decreased the amount of the valuation allowance by the same amount resulting in no overall net impact to the Company's income tax provision.

        Section 382 of the Internal Revenue Code of 1986, as amended (the Code), limits the amount of U.S. tax attributes (net operating loss and tax credit carryforwards) following a change in ownership. The Company has determined that an ownership change occurred under Section 382 on April 3, 2014 and October 31, 2014 for the Pangea group and on October 31, 2014 for the SourceHOV Holdings

37


group. The Section 382 limitations significantly limit the pre-acquisition Pangea net operating losses. Accordingly, upon the October 31, 2014 change in control, most of the historic Pangea federal net operating losses were limited and a valuation allowance has been established against the related deferred tax asset. Following the filing of the October 31, 2014, Pangea federal tax returns and further Section 382 analysis, management finalized the amount of the limitation and as a result, approximately $3.5 million of the valuation allowance was released in 2015. Management has concluded that the U.S. tax attributes after Section 382 limitations were applied are more likely than not to be realized. With regard to Pangea's foreign subsidiaries, it was determined that most deferred tax assets are not likely to be realized and valuation allowances have been established. The Section 382 limit that applied to the historic SourceHOV LLC group is greater than the net operating losses and tax credits generated in the predecessor periods. Therefore, no additional valuation allowances were established relating to Section 382 limitations other than the pre-2011 Section 382 limitations that applied.

        Included in deferred tax assets are federal, foreign and state net operating loss carryforwards, federal general business credit carryforwards and state tax credit carryforwards due to expire beginning in 2018 through 2037. As of December 31, 2017, the Company has federal and state income tax net operating loss (NOL) carryforwards of $756.6 million and $465.9 million, which will expire at various dates from 2018 through 2037. Such NOL carryforwards expire as follows:

 
  Federal NOL   State and Local
NOL
 

2018 - 2021

  $ 116,285   $ 30,400  

2022 - 2026

    117,314     79,355  

2027 - 2037

    523,025     356,172  

  $ 756,624   $ 465,927  

        As of December 31, 2017, the Company has foreign net operating loss carryforwards of $28.8 million, $7.8 million of which were generated by BancTec Holding N.V. and BancTec B.V., and will expire at various dates from 2018 through 2026, and the rest of which can be carried forward indefinitely.

        Since the 2014 Reorganization did not result in a new tax basis of assets and liabilities for the Company, some of the goodwill continues to be deductible over the remaining amortization period for tax purposes. At December 31, 2017, approximately $63.9 million of the Company's goodwill is tax deductible, $25.4 million of which is carried over from the 2014 Reorganization. Additionally, the Company has tax deductible goodwill of $26.5 million in connection with the TransCentra acquisition, and $12.0 million in connection with the Novitex acquisition as of December 31, 2017. These amounts were related to the tax basis carried over from the seller.

        The Company adopted the provision of accounting for uncertainty in income taxes in the Topic of the ASC 740. ASC 740 clarifies the accounting for uncertain tax positions in the Company's financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on tax returns. The total amount of unrecognized tax benefits at December 31, 2017 is $1.0 million, and if recognized $0.5 million would benefit the effective tax rate. Total accrued interest and penalties recorded on the Consolidated Balance Sheet were $3.0 million and $2.6 million at December 31, 2017 and 2016, respectively. The total amount of interest and penalties recognized in the Consolidated Statement of Operations at December 31, 2017 was $0.4 million. The Company does not anticipate a significant change in the amount of unrecognized tax benefits during 2017.

38


        The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

 
  Year Ended December 31,  
 
  2017   2016   2015  

Unrecognized tax benefits—January 1

  $ 999   $ 1,287   $ 2,760  

Gross increases—tax positions in prior period

    9          

Gross decreases—tax positions in prior period

    39     (31 )   (916 )

Gross increases—tax positions in current period

        45     70  

Settlement

        (103 )   (110 )

Lapse of statute of limitations

        (199 )   (517 )

Unrecognized tax benefits—December 31

  $ 1,047   $ 999   $ 1,287  

        The Company files income tax returns in the U.S. and various state and foreign jurisdictions. The statute of limitations for U.S. purposes is open for tax years ending on or after December 31, 2013, However, NOLs generated in years prior to 2013 and utilized in future periods may be subject to examination by U.S. tax authorities. State jurisdictions that remain subject to examination are not considered significant. The Company has significant foreign operations in India and Europe. The Company may be subject to examination by the India tax authorities for tax periods ending on or after March 31, 2011.

        The Company recorded a provisional amount for the deemed mandatory repatriation of its total post-1986 earnings and profits that were previously deferred from US income taxes. The deemed mandatory repatriation was based in part on the amount of untaxed earnings held in cash and other specified assets. The Company notes the final amount of earnings and profits may change based on the completion of the Company's US federal tax return and the actual amounts held in cash and other specified assets. At December 31, 2017, the Company has not changed its prior indefinite reinvestment assertion on undistributed earnings related to certain foreign subsidiaries. As such, no additional taxes including foreign withholding taxes have been provided on these undistributed earnings. Additionally, the Company does not indefinitely reinvest earnings in Canada, China, India, Mexico and Philippines.

11. Employee Benefit Plans

German Pension Plan

        The Company's subsidiary in Germany provides pension benefits to eligible retirees. Employees eligible for participation includes 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 eligible 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

39


economic cycles. The Company assumed a weighted average expected long-term rate on plan assets of 4.25%.

Funded Status

        The change in benefit obligations, the change in the fair value of the plan assets and the funded status of the Company's pension plans (except for the German pension plan which is unfunded) and the amounts recognized in the Company's consolidated financial statements are as follows:

 
  Year ended
December 31,
 
 
  2017   2016  

Change in Benefit Obligation:

             

Benefit obligation at beginning of period

  $ 82,320   $ 76,569  

Service cost

    8     11  

Interest cost

    2,288     2,667  

Plan participants' contributions

         

Actuarial loss

    1,021     19,330  

Plan curtailment

         

Benefits paid

    (1,797 )   (2,042 )

Foreign-exchange rate changes

    7,674     (14,215 )

Benefit obligation at end of year

  $ 91,514   $ 82,320  

Change in Plan Assets:

             

Fair value of plan assets at beginning of period

  $ 52,538   $ 55,909  

Actual return on plan assets

    6,579     6,790  

Employer contributions

    2,297     1,770  

Plan participants' contributions

         

Benefits paid

    (1,782 )   (2,031 )

Foreign-exchange rate changes

    5,254     (9,900 )

Fair value of plan assets at end of year

    64,886     52,538  

Funded status at end of year

  $ (26,628 ) $ (29,782 )

Net amount recognized in the Consolidated Balance Sheets:

             

Accrued compensation and benefits(a)

  $ (1,551 )   (1,479 )

Pension liability(b)

  $ (25,077 ) $ (28,303 )

Amounts recognized in accumulated other comprehensive loss, net of tax consist of:

             

Net actuarial loss

    (11,054 )   (12,339 )

Net amount recognized in accumulated other comprehensive loss, net of tax

  $ (11,054 ) $ (12,339 )

Plans with underfunded or non-funded accumulated benefit obligation:

             

Aggregate projected benefit obligation

 
$

91,514
 
$

82,320
 

Aggregate accumulated benefit obligation

  $ 91,514   $ 82,320  

Aggregate fair value of plan assets

  $ 64,886   $ 52,538  

(a)
Germany pension represents only a portion of the accrued compensation and benefits balance presented in the consolidated balance sheet.

(b)
Consolidated balance of $25,496 and $28,712 includes UK pension of $25,077 and $28,303, for the years ended December 31, 2017 and 2016, respectively, and minimum regulatory benefit for a Philippines legal entity.

40


Amounts in Accumulated Other Comprehensive Loss Expected to be Recognized in Net Periodic Benefit Costs in 2017

        The liability recorded on the Company's consolidated balance sheets representing the net unfunded status of this plan is different than the cumulative expense recognized for this plan. The difference relates to losses that are deferred and that will be amortized into periodic benefit costs in future periods. These unamortized amounts are recorded in Accumulated Other Comprehensive Loss in the consolidated balance sheets.

        As of December 31, 2017, the estimated pre-tax amount that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next year will be net actuarial loss of $3.1 million and prior service cost of $0.1 million.

Tax Effect on Accumulated Other Comprehensive Loss

        As of December 31, 2017 and 2016, the Company recorded actuarial losses of $11.1 million and $12.3 million, respectively, which is net of a deferred tax benefit of $2.0 million and $2.5 million, respectively.

Pension and Postretirement Expense

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

 
  Year ended December 31,  
 
  2017   2016   2015  

Service cost

  $ 8   $ 11   $ 735  

Interest cost

    2,288     2,667     2,926  

Expected return on plan assets

    (2,392 )   (2,623 )   (2,696 )

Curtailment recognized

            (258 )

Amortization:

               

Amortization of prior service cost

    (134 )   (141 )   (159 )

Amortization of net (gain) loss

    2,063     891     1,426  

Net periodic benefit cost

  $ 1,833   $ 805   $ 1,974  

Valuation

        The Company uses the corridor approach and projected unit credit method in the valuation of its defined benefit plans for the UK and Germany, respectively. The corridor approach defers all actuarial gains and losses resulting from variances between actual results and economic estimates or actuarial assumptions. For defined benefit pension plan, these unrecognized gains and losses are amortized when the net gains and losses exceed 10% of the greater of the market-related value of plan assets or the projected benefit obligation at the beginning of the year. The amount in excess of the corridor is amortized over 15 years. Similarly, the Company used the Projected Unit Credit Method for the German Plan, and evaluated the assumptions used to derive the related benefit obligations consisting primarily of financial and demographic assumptions including commencement of employment, biometric decrement tables, retirement age, staff turnover. The projected unit credit method determines the present value of the Company's defined benefit obligations and related service costs by taking into account each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately in building up the final obligation. Benefit is attributed to periods of service using the plan's benefit formula, unless an employee's service in later years will lead to a materially higher of benefit than in earlier years, in which case a straight-line basis is used.

41


        The following tables set forth the principal actuarial assumptions used to determine benefit obligation and net periodic benefit costs:

 
  December 31,  
 
  2017   2016   2017   2016  
 
  UK
  Germany
 

Weighted-average assumptions used to determine benefit obligations:

                         

Discount rate

    2.50 %   2.70 %   2.40 %   2.45 %

Rate of compensation increase

    N/A     N/A     1.00 %   1.00 %

Weighted-average assumptions used to determine net periodic benefit cost:

   
 
   
 
   
 
   
 
 

Discount rate

    2.70 %   3.90 %   N/A     N/A  

Expected asset return

    4.34 %   5.15 %   N/A     N/A  

Rate of compensation increase

    N/A     N/A     N/A     N/A  

        The Germany plan is an unfunded plan and therefore has no plan assets. The expected rate of return assumptions for plan assets relates 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. Adjustments, upward and downward, may be made to those historical returns to reflect future capital market expectations; these expectations are typically derived from expert advice from the investment community and surveys of peer company assumptions.

        The Company assumed a weighted average expected long-term rate of return on plan assets for the overall scheme of 4.25%. The Company's expected rate of return for equities is derived by applying an equity risk premium to the expected yield on the fixed-interest 15-year U.K. government gilts. The Company evaluated a number of indicators including prevailing market valuations and conditions, corporate earnings expectations, and the estimates of long-term economic growth and inflations to derive the equity risk premium. The expected return on the gilts and corporate bonds typically reflect market conditions at the balance sheet date, and the nature of the bond holdings.

        The discount rate assumption was developed considering the current yield on an investment grade non-gilt index with an adjustment to the yield to match the average duration of the index with the average duration of the plan's liabilities. The index utilized reflected the market's yield requirements for these types of investments.

        The inflation rate assumption was developed considering the difference in yields between a long-term government stocks index and a long-term index-linked stocks index. This difference was modified to consider the depression of the yield on index-linked stocks due to the shortage of supply and high demand, the premium for inflation above the expectation built into the yield on fixed-interest stocks and the UK government's target rate for inflation (CPI) at 2.0%.The assumptions used are the best estimates chosen from a range of possible actuarial assumptions which, due to the time scale covered, may not necessarily be borne out in practice.

Plan Assets

        The investment objective for the plan is to earn, over moving fifteen to twenty year periods, the long-term expected rate of return, net of investment fees and transaction costs, to satisfy the benefit obligations of the plan, while at the same time maintaining sufficient liquidity to pay benefit obligations and proper expenses, and meet any other cash needs, in the short-to medium-term.

        The Company's investment policy related to the defined benefit plan is to continue to maintain investments in government gilts and highly rated bonds as a means to reduce the overall risk of assets held in the fund. No specific targeted allocation percentages have been set by category, but are at the direction and discretion of the plan trustees. During 2017 and 2016, all contributions made to the fund were in these categories.

42


        The weighted average allocation of plan assets by asset category is as follows:

 
  December 31,  
 
  2017   2016   2015  

U.S. and international equities

    45.0 %   42.0 %   41.0 %

UK government and corporate bonds

    20.0 %   21.0 %   20.0 %

Diversified growth fund

    35.0 %   37.0 %   39.0 %

Total

    100.0 %   100.0 %   100.0 %

        The following tables set forth, by category and within the fair value hierarchy, the fair value of the Company's pension assets at December 31, 2017 and 2016:

 
  December 31, 2017  
 
  Total   Level 1   Level 2   Level 3  

Asset Category:

                         

Cash

  $ 256   $ 256   $   $  

Equities:

                       

U.S. 

    17,307     17,307          

International

    11,539     11,539          

Fixed Income Securities:

                       

Corporate bonds

    12,884     12,884          

Other investments:

                       

Diversified growth fund

    22,900     22,900          

Total fair value

  $ 64,886   $ 64,886   $   $