UNITED STATES

~~UNITED STATES~~

SECURITIES AND EXCHANGE COMMISSION

~~Washington,~~WASHINGTON, D.C. 20549

FORM 10-Q

☒~~(Mark One)~~

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2020

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

For the transition period from to

Commission ~~File Number:~~file number: 001-36788

EXELA TECHNOLOGIES, INC.

(Exact ~~name~~Name of ~~registrant~~Registrant as ~~specified~~Specified in its ~~charter)~~Charter)

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

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

~~Registrant’s telephone number, including area code:~~Registrant's Telephone Number, Including Area Code: ~~(214) 740-6500~~(844) 935-2832

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


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

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

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

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

Large ~~accelerated filer~~	oAccelerated Filer ☐	Accelerated ~~filer~~	xFiler ☒
~~Non-accelerated filer~~	oNon-Accelerated Filer ☐	Smaller ~~reporting company~~	oReporting Company ☒
~~(Do not check if a smaller reporting company)~~	Emerging ~~growth company~~	xGrowth Company ☐

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

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

As of ~~November 8, 2017 there were 150,578,451~~June 26, 2020 the registrant had 147,511,430 shares of ~~common stock of the Company issued and~~Common Stock outstanding.

Table of Contents

Exela Technologies, Inc.

Form 10-Q

For the quarterly period ended ~~September 30, 2017~~

March 31, 2020

TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements	3

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019	31

Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (as restated)	42

Condensed Consolidated Statements of Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (as restated)	53

Condensed Consolidated Statements of Stockholders’ ~~Equity (Deficit)~~Deficit for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (as restated)	64

Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (as restated)	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	5742

Item 4. Internal Controls and Procedures	5742

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	5843

Item 1A. Risk Factors	5844

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5844

Item 3. Defaults Upon Senior Securities	5845

Item 4. Mine Safety Disclosures	5845

Item 5. Other Information	5845

Item 6. Exhibits	46

Table of Contents

~~PART I—FINANCIAL INFORMATION~~

~~Item 1. Financial Statements.~~

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019

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


	March 31,		December 31,
	2020		2019
	(Unaudited)		(Audited)
Assets
Current assets
Cash and cash equivalents	$	113,013	$	6,198
Restricted cash		9,563		7,901
Accounts receivable, net of allowance for doubtful accounts of $5,508 and $4,975, respectively		242,757		261,400
Related party receivables		866		716
Inventories, net		17,353		19,047
Prepaid expenses and other current assets		30,271		23,663
Total current assets		413,823		318,925
Property, plant and equipment, net of accumulated depreciation of $180,378 and $176,995, respectively		107,586		113,637
Operating lease right-of-use assets, net		85,983		93,627
Goodwill		358,880		359,771
Intangible assets, net		329,837		342,443
Deferred income tax assets		11,661		12,032
Other noncurrent assets		20,293		17,889
Total assets	$	1,328,063	$	1,258,324

Liabilities and Stockholders' Equity (Deficit)
Liabilities
Current liabilities
Accounts payables	$	74,093	$	86,167
Related party payables		1,323		1,740
Income tax payable		2,532		352
Accrued liabilities		116,557		121,553
Accrued compensation and benefits		54,034		48,574
Accrued interest		23,786		48,769
Customer deposits		25,605		27,765
Deferred revenue		18,455		16,282
Obligation for claim payment		40,225		39,156
Current portion of finance lease liabilities		13,214		13,788
Current portion of operating lease liabilities		24,177		25,345
Current portion of long-term debts		36,691		36,490
Total current liabilities		430,692		465,981
Long-term debt, net of current maturities		1,520,619		1,398,385
Finance lease liabilities, net of current portion		16,954		20,272
Pension liabilities		28,600		25,681
Deferred income tax liabilities		7,473		7,996
Long-term income tax liabilities		2,795		2,806
Operating lease liabilities, net of current portion		66,848		73,282
Other long-term liabilities		7,508		6,962
Total liabilities		2,081,489		2,001,365
Commitments and Contingencies (Note 8)

Stockholders' equity (deficit)
Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 154,866,550 shares issued and 147,508,669 shares outstanding at March 31, 2020 and 153,638,836 shares issued and 150,851,689 shares outstanding at December 31, 2019		15		15
Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized; 3,290,050 shares issued and outstanding at March 31, 2020 and 4,294,233 shares issued and outstanding at December 31, 2019		1		1
Additional paid in capital		445,452		445,452
Less: Common Stock held in treasury, at cost; 7,357,881 shares at March 31, 2020 and 2,787,147 shares at December 31, 2019		(10,949)		(10,949)
Equity-based compensation		50,197		49,336
Accumulated deficit		(1,224,178)		(1,211,508)
Accumulated other comprehensive loss:
Foreign currency translation adjustment		(6,409)		(7,329)
Unrealized pension actuarial losses, net of tax		(7,555)		(8,059)
Total accumulated other comprehensive loss		(13,964)		(15,388)
Total stockholders’ deficit		(753,426)		(743,041)
Total liabilities and stockholders’ deficit	$	1,328,063	$	1,258,324

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

Table of Contents

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2020 and 2019

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

(Unaudited)

September 30,

December 31,

2017

2016

(Unaudited)

Assets

Current assets

Cash and cash equivalents

$
27,368

$
8,361

Restricted cash

37,315

25,892

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

227,704

138,421

Inventories, net

13,634

11,195

Prepaid expenses and other current assets

24,263

12,202

Total current assets

330,284

196,071

Property, plant and equipment, net

133,617

81,600

Goodwill

776,010

373,291

Intangible assets, net

514,873

298,739

Deferred income tax assets

7,880

9,654

Other noncurrent assets

15,573

10,131

Total assets

$
1,778,237

$
969,486

Liabilities and Stockholders’ Equity (Deficit)

Liabilities

Current liabilities

Accounts payable

$
82,676

$
42,212

Related party payables

14,474

9,344

Income tax payable

770

1,031

Accrued liabilities

75,259

29,492

Accrued compensation and benefits

52,955

31,200

Customer deposits

34,268

18,729

Deferred revenue

17,633

17,235

Obligation for claim payment

37,315

25,892

Current portion of capital lease obligations

15,246

6,507

Current portion of long-term debt

18,662

55,833

Total current liabilities

349,258

237,475

Long-term debt, net of current maturities

1,278,306

983,502

Capital lease obligations, net of current maturities

25,242

18,439

Pension liability

29,717

28,712

Deferred income tax liabilities

35,124

26,223

Long-term income tax liability

3,063

3,063

Other long-term liabilities

15,811

11,973

Total liabilities

1,736,521

1,309,387

Commitment and Contingencies

Stockholders’ equity (deficit)

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

15

—

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

1

—

Additional paid in capital

482,018

(57,389
)
Equity-based compensation

31,788

27,342

Accumulated deficit

(455,976
)
(293,968
)
Accumulated other comprehensive loss:

Foreign currency translation adjustment

(2,291
)
(3,547
)
Unrealized pension actuarial losses, net of tax

(13,839
)
(12,339
)
Total accumulated other comprehensive loss

(16,130
)
(15,886
)
Total stockholders’ equity (deficit)

41,716

(339,901
)
Total liabilities and stockholders’ equity (deficit)

$
1,778,237

$
969,486


	Three Months Ended March 31,
			2019
	2020		(Restated)
Revenue	$	365,451	$	404,357
Cost of revenue (exclusive of depreciation and amortization)		292,539		310,601
Selling, general and administrative expenses (exclusive of depreciation and amortization)		50,374		49,677
Depreciation and amortization		23,185		26,624
Related party expense		1,551		998
Operating income (loss)		(2,198)		16,457
Other expense (income), net:
Interest expense, net		41,588		39,701
Sundry expense, net		1,082		2,715
Other expense (income), net		(34,657)		1,493
Net loss before income taxes		(10,211)		(27,452)
Income tax expense		(2,459)		(4,720)
Net loss	$	(12,670)	$	(32,172)
Cumulative dividends for Series A Preferred Stock		1,440		(914)
Net loss attributable to common stockholders	$	(11,230)	$	(33,086)
Loss per share:
Basic and diluted	$	(0.08)	$	(0.23)

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

Table of Contents

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of ~~Operations~~Comprehensive Loss

For the Three Months Ended March 31, 2020 and ~~Nine Months ended September 30, 2017 and 2016~~2019

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

(Unaudited)


	Three Months Ended March 31,
			2019
	2020		(Restated)
Net loss	$	(12,670)	$	(32,172)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		920		3,392
Unrealized pension actuarial gains (losses), net of tax		504		(224)
Total other comprehensive loss, net of tax	$	(11,246)	$	(29,004)

Three months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

Revenue

$
338,393

$
186,373

$
766,035

$
577,527

Cost of revenue (exclusive of depreciation and amortization)

255,116

121,780

539,242

377,700

Gross profit

83,277

64,593

226,793

199,827

Selling, general and administrative expenses

102,048

30,829

172,626

95,385

Depreciation and amortization

28,052

18,761

70,779

58,463

Related party expense

26,892

2,448

31,733

7,372

Operating (loss) income

(73,715
)
12,555

(48,345
)
38,607

Other expense (income), net:

Interest expense, net

37,652

27,399

91,740

81,712

Loss on extinguishment of debt

35,512

—

35,512

—

Sundry expense (income), net

563

711

2,960

283

Net loss before income taxes

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

37,002

3,757

32,924

9,969

Net loss

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

(16,375
)
—

(16,375
)
—

Cumulative dividends for Series A Preferred Stock

(1,225
)
—

(1,225
)
—

Net loss attributable to common stockholders

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

Basic and diluted

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

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

Table of Contents

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of ~~Comprehensive Loss~~Stockholders’ Deficit

For the Three Months Ended March 31, 2020 and ~~Nine Months ended September 30, 2017 and 2016~~2019

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

(Unaudited)


														Accumulated Other Comprehensive Loss
																Unrealized
														Foreign		Pension
														Currency		Actuarial				Total
	Common Stock			Preferred Stock			Treasury Stock			Additional		Equity-Based		Translation		Losses,		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		Paid in Capital		Compensation		Adjustment		net of tax		Deficit		Deficit
Balances at January 1, 2019. as restated	150,142,955	$	15	4,569,233	$	1	2,549,185	$	(10,342)	$	445,452	$	41,731	$	(6,423)	$	(9,301)	$	(702,391)	$	(241,258)
Net loss January 1, 2019 to March 31, 2019, as restated	—		—	—		—	—		—		—		—		—		—		(32,172)		(32,172)
Equity-based compensation	—		—	—		—	—		—		—		2,798		—		—		—		2,798
Foreign currency translation adjustment	—		—	—		—	—		—		—		—		3,392		—		—		3,392
Net realized pension actuarial gains, net of tax	—		—	—		—	—		—		—		—		—		(224)		—		(224)
Balances at March 31, 2019, as restated	150,142,955	$	15	4,569,233		1	2,549,185	$	(10,342)	$	445,452	$	44,529	$	(3,031)	$	(9,525)	$	(734,563)	$	(267,464)

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
)


														Accumulated Other Comprehensive Loss
																Unrealized
														Foreign		Pension
														Currency		Actuarial				Total
	Common Stock			Preferred Stock			Treasury Stock			Additional		Equity-Based		Translation		Losses,		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		Paid in Capital		Compensation		Adjustment		net of tax		Deficit		Deficit
Balances at January 1, 2020	150,851,689	$	15	4,294,233	$	1	2,787,147	$	(10,949)	$	445,452	$	49,336	$	(7,329)	$	(8,059)	$	(1,211,508)	$	(743,041)
Net loss January 1, 2020 to March 31, 2020	—		—	—		—	—		—		—		—		—		—		(12,670)		(12,670)
Equity-based compensation	—		—	—		—	—		—		—		861		—		—		—		861
Foreign currency translation adjustment	—		—	—		—	—		—		—		—		920		—		—		920
Net realized pension actuarial gains, net of tax	—		—	—		—	—		—		—		—		—		504		—		504
Shares returned in connection with the Appraisal Action as result of repayment of Margin Loan	(4,570,734)		—	—		—	4,570,734		—		—		—		—		—		—		—
Preferred shares converted to common shares	1,227,714		—	(1,004,183)		—	—		—		—		—		—		—		—		—
Balances at March 31, 2020	147,508,669	$	15	3,290,050	$	1	7,357,881	$	(10,949)	$	445,452	$	50,197	$	(6,409)	$	(7,555)	$	(1,224,178)	$	(753,426)

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

Table of Contents

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated ~~Statements~~Statement of ~~Stockholders’ Equity (Deficit)~~Cash Flows

For the ~~Nine~~Three Months ~~ended September 30, 2017~~Ended March 31, 2020 and ~~2016~~2019

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

(Unaudited)


	Three Months Ended March 31,
			2019
	2020		(Restated)
Cash flows from operating activities
Net loss	$	(12,670)	$	(32,172)
Adjustments to reconcile net loss
Depreciation and amortization		23,185		26,624
Original issue discount and debt issuance cost amortization		3,193		2,852
Provision for doubtful accounts		74		800
Deferred income tax provision		(401)		1,076
Share-based compensation expense		861		2,798
Foreign currency remeasurement		(936)		35
Loss (gain) on sale of assets		(35,246)		54
Fair value adjustment for interest rate swap		845		1,677
Change in operating assets and liabilities, net effect from acquisitions:
Accounts receivable		13,476		(8,742)
Prepaid expenses and other assets		(5,678)		(632)
Accounts payable and accrued liabilities		(21,420)		(33,033)
Related party balances		(568)		(1,551)
Additions to outsource contract costs		(88)		(2,434)
Net cash used in operating activities		(35,373)		(42,648)

Cash flows from investing activities
Purchases of property, plant, and equipment		(3,591)		(5,572)
Additions to internally developed software		(1,153)		(1,879)
Cash paid in acquisition, net of cash received		(3,500)		—
Proceeds from sale of assets		38,222		7
Net cash provided by (used in) investing activities		29,978		(7,444)

Cash flows from financing activities
Repurchases of Common Stock		—		(2,872)
Borrowings from other loans		11,241		6,904
Borrowings under factoring arrangement and A/R Facility		131,591		14,678
Principal repayment on borrowings under factoring arrangement and A/R Facility		(23,042)		(13,560)
Lease terminations		(14)		(45)
Cash paid for debt issuance costs		(2,908)		—
Borrowings from senior secured revolving facility		29,750		51,000
Repayments on senior secured revolving facility		(14,000)		(21,000)
Principal payments on finance lease obligations		(3,187)		(5,077)
Principal repayments on senior secured term loans and other loans		(15,343)		(10,498)
Net cash provided by financing activities		114,088		19,530
Effect of exchange rates on cash		(216)		(32)
Net increase (decrease) in cash and cash equivalents		108,477		(30,594)
Cash, restricted cash, and cash equivalents
Beginning of period		14,099		43,854
End of period	$	122,576	$	13,260

Supplemental cash flow data:
Income tax payments, net of refunds received	$	623	$	1,356
Interest paid		61,852		60,573
Noncash investing and financing activities:
Assets acquired through right-of-use arrangements		270		4,097
Accrued capital expenditures		1,565		809

Accumulated Other Comprehensive Loss

Foreign Currency

Unrealized Pension

Total

Common Stock

Preferred Stock

Additional

Equity-Based

Translation

Actuarial Losses,

Accumulated

Stockholders’

Shares

Amount

Shares

Amount

Paid in Capital

Compensation

Adjustment

net of tax

Deficit

Equity

Balances at December 31, 2016 (as previously reported)

144,400

$
—

—

$
—

$
(57,389
)
$
27,342

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

63,880,157

6

—

—

(6
)
—

—

—

—

—

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

64,024,557

$
6

—

$
—

$
(57,395
)
$
27,342

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

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

4,446

4,446

Foreign currency translation adjustment

1,256

1,256

Net realized pension actuarial gains, net of tax

(1,500
)

(1,500
)
Merger recapitalization

16,575,443

2

20,546

20,548

Shares issued to acquire Novitex (refer to Note 3)

30,600,000

3

244,797

244,800

Issuance\Conversion of Quinpario shares

12,093,331

1

22,358

22,359

Sale of common shares at July 12, 2017

18,757,942

3

130,860

130,863

Issuance of Series A Preferred Stock

—

—

9,194,233

1

73,553

73,554

Shares issued for advisory services and underwriting fees

3,609,375

—

28,573

28,573

Conversion of Series A Preferred Stock to common shares

3,667,803

—

(3,000,000
)
—

—

—

Shares issued for HandsOn Global Management contract termination fee

1,250,000

10,000

10,000

Equity issuance expenses

(7,649
)

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

16,375

(16,375
)
—

Balances at September 30, 2017

150,578,451

$
15

6,194,233

$
1

$
482,018

$
31,788

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

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

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Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements ~~of Cash Flows~~

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

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

(Unaudited)

Nine Months ended September 30,

2017

2016

Cash flows from operating activities

Net loss

$
(145,633
)
$
(33,419
)
Adjustments to reconcile net loss

Depreciation and amortization

70,779

58,463

Fees paid in stock

23,875

—

HGM contract termination fee paid in stock

10,000

—

Original issue discount and debt issuance cost amortization

9,684

10,183

Loss on extinguishment of debt

35,512

—

Provision (recovery) for doubtful accounts

451

(372
)
Deferred income tax benefit (expense)

(37,186
)
(9,092
)
Share-based compensation expense

4,446

5,422

Foreign currency remeasurement

777

172

Gain on sale of Meridian

(588
)
—

Loss on sale of property, plant and equipment

508

1,242

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

Accounts receivable

(2,784
)
12,732

Related party receivable

—

(1,089
)
Prepaid expenses and other assets

189

(3,807
)
Accounts payable and accrued liabilities

37,316

4,227

Related party payables

4,936

(1,345
)
Net cash provided by operating activities

12,282

43,317

Cash flows from investing activities

Purchases of property, plant and equipment

(7,001
)
(4,971
)
Additions to internally developed software

(6,348
)
(7,207
)
Additions to outsourcing contract costs

(8,574
)
(11,015
)
Cash acquired in Transcentra acquisition

—

3,351

Proceeds from sale of Meridian

4,582

—

Cash acquired in Quinpario reverse merger

91

—

Cash paid in Novitex acquisition, net of cash received

(423,428
)
—

Proceeds from sale of property, plant and equipment

11

625

Net cash used in by investing activities

(440,667
)
(19,217
)
Cash flows from financing activities

Change in bank overdraft

(210
)
(1,541
)
Proceeds from issuance of common and preferred stock

204,417

—

Cash received from Quinpario

27,031

—

Proceeds from financing obligations

3,040

4,801

Contribution from Shareholders

20,548

—

Proceeds from new credit facility

1,320,500

—

Retirement of previous credit facilities

(1,055,736
)
—

Cash paid for debt issuance costs and debt discounts

(39,837
)
—

Cash paid for equity issue costs

(149
)
—

Borrowings from revolver and swing-line loan

72,600

53,200

Repayments on revolver and swing line loan

(72,500
)
(53,200
)
Principal payments on long-term obligations

(32,647
)
(35,247
)
Net cash provided by (used in) financing activities

447,057

(31,987
)
Effect of exchange rates on cash

335

(239
)
Net increase (decrease) in cash and cash equivalents

19,007

(8,126
)
Cash and cash equivalents

Beginning of period

8,361

16,619

End of period

$
27,368

$
8,493

Supplemental cash flow data:

Income tax payments, net of refunds received

$
2,673

$
2,798

Interest paid

60,347

79,828

Noncash investing and financing activities:

Assets acquired through capital lease arrangements

$
2,080

$
5,632

Leasehold improvements funded by lessor

74

1,016

Issuance of common stock as consideration for Novitex

244,800

—

Accrued capital expenditures

3,512

412

Dividend equivalent on Series A Preferred Stock

$
16,375

$
—

Liability assumed of Quinpario

4,672

—

1. General

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes~~statements should be read in conjunction with the notes to the ~~Condensed Consolidated Financial Statements~~

(consolidated financial statements as of and for the year ended December 31, 2019 included in ~~thousands of United States dollars except share and per share amounts)~~

~~(Unaudited)~~

~~1. Description of~~ the ~~Business~~

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, 2017such period (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”“2019 Form 10-K”). In connection with the Closing, the Company changed its name from Quinpario Acquisition Corp 2 to Exela Technologies, Inc. Unless the context otherwise requires, the “Company” refers to the combined company and its subsidiaries following the Business Combination, “Quinpario” refers to the Company prior to the closing of the Business Combination, “SourceHOV” refers to SourceHOV prior to the Business Combination and “Novitex” refers to Novitex prior to the Business Combination. Refer to Note 3 for further discussion of the Business Combination.

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

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

~~Basis of Presentation~~

The accompanying ~~unaudited~~ condensed consolidated financial statements have been prepared ~~in accordance with~~using accounting principles generally accepted ~~accounting principles~~ in the United States ~~(“U.S. GAAP”~~of America ("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”~~("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 any other interim period or the ~~year ending~~fiscal year.

Restatement

As described in additional detail in the Explanatory Note to its 2019 Form 10-K, the Company restated its audited consolidated financial statements in the 2019 Form 10-K for the years ended December 31, ~~2017. These interim financial statements should be read~~2018 and 2017 and its unaudited quarterly results for the first three fiscal quarters in ~~conjunction with SourceHOV’s audited financial statements for~~ the fiscal year ended December 31, ~~2016 included~~2019 and each fiscal quarter 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 thefiscal year ended December 31, ~~2016) are those~~2018. Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. See Note 20, Unaudited Quarterly Financial Data, 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, priorNotes to the ~~Business Combination, have been retroactively restated as shares reflecting the exchange ratio established~~consolidated financial statements in the ~~Business Combination. The presented financial information~~2019 Form 10-K for the ~~quarter ended September 30, 2017 includes~~impact of these adjustments on each of the ~~financial information~~quarterly periods in fiscal 2018 and ~~activities for SourceHOV~~ for the ~~period July 1, 2017 to September 30, 2017 (92 days) as well as the financial information and activities~~first three quarters of ~~Novitex for the period July 13, 2017 to September 30, 2017 (80 days).~~

~~Principles of Consolidation~~

~~The unaudited~~fiscal 2019. These condensed consolidated financial statements include restated results for the ~~accounts~~corresponding interim period of fiscal 2019.

Going Concern

Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), the Company ~~and~~has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ~~wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company evaluates~~ability to meet its ~~relationships with other entities to identify whether~~future financial obligations as 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 atbecome due within one year after the date ofthat the financial statements ~~and~~are issued. As required under ASC 205-40, management’s evaluation should initially not take into consideration the ~~reported amounts~~potential mitigating effects of ~~revenues and expenses during~~management’s plans that have not been fully implemented as of the ~~reporting period.~~

~~Key estimates and judgments relied upon in preparing these consolidated~~date the 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.are issued. 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 assumptionsaccompanying financial statements have been prepared assuming that the Company ~~believes~~will continue as a going concern.

Substantial Doubt Raised

In performing the first step of the evaluation, we concluded that the following conditions raised substantial doubt about our ability to ~~be reasonable~~continue as a going concern:

●

history of net losses of $12.7 million for the three months ended March 31, 2020 and $509.1 million and $169.8 million for the years ended December 31, 2019 and December 31, 2018, respectively. This is after considering a gain of $35.3 million on the sale of SourceHOV Tax, LLC recognized during the three months

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ended March 31, 2020, and including goodwill and other intangible asset impairment of $349.6 million, for the year ended December 31, 2019 and $48.1 million for the year ended December 31, 2018;

●

net operating cash outflow of $35.4 million for the three months ended March 31, 2020, $63.9 million in 2019 and inflow of $23.6 million in 2018;

●

working capital deficits of $16.9 million as of March 31, 2020, $147.1 million as of December 31, 2019 and $123.5 million as of December 31, 2018;

●

significant cash payments for interest on our long-term debt of $144.5 million in 2019 and a similar amount expected in 2020;

●

a liability incurred of $57.4 million for Appraisal Action (as described further in Note 8);

●

a requirement that the Company maintain a minimum of $40.0 million and $35.0 million in liquidity, at all times, to not be considered in default of the A/R Facility and the Credit Agreement (as defined below); and

●

an accumulated deficit of $1,224.2 million.

Furthermore, under the ~~circumstances. Actual results could differ from those estimates.~~

~~Exela Technologies, Inc.~~terms of each of the First Lien Credit Agreement, dated as of July 12, 2017, as amended and ~~Subsidiaries~~

~~Notes~~restated as of July 13, 2018 and as further amended and restated as of April 16, 2019 (the “Credit Agreement”), and the Indenture and First Supplemental Indenture (collectively, the “Indenture”), dated July 12, 2017, the Company was required to deliver to lender the ~~Condensed Consolidated Financial Statements~~

~~(in thousands~~December 31, 2019 audited financial statements by April 14, 2020, which the Company failed to do. Such failure was an event of ~~United States dollars except share and per share amounts)~~

~~(Unaudited)~~

~~Segment Reporting~~

default under the Credit Agreement if not cured within 30 days of receiving a notice of default. The Company ~~consists~~received such notice on April 15, 2020. Additionally, under the terms of the ~~following three segments:~~

1.~~Information & Transaction Processing Solutions (“ITPS”).~~ ~~ITPS provides industry solutions for banking and~~A/R Facility (as described in Note 5), the Company was required to furnish to each lender the December 31, 2019 audited 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 relatedstatements by May 11, 2020, which the Company failed 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~~do. In May 2020, both the ~~healthcare payer~~Credit Agreement and ~~provider markets. Payer service offerings include claims processing, claims adjudication~~the A/R Facility were amended. Refer to Consideration of Management’s Plans section below.

Consideration of Management’s Plans

In performing the second step of this assessment, we are required to evaluate whether it is probable that our plans will be effectively implemented within one year after the financial statements are issued 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.whether it is probable those plans will alleviate the substantial doubt about our ability to continue as a going concern.

3.~~Legal and Loss Prevention Services (“LLPS”).~~ ~~LLPS solutions include processing~~As 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,~~June 26, 2020, the Company ~~holds~~had $89.0 million in available cash ~~for various settlement funds once~~and an additional source of liquidity of $13.0 million from 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.borrowing facilities.

~~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~~undertaken the following plans to improve our available cash balances, liquidity and cash generated flows from operations, over the twelve month period from the date the financial statements are ~~indefinite-lived assets and therefore are~~issued, as follows:

●

On January 10, 2020, certain subsidiaries of the Company entered into a $160.0 million A/R Facility with a five-year term. The Company used the proceeds of the initial borrowings to repay outstanding revolving borrowings under the Company’s senior credit facility and to provide additional liquidity and funding for the ongoing business needs of the Company and its subsidiaries. As of June 8, 2020, the Company has fully drawn on the remaining availability under the A/R Facility. Additionally, the A/R Facility agreement includes a requirement that the Company maintain a minimum of $40.0 million in liquidity, at all times, to not be considered in default.

●

On March 16, 2020, the Company and its indirect wholly owned subsidiaries, Merco Holdings, LLC and SourceHOV Tax, LLC entered into a Membership Interest Purchase Agreement with Gainline Source Intermediate Holdings LLC at which time Gainline Source Intermediate Holdings LLC acquired all of the outstanding membership interests of SourceHov Tax for $40.0 million, subject to adjustment as set forth in the purchase agreement of approximately $2.0 million.

●

On March 23, 2020, in response to the potential impact of the COVID-19 pandemic, the Company implemented a temporary freeze on increases to base salaries and wages unless contractually mandated. Additionally, in connection with the incentive program administered by the Company for hourly, non-exempt employees, a new

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maximum was put in place to limit the amount of incentives that could be earned in any given two (2) week pay period. Although the Company expects these to be short-term actions, it expects these actions will result in a cash savings to the Company of approximately $23.4 million on an annual basis.

●

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The refundable payroll tax credits and deferment of employer side social security payments provisions of the CARES Act will benefit Company’s liquidity by approximately $29.0 million.

●

Management Assessment of Ability 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 payContinue as a ~~royalty to a third party to license such names.~~

~~Trademarks~~Going Concern

The Company has ~~determined~~a history of negative trends in its financial condition and operating results as well as recent noncompliance with covenants with its respective lenders. However, despite these conditions, the Company believes management’s plans, as described fully above, will provide sufficient liquidity to meet its financial obligations and further, maintain levels of liquidity as specifically required under the Credit Agreement and the A/R Facility. Therefore, management concluded these plans alleviate the substantial doubt that was raised about our ability to continue as a going concern for at least twelve months from the date that the financial statements were issued.

Future Plans and Considerations

Our plans to further enhance liquidity, which were not considered for the purposes of our assessment of whether substantial doubt is alleviated, include the potential sale of certain non-core assets that are not central to the Company’s long-term strategic vision, and any potential action with respect to these operations would be intended to allow the Company to better focus on its ~~trademark intangible assets resulting~~core businesses. The Company has retained financial advisors to assist with the sale of select assets. The Company expects to use the potential net proceeds from ~~acquisitions are definite-lived assets and therefore~~this initiative for the paydown of debt.

Our plans are subject to ~~amortization. The Company amortizes trademarks on a straight-line basis over~~inherent risks and uncertainties, which become significantly magnified when 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 marketabilityeffects of the ~~commercial software products~~current pandemic 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,~~financial crisis 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 orassessment. Accordingly, there ~~is a bargain purchase option, in which case assets are amortized normally on a straight-line basis over the useful life~~can be no assurance that ~~would~~our plans can 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~~effectively implemented 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 evidencetherefore, that the ~~criteria specified in the client acceptance provisions have been satisfied. The sales price is not considered to~~conditions can be ~~fixed or determinable until all contingencies related to the sale have been resolved.~~effectively mitigated.
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)~~
Net Loss per Share
Earnings per share (“EPS”) is computed by dividing net loss available to holders of the Company’s common ~~stockholders~~stock, par value $0.0001 per share (“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 method is an earnings allocation method that determines earnings per share for ~~common shares~~Common Stock and participating securities. Diluted EPS excludes all dilutive potential of shares of Common Stock if their effect is anti-dilutive.

Table of Contents

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~~As of ~~shares of common stock if their effect is anti-dilutive.~~

~~For the three and nine months ended September 30, 2017,~~March 31, 2020 outstanding shares of the Company’s Series A Preferred Stock, if converted would have resulted in an additional ~~7,573,066~~4,022,415 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 as a special purpose acquisition company under the name Quinpario Acquisition Corp 2 (“Quinpario”), which changed its name to Exela Technologies, Inc. in July 2017. The Company has not ~~considered~~included the effect of 35,000,000 warrants sold in the Quinpario Initial Public Offering (“IPO”) or the effect of the aggregate number of shares issuable pursuant to outstanding restricted stock units and options of 5,168,005 and 4,223,597 as of March 31, 2020 and 2019, respectively, in the calculation of ~~net income (loss)~~diluted loss per ~~share. Warrants are considered anti-dilutive~~share for the three months ended March 31, 2020 and ~~excluded when the exercise price exceeds the average market value of the Company’s common stock price during the applicable period.~~2019 as their effects were anti-dilutive.

Three Months Ended March 31,




2019


2020

(Restated)
Net loss attributable to common stockholders (A)

$
(11,230)

$
(33,086)
Weighted average common shares outstanding - basic and diluted (B)

147,195,164

145,572,221
Loss Per Share:

Basic and diluted (A/B)

$
(0.08)

$
(0.23)

The ~~components of~~weighted average common shares outstanding - basic and diluted, ~~EPS are~~in the table above, exclude in each case the 4,570,734 shares returned to the Company in the first quarter of 2020 in connection with the Appraisal Action (as defined and described further in Note 8 below, such shares, the “Appraisal Shares”), even though the Appraisal Shares were outstanding as ~~follows:~~of March 31, 2019.

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
)

Sale of SourceHOV Tax, LLC
On March 16, 2020, the Company and its indirect wholly owned subsidiaries, Merco Holdings, LLC and SourceHOV Tax, LLC entered into a Membership Interest Purchase Agreement with Gainline Source Intermediate Holdings LLC at which time Gainline Source Intermediate Holdings LLC acquired all of the outstanding membership interests of SourceHov Tax, LLC for $40.0 million subject to adjustment as set forth in the purchase agreement. The Company recognized a gain of $35.3 million on the sale of SourceHOV Tax, LLC during the three months ended March 31, 2020, which takes into account approximately $2.0 million downwards adjustments to the purchase price in accordance with the purchase agreement. The gain on sale of SourceHOV Tax, LLC is included in Other expense (income), net in the condensed consolidated statements of operations.

2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective ~~January 1, 2017,~~March 12, 2020, the Company adopted Accounting Standards Update (“ASU”) no. ~~2015-11,~~2020-04, ~~Inventory (Topic 330): Simplifying~~Facilitation of the ~~Measurement~~Effects of ~~Inventory~~Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The guidance is effective upon issuance and generally can be applied through 31 December 2022. The adoption had no impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.
Effective March 9, 2020, the Company adopted ASU no. 2020-03, Codification Improvements to Financial Instruments. This ~~amendment replaced~~ASU represents changes to clarify or improve the ~~method~~Codification. The amendments make the

Table of ~~measuring inventories~~Contents

Codification easier to understand and apply by eliminating inconsistencies and providing clarifications in relation to financial instruments. This guidance was effective immediately upon issuance. The additional elements of the ASU did not have a material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective January 1, 2020, the Company adopted ASU no. 2018-13, Fair Value Measurement (Topic 820); which changes the fair value measurement disclosure requirements of Accounting Standards Codification (“ASC 820”). The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting. The FASB used the guidance in the Concepts Statement to improve the effectiveness of ASC 820’s disclosure requirements. The objective of the disclosure requirements in this subtopic is to provide users of financial statements with information about assets and liabilities measured at ~~lower~~fair value in the statement of ~~cost~~financial position or ~~market with~~disclosed in the notes to financial statements. The ASU includes but is not limited to the valuation techniques and inputs that a ~~lower~~reporting entity uses to arrive at its measures of ~~cost~~fair value, including judgments and ~~net realizable~~assumptions that the entity makes, the uncertainty in the fair value ~~method.~~measurements as of the reporting date, and how changes in fair value measurements affect an entity’s performance and cash flows. The adoption had no material impact on the ~~Company’s financial position,~~Company's consolidated results of operations, ~~and~~ cash ~~flows.~~flows, financial position or disclosures.

Effective January 1, ~~2017,~~2020, the Company adopted ASU no. ~~2016-09,~~2018-15, ~~Compensation~~Intangibles, Goodwill, and Other - ~~Stock Compensation (Topic 718)~~Internal Use Software (Subtopic 350-40): ~~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~~Customer's accounting for ~~income taxes, forfeitures, and statutory tax withholding~~implementation costs incurred in a Cloud Computing Arrangement that is a service contract. The amendments 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 ~~well as classification in the statement of cash flows. The standard requires that all tax effects~~an asset related to ~~share-based payments be recorded as income tax~~the service contract and which costs to expense. The amendments also require the entity (customer) to 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~~capitalized implementation costs of a hosting arrangement that is a service contract over the ~~statement~~term of ~~cash flows. Upon adoption of this standard,~~ the ~~Company elected to continue its current practice of estimating expected forfeitures.~~hosting arrangement, which includes reasonably certain renewals. The adoption had no material impact on the ~~Company’s financial position,~~Company's consolidated results of operations, ~~and~~ cash ~~flows.~~

~~Exela Technologies, Inc. and Subsidiaries~~flows, financial position or disclosures.
~~Notes to~~
Effective January 1, 2020, the ~~Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
~~Recently Issued Accounting Pronouncements~~

~~In May 2014, the~~ ~~FASB~~ ~~issued~~Company adopted ASU no. ~~2014-09,~~2019-08, ~~Revenue from Contracts~~Codification Improvements — Share-Based Consideration Payable to a Customer. This ASU clarifies the accounting for share-based payments issued as consideration payable to a customer in accordance with ~~Customers (ASC 606)~~.ASC 606. Under the ~~update, revenue will be recognized based on~~ASU, entities apply the guidance in ASC 718 to measure and classify share-based payments issued to a ~~five-step model. The core principle of the model is~~customer 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~~are not in exchange for ~~those goods~~a distinct good or ~~services.~~ service (i.e., share-based sales incentives). Accordingly, entities use a fair-value-based measure to calculate such incentives on the grant date, which is the date on which the grantor (the entity) and the grantee (the customer) reach a mutual understanding of the key terms and conditions of the share-based consideration. The result is reflected as a reduction of revenue in accordance with the guidance in ASC 606 on consideration payable to a customer. After initial recognition, the measurement and classification of the share-based sales incentives continue to be subject to ASC 718 unless (1) the award is subsequently modified when vested and (2) the grantee is no longer a customer. The adoption had no impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

In July 2015, the FASB deferred the effective date by one year (ASU no. 2015-14). This ASU will be effective beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in ASC 605 (ASU 2016-11); 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12); and 5) technical corrections and improvements (ASU 2016-20). The new standard will be effective for us beginning January 1, 2018. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

~~In February 2016,~~2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. The S-X Rule 3-04 requires the presentation of changes in stockholders’ equity in the form of a reconciliation of the beginning balance to the ending balance for each period for which a statement of income is required to be filed with all significant reconciling items. The Company presented changes in stockholders' equity as separate financial statements for the current and comparative year-to-date interim periods beginning on January 1, 2019. This guidance was effective immediately upon issuance. The additional elements of the ASU did not have a material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective January 1, 2019, the Company adopted ASU no. 2016-02, Leases ~~(842)~~(ASC 842).. This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ~~amendments in~~Company adopted this guidance effective January 1,

Table of Contents

2019, under the modified retrospective transition method provided by ASU ~~are effective for fiscal years~~ ~~beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.~~2018-11 with the following practical expedients below:

●

Not to record leases with an initial term of 12 months or less on the balance sheet; and

●

Not to reassess the (1) definition of a lease, (2) lease classification, and (3) initial direct costs for existing leases during transition.

The ~~Company is currently in the early stages of evaluating the~~adoption had a material impact ~~that adopting this standard will have~~ on the Company's unaudited consolidated ~~financial statements.~~balance sheets, but did not have a material impact on the Company's unaudited consolidated statements of operations and unaudited consolidated statements of cash flows. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged.

Recently Issued Accounting Pronouncements

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~~This ASU along with related additional clarificatory guidance in the ~~amortized cost basis of~~ASU No. 2019-05, “Financial Instruments—Credit Losses (Topic 326)” and ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, are effective for the ~~securities. The standard will be effective~~Company for fiscal years beginning after December 15, ~~2020,~~2022, 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,~~December 2019, the FASB issued ASU no. ~~2016-15,~~2019-12, ~~Statement~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes, for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of ~~Cash Flows: Classification~~a consolidated group. It also clarifies certain aspects of ~~Certain Cash Receipts and Cash Payments (Topic 230), which adds or clarifies~~the existing guidance on the presentation and classification of eight specific types of cash receipts and cash payments in the statement of cash flows such as debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees, with the intent of reducing diversity in practice. For public entities,to promote more consistent application, among other things. The ASU ~~2016-15~~ is effective for ~~fiscal years, including interim periods within those~~the Company for fiscal years beginning after December 15, ~~2018, and~~2020, including interim periods ~~within fiscal years beginning after December 15, 2019. Entities must apply the guidance retrospectively to all periods presented unless retrospective application~~therein. Early adoption is ~~impracticable.~~permitted. 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~~3. Significant Accounting Policies

~~Notes~~The information presented below supplements the Significant Accounting Policies information presented in our 2019 Form 10-K, including Revenue Recognition for the adoption of ASC 606 (ASU 2014-09: Revenue from Contracts with Customers), which became effective January 1, 2018. See our 2019 Form 10-K for a description of our significant accounting policies in effect prior 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~~adoption of the ~~current~~new accounting standard.

Revenue Recognition

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and ~~deferred income tax effects~~is the unit of ~~intra-entity transfers~~account in ASC 606. Revenue is measured as the amount of ~~assets other than inventory,~~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 ~~intent~~provision of reducing complexity and diversity in practice. Under ASU 2016-16, entities must recognize the income tax consequences when the transfer occurs rather than deferring recognition. For public entities, ASU 2016-16 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019, with early adoption permitted as of the beginning of a fiscal year (i.e., early adoption is permitted only in the first interim period). Entities must apply the guidance on a modified retrospective basis though a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. ~~The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.~~

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

~~In January 2017, the FASB issued ASU no. 2017-01,~~ ~~Business Combinations: Clarifying the Definition of a Business (Topic 805).~~ ~~The ASU clarifies the definition of a~~ business and ~~provides guidance on evaluating as to whether transactions should be accounted for as acquisitions (or disposals)~~transaction processing services within each 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 addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating ~~Topic 480, Distinguishing Liabilities from Equity~~, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this updateour segments. We do not have any significant extended payment terms, as payment is received shortly after goods are delivered or services are provided.

Table of Contents

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 ~~accounting effect. This ASU~~unknown or unspecified quantity of tasks and the consideration received is ~~effective for fiscal years, and interim periods within those years, beginning after December 15,~~ ~~2019, and interim periods within fiscal years beginning after December 15, 2020. The Company~~contingent upon the customers’ use (i.e., number of transactions processed, requests fulfilled, etc.); as such, the total transaction price is ~~currently in~~variable. We allocate the ~~early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.~~

3.~~Business Combination~~

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

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

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

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

Disaggregation of Revenues

The following ~~table summarizes the consideration paid for Novitex~~tables disaggregate revenue from contracts by geographic region 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)~~

~~(Unaudited)~~

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

Weighted Average Useful Life
(in years)

Fair value

Trademark and trade name - Novitex

9.5

$
18,000

Customer relationships

16.0

230,000

Internally devleoped software - Connect Platform

5.0

1,710

Non-compete agreements

1.0

1,350

$
251,060

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

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

~~Transaction Costs~~

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

~~Restructuring Charges~~

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

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

~~Exela Technologies, Inc.~~March 31, 2020 and ~~Subsidiaries~~2019:

Three Months Ended March 31,

2019

2020

(Restated)

ITPS

HS

LLPS

Total

ITPS

HS

LLPS

Total
U.S.A.

$
223,326

$
64,049

$
17,290

$
304,665

$
251,500

$
61,343

$
17,842

$
330,685
EMEA

53,906

—

—

53,906

66,678

—

—

66,678
Other

6,880

—

—

6,880

6,994

—

—

6,994
Total

$
284,112

$
64,049

$
17,290

$
365,451

$
325,172

$
61,343

$
17,842

$
404,357

~~Notes~~

Contract Balances

The following table presents contract assets, contract liabilities and contract costs recognized at March 31, 2020 and December 31, 2019:

March 31,

December 31,

2020

2019
Accounts receivable, net

$
242,757

$
261,400
Deferred revenues

18,851

16,621
Customer deposits

25,605

27,765
Costs to obtain and fulfill a contract

4,517

4,977

Accounts receivable, net includes $24.2 million and $34.1 million as of March 31, 2020 and December 31, 2019, 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 ~~Condensed Consolidated Financial Statements~~customer but rather are used in fulfilling the related performance obligations that transfer over time. The advance consideration received from customers is deferred over the contract term. We recognized revenue of $7.0 million during the three months ended March 31, 2020 that had been deferred as of December 31, 2019.

~~(in thousands~~Costs incurred to obtain and fulfill contracts are deferred and expensed on a straight-line basis over the estimated benefit period. We recognized $0.7 million of ~~United States dollars except share and per share amounts)~~

~~(Unaudited)~~

~~The Company does not expect to incur additional charges~~amortization for these ~~terminations~~costs in ~~future periods. Severance charges associated with~~ the ~~terminations were~~first three months of 2020 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 fulfillment and can be separated into two principal categories: contract commissions and fulfillment 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~~expenses. The effect of applying this practical expedient was not material.

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Customer deposits consist primarily of amounts received from customers in advance for postage. The amounts recorded as of December 31, 2019 were used to pay for postage with the corresponding postage revenue being recognized during the three months ended March 31, 2020. Any residual balances may be retained and used in future periods.

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 ~~consolidated statement~~related labor or transactional volumes.

Certain of ~~operations and were included~~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 ~~ITPS segment. Of~~contract. The primary method used to estimate standalone selling price is the ~~total amount~~expected cost plus a margin approach, under which we estimate our expected costs of ~~restructuring charges, $2.1 million was shown as~~satisfying a ~~liability as~~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 ~~September 30, 2017, which~~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 ~~included within Accrued compensation~~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 ~~benefits~~other similar items that generally decrease the transaction price. We estimate these amounts based on the ~~Condensed Consolidated Balance Sheets.~~expected amount to be provided to customers and reduce revenues recognized. We do not anticipate significant changes to our estimates of variable consideration.

~~Pro-Forma Information~~

~~Following are~~We include reimbursements from customers, such as postage costs, in revenue, while 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 cost of revenue.
Transaction Price Allocated to the ~~earliest period presented.~~Remaining Performance Obligations
~~Additionally,~~In accordance with optional exemptions available under ASC 606, we did not disclose the ~~pro forma results~~value of unsatisfied performance obligations for (a) contracts with an original expected length of one year or less, and (b) 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 ~~inclusive~~substantially the same and have the same pattern of transfer over time, with the corresponding remaining performance obligations as of March 31, 2020 in each of the ~~acquisition~~future periods below:

Estimated Remaining Fixed Consideration for Unsatisfied
Performance Obligations

Remainder of 2020

$
36,826
2021

38,591
2022

32,814
2023

27,638
2024

26,703
2025 and thereafter

27,144
Total

$
189,716

Table 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.Contents

4.~~Accounts Receivable~~

~~Accounts receivable, net consist of the following:~~

September 30,

December 31,

2017

2016

Billed receivables

$
195,437

$
116,148

Unbilled receivables

31,341

20,982

Other

4,868

4,510

Less: Allowance for doubtful accounts

(3,942
)
(3,219
)

$
227,704

$
138,421

Unbilled receivables represent balances recognized as revenue that have not been billed to the customer. The Company’s allowance for doubtful accounts is based on a policy developed by historical experience and management judgment. Adjustments to the allowance for doubtful accounts may occur based on market conditions or specific client circumstances.
~~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
Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization and ~~consist~~consists of the following:

March 31, 2020

Gross Carrying

Intangible


Amount (a)

Amortization

Asset, net
Customer relationships

$
507,589

$
(247,272)

$
260,317
Developed technology

88,553

(86,734)

1,818
Trade names (b)

8,400

(3,100)

5,300
Outsource contract costs

15,877

(11,360)

4,517
Internally developed software

44,247

(13,966)

30,281
Trademarks

23,378

(23,370)

8
Assembled workforce

4,473

(1,398)

3,075
Purchased software

26,749

(2,229)

24,520
Intangibles, net

$
719,265

$
(389,428)

$
329,837

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

December 31, 2019

Gross Carrying

Intangible


Amount (a)

Amortization

Asset, net
Customer relationships

$
508,074

$
(237,313)

$
270,761
Developed technology

89,053

(87,109)

1,944
Trade names (b)

8,400

(3,100)

5,300
Outsource contract costs

16,726

(11,749)

4,977
Internally developed software

43,261

(12,129)

31,132
Trademarks

23,378

(23,370)

8
Assembled workforce

4,473

(1,118)

3,355
Purchased software

26,749

(1,783)

24,966
Intangibles, net

$
720,114

$
(377,671)

$
342,443
~~(a) Amounts include intangibles acquired in the Business Combination. Refer to Note 3.~~
(a) Amounts include intangible assets acquired in business combinations and asset acquisitions.
(b) The carrying amount of trade names for 2020 and 2019 is net of accumulated impairment losses of $44.1 million, of which $1.0 million was recognized in 2019.
~~Exela Technologies, Inc. and Subsidiaries~~Goodwill
~~Notes to~~The Company’s operating segments are significant strategic business units that align its products and services with how it manages its business, approach the ~~Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share~~markets and ~~per share amounts)~~
~~(Unaudited)~~
~~Goodwill~~
interacts with its clients. The Company is organized into three segments: ITPS, HS, and LLPS (See Note 13).
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

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Beginning
of Year
Balance (a)

Additions

Impairments

Currency Translation Adjustments

End of Year Balance (a)
ITPS

$
571,575

$
—

$
(317,525)

$
70

$
254,120
HS

86,786

—

—

—

86,786
LLPS

49,897

—

(31,032)

—

18,865
Balance as of December 31, 2019

$
708,258

$
—

$
(348,557)

$
70

$
359,771
ITPS

254,120

—

—

(891)

253,229
HS

86,786

—

—

—

86,786
LLPS

18,865

—

—

—

18,865
Balance as of March 31, 2020

$
359,771

$
—

$
—

$
(891)

$
358,880

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

(a)

The goodwill amount for all periods presented is net of accumulated impairment amount as at December 31, 2018. Accumulated impairment is $212.3 million and $560.9 million as at December 31, 2018 and March 31, 2020, respectively.

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

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

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

8.~~Accrued Liabilities and Other Long-Term Liabilities~~

~~Accrued liabilities consist of the following:~~

September 30,

December 31,

2017

2016

Accrued taxes (exclusive of income taxes)

$
7,521

$
3,309

Accrued lease exit obligations

2,474

3,949

Accrued professional and legal fees

12,821

8,289

Deferred rent

1,136

989

Accrued interest

30,405

8,459

Accrued transaction costs

19,250

2,750

Other accruals

1,652

1,747

$
75,259

$
29,492

~~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

9.5. 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 (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.
Senior Credit Facilities
On July 12, 2017, the Company entered into a First Lien Credit Agreement with Royal Bank of Canada, Credit Suisse AG, Cayman Islands Branch, Natixis, New York Branch and KKR Corporate Lending LLC (the “Credit Agreement”) providing Exela Intermediate LLC, a wholly owned subsidiary of the Company, upon the terms and subject to the conditions set forth in the Credit Agreement, (i) a $350.0 million senior secured term loan maturing July 12, 2023 with an original issue discount (“OID”) of $7.0 million, and (ii) a $100.0 million senior secured revolving facility maturing July 12, ~~2022, none~~2022. As of ~~which is currently drawn.~~
March 31, 2020 and December 31, 2019 the Company had outstanding irrevocable letters of credit totaling approximately $19.2 million and $20.6 million, respectively, under the senior secured revolving facility.
The Credit Agreement ~~provides~~provided for the following interest rates for borrowings under the senior secured term facility and senior secured revolving facility: at the Company’s option, either (1) an adjusted LIBOR, subject to a 1.0% floor in the case of term loans, or (2) a base rate, in each case plus an applicable margin. The initial applicable margin for the senior secured term facility iswas 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 iswas 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 the First Lien Credit Agreement (the “First Amendment”), dated as of July 13, 2018, by and among the Company’s subsidiaries

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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 in aggregate principal amount~~borrowed $343.4 million of ~~10.0% First Priority Senior Secured Notes due 2023 with an OID of $22.5 million~~refinancing term loans (the ~~“Notes”~~“Repricing Term Loans”)~~. The Notes are guaranteed by certain subsidiaries of~~ to refinance 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.

~~Exela Technologies, Inc. and Subsidiaries~~Company’s existing senior secured term loans.
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
~~Debt Refinancing~~
Upon the closing of the Business Combination on July 12, 2017, the $1,050.7 million outstanding balance of SourceHOV related debt facilities and the $420.5 million outstanding balance of Novitex related debt facilities were paid off using proceeds from the Credit Agreement and issuance of the Notes.
In accordance with ASC 470 —– Debt —– Modifications and Extinguishments, as a result of certain lenders that participated in ~~SourceHOV’s~~Exela’s debt structure prior to the ~~refinancing~~Repricing and the Company’s debt structure after the ~~refinancing,~~Repricing, it was determined that a portion of the refinancing of ~~SourceHOV’s first lien~~Exela’s senior secured ~~term loan and second lien secured term loan (“Original SourceHOV Term Loans”)~~credit facilities would be accounted for as a debt modification, and the remaining would be accounted for as an extinguishment. The Company incurred ~~$28.9~~$1.0 million in new debt issuance costs related to the ~~new secured term loan,~~refinancing, of which ~~$2.8~~$1.0 million was ~~third party~~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. ~~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~~All 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~~life of the new term loan ~~which are presented on~~using the ~~balance sheet as~~effective interest rate of the term loan.

The Repricing Term Loans will bear interest at a ~~contra-debt liability. The Company incurred~~rate per annum of, at the Company’s option, either (a) a ~~$5.0 million prepayment penalty related~~LIBOR rate determined by reference to the ~~Original SourceHOV~~costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% 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 ~~was recorded~~were incurred on July 12, 2017 pursuant to the Credit Agreement. The Repricing Term Loans will mature on July 12, 2023, the same maturity date as ~~a loss on extinguishment of debt.~~the prior senior secured term loans.
2018 Incremental Term Loans
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 ~~new debt financing were also~~Incremental Term Loans may be used by the Company for general corporate purposes and to pay fees and expenses ~~incurred~~ in connection with the ~~Business Combination~~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, subject to customary “breakage” costs with respect to LIBOR rate loans.

Other than as described above, the terms, conditions and covenants applicable to the Repricing Term Loans and the Incremental Term Loans are consistent with the terms, conditions and covenants that were applicable to the existing senior secured loans under the Credit Agreement. The Repricing and issuance of the Incremental Term Loans resulted in a partial debt extinguishment, for which Exela recognized $1.1 million in debt extinguishment costs in the third quarter of 2018.
2019 Incremental Term Loan
On April 16, 2019, the Company successfully borrowed an additional $30.0 million pursuant to incremental term loans (the “2019 Incremental Term Loans”) under the Second Amendment to First Lien Credit Agreement (the “Second Amendment”). The proceeds of the 2019 Incremental Term Loans were used to replace the cash spent for acquisitions, pay related fees, expenses and related borrowings and for general corporate purposes.
The 2019 Incremental Term Loans will bear interest at a rate per annum that is the same as the Company’s Repricing Term Loans under the senior credit facility. The 2019 Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Term Loans. The Company may voluntarily repay the 2019 Incremental Term Loans at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans.

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~~Exela Technologies, Inc.~~

Other than as described above, the terms, conditions and ~~Subsidiaries~~

~~Notes~~covenants applicable to the ~~Condensed Consolidated Financial Statements~~2019 Incremental Term Loans are consistent with the terms, conditions and covenants that are applicable to the Repricing Term Loans and 2018 Incremental Term Loans under the Credit Agreement. The Repricing and issuance of the 2018 and 2019 Incremental Term Loans resulted in a partial debt extinguishment, for which Exela recognized $1.4 million in debt extinguishment costs in the second quarter of 2019.

Receivables Securitization

(

On January 10, 2020, certain subsidiaries of the Company entered into a $160.0 million accounts receivable securitization facility (the “A/R Facility”) with a five year term. In the A/R Facility, (i) Exela Receivables 1, LLC (the “A/R Borrower”), a wholly-owned indirect subsidiary of the Company, entered into a Loan and Security Agreement (the “A/R Loan Agreement”), dated as of January 10, 2020, with TPG Specialty Lending, Inc., as administrative agent (the “A/R Administrative Agent”), PNC Bank National Association, as LC Bank (the “LC Bank”), the lenders (each, an “A/R Lender” and collectively the “A/R Lenders”) and the Company, as initial servicer, pursuant to which the A/R Lenders will make loans (the “Loan”) to the A/R Borrower to be used to purchase certain receivables and related assets from its sole member, Exela Receivables Holdco, LLC (the “Parent SPE”), a wholly-owned indirect subsidiary of the Company, (ii) sixteen other indirect, wholly-owned U.S. subsidiaries of the Company (collectively, the “Originators”) sold or contributed and will sell or contribute to the Parent SPE certain receivables and related assets in ~~thousands~~consideration for a combination of ~~United States dollars except share~~cash, equity in the Parent SPE and/or letters of credit issued by the LC Bank to the Originators; and (iii) the Parent SPE has sold or contributed and will sell or contribute to the Borrower certain receivables and related assets in consideration for a combination of cash, equity in the A/R Borrower and/or letters of credit issued by the LC Bank to the beneficiaries elected by Parent SPE.

The Company, the Parent SPE, the A/R Borrower and the Originators provide customary representations and covenants pursuant to the agreements entered into in connection with the A/R Facility. The A/R Loan Agreement provides for certain events of default upon the occurrence of which the A/R Administrative Agent may declare the A/R Facility’s termination date to have occurred and declare the outstanding Loan and all other obligations of the A/R Borrower to be immediately due and payable. The Company used the proceeds of the initial borrowings to repay outstanding revolving borrowings under the Company’s senior credit facility and to provide additional liquidity and funding for the ongoing business needs of the Company and its subsidiaries.

Pursuant to the A/R Loan Agreement, each of Company, the A/R Borrower, the Parent SPE and the Originators (the “Exela Parties”) is prohibited from amending or modifying any Existing Secured Debt Documents (as defined in the A/R Loan Agreement) if such amendment or modification could: (i) by its terms cause any Exela Party to be unable to perform its obligations under Transaction Documents (as defined in the A/R Loan Agreement), (ii) cause any inaccuracy or breach of any representation, warranty, or covenant of any Exela Party, (iii) could subject any existing or subsequently arising Collateral to an Adverse Claim (each as defined in the A/R Loan Agreement), or (iv) adversely affect any rights or remedies of the Lenders, the LC Bank and the A/R Administrative Agent under the A/R Facility. The A/R Borrower and Parent SPE were formed in December 2019, and are consolidated into the Company’s financial statements even though they had no material assets or operations during the year end December 31, 2019. The A/R Borrower and Parent SPE are bankruptcy remote entities and as such their assets are not available to creditors of the Company or any of its subsidiaries. Since January 10, 2020, the parties have amended and waived the A/R Facility several times to address contractually, the occurrence of certain events, including among other things, the delay in delivery of annual financial statements for the fiscal year ended 2019, financial statements for the quarter ended March 31, 2020, and the Initial Servicer’s liquidity (as defined in the A/R Facility) falling below $60.0 million.

Each loan bears interest on the unpaid principal amount as follows: (1) if a Base Rate Loan, at 3.75% plus a rate equal to the greater of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50%, (c) the Adjusted LIBOR Rate (which rate shall be calculated based upon an Interest Period of one month and determined on a daily basis) plus 1.00%, and (d) 4.50% per ~~share amounts)~~annum and (2) if a LIBOR Rate Loan, 4.75% plus a floating LIBOR Rate with a 1.00% LIBOR floor. As of March 31, 2020, there were $108.4 million borrowings under the Receivables Securitization Facility.

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Third Amendment

~~(Unaudited)~~

On May 18, 2020, the Company amended the Credit Agreement to, among other things, extend the time for delivery of its audited financial statements for the year ended December 31, 2019 and its financial statements for the quarter ended March 31, 2020. Upon the Company’s delivery of the annual and quarterly financial statements described above within the time frames stated therein (which the Company believes it has now satisfied), the Company will, upon delivery of such financial statements, be in compliance with the Credit Agreement, with respect to the financial statement delivery requirements set forth therein. Pursuant to the amendment, the Company also amended the Credit Agreement to, among other things: restrict the borrower and its subsidiaries’ ability to designate or invest in unrestricted subsidiaries; incur certain debt; create certain liens; make certain investments; pay certain dividends or other distributions on account of its equity interests; make certain asset sales or other dispositions (or utilize the proceeds of certain asset sales to reinvest in the business); or enter into certain affiliate transactions pursuant to the negative covenants under the Credit Agreement. Further, pursuant to the amendment, the borrower under the Credit Agreement is also required to maintain a minimum Liquidity (as defined in the amendment) of $35.0 million.

Long-Term Debt Outstanding

As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, 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

March 31,

December 31,


2020

2019
Other (a)

$
30,807

$
30,232
First lien credit agreement (b)

357,098

360,583
Senior secured notes (c)

980,289

979,060
Secured borrowings under A/R Facility

108,366

—
Revolver

80,750

65,000
Total debt

1,557,310

1,434,875
Less: Current portion of long-term debt

(36,691)

(36,490)
Long-term debt, net of current maturities

$
1,520,619

$
1,398,385
~~(a)~~    ~~Net of unamortized debt issuance costs of $2.3 million as of December 31, 2016~~
(a) Other debt represents the Company’s outstanding loan balances associated with various hardware and software purchases along with loans entered into by subsidiaries of the Company.
(b) Net of unamortized original issue discount and debt issuance costs of $6.1 million and $17.7 million as of March 31, 2020 and $6.5 million and $18.9 million as of December 31, 2019.
(c) Net of unamortized debt discount and debt issuance costs of $14.1 million and $5.6 million as of March 31, 2020 and $14.9 million and $6.0 million as of December 31, 2019.

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

~~Credit Facilities~~
As of September 30, 2017 and December 31, 2016, the Company had outstanding irrevocable letters of credit totaling approximately $22.8 million and $9.3 million, respectively, under a revolving credit facility.
~~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.~~6.     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~~expense of ~~$37.0~~$2.5 million and ~~an income tax benefit of $3.8~~$4.7 million for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, respectively. The Company recorded an income tax benefit of $32.9 million and an income tax benefit of $10.0 million for the nine months ended September 30, 2017 and 2016,~~2019, respectively.

The ~~Company’s actual effective tax rate~~Company's ETR of ~~25.12% and 18.44%~~(24.1%) for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2020 differed from the expected U.S. statutory tax rate of ~~35.0%. The Company’s~~21.0% and was primarily impacted by permanent tax ~~rate includes the tax effects related to the decrease of~~adjustments, state and local current expense, foreign operations, and valuation ~~allowance~~allowances, including valuation allowances 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~~on U.S. disallowed interest expense carryforward’s created by the ~~combined entity~~provisions of The Tax Cuts and ~~a portion of~~Jobs Act (“TCJA”).
For the ~~valuation allowance should be decreased. However, based on tax law ordering rules,~~three months ended March, 2019, 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,~~(17.2%) differed from the expected U.S. statutory tax rate of ~~35.0%~~21.0%, and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, ~~FIN48 liability release due to statute~~and valuation allowances, including valuation allowances on a portion of ~~limitation expiration, and a valuation allowance against certain domestic and foreign deferred tax assets that are not more-likely-than-not to be realized.~~the Company’s U.S. disallowed interest expense carryforward’s created by the provisions of the TCJA.

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As of ~~September 30, 2017,~~March 31, 2020, 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.~~2019. The Company's valuation allowances have increased by approximately $3.1 million from December 31, 2019 to March 31, 2020 due largely to effects of TCJA relating to interest expense.

~~11.~~7. 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 or its predecessors 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. No new employees are registered under this plan and the participants who are already eligible to receive benefits under this plan are no longer employees of the Company.

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. No new employees are registered under this plan and the pension obligation for the existing participants of the plan is calculated based on actual salary of the participants as at the earlier of two dates, the participants leaving the Company or December 31, 2015.

Norway Pension Plan

The ~~German~~Company’s subsidiary in Norway provides pension benefits to eligible retirees and eligible dependents. Employees eligible for participation include all employees who were more than three years from retirement prior to March 2018. 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. No new employees are registered under this plan and the pension obligation for the existing participants of the plan is calculated based on actual salary of the participants as at the earlier of two dates, the participants leaving the Company or April 30, 2018.

Asterion Pension Plan

In April 2018 through its acquisition of Asterion International Group the Company became obligated to provide pension benefits to eligible retirees and eligible dependents of Asterion. Employees eligible for participation included all full-time regular employees who were more than three years from retirement prior to July 2003. 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 ~~unfunded~~actuarial calculation. The Company uses a December 31 measurement date for this plan. No new employees are registered under this plan and ~~therefore has no plan assets. The expected rate of return assumptions for plan assets relate solely to~~ the UK plan and are based mainly on historical performance achieved over a long period of time (15 to 20 years) encompassing many business and economic cycles. The Company assumed a weighted average expected long-term rate on plan assetspension obligation for the ~~overall scheme~~existing participants of ~~5.16%.~~

~~Exela Technologies, Inc. and Subsidiaries~~the plan is calculated based on actual salary of the participants as at the earlier of two dates, the participants leaving the Company or April 10, 2018.
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~
Tax Effect on Accumulated Other Comprehensive Loss
As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019 the Company recorded actuarial losses of ~~$13.8~~$7.6 million and ~~$12.3~~$8.1 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which isare net of a deferred tax benefit of ~~$2.2 million and $2.5 million, respectively.~~$2.0 million.

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Pension ~~and Post Retirement~~ Expense

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

Three Months Ended March 31,




2019


2020

(Restated)
Service cost

$
19

$
23
Interest cost

498

605
Expected return on plan assets

(644)

(626)
Amortization:

Amortization of prior service cost

26

26
Amortization of net (gain) loss

432

415
Net periodic benefit cost

$
331

$
443

Three Months ended September 30,

Nine Months ended September 30,

2017

2016

2017

2016

Service cost

$
2

$
3

$
6

$
9

Interest cost

585

667

1,708

2,001

Expected return on plan assets

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

Amortization of prior service cost

(34
)
(35
)
(99
)
(105
)
Amortization of net loss

529

223

1,546

669

Net periodic benefit cost

$
472

$
202

$
1,379

$
606

The Company 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~~$0.6 million to its pension plans during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, respectively.~~2019. The Company has ~~fully~~ funded the pension plans with the required contributions for ~~2017~~2020 based on current plan provisions.

~~Executive Deferred Compensation Plan~~
The Company has individual arrangements with seven former executives in the U.S. which provide for fixed payments to be made to each individual beginning at age 65 and continuing for 20 years. This is an unfunded plan with payments to be made from operating cash of the Company. Benefit payments of $0.1 million were made for both three months ended September 30, 2017 and 2016, respectively. Benefit payments of $0.2 million were made during both nine months ended September 30, 2017 and 2016, respectively. There was an expense of $0.2 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively. The benefit for the nine months ended September 30, 2017 was $0.3 million with a corresponding expense for the nine months ended September 30, 2016 of $0.7 million. Benefit payments expected to be paid to plan participants during the remainder of 2017 are $0.1 million.
~~12.~~8. Commitments and Contingencies
Appraisal ~~Demand~~Action
On September 21, 2017, former stockholders of ~~our wholly-owned subsidiary~~ SourceHOV Holdings, Inc. (“SourceHOV”), who ~~allege combined ownership of~~owned 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~~2017 0673 JRS (the “Appraisal Action”). The Appraisal Action ~~arises~~arose out of the acquisition of SourceHOV and Novitex Holdings, Inc., by Quinpario in July 2017 (“Novitex Business ~~Combination Transaction, which gave rise to appraisal rights pursuant to 8 Del. C. § 262. In the Appraisal Action,~~Combination”), and the petitioners ~~seek,~~sought, among other things, a determination of the fair value of their SourceHOV 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.
During the trial the parties and their experts offered competing valuations of the SourceHOV shares as of the date of the Novitex Business Combination. SourceHOV argued the value was no more than $1,633.85 per share and the petitioners argued the value was at least $5,079.28 per share. On January 30, 2020, the Court issued its post-trial Memorandum Opinion in the Appraisal Action, in which it found that the fair value of SourceHOV as of the date of the Novitex Business Combination was $4,591 per share, and on March 26, 2020, the Court issued its final order and judgment awarding the petitioners $57,698,426 inclusive of costs and interest.
On ~~October 12, 2017,~~May 7, 2020, SourceHOV filed ~~its answer~~a motion for new trial in relation to share count. On June 11, 2020 the Court denied SourceHOV’s motion for new trial. SourceHOV now has the right to appeal the judgment to the ~~petition~~Supreme Court of the State of Delaware and ~~a verified list pursuant~~intends to ~~8 Del. C. § 262(f).~~do so by July 1, 2020. At this ~~early stage~~time, we cannot determine whether such an appeal would be successful. Per the Court’s opinion, the legal rate of interest, compounded quarterly, accrues on the per share value from the July 2017 closing date of the ~~litigation,~~Novitex Business Combination until the ~~Company is unable~~date of payment to ~~predict the outcome~~petitioners.
As a result of the Appraisal Action ~~or estimate any loss or range~~and repayment of ~~loss that may arise from~~the Margin Loan by Ex-Sigma 2 LLC (“Ex-Sigma 2”), 4,570,734 shares of our Common Stock issued to Ex-Sigma 2, our largest shareholder following the Novitex Business Combination, have been returned to the Company during the first quarter of 2020.

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As of March 31, 2020, the Company accrued a liability of $57.4 million for the Appraisal ~~Action.~~Action based on management’s best estimate of total payment obligation including accrued interest.

~~Exela Technologies, Inc. and Subsidiaries~~Contract-Related Contingencies
~~Notes~~The Company has certain contingent obligations that arise in the ordinary course of providing services to its customers. These contingencies are generally the result of contracts that require the Company to comply with certain performance measurements or the delivery of certain services to customers by a specified deadline. The Company believes the adjustments to the ~~Condensed Consolidated Financial Statements~~transaction price, if any, under these contract provisions will not result in a significant revenue reversal or have a material adverse effect on the Company’s consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.
(On February 20, 2014, the Company’s subsidiary, Pangea Acquisitions, Inc. ("Pangea") acquired BancTec, Inc. ("BancTec") through a merger of BancTec and a Pangea subsidiary. The merger agreement for that transaction provided that contingent, or "earnout," consideration would be paid to former BancTec shareholders in ~~thousands~~the event Pangea's controlling shareholder realizes certain returns on its post-merger Pangea stock. A liability of ~~United States dollars except share~~$0.7 million was recognized for the fair value of the contingent consideration on the acquisition date. The liability for the contingent consideration is adjusted to fair value at each reporting date. (Refer to Note 9, Fair Value Measurements). The liability for the fair value of the contingent consideration was $0.7 million as of December 31, 2019 and ~~per share amounts)~~2018.
~~(Unaudited)~~
On April 13, 2018, Western Standard, LLC, in its capacity as representative of the former BancTec shareholders filed suit in the Delaware Court of Chancery alleging that the above described earnout was triggered by the Novitex Business Combination and seeks payment of approximately $8.1 million in respect of the earnout. While the Company moved to dismiss the complaint because the earnout was moot or had not been triggered, on July 24, 2019, the Company was denied its motion to dismiss. The case is scheduled for trial in November 2020 in Wilmington, Delaware, and discovery is ongoing.
~~13.~~9. 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 and current portion of long-term debt approximated their fair value as of ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016~~2019, 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%~~30.0% and ~~98.3%~~24.0% respectively, of the respective principal balance outstanding as of ~~September 30, 2017.~~March 31, 2020. The ~~carrying~~fair value ~~approximates~~is substantially less than the ~~fair~~carrying 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~~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.

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The Company determined the fair value of the interest rate swap using Level 2 inputs. The Company uses closing prices as provided by a third party institution.

The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as of ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016:~~2019:

Carrying

Fair

Fair Value Measurements
As of March 31, 2020

Amount

Value

Level 1

Level 2

Level 3
Recurring assets and liabilities:

Long-term debt

$
1,520,619

$
535,387

$
—

$
535,387

$
—
Interest rate swap liability

1,346

1,346

—

1,346

—
Acquisition contingent liability

$
721

$
721

$
—

$
—

$
721
Nonrecurring assets and liabilities:

Goodwill

358,880

358,880

—

—

358,880

	Carrying		Fair		Fair Value Measurements
As of September 30, 2017	Amount		Value		Level 1		Level 2		Level 3
Recurring and nonrecurring assets and liabilities:

											Carrying		Fair		Fair Value Measurements
As of December 31, 2019											Amount		Value		Level 1		Level 2		Level 3
Recurring assets and liabilities:
Long-term debt											$	1,398,385	$	632,796	$	—	$	632,796	$	—
Interest rate swap liability												501		501		—		501		—
Acquisition contingent liability	$	721	$	721	$	—	$	—	$	721	$	721	$	721	$	—	$	—	$	721
Long-term debt	1,278,306		1,327,130		—		1,327,130		—
	$	1,279,027	$	1,327,851	$	—	$	1,327,130	$	721
Nonrecurring assets and liabilities:
Goodwill												359,771		359,771		—		—		359,771

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)~~

The significant unobservable inputs used in the fair value of the Company’s acquisition contingent liabilities are the discount rate, growth assumptions, and revenue thresholds. Significant increases (decreases) in the discount rate would have resulted in a lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a higher (lower) fair value measurement. For all significant unobservable inputs used in the fair value measurement of the Level 3 liabilities, a change in one of the inputs would not necessarily result in a directionally similar change in the other based on the current level of billings.
The following table reconciles the beginning and ending balances of net assets and liabilities classified as Level 3 for which a reconciliation is required:

Balance as of January 1, 2016

$
1,513

Payments/Reductions

(792
)
Balance as of December 31, 2016

$
721

Payments/Reductions

—

Balance as of September 30, 2017

$
721

March 31,

December 31,


2020

2019
Balance as of Beginning of Period

$
721

$
721
Payments/Reductions

—

—
Balance as of End of Period

$
721

$
721

~~14.~~10.   Stock-Based Compensation
~~At Closing,~~ SourceHOV had 24,535 restricted stock units (“RSUs”) outstanding under its 2013 Long Term Incentive Plan (“2013 Plan”). at the closing of the Novitex Business Combination. Simultaneous with the ~~Closing,~~closing, the 2013 Plan, as well as all vested and unvested RSUs under the 2013 Plan, were assumed by Ex-Sigma LLC (“Ex-Sigma”), the sole equityholder of Ex-Sigma 2, an entity formed by the former SourceHOV equity ~~holders, which is also the Company’s principal stockholder.~~holders. In accordance with ~~U.S.~~ GAAP, the Company ~~will continue to incur~~incurred compensation ~~expense~~expenses 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~~under the 2013 Plan were employees of the Company. All unvested RSUs under the 2013 Plan were vested by April 2019. As of March 31, 2020, there were no outstanding obligations under the 2013 Plan.

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Exela 2018 Stock Incentive Plan

On January 17, 2018, Exela’s 2018 Stock Incentive Plan (the “2018 Plan”) became effective. The 2018 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, and other stock-based compensation to eligible participants. 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 unit awards generally vest ratably over a one to two year period. 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 March 31, 2020 is presented as follows:

Average

Weighted

Remaining

Number

Average Grant

Contractual Life

Aggregate


of Shares

Date Fair Value

(Years)

Intrinsic Value
Balance as of December 31, 2019

309,305

$
1.99

1.19

$
616
Granted

—

—

Forfeited

—

—

Vested

—

—

Balance as of March 31, 2020

309,305

$
1.99

0.94

$
616

Options

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. 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 three months of 2020 is summarized in the following table:

Weighted

Weighted

Average Remaining

Average Grant

Average

Vesting Period

Aggregate


Outstanding

Date Fair Value

Exercise Price

(Years)

Intrinsic Value (2)
Balance as of December 31, 2019

4,937,700

$
1.97

$
4.14

2.27

$
—
Granted

—

—

Exercised

—

—

Forfeited

(79,000)

2.69

Expired

—

—

Balance as of March 31, 2020 (1)

4,858,700

$
1.96

$
4.14

2.03

$
—

(1) None of the outstanding options are exercisable as of March 31, 2020.

(2) Exercise prices of all of the outstanding options are higher than the market price of the shares of the Company. Therefore, aggregate intrinsic value is zero.

As of March 31, 2020, there was approximately $5.1 million of total unrecognized compensation expense related to non-vested awards for the 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 ~~$2.2~~$0.9 million and ~~$4.4~~$2.8 million related to ~~these~~plan awards for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2020 and 2019, respectively.

~~The Company has not approved any incentive plans to grant awards~~23

Table of ~~stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and performance awards as of September 30, 2017.~~Contents

~~Awards to Non-employees~~

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

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

~~15.~~11. Stockholders’ Equity

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

Common Stock

The Company is authorized to issue 1,600,000,000 shares of common stock. At Closing, the Company had 146,910,648 shares of common stock outstanding, of which: a) 80,600,000 shares were issued to Ex-Sigma, b) 30,600,000 shares were issued to the sole shareholder of Novitex, c) 12,093,331 shares were issued to the stockholders of Quinpario who did not redeem their shares, d) 3,609,375 shares were issued to certain third party advisors involved in the Business Combination, and e) 16,358,389 shares were issued to holders as part of a secondary offering at $8.00 per share with an additional 2,399,553 bonus shares issued. Certain shareholders of Quinpario were offered 25% common stock bonuses if they executed conversion agreements within a specified time limit. Seven Quinpario shareholders returned the agreements and were awarded 841,876 additional shares. As of September 30, 2017, there were no additional issuances of common stock other than the conversion of 3,000,000 shares of Series A Preferred Stock being converted into 3,667,803 shares of common stock. As of September 30, 2017, there were 150,578,451 shares of common stock issued and outstanding.

Common Stock. Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock or as provided for in the Director Nomination Agreements, the holders of ~~Exela common stock~~our Common Stock possess all voting power for the election of ~~Exela’s~~our board of 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~~our Common Stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of ~~Exela common stock~~our 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~~Common Stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock.

In first quarter of 2020, 1,004,183 shares of Series A Preferred Stock were converted into 1,227,714 shares of Common Stock. As of March 31, 2020 and December 31, 2019, there were 147,508,669 and 150,851,689 shares outstanding, respectively (the outstanding shares of Common Stock as of December 31, 2019 includes the 4,570,734 shares returned to the Company in the first quarter of 2020 in connection with the Appraisal Action which became treasury 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~~board of ~~Directors.~~directors. At ~~the Closing,~~March 31, 2020 and December 31, 2019, the Company ~~issued 9,194,233~~had 3,290,050 shares and 4,294,233 shares of Series A Preferred ~~Stock. Refer to Note 3 for additional details about the Business Combination.~~Stock outstanding, respectively. The par value of the Series A Preferred Stock is $0.0001 per share. Each share of Series A Preferred Stock will be convertible at the ~~holder’s~~holder's option, at any time after the six month anniversary and prior to the third anniversary of the issue date, initially into 1.2226 shares of Exela common stock (assuming a conversion price of $8.80 per share and a third anniversary expected liquidation preference of $10.75911 per the below). Due to a Fundamental Change that occurred on August 1, 2017 as described in the beneficial conversion feature section of Note 2, preferred stockholders were able to convert their shares prior to the six month anniversary. Based on such assumed conversion rate, approximately 11,240,869 shares of Exela common stock would be issuable upon conversion of all of the shares of Series A Preferred Stock at the six month anniversary of the issue date. As 3,000,000 shares of Series A Preferred Stock converted into 3,667,803 shares of common stock upon the occurrence of a fundamental change, as of September 30, 2017, an additional 7,573,066 shares of common stock as issuable upon conversion of the remaining 6,194,233 shares of Series A 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 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. However, the Company is not required to make any payment or allowance for unpaid dividends, whether or not in arrears, on converted shares of Series A Preferred Stock or for dividends on the shares of Common Stock issued upon conversion. The dividend accumulation for the three months ended March 31, 2019 was $0.9 million, as reflected on the Consolidated Statement of Operations, however, as a result of 1,004,183 shares of Series A Preferred Stock being converted into 1,227,714 shares of Common Stock during the quarter, accumulated dividend of $2.3 million was reversed, resulting in a reduction of dividend accumulation of $1.4 million for the three months ended March 31, 2020. As of March 31, 2020, the total accumulated but unpaid dividends on the Series A Preferred Stock since inception on July 12, 2017 is $8.0 million. The per share average of cumulative preferred dividends for the three months ended March 31, 2020 and 2019 is $(0.4) and $0.2, respectively.
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.

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Treasury Stock

~~Warrants~~On November 8, 2017, the Company’s board of directors authorized a share buyback program (the “Share Buyback Program”), pursuant to which the Company was permitted to purchase up to 5,000,000 shares of its Common Stock. The Share Buyback Program has expired. As of March 31, 2020, 2,787,147 shares had been repurchased under the Share Buyback Program and they are held in treasury stock. The Company records treasury stock using the cost method.

During the first quarter of 2020 4,570,734 shares of Common stock were returned to the Company by Ex-Sigma 2 in connection with the Appraisal Action. These shares are also included in treasury stock.

Warrants

At ~~September 30, 2017,~~December 31, 2019, 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 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 which are included in the number of shares of common stock ~~and one warrant.~~outstanding referred to above. The warrants are traded on the OTC ~~Bulletin Board~~bulletin board as of ~~September 30, 2017.~~

March 31, 2020.

Each warrant entitles the holder to purchase one-half of one share of ~~common stock~~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.~~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~~the shares of ~~common stock~~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 Company sends 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~~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.~~12. Related-Party Transactions

Relationship with HandsOn Global Management

~~Leasing Transactions~~The Company incurred reimbursable travel expenses to HOVS LLC and HandsOn Fund 4 I, LLC (collectively, “HGM”) of less than $0.1 million for the three months ended March 31, 2020 and 2019. As of March 31, 2020, and following a distribution of all the shares held by Ex-Sigma 2, HGM beneficially owned approximately 50% of the Company’s common stock, including shares controlled, pursuant to a voting agreement.

Pursuant to a master agreement dated January 1, 2015 between Rule 14, LLC and a subsidiary of the Company, the Company incurs marketing fees to Rule 14, LLC, a portfolio company of HGM. Similarly, the Company 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 the Company with use of certain technology and includes a reseller arrangement pursuant to which the Company is entitled to sell these services to third parties. Any revenue earned by the Company in such third-party sale is shared 75%/25% with each of HGM’s venture affiliates in favor of the Company. The brands Zuma, Athena, Peri, BancMate, Spring, Jet, Teletype, CourtQ and Rewardio are part of the HGM managed funds. The Company has the license to use and resell such brands, as described therein. The Company incurred fees relating to these agreements of $0.4 million and less than $0.1 million for the three months ended March 31, 2020 and 2019, respectively.

Certain operating companies lease their operating facilities from HOV RE, LLC ~~an affiliate through~~and HOV Services Limited, which are affiliates under common ~~interest held by certain shareholders.~~control with HGM. The rental expense for these operating leases was ~~$0.2~~less than $0.1 million and $0.1 million for ~~both~~ the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively. In addition, HOV Services,

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Ltd. provides the Company data capture and ~~$0.5~~technology services. The expense recognized for these services was approximately $0.4 million for ~~both~~each of the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019. These expenses are included in cost of revenue in the consolidated statements of operations.

The Company determined it is obligated to reimburse certain reimbursable expenses incurred by Ex-Sigma 2 under the terms of the Consent, Waiver and Amendment dated June 15, 2017, by and ~~2016.~~among the Company, Quinpario Merger Sub I, Inc., Quinpario Merger Sub II, Inc., SourceHOV, Novitex, Novitex Parent, L.P., Ex Sigma LLC, HOVS LLC and HandsOn Fund 4 I, LLC, amending the Novitex Business Combination agreement (the “Consent, Waiver and Amendment”). The Company incurred reimbursable expenses to Ex-Sigma 2 of $0.2 million and less than $0.1 million for the three months ended March 31, 2020 and 2019, respectively, in connection with legal expenses of Ex-Sigma 2.

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

~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands~~each of ~~United States dollars except share and per share amounts)~~
~~(Unaudited)~~
~~Relationship with HandsOn Global Management~~
~~The Company incurred management fees to HandsOn Global Management (“HGM”), SourceHOV’s former owner, of $3.0 million and $1.5 million for~~ the three months ended ~~September 30, 2017~~March 31, 2020 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 2016,2019, 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 Global Management, Inc. (“Apollo”) affiliated companies. Funds managed by Apollo ~~Global Management, LLC have~~held the second largest position in our Common Stock following the Novitex Business Combination and had the right to designate two of the Company’s ~~directors. For both~~directors pursuant to a director nomination agreement. Apollo has announced that its affiliated funds ceased being shareholders on March 11, 2020.
On November 18, 2014, one of the Company's subsidiaries entered into a master services agreement with an indirect wholly owned subsidiary of Apollo. Pursuant to this master services agreement, the Company provides printer supplies and maintenance services, including toner maintenance, training, quarterly business review and printer procurement. The Company recognized revenue of less than $0.1 million and $0.1 million under this agreement for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, respectively, in its consolidated statements of operations.
On January 18, 2017, one of the Company’s subsidiaries 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, the Company provides managed print services to Caesars, including general equipment operation, supply management, support services and technical support. The Company recognized revenue of $0.9 million and $1.1 million for the three months ended March 31, 2020 and 2019, respectively, in its consolidated statements of operations.
On May 5, 2017, one of the Company’s subsidiaries 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, the Company 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. The Company recognized revenue of $0.3 million for each of the three months ended March 31, 2020 and 2019, from ADT LLC under this master services agreement in its consolidated statements of operations.
On July 20, 2017, one of the Company’s subsidiaries 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, the Company 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 $0.9 million and $1.7 million for the three months ended March 31, 2020 and 2019, respectively, and cost of revenue of less than $0.1 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively, from Diamond Resorts Centralized Services Company under this master services agreement.

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In April 2016, one of the Company’s subsidiaries 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. Pursuant to this master services agreement, Presidio Group provides the Company with employees, subcontractors, and/or goods and services. For each of the three months ended March 31, 2020 and 2019 there were related party expenses of $0.2 million for ~~services received from an Apollo~~this service.

In June 2002, one of the Company’s subsidiaries entered into a systems purchase and license agreement with Evertec Group LLC (“Evertec”). Evertec is controlled by investment funds affiliated ~~company~~ with ~~a common Apollo designated director.~~

~~Exela Technologies, Inc. and Subsidiaries~~
~~Notes~~Apollo. Pursuant to the ~~Condensed Consolidated Financial Statements~~agreement, the Company provided system and ongoing maintenance services as detailed in the agreement. In August, 2016, another subsidiary of the Company entered into an equipment maintenance agreement with Evertec. Pursuant to the equipment maintenance agreement, the Company provides preventive and corrective maintenance service to selected equipment listed in the agreement. The Company recognized revenue of less than $0.1 million under these agreements for each of the three months ended March 31, 2020 and 2019, respectively, in its consolidated statements of operations.
~~(in thousands of United States dollars except share~~Payable and ~~per share amounts)~~
~~(Unaudited)~~
Receivable ~~and Payable~~ Balances with Affiliates

~~Receivable~~Payable and ~~Payable~~receivable balances with affiliates as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 are as ~~follows:~~follows below.

March 31,

December 31,

2020

2019

Receivable

Payable

Receivable

Payable
HOV Services, Ltd

$
603

$
—

$
601

$
—
Rule 14

263

—

—

250
HGM

—

20

115

—
Apollo affiliated company

—

—

—

202
Oakana

—

16

—

1
Ex-Sigma 2

—

1,287

—

1,287

$
866

$
1,323

$
716

$
1,740

September 30,
2017

December 31,
2016

Payables

Payables

HOV Services, Ltd

$
463

$
352

Rule 14

44

134

HGM

13,516

8,858

Presidio

451

—

$
14,474

$
9,344

~~17.~~13. 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~~approaches the markets and interacts with its clients. The Company is organized into three segments: ITPS, HS, and LLPS.
ITPS: The ITPS segment provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning and distribution to customers primarily in the financial services, commercial, public sector and legal industries.
HS:The HS segment operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets.
LLPS:The LLPS segment provides a broad and active array of legal services in connection with class action, bankruptcy labor, claims adjudication and employment and other legal matters.

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The chief operating decision maker reviews segment profit to evaluate operating segment performance and determine how to allocate resources to operating segments. “Segment profit” is defined as revenue less cost of revenue (exclusive of depreciation and ~~gross profit.~~amortization). The Company does not allocate Selling, general, and administrative expenses, depreciation and amortization, interest expense and sundry, net. The Company manages assets on a total company basis, not by operating segment, and therefore asset information and capital expenditures by operating segments are not presented. A reconciliation of segment profit to net loss before income taxes is presented below.

Three months ended March 31, 2020


ITPS

HS

LLPS

Total
Revenue

$
284,112

$
64,049

$
17,290

$
365,451
Cost of revenue (exclusive of depreciation and amortization)

235,120

44,931

12,488

292,539
Segment profit

48,992

19,118

4,802

72,912
Selling, general and administrative expenses (exclusive of depreciation and amortization)

50,374
Depreciation and amortization

23,185
Related party expense

1,551
Interest expense, net

41,588
Sundry expense, net

1,082
Other expense, net

(34,657)
Net loss before income taxes

$
(10,211)

Three months ended March 31, 2019 (Restated)


ITPS

HS

LLPS

Total
Revenue

$
325,172

$
61,343

$
17,842

$
404,357
Cost of revenue (exclusive of depreciation and amortization)

259,272

40,341

10,988

310,601
Segment profit

65,900

21,002

6,854

93,756
Selling, general and administrative expenses (exclusive of depreciation and amortization)

49,677
Depreciation and amortization

26,624
Related party expense

998
Interest expense, net

39,701
Sundry expense, net

2,715
Other expense, net

1,493
Net loss before income taxes

$
(27,452)

~~Exela Technologies, Inc. and Subsidiaries~~14. Subsequent Events
~~Notes to the Condensed Consolidated Financial Statements~~
~~(in thousands of United States dollars except share and per share amounts)~~
~~(Unaudited)~~

Three months ended September 30, 2017

ITPS

HS

LLPS

Total

Revenue

260,019

56,405

21,969

338,393

Cost of revenue

204,602

37,451

13,063

255,116

Gross profit

55,417

18,954

8,906

83,277

Selling, general and administrative expenses

102,048

Depreciation and amortization

28,052

Related party expense

26,892

Interest expense, net

37,652

Loss on extinguishment of debt

35,512

Sundry expense, net

563

Net loss before income taxes

$
(147,442
)

Three months ended September 30, 2016

ITPS

HS

LLPS

Total

Revenue

97,402

60,657

28,314

186,373

Cost of revenue

66,704

38,729

16,347

121,780

Gross profit

30,698

21,928

11,967

64,593

Selling, general and administrative expenses

30,829

Depreciation and amortization

18,761

Related party expense

2,448

Interest expense, net

27,399

Loss on extinguishment of debt

—

Sundry expense, net

711

Net loss before income taxes

$
(15,555
)

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

~~18.    Subsequent Events~~
In order to hedge against interest rate fluctuations with respect to term loan borrowings under the Credit Agreement, the Company 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.
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.

The Company performed its subsequent event procedures through ~~November 9, 2017,~~June 29, 2020, the date these condensed consolidated financial statements were made available for issuance.
Impact of COVID-19
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease ("COVID-19") a “Public Health Emergency of International Concern,” and on March 11, 2020, the World Health Organization characterized the outbreak as a “pandemic”.
The Company is dependent on its workforce to deliver its solutions and services. Developments such as social distancing and stay-at-home orders from various jurisdictions may impact the Company’s ability to deploy its workforce effectively.

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Additionally, COVID-19 has spread to most of the countries in the world and throughout the United States, creating a serious impact on customers, workforces, suppliers, disrupting economies and financial markets, and potentially leading to a world-wide economic downturn. While expected to be temporary, prolonged workforce disruptions may negatively impact sales in fiscal year 2020 and the Company’s overall liquidity.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global situation and its impact on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate adverse effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.

Amendment to Credit Agreement

Under the terms of the Credit Agreement, the Company was required to deliver to the lenders the December 31, 2019 audited financial statements by April 14, 2020, which the Company failed to do. On May 18, 2020, the Company amended the Credit Agreement to, among other things, extend the time for delivery of its audited financial statements for the year ended December 31, 2019 and its financial statements for the quarter ended March 31, 2020. Pursuant to the amendment, the Company also amended the Credit Agreement to, among other things: restrict the borrower and its subsidiaries’ ability to designate or invest in unrestricted subsidiaries; incur certain debt; create certain liens; make certain investments; pay certain dividends or other distributions on account of its equity interests; make certain asset sales or other dispositions (or utilize the proceeds of certain asset sales to reinvest in the business); or enter into certain affiliate transactions pursuant to the negative covenants under the Credit Agreement. Further, pursuant to the amendment, the borrower under the Credit Agreement is also required to maintain a minimum Liquidity (as defined in the amendment) of $35.0 million. Upon the Company’s delivery of the annual and quarterly financial statements described above within the time frames stated within such agreements (which the Company believes it has now satisfied), the Company will, upon delivery of such financial statements, be in compliance with the Credit Agreement.

Amendment to A/R Facility

Since January 10, 2020, the parties have amended and waived the A/R Facility several times to address contractually, the occurrence of certain events, including among other things, the delay in delivery of annual financial statements for the fiscal year ended 2019, financial statements for the quarter ended March 31, 2020, and the Initial Servicer’s liquidity (as defined in the A/R Facility) falling below $60.0 million.

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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.

Restatement

As described in additional detail in the Explanatory Note to our Annual Report on Form 10-K for the year ended December 31, 2019 (our “Annual Report”), in our Annual Report we restated our audited consolidated financial statements for the years ended December 31, 2018 and 2017 and our unaudited quarterly results for the first three fiscal quarters in the fiscal year ended December 31, 2019 and each fiscal quarter in the fiscal year ended December 31, 2018. Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. Accordingly, investors should no longer rely upon the Company’s previously released financial statements for these periods, and, for these periods, investors should rely solely on the financial statements and other financial data for the relevant periods included in the 2019 Form 10-K and subsequent reports. See Note 20, Unaudited Quarterly Financial Data, of the Notes to the consolidated financial statements in the Annual Report for the impact of these adjustments on each of the quarterly periods in fiscal 2018 and for the first three quarters of fiscal 2019.All amounts in this quarterly report on Form 10-Q affected by the restatement adjustments reflect such amounts as restated.

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 Business Combination,~~ future opportunities for ~~the combined company,~~Exela, 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 the COVID-19 pandemic; 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 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 discussedour Annual Report under the heading “Risk Factors”, and otherwise identified or discussed in ~~Exela’s Proxy Statement dated June 26, 2017 (the “Proxy Statement”) filed with~~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 any websites that may be referenced herein as part of, or incorporating such information by reference into, this quarterly report. In addition, forward-looking statements provide ~~Exela’s~~our expectations, plans or forecasts of future events and views as of the date of this quarterly report. ~~Exela anticipates~~We anticipate that subsequent events and developments ~~will~~may cause ~~Exela’s~~ours assessments to change. These forward-looking statements should not be relied upon as representing ~~Exela’s~~our assessments as of any date subsequent to the date of this quarterly report.

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Overview

~~We are~~Exela Technologies, Inc. (“Exela,” the “Company”, “we” or “us”) is a global ~~provider of transaction processing solutions, enterprise information management, document management and digital~~ business process ~~services.~~automation leader leveraging a global footprint and proprietary technology to help turn the complex into the simple through user friendly software platforms and solutions that enable our customers’ digital transformation. We have decades of expertise earned from serving more than 4,000 customers worldwide, including many of the world’s largest enterprises and over 60% of the Fortune® 100, in many mission critical environments across multiple industries, including banking, healthcare, insurance and manufacturing. Our technology-enabled solutions allow ~~multi-national~~global 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. Through cloud-enabled platforms, built on a configurable stack of automation modules, and over 22,700 employees operating in 23 countries, Exela rapidly deploys integrated technology and operations as an end-to-end digital journey partner.

We believe our process expertise, information technology capabilities and operational insights enable our ~~clients’~~customers’ 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. Our solutions are location agnostic, and we believe the combination of our hybrid hosted solutions and global work force in the Americas, EMEA and Asia offers a meaningful differentiation in the industries we serve and services we provide.

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 our ~~common shares,~~Common Stock, 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~~On April 10, 2018, Exela completed the acquisition of ~~Presentation~~Asterion International Group, a well-established provider of technology driven business process outsourcing, document management and business process automation across Europe. The acquisition was strategic to expanding Exela’s European business.
On November 12, 2019 we announced that our Board of Directors had adopted a debt reduction and liquidity improvement initiative (“Initiative”). This ~~analysis~~new Initiative 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~~part of the ~~results being analyzed. Due~~Company’s strategic priority to ~~our specific situation,~~position the ~~presented~~Company for long-term success and increased stockholder value. As part of the Initiative, on January 10, 2020, certain subsidiaries of the Company entered into a $160.0 million accounts receivable securitization facility with a five year term and consummated the sale of SourceHOV Tax, LLC (described below). To fund the debt reduction, the Company is also pursuing the sale of certain non-core assets that are not central to the Company’s long-term strategic vision, and any potential action with respect to these operations would be intended to allow the Company to better focus on its core businesses. The Company has retained financial ~~information~~advisors to assist with the sale of select assets. The Company expects to use the net proceeds from the Initiative for the ~~three~~repayment of debt, with a target reduction of $150.0 to $200.0 million. Exela has set a two-year timetable for completion of the Initiative. There can be no assurance that the Initiative or any particular element of the Initiative will be consummated or will achieve its desired result.
As part of the Initiative, on March 16, 2020, the Company and ~~nine month periods ended September 30, 2017 is only partially comparable~~its indirect wholly owned subsidiaries, Merco Holdings, LLC and SourceHOV Tax, LLC entered into a Membership Interest Purchase Agreement with Gainline

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Source Intermediate Holdings LLC at which time Gainline Source Intermediate Holdings LLC acquired all of the outstanding membership interests of SourceHov Tax for $40.0 million, subject to ~~the financial information for the three and nine month periods ended September 30, 2016. Since SourceHOV was deemed the accounting acquirer~~adjustment as set forth in the Business Combination consummated on July 12, 2017, the presented financial information for the three and nine month periods ended September 30, 2016 reflects the financial information and activities of SourceHOV only. 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). 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.

purchase agreement.

Our Segments

Our three reportable segments are Information & Transaction Processing Solutions ~~(‘‘ITPS’’~~(“ITPS”), Healthcare Solutions ~~(‘‘HS’’~~(“HS”), and Legal & Loss Prevention Services ~~(‘‘LLPS’’~~(“LLPS”). These segments are comprised of significant strategic business units that align our TPS and EIM products and services with how we manage our business, ~~approaches~~approach our key markets and ~~interacts~~interact with our ~~clients~~customers 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.~~many leading banks, ~~7 of the top 10 U.S.~~ insurance companies, 5and utilities, as well as hundreds of ~~the top U.S. telecom companies, over 40 utility companies, over 30~~federal, 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: 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~~hundreds of healthcare providers.

LLPS:~~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~~customer base consists of corporate counsel, government attorneys, and law firms.

~~Acquisitions~~Revenues

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

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

~~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,~~March 31, 2020, we had approximately ~~22,100~~22,700 employees globally, with ~~56%~~62% located in ~~the United States~~Americas and EMEA, 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~~$182.7 million and ~~$87.0~~$178.1 million for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016, respectively, and $360.0 million and $275.0 million for the nine months ended September 30, 2017 and 2016,~~2019, 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~~:following:

●

Revenue by segment;

●

EBITDA; and

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●

Adjusted EBITDA

Revenue by ~~segment;~~

· ~~Gross Profit by segment;~~

· ~~Gross Profit Margin by segment;~~

· ~~EBITDA; and~~

· ~~Adjusted EBITDA.~~

~~Revenue~~

segment

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 of our consolidated operations. 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 integration 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 March 31, 2020 compared to Three Months Ended March 31, 2019:

Three Months Ended March 31,




2019





2020

(Restated)

Change

% Change
Revenue:








ITPS

$
284,112

$
325,172

$
(41,060)

-12.63%
HS

64,049

61,343

2,706

4.41%
LLPS

17,290

17,842

(552)

-3.09%
Total revenue

365,451

404,357

(38,906)

-9.62%
Cost of revenue (exclusive of depreciation and amortization:








ITPS

235,120

259,272

(24,152)

-9.32%
HS

44,931

40,341

4,590

11.38%
LLPS

12,488

10,988

1,500

13.65%
Total cost of revenues

292,539

310,601

(18,062)

-5.82%
Selling, general and administrative expenses (exclusive of depreciation and amortization)

50,374

49,677

697

1.40%
Depreciation and amortization

23,185

26,624

(3,439)

-12.92%
Related party expense

1,551

998

553

55.41%
Operating income (loss)

(2,198)

16,457

(18,655)

-113.36%
Interest expense, net

41,588

39,701

1,887

4.75%
Sundry expense (income), net

1,082

2,715

(1,633)

-60.15%
Other expense (income), net

(34,657)

1,493

(36,150)

-2421.30%
Net loss before income taxes

(10,211)

(27,452)

17,241

-62.80%
Income tax expense

(2,459)

(4,720)

2,261

-47.90%
Net loss

$
(12,670)

$
(32,172)

$
19,502

-60.62%

Revenue

For the three months ended March 31, 2020, our revenue decreased by $38.9 million, or 9.6%, to $365.5 million from $404.4 million for the three months ended March 31, 2019. The decrease was primarily driven by revenue

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decline in our ITPS and LLPS segments, which was partially offset by an increase in our HS segment as discussed below. Our ITPS, HS, and LLPS segments constituted 77.7%, 17.5%, and 4.7% of total revenue, respectively, for the three months ended March 31, 2020, compared to 80.0%, 15.2%, and 4.4%, respectively, for the three months ended March 31, 2019. The revenue changes by reporting segment were as follows:

ITPS— For the three months ended March 31, 2020, revenue attributable to our ITPS segment decreased by $41.1 million, or 12.6% compared to the same period in the prior year. The majority of this revenue decline is attributable to exiting contracts and statements of work in late 2019 from certain customers with revenue that we believe was unpredictable, non-recurring and were not a strategic fit to Company’s long-term success or unlikely to achieve the Company’s long-term target margins (“transition revenue”).

HS— For the three months ended March 31, 2020, revenue attributable to our HS segment increased compared to the same period in the prior year primarily due to ramp up of new customers and higher volumes from existing customers.

LLPS— For the three months ended March 31, 2020, revenue attributable to our LLPS segment decreased marginally compared to the same period in the prior year primarily due to a decline in legal claims administration services.

Cost of Revenue

For the three months ended March 31, 2020, our direct costs decreased by $18.1 million, or 5.8%, compared to the three months ended March 31, 2019. The decrease was primarily driven by our ITPS segment, offset by increase in our HS and LLPS segments. The cost of revenue changes by operating segment was as follows:

ITPS—For the three months ended March 31, 2020, costs decreased by $24.2 million, or 9.3%, compared to the three months ended March 31, 2019. The decrease was primarily attributable to a corresponding decline in revenues. However, the three months ended March 31, 2020 still had some personnel costs related to the transition revenue that we expect to see gradually removed to further improve the gross margin profile of the business over the remainder of the year.

HS— The increases primarily corresponded with the related revenue increase and continued ramp of projects.

LLPS— Revenue mix (higher pass through revenue) resulted in increased costs in legal claims administration services.

Selling, General and Administrative Expenses

For the three months ended March 31, 2020, SG&A was $50.4 million, relatively flat with the three months ended March 31, 2019 at $49.7 million. Higher compensation expenses and professional fees was offset by favorable impacts from lower stock compensation expense, travel and other expenses.

Depreciation & Amortization

Total depreciation and amortization expense was $23.2 million and $26.6 million for the three months ended March 31, 2020 and 2019, respectively. The decrease in total depreciation and amortization expense was primarily due to a decrease in amortization expense from intangible assets resulting from business combinations completed in prior periods and a decrease in depreciation expense related to an increase in assets that are fully amortized.

Related Party Expenses

Related party expense was $1.6 million and $1.0 million for the three months ended March 31, 2020 and 2019, respectively.

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Interest Expense

The Company pays interest on its Notes on a semi-annual basis in the first and third quarters of each year; as such, interest expense remained materially consistent with the prior year period.

Sundry Expense (Income)

The decrease of $1.6 million over the prior year period was primarily attributable to foreign currency transaction gain / losses associated with exchange rate fluctuations.

Other Income

Other income, net was $(34.7) million and $1.5 million for the three months ended March 31, 2020 and 2019, respectively. The change was primarily due to higher other (income) of $35.3 million of gain recognized on the sale of SourceHOV Tax, LLC. Other income also includes 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 are recorded directly in earnings. For the three months ended March 31, 2020, the fair value of the interest swap decreased $0.8 million.

Income Tax (Expense) Benefit

We had an income tax expense of $2.5 million for the three months ended March 31, 2020, compared to an income tax expense of $4.7 million for the three months ended March 31, 2019. The change in the income tax expense was primarily attributable to our change in judgment related to the realizability of certain deferred tax assets. The change in the effective tax rate for the three months ended March 31, 2020, 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.

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. 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 compared to Three Months Ended September 30, 2016~~

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
)
~~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 increase was primarily related to an increase in the ITPS segment revenues of $162.6 million, which was primarily attributable to 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. Our ITPS, HS, and LLPS segments constituted 76.8%, 16.7%, and 6.5% of total revenue, respectively, for the three months ended September 30, 2017, compared to 52.3%, 32.5%, and 15.2%, respectively, for the three months ended September 30, 2016. The revenue changes by reporting segment were as follows:
ITPS—Revenues increased $162.6 million, or 167.0%, to $260.0 million for the three months ended September 30, 2017 compared to $97.4 million for the three months ended September 30, 2016. The increase was primarily attributable to the acquisition 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. 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 for the three months ended September 30, 2017 compared to $60.7 million for the three months ended September 30, 2016. The decrease was primarily attributable to a surge in demand from healthcare provider clients in first three quarters 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 Q1 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 cost of revenue in the ITPS segment of $137.9 million, partially offset by decreases in the HS and LLPS segments of $1.2 million and $3.2 million, respectively. The cost of revenue decrease 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. The increase was primarily attributable to the acquisition of Novitex, which contributed approximately $114.6 million, or 83.1% 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. The decrease was primarily driven by lower revenue in the healthcare provider business as described above.
LLPS—Cost of revenue decreased $3.2 million, or 20.1%, to $13.1 million for the three 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 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 million for the three months ended September 30, 2017 compared to $30.8 million for the three months ended September 30, 2016. The increase was primarily attributable to the acquisitions of 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.
~~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 of customer relationships, developed technology, and outsource contract costs, resulting in higher amortization expense for the three months ended September 30, 2017 compared to the three months ended September 30, 2016.
~~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 was primarily attributable to contract termination and advising fees as a result of the Business Combination.
~~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 the Business Combination.
~~Sundry 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 attributable to foreign currency transaction losses associated with exchange rate fluctuations.
~~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 primarily attributable to 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 impact of this reduction 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 million for the nine months ended September 30, 2017 compared to $577.5 million for the nine months ended September 30, 2016. 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 to the sale of Meridian Consulting Group, LLC 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.
~~Income Tax (Expense) Benefit~~
~~We had income tax benefit of $32.9 million~~ 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 to the reversal of $11.5 million of our 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 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 to $33.4 million for the nine months ended September 30, 2016 as a result of the above.~~
~~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
integration 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~~our business in addition to measures calculated under GAAP. Additionally, our credit agreement requires us to comply with certain EBITDA related metrics. Refer ~~to ‘‘—~~to—“Liquidity and Capital Resources—~~Credit Facility.’’~~Indebtedness.”
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~~These non-GAAP financial measures are not required to be uniformly applied, are not audited and should not ~~consider EBITDA and Adjusted EBITDA~~be considered in isolation or as substitutes for ~~an analysis of our~~ results ~~as reported under~~prepared in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other

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companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

The following ~~tables present~~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 months ended ~~September 30, 2017~~March 31, 2020 and ~~2016:~~

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

Three months ended September 30,

2017

2016

Net Loss

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

(37,002
)
(3,757
)
Interest Expense

37,652

27,399

Depreciation and Amortization

28,052

18,761

EBITDA

(81,738
)
30,605

Optimization and Restructuring expenses (1)

19,702

4,929

Transaction and integration costs (2)

77,321

702

Non-cash equity compensation (3)

2,230

1,715

Other non-cash charges (4)

364

75

Loss on sale of of assets (5)

—

56

Gain on sale of Meridian (6)

(337
)
—

Management, Board Fees and expenses (7)

—

1,737

Loss on extinguishment of debt

35,512

—

Adjusted EBITDA

53,054

39,819

~~(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 three 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.
2019. 2019 reconciliation items between EBITDA and Adjusted EBITDA
have been adjusted for comparability purposes in the table below. EBITDA ~~was ($81.7) million~~and Adjusted EBITDA 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.March 31, 2019 remains unchanged.

Three Months Ended March 31,




2019


2020

(Restated)
Net Loss

$
(12,670)

$
(32,172)
Taxes

2,459

4,720
Interest expense

41,588

39,701
Depreciation and amortization

23,185

26,624
EBITDA

54,562

38,873
Optimization and restructuring expenses (1)

13,140

23,661
Transaction and integration costs (2)

4,374

1,008
Non-cash equity compensation (3)

861

2,798
Other charges including non-cash (4)

3,912

3,055
Loss/(Gain) on sale of assets (5)

157

219
Loss/(Gain) on business disposals (6)

(35,316)

—
Loss/(Gain) on derivative instruments (7)

845

1,677
Contract costs (8)

1,852

5,062
Adjusted EBITDA

$
44,387

$
76,353

1. Adjustment represents net salary and benefits associated with positions, current vendor expenses and existing lease contracts that are part of the on-going savings and productivity improvement initiatives in process transformation, customer transformation and post-merger or acquisition integration.
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 that vested during the year at Ex-Sigma (the sole equity holder of Ex-Sigma 2) in the case of the SourceHOV 2013 Long Term Incentive Plan assumed by it in connection with the Novitex Business Combination and the Company under the 2018 Stock Incentive Plan.
4. Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase accounting and other non-cash charges. Other charges include severance, retention bonus, facility consolidation and other transition costs.
5. Represents a loss/(gain) recognized on the disposal of property, plant, and equipment and other assets.
6. Represents a loss/(gain) recognized on the disposal of noncore-business assets.
7. Represents the impact of changes in the fair value of an interest rate swap entered into during the fourth quarter of 2017.
8. Represents costs incurred on new projects, contract start-up costs and project ramp costs.

~~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) million for the nine months ended September 30, 2017 compared to $96.8 million for the nine months ended September 30, 2016. Adjusted EBITDA was $146.1 million for the nine months ended September 30, 2017 compared to $125.4 million for the nine months ended September 30, 2016. The decrease in EBITDA was primarily due to a higher net loss amount for the nine months ended September 30, 2017 resulting from an increase in SG&A, related party expense, and loss on extinguishment of debt compared to the nine 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 due to various cost savings initiative implemented during the period.
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.

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Our primary source of liquidity is cash generated from operating activities, supplemented as necessary on a short-term basis by borrowings against our senior secured revolving credit facility and accounts receivable securitization facility. We believe our current level of cash and short-term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business. Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As previously reported, Company believes management’s plans alleviate the substantial doubt about the entity’s ability to continue as a going concern for at least twelve months from the date that these condensed consolidated financial statements were issued.

We currently expect to spend approximately ~~$40.0~~$20.0 to ~~$45.0~~$25.0 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 our senior secured credit facilities (the “Repricing Term 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 (the “Credit Agreement”).

On July 13, 2018, the Company borrowed a further $30.0 million pursuant to incremental term loans under the Credit Agreement. On April 16, 2019, the Company borrowed an additional $30.0 million pursuant to incremental term loans under the Credit Agreement. The proceeds of these incremental term loans (collectively, the “Incremental Term Loans”) were used to replace the cash spent for acquisitions, pay related fees, expenses and related borrowings and for general corporate purposes.

The Repricing Term Loans and the Incremental Term Loans bear interest at a rate per annum consisting 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 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans. The Repricing Term Loans and the Incremental Term Loans will mature on July 12, 2023.

At ~~September 30, 2017,~~March 31, 2020, cash and cash equivalents totaled ~~$27.4~~$122.6 million and we had availability of ~~$77.2~~less than $0.1 million under our senior secured revolving credit facility.

The Company is pursuing a debt reduction and liquidity improvement initiative that contemplates the pursuit of the sale of certain non-core businesses that are not central to the Company’s long-term strategic vision. The disposition of those businesses would reduce indebtedness and enhance the Company’s ability to focus on its core businesses. The Company has retained financial advisors to assist with the sale of select assets. As part of the initiative, the Company has taken steps to increase its liquidity and its overall financial flexibility. The Company expects to use the net proceeds from the initiative for the repayment of debt, with a target reduction of $150.0 to $200.0 million. The Company has set a two-year timetable for completion of the initiative. There can be no assurance that the initiative or any particular element of the initiative will be consummated or will achieve its desired result.

On January 10, 2020 certain subsidiaries of the Company entered into a $160.0 million accounts receivable securitization facility with a five year term (the “A/R Facility”). The Company used the proceeds of the initial borrowings to repay outstanding revolving borrowings under the Company’s senior credit facility and to provide additional liquidity and funding for the ongoing business needs of the Company and its subsidiaries.

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On March 26, 2020, the Delaware Court of Chancery entered a judgment against one of our subsidiaries in the amount of $57.7 million inclusive of costs and interest arising out of the Appraisal Action, which judgment will continue to accrue interest, until paid, at the legal rate, compounded quarterly. On May 7, 2020, we filed a motion for new trial in relation to share count. On May 7, 2020, SourceHOV filed a motion for new trial in relation to share count. On June 11, 2020 the Court denied SourceHOV’s motion for new trial. SourceHOV now has the right to appeal the judgment to the Supreme Court of the State of Delaware and intends to do so by July 1, 2020. However, at present the judgment has not been stayed, and we expect the petitioners to seek to enforce the judgment. If we are forced to pay the judgment (or bond the judgment pending an appeal, which will likely require cash collateral), such action could have a material adverse effect on our liquidity and/or cause our lenders to take action adverse to us.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently evaluating the impact of the CARES Act, and at present expects that the refundable payroll tax credits and deferment of employer side social security payments provisions of the CARES Act will result in a material cash benefit to the Company. The Company will also defer certain payroll, social security and value added taxes in various European jurisdictions, as permitted under the recently enacted COVID-19 relief measures.

On May 18, 2020, the Company amended the Credit Agreement to, among other things, extend the time for delivery of its audited financial statements for the year ended December 31, 2019 and its financial statements for the quarter ended March 31, 2020. Pursuant to the amendment, the Company also amended the Credit Agreement to, among other things: restrict the borrower and its subsidiaries’ ability to designate or invest in unrestricted subsidiaries; incur certain debt; create certain liens; make certain investments; pay certain dividends or other distributions on account of its equity interests; make certain asset sales or other dispositions (or utilize the proceeds of certain asset sales to reinvest in the business); or enter into certain affiliate transactions pursuant to the negative covenants under the Credit Agreement. Further, pursuant to the amendment, the borrower under the Credit Agreement is also required to maintain a minimum Liquidity (as defined in the amendment) of $35.0 million. On May 21, 2020, the Company also amended the A/R Facility to, among other things, extend the time for delivery of its audited financial statements for the year ended December 31, 2019 and its financial statements for the quarter ended March 31, 2020. Upon the Company’s delivery of the annual and quarterly financial statements described above within the time frames stated within such agreements (which the Company believes it has now satisfied), the Company will, upon delivery of such financial statements, be in compliance with the Credit Agreement, the indenture for its outstanding Notes and the A/R Facility with respect to the financial statement delivery requirements set forth therein. See those certain Current Reports on Form 8-K, filed by the Company on May 21, 2020 and May 22, 2020 for additional information on the amendments described above.

Cash Flows

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

Three Months Ended March 31,




2019





2020

(Restated)

Change

% Change
Cash flows used in operating activities

$
(35,373)

$
(42,648)

$
7,275

-17.06%
Cash flows (used in) provided by investing activities

29,978

(7,444)

37,422

-502.71%
Cash flows provided by financing activities

114,088

19,530

94,558

484.17%
Subtotal

108,693

(30,562)

139,255

-455.65%
Effect of exchange rates on cash

(216)

(32)

(184)

575.00%
Net increase/(decrease) in cash

108,477

(30,594)

139,071

-454.57%

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Analysis of Cash Flow Changes between the Three Months Ended March 31, 2020 and March 31, 2019

Operating Activities—The increase of $7.2 million in cash flows from operating activities for the three months ended March 31, 2020 was primarily due to higher cash flows from accounts receivables and lower cash paid for settling accounts payable and accrued liabilities. This increase in cash flow was offset by lower Gross profits in the corresponding period. “Gross profit” is defined as revenue less cost of revenue (exclusive of depreciation and amortization).

Investing Activities—The increase of $37.4 million in cash used in investing activities for the three months ended March 31, 2020 was primarily due to $38.2 million cash proceeds received from the sale of SourceHOV Tax, LLC, lower additions to Property, plant and equipment and development of internal software offset by partial settlement of the liabilities related to the healthcare acquisition announced early in the first quarter of 2019.

Financing Activities—The increase of $94.5 million in cash provided by financing activities for the three months ended March 31, 2020 was primarily due to the A/R Facility executed in January 2020.

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 12, 2022. ~~As of September 30, 2017, none of~~The Credit Agreement provided 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 was 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 was 7.0% with respect to LIBOR borrowings and 6.0% with respect to base rate borrowings. The applicable margin for borrowings under the senior secured revolving facility is subject to step-downs based on leverage ratios. The senior secured term loan is subject to amortization payments, commencing on the last day of the first full fiscal quarter of the Company following the closing date, of 0.6% of the aggregate principal amount for each of the first eight payments and 1.3% of the aggregate principal amount for payments thereafter, with any balance due at maturity.
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 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 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% 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

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Intermediate Holdings, LLC, the Company, Royal Bank of Canada, as administrative agent and collateral agent, and each ~~rate. Interest rates were 8.8% and 8.3%~~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. As of March 31, 2020, the interest rate applicable for the first lien senior secured term loan was 7.5%.

On July 13, 2018, the Company successfully borrowed an additional $30.0 million pursuant to incremental term loans (the “2018 Incremental Term Loans”) under the First Amendment to the Credit Agreement. The proceeds of the 2018 Incremental Term Loans were used by the Company for general corporate purposes and ~~senior revolving credit facility, respectively,~~to pay fees and expenses in connection with the First Amendment.

On April 16, 2019, the Company successfully borrowed a further $30.0 million pursuant to incremental term loans (the “2019 Incremental Term Loans”, and, together with the 2018 Incremental Terms Loans, the “Incremental Term Loans”) under the Second Amendment to the Credit Agreement. The proceeds of the 2019 Incremental Term Loans were used to replace cash spent for acquisitions, pay related fees, expenses and related borrowings for general corporate purposes.

The Incremental Term Loans bear interest at a rate per annum that is the same as ~~of September 30, 2017.~~the Repricing Term Loans. The Incremental Term Loans will mature on July 12, 2023, the same maturity date as 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.

Other than as described above, the terms, conditions and covenants applicable to the Incremental Term Loans are consistent with the terms, conditions and covenants that were applicable to the Repricing Term Loans under the Credit Agreement.

Letters of Credit

As of March 31, 2020 and December 31, 2019, we had outstanding irrevocable letters of credit totaling approximately $19.2 million and $20.6 million, respectively, under the senior secured revolving facility.

Senior Secured Notes

~~Senior secured notes~~Upon the closing of the Novitex Business Combination on July 12, 2017, the Company issued $1.0 billion in aggregate principal amount of 10.0% First Priority Senior Secured Notes due ~~July~~ 2023 ~~were also issued as part~~(the “Notes”). The Notes are guaranteed by certain subsidiaries of the ~~Business Combination.~~Company. The ~~notes~~Notes bear interest at a rate of 10.0% per year. ~~We pay~~The Company pays interest on the ~~notes~~Notes on January 15 and July 15 of each year, commencing on January 15, 2018. The ~~notes~~Notes are guaranteed by subsidiary guarantors pursuant to a supplemental indenture.

~~Letters of Credit~~

The Notes will mature on July 15, 2023. As of ~~September 30, 2017 and~~ December 31, ~~2016, we had outstanding irrevocable letters of credit totaling approximately $22.8 million and $9.3 million, respectively,~~2019, the Company was in compliance with all covenants required under the ~~revolving credit facility.~~Notes.

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Accounts Receivables Securitization Facility

~~Contractual Obligations~~

~~The table below provides estimates~~On January 10, 2020 certain subsidiaries of the ~~timing~~Company entered into a $160.0 million accounts receivable securitization facility with a five year term. The Company used the proceeds of ~~future payments that we are obligated~~the initial borrowings to ~~make based on agreements in place at September 30, 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

repay outstanding revolving borrowings under the Company’s senior credit facility and to provide additional liquidity and funding for the ongoing business needs of the Company and its subsidiaries. On May 21, 2020, the Company amended the A/R Facility to, among other things, extend the time for delivery of its audited financial statements for the year ended December 31, 2019 and its financial statements for the quarter ended March 31, 2020.
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 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,~~facilities, 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, pursuant to the Registration Rights Agreement that we entered into in connection with the closing of the Novitex Business Combination, certain of our ~~shareholders~~stockholders have the right to demand underwritten offerings of our ~~common stock.~~Common Stock. We ~~are exploring, and~~ may from time to time in the future explore, with certain of those ~~shareholders~~stockholders the possibility of an underwritten public offering of our ~~common shares~~Common Stock held by those ~~shareholders.~~stockholders. 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,~~March 31, 2020, we had no material off balance sheet arrangements, except ~~for operating leases.~~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. ~~Our operating leases are composed~~
The HGM Group and other former SourceHOV equity holders formed Ex-Sigma and its wholly-owned subsidiary, Ex-Sigma 2, to hold the Exela shares to be issued to SourceHOV as merger consideration upon the closing of ~~various office~~the Novitex Business Combination and ~~industrial buildings, machinery, equipment,~~to invest in Exela immediately prior to the closing. Ex-Sigma 2 secured additional PIPE financing in the form of a $55.8 million loan (the “Margin Loan”) that was used to purchase additional common and ~~vehicles.~~preferred shares from the Company to help meet the minimum cash requirements needed to close the Novitex Business Combination. As a result of ~~September 30, 2017, our total future minimum leases~~these transactions, the Company issued 84,912,500 shares of Common Stock to Ex-Sigma 2 at the closing, which represented approximately 54.9% ownership in the Company at that time and were pledged as collateral for the Margin Loan.
The Company determined that Ex-Sigma was a variable interest entity and that the Company had a variable interest in Ex-Sigma through an expense reimbursement arrangement related to the Margin Loan and contained in the Consent, Waiver and Amendment. The Consent, Waiver and Amendment provided among other things for the Company to reimburse Ex-Sigma for costs and fees related to the maintenance of the Margin Loan, other than payments ~~under non-cancelable operating leases were $121.2 million.~~of principal, interest and original issue discount.
The Company was not the primary beneficiary because the Company did not have the power to direct the activities that most significantly impacted the economic performance of Ex-Sigma. Accordingly, the Company did not consolidate the financial statements of Ex-Sigma and did not have any assets or liabilities related to Ex-Sigma and the Company did not have an investment in Ex-Sigma. The Company reaffirmed its assessment as of June 8, 2020.
Ex-Sigma 2 paid off the balance of the Margin Loan as of December 31, 2019, and as such the maximum exposure to loss as a result of the Company’s involvement with Ex-Sigma is $0. Ex-Sigma 2 distributed the shares held by it during the first quarter of 2020 and is no longer a shareholder of Exela. Ex-Sigma and Ex-Sigma 2 ceased to be variable interest entities upon the distribution that occurred on February 21, 2020.

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Item 3. Quantitative and Qualitative ~~Disclosures about~~Disclosure About Market ~~Risk.~~Risk

Interest Rate Risk

~~Information~~At March 31, 2020, we had $1,557.3 million of debt outstanding, with a weighted average interest rate of 9.3%. 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 $15.6 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 ~~quantitative~~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 ~~qualitative disclosures regarding market risk is set forth~~other identified risks, was not designated as a hedge. As such, changes in ~~Management’s Discussion~~the fair value of the derivative are recorded directly to other expense (income), net. Other expense (income), net includes a loss of $0.8 million and ~~Analysis~~$1.7 million related to changes in the fair value of ~~Financial Condition~~the interest rate swap for the three months ended March 31, 2020 and ~~Results of Operations under Item 2 above. Such information is incorporated by reference herein.~~

2019, respectively.

~~Item 4. Controls and Procedures.~~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.

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 Act~~control system are met. Because of ~~2002,~~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 ~~are therefore not required to make a formal assessment~~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 material weaknesses in internal control over financial reporting described in our Annual Report.

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Notwithstanding such material weaknesses in internal control over financial reporting, our management, including our CEO and CFO, has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Quarterly Report, in conformity with U.S. generally accepted accounting principles.

Remediation

As previously described in Part II—Item 9A – Controls and Procedures of our Annual Report, we began implementing a remediation plan to address the material weaknesses mentioned above. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting ~~for~~during the quarter-ended March 31, 2020, that ~~purpose. However, we~~have materially affected, or are ~~required~~reasonably likely to ~~comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act of 2002, which require~~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~~Action

On September 21, 2017, former stockholders of ~~our wholly-owned subsidiary~~ SourceHOV, ~~Holdings, Inc. (“Source HOV”),~~ who ~~allege combined ownership of~~owned 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”).an Appraisal Action. The Appraisal Action ~~arises~~arose out of the Novitex Business Combination, ~~Transaction, which gave rise to appraisal rights pursuant to 8 Del. C. § 262. In the Appraisal Action,~~and the petitioners ~~seek,~~sought, 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.

During the trial the parties and their experts offered competing valuations of the SourceHOV shares as of the date of the Novitex Business Combination. SourceHOV argued the value was no more than $1,633.85 per share and the petitioners argued the value was at least $5,079.28 per share. On January 30, 2020, the Court issued its post-trial Memorandum Opinion in the Appraisal Action, in which it found that the fair value of SourceHOV as of the Closing Date was $4,591 per share, and on March 26, 2020, the Court issued its final order and judgment awarding the petitioners $57,698,426 inclusive of costs and interest. On May 7, 2020, SourceHOV filed a motion for new trial in relation to share count.

On ~~October 12, 2017,~~May 7, 2020, SourceHOV filed ~~its answer~~a motion for new trial in relation to share count. On June 11, 2020 the Court denied SourceHOV’s motion for new trial. SourceHOV now has the right to appeal the judgment to the ~~petition~~Supreme Court of the State of Delaware and intends to do so by July 1, 2020. At this time, we cannot determine whether such an appeal would be successful. Per the Court’s opinion, the legal rate of interest, compounded quarterly, accrues on the per share value from the closing date of the Novitex Business Combination until the date of payment to petitioners.

As a ~~verified list pursuant~~result of the Appraisal Action, 4,570,734 shares of our Common Stock issued to ~~8 Del. C. § 262(f)~~Ex-Sigma 2 have been returned to the Company during the first quarter of 2020.

Class Action

On March 23, 2020, the Plaintiff, Bo Shen, filed a putative class action against the Company, Ronald Cogburn, the Company’s Chief Executive Officer, and James Reynolds, the Company’s former Chief Financial Officer. Plaintiff claims to be a current holder of 4,000 shares of Company stock, purchased on October 4, 2019 at $1.34/share. Plaintiff asserts two claims covering the purported class period of March 16, 2018 to March 16, 2020: (1) a violation of Section 10(b) and Rule 10b-5 of the Exchange Act against all defendants; and (2) a violation of Section 20(a) of the Exchange Act against Mr. Cogburn and Mr. Reynolds. The allegations stem from the Company’s press release, dated March 16, 2020 (announcing the postponement of the earnings call and delay in filing of its annual report on Form 10-K for the

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fiscal year ended December 31, 2019), and press release and related SEC filings, dated March 17, 2020 (announcing its intent to restate its financial statements for 2017, 2018 and interim periods through September 30, 2019). At this early stage ofin the litigation, it is not practicable to render an opinion about whether an unfavorable outcome is probable or remote with respect to this matter; however, 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 Business Combination Agreement, if such appraisal rights are perfected, a corresponding portion of shares of our common stock issued to Ex-Sigma, LLC, our principal shareholder,believes it has meritorious defenses and 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.~~

assert them.

Other

We are, from time to time, involved in ~~various~~ other legal proceedings, ~~that have arisen~~inquiries, claims and disputes, which arise in the ~~normal~~ordinary course of business. ~~While~~Although our management cannot predict the ~~ultimate results~~outcomes of these matters, ~~cannot be predicted with certainty, we do~~our management believes these actions will not ~~expect them to~~ have a material, adverse effect on our ~~Consolidated Financial Statements.~~financial position, results of operations or cash flows.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report which could materially affect our business, financial condition and/or operating results. The risks described in these Risk Factors are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

We restated certain of our previously issued consolidated financial statements, which resulted in unanticipated costs and may affect investor and customer confidence and raise reputational issues.

As discussed in the Explanatory Note, in Note 3, “Restatement of Previously Issued Financial Statements” and in Note 20, “Unaudited Quarterly Financial Data” of the Consolidated Financial Statements included in our Annual Report, we restated our consolidated financial statements and related disclosures for the years ended December 30, 2018 and December 31, 2017 and restated each of the quarterly and year-to-date periods for the nine months ended September 29, 2019 and for fiscal year 2018. As a result, we incurred unanticipated costs for accounting and legal fees in connection with or related to the restatement, and have become subject to a number of additional risks and uncertainties, which may affect investor and customer confidence in the ~~closing~~accuracy of our financial disclosures and may raise reputational issues for our business.

Our failure to prepare and timely file our periodic reports with the ~~Business Combination on July 12, 2017 all of~~SEC limits our access to the ~~risk factors previously disclosed in Part I, Item 1A of~~public markets to raise debt or equity capital.

We did not file our Annual Report within timeframe required by the SEC, meaning we did not remain current in our reporting requirements with the SEC. As such, we are not currently eligible, and will not become eligible until we have timely filed all SEC reports required to be filed in the 12 month period immediately preceding the filing of a Form S-3 registration statement, to use a registration statement on Form ~~10-K~~S-3 that would allow us to continuously incorporate by reference our SEC reports into the registration statement, or to use “shelf” registration statements to conduct offerings, until we have maintained our status as a current filer for approximately one year. This limits our ability to access the ~~fiscal year ended December 31, 2016 no longer apply. Risk factors relating~~public markets to raise debt or equity capital, which could prevent us from pursuing transactions or implementing business strategies that we might otherwise believe are beneficial to our ~~business following~~business. If we wish to pursue a public offering now, we would be required to file a registration statement on Form S-1 and have it reviewed and declared effective by the ~~Business Combination may be found~~SEC. Doing so would likely take significantly longer than using a registration statement on Form S-3 and increase our transaction costs, and the necessity of using a Form S-1 for a public offering of registered securities could, to the extent we are not able to conduct offerings using alternative methods, adversely impact our ability to raise capital or complete acquisitions of other companies in ~~our definitive proxy statement, as filed with the Securities and Exchange Commission on June 26, 2017.~~a timely manner.

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

None.

(~~a) Sales~~44

Table of ~~Unregistered Securities~~Contents

~~For a description of certain sales of unregistered securities, please see the Company’s Form 8-K, dated July 12, 2017.~~

During the quarter ended September 30, 2017, a holder of 3,000,000 shares of our Series A Preferred Stock converted such Series A Preferred Stock into 3,667,803 shares of our common stock pursuant to the conversion provisions of the Series A Preferred Stock.

~~(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.
~~None.~~
Item 4. Mine Safety Disclosures.
Not applicable.

Item 5. Other Information.
None.

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Item 6. Exhibits.


Exhibit ~~Number~~ No.		Description
~~3.1 (1)~~
3.1		Restated Certificate of Incorporation, dated July 12, ~~2017~~2017. (1)
3.2 ~~(1)~~		Second Amended and Restated Bylaws, dated ~~July 12, 2017~~November 6, 2019. (2)
31.1*4.1		Specimen Common Stock Certificate. (3)
4.2		Specimen Warrant Certificate. (3)
4.3		Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant. (3)
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. (1)
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. (1)
10.1		Loan and Security Agreement, dated as of January 10, 2020, by and among Exela Receivables 1, LLC, as borrower, Exela Technologies, Inc., as initial servicer, TPG Specialty Lending, Inc., as administrative agent, PNC Bank, National Association, as LC Bank, and the lenders from time to time party thereto. (4)
10.2		First Tier Purchase and Sale Agreement, dated as of January 10, 2020, by and among Exela Receivables Holdco, LLC, as purchaser, Exela Technologies, Inc., as initial servicer, and BancTec, Inc., Deliverex, LLC, Economic Research Services, Inc., Exela Enterprise Solutions, Inc., SourceHOV Healthcare, Inc., United Information Services, Inc., HOV Enterprise Services, Inc., HOV Services, Inc., HOV Services, LLC, J&B Software, Inc., Novitex Government Solutions, LLC, Regulus Group II LLC, Regulus Group LLC, Regulus Integrated Solutions LLC, SourceCorp BPS Inc. and Sourcecorp Management, Inc., as originators. (4)
10.3		Second Tier Purchase and Sale Agreement, dated as of January 10, 2020, by and among Exela Receivables 1, LLC, Exela Receivables Holdco, LLC, and Exela Technologies, Inc. (4)
10.4		Sub-Servicing Agreement, dated as of January 10, 2020, by and among Exela Technologies, Inc., as initial servicer, and BancTec, Inc., Deliverex, LLC, Economic Research Services, Inc., Exela Enterprise Solutions, Inc., SourceHOV Healthcare, Inc., United Information Services, Inc., HOV Enterprise Services, Inc., HOV Services, Inc., HOV Services, LLC, J&B Software, Inc., Novitex Government Solutions, LLC, Regulus Group II LLC, Regulus Group LLC, Regulus Integrated Solutions LLC, SourceCorp BPS Inc., Sourcecorp Management, Inc., as sub-servicers. (4)
10.5		Guaranty, dated as of January 10, 2010, between Exela Receivables Holdco, LLC and TPG Specialty Lending, Inc. (4)
10.6		Performance Guaranty, dated as of January 10, 2010, between Exela Technologies, Inc. and TPG Specialty Lending, Inc. (4)
10.7		Membership Interest Purchase Agreement, dated as of March 16, 2020, by and among SourceHOV Tax, LLC, Merco Holdings, LLC, Exela Technologies, Inc., and Gainline Source Intermediate Holdings LLC. (5)
10.8		First Amendment to Loan and Security Agreement, First Tier Purchase and Sale Agreement and Second Tier Purchase and Sale Agreement, dated as of March 16, 2020, by and among Exela Receivables 1, LLC, Exela Technologies, Inc., Exela Receivables Holdco, LLC, the Originators, the Lenders, and TPG Specialty Lending, Inc. (5)
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

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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~~
(1) Incorporated by reference to the Registrants’ Current Report on Form 8 K, filed on ~~Form 8-K, filed~~ July 18, 2017.
(2) Incorporated by reference to the Registrants’ Quarterly Report on Form 10-Q, filed on November 12, 2019.
(3) Incorporated by reference to the Registrants’ Registration Statement on Form S 1 (SEC File No. 333 198988).
(4) Incorporated by reference to the Registrants’ Current Report on Form 8-K, filed on January 15, 2020.
(5) Incorporated by reference to the Registrants’ Current Report on Form 8-K, filed on March 17, 2020.

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* 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~~29^th day of ~~November, 2017.~~June, 2020.


	EXELA TECHNOLOGIES, INC.

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


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

5848

	September 30,			December 31,
	2017			2016
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	27,368		$	8,361
Restricted cash	37,315			25,892
Accounts receivable, net of allowance for doubtful accounts of $3,942 and $3,219 respectively	227,704			138,421
Inventories, net	13,634			11,195
Prepaid expenses and other current assets	24,263			12,202
Total current assets	330,284			196,071
Property, plant and equipment, net	133,617			81,600
Goodwill	776,010			373,291
Intangible assets, net	514,873			298,739
Deferred income tax assets	7,880			9,654
Other noncurrent assets	15,573			10,131
Total assets	$	1,778,237		$	969,486
Liabilities and Stockholders’ Equity (Deficit)
Liabilities
Current liabilities
Accounts payable	$	82,676		$	42,212
Related party payables	14,474			9,344
Income tax payable	770			1,031
Accrued liabilities	75,259			29,492
Accrued compensation and benefits	52,955			31,200
Customer deposits	34,268			18,729
Deferred revenue	17,633			17,235
Obligation for claim payment	37,315			25,892
Current portion of capital lease obligations	15,246			6,507
Current portion of long-term debt	18,662			55,833
Total current liabilities	349,258			237,475
Long-term debt, net of current maturities	1,278,306			983,502
Capital lease obligations, net of current maturities	25,242			18,439
Pension liability	29,717			28,712
Deferred income tax liabilities	35,124			26,223
Long-term income tax liability	3,063			3,063
Other long-term liabilities	15,811			11,973
Total liabilities	1,736,521			1,309,387
Commitment and Contingencies
Stockholders’ equity (deficit)
Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 150,578,451 shares issued and outstanding at September 30, 2017 and 64,024,557 shares issued and outstanding at December 31, 2016;	15			—


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


Additional paid in capital	482,018			(57,389		)
Equity-based compensation	31,788			27,342
Accumulated deficit	(455,976		)	(293,968		)
Accumulated other comprehensive loss:
Foreign currency translation adjustment	(2,291		)	(3,547		)
Unrealized pension actuarial losses, net of tax	(13,839		)	(12,339		)
Total accumulated other comprehensive loss	(16,130		)	(15,886		)
Total stockholders’ equity (deficit)	41,716			(339,901		)
Total liabilities and stockholders’ equity (deficit)	$	1,778,237		$	969,486

	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	)

												Accumulated Other Comprehensive Loss
												Foreign Currency			Unrealized Pension						Total
	Common Stock			Preferred Stock			Additional			Equity-Based		Translation			Actuarial Losses,			Accumulated			Stockholders’
	Shares	Amount		Shares	Amount		Paid in Capital			Compensation		Adjustment			net of tax			Deficit			Deficit
Balances at December 31, 2015 (as previously reported)	144,400	$	—	—	$	—	$	(57,389	)	$	20,256	$	(3,415	)	$	(5,076	)	$	(245,865	)	$	(291,489	)
Conversion of shares	63,880,157	6		—	—		(6		)	—		—			—			—			—
Balances at December 31, 2015, effect of reverse acquisition (refer to Note 2)	64,024,557	$	6	—	$	—	$	(57,395	)	$	20,256	$	(3,415	)	$	(5,076	)	$	(245,865	)	$	(291,489	)
Net loss January 1 to September 30, 2016																		(33,419		)	(33,419		)
Equity-based compensation										5,422											5,422
Foreign currency translation adjustment												1,955									1,955
Net realized pension actuarial gains, net of tax															469						469
Balances at September 30, 2016	64,024,557	$	6	—	$	—	$	(57,395	)	$	25,678	$	(1,460	)	$	(4,607	)	$	(279,284	)	$	(317,062	)

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
Trademark and trade name - Novitex	9.5	$	18,000
Customer relationships	16.0	230,000
Internally devleoped software - Connect Platform	5.0	1,710
Non-compete agreements	1.0	1,350
		$	251,060


Estimated Remaining Fixed Consideration for Unsatisfied Performance Obligations

Remainder of 2020	$	36,826
2021		38,591
2022		32,814
2023		27,638
2024		26,703
2025 and thereafter		27,144
Total	$	189,716

	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


	March 31, 2020
	Gross Carrying				Intangible
	Amount (a)		Amortization		Asset, net
Customer relationships	$	507,589	$	(247,272)	$	260,317
Developed technology		88,553		(86,734)		1,818
Trade names (b)		8,400		(3,100)		5,300
Outsource contract costs		15,877		(11,360)		4,517
Internally developed software		44,247		(13,966)		30,281
Trademarks		23,378		(23,370)		8
Assembled workforce		4,473		(1,398)		3,075
Purchased software		26,749		(2,229)		24,520
Intangibles, net	$	719,265	$	(389,428)	$	329,837

	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


	December 31, 2019
	Gross Carrying				Intangible
	Amount (a)		Amortization		Asset, net
Customer relationships	$	508,074	$	(237,313)	$	270,761
Developed technology		89,053		(87,109)		1,944
Trade names (b)		8,400		(3,100)		5,300
Outsource contract costs		16,726		(11,749)		4,977
Internally developed software		43,261		(12,129)		31,132
Trademarks		23,378		(23,370)		8
Assembled workforce		4,473		(1,118)		3,355
Purchased software		26,749		(1,783)		24,966
Intangibles, net	$	720,114	$	(377,671)	$	342,443

	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




	Beginning of Year Balance (a)			Additions		Impairments		Currency Translation Adjustments		End of Year Balance (a)
ITPS	$	571,575	$	—	$	(317,525)	$	70	$	254,120
HS		86,786		—		—		—		86,786
LLPS		49,897		—		(31,032)		—		18,865
Balance as of December 31, 2019	$	708,258	$	—	$	(348,557)	$	70	$	359,771
ITPS		254,120		—		—		(891)		253,229
HS		86,786		—		—		—		86,786
LLPS		18,865		—		—		—		18,865
Balance as of March 31, 2020	$	359,771	$	—	$	—	$	(891)	$	358,880

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


				Average
		Weighted		Remaining
	Number	Average Grant		Contractual Life	Aggregate
	of Shares	Date Fair Value		(Years)	Intrinsic Value
Balance as of December 31, 2019	309,305	$	1.99	1.19	$	616
Granted	—		—
Forfeited	—		—
Vested	—		—
Balance as of March 31, 2020	309,305	$	1.99	0.94	$	616


		Weighted		Weighted		Average Remaining
		Average Grant		Average		Vesting Period	Aggregate
	Outstanding	Date Fair Value		Exercise Price		(Years)	Intrinsic Value (2)
Balance as of December 31, 2019	4,937,700	$	1.97	$	4.14	2.27	$	—
Granted	—		—
Exercised	—		—
Forfeited	(79,000)		2.69
Expired	—		—
Balance as of March 31, 2020 (1)	4,858,700	$	1.96	$	4.14	2.03	$	—

	September 30, 2017		December 31, 2016
	Payables		Payables
HOV Services, Ltd	$	463	$	352
Rule 14	44		134
HGM	13,516		8,858
Presidio	451		—
	$	14,474	$	9,344


		Three months ended March 31, 2020
	ITPS		HS		LLPS		Total
Revenue	$	284,112	$	64,049	$	17,290	$	365,451
Cost of revenue (exclusive of depreciation and amortization)		235,120		44,931		12,488		292,539
Segment profit		48,992		19,118		4,802		72,912
Selling, general and administrative expenses (exclusive of depreciation and amortization)								50,374
Depreciation and amortization								23,185
Related party expense								1,551
Interest expense, net								41,588
Sundry expense, net								1,082
Other expense, net								(34,657)
Net loss before income taxes							$	(10,211)


		Three months ended March 31, 2019 (Restated)
	ITPS		HS		LLPS		Total
Revenue	$	325,172	$	61,343	$	17,842	$	404,357
Cost of revenue (exclusive of depreciation and amortization)		259,272		40,341		10,988		310,601
Segment profit		65,900		21,002		6,854		93,756
Selling, general and administrative expenses (exclusive of depreciation and amortization)								49,677
Depreciation and amortization								26,624
Related party expense								998
Interest expense, net								39,701
Sundry expense, net								2,715
Other expense, net								1,493
Net loss before income taxes							$	(27,452)

	Three months ended September 30, 2017
	ITPS	HS	LLPS	Total
Revenue	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
Selling, general and administrative expenses				102,048
Depreciation and amortization				28,052
Related party expense				26,892
Interest expense, net				37,652
Loss on extinguishment of debt				35,512
Sundry expense, net				563
Net loss before income taxes				$	(147,442	)

	Three months ended September 30, 2016
	ITPS	HS	LLPS	Total
Revenue	97,402	60,657	28,314	186,373
Cost of revenue	66,704	38,729	16,347	121,780
Gross profit	30,698	21,928	11,967	64,593
Selling, general and administrative expenses				30,829
Depreciation and amortization				18,761
Related party expense				2,448
Interest expense, net				27,399
Loss on extinguishment of debt				—
Sundry expense, net				711
Net loss before income taxes				$	(15,555	)

	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