Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  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 November 5, 2018, the registrant had 151,648,643 shares of Common Stock outstanding.

 

 

 


Table of Contents

 

Exela Technologies, Inc.

 

Form 10-Q

 

For the quarterly period ended September 30, 2018

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

1

 

 

Condensed Consolidated Financial Statements

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

1

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

2

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017

3

 

 

Condensed Consolidated Statements of Stockholders’ Deficit for the nine months ended September 30, 2018 and 2017

4

 

 

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

30

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

43

 

 

Item 4. Controls and Procedures

43

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

44

 

 

Item 1A. Risk Factors

45

 

 

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

46

 

 

Item 3. Defaults Upon Senior Securities

46

 

 

Item 4. Mine Safety Disclosures

46

 

 

Item 5. Other Information

46

 

 

Item 6. Exhibits

47

 


Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of September 30, 2018 and December 31, 2017

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

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

40,692

 

$

39,000

 

Restricted cash

 

8,955

 

42,489

 

Accounts receivable, net of allowance for doubtful accounts of $4,427 and $3,725, respectively

 

253,986

 

229,704

 

Inventories, net

 

16,122

 

11,922

 

Prepaid expenses and other current assets

 

26,933

 

24,596

 

Total current assets

 

346,688

 

347,711

 

Property, plant and equipment, net

 

131,156

 

132,908

 

Goodwill

 

749,762

 

747,325

 

Intangible assets, net

 

398,280

 

464,984

 

Deferred income tax assets

 

14,810

 

9,019

 

Other noncurrent assets

 

21,650

 

12,891

 

Total assets

 

$

1,662,346

 

$

1,714,838

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

90,673

 

$

81,263

 

Related party payables

 

10,756

 

14,445

 

Income tax payable

 

5,422

 

3,612

 

Accrued liabilities

 

41,397

 

49,383

 

Accrued compensation and benefits

 

54,975

 

46,925

 

Accrued interest

 

23,845

 

55,102

 

Customer deposits

 

39,419

 

31,656

 

Deferred revenue

 

18,084

 

12,709

 

Obligation for claim payment

 

52,889

 

42,489

 

Current portion of capital lease obligations

 

15,926

 

15,611

 

Current portion of long-term debt

 

20,062

 

20,565

 

Total current liabilities

 

373,448

 

373,760

 

Long-term debt, net of current maturities

 

1,307,884

 

1,276,094

 

Capital lease obligations, net of current maturities

 

22,945

 

25,958

 

Pension liability

 

30,376

 

25,496

 

Deferred income tax liabilities

 

2,115

 

5,362

 

Long-term income tax liability

 

3,470

 

3,470

 

Other long-term liabilities

 

15,307

 

14,704

 

Total liabilities

 

$

1,755,545

 

$

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; 152,692,140 shares issued and 151,648,643 outstanding at September 30, 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 share; 20,000,000 shares authorized; 4,569,233 shares issued and outstanding at September 30, 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; 1,043,497 shares at September 30, 2018 and 49,300 shares at December 31, 2017

 

(5,148

)

(249

)

Equity based compensation

 

38,601

 

34,085

 

Accumulated deficit

 

(594,162

)

(514,628

)

Accumulated other comprehensive loss:

 

 

 

 

 

Foreign currency translation adjustment

 

(3,833

)

(194

)

Unrealized pension actuarial losses, net of tax

 

(10,691

)

(11,054

)

Total accumulated other comprehensive loss

 

(14,524

)

(11,248

)

Total stockholders’ deficit

 

(93,199

)

(10,006

)

Total liabilities and stockholders’ deficit

 

$

1,662,346

 

$

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 and Nine Months ended September 30, 2018 and 2017

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

(Unaudited)

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Revenue

 

$

383,030

 

$

338,393

 

$

1,186,579

 

$

766,035

 

Cost of revenue (exclusive of depreciation and amortization)

 

295,936

 

255,116

 

903,682

 

539,242

 

Selling, general and administrative expenses

 

44,913

 

102,048

 

137,231

 

172,626

 

Depreciation and amortization

 

35,041

 

28,052

 

109,428

 

70,779

 

Related party expense

 

759

 

26,892

 

3,267

 

31,733

 

Operating income (loss)

 

6,381

 

(73,715

)

32,971

 

(48,345

)

Other expense (income), net:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

38,339

 

37,652

 

114,883

 

91,740

 

Loss on extinguishment of debt

 

1,067

 

35,512

 

1,067

 

35,512

 

Sundry expense (income), net

 

(2,571

)

563

 

(4,961

)

2,960

 

Other income, net

 

(781

)

 

(4,813

)

 

Net loss before income taxes

 

(29,673

)

(147,442

)

(73,205

)

(178,557

)

Income tax benefit (expense)

 

733

 

37,002

 

(4,911

)

32,924

 

Net loss

 

(28,940

)

(110,440

)

(78,116

)

(145,633

)

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

 

 

(16,375

)

 

(16,375

)

Cumulative dividends for Series A Preferred Stock

 

(914

)

(1,225

)

(2,742

)

(1,225

)

Net loss attributable to common stockholders

 

$

(29,854

)

$

(128,040

)

$

(80,858

)

$

(163,233

)

Net loss per share - basic and diluted

 

$

(0.20

)

$

(2.08

)

$

(0.53

)

$

(3.98

)

 

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

 

2


Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the Three and Nine Months ended September 30, 2018 and 2017

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

(Unaudited)

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net loss

 

$

(28,940

)

$

(110,440

)

$

(78,116

)

$

(145,633

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(2,492

)

233

 

(3,639

)

1,256

 

Unrealized pension actuarial gains (losses), net of tax

 

140

 

(536

)

363

 

(1,500

)

Comprehensive loss

 

$

(31,292

)

$

(110,743

)

$

(81,392

)

$

(145,877

)

 

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

 

3


Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

For the Nine Months ended September 30, 2018 and 2017

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive
Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Unrealized Pension

 

 

 

 

 

 

 

Common Stock

 

Preferred Stock

 

Treasury Stock

 

Additional Paid-in

 

Equity-based

 

Translation

 

Actuarial Losses,

 

Accumulated

 

Total Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Compensation

 

Adjustment

 

net of tax

 

Deficit

 

Deficit

 

Balances at December 31, 2016, effect of reverse acquisition (refer to Note 4)

 

64,024,557

 

$

6

 

 

$

 

 

$

 

$

(57,395

)

$

27,342

 

$

(3,547

)

$

(12,339

)

$

(293,968

)

$

(339,901

)

Net loss January 1 to September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(145,633

)

(145,633

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,446

 

 

 

 

 

 

 

4,446

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,256

 

 

 

 

 

1,256

 

Net realized pension actuarial gains, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,500

)

 

 

(1,500

)

Merger recapitalization

 

16,575,443

 

2

 

 

 

 

 

 

 

 

 

20,546

 

 

 

 

 

 

 

 

 

20,548

 

Shares issued to acquire Novitex (refer to Note 3)

 

30,600,000

 

3

 

 

 

 

 

 

 

 

 

244,797

 

 

 

 

 

 

 

 

 

244,800

 

Issuance/Conversion of Quinpario shares

 

12,093,331

 

1

 

 

 

 

 

 

 

 

 

22,358

 

 

 

 

 

 

 

 

 

22,359

 

Sale of common shares at July 12, 2017

 

18,757,942

 

3

 

 

 

 

 

 

 

 

 

130,860

 

 

 

 

 

 

 

 

 

130,863

 

Issuance of Series A Preferred Stock

 

 

 

 

 

9,194,233

 

1

 

 

 

 

 

73,553

 

 

 

 

 

 

 

 

 

73,554

 

Shares issued for advisory services and underwriting fees

 

3,609,375

 

 

 

 

 

 

 

 

 

 

 

28,573

 

 

 

 

 

 

 

 

 

28,573

 

Conversion of Series A Preferred Stock to common shares

 

3,667,803

 

 

 

(3,000,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued for HandsOn Global Management contract termination fee

 

1,250,000

 

 

 

 

 

 

 

 

 

 

 

10,000

 

 

 

 

 

 

 

 

 

10,000

 

Equity issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,649

)

 

 

 

 

 

 

 

 

(7,649

)

Adjustment for beneficial conversion feature of Series A preferred stock (refer to Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

16,375

 

 

 

 

 

 

 

(16,375

)

 

Balances at September 30, 2017

 

150,578,451

 

$

15

 

6,194,233

 

$

1

 

 

$

 

$

482,018

 

$

31,788

 

$

(2,291

)

$

(13,839

)

$

(455,976

)

$

41,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive
Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

Unrealized

 

 

 

 

 

 

 

Common Stock

 

Preferred Stock

 

Treasury Stock

 

Additional Paid-in

 

Equity-based

 

Translation

 

Pension Actuarial

 

Accumulated

 

Total Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Compensation

 

Adjustment

 

Losses, net of tax

 

Deficit

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,418

)

(1,418

)

Net loss January 1 to September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(78,116

)

(78,116

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,260

 

 

 

 

 

 

 

4,260

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,639

)

 

 

 

 

(3,639

)

Net realized pension actuarial gains, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

363

 

 

 

363

 

Stock options exercised

 

126,922

 

 

 

 

 

 

 

 

 

 

 

 

 

256

 

 

 

 

 

 

 

256

 

Preferred shares converted to common

 

1,986,767

 

 

 

(1,625,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Repurchased

 

(994,197

)

 

 

 

 

 

 

994,197

 

(4,899

)

 

 

 

 

 

 

 

 

 

 

(4,899

)

Balances at September 30, 2018

 

151,648,643

 

$

15

 

4,569,233

 

$

1

 

1,043,497

 

$

(5,148

)

$

482,018

 

$

38,601

 

$

(3,833

)

$

(10,691

)

$

(594,162

)

$

(93,199

)

 

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

 

4


Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

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

(Unaudited)

 

 

 

Nine Months ended September 30,

 

 

 

2018

 

2017

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(78,116

)

$

(145,633

)

Adjustments to reconcile net loss

 

 

 

 

 

Depreciation and amortization

 

109,428

 

70,779

 

Fees paid in stock

 

 

23,875

 

HGM Contract Termination Fee paid in stock

 

 

10,000

 

Original issue discount and debt issuance cost amortization

 

8,062

 

9,684

 

Provision (recovery) for doubtful accounts

 

2,470

 

451

 

Deferred income tax benefit

 

(3,689

)

(37,186

)

Share-based compensation expense

 

4,516

 

4,446

 

Foreign currency remeasurement

 

(2,040

)

777

 

Gain on sale of Meridian

 

 

(588

)

Loss on sale of assets

 

1,835

 

508

 

Fair value adjustment for interest rate swap

 

(5,456

)

 

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

 

 

 

 

 

Accounts receivable

 

(6,374

)

(2,784

)

Prepaid expenses and other assets

 

(5,770

)

189

 

Accounts payable and accrued liabilities

 

(23,457

)

48,745

(1)

Related party payables

 

(3,689

)

4,936

 

Net cash used in operating activities

 

(2,280

)

(11,801

)(1)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(14,077

)

(7,001

)

Additions to internally developed software

 

(3,080

)

(6,348

)

Additions to outsourcing contracts

 

(5,427

)

(8,574

)

Proceeds from sale of Meridian

 

 

4,582

 

Cash acquired in Quinpario reverse merger

 

 

91

 

Cash paid in acquisition, net of cash received

 

(6,513

)

(423,428

)

Proceeds on sale of assets

 

1,095

 

11

 

Net cash used in investing activities

 

(28,002

)

(440,667

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Change in bank overdraft

 

 

(210

)

Loss on extinguishment of debt

 

1,067

 

35,512

(2)

Proceeds from issuance of stock

 

 

231,448

 

Repurchases of common stock

 

(4,899

)

 

Proceeds from financing obligations

 

3,068

 

3,040

 

Contribution from shareholders

 

 

20,548

 

Proceeds from credit facility

 

30,000

 

1,320,500

 

Retirement of previous credit facilities

 

 

(1,055,736

)

Cash paid for debt issuance costs and debt discounts

 

(1,094

)

(39,837

)

Cash paid for equity issue costs

 

(7,500

)

(149

)

Borrowings from revolver and swing-line loan

 

30,000

 

72,600

 

Repayments from revolver and swing line loan

 

(30,000

)

(72,500

)

Principal payments on long-term obligations

 

(21,647

)

(32,647

)

Net cash provided by (used in) financing activities

 

(1,005

)

482,569

 

Effect of exchange rates on cash

 

(554

)

335

 

Net increase (decrease) in cash and cash equivalents

 

(31,842

)

30,436

(1)

Cash, restricted cash, and cash equivalents

 

 

 

 

 

Beginning of period

 

81,489

 

34,253

(1)

End of period

 

$

49,647

 

$

64,689

(1)

 

 

 

 

 

 

Supplemental cash flow data:

 

 

 

 

 

Income tax payments, net of refunds received

 

$

5,296

 

$

2,673

 

Interest paid

 

136,396

 

60,347

 

Noncash investing and financing activities:

 

 

 

 

 

Assets acquired through capital lease arrangements

 

9,318

 

2,080

 

Leasehold improvements funded by lessor

 

1,565

 

74

 

Issuance of common stock as consideration for Novitex

 

 

244,800

 

Accrued capital expenditures

 

1,994

 

3,512

 

Accretion of dividend equivalents

 

 

16,375

 

 

Note: Amounts may not foot due to rounding.

 


(1)         Balances for these items differ from previously reported balances due to the adoption of ASU no. 2016-18, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230), see Note 2.

(2)         Exela reclassified ‘Loss on extinguishment of debt’ from operating to financing activities due to the adoption of ASU no. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, see Note 2.

 

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

 

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 or unless otherwise noted)

(Unaudited)

 

1.                            General

 

These condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements as of and for the year ended December 31, 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 the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”) was calculated based on the if-converted method. Diluted EPS excludes all dilutive potential of shares of Common Stock if their effect is anti-dilutive.

 

For the three and nine months ended September 30, 2018, outstanding shares of the 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 was originally incorporated July 12, 2017 as a special purpose acquisition company under the name Quinpario Acquisition Corp 2 (“Quinpario”). The Company has not included the effect of 35,000,000 warrants sold in the Quinpario Initial Public Offering (“IPO”) in the calculation of net income (loss) per share. Warrants are considered anti-dilutive and excluded when the exercise price exceeds the average market value of the Company’s Common Stock price during the applicable period.

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net loss attributable to common stockholders (A)

 

$

(29,854

)

$

(128,040

)

$

(80,858

)

$

(163,233

)

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

 

151,663,670

 

61,584,175

 

152,010,290

 

41,018,724

 

Loss Per Share:

 

 

 

 

 

 

 

 

 

Basic and diluted (A/B)

 

$

(0.20

)

$

(2.08

)

$

(0.53

)

$

(3.98

)

 

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 or unless otherwise noted)

(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 ASU 2014-09, 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. The Company 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 September 30, 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 reclassified a loss on extinguishment of debt from operating activities to financing activities in the third quarter of 2017 in the currently presented financial statements and the to be filed annual financial statements ended December 31, 2018. The adoption had no impact on the Company’s financial position, results of operations, and cash flows for the quarter ended September 30, 2018.

 

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 nine months ended September 30, 2018 and 2017. Adopting the standard increased the net change in cash and cash equivalents, which is reflected within operating cash flows, by $11.4 million for the nine months ended September 30, 2017. Total Cash and cash equivalents for the Beginning of period and End of period September 30, 2017 increased $25.9 million and $37.3 million due to the inclusion of restricted cash.

 

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.

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

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 has a significant amount of facilities and equipment leases and 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 January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Topic 350). Current guidance requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this Update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this ASU addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity,

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

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.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles, Goodwill, and Other - Internal Use Software (Subtopic 350-40): Customer’s accounting for implementation costs incurred in a Cloud Computing Arrangement that is a service contract. The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

 

3.                            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 extended payment terms, as payment is received shortly after goods are delivered or services are provided.

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

Nature of Services

 

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

 

Disaggregation of Revenues

 

The following tables disaggregate revenue from contracts by geographic region and by segment for the three and nine months ended September 30, 2018, and 2017:

 

 

 

Three months ended September 30,

 

 

 

2018

 

2017

 

 

 

ITPS

 

HS

 

LLPS

 

ITPS

 

HS

 

LLPS

 

United States

 

$

248,055

 

$

56,776

 

$

18,941

 

$

223,555

 

$

56,405

 

$

21,969

 

Europe

 

52,602

 

 

 

30,505

 

 

 

Other

 

6,656

 

 

 

5,959

 

 

 

Total

 

$

307,313

 

$

56,776

 

$

18,941

 

$

260,019

 

$

56,405

 

$

21,969

 

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

 

 

ITPS

 

HS

 

LLPS

 

ITPS

 

HS

 

LLPS

 

United States

 

$

782,870

 

$

171,722

 

$

65,476

 

$

427,675

 

$

173,548

 

$

66,930

 

Europe

 

146,242

 

 

 

89,736

 

 

 

Other

 

20,269

 

 

 

8,146

 

 

 

Total

 

$

949,381

 

$

171,722

 

$

65,476

 

$

525,557

 

$

173,548

 

$

66,930

 

 

Contract Balances

 

The following table presents contract assets and contract liabilities recognized at September 30, 2018 and December 31, 2017:

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

Accounts receivable, net

 

$

253,986

 

$

229,704

 

Deferred revenues

 

18,322

 

13,717

 

Costs to obtain and fulfill a contract

 

19,902

 

22,929

 

Customer deposits

 

39,419

 

31,656

 

 

Accounts receivable, net includes $37.7 million and $27.9 million as of September 30, 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 maintenance contracts or other service contracts where we received payments for upfront conversions or implementation activities which do not transfer a service to the customer but rather are used in fulfilling the related performance obligations that transfer over time. The advance consideration received from customers is deferred over the contract term. We recognized revenue of $12.1 million during the nine months ended September 30, 2018 that had been deferred as of December 31, 2017.

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

Costs incurred to obtain and fulfill contracts are deferred and expensed on a straight-line basis over the estimated benefit period. We recognized $7.3 million of amortization for these costs in the first nine months 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 nine months ended September 30, 2018.

 

Performance Obligations

 

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

 

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

 

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

 

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

 

Transaction Price Allocated to the Remaining Performance Obligations

 

In accordance with optional exemptions available under ASC 606, we did not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less, and (2) contracts for which variable consideration relates entirely to an unsatisfied performance obligation, which comprise the majority of our contracts. We have certain non-cancellable contracts where we receive a fixed monthly fee in exchange for a series of distinct services that are substantially the same

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

and have the same pattern of transfer over time, with the corresponding remaining performance obligations as of September 30, 2018 in each of the future periods below:

 

Estimated Remaining Fixed Consideration for Unsatisfied Performance Obligations

 

 

 

 

2018

 

$

11,894

 

2019

 

35,726

 

2020

 

19,939

 

2021

 

11,385

 

2022

 

5,556

 

2023 and thereafter

 

2,299

 

Total

 

$

86,799

 

 

4.                            Business Combinations and Acquisitions

 

Novitex

 

On July 12, 2017, the Company consummated its business combination with SourceHOV Holdings, Inc. (“SourceHOV”) and Novitex Holdings, Inc. (“Novitex”, the “Novitex Business Combination”) pursuant to the Business Combination Agreement and Consent, Waiver and Amendment to the Novitex Business Combination Agreement, dated February 21, 2017 and June 15, 2017. In connection with the Novitex Business Combination, the Company acquired debt facilities and issued notes totaling $1.4 billion (refer to Note 6 — 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 Novitex Business Combination. Immediately following the Novitex 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 predominant 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 following table summarizes the consideration paid for Novitex and the fair value of the assets acquired and liabilities assumed at the acquisition date on July 12, 2017:

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

Assets Acquired:

 

 

 

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 identifiable assets acquired

 

$

831,714

 

Liabilities Assumed:

 

 

 

Accounts payable

 

$

(29,444

)

Short-term borrowings and current portion of long term debt

 

(11,335

)

Accrued liabilities

 

(30,432

)

Advanced billings and customer deposits

 

(18,926

)

Long term debt

 

(15,704

)

Deferred taxes

 

(46,991

)

Other liabilities

 

(2,226

)

Total liabilities assumed

 

$

(155,058

)

Total Consideration

 

$

676,656

 

 

The identifiable intangible assets include customer relationships, non-compete agreements, internally developed software, and 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.

 

 

 

Weighted Average
Useful Life (in years)

 

Fair Value

 

Trademark and trade name - Novitex

 

9.5

 

$

18,000

 

Customer relationships

 

16.0

 

230,000

 

Inernally developed software - Connect Platform

 

5.0

 

1,710

 

Non-compete agreements

 

1.0

 

1,350

 

 

 

 

 

$

251,060

 

 

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

 

Through the acquisition of Novitex, we continue to pursue revenue synergies, leverage brand awareness, generate greater free cash flow, expand the existing Novitex sales channels, and increase utilization of the existing workforce. The Company also anticipates continued opportunity for growth through the ability to leverage additional future services and capabilities. Our anticipation of synergies and leveraging existing brand awareness, among other factors, 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. Approximately $14.0 million of the

 

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 or unless otherwise noted)

(Unaudited)

 

goodwill recorded was tax deductible, which was carried over from the tax basis of the seller. Since the acquisition date of July 12, 2017, $292.1 million of revenue and $17.5 million of net loss were included in our consolidated revenues and net loss, respectively, for Novitex for the year ended December 31, 2017.  For the three and nine months ended September 30, 2018 Exela recognized $162.6 million and $512.7 million in revenue related to Novitex in the Consolidated Statement of Operations. 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 Novitex Business Combination as of December 31, 2017, excluding contract cancellation and advising fees to HandsOn Global Management (“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 nine months ended September 30, 2018.

 

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 nine months ended September 30, 2018 and $4.7 million were incurred during the nine months ended September 30, 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. In connection with the closing of the Novitex Business Combination in the third quarter of 2017 the Company recorded severance expense in the amount of $5.3 million related to the impacted executives and $0.1 million related to other terminations in the statement of operations. Severance expense was $0.4 million for the nine months ended September 30, 2018.

 

Asterion

 

On April 10, 2018, Exela completed the acquisition of Asterion International Group (“Asterion,” the “Asterion Business Combination”), a well-established provider of technology driven business process outsourcing, document management and business process automation across Europe. The purchase price was approximately $19.5 million. The acquisition comes with minimal customer overlap and is strategic to expanding Exela’s European business.

 

The acquired assets and assumed liabilities of Asterion were recorded at their estimated fair values. The purchase price allocation for Asterion is preliminary for estimates for items such as income taxes 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 Asterion and the preliminary fair value of the assets acquired and liabilities assumed at the acquisition date on April 10, 2018:

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

Assets Acquired:

 

 

 

Cash and cash equivalents

 

$

15,323

 

Accounts receivable

 

18,123

 

Other current assets

 

2,282

 

Inventories, net

 

1,137

 

Property, plant, and equipment, net

 

4,747

 

Deferred income tax assets

 

6,317

 

Other noncurrent assets

 

522

 

Intangible assets, net

 

3,525

 

Goodwill

 

1,493

 

Total identifiable assets acquired

 

$

53,469

 

Liabilities Assumed:

 

 

 

Accounts payable

 

$

(6,583

)

Income tax payable

 

(5

)

Accrued liabilities

 

(7,718

)

Accrued compensation and benefits

 

(7,079

)

Deferred revenue

 

(880

)

Current portion of long term debt

 

(664

)

Current capital lease obligations

 

(331

)

Customer deposits

 

(462

)

Pension liability

 

(7,134

)

Other long-term liabilities

 

(1,324

)

Deferred income tax liabilities

 

(1,171

)

Capital lease obligations, net of current maturities

 

(650

)

Total liabilities assumed

 

$

(34,001

)

Total Consideration

 

$

19,468

 

 

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

 

 

 

Weighed Average
Useful Life (in years)

 

Fair Value

 

Customer Relationships

 

9.5

 

$

3,516

 

 

Through the acquisition of Asterion, we expect to leverage brand awareness, strengthen margins, and expand the existing Asterion sales channels. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Asterion’s identifiable net assets assumed, and as a result, the Company has recorded goodwill in connection with this acquisition. For the three and nine months ended September 30, 2018 Exela recognized $18.9 million and $39.8 million in revenue related to Asterion in the Consolidated Statement of Operations.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

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:

 

 

 

September 30, 2018

 

 

 

Gross Carrying
Amount (a)

 

Accumulated
Amortization

 

Intangible Assets, Net

 

Customer relationships

 

$

507,950

 

$

(176,967

)

$

330,983

 

Developed technology

 

89,053

 

(85,096

)

3,957

 

Trade names

 

13,100

 

(2,326

)

10,774

 

Costs to obtain and fulfill a contract

 

44,406

 

(24,504

)

19,902

 

Internally developed software

 

32,518

 

(5,343

)

27,175

 

Trademarks

 

23,379

 

(17,890

)

5,489

 

Non compete agreements

 

1,350

 

(1,350

)

 

Intangibles, net

 

$

711,756

 

$

(313,476

)

$

398,280

 

 

 

 

December 31, 2017

 

 

 

Gross Carrying
Amount (a)

 

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

 

Costs to obtain and fulfill a contract

 

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 intangible assets acquired in business combinations

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

 

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

 

$

2,541

(d)

 

 

$

(104

)

568,652

 

HC

 

86,786

 

 

 

 

 

 

 

86,786

 

LLPS

 

94,324

 

 

 

 

 

 

 

94,324

 

Balance as of September 30, 2018

 

$

747,325

 

$

2,541

 

$

 

$

(104

)

$

749,762

 

 


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

(b) Addition to goodwill is due to the Novitex Business Combination. Refer to Note 4.

(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.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

(d) Addition to goodwill due to the Asterion Business Combination (Refer to Note 4) and an immaterial acquisition in the third quarter.

 

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 original issue discount (“OID”) of $22.5 million (the “Notes”).  The Notes are guaranteed by certain subsidiaries of the Company. The Notes bear interest at a rate of 10.0% per year.  The Company pays interest on the Notes on January 15 and July 15 of each year, commencing on January 15, 2018.  The Notes will mature on July 15, 2023.

 

Debt Refinancing

 

Upon the closing of the Novitex 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 in the third quarter of 2017. The Company wrote off $30.5 million of the unamortized issuance costs and discounts associated with the retirement of SourceHOV’s credit facilities during the third quarter of 2017. 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 in the third quarter of 2017.

 

The proceeds of the new debt financing were also used to pay fees and expenses incurred in connection with the Novitex 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 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 September 30, 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

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

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.

 

Term Loan Repricing

 

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

 

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

 

The Repricing Term Loans will bear interest at a rate per annum of, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.00% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.00%, in each case plus an applicable margin of 6.50% for LIBOR loans and 5.50% for base rate loans. The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the Credit Agreement. The Repricing Term Loans will mature on July 12, 2023, the same maturity date as the existing senior secured term loans.

 

Incremental Term Loan

 

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

 

The Company may voluntarily repay the Repricing Term Loans and the Incremental Term Loans (collectively, the “Term Loans”) at any time, without prepayment premium or penalty, except in connection with a repricing event as described in the following sentence, subject to customary “breakage” costs with respect to LIBOR rate loans.  Any refinancing of the Term Loans through the issuance of certain debt or any repricing amendment, in either case, that constitutes a “repricing event” applicable to the Term Loans

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

resulting in a lower yield occurring at any time during the first six months after July 13, 2018 will be accompanied by a 1.00% prepayment premium or fee, as applicable.

 

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

 

Long-Term Debt Outstanding

 

As of September 30, 2018 and December 31, 2017, the following long-term debt instruments were outstanding:

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

Other (a)

 

$

17,906

 

$

17,534

 

First lien credit agreement (b)

 

336,684

 

308,825

 

Senior secured notes (c)

 

973,356

 

970,300

 

Total debt

 

1,327,946

 

1,296,659

 

Less: Current portion of long-term debt

 

(20,062

)

(20,565

)

Long-term debt, net of current maturities

 

$

1,307,884

 

$

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 $8.7 million and $25.7 million as of September 30, 2018 and $9.9 million and $29.1 million as of December 31, 2017.

(c)                   Net of unamortized debt discount and debt issuance costs of $19.0 million and $7.6 million as of September 30, 2018 and $21.2 million and $8.5 million as of 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 benefit of $0.7 million and $37.0 million for the three months ended September 30, 2018 and 2017, respectively. The Company recorded an income tax expense of $4.9 million and an income tax benefit of $32.9 million for the nine months ended September 30, 2018 and 2017, respectively.

 

The Company’s ETR of 2.5% and (6.7%) for the three and nine months ended September 30, 2018, respectively, differed from the expected U.S. statutory tax rate of 21.0% and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s deferred tax assets on U.S. disallowed interest expense carryforward’s created by the provisions of The Tax Cuts and Jobs Act (“TCJA”).

 

The Company’s ETR of 25.1% and 18.4% for the three and nine months ended September 30, 2017, respectively, differed from the U.S. statutory tax rate of 35.0%, and was primarily impacted by permanent tax adjustments (primarily transaction costs), Meridian goodwill impairment, foreign operations, Indian prior year tax expense true-up, and a valuation allowance against certain domestic deferred tax assets that are not more-likely-than-not to be realized.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

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. Our accounting policy election with respect to the new GILTI Tax rules will depend, in part, on analyzing our global income to determine whether we can reasonably estimate the tax impact. We are interpreting the provisions included in the recently proposed GILTI regulations issued by the U.S. Treasury Department which may impact our GILTI calculation. 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 September 30, 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.

 

Additionally, on August 1, 2018, the U.S. Treasury Department released proposed regulations covering the one-time transition tax on undistributed foreign earnings, which was enacted as part of the TCJA. We evaluated the issuance of the new guidance to our provisional amounts related to the transition tax that were initially recorded in our overall tax provision for the year ended December 31, 2017 and determined there are no changes to our prior estimates of the one-time transition tax as a result of the proposed regulations. We will continue to refine our provisional estimates for our computations as information is made available.

 

As of September 30, 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. The Company’s valuation allowances have increased by approximately $18.5 million from December 31, 2017 to September 30, 2018 due largely to effects of TCJA relating to interest expense.

 

During the fourth quarter the Company filed its 2017 U.S. federal income tax return for the year ended December 31, 2017. The impact of the 2017 tax return to provision adjustments included changes in estimates to our previously recognized one-time transition tax on undistributed foreign earnings that resulted in a reduction of our US federal net operating loss carryforwards by $6.7 million ($1.4 million tax effected at the newly enacted US federal rate of 21%) and also decreased our federal valuation allowance by the same amount resulting in no net effect to the tax provision. As of September 30, 2018 the Company has not finalized its accounting for the income tax effects of the TCJA and will continue to analyze the impact of the proposed regulations covering the one-time transition tax during the SAB 118 measurement period.

 

8.                            Employee Benefit Plans

 

German Pension Plan

 

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

 

U.K. Pension Plan

 

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

 

Tax Effect on Accumulated Other Comprehensive Loss

 

As of September 30, 2018 and December 31, 2017, the Company recorded actuarial losses of $10.7 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.

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

Pension Expense

 

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

 

 

 

Three Months ended September 30,

 

Nine Months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Service cost

 

$

27

 

$

2

 

$

56

 

$

6

 

Interest cost

 

569

 

585

 

1,686

 

1,708

 

Expected return on plan assets

 

(701

)

(610

)

(2,076

)

(1,782

)

Amortization:

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

(34

)

(34

)

(102

)

(99

)

Amortization of net (gain) loss

 

433

 

529

 

1,294

 

1,546

 

Net periodic benefit cost

 

$

294

 

$

472

 

$

858

 

$

1,379

 

 

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

 

Employer Contributions

 

The Company’s funding of employer contributions is based on governmental requirements and differs from those methods used to recognize pension expense. The Company made contributions of $2.3 million to its pension plans during the nine months ended September 30, 2018 and 2017. The Company has funded the pension plans with the required contributions for 2018 based on current plan provisions.

 

9.                            Commitments and Contingencies

 

Appraisal Demand

 

On September 21, 2017, former stockholders of 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 Novitex Business Combination, which gave rise to appraisal rights pursuant to 8 Del. C. § 262. In the Appraisal Action, the petitioners seek, among other things, a determination of the fair value of their shares at the time of the Novitex 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). The parties have commenced discovery.  Trial is currently scheduled for June 2019.  At this 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. Pursuant to the terms of the Novitex Business Combination Agreement, if such appraisal rights are perfected, a corresponding portion of shares of our Common Stock issued to Ex-Sigma 2 LLC, our principal stockholder, will be forfeited at such time as the PIPE Financing (as defined in the Consent, Waiver and Amendment dated June 15, 2017) is repaid. The Company intends to vigorously defend against the Appraisal Action.

 

10.    Fair Value Measurement

 

Assets and Liabilities Measured at Fair Value

 

The carrying amount of assets and liabilities including cash and cash equivalents, accounts receivable and accounts payable approximated their fair value as of September 30, 2018 and December 31, 2017

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

due to the relative short maturity of these instruments. Management estimates the fair values of the secured term loan and secured notes at approximately 101.5% and 106.4% respectively, of the respective principal balance outstanding as of September 30, 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 September 30, 2018 and December 31, 2017:

 

 

 

Carrying

 

Fair

 

Fair Value Measurements

 

As of September 30, 2018

 

Amount

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Recurring and nonrecurring assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

Acquisition contingent liability

 

$

721

 

721

 

 

 

721

 

Long-term debt

 

1,307,884

 

1,438,469

 

 

 

1,438,469

 

 

 

Interest rate swap asset

 

$

6,753

 

6,753

 

 

6,753

 

 

 

 

 

 

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

 

 

 

 

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

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

Balance as of Beginning of Period

 

$

721

 

$

721

 

Payments/Reductions

 

 

 

Balance as of End of Period

 

$

721

 

$

721

 

 

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

11.   Stock-Based Compensation

 

At closing of the Novitex Business Combination, SourceHOV had 24,535 restricted stock units (“RSUs”) outstanding under its 2013 Long Term Incentive Plan (“2013 Plan”). Simultaneous with the closing of the Novitex Business Combination, the 2013 Plan, as well as all vested and unvested RSUs under the 2013 Plan were assumed by Ex-Sigma, LLC (“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 continues to incur compensation expense related to the 9,880 unvested RSUs as of July 12, 2017 on a straight-line basis until fully vested, as the recipients of the RSUs are employees of the Company. Subject to continuous employment and other terms of the 2013 Plan, all remaining unvested RSUs with an initial vesting period of 3 or 4 years will vest in April 2019. As of September 30, 2018 there are 2,675 nonvested shares related to the 2013 Plan with a weighted average remaining contractual life of .58 years and a weighted average aggregate intrinsic value per share of $1,633.

 

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 vesting period for each option award is established on the grant date, and the options generally expire 10 years from the grant date. The Company is authorized to issue up to 8,323,764 shares of Common Stock under the 2018 plan.

 

Restricted Stock Unit Grants

 

Restricted stock awards generally vest ratably over a one to two year period. Shares of restricted stock granted under the 2018 plan are considered issued and outstanding at the date of grant and have the same voting rights as other outstanding common stock. Restricted stock units are subject to forfeiture if employment terminates prior to vesting and are expensed ratably over the vesting period.

 

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

 

 

 

Number of
Shares

 

Weighted
Average Grant
Date Fair Value

 

Average Remaining
Contractual Life
(Years)

 

Aggregate
Intrinsic Value ($)

 

Shares granted

 

1,020,220

 

$

283.1

 

 

 

 

 

Shares forfeited

 

 

 

 

 

 

 

 

Shares vested

 

(126,923

)

 

 

 

 

 

 

Nonvested at September 30, 2018

 

893,297

 

$

283.1

 

1.00

 

$

4,598

 

 

Options

 

Options are granted at not less than fair market value on the date of grant and expire no later than ten years after the date of grant. Options granted under the 2018 Plan generally require no less than a two or four year ratable vesting period. Stock option activity in the first nine months of 2018 is summarized in the following table:

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

 

 

Outstanding

 

Weighted
Average
Exercise Price

 

Average Remaining
Contractual Life
(Years)

 

Aggregate
Intrinsic Value ($)

 

Granted

 

3,570,300

 

$

6.06

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

Canceled

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

3,570,300

 

$

6.06

 

3.14

 

$

9,590

 

 

As of September 30, 2018, there was approximately $17.0 million of total unrecognized compensation expense related to non-vested awards for the 2013 Plan and 2018 Plan, which will be recognized over the respective service period.

 

Stock-based compensation expense is recorded within Selling, general, and administrative expenses. The Company incurred total compensation expense of $4.5 million and $1.6 million related to the 2013 Plan and 2018 Plan awards for the three and nine months ended September 30, 2018.

 

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 September 30, 2018 the Company had 151,648,643 shares of common stock outstanding. Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of Exela Common Stock possess all voting power for the election of Exela’s directors and all other matters requiring stockholder action and will at all times vote together as one class on all matters submitted to a vote of Exela stockholders. Holders of Exela Common Stock are entitled to one vote per share on matters to be voted on by stockholders.  Holders of Exela Common Stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the board of directors in its discretion out of funds legally available therefor and shall share equally on a per share basis in such dividends and distributions. The holders of the common stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock.

 

Preferred Stock

 

The Company is authorized to issue 20,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At September 30, 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 three and nine months ended September 30, 2018 this amount was $0.9 million and $2.7 million, respectively, as reflected on the Consolidated

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

Statement of Operations. The cumulative accrued but unpaid dividends of the Series A Preferred Stock since their inception on July 12, 2017 is $5.2 million. The per share average of cumulative preferred dividends is 0.6 dollars.

 

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. We purchased 994,197 shares during the nine months ended September 30, 2018 under the Share Buyback Program at an average share price of $4.81.

 

Warrants

 

At September 30, 2018, there were 34,988,302 warrants outstanding. As part of its IPO, Quinpario had issued 35,000,000 units including one share of common stock and one warrant of which 34,988,302 have been separated from the original unit and 11,698 warrants remain an unseparated part of the originally issued units. The warrants are traded on the OTC Bulletin Board as of September 30, 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 Novitex Business Combination), or earlier upon redemption.

 

The Company may call the warrants for redemption at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption, if, and only if, the last sales price of 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.

 

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Table of Contents

 

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

 

The rental expense for these operating leases was $0.2 million for the three months ended September 30, 2018 and 2017, and $0.5 million for the nine months ended September 30, 2018 and 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 $0.1 million for the three months ended September 30, 2018. The expense recognized for these services was $0.1 million for the nine months ended September 30, 2018.

 

The Company received consulting services from Shadow Pond, LLC. Shadow Pond, LLC is wholly owned and controlled by Vik Negi, our Executive Vice President Treasury and Business Affairs. The consulting arrangement was established to compensate Mr. Negi for his services to the Company prior to becoming an employee. The expense recognized for these services was $0.1 million and $0.4 million for the nine months ended September 30, 2018 and 2017, respectively. This consulting arrangement with Shadow Pond, LLC terminated on April 1, 2018 and Mr. Negi continues to provide services as an employee of the Company. As such, there were no additional expenses for the three months ended September 30, 2018.

 

Relationship with HandsOn Global Management

 

The Company incurred management fees to HGM, SourceHOV’s former owner, of $3.0 million and $6.0 million for the three and nine month periods ended September 30, 2017. The management agreement terminated in 2017 and there were no such fees for the three and nine months ended September 30, 2018.

 

The Company incurred reimbursable travel expenses to HGM of $0.1 million for the three months ended September 30, 2018, and $0.2 million and $0.5 million for the nine months ended September 30, 2018 and 2017.

 

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 managed funds, 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 managed funds. 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 September 30, 2018 and 2017. We incurred fees relating to these agreements of $0.6 million and $0.3 million for the nine months ended September 30, 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 $0.4 million fo