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~~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~~ ~~incorporation~~Jurisdiction 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~~6, 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~~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~~2020 and December 31, ~~2016~~2019	31

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

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

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

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 (as restated)	76

Notes to the Condensed Consolidated Financial Statements	87

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3733

Item 3. Quantitative and Qualitative Disclosures about Market Risk	5749

Item 4. Internal Controls and Procedures	5750

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	5850

Item 1A. Risk Factors	5852

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5852

Item 3. Defaults Upon Senior Securities	5852

Item 4. Mine Safety Disclosures	5852

Item 5. Other Information	5852

Item 6. Exhibits	53

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~~2020 and December 31, ~~2016~~2019

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


	September 30,		December 31,
	2020		2019
	(Unaudited)		(Audited)
Assets
Current assets
Cash and cash equivalents	$	37,176	$	6,198
Restricted cash		6,032		7,901
Accounts receivable, net of allowance for doubtful accounts of $5,444 and $4,975, respectively		214,949		261,400
Related party receivables		786		716
Inventories, net		17,428		19,047
Prepaid expenses and other current assets		33,359		23,663
Total current assets		309,730		318,925
Property, plant and equipment, net of accumulated depreciation of $181,310 and $176,995, respectively		91,846		113,637
Operating lease right-of-use assets, net		67,522		93,627
Goodwill		359,270		359,771
Intangible assets, net		304,958		342,443
Deferred income tax assets		12,192		12,032
Other noncurrent assets		24,907		17,889
Total assets	$	1,170,425	$	1,258,324

Liabilities and Stockholders' Equity (Deficit)
Liabilities
Current liabilities
Accounts payable	$	61,788	$	86,167
Related party payables		162		1,740
Income tax payable		1,695		352
Accrued liabilities		109,336		121,553
Accrued compensation and benefits		53,904		48,574
Accrued interest		23,274		48,769
Customer deposits		15,605		27,765
Deferred revenue		18,071		16,282
Obligation for claim payment		36,284		39,156
Current portion of finance lease liabilities		12,599		13,788
Current portion of operating lease liabilities		20,049		25,345
Current portion of long-term debts		38,042		36,490
Total current liabilities		390,809		465,981
Long-term debt, net of current maturities		1,491,969		1,398,385
Finance lease liabilities, net of current portion		13,448		20,272
Pension liabilities		24,885		25,681
Deferred income tax liabilities		7,682		7,996
Long-term income tax liabilities		2,808		2,806
Operating lease liabilities, net of current portion		50,085		73,282
Other long-term liabilities		16,202		6,962
Total liabilities		1,997,888		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 147,511,430 shares outstanding at September 30, 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 September 30, 2020 and 4,294,233 shares issued and outstanding at December 31, 2019		1		1
Additional paid in capital		446,739		445,452
Less: Common Stock held in treasury, at cost; 7,355,120 shares at September 30, 2020 and 2,787,147 shares at December 31, 2019		(10,949)		(10,949)
Equity-based compensation		51,816		49,336
Accumulated deficit		(1,301,187)		(1,211,508)
Accumulated other comprehensive loss:
Foreign currency translation adjustment		(6,044)		(7,329)
Unrealized pension actuarial losses, net of tax		(7,854)		(8,059)
Total accumulated other comprehensive loss		(13,898)		(15,388)
Total stockholders’ deficit		(827,463)		(743,041)
Total liabilities and stockholders’ deficit	$	1,170,425	$	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 and Nine Months Ended September 30, 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 September 30,				Nine Months Ended September 30,
			2019				2019
	2020		(Restated)		2020		(Restated)
Revenue	$	305,280	$	373,545	$	978,453	$	1,168,751
Cost of revenue (exclusive of depreciation and amortization)		234,222		295,445		768,548		909,877
Selling, general and administrative expenses (exclusive of depreciation and amortization)		42,837		48,347		140,224		149,186
Depreciation and amortization		22,095		25,079		68,127		76,482
Impairment of goodwill and other intangible assets		—		97,158		—		97,158
Related party expense		1,360		1,430		4,058		7,759
Operating income (loss)		4,766		(93,914)		(2,504)		(71,711)
Other expense (income), net:
Interest expense, net		43,612		40,573		129,639		120,235
Debt modification and extinguishment costs		—		—		—		1,404
Sundry expense (income), net		(434)		165		(251)		1,569
Other expense (income), net		(10,414)		406		(45,655)		4,424
Net loss before income taxes		(27,998)		(135,058)		(86,237)		(199,343)
Income tax benefit (expense)		(320)		3,769		(3,440)		(5,689)
Net loss	$	(28,318)	$	(131,289)	$	(89,677)	$	(205,032)
Cumulative dividends for Series A Preferred Stock		(976)		(884)		(394)		(2,712)
Net loss attributable to common stockholders	$	(29,294)	$	(132,173)	$	(90,071)	$	(207,744)
Loss per share:
Basic and diluted	$	(0.20)	$	(0.91)	$	(0.61)	$	(1.43)

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 and Nine Months ~~ended~~Ended September 30, ~~2017~~2020 and ~~2016~~2019

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

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
			2019				2019
	2020		(Restated)		2020		(Restated)
Net loss	$	(28,318)	$	(131,289)	$	(89,677)	$	(205,032)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		343		(2,325)		1,285		(1,221)
Unrealized pension actuarial gains (losses), net of tax		(332)		291		205		323
Total other comprehensive loss, net of tax	$	(28,307)	$	(133,323)	$	(88,187)	$	(205,930)

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~~ and Nine Months ~~ended~~Ended September 30, ~~2017~~2020 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 loss, 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)
Net loss April 1, 2019 to June 30, 2019, as restated	—		—	—		—	—		—		—		—		—		—		(41,571)		(41,571)
Equity-based compensation	—		—	—		—	—		—		—		2,661		—		—		—		2,661
Foreign currency translation adjustment	—		—	—		—	—		—		—		—		(2,288)		—		—		(2,288)
Net realized pension actuarial gains, net of tax	—		—	—		—	—		—		—		—		—		256		—		256
RSUs Vested	102,092		—	—		—	—		—		—		—		—		—		—		—
Shares repurchased	(237,962)		—	—		—	237,962		(607)		—		—		—		—		—		(607)
Balances at June 30, 2019, as restated	150,007,085	$	15	4,569,233		1	2,787,147	$	(10,949)	$	445,452	$	47,190	$	(5,319)	$	(9,269)	$	(776,134)	$	(309,013)
Net loss July 1, 2019 to September 30, 2019, as restated	—		—	—		—	—		—		—		—		—		—		(131,289)		(131,289)
Equity-based compensation	—		—	—		—	—		—		—		1,444		—		—		—		1,444
Foreign currency translation adjustment	—		—	—		—	—		—		—		—		(2,325)		—		—		(2,325)
Net realized pension actuarial gains, net of tax	—		—	—		—	—		—		—		—		—		291		—		291
RSUs vested	508,390		—	—		—	—		—		—		—		—		—		—		—
Withholding of employee taxes on vested RSUs	—		—	—		—	—		—		—		(223)		—		—		—		(223)
Preferred shares converted to common	183,389		—	(150,000)		—	—		—		—		—		—		—		—		—
Balances at September 30, 2019, as restated	150,698,864	$	15	4,419,233		1	2,787,147	$	(10,949)	$	445,452	$	48,411	$	(7,644)	$	(8,978)	$	(907,423)	$	(441,115)

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
)

Table of Contents


														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 following 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)
Net loss April 1, 2020 to June 30, 2020	—		—	—		—	—		—		—		—		—		—		(48,691)		(48,691)
Equity-based compensation	—		—	—		—	—		—		—		921		—		—		—		921
Foreign currency translation adjustment	—		—	—		—	—		—		—		—		22		—		—		22
Net realized pension actuarial gains, net of tax	—		—	—		—	—		—		—		—		—		33		—		33
Settlement gain on related party payable to Ex-Sigma 2	—		—	—		—	—		—		1,287		—		—		—		—		1,287
Adjustment to number of shares withheld in lieu of tax obligation of RSU holders in the year 2018	2,761		—	—		—	(2,761)		—		—		—		—		—		—		—
Balances at June 30, 2020	147,511,430	$	15	3,290,050	$	1	7,355,120	$	(10,949)	$	446,739	$	51,118	$	(6,387)	$	(7,522)	$	(1,272,869)	$	(799,854)
Net loss July 1, 2020 to September 30, 2020	—		—	—		—	—		—		—		—		—		—		(28,318)		(28,318)
Equity-based compensation	—		—	—		—	—		—		—		698		—		—		—		698
Foreign currency translation adjustment	—		—	—		—	—		—		—		—		343		—		—		343
Net realized pension actuarial loss, net of tax	—		—	—		—	—		—		—		—		—		(332)		—		(332)
Balances at September 30, 2020	147,511,430	$	15	3,290,050	$	1	7,355,120	$	(10,949)	$	446,739	$	51,816	$	(6,044)	$	(7,854)	$	(1,301,187)	$	(827,463)

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

Table of Contents

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

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

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

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

(Unaudited)

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


	Nine Months Ended September 30,
			2019
	2020		(Restated)
Cash flows from operating activities
Net loss	$	(89,677)	$	(205,032)
Adjustments to reconcile net loss
Depreciation and amortization		68,127		76,482
Original issue discount and debt issuance cost amortization		10,979		8,730
Impairment of goodwill and other intangible assets		—		97,158
Debt modification and extinguishment costs		—		1,049
Provision for doubtful accounts		415		4,402
Deferred income tax provision		(417)		1,632
Share-based compensation expense		2,480		6,903
Foreign currency remeasurement		(499)		(173)
Loss (gain) on sale of assets		(44,868)		123
Fair value adjustment for interest rate swap		23		4,965
Change in operating assets and liabilities, net effect from acquisitions:
Accounts receivable		44,197		3,501
Prepaid expenses and other assets		(8,012)		2,377
Accounts payable and accrued liabilities		(48,257)		(41,146)
Related party balances		(362)		(5,198)
Additions to outsource contract costs		(289)		(3,130)
Net cash used in operating activities		(66,160)		(47,357)

Cash flows from investing activities
Purchases of property, plant, and equipment		(6,893)		(10,797)
Additions to internally developed software		(2,988)		(5,074)
Cash paid in acquisition, net of cash received		(12,500)		(5,000)
Proceeds from sale of assets		50,126		360
Net cash provided by (used in) investing activities		27,745		(20,511)

Cash flows from financing activities
Repurchases of Common Stock		—		(3,480)
Borrowings from other loans		28,626		21,530
Borrowings under factoring arrangement and A/R Facility		166,786		48,748
Principal repayment on borrowings under factoring arrangement and A/R Facility		(84,121)		(49,243)
Cash paid for withholding taxes on vested RSUs		—		(223)
Proceeds from senior secured term loans		—		29,850
Lease terminations		(331)		(314)
Cash paid for debt issuance costs		(12,708)		(7)
Borrowings from senior secured revolving facility		29,750		130,500
Repayments on senior secured revolving facility		(14,200)		(91,500)
Principal payments on finance lease obligations		(9,614)		(13,598)
Principal repayments on senior secured term loans and other loans		(37,283)		(32,996)
Net cash provided by financing activities		66,905		39,267
Effect of exchange rates on cash		619		(29)
Net increase (decrease) in cash and cash equivalents		29,109		(28,630)
Cash, restricted cash, and cash equivalents
Beginning of period		14,099		43,854
End of period	$	43,208	$	15,224

Supplemental cash flow data:
Income tax payments, net of refunds received	$	2,767	$	6,981
Interest paid		140,751		131,744
Noncash investing and financing activities:
Assets acquired through right-of-use arrangements		2,472		9,352
Settlement gain on related party payable to Ex-Sigma 2		1,287		—
Accrued capital expenditures		1,699		2,388

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

Table of Contents

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.

Certain amounts in condensed consolidated statements of cash flows have been reclassified for comparability purposes.

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 periods 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:

Table of Contents

●

history of net losses of $28.3 million and $89.7 million for the three and nine months ended September 30, 2020, respectively, 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 and a gain of $9.8 million on the sale of its physical record storage and logistics business each recognized during the nine months ended September 30, 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 $66.2 million for the nine months ended September 30, 2020, $63.9 million in 2019 and inflow of $23.6 million in 2018;

●

working capital deficits of $81.1 million as of September 30, 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 $59.6 million for the 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 in default of the A/R Facility (as defined below) and the First Lien Credit Agreement, dated as of July 12, 2017, as amended and restated as of July 13, 2018 and as further amended and restated as of April 16, 2019 (the “Prior Credit Agreement” and as further amended and restated as of May 18, 2020, the “Credit Agreement”), respectively; and

●

an accumulated deficit of $1,301.2 million.

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

~~Exela Technologies, Inc.~~terms of each of the Prior Credit Agreement, and ~~Subsidiaries~~

~~Notes~~the Indenture and First Supplemental Indenture (collectively, the “Indenture”), dated July 12, 2017, the Company was required to deliver to its lenders and bondholders 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 Prior 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:~~A/R Facility (as described in Note 5), the Company was required to furnish to each lender the December 31, 2019 audited financial statements by May 11, 2020, which the Company failed to do. During the second quarter of 2020, both the Prior Credit Agreement and the A/R Facility were amended. Refer to Consideration of Management’s Plans section below.

1.~~Information & Transaction Processing Solutions (“ITPS”).~~Consideration of Management’s Plans ~~ITPS provides industry solutions for banking~~

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 ~~financial services, including lending solutions for mortgages~~whether it is probable those plans will alleviate the substantial doubt about our ability to continue as a going concern.

As of November 6, 2020, the Company had $77.0 million of liquidity, comprised of available cash of $47.7 million 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 storageavailability under borrowing facilities of ~~data, documents; and software, hardware, professional services and maintenance related to information and transaction processing automation, among others.~~

2.~~Healthcare Solutions (“HS”). HS offerings include revenue cycle solutions, integrated~~$30.5 million, net of accounts payable and accounts receivable, and information management for both the healthcare payer and provider markets. Payer service offerings include claims processing, claims adjudication and auditing services, enrollment processing and policy management, and scheduling and prescription management. Provider service offerings include medical coding and insurance claim generation, underpayment audit and recovery, and medical records management.

3.~~Legal and Loss Prevention Services (“LLPS”).~~ ~~LLPS solutions include processing~~greater than 90 days of legal claims for class action and mass action settlement administrations, involving project management support, notification and outreach to claimants, collection, analysis and distribution of settlement funds. Additionally, LLPS provides data and analytical services in the context of litigation consulting, economic and statistical analysis, expert witness services, and revenue recovery services for delinquent accounts receivable.

~~Restricted Cash~~

As part of the Company’s legal claims processing service, the Company holds cash for various settlement funds once the fund is in the wind down stage and claims have been paid. The cash is used to pay tax obligations and other liabilities of the settlement funds. The Company recorded an offsetting liability in obligation for claim payment in the consolidated balance sheets for the settlement funds received of $37.3$1.2 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.~~A/R Loan Agreement.

~~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 not subject to amortization. The Company’s valuation~~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 (as amended, 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. As of November 6, 2020, the Company has the remaining availability of $4.0 million 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.

Table of trade names at the reporting unit level utilizes the Relief-from-Royalty method that represents the present value of the future economic benefits generated by ownership of the trade names and approximates the amount that the Company would have to pay as a royalty to a third party to license such names.Contents

●

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 which can be used to acquire, maintain, develop, construct, improve, upgrade or repair assets useful in our business or to make certain investments and acquisitions as permitted by the Credit Agreement.

●

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 maximum was put in place to limit the amount of incentives that could be earned in any given two (2) week pay period.

●

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.

●

On July 22, 2020 the Company completed the sale of its physical records storage and logistics business for a purchase price of $12.3 million which can be used to acquire, maintain, develop, construct, improve, upgrade or repair assets useful in our business or to make certain investments and acquisitions as permitted by the Credit Agreement.

~~Trademarks~~Substantial Doubt Alleviated

The Company has ~~determined~~had a history of negative trends in its financial condition and operating results as well as recent noncompliance with covenants with certain of its 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 Other 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~~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 this initiative for the paydown of debt.

Table of Contents

Additionally, as discussed in Note 8, the petitioners in the Appraisal Action have filed additional actions to recognize the judgment against SourceHOV, which is a subsidiary without assets ~~resulting~~to satisfy the judgement. The Company does not expect these actions to be resolved and a settlement of liability recorded for the Appraisal Action to be made within twelve months from ~~acquisitions are definite-lived assets and therefore~~the date the financial statements were issued.

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 uncertainty 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 future 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 orand if-converted method in periods of earnings. The two class method is an earnings allocation method that determines earnings per share (when there are earnings) for common ~~shares~~stock and participating securities. The if-converted method assumes all convertible securities are converted into common stock. Diluted EPS excludes all dilutive potential shares of common stock if their effect is anti-dilutive.

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~~using 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,~~2020, the 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~~however, they 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 5,175,747 and 5,403,055 as of September 30, 2020 and 2019, respectively, in the calculation of diluted loss per share for the three and nine months ended September 30, 2020 and 2019, because their effects were anti-dilutive (i.e. reduces the net ~~income (loss)~~loss per ~~share. Warrants are considered anti-dilutive and excluded when the exercise price exceeds the average market value of the Company’s common stock price during the applicable period.~~share).


	Three Months Ended September 30,				Nine Months Ended September 30,
			2019				2019
	2020		(Restated)		2020		(Restated)
Net loss attributable to common stockholders (A)	$	(29,294)	$	(132,173)	$	(90,071)	$	(207,744)
Weighted average common shares outstanding - basic and diluted (B)		147,511,430		145,636,749		147,405,476		145,569,843
Loss Per Share:
Basic and diluted (A/B)	$	(0.20)	$	(0.91)	$	(0.61)	$	(1.43)

The ~~components of~~weighted average common shares outstanding - basic and diluted, ~~EPS~~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) which became treasury stock, but which were included in the number of shares of Common Stock outstanding as of September 30, 2019.

Sale of Non-Core Assets

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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 first quarter of 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 for the nine months ended September 30, 2020.

On July 22, 2020, the Company completed the sale of its physical records storage and logistics business for a purchase price of $12.3 million. The Company recognized a gain of $9.8 million on the sale of physical records storage and logistics business during the third quarter of 2020. The gain on sale of physical records storage and logistics business is included in Other expense (income), net in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020.

Impact of COVID-19

Our global operations continue to expose us to risks associated with the coronavirus pandemic (“COVID-19”), which continues to result in challenging operating environments and has affected almost all of the countries and territories in which we operate. Authorities across the world have implemented measures like travel bans, quarantines, curfews, restrictions on public gatherings, shelter in place orders, business shutdowns and closures to control the spread of COVID-19. These measures, alongside the virus itself, have impacted, and we expect will continue to impact, us, our customers, suppliers and other third parties with whom we do business, as well as the global economy, demand for our services and spending across many sectors, as a whole. While some jurisdictions have now started to implement plans for reopening, there are others which had to return to restrictions due to increased spread of COVID-19.

The Company is dependent on its workforce to deliver its solutions and services. While we have developed and implemented health and safety protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19, restrictions such as ~~follows:~~shutdowns, social distancing and stay-at-home orders in various jurisdictions have impacted and will continue to impact the Company’s ability to deploy its workforce effectively. A part of our workforce has now started to operate from offices and delivery centers, but many are still operating in a remote work environment.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report and the extent to which COVID-19 will ultimately impact the Company’s business depends upon various dynamic factors which are difficult to be predicted reliably. Management continues to actively monitor the global situation and its impact on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the continuous evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to fully estimate adverse effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for the remainder of fiscal year 2020 or the future.

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
)

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 December 31, 2022. The adoption had no impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

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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 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 ~~measuring inventories~~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, 2019,

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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~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

In ~~October 2016,~~August 2020, the FASB issued ASU no. ~~2016-16~~2020-06, ~~, Income Taxes: Intra-Entity Transfers~~Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU eliminates two models in ASC 470-20 for convertible instruments that require separate accounting for embedded conversion features namely cash conversion model and beneficial conversion feature model. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of ~~Assets Other Than Inventory (Topic 740)~~, which eliminates the current prohibition on immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory, with the intent of reducing complexity and diversityshare settlement for instruments that may be settled in ~~practice. Under~~cash or shares. The 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~~the Company for fiscal years beginning after December 15, ~~2018, and~~2021, including 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~~therein. 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. permitted. 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,~~3. Significant Accounting Policies

The information presented below supplements the ~~FASB issued ASU no. 2016-18,~~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 adoption of the new accounting standard.

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Revenue Recognition

We account for revenue in accordance with ASC 606, ~~Statement~~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 is the unit of ~~Cash Flows: Restricted Cash~~ ~~(Topic 230).~~account in ASC 606. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The ~~ASU addresses diversity in practice that exists in~~contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the ~~classification and presentation~~performance obligation is satisfied. All of ~~changes in restricted cash and requires that a statement~~our material sources of ~~cash flows explain~~revenue are derived from contracts with customers, primarily relating to the ~~change during the period in the total~~provision 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.

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 tables disaggregate revenue from contracts by geographic region and by segment for the three and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,
									2019
	2020								(Restated)
		ITPS		HS		LLPS		Total		ITPS		HS		LLPS		Total
U.S.A.	$	178,075	$	54,209	$	16,706	$	248,990	$	230,120	$	62,132	$	18,806	$	311,058
EMEA		51,232		—		—		51,232		55,836		—		—		55,836
Other		5,058		—		—		5,058		6,651		—		—		6,651
Total	$	234,365	$	54,209	$	16,706	$	305,280	$	292,607	$	62,132	$	18,806	$	373,545


	Nine Months Ended September 30,
									2019
	2020								(Restated)
		ITPS		HS		LLPS		Total		ITPS		HS		LLPS		Total
U.S.A.	$	592,238	$	167,424	$	49,524	$	809,186	$	720,846	$	186,915	$	54,217	$	961,978
EMEA		152,222		—		—		152,222		186,337		—		—		186,337
Other		17,045		—		—		17,045		20,436		—		—		20,436
Total	$	761,505	$	167,424	$	49,524	$	978,453	$	927,619	$	186,915	$	54,217	$	1,168,751

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Contract Balances

The following table ~~summarizes the consideration paid for Novitex~~presents contract assets, contract liabilities and ~~the preliminary fair value of the assets acquired and liabilities assumed~~contract costs recognized 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.~~2020 and December 31, 2019:


	September 30,		December 31,
	2020		2019
Accounts receivable, net	$	214,949	$	261,400
Deferred revenues		18,623		16,621
Customer deposits		15,605		27,765
Costs to obtain and fulfill a contract		3,616		4,977

~~The Company expects to realize revenue synergies, leverage, brand awareness, stronger margins, greater free cash flow generation,~~Accounts receivable, net includes $20.1 million 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$34.1 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~~2020 and December 31, 2019, respectively, representing amounts not billed to ~~equity issuance costs and $40.9 million was incurred~~customers. We have accrued the unbilled receivables for work performed in ~~debt issuance costs.~~accordance with the terms of contracts with customers.

~~Restructuring Charges~~

~~In February 2017, management performed~~Deferred revenues relate to payments received in advance of performance under a ~~strategic review~~contract. A significant portion of ~~human resources at Novitex~~this balance relates to maintenance contracts or other service contracts where we received payments for ~~the purpose of assessing the business need for their employment and for the purpose of quantifying the synergies resulting from the acquisition. As~~upfront conversions or implementation activities which do not transfer 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 relatedservice to the ~~impacted executives and $0.1~~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 $14.2 million ~~related to other terminations in~~during the ~~statement of operations for the three~~nine months ended September 30, ~~2017.~~2020 that had been deferred as of December 31, 2019.

~~Exela Technologies, Inc.~~Costs incurred to obtain and ~~Subsidiaries~~

~~Notes~~fulfill contracts are deferred and expensed on a straight-line basis over the estimated benefit period. We recognized $1.8 million of amortization for these costs in the first nine 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 ~~Condensed Consolidated Financial Statements~~

(contract acquisition or fulfillment and can be separated into two principal categories: contract commissions and fulfillment costs. Applying the practical expedient in ~~thousands~~ASC 340-40-25-4, we recognize the incremental costs of ~~United States dollars except share and per share amounts)~~

~~(Unaudited)~~

~~The Company does not expect to incur additional charges for these terminations in future periods. Severance charges associated with~~obtaining contracts as an expense when incurred if the ~~terminations were~~amortization period would have been one year or less. These costs are included in Selling, general and administrative ~~expenses on the consolidated statement~~expenses. The effect of ~~operations and were included~~applying this practical expedient was not material.

Customer deposits consist primarily of amounts received from customers in ~~the ITPS segment. Of the total amount of restructuring charges, $2.1 million was shown as a liability~~advance for postage. The amounts recorded as of ~~September 30, 2017, which is included within Accrued compensation and benefits on~~December 31, 2019 were used to pay for postage with the ~~Condensed Consolidated Balance Sheets.~~

~~Pro-Forma Information~~

~~Following are~~corresponding postage revenue being recognized during 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~~2020. Any residual balances may be retained and ~~2016:~~used in future periods.

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
)

Performance Obligations

~~These pro forma results were~~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, typically based on ~~estimates~~the related labor or transactional volumes.

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

Table of Contents

whether it relates specifically to its efforts to satisfy a specific part of the contract. Certain of our software implementation performance obligations are ~~reasonable. They are not~~satisfied at a point in time, typically when customer acceptance is obtained.

When evaluating the ~~results that would have been realized had the Company been~~transaction price, we analyze, on a ~~combined company during the periods presented and are not necessarily indicative~~contract-by-contract basis, all applicable variable consideration. The nature of ~~consolidated results of operations in future periods. The pro forma results include adjustments primarily related~~our contracts give rise to ~~purchase accounting adjustments. Acquisition costs~~variable consideration, including volume discounts, contract penalties, and other ~~non-recurring charges incurred~~similar items that generally decrease the transaction price. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We do not anticipate significant changes to our estimates of variable consideration.

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

Transaction Price Allocated to the ~~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 September 30, 2020 in each of the ~~acquisition of TransCentra by SourceHOV for the three and nine month~~future 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.below:


Estimated Remaining Fixed Consideration for Unsatisfied Performance Obligations

Remainder of 2020	$	12,360
2021		42,714
2022		35,611
2023		28,944
2024		26,814
2025 and thereafter		27,144
Total	$	173,587

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)~~

7.4. 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:

	September 30, 2017
	Gross Carrying Amount (a)		Accumulated Amortization			Intangible Asset, net

								September 30, 2020
								Gross Carrying				Intangible
								Amount (a)		Amortization		Asset, net
Customer relationships	504,643		(125,803		)	$	378,840	$	508,084	$	(267,917)	$	240,167
Developed technology	89,076		(72,806		)	16,270			88,553		(86,985)		1,568
Trade names	52,470		—			52,470
Trade names (b)									8,400		(3,100)		5,300
Outsource contract costs	37,144		(15,020		)	22,124			16,065		(12,449)		3,616
Internally developed software	24,799		(3,159		)	21,640			46,184		(18,021)		28,163
Trademarks	23,370		(898		)	22,472
Non-compete agreements	1,350		(293		)	1,057
	$	732,852	$	(217,979	)	$	514,873

Assembled workforce									4,473		(1,957)		2,516
Purchased software									26,749		(3,121)		23,628
Intangibles, net								$	698,508	$	(393,550)	$	304,958

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

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	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 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. Carrying amount of $5.3 million as at September 30, 2020 represents indefinite-lived intangible asset.

~~(a) Amounts include intangibles acquired in the Business Combination. Refer to Note 3.~~

~~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 3 segments: ITPS, HS, and LLPS (See Note 13).

Goodwill by reporting segment consists of the following:

	Goodwill		Additions			Reductions			Currency translation adjustments		Goodwill



														Balances as at January 1, 2019 (a)			Additions		Impairments		Currency Translation Adjustments		Balances as at December 31, 2019 (a)
ITPS	$	145,562	$	13,558		$	—		$	274	$	159,394		$	571,575	$	—	$	(317,525)	$	70	$	254,120
HS	86,786		—			—			—		86,786				86,786		—		—		—		86,786
LLPS	127,111		—			—			—		127,111		(a)		49,897		—		(31,032)		—		18,865
Balance as of December 31, 2016	$	359,459	$	13,558		$	—		$	274	$	373,291
Total														$	708,258	$	—	$	(348,557)	$	70	$	359,771

														Balances as at January 1, 2020 (a)			Additions		Impairments		Currency Translation Adjustments		Balances as at September 30, 2020 (a)
ITPS	159,394		405,141		(c)				299		564,834				254,120		—		—		(501)		253,619
HS	86,786										86,786				86,786		—		—		—		86,786
LLPS	127,111		—			(2,721		)(b)	—		124,390		(a)		18,865		—		—		—		18,865
Balance as of September 30, 2017	$	373,291	$	405,141		$	(2,721	)	$	299	$	776,010
Total														$	359,771	$	—	$	—	$	(501)	$	359,270

(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 September 30, 2020, respectively.

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

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

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

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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.~~

September 30, 2020 and December 31, 2019, the Company had outstanding irrevocable letters of credit totaling approximately $19.4 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%~~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 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~~the prior senior secured term loans.

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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.

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes~~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 ~~the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~customary “breakage” costs with respect to LIBOR rate loans.

Other than as described above, the terms, conditions and covenants applicable to the 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 during the nine months ended September 30, 2019.

Third Amendment

On May 18, 2020, the Company amended the Prior 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 satisfied during the month of June 2020), the Company became 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 Prior 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. In connection with this amendment, the Company paid a forbearance fee of $5 million to the consenting lenders. The Company concluded that the amendment represents modification of debt under ASC 470-50. Accordingly, the forbearance fee paid was added to unamortized debt issuance cost which shall be amortized using updated effective interest rate based on modified cash flows.

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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 consideration for a combination of 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. In connection with these amendments a forbearance fee of $4.8 million was due and added to the outstanding principal balance of the loans. The Company concluded that the amendment represents modification of debt under ASC 470-50. Accordingly, the forbearance fee paid was added to unamortized debt issuance cost which shall be amortized ratably over the remaining term of the A/R facility.

Each loan under the A/R Facility originally bore 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 annum and (2) if a LIBOR Rate Loan, 4.75% plus a floating LIBOR Rate with a 1.00% LIBOR floor. In connection with the above described amendments to the A/R Facility, the applicable margin of the Base Rate Loans was increased to 5.75% and the LIBOR Rate Loans was increased to 6.75%. As of September 30, 2020, there were $83.0 million borrowings under the Receivables Securitization Facility.

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Long-Term Debt Outstanding

As of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, the following long-term debt instruments were outstanding:


	September 30,		December 31,
	2020		2019
Other (a)	$	36,897	$	30,232
First lien credit agreement (b)		346,697		360,583
Senior secured notes (c)		982,867		979,060
Secured borrowings under A/R Facility		83,000		—
Revolver		80,550		65,000
Total debt		1,530,011		1,434,875
Less: Current portion of long-term debt		(38,042)		(36,490)
Long-term debt, net of current maturities	$	1,491,969	$	1,398,385

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

(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 $5.2 million and $18.7 million as of September 30, 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 $12.2 million and $4.9 million as of September 30, 2020 and $14.9 million and $6.0 million as of December 31, 2019.

~~(a)~~ ~~Net of unamortized debt issuance costs of $2.3 million as of December 31, 2016~~

~~(b)~~ ~~Net of unamortized original issue discount and debt issuance costs of $14.6 million and $14.2 million as of December 31, 2016~~

~~(c)~~ ~~Net of unamortized original issue discount and debt issuance costs of $7.3 million and $6.3 million as of December 31, 2016~~

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

~~(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~~$0.3 million and an income tax benefit of $3.8 million for the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively. The Company recorded an income tax ~~benefit~~expense of ~~$32.9~~$3.4 million and ~~an income tax benefit of $10.0~~$5.7 million for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

The ~~Company’s actual effective tax rate~~Company's ETR of ~~25.12%~~(1.1%) and ~~18.44%~~(4.0%) for the three and nine months ended September 30, ~~2017, respectively,~~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 carryforwards 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, 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,~~2019, the Company’s ETR of 2.8% and (2.9%) 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 carryforwards created by the provisions of the TCJA.

As of September 30, ~~2017,~~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 $25.8 million from December 31, 2019 to September 30, 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

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measurement date for this plan. The German pension plan is an unfunded plan and therefore has 0 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~~2020 and December 31, ~~2016,~~2019 the Company recorded actuarial losses of ~~$13.8~~$7.9 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 September 30,						Nine Months ended September 30,
	2017			2016			2017			2016

													Three Months Ended September 30,					Nine Months Ended September 30,
															2019					2019
													2020		(Restated)			2020		(Restated)
Service cost	$	2		$	3		$	6		$	9		$	19	$	23		$	57	$	68
Interest cost	585			667			1,708			2,001				494		592			1,482		1,777
Expected return on plan assets	(610		)	(656		)	(1,782		)	(1,968		)		(639)		(612)			(1,917)		(1,837)
Amortization:
Amortization of prior service cost	(34		)	(35		)	(99		)	(105		)		25		25			75		76
Amortization of net loss	529			223			1,546			669
Amortization of net (gain) loss														430		406	��		1,290		1,218
Net periodic benefit cost	$	472		$	202		$	1,379		$	606		$	329	$	434		$	987	$	1,302

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~~$1.8 million and ~~$2.0~~$1.7 million to its pension plans during the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019 (as restated), respectively. 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 a preliminary transaction in connection with 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 awarding the petitioners $57,698,426 inclusive of costs and interest. 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 Novitex Business Combination until the date of payment to petitioners.

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 appealed the judgment in the Appraisal Action to the ~~petition and a verified list pursuant to 8 Del. C. § 262(f). At this early stage~~Supreme Court of the ~~litigation,~~State of Delaware on June 30, 2020. The appeal is pending and at this time, we cannot determine whether the appeal will be successful. At present, SourceHOV has not posted a bond to stay the judgment in the Appraisal Action, and to date, the petitioners have not been successful in their attempts to collect on the judgment against SourceHOV.

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The petitioners have filed additional actions to recognize the judgment against SourceHOV, an action alleging unjust enrichment and seeking restitution and to pierce the corporate veil and seek alter ego liability against Exela Technologies, Inc. and over 50 alleged subsidiaries and/or affiliates in an attempt to collect the award in the Appraisal Action from entities other than SourceHOV, and an action against SourceHOV and certain of its directors and officers alleging creditor derivative claims. Although the Company ~~is unable~~believes that it has valid defenses to ~~predict~~these ancillary proceedings, the ~~outcome~~ancillary proceedings are in the preliminary stages and there can be no assurance that the Company will be successful.

As a result of the Appraisal Action ~~or estimate any loss or range~~and following 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, were returned to the Company during the first quarter of 2020.

As of September 30, 2020, the Company accrued a liability of $59.6 million for the Appraisal ~~Action.~~Action based on the judgment received on January 30, 2020 plus accrued interest, which is management’s best estimate of the total payment.

~~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 ~~thousands~~a significant revenue reversal or have a material adverse effect on the Company’s consolidated balance sheets, consolidated statements of ~~United States dollars except share and per share amounts)~~

~~(Unaudited)~~

operations or consolidated statements of cash flows.

~~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~~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%~~32.0% and ~~98.3%~~30.0% respectively, of the respective principal balance outstanding as of September 30, ~~2017.~~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~~2020, and December 31, ~~2016:~~2019:

	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 September 30, 2020											Amount		Value		Level 1		Level 2		Level 3
Recurring assets and liabilities:
Long-term debt											$	1,491,969	$	580,987	$	—	$	580,987	$	—
Interest rate swap liability												524		524		—		524		—
Acquisition contingent liability	$	721	$	721	$	—	$	—	$	721		1,000		1,000						1,000
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												359,270		359,270		—		—		359,270

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


	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
Nonrecurring assets and liabilities:
Goodwill		359,771		359,771		—		—		359,771

~~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


	September 30,		December 31,
	2020		2019
Balance as of Beginning of Period	$	721	$	721
Earn-out Adjustment		279		—
Balance as of End of Period	$	1,000	$	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 September 30, 2020, there were 0 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 September 30, 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	(190,258)		2.50
Balance as of September 30, 2020	119,047	$	1.70	1.67	$	150

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 nine 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	210,000		0.25
Exercised	—		—
Forfeited	(91,000)		2.69
Expired	—		—
Balance as of September 30, 2020 (1)	5,056,700	$	1.88	$	3.94	1.61	$	—

(1) 1,138,440 of the outstanding options are exercisable as of September 30, 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 0.

As of September 30, 2020, there was approximately $3.5 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~~$0.7 million and ~~$4.4~~$2.5 million related to ~~these~~plan awards for the three and nine months ended September 30, ~~2017, respectively.~~

~~The Company has not approved any incentive plans~~2020, respectively, and $1.4 million and $6.9 million related to ~~grant~~plan awards ~~of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards~~for the three and ~~performance awards as of September 30, 2017.~~

~~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 threenine months ended September 30, ~~2017, the Company recorded expense related to these non-employee advisors~~2019, respectively.

Table of ~~$28.6 million in Selling, general and administrative expense, based on the fair value of $8.00 per share.~~Contents

~~Exela Technologies, Inc. and Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

~~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~~1 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 September 30, 2020 and December 31, 2019, there were 147,511,430 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,~~September 30, 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~~into the ~~six month anniversary and prior to the third anniversary~~number of shares of Common Stock determined as of the ~~issue~~ date ~~initially~~of conversion using a certain conversion formula that takes into ~~1.2226 shares~~account the amount of ~~Exela common stock (assuming a conversion price of $8.80~~Liquidation Preference 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 adjusted for accrued but unpaid dividends, as described ~~in the beneficial conversion feature section~~below. As 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 ofSeptember 30, 2020, each outstanding Series A Preferred Stock ~~at the six month anniversary of the issue date. As 3,000,000~~was convertible into 1.2492 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 uponExela Common Stocks using this conversion ~~of the remaining 6,194,233 shares of Series A Preferred Stock.~~

~~Exela Technologies, Inc. and Subsidiaries~~formula.

~~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 entitled to receive cumulative dividends at a rate per annum of 10% of the ~~Liquidation Preference~~dollar amount of per share liquidation preference (plus accumulated but unpaid dividends, 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,~~through September 30, 2020 the amount of all accrued but unpaid dividends on the Series A Preferred Stock ~~will be~~have been added to the Liquidation Preference. The Company shall accrue each dividend payable on the Series A Preferred Stock by adding the amount of all accrued but unpaid dividends on the dividend payment date to the Liquidation Preference, except to the extent the Company elects to make all or any portion of such payment in cash on or prior to the applicable dividend payment date, in which case, the amount of the accrued but unpaid dividends that is added to the Liquidation Preference ~~without any action~~shall be reduced on a dollar-for-dollar basis by the ~~Company’s Board~~amount of ~~Directors.~~any such cash payment. 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 of such shares. The dividend accumulation for the three months ended September 30, 2020 was $1.0 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 first quarter of 2020, accumulated dividend of $2.3 million was reversed, resulting in a net dividend accumulation of $0.4 million for the nine months ended September 30, 2020. The dividend accumulation for the three and nine months ended September 30, 2019 was $0.9 million and $2.7 million, respectively. As of September 30, 2020, the total accumulated but unpaid dividends on the Series A Preferred Stock since inception on July 12, 2017 is $9.8 million. The per share average of cumulative preferred dividends for the three and nine months ended September 30, 2020 is $0.3 and $0.1, respectively. The per share average of cumulative preferred dividends for the three and nine months ended September 30, 2019 is $0.2.

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

Treasury Stock

~~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 September 30, 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,~~2020, there were a total of ~~35,000,000~~34,986,302 warrants outstanding. As part of its IPO, Quinpario had issued 35,000,000 units including ~~one~~1 share of Common Stock and 1 warrant of which 34,986,302 have been separated from the original unit and 13,698 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.~~

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 and $0.3 million for the three months ended September 30, 2020 and 2019, respectively and $0.1 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 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 10 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

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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 $0.5 million and less than $0.2 million for the three months ended September 30, 2020 and 2019, respectively. The Company incurred fees relating to these agreements of $1.4 million and $0.3 million for the nine months ended September 30, 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~~$0.1 million for ~~both~~each of the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, and ~~$0.5~~$0.2 million and $0.3 million for ~~both~~ the nine months ended September 30, 2020 and 2019, respectively. In addition, HOV Services, Ltd. provides the Company data capture and technology services. The expense recognized for these services was approximately $0.3 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively and $1.0 million and $1.1 million for the nine months ended September 30, 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 recorded related party expenses of less than $0.1 million for the three months ended September 30, 2019, and $0.2 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively, for reimbursable legal expenses of Ex-Sigma 2. The Company recorded related party expenses of $1.7 million for the nine months ended September 30, 2019 related to the Company’s obligation to reimburse Ex-Sigma 2 for premium payments on the Margin Loan. The Company recorded related party expenses of $2.1 million for the nine months ended September 30, 2019 for reimbursable expenses related to secondary offerings of shares by Ex-Sigma 2, the proceeds of which were used to repay the Margin Loan. “Margin Loan” means the additional PIPE financing in the form of a $55.8 million loan obtained by Ex-Sigma 2 as borrower (and secured by shares of the Company held by Ex-Sigma 2) that was used by Ex-Sigma 2 to purchase additional common and preferred shares from the Company to help meet the minimum cash requirements needed to close the Novitex Business Combination.

Separately, the Company determined it was obligated to reimburse premium payments of $6.9 million made by Ex-Sigma 2 on the Margin Loan under the terms of the Consent, Waiver and Amendment. Pursuant to a written settlement agreement entered into in June 2020, Ex-Sigma, SourceHOV and the Company agreed that the $5.6 million of payments made during the fourth quarter of 2019 would be accepted to fully discharge the Company’s obligation to reimburse Ex-Sigma 2 for the $6.9 million of premium payments. The Company recorded the difference of $1.3 million between the obligation amount and the settlement amount as an increase to additional paid in capital in the condensed consolidated statements of stockholders’ deficit during the nine months ended September 30, 2020.

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~~2020 and ~~2016,~~2019, respectively, and ~~$6.0~~$0.1 million ~~and $4.5 million~~ for each of the nine months ended September 30, ~~2017~~2020 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. The Company excluded disclosure of transactions related to Apollo after March 31, 2020 as the related party relationship with Apollo ceased during the first quarter of 2020.

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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 $0.1 million and $0.4 million under this agreement for the three months and nine months ended September 30, 2019, respectively, in its consolidated statements of operations. The Company recognized revenue of less than $0.1 million for the nine months ended September 30, 2020.

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 $1.1 million and $3.3 million for the three months and nine months ended September 30, 2019, respectively, in its consolidated statements of operations. The Company recognized revenue of $0.9 million for the nine months ended September 30, 2020.

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 and $0.9 million for the three months and nine months ended September 30, 2019, from ADT LLC under this master services agreement in its consolidated statements of operations. The Company recognized revenue of $0.3 million for the nine months ended September 30, 2020.

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 $1.4 million and $4.0 million for the three months and nine months ended September 30, 2019, respectively, and cost of revenue of $0.1 million for the nine months ended September 30, 2019 from Diamond Resorts Centralized Services Company under this master services agreement. The Company recognized revenue of $0.9 million and cost of revenue of less than $0.1 million for the nine months ended September 30, 2020.

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 the three months and nine months ended September 30, 2019 there were related party expenses of $0.4 million and $0.7 million for this service. For the nine months ended September 30, 2020 there were related party expenses of $0.2 million.

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 with Apollo. Pursuant to the 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 and $0.2 million under these agreements for the three months and nine months ended September 30, 2019, respectively, in its consolidated statements of operations. The Company recognized revenue of less than $0.1 million for ~~services received from an Apollo affiliated company with a common Apollo designated director.~~the nine months ended September 30, 2020.

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~~Exela Technologies, Inc.~~Payable and ~~Subsidiaries~~

~~Notes to the Condensed Consolidated Financial Statements~~

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

~~(Unaudited)~~

Receivable ~~and Payable~~ Balances with Affiliates

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

	September 30, 2017		December 31, 2016
	Payables		Payables

					September 30,				December 31,
					2020				2019
					Receivable		Payable		Receivable		Payable
HOV Services, Ltd	$	463	$	352	$	729	$	—	$	601	$	—
Rule 14	44		134			—		162		—		250
HGM	13,516		8,858			57		—		115		—
Presidio	451		—
	$	14,474	$	9,344
Apollo affiliated company						—		—		—		202
Oakana						—		—		—		1
Ex-Sigma 2						—		—		—		1,287
					$	786	$	162	$	716	$	1,740

~~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~~3 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.

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 September 30, 2020
	ITPS		HS		LLPS		Total
Revenue	$	234,365	$	54,209	$	16,706	$	305,280
Cost of revenue (exclusive of depreciation and amortization)		183,671		39,444		11,107		234,222
Segment profit		50,694		14,765		5,599		71,058
Selling, general and administrative expenses (exclusive of depreciation and amortization)								42,837
Depreciation and amortization								22,095
Related party expense								1,360
Interest expense, net								43,612
Sundry income, net								(434)
Other income, net								(10,414)
Net loss before income taxes							$	(27,998)

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	Three months ended September 30, 2019 (Restated)
	ITPS		HS		LLPS		Total
Revenue	$	292,607	$	62,132	$	18,806	$	373,545
Cost of revenue (exclusive of depreciation and amortization)		241,867		42,717		10,861		295,445
Segment profit		50,740		19,415		7,945		78,100
Selling, general and administrative expenses (exclusive of depreciation and amortization)								48,347
Depreciation and amortization								25,079
Impairment of goodwill and other intangible assets								97,158
Related party expense								1,430
Interest expense, net								40,573
Sundry expense, net								165
Other expense, net								406
Net loss before income taxes							$	(135,058)


		Nine months ended September 30, 2020
	ITPS		HS		LLPS		Total
Revenue	$	761,505	$	167,424	$	49,524	$	978,453
Cost of revenue (exclusive of depreciation and amortization)		614,625		120,522		33,401		768,548
Segment profit		146,880		46,902		16,123		209,905
Selling, general and administrative expenses (exclusive of depreciation and amortization)								140,224
Depreciation and amortization								68,127
Related party expense								4,058
Interest expense, net								129,639
Sundry income, net								(251)
Other income, net								(45,655)
Net loss before income taxes							$	(86,237)


		Nine months ended September 30, 2019 (Restated)
	ITPS		HS		LLPS		Total
Revenue	$	927,619	$	186,915	$	54,217	$	1,168,751
Cost of revenue (exclusive of depreciation and amortization)		750,728		126,411		32,738		909,877
Segment profit		176,891		60,504		21,479		258,874
Selling, general and administrative expenses (exclusive of depreciation and amortization)								149,186
Depreciation and amortization								76,482
Impairment of goodwill and other intangible assets								97,158
Related party expense								7,759
Interest expense, net								120,235
Debt modification and extinguishment costs								1,404
Sundry expense, net								1,569
Other expense, net								4,424
Net loss before income taxes							$	(199,343)

~~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~~has evaluated all events that occur after the balance sheet date through ~~November 9, 2017,~~ the date when these condensed consolidated financial statements were ~~made available for issuance.~~issued to determine if they must be reported. The Management of the Company determined that there were no reportable subsequent event(s) to be disclosed.

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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~~our 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 21,000 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.

HSHS:: 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~~

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,~~2020, we had approximately ~~22,100~~21,000 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~~$148.7 million and ~~$87.0~~$175.6 million for the three months ended September 30, ~~2017~~2020 and ~~2016, respectively, and $360.0~~2019, respectively. We incurred personnel costs of $478.9 million and ~~$275.0~~$534.7 million for the nine months ended September 30, ~~2017~~2020 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;

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●

EBITDA; and

●

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 September 30, 2020 compared to Three Months Ended September 30, 2019:

Three Months Ended September 30,


2019


2020

(Restated)

Change

% Change
Revenue:








ITPS

$
234,365

$
292,607

$
(58,242)

-19.90%
HS

54,209

62,132

(7,923)

-12.75%
LLPS

16,706

18,806

(2,100)

-11.17%
Total revenue

305,280

373,545

(68,265)

-18.27%
Cost of revenue (exclusive of depreciation and amortization):








ITPS

183,671

241,867

(58,196)

-24.06%
HS

39,444

42,717

(3,273)

-7.66%
LLPS

11,107

10,861

246

2.26%
Total cost of revenues

234,222

295,445

(61,223)

-20.72%
Selling, general and administrative expenses (exclusive of depreciation and amortization)

42,837

48,347

(5,510)

-11.40%
Depreciation and amortization

22,095

25,079

(2,984)

-11.90%
Impairment of goodwill and other intangible assets

—

97,158

(97,158)

100.00%
Related party expense

1,360

1,430

(70)

-4.90%
Operating income (loss)

4,766

(93,914)

98,680

-105.07%
Interest expense, net

43,612

40,573

3,039

7.49%
Sundry expense (income), net

(434)

165

(599)

-363.03%
Other expense (income), net

(10,414)

406

(10,820)

-2665.02%
Net loss before income taxes

(27,998)

(135,058)

107,060

-79.27%
Income tax benefit (expense)

(320)

3,769

(4,089)

-108.49%
Net loss

$
(28,318)

$
(131,289)

$
102,971

-78.43%

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Revenue

For the three months ended September 30, 2020, our revenue decreased by $68.3 million, or 18.3%, to $305.3 million from $373.5 million for the three months ended September 30, 2019. We experienced revenue declines on all of our segments due to lower transaction volumes as a result of COVID-19. Our ITPS, HS, and LLPS segments constituted 76.8%, 17.7%, and 5.5% of total revenue, respectively, for the three months ended September 30, 2020, compared to 78.3%, 16.7%, and 5.0%, respectively, for the three months ended September 30, 2019. The revenue changes by reporting segment were as follows:

ITPS— For the three months ended September 30, 2020, revenue attributable to our ITPS segment decreased by $58.2 million, or 19.9% 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”) in addition to lower transaction volumes as a result of COVID-19.

HS— For the three months ended September 30, 2020, revenue attributable to our HS segment decreased by $7.9 million, or 12.8% compared to the same period in the prior year primarily due to impact of COVID-19 on our healthcare customers.

LLPS— For the three months ended September 30, 2020, revenue attributable to our LLPS segment decreased by $2.1 million, or 11.2% 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 September 30, 2020, our direct costs decreased by $61.2 million, or 20.7%, compared to the three months ended September 30, 2019. On ITPS and HS segments, the decrease was primarily attributable to the corresponding decline in revenues. Costs on ITPS segment decreased by $58.2 million, or 24.1% and HS segment decreased by $3.3 million, or 7.7%. Costs on LLPS segment increased by $0.2 million, or 2.3%.

Cost of revenue for the three months ended September 30, 2020 was 76.7% compared to the 79.1% for the comparable same period in the prior year, as a percentage of revenues a decrease by 2.4%. The decrease in cost of revenues was primarily due to a decrease in employee-related costs of $32.4 million, lower travel costs of $1.6 million, lower infrastructure and maintenance costs of $5.6 million and other operating costs of $8.4mn. The lower costs were attributable to cost and capacity management as a result of COVID-19 and transition revenue impact during the three months ended September 30, 2020.

Selling, General and Administrative Expenses

SG&A expenses decreased $5.5 million, or 11.4%, to $42.8 million for the three months ended September 30, 2020, compared to $48.3 million for the three months ended September 30, 2019. The decrease was primarily attributable to lower professional and legal expenses by $2.3 million, lower travel costs of $1.5 million and lower infrastructure and maintenance costs of $1.0 million.

SG&A expenses increased as a percentage of revenues to 14.0% in 2020 as compared to 12.9% in 2019. The increase, as a percentage of revenues by 1.1%, was primarily due to the decline in revenues brought on by the COVID-19 pandemic and the transition revenue.

Depreciation & Amortization

Total depreciation and amortization expense was $22.1 million and $25.1 million for the three months ended September 30, 2020 and 2019, respectively. The decrease in total depreciation and amortization expense by $3.0mn was

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primarily due to a reduction in depreciation expense as a result of the expiration of the lives of assets acquired in prior periods and decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Related Party Expenses

Related party expense was $1.4 million for each of the three months ended September 30, 2020 and 2019.

Interest Expense

The Company pays interest on its Notes on a semi-annual basis in the first and third quarters of each year. Interest expense was $43.6 million and $40.6 million for the three months ended September 30, 2020 and 2019, respectively. The increase in interest costs was partially attributable to the interest on A/R Facility and other interest accruals that was not incurred during the corresponding period in 2019.

Sundry Expense (Income)

The decrease of $0.6 million over the prior year period was primarily attributable to foreign currency transaction gain / losses associated with exchange rate fluctuations.

Other Expense (Income)

Other expense (income), net was $(10.4) million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively. The change was primarily due to higher other (income) of $9.8 million on the sale of physical records storage and logistics business during the third quarter of 2020. 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 September 30, 2020, the fair value of the interest swap decreased $1.0 million.

Income Tax Expense (Benefit)

We had an income tax expense of $0.3 million and income tax benefit of $3.8 million for the three months ended September 30, 2020 and 2019, respectively. The change in the income tax expense was primarily attributable to our change in judgment related to the realizability of certain deferred tax assets and changes in permanent tax adjustments. The change in the effective tax rate for the three months ended September 30, 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.

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Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019:

Nine Months Ended September 30,




2019





2020

(Restated)

Change

% Change
Revenue:








ITPS

$
761,505

$
927,619

$
(166,114)

-17.91%
HS

167,424

186,915

(19,491)

-10.43%
LLPS

49,524

54,217

(4,693)

-8.66%
Total revenue

978,453

1,168,751

(190,298)

-16.28%
Cost of revenue (exclusive of depreciation and amortization:








ITPS

614,625

750,728

(136,103)

-18.13%
HS

120,522

126,411

(5,889)

-4.66%
LLPS

33,401

32,738

663

2.03%
Total cost of revenues

768,548

909,877

(141,329)

-15.53%
Selling, general and administrative expenses (exclusive of depreciation and amortization)

140,224

149,186

(8,962)

-6.01%
Depreciation and amortization

68,127

76,482

(8,355)

-10.92%
Impairment of goodwill and other intangible assets

—

97,158

(97,158)

100.00%
Related party expense

4,058

7,759

(3,701)

-47.70%
Operating income (loss)

(2,504)

(71,711)

69,207

-96.51%
Interest expense, net

129,639

120,235

9,404

7.82%
Debt modification and extinguishment costs

—

1,404

(1,404)

-100.00%
Sundry expense (income), net

(251)

1,569

(1,820)

-116.00%
Other expense (income), net

(45,655)

4,424

(50,079)

-1131.98%
Net loss before income taxes

(86,237)

(199,343)

113,106

-56.74%
Income tax expense

(3,440)

(5,689)

2,249

-39.53%
Net loss

$
(89,677)

$
(205,032)

$
115,355

-56.26%

Revenue
For the nine months ended September 30, 2020, our revenue decreased by $190.3 million, or 16.3%, to $978.5 million from $1,168.8 million for the nine months ended September 30, 2019. We experienced revenue declines on all of our segments due to lower transaction volumes since mid-March as a result of COVID-19. Our ITPS, HS, and LLPS segments constituted 77.8%, 17.1%, and 5.1% of total revenue, respectively, for the nine months ended September 30, 2020, compared to 79.3%, 16.0%, and 4.7%, respectively, for the nine months ended September 30, 2019. The revenue changes by reporting segment were as follows:
ITPS— For the nine months ended September 30, 2020, revenue attributable to our ITPS segment decreased by $166.1 million, or 17.9% 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”) in addition to lower transaction volumes since mid-March as a result of COVID-19.
HS— For the nine months ended September 30, 2020, revenue attributable to our HS segment decreased by $19.5 million, or 10.4% compared to the same period in the prior year primarily due to impact of COVID-19 on our healthcare customers.
LLPS— For the nine months ended September 30, 2020, revenue attributable to our LLPS segment decreased by $4.7 million, or 8.7% compared to the same period in the prior year primarily due to a decline in legal claims administration services.

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Cost of Revenue

For the nine months ended September 30, 2020, our direct costs decreased by $141.3 million, or 15.5%, compared to the nine months ended September 30, 2019. On our ITPS and HS segments, the decrease was primarily attributable to the corresponding decline in revenues. Costs on ITPS segment decreased by $136.1 million, or 18.1%, and HS segment decreased by $5.9 million, or 4.7%. Costs on LLPS segment increased by $0.7 million, or 2.0%.

The decrease in cost of revenues was primarily due to a decrease in employee-related costs of $71.6 million, lower travel costs of $3.2 million, lower infrastructure and maintenance costs of $13.2 million and other operating costs of $23.4mn. The lower costs were attributable to cost and capacity management as a result of COVID-19 and transition revenue impact during the nine months ended September 30, 2020.

Cost of revenue for the nine months ended September 30, 2020 was 78.5% compared to the 77.9% for the comparable same period in the prior year. The increase in cost of revenues, as a percentage of revenues by 0.7% was primarily due to the impact of 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.

Selling, General and Administrative Expenses

SG&A expenses decreased $9.0 million, or 6.0%, to $140.2 million for the nine months ended September 30, 2020, compared to $149.1 million for the nine months ended September 30, 2019. The decrease was primarily attributable to lower employee related costs by $5.1 million, lower travel costs of $3.1 million, lower infrastructure and maintenance costs of $1.3 million and lower other costs of $5.4mn offset by higher professional fees of $6.0 million.

SG&A expenses increased as a percentage of revenues to 14.3% in 2020 as compared to 12.7% in 2019. The increase, as a percentage of revenues by 1.6%, was primarily due to the decline in revenues brought on by the COVID-19 pandemic and the transition revenue.

Depreciation & Amortization

Total depreciation and amortization expense was $68.1 million and $76.5 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease in total depreciation and amortization expense by $8.4million was primarily due to a reduction in depreciation expense as a result of the expiration of the lives of assets acquired in prior periods and decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Related Party Expenses

Related party expense was $4.1 million and $7.8 million for the nine months ended September 30, 2020 and 2019, respectively. The lower related party expense in 2020 is attributable to the curtailment in reimbursements made to Ex-Sigma and Ex-Sigma 2. In 2019 the Company paid approximately $4.3 million in respect of legal expenses, premium payments on the Margin Loan and other expenses related to secondary offerings that did not recur in 2020.

Interest Expense

Interest expense was $129.6 million and $120.2 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in interest costs was partially attributable to the interest on A/R Facility and other interest accruals that was not incurred during the corresponding period in 2019.

Sundry Expense (Income)

The decrease of $1.8 million over the prior year period was primarily attributable to foreign currency transaction gain / losses associated with exchange rate fluctuations.

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Other Expense (Income)

Other expense (income), net was $(45.7) million and $4.4 million for the nine months ended September 30, 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 and $9.8 million on the sale of physical records storage and logistics business. 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 nine months ended September 30, 2020, the fair value of the interest swap decreased $4.9 million.

Income Tax Expense

We had an income tax expense of $3.4 million and $5.7 million for the nine months ended September 30, 2020 and 2019, respectively. 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 nine months ended September 30, 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 ‘‘—Liquidity and Capital Resources—Credit Facility.’’~~
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations as our board of directors and management use EBITDA and Adjusted EBITDA to assess our financial performance, because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. Net loss is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP financial measures has important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. ~~You~~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 companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Three Months ended September 30, 2020 compared to the Three Months ended September 30, 2019
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~~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~~2019 remains unchanged.

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Three Months Ended September 30,


2019


2020

(Restated)
Net Loss

$
(28,318)

$
(131,289)
Taxes

320

(3,769)
Interest Expense

43,612

40,573
Depreciation and Amortization

22,095

25,079
EBITDA

37,709

(69,406)
Optimization and restructuring expenses (1)

11,258

16,848
Transaction and integration costs (2)

2,564

1,155
Non-cash equity compensation (3)

698

1,444
Other charges including non-cash (4)

5,729

9,193
Loss/(Gain) on sale of assets (5)

279

(22)
Loss/(Gain) on business disposals (6)

(9,280)

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

(947)

580
Contract costs (8)

684

3,594
Impairment of goodwill and other intangible assets

—

97,158
Adjusted EBITDA

$
48,694

$
60,544

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 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, 2016. Adjusted EBITDA was $53.1 million for the three months ended September 30, 2017 compared to $39.8 million for the three months ended September 30, 2016. The decrease in EBITDA was primarily due to a higher net loss amount for the three months ended September 30, 2017 resulting from increase in SG&A and related party expense, and loss on extinguishment of debt compared to the three months ended September 30, 2016. The increase in Adjusted EBITDA was primarily due higher overall gross profit for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, along with lower recurring expenses as part of on-going operations.
~~Nine months ended September 30, 2017~~2020 compared to the Nine Months ended September 30, ~~2016~~2019

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~~The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net ~~salary and benefits associated with positions that were terminated, including severance, retention bonuses, and related fees and expenses. Additionally,~~loss, 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~~most directly comparable GAAP measure, for ~~completed or contemplated transactions during the period. For~~ the nine months 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~~2020 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 ($16.0) million~~and Adjusted EBITDA 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 extinguishment2019 remains unchanged.

Table 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.Contents

Nine Months Ended September 30,




2019


2020

(Restated)
Net Loss

$
(89,677)

$
(205,032)
Taxes

3,440

5,689
Interest expense

129,639

120,235
Depreciation and amortization

68,127

76,482
EBITDA

111,529

(2,626)
Optimization and restructuring expenses (1)

36,119

59,217
Transaction and integration costs (2)

11,737

4,193
Non-cash equity compensation (3)

2,480

6,903
Other charges including non-cash (4)

15,464

16,975
Loss/(Gain) on sale of assets (5)

690

404
Loss/(Gain) on business disposals (6)

(44,595)

—
Debt modification and extinguishment costs

—

1,404
Loss/(Gain) on derivative instruments (7)

(507)

4,965
Contract costs (8)

3,295

13,186
Impairment of goodwill and other intangible assets

—

97,158
Adjusted EBITDA

$
136,212

$
201,779

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 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.

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 and accounts receivable securitization 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. 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. The following conditions raised substantial doubt about our ability to continue as a going concern: history of net losses, net operating cash outflows, working capital deficits, Appraisal Action liability, and the accumulated deficit. As previously reported, the Company has undertaken plans to improve our available cash balances, liquidity and cash generated from operations, as further outlined below, and the Company believes these plans alleviate the substantial doubt about the entity’s ability to continue as a going concern for at least twelve months from the date hereof.

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At September 30, 2020, cash and cash equivalents totaled $43.2 million and we had availability of less than $0.1 million under our senior secured revolving credit facility.

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 will continue to evaluate additional capex needs that may arise due to changes in the business model due to COVID-19 and remote working. We believe that our operating cash flow and available borrowings under our credit facility will be sufficient to fund our operations for at least the next twelve months.

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

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.

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.~~facility and to provide additional liquidity and funding for the ongoing business needs of the Company and its subsidiaries.

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 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 (pursuant to which former stockholders of SourceHOV sought, among other things, a determination of the fair value of their 10,304 SourceHOV shares at the time of the Novitex Business Combination) (the “Appraisal Action”), which judgment will continue to accrue interest, until paid, at the legal rate, compounded quarterly. 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 appealed the judgment to the Supreme Court of the State of Delaware

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on June 30, 2020. The appeal is pending and at this time, we cannot determine whether the appeal will be successful. At present SourceHOV has not posted a bond to stay the judgment in the Appraisal Action, and to date, the petitioners have not been successful in their attempts to collect on the judgment against SourceHOV. The petitioners have filed additional actions seeking to enforce their award against SourceHOV, including an action alleging unjust enrichment and seeking restitution and to pierce the corporate veil and seek alter ego liability against Exela Technologies, Inc. and over 50 alleged subsidiaries and/or affiliates. If we are forced to pay the judgment, 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 continues to evaluate 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 to materially benefit 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 Prior 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 Prior 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 Credit Agreement) 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 delivery of such financial statements, the Company became 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.

Cash Flows

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

Nine Months Ended September 30,




2019



2020

(Restated)

Change
Cash flows used in operating activities

$
(66,160)

$
(47,357)

$
(18,803)
Cash flows (used in) provided by investing activities

27,745

(20,511)

48,256
Cash flows provided by financing activities

66,905

39,267

27,638
Subtotal

28,490

(28,601)

57,091
Effect of exchange rates on cash

619

(29)

648
Net increase/(decrease) in cash

29,109

(28,630)

57,739

Analysis of Cash Flow Changes between the Nine Months Ended September 30, 2020 and September 30, 2019
Operating Activities—The decrease of $18.8 million in cash flows from operating activities for the nine months ended September 30, 2020 was primarily due to lower Gross profits in the corresponding period. “Gross profit” is defined as revenue less cost of revenue (exclusive of depreciation and amortization). This decrease in cash flow was significantly offset by higher cash flows from accounts receivables.

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Investing Activities—The increase of $48.3 million in cash used in investing activities for the nine months ended September 30, 2020 was primarily due to $50.1 million total cash proceeds received from asset sales, 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 $27.6 million in cash provided by financing activities for the nine months ended September 30, 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 ~~each rate. Interest~~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 ~~8.8% and 8.3%~~incurred on July 12, 2017 pursuant to the Credit Agreement. The Repricing Term Loans will mature on July 12, 2023, the same maturity date as the existing senior secured term loans. As of September 30, 2020, the interest rate applicable for the first lien senior secured term loan was 8.4%.

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.

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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 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, 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.

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 agreed to amend 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. In addition, pursuant to the amendment, the borrower under the Credit Agreement is required to maintain minimum Liquidity (as defined in the amendment) of $35.0 million.

Letters of Credit

As of September 30, ~~2017.~~

2020 and December 31, 2019, we had outstanding irrevocable letters of credit totaling approximately $19.4 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.

The Notes will mature on July 15, 2023.

~~Letters~~Accounts Receivables Securitization Facility

On January 10, 2020, certain subsidiaries of ~~Credit~~the Company entered into a $160.0 million 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 consideration for a combination of 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.

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Each loan under the A/R Facility originally bore 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 annum and (2) if a LIBOR Rate Loan, 4.75% plus a floating LIBOR Rate with a 1.00% LIBOR floor. In connection with the above described amendments to the A/R Facility, the applicable margin of the Base Rate Loans was increased to 5.75% and the LIBOR Rate Loans was increased to 6.75%. As of September 30, ~~2017 and December 31, 2016, we had outstanding irrevocable letters of credit totaling approximately $22.8~~2020, there were $83.0 million ~~and $9.3 million, respectively,~~borrowings under the ~~revolving credit facility.~~

A/R Facility.

~~Contractual Obligations~~

~~The table below provides estimates of the timing of future payments that we are obligated 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

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,~~Off Balance Sheet Arrangements
At September 30, 2020, we had no material off balance sheet arrangements, except 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.

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The HGM Group and other former SourceHOV equity holders formed Ex-Sigma and its wholly-owned subsidiary, Ex-Sigma 2, to hold the ~~Company’s Board~~Exela shares to be issued to SourceHOV as merger consideration upon the closing of ~~Directors authorized~~the Novitex Business Combination and to invest in Exela immediately prior to the closing. Ex-Sigma 2 secured additional PIPE financing in the form of a ~~share buyback program~~$55.8 million loan (the ~~“Share Buyback Program”~~“Margin Loan”)~~, pursuant~~ that was used to ~~which~~purchase additional common and preferred shares from the Company ~~may, from time~~ to ~~time, purchase up~~help meet the minimum cash requirements needed to ~~5,000,000~~close the Novitex Business Combination. As a result of these transactions, the Company issued 84,912,500 shares of ~~its common stock. Share repurchases may be executed~~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 ~~various means, including, without limitation, open market transactions, privately negotiated transactions~~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 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 ~~otherwise. The decision as~~liabilities related to ~~whether to purchase any shares~~Ex-Sigma and the ~~timing~~Company did not have an investment in Ex-Sigma. The Company reaffirmed its assessment as of ~~purchases, if any, will be based on~~September 30, 2020.

Ex-Sigma 2 paid off the ~~price~~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 ~~common stock, general business~~involvement with Ex-Sigma is $0. Ex-Sigma 2 distributed the shares held by it during the first quarter of 2020 and ~~market conditions~~is no longer a shareholder of Exela. Ex-Sigma and ~~other investment considerations and factors. The Share Buyback Program does not obligate~~Ex-Sigma 2 ceased to be variable interest entities upon 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.~~distribution that occurred on February 21, 2020.

Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
At September 30, ~~2017,~~2020, we had ~~$1,350.0~~$1,530.0 million of debt outstanding, with a weighted average interest rate of ~~9.7%~~9.6%. Interest is calculated under the terms of our credit agreement based on the greatest of certain specified base rates plus an applicable margin that varies based on certain factors. Assuming no change in the amount outstanding, the impact on interest expense of a 1% increase or decrease in the assumed weighted average interest rate would be approximately ~~$13.5~~$15.3 million per year. In order to ~~hedge against~~mitigate 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~~swap contract with a notional amount of $347.8 million, which isat the time was the remaining principal balance of the term loan. The ~~hedge~~swap contract ~~will swap~~swaps out the floating rate interest risk related to the LIBOR with a fixed interest rate of 1.9275% ~~and will go into effect starting~~effective January 12, 2018.
The interest rate swap, which is used to manage our exposure to interest rate movements and other identified risks, was not designated as a hedge. As such, changes in the fair value of the derivative are recorded directly to other expense (income), net. Other expense (income), net includes a loss of $0.2 million and $5.0 million related to changes in the fair value of the interest rate swap for the nine months ended September 30, 2020 and 2019, respectively.
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.

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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.

Item 4. Internal Controls and Procedures
~~Critical Accounting Policies~~Disclosure Controls and ~~Estimates~~Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required to 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 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 control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
~~The preparation~~As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial ~~statements requires the use of judgments and estimates. Our critical accounting policies~~reporting that are described ~~below to provide a better understanding of how we develop~~in our ~~assumptions~~Annual Report.
Notwithstanding such material weaknesses in internal control over financial reporting, our management, including our CEO and ~~judgments about future events and related estimations and how they can impact our financial statements. A critical accounting estimate is one~~CFO, has concluded 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~~present fairly, 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 aall 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 onrespects, our financial position, results of our operations and our cash ~~flows.~~flows for the periods presented in this Quarterly Report, in conformity with U.S. generally accepted accounting principles.

~~Off Balance Sheet Arrangements~~Remediation

~~At September 30, 2017, we had no material off balance sheet arrangements, except for operating leases.~~ As ~~such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged~~previously described in such financing arrangements. Our operating leases are composed of various office and industrial buildings, machinery, equipment, and vehicles. As of September 30, 2017, our total future minimum leases payments under non-cancelable operating leases were $121.2 million.
Part II—Item ~~3. Quantitative and Qualitative Disclosures about Market Risk.~~
Information related to quantitative and qualitative disclosures regarding market risk is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 2 above. Such information is incorporated by reference herein.
~~Item 4.~~9A – Controls and ~~Procedures.~~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.

We are not currently required to comply with the SEC’s rules implementing Section 404(b) of the Sarbanes Oxley Act of 2002, and we are therefore not required to make a formal assessment of the effectiveness ofChanges in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting ~~for~~during the quarter-ended September 30, 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
~~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 a preliminary transaction in connection with 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

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of their shares at the time of the Novitex Business Combination; an order that SourceHOV pay that value to the petitioners, together with interest at the statutory rate; and an award of costs, attorneys’ fees, and other expenses.

~~On October 12, 2017, SourceHOV filed its answer to~~ During the ~~petition~~trial the parties and ~~a verified list pursuant to 8 Del. C. § 262(f). At this early stage~~their experts offered competing valuations of the ~~litigation,~~SourceHOV shares as of the ~~Company is unable to predict~~date of the ~~outcome of~~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, ~~or estimate any loss or range~~in which it found that the fair value of ~~loss that may arise~~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 awarding the petitioners $57,698,426 inclusive of costs and interest. Per the Court’s opinion, the legal rate of interest, compounded quarterly, accrues on the per share value from the ~~Appraisal Action. Pursuant to the terms~~July 2017 closing date of the Novitex Business Combination ~~Agreement, if such appraisal rights are perfected,~~until the date of payment to petitioners.

On May 7, 2020, SourceHOV filed a ~~corresponding portion of shares of our common stock issued~~motion for new trial in relation to ~~Ex-Sigma, LLC, our principal shareholder,~~share count. On June 11, 2020 the Court denied SourceHOV’s motion for new trial. SourceHOV appealed the judgment in the Appraisal Action on June 30, 2020. The appeal is pending and at this time, we cannot determine whether the appeal will be ~~forfeited at such time as~~successful. The Company is not required to make a payment towards settlement or post a letter of credit to secure the ~~PIPE Financing (as defined~~judgment while the Appraisal Action is under appeal. At present, SourceHOV has not posted a bond to stay the judgment in the ~~Consent, Waiver~~Appraisal Action, and ~~Amendment dated June 15, 2017) is repaid.~~ to date, the petitioners have not been successful in their attempts to collect on the judgment against SourceHOV.

The ~~Company intends~~petitioners have filed additional actions to ~~vigorously defend~~recognize the judgment against SourceHOV, an action alleging unjust enrichment and seeking restitution and to pierce the corporate veil and seek alter ego liability against Exela Technologies, Inc. and over 50 alleged subsidiaries and/or affiliates in an attempt to collect the award in the Appraisal ~~Action.~~

~~Other~~

WeAction from entities other than SourceHOV, and an action against SourceHOV and certain of its directors and officers alleging creditor derivative claims. Although the Company believes that it has valid defenses to these ancillary proceedings, the ancillary proceedings are ~~involved in various other legal proceedings that have arisen~~ in the ~~normal course of business. While~~preliminary stages and there can be no assurance that the ~~ultimate results of these matters cannot~~Company will be ~~predicted with certainty, we do not expect them to have a material adverse effect on our Consolidated Financial Statements.~~

~~Item 1A. Risk Factors.~~

successful.

As a result of the ~~closing~~Appraisal Action, 4,570,734 shares of our Common Stock issued to Ex-Sigma 2 were returned to the Company during the first quarter of 2020. As of September 30, 2020, the Company accrued a liability of $59.6 million for the Appraisal Action based on management’s best estimate of SourceHOV’s total payment obligation including accrued interest as of such date assuming the appeal is not successful. As a result of the ~~Business Combination on July 12, 2017 all~~appeal of the ~~risk factors previously disclosed~~Appraisal Action and the status of the ancillary proceedings, the Company believes that this matter may not be fully resolved through the courts within the next four fiscal quarters.

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 ~~Part I, Item 1A~~filing of ~~our Annual Report~~its annual report on Form 10-K for the fiscal year ended December 31, ~~2016 no longer apply.~~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 in 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 has moved to dismiss the case and believes it has meritorious defenses and will vigorously assert them.

Derivative Action

On July 8, 2020 Plaintiff, Gregory McKenny filed a shareholder derivative action asserting the following claims against current and former directors and officers of Exela: (1) Violations of Section 14(a) of the Exchange Act; (2) Violations of Section 10(b) and Rule 10b-5 of the Exchange Act; (3) Violations of Section 20(a) of the Exchange Act; (4) breach of fiduciary duty; (5) unjust enrichment; and (6) waste of corporate assets. The claims stem from

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substantially the same factual allegations set forth in the Shen securities class action lawsuit, described above. At this time, 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 believes it has meritorious defenses and will vigorously assert them.

Other

We are, from time to time, involved in other legal proceedings, inquiries, claims and disputes, which arise in the ordinary course of business. Although our management cannot predict the outcomes of these matters, our management believes these actions will not have a material, adverse effect on our 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 ~~relating to~~described in Part I, “Item 1A. Risk Factors” in our Annual Report and as supplemented in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, which could materially affect our business, ~~following~~financial condition and/or operating results. The risks described in these Risk Factors are not the ~~Business Combination~~only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may ~~be found in~~materially and adversely affect our ~~definitive proxy statement, as filed with the Securities and Exchange Commission on June 26, 2017.~~business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.

(~~a) Sales of Unregistered Securities~~
~~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.

Item 4. Mine Safety Disclosures.
Not applicable.

Item 5. Other Information.
None.

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~~Item 6. Exhibits.~~
Item 6.Exhibits.

Exhibit
~~Number~~ No.

Description
~~3.1 (1)~~

~~Restated Certificate of Incorporation, dated July 12, 2017~~
~~3.2 (1)~~31.1

~~Amended and Restated Bylaws, dated July 12, 2017~~
31.1*
Certification of the Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of ~~2002.~~2002
31.2*31.2

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

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

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

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH*101.SCH

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

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

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

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

Inline XBRL Taxonomy Extension Presentation Linkbase ~~Document~~
104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
~~(1) Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed July 18, 2017.~~

* Filed herewith
** Furnished herewith

~~SIGNATURES~~53

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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~~9^th day of November, ~~2017.~~

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)

58

												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 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

	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

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

	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

Item 6.Exhibits. Exhibit ~~Number~~ No.		Description
~~3.1 (1)~~		~~Restated Certificate of Incorporation, dated July 12, 2017~~
~~3.2 (1)~~31.1		~~Amended and Restated Bylaws, dated July 12, 2017~~
31.1*		Certification of the Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of ~~2002.~~2002
31.2*31.2		Certification of the Principal Financial and Accounting Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of ~~2002.~~2002
32.1*32.1		Certification of the Principal Executive Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of ~~2002.~~2002
32.2**32.2		Certification of the Principal Financial and Accounting Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of ~~2002.~~2002
101.INS*101.INS		Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH*101.SCH		Inline XBRL Taxonomy Extension Schema ~~Document~~
101.CAL*101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document~~
101.DEF*101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase ~~Document~~
101.LAB*101.LAB		Inline XBRL Taxonomy Extension ~~Labels~~Label Linkbase ~~Document~~
101.PRE*101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase ~~Document~~
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)