Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q/A

 

Amendment No. 1

 


 

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

 

For the quarterly period ended March 31, 2018

 

Or

 

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

 

For the transition period from                      to                     .

 

Commission file number: 001-36788

 


 

EXELA TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware

 

47-1347291

(State of or other Jurisdiction

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

2701 E. Grauwyler Rd.

 

 

Irving, TX

 

75061

(Address of Principal Executive

 

(Zip Code)

Offices)

 

 

 

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

 

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

 

Title of Each Class

 

Name of Each Exchange on Which Registered 

Common Stock, Par Value $0.0001 per share

 

The Nasdaq Stock Market LLC

 

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

 

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

 

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

 

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

Smaller Reporting Company o

Emerging Growth Company o

 

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

 

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

 

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

 

 

 



Table of Contents

 

Explanatory Note

 

This Amendment No. 1 to the Quarterly Report on Form 10-Q/A (“Amendment No. 1”) of Exela Technologies, Inc. (the “Company”) is being filed to amend the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which was originally filed with the Securities and Exchange Commission (the “SEC”) on May 10, 2018 (the “Original Filing”) to correct a scrivener’s error in the presentation of net loss per share in the Original Filing by moving the placement of the decimal from (1.64) to (0.16) for the three months ended March 31, 2018, and from (2.45) to (0.24) for the three months ended March 31, 2017.  For the convenience of the reader, this Amendment No. 1 restates in its entirety the remainder of Original Filing, and no other changes have been made to the Form 10-Q.

 



Table of Contents

 

Exela Technologies, Inc.

 

Form 10-Q/A

 

For the quarterly period ended March 31, 2018

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

1

 

 

Condensed Consolidated Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

1

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017

2

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017

3

 

 

Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2018 and 2017

4

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

5

 

 

Notes to the Condensed Consolidated Financial Statements

6

 

 

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

27

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

36

 

 

Item 4. Controls and Procedures

37

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

38

 

 

Item 1A. Risk Factors

39

 

 

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

39

 

 

Item 3. Defaults Upon Senior Securities

39

 

 

Item 4. Mine Safety Disclosures

39

 

 

Item 5. Other Information

39

 

 

Item 6. Exhibits

39

 



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of March 31, 2018 and December 31, 2017

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

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

26,882

 

$

39,000

 

Restricted cash

 

12,549

 

42,489

 

Accounts receivable, net of allowance for doubtful accounts of $4,077 and $3,725, respectively

 

238,680

 

229,704

 

Inventories, net

 

13,519

 

11,922

 

Prepaid expenses and other current assets

 

27,520

 

24,596

 

Total current assets

 

319,150

 

347,711

 

Property, plant and equipment, net

 

132,870

 

132,908

 

Goodwill

 

747,325

 

747,325

 

Intangible assets, net

 

438,929

 

464,984

 

Deferred income tax assets

 

9,171

 

9,019

 

Other noncurrent assets

 

18,490

 

12,891

 

Total assets

 

$

1,665,935

 

$

1,714,838

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

Liabilities

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

$

77,194

 

$

81,263

 

Related party payables

 

14,172

 

14,445

 

Income tax payable

 

6,967

 

3,612

 

Accrued liabilities

 

31,805

 

49,383

 

Accrued compensation and benefits

 

49,738

 

46,925

 

Accrued Interest

 

23,795

 

55,102

 

Customer deposits

 

36,542

 

31,656

 

Deferred revenue

 

15,933

 

12,709

 

Obligation for claim payment

 

56,554

 

42,489

 

Current portion of capital lease obligations

 

14,785

 

15,611

 

Current portion of long-term debt

 

21,170

 

20,565

 

Total current liabilities

 

348,655

 

373,760

 

Long-term debt, net of current maturities

 

1,277,029

 

1,276,094

 

Capital lease obligations, net of current maturities

 

26,474

 

25,958

 

Pension liability

 

26,081

 

25,496

 

Deferred income tax liabilities

 

5,478

 

5,362

 

Long-term income tax liability

 

3,470

 

3,470

 

Other long-term liabilities

 

13,879

 

14,704

 

Total liabilities

 

1,701,066

 

1,724,844

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 152,565,218 shares issued and 152,515,918 outstanding at March 31, 2018 and 150,578,451 shares issued and 150,529,151 outstanding at December 31, 2017

 

15

 

15

 

Preferred stock, par value of $0.0001 per shares; 20,000,000 shares authorized; 4,569,233 shares issued and outstanding at March 31, 2018 and 6,194,233 shares issued and outstanding at December 31, 2017

 

1

 

1

 

Additional paid in capital

 

482,018

 

482,018

 

Less:common stock held in treasury, at cost; 49,300 shares at March 31, 2018 and 49,300 shares at December 31, 2017

 

(249

)

(249

)

Equity based compensation

 

35,044

 

34,085

 

Accumulated deficit

 

(540,041

)

(514,628

)

Accumulated other comprehensive loss:

 

 

 

 

 

Foreign currency translation adjustment

 

(462

)

(194

)

Unrealized pension actuarial losses, net of tax

 

(11,457

)

(11,054

)

Total accumulated other comprehensive loss

 

(11,919

)

(11,248

)

Total stockholders’ deficit

 

(35,131

)

(10,006

)

Total liabilities and stockholders’ deficit

 

$

1,665,935

 

$

1,714,838

 

 

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

 

1



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three Months ended March 31, 2018 and 2017

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

(Unaudited)

 

 

 

Three Months ended March 31,

 

 

 

2018

 

2017

 

Revenue

 

$

393,167

 

$

218,260

 

Cost of revenue (exclusive of depreciation and amortization)

 

293,792

 

143,708

 

Selling, general and administrative expenses

 

45,595

 

35,581

 

Depreciation and amortization

 

38,019

 

21,320

 

Related party expense

 

1,105

 

2,385

 

Operating income (loss)

 

14,656

 

15,266

 

Other expense (income), net:

 

 

 

 

 

Interest expense, net

 

38,017

 

26,219

 

Sundry expense (income), net

 

(64

)

2,724

 

Other income, net

 

(3,328

)

 

Net loss before income taxes

 

(19,969

)

(13,677

)

Income tax (expense) benefit

 

(4,025

)

(2,004

)

Net loss

 

(23,994

)

(15,681

)

Cumulative dividends for Series A Preferred Stock

 

(914

)

 

Net loss attributable to common stockholders

 

$

(24,908

)

$

(15,681

)

Net loss per share - basic and diluted

 

(0.16

)

(0.24

)

 

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

 

2



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the Three Months ended March 31, 2018 and 2017

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

(Unaudited)

 

 

 

Three Months ended March 31,

 

 

 

2018

 

2017

 

Net loss

 

$

(23,994

)

$

(15,681

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

(268

)

2,414

 

Unrealized pension actuarial gains (losses), net of tax

 

(403

)

(281

)

Comprehensive loss

 

$

(24,665

)

$

(13,548

)

 

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

 

3



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

For the Three Months ended March 31, 2018 and 2017

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

(Unaudited)

 

 

 

Common Stock

 

Preferred Stock

 

Treasury Stock

 

 

 

 

 

Accumulated Other Comprehensive 
Income (Loss)

 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Additional Paid-in
Capital

 

Equity-based 
Compensation 
Agreement

 

Foreign Currency
Translation 
Adjustment

 

Unrealized 
Pension Actuarial
Losses, net of tax

 

Accumulated
Deficit

 

Total Stockholder’s
Deficit

 

Balances at December 31, 2016 (as previously reported)

 

$

144,400

 

$

 

$

 

$

 

$

 

$

 

$

(57,389

)

$

27,342

 

$

(3,547

)

$

(12,339

)

$

(293,968

)

$

(339,901

)

Conversion of shares

 

63,880,157

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016, effect of reverse acquisition (refer to Note 3)

 

$

64,024,557

 

$

 

$

 

$

 

$

 

$

 

$

(57,389

)

$

27,342

 

$

(3,547

)

$

(12,339

)

$

(293,968

)

$

(339,901

)

Net loss January 1 to March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,681

)

(15,681

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

310

 

 

 

 

 

 

 

310

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,414

 

 

 

 

 

2,414

 

Contribution from Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

20,538

 

 

 

 

 

 

 

 

 

20,538

 

Net realized pension actuarial gains, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(281

)

 

 

(281

)

Balances at March 31, 2017

 

$

64,024,557

 

$

 

$

 

$

 

$

 

$

 

$

(36,851

)

$

27,652

 

$

(1,133

)

$

(12,620

)

$

(309,649

)

$

(332,601

)

 

 

 

Common Stock

 

Preferred Stock

 

Treasury Stock

 

 

 

 

 

Accumulated Other Comprehensive 
Income (Loss)

 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Additional Paid-in
Capital

 

Equity-based 
Compensation 
Agreement

 

Foreign Currency 
Translation 
Adjustment

 

Unrealized 
Pension Actuarial 
Losses, net of tax

 

Accumulated
Deficit

 

Total Stockholder’s
Deficit

 

Balances at December 31, 2017

 

150,529,151

 

$

15

 

6,194,233

 

$

1

 

49,300

 

$

(249

)

$

482,018

 

$

34,085

 

$

(194

)

$

(11,054

)

$

(514,628

)

$

(10,006

)

Implementation of ASU 2014-09 (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,419

)

(1,419

)

Net loss January 1 to March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,994

)

(23,994

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

959

 

 

 

 

 

 

 

959

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(268

)

 

 

 

 

(268

)

Net realized pension actuarial gains, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(403

)

 

 

(403

)

Preferred shares converted to common

 

1,986,767

 

 

 

(1,625,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2018

 

152,515,918

 

$

15

 

4,569,233

 

$

1

 

49,300

 

$

(249

)

$

482,018

 

$

35,044

 

$

(462

)

$

(11,457

)

$

(540,041

)

$

(35,131

)

 

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

 

4



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

Three Months ended March 31,

 

 

 

2018

 

2017

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(23,994

)

$

(15,681

)

Adjustments to reconcile net loss

 

 

 

 

 

Depreciation and amortization

 

38,019

 

21,320

 

Debt discount and debt issuance cost amortization

 

2,595

 

3,474

 

Provision (recovery) for doubtful accounts

 

481

 

79

 

Deferred income tax benefit

 

835

 

627

 

Share-based compensation expense

 

959

 

310

 

Foreign currency remeasurement

 

(323

)

687

 

Gain on sale of Meridian

 

 

(251

)

Loss on sale of property, plant and equipment

 

253

 

272

 

Fair value adjustment for interest rate swap

 

(3,328

)

 

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

 

 

 

 

 

Accounts receivable

 

(10,876

)

(1,086

)

Prepaid expenses and other assets

 

(5,567

)

(3,720

)

Accounts payable and accrued liabilities

 

(18,864

)

1,928

(1)

Related party payables

 

(273

)

(3,690

)

Net cash provided by (used in) operating activities

 

(20,083

)

4,269

(1)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(5,957

)

(2,045

)

Additions to internally developed software

 

(1,092

)

(2,528

)

Additions to outsourcing contract costs

 

(1,596

)

(3,989

)

Proceeds from sale of Meridian

 

 

4,381

 

Proceeds from sale of property, plant, and equipment

 

2

 

 

Net cash used in investing activities

 

(8,643

)

(4,181

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Change in bank overdraft

 

 

(210

)

Proceeds from financing obligations

 

1,863

 

3,008

 

Contribution from shareholders

 

 

20,538

 

Cash paid for equity issue costs

 

(7,500

)

 

Borrowings from revolver and swing-line loan

 

25,000

 

38,500

 

Repayments from revolver and swing line loan

 

(25,000

)

(38,500

)

Principal payments on long-term obligations

 

(7,750

)

(15,786

)

Net cash provided by (used in) financing activities

 

(13,387

)

7,550

 

Effect of exchange rates on cash

 

55

 

(44

)

Net increase (decrease) in cash and cash equivalents

 

(42,058

)

7,594

(1)

Cash, restricted cash, and cash equivalents

 

 

 

 

 

Beginning of period

 

81,489

 

34,253

(1)

End of period

 

$

39,431

 

$

41,847

(1)

 

 

 

 

 

 

Supplemental cash flow data:

 

 

 

 

 

Income tax payments, net of refunds received

 

$

1,053

 

$

(12

)

Interest paid

 

66,192

 

30,844

 

Noncash investing and financing activities:

 

 

 

 

 

Assets acquired through capital lease arrangements

 

4,432

 

68

 

Accrued capital expenditures

 

1,101

 

98

 

 


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

 

5



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

1.                            General

 

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

 

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

 

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

 

Net Loss per Share

 

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

 

For the quarter ended March 31, 2018, shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), if converted would have resulted in an additional 5,586,344 shares of Common Stock outstanding, but were not included in the computation of diluted loss per share as their effects were anti-dilutive.

 

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

 

 

 

Three Months ended March 31,

 

 

 

2018

 

2017

 

Net loss attributable to common stock holders (A)

 

$

(24,908

)

$

(15,681

)

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

 

152,140,117

 

64,024,557

 

Loss Per Share:

 

 

 

 

 

Basic and diluted (A/B)

 

$

(0.16

)

$

(0.24

)

 

6



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

2.                            Recently Adopted Accounting Pronouncements

 

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

 

Effective January 1, 2018, the Company adopted ASU no. 2016-15, (Topic 230): Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which adds or clarifies guidance on the presentation and classification of eight specific types of cash receipts and cash payments in the statement of cash flows such as debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees, with the intent of reducing diversity in practice. We applied the guidance retrospectively to all periods presented. Exela will reclassify a loss on extinguishment of debt from operating activities to financing activities in the third quarter of 2017 in the to be filed quarterly and annual statements ended September 30, 2018 and December 31, 2018, respectively. The adoption had no impact on the Company’s financial position, results of operations and cash flows for the quarter ended March 31, 2018.

 

Effective January 1, 2018, the Company adopted ASU no. 2016-16, Income Taxes Topic (740): Intra-Entity Transfers of Assets Other Than Inventory, which eliminates the current prohibition on immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory, with the intent of reducing complexity and diversity in practice. Under ASU 2016-16, entities must recognize the income tax consequences when the transfer occurs rather than deferring recognition. Entities must apply the guidance on a modified retrospective basis though a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The adoption had no material impact on the Company’s financial position, results of operations and cash flows.

 

Effective January 1, 2018, the Company adopted ASU no. 2016-18, (Topic 230): Restricted Cash. Statement of Cash Flows: Restricted Cash. The ASU addresses diversity in practice that exists in the classification and presentation of changes in restricted cash and requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. We applied the guidance retrospectively to all periods presented. As a result of adopting the ASU no. 2016-18, restricted cash is included in the balances of restricted cash, cash and cash equivalents presented in the Statement of Cash Flows for the quarters ended March 31, 2018 and 2017. Adopting the standard increased the net change in cash and cash equivalents, which is reflected within operating cash flows, by less than $0.1 million for the period ended March 31, 2017. Total Cash and cash equivalents for the Beginning of period and End of period March 31, 2017 increased $25.9 million due to the inclusion of restricted cash.

 

7



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Effective January 1, 2018, the Company adopted ASU no. 2017-01, (Topic 805): Business Combinations: Clarifying the Definition of a Business. The ASU clarifies the definition of a business and provides guidance on evaluating as to whether transactions should be accounted for as acquisitions (or disposals) of assets or business combinations. The definition clarification as outlined in this ASU affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The adoption had no material impact on the Company’s financial position, results of operations and cash flows.

 

Effective January 1, 2018, the Company adopted ASU no. 2017-07, (Topic 715): Compensation  Retirement Benefit; Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments to this ASU require the service cost component of net periodic benefit cost be reported in the same income statement line or lines as other compensation costs for employees. The other components of net periodic benefit cost are required to be reported separately from service costs and outside a subtotal of income from operations. The new standard requires retrospective application and allows a practical expedient that permits an employer to use the amounts disclosed in its pension plan footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation. Adoption of the standard resulted in only the service cost being recorded to Cost of revenue; see Note 8 for the related impact.

 

Effective January 1, 2018 the company adopted ASU no. 2017-09, (Topic 718): Compensation — Stock Compensation: Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update will be applied on a prospective basis to an award modified on or after the adoption date. The adoption had no impact on the Company’s financial position, results of operations and cash flows.

 

Recently Issued Accounting Pronouncements

 

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

 

In June 2016, the FASB issued ASU no. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily

 

8



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements

 

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

 

3.         Significant Accounting Policies

 

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

 

Revenue Recognition

 

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

 

Nature of Services

 

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

 

9



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Disaggregation of Revenues

 

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

 

 

 

Three months ended March 31,

 

 

 

2018

 

2017

 

 

 

ITPS

 

HS

 

LLPS

 

ITPS

 

HS

 

LLPS

 

United States

 

$

269,939

 

$

58,632

 

$

22,598

 

$

106,347

 

$

59,078

 

$

23,385

 

Europe

 

35,283

 

 

 

28,300

 

 

 

Other

 

6,715

 

 

 

1,150

 

 

 

Total

 

$

311,937

 

$

58,632

 

$

22,598

 

$

135,797

 

$

59,078

 

$

23,385

 

 

Contract Balances

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Accounts Receivable, net

 

$

238,680

 

$

229,704

 

Deferred revenues

 

16,793

 

13,717

 

Costs to obtain and fulfill a contract

 

20,814

 

22,929

 

Customer deposits

 

36,542

 

31,656

 

 

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

 

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

 

Costs incurred to obtain and fulfill contract are deferred and expensed on a straight-line basis over the estimated benefit period, which is generally the contract term. We recognized $2.4 million of amortization for these costs in the first quarter of 2018 within depreciation and amortization expense. These costs represent incremental external costs or certain specific internal costs that are directly related to the contract acquisition or transition activities and can be separated into two principal categories: contract commissions and transition/set-up costs. Examples of such capitalized costs include hourly labor and related fringe benefits and travel costs. Applying the practical expedient in ASC 340-40-25-4, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in Selling, general and administrative expenses. The effect of applying this practical expedient was not material.

 

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

 

10



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Performance Obligations

 

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

 

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

 

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

 

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

 

Transaction Price Allocated to the Remaining Performance Obligations

 

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

 

Estimated Remaining Fixed
Consideration for Unsatisfied
Performance Obligations

 

2018

 

213,796,515

 

2019

 

250,487,172

 

2020

 

119,914,305

 

2021

 

59,989,281

 

2022

 

34,163,699

 

2023 and thereafter

 

11,548,764

 

Total

 

$

689,899,736

 

 

11



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

4.                            Business Combination

 

On July 12, 2017, the Company consummated its business combination with SourceHOV and Novitex (the “Business Combination”) pursuant to the Business Combination Agreement and Consent, Waiver and Amendment to the Business Combination Agreement, dated February 21, 2017 and June 15, 2017. In connection with the Business Combination, the Company acquired debt facilities and issued notes totaling $1.4 billion (refer to Note 5 — Long Term Debt and Credit Facilities). Proceeds from the acquired debt were used to refinance the existing debt of SourceHOV, settle the outstanding debt of Novitex, and pay fees and expenses incurred in connection with the Business Combination. Immediately following the Business Combination, there were 146,910,648 shares of common stock, 9,194,233 shares of Series A Preferred Stock, and 35,000,000 warrants outstanding.

 

Under ASC 805, Business Combinations, SourceHOV was deemed the accounting acquirer based on the following predominate factors: it has the largest portion of voting rights in the Company, the Board and Management has more individuals coming from SourceHOV than either Quinpario or Novitex, SourceHOV was the largest entity by revenue and by assets, and the headquarters was moved to the SourceHOV headquarters location. The Company acquired 100% of the equity of Novitex pursuant to the Business Combination Agreement by issuing 30,600,000 shares of common stock of Exela to Novitex Parent, L.P., the sole stockholder of Novitex Holdings, Inc. Total value of equity for the transaction was $244.8 million. Additionally, as noted, the Company used proceeds from acquired debt to settle the outstanding debt of Novitex in the amount of $420.5 million, and pay transaction related costs and interest on behalf of Novitex in the amount of $10.3 million and $1.0 million, respectively, which was accounted for as part of consideration.

 

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

 

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

 

12



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Cash and equivalents

 

8,428

 

Accounts receivable

 

87,474

 

Inventory

 

1,245

 

Prepaid expenses & other

 

13,974

 

Property and equipment, net

 

60,657

 

Identifiable intangible Assets, net

 

251,060

 

Deferred charges and other assets

 

2,723

 

Other noncurrent assets

 

93

 

Goodwill, excess/deficient purchase price

 

406,060

 

Total assets

 

831,714

 

Total assets less goodwill

 

425,654

 

 

 

 

 

Liabilities and Equity

 

 

 

Accounts payable

 

29,444

 

Short-term borrowings and current portion of LT debt

 

11,335

 

Accrued liabilities

 

30,432

 

Advanced billings and customer deposits

 

18,926

 

Long term debt

 

15,704

 

Deferred taxes

 

46,991

 

Other liabilities

 

2,226

 

Equity

 

676,656

 

Total liabilities and equity

 

831,714

 

Total liabilities less equity/purchase price

 

155,058

 

 

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

 

 

 

Fair Value

 

Weighted Average Useful Life
(in Years)

 

Trademark and trade name - Novitex

 

$

18,000

 

9.5

 

Customer relationships

 

230,000

 

16.0

 

Internally devleoped software - Connect Platform

 

1,710

 

5.0

 

Non-compete agreements

 

1,350

 

1.0

 

Total identifiable intangibles, net

 

$

251,060

 

 

 

 

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

 

Through the acquisition of SourceHOV and Novitex, we expect to realize revenue synergies, leverage brand awareness, strengthen margins, generate greater free cash flow, expand the existing Novitex sales channels, and increase utilization of the existing workforce. The Company also anticipates opportunities for growth through the ability to leverage additional future services and capabilities. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Novitex’s identifiable net assets assumed, and as a result, the Company has recorded goodwill in connection with this acquisition.

 

13



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

The Company engaged a third party valuation firm to aid Management in its analyses of the fair value of the assets and liabilities. All estimates, key assumptions, and forecasts were either provided by or reviewed by the Company. Approximately $14.0 million of the goodwill recorded was tax deductible, which was carried over from the tax basis of the seller. Since the acquisition date of July 12, 2017, $134.4 million of revenue and $5.0 million of net loss are included in our consolidated revenues and net loss, respectively, for Novitex for the year ended December 31, 2017. These results are included in the ITPS segment.

 

Transaction Costs

 

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

 

Restructuring Charges

 

In February 2017, Management performed a strategic review of human resources at Novitex for the purpose of assessing the business need for their employment and for the purpose of quantifying the synergies resulting from the acquisition. As a result, in June 2017, representatives of SourceHOV and HGM Group communicated the termination of certain executives and non-executive Novitex employees. There were no restructuring charges incurred in the three months ended March 31, 2018 and 2017.

 

The Company determined that costs associated with termination benefits should be accounted for separately from the acquisition, as a post combination expense of the combined entity because the expense was incurred for the benefit of the combined entity. As of July 12, 2017, the Company recorded severance expense in the amount of $4.6 million related to the impacted executives and $0.1 million related to other terminations in the statement of operations No severance expense was incurred or recognized for the three months ended March 31, 2018.

 

5.         Intangibles Assets and Goodwill

 

Intangibles

 

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

 

 

 

March 31, 2018

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Intangible Assets,
Net

 

Customer relationships

 

$

504,643

 

$

(149,576

)

$

355,067

 

Developed technology

 

89,077

 

(81,543

)

7,534

 

Trade names

 

13,100

 

(775

)

12,325

 

Outsource contract costs

 

40,996

 

(20,182

)

20,814

 

Internally developed software

 

30,762

 

(4,398

)

26,364

 

Trademarks

 

23,370

 

(6,927

)

16,443

 

Non compete agreements

 

1,350

 

(969

)

381

 

Intangibles, net

 

$

703,298

 

$

(264,370

)

$

438,928

 

 

14



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

December 31, 2017

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Intangible Assets,
Net

 

Customer relationships

 

$

504,643

 

$

(135,962

)

$

368,681

 

Developed technology

 

89,076

 

(77,103

)

11,973

 

Trade names (b)

 

13,100

 

 

13,100

 

Outsource contract costs

 

40,456

 

(17,526

)

22,930

 

Internally developed software

 

28,254

 

(2,597

)

25,657

 

Trademarks

 

23,370

 

(1,446

)

21,924

 

Non compete agreements

 

1,350

 

(631

)

719

 

Intangibles, net

 

$

700,249

 

$

(235,265

)

$

464,984

 

 


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

 

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

 

Goodwill

 

Goodwill by reporting segment consists of the following:

 

 

 

Goodwill

 

Additions

 

Reductions

 

Currency
translation
adjustments

 

Goodwill (a)

 

ITPS

 

$

159,394

 

$

406,522

(b)

$

 

$

299

 

$

566,215

 

HC

 

86,786

 

 

 

 

86,786

 

LLPS

 

127,111

 

 

(32,787

)(c)

 

94,324

 

Balance as of December 31, 2017

 

$

373,291

 

$

406,522

 

$

(32,787

)

$

299

 

$

747,325

 

ITPS

 

566,215

 

 

 

 

 

 

 

566,215

 

HC

 

86,786

 

 

 

 

 

 

 

86,786

 

LLPS

 

94,324

 

 

 

 

 

94,324

 

Balance as of March 31, 2018

 

$

747,325

 

$

 

$

 

$

 

$

747,325

 

 


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

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

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

 

6.    Long-Term Debt and Credit Facilities

 

Senior Secured Notes

 

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

 

15



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Debt Refinancing

 

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

 

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

 

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

 

Senior Credit Facilities

 

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

 

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

 

Long-Term Debt Outstanding

 

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

 

16



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Other (a)

 

18,815

 

17,534

 

First lien credit agreement (b)

 

308,104

 

308,825

 

Senior secured notes (c)

 

971,280

 

970,300

 

Total debt

 

1,298,199

 

1,296,659

 

Less: Current portion of long-term debt

 

(21,170

)

(20,565

)

Long-term debt, net of current maturities

 

$

1,277,029

 

$

1,276,094

 

 

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

(b)                  Net of unamortized original issue discount and debt issuance costs of $9.5 million and $28.0 million and $9.9 million and $29.1 million as of March 31, 2018 and December 31, 2017.

(c)                   Net of unamortized debt discount and debt issuance costs of $20.5 million and $8.2 million and $21.2 million and $8.5 million as of March 31, 2018 and December 31, 2017.

 

7.         Income Taxes

 

The Company applies an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods, as required under U.S. GAAP. The Company recorded an income tax expense of million $4.0 million and $2.0 million for the three months ended March 31, 2018 and 2017, respectively.

 

For the three months ended March 31, 2018, the Company’s ETR of (20.2%) differed from the expected U.S. statutory tax rate of 21.0%, and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s U.S. disallowed interest expense carryforwards created by the provisions of The Tax Cuts and Jobs Act (“TCJA”).

 

For the three months ended March 31, 2017, the Company’s ETR of (14.65%) differed from the expected U.S. statutory tax rate of 35.0%, and was primarily impacted by permanent tax adjustments, foreign operations, and a valuation allowance against certain domestic deferred tax assets that are not more-likely-than-not to be realized.

 

The TCJA subjects a US shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At March 31, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI related to current-year operations only in our annual effective ETR and have not provided additional GILTI on deferred items.

 

As of March 31, 2018, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2017.

 

8.                            Employee Benefit Plans

 

German Pension Plan

 

The Company’s subsidiary in Germany provides pension benefits to retirees. Employees eligible for participation include all employees who started working for the Company prior to September 30, 1987 and have finished a qualifying period of at least 10 years. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a

 

17



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

December 31 measurement date for this plan. The German pension plan is an unfunded plan and therefore has no plan assets.

 

U.K. Pension Plan

 

The Company’s subsidiary in the United Kingdom provides pension benefits to 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 expected rate of return assumptions for U.K pension plan assets are based mainly on historical performance achieved over a long period of time (15 to 20 years) encompassing many business and economic cycles. The Company assumed a weighted average expected long-term rate on plan assets for the overall scheme of 4.25%.

 

Tax Effect on Accumulated Other Comprehensive Loss

 

As of March 31, 2018 and December 31, 2017, the Company recorded actuarial losses of $11.5 million and $11.1 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which is net of a deferred tax benefit of $2.0 million.

 

Pension and Post Retirement Expense

 

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

 

 

 

Three Months ended March 31,

 

 

 

2018

 

2017

 

Service cost

 

$

2

 

$

2

 

Interest cost

 

586

 

553

 

Expected return on plan assets

 

(719

)

(577

)

Amortization:

 

 

 

 

 

Amortization of prior service cost

 

(36

)

(32

)

Amortization of net (gain) loss

 

463

 

500

 

Net periodic benefit cost

 

$

296

 

$

446

 

 

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

 

Employer Contributions

 

The Company’s funding of employer contributions is based on governmental requirements and differs from those methods used to recognize pension expense. The Company made contributions of $0.6 million and $0.6 million to its pension plans during the three months ended March 31, 2018 and 2017, respectively. The Company has fully funded the pension plans for 2018 based on current plan provisions.

 

18



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

9.                            Commitments and Contingencies

 

Appraisal Demand

 

On September 21, 2017, stockholders of our wholly-owned subsidiary SourceHOV, who allege combined ownership of 10,304 shares of SourceHOV common stock, filed a petition for appraisal pursuant to 8 Del. C. § 262 in the Delaware Court of Chancery, captioned Manichaean Capital, LLC, et al. v. SourceHOV Holdings, Inc., C.A. No. 2017-0673-JRS (the “Appraisal Action”). The Appraisal Action arises out of the Business Combination Transaction, which  gave rise to appraisal rights  pursuant to 8 Del. C. § 262.  In the Appraisal Action, the petitioners seek, among other things, a determination of the fair value of their shares at the time of the Business Combination; an order that SourceHOV pay that value to the petitioners, together with interest at the statutory rate; and an award of costs, attorneys’ fees, and other expenses. On October 12, 2017, SourceHOV filed its answer to the petition and a verified list pursuant to 8 Del. C. § 262(f). Trial is currently scheduled for June 2019. At this early stage of the litigation, the Company is unable to predict the outcome of the Appraisal Action or estimate any loss or range of loss that may arise from the Appraisal Action.

 

10.    Fair Value Measurement

 

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

 

The carrying amount of assets and liabilities including cash and cash equivalents, accounts receivable and accounts payable approximated their fair value as of March 31, 2018 and December 31, 2017 due to the relative short maturity of these instruments. Management estimates the fair values of the secured term loan and secured notes at approximately 100.9% and 101.0% respectively, of the respective principal balance outstanding as of March 31, 2018. The carrying value approximates the fair value for the long-term debt. Other debt represents the Company’s outstanding loan balances associated with various hardware and software purchases along with loans entered into by subsidiaries of the Company and as such, the cost incurred would approximate fair value. Property and equipment, intangible assets, capital lease obligations, and goodwill are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the respective asset is written down to its fair value.

 

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

 

The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as of March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

Fair Value Measurements

 

As of March 31, 2018

 

Carrying
Amount

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Recurring and nonrecurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Acquisition contingent liability

 

$

721

 

$

721

 

$

 

$

 

$

721

 

Long-term debt

 

1,277,029

 

1,356,297

 

 

 

1,356,297

 

 

 

Interest rate swap asset

 

4,625

 

4,625

 

 

4,625

 

 

 

 

 

$

1,282,375

 

$

1,361,643

 

$

 

$

1,360,922

 

$

721

 

 

19



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

Carrying

 

Fair

 

Fair Value measurements

 

As of December 31, 2017

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Recurring and nonrecurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Acquisition contingent liability

 

$

721

 

$

721

 

$

 

$

 

$

721

 

Long-term debt

 

1,276,094

 

1,308,478

 

 

 

1,308,478

 

 

 

Interest rate swap asset

 

1,297

 

1,297

 

 

1,297

 

 

 

 

 

$

1,278,112

 

$

1,310,496

 

$

 

$

1,309,775

 

$

721

 

 

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

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2018

 

2017

 

Balance as of Beginning of Period

 

$

721

 

$

721

 

Payments/Reductions

 

 

 

Balance as of End of Period

 

$

721

 

$

721

 

 

11.   Stock-Based Compensation

 

At Closing, SourceHOV had 24,535 restricted stock units (“RSUs”) outstanding under its 2013 Long Term Incentive Plan (“2013 Plan”). Simultaneous with the Closing, the 2013 Plan, as well as all vested and unvested RSUs under the 2013 Plan, were assumed by Ex-Sigma, LLC (“ExSigma”), an entity formed by the former SourceHOV equity holders, which is also the Company’s principal stockholder. In accordance with U.S. GAAP, the Company will continue to incur compensation expense related to the 9,880 unvested RSUs as of July 12, 2017 on a straight-line basis until fully vested, as the recipients of the RSUs are employees of the Company. Subject to continuous employment and other terms of the 2013 Plan, all remaining unvested RSUs with an initial vesting period of 3 or 4 years will vest in April 2019. Stock-based compensation expense is recorded within Selling, general, and administrative expenses. The Company incurred total compensation expense of $0.9 million related to these awards for the three months ended March 31, 2018.

 

Exela 2018 Stock Incentive Plan

 

On January 17, 2018, Exela’s 2018 Stock Incentive Plan (the “2018 Plan”) became effective. The 2018 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, and other stock-based compensation to eligible participants. Under the 2018 Plan, stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying stock at the grant date. The plan administrator determines the vesting period for each option award on the grant date, and the options generally expire 10 years from the grant date. The Company will be authorized to issue up to 8,323,764 shares of Common Stock. No awards have been issued under the 2018 Plan as of March 31, 2018.

 

20



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

A summary of the status of restricted stock units as of March 31, 2018 and December 31, 2017 and the changes during the periods then ended is presented as follows:

 

 

 

Number
of Shares

 

Weighted
Remaining
Contractural Life
(Years)

 

Weighted
Average Aggregate
Intrinsic Value
($)

 

Nonvested at January 1, 2017

 

8,887

 

2.01

 

$

1,567

 

Shares granted

 

 

 

 

 

Shares forfeited

 

(1,192

)

 

 

 

Shares vested

 

(2,295

)

 

 

 

Nonvested at December 31, 2017

 

5,400

 

1.33

 

$

1,633

 

Shares granted

 

 

 

 

 

Shares forfeited

 

 

 

 

 

Shares vested

 

 

 

 

 

Nonvested at March 31, 2018

 

5,400

 

1.08

 

$

1,573

 

 

As of March 31, 2018, there was approximately $5.0 million of total unrecognized compensation expense related to restricted stock, which will be recognized over the respective service period of approximately 1.08 years until April of 2019. There were 24,535 restricted stock units outstanding, of which 5,400 were unvested as of March 31, 2018.

 

Restricted Stock Unit Grants

 

As part of the 2018 plan Exela issued Restricted Stock Units (“RSUs”) to directors on April 2, 2018. The RSUs are subject to all of the terms and conditions of the 2018 Plan. In total Exela issued 207,020 units at a grant date fair value of $1.1 million. Provided that the Holder has not undergone a Termination prior to the applicable vesting date, 86,874 of the shares issued shall vest immediately prior to the 2018 annual meeting of the stockholders of the Company. Provided that Holder has not undergone a Termination prior to the applicable vesting date, for 120,146 of the shares issued, thirty-three and one third percent of the Restricted Stock Units shall vest immediately prior to each of the 2018 annual meeting of the stockholders of the Company, the 2019 annual meeting of the stockholders of the Company and the 2020 annual meeting of the stockholders of the Company.

 

12.     Stockholders’ Equity

 

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

 

Common Stock

 

The Company is authorized to issue 1,600,000,000 shares of common stock, par value $0.0001 per share. At March 31, 2018 the Company had  152,515,918 shares of common stock outstanding: a) 80,600,000 shares of common stock were issued to to Ex-Sigma, b) 30,600,000 shares of common stock to the sole shareholder of Novitex, c) 12,093,331 shares of common stock to the shareholders of Quinpario who did not redeem their shares, d) 3,609,375 to certain third party advisors involved in the Business Combination, and 19,599,818 shares of common stock issued to holders as part of a private placement at $8 per share. Certain shareholders of Quinpario were offered 25% common stock bonuses if

 

21



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

they executed conversion agreements within a specified time limit. No agreements were executed for the three months ended March 31, 2018. As of March 31, 2018, there were no additional issuances of common stock.

 

Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of Exela Common Stock possess all voting power for the election of Exela’s directors and all other matters requiring stockholder action and will at all times vote together as one class on all matters submitted to a vote of Exela stockholders. Holders of Exela Common Stock are entitled to one vote per share on matters to be voted on by stockholders.  Holders of Exela Common Stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the board of directors in its discretion out of funds legally available therefor and shall share equally on a per share basis in such dividends and distributions. The holders of the common stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock.

 

Preferred Stock

 

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

 

Holders of the Series A Preferred Stock will be entitled to receive cumulative dividends at a rate per annum of 10% of the Liquidation Preference per share of Series A Preferred Stock, paid or accrued quarterly in arrears. From the issue date until the third anniversary of the issue date, the amount of all accrued but unpaid dividends on the Series A Preferred Stock will be added to the Liquidation Preference without any action by the Company’s board of directors. For the quarter ended March 31, 2018 this amount was $0.9 million as reflected on the Consolidated Statement of Operations.

 

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

 

Treasury Stock

 

On November 8, 2017, the Company’s board of directors authorized a share buyback program (the “Share Buyback Program”), pursuant to which the Company may, from time to time, purchase up to 5,000,000 shares of its Common Stock. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or otherwise. The decision as to whether to purchase any shares and the timing of purchases, if any, will be based on the price of the Company’s Common Stock, general business and market conditions and other investment considerations and factors. The Share Buyback Program does not obligate the Company to purchase any shares and expires in 24 months. The Share Buyback Program may be terminated or amended by the Company’s board of directors in its discretion at any time. No shares were repurchased for the three months ended March 31, 2018.

 

22



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Under the Share Buyback Program we purchased an additional 136,905 shares during April 2018 at an average share price of $4.70.

 

Warrants

 

At March 31, 2018, there were a total of 34,980,163 warrants outstanding. As part of its IPO, Quinpario had issued 35,000,000 units including one share of common stock and one warrant. The warrants are traded on the OTC Bulletin Board as of March 31, 2018.

 

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

 

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

 

13.    Related-Party Transactions

 

Leasing Transactions

 

Certain operating companies lease their operating facilities from HOV RE, LLC and HOV Services Limited, which are affiliates through common interest held by Ex-Sigma 2 LLC, our largest stockholder. The rental expense for these operating leases was $0.2 million for the three months ended March 31, 2018 and none were incurred for the three months ended March 31, 2017.

 

Consulting Agreement

 

The Company receives services from Oakana Holdings, Inc. The Company and Oakana Holdings, Inc. are related through a family relationship between certain shareholders and the president of Oakana Holdings, Inc. The expense recognized for these services was approximately $0.1 million for the three months ended March 31, 2018 and no such expense was recognized for the three months ended March 31, 2017.

 

The Company receives consulting services from Shadow Pond, LLC. Shadow Pond, LLC is wholly owned and controlled by Vik Negi, our Executive Vice President Treasury and Business Affairs. The consulting arrangement was established to compensate Mr. Negi for his services to the Company prior to becoming an employee. The expense recognized for these services was approximately $0.1 million and $0.1 million for three months ended March 31, 2018 and 2017, respectively. We expect the consulting arrangement with Shadow Pond, LLC to terminate on April 1, 2018 and for Mr.Negi to continue to provide services as an employee of the Company.

 

Relationship with HandsOn Global Management

 

The Company incurred management fees to HandsOn Global Management (“HGM”), SourceHOV’s former owner, of $1.5 million for the three months ended March 31, 2017. The management agreement terminated in 2017 and there were no such fees for the three months ended March 31, 2018.

 

23



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Pursuant to a master agreement dated January 1, 2015 between Rule 14, LLC and SourceHOV, the Company incurs marketing fees to Rule 14, LLC, a portfolio company of HGM. Similarly, SourceHOV is party to ten master agreements with entities affiliated with HGM’s ventures portfolio, each of which were entered into during 2015 and 2016. Each master agreement provides SourceHOV with free use of technology and includes a reseller arrangement pursuant to which SourceHOV is entitled to sell these services to third parties. Any revenue earned by SourceHOV in such third-party sale is shared 75%/25% with each of HGM’s venture affiliates in favor of SourceHOV. The brands Zuma, Athena, Peri, BancMate, Spring, Jet, Teletype, CourtQ and Rewardio are part of the HGM ventures portfolio. SourceHOV has the license to use and resell such brands, as described therein. We incurred fees relating to these agreements of $0.2 million and $0.1 million for the three months ended March 31, 2018 and 2017, respectively.

 

Relationship with HOV Services, Ltd.

 

HOV Services, Ltd. provides the Company data capture and technology services. HOV Services, Ltd is an indirect equity holder of Ex-Sigma LLC. The expense recognized for these services was approximately $0.4 million for the three months ended March 31, 2018 and 2017 and is included in cost of revenue in the consolidated statements of operations.

 

Relationship with Apollo Global Management, LLC

 

The Company provides services to and receives services from certain Apollo affiliated companies. Funds managed by Apollo Global Management, LLC have the right to designate two of the Company’s directors. On November 18, 2014, Novitex Solutions, entered into a master services agreement with Management Holdings, an indirect wholly owned subsidiary of Apollo. Pursuant to this master services agreement, Novitex Solutions provides Management Holdings printer supplies and maintenance services, including toner maintenance, training, quarterly business review and printer procurement. We recognized revenue of approximately $0.1 million in our consolidated statements of operations from Apollo affiliated companies under this agreement for the three months ended March 31, 2018 and 2017.

 

On January 18, 2017, Novitex Solutions entered into a master purchase and professional services agreement with Caesars Enterprise Services, LLC (“Caesars”). Caesars is controlled by investment funds affiliated with Apollo. Pursuant to this master purchase and professional services agreement, Novitex Solutions provides managed print services to Caesars, including general equipment operation, supply management, support services and technical support. We recognized revenue of approximately $1.0 million in our consolidated statements of operations from Caesars under this master purchase and professional services agreement for the three months ended March 31, 2018.

 

On May 5, 2017, Novitex Solutions entered into a master services agreement with ADT LLC. ADT LLC is controlled by investment funds affiliated with Apollo. Pursuant to this master services agreement, Novitex Solutions provides ADT LLC with mailroom and onsite mail delivery services at an ADT LLC office location and managed print services, including supply management, equipment maintenance and technical support services. We recognized revenue of less than $0.1 million in our consolidated statements of operations from ADT LLC under this master services agreement for the three months ended March 31, 2018.

 

On July 20, 2017, Novitex Solutions entered into a master services agreement with Diamond Resorts Centralized Services Company. Diamond Resorts Centralized Services Company is controlled by investment funds affiliated with Apollo. Pursuant to this master services agreement, Novitex Solutions provides commercial print and promotional product procurement services to Diamond Resorts Centralized Services Company, including sourcing, inventory management and fulfillment services. The Company recognized revenue of $2.4 million and cost of revenue of $0.1 million from Diamond Resorts Centralized Services Company under this master services agreement during the three months ended March 31, 2018.

 

In April 2016, the Company’s subsidiary, Novitex Enterprise Solutions, Inc. (“Novitex Solutions”) entered into a master services agreement with Presidio Networked Solutions Group, LLC (“Presidio Group”), a wholly-owned subsidiary of Presidio, Inc., a portion of which is owned by affiliates of Apollo and with a common Apollo designated director. Pursuant to this master services agreement, Presidio Group provides Novitex Solutions with employees, subcontractors, and/or goods and services. For the three months ended March 31, 2018 there were related party expenses of $0.1 million for this service.

 

24



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

Payable Balances with Affiliates

 

Payable balances with affiliates as of March 31, 2018 and December 31, 2017 are as follows:

 

 

 

March 31,
2018

 

December 31,
2017

 

HOV Services, Ltd

 

$

410

 

$

286

 

Rule 14

 

 

37

 

158

 

HGM

 

 

13,420

 

13,689

 

Apollo affiliated company

 

 

303

 

312

 

Other

 

 

2

 

 

 

 

$

14,172

 

$

14,445

 

 

14.    Segment Information

 

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

 

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

 

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

 

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

 

The chief operating decision maker reviews operating segment revenue and gross profit. The Company does not allocate SG&A, depreciation and amortization, interest expense and sundry, net. The Company manages assets on a total company basis, not by operating segment, and therefore asset information and capital expenditures by operating segments are not presented.

 

 

 

Three months ended March 31, 2018

 

 

 

ITPS

 

HS

 

LLPS

 

Total

 

Revenue

 

311,937

 

58,632

 

22,598

 

393,167

 

Cost of revenue

 

245,173

 

34,956

 

13,663

 

293,792

 

Selling, general and administrative expenses

 

 

 

 

 

 

 

45,595

 

Depreciation and amortization

 

 

 

 

 

 

 

38,019

 

Related party expense

 

 

 

 

 

 

 

1,105

 

Interest expense, net

 

 

 

 

 

 

 

38,017

 

Sundry expense, net

 

 

 

 

 

 

 

(64

)

Other income, net

 

 

 

 

 

 

 

(3,328

)

Net loss before income taxes

 

 

 

 

 

 

 

$

(19,969

)

 

25



Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

Three months ended March 31, 2017

 

 

 

ITPS

 

HS

 

LLPS

 

Total

 

Revenue

 

135,797

 

59,078

 

23,385

 

218,260

 

Cost of revenue

 

91,599

 

37,828

 

14,281

 

143,708

 

Selling, general and administrative expenses

 

 

 

 

 

 

 

35,581

 

Depreciation and amortization

 

 

 

 

 

 

 

21,320

 

Related party expense

 

 

 

 

 

 

 

2,385

 

Interest expense, net

 

 

 

 

 

 

 

26,219

 

Sundry expense, net

 

 

 

 

 

 

 

2,724

 

Other income, net

 

 

 

 

 

 

 

 

Net loss before income taxes

 

 

 

 

 

 

 

$

(13,677

)

 

15. Subsequent Events

 

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

 

26



Table of Contents

 

ITEM 2.                                                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Forward Looking Statements

 

Certain statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report are not historical facts but are forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are accompanied by words such as “may”, “should”, “would”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “seem”, “seek”, “continue”, “future”, “will”, “expect”, “outlook” or other similar words, phrases or expressions. These forward-looking statements include statements regarding our industry, future events, the estimated or anticipated future results and benefits of the Business Combination, future opportunities for the combined company, and other statements that are not historical facts. These statements are based on the current expectations of Exela management and are not predictions of actual performance. These statements are subject to a number of risks and uncertainties regarding Exela’s businesses and actual results may differ materially. The factors that may affect our results include, among others: the impact of political and economic conditions on the demand for our services; the impact of a data or security breach; the impact of competition or alternatives to our services on our business pricing and other actions by competitors; our ability to address technological development and change in order to keep pace with our industry and the industries of our customers; the impact of terrorism, natural disasters or similar events on our business; the effect of legislative and regulatory actions in the United States and internationally; the impact of operational failure due to the unavailability or failure of third-party services on which we rely; the effect of intellectual property infringement; and other factors discussed in this quarterly report and our Annual Report on Form 10-K for the year ended December 31, 2017 (our “Annual Report”) under the heading “Risk Factors” and otherwise identified or discussed in this quarterly report. You should consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on such statements, which speak only as of the date of this quarterly report. It is impossible for us to predict new events or circumstances that may arise in the future or how they may affect us. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this quarterly report. We are not including the information provided on the websites referenced herein as part of, or incorporating such information by reference into, this quarterly report. In addition, forward-looking statements provide Exela’s expectations, plans or forecasts of future events and views as of the date of this quarterly report. Exela anticipates that subsequent events and developments will cause Exela’s assessments to change. These forward-looking statements should not be relied upon as representing Exela’s assessments as of any date subsequent to the date of this quarterly report.

 

Overview

 

We are a global provider of transaction processing solutions, enterprise information management, document management and digital business process services. Our technology-enabled solutions allow multi-national organizations to address critical challenges resulting from the massive amounts of data obtained and created through their daily global operations. Our solutions address the life cycle of transaction processing and enterprise information management, from enabling payment gateways and data exchanges across multiple systems, to matching inputs against contracts and handling exceptions, to ultimately depositing payments and distributing communications. We believe our process expertise,

 

27



Table of Contents

 

information technology capabilities and operational insights enable our clients’ organizations to more efficiently and effectively execute transactions, make decisions, drive revenue and profitability, and communicate critical information to their employees, customers, partners, and vendors.

 

History

 

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

 

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

 

Basis of Presentation

 

This analysis is presented on a consolidated basis. In addition, a description is provided of significant transactions and events that have an impact on the comparability of the results being analyzed. Due to our specific situation, the presented financial information for the quarter ended March 31, 2018 is only partially comparable to the financial information for the quarter ended March 31, 2017. Since SourceHOV was deemed the accounting acquirer in the Business Combination consummated on July 12, 2017, the presented financial information for the quarter ended March 31, 2017 reflects the financial information and activities of SourceHOV only. The presented financial information for the quarter ended March 31, 2018 includes the financial information and activities for SourceHOV and Novitex for the period January 1, 2018 to March 31, 2018.  This lack of comparability needs to be taken into account when reading the discussion and analysis of our results of operations and cash flows.

 

Our Segments

 

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

 

ITPS: Our largest segment, ITPS, provides a wide range of solutions and services designed to aid businesses in information capture, processing, and distribution to customers primarily in the financial services, commercial, public sector and legal industries. Our major customers include the top 10 U.S. banks, 9 of the top 10 U.S. insurance companies, 5 of the top U.S. telecom companies, over 40 utility companies, over 30 state and county departments, and over 80 government entities. Our ITPS offerings enable companies to increase availability of working capital, reduce turnaround times for application processes, increase regulatory compliance and enhance consumer engagement.

 

28



Table of Contents

 

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

 

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

 

Acquisitions

 

In July 2017, we completed the Business Combination. SourceHOV was deemed to be the accounting acquirer, and is a leading provider of platform-based enterprise information management and transaction processing solutions primarily for the healthcare, banking and financial services, commercial, public sector and legal industries.  Through the acquisition of SourceHOV and Novitex, we expect to realize revenue synergies, leverage brand awareness, strengthen margins, generate greater free cash flow, expand the existing Novitex sales channels, and increase utilization of the existing workforce. We anticipate opportunities for growth through the ability to leverage additional future services and capabilities.

 

Prior to the Business Combination, SourceHOV transformed into a multi-industry solution provider and acquired key technology through the acquisition of TransCentra, Inc. (‘‘TransCentra’’), a provider of integrated outsourced billing, remittance processing and imaging software and consulting services. The addition of TransCentra increased SourceHOV’s footprint in the remittance transaction processing and presentment area, expanded its mobile banking offering and enabled significant cross-selling and up-selling opportunities.

 

On April 10, 2018 Exela announced the acquisition of Asterion International Group (“Asterion”), a well-established provider of technology driven business process outsourcing, document management and business process automation (BPA) across Europe. Asterion currently serves over 250 key customers in Europe from 13 operating locations and 30 customer sites. The purchase price was approximately $19.5 million. The acquisition comes with minimal customer overlap and is strategic to expand Exela’s pro forma combined European business to over $200 million in annual revenue. This acquisition will not only enable Asterion’s customers to access Exela’s full suite of BPA solutions but also strategically position Exela to expand its existing revenue base through a broader portfolio of offerings with a larger European presence.

 

Revenues

 

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

 

People

 

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

 

Costs associated with our employees represent the most significant expense for our business. We incurred personnel costs of $167.1 million and $95.6 million for the three months ended March 31, 2018

 

29



Table of Contents

 

and 2017, respectively. The majority of our personnel costs are variable and are incurred only while we are providing our services.

 

Key Performance Indicators

 

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

 

·                  Revenue by segment;

 

·                  EBITDA; and

 

·                  Adjusted EBITDA

 

Revenue

 

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

 

EBITDA and Adjusted EBITDA

 

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

 

30



Table of Contents

 

Results of Operations

 

Three Months Ended March 31, 2018 compared to Three Months Ended March 31, 2017:

 

 

 

Three Months ended March 31,

 

 

 

 

 

 

 

2018

 

2017

 

Change

 

% Change

 

Revenue:

 

 

 

 

 

 

 

 

 

ITPS

 

$

311,937

 

$

135,797

 

$

176,140

 

129.71

%

HS

 

58,632

 

59,078

 

(446

)

-0.75

%

LLPS

 

22,598

 

23,385

 

(787

)

-3.37

%

Total revenue

 

393,167

 

218,260

 

174,907

 

80.14

%

Cost of revenues:

 

 

 

 

 

 

 

 

 

ITPS

 

245,173

 

91,599

 

153,574

 

167.66

%

HS

 

34,956

 

37,828

 

(2,872

)

-7.59

%

LLPS

 

13,663

 

14,281

 

(618

)

-4.33

%

Total cost of revenues

 

293,792

 

143,708

 

150,084

 

104.44

%

Selling, general and administrative expenses

 

45,595

 

35,581

 

10,014

 

28.14

%

Depreciation and amortization

 

38,019

 

21,320

 

16,699

 

78.33

%

Related party expense

 

1,105

 

2,385

 

(1,280

)

-53.67

%

Operating income

 

14,656

 

15,266

 

(610

)

-4.00

%

Interest expense, net

 

38,017

 

26,219

 

11,798

 

45.00

%

Sundry expense/(income), net

 

(64

)

2,724

 

(2,788

)

-102.35

%

Other income, net

 

(3,328

)

 

(3,328

)

 

Net loss before taxes

 

(19,969

)

(13,677

)

(6,292

)

46.00

%

Income tax (expense) benefit

 

(4,025

)

(2,004

)

(2,021

)

100.85

%

Net loss

 

(23,994

)

(15,681

)

(8,313

)

53.01

%

 

Revenue

 

The increase in total revenues was primarily related to the acquisition of Novitex in July 2017. Our ITPS, HS, and LLPS segments constituted 79.3%, 14.9%, and 5.7% of total revenue, respectively, for the three months ended March 31, 2018, compared to 62.2%, 27.1%, and 10.7%, respectively, for the three months ended March 31, 2017. The revenue changes by reporting segment were as follows:

 

ITPS—The increase was primarily attributable to the acquisition of Novitex in 2017, which contributed $174.1 million, or 98.9% of the increase.

 

HS—For the three months ended March 31, 2018 compared to the three months ended March 31, 2017 the nature and amounts of revenues remained materially consistent.

 

LLPS—For the three months ended March 31, 2018 compared to the three months ended March 31, 2017 the nature and amounts of revenues remained materially consistent.

 

Cost of Revenue

 

The increase in total cost of revenue was primarily related to the acquisition of Novitex in July 2017. The increase was partially offset by decreases in the HS and LLPS segments. The cost of revenue changes by operating segment was as follows:

 

31



Table of Contents

 

ITPS—The increase was primarily attributable to the acquisition of Novitex in 2017, which contributed approximately $150.4 million, or 97.9% of the increase.

 

HS—The decrease was primarily driven by cost saving synergies.

 

LLPS—The decrease was primarily attributable to a corresponding decrease in revenues.

 

Selling, General and Administrative Expenses (“SG&A”)

 

The increase was primarily attributable to the acquisition of Novitex in 2017, which contributed $9.5 million in expense for the three months ended March 31, 2018.

 

Depreciation & Amortization

 

The increase was primarily attributable to accelerated amortization of Novitex and TransCentra trademarks resulting in higher amortization expense.

 

Related Party Expenses

 

The decrease was primarily attributable the termination of the management agreement with Hands on Global Management resulting in lower management fees paid of $1.5 million.

 

Interest Expense

 

The increase was primarily attributable to the issuance of new debt in conjunction with the Business Combination.

 

Sundry Expense

 

The decrease was attributable to foreign currency transaction losses associated with exchange rate fluctuations.

 

Other Income

 

The increase is primarily attributable to an interest rate swap entered into in 2017. The interest rate swap was not designated as a hedge. As such, changes in the fair value of the derivative of $3.3 million for the quarter ended March 31, 2018 were recorded directly in earnings.

 

Income Tax (Expense) Benefit

 

We had income tax expense of $4.0 million for the three months ended March 31, 2018 compared to $2.0 million for the three months ended March 31, 2017. The change in the income tax expense was primarily attributable to our change in judgment related to the realizability of certain deferred tax assets. The change in the effective tax rate for the three months ended March 31, 2018 resulted from permanent tax adjustments and valuation allowances against disallowed interest expense deferred tax assets that are not more-likely-than-not to be realized.

 

Other Financial Information (Non-GAAP Financial Measures)

 

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus taxes, interest expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus optimization and restructuring charges, including severance and retention expenses; transaction and integrations costs; other non-cash charges, including non-cash

 

32



Table of Contents

 

compensation, (gain) or loss from sale or disposal of assets, and impairment charges; and management fees and expenses.

 

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

 

Note Regarding Non-GAAP Financial Measures

 

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

 

The following tables present a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the three months ended March 31, 2018 and 2017:

 

 

 

 

Three months ended March 31,

 

 

 

2018

 

2017

 

Net Loss

 

$

(23,994

)

$

(15,681

)

Taxes

 

4,025

 

2,004

 

Interest Expense

 

38,017

 

26,219

 

Depreciation and Amortization

 

38,019

 

21,320

 

EBITDA

 

56,067

 

33,862

 

Optimization and Restructuring expenses (1) 

 

14,513

 

4,337

 

Transaction related costs (2) 

 

1,057

 

5,066

 

Non-cash equity compensation (3) 

 

959

 

310

 

Other non-cash charges (4) 

 

 

75

 

Loss on sale of of assets

 

299

 

 

Non-cash gain on sale of Meridian (5)

 

 

(251

)

Management, Board Fees and expenses (6) 

 

 

2,060

 

Gain/Loss on Derivative Instruments

 

(3,328

)

 

Adjusted EBITDA

 

69,567

 

45,459

 

 


1.     Adjustment represents net salary and benefits associated with positions that are part of the on-going savings initiatives including severance, retention bonuses, and related fees and expenses. Additionally, the adjustment includes charges incurred by us to terminate existing lease and vendor contracts as part of the on-going savings initiatives.

 

33



Table of Contents

 

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

3.              Represents the non-cash charges related to restricted stock units granted by Ex-Sigma, LLC to our employees that vested during the year.

4.              Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase accounting.

5.              Represents a gain recognized on the disposal of Meridian Consulting Group, LLC.

6.              Amount represents management fees paid to HGM and TransCentra’s prior owner, Board of Directors fees and corresponding travel, and other expenses (e.g., rating agency fees, chargebacks) which are not expected to continue on a go-forward basis.

 

Three months ended March 31, 2018 compared to the Three Months ended March 31, 2017

 

EBITDA and Adjusted EBITDA

 

EBITDA was $56.1 million for the three months ended March 31, 2018 compared to $33.9 million for the three months ended March 31, 2017. Adjusted EBITDA was $69.6 million for the three months ended March 31, 2018 compared to $45.5 million for the three months ended March 31, 2017. The increase in EBITDA was primarily due to a higher net loss amount and increased optimization and restructuring expenses for the three months ended March 31, 2018 resulting from the acquisition of Novitex in 2017.

 

Liquidity and Capital Resources

 

Overview

 

Our primary source of liquidity is principally cash generated from operating activities supplemented as necessary on a short-term basis by borrowings against our senior secured revolving credit facility. We believe our current level of cash and short-term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business.

 

We currently expect to spend approximately $40 to $45 million on total capital expenditures over the next twelve months. We believe that our operating cash flow and available borrowings under our credit facility will be sufficient to fund our operations for at least the next twelve months.

 

At March 31, 2018, cash and cash equivalents totaled $26.9 million and we had availability of $79.4 million under our senior secured revolving credit facility.

 

34



Table of Contents

 

Cash Flows

 

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

 

 

 

Three months ended March 31,