~~PART I—FINANCIAL INFORMATION~~

~~Item 1. Financial Statements.~~

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of September 30, ~~2017~~2018 and December 31, ~~2016~~2017

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

	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
	(Unaudited)						(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	27,368		$	8,361		$	40,692		$	39,000
Restricted cash	37,315			25,892			8,955			42,489
Accounts receivable, net of allowance for doubtful accounts of $3,942 and $3,219 respectively	227,704			138,421
Accounts receivable, net of allowance for doubtful accounts of $4,427 and $3,725, respectively							253,986			229,704
Inventories, net	13,634			11,195			16,122			11,922
Prepaid expenses and other current assets	24,263			12,202			26,933			24,596
Total current assets	330,284			196,071			346,688			347,711
Property, plant and equipment, net	133,617			81,600			131,156			132,908
Goodwill	776,010			373,291			749,762			747,325
Intangible assets, net	514,873			298,739			398,280			464,984
Deferred income tax assets	7,880			9,654			14,810			9,019
Other noncurrent assets	15,573			10,131			21,650			12,891
Total assets	$	1,778,237		$	969,486		$	1,662,346		$	1,714,838
Liabilities and Stockholders’ Equity (Deficit)
Liabilities and Stockholders’ Deficit
Liabilities
Current liabilities
Accounts payable	$	82,676		$	42,212		$	90,673		$	81,263
Related party payables	14,474			9,344			10,756			14,445
Income tax payable	770			1,031			5,422			3,612
Accrued liabilities	75,259			29,492			41,397			49,383
Accrued compensation and benefits	52,955			31,200			54,975			46,925
Accrued interest							23,845			55,102
Customer deposits	34,268			18,729			39,419			31,656
Deferred revenue	17,633			17,235			18,084			12,709
Obligation for claim payment	37,315			25,892			52,889			42,489
Current portion of capital lease obligations	15,246			6,507			15,926			15,611
Current portion of long-term debt	18,662			55,833			20,062			20,565
Total current liabilities	349,258			237,475			373,448			373,760
Long-term debt, net of current maturities	1,278,306			983,502			1,307,884			1,276,094
Capital lease obligations, net of current maturities	25,242			18,439			22,945			25,958
Pension liability	29,717			28,712			30,376			25,496
Deferred income tax liabilities	35,124			26,223			2,115			5,362
Long-term income tax liability	3,063			3,063			3,470			3,470
Other long-term liabilities	15,811			11,973			15,307			14,704
Total liabilities	1,736,521			1,309,387			$	1,755,545		$	1,724,844
Commitment and Contingencies
Stockholders’ equity (deficit)
Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 150,578,451 shares issued and outstanding at September 30, 2017 and 64,024,557 shares issued and outstanding at December 31, 2016;	15			—


Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized and 6,194,233 shares issued and outstanding at September 30, 2017 and no shares issued or outstanding at December 31, 2016	1			—


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			(57,389		)	482,018			482,018
Equity-based compensation	31,788			27,342
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	(455,976		)	(293,968		)	(594,162		)	(514,628		)
Accumulated other comprehensive loss:
Foreign currency translation adjustment	(2,291		)	(3,547		)	(3,833		)	(194		)
Unrealized pension actuarial losses, net of tax	(13,839		)	(12,339		)	(10,691		)	(11,054		)
Total accumulated other comprehensive loss	(16,130		)	(15,886		)	(14,524		)	(11,248		)
Total stockholders’ equity (deficit)	41,716			(339,901		)
Total liabilities and stockholders’ equity (deficit)	$	1,778,237		$	969,486
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.

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Nine Months ended September 30, ~~2017~~2018 and ~~2016~~2017

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

(Unaudited)

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Revenue

$
338,393

$
186,373

$
766,035

$
577,527

Cost of revenue (exclusive of depreciation and amortization)

255,116

121,780

539,242

377,700

Gross profit

83,277

64,593

226,793

199,827

Selling, general and administrative expenses

102,048

30,829

172,626

95,385

Depreciation and amortization

28,052

18,761

70,779

58,463

Related party expense

26,892

2,448

31,733

7,372

Operating (loss) income

(73,715
)
12,555

(48,345
)
38,607

Other expense (income), net:

Interest expense, net

37,652

27,399

91,740

81,712

Loss on extinguishment of debt

35,512

—

35,512

—

Sundry expense (income), net

563

711

2,960

283

Net loss before income taxes

(147,442
)
(15,555
)
(178,557
)
(43,388
)
Income tax benefit

37,002

3,757

32,924

9,969

Net loss

$
(110,440
)
$
(11,798
)
$
(145,633
)
$
(33,419
)
Dividend equivalent on Series A Preferred Stock related to beneficial conversion feature

(16,375
)
—

(16,375
)
—

Cumulative dividends for Series A Preferred Stock

(1,225
)
—

(1,225
)
—

Net loss attributable to common stockholders

$
(128,040
)
$
(11,798
)
$
(163,233
)
$
(33,419
)
Earnings per share:

Basic and diluted

$
(0.92
)
$
(0.18
)
$
(1.76
)
$
(0.52
)

	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.

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the Three ~~Months~~ and Nine Months ended September 30, ~~2017~~2018 and ~~2016~~2017

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

(Unaudited)

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Net loss

$
(110,440
)
$
(11,798
)
$
(145,633
)
$
(33,419
)
Other comprehensive loss, net of tax

Foreign currency translation adjustments

233

222

1,256

1,955

Unrealized pension actuarial (losses) gains, net of tax

(536
)
109

(1,500
)
469

Total other comprehensive loss, net of tax

$
(110,743
)
$
(11,467
)
$
(145,877
)
$
(30,995
)

	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.

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ ~~Equity (Deficit)~~Deficit

For the Nine Months ended September 30, ~~2017~~2018 and ~~2016~~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 Loss

Foreign Currency

Unrealized Pension

Total

Common Stock

Preferred Stock

Additional

Equity-Based

Translation

Actuarial Losses,

Accumulated

Stockholders’

Shares

Amount

Shares

Amount

Paid in Capital

Compensation

Adjustment

net of tax

Deficit

Equity

Balances at December 31, 2016 (as previously reported)

144,400

$
—

—

$
—

$
(57,389
)
$
27,342

$
(3,547
)
$
(12,339
)
$
(293,968
)
$
(339,901
)
Conversion of shares

63,880,157

6

—

—

(6
)
—

—

—

—

—

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

64,024,557

$
6

—

$
—

$
(57,395
)
$
27,342

$
(3,547
)
$
(12,339
)
$
(293,968
)
$
(339,901
)
Net loss January 1 to September 30, 2017

(145,633
)
(145,633
)
Equity-based compensation

4,446

4,446

Foreign currency translation adjustment

1,256

1,256

Net realized pension actuarial gains, net of tax

(1,500
)

(1,500
)
Merger recapitalization

16,575,443

2

20,546

20,548

Shares issued to acquire Novitex (refer to Note 3)

30,600,000

3

244,797

244,800

Issuance\Conversion of Quinpario shares

12,093,331

1

22,358

22,359

Sale of common shares at July 12, 2017

18,757,942

3

130,860

130,863

Issuance of Series A Preferred Stock

—

—

9,194,233

1

73,553

73,554

Shares issued for advisory services and underwriting fees

3,609,375

—

28,573

28,573

Conversion of Series A Preferred Stock to common shares

3,667,803

—

(3,000,000
)
—

—

—

Shares issued for HandsOn Global Management contract termination fee

1,250,000

10,000

10,000

Equity issuance expenses

(7,649
)

(7,649
)
Adjustment for beneficial conversion feature of Series A Preferred Stock (refer to Note 2)

16,375

(16,375
)
—

Balances at September 30, 2017

150,578,451

$
15

6,194,233

$
1

$
482,018

$
31,788

$
(2,291
)
$
(13,839
)
$
(455,976
)
$
41,716

																	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.

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated ~~Statements~~Statement of Cash Flows

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

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

(Unaudited)

	Nine Months ended September 30,						Nine Months ended September 30,
	2017			2016			2018			2017
Cash flows from operating activities
Net loss	$	(145,633	)	$	(33,419	)	$	(78,116	)	$	(145,633	)
Adjustments to reconcile net loss
Depreciation and amortization	70,779			58,463			109,428			70,779
Fees paid in stock	23,875			—			—			23,875
HGM contract termination fee paid in stock	10,000			—
HGM Contract Termination Fee paid in stock							—			10,000
Original issue discount and debt issuance cost amortization	9,684			10,183			8,062			9,684
Loss on extinguishment of debt	35,512			—
Provision (recovery) for doubtful accounts	451			(372		)	2,470			451
Deferred income tax benefit (expense)	(37,186		)	(9,092		)
Deferred income tax benefit							(3,689		)	(37,186		)
Share-based compensation expense	4,446			5,422			4,516			4,446
Foreign currency remeasurement	777			172			(2,040		)	777
Gain on sale of Meridian	(588		)	—			—			(588		)
Loss on sale of property, plant and equipment	508			1,242
Change in operating assets and liabilities, net of effect from acquisitions:
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	(2,784		)	12,732			(6,374		)	(2,784		)
Related party receivable	—			(1,089		)
Prepaid expenses and other assets	189			(3,807		)	(5,770		)	189
Accounts payable and accrued liabilities	37,316			4,227			(23,457		)	48,745		(1)
Related party payables	4,936			(1,345		)	(3,689		)	4,936
Net cash provided by operating activities	12,282			43,317
Net cash used in operating activities							(2,280		)	(11,801		)(1)

Cash flows from investing activities
Purchases of property, plant and equipment	(7,001		)	(4,971		)	(14,077		)	(7,001		)
Additions to internally developed software	(6,348		)	(7,207		)	(3,080		)	(6,348		)
Additions to outsourcing contract costs	(8,574		)	(11,015		)
Cash acquired in Transcentra acquisition	—			3,351
Additions to outsourcing contracts							(5,427		)	(8,574		)
Proceeds from sale of Meridian	4,582			—			—			4,582
Cash acquired in Quinpario reverse merger	91			—			—			91
Cash paid in Novitex acquisition, net of cash received	(423,428		)	—
Proceeds from sale of property, plant and equipment	11			625
Net cash used in by investing activities	(440,667		)	(19,217		)
Cash 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		)	(1,541		)	—			(210		)
Proceeds from issuance of common and preferred stock	204,417			—
Cash received from Quinpario	27,031			—
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	3,040			4,801			3,068			3,040
Contribution from Shareholders	20,548			—
Proceeds from new credit facility	1,320,500			—
Contribution from shareholders							—			20,548
Proceeds from credit facility							30,000			1,320,500
Retirement of previous credit facilities	(1,055,736		)	—			—			(1,055,736		)
Cash paid for debt issuance costs and debt discounts	(39,837		)	—			(1,094		)	(39,837		)
Cash paid for equity issue costs	(149		)	—			(7,500		)	(149		)
Borrowings from revolver and swing-line loan	72,600			53,200			30,000			72,600
Repayments on revolver and swing line loan	(72,500		)	(53,200		)
Repayments from revolver and swing line loan							(30,000		)	(72,500		)
Principal payments on long-term obligations	(32,647		)	(35,247		)	(21,647		)	(32,647		)
Net cash provided by (used in) financing activities	447,057			(31,987		)	(1,005		)	482,569
Effect of exchange rates on cash	335			(239		)	(554		)	335
Net increase (decrease) in cash and cash equivalents	19,007			(8,126		)	(31,842		)	30,436		(1)
Cash and cash equivalents
Cash, restricted cash, and cash equivalents
Beginning of period	8,361			16,619			81,489			34,253		(1)
End of period	$	27,368		$	8,493		$	49,647		$	64,689	(1)

Supplemental cash flow data:
Income tax payments, net of refunds received	$	2,673		$	2,798		$	5,296		$	2,673
Interest paid	60,347			79,828			136,396			60,347
Noncash investing and financing activities:
Assets acquired through capital lease arrangements	$	2,080		$	5,632		9,318			2,080
Leasehold improvements funded by lessor	74			1,016			1,565			74
Issuance of common stock as consideration for Novitex	244,800			—			—			244,800
Accrued capital expenditures	3,512			412			1,994			3,512
Dividend equivalent on Series A Preferred Stock	$	16,375		$	—
Liability assumed of Quinpario		4,672			—
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.

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

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

~~The Company was originally incorporated in Delaware on July 15, 2014 as a special purpose acquisition company under the name Quinpario Acquisition Corp 2 (“Quinpario”)~~Form 10-K for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving Quinpario and one or more businesses or entities. On July 12, 2017 (the “Closing”), the Company consummated its business combination with SourceHOV Holdings, Inc. (“SourceHOV”) and Novitex Holdings, Inc. (“Novitex”) pursuant to the Business Combination Agreement and Consent, Waiver and Amendment to the Business Combination Agreement, dated February 21, 2017 and June 15, 2017, respectively (the “Business Combination”). In connection with the Closing, the Company changed its name from Quinpario Acquisition Corp 2 to Exela Technologies, Inc. Unless the context otherwise requires, the “Company” refers to the combined company and its subsidiaries following the Business Combination, “Quinpario” refers to the Company prior to the closing of the Business Combination, “SourceHOV” refers to SourceHOV prior to the Business Combination and “Novitex” refers to Novitex prior to the Business Combination. Refer to Note 3 for further discussion of the Business Combination.

2.~~Basis of Presentation and Summary of Significant Accounting Policies~~

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

~~Basis of Presentation~~such period.

The accompanying ~~unaudited~~ condensed consolidated financial statements have been prepared ~~in accordance with~~using accounting principles generally accepted ~~accounting principles~~ in the United States of America (“~~U.S.~~ GAAP”) ~~for interim financial information~~ and ~~in accordance~~ with the ~~rules~~instructions to Form 10-Q and ~~regulations~~Rule 10-01 of ~~the~~ 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 ~~footnotes~~notes required by ~~U.S.~~ 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 ~~unaudited~~ condensed consolidated financial statements ~~reflect~~are unaudited, but in our opinion include all adjustments (consisting of normal ~~and~~ recurring ~~adjustments that are, in the opinion of the Company’s management,~~adjustments) necessary for ~~the~~a fair ~~presentation~~statement of the results ~~of operations~~ for the interim ~~periods. Operating~~period. The interim financial results ~~for the three and nine months ended September 30, 2017~~ are not necessarily indicative of ~~the~~ results that may be expected for ~~the year ending December 31, 2017. These~~any other interim financial statements should be read in conjunction with SourceHOV’s audited financial statements for the year ended December 31, 2016 included in the Proxy Statement of the Company filed with the SEC on June 26, 2017, as amended and supplemented.

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

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

~~Principles of Consolidation~~

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

~~Use of Estimates~~

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

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

~~Segment Reporting~~

~~The Company consists of the following three segments:~~

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

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

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

~~Restricted Cash~~

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

~~Intangible Assets~~

~~Customer Relationships~~

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

~~Trade Names~~

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

~~Trademarks~~

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

~~Developed Technology~~

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

~~Capitalized Software Costs~~

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

~~Outsourced Contract Costs~~

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

~~Non-compete agreements~~

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

~~Property, Plant and Equipment~~

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

~~Leases~~

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

~~Stock-Based Compensation~~

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

~~Revenue Recognition~~

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

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

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

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

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

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

~~Multiple Element Arrangements~~

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

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

~~Beneficial Conversion Feature~~

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~fiscal year.

Net Loss per Share

Earnings per share (“EPS”) is computed by dividing net loss available to ~~common stockholders~~holders of the Company’s Common Stock by the weighted average number of shares of ~~common stock~~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~~Common Stock were exercised or converted into ~~common stock,~~Common Stock, using the more dilutive of the two-class method or if-converted method in periods of earnings. The ~~two class~~two-class method is an earnings allocation method that determines earnings per share for ~~common shares~~Common Stock and participating securities. As the Company experienced net losses for the periods presented, the impact of ~~participating~~ the Company’s Series A Convertible Preferred Stock (“Series A Preferred ~~Stock~~Stock”) was calculated based on the if-converted method. Diluted EPS excludes all dilutive potential of shares of ~~common stock~~Common Stock if their effect is anti-dilutive.

For the three and nine months ended September 30, ~~2017,~~2018, outstanding shares of the ~~Company’s~~ Series A Preferred Stock, if converted would have resulted in an additional ~~7,573,066~~5,586,344 shares of ~~common stock~~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 ~~considered~~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~~Common Stock price during the applicable period.

~~The components of basic and diluted EPS are as follows:~~

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Net loss attributable to common stockholders (A)

$
(128,040
)
$
(11,798
)
$
(163,233
)
$
(33,419
)
Weighted average common shares outstanding - basic and diluted (B)

138,895,681

64,024,557

92,512,729

64,024,557

Earnings Per Share:

Basic and diluted (A/B)

$
(0.92
)
$
(0.18
)
$
(1.76
)
$
(0.52
)

~~Recently Adopted Accounting Pronouncements~~

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

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

	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	)

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

2.Recently ~~Issued~~Adopted Accounting Pronouncements

~~In May 2014,~~Effective January 1, 2018, the ~~FASB~~ ~~issued ASU~~Company adopted Accounting Standards Update (“ASU”) no. 2014-09, Revenue from Contracts with Customers (ASC 606). Under ~~the update,~~ASU 2014-09, revenue ~~will be~~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. ~~In July 2015,~~The Company adopted this standard using the ~~FASB deferred~~modified retrospective approach applied to those contracts that were not completed as of January 1, 2018. The results for the ~~effective date by one year (ASU no. 2015-14). This ASU will be effective~~reporting period beginning after ~~December 15, 2017,~~January 1, 2018 are presented in accordance with the new standard, although historical information has not been restated and ~~interim~~continues to be reported under the accounting standards and policies in effect for those periods ~~within annual periods beginning after December 15, 2018. Earlier application is permitted only~~. 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 ~~annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Since~~or for the ~~issuance~~period ended September 30, 2018, and we expect the impact of the ~~original standard, the FASB has issued several other subsequent updates including the following: 1) clarification~~adoption of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in ASC 605 (ASU 2016-11); 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12); and 5) technical corrections and improvements (ASU 2016-20). The new standard will be ~~effective~~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 ~~us beginning~~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 ~~is currently~~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 ~~early stages~~classification and presentation of ~~evaluating~~changes in restricted cash and requires that a statement of cash flows explain the ~~impact~~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 ~~adopting this~~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 ~~will have on~~resulted in only the ~~consolidated financial statements.~~service cost being recorded to Cost of revenue; see Note 8 for the related impact.

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 yearsbeginning after December 15, ~~2019,~~2018, and interim periods within those fiscal years ~~beginning after December 15, 2020.~~and early application is permitted. The Company has a significant amount of facilities and equipment leases and is currently ~~in the early stages of~~ evaluating the impact that adopting this standard will have on the consolidated financial statements.

In June 2016, the FASB issued ASU no. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for fiscal years beginning after December 15, ~~2020,~~2019, and interim periods within those fiscal ~~years beginning after December 15, 2021.~~years. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

In ~~August 2016,~~January 2017, the FASB issued ASU ~~no. 2016-15,~~ ~~Statement~~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 ~~Cash Flows: Classification~~goodwill impairment. In Step 1, an entity compares the fair value of ~~Certain Cash Receipts~~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 ~~Cash Payments (Topic 230), which adds or clarifies guidance on~~compares the ~~presentation and classification~~implied fair value 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,goodwill with the ~~intent~~carrying amount of ~~reducing diversity~~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 ~~practice. For public entities, ASU 2016-15~~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, including interim periods within those~~ fiscal years beginning after December 15, ~~2018,~~2019, and ~~interim periods within fiscal years beginning after December 15, 2019. Entities must apply the guidance retrospectively to all periods presented unless retrospective application is impracticable.~~ ~~The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.~~

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

~~In October 2016, the FASB issued ASU no. 2016-16~~~~, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740)~~, which eliminates the current prohibition on immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory, with the intent of reducing complexity and diversity in practice. Under ASU 2016-16, entities must recognize the income tax consequences when the transfer occurs rather than deferring recognition. For public entities, ASU 2016-16 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019, with early adoption permitted as of the beginning of a fiscal year (i.e., early adoption is permitted only in the first interim period). Entities must apply the guidance on a modified retrospective basis though a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. 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 November 2016, the FASB issued ASU no. 2016-18,~~ ~~Statement of Cash Flows: Restricted Cash~~ (Topic 230). The ASU addresses diversity in practice that exists in the classification and presentation of changes in restricted cash and requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The ASU is effective ~~beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company~~company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

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

~~In January 2017, the FASB issued ASU no. 2017-04,~~ ~~Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~, which eliminates Step 2 of the goodwill impairment test that had required a hypothetical purchase price allocation. Rather, entities should apply the same impairment assessment to all reporting units and recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be effective prospectively for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2021, or those beginning after January 1, 2017 if early adopted. T~~he Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.~~

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

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

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

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this ~~update~~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 ~~update~~ASU addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity,

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, ~~2019, and interim periods within fiscal years beginning after December 15, 2020~~.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.
3.3.                            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.
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.
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
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 ~~Combination~~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, respectively.~~2017. In connection with the Novitex Business Combination, the Company acquired debt facilities and issued notes totaling $1.4 billion (refer to Note 96 — Long Term ~~Debt)~~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. ~~Refer to Note 14 — Stockholders’ Equity.~~

Under ASC 805, Business Combinations, SourceHOV was deemed the accounting acquirer based on the following ~~predominate~~predominant factors: ~~its former owners have~~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.
~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
The Company acquired 100% of the equity of Novitex pursuant to the Business Combination Agreement by issuing 30,600,000 shares of common stock of Exela to Novitex Parent, L.P.,; the sole stockholder of ~~Novitex.~~Novitex Holdings, Inc. Total value of equity for the transaction was $244.8 million. Additionally, as noted, the Company used proceeds from acquired debt to settle the outstanding debt of Novitex in the amount of $420.5 million, and pay transaction related costs and interest on behalf of Novitex in the amount of $10.3 million and $1.0 million, respectively, which was accounted for as part of consideration.
The acquired assets and assumed liabilities of Novitex were recorded at their estimated fair values. The purchase price allocation for the Novitex business combination is preliminary and subject to change within the respective measurement period which will not extend beyond one year from the acquisition date. Measurement period adjustments will be recognized in the reporting period in which the adjustment amounts are determined.

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

Cash and equivalents

$
8,428

Accounts receivable

87,474

Inventory

1,245

Prepaid expenses & other

13,974

Property, plant and equipment, net

60,657

Identifiable intangible Assets, net

251,060

Deferred charges and other assets

2,723

Other noncurrent assets

93

Goodwill

405,141

Total identifiable assets acquired

$
830,795

Liabilities Assumed:

Accounts payable

(29,444
)
Short-term borrowings and current portion of LT debt

(11,335
)
Accrued liabilities

(30,432
)
Advanced billings and customer deposits

(18,926
)
Long term debt

(15,704
)
Deferred taxes

(46,072
)
Other liabilities

(2,226
)
Total liabilities assumed

$
(154,139
)
Total Consideration

$
676,656

Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~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 ~~the Company’s management’s~~Management’s own assumptions about the inputs used in pricing the asset or liability at fair value.

Weighted Average Useful Life
(in years)

Fair value

Weighted Average
Useful Life (in years)

Fair Value

Trademark and trade name - Novitex

9.5

$
18,000

9.5

$
18,000

Customer relationships

16.0

230,000

16.0

230,000

Internally devleoped software - Connect Platform

5.0

1,710

Inernally developed software - Connect Platform

5.0

1,710

Non-compete agreements

1.0

1,350

1.0

1,350

$
251,060

$
251,060

As of ~~September 30, 2017,~~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, iswas 15.4 years.

~~The Company expects~~Through the acquisition of Novitex, we continue to ~~realize~~pursue revenue synergies, leverage brand awareness, ~~stronger margins,~~generate greater free cash flow, ~~generation, and~~ expand the existing Novitex sales channels, and ~~utilize~~increase utilization of the existing workforce. The Company also anticipates ~~opportunities~~continued opportunity for growth through the ability to leverage additional future services and capabilities. ~~These~~Our anticipation of synergies and leveraging existing brand awareness, among other factors, ~~among others,~~ contributed to a purchase price in excess of the estimated fair value of Novitex’s identifiable net assets assumed, and as a result, the Company has recorded goodwill in connection with this acquisition. The Company engaged a third party valuation firm to aid management in its analyses of the fair value of the assets and liabilities. All estimates, key assumptions, and forecasts were either provided by or reviewed by the Company. Approximately $14.0 million of the
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, ~~$134.4~~$292.1 million of revenue and ~~$5.0~~$17.5 million of net loss ~~are~~were included in our consolidated revenues and net loss, respectively, for ~~Novitex.~~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 ~~$69.3~~$60.0 million in advisory, legal, accounting and management fees in conjunction with the Novitex Business Combination as of ~~September 30, 2017.~~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~~Management performed a strategic review of human resources at Novitex for the purpose of assessing the business need for their employment and for the purpose of quantifying the synergies resulting from the acquisition. As a result, in ~~July~~June 2017, ~~the Company~~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~~post combination expense of the combined entity because the expense was incurred for the benefit of the combined entity. ~~The~~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 ~~$4.6~~$5.3 million related to the impacted executives and $0.1 million related to other terminations in the statement of ~~operations~~operations. Severance expense was $0.4 million for the ~~three~~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:
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.
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.
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~amounts or unless otherwise noted)
(Unaudited)
The Company does not expect to incur additional charges for these terminations in future periods. Severance charges associated with the terminations were included in Selling, general and administrative expenses on the consolidated statement of operations and were included in the ITPS segment. Of the total amount of restructuring charges, $2.1 million was shown as a liability as of September 30, 2017, which is included within Accrued compensation and benefits on the Condensed Consolidated Balance Sheets.
~~Pro-Forma Information~~
Following are the supplemental consolidated results of the Company on an unaudited pro forma basis, as if the acquisition had been consummated on January 1, 2016 for three months and nine months ended September 30, 2017 and 2016:

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Net Revenue

$
358,166

$
350,784

$
1,069,992

$
1,082,299

Net Loss

(47,098
)
(24,460
)
(64,304
)
(107,772
)
These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative of consolidated results of operations in future periods. The pro forma results include adjustments primarily related to purchase accounting adjustments. Acquisition costs and other non-recurring charges incurred are included in the earliest period presented.
Additionally, the pro forma results are inclusive of the acquisition of TransCentra by SourceHOV for the three and nine month periods ended September 30, 2016. These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative of the Company’s consolidated results of operations in future periods.
4.~~Accounts Receivable~~
~~Accounts receivable, net consist of the following:~~

September 30,

December 31,

2017

2016

Billed receivables

$
195,437

$
116,148

Unbilled receivables

31,341

20,982

Other

4,868

4,510

Less: Allowance for doubtful accounts

(3,942
)
(3,219
)

$
227,704

$
138,421

~~Unbilled receivables represent balances recognized as revenue that have not been billed~~(d) Addition to the customer. The Company’s allowance for doubtful accounts is based on a policy developed by historical experience and management judgment. Adjustments to the allowance for doubtful accounts may occur based on market conditions or specific client circumstances.
~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
5.~~Prepaid Expenses and Other Current Assets~~
~~Prepaid expenses and other current assets consist of the following:~~

September 30,

December 31,

2017

2016

Prepaids

$
22,923

$
10,906

Deposits

1,340

1,296

$
24,263

$
12,202

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

Estimated Useful

September 30,

December 31,

Lives (in Years)

2017

2016

Land

N/A

$
7,744

$
7,637

Buildings and improvements

7 - 40

18,450

16,989

Leasehold improvements

Lesser of the useful life or lease term

48,243

31,342

Vehicles

5 - 7

792

784

Machinery and equipment

5 - 15

62,242

23,297

Computer equipment and software

3 - 8

112,490

98,544

Furniture and fixtures

5 - 15

6,993

5,007

256,954

183,600

Less: Accumulated depreciation and amortization

(123,337
)
(102,000
)
Property, plant and equipment, net

$
133,617

$
81,600

~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
7.~~Intangibles Assets and Goodwill~~
~~Intangibles~~
~~Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization and consist of the following:~~

September 30, 2017

Gross Carrying
Amount (a)

Accumulated
Amortization

Intangible
Asset, net

Customer relationships

504,643

(125,803
)
$
378,840

Developed technology

89,076

(72,806
)
16,270

Trade names

52,470

—

52,470

Outsource contract costs

37,144

(15,020
)
22,124

Internally developed software

24,799

(3,159
)
21,640

Trademarks

23,370

(898
)
22,472

Non-compete agreements

1,350

(293
)
1,057

$
732,852

$
(217,979
)
$
514,873

December 31, 2016

Gross Carrying
Amount

Accumulated
Amortization

Intangible
Asset, net

Customer relationships

$
274,643

$
(100,172
)
$
174,471

Developed technology

89,076

(59,539
)
29,537

Trade names

53,370

—

53,370

Outsource contract costs

27,619

(7,378
)
20,241

Internally developed software

16,742

(858
)
15,884

Trademarks

5,370

(134
)
5,236

$
466,820

$
(168,081
)
$
298,739

~~(a) Amounts include intangibles acquired in the Business Combination. Refer to Note 3.~~
~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
~~Goodwill~~
~~Goodwill by reporting segment consists of the following:~~

Goodwill

Additions

Reductions

Currency
translation
adjustments

Goodwill

ITPS

$
145,562

$
13,558

$
—

$
274

$
159,394

HS

86,786

—

—

—

86,786

LLPS

127,111

—

—

—

127,111
(a)
Balance as of December 31, 2016

$
359,459

$
13,558

$
—

$
274

$
373,291

ITPS

159,394

405,141
(c)

299

564,834

HS

86,786

86,786

LLPS

127,111

—

(2,721
)(b)
—

124,390
(a)
Balance as of September 30, 2017

$
373,291

$
405,141

$
(2,721
)
$
299

$
776,010

~~(a)~~    ~~The carrying amount of~~ goodwill ~~for all periods presented is net of accumulated impairment losses of $137.9 million.~~
~~(b)~~    ~~The reduction in goodwill is~~ due to the ~~sale of Meridian in Q1 2017.~~
~~(c)~~     ~~Addition to goodwill is due to the Novitex acquisition. Refer~~Asterion Business Combination (Refer to Note 3.
~~The Company recorded $405.1 million of goodwill as a result of the allocation of the purchase price between assets acquired~~4) and ~~liabilities assumed~~an immaterial acquisition in the Business Combination. Of the total amount of goodwill recorded, $46.1 million of goodwill is associated with deferred tax liabilities recorded in connection with amortizable intangible assets acquired in the Business Combination.
third quarter.
8.~~Accrued Liabilities and Other Long-Term Liabilities~~
~~Accrued liabilities consist of the following:~~

September 30,

December 31,

2017

2016

Accrued taxes (exclusive of income taxes)

$
7,521

$
3,309

Accrued lease exit obligations

2,474

3,949

Accrued professional and legal fees

12,821

8,289

Deferred rent

1,136

989

Accrued interest

30,405

8,459

Accrued transaction costs

19,250

2,750

Other accruals

1,652

1,747

$
75,259

$
29,492

~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
~~Other Long-term liabilities consist of the following:~~

September 30,

December 31,

2017

2016

Deferred revenue

$
447

$
235

Deferred rent

7,383

6,110

Accrued lease exit obligations

1,667

672

Accrued compensation expense

2,980

3,783

Other

3,334

1,173

$
15,811

$
11,973

9.6.    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) a $350.0 million senior secured term loan maturing July 12, 2023 with an ~~original issue discount (“OID”)~~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
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 ~~0.63%~~0.6% of the aggregate principal amount for each of the first eight payments and 1.3% of the aggregate principal amount for payments thereafter, with any balance due at maturity.

~~Senior Secured Notes~~Term Loan Repricing

On July ~~12, 2017,~~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 ~~issued $1.0 billion~~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 ~~aggregate principal amount of 10.0% First Priority Senior Secured Notes due 2023 with an OID of $22.5 million (the “Notes”). The Notes are guaranteed by certain subsidiaries~~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 ~~Company.~~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 ~~Notes~~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, ~~10.0% per year.~~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 ~~Company pays~~ 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 ~~Notes on January 15 and July 15 of each year, commencing on January 15, 2018.~~Credit Agreement. The ~~Notes~~Repricing Term Loans will mature on July ~~15, 2023.~~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
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~amounts or unless otherwise noted)
(Unaudited)

~~Debt Refinancing~~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.

~~Upon~~Other than as described above, the ~~closing of~~terms, conditions and covenants applicable to the ~~Business Combination on July 12, 2017, the $1,050.7 million outstanding balance of SourceHOV related debt facilities~~Repricing Term Loans and the ~~$420.5 million outstanding balance of Novitex related debt facilities~~Incremental Term Loans are consistent with the terms, conditions and covenants that were ~~paid off using proceeds from~~applicable to the ~~Credit Agreement~~Existing Term Loans under the First Lien Credit. The Repricing and issuance of the ~~Notes.~~
~~In accordance with ASC 470~~ ~~— Debt — Modifications and Extinguishments,~~ asIncremental Term Loans resulted in a ~~result of certain lenders that participated in SourceHOV’s~~partial debt structure prior to the refinancing and the Company’s debt structure after the refinancing, it was determined that a portion of the refinancing of SourceHOV’s first lien secured term loan and second lien secured term loan (“Original SourceHOV Term Loans”) would be accountedextinguishment, for ~~as a debt modification, and the remaining would be accounted for as an extinguishment. The Company incurred $28.9~~which Exela recognized $1.1 million in debt ~~issuance~~extinguishment costs ~~related to~~in the ~~new secured term loan,~~third quarter of which $2.8 million was third party costs. The Company expensed $1.1 million of costs related to the modified debt and capitalized the remaining $27.8 million. The Company wrote off $30.5 million of the unamortized issuance costs and discounts associated with the retirement of SourceHOV’s credit facilities. The Company retained approximately $3.3 million and $3.5 million of debt issuance costs and debt discounts, respectively, associated with the modified portion of the Original SourceHOV Term Loans that will be amortized over the term of the new term loan, which are presented on the balance sheet as a contra-debt liability. The Company incurred a $5.0 million prepayment penalty related to the Original SourceHOV Term Loans that was recorded as a loss on extinguishment of debt.
~~The proceeds of the new debt financing were also used to pay fees and expenses incurred in connection with the Business Combination and for general corporate purposes.~~
~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~2018.

Long-Term Debt Outstanding

As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the following long-term debt instruments were outstanding:

September 30,

December 31,

2017

2016

First lien revolving credit facility (a)

$
—

$
63,337

First lien secured term loan (b)

—

687,884

Second lien secured term loan (c)

—

236,344

Transcentra revolving credit facility

—

5,000

Transcentra term loan

—

19,250

FTS unsecured term loan

—

15,911

Other (d)

18,104

11,609

First lien credit agreement (e)

309,540

—

Senior secured notes (f)

969,324

—

Senior secured revolving credit facility (g)

—

—

Total debt

1,296,968

1,039,335

Less: Current portion of long-term debt

(18,662
)
(55,833
)
Long-term debt, net of current maturities

$
1,278,306

$
983,502

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)    ~~Net of unamortized debt issuance costs of $2.3 million as of December 31, 2016~~
~~(b)~~    ~~Net of unamortized original issue discount and debt issuance costs of $14.6 million and $14.2 million as of December 31, 2016~~
~~(c)~~     ~~Net of unamortized original issue discount and debt issuance costs of $7.3 million and $6.3 million as of December 31, 2016~~
~~(d)~~                  Other debt represents the Company’s outstanding loan balances associated with various hardware and software purchases along with loans entered into by subsidiaries of the ~~Company~~Company.
~~(e)~~(b)                  Net of unamortized original issue discount and debt issuance costs of ~~$10.2~~$8.7 million and ~~$30.2~~$25.7 million as of September 30, ~~2017~~2018 and $9.9 million and $29.1 million as of December 31, 2017.
~~(f)~~(c)                   Net of unamortized ~~original issue~~debt discount and debt issuance costs of ~~$21.9~~$19.0 million and ~~$8.8~~$7.6 million as of September 30, ~~2017~~
~~(g)~~     ~~Debt issuance costs~~2018 and $21.2 million and $8.5 million as of ~~$3.0 million were capitalized as an asset and will be amortized ratably over the term of the facility. Debt issuance costs are included in Other Non Current Assets on the balance sheet.~~December 31, 2017.

~~Credit Facilities~~
As of September 30, 2017 and December 31, 2016, the Company had outstanding irrevocable letters of credit totaling approximately $22.8 million and $9.3 million, respectively, under a revolving credit facility.
~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
~~10.~~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 ~~$37.0~~$0.7 million and ~~an income tax benefit of $3.8~~$37.0 million for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The Company recorded an income tax ~~benefit~~expense of ~~$32.9~~$4.9 million and an income tax benefit of ~~$10.0~~$32.9 million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

The Company’s ~~actual effective~~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 ~~25.12%~~21.0% and ~~18.44%~~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 expected U.S. statutory tax rate of 35.0%. The Company’s tax rate includes the tax effects related to the decrease of valuation allowance on a portion of the Company’s U.S. net operating loss (“NOL”) carryforwards. In connection with the acquisition of Novitex, the Company recognized an $11.5 million income tax benefit from the reversal of a portion of the Company’s U.S. federal and state valuation allowance on deferred tax assets. The Company determined that a portion of its pre-existing deferred tax assets are more-likely-than-not to be realized by the combined entity and a portion of the valuation allowance should be decreased. However, based on tax law ordering rules, the reduction of valuation allowance on the Company’s pre-existing deferred tax assets was partially offset by an increase in valuation allowance on current year losses that are not more-likely-than-not to be realized.
~~The Company’s ETR of 23.29% and 22.98% for the three months and nine months ended September 30, 2016, respectively, differed from the expected~~ U.S. statutory tax rate of 35.0%, and was primarily impacted by permanent tax adjustments (primarily transaction costs), Meridian goodwill impairment, foreign operations, ~~FIN48 liability release due to statute of limitation expiration,~~Indian prior year tax expense true-up, and a valuation allowance against certain domestic ~~and foreign~~ deferred tax assets that are not more-likely-than-not to be realized.
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, ~~2017,~~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, ~~2016.~~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.
~~11.~~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.

~~The German pension 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 ~~an unfunded plan and therefore has no plan assets. The expected rate~~net of ~~return assumptions for plan assets relate solely to the UK plan and are based mainly on historical performance achieved over~~ a ~~long period~~deferred tax benefit of ~~time (15 to 20 years) encompassing many business and economic cycles. The Company assumed a weighted average expected long-term rate on plan assets for the overall scheme of 5.16%.~~$2.0 million.
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~amounts or unless otherwise noted)
(Unaudited)
~~Tax Effect on Accumulated Other Comprehensive Loss~~
As of September 30, 2017 and December 31, 2016, the Company recorded actuarial losses of $13.8 million and $12.3 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which is net of a deferred tax benefit of $2.2 million and $2.5 million, respectively.

Pension ~~and Post Retirement~~ Expense

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

Three Months ended September 30,

Nine Months ended September 30,

Three Months ended September 30,

Nine Months ended September 30,

2017

2016

2017

2016

2018

2017

2018

2017

Service cost

$
2

$
3

$
6

$
9

$
27

$
2

$
56

$
6

Interest cost

585

667

1,708

2,001

569

585

1,686

1,708

Expected return on plan assets

(610
)
(656
)
(1,782
)
(1,968
)

(701
)
(610
)
(2,076
)
(1,782
)
Amortization:

Amortization of prior service cost

(34
)
(35
)
(99
)
(105
)

(34
)
(34
)
(102
)
(99
)
Amortization of net loss

529

223

1,546

669

Amortization of net (gain) loss

433

529

1,294

1,546

Net periodic benefit cost

$
472

$
202

$
1,379

$
606

$
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 ~~and $2.0 million~~ to its pension plans during the nine months ended September 30, ~~2017~~2018 and ~~2016, respectively.~~2017. The Company has ~~fully~~ funded the pension plans with the required contributions for ~~2017~~2018 based on current plan provisions.

~~Executive Deferred Compensation Plan~~9.
The Company has individual arrangements with seven former executives in the U.S. which provide for fixed payments to be made to each individual beginning at age 65 and continuing for 20 years. This is an unfunded plan with payments to be made from operating cash of the Company. Benefit payments of $0.1 million were made for both three months ended September 30, 2017 and 2016, respectively. Benefit payments of $0.2 million were made during both nine months ended September 30, 2017 and 2016, respectively. There was an expense of $0.2 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively. The benefit for the nine months ended September 30, 2017 was $0.3 million with a corresponding expense for the nine months ended September 30, 2016 of $0.7 million. Benefit payments expected to be paid to plan participants during the remainder of 2017 are $0.1 million.
~~12.~~ Commitments and Contingencies

Appraisal Demand

On September 21, 2017, former stockholders of ~~our wholly-owned subsidiary~~ SourceHOV, who allege combined ownership of 10,304 shares of SourceHOV common stock, filed a petition for appraisal pursuant to 8 Del. C. § 262 in the Delaware Court of Chancery, captioned Manichaean Capital, LLC, et al. v. SourceHOV Holdings, Inc., C.A. No. 2017-0673-JRS (the “Appraisal Action”). The Appraisal Action arises out of the Novitex Business Combination, ~~Transaction,~~ which gave rise to appraisal rights pursuant to 8 Del. C. § 262. In the Appraisal Action, the petitioners seek, among other things, a determination of the fair value of their shares at the time of the 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 ~~early~~ stage of the litigation, the Company is unable to predict the outcome of the Appraisal Action or estimate any loss or range of loss that may arise from the Appraisal Action. 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
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~amounts or unless otherwise noted)
(Unaudited)

~~13. Fair Value Measurement~~
~~Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis~~
The carrying amount of assets and liabilities including cash and cash equivalents, accounts receivable and accounts payable approximated their fair value as of September 30, 2017 and December 31, 2016 due to the relative short maturity of these instruments. Management estimates the fair values of the secured term loan and secured notes at approximately ~~98.6%~~101.5% and ~~98.3%~~106.4% respectively, of the respective principal balance outstanding as of September 30, ~~2017.~~2018. The carrying value approximates the fair value for the long-term debt. ~~The Company acquired $11.7 million of other long term debt from Novitex (refer to Note 3), which primarily relates to the financing of equipment.~~ Other debt represents the Company’s outstanding loan balances associated with various hardware and software purchases along with loans entered into by subsidiaries of the Company and as such, the cost incurred would approximate fair value. Property and equipment, intangible assets, capital lease obligations, and goodwill are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the respective asset is written down to its fair value.

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

The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as of September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

Carrying

Fair

Fair Value Measurements

Carrying

Fair

Fair Value Measurements

As of September 30, 2017

Amount

Value

Level 1

Level 2

Level 3

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

$
721

721

—

—

721

Long-term debt

1,278,306

1,327,130

—

1,327,130

—

1,307,884

1,438,469

1,438,469

$
1,279,027

$
1,327,851

$
—

$
1,327,130

$
721

Interest rate swap asset

$
6,753

6,753

—

6,753

Carrying

Fair

Fair Value Measurements

As of December 31, 2016

Amount

Value

Level 1

Level 2

Level 3

Recurring and nonrecurring assets and liabilities:

Acquisition contingent liability

$
721

$
721

$
—

$
—

$
721

Long-term debt

983,502

$
1,009,913

—

1,009,913

$
984,223

$
1,010,634

$
—

$
1,009,913

$
721

~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~

Carrying

Fair

Fair Value measurements

As of December 31, 2017

Amount

Value

Level 1

Level 2

Level 3

Recurring and nonrecurring assets and liabilities:

Acquisition contingent liability

$
721

721

—

—

721

Long-term debt

1,276,094

1,308,478

1,308,478

Interest rate swap asset

$
1,297

1,297

—

1,297

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

Balance as of January 1, 2016

$
1,513

Payments/Reductions

(792
)
Balance as of December 31, 2016

$
721

Payments/Reductions

—

Balance as of September 30, 2017

$
721

September 30,

December 31,

2018

2017

Balance as of Beginning of Period

$
721

$
721

Payments/Reductions

—

—

Balance as of End of Period

$
721

$
721

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)

~~14.~~11.   Stock-Based Compensation

At ~~Closing,~~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,~~closing of the Novitex Business Combination, the 2013 Plan, as well as all vested and unvested RSUs under the 2013 Plan were assumed by Ex-Sigma, LLC (“~~Ex-Sigma”~~ExSigma”), an entity formed by the former SourceHOV equity holders, which is also the Company’s principal stockholder. In accordance with U.S. GAAP, the Company ~~will continue~~continues to incur compensation expense related to the 9,880 unvested RSUs as of July 12, 2017 on a ~~straight line~~straight-line basis until fully vested, as the recipients of the RSUs are employees of the Company. ~~The Company incurred total compensation expense~~Subject to continuous employment and other terms of ~~$2.2 million and $4.4 million~~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 ~~these awards~~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 ~~three~~grant of incentive and ~~nine months ended September 30, 2017, respectively.~~
~~The Company has not approved any incentive plans to grant awards of~~nonqualified stock options, ~~stock appreciation rights,~~ 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 ~~performance awards~~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, ~~2017.~~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

~~Awards to Non-employees~~
~~At Closing, the Company issued 3,609,375 shares of common stock to advisors who~~Options are granted at not affiliates of the Company at the Closing in exchange for services provided. The shares issued were fully vested at the Closing. The Company records equity instruments issued to non-employees as expense at theless than fair ~~value. For the three months ended September 30, 2017, the Company recorded expense related to these non-employee advisors of $28.6 million in Selling, general and administrative expense, based~~market value on the ~~fair value~~date of ~~$8.00 per share.~~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:
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~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.

~~15.~~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.~~stock, par value $0.0001 per share. At ~~Closing,~~September 30, 2018 the Company had ~~146,910,648~~151,648,643 shares of common stock outstanding, of which: a) 80,600,000 shares were issued to Ex-Sigma, b) 30,600,000 shares were issued to the sole shareholder of Novitex, c) 12,093,331 shares were issued to the stockholders of Quinpario who did not redeem their shares, d) 3,609,375 shares were issued to certain third party advisors involved in the Business Combination, and e) 16,358,389 shares were issued to holders as part of a secondary offering at $8.00 per share with an additional 2,399,553 bonus shares issued. Certain shareholders of Quinpario were offered 25% common stock bonuses if they executed conversion agreements within a specified time limit. Seven Quinpario shareholders returned the agreements and were awarded 841,876 additional shares. As of September 30, 2017, there were no additional issuances of common stock other than the conversion of 3,000,000 shares of Series A Preferred Stock being converted into 3,667,803 shares of common stock. As of September 30, 2017, there were 150,578,451 shares of common stock issued and outstanding.
Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of Exela ~~common stock~~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~~Common Stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of Exela ~~common stock~~Common Stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the board of directors in its discretion out of funds legally available therefor and shall share equally on a per share basis in such dividends and distributions. The holders of the common stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock.

Preferred Stock

The Company is authorized to issue 20,000,000 shares of ~~Series A Preferred Stock~~preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At ~~the Closing,~~September 30, 2018, the Company ~~issued 9,194,233~~had 4,569,233 shares of Series A Preferred ~~Stock. Refer to Note 3 for additional details about the Business Combination.~~Stock outstanding. The par value of ~~the~~ 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~~six-month anniversary and prior to the third anniversary of the issue date, initially into 1.2226 shares of Exela common stock (assuming a conversion price of $8.80 per share and a third anniversary expected liquidation preference of $10.75911 per the below). Due to a Fundamental Change that occurred on August 1, 2017 as described in the beneficial conversion feature section of Note 2, preferred stockholders were able to convert their shares prior to the six month anniversary. Based on such assumed conversion rate, approximately 11,240,869 shares of Exela common stock would be issuable upon conversion of all of the shares of Series A Preferred Stock at the six month anniversary of the issue date. As 3,000,000 shares of Series A Preferred Stock converted into 3,667,803 shares of common stock upon the occurrence of a fundamental change, as of September 30, 2017, an additional 7,573,066 shares of common stock as issuable upon conversion of the remaining 6,194,233 shares of Series A PreferredCommon Stock.
~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~

Holders of the Series A Preferred Stock ~~are~~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.~~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~~board of ~~Directors.~~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
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~~Common Stock pro rata with the holders of the ~~common stock,~~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~~Common Stock immediately prior to the date on which such holders of the ~~common stock~~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, ~~2017,~~2018, there were ~~a total of 35,000,000~~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.~~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, ~~2017.~~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.

~~16.~~13.    Related-Party Transactions

Leasing Transactions

Certain operating companies lease their operating facilities from HOV RE, LLC ~~an affiliate~~and HOV Services Limited, which are affiliates through common interest held by ~~certain shareholders.~~ Ex-Sigma 2 LLC, our largest stockholder.
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 ~~both~~ the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, and $0.5 million for ~~both~~ the nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017.

Consulting Agreement

The Company receives services from Oakana Holdings, Inc. The Company and Oakana Holdings, Inc. are related through a family relationship between certain shareholders and the president of Oakana Holdings, Inc. The expense recognized for these services was ~~approximately~~ $0.1 million for ~~both~~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 for the three months ended September 30, 2018 and 2017, and $1.2 million and $1.3 million for the nine months ended September 30, 2018 and 2017, respectively. These expenses are included in cost of revenue in the consolidated statements of operations.
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~amounts or unless otherwise noted)
(Unaudited)

~~Relationship with HandsOn Global Management~~
The Company incurred management fees to HandsOn Global Management (“HGM”), SourceHOV’s former owner, of $3.0 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively, and $6.0 million and $4.5 million for the nine months ended September 30, 2017 and 2016, respectively. The contract with HGM was terminated upon consummation of the Business Combination, and no fees were payable after July 12, 2017.
The Company incurred no reimbursable travel expenses to HGM for the three months ended September 30, 2017 and $0.2 million for the three months ended September 30, 2016, and $0.5 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively.
The Company incurred marketing fees to Rule 14, LLC, a portfolio company of HGM, of $0.1 million for both the three months ended September 30, 2017 and 2016, and $0.3 million for both the nine months ended September 30, 2017 and 2016, respectively.
The Company incurred contract cancellation and advising fees to HGM of $23.0 million, $10 million of which was paid by the issuance of 1,250,000 shares of common stock, for the three months ended September 30, 2017, relating to the Business Combination.
~~Relationship with HOV Services, Ltd.~~
~~HOV Services, Ltd., a former shareholder of SourceHOV who currently owns equity interest in the Company through Ex-Sigma, provides the Company data capture and technology services.~~
The expense recognized for these services was approximately $0.4 million for both the three months ended September 30, 2017 and 2016, respectively, and $1.3 million for both the nine months ended September 30, 2017 and 2016, respectively and is included in cost of revenue in the consolidated statements of operations.
Relationship with Apollo Global Management, LLC

The Company provides services to and receives services from certain Apollo affiliated companies. Funds managed by Apollo Global Management, LLC have the right to designate two of the Company’s directors. On November 18, 2014, the Company’s subsidiary, Exela Enterprises Solutions, Inc. (“Novitex Solutions”), entered into a master services agreement with Management Holdings, an indirect wholly owned subsidiary of Apollo. Pursuant to this master services agreement, Novitex Solutions provides Management Holdings printer supplies and maintenance services, including toner maintenance, training, quarterly business review and printer procurement. We recognized revenue of $0.1 million and $0.2 million in our consolidated statements of operations from Apollo affiliated companies under this agreement for the three months ended September 30, 2018 and 2017. We recognized revenue of $0.5 million and $0.2 million for the nine months ended September 30, 2018 and 2017 in our consolidated statements of operations from Apollo affiliated companies under this agreement.
On January 18, 2017, Novitex Solutions entered into a master purchase and professional services agreement with Caesars Enterprise Services, LLC (“Caesars”). Caesars is controlled by investment funds affiliated with Apollo. Pursuant to this master purchase and professional services agreement, Novitex Solutions provides managed print services to Caesars, including general equipment operation, supply management, support services and technical support. We recognized revenue of approximately $1.1 million and 0.4 million in our consolidated statements of operations from Caesars under this master purchase and professional services agreement for the three months ended September 30, 2018 and 2017. We recognized revenue of $3.1 million and $0.4 million for the nine months ended September 30, 2018 and 2017 in our consolidated statements of operations from Caesars under this master purchase and professional services agreement.
On May 5, 2017, Novitex Solutions entered into a master services agreement with ADT LLC. ADT LLC is controlled by investment funds affiliated with Apollo. Pursuant to this master services agreement, Novitex Solutions provides ADT LLC with mailroom and onsite mail delivery services at an ADT LLC office location and managed print services, including supply management, equipment maintenance and technical support services. We recognized revenue of $0.2 million and $0.4 million in our consolidated statements of operations from ADT LLC under this master services agreement for the three and nine months ended September 30, 2018.
On July 20, 2017, Novitex Solutions entered into a master services agreement with Diamond Resorts Centralized Services Company. Diamond Resorts Centralized Services Company is controlled by investment funds affiliated with Apollo. Pursuant to this master services agreement, Novitex Solutions provides commercial print and promotional product procurement services to Diamond Resorts Centralized Services Company, including sourcing, inventory management and fulfillment services. The Company recognized revenue of $0.7 million and $4.9 million for the three and nine months ended September 30, 2018 and cost of revenue of $0.1 million for the nine months ended September 30, 2018 from Diamond Resorts Centralized Services Company under this master services agreement. No cost of revenue was recognized for the three months ended September 30, 2018 under this agreement.
In April 2016, Novitex Solutions entered into a master services agreement with Presidio Networked Solutions Group, LLC (“Presidio Group”), a wholly owned subsidiary of Presidio, Inc., a portion of which is owned by affiliates of Apollo and with a common Apollo designated director. Pursuant to this master services agreement, Presidio Group provides Novitex Solutions with employees, subcontractors, and/or goods and services. For ~~both~~the three and nine months ended September 30, 2018 there were related party expenses of $0.2 million and $0.5 million, respectively, for this service. For the three and nine months ended September 30, 2017 there were related party expenses of $0.2 million for ~~services received from an Apollo affiliated company with a common Apollo designated director.~~this service.
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~amounts or unless otherwise noted)
(Unaudited)

~~Receivable and~~ Payable Balances with Affiliates

~~Receivable and~~ Payable balances with affiliates as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are as follows:

September 30,
2017

December 31,
2016

September 30,

December 31,

Payables

Payables

2018

2017

HOV Services, Ltd

$
463

$
352

$
411

$
286

Rule 14

44

134

123

158

HGM

13,516

8,858

10,080

13,689

Presidio

451

—

Apollo affiliated company

142

312

$
14,474

$
9,344

$
10,756

$
14,445

~~17.~~14.    Segment ~~and Geographic Area~~ Information

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

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

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

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

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

Three months ended September 30, 2018

ITPS

HS

LLPS

Total

Revenue

$
307,313

$
56,776

$
18,941

$
383,030

Cost of revenue (exclusive of depreciation and amortization)

246,492

36,919

12,525

295,936

Selling, general and administrative expenses

44,913

Depreciation and amortization

35,041

Related party expense

759

Interest expense, net

38,339

Loss on extinguishment of debt

1,067

Sundry expense, net

(2,571
)
Other income, net

(781
)
Net loss before income taxes

$
(29,673
)
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share ~~amounts)~~amounts or unless otherwise noted)
(Unaudited)

Three months ended September 30, 2017

Three months ended September 30, 2017

ITPS

HS

LLPS

Total

ITPS

HS

LLPS

Total

Revenue

260,019

56,405

21,969

338,393

$
260,019

$
56,405

$
21,969

$
338,393

Cost of revenue

204,602

37,451

13,063

255,116

Gross profit

55,417

18,954

8,906

83,277

Cost of revenue (exclusive of depreciation and amortization)

204,602

37,451

13,063

255,116

Selling, general and administrative expenses

102,048

102,048

Depreciation and amortization

28,052

28,052

Related party expense

26,892

26,892

Interest expense, net

37,652

37,652

Sundry expense, net

563

Loss on extinguishment of debt

35,512

35,512

Sundry expense, net

563

Net loss before income taxes

$
(147,442
)

$
(147,442
)

Three months ended September 30, 2016

Nine months ended September 30, 2018

ITPS

HS

LLPS

Total

ITPS

HS

LLPS

Total

Revenue

97,402

60,657

28,314

186,373

$
949,381

$
171,722

$
65,476

$
1,186,579

Cost of revenue

66,704

38,729

16,347

121,780

Gross profit

30,698

21,928

11,967

64,593

Cost of revenue (exclusive of depreciation and amortization)

752,796

111,135

39,751

903,682

Selling, general and administrative expenses

30,829

137,231

Depreciation and amortization

18,761

109,428

Related party expense

2,448

3,267

Interest expense, net

27,399

114,883

Loss on extinguishment of debt

—

1,067

Sundry expense, net

711

(4,961
)
Other income, net

(4,813
)
Net loss before income taxes

$
(15,555
)

$
(73,205
)

Nine months ended September 30, 2017

ITPS

HS

LLPS

Total

Revenue

525,557

173,548

66,930

766,035

Cost of revenue

385,447

113,152

40,643

539,242

Gross profit

140,110

60,396

26,287

226,793

Selling, general and administrative expenses

172,626

Depreciation and amortization

70,779

Related party expense

31,733

Interest expense, net

91,740

Loss on extinguishment of debt

35,512

Sundry expense, net

2,960

Net loss before income taxes

$
(178,557
)
~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~

Nine months ended September 30, 2016

ITPS

HS

LLPS

Total

Revenue

309,112

189,046

79,369

577,527

Cost of revenue

208,614

120,700

48,386

377,700

Gross profit

100,498

68,346

30,983

199,827

Selling, general and administrative expenses

95,385

Depreciation and amortization

58,463

Related party expense

7,372

Interest expense, net

81,712

Loss on extinguishment of debt

—

Sundry expense, net

283

Net loss before income taxes

$
(43,388
)
~~The following table presents revenues by principal geographic area where the Company’s customers are located for the three and nine months ended September 30, 2017 and 2016:~~

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

United States

$
302,129

$
153,563

$
668,153

$
477,742

Europe

30,305

31,710

89,736

96,826

Other

5,959

1,100

8,146

2,959

Total Consolidated Revenue

$
338,393

$
186,373

$
766,035

$
577,527

Nine months ended September 30, 2017

ITPS

HS

LLPS

Total

Revenue

$
525,557

$
173,548

$
66,930

$
766,035

Cost of revenue (exclusive of depreciation and amortization)

385,447

113,152

40,643

539,242

Selling, general and administrative expenses

172,626

Depreciation and amortization

70,779

Related party expense

31,733

Interest expense, net

91,740

Sundry expense, net

2,960

Loss on extinguishment of debt

35,512

Net loss before income taxes

$
(178,557
)

~~18.~~15. Subsequent Events

~~In order to hedge against interest rate fluctuations with respect to term loan borrowings under the Credit Agreement, the Company~~On October 31, 2018 Exela entered into a ~~standard three year, one-month LIBOR interest rate hedging contract~~definitive agreement to acquire Drescher Group (“Drescher”), a well-established business process outsourcing (“BPO”) company focusing on integrated communications with a ~~notional amount of $347.8~~large presence in Europe’s largest economy, Germany. The purchase price was approximately $5.1 million ~~which~~on a cash free, debt free basis. The acquisition is ~~the remaining principal balance of the term loan. The hedge contract will swap out the floating rate interest risk related~~subject to ~~the LIBOR with a fixed interest rate of 1.9275%~~customary and ~~will go into effect starting January 12, 2018.~~
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,closing conditions, 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.
~~The Company performed its subsequent event procedures through November 9, 2017, the date these consolidated financial statements were made available for issuance.~~regulatory approval.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.~~Operations

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

Forward Looking Statements

Certain statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report are not historical facts but are forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are accompanied by words such as “may”, “should”, “would”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “seem”, “seek”, “continue”, “future”, “will”, “expect”, “outlook” or other similar words, phrases or expressions. These forward-looking statements include statements regarding our industry, future events, the estimated or anticipated future results and benefits of the ~~recently consummated~~Novitex Business Combination, future opportunities for the combined company, and other statements that are not historical facts. These statements are based on the current expectations of Exela management and are not predictions of actual performance. These statements are subject to a number of risks and uncertainties regarding Exela’s businesses and actual results may differ materially. ~~These risks~~The factors that may affect our results include, among others: the impact of political and ~~uncertainties include, but are not limited~~economic conditions on the demand for our services; the impact of a data or security breach; the impact of competition or alternatives to ~~changes~~our services on our business pricing and other actions by competitors; our ability to address technological development and change in order to keep pace with our industry and the industries of our customers; the impact of terrorism, natural disasters or similar events on our business; the effect of legislative and regulatory actions in the ~~business environment~~United States and internationally; the impact of operational failure due to the unavailability or failure of third-party services on which we rely; the effect of intellectual property infringement; and other factors discussed in ~~which Exela operates~~this quarterly report and ~~general financial, economic, regulatory and political conditions affecting~~our Annual Report on Form 10-K for the industries in which Exela operates; changes in taxes, governmental laws, and regulations; competitive product and pricing activity; failure to realize the anticipated benefits of the Business Combination, including as a result of a delay or difficulty in integrating the businesses of SourceHOV and Novitex or the inability to realize the expected amount and timing of cost savings and operating synergies of the Business Combination; and those factors discussedyear ended December 31, 2017 (our “Annual Report”) under the heading “Risk Factors” as supplemented by risk factors described in ~~Exela’s Proxy Statement dated~~Part II, “Item 1A. Risk Factors” of our quarterly report for the quarter ended June ~~26, 2017 (the “Proxy Statement”) filed with~~30, 2018 and otherwise identified or discussed in this quarterly report. You should consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on such statements, which speak only as of the ~~Securities and Exchange Commission (“SEC”).~~date of this quarterly report. It is impossible for us to predict new events or circumstances that may arise in the future or how they may affect us. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this quarterly report. We are not including the information provided on the websites referenced herein as part of, or incorporating such information by reference into, this quarterly report. In addition, forward-looking statements provide Exela’s expectations, plans or forecasts of future events and views as of the date of this quarterly report. Exela anticipates that subsequent events and developments will cause Exela’s assessments to change. These forward-looking statements should not be relied upon as representing Exela’s assessments as of any date subsequent to the date of this quarterly report.
Overview

We are a global provider of transaction processing solutions, enterprise information management, document management and digital business process services. Our technology-enabled solutions allow multi-national organizations to address critical challenges resulting from the massive amounts of data obtained and created through their daily global operations. Our solutions address the life cycle of transaction processing and enterprise information management, from enabling payment gateways and data exchanges across multiple systems, to matching inputs against contracts and handling exceptions, to ultimately depositing payments and distributing communications. We believe our process expertise, information technology capabilities and operational insights enable our clients’ organizations to more efficiently and effectively execute transactions, make decisions, drive revenue and profitability, and communicate critical information to their employees, customers, partners, and vendors.

History

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

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

This analysis is presented on a consolidated basis. In addition, a ~~brief~~ description is provided of significant transactions and events that have an impact on the comparability of the results being analyzed. Due to our specific situation, the ~~presented~~ financial information presented for the three and nine ~~month periods~~months ended September 30, ~~2017~~2018 is only partially comparable to the financial information for the three and nine ~~month periods~~months ended September 30, ~~2016.~~2017. Since SourceHOV was deemed the accounting acquirer in the Novitex Business Combination consummated on July 12, 2017, the ~~presented~~ financial information presented for the three and nine ~~month periods~~months ended September 30, ~~2016~~2017 reflects the financial information and activities of SourceHOV only. The ~~presented~~ financial information presented for the ~~quarter~~three and nine months ended September 30, ~~2017~~2018 includes the financial information and activities for SourceHOV ~~for the period July 1, 2017 to September 30, 2017 (92 days) as well as the financial information~~ and ~~activities of~~ Novitex for the period ~~July 13, 2017~~January 1, 2018 to September 30, ~~2017 (80 days).~~2018. This lack of comparability needs to be taken into account when reading the discussion and analysis of our results of operations and cash flows. Furthermore, the presented financial information for the three and nine month periods ended September 30, 2017 also contains other one-time costs that are directly associated with the Business Combination, such as professional fees, to support the our new and complex legal, tax, statutory and reporting requirements following the Business Combination.

Our Segments

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

~~ITPS~~ITPS:: Our largest segment, ITPS, provides a wide range of solutions and services designed to aid businesses in information capture, processing, ~~decisioning~~ and distribution to customers primarily in the financial services, commercial, public sector and legal industries. Our major customers include ~~9 of~~ the top 10 U.S. banks, 79 of the top 10 U.S. insurance companies, 5 of the top U.S. telecom companies, over 40 utility companies, over 30 state and county departments, and over 80 government entities. Our ITPS offerings
enable companies to increase availability of working capital, reduce turnaround times for application processes, increase regulatory compliance and enhance consumer engagement.

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

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

Acquisitions

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

Prior to the 2017 Novitex Business Combination, SourceHOV transformed into a multi-industry solution provider and acquired key technology through the acquisition of TransCentra, Inc. (‘‘TransCentra’’), a provider of integrated outsourced billing, remittance processing and imaging software and consulting services. The addition of TransCentra increased SourceHOV’s footprint in the remittance transaction processing and presentment area, expanded its mobile banking offering and enabled significant cross-selling and up-selling opportunities.
On April 10, 2018, Exela completed the acquisition of Asterion International Group (“Asterion”), a well-established provider of technology driven business process outsourcing, document management and business process automation (“BPA”) across Europe. Asterion currently serves over 250 key customers in Europe from 13 operating locations and 30 customer sites. The purchase price was approximately $19.5 million. The acquisition comes with minimal customer overlap and is strategic to expand Exela’s pro forma combined European business to over $200 million in annual revenue. This acquisition will not only enable Asterion’s customers to access Exela’s full suite of BPA solutions but also strategically position Exela to expand its existing revenue base through a broader portfolio of offerings with a larger European presence.
Revenues

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

People

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

As of September 30, 2017, we had approximately 22,100 employees globally, with 56% located in the United States and the remainder located primarily in Europe, India, the Philippines, Mexico, and China.
~~Labor costs~~Costs associated with our employees represent the most significant ~~costs of~~expense for our business. We incurred personnel costs of ~~$168.0~~$168.8 million and ~~$87.0~~$168.0 million for the three months ended September 30, 2018 and 2017, ~~and 2016, respectively,~~respectively. We incurred personnel costs of $516.5 million and $360.0 ~~million and $275.0~~ million for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The majority of our personnel costs are variable and are incurred only while we are providing ~~its~~our services.
~~Facilities~~
We lease and own numerous facilities worldwide with larger concentrations of space in Texas, Michigan, Connecticut, California, India, Mexico, the Philippines, and China. Our owned and leased facilities house general offices, sales offices, service locations, and production facilities.
The size of our active property portfolio as of September 30, 2017 was approximately 3.7 million square feet at an annual operating cost of approximately $32.0 million and comprised 136 leased properties and 7 owned properties..
We believe that our current facilities are suitable and adequate for our current businesses. Because of the interrelation of our business segments, each of the segments use substantially all of these properties at least in part.
Key Performance Indicators

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

·Revenue by segment;

·                  ~~Gross Profit by segment;~~
·                  ~~Gross Profit Margin by segment;~~
·EBITDA; and

·Adjusted ~~EBITDA.~~EBITDA
Revenue

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

~~Gross Profit and Gross Profit Margin~~
~~We analyze our gross profit by segment by comparing to prior periods.~~
EBITDA and Adjusted EBITDA

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

Results of Operations

Three Months Ended September 30, ~~2017~~2018 compared to Three Months Ended September 30, ~~2016~~2017:

Three Months ended September 30,

2017

2016

Revenue:

ITPS

$
260,019

$
97,402

HS

56,405

60,657

LLPS

21,969

28,314

Total revenue

338,393

186,373

Cost of revenues:

ITPS

204,602

66,704

HS

37,451

38,729

LLPS

13,063

16,347

Total cost of revenues

255,116

121,780

Gross profit

83,277

64,593

Selling, general and administrative expenses

102,048

30,829

Depreciation and amortization

28,052

18,761

Related party expenses

26,892

2,448

Operating income

(73,715
)
12,555

Interest expense, net

37,652

27,399

Loss on extinguishment of debt

35,512

—

Sundry expense/(income), net

563

711

Net loss before taxes

(147,442
)
(15,555
)
Income tax (expense) benefit

37,002

3,757

Net loss

(110,440
)
(11,798
)

Three Months ended September 30,

2018

2017

Change

% Change

Revenue:

ITPS

$
307,313

$
260,019

$
47,294

18.19
%
HS

56,776

56,405

371

0.66
%
LLPS

18,941

21,969

(3,028
)
-13.78
%
Total revenue

383,030

338,393

44,637

13.19
%
Cost of revenues (exclusive of depreciation and amortization):

ITPS

246,492

204,602

41,890

20.47
%
HS

36,919

37,451

(532
)
-1.4
%
LLPS

12,525

13,063

(538
)
-4.12
%
Total cost of revenues

295,936

255,116

40,820

16.00
%
Selling, general and administrative expenses

44,913

102,048

(57,135
)
-55.99
%
Depreciation and amortization

35,041

28,052

6,989

24.91
%
Related party expense

759

26,892

(26,133
)
-97.18
%
Operating income

6,381

(73,715
)
80,096

-108.66
%
Interest expense, net

38,339

37,652

687

1.82
%
Loss on extinguishment of debt

1,067

35,512

(34,445
)
-97.00
%
Sundry expense/(income), net

(2,571
)
563

(3,134
)
-556.66
%
Other income, net

(781
)
—

(781
)
—

Net loss before taxes

(29,673
)
(147,442
)
117,769

-79.87
%
Income tax expense

733

37,002

(36,269
)
-98.02
%
Net loss

$
(28,940
)
$
(110,440
)
$
81,500

-73.8
%

Revenue

~~Our revenue increased $152.0 million, or 81.6%, to $338.4 million for the three months ended September 30, 2017 compared to $186.4 million for the three months ended September 30, 2016. This~~The increase in total revenues was primarily related to ~~an increase in~~ the ~~ITPS segment revenues of $162.6 million, which was primarily attributable to~~Novitex Business Combination and the ~~acquisition of~~
~~TransCentra in late 2016 and Novitex in 2017. The increase was partially offset by a decrease in revenues in the HS segment and LLPS segment of $4.3 million and $6.3 million, respectively.~~Asterion Business Combination. Our ITPS, HS, and LLPS segments constituted ~~76.8%~~80.2%, ~~16.7%~~14.8%, and ~~6.5%~~5.0% of total revenue, respectively, for the three months ended September 30, ~~2017,~~2018, compared to ~~52.3%~~76.8%, ~~32.5%~~16.7%, and ~~15.2%~~6.5%, respectively, for the three months ended September 30, ~~2016.~~2017. The revenue changes by reporting segment were as follows:

~~ITPS—Revenues increased $162.6~~ITPS —   The increase was primarily attributable to the Novitex Business Combination and the Asterion Business Combination, which contributed $28.1 million and $18.9 million, or ~~167.0%,~~99.5% of the increase.
HS   —       The amounts are materially consistent with the prior period.
LLPS — The decrease was primarily attributable to ~~$260.0~~projects winding down during the third quarter of 2018.
Cost of Revenue
The increase in total cost of revenue was primarily related to the Novitex Business Combination and the Asterion Business Combination. The cost of revenue changes by operating segment was as follows:
ITPS — The increase was primarily attributable to the Novitex Business Combination and the Asterion Business Combination, which contributed approximately $26.0 million and $17.5 million of the increase.
HS   —       The amounts are materially consistent with the prior period. Cost of revenue as a percentage of total revenue was 65.0% in the third quarter of 2018 compared to 66.4% in the third quarter of 2017, a decrease of 1.4%.
LLPS — Cost of revenue as a percentage of revenue increased to 66.1% in the third quarter of 2018 compared to 59.5% in the third quarter of 2017 mainly driven by the lower revenue from projects winding down.
Selling, General and Administrative Expenses
The decrease of $57.1 million for the comparative period was primarily driven by the one-time transaction costs incurred in 2017 as part of the Business Combination, offset by the impact of the Asterion Business Combination which contributed $2.0 million in expense for the three months ended September 30, 2018.
Depreciation & Amortization
The increase was primarily attributable to amortization of trademarks and trade names resulting in higher amortization expense.
Related Party Expenses
Excluding the $23.0 million of contract termination and advisory fees to HandsOn Global Management (“HGM”) during 2017 in connection with the Novitex Business Combination, the expenses remained relatively flat.
Interest Expense
The amounts are materially consistent with the prior period.
Sundry Expense (Income)
The decrease was primarily attributable to foreign currency transaction losses associated with exchange rate fluctuations.
Other Income
The increase is primarily attributable to an interest rate swap entered into in 2017. The interest rate swap was not designated as a hedge. As such, changes in the fair value of this derivative instrument of $0.8 million for the quarter ended September 30, 2018 were recorded directly in earnings.
Income Tax (Expense) Benefit
We had an income tax benefit of $0.7 million for the three months ended September 30, ~~2017~~2018 compared to ~~$97.4~~an income tax benefit of $37.0 million for the three months ended September 30, ~~2016.~~2017. The ~~increase~~change in the income tax expense was primarily attributable to our change in judgment related to the ~~acquisition~~realizability of Novitex that was completed in mid-2017 which contributed $134.4 million, or 82.7% of the increase. Additionally, the TransCentra acquisition that was completed in late 2016 contributed $26.5 million, or 16.3% of the increase.certain deferred tax assets. The ~~remainder of the increase of approximately $1.5 million was driven by the appreciation of British Pounds (“GBP”) and Euros (“EUR”) compared to USD.~~
~~HS— Revenues decreased $4.3 million, or 7.0%, to $56.4 million~~income tax benefit for the three months ended September 30, 2017 ~~compared~~was primarily related to ~~$60.7 million~~the decrease of valuation allowance on a portion of the Company’s U.S. federal and state valuation allowance on deferred tax assets in connection with the acquisition of Novitex. The change in the effective tax rate for the three months ended September 30, ~~2016.~~2018 resulted from permanent tax adjustments and valuation allowances, including valuation allowances against disallowed interest expense deferred tax assets that are not more-likely-than-not to be realized.
Nine Months Ended September 30, 2018 compared to Nine Months Ended September 30, 2017:

Nine Months ended September 30,

2018

2017

Change

% Change

Revenue:

ITPS

$
949,381

$
525,557

$
423,824

80.64
%
HS

171,722

173,548

(1,826
)
-1.05
%
LLPS

65,476

66,930

(1,454
)
-2.17
%
Total revenue

1,186,579

766,035

420,544

54.90
%
Cost of revenues (exclusive of depreciation and amortization):

ITPS

752,796

385,447

367,349

95.30
%
HS

111,135

113,152

(2,017
)
-1.78
%
LLPS

39,751

40,643

(892
)
-2.19
%
Total cost of revenues

903,682

539,242

364,440

67.58
%
Selling, general and administrative expenses

137,231

172,626

(35,395
)
-20.50
%
Depreciation and amortization

109,428

70,779

38,649

54.61
%
Related party expense

3,267

31,733

(28,466
)
-89.70
%
Operating income

32,971

(48,345
)
81,316

-168.20
%
Interest expense, net

114,883

91,740

23,143

25.23
%
Loss on extinguishment of debt

1,067

35,512

(34,445
)
-97.00
%
Sundry expense/(income), net

(4,961
)
2,960

(7,921
)
-267.60
%
Other income, net

(4,813
)
—

(4,813
)
—

Net loss before taxes

(73,205
)
(178,557
)
105,352

-59.00
%
Income tax expense

(4,911
)
32,924

(37,835
)
-114.92
%
Net loss

$
(78,116
)
$
(145,633
)
$
67,517

-46.4
%
Revenue
The increase in total revenues was primarily related to the Novitex Business Combination and the Asterion Business Combination. Our ITPS, HS, and LLPS segments constituted 80.0%, 14.5%, and 5.5% of total revenue, respectively, for the nine months ended September 30, 2018, compared to 68.6%, 22.7%, and 8.7%, respectively, for the nine months ended September 30, 2017. The revenue changes by reporting segment were as follows:
ITPS —   The increase was primarily attributable to the Novitex Business Combination and the Asterion Business Combination, which contributed $378.3 million and $39.8 million, or 98.6% of the increase.
HS — The net decrease of $2.0 million is primarily attributable to lower volumes in healthcare provider business.
LLPS — The decrease was primarily attributable to ~~a surge in demand from healthcare provider clients in first three quarters~~the disposal of 2016 as a result of a change in regulatory coding requirements, resulting in a decline in revenue of $3.3 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. We have since experienced a normalization of demand as healthcare provider clients have reduced outsourcing of the service.
LLPS— Revenues decreased $6.3 million, or 22.4%, to $22.0 million for the three months ended September 30, 2017 compared to $28.3 million for the three months ended September 30, 2016. The decrease was primarily attributable to lower revenue from the legal claims administration services of $4.7 million, along with a decrease of $1.2 million attributable to Meridian Consulting ~~Group, LLC which was sold~~ in Q1the first quarter of 2017.

Cost of Revenue

~~Cost of revenue increased $133.3 million, or 109.5%, to $255.1 million for the three months ended September 30, 2017 compared to $121.8 million for the three months ended September 30, 2016.~~ The increase ~~was attributable to an increase~~ in ~~the~~total cost of revenue inwas primarily related to the ~~ITPS segment of $137.9 million, partially offset by decreases in~~Novitex Business Combination and the ~~HS and LLPS segments of $1.2 million and $3.2 million, respectively.~~Asterion Business Combination. The cost of revenue ~~decrease~~changes by operating segment was as follows:

~~ITPS—Cost of revenue increased $137.9 million, or 206.7%, to $204.6 million for the three months ended September 30, 2017 compared to $66.7 million for the three months ended September 30, 2016.~~ITPS — The increase was primarily attributable to the ~~acquisition of~~ Novitex Business Combination and the Asterion Business combination, which contributed approximately ~~$114.6~~$324.5 million and $36.6 million, or ~~83.1%~~98.3% of the increase. ~~The acquisition of TransCentra contributed approximately $21.3 million, or 15.4% of the increase. The remainder of the increase was primarily driven by the appreciation of GBP and EUR against the USD.~~

~~HS—Cost of revenue decreased $1.2 million, or 3.3%, to $37.5 million for the three months ended September 30, 2017 compared to $38.7 million for the three months ended September 30, 2016.~~HS — The decrease was primarily driven by ~~lower revenue in the healthcare provider business as described above.~~
~~LLPS—~~cost savings synergies. Cost of revenue ~~decreased $3.2 million, or 20.1%,~~as a percentage of revenue remained relatively flat at 64.7% in the first nine months of 2018 compared to ~~$13.1 million~~65.2% in the first nine months of 2017.
LLPS — Cost of revenue, as a percentage of revenue remained flat at 60.7% for the ~~three~~first nine months ended September 30, 2017 compared to $16.3 million for the three months ended September 30, 2016. The decrease was primarily attributable to a decrease in corresponding revenues from the legal claims administration of ~~$2.1 million, along with a decrease of $0.8 million attributable to Meridian Consulting Group, LLC which was sold in Q1~~2018 as well as 2017.

~~Gross Profit~~
Gross profit increased $18.7 million, or 28.9%, to $83.3 million for the three months ended September 30, 2017 compared to $64.6 million for the three months ended September 30, 2016. For the three months ended September 30, 2017, gross margins for ITPS, HS, and LLPS were 21.3%, 33.6%, and 40.5%, respectively, compared to 31.5%, 36.2%, and 42.3%, respectively, for the three months ended September 30, 2016.
Selling, General and Administrative Expenses

~~Selling, general, and administrative expenses increased $71.2 million, or 231.0%, to $102.0~~The decrease of $35.4 million for the ~~three months ended September 30, 2017 compared to $30.8 million for the three months ended September 30, 2016. The increase~~comparative period was primarily ~~attributable to~~driven by the ~~acquisitions~~one-time transaction costs incurred in 2017 as part of the Novitex and TransCentra, which contributed $16.0 million and $1.9 million, respectively, in expense for the three months ended September 30, 2017. Additionally, the increase is attributable to expenses for professional and advisory fees related to the Business ~~Combination, which contributed $51.3 million in expense for the three months ended September 30, 2017.~~Combination.

Depreciation & Amortization

Depreciation and amortization expense increased $9.3 million, or 49.5%, to $28.1 million for the three months ended September 30, 2017 compared to $18.8 million for the three months ended September 30, 2016. The increase was primarily attributable to ~~higher balances~~accelerated amortization of ~~customer relationships, developed technology,~~trademarks and ~~outsource contract costs,~~trade names resulting in higher amortization ~~expense for the three months ended September 30, 2017 compared to the three months ended September 30, 2016.~~expense.

Related Party Expenses

~~Related party expenses increased $24.5 million to $26.9 million for the three months ended September 30, 2017 compared to $2.4 million for the three months ended September 30, 2016.~~ The ~~increase~~decrease was primarily attributable to the $23.0 million of contract termination and ~~advising~~advisory fees ~~as a result~~to HandsOn Global Management (“HGM”) during 2017 in connection with the Novitex Business Combination. Additionally, the July 2017 termination of the ~~Business Combination.~~management agreement with HGM resulted in lower management fees expense of $3.0M for the comparative period.

Interest Expense

~~Interest expense increased $10.3 million, or 37.4%, to $37.7 million for the three months ended September 30, 2017 compared to $27.4 million for the three months ended September 30, 2016.~~ The increase was primarily attributable to the issuance of new debt in conjunction with the ~~Business Combination.~~
~~Loss on Extinguishment of Debt~~
Loss on extinguishment of debt increased $35.5 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 due to the restructuring of the debt as a result of theNovitex Business Combination.

Sundry ~~Expense/~~Expense (Income)

~~Sundry expense decreased $0.1 million to $0.6 million expense for the three months ended September 30, 2017 compared to $0.7 million expense for the three months ended September 30, 2016.~~ The decrease was primarily attributable to foreign currency transaction losses associated with exchange rate fluctuations.

Other Income ~~Tax (Expense) Benefit~~

~~We had income tax benefit of $37.0 million~~ ~~for the three months ended September 30, 2017 compared to an income tax benefit of $3.8 million for the three months ended September 30, 2016.~~ The ~~change in the income tax benefit was~~increase is primarily attributable to an interest rate swap entered into in 2017. The interest rate swap was not designated as a hedge. As such, changes in the reversal of $11.5 million of our beginning of the year U.S. federal and state valuation allowance on deferred tax assets that are more likely-than-not to be realized, in connection with the acquisition of Novitex. The impactfair value of this ~~reduction~~derivative instrument of valuation allowance on our effective tax rate for the three months ended September 30, 2017 was partially offset by an increase in valuation allowance on the current year losses that are not more-likely-than-not to be realized and nondeductible transaction costs.
~~Net Loss~~
~~Net loss increased $98.6 million to $110.4 million for the three months ended September 30, 2017 compared to $11.8 million for the three months ended September 30, 2016 as a result of the above.~~
~~Nine Months Ended September 30, 2017 compared to Nine Months Ended September 30, 2016~~

Nine Months ended September 30,

2017

2016

Revenue:

ITPS

$
525,557

$
309,112

HS

173,548

189,046

LLPS

66,930

79,369

Total revenue

766,035

577,527

Cost of revenues:

ITPS

385,447

208,614

HS

113,152

120,700

LLPS

40,643

48,386

Total cost of revenues

539,242

377,700

Gross profit

226,793

199,827

Selling, general and administrative expenses

172,626

95,385

Depreciation and amortization

70,779

58,463

Related party expenses

31,733

7,372

Operating income

(48,345
)
38,607

Interest expense, net

91,740

81,712

Loss on extinguishment of debt

35,512

—

Sundry expense/(income), net

2,960

283

Net loss before taxes

(178,557
)
(43,388
)
Income tax (expense) benefit

32,924

9,969

Net loss

(145,633
)
(33,419
)
~~Revenue~~
~~Our revenue increased $188.5 million, or 32.6%, to $766.0~~$5.5 million for the nine months ended September 30, ~~2017 compared to $577.5 million for the nine months ended September 30, 2016.~~2018 were recorded directly in earnings. This ~~increase~~ was primarily related to an increase in the ITPS segment revenues of $216.5 million, which was partially attributable to the acquisitions of TransCentra in late 2016 and Novitex in 2017. The increase was partially offset by a decrease in the HS and LLPS segments of $15.5 million and $12.5 million, respectively. For the nine months ended September 30, 2017, our ITPS, HS, and LLPS segments constituted 68.6%, 22.7%, and 8.7% of total revenue, respectively, compared to 53.6%, 32.7%, and 13.7%, respectively, for the nine months ended September 30, 2016. The revenue changes by reporting segment were as follows:
ITPS—Revenues increased $216.5 million, or 70.0%, to $525.6 million for the nine months ended September 30, 2017 compared to $309.1 million for the nine months ended September 30, 2016. The increase was primarily attributable to the acquisition of Novitex, which contributed $134.4 million, or 62.1% of the increase. Additionally, the acquisition of TransCentra that was completed in late 2016 contributed $94.1 million, or 43.5% of the increase. The increase was partially offset by devaluation of GBP and EUR compared to USD, resulting in a decrease of $3.4 million. Additionally, the increase was further offset by a decrease in revenue from the hardware business and revenue from the European business of $3.6 million and $3.7 million, respectively.
HS— Revenues decreased $15.5 million, or 8.2%, to $173.5 million for the nine months ended September 30, 2017 compared to $189.0 million for the nine months ended September 30, 2016. The decrease was primarily attributable to a surge in demand from healthcare provider clients in early 2016 as a result of a change in regulatory
coding requirements beginning in the fourth quarter of 2015, resulting in a decline in revenue of $16.6 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. We have since experienced a normalization of demand as healthcare provider clients have reduced outsourcing of the service. The decrease was partially offset by an increase in revenues of $3.2 million from the Payer business during the period.
LLPS— Revenues decreased $12.5 million, or 15.7%, to $66.9 million for the nine months ended September 30, 2017 compared to $79.4 million for the nine months ended September 30, 2016. The decrease was primarily attributable to lower revenue from the legal claims administration services of $8.2 million, lower revenue from ERS of $2.0 million, along with a lower revenues attributable tonet loss on the sale of ~~Meridian Consulting Group, LLC~~a business asset of ~~approximately $3.2 million during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016 as it was sold in Q1 2017.~~
~~Cost of Revenue~~
Cost of revenue increased $161.5 million, or 42.8%, to $539.2 million for the nine months ended September 30, 2017 compared to $377.7 million for the nine months ended September 30, 2016. The increase was primarily attributable to an increase in the ITPS segment of $176.8 million, offset by decreases in the HS and LLPS segments of $7.5 million and $7.8 million, respectively. The cost of revenue decrease by operating segment was as follows:
ITPS—Cost of revenue increased $176.8 million, or 84.8%, to $385.4 million for the nine months ended September 30, 2017 compared to $208.6 million for the nine months ended September 30, 2016. The increase was primarily attributable to the acquisition of Novitex, which contributed $114.6 million, or 64.8% of the increase. The acquisition of TransCentra contributed approximately $75.4 million, or 42.6% of the increase. The increase was partially offset by decreases as a result of the decline in hardware services revenue, and devaluation of GBP and EUR compared to USD of $1.6 million and $2.6 million, respectively. Additionally, the increase was further offset by various cost savings initiatives implemented during the nine months ended September 30, 2017.
HS—Cost of revenue decreased $7.5 million, or 6.3%, to $113.2 million for the nine months ended September 30, 2017 compared to $120.7 million for the nine months ended September 30, 2016. The decrease was primarily attributable to normalization of demand for coding during the nine months ended September 30, 2017 after the surge we experienced in early 2016 as a result of the increased healthcare coding requirements, resulting in a decrease of $4.3 million, along with an associated decrease in revenue. The decrease was partially offset by an increase of $1.6 million due to higher revenues from the Payer business during the nine months ended September 30, 2017. Additionally, the increase was further offset by various cost savings initiatives implemented during the nine months ended September 30, 2017.
LLPS—Cost of revenue decreased $7.8 million, or 16.0%, to $40.6 million for the nine months ended September 30, 2017 compared to $48.4 million for the nine months ended September 30, 2016. The decrease was primarily attributable to a decrease in revenues from the legal claims administration of $3.8 million, $0.5 million due to lower revenues from ERS, along with a decrease of $0.7 million as a result of the sale of Meridian Consulting Group, LLC. Additionally, the increase was further offset by various cost savings initiatives implemented during the nine months ended September 30, 2017.
~~Gross Profit~~
Gross profit increased $27.0 million, or 13.5%, to $226.8 million for the nine months ended September 30, 2017 compared to $199.8 million for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, gross margins for ITPS, HS, and LLPS were 26.7%, 34.8%, and 39.3%, respectively, compared to 32.5%, 36.2%, and 39.0%, respectively, for the nine months ended September 30, 2016.
~~Selling, General and Administrative Expenses~~
Selling, general, and administrative expenses increased $77.2 million, or 81.0%, to $172.6 million for the nine months ended September 30, 2017 compared to $95.4 million for the nine months ended September 30, 2016. The increase was primarily attributable to the acquisitions of Novitex and TransCentra, which contributed $16.0 million and $6.4 million, respectively, in expense for the nine months ended September 30, 2017. Additionally, the increase is attributable to expenses for professional fees related to the Business Combination, which contributed $61.0 million
in expense for the nine months ended September 30, 2017. The increases were partially offset by a decrease due to cost saving initiatives we implemented, including reduced medical insurance expenditures and administrative wages.
~~Depreciation & Amortization~~
Depreciation and amortization expense increased $12.3 million, or 21.1%, to $70.8 million for the nine months ended September 30, 2017 compared to $58.5 million for the nine months ended September 30, 2016. The increase was primarily attributable to higher balances of customer relationships, developed technology, and outsource contract costs, resulting in higher amortization expense for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
~~Related Party Expenses~~
Related party expenses increased $24.3 million to $31.7 million for the nine months ended September 30, 2017 compared to $7.4 million for the nine months ended September 30, 2016. The increase was primarily attributable to contract termination and advising fees as a result of the Business Combination.
~~Interest Expense~~
Interest expense increased $10.0 million, or 12.3%, to $91.7 million for the nine months ended September 30, 2017 compared to $81.7 million for the nine months ended September 30, 2016. The increase was primarily attributable to the issuance of new debt in conjunction with the Business Combination.
~~Loss on Extinguishment of Debt~~
Loss on extinguishment of debt increased $35.5 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to the restructuring of the debt as a result of the Business Combination.
~~Sundry Expense/(Income)~~
Sundry expense increased $2.7 million to $3.0 million expense for the nine months ended September 30, 2017 compared to $0.3 million expense for the nine months ended September 30, 2016. The increase was attributable to foreign currency transaction losses associated with exchange rate fluctuations.0.7 million.

Income Tax (Expense) Benefit

We had income tax expense of $4.9 million for the nine months ended September 30, 2018 compared to income tax benefit of $32.9 million for the nine months ended September 30, 2017. The change in the income tax expense was primarily attributable to our change in judgment related to the realizability of certain deferred tax assets. The income tax benefit for the nine months ended September 30, 2017 ~~compared to an income tax benefit of $10.0 million for the nine months ended September 30, 2016. The change in the income tax benefit~~ was ~~partially attributable~~primarily related to the ~~reversal~~decrease of ~~$11.5 million~~valuation allowance on a portion of ~~our~~the Company’s U.S. federal and state valuation allowance on deferred tax assets ~~that are more likely-than-not to be realized,~~ in connection with the acquisition of Novitex. The ~~impact of this reduction of valuation allowance on our~~change in the effective tax rate for the three months ended September 30, 2017 was partially offset by an increase in valuation allowance on the current year losses that are not more-likely-than-not to be realized and nondeductible transaction costs.
~~Net Loss~~
~~Net loss increased $112.2 million to $145.6 million~~ for the nine months ended September 30, ~~2017 compared~~2018 resulted from permanent tax adjustments and valuation allowances, including valuation allowances against disallowed interest expense deferred tax assets that are not more-likely-than-not to ~~$33.4 million for the nine months ended September 30, 2016 as a result of the above.~~be realized.

Other Financial Information (Non-GAAP Financial Measures)

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

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

Note Regarding Non-GAAP Financial Measures

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

Three months ended September 30, 2018 compared to the Three Months ended September 30, 2017
The following ~~tables present~~table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the three ~~and nine~~ months ended September 30, ~~2017~~2018 and ~~2016:~~2017:

~~Three months ended September 30, 2017 compared to the Three Months ended September 30, 2016~~

Three months ended September 30,

Three months ended September 30,

2017

2016

2018

2017

Net Loss

$
(110,440
)
$
(11,798
)

$
(28,940
)
$
(110,440
)
Taxes

(37,002
)
(3,757
)

(733
)
(37,002
)
Interest Expense

37,652

27,399

38,339

37,652

Depreciation and Amortization

28,052

18,761

35,041

28,052

EBITDA

(81,738
)
30,605

43,707

(81,738
)
Optimization and Restructuring expenses (1)

19,702

4,929

Transaction and integration costs (2)

77,321

702

Optimization and restructuring expenses (1)

19,446

19,702

Transaction related costs (2)

220

77,321

Non-cash equity compensation (3)

2,230

1,715

1,621

2,230

Other non-cash charges (4)

364

75

Other charges including non-cash (4)

2,848

364

Loss on sale of of assets (5)

—

56

769

—

Gain on sale of Meridian (6)

(337
)
—

—

(337
)
Management, Board Fees and expenses (7)

—

1,737

Loss on extinguishment of debt

35,512

—

1,067

35,512

Gain on derivative instruments

(781
)
—

Adjusted EBITDA

53,054

39,819

$
68,898

53,054

(1)         Adjustment represents net salary and benefits associated with positions that ~~were terminated,~~are part of the on-going savings initiatives including severance, retention bonuses, and related fees and expenses. Additionally, the adjustment includes charges incurred by us to terminate existing lease and vendor contracts as part of ~~facility consolidation~~the on-going savings initiatives.
(2)         Represents costs incurred related to transactions ~~and integration~~ for completed or contemplated transactions during the period. ~~For the three months ended September 30, 2017, only transaction costs were incurred.~~
(3)         Represents the non-cash charges related to restricted stock units and options granted by Ex-Sigma, LLC and Exela to our employees that vested during the year.
(4)         Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase ~~accounting.~~accounting and other non-cash charges.
(5)         Represents a loss recognized on the disposal of property, plant, and equipment and other assets.
(6)         Represents a gain recognized on the disposal of Meridian Consulting Group, LLC.
EBITDA and Adjusted EBITDA
EBITDA was $43.7 million for the three months ended September 30, 2018 compared to $(81.7) million for the three months ended September 30, 2017. Adjusted EBITDA was $68.9 million for the three months ended September 30, 2018 compared to $53.1 million for the three months ended September 30, 2017. The increase in EBITDA for the three months ended September 30, 2018 was primarily due to the net loss that was comprised of significantly higher transaction costs and loss on extinguishment of debt incurred as a result of the Novitex Business Combination in 2017.
Nine months ended September 30, 2018 compared to the Nine Months ended September 30, 2017:
The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the nine months ended September 30, 2018 and 2017:

Nine months ended September 30,

2018

2017

Net Loss

$
(78,116
)
$
(145,633
)
Taxes

4,911

(32,924
)
Interest Expense

114,883

91,740

Depreciation and Amortization

109,428

70,779

EBITDA

151,106

(16,038
)
Optimization and restructuring expenses (1)

46,968

31,535

Transaction related costs (2)

2,097

86,561

Non-cash equity compensation (3)

4,516

4,446

Other charges including non-cash (4)

5,463

514

Loss on sale of of assets (5)

1,434

18

(Gain)/loss on sale of Meridian (6)

720

(588
)
Management, board fees and expenses (7)

—

4,153

Loss on extinguishment of debt

1,067

35,512

Gain on derivative instruments

(4,813
)
—

Adjusted EBITDA

$
208,558

146,113

(1)         Adjustment represents net salary and benefits associated with positions that are part of the on-going savings initiatives including severance, retention bonuses, and related fees and expenses. Additionally, the adjustment includes charges incurred by us to terminate existing lease and vendor contracts as part of the on-going savings initiatives.
(2)         Represents costs incurred related to transactions for completed or contemplated transactions during the period.
(3)         Represents the non-cash charges related to restricted stock units and options granted by Ex-Sigma, LLC and Exela to our employees that vested during the year.
(4)         Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase accounting and other non-cash charges.
(5)         Represents a loss recognized on the disposal of property, plant, and equipment and other assets.
(6)         Represents a gain recognized on the disposal of Meridian Consulting Group, LLC.
(7)         Amount represents management fees paid to HGM and TransCentra’s prior owner, Board of Directors fees and corresponding travel, and other expenses (e.g., rating agency fees, chargebacks) which are not expected to continue on a go-forward basis.

EBITDA and Adjusted EBITDA

EBITDA was ($81.7) million for the three months ended September 30, 2017 compared to $30.6 million for the three months ended September 30, 2016. Adjusted EBITDA was $53.1 million for the three months ended September 30, 2017 compared to $39.8 million for the three months ended September 30, 2016. The decrease in EBITDA was primarily due to a higher net loss amount for the three months ended September 30, 2017 resulting from increase in SG&A and related party expense, and loss on extinguishment of debt compared to the three months ended September 30, 2016. The increase in Adjusted EBITDA was primarily due higher overall gross profit for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, along with lower recurring expenses as part of on-going operations.
~~Nine months ended September 30, 2017 compared to the Nine Months ended September 30, 2016~~

Nine months ended September 30,

2017

2016

Net Loss

$
(145,633
)
$
(33,419
)
Taxes

(32,924
)
(9,969
)
Interest Expense

91,740

81,712

Depreciation and Amortization

70,779

58,463

EBITDA

(16,038
)
96,787

Optimization and Restructuring expenses (1)

31,535

14,358

Transaction and integration costs (2)

86,561

1,923

Non-cash equity compensation (3)

4,446

5,422

Other non-cash charges (4)

514

293

Loss on sale of assets (5)

18

1,243

Gain on sale of Meridian (6)

(588
)
—

Management, Board Fees and expenses (7)

4,153

5,418

Loss on extinguishment of debt

35,512

—

Adjusted EBITDA

146,113

125,444

~~(1)~~         Adjustment represents net salary and benefits associated with positions that were terminated, including severance, retention bonuses, and related fees and expenses. Additionally, the adjustment includes charges incurred by us to terminate existing lease contracts as part of facility consolidation initiatives.
~~(2)~~         Represents costs incurred related to transactions and integration for completed or contemplated transactions during the period. For the nine months ended September 30, 2017, only transaction costs were incurred.
~~(3)~~         ~~Represents the non-cash charges related to restricted stock units granted by Ex-Sigma, LLC to our employees that vested during the year.~~
~~(4)~~         ~~Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase accounting.~~
~~(5)~~         ~~Represents a loss recognized on the disposal of property, plant and equipment and other assets.~~
~~(6)~~         ~~Represents a gain recognized on the disposal of Meridian Consulting Group, LLC.~~
~~(7)~~         Amount represents management fees paid to HGM and TransCentra’s prior owner, Board of Directors fees and corresponding travel, and other expenses (e.g., rating agency fees, chargebacks) which are not expected to continue on a go-forward basis.
~~EBITDA and Adjusted EBITDA~~
~~EBITDA was ($16.0)~~$151.1 million for the nine months ended September 30, ~~2017~~2018 compared to ~~$96.8~~$(16.0) million for the nine months ended September 30, ~~2016.~~2017. Adjusted EBITDA was $208.6 million for the nine months ended September 30, 2018 compared to $146.1 million for the nine months ended September 30, ~~2017 compared to $125.4 million~~2017. The increase in EBITDA for the nine months ended September 30, ~~2016. The decrease in EBITDA~~2018 was primarily due to ~~a higher~~the net loss ~~amount for the nine months ended September 30, 2017 resulting from an increase in SG&A, related party expense,~~that was comprised of significantly higher transaction costs and loss on extinguishment of debt ~~compared to~~incurred as a result of the ~~nine months ended September 30, 2016. The increase~~Novitex Business Combination in Adjusted EBITDA was primarily due higher overall gross profit for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, along with lower recurring expenses as part of on-going operations due to various cost savings initiative implemented during the period.2017.

Liquidity and Capital Resources

Overview

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

We currently expect to spend approximately ~~$40.0~~$40 to ~~$45.0~~$45 million on total capital expenditures over the next twelve months. We believe that our operating cash flow and available borrowings under our credit facility will be sufficient to fund our operations for at least the next twelve months.

On July 13, 2018, Exela successfully repriced the $343.4 million of term loans outstanding under its senior secured credit facilities (the “Repricing”). The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the First Lien Credit Agreement. The Repricing Term Loans will mature on July 12, 2023, the same maturity date as the existing senior secured term loans.
At September 30, ~~2017,~~2018, cash and cash equivalents totaled ~~$27.4~~$49.6 million and we had availability of ~~$77.2~~$79.4 million under our senior secured revolving credit facility.

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

Nine months ended September 30,

2018

2017

Cash flow used in operating activities

$
(2,280
)
$
(11,801
)
Cash flow used in investing activities

(28,002
)
(440,667
)
Cash flow provided by (used in) financing activities

(1,005
)
482,569

Subtotal

(31,287
)
30,101

Effect of exchange rates on cash

(554
)
335

Net increase (decrease) in cash

$
(31,842
)
$
30,436

Analysis of Cash Flow Changes between the Nine Months Ended September 30, 2018 and September 30, 2017
Operating Activities—The increase of $9.5 million in cash flows from operating activities for the nine months ended September 30, 2018 was primarily due to increased revenues due to the Novitex Business Combination, professional stock fees paid in 2017 as part of the Novitex Business Combination, and an
adjustment in deferred income tax benefits offset by lower cash flows relating to the timing of payment of accounts payable and accrued liabilities, an increase in cost of revenues, higher interest payments, and lower cash inflows from accounts receivable due to unbilled receivables from new customers.
Investing Activities—The increase of $412.7 million in cash used in investing activities was primarily due to the cash paid in the Novitex Business Combination offset by an increase in purchases of property, plant, and equipment.
Financing Activities—The decrease of $483.6 million in cash used in financing activities was primarily due to proceeds from the new credit facility associated with the Novitex Business Combination and lower principal payments on long-term obligations offset by contributions from shareholders during the first quarter of 2017, increased cash paid for equity issuance costs during the first quarter of 2018, and cash paid for common share repurchases in the second quarter of 2018, partially offset by lower principal payments on long-term obligations.
Indebtedness
In connection with the Novitex Business Combination, we acquired debt facilities and issued notes totaling $1.4 billion. Proceeds from the acquired debt were used to refinance the existing debt of SourceHOV, settle the outstanding debt facilities for Novitex, and pay fees and expenses incurred in connection with the Business Combination. We entered in to a Credit Agreement with a $350.0 million senior secured term loan, a $100.0 million senior secured revolving facility, and $1.0 billion in Senior Secured Notes. The $100.0 million revolver remained undrawn at the time of compilation of this report.
~~Cash Flows~~
~~The following table summarizes our cash flows for the periods indicated:~~

Nine months ended September

2017

2016

Cash flow from operating activities

$
12,282

$
43,317

Cash flow used in investing activities

(440,667
)
(19,217
)
Cash flows (used in) provided by financing activities

447,057

(31,987
)
Subtotal

18,672

(7,887
)
Effect of exchange rates on cash

335

(239
)
Net increase/(decrease) in cash

19,007

(8,126
)
~~Analysis of Cash Flow Changes between the Nine Months Ended September 30, 2017 and September 30, 2016~~
~~Operating Activities—Net cash provided by operating activities was $12.3~~ ~~million~~ for the nine months ended September 30, 2017, compared to $43.3 million for the nine months ended September 30, 2016. The decrease of $31.0 million in cash flow from operating activities was primarily due to decreases in operating results, and timing of payments for accounts receivable and accounts payable and accrued liabilities.
~~Investing Activities— Net cash used in investing activities was $440.7~~ ~~million~~ for the nine months ended September 30, 2017, compared to $19.2 million for the nine months ended September 30, 2016. The increase of $421.5 million in cash used in investing activities was primarily due to cash paid to acquire Novitex, partially offset by
~~proceeds received from the sale of Meridian during the nine months ended September 30, 2017, as well as higher additions to intangible assets during the nine months ended September 30, 2016.~~
~~Financing Activities— Net cash provided by financing activities was $447.1~~ ~~million~~ for the nine months ended September 30, 2017, compared to cash used in financing activities of $32.0 million for the nine months ended September 30, 2016. The increase of $479.1 million in cash provided by financing activities was primarily due to proceeds from issuance of stock in the amount of $231.4 million, as well as proceeds from a new credit facility of $1,320.5 million during the nine months ended September 30, 2017, which was partially offset by the retirement of the previous credit facilities of $1,055.7 million.
~~Indebtedness~~
~~As noted, in connection with the Business Combination on~~ ~~July 12, 2017, we acquired debt facilities and issued notes totaling $1.4 billion in principal. Proceeds from the~~ indebtedness were used to pay off credit facilities existing immediately before the Novitex Business Combination.

Senior Credit Facilities

~~The financing obtained as part~~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 ~~Business Combination included~~Company, upon the terms and subject to the conditions set forth in the Credit Agreement, (i) a ~~first lien~~$350.0 million senior secured term loan maturing July 12, 2023 with an original issue discount of ~~$350.0~~$7.0 million, ~~due July 2023~~ and (ii) a $100.0 million senior secured revolving ~~credit~~ facility ~~of $100.0 million due~~maturing July ~~2022. As of September 30, 2017,~~12, 2022, none of which is currently drawn. The Credit Agreement provides for the ~~revolving credit facility was drawn. We have the option to choose~~following interest rates ~~based on 1) base rate (as defined) or 2)~~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 ~~the~~ term loans, or (2) a base rate, in each case plus an applicable margin. The initial applicable margin for the senior secured term facility is 7.5% with respect to LIBOR borrowings and 6.5% with respect to base rate borrowings. The initial applicable margin for the senior secured revolving facility is 7.0% with respect to LIBOR borrowings and 6.0% with respect to base rate borrowings. The applicable margin for borrowings under the senior secured revolving facility is subject to step-downs based on leverage ratios. The senior secured term loan is subject to amortization payments, commencing on the last day of the first full fiscal quarter of the Company following the closing date, of 0.6% of the aggregate principal amount for each ~~rate. Interest rates were 8.8%~~of the first eight payments and ~~8.3%~~1.3% of the aggregate principal amount for payments thereafter, with any balance due at maturity. As of September 30, 2018 the interest rate applicable for the first lien senior secured term loan ~~and senior revolving credit facility, respectively, as of September 30, 2017.~~was 8.83%.

Senior Secured Notes

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

Term Loan Repricing
On July 13, 2018, Exela successfully repriced the $343.4 million of term loans outstanding under its senior secured credit facilities (the “Repricing”). The Repricing was accomplished pursuant to a First Amendment to First Lien Credit Agreement (the “First Amendment”), dated as of July 13, 2018, by and among Exela Intermediate Holdings LLC, the Company, each “Subsidiary Loan Party” listed on the signature pages thereto, Royal Bank of Canada, as administrative agent, and each of the lenders party
thereto, whereby the Company borrowed $343.4 million of refinancing term loans (the “Repricing Term Loans”) to refinance the Company’s existing senior secured term loans.
The Repricing Term Loans will bear interest at a rate per annum of, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.00% 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 First Lien Credit Agreement, by and among Exela Intermediate Holdings, LLC, the Company, Royal Bank of Canada, as administrative agent and collateral agent, and each of the lenders party thereto. 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 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.
Letters of Credit

As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we had outstanding irrevocable letters of credit totaling approximately ~~$22.8~~$20.6 million and ~~$9.3~~$20.9 million, respectively, under the revolving credit facility.

Contractual Obligations

~~The table below provides estimates of~~Our contractual obligations are described in our Form 10-K for the ~~timing of future payments~~fiscal year ended December 31, 2017. There have been no material changes to that ~~we are obligated to make based on agreements in place at September 30,~~information since December 31, 2017.

Payments Due by Period

Less than 1 Year

1 - 3 Years

3 - 5 Years

More than 5 Years

Total

(in millions)

Credit Facilities

8.8

26.2

35.0

1,280.0

1,350.0

Interest payments

132.6

262.4

256.3

98.4

749.7

Capital lease obligations

18.5

19.4

7.9

3.5

49.3

Operating lease obligations

34.8

46.0

26.4

14.0

121.2

Other Obligations

12.1

3.2

2.8

0.0

18.1

Total

206.8

357.2

328.4

1,395.9

2,288.3

Potential Future Transactions

We may, from time to time explore and evaluate possible strategic transactions, which may include joint ventures, as well as business ~~combinations~~acquisitions or the acquisition or disposition of assets. In order to pursue certain of these opportunities, additional funds will likely be required. Subject to applicable contractual restrictions, to obtain such financing, we may seek to use cash on hand, borrowings under our revolving credit facility, or we may seek to raise additional debt or equity financing through private placements or through underwritten offerings. There can be no assurance that we will enter into additional strategic transactions or alliances, nor do we know if we will be able to obtain the necessary financing for transactions that require additional funds on favorable terms, if at all. In addition, certain of our shareholders have the right to demand underwritten offerings of our common stock. We are exploring, and may from time to time in the future explore, with certain of those shareholders the possibility of an underwritten public offering of our common shares held by those shareholders. There can be no assurance as to whether or when an offering may be commenced or completed, or as to the actual size or terms of the offering.
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.
~~Quantitative and Qualitative Disclosure About Market Risk~~
~~Interest Rate Risk~~
At September 30, 2017, we had $1,350.0 million of debt outstanding, with a weighted average interest rate of 9.7%. Interest is calculated under the terms of our credit agreement based on the greatest of certain specified base rates plus an applicable margin that varies based on certain factors. Assuming no change in the amount outstanding, the impact on interest expense of a 1% increase or decrease in the assumed weighted average interest rate would be approximately $13.5 million per year. In order to hedge against interest rate fluctuations with respect to term loan borrowings under the Credit Agreement, in November 2017, we entered into a standard three year, one-month LIBOR interest rate hedging contract with a notional amount of $347.8 million, which is the remaining principal balance of the term loan. The hedge contract will swap out the floating rate interest risk related to the LIBOR with a fixed interest rate of 1.9275% and will go into effect starting January 12, 2018.
~~Foreign Currency Risk~~
We are exposed to foreign currency risks that arise from normal business operations. These risks include transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location’s functional currency. Contracts are denominated in currencies of major industrial countries.
~~Market Risk~~
~~We are~~ exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.
~~Critical Accounting Policies and Estimates~~
The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimations and how they can impact our financial statements. A critical accounting estimate is one that requires subjective or complex estimates and assessments, and is fundamental to our results of operations. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the current assumptions, judgments and estimates used to determine amounts reflected in our consolidated financial statements are appropriate, however, actual results may differ under different conditions. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this document.
~~Goodwill and other intangible assets~~: Goodwill and other intangible assets are initially recorded at their fair values. Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Our goodwill at September 30, 2017 and December 31, 2016 was $776.0 million and $373.3 million, respectively. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized.
~~Software capitalization~~: We capitalize certain costs incurred to develop commercial software products to be sold, leased or marketed after establishing technological feasibility. Amortization of capitalized software development costs is recorded at the greater of the amount computed using the ratio of current gross revenues for the product to total current and anticipated future gross revenues for that product or the straight-line basis over the remaining estimated economic life of the software, which we have determined is four to eight years. We are required to use our judgment in determining whether development costs meet the criteria for immediate expense or capitalization. Additionally, we are required to use our judgment in the valuation of the unamortized capitalized software costs in determining whether the recorded value is recoverable based on estimated future product sales. We consider various factors to project
marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete.
We also capitalize costs to develop or purchase internal-use software. For internal-use software, the appropriate amortization period is based on estimates of our ability to utilize the software on an ongoing basis, which has been determined to be five years. To assess the recoverability of capitalized software costs, we consider estimates of future revenue, costs and cash flows. A significant change in an estimate related to one or more software products could result in a material change to our results of operations.
~~Outsourced contract costs~~: In connection with services arrangements, we incur and capitalizes costs to originate long-term contracts. Certain initial direct costs of an arrangement are capitalized and amortized over the contractual service period of the arrangement to cost of services. We regularly review costs to determine appropriateness for deferral in accordance with the relevant accounting guidance. Key estimates and assumptions that we must make include projecting future cash flows in order to assess the recoverability of deferred costs. To assess recoverability, cash flows are projected over the remaining life and compared to the carrying amount of contract related assets, including the unamortized deferred cost balance. Such estimates require judgment and assumptions, which are based upon the professional knowledge and experience of our personnel. A significant change in an estimate or assumption on one or more contracts could have a material effect on our results of operations.
~~Impairment of goodwill, long-lived and other intangible assets~~: Long-lived assets, such as property and equipment and finite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability is measured by a comparison of their carrying amount to the estimated undiscounted cash flows to be generated by those assets. If the undiscounted cash flows are less than the carrying amount, we record impairment losses for the excess of the carrying value over the estimated fair value. Fair value is determined, in part, by the estimated cash flows to be generated by those assets. Our cash flow estimates are based upon, among other things, historical results adjusted to reflect our best estimate of future market rates, and operating performance. Development of future cash flows also requires us to make assumptions and to apply judgment, including timing of future expected cash flows, using the appropriate discount rates, and determining salvage values. The estimate of fair value represents our best estimates of these factors, and is subject to variability. Assets are generally grouped at the lowest level of identifiable cash flows, which is the reporting unit level for us. Changes to our key assumptions related to future performance and other economic factors could adversely affect our impairment valuation.
~~We test our indefinite lived intangible assets on October 1~~st of each year, or more frequently if events or changes in circumstances indicate that the assets may be impaired. When performing the impairment test, we have the option of performing a qualitative or quantitative assessment to determine if an impairment has occurred. A quantitative assessment requires comparison of fair value of the asset to its carrying value. We utilize the Income Approach, specifically the Relief-from-Royalty method, which has the basic tenet that a user of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids these payments. Application of the indefinite lived intangible asset impairment test requires judgment, including determination of royalty rates, and projecting revenue attributable to the assets in order to determine fair value. For the three months and nine ended September 30, 2017, no impairment was recorded.
~~We conduct our annual goodwill impairment tests on October 1~~st of each year, or more frequently if indicators of impairment exist. When performing the annual impairment test, we have the option of performing a qualitative or quantitative assessment to determine if an impairment has occurred. If a qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would be required to perform a quantitative impairment test for goodwill. Goodwill is tested for impairment using a two-step process. In the first step, the fair value of each reporting unit is determined and compared to the reporting unit’s carrying value, including goodwill. We use the Guideline Public Company Method of the Market Approach to determine the reporting unit fair value. We estimate the fair value using a multiple of EBITDA for the reporting unit. Guideline companies are analyzed to determine the multiple to be applied. If the fair value of a reporting unit is less than its carrying value, the second step of the goodwill impairment test is performed to measure the amount of impairment, if any. In the second step, the fair value of the reporting unit is allocated to the assets and liabilities of the reporting unit as if it had been acquired in a business combination and the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. If the implied fair value of goodwill at the reporting unit level is less than its carrying value, an
impairment loss is recorded to the extent that the implied fair value of goodwill at the reporting unit is less than its carrying value. For the three and nine months ended September 30, 2017, no impairment was recorded.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, allocation of assets and liabilities to reporting units, and determination of fair value. The determination of reporting unit fair value is sensitive to the amount of EBITDA generated by us, as well as the EBITDA multiple used in the calculation. Unanticipated changes, including immaterial revisions, to these assumptions could result in a provision for impairment in a future period. Given the nature of these evaluations and their application to specific assets and time frames, it is not possible to reasonably quantify the impact of changes in these assumptions.
~~Revenue~~: Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Refer to ~~Note 2—Basis of Presentation and Summary of Significant Accounting Policies~~ ~~for additional information regarding our revenue recognition policy.~~
If a contract involves the provision of a single element, revenue is generally recognized when the product or service is provided and the amount earned is not contingent upon any future event. Revenue from time and materials arrangements is recognized as the services are performed.
~~Multiple element arrangements~~
We also enter into multiple element arrangements involving various combinations. The deliverables within these arrangements are evaluated at contract inception to determine whether they represent separate units of accounting, and if so, contract consideration is allocated to each deliverable based on relative selling price. With respect to arrangements including tangible products containing both software and non-software components that function together to deliver the product’s essential functionality, the relative selling price is determined using vendor specific objective evidence (“VSOE”) of fair value, third-party evidence or best estimate of selling price. For our multiple element arrangements that are comprised solely of software and software elements, revenue is allocated to the various elements based on VSOE of fair value and the residual method to allocate the arrangement consideration. Revenue is then recognized in accordance with the appropriate revenue recognition guidance applicable to the respective elements.
If the multiple element arrangements criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized on a straight-line basis over the period of delivery or being deferred until the earlier of when such criteria are met or when the last element is delivered.
~~Equity-based compensation~~: We account for equity-based awards by measuring the awards at the grant date and recognizing the grant-date fair value as an expense over the service period, which is usually the vesting period. We have historically and consistently calculated fair value using the Enterprise Value (‘‘EV’’) model. We perform a comparable company analysis, and determine the enterprise multiple to apply based on guideline public companies. The guideline public companies are selected based on revenue and/or revenue growth rates, market capitalization, profitability, industry, and other characteristics that are considered comparable to us. We analyze the guideline public companies’ enterprise multiples, defined as equity value to adjusted EBITDA, based on publicly available financial information. The calculated price per share is determined by dividing the enterprise value, which is the product of adjusted EBITDA and the selected enterprise multiple, less debt, by fully diluted shares.
Calculation of the enterprise value based on the EV model requires judgment in terms of determining comparable guideline public companies and enterprise multiples. Our management, using its professional judgment and experience in the industry, determines which guideline public companies have similar characteristics based on the aforementioned metrics and characteristics. Additionally, determination of the appropriate enterprise multiple to be applied requires judgment as guideline companies may have a range of enterprise multiples.
~~Income Taxes~~: We account for income taxes by using the asset and liability method. We account for income taxes regarding uncertain tax positions and recognize interest and penalties related to uncertain tax positions in income tax benefit/(expense) in the consolidated statements of operations.
Deferred income taxes are recognized on the tax consequences of temporary differences by applying enacted statutory tax rates applicable in future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, as determined under tax laws and rates. A valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax assets will not be realized. Due to numerous ownership changes, we are subject to limitations on existing net operating losses under Section 382 of the Internal Revenue Code (the Code). In the event we determine that we would be able to realize deferred tax assets that have valuation allowances established, an adjustment to the deferred tax assets would be recognized as component of income tax expense through continuing operations.
We engage in transactions (such as acquisitions) in which the tax consequences may be subject to uncertainty and examination by the varying taxing authorities. Significant judgment is required by us in assessing and estimating the tax consequences of these transactions. While our tax returns are prepared and based on our interpretation of tax laws and regulations, in the normal course of business the tax returns are subject to examination by the various taxing authorities. Such examinations may result in future assessments of additional tax, interest and penalties. For purposes of our income tax provision, a tax benefit is not recognized if the tax position is not more likely than not to be sustained based solely on its technical merits. Considerable judgment is involved in determining which tax positions are more likely than not to be sustained.
~~Business Combinations:~~ We allocate the total cost of an acquisition to the underlying assets based on their respective estimated fair values. Determination of fair values involves significant estimates and assumptions about highly subjective variables, including future cash flows, discount rates, and asset lives. The estimates of the fair values of assets and liabilities acquired are based upon assumptions believed to be reasonable and, when appropriate, include assistance from independent third-party valuation firms.
Because we are primarily a services business, our acquisitions typically result in significant amounts of goodwill and other intangible assets. Fair value estimates and calculations for these acquisitions will affect the amount of amortization expense, or possible impairment related charges recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable, but recognize that the assumptions are inherently uncertain.
~~JOBS Act~~
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We have previously elected to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. If we were to subsequently elect instead to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
~~Recently Adopted Accounting Pronouncements~~
Effective January 1, 2017, we adopted Accounting Standards Update (“ASU”) no. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This amendment replaced the method of measuring inventories at lower of cost or market with a lower of cost and net realizable value method. The adoption had no material impact on our financial ~~position, results of operations and cash flows.~~
~~Effective January 1, 2017, we adopted ASU no. 2016-09,~~ ~~Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)~~. The ASU changes how companies account for certain aspects of equity-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard requires that all tax effects related to share-based payments be recorded as income tax expense or benefit in the income statement at settlement or expiration and, accordingly, excess tax benefits and tax deficiencies be presented as operating activities in the statement of cash flows. Upon adoption of this standard, we elected to continue our current practice of estimating expected forfeitures. The adoption had no material impact on our financial position, results of operations and cash flows.
~~Off Balance Sheet Arrangements~~
At September 30, 2017, we had no material off balance sheet arrangements, except for operating leases. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements. Our operating leases are composed of various office and industrial buildings, machinery, equipment, and vehicles. As of September 30, 2017, our total future minimum leases payments under non-cancelable operating leases were $121.2 million.
Item 3. Quantitative and Qualitative ~~Disclosures about~~Disclosure About Market ~~Risk.~~Risk
Information related to quantitative and qualitative disclosures regarding market risk is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 2 above. Such information is incorporated by reference herein.

~~Item 4. Controls~~Interest Rate Risk
At September 30, 2018, we had $1,327.9 million of debt outstanding, with a weighted average interest rate of 9.6%. Interest is calculated under the terms of our credit agreement based on the greatest of certain specified base rates plus an applicable margin that varies based on certain factors. Assuming no change in the amount outstanding, the impact on interest expense of a 1% increase or decrease in the assumed weighted average interest rate would be approximately $13.3 million per year. In order to mitigate interest rate fluctuations with respect to term loan borrowings under the Credit Agreement, in November 2017, we entered into a three year; one-month LIBOR interest rate swap contract with a notional amount of $347.8 million, which at the time was the remaining principal balance of the term loan. The swap contract swaps out the floating rate interest risk related to the LIBOR with a fixed interest rate of 1.9275% effective January 12, 2018.
The interest rate swap, which is used to manage our exposure to interest rate movements and ~~Procedures.~~other identified risks, was not designated as a hedge. As such, changes in the fair value of the derivative are recorded directly to other income in the amount of $0.8 million and $5.5 million for the three and nine months ended September 30, 2018.
Foreign Currency Risk

We are exposed to foreign currency risks that arise from normal business operations. These risks include transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location’s functional currency. Contracts are denominated in currencies of major industrial countries.
Market Risk
We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. We do not ~~currently~~use derivatives for trading purposes, to generate income or to engage in speculative activity.
Off Balance Sheet Arrangements
At September 30, 2018, we had no material off balance sheet arrangements, except for operating leases as described in our Form 10-K for the fiscal year ended December 31, 2017 and letters of credit described above under Liquidity and Capital Resources. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
Item 4. Internal Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required to ~~comply with~~be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules ~~implementing Section 404(b)~~and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the ~~Sarbanes Oxley~~control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting described below.
Material Weakness identified as of December 31, 2017
As of the year ended December 31, 2017, management identified a material weakness in internal controls over financial reporting relating to the supervision of specialists engaged to assist management in developing accounting conclusions with respect to a specific revenue contract and stock-based compensation accounting. We are addressing the material weakness through hiring additional experienced professionals. We have initiated changes in our process of evaluating information provided to and received from experts and are currently assessing the design and operating effectiveness of such controls.
Management’s Report on Internal Controls over Financial Reporting
Our Annual Report on Form 10-K for the year ended December 31, 2017 did not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act, ~~of 2002, and we are therefore not~~adopted rules requiring companies that file reports with the SEC to include a management report on such company’s internal control over financial reporting in its annual report. In addition, our independent registered public accounting firm will be required to ~~make a formal~~attest to our internal control over financial reporting. Management will be required to provide an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018. Our independent registered public accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for ~~that purpose. However,~~our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company” under the JOBS Act. We are in the process of improving the internal control over financial reporting required to comply with this obligation. However, there is no guarantee that our efforts will result in management’s ability to conclude, or, if required, our independent registered public accounting firm to attest, that our internal control over financial reporting is effective as of December 31, 2018.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the ~~SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act of 2002, which require~~quarter-ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our ~~management to certify~~internal control over financial ~~and other information in its quarterly and annual reports and provide an annual management report on the effectiveness of our disclosure controls and procedures.~~reporting.
PART II — OTHER INFORMATION

Item 1. Legal ~~Proceedings.~~Proceedings

Appraisal Demand

On September 21, 2017, former stockholders of ~~our wholly-owned subsidiary~~ SourceHOV, ~~Holdings, Inc. (“Source HOV”),~~ 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, ~~Transaction,~~ which gave rise to appraisal rights pursuant to 8 Del. C. § 262. In the Appraisal Action, the petitioners seek, among other things, a determination of the fair value of their shares at the time of the
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 ~~early~~ stage of the litigation, the Company is unable to predict the outcome of the Appraisal Action or estimate any loss or range of loss that may arise from the Appraisal Action. 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~~Common Stock issued to Ex-Sigma 2 LLC, our principal ~~shareholder,~~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.

Other

We are involved in various other legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, we do not expect them to have a material adverse effect on our Consolidated Financial Statements.

Item 1A. Risk Factors.

~~As a result of~~In addition to the ~~closing of the Business Combination on July 12, 2017 all of~~other information set forth in this report, you should carefully consider the risk factors ~~previously disclosed~~described in Part I, ~~Item 1A of~~“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016 no longer apply.~~2017, and supplemented by risk factors described in Part II, “Item 1A. Risk ~~factors relating to~~Factors” in our quarterly report for the quarter ended June 30, 2018 (collectively, the “Risk Factors”) which could materially affect our business, ~~following~~financial condition and/or operating results. The risks described in these Risk Factors are not the ~~Business Combination~~only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may ~~be found in~~materially and adversely affect our ~~definitive proxy statement, as filed with the Securities and Exchange Commission on June 26, 2017.~~business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(~~a) Sales of Unregistered Securities~~
~~For a description of certain sales of unregistered securities, please see~~On November 8, 2017, the Company’s ~~Form 8-K, dated July 12, 2017.~~
~~During~~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 24 months after authorized. The Share Buyback Program may be terminated or amended by the Company’s board of directors in its discretion at any time. In November of 2017, the Company purchased 49,300 shares as part of the Program. We purchased an additional 225,504 shares during the third quarter ~~ended~~of 2018 at an average share price of $4.94. As of September 30, ~~2017, a holder of 3,000,000~~2018, 1,043,497 shares ~~of our Series A Preferred Stock converted such Series A Preferred Stock into 3,667,803 shares of our common~~had been repurchased under the Share Buyback Program. The Company records treasury stock ~~pursuant to~~using the ~~conversion provisions of the Series A Preferred Stock.~~cost method.
~~(b) Use of Proceeds from the Initial Public Offering.~~
~~See Item (c) below.~~
~~(c) Issuer Purchases of Equity Securities~~
On July 12, 2017, in connection with the closing of the Business Combination, we redeemed a total of 16,646,342 shares of our common stock pursuant to the terms of our certificate of incorporation, resulting in a total cash payment from the Company’s trust account to redeeming stockholders of $166,463,420.
Period

Total Number of Shares
Purchased

Average Price Paid Per
Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Maximum Number of
Shares that May Yet
be Purchased Under
Plans or Programs

July 12, 2017

16,646,342

$
10.00

N/A

N/A

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.
Item 6. Exhibits.

Exhibit
~~Number~~ No.

Description
2.1
Business Combination Agreement, dated as of February 21, 2017, by and among Quinpario Acquisition Corp. 2, Quinpario Merger Sub I, Inc., Quinpario Merger Sub II, Inc., Novitex Holdings, Inc., SourceHOV Holdings, Inc., Novitex Parent, L.P, HOVS LLC and HandsOn Fund 4 I, LLC (3)
3.1 ~~(1)~~

Restated Certificate of Incorporation, dated July 12, 2017 (4)
3.2 ~~(1)~~

Amended and Restated Bylaws, dated July 12, 2017 (4)
31.1*4.1
Specimen common stock Certificate (1)
4.2
Specimen Warrant Certificate (1)
4.3
Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant (1)
4.4
Indenture, dated July 12, 2017, by and among Exela Intermediate LLC and Exela Finance Inc. as Issuers, the Subsidiary Guarantors set forth therein and Wilmington Trust, National Association, as Trustee (4)
4.5
First Supplemental Indenture, dated July 12, 2017, by and among Exela Intermediate LLC and Exela Finance Inc., as Issuers, the Subsidiary Guarantors set forth therein and Wilmington Trust, National Association, as Trustee (4)
10.1
First Amendment to First Lien Credit Agreement, dated as of July 13, 2018, by and among Exela Intermediate Holdings LLC, Exela Intermediate, LLC, each Subsidiary Loan Party listed on the signature pages thereto, Royal Bank of Canada, as administrative agent, and each of the lenders party thereto.
31.1

Certification of the Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of ~~2002.~~2002
31.2*31.2

Certification of the Principal Financial and Accounting Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of ~~2002.~~2002
32.1*32.1

Certification of the Principal Executive Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of ~~2002.~~2002
32.2**32.2

Certification of the Principal Financial and Accounting Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of ~~2002.~~2002
101.INS*101.INS

XBRL Instance Document
101.SCH*101.SCH

XBRL Taxonomy Extension Schema ~~Document~~
101.CAL*101.CAL

XBRL Taxonomy Extension Calculation Linkbase ~~Document~~
101.DEF*101.DEF

XBRL Taxonomy Extension Definition Linkbase ~~Document~~
101.LAB*101.LAB

XBRL Taxonomy Extension ~~Labels~~Label Linkbase ~~Document~~
101.PRE*101.PRE

XBRL Taxonomy Extension Presentation Linkbase ~~Document~~

(1)
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-198988).
(2)
Incorporated by reference to the Registrant’s Amendment No. 1 to Registration Statement on Form S-3, filed on February 16, 2018.
(3)
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on February 22, 2017.
(4)
Incorporated by reference to the Registrants’ Current Report on Form 8-K, filed on July 18, 2017.
(5)
Incorporated by reference to the Registrants’ Current Report on Form 8-K, filed on July 17, 2018.

* Filed herewith
** Furnished herewith
SIGNATURES

Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the ~~9th~~8th day of November, ~~2017.~~2018.

EXELA TECHNOLOGIES, INC.

By:
/s/ Ronald Cogburn

Ronald Cogburn

Chief Executive Officer (Principal Executive Officer)

By:
/s/ James G. Reynolds

James G. Reynolds

Chief Financial Officer (Principal Financial and Accounting Officer)

5847

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

2701 E. Grauwyler Rd.
~~2701 E. Grauwyler Rd.~~ Irving, TX		75061
(Address of ~~principal executive offices)~~Principal Executive		(Zip Code)
Offices)

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements	31

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017	31

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017	42

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017	53

Condensed Consolidated Statements of Stockholders’ ~~Equity (Deficit)~~Deficit for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017	64

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017	75

Notes to the Condensed Consolidated Financial Statements	86

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3730

Item 3. Quantitative and Qualitative Disclosures about Market Risk	5743

Item 4. Controls and Procedures	5743

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	5844

Item 1A. Risk Factors	5845

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5846

Item 3. Defaults Upon Senior Securities	5846

Item 4. Mine Safety Disclosures	5846

Item 5. Other Information	5846

Item 6. Exhibits	47

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

Assets acquired:
Cash and equivalents	$	8,428
Accounts receivable	87,474
Inventory	1,245
Prepaid expenses & other	13,974
Property, plant and equipment, net	60,657
Identifiable intangible Assets, net	251,060
Deferred charges and other assets	2,723
Other noncurrent assets	93
Goodwill	405,141
Total identifiable assets acquired	$	830,795
Liabilities Assumed:
Accounts payable	(29,444		)
Short-term borrowings and current portion of LT debt	(11,335		)
Accrued liabilities	(30,432		)
Advanced billings and customer deposits	(18,926		)
Long term debt	(15,704		)
Deferred taxes	(46,072		)
Other liabilities	(2,226		)
Total liabilities assumed	$	(154,139	)
Total Consideration	$	676,656

	Weighted Average Useful Life (in years)	Fair value		Weighted Average Useful Life (in years)	Fair Value
Trademark and trade name - Novitex	9.5	$	18,000	9.5	$	18,000
Customer relationships	16.0	230,000		16.0	230,000
Internally devleoped software - Connect Platform	5.0	1,710
Inernally developed software - Connect Platform				5.0	1,710
Non-compete agreements	1.0	1,350		1.0	1,350
		$	251,060		$	251,060

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

	Weighed Average Useful Life (in years)	Fair Value
Customer Relationships	9.5	$	3,516

	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

	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

	Estimated Useful	September 30,			December 31,
	Lives (in Years)	2017			2016
Land	N/A	$	7,744		$	7,637
Buildings and improvements	7 - 40	18,450			16,989
Leasehold improvements	Lesser of the useful life or lease term	48,243			31,342
Vehicles	5 - 7	792			784
Machinery and equipment	5 - 15	62,242			23,297
Computer equipment and software	3 - 8	112,490			98,544
Furniture and fixtures	5 - 15	6,993			5,007
		256,954			183,600
Less: Accumulated depreciation and amortization		(123,337		)	(102,000		)
Property, plant and equipment, net		$	133,617		$	81,600

	September 30, 2017
	Gross Carrying Amount (a)		Accumulated Amortization			Intangible Asset, net
Customer relationships	504,643		(125,803		)	$	378,840
Developed technology	89,076		(72,806		)	16,270
Trade names	52,470		—			52,470
Outsource contract costs	37,144		(15,020		)	22,124
Internally developed software	24,799		(3,159		)	21,640
Trademarks	23,370		(898		)	22,472
Non-compete agreements	1,350		(293		)	1,057
	$	732,852	$	(217,979	)	$	514,873

	December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Intangible Asset, net
Customer relationships	$	274,643	$	(100,172	)	$	174,471
Developed technology	89,076		(59,539		)	29,537
Trade names	53,370		—			53,370
Outsource contract costs	27,619		(7,378		)	20,241
Internally developed software	16,742		(858		)	15,884
Trademarks	5,370		(134		)	5,236
	$	466,820	$	(168,081	)	$	298,739

	Carrying		Fair		Fair Value Measurements						Carrying		Fair	Fair Value Measurements
As of September 30, 2017	Amount		Value		Level 1		Level 2		Level 3
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	$	721	721	—	—	721
Long-term debt	1,278,306		1,327,130		—		1,327,130		—		1,307,884		1,438,469		1,438,469
	$	1,279,027	$	1,327,851	$	—	$	1,327,130	$	721
Interest rate swap asset											$	6,753	6,753	—	6,753

Balance as of January 1, 2016	$	1,513
Payments/Reductions	(792		)
Balance as of December 31, 2016	$	721
Payments/Reductions	—
Balance as of September 30, 2017	$	721

	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

	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

	September 30, 2017		December 31, 2016		September 30,		December 31,
	Payables		Payables		2018		2017
HOV Services, Ltd	$	463	$	352	$	411	$	286
Rule 14	44		134		123		158
HGM	13,516		8,858		10,080		13,689
Presidio	451		—
Apollo affiliated company					142		312
	$	14,474	$	9,344	$	10,756	$	14,445

	Three months ended September 30, 2018
	ITPS		HS		LLPS		Total
Revenue	$	307,313	$	56,776	$	18,941	$	383,030
Cost of revenue (exclusive of depreciation and amortization)	246,492		36,919		12,525		295,936
Selling, general and administrative expenses							44,913
Depreciation and amortization							35,041
Related party expense							759
Interest expense, net							38,339
Loss on extinguishment of debt							1,067
Sundry expense, net							(2,571		)
Other income, net							(781		)
Net loss before income taxes							$	(29,673	)

	Three months ended September 30, 2017						Three months ended September 30, 2017
	ITPS	HS	LLPS	Total			ITPS		HS		LLPS		Total
Revenue	260,019	56,405	21,969	338,393			$	260,019	$	56,405	$	21,969	$	338,393
Cost of revenue	204,602	37,451	13,063	255,116
Gross profit	55,417	18,954	8,906	83,277
Cost of revenue (exclusive of depreciation and amortization)							204,602		37,451		13,063		255,116
Selling, general and administrative expenses				102,048									102,048
Depreciation and amortization				28,052									28,052
Related party expense				26,892									26,892
Interest expense, net				37,652									37,652
Sundry expense, net													563
Loss on extinguishment of debt				35,512									35,512
Sundry expense, net				563
Net loss before income taxes				$	(147,442	)							$	(147,442	)

	Three months ended September 30, 2016						Nine months ended September 30, 2018
	ITPS	HS	LLPS	Total			ITPS		HS		LLPS		Total
Revenue	97,402	60,657	28,314	186,373			$	949,381	$	171,722	$	65,476	$	1,186,579
Cost of revenue	66,704	38,729	16,347	121,780
Gross profit	30,698	21,928	11,967	64,593
Cost of revenue (exclusive of depreciation and amortization)							752,796		111,135		39,751		903,682
Selling, general and administrative expenses				30,829									137,231
Depreciation and amortization				18,761									109,428
Related party expense				2,448									3,267
Interest expense, net				27,399									114,883
Loss on extinguishment of debt				—									1,067
Sundry expense, net				711									(4,961		)
Other income, net													(4,813		)
Net loss before income taxes				$	(15,555	)							$	(73,205	)

	Nine months ended September 30, 2017
	ITPS	HS	LLPS	Total
Revenue	525,557	173,548	66,930	766,035
Cost of revenue	385,447	113,152	40,643	539,242
Gross profit	140,110	60,396	26,287	226,793
Selling, general and administrative expenses				172,626
Depreciation and amortization				70,779
Related party expense				31,733
Interest expense, net				91,740
Loss on extinguishment of debt				35,512
Sundry expense, net				2,960
Net loss before income taxes				$	(178,557	)

	Nine months ended September 30, 2016
	ITPS	HS	LLPS	Total
Revenue	309,112	189,046	79,369	577,527
Cost of revenue	208,614	120,700	48,386	377,700
Gross profit	100,498	68,346	30,983	199,827
Selling, general and administrative expenses				95,385
Depreciation and amortization				58,463
Related party expense				7,372
Interest expense, net				81,712
Loss on extinguishment of debt				—
Sundry expense, net				283
Net loss before income taxes				$	(43,388	)

	Nine months ended September
	2017			2016
Cash flow from operating activities	$	12,282		$	43,317
Cash flow used in investing activities	(440,667		)	(19,217		)
Cash flows (used in) provided by financing activities	447,057			(31,987		)
Subtotal	18,672			(7,887		)
Effect of exchange rates on cash	335			(239		)
Net increase/(decrease) in cash	19,007			(8,126		)

	Payments Due by Period
	Less than 1 Year	1 - 3 Years	3 - 5 Years	More than 5 Years	Total
			(in millions)
Credit Facilities	8.8	26.2	35.0	1,280.0	1,350.0
Interest payments	132.6	262.4	256.3	98.4	749.7
Capital lease obligations	18.5	19.4	7.9	3.5	49.3
Operating lease obligations	34.8	46.0	26.4	14.0	121.2
Other Obligations	12.1	3.2	2.8	0.0	18.1
Total	206.8	357.2	328.4	1,395.9	2,288.3

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under Plans or Programs
July 12, 2017	16,646,342	$	10.00	N/A	N/A

Exhibit ~~Number~~ No.		Description

2.1		Business Combination Agreement, dated as of February 21, 2017, by and among Quinpario Acquisition Corp. 2, Quinpario Merger Sub I, Inc., Quinpario Merger Sub II, Inc., Novitex Holdings, Inc., SourceHOV Holdings, Inc., Novitex Parent, L.P, HOVS LLC and HandsOn Fund 4 I, LLC (3)
3.1 ~~(1)~~		Restated Certificate of Incorporation, dated July 12, 2017 (4)
3.2 ~~(1)~~		Amended and Restated Bylaws, dated July 12, 2017 (4)
31.1*4.1		Specimen common stock Certificate (1)
4.2		Specimen Warrant Certificate (1)
4.3		Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant (1)
4.4		Indenture, dated July 12, 2017, by and among Exela Intermediate LLC and Exela Finance Inc. as Issuers, the Subsidiary Guarantors set forth therein and Wilmington Trust, National Association, as Trustee (4)
4.5		First Supplemental Indenture, dated July 12, 2017, by and among Exela Intermediate LLC and Exela Finance Inc., as Issuers, the Subsidiary Guarantors set forth therein and Wilmington Trust, National Association, as Trustee (4)
10.1		First Amendment to First Lien Credit Agreement, dated as of July 13, 2018, by and among Exela Intermediate Holdings LLC, Exela Intermediate, LLC, each Subsidiary Loan Party listed on the signature pages thereto, Royal Bank of Canada, as administrative agent, and each of the lenders party thereto.
31.1		Certification of the Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of ~~2002.~~2002
31.2*31.2		Certification of the Principal Financial and Accounting Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of ~~2002.~~2002
32.1*32.1		Certification of the Principal Executive Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of ~~2002.~~2002
32.2**32.2		Certification of the Principal Financial and Accounting Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of ~~2002.~~2002
101.INS*101.INS		XBRL Instance Document
101.SCH*101.SCH		XBRL Taxonomy Extension Schema ~~Document~~
101.CAL*101.CAL		XBRL Taxonomy Extension Calculation Linkbase ~~Document~~
101.DEF*101.DEF		XBRL Taxonomy Extension Definition Linkbase ~~Document~~
101.LAB*101.LAB		XBRL Taxonomy Extension ~~Labels~~Label Linkbase ~~Document~~
101.PRE*101.PRE		XBRL Taxonomy Extension Presentation Linkbase ~~Document~~

(1)		Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-198988).
(2)		Incorporated by reference to the Registrant’s Amendment No. 1 to Registration Statement on Form S-3, filed on February 16, 2018.
(3)		Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on February 22, 2017.
(4)		Incorporated by reference to the Registrants’ Current Report on Form 8-K, filed on July 18, 2017.
(5)		Incorporated by reference to the Registrants’ Current Report on Form 8-K, filed on July 17, 2018.

	EXELA TECHNOLOGIES, INC.

	By:	/s/ Ronald Cogburn
		Ronald Cogburn
		Chief Executive Officer (Principal Executive Officer)


	By:	/s/ James G. Reynolds
		James G. Reynolds
		Chief Financial Officer (Principal Financial and Accounting Officer)