UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020March 31, 2021
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-36788
EXELA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 47-1347291 |
(State of or other Jurisdiction | (I.R.S. Employer |
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2701 E. Grauwyler Rd. | 75061 |
(Address of Principal Executive | (Zip Code) |
Registrant's Telephone Number, Including Area Code: (844) 935-2832
Securities Registered Pursuant to Section 12(b) of the Act:
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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: (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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ | Accelerated Filer |
Non-Accelerated Filer | Smaller Reporting Company ☒ |
| Emerging Growth 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 7, 2020May 5, 2021 the registrant had 147,511,43059,192,012 shares of Common Stock outstanding.
Exela Technologies, Inc.
Form 10-Q
For the quarterly period ended June 30, 2020March 31, 2021
TABLE OF CONTENTS
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PART I—FINANCIAL INFORMATION | |
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Item 1. Financial Statements | |
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Condensed Consolidated Financial Statements | |
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Condensed Consolidated Balance Sheets as of | 1 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of June 30, 2020March 31, 2021 and December 31, 20192020
(in thousands of United States dollars except share and per share amounts)
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| | June 30, | | December 31, | | | March 31, | | December 31, | | ||||
| | 2020 | | 2019 | | | 2021 |
| 2020 | | ||||
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| (Unaudited) |
| (Audited) | |
| (Unaudited) |
| (Audited) | | ||||
Assets |
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Current assets |
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Cash and cash equivalents | | $ | 86,470 | | $ | 6,198 | | | $ | 22,055 | | $ | 68,221 | |
Restricted cash | |
| 5,457 | |
| 7,901 | | |
| 1,683 | |
| 2,088 | |
Accounts receivable, net of allowance for doubtful accounts of $5,362 and $4,975, respectively | | | 219,433 | | | 261,400 | | |||||||
Related party receivables | | | 906 | | | 716 | | |||||||
Accounts receivable, net of allowance for doubtful accounts of $5,634 and $5,647, respectively | | | 216,077 | | | 206,868 | | |||||||
Related party receivables and prepaid expenses | | | 702 | | | 711 | | |||||||
Inventories, net | | | 17,268 | | | 19,047 | | | | 14,845 | | | 14,314 | |
Prepaid expenses and other current assets | | | 33,695 | | | 23,663 | | | | 33,429 | | | 31,091 | |
Total current assets | |
| 363,229 | |
| 318,925 | | |
| 288,791 | |
| 323,293 | |
Property, plant and equipment, net of accumulated depreciation of $187,260 and $176,995, respectively | | | 100,878 | | | 113,637 | | |||||||
Property, plant and equipment, net of accumulated depreciation of $192,177 and $193,760, respectively | | | 81,862 | | | 87,851 | | |||||||
Operating lease right-of-use assets, net | | | 90,067 | | | 93,627 | | | | 66,743 | | | 68,861 | |
Goodwill | | | 359,009 | | | 359,771 | | | | 359,309 | | | 359,781 | |
Intangible assets, net | | | 317,630 | | | 342,443 | | | | 280,891 | | | 292,664 | |
Deferred income tax assets | | | 11,769 | | | 12,032 | | | | 6,370 | | | 6,606 | |
Other noncurrent assets | |
| 25,961 | |
| 17,889 | | |
| 20,756 | |
| 18,723 | |
Total assets | | $ | 1,268,543 | | $ | 1,258,324 | | | $ | 1,104,722 | | $ | 1,157,779 | |
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Liabilities and Stockholders' Equity (Deficit) | |
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Liabilities | |
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Current liabilities | | | | | | | | | | | | | | |
Accounts payables | | $ | 67,385 | | $ | 86,167 | | |||||||
Accounts payable | | $ | 73,666 | | $ | 76,027 | | |||||||
Related party payables | | | 2 | | | 1,740 | | | | 124 | | | 97 | |
Income tax payable | | | 2,333 | | | 352 | | | | 1,531 | | | 2,466 | |
Accrued liabilities | | | 116,376 | | | 121,553 | | | | 122,080 | | | 126,399 | |
Accrued compensation and benefits | | | 52,636 | | | 48,574 | | | | 62,392 | | | 63,467 | |
Accrued interest | | | 48,127 | | | 48,769 | | | | 24,059 | | | 48,769 | |
Customer deposits | | | 27,301 | | | 27,765 | | | | 17,648 | | | 21,277 | |
Deferred revenue | | | 19,179 | | | 16,282 | | | | 21,182 | | | 16,377 | |
Obligation for claim payment | | | 34,801 | | | 39,156 | | | | 28,222 | | | 29,328 | |
Current portion of finance lease liabilities | | | 12,831 | | | 13,788 | | | | 11,143 | | | 12,231 | |
Current portion of operating lease liabilities | | | 24,271 | | | 25,345 | | | | 17,852 | | | 18,349 | |
Current portion of long-term debts | |
| 36,101 | |
| 36,490 | | |
| 39,713 | |
| 39,952 | |
Total current liabilities | |
| 441,343 | |
| 465,981 | | |
| 419,612 | |
| 454,739 | |
Long-term debt, net of current maturities | | | 1,493,775 | | | 1,398,385 | | | | 1,499,031 | | | 1,498,004 | |
Finance lease liabilities, net of current portion | | | 14,437 | | | 20,272 | | | | 11,401 | | | 13,287 | |
Pension liabilities | | | 23,881 | | | 25,681 | | |||||||
Pension liabilities, net | | | 35,335 | | | 35,515 | | |||||||
Deferred income tax liabilities | | | 7,685 | | | 7,996 | | | | 9,154 | | | 9,569 | |
Long-term income tax liabilities | | | 2,808 | | | 2,806 | | | | 2,260 | | | 2,759 | |
Operating lease liabilities, net of current portion | | | 71,661 | | | 73,282 | | | | 54,929 | | | 56,814 | |
Other long-term liabilities | | | 12,807 | | | 6,962 | | | | 13,336 | | | 13,624 | |
Total liabilities | | | 2,068,397 | | | 2,001,365 | | | | 2,045,058 | | | 2,084,311 | |
Commitments and Contingencies (Note 8) | |
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Stockholders' equity (deficit) | |
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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 June 30, 2020 and 153,638,836 shares issued and 150,851,689 shares outstanding at December 31, 2019 | |
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| 15 | | |||||||
Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized; 3,290,050 shares issued and outstanding at June 30, 2020 and 4,294,233 shares issued and outstanding at December 31, 2019 | | | 1 | | | 1 | | |||||||
Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 61,643,718 shares issued and 59,192,012 shares outstanding at March 31, 2021 and 51,693,931 shares issued and 49,242,225 shares outstanding at December 31, 2020 | |
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| 15 | | |||||||
Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized; 2,779,369 shares issued and outstanding at March 31, 2021 and 3,290,050 shares issued and outstanding at December, 2020 | | | 1 | | | 1 | | |||||||
Additional paid in capital | |
| 446,739 | |
| 445,452 | | |
| 471,804 | |
| 446,739 | |
Less: Common Stock held in treasury, at cost; 7,355,120 shares at June 30, 2020 and 2,787,147 shares at December 31, 2019 | | | (10,949) | | | (10,949) | | |||||||
Less: Common Stock held in treasury, at cost; 2,451,706 shares at March 31, 2021 and December 31, 2020 | | | (10,949) | | | (10,949) | | |||||||
Equity-based compensation | | | 51,118 | | | 49,336 | | | | 52,570 | | | 52,183 | |
Accumulated deficit | |
| (1,272,869) | |
| (1,211,508) | | |
| (1,429,238) | |
| (1,390,038) | |
Accumulated other comprehensive loss: | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | (6,387) | | | (7,329) | | | | (7,319) | | | (7,419) | |
Unrealized pension actuarial losses, net of tax | | | (7,522) | | | (8,059) | | | | (17,221) | | | (17,064) | |
Total accumulated other comprehensive loss | | | (13,909) | | | (15,388) | | | | (24,540) | | | (24,483) | |
Total stockholders’ deficit | |
| (799,854) | |
| (743,041) | | |
| (940,336) | |
| (926,532) | |
Total liabilities and stockholders’ deficit | | $ | 1,268,543 | | $ | 1,258,324 | | | $ | 1,104,722 | | $ | 1,157,779 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Threethree months ended March 31, 2021 and Six Months Ended June 30, 2020 and 2019
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
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| | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | ||||||||
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| 2019 |
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| 2019 | | Three Months Ended March 31, | ||||||||
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| 2020 |
| (Restated) |
| 2020 |
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| 2021 |
| 2020 | ||||||
Revenue | | $ | 307,722 | | $ | 390,849 | | $ | 673,173 | | $ | 795,206 | | $ | 300,056 | | $ | 365,451 |
Cost of revenue (exclusive of depreciation and amortization) | |
| 241,788 | |
| 303,831 | |
| 534,326 | |
| 614,432 | |
| 232,587 | |
| 292,539 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | | | 47,014 | | | 51,162 | | | 97,387 | | | 100,839 | | | 41,885 | | | 50,374 |
Depreciation and amortization | | | 22,847 | | | 24,779 | | | 46,032 | | | 51,403 | | | 19,599 | | | 23,185 |
Related party expense | | | 1,146 | | | 5,331 | | | 2,698 | | | 6,329 | | | 1,707 | | | 1,551 |
Operating income (loss) | | | (5,073) | | | 5,746 | | | (7,270) | | | 22,203 | ||||||
Operating profit (loss) | | | 4,278 | | | (2,198) | ||||||||||||
Other expense (income), net: | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | 44,440 | | | 39,959 | | | 86,028 | | | 79,660 | | | 43,131 | | | 41,588 |
Debt modification and extinguishment costs | | | — | | | 1,404 | | | — | | | 1,404 | ||||||
Sundry expense (income), net | | | (899) | | | (1,311) | | | 183 | | | 1,404 | ||||||
Sundry expense, net | | | 213 | | | 1,082 | ||||||||||||
Other expense (income), net | | | (584) | | | 2,527 | | | (35,241) | | | 4,020 | | | 152 | | | (34,657) |
Net loss before income taxes | | | (48,030) | | | (36,833) | | | (58,240) | | | (64,285) | | | (39,218) | | | (10,211) |
Income tax expense | | | (661) | | | (4,738) | | | (3,120) | | | (9,458) | ||||||
Income tax benefit (expense) | | | 18 | | | (2,459) | ||||||||||||
Net loss | | $ | (48,691) | | $ | (41,571) | | $ | (61,360) | | $ | (73,743) | | $ | (39,200) | | $ | (12,670) |
Cumulative dividends for Series A Preferred Stock | | | (858) | | | (914) | | | 582 | | | (1,828) | | | 896 | | | 1,440 |
Net loss attributable to common stockholders | | $ | (49,549) | | $ | (42,485) | | $ | (60,778) | | $ | (75,571) | | $ | (38,304) | | $ | (11,230) |
Loss per share: | | | | | | | | | | | | | | | | | | |
Basic and diluted | | $ | (0.34) | | $ | (0.29) | | $ | (0.41) | | $ | (0.52) | | $ | (0.76) | | $ | (0.23) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
For the Threethree months ended March 31, 2021 and Six Months Ended June 30, 2020 and 2019
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
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| | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | ||||||||
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| 2019 |
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| 2019 | | Three Months Ended March 31, | ||||||||
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| 2020 |
| (Restated) |
| 2020 |
| (Restated) |
| 2021 |
| 2020 | ||||||
Net loss | | $ | (48,691) | | $ | (41,571) | | $ | (61,360) | | $ | (73,743) | | $ | (39,200) | | $ | (12,670) |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | |
| 22 | |
| (2,288) | |
| 942 | |
| 1,104 | |
| 100 | |
| 920 |
Unrealized pension actuarial gains (losses), net of tax | |
| 33 | |
| 256 | |
| 537 | |
| 32 | |
| (157) | |
| 504 |
Total other comprehensive loss, net of tax | | $ | (48,636) | | $ | (43,603) | | $ | (59,881) | | $ | (72,607) | | $ | (39,257) | | $ | (11,246) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit
For the Threethree months ended March 31, 2021 and Six Months Ended June 30, 2020 and 2019
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | Accumulated Other | | | | | | | ||||
| | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | Currency | | Actuarial | | | | | Total | |||
| | Common Stock | | Preferred Stock | | Treasury Stock | | Additional | | Equity-Based | | Translation | | Losses, | | Accumulated | | Stockholders' | |||||||||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Paid in Capital |
| Compensation |
| Adjustment |
| net of tax |
| Deficit |
| Deficit | |||||||||
Balances at January 1, 2019, as restated | | 150,142,955 | | $ | 15 | | 4,569,233 | | $ | 1 | | 2,549,185 | | $ | (10,342) | | $ | 445,452 | | $ | 41,731 | | $ | (6,423) | | $ | (9,301) | | $ | (702,391) | | $ | (241,258) |
Net loss January 1, 2019 to March 31, 2019, as restated | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (32,172) | | | (32,172) |
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | | — | | | 2,798 | | | — | | | — | | | — | | | 2,798 |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 3,392 | | | — | | | — | | | 3,392 |
Net realized pension actuarial gains, net of tax | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (224) | | | — | | | (224) |
Balances at March 31, 2019, as restated | | 150,142,955 | | $ | 15 | | 4,569,233 | | | 1 | | 2,549,185 | | $ | (10,342) | | $ | 445,452 | | $ | 44,529 | | $ | (3,031) | | $ | (9,525) | | $ | (734,563) | | $ | (267,464) |
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) |
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| | | | | | | | | | | | | | | | | | | | | | | Accumulated Other | | | | | | | ||||
| | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Foreign | | Pension | | | | | | | ||
| | | | | | | | | | | | | | | | | | | | | | | Currency | | Actuarial | | | | | Total | |||
| | Common Stock | | Preferred Stock | | Treasury Stock | | Additional | | Equity-Based | | Translation | | Losses, | | Accumulated | | Stockholders' | |||||||||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Paid in Capital |
| Compensation |
| Adjustment |
| net of tax |
| Deficit |
| Deficit | |||||||||
Balances at January 1, 2020 | | 50,283,896 | | $ | 15 | | 4,294,233 | | $ | 1 | | 929,049 | | $ | (10,949) | | $ | 445,452 | | $ | 49,336 | | $ | (7,329) | | $ | (8,059) | | $ | (1,211,508) | | $ | (743,041) |
Net loss January 1 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 | | (1,523,578) | | | — | | — | | | — | | 1,523,578 | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Preferred shares converted to Common Stock | | 409,238 | | | — | | (1,004,183) | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Balances at March 31, 2020 | | 49,169,556 | | $ | 15 | | 3,290,050 | | $ | 1 | | 2,452,627 | | $ | (10,949) | | $ | 445,452 | | $ | 50,197 | | $ | (6,409) | | $ | (7,555) | | $ | (1,224,178) | | $ | (753,426) |
4
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| | | | | | | | | | | | | | | | | | | | | | | Accumulated Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated Other | | | | | | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized | | | | | | | ||
| | | | | | | | | | | | | | | | | | | | | | | Foreign | | Pension | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign | | Pension | | | | | | | ||||
| | | | | | | | | | | | | | | | | | | | | | | Currency | | Actuarial | | | | | Total | | | | | | | | | | | | | | | | | | | | | | | Currency | | Actuarial | | | | | Total | ||||||
| | Common Stock | | Preferred Stock | | Treasury Stock | | Additional | | Equity-Based | | Translation | | Losses, | | Accumulated | | Stockholders' | | 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 |
| 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) | |||||||||||||||||||||||||||||||||
Balances at January 1, 2021 | | 49,242,225 | | $ | 15 | | 3,290,050 | | $ | 1 | | 2,451,706 | | $ | (10,949) | | $ | 446,739 | | $ | 52,183 | | $ | (7,419) | | $ | (17,064) | | $ | (1,390,038) | | $ | (926,532) | |||||||||||||||||||||||||||||||||
Net loss January 1 to March 31, 2021 | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (39,200) | | | (39,200) | |||||||||||||||||||||||||||||||||
Equity-based compensation | | — | | | — | | — | | | — | | — | | | — | | | — | | | 861 | | | — | | | — | | | — | | | 861 | | — | | | — | | — | | | — | | — | | | — | | | — | | | 387 | | | — | | | — | | | — | | | 387 |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 920 | | | — | | | — | | | 920 | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 100 | | | — | | | — | | | 100 |
Net realized pension actuarial gains, net of tax | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 504 | | | — | | | 504 | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (157) | | | — | | | (157) |
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) | |||||||||||||||||||||||||||||||||
Preferred shares converted to Common Stock | | 223,413 | | | — | | (510,681) | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |||||||||||||||||||||||||||||||||
Payment for fractional shares on Reverse Stock Split | | (5,445) | | | — | | — | | | — | | — | | | — | | | (14) | | | — | | | — | | | — | | | — | | | (14) | |||||||||||||||||||||||||||||||||
Issuance of Common Stock | | 9,731,819 | | | 1 | | — | | | — | | — | | | — | | | 25,079 | | | — | | | — | | | — | | | — | | | 25,080 | |||||||||||||||||||||||||||||||||
Balances at March 31, 2021 | | 59,192,012 | | $ | 16 | | 2,779,369 | | $ | 1 | | 2,451,706 | | $ | (10,949) | | $ | 471,804 | | $ | 52,570 | | $ | (7,319) | | $ | (17,221) | | $ | (1,429,238) | | $ | (940,336) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
54
Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30,three months ended March 31, 2021 and 2020 and 2019
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
| | | | | | | |
| | Six Months Ended June 30, | | ||||
|
| |
| 2019 | | ||
|
| 2020 |
| (Restated) | | ||
Cash flows from operating activities | | | | | | | |
Net loss | | $ | (61,360) | | $ | (73,743) | |
Adjustments to reconcile net loss | | | | | | | |
Depreciation and amortization | | | 46,032 | | | 51,403 | |
Original issue discount and debt issuance cost amortization | | | 6,857 | | | 5,749 | |
Debt modification and extinguishment costs | | | — | | | 1,049 | |
Provision for doubtful accounts | | | (110) | | | 3,334 | |
Deferred income tax provision | | | (338) | | | 4,623 | |
Share-based compensation expense | | | 1,782 | | | 5,459 | |
Foreign currency remeasurement | | | (980) | | | 288 | |
Loss (gain) on sale of assets | |
| (34,791) | |
| 85 | |
Fair value adjustment for interest rate swap | | | 440 | | | 4,385 | |
Change in operating assets and liabilities, net effect from acquisitions: | |
| | |
| | |
Accounts receivable | |
| 38,260 | |
| 624 | |
Prepaid expenses and other assets | | | (9,157) | | | 1,260 | |
Accounts payable and accrued liabilities | | | (8,812) | | | (12,595) | |
Related party balances | | | (642) | | | (3,899) | |
Additions to outsource contract costs | | | (297) | | | (2,860) | |
Net cash used in operating activities | |
| (23,116) | |
| (14,838) | |
| | | | | | | |
Cash flows from investing activities | |
|
| |
|
| |
Purchases of property, plant, and equipment | | | (5,766) | | | (9,072) | |
Additions to internally developed software | | | (2,216) | | | (4,007) | |
Cash paid in acquisition, net of cash received | | | (3,500) | | | (5,000) | |
Proceeds from sale of assets | | | 38,222 | | | 20 | |
Net cash provided by (used in) investing activities | |
| 26,740 | |
| (18,059) | |
| | | | | | | |
Cash flows from financing activities | |
|
| |
| | |
Repurchases of Common Stock | | | — | | | (3,480) | |
Borrowings from other loans | | | 23,248 | | | 14,092 | |
Borrowings under factoring arrangement and A/R Facility | | | 149,951 | | | 34,050 | |
Principal repayment on borrowings under factoring arrangement and A/R Facility | | | (66,114) | | | (31,624) | |
Proceeds from senior secured term loans | | | — | | | 29,850 | |
Lease terminations | | | (331) | | | (95) | |
Cash paid for debt issuance costs | | | (12,708) | | | (7) | |
Borrowings from senior secured revolving facility | | | 29,750 | | | 68,000 | |
Repayments on senior secured revolving facility | | | (14,200) | | | (68,000) | |
Principal payments on finance lease obligations | | | (6,353) | | | (9,180) | |
Principal repayments on senior secured term loans and other loans | |
| (29,040) | |
| (21,248) | |
Net cash provided by financing activities | |
| 74,203 | |
| 12,358 | |
Effect of exchange rates on cash | | | 1 | | | 111 | |
Net increase (decrease) in cash and cash equivalents | |
| 77,828 | |
| (20,428) | |
Cash, restricted cash, and cash equivalents | |
| | |
| | |
Beginning of period | | | 14,099 | | | 43,854 | |
End of period | | $ | 91,927 | | $ | 23,426 | |
| | | | | | | |
Supplemental cash flow data: | |
| | |
| | |
Income tax payments, net of refunds received | | $ | 1,339 | | $ | 5,181 | |
Interest paid | | | 76,781 | | | 71,211 | |
Noncash investing and financing activities: | | | | | | | |
Assets acquired through right-of-use arrangements | | | 772 | | | 6,778 | |
Settlement gain on related party payable to Ex-Sigma 2 | | | 1,287 | | | — | |
Accrued capital expenditures | | | 1,088 | | | 1,083 | |
| | | | | | | |
| | Three Months Ended March 31, | | ||||
|
| 2021 |
| 2020 | | ||
Cash flows from operating activities | | | | | | | |
Net loss | | $ | (39,200) | | $ | (12,670) | |
Adjustments to reconcile net loss | | | | | | | |
Depreciation and amortization | | | 19,599 | | | 23,185 | |
Original issue discount and debt issuance cost amortization | | | 3,840 | | | 3,193 | |
Provision for doubtful accounts | | | 50 | | | 74 | |
Deferred income tax provision | | | (297) | | | (401) | |
Share-based compensation expense | | | 387 | | | 861 | |
Unrealized foreign currency losses | |
| (159) | |
| (936) | |
Loss (gain) on sale of assets | | | 29 | | | (35,246) | |
Fair value adjustment for interest rate swap | | | (125) | | | 845 | |
Change in operating assets and liabilities, net of effect from acquisitions | |
| | |
|
| |
Accounts receivable | |
| (11,248) | |
| 13,476 | |
Prepaid expenses and other assets | | | (5,895) | | | (5,678) | |
Accounts payable and accrued liabilities | | | (30,787) | | | (21,420) | |
Related party payables | | | 37 | | | (568) | |
Additions to outsource contract costs | | | (156) | | | (88) | |
Net cash used in operating activities | |
| (63,925) | |
| (35,373) | |
| | | | | | | |
Cash flows from investing activities | |
|
| |
|
| |
Purchase of property, plant and equipment | | | (1,609) | | | (3,591) | |
Additions to internally developed software | | | (672) | | | (1,153) | |
Cash paid for acquisition, net of cash received | | | — | | | (3,500) | |
Proceeds from sale of assets | | | — | | | 38,222 | |
Net cash provided by (used in) investing activities | |
| (2,281) | |
| 29,978 | |
| | | | | | | |
Cash flows from financing activities | |
|
| |
|
| |
Proceeds from issuance of stock | | | 25,065 | | | — | |
Borrowings under factoring arrangement and Securitization Facilities | | | 32,432 | | | 131,591 | |
Principal repayment on borrowings under factoring arrangement and Securitization Facilities | | | (31,533) | | | (23,042) | |
Lease terminations | | | (16) | | | (14) | |
Cash paid for debt issuance costs | | | — | | | (2,908) | |
Principal payments on finance lease obligations | | | (3,029) | | | (3,187) | |
Borrowings from senior secured revolving facility | | | 3,000 | | | 29,750 | |
Repayments on senior secured revolving facility | | | — | | | (14,000) | |
Borrowings from other loans | | | 1,959 | | | 11,241 | |
Principal repayments on senior secured term loans and other loans | |
| (8,142) | |
| (15,343) | |
Net cash provided by financing activities | |
| 19,736 | |
| 114,088 | |
Effect of exchange rates on cash | | | (101) | | | (216) | |
Net decrease in cash and cash equivalents | |
| (46,571) | |
| 108,477 | |
Cash, restricted cash, and cash equivalents | |
| | |
| | |
Beginning of period | | | 70,309 | | | 14,099 | |
End of period | | $ | 23,738 | | $ | 122,576 | |
| | | | | | | |
Supplemental cash flow data: | |
| | |
| | |
Income tax payments, net of refunds received | | $ | 1,510 | | $ | 623 | |
Interest paid | | | 62,510 | | | 61,852 | |
Noncash investing and financing activities: | | | | | | | |
Assets acquired through right-of-use arrangements | | | 220 | | | 270 | |
Accrued capital expenditures | | | 1,617 | | | 1,565 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
65
Exela Technologies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(in thousands of United States dollars except share and per share amounts or unless otherwise noted)
(Unaudited)
1. General
These condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements as of and for the year ended December 31, 20192020 included in the Exela Technologies, Inc. (the "Company," "Exela," "we," "our" or "us") annual report on Form 10-K for such period (the “2019“2020 Form 10-K”).
The accompanying condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America ("GAAP") and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission ("SEC") Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These accounting principles require us to use estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from our estimates.
The condensed consolidated financial statements are unaudited, but in our opinion include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim period. The interim financial results are not necessarily indicative of results that may be expected for any other interim period or the fiscal year.
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, 2018 and 2017 and its 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. See Note 20, Unaudited Quarterly Financial Data, of the Notes to the consolidated financial statements in the 2019 Form 10-K for the impact of these adjustments on each of the quarterly periods in fiscal 2018 and for the first three quarters of fiscal 2019. These condensed consolidated financial statements include restated results for the corresponding interim periods of fiscal 2019.
Going Concern
Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required under ASC 205-40, management’s evaluation should initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. The accompanying financial statements have been prepared assuming that the Company 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 continue as a going concern:
7
● | history of net losses of |
● | net operating cash |
● | working capital deficits of |
● | significant cash payments for interest on our long-term debt of |
● | a liability incurred of |
6
● | a requirement that the Company maintain a minimum of |
● | an |
Furthermore, under the terms of each of 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”), and 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 December 31, 2019 audited financial statements by April 14, 2020, which the Company failed to do. Such failure was an event of default under the Prior Credit Agreement if not cured within 30 days of receiving a notice of default. The Company received such notice on April 15, 2020. Additionally, under the terms of the 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.
Consideration of Management’s Plans
In performing the second step of this assessment, we are required to evaluate whether it is probable that our plans will be effectively implemented within one year after the financial statements are issued and whether it is probable those plans will alleviate the substantial doubt raised about our ability to continue as a going concern.
As of August 7, 2020,May 3, 2021, the Company had approximately $42.0$51.0 million inof liquidity, comprised of available cash of $31.2 million and availability under borrowing facilities of $19.8 million. This does not take into account an additional sourceadd back for certain fees, costs and expenses incurred by the Company relating to the Credit Agreement and the receivables financings, which was approximately $22.8 million as of May 3, 2021, that is used to calculate minimum liquidity in accordance with the terms of approximately $35.8 million from the borrowing facilities.Credit Agreement.
The Company has undertaken the following plans and actions, since substantial doubt about our ability to continue as a going concern was initially raised in the December 31, 2019 financial statements, 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 issued, as follows:
● | On January 10, 2020, certain subsidiaries of the Company entered into a $160.0 million |
● | 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 |
8
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, |
● | On March 23, 2020, in response to the potential impact of the COVID-19 pandemic, the Company implemented a |
● | 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 the Company’s liquidity by |
7
● | On May 18, 2020, the Company amended the Prior Credit Agreement, |
● | 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. |
● | On December 17, 2020, certain subsidiaries of the Company closed on a $145.0 million securitization facility (the “Securitization Facility”) with a five year term. Borrowings under the Securitization Facility are subject to an improved borrowing base definition that consists of receivables and, subject to contribution, further supported by inventory and intellectual property, in each case, subject to certain eligibility criteria, concentration limits and reserves. On December 17, 2020 the Company made the initial borrowing of approximately $92.0 million under the Securitization Facility and used a portion of the proceeds to repay the A/R Facility, which terminated on such date. |
● | In December 2020, the Company decided to close 1 of its production facilities. It also limited discretionary bonus payments to certain corporate and production personnel. In January 2021, the Company completed a furlough program mostly impacting corporate positions. These initiatives are expected to result in costs saving of $32.5 million through March 31, 2022. |
● | In February 2021, the Company decided to close a European production facility. This initiative is expected to result in annual cost savings of $5.0 million. |
● | On March 18, 2021, the Company completed a private placement of Common Stock (as defined below) and warrants. The net proceeds to the Company were $25.2 million. |
Substantial Doubt Alleviated
The Company has had a history of negative trends in its financial condition and operating results as well as recent noncompliance with covenants with certain of its respective lenders.lenders due to late delivery of financial statements for the fiscal year ended December 31, 2019 and for the quarter ended March 31, 2020, that have been cured. However, despite these conditions, the Company believes management’s plans and actions to date, 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.Agreement. 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
The Securitization Facility provides for an initial funding of approximately $92.0 million supported by the receivables portion of the borrowing base and, subject to contribution, provides for further funding of approximately $53.0 million supported by inventory and intellectual property.
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 core businesses.vision. 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.
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 liquid assets 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 the date the financial statements were issued.
8
Our plans are subject to inherent risks and uncertainties, which become significantly magnified when the effects of the current pandemic and related financial crisisuncertainty are included in the assessment. Accordingly, there can be no assurance that our future plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.
9
Net Loss per Share
Earnings per share (“EPS”) is computed by dividing net loss available to holders of the Company’s common stock, par value $0.0001 per share (“Common Stock”) by the weighted average number of shares of Common Stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock, using the more dilutive of the two-class method orand the 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 Stock and participating securities. The if-converted method assumes all convertible securities are converted into Common Stock. Diluted EPS excludes all dilutive potential of shares of Common Stock if their effect is anti-dilutive.
As the Company experienced net losses for the periods presented, the impact of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”) was calculated based onusing the if-converted method. As of June 30, 2020March 31, 2021, the outstanding shares of the Company’s Series A Preferred Stock, if converted would have resulted in an additional 4,022,4151,215,924 shares of Common Stock outstanding, buthowever, they were not included in the computation of diluted loss per share as their effects were anti-dilutive.anti-dilutive (i.e., reduces the net loss per share).
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 hasalso did not includedinclude the effect of 35,000,000 warrants sold in the Quinpario Initial Public Offering (“IPO”), the effect of 9,731,819 warrants sold in a private placement of securities on March 18, 2021 or the effect of the aggregate number of shares issuable pursuant to outstanding restricted stock units and options of 5,002,7472,278,365 and 3,997,7871,722,668 as of June 30,March 31, 2021 and 2020, and 2019, respectively, in the calculation of diluted loss per share for the three and six months ended June 30,March 31, 2021 and 2020, and 2019 asbecause their effects were anti-dilutive.
| | | | | | | | | | | | | ||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | ||||||||
|
| |
| 2019 |
| |
| 2019 | | Three Months Ended March 31, | ||||||||
|
| 2020 |
| (Restated) |
| 2020 |
| (Restated) |
| 2021 |
| 2020 | ||||||
Net loss attributable to common stockholders (A) | | $ | (49,549) | | $ | (42,485) | | $ | (60,778) | | $ | (75,571) | | $ | (38,304) | | $ | (11,230) |
Weighted average common shares outstanding - basic and diluted (B) | | | 147,508,669 | | | 145,466,193 | | | 147,351,917 | | | 145,518,914 | | | 50,646,482 | | | 49,065,055 |
Loss Per Share: | | | | | | | | | | | | | | | | | | |
Basic and diluted (A/B) | | $ | (0.34) | | $ | (0.29) | | $ | (0.41) | | $ | (0.52) | | $ | (0.76) | | $ | (0.23) |
The weighted average common shares outstanding - basic and diluted, in the table above, exclude in each case the 4,570,7341,523,578 shares returned to the Company in the first quarter of 2020 in connection with the Appraisal Action (as defined and described further in Note 8 below, such shares, the “Appraisal Shares”), even though the Appraisal Shares were outstanding as of June 30, 2019.which became treasury stock.
Sale of Non-Core Assets
On March 16, 2020, the Company and its indirect wholly owned subsidiaries, Merco Holdings, LLC and SourceHOV Tax, LLC entered into a Membership Interest Purchase Agreement with Gainline Source Intermediate Holdings LLC at which time Gainline Source Intermediate Holdings LLC acquired all of the outstanding membership interests of SourceHov Tax, LLC for $40.0 million subject to adjustment as set forth in the purchase agreement. The Company recognized a gain of $35.3$35.5 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 sixthree months ended June 30,March 31, 2020.
9
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.
10
Impact of COVID-19
In December 2019, a novel strain ofThe coronavirus was reportedpandemic (“COVID-19”) continues to have surfacedexpose our global operations to risks. COVID-19 continues to result in Wuhan, China, whichchallenging operating environments and has and is continuing to spread throughout other partsaffected almost all of the countries and territories in which we operate. Authorities across the world includinghave implemented measures like travel bans, quarantines, curfews, restrictions on public gatherings, shelter in place orders, business shutdowns and closures to control the United States. On January 30, 2020,spread of COVID-19. These measures, alongside the World Health Organization declaredvirus 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 outbreak of the coronavirus disease ("COVID-19") a “Public Health Emergency of International Concern,”global economy, demand for our services and on March 11, 2020, the World Health Organization characterized the outbreakspending across many sectors, as a “pandemic”.whole. While some jurisdictions have now started to implement plans for reopening, there are others which have 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. DevelopmentsWhile 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 shutdowns, social distancing and stay-at-home orders fromin various jurisdictions mayhave impacted and will continue to impact the Company’s ability to deploy its workforce effectively. We have been performing and delivering all of our essential services out of our facilities and delivery centers. Most of our customer site employees (onsite) continue to perform the work and take directions from our customers. A part of our non-essential services related workforce has now started to operate from offices and delivery centers, but many are still operating in a remote work environment.
Additionally, COVID-19 has spread to most of the countries in the world and throughout the United States, creating a serious impact on customers, workforces, suppliers, disrupting economies and financial markets, and potentially leading to a world-wide economic downturn. While expected to be temporary, prolonged workforce disruptions may negatively impact sales in fiscal year 2020 and the Company’s overall liquidity.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.report and the extent to which COVID-19 will ultimately impact the Company’s business depends upon various dynamic factors which are difficult to reliably predict. Management iscontinues to actively monitoringmonitor the global situation and its impact on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolutionOverall, in light of the COVID-19 outbreakchanging nature and the global responses to curb its spread, the Company is not able to estimate adverse effects ofcontinuing uncertainty around the COVID-19 outbreakpandemic, our ability to fully estimate the impact of COVID-19 on itsour results of operations, financial condition, or liquidity for fiscal year 2020.in future periods remains limited. Shifts in our customers’ priorities and changes to the transaction types offered are still evolving and the dynamic situation hinders reliable forecasting. The effects of the pandemic on our business are unlikely to be fully realized, or reflected in our financial results, until future periods.
2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective March 12, 2020,January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) no. 2020-04,2019-12, Facilitation ofIncome Taxes (Topic 740): Simplifying the Effects of Reference Rate Reform on Financial Reporting. Accounting for Income Taxes. This ASU provides temporary optional expedients andsimplifies 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 GAAP on contract modificationscertain areas, including recognizing deferred taxes for tax goodwill and hedge accountingallocating taxes 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 applymembers of a consolidated group. It also clarifies 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.
Effective March 9, 2020, the Company adopted ASU no. 2020-03, Codification Improvements to Financial Instruments. This ASU represents changes to clarify or improve the 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 elementsaspects of the ASU did not have a material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.
Effective January 1, 2020, the Company adopted ASU no. 2018-13, Fair Value Measurement (Topic 820); which changes the fair value measurement disclosure requirements of Accounting Standards Codification (“ASC 820”). The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting. The FASB used theexisting 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 fair value in the statement of financial position or disclosed in the notes to financial statements. The ASU includes but is not limited to the valuation techniques and inputs that a reporting entity uses to arrive at its measures of fair value, including judgments and assumptions that the entity makes, the uncertainty in the fair value measurements as of the reporting date,
11
and how changes in fair value measurements affect an entity’s performance and cash flows.promote more consistent application, among other things. The adoption had no 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. 2018-15, Intangibles, Goodwill, and Other - Internal Use Software (Subtopic 350-40):Customer's accounting for implementation costs incurred in a Cloud Computing Arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The adoption had no 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. 2019-08, 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 ASC 606. Under the ASU, entities apply the guidance in ASC 718 to measure and classify share-based payments issued to a customer that are not in exchange for a distinct good or 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.
Recently Issued Accounting Pronouncements
In July 2019,August 2020, the FASB issued ASU 2019-07, Codification Updatesno. 2020-06, 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 SEC Sections. This ASU amends various SEC paragraphs pursuant touse 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’ equityif-converted method for all convertible instruments in the formdiluted earnings per share calculation and include the effect of a reconciliation of the beginning balance to the ending balanceshare settlement 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 (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 Company adopted this guidance effective January 1, 2019, under the modified retrospective transition method provided by ASU 2018-11 with the following practical expedients below:
The adoption had a material impact on the Company's unaudited consolidated 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.
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Recently Issued Accounting Pronouncementsinstruments that may be settled in cash or shares. The ASU is effective for the Company for fiscal years beginning after December 15, 2021, including interim periods therein. Early adoption is 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 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 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. This ASU along with related additional clarificatory guidance in the ASU No. 2019-05, “Financial Instruments—Credit Losses (Topic 326)” and ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, areis effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.
In December 2019, the FASB issued ASU no. 2019-12, 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 a consolidated group. It also clarifies certain aspects of the existing guidance to promote more consistent application, among other things. The ASU is effective for the Company for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption is permitted. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.
3. Significant Accounting Policies
The information presented below supplements the Significant Accounting Policies information presented in our 20192020 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.10-K.
Revenue Recognition
We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our material sources of revenue are derived from contracts with customers, primarily relating to the provision of business and transaction processing services within each of our segments. We do not have any significant extended payment terms, as payment is received shortly after goods are delivered or services are provided.
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, but that are substantially the same, and have the same pattern of transfer over time, and accordingly are combined into a single performance obligation. Our promise to our customers is typically to perform an unknown or unspecified quantity of tasks and the consideration received is contingent upon the customers’ use (i.e., number of transactions processed, requests fulfilled, etc.); as such, the total transaction price is variable. We allocate the variable fees to the single performance obligation charged to the distinct service period in which we have the contractual right to bill under the contract.
Disaggregation of Revenues
The following tables disaggregate revenue from contracts by geographic region and by segment for the three months ended March 31, 2021 and 2020:
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Disaggregation of Revenues
The following tables disaggregate revenue from contracts by geographic region and by segment for the three and six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | ||||||||||||||||||||||
| | | | 2019 | ||||||||||||||||||||
| | 2020 | | (Restated) | ||||||||||||||||||||
| | | ITPS | | | HS | | | LLPS | | | Total | | | ITPS | | | HS | | | LLPS | | | Total |
U.S.A. |
| $ | 190,775 | | $ | 49,166 | | $ | 15,527 | | $ | 255,468 | | $ | 239,226 | | $ | 63,440 |
| $ | 17,569 |
| $ | 320,235 |
EMEA | |
| 47,084 | |
| — | |
| — | |
| 47,084 | |
| 63,823 | |
| — | |
| — | |
| 63,823 |
Other | |
| 5,170 | |
| — | |
| — | |
| 5,170 | |
| 6,791 | |
| — | |
| — | |
| 6,791 |
Total |
| $ | 243,029 | | $ | 49,166 | | $ | 15,527 | | $ | 307,722 | | $ | 309,840 | | $ | 63,440 |
| $ | 17,569 |
| $ | 390,849 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | Six Months Ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
| | | | 2019 | | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||
| | 2020 | | (Restated) | | 2021 | | 2020 | ||||||||||||||||||||||||||||||||||||||||
|
| | ITPS | | | HS | | | LLPS | | | Total | | | ITPS | | | HS | | | LLPS | | | Total |
| | ITPS | | | HS | | | LLPS | | | Total | | | ITPS | | | HS | | | LLPS | | | Total |
U.S.A. |
| $ | 414,163 | | $ | 113,216 | | $ | 32,817 | | $ | 560,196 | | $ | 490,726 | | $ | 124,783 |
| $ | 35,411 |
| $ | 650,920 |
| $ | 172,924 | | $ | 51,093 | | $ | 17,088 | | $ | 241,105 | | $ | 223,326 | | $ | 64,049 | | $ | 17,290 | | $ | 304,665 |
EMEA | |
| 100,990 | |
| — | |
| — | |
| 100,990 | |
| 130,501 | |
| — | |
| — | |
| 130,501 | |
| 54,209 | |
| — | |
| — | |
| 54,209 | | | 53,906 | | | — | | | — | | | 53,906 |
Other | |
| 11,987 | |
| — | |
| — | |
| 11,987 | |
| 13,785 | |
| — | |
| — | |
| 13,785 | |
| 4,742 | |
| — | |
| — | |
| 4,742 | | | 6,880 | | | — | | | — | | | 6,880 |
Total |
| $ | 527,140 | | $ | 113,216 | | $ | 32,817 | | $ | 673,173 | | $ | 635,012 | | $ | 124,783 |
| $ | 35,411 |
| $ | 795,206 |
| $ | 231,875 | | $ | 51,093 | | $ | 17,088 | | $ | 300,056 | | $ | 284,112 | | $ | 64,049 |
| $ | 17,290 |
| $ | 365,451 |
Contract Balances
The following table presents contract assets, contract liabilities and contract costs recognized at June 30, 2020March 31, 2021 and December 31, 2019:2020:
| | | | | | | ||||||
| | June 30, | | December 31, | | | | | | | ||
|
| 2020 |
| 2019 |
| March 31, |
| December 31, | ||||
Accounts receivable, net | | $ | 219,433 | | $ | 261,400 | | $ | 216,077 | | $ | 206,868 |
Deferred revenues | |
| 19,675 | |
| 16,621 | |
| 21,413 | |
| 16,919 |
Customer deposits | |
| 27,301 | |
| 27,765 | |
| 17,648 | |
| 21,277 |
Costs to obtain and fulfill a contract | |
| 4,130 | |
| 4,977 | |
| 3,018 | |
| 3,295 |
Accounts receivable, net includes $21.8$25.4 million and $34.1$23.2 million as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, representing amounts not yet billed to customers. We have accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers.
Deferred revenues relate to payments received in advance of performance under a contract. A significant portion of this balance relates to maintenance contracts or other service contracts where we received payments for upfront conversions or implementation activities which do not transfer a service to the customer but rather are used in fulfilling the related performance obligations that transfer over time. The advance consideration received from customers is deferred over the contract term. We recognized revenue of $11.1$6.6 million during the sixthree months ended June 30, 2020March 31, 2021 that had been deferred as of December 31, 2019.2020.
Costs incurred to obtain and fulfill contracts are deferred and presented as part of intangible assets, net and expensed on a straight-line basis over the estimated benefit period. We recognized $1.3$0.4 million of amortization for these costs infor the first sixthree months of 2020ended March 31, 2021 within depreciation and amortization expense. These costs represent incremental external costs or certain specific internal costs that are directly related to the contract acquisition or fulfillment and can be separated into two principal categories: contract commissions and fulfillment costs. Applying the practical expedient in ASC 340-40-25-4, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in Selling, general and administrative expenses. The effect of applying this practical expedient was not material.
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Customer deposits consist primarily of amounts received from customers in advance for postage. The amounts recorded as of December 31, 2019 wereThese advanced postage deposits are used to pay forcover the costs associated with postage, with the corresponding postage revenue being recognized during the six months ended June 30, 2020. Any residual balances may be retained and used in future periods.as services are performed.
Performance Obligations
At the inception of each contract, we assess the goods and services promised in our contracts and identify each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts. For the majority of our business and transaction processing service contracts, revenues are recognized as services are provided based on an appropriate input or output method, typically based on the related labor or transactional volumes.
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Certain of our contracts have multiple performance obligations, including contracts that combine software implementation services with post-implementation customer support. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we estimate our expected costs of satisfying a performance obligation and add an appropriate margin for that distinct good or service. We also use the adjusted market approach whereby we estimate the price that customers in the market would be willing to pay. In assessing whether to allocate variable consideration to a specific part of the contract, we consider the nature of the variable payment and whether it relates specifically to its efforts to satisfy a specific part of the contract. Certain of our software implementation performance obligations are satisfied at a point in time, typically when customer acceptance is obtained.
When evaluating the transaction price, we analyze, on a contract-by-contract basis, all applicable variable consideration. The nature of our contracts give rise to variable consideration, including volume discounts, contract penalties, and other similar items that generally decrease the transaction price. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We do not anticipate significant changes to our estimates of variable consideration.
We include reimbursements from customers, such as postage costs, in revenue, while the related costs are included in cost of revenue.
Transaction Price Allocated to the Remaining Performance Obligations
In accordance with optional exemptions available under ASC 606, we did not disclose the value of unsatisfied performance obligations for (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 substantially the same and have the same pattern of transfer over time, with the corresponding remaining performance obligations as of June 30, 2020March 31, 2021 in each of the future periods below:
| | | | | | |
Estimated Remaining Fixed Consideration for Unsatisfied | Estimated Remaining Fixed Consideration for Unsatisfied | Estimated Remaining Fixed Consideration for Unsatisfied | ||||
|
| | |
| | |
Remainder of 2020 | | $ | 23,696 | |||
2021 | |
| 38,801 | |||
Remainder of 2021 | | $ | 40,880 | |||
2022 | |
| 33,082 | |
| 37,579 |
2023 | |
| 28,014 | |
| 31,854 |
2024 | |
| 26,814 | |
| 28,416 |
2025 and thereafter | |
| 27,144 | |||
2025 | |
| 27,757 | |||
2026 and thereafter | |
| 306 | |||
Total |
| $ | 177,551 |
| $ | 166,792 |
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4. Intangibles Assets and Goodwill
Intangible Assets
Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization and consists of the following:
| | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | March 31, 2021 | ||||||||||||||
| | Gross Carrying | | | | Intangible | | Gross Carrying | | Accumulated | | Intangible | ||||||
|
| Amount (a) |
| Amortization |
| Asset, net |
| Amount (a) |
| Amortization |
| Asset, net | ||||||
Customer relationships | | $ | 507,839 | | $ | (257,591) | | $ | 250,248 | | $ | 508,396 | | $ | (287,749) | | $ | 220,647 |
Developed technology | | | 88,553 | | | (86,860) | | | 1,693 | | | 88,553 | | | (87,236) | | | 1,317 |
Trade names (b) | | | 8,400 | | | (3,100) | | | 5,300 | | | 8,400 | | | (3,100) | | | 5,300 |
Outsource contract costs | | | 16,080 | | | (11,950) | | | 4,130 | | | 16,447 | | | (13,429) | | | 3,018 |
Internally developed software | | | 45,300 | | | (15,920) | | | 29,380 | | | 47,878 | | | (21,963) | | | 25,915 |
Trademarks | | | 23,378 | | | (23,370) | | | 8 | |||||||||
Assembled workforce | | | 4,473 | | | (1,677) | | | 2,796 | | | 4,473 | | | (2,516) | | | 1,957 |
Purchased software | | | 26,750 | | | (2,675) | | | 24,075 | | | 26,749 | | | (4,012) | | | 22,737 |
Intangibles, net | | $ | 720,773 | | $ | (403,143) | | $ | 317,630 | | $ | 700,896 | | $ | (420,005) | | $ | 280,891 |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2020 | ||||||||||||||
| | Gross Carrying | | | | Intangible | | Gross Carrying | | Accumulated | | Intangible | ||||||
|
| Amount (a) |
| Amortization |
| Asset, net |
| Amount (a) |
| Amortization |
| Asset, net | ||||||
Customer relationships | | $ | 508,074 | | $ | (237,313) | | $ | 270,761 | | $ | 508,485 | | $ | (278,306) | | $ | 230,179 |
Developed technology | | | 89,053 | | | (87,109) | | | 1,944 | | | 88,553 | | | (87,111) | | | 1,442 |
Trade names (b) | | | 8,400 | | | (3,100) | | | 5,300 | | | 8,400 | | | (3,100) | | | 5,300 |
Outsource contract costs | | | 16,726 | | | (11,749) | | | 4,977 | | | 16,331 | | | (13,036) | | | 3,295 |
Internally developed software | | | 43,261 | | | (12,129) | | | 31,132 | | | 47,182 | | | (20,152) | | | 27,030 |
Trademarks | | | 23,378 | | | (23,370) | | | 8 | |||||||||
Assembled workforce | | | 4,473 | | | (1,118) | | | 3,355 | | | 4,473 | | | (2,237) | | | 2,236 |
Purchased software | | | 26,749 | | | (1,783) | | | 24,966 | | | 26,749 | | | (3,567) | | | 23,182 |
Intangibles, net | | $ | 720,114 | | $ | (377,671) | | $ | 342,443 | | $ | 700,173 | | $ | (407,509) | | $ | 292,664 |
(a) | Amounts include intangible assets acquired in business combinations and asset acquisitions. |
(b) | The carrying amount of trade names for |
Goodwill
The Company’s operating segments are significant strategic business units that align its products and services with how it manages its business, approach the markets and interacts with its clients. The Company is organized into 3 segments: ITPS, HS,Information & Transaction Processing Solutions (“ITPS”), Healthcare Solutions (“HS”), and LLPSLegal & Loss Prevention Services (“LLPS”) (See Note 13).
Goodwill by reporting segment consists of the following:
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| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
|
| Beginning | | | Additions | | | Impairments | | | Currency Translation Adjustments | | | End of Year Balance (a) | |
ITPS | | $ | 571,575 | | $ | — | | $ | (317,525) | | $ | 70 | | $ | 254,120 |
HS | | | 86,786 | | | — | | | — | | | — | | | 86,786 |
LLPS | | | 49,897 | | | — | | | (31,032) | | | — | | | 18,865 |
Balance as of December 31, 2019 | | $ | 708,258 | | $ | — | | $ | (348,557) | | $ | 70 | | $ | 359,771 |
ITPS | | | 254,120 | | | — | | | — | | | (762) | | | 253,358 |
HS | | | 86,786 | | | — | | | — | | | — | | | 86,786 |
LLPS | | | 18,865 | | | — | | | — | | | — | | | 18,865 |
Balance as of June 30, 2020 | | $ | 359,771 | | $ | — | | $ | — | | $ | (762) | | $ | 359,009 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
|
| Balances as at January 1, 2020 (a) | | | Additions | | | Impairments | | | Currency Translation Adjustments | | | Balances as at December 31, 2020 (a) | |
ITPS | | $ | 254,120 | | $ | — | | $ | — | | $ | 10 | | $ | 254,130 |
HS | | | 86,786 | | | — | | | — | | | — | | | 86,786 |
LLPS | | | 18,865 | | | — | | | — | | | — | | | 18,865 |
Total | | $ | 359,771 | | $ | — | | $ | — | | $ | 10 | | $ | 359,781 |
| | | | | | | | | | | | | | | |
|
| Balances as at January 1, 2021 (a) | | | Additions | | | Impairments | | | Currency Translation Adjustments | | | Balances as at March 31, 2021 (a) | |
ITPS | | $ | 254,130 | | $ | — | | $ | — | | $ | (472) | | $ | 253,658 |
HS | | | 86,786 | | | — | | | — | | | — | | | 86,786 |
LLPS | | | 18,865 | | | — | | | — | | | — | | | 18,865 |
Total | | $ | 359,781 | | $ | — | | $ | — | | $ | (472) | | $ | 359,309 |
(a) | The goodwill amount for all periods presented is net of accumulated impairment amount as at December 31, |
5. Long-Term Debt and Credit Facilities
Senior Secured Notes
On July 12, 2017, the Company issued $1.0 billion in aggregate principal amount of 10.0% First Priority Senior Secured Notes due 2023 (the “Notes”). The Notes are guaranteed by certain subsidiaries of the Company. The Notes bear interest at a rate of 10.0% per year. The Company pays interest on the Notes on January 15 and July 15 of each year, commencing on January 15, 2018. The Notes will mature on July 15, 2023.
Senior Credit Facilities
On July 12, 2017, the Company entered into a First Lien Credit Agreement with Royal Bank of Canada, Credit Suisse AG, Cayman Islands Branch, Natixis, New York Branch and KKR Corporate Lending LLC 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. As of June 30, 2020March 31, 2021 and December 31, 20192020, the Company had outstanding irrevocable letters of credit totaling approximately $19.4$16.5 million and $20.6$19.5 million, respectively, under the senior secured revolving facility.
The Credit Agreement 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 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.
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Term Loan Repricing
On July 13, 2018, Exela successfully repriced the $343.4 million of term loans outstanding under its senior secured credit facilities (the “Repricing”). The Repricing was accomplished pursuant to a First Amendment to 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
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Company borrowed $343.4 million of refinancing term loans (the “Repricing Term Loans”) to refinance the Company’s existing senior secured term loans.
In accordance with ASC 470 – Debt – Modifications and Extinguishments, as a result of certain lenders that participated in Exela’s debt structure prior to the Repricing and the Company’s debt structure after the Repricing, it was determined that a portion of the refinancing of Exela’s senior secured credit facilities would be accounted for as a debt modification, and the remaining would be accounted for as an extinguishment. The Company incurred $1.0 million in new debt issuance costs related to the refinancing, of which $1.0 million was expensed pursuant to modification accounting. The proportion of debt that was extinguished resulted in a write off of previously recognized debt issue costs of $0.1 million. Additionally, for the new lenders who exceeded the 10% test, less than $0.1 million was recorded as additional debt issue costs. All unamortized costs and discounts will be amortized over the life of the new term loan using the effective interest rate of the term loan.
The Repricing Term Loans will bear interest at a rate per annum of, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans. The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the Credit Agreement. The Repricing Term Loans will mature on July 12, 2023, the same maturity date as the prior senior secured term loans.
2018 Incremental Term Loans
On July 13, 2018, the Company successfully borrowed an additional $30.0 million pursuant to incremental term loans (the “Incremental Term Loans”) under the First Amendment. The proceeds of the Incremental Term Loans may be used by the Company for general corporate purposes and to pay fees and expenses in connection with the First Amendment. The interest rates applicable to the Incremental Term Loans are the same as those for the Repricing Term Loans.
The Company may voluntarily repay the Repricing Term Loans and the Incremental Term Loans (collectively, the “Term Loans”) at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans. The Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Repricing Term Loans and prior senior secured term loans.
Other than as described above, the terms, conditions and covenants applicable to the Repricing Term Loans and the Incremental Term Loans are consistent with the terms, conditions and covenants that were applicable to the existing senior secured loans under the Credit Agreement. The Repricing and issuance of the Incremental Term Loans resulted in a partial debt extinguishment, for which Exela recognized $1.1 million in debt extinguishment costs in the third quarter of 2018.
2019 Incremental Term Loan
On April 16, 2019, the Company successfully borrowed an additional $30.0 million pursuant to incremental term loans (the “2019 Incremental Term Loans”) under the Second Amendment to First Lien Credit Agreement (the “Second Amendment”). The proceeds of the 2019 Incremental Term Loans were used to replace the cash spent for acquisitions, pay related fees, expenses and related borrowings and for general corporate purposes. The 2019 Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Incremental Term Loans, Repricing Term Loans and prior senior secured term loans.
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The 2019 Incremental Term Loans will bear interest at a rate per annum that is the same as the Company’s Repricing Term Loans under the senior credit facility. The 2019 Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Term Loans. The Company may voluntarily repay the 2019 Incremental Term Loans at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans.
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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 induring the second quarter ofyear ended December 31, 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.in the Credit Agreement. 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.
Receivables Securitization Facilities
On January 10, 2020, certain subsidiaries of the Company entered into athe $160.0 million accounts receivable securitization facility (the “A/A/R Facility”)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“A/R 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 makemade loans (the “Loan”“A/R 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“A/R 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”“A/R Originators”) sold or contributed and will sell or contribute to the A/R Parent SPE certain receivables and related assets in consideration for a combination of cash, equity in the A/R Parent SPE and/or letters of credit issued by the A/R LC Bank to the A/R Originators; and (iii) the A/R 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 A/R 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 under the A/R Facility 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
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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 A/R Parent SPE were formed in December 2019, and are identified as variable interest entities (“VIEs”) and consolidated into the Company’s financial statements even though they had no material assets or operations during the year end December 31, 2019.following variable interest entities (“VIE”) consolidation model under ASC 810. The A/R Borrower and A/R 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
17
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 representsrepresented modification of debt under ASC 470-50. Accordingly, the forbearance fee paid was added to unamortized debt issuance cost which shall beand 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(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%.
On December 17, 2020, the Company repaid in full the loans outstanding under the A/R Facility. The aggregate outstanding principal amount of loans under the A/R Facility as of such date was approximately $83.0 million. The early termination of the A/R Facility triggered an early termination fee of $0.8 million and required repayment of approximately $0.5 million in respect of principal, accrued interest and fees. All obligations under the A/R Facility (other than contingent indemnification obligations that expressly survive termination) terminated upon repayment. The A/R Facility was replaced by the Securitization Facility as described below. Repayment of A/R Facility was treated as an extinguishment of debt under ASC 470-50. Accordingly, the Company wrote off the unamortized balance of $8.2 million of debt issuance costs related to A/R facility.
On December 17, 2020, certain subsidiaries of Company closed on the $145.0 million Securitization Facility with a five year term. Borrowings under the Securitization Facility are subject to an improved borrowing base definition over the A/R Facility that consists of receivables and, subject to contribution, further supported by inventory and intellectual property, in each case, subject to certain eligibility criteria, concentration limits and reserves.
The Securitization Facility provided for an initial funding of approximately $92.0 million supported by the receivables portion of the borrowing base and, subject to contribution, a further funding of approximately $53.0 million supported by inventory and intellectual property. On December 17, 2020 the Company made the initial borrowing of approximately $92.0 million under the Securitization Facility and used a portion of the proceeds to repay the A/R Facility and used the remaining proceeds for general corporate purposes.
The initial documentation for the Securitization Facility includes (i) a Loan and Security Agreement (the “Securitization Loan Agreement”), dated as of December 10, 2020, by and among Exela Receivables 3, LLC (the “Securitization Borrower”), a wholly-owned indirect subsidiary of the Company, the lenders (each, a “Securitization Lender” and collectively the “Securitization Lenders”), Alter Domus (US), LLC, as administrative agent (the “Securitization Administrative Agent”) and the Company, as initial servicer, pursuant to which the Securitization Lenders will make loans to the Securitization Borrower to be used to purchase receivables and related assets from the Securitization Parent SPE (as defined below), (ii) a First Tier Receivables Purchase and Sale Agreement (the, dated as of December 17, 2020, by and among Exela Receivables 3 Holdco, LLC (the “Securitization Parent SPE”), a wholly-owned indirect subsidiary of the Company, and certain other indirect, wholly-owned subsidiaries of the Company listed therein (collectively, the “Securitization Originators”), and the Company, as initial servicer, pursuant to which each Securitization Originator has sold or contributed and will sell or contribute to the Securitization Parent SPE certain receivables and related assets in consideration for a combination of cash and equity in the Securitization Parent SPE, (iii) a Second Tier Receivables Purchase and Sale Agreement, dated as of December 17, 2020, by and among, the Securitization Borrower, the Securitization Parent SPE and the Company, as initial servicer, pursuant to which Securitization Parent SPE has sold or contributed and will sell or contribute to the Securitization Borrower certain receivables and related assets in consideration for a combination of cash and equity in the Securitization Borrower, (iv) the Sub-Servicing Agreement, dated as of December 17, 2020, by and among the Company and each Securitization Originator, (v) the Pledge and Guaranty, dated as of the December 10, 2020, between the Securitization Parent SPE and
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the Administrative Agent, and (vi) the Performance Guaranty, dated as of December 17, 2020, between the Company, as performance guarantor, and the Securitization Administrative Agent (and together with all other certificates, instruments, UCC financing statements, reports, notices, agreements and documents executed or delivered in connection with the Securitization Loan Agreement, the “Securitization Agreements”).
The Securitization Borrower, the Company, the Securitization Parent SPE and the Securitization Originators provide customary representations and covenants under the Securitization Agreements. The Securitization Loan Agreement provides for certain events of default upon the occurrence of which the Securitization Administrative Agent may declare the facility’s termination date to have occurred and declare the outstanding Securitization Loan and all other obligations of the Securitization Borrower to be immediately due and payable, however the Securitization Facility does not include an ongoing liquidity covenant like the A/R Facility and aligns reporting obligations with the Company’s other material indebtedness agreements.
The Securitization Borrower and Securitization Parent SPE were formed in December 2020, and are identified as VIEs and consolidated into the Company’s financial statements following VIE consolidation model under ASC 810. The Securitization Borrower and Securitization Parent SPE are bankruptcy remote entities and as such their assets are not available to creditors of the Company or any of its subsidiaries. Each loan under the Securitization Facility bears interest on the unpaid principal amount as follows: (i) if a Base Rate Loan, at a rate per annum equal to (x) the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) the Adjusted LIBOR Rate (as defined in the Securitization Loan Agreement) plus 1.00%, plus (y) 8.75%; or (ii) if a LIBOR Rate Loan, at the Adjusted LIBOR Rate plus 9.75%. As of June 30, 2020,March 31, 2021, there were $86.0borrowings of $91.9 million borrowingsoutstanding under the Receivables Securitization Facility.
Long-Term Debt Outstanding
As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the following long-term debt instruments were outstanding:
| | | | | | | | | | | |
| | June 30, | | December 31, | March 31, | | December 31, | ||||
|
| 2020 |
| 2019 | 2021 |
| 2020 | ||||
Other (a) | | $ | 31,953 | | $ | 30,232 | $ | 37,199 | | | 37,653 |
First lien credit agreement (b) | | | 349,819 | | | 360,583 | |||||
Term loan under first lien credit agreement (b) | | 340,482 | | | 343,597 | ||||||
Senior secured notes (c) | | | 981,554 | | | 979,060 | | 985,573 | | | 984,216 |
Secured borrowings under A/R Facility | | | 86,000 | | | — | |||||
Secured borrowings under Securitization Facility | | 91,947 | | | 91,947 | ||||||
Revolver | | | 80,550 | | | 65,000 | | 83,543 | | | 80,543 |
Total debt | | | 1,529,876 | | | 1,434,875 | | 1,538,744 | | | 1,537,956 |
Less: Current portion of long-term debt | | | (36,101) | | | (36,490) | | (39,713) | | | (39,952) |
Long-term debt, net of current maturities | | $ | 1,493,775 | | $ | 1,398,385 | $ | 1,499,031 | | $ | 1,498,004 |
(a) | Other debt represents |
(b) | Net of unamortized original issue discount and debt issuance costs of |
(c) | Net of unamortized debt discount and debt issuance costs of |
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 GAAP. The Company recorded an income tax benefit of less than $0.1 million and income tax expense of $0.7 million and $4.7$2.5 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The Company recorded an income tax expense of $3.1 million and $9.5 million for the six months ended June 30, 2020 and 2019, respectively
The Company's ETR of (1.4%) and (5.4%)0.05% for the three and six months ended June 30, 2020March 31, 2021 differed from the expected U.S. statutory tax rate of 21.0% and was primarily impacted by permanent tax adjustments, state and local current expense,
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current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s deferred tax assets on U.S. disallowed interest expense carryforwards created by the provisions of The Tax Cuts and Jobs Act (“TCJA”).
For the three and six months ended June 30, 2019,March 31, 2020, the Company’s ETR of (12.8%) and (14.7%(24.1%) differed from the expected U.S. statutory tax rate of 21.0%, and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s U.S. disallowed interest expense carryforwards created by the provisions of the TCJA.
As of June 30, 2020,March 31, 2021, 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, 2019. The Company's valuation allowances have increased by approximately $18.3 million from December 31, 2019 to June 30, 2020 due largely to effects of TCJA relating to interest expense.2020.
7. Employee Benefit Plans
German Pension Plan
The Company’s subsidiary in Germany provides pension benefits to certain retirees. Employees eligible for participation include all employees who started working for the Company or its predecessors prior to September 30, 1987 and have finished a qualifying period of at least 10 years. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan. The German pension plan is an unfunded plan and therefore has 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 includedinclude 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 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 earlierlater 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 includedinclude 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 actuarial calculation. The Company uses a December 31 measurement date for this plan. No new employees are
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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 10, 2018.
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Tax Effect on Accumulated Other Comprehensive Loss
As of June 30, 2020March 31, 2021 and December 31, 20192020 the Company recorded actuarial losses of $7.5$17.2 million and $8.1$17.1 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which areis net of a deferred tax benefit of $2.0 million.million for each period.
Pension Expense
The components of the net periodic benefit cost are as follows:
| | | | | | | | | | | | | ||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | ||||||||
|
| |
| 2019 |
| |
| 2019 | | Three Months Ended March 31, | ||||||||
|
| 2020 |
| (Restated) |
| 2020 |
| (Restated) |
| 2021 |
| 2020 | ||||||
Service cost | | $ | 19 | | $ | 23 | | $ | 38 | | $ | 46 | | $ | 19 | | $ | 19 |
Interest cost | | | 490 | | | 602 | | | 980 | | | 1,203 | | | 424 | | | 498 |
Expected return on plan assets | | | (634) | | | (622) | | | (1,268) | | | (1,244) | | | (605) | | | (644) |
Amortization: | | | | | | | | | | | | | | | | | | |
Amortization of prior service cost | | | 25 | | | 26 | | | 50 | | | 52 | | | 45 | | | 26 |
Amortization of net (gain) loss | | | 426 | | | 413 | | | 852 | | | 826 | ||||||
Amortization of net loss | | | 838 | | | 432 | ||||||||||||
Net periodic benefit cost | | $ | 326 | | $ | 442 | | $ | 652 | | $ | 883 | | $ | 721 | | $ | 331 |
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 $1.2$0.9 million and $0.6 million to its pension plans during each of the sixthree months ended June 30,March 31, 2021 and 2020, and 2019 (as restated).respectively. The Company has funded the pension plans with the required contributions for 20202021 based on current plan provisions.
8. Commitments and Contingencies
Appraisal Action
On September 21, 2017, former stockholders of SourceHOV Holdings, Inc. (“SourceHOV”), who 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 (the “Court”), captioned Manichaean Capital, LLC, et al. v. SourceHOV Holdings, Inc., C.A. No. 2017 0673 JRS (the “Appraisal Action”). The Appraisal Action 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”), and the petitioners 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.
SourceHOV appealed the judgment in the Appraisal Action on June 30, 2020. On January 22, 2021, the Delaware Supreme Court affirmed the judgment of the Delaware Court of Chancery in favor of the petitioners. To date,
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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 filed a notice of appeal in relation to the Appraisal Action with the Supreme Court of the State of Delaware on June 30, 2020. The appeal brief is due on August 26, 2020. At this time, we cannot determine whether the appeal will be successful. At present, SourceHOV has not posted a bond to staypaid $1.0 million toward 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 appraisal petitioners have filed additional actions to recognize the judgment against SourceHOV, and 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.SourceHOV, and an action against SourceHOV and certain of its directors and officers alleging creditor derivative claims relating to the Company’s securitization facilities. In early February 2021, petitioners also filed a motion for a preliminary injunction in the derivative action in which they sought a court order to force Exela to set aside sufficient assets for SourceHOV to pay the potential judgment in the derivative action prior to paying other creditors or, in the alternative, to pay all creditors, including the creditors of SourceHOV, on a pari passu basis. The Delaware Court of Chancery denied the motion seeking the preliminary injunction on April 29, 2021. Although the Company believes that it has valid defenses to these ancillary proceedings the ancillary proceedings are in the preliminary stages and has moved to dismiss them, there can be no assurance that the Company will be successful.
As a result of the Appraisal Action and following repayment of the Margin Loan by Ex-Sigma 2, LLC (“Ex-Sigma 2”), 4,570,734 1,523,578 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 June 30, 2020,March 31, 2021, the Company has an accrued a liability of $58.5$61.7 million for the Appraisal Action based on the judgment received on January 30, 2020 plus accrued interest, which is management’s best estimate of the total payment obligation includingas of such date.
Adverse Arbitration Order
In April 2020, one of the Company's Nordic subsidiaries commenced an arbitration in Finland against a customer alleging breach of contract and other damages in connection with an outsourcing services agreement and transition services agreement executed in 2017. In September 2020, the customer submitted counterclaims against the Company in an aggregate amount in excess of €10.0 million. Following an expedited arbitration, in late November 2020, the arbitrator awarded the customer approximately $13.0 million in the aggregate for the counterclaimed damages and costs. The Company filed an application to annul the award in late January 2021 with the relevant court asserting, among other bases, that the arbitrator violated due process and procedural rules by disallowing the Company’s witness and expert testimony and maintaining the expedited format following the assertion of significant counterclaims which would ordinarily have required the application of normal rather than expedited rules. At this time, it is not practicable to render an opinion about whether an unfavorable outcome is probable or remote with respect to the appeal; however, the Company believes it has meritorious claims and defenses and is vigorously asserting them. However, at the same time, principals from the Company and the customer’s owner groups are engaged in substantive settlement discussions seeking a commercial solution, which are in an advanced stage, but have not yet come to a resolution. The Company has an accrued interest.liability of $9.2 million for this matter as of March 31, 2021.
Contract-Related Contingencies
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 transaction price, if any, under these contract provisions will not result in a significant revenue reversal or have a material adverse effect on the Company’s consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.
On February 20, 2014, the Company’s subsidiary, Pangea Acquisitions, Inc. ("Pangea") acquired BancTec, Inc. ("BancTec") through a merger of BancTec and a Pangea subsidiary. The merger agreement for that transaction provided that contingent, or "earnout," consideration would be paid to former BancTec shareholders in the event Pangea's controlling shareholder realizes certain returns on its post-merger Pangea stock. A liability of $0.7 million was recognized for the fair value of the contingent consideration on the acquisition date. The liability for the contingent consideration is adjusted to fair value at each reporting date. (Refer to Note 9, Fair Value Measurements). The liability for the fair value of the contingent consideration was $0.7 million as of June 30, 2020 and December 31, 2019.
On April 13, 2018, Western Standard, LLC, in its capacity as representative of the former BancTec shareholders filed suit in the Delaware Court of Chancery alleging that the above described earnout was triggered by the Novitex Business Combination and seeks payment of approximately $8.1 million in respect of the earnout. While the Company moved to dismiss the complaint because the earnout was moot or had not been triggered, on July 24, 2019, the Company was denied its motion to dismiss. The case is scheduled for trial in November 2020 in Wilmington, Delaware, and discovery is ongoing.
9. Fair Value Measurement
Assets and Liabilities Measured at Fair Value
The carrying amount of assets and liabilities including cash and cash equivalents, accounts receivable, accounts payable and current portion of long-term debt approximated their fair value as of June 30, 2020, and December 31, 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 28.0% and 24.5% respectively, of the respective principal balance outstanding as of June 30, 2020. The fair value is substantially less than the carrying value for the long-term debt. Other debt represents
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9. Fair Value Measurement
Assets and Liabilities Measured at Fair Value
The carrying amount of assets and liabilities including cash and cash equivalents, accounts receivable, accounts payable and current portion of long-term debt approximated their fair value as of March 31, 2021, and December 31, 2020, due to the relative short maturity of these instruments. Management estimates the fair values of the secured term loan and secured notes at approximately 39.0% and 35.5% respectively, of the respective principal balance outstanding as of March 31, 2021. The fair values of secured borrowings under the Company’s securitization facility and senior secured revolving credit facility are equal to the respective carrying values. Other debt represents the Company's outstanding loan balances associated with various hardware, and software purchases, maintenance and leasehold improvements along with loans and receivables factoring arrangement 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 23 measurement as it is based on using an earn out methodthe settlement amount based on the settlement agreement terms.terms less amount already paid.
The Company determined the fair value of the interest rate swap using Level 2 inputs. The Company usesused 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 June 30, 2020,March 31, 2021, and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying | | Fair | | Fair Value Measurements | | Carrying | | Fair | | Fair Value Measurements | ||||||||||||||||||
As of June 30, 2020 |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||||||||||||
As of March 31, 2021 |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||||||||||||
Recurring assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | $ | 1,493,775 | | $ | 512,602 | | $ | — | | $ | 512,602 | | $ | — | | $ | 1,499,031 | | $ | 668,483 | | $ | — | | $ | 668,483 | | $ | — |
Interest rate swap liability | | | 941 | | | 941 | | | — | | | 941 | | | — | |||||||||||||||
Acquisition contingent liability | | $ | 721 | | $ | 721 | | $ | — | | $ | — | | $ | 721 | |||||||||||||||
Nonrecurring assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | | 359,009 | | | 359,009 | | | — | | | — | | | 359,009 | | | 359,309 | | | 359,309 | | | — | | | — | | | 359,309 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying | | Fair | | Fair Value Measurements | | Carrying | | Fair | | Fair Value Measurements | ||||||||||||||||||
As of December 31, 2019 |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||||||||||||
As of December 31, 2020 |
| Amount |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||||||||||||
Recurring assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | $ | 1,398,385 | | $ | 632,796 | | $ | — | | $ | 632,796 | | $ | — | | $ | 1,498,004 | | $ | 604,775 | | $ | — | | $ | 604,775 | | $ | — |
Interest rate swap liability | | | 501 | | | 501 | | | — | | | 501 | | | — | | | 125 | | | 125 | | | — | | | 125 | | | — |
Acquisition contingent liability | | $ | 721 | | $ | 721 | | $ | — | | $ | — | | $ | 721 | | | 300 | | | 300 | | | — | | | — | | | 300 |
Nonrecurring assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | | 359,771 | | | 359,771 | | | — | | | — | | | 359,771 | | | 359,781 | | | 359,781 | | | — | | | — | | | 359,781 |
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:
| | | | | | |
| | June 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
Balance as of Beginning of Period | | $ | 721 | | $ | 721 |
Payments/Reductions | | | — | | | — |
Balance as of End of Period | | $ | 721 | | $ | 721 |
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| | | | | | |
| | March 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Balance as of Beginning of Period | | $ | 300 | | $ | 721 |
Earn-out Adjustment | | | — | | | 279 |
Payments | | | (300) | | | (700) |
Balance as of End of Period | | $ | — | | $ | 300 |
10. Stock-Based Compensation
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, 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. In accordance with GAAP, the Company incurred compensation expenses related to the 9,880 unvested RSUs as of July 12, 2017 on a straight-line basis until fully vested, as the recipients of the RSUs under the 2013 Plan were employees of the Company. All unvested RSUs under the 2013 Plan were vested by April 2019. As of June 30, 2020, there were 0 outstanding obligations under the 2013 Plan.
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 8,323,7642,774,588 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 toRSU activity under the 2018 Plan as of June 30, 2020for the three months ended March 31, 2021 is presented as follows:summarized in the following table:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | Average | | | | | | | | | | Average | | | |
| | | | Weighted | | Remaining | | | | | | Weighted | | Remaining | | | ||||
| | Number | | Average Grant | | Contractual Life | | Aggregate | | Number | | Average Grant | | Contractual Life | | Aggregate | ||||
|
| of Shares |
| Date Fair Value |
| (Years) |
| Intrinsic Value |
| of Shares |
| Date Fair Value |
| (Years) |
| Intrinsic Value | ||||
Balance as of December 31, 2019 | | 309,305 | | $ | 1.99 |
| 1.19 | | $ | 616 | ||||||||||
Outstanding Balance as of December 31, 2020 | | 26,455 | | $ | 3.78 |
| 0.91 | | $ | 50 | ||||||||||
Granted |
| — | |
| — | | | | | |
| 676,677 | |
| 2.71 | | | | | |
Forfeited |
| — | |
| — | | | | | |
| — | |
| — | | | | | |
Vested |
| (165,258) | |
| 2.50 | | | | | |
| — | |
| — | | | | | |
Balance as of June 30, 2020 | | 144,047 | | $ | 1.40 |
| 1.59 | | $ | 202 | ||||||||||
Outstanding Balance as of March 31, 2021 | | 703,132 | | $ | 2.75 |
| 0.88 | | $ | 1,934 |
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 infor the first sixthree months of 2020ended March 31, 2021 is summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Weighted | | Weighted | | Average Remaining | | | | | | | | | | | Average | | | | ||||
| | | | Average Grant | | Average | | Vesting Period | | Aggregate | | | | Weighted | | Weighted | | Remaining | | | | |||||
|
| Outstanding |
| Date Fair Value |
| Exercise Price |
| (Years) |
| Intrinsic Value (2) | | | | Average Grant | | Average | | Vesting Period | | Aggregate | ||||||
Balance as of December 31, 2019 | | 4,937,700 |
| $ | 1.97 |
| $ | 4.14 |
| 2.27 |
| $ | — | |||||||||||||
|
| Outstanding |
| Date Fair Value |
| Exercise Price |
| (Years) |
| Intrinsic Value (2) | ||||||||||||||||
Outstanding Balance as of December 31, 2020 | | 1,635,700 |
| $ | 5.67 |
| $ | 11.89 |
| 1.42 |
| $ | — | |||||||||||||
Granted |
| — |
| | — |
| | | | | | | |
| — |
| | — |
| | | | | | | |
Exercised |
| — | | | — | | | | | | | | |
| — | | | — | | | | | | | | |
Forfeited |
| (79,000) | | | 2.69 | | | | | | | | |
| (60,467) | | | 5.72 | | | | | | | | |
Expired | | — | | | — | | | | | | | | | | — | | | — | | | | | | | | |
Balance as of June 30, 2020 (1) |
| 4,858,700 |
| $ | 1.96 |
| $ | 4.11 |
| 1.78 |
| $ | — | |||||||||||||
Outstanding Balance as of March 31, 2021 (1) |
| 1,575,233 |
| $ | 5.67 |
| $ | 11.89 |
| 1.22 |
| $ | — |
(1) NaN364,680 of the outstanding options are exercisable as of June 30, 2020.March 31, 2021.
(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.
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As of June 30, 2020,March 31, 2021, there was approximately $4.2$4.0 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 $0.9$0.4 million and $1.8$0.9 million related to plan awards for the three and six months ended June 30,March 31, 2021 and 2020, respectively, and $2.6 million and $5.5 million related to plan awards for the three and six months ended June 30, 2019, respectively.
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. 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,Agreement to which the Company is party, the holders of our Common Stock possess all voting power for the election of 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 our Common Stock are entitled to 1 vote per share on matters to be voted on by stockholders. Holders of 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 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, 1,004,183Common Stock. During the three months ended March 31, 2021, 510,681 shares of Series A Preferred Stock were converted into 1,227,714223,413 shares of Common Stock. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, there were 147,511,43059,192,012 and 150,851,68949,242,225 shares outstanding, respectivelyrespectively.
Reverse Stock Split
On January 25, 2021, we effected a one-for-three reverse split (the “Reverse Stock Split”) of our issued and outstanding shares of Common Stock. As a result of the Reverse Split every three (3) shares of Common Stock asissued and outstanding were automatically combined into one (1) share of issued and outstanding Common Stock, without any change in the par value per share. All information related to Common Stock, stock options, restricted stock units, warrants and earnings per share have been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented.
Giving effect to the Reverse Split the Company’s issued and outstanding stock decreased from 147,511,430 to 49,242,225 at 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).2020.
Preferred Stock
The Company is authorized to issue 20,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the board of directors. At June 30,December 31, 2020 and December 31, 2019, the Company had 3,290,050 shares and 4,294,233 shares of Series A Preferred 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 beis convertible at the holder's option, at any time afterinto the six month anniversary and prior to the third anniversarynumber of shares of Common Stock determined as of the issue date initiallyof conversion using a certain conversion formula that takes into 1.2226account the amount of Liquidation Preference per share as adjusted for accrued but unpaid dividends, as described below. As of March 31, 2021, after taking into account the effect of the Reverse Stock Split, each outstanding share of Series A Preferred Stock was convertible into 0.4375 shares of Exela Common Stock using this conversion formula. Accordingly, as of March 31, 2021, 1,215,924 shares of Common Stock were issuable upon conversion of the remaining 2,779,369 shares of Series A Preferred Stock.
Holders of the Series A Preferred Stock are be entitled to receive cumulative dividends at a rate per annum of 10% of the Liquidation Preferencedollar amount of per share liquidation preference (plus accumulated but unpaid dividends, the “Liquidation
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Preference") per share of Series A Preferred Stock, paid or accrued quarterly in arrears. From the issue date until the third anniversary of the issue date,through December 31, 2020 the amount of all accrued but unpaid dividends on the Series A Preferred Stock will behave been added to the Liquidation Preference. The Company shall add the amount of all accrued but unpaid dividends on each quarterly 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 actionshall be reduced on a dollar-for-dollar basis by the Company’s boardamount of directors. However, theany 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.conversion of such shares. The gross dividend accumulation for the three months ended June 30,March 31, 2021 was $0.9 million. However, as a result of 510,681 shares of Series A Preferred Stock being converted into 223,413 shares of Common Stock during the first quarter of 2021, accumulated dividend of $1.8 million was reversed, resulting in a net reduction of dividend accumulation of $0.9 million for the three months ended March 31, 2021. Similarly, the gross dividend accumulation for the three months ended March 31, 2020 was $0.9 million, as reflected on the Consolidated Statement of Operations, however,$0.9 million. However, as a result of 1,004,183 shares of Series A Preferred Stock being converted into 1,227,714409,238 shares of Common Stock during the first quarter of 2020, accumulated dividend of $2.3 million was reversed, resulting in a net reduction of dividend accumulation of $0.6$1.4 million for the sixthree months ended June 30,March 31, 2020. The dividend accumulation for the three and six months ended June 30, 2019 was $0.9 million and $1.8 million, respectively. As of June 30, 2020,March 31, 2021, the total accumulated but unpaid dividends on the Series A Preferred Stock since inception on July 12, 2017 is $8.9$9.9 million. The per share average of cumulative preferred dividends for the three and six months ended June 30,March 31, 2021 and 2020 is $0.3$(0.3) and $(0.2)$(0.4), respectively. The per share average of cumulative preferred dividends for the three and six months ended June 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 pro rata with the holders of the Common Stock (other than certain dividends or distributions that trigger an adjustment to the conversion rate, as described in the Certificate of Designations), as if all shares of Series A Preferred Stock had been converted into Common Stock immediately prior to the date on which such holders of the Common Stock became entitled to such dividend or distribution.
Treasury Stock
On November 8, 2017, the Company’s board of directors authorized a share buyback program (the “Share Buyback Program”), pursuant to which the Company was permitted to purchase up to 5,000,0001,666,667 shares of its Common Stock. The Share Buyback Program has expired. As of June 30, 2020, 2,787,147March 31, 2021, 929,049 shares had been repurchased under the Share Buyback Program and they are held inas treasury stock. The Company records treasury stock using the cost method.
During the first quarter of 2020, 4,570,7341,523,578 shares of Common stockStock 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 June 30, 2020,March 31, 2021, there were a totalwarrants outstanding to purchase 15,565,152 shares of 34,988,302our Common Stock, consisting of 35,000,000 warrants outstanding. to purchase one-sixth of one share outstanding from our 2015 IPO and 9,731,819 warrants to purchase one share from the private placement that was completed in March 2021.
IPO Warrants
As part of its IPO, Quinpario had issued 35,000,000 units includingcomprising 1 share of Common Stock and 1 warrant of which 34,988,30234,986,302 have been separated from the original unit and 11,69813,698 warrants remain an unseparated part of the originally issued units which are(the Common Stock included in these originally issued units (adjusted to reflect the Reverse Split) have been accounted for in the number of shares of common stockCommon Stock outstanding referred to above.above). The warrants are traded on the OTC bulletin boardPink under the symbol “XELAW” as of June 30, 2020.March 31, 2021.
Each IPO warrant entitles the holder to purchase one-halfone-sixth of one share of Common Stock at a price of $5.75 per halfone-sixth share ($11.5034.50 per whole share). IPO Warrants may be exercised only for a whole number of shares of
26
Common Stock. No fractional shares will be issued upon exercise of the warrants. Each IPO 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 IPO 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 the shares of Common Stock equals or exceeds $24.00$72.00 per share for any 20 trading days within a 30 trading day period (the “30-day trading period”) ending three business days before 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 underlying such warrants commencing five business days prior to the 30-day trading period and continuing each day thereafter until the date of redemption.
Private Placement of Unregistered Shares and Warrants
On March 15, 2021, the Company, entered into a securities purchase agreement with certain accredited institutional investors pursuant to which the Company issued and sold to the ten accredited institutional investors in a private placement an aggregate of 9,731,819 unregistered shares of the Company’s Common Stock at a price of $2.75 per share and an equal number of warrants, generating gross proceeds to the Company of $26.8 million. Cantor Fitzgerald acted as underwriter in connection with such sale of unregistered securities and received a placement fee of 5.5% of gross proceeds in connection with such service. In selling the shares without registration, the Company relied on exemptions from registration available under Section 4(a)(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The shares of Common Stock sold together with these warrants are included in the Company’s calculation of total shares outstanding. The Company filed a registration statement on Form S-3 on May 3, 2021 to register these shares and the shares underlying these private placement warrants.
Each private placement warrant entitles the holder to purchase one share of Common Stock, will be exercisable at an exercise price of $4.00 per share beginning on September 19, 2021 and will expire on September 19, 2026. The private placement warrants are not traded as of March 31, 2021 and are not subject to redemption by the Company.
12. Related-Party Transactions
Relationship with HandsOn Global Management
The Company incurred reimbursable travel expenses to HOVS LLC and HandsOn Fund 4 I, LLC (collectively, together with certain affiliated entities controlled by HandsOn Global Management LLC, “HGM”) of less than $0.1 million and $0.2 million for each of the three months ended June 30, 2020March 31, 2021 and 2019, respectively and less than $0.1 million and $0.3 million for the six months ended June 30, 2020 and 2019, respectively.2020. As of June 30, 2020, and following a distribution of all the shares held by Ex-Sigma 2,March 31, 2021, HGM beneficially owned approximately 50%40% of the Company’s common stock,Common Stock, including shares controlled pursuant to a voting agreement.agreements (as described below) and shares issuable upon conversion of Series A Preferred Stock.
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 Company in such third-party sale is shared 75%/25% with each of HGM’s venture affiliates in favor of the Company.
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The brands Zuma, Athena, Peri, BancMate, Spring, Jet, Teletype, CourtQ and Rewardio are part of the HGM managed funds. The Company has the license to use and resell such brands, as described therein. The Company incurred fees relating to these agreements of $0.4$1.1 million and less than $0.1$0.4 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The Company incurred fees relating to these agreements of $0.8 million and $0.1 million for the six months ended June 30, 2020 and 2019, respectively
Certain operating companies lease their operating facilities from HOV RE, LLC and HOV Services Limited, which are affiliates under common control with HGM. The rental expense for these operating leases was less than $0.1 million and $0.1 million for each of the three months ended June 30, 2020March 31, 2021 and 2019, respectively, and $0.1 million and $0.3 million for the six months ended June 30, 2020 and 2019, respectively.2020. In addition, HOV Services, Ltd. provides the Company data capture and technology services. The expense recognized for these services was approximately $0.3
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million and $0.4 million for each of the three months ended June 30,March 31, 2021 and 2020, and 2019, and $0.8 million for each of the six months ended June 30, 2020 and 2019.respectively. 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, the former majority shareholder of the Company, under the terms of the Consent, Waiver and Amendment dated June 15, 2017, by and among the Company, Quinpario Merger Sub I, Inc., Quinpario Merger Sub II, Inc., SourceHOV, Novitex, Novitex Parent, L.P., Ex Sigma LLC (“Ex-Sigma”), HOVS LLC and HandsOn Fund 4 I, LLC, amending the Novitex Business Combination agreement (the “Consent, Waiver and Amendment”). The Company recorded related partyincurred reimbursable expenses to Ex-Sigma 2 of less than $0.1 million and $0.5$0.2 million for the three months ended June 30,March 31, 2020 and 2019, respectively, and $0.2 million and $0.5 million for the six months ended June 30, 2020 and 2019, respectively, for reimbursablein connection with legal expenses of Ex-Sigma 2. The Company recorded related party expenses of $1.7 million for the three and six months ended June 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 three and six months ended June 30, 2019 forThere were 0 such 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 madeincurred 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 for the three months ended June 30, 2020.March 31, 2021. Ex-Sigma 2 distributed the shares held by it during the first quarter of 2020 and is no longer a shareholder of Exela. Many recipients of these shares have entered into voting agreements in respect of those shares with HGM.
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 less than $0.1 million for each of the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $0.1 million for each of the six months ended June 30, 2020 and 2019, respectively.
Relationship with Apollo Global Management, LLC
The Company provides services to and receives services from certain Apollo Global Management, Inc.LLC (“Apollo”) affiliated companies. Funds managed by Apollo 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 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 providesprovided printer supplies and maintenance services, including toner maintenance, training, quarterly business review and printer procurement. The Company recognized revenue of $0.2 million and $0.3less than $0.1 million under this agreement for the three months and six months ended June 30, 2019, respectively,March 31, 2020 in its consolidated statements of operations. The Company recognized revenue of less than $0.1 million for the six months ended June 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 $2.2 million for the three months and six months ended June 30, 2019, respectively, in its consolidated statements of operations. The Company recognized revenue of $0.9 million for the six months ended June 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 $0.6 million for the three months and six months ended June 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 six months ended June 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 $0.9 million and $2.6 million for the three months and six months ended June 30, 2019, respectively, and cost of revenue of $0.1 million for the six months ended June 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 six months ended June 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 providesprovided the Company with employees, subcontractors, and/or goods and services. For the three months and six months ended June 30, 2019 there were related party expenses of $0.2 million and $0.4 million for this service. For the six months ended June 30,March 31, 2020 there were related party expenses of $0.2 million.
In June 2002,On January 18, 2017, one of the Company’s subsidiaries entered into a systemsmaster purchase and licenseprofessional services agreement with Evertec GroupCaesars Enterprise Services, LLC (“Evertec”(‘‘Caesars’’). EvertecCaesars is controlled by investment funds affiliated with Apollo. Pursuant to thethis master purchase and professional services agreement, the Company provided systemmanaged print services to Caesars, including general equipment operation, supply management, support services 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.technical support. The Company recognized revenue of less than $0.1$0.9 million and $0.1 million under these agreements for the three months and six months ended June 30, 2019, respectively,March 31, 2020 in its consolidated statements of operations.
On May 5, 2017, one of the Company’s subsidiaries entered into a master services agreement with ADT LLC. ADT LLC is controlled by investment funds affiliated with Apollo. Pursuant to this master services agreement, the Company provided 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 less than $0.1$0.3 million under this master services agreement for the sixthree months ended June 30, 2020.March 31, 2020 in its consolidated statements of operations.
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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 provided commercial print and promotional product procurement services to Diamond Resorts Centralized Services Company, including sourcing, inventory management and fulfillment services. The Company recognized revenue of $0.9 million and cost of revenue of less than $0.1 million under this master services agreement for the three months ended March 31, 2020 in its consolidated statements of operations.
Payable and ReceivableReceivable/Prepayment Balances with Affiliates
Payable and receivablereceivable/prepayment balances with affiliates as of June 30, 2020March 31, 2021 and December 31, 20192020 are as follows below.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, | | December 31, | | | | | ||||||||||||||||
| | 2020 |
| 2019 | | March 31, 2021 |
| December 31, 2020 | ||||||||||||||||
| | Receivable | | Payable | | Receivable | | Payable | | Receivables and | | Payables | | Receivables and | | Payables | ||||||||
HOV Services, Ltd | | $ | 672 | | $ | — | | $ | 601 | | $ | — | | $ | 702 | | $ | — | | $ | 711 | | $ | — |
Rule 14 | | | 172 | | | — | | | — | | | 250 | | | — | | | 80 | | | — | | | 44 |
HGM | | | 62 | | | — | | | 115 | | | — | | | — | | | 43 | | | — | | | 52 |
Apollo affiliated company | | | — | | | — | | | — | | | 202 | ||||||||||||
Oakana | | | — | | | 2 | | | — | | | 1 | | | — | | | 1 | | | — | | | 1 |
Ex-Sigma 2 | | | — | | | — | | | — | | | 1,287 | ||||||||||||
| | $ | 906 | | $ | 2 | | $ | 716 | | $ | 1,740 | | $ | 702 | | $ | 124 | | $ | 711 | | $ | 97 |
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, approaches the markets and interacts with its clients. The Company is organized into 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 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 June 30, 2020 | ||||||||||
|
| ITPS |
| HS |
| LLPS |
| Total | ||||
Revenue | | $ | 243,029 | | $ | 49,166 | | $ | 15,527 | | $ | 307,722 |
Cost of revenue (exclusive of depreciation and amortization) | |
| 195,835 | |
| 36,148 | |
| 9,805 | |
| 241,788 |
Segment profit | | | 47,194 | | | 13,018 | | | 5,722 | | | 65,934 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | | | | | | | | | | |
| 47,014 |
Depreciation and amortization | | | | | | | | | | |
| 22,847 |
Related party expense | | | | | | | | | | |
| 1,146 |
Interest expense, net | | | | | | | | | | |
| 44,440 |
Sundry income, net | | | | | | | | | | |
| (899) |
Other income, net | | | | | | | | | | |
| (584) |
Net loss before income taxes | | | | | | | | | |
| $ | (48,030) |
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| | | | | | | | | | | | |
| | | Three months ended March 31, 2021 | |||||||||
|
| ITPS |
| HS |
| LLPS |
| Total | ||||
Revenue | | $ | 231,875 | | $ | 51,093 | | $ | 17,088 | | $ | 300,056 |
Cost of revenue (exclusive of depreciation and amortization) | | | 185,502 | | | 35,818 | | | 11,267 | | | 232,587 |
Segment profit | | | 46,373 | | | 15,275 | | | 5,821 | | | 67,469 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | | | | | | | | | | | | 41,885 |
Depreciation and amortization | | | | | | | | | | | | 19,599 |
Related party expense | | | | | | | | | | | | 1,707 |
Interest expense, net | | | | | | | | | | | | 43,131 |
Sundry expense, net | | | | | | | | | | | | 213 |
Other expense, net | | | | | | | | | | | | 152 |
Net loss before income taxes | | | | | | | | | | | $ | (39,218) |
| | | | | | | | | | | | |
| | Three months ended June 30, 2019 (Restated) | ||||||||||
|
| ITPS |
| HS |
| LLPS |
| Total | ||||
Revenue | | $ | 309,840 | | $ | 63,440 | | $ | 17,569 | | $ | 390,849 |
Cost of revenue (exclusive of depreciation and amortization) | |
| 249,589 | |
| 43,353 | |
| 10,889 | |
| 303,831 |
Segment profit | | | 60,251 | | | 20,087 | | | 6,680 | | | 87,018 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | | | | | | | | | | |
| 51,162 |
Depreciation and amortization | | | | | | | | | | |
| 24,779 |
Related party expense | | | | | | | | | | |
| 5,331 |
Interest expense, net | | | | | | | | | | |
| 39,959 |
Debt modification and extinguishment costs | | | | | | | | | | | | 1,404 |
Sundry income, net | | | | | | | | | | |
| (1,311) |
Other expense, net | | | | | | | | | | |
| 2,527 |
Net loss before income taxes | | | | | | | | | |
| $ | (36,833) |
| | | | | | | | | | | | |
| | | Six months ended June 30, 2020 | |||||||||
|
| ITPS |
| HS |
| LLPS |
| Total | ||||
Revenue | | $ | 527,140 | | $ | 113,216 | | $ | 32,817 | | $ | 673,173 |
Cost of revenue (exclusive of depreciation and amortization) | | | 430,954 | | | 81,078 | | | 22,294 | | | 534,326 |
Segment profit | | | 96,186 | | | 32,138 | | | 10,523 | | | 138,847 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | | | | | | | | | | | | 97,387 |
Depreciation and amortization | | | | | | | | | | | | 46,032 |
Related party expense | | | | | | | | | | | | 2,698 |
Interest expense, net | | | | | | | | | | | | 86,028 |
Sundry income, net | | | | | | | | | | | | 183 |
Other income, net | | | | | | | | | | | | (35,241) |
Net loss before income taxes | | | | | | | | | | | $ | (58,240) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six months ended June 30, 2019 (Restated) | | | Three months ended March 31, 2020 | ||||||||||||||||||
|
| ITPS |
| HS |
| LLPS |
| Total |
| ITPS |
| HS |
| LLPS |
| Total | ||||||||
Revenue | | $ | 635,012 | | $ | 124,783 | | $ | 35,411 | | $ | 795,206 | | $ | 284,112 | | $ | 64,049 | | $ | 17,290 | | $ | 365,451 |
Cost of revenue (exclusive of depreciation and amortization) | | | 508,861 | | | 83,694 | | | 21,877 | | | 614,432 | | | 235,120 | | | 44,931 | | | 12,488 | | | 292,539 |
Segment profit | | | 126,151 | | | 41,089 | | | 13,534 | | | 180,774 | | | 48,992 | | | 19,118 | | | 4,802 | | | 72,912 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | | | | | | | | | | | | 100,839 | | | | | | | | | | | | 50,374 |
Depreciation and amortization | | | | | | | | | | | | 51,403 | | | | | | | | | | | | 23,185 |
Related party expense | | | | | | | | | | | | 6,329 | | | | | | | | | | | | 1,551 |
Interest expense, net | | | | | | | | | | | | 79,660 | | | | | | | | | | | | 41,588 |
Debt modification and extinguishment costs | | | | | | | | | | | | 1,404 | ||||||||||||
Sundry expense, net | | | | | | | | | | | | 1,404 | | | | | | | | | | | | 1,082 |
Other expense, net | | | | | | | | | | | | 4,020 | ||||||||||||
Other income, net | | | | | | | | | | | | (34,657) | ||||||||||||
Net loss before income taxes | | | | | | | | | | | $ | (64,285) | | | | | | | | | | | $ | (10,211) |
14. Subsequent Events
The Company performed its subsequent event procedureshas evaluated all events that occur after the balance sheet date through August 10, 2020, the date when these condensed consolidated financial statements were made available for issuance.
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Sale of Physical Records Storage Business
issued to determine if they must be reported. On July 22, 2020April 11, 2021, the Company completedamended the saleSecuritization Loan Agreement and agreed to, among other things, extend the option to access approximately $53.0 million in additional borrowings from April 10, 2021 to September 30, 2021 upon the contribution of its physical records storageinventory and logistics business for a purchase price of $12.3 million.
intellectual property to support the borrowing base.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis together with our 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, estimated or anticipated future results and benefits, future opportunities for 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. The factors that may affect our results include, among others: the impact of political and economic conditions on the demand for our services; the impact of the COVID-19 pandemic; the impact of a data or security breach; the impact of competition or alternatives to our services on our business pricing and other actions by competitors; our ability to address technological development and change in order to keep pace with our industry and the industries of our customers; the impact of terrorism, natural disasters or similar events on our business; the effect of legislative and regulatory actions in the United States and internationally; the impact of operational failure due to the unavailability or failure of third-party services on which we rely; the effect of intellectual property infringement; and other factors discussed in this quarterly report and our Annual Report under the heading “Risk Factors”, and otherwise identified or discussed in this quarterly report. You should consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on such statements, which speak only as of the date of this quarterly report. It is impossible for us to predict new events or circumstances that may arise in the future or how they may affect us. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this quarterly report. We are not including the information provided on 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 our expectations, plans or forecasts of future events and views as of the date of this quarterly report. We anticipate that subsequent events and developments may cause oursour assessments to change. These forward-looking statements should not be relied upon as representing our assessments as of any date subsequent to the date of this quarterly report.
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Overview
Exela Technologies, Inc. (“Exela,” the “Company”, “we” or “us”) is a global business process 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 global organizations to address critical challenges resulting from the massive amounts of data obtained and created through their daily 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 21,000approximately 18,400 employees operating in 2322 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 customers’ organizations to more efficiently and effectively execute transactions, make decisions, drive revenue and
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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 checkspecial purpose acquisition 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 Exela Technologies, Inc.
The Novitex Business Combination was accounted for as a reverse merger for which SourceHOV was determined to be the accounting acquirer. Outstanding shares of SourceHOV were converted into our 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.
On April 10, 2018, Exela completed the acquisitionSale of 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.Non-core Assets
On November 12, 2019 we announced that our Board of Directors had adopted a debt reduction and liquidity improvement initiative (“Initiative”). This new Initiative is part of the Company’s strategic priority to position the 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 advisors to assist with the sale of select assets. 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. 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 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, LLC for $40.0 million subject to adjustment as set forth in the purchase agreement.
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.
Reverse Stock Split
On January 25, 2021, we effected a one-for-three reverse split of our issued and outstanding shares of our Common Stock. At the effective time of the reverse split, every three (3) shares of Common Stock issued and outstanding were automatically combined into one (1) share of issued and outstanding Common Stock, without any change in the par value per share. Our Common Stock began trading on The Nasdaq Capital Market on a Reverse Stock Split-adjusted basis on January 26, 2021. There was no change in our ticker symbol as a result of the Reverse Stock Split.
Our Segments
Our three reportable segments are Information & Transaction Processing Solutions (“ITPS”), Healthcare Solutions (“HS”), and Legal & Loss Prevention Services (“LLPS”). These segments are comprised of significant strategic business units that align our TPS and EIM products and services with how we manage our business, approach our key markets and interact with our customers based on their respective industries.
ITPS: Our largest segment, ITPS, provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning and distribution to customers primarily in the financial services, commercial, public sector and legal industries. Our major customers include many leading banks, insurance companies, and utilities, as well as hundreds of federal, state and 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.
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HS: HS operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets. We serve the top healthcare insurance payers and hundreds of healthcare providers.
LLPS: Our LLPS segment provides a broad and active array of support services in connection with class action, bankruptcy labor, claims adjudication and employment and other legal matters. Our customer base consists of corporate counsel, government attorneys, and law firms.
Revenues
ITPS revenues are primarily generated from a transaction-basedtransaction 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-basedtransaction based pricing model for the various types of volumes processed for healthcare payers and providers. LLPS revenues are primarily based on time and materials pricing as well as through transactional services priced on a per item basis.
People
We draw on the business and technical expertise of our talented and diverse global workforce to provide our customers with high-quality services. Our business leaders bring a strong diversity of experience in our industry and a track record of successful performance and execution.
As of June 30, 2020,March 31, 2021, we had approximately 21,00018,400 employees globally, with 62%58% located in Americas and EMEA, and the remainder located primarily in India, the Philippines and China.
Costs associated with our employees represent the most significant expense for our business. We incurred personnel costs of $147.7$139.5 million and $181.0$182.7 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. We incurred personnel costs of $330.2 million and $359.0 million for the six months ended June 30, 2020 and 2019, respectively. The majority of our personnel costs are variable and incurred only while we are providing our services.
Key Performance Indicators
We use a variety of operational and financial measures to assess our performance. Among the measures considered by our management are the following:
● | Revenue by segment; |
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● | EBITDA; and |
● | Adjusted EBITDA |
Revenue by 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.
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
33
EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Results of Operations
Three Months Ended June 30, 2020March 31, 2021 compared to Three Months Ended June 30, 2019:March 31, 2020:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | ||||
| | |
| 2019 | | | | | | | ||
|
| 2020 |
| (Restated) |
| Change |
| % Change | ||||
Revenue: |
| |
|
| |
| | |
|
| |
|
ITPS | | $ | 243,029 | | $ | 309,840 | | $ | (66,811) | | | -21.56% |
HS | |
| 49,166 | |
| 63,440 | |
| (14,274) | |
| -22.50% |
LLPS | |
| 15,527 | |
| 17,569 | |
| (2,042) | |
| -11.62% |
Total revenue | |
| 307,722 | |
| 390,849 | |
| (83,127) | |
| -21.27% |
Cost of revenue (exclusive of depreciation and amortization): | |
|
| |
|
| |
|
| |
|
|
ITPS | |
| 195,835 | |
| 249,589 | |
| (53,754) | |
| -21.54% |
HS | |
| 36,148 | |
| 43,353 | |
| (7,205) | |
| -16.62% |
LLPS | |
| 9,805 | |
| 10,889 | |
| (1,084) | |
| -9.96% |
Total cost of revenues | |
| 241,788 | |
| 303,831 | |
| (62,043) | |
| -20.42% |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | |
| 47,014 | |
| 51,162 | |
| (4,148) | |
| -8.11% |
Depreciation and amortization | |
| 22,847 | |
| 24,779 | |
| (1,932) | |
| -7.80% |
Related party expense | |
| 1,146 | |
| 5,331 | |
| (4,185) | |
| -78.50% |
Operating income (loss) | |
| (5,073) | |
| 5,746 | |
| (10,819) | |
| -188.29% |
Interest expense, net | |
| 44,440 | |
| 39,959 | |
| 4,481 | |
| 11.21% |
Debt modification and extinguishment costs | | | — | | | 1,404 | | | (1,404) | | | -100.00% |
Sundry income, net | |
| (899) | |
| (1,311) | |
| 412 | |
| -31.43% |
Other expense (income), net | |
| (584) | |
| 2,527 | |
| (3,111) | |
| -123.11% |
Net loss before income taxes | |
| (48,030) | |
| (36,833) | |
| (11,197) | |
| 30.40% |
Income tax expense | |
| (661) | |
| (4,738) | |
| 4,077 | |
| -86.05% |
Net loss | | $ | (48,691) | | $ | (41,571) | | $ | (7,120) | |
| 17.13% |
36
| | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | | ||||
|
| 2021 |
| 2020 |
| Change |
| % Change | ||||
Revenue: |
| |
|
| |
| | |
|
| |
|
ITPS | | $ | 231,875 | | $ | 284,112 | | $ | (52,237) | | | (18.39)% |
HS | |
| 51,093 | |
| 64,049 | |
| (12,956) | |
| (20.23)% |
LLPS | |
| 17,088 | |
| 17,290 | |
| (202) | |
| (1.17)% |
Total revenue | |
| 300,056 | |
| 365,451 | |
| (65,395) | |
| (17.89)% |
Cost of revenue (exclusive of depreciation and amortization): | |
|
| |
|
| |
|
| |
|
|
ITPS | |
| 185,502 | |
| 235,120 | |
| (49,618) | |
| (21.10)% |
HS | |
| 35,818 | |
| 44,931 | |
| (9,113) | |
| (20.28)% |
LLPS | |
| 11,267 | |
| 12,488 | |
| (1,221) | |
| (9.78)% |
Total cost of revenues | |
| 232,587 | |
| 292,539 | |
| (59,952) | |
| (20.49)% |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | |
| 41,885 | |
| 50,374 | |
| (8,489) | |
| (16.85)% |
Depreciation and amortization | |
| 19,599 | |
| 23,185 | |
| (3,586) | |
| (15.47)% |
Related party expense | |
| 1,707 | |
| 1,551 | |
| 156 | |
| 10.06% |
Operating profit (loss) | |
| 4,278 | |
| (2,198) | |
| 6,476 | |
| (294.63)% |
Interest expense, net | |
| 43,131 | |
| 41,588 | |
| 1,543 | |
| 3.71% |
Sundry expense, net | |
| 213 | |
| 1,082 | |
| (869) | |
| (80.31)% |
Other expense (income), net | |
| 152 | |
| (34,657) | |
| 34,809 | |
| (100.44)% |
Net loss before income taxes | |
| (39,218) | |
| (10,211) | |
| (29,007) | |
| 284.08% |
Income tax benefit (expense) | |
| 18 | |
| (2,459) | |
| 2,477 | |
| (100.73)% |
Net loss | | $ | (39,200) | | $ | (12,670) | | $ | (26,530) | |
| 209.39% |
Revenue
For the three months ended June 30, 2020,March 31, 2021, our revenue decreased by $83.1$65.4 million, or 21.3%17.9%, to $307.7$300.1 million from $390.8$365.5 million for the three months ended June 30, 2019.March 31, 2020. We experienced revenue declines on all of our segments due to lower transaction volumes since mid-March of 2020 as a result of COVID-19. Our ITPS, HS, and LLPS segments constituted 79.0%77.3%, 16.0%17.0%, and 5.0%5.7% of total revenue, respectively, for the three months ended June 30, 2020,March 31, 2021, compared to 79.3%77.7%, 16.2%17.5%, and 4.5%4.7%, respectively, for the three months ended June 30, 2019.March 31, 2020. The revenue changes by reporting segment were as follows:
ITPS— For the three months ended June 30, 2020,March 31, 2021, revenue attributable to our ITPS segment decreased by $66.8$52.2 million, or 21.6%18.4% 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 June 30, 2020,March 31, 2021, revenue attributable to our HS segment decreased by $14.3$13.0 million, or 22.5%20.2% 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 June 30, 2020,March 31, 2021, revenue attributable to our LLPS segment decreased by $2.0$0.2 million, or 11.6%1.2% compared to the same period in the prior year primarily due to a decline in legal claims administration services.
34
Cost of Revenue
For the three months ended June 30, 2020,March 31, 2021, our direct costs decreased by $62.0$60.0 million, or 20.4%20.5%, compared to the three months ended June 30, 2019.March 31, 2020. On each of our ITPS and HS segments, the decrease was primarily attributable to the corresponding decline in revenues. Costs on ITPS segment decreased by $53.8$49.6 million, or 21.5%21.1%, HS segment decreased by $7.2$9.1 million, or 16.6%,20.3% and LLPS segment decreased by $1.1$1.2 million,or 10.0%9.8%.
The decrease in cost of revenues was primarily due to a decrease in employee-related costs of $33.6 million, lower travel costs of $1.3 million, lower infrastructure and maintenance costs of $6.7 million and other operating costs of $18.4 million. 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 March 31, 2021.
Cost of revenue for the three months ended June 30, 2020March 31, 2021 was 78.6%77.5% compared to the 77.7%80.0% for the comparable same period in the prior year. The increasedecrease in cost of revenues, as a percentage of revenues by 0.8%2.5% was primarily due to the impact of lower costs related to the transition revenue that we expectcontinues to seebe gradually removed to further improve the gross margin profile of the business over the remainder of the year.business.
Selling, General and Administrative Expenses
SG&A expenses decreased $4.1$8.5 million, or 8.1%16.9%, to $47.0$41.9 million for the three months ended June 30, 2020,March 31, 2021, compared to $51.2$50.4 million for the three months ended June 30, 2019.March 31, 2020. The decrease was primarily attributable to lower compensation expenses, includingemployee related costs by $9.7 million, lower stock compensation expense that wastravel costs of $0.8 million, lower infrastructure and maintenance costs of $0.9 million, offset by higher professional fees.fees and other costs of $2.9 million. .
SG&A expenses increased as a percentage of revenues to 15.3% in 202014.0% for the three months ended March 31, 2021 as compared to 13.1% in 2019.13.8% for the three months ended March 31, 2020. The increase, as a percentage of revenues by 2.2%0.2%, was primarily due to the decline in revenues brought on by the COVID-19 pandemic and the continued removal of transition revenue.
Depreciation & Amortization
Total depreciation and amortization expense was $22.8$19.6 million and $24.8$23.2 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The decrease in total depreciation and amortization expense by $3.6 million was primarily due to a decreasereduction in amortizationdepreciation expense from intangibleas a result of the expiration of the lives of assets resulting from business combinations completedacquired in prior periods and a decrease in depreciationintangibles amortization expense relateddue to an increase inend of useful lives for certain intangible assets that are fully amortized.during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
37
Related Party Expenses
Related party expense was $1.1$1.7 million and $5.3$1.6 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The lower related party expense in 2020 is attributable to the curtailment in reimbursements made to Ex-Sigma 2 LLC (our largest shareholder following the Novitex Business Combination (“Ex-Sigma 2”)) and Ex-Sigma LLC (the sole equity holder of Ex-Sigma 2 (“Ex-Sigma”)). 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
The Company pays interest on its Notes on a semi-annual basis in the first and third quarters of each year. Interest expense was $44.4$43.1 million and $40.0$41.6 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The increase in interest costs was partially attributable to the interest on A/R Facilitysecuritization facilities and other interest accruals that was not incurred during the corresponding period in 2019.2020.
Sundry IncomeExpense
The decrease of $0.4$0.9 million over the prior year period was primarily attributable to exchange rate fluctuations on foreign currency transaction gain / losses associated with exchange rate fluctuations.transactions.
35
Other Expense (Income)
Other expense, (income), net was $(0.6) million and $2.5$0.2 million for the three months ended June 30, 2020 and 2019, respectively.March 31, 2021 compared to other income of ($34.7) million for the three months ended March 31, 2020. The change was primarily due to the gain of $35.3 million on the sale of SourceHOV Tax, LLC recognized on March 16, 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 June 30, 2020,March 31, 2021, the fair value of the interest swap decreased $3.1changed by $0.1 million.
Income Tax Expense (Benefit)
We had a nominal income tax benefit for the three months ended March 31, 2021 compared with an income tax expense of $0.7 million and $4.7$2.5 million for the three months ended June 30, 2020 and 2019, respectively.March 31, 2020. The change in the income tax expensetaxes was primarily attributable to our change in judgment in 2021 related to the realizability of certain deferred tax assets.assets in certain state and foreign jurisdictions. The changesignificant decrease in the effective tax rate for the three months ended June 30, 2020, resultedMarch 31, 2021 was driven in large part by a Q1 2021 foreign tax benefit generated 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.
38
Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019:
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | ||||
|
| |
| 2019 |
| |
| | ||||
|
| 2020 |
| (Restated) |
| Change |
| % Change | ||||
Revenue: |
| |
|
| |
| | |
|
| |
|
ITPS | | $ | 527,140 | | $ | 635,012 | | $ | (107,872) | | | -16.99% |
HS | |
| 113,216 | |
| 124,783 | |
| (11,567) | |
| -9.27% |
LLPS | |
| 32,817 | |
| 35,411 | |
| (2,594) | |
| -7.33% |
Total revenue | |
| 673,173 | |
| 795,206 | |
| (122,033) | |
| -15.35% |
Cost of revenue (exclusive of depreciation and amortization: | |
|
| |
|
| |
|
| |
|
|
ITPS | |
| 430,954 | |
| 508,861 | |
| (77,907) | |
| -15.31% |
HS | |
| 81,078 | |
| 83,694 | |
| (2,616) | |
| -3.13% |
LLPS | |
| 22,294 | |
| 21,877 | |
| 417 | |
| 1.91% |
Total cost of revenues | |
| 534,326 | |
| 614,432 | |
| (80,106) | |
| -13.04% |
Selling, general and administrative expenses (exclusive of depreciation and amortization) | |
| 97,387 | |
| 100,839 | |
| (3,452) | |
| -3.42% |
Depreciation and amortization | |
| 46,032 | |
| 51,403 | |
| (5,371) | |
| -10.45% |
Related party expense | |
| 2,698 | |
| 6,329 | |
| (3,631) | |
| -57.37% |
Operating income (loss) | |
| (7,270) | |
| 22,203 | |
| (29,473) | |
| -132.74% |
Interest expense, net | |
| 86,028 | |
| 79,660 | |
| 6,368 | |
| 7.99% |
Debt modification and extinguishment costs | | | — | | | 1,404 | | | (1,404) | | | -100.00% |
Sundry expense, net | |
| 183 | |
| 1,404 | |
| (1,221) | |
| -86.97% |
Other expense (income), net | |
| (35,241) | |
| 4,020 | |
| (39,261) | |
| -976.64% |
Net loss before income taxes | |
| (58,240) | |
| (64,285) | |
| 6,045 | |
| -9.40% |
Income tax expense | |
| (3,120) | |
| (9,458) | |
| 6,338 | |
| -67.01% |
Net loss | | $ | (61,360) | | $ | (73,743) | | $ | 12,383 | |
| -16.79% |
Revenue
For the six months ended June 30, 2020, our revenue decreased by $122.0 million, or 15.3%, to $673.2 million from $795.2 million for the six months ended June 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 78.3%, 16.8%, and 4.9% of total revenue, respectively, for the six months ended June 30, 2020, compared to 79.9%, 15.7%, and 4.5%, respectively, for the six months ended June 30, 2019. The revenue changes by reporting segment were as follows:
ITPS— For the six months ended June 30, 2020, revenue attributable to our ITPS segment decreased by $107.9 million, or 17.0% compared to the same periodnon-recurring charges in the prior year. The majorityfirst quarter 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 during the three months ended June 30, 2019 as a result of COVID-19.
HS— For the six months ended June 30, 2020, revenue attributable to our HS segment decreased by $11.6 million, or 9.3% compared to the same period in the prior year primarily due to impact of COVID-19 on our healthcare customers.
LLPS— For the six months ended June 30, 2020, revenue attributable to our LLPS segment decreased by $2.6 million, or 7.3% compared to the same period in the prior year primarily due to a decline in legal claims administration services.
39
Cost of Revenue
For the six months ended June 30, 2020, our direct costs decreased by $80.1 million, or 13.0%, compared to the six months ended June 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 $77.9 million, or 15.3%, and HS segment decreased by $2.6 million, or 3.1%. Costs on LLPS segment increased by $0.4 million, or 1.9%.
Cost of revenue for the six months ended June 30, 2020 was 79.4% compared to the 77.3% for the comparable same period in the prior year. The increase in cost of revenues, as a percentage of revenues by 2.1% 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 $3.5 million, or 3.4%, to $97.4 million for the six months ended June 30, 2020, compared to $100.8 million for the six months ended June 30, 2019. The decrease was primarily attributable to lower compensation expenses, including lower stock compensation expense that was offset by higher professional fees.
SG&A expenses increased as a percentage of revenues to 14.5% in 2020 as compared to 12.7% in 2019. The increase, as a percentage of revenues by 1.8%, 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 $46.0 million and $51.4 million for the six months ended June 30, 2020 and 2019, respectively. The decrease in total depreciation and amortization expense was primarily due to a decrease in depreciation expense related to an increase in assets that are fully amortized.
Related Party Expenses
Related party expense was $2.7 million and $6.3 million for the six months ended June 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 $86.0 million and $79.7 million for the six months ended June 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
The decrease of $1.2 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 $(35.2) million and $4.0 million for the six months ended June 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. 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.
40
Income Tax Expense
We had an income tax expense of $3.1 million and $9.5 million for the six months ended June 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 six months ended June 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.2021.
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 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 our business in addition to measures calculated under GAAP. Additionally, our credit agreement requires us to comply with certain EBITDA related metrics.
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-GAAPnon 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-GAAPnon GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAPnon 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. These non-GAAPnon GAAP financial measures are not required to be uniformly applied, are not audited and should not be considered in isolation or as substitutes for results 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-GAAPnon GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Three Months ended June 30, 2020 comparedEnded March 31, 2021 Compared to the Three Months ended June 30, 2019Ended March 31, 2020
The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the three months months ended June 30, 2020March 31, 2021 and 2019. 2019 reconciliation items between EBITDA and Adjusted EBITDA have been adjusted for comparability purposes in the table below. EBITDA and Adjusted EBITDA for the three months ended June 30, 2019 remains unchanged.
2020.
4136
| | | | | | |
| | Three Months Ended June 30, | ||||
| | |
| 2019 | ||
|
| 2020 |
| (Restated) | ||
Net Loss | | $ | (48,691) | | $ | (41,571) |
Taxes | |
| 661 | |
| 4,738 |
Interest Expense | |
| 44,440 | |
| 39,959 |
Depreciation and Amortization | |
| 22,847 | |
| 24,779 |
EBITDA | |
| 19,257 | |
| 27,905 |
Optimization and restructuring expenses (1) | |
| 11,721 | | | 18,708 |
Transaction and integration costs (2) | |
| 4,799 | | | 2,030 |
Non-cash equity compensation (3) | |
| 921 | | | 2,661 |
Other charges including non-cash (4) | | | 5,824 | | | 4,726 |
Loss/(Gain) on sale of assets (5) | | | 254 | | | 207 |
Debt modification and extinguishment costs | | | — | | | 1,404 |
Loss/(Gain) on derivative instruments (7) | |
| (405) | | | 2,708 |
Contract costs (8) | | | 759 | | | 4,529 |
Adjusted EBITDA |
| $ | 43,130 | | $ | 64,878 |
Six Months ended June 30, 2020 compared to the Six Months ended June 30, 2019
The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the six months months ended June 30, 2020 and 2019. 2019 reconciliation items between EBITDA and Adjusted EBITDA have been adjusted for comparability purposes in the table below. EBITDA and Adjusted EBITDA for the six months ended June 30, 2019 remains unchanged.
42
| | | | | | | ||||||
| | Six Months Ended June 30, | | | | | | | ||||
|
| |
| 2019 | | Three Months Ended March 31, | ||||||
|
| 2020 |
| (Restated) |
| 2021 |
| 2020 | ||||
Net Loss | | $ | (61,360) | | $ | (73,743) | | $ | (39,200) | | $ | (12,670) |
Taxes | |
| 3,120 | |
| 9,458 | |
| (18) | |
| 2,459 |
Interest expense | |
| 86,028 | |
| 79,660 | |
| 43,131 | |
| 41,588 |
Depreciation and amortization | |
| 46,032 | |
| 51,403 | |
| 19,599 | |
| 23,185 |
EBITDA | |
| 73,820 | |
| 66,778 | |
| 23,512 | |
| 54,562 |
Optimization and restructuring expenses (1) | |
| 24,861 | | | 42,369 | |
| 5,367 | |
| 13,140 |
Transaction and integration costs (2) | |
| 9,174 | | | 3,038 | |
| 4,648 | |
| 4,374 |
Non-cash equity compensation (3) | |
| 1,782 | | | 5,460 | |
| 387 | |
| 861 |
Other charges including non-cash (4) | | | 9,735 | | | 7,781 | | | 12,027 | | | 3,912 |
Loss/(Gain) on sale of assets (5) | | | 411 | | | 426 | | | (302) | | | 157 |
Loss/(Gain) on business disposals (6) | | | (35,316) | | | — | | | — | | | (35,316) |
Debt modification and extinguishment costs | | | — | | | 1,404 | ||||||
Loss/(Gain) on derivative instruments (7) | |
| 440 | | | 4,385 | |
| (125) | |
| 845 |
Contract costs (8) | | | 2,611 | | | 9,592 | | | 952 | | | 1,852 |
Adjusted EBITDA | | $ | 87,518 | | $ | 141,233 | | $ | 46,466 | | $ | 44,387 |
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 cash generated from operating activities, supplemented as necessary on a short-term basis by borrowings against our senior secured revolving credit facility. We believe our current level of cash and short-term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business.
Our primary source of liquidity is cash generated from operating activities, supplemented as necessary on a short-term basis by borrowings against our senior secured revolving credit facility and accounts receivable securitization facility. We believe our current level of cash and short-term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business. Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. 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 management’sthese plans alleviate the substantial doubt about the entity’s ability to continue as a going concern for at least twelve months from the date that these condensed consolidatedthe accompanying financial statements included elsewhere in this Form 10-Q were issued. Going concern matters are more fully discussed in Note 1, General.
At March 31, 2021, cash and cash equivalents totaled $23.7 million and we had unutilized availability of less than $0.1 million under our senior secured revolving credit facility.
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We currently expect to spend approximately $20.0 to $25.0 million on total capital expenditures over the next twelve months. We will continue to evaluate additional capital expenditure 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.
On July 13, 2018, Exela successfully repriced the $343.4 million of term loans outstanding under our senior secured credit facilities (the “Repricing Term Loans”). The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the Credit Agreement.
On July 13, 2018, the Company borrowed a further $30.0 million pursuant to incremental term loans under the Credit Agreement. On April 16, 2019, the Company borrowed an additional $30.0 million pursuant to incremental term loans under the Credit Agreement. The proceeds of these incremental term loans (collectively, the “Incremental Term Loans”) were used to replace the cash spent for acquisitions, pay related fees, expenses and related borrowings and for general corporate purposes.
The Repricing Term Loans and the Incremental Term Loans bear interest at a rate per annum consisting of, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans. The Repricing Term Loans and the Incremental Term Loans will mature on July 12, 2023.
At June 30, 2020, cash and cash equivalents totaled $91.9 million and we had availability of less than $0.1 million under our senior secured revolving credit facility.
The Company is pursuing a debt reduction and liquidity improvement initiative that contemplates the pursuit of the sale of certain non-core businesses that are not central to the Company’s long-term strategic vision. The disposition of those businesses wouldcould reduce indebtedness and enhance the Company’s ability to focus on its core businesses. The Company has retained financial advisors to assist with the sale of select assets. As part of the initiative, the Company has taken steps to increase its liquidity and its overall financial flexibility. The Company expects to use the net proceeds from the initiative for the repayment of debt, with a target reduction of $150.0 to $200.0 million. The Company has set a two-year timetable for completion of the initiative. There can be no assurance that the initiative or any particular element of the initiative will be consummated or will achieve its desired result.
On January 10, 2020 certain subsidiaries of the Company entered into a $160.0 million accounts receivable securitization facility with a five year term (the “A/R Facility”). The Company used the proceeds of the initial borrowings to repay outstanding revolving borrowings under the Company’s senior credit facility and to provide additional liquidity and funding for the ongoing business needs of the Company and its subsidiaries.
On March 16, 2020, the Company and its indirect wholly owned subsidiaries, Merco Holdings, LLC and SourceHOV Tax, LLC entered into a Membership Interest Purchase Agreement with Gainline Source Intermediate Holdings LLC at which time Gainline Source Intermediate Holdings LLC acquired all of the outstanding membership interests of SourceHov Tax for $40.0 million, subject to adjustment as set forth in the purchase agreement of approximately $2.0 million.
On March 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, we filed a motion for new trial in relation to share count. On May 7, 2020, SourceHOV filed a motion for new trial in relation to share count. On June 11, 2020 the Court denied SourceHOV’s motion for new trial. SourceHOV appealed the judgment to the Supreme Court of the State of Delaware on June 30, 2020. However, at presentOn January 22, 2021, the
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judgmentthe Delaware Court of Chancery in favor of the appraisal petitioners. As of March 31, 2021, the Company has not been stayed, andaccrued a liability of $61.7 million for the petitionersAppraisal Action based on management’s best estimate of SourceHOV’s total payment obligation including accrued interest as of such date. To date, SourceHOV has paid $1.0 million toward the judgment in the Appraisal Action, and the petitioners have not been successful in their attempts to collect on the judgment against SourceHOV.
The appraisal petitioners have filed cases seekingadditional actions to enforce their awardrecognize the judgment 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 forcedaffiliates 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 relating to the Company’s securitization facilities. In early February 2021, petitioners also filed a motion for a preliminary injunction in the derivative action in which they sought a court order to force Exela to set aside sufficient assets for SourceHOV to pay the potential judgment (or bondin the derivative action prior to paying other creditors or, in the alternative, to pay all creditors, including the creditors of SourceHOV, on a pari passu basis. The motion seeking the preliminary injunction motion was denied on April 29, 2021, however, if the petitioners are ultimately successful in their efforts to accelerate payment of the entire judgment, pending an appeal, which will likely require cash collateral), such action could have a material adverse effect on our liquidity and/or cause certain of our secured 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
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depreciation methods for qualified improvement property. The Company is currently evaluatingcontinues 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 will result in a material cashto materially benefit to the Company. The Company will also defer certain payroll, social security and value added taxes in various European jurisdictions, as permitted under the recently enacted COVID-19 relief measures.
On May 18, 2020, the Company amended the 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. See those
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 Current Reports on Form 8-K, filedinvestments and acquisitions as permitted by the Credit Agreement.
On December 17, 2020 certain subsidiaries of the Company entered into a $145.0 million securitization facility with a five year term (the “Securitization Facility”). On December 17, 2020 the Company made the initial borrowing of approximately $92.0 million under the Securitization Facility and used a portion of the proceeds to repay the A/R Facility, which terminated on May 21, 2020such date. The Company used the remaining proceeds for general corporate purposes.
On March 15, 2021, the Company, entered into a securities purchase agreement with certain accredited institutional investors pursuant to which the Company issued and May 22, 2020 for additional informationsold to the ten accredited institutional investors in a private placement an aggregate of 9,731,819 unregistered shares of the Company’s Common Stock at a price of $2.75 per share and an equal number of warrants, generating gross proceeds to the Company of $26.8 million. Cantor Fitzgerald acted as underwriter in connection with such sale of unregistered securities and received a placement fee of 5.5% of gross proceeds in connection with such service. In selling the shares without registration, the Company relied on exemptions from registration available under Section 4(a)(2) of the amendments described above.Securities Act of 1933 and Rule 506 promulgated thereunder. Each private placement warrant entitles the holder to purchase one share of Common Stock, will be exercisable at an exercise price of $4.00 per share beginning on September 19, 2021 and will expire on September 19, 2026.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Three Months Ended March 31, | |||||||||||||||||
|
| |
| 2019 |
| |
| |
| 2021 |
| 2020 |
| Change | |||||||
|
| 2020 |
| (Restated) |
| Change |
| % Change | |||||||||||||
Cash flows used in operating activities | | $ | (23,116) | | $ | (14,838) | | $ | (8,278) |
| | 55.79% | |||||||||
Cash flows (used in) provided by operating activities | | $ | (63,925) | | $ | (35,373) | | $ | (28,552) | ||||||||||||
Cash flows (used in) provided by investing activities | |
| 26,740 | |
| (18,059) | | | 44,799 |
| | -248.07% | |
| (2,281) | |
| 29,978 | | | (32,259) |
Cash flows provided by financing activities | |
| 74,203 | |
| 12,358 | |
| 61,845 |
| | 500.45% | |||||||||
Cash flows (used in) provided by financing activities | |
| 19,736 | |
| 114,088 | |
| (94,352) | ||||||||||||
Subtotal | |
| 77,827 | |
| (20,539) | |
| 98,366 |
| | -478.92% | |
| (46,470) | |
| 108,693 | |
| (155,163) |
Effect of exchange rates on cash | |
| 1 | |
| 111 | |
| (110) |
| | -99.10% | |
| (101) | |
| (216) | |
| 115 |
Net increase/(decrease) in cash | |
| 77,828 | |
| (20,428) | |
| 98,256 |
| | -480.99% | |
| (46,571) | |
| 108,476 | |
| (155,047) |
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Analysis of Cash Flow Changes between the Six Months Ended June 30,three months ended March 31, 2021 and March 31, 2020 and June 30, 2019
Operating Activities—The decrease of $8.3$28.6 million in cash flows from operating activities for the sixthree months ended June 30, 2020March 31, 2021 was primarily due to lower Gross profitscollections in the corresponding period. “Gross profit” is defined as revenue less cost of revenue (exclusive of depreciationperiod from the accounts receivables and amortization).higher outflows related to Accounts payable. This decrease in cash flow was offset by higher cash flows from accounts receivables and lower cash paid for settling accounts payable and accrued liabilities and related party payables.operating profits.
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Investing Activities—The increasedecrease of $44.8$32.3 million in cash used in investing activities for the sixthree months ended June 30, 2020March 31, 2021 was primarily due to $38.2$38.0 million cash proceeds received from the sale of SourceHOV Tax, LLC,asset sales, lower additions to Property,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 increasedecrease of $61.8$94.4 million in cash provided by financing activities for the sixthree months ended June 30, 2020March 31, 2021 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 indebtedness were used to pay off credit facilities existing immediately before the Novitex Business Combination.
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 of $7.0 million, and (ii) a $100.0 million senior secured revolving facility maturing July 12, 2022. The Credit Agreement 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 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 repricedwas able to reprice the $343.4 million of term loans outstanding under its senior secured credit facilities (the “Repricing”). The Repricing was accomplished pursuant to a First Amendment to First Lien Credit Agreement (the “First Amendment”), dated as of July 13, 2018, by and among Exela Intermediate Holdings LLC, the Company, each “Subsidiary Loan Party” listed on the signature pages thereto, Royal Bank of Canada, as administrative agent, and each of the lenders party thereto, whereby the Company borrowed $343.4 million of refinancing term loans (the “Repricing Term Loans”) to refinance the Company’s existing senior secured term loans.
The Repricing Term Loans bear interest at a rate per annum of, at the Company’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans. The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the Credit Agreement. The Repricing Term Loans will mature on July 12,
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2023, the same maturity date as the existing senior secured term loans. As of June 30,December 31, 2020, the interest rate applicable for the first lien senior secured term loan was 8.4%8.3%.
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 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 also required to maintain a minimum Liquidity (as defined in the amendment) of $35.0 million.
Letters of Credit
As of June 30, 2020March 31, 2021 and December 31, 2019,2020, we had outstanding irrevocable letters of credit totaling approximately $19.4$16.5 million and $20.6$19.5 million, respectively, under the senior secured revolving facility.
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 2023 (the “Notes”). The Notes are guaranteed by certain subsidiaries of the Company. The Notes bear interest at a rate of 10.0% per year. The Company pays interest on the Notes on January 15 and July 15 of each year, commencing on January 15, 2018. The Notes are guaranteed by subsidiary guarantors pursuant to a supplemental indenture. The Notes will mature on July 15, 2023.
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Accounts Receivables Securitization FacilityFacilities
On January 10, 2020, certain subsidiaries of the Company entered into athe $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“A/R 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 makemade loans (the “Loan”“A/R 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“A/R Parent SPE”), a wholly-owned indirect subsidiary of the Company, (ii) sixteen other indirect,
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wholly-owned U.S. subsidiaries of the Company (collectively, the “Originators”“A/R Originators”) sold or contributed and will sell or contribute to the A/R Parent SPE certain receivables and related assets in consideration for a combination of cash, equity in the A/R Parent SPE and/or letters of credit issued by the A/R LC Bank to the A/R Originators; and (iii) the A/R 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 A/R 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 under the A/R Facility 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 A/R 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.statements. The A/R Borrower and A/R 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 represented modification of debt under ASC 470-50. Accordingly, the forbearance fee paid was added to unamortized debt issuance cost and 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(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 June 30,
On December 17, 2020, there were $86.0 million borrowingsthe Company repaid in full the loans outstanding under the A/R Facility. The aggregate outstanding principal amount of loans under the A/R Facility as of such date was approximately $83.0 million. The early termination of the A/R Facility triggered an early termination fee of $0.8 million and required repayment of approximately $0.5 million in respect of principal, accrued interest and fees. All obligations under the A/R Facility (other than contingent indemnification obligations that expressly survive termination) terminated upon repayment. The A/R Facility was replaced by the Securitization Facility as described below.
On December 17, 2020, certain subsidiaries of Company closed on Securitization Facility with a five year term. Borrowings under the Securitization Facility are subject to an improved borrowing base definition over the A/R Facility that consists of receivables and, subject to contribution, further supported by inventory and intellectual property, in each case, subject to certain eligibility criteria, concentration limits and reserves.
The Securitization Facility provided for an initial funding of approximately $92.0 million supported by the receivables portion of the borrowing base and, subject to contribution, a further funding of approximately $53.0 million supported by inventory and intellectual property. On December 17, 2020 the Company made the initial borrowing of approximately $92.0 million under the Securitization Facility and used a portion of the proceeds to repay the A/R Facility and used the remaining proceeds for general corporate purposes.
The initial documentation for the Securitization Facility includes (i) a Loan and Security Agreement (the “Securitization Loan Agreement”), dated as of December 10, 2020, by and among Exela Receivables 3, LLC (the “Securitization Borrower”), a wholly-owned indirect subsidiary of the Company, the lenders (each, a “Securitization Lender” and collectively the “Securitization Lenders”), Alter Domus (US), LLC, as administrative agent (the “Securitization Administrative Agent”) and the Company, as initial servicer, pursuant to which the Securitization Lenders will make loans to the Securitization Borrower to be used to purchase receivables and related assets from the Securitization Parent SPE (as defined below), (ii) a First Tier Receivables Purchase and Sale Agreement (the, dated as of
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December 17, 2020, by and among Exela Receivables 3 Holdco, LLC (the “Securitization Parent SPE”), a wholly-owned indirect subsidiary of the Company, and certain other indirect, wholly-owned subsidiaries of the Company listed therein (collectively, the “Securitization Originators”), and the Company, as initial servicer, pursuant to which each Securitization Originator has sold or contributed and will sell or contribute to the Securitization Parent SPE certain receivables and related assets in consideration for a combination of cash and equity in the Securitization Parent SPE, (iii) a Second Tier Receivables Purchase and Sale Agreement, dated as of December 17, 2020, by and among, the Securitization Borrower, the Securitization Parent SPE and the Company, as initial servicer, pursuant to which Securitization Parent SPE has sold or contributed and will sell or contribute to the Securitization Borrower certain receivables and related assets in consideration for a combination of cash and equity in the Securitization Borrower, (iv) the Sub-Servicing Agreement, dated as of December 17, 2020, by and among the Company and each Securitization Originator, (v) the Pledge and Guaranty, dated as of the December 10, 2020, between the Securitization Parent SPE and the Administrative Agent, and (vi) the Performance Guaranty, dated as of December 17, 2020, between the Company, as performance guarantor, and the Securitization Administrative Agent (and together with all other certificates, instruments, UCC financing statements, reports, notices, agreements and documents executed or delivered in connection with the Securitization Loan Agreement, the “Securitization Agreements”). On April 11, 2021,the Company amended the Securitization Loan Agreement and agreed to, among other things, extend the option to contribute inventory and intellectual property to the borrowing base from April 10, 2021 to September 30, 2021.
The Securitization Borrower, the Company, the Securitization Parent SPE and the Securitization Originators provide customary representations and covenants under the Securitization Agreements. The Securitization Loan Agreement provides for certain events of default upon the occurrence of which the Securitization Administrative Agent may declare the facility’s termination date to have occurred and declare the outstanding Securitization Loan and all other obligations of the Securitization Borrower to be immediately due and payable, however the Securitization Facility does not include an ongoing liquidity covenant like the A/R Facility and aligns reporting obligations with the Company’s other material indebtedness agreements.
The Securitization Borrower and Securitization Parent SPE were formed in December 2020, and are consolidated into the Company’s financial statements. The Securitization Borrower and Securitization Parent SPE are bankruptcy remote entities and as such their assets are not available to creditors of the Company or any of its subsidiaries. Each loan under the Securitization Facility bears interest on the unpaid principal amount as follows: (i) if a Base Rate Loan, at a rate per annum equal to (x) the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) the Adjusted LIBOR Rate (as defined in the Securitization Loan Agreement) plus 1.00%, plus (y) 8.75%; or (ii) if a LIBOR Rate Loan, at the Adjusted LIBOR Rate plus 9.75%. As of March 31, 2021, there were borrowings of $91.9 million outstanding under the Securitization Facility.
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
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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 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 stockholders have the right to demand underwritten offerings of our Common Stock. We may from time to time in the future explore, with certain of those stockholders the possibility of an underwritten public offering of our Common Stock held by those 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.
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Off Balance Sheet Arrangements
At June 30, 2020,March 31, 2021 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.
The HGM Group and other former SourceHOV equity holders formed Ex-Sigma and its wholly-owned subsidiary, Ex-Sigma 2, to hold the Exela shares to be issued to SourceHOV as merger consideration upon the closing of 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 $55.8 million loan (the “Margin Loan”) that was used to purchase additional common and preferred shares from the Company to help meet the minimum cash requirements needed to close the Novitex Business Combination. As a result of these transactions, the Company issued 84,912,50028,304,167 shares of Common Stock to Ex-Sigma 2 at the closing, which represented approximately 54.9% ownership in the Company at that time and were pledged as collateral for the Margin Loan.
The Company determined that Ex-Sigma was a variable interest entity and that the Company had a variable interest in Ex-Sigma through an expense reimbursement arrangement related to the Margin Loan and contained in the Consent, Waiver and Amendment. The Consent, Waiver and Amendment provided among other things for the Company to reimburse Ex-Sigma for costs and fees related to the maintenance of the Margin Loan, other than payments of principal, interest and original issue discount.
The Company was not the primary beneficiary because the Company did not have the power to direct the activities that most significantly impacted the economic performance of Ex-Sigma. Accordingly, the Company did not consolidate the financial statements of Ex-Sigma and did not have any assets or liabilities related to Ex-Sigma and the Company did not have an investment in Ex-Sigma. The Company reaffirmed its assessment as of June 30, 2020.March 31, 2021.
Ex-Sigma 2 paid off the balance of the Margin Loan as of December 31, 2019, and as such the maximum exposure to loss as a result of the Company’s involvement with Ex-Sigma is $0. Ex-Sigma 2 distributed the shares held by it during the first quarter of 2020 and is no longer a shareholder of Exela. Ex-Sigma and Ex-Sigma 2 ceased to be variable interest entities upon the distribution that occurred on February 21, 2020.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
At June 30, 2020,March 31, 2021, we had $1,529.9$1,538.7 million of debt outstanding, with a weighted average interest rate of 9.6%. Interest is calculated under the terms of our credit agreement based on the greatest of certain specified base rates plus an applicable margin that varies based on certain factors. Assuming no change in the amount outstanding, the impact on interest expense of a 1% increase or decrease in the assumed weighted average interest rate would be approximately $15.3$15.4 million per year. In order to mitigate interest rate fluctuations with respect to term loan borrowings under the Credit Agreement, in November 2017, we entered into a three year one-month LIBOR interest rate swap contract with a notional amount of $347.8 million, which at the time was the remaining principal balance of the term loan. The swap
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contract swaps out the floating rate interest risk related to the LIBOR with a fixed interest rate of 1.9275% effective January 12, 2018. The interest rate swap contract expired in January 2021.
The interest rate swap, which iswas 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 gain of $0.1 million and a loss of $0.4 million and $4.4$0.8 million related to changes in the fair value of the interest rate swap for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
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Foreign Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These risks include transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location’s functional currency. Contracts are denominated in currencies of major industrial countries.
Market Risk
We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.
Item 4. Internal Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required to 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, withwithin a company have been detected.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting that are described in our Annual Report.
Notwithstanding such material weaknesses in internal control over financial reporting, our management, including our CEO and CFO, has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Quarterly Report, in conformity with U.S. generally accepted accounting principles.
Remediation
As previously described in Part II—Item 9A – Controls and Procedures of our Annual Report, we began implementingcontinue to implement 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.
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Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter-ended June 30, 2020,March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Appraisal Action
On September 21, 2017, former stockholders of SourceHOV, who owned 10,304 shares of SourceHOV common stock, filed an Appraisal Action. The Appraisal Action arose out of a preliminary transaction in connection with the Novitex Business Combination, and the petitioners sought, among other things, a determination of the fair value of their shares at the time of the Novitex Business Combination; an order that SourceHOV pay that value to the petitioners, together with interest at the statutory rate; and an award of costs, attorneys’ fees, and other expenses. During the trial the parties and their experts offered competing valuations of the SourceHOV shares as of the date of the Novitex Business Combination. SourceHOV argued the value was no more than $1,633.85 per share and the appraisal 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 May 7, 2020, SourceHOV filed a motion As of March 31, 2021, the Company has an accrued liability of $61.7 million for new trial in relation to share count. On June 11, 2020 the Court denied SourceHOV’s motion for new trial. SourceHOV filed a notice of appeal in relation to the Appraisal Action withbased on the Supreme Courtjudgment received on January 30, 2020 plus accrued interest, which is management’s best estimate of the Statetotal payment obligation as of Delaware on June 30, 2020. The appeal brief is due on August 26, 2020. At this time, we cannot determine whether the appeal will be successful. At present, such date.
SourceHOV has not posted a bond to stayappealed the judgment in the Appraisal Action on June 30, 2020. On January 22, 2021, the Delaware Supreme Court affirmed the judgment of the Delaware Court of Chancery in favor of the petitioners. To date, SourceHOV has paid $1.0 million toward 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 appraisal petitioners have filed additional actions to recognize the judgment against SourceHOV, and 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.SourceHOV, and an action against SourceHOV and certain of its directors and officers alleging creditor derivative claims relating to the Company’s securitization facilities. In early February 2021, petitioners also filed a motion for a preliminary injunction in the derivative action in which they sought a court order to force Exela to set aside sufficient assets for SourceHOV to pay the potential judgment in the derivative action prior to paying other creditors or, in the alternative, to pay all creditors, including the creditors of SourceHOV, on a pari passu basis. The Delaware Court of Chancery denied the motion seeking the preliminary injunction on April 29, 2021. Although the Company believes that it has valid defenses to these ancillary proceedings the ancillary proceedings are in the preliminary stages and has moved to dismiss them, there can be no assurance that the Company will be successful.
As a result of the 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 June 30, 2020, the Company accrued a liability of $58.5 million for the Appraisal Action based Based on management’s best estimate of SourceHOV’s total payment obligation including accrued interest. As a result of the appeal of the Appraisal Action and the status of the ancillary proceedings, the Company believes that this matter may not be fully resolved inthrough the courts within the next four fiscal quarters. The Company is not required to make a payment towards settlement or post a letter of credit while the Appraisal Action is under appeal.
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 4,0001,333 shares of Company stock, purchased on October 4, 2019 at $1.34/$4.02/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
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Act against Mr. Cogburn and Mr. Reynolds. The allegations stem from the Company’s press release, dated March 16, 2020 (announcing the postponement of the earnings call and delay in filing of its annual report on Form 10-K for the fiscal year ended December 31, 2019), and press release and related SEC filings, dated March 17, 2020 (announcing its intent to restate its financial statements for 2017, 2018 and interim periods through September 30, 2019). At this early stage 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.
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Derivative Action
On July 8, 2020 Plaintiff Gregory McKennyMcKenna 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. On December 21, 2020, Plaintiffs Richard W. Moser and Jonathan Gonzalez filed a substantially similar shareholder derivative action, which has been consolidated with the McKenna action. The claims stem from 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 described in Part I, “Item 1A. Risk Factors” in our Annual Report and as supplemented in our Quarterly Report on Form 10-Q10‑K for the quarterly periodfiscal year ended MarchDecember 31, 2020, which could materially affect our business, financial condition and/or operating results. The risks described in these Risk Factors are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.Private Placement of Unregistered Shares and Warrants
On March 15, 2021, the Company, entered into a securities purchase agreement with certain accredited institutional investors pursuant to which the Company issued and sold to the ten accredited institutional investors in a private placement an aggregate of 9,731,819 unregistered shares of the Company’s Common Stock at a price of $2.75 per share and an equal number of warrants, generating gross proceeds to the Company of $26.8 million. Cantor Fitzgerald acted as underwriter in connection with such sale of unregistered securities and received a placement fee of 5.5% of gross proceeds in connection with such service. In selling the shares without registration, the Company relied on exemptions from registration available under Section 4(a)(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. Each private placement warrant entitles the holder to purchase one share of Common Stock, will be exercisable at an exercise price of $4.00 per share beginning on September 19, 2021 and will expire on September 19, 2026.
The shares of Common Stock sold together with these warrants are included in the Company’s calculation of total shares outstanding. The Company filed a registration statement on Form S-3 on May 3, 2021 to register these shares and the shares underlying these private placement warrants.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
The Company expects to receive a delisting determination letter from the Nasdaq Stock Market Listing Qualifications Department due to the Company’s failure to regain compliance with the Nasdaq Capital Market's minimum $1.00 per share bid price requirement for the continued listing of its Common Stock on The Nasdaq Capital Market as set forth in Nasdaq Listing Rule 5550(a)(2) within the time provided by Nasdaq to regain compliance under its rules. As previously announced, pursuant to Nasdaq Listing Rules, as tolled for the current COVID-19 pandemic, the Company had until August 10, 2020 to regain compliance with the minimum bid price requirement. To regain
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compliance, the closing bid price of the Company’s Common Stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days. The Company intends to appeal the determination by requesting a hearing before a Hearings Panel within seven days of receipt of the letter. A hearing request will stay the delisting until the hearing process concludes and the Hearing Panel has issued a written decision. The Company is considering a number of alternatives to regain compliance with the continued listing requirement, however, there can be no assurance that the Hearing Panel will grant the Company's request for continued listing.
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Item 6.Exhibits. |
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32.2 | | |
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 | | Inline XBRL Taxonomy Extension Schema |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | | Cover Page Interactive Data File |
(1) | Incorporated by reference to the Registrants’ Current Report on Form |
(2) | Incorporated by reference to the Registrants’ |
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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 106th day of August, 2020.May, 2021.
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| EXELA TECHNOLOGIES, INC. | |
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| By: | /s/ Ronald Cogburn |
| | Ronald Cogburn |
| | Chief Executive Officer (Principal Executive Officer) |
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| By: | /s/ Shrikant Sortur |
| | Shrikant Sortur |
| | Chief Financial Officer (Principal Financial and Accounting Officer) |
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