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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, 2024
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 |
|
|
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:
|
|
|
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 |
|
6.00% Series B Cumulative Convertible Tandem Preferred Stock, par value of $0.0001 per share |
XELAP |
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 13, 2024, the registrant had 6,365,363 shares of Common Stock outstanding.
Exela Technologies, Inc.
Form 10-Q
For the quarterly period ended June 30, 2024
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION |
|
|
|
Item 1. Financial Statements |
|
|
|
Condensed Consolidated Financial Statements |
|
|
|
Condensed Consolidated Balance Sheets as of June 30, 2024 (Unaudited) and December 31, 2023 |
1 |
|
|
2 |
|
|
|
3 |
|
|
|
4 |
|
|
|
6 |
|
|
|
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
7 |
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
36 |
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
54 |
|
|
54 |
|
|
|
|
|
|
|
56 |
|
|
|
56 |
|
|
|
57 |
|
|
|
58 |
|
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|
58 |
|
|
|
58 |
|
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|
59 |
|
|
|
60 |
Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of June 30, 2024 and December 31, 2023
(in thousands of United States dollars except share and per share amounts)
|
|
June 30, |
|
December 31, |
|
||
|
|
2024 |
|
2023 |
|
||
|
|
(Unaudited) |
|
(Audited) |
|
||
Assets |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
30,327 |
|
$ |
23,341 |
|
Restricted cash |
|
|
20,933 |
|
|
43,812 |
|
Accounts receivable, net of allowance for credit losses of $6,813 and $6,628, respectively |
|
|
61,501 |
|
|
76,893 |
|
Related party receivables and prepaid expenses |
|
|
449 |
|
|
296 |
|
Inventories, net |
|
|
13,251 |
|
|
11,502 |
|
Prepaid expenses and other current assets |
|
|
30,140 |
|
|
25,364 |
|
Total current assets |
|
|
156,601 |
|
|
181,208 |
|
Property, plant and equipment, net of accumulated depreciation of $216,695 and $213,142, respectively |
|
|
58,448 |
|
|
58,366 |
|
Operating lease right-of-use assets, net |
|
|
31,421 |
|
|
33,874 |
|
Goodwill |
|
|
170,354 |
|
|
170,452 |
|
Intangible assets, net |
|
|
148,364 |
|
|
164,920 |
|
Deferred income tax assets |
|
|
2,990 |
|
|
3,043 |
|
Other noncurrent assets |
|
|
19,775 |
|
|
24,474 |
|
Total assets |
|
$ |
587,953 |
|
$ |
636,337 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
53,723 |
|
$ |
30,029 |
|
Accounts payable |
|
|
68,628 |
|
|
61,109 |
|
Related party payables |
|
|
3,047 |
|
|
1,938 |
|
Income tax payable |
|
|
4,211 |
|
|
2,080 |
|
Accrued liabilities |
|
|
57,611 |
|
|
63,699 |
|
Accrued compensation and benefits |
|
|
71,192 |
|
|
65,012 |
|
Accrued interest |
|
|
55,776 |
|
|
52,389 |
|
Customer deposits |
|
|
27,898 |
|
|
23,838 |
|
Deferred revenue |
|
|
14,018 |
|
|
12,099 |
|
Obligation for claim payment |
|
|
38,913 |
|
|
66,988 |
|
Current portion of finance lease liabilities |
|
|
6,422 |
|
|
4,856 |
|
Current portion of operating lease liabilities |
|
|
9,590 |
|
|
10,845 |
|
Total current liabilities |
|
|
411,029 |
|
|
394,882 |
|
Long-term debt, net of current maturities |
|
|
1,015,252 |
|
|
1,030,580 |
|
Finance lease liabilities, net of current portion |
|
|
8,203 |
|
|
5,953 |
|
Pension liabilities, net |
|
|
12,879 |
|
|
13,192 |
|
Deferred income tax liabilities |
|
|
12,516 |
|
|
11,692 |
|
Long-term income tax liabilities |
|
|
6,511 |
|
|
6,359 |
|
Operating lease liabilities, net of current portion |
|
|
24,676 |
|
|
26,703 |
|
Other long-term liabilities |
|
|
5,621 |
|
|
5,811 |
|
Total liabilities |
|
|
1,496,687 |
|
|
1,495,172 |
|
Commitments and Contingencies (Note 8) |
|
|
|
|
|
|
|
Stockholders' deficit |
|
|
|
|
|
|
|
Common Stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 6,365,363 shares issued and outstanding at June 30, 2024 and 6,365,355 shares issued and outstanding at December 31, 2023 |
|
|
261 |
|
|
261 |
|
Preferred stock, $0.0001 par value per share, 20,000,000 shares authorized at June 30, 2024 and December 31, 2023 |
|
|
|
|
|
|
|
Series A Preferred Stock, 2,778,111 shares issued and outstanding at June 30, 2024 and December 31, 2023 |
|
|
1 |
|
|
1 |
|
Series B Preferred Stock, 3,029,900 shares issued and outstanding at June 30, 2024 and December 31, 2023 |
|
|
— |
|
|
— |
|
Additional paid in capital |
|
|
1,237,687 |
|
|
1,236,171 |
|
Accumulated deficit |
|
|
(2,134,670) |
|
|
(2,084,114) |
|
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(7,282) |
|
|
(7,648) |
|
Unrealized pension actuarial gains (losses), net of tax |
|
|
215 |
|
|
(174) |
|
Total accumulated other comprehensive loss |
|
|
(7,067) |
|
|
(7,822) |
|
Total stockholders’ deficit attributable to Exela Technologies, Inc. |
|
|
(903,788) |
|
|
(855,503) |
|
Noncontrolling interest in XBP Europe |
|
|
(4,946) |
|
|
(3,332) |
|
Total stockholders’ deficit |
|
|
(908,734) |
|
|
(858,835) |
|
Total liabilities and stockholders’ deficit |
|
$ |
587,953 |
|
$ |
636,337 |
|
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 three and six months ended June 30, 2024 and 2023
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Revenue |
|
$ |
245,653 |
|
$ |
272,938 |
|
$ |
504,464 |
|
$ |
546,558 |
Cost of revenue (exclusive of depreciation and amortization) |
|
|
187,964 |
|
|
212,059 |
|
|
389,952 |
|
|
428,526 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
41,778 |
|
|
32,026 |
|
|
82,632 |
|
|
76,407 |
Depreciation and amortization |
|
|
14,983 |
|
|
14,890 |
|
|
28,490 |
|
|
31,450 |
Related party expense |
|
|
3,282 |
|
|
2,739 |
|
|
5,673 |
|
|
5,851 |
Operating profit (loss) |
|
|
(2,354) |
|
|
11,224 |
|
|
(2,283) |
|
|
4,324 |
Other expense (income), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
23,129 |
|
|
45,092 |
|
|
44,217 |
|
|
89,272 |
Debt modification and extinguishment costs (gain), net |
|
|
— |
|
|
(6,785) |
|
|
— |
|
|
(15,558) |
Sundry (income) expense, net |
|
|
(204) |
|
|
1,500 |
|
|
1,677 |
|
|
2,248 |
Other income, net |
|
|
(423) |
|
|
(232) |
|
|
(874) |
|
|
(514) |
Loss before income taxes |
|
|
(24,856) |
|
|
(28,351) |
|
|
(47,303) |
|
|
(71,124) |
Income tax expense |
|
|
(2,049) |
|
|
(2,535) |
|
|
(5,175) |
|
|
(5,198) |
Net loss |
|
|
(26,905) |
|
|
(30,886) |
|
|
(52,478) |
|
|
(76,322) |
Net loss attributable to noncontrolling interest in XBP Europe, net of taxes |
|
|
(1,228) |
|
|
— |
|
|
(1,922) |
|
|
— |
Net loss attributable to Exela Technologies, Inc. |
|
$ |
(25,677) |
|
$ |
(30,886) |
|
$ |
(50,556) |
|
$ |
(76,322) |
Cumulative dividends for Series A Preferred Stock |
|
|
(1,067) |
|
|
(967) |
|
|
(2,120) |
|
|
(1,921) |
Cumulative dividends for Series B Preferred Stock |
|
|
(1,242) |
|
|
(1,171) |
|
|
(2,466) |
|
|
(2,324) |
Net loss attributable to common stockholders |
|
$ |
(27,986) |
|
$ |
(33,024) |
|
$ |
(55,142) |
|
$ |
(80,567) |
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(4.40) |
|
$ |
(5.19) |
|
$ |
(8.66) |
|
$ |
(14.40) |
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 three and six months ended June 30, 2024 and 2023
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Net loss |
|
$ |
(26,905) |
|
$ |
(30,886) |
|
$ |
(52,478) |
|
$ |
(76,322) |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(820) |
|
|
1,901 |
|
|
483 |
|
|
(204) |
Unrealized pension actuarial gains (losses), net of tax |
|
|
246 |
|
|
(116) |
|
|
536 |
|
|
(205) |
Total other comprehensive income (loss), net of tax |
|
|
(574) |
|
|
1,785 |
|
|
1,019 |
|
|
(409) |
Comprehensive loss |
|
|
(27,479) |
|
|
(29,101) |
|
|
(51,459) |
|
|
(76,731) |
Comprehensive loss attributable to noncontrolling interest in XBP Europe, net of tax |
|
|
(1,120) |
|
|
— |
|
|
(1,658) |
|
|
— |
Comprehensive loss attributable to Exela Technologies, Inc., net of tax |
|
$ |
(26,359) |
|
$ |
(29,101) |
|
$ |
(49,801) |
|
$ |
(76,731) |
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 three and six months ended June 30, 2024 and 2023
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
Pension |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
Actuarial |
|
|
|
|
Total |
||||
|
|
Common Stock |
|
Series A Preferred Stock |
|
Series B Preferred Stock |
|
|
Treasury Stock |
|
Additional |
|
Translation |
|
Losses, |
|
Accumulated |
|
Stockholders' |
|||||||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
Shares |
|
Amount |
|
Paid in Capital |
|
Adjustment |
|
net of tax |
|
Deficit |
|
Deficit |
|||||||||
Balances at January 1, 2023 |
|
1,393,276 |
|
$ |
162 |
|
2,778,111 |
|
$ |
1 |
|
3,029,900 |
|
$ |
— |
|
|
612 |
|
$ |
(10,949) |
|
$ |
1,159,577 |
|
$ |
(4,788) |
|
$ |
(3,583) |
|
$ |
(1,948,009) |
|
$ |
(807,589) |
Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(45,436) |
|
|
(45,436) |
Equity-based compensation expense |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
111 |
|
|
— |
|
|
— |
|
|
— |
|
|
111 |
Foreign currency translation adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,105) |
|
|
— |
|
|
— |
|
|
(2,105) |
Net realized pension actuarial losses, net of tax |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(89) |
|
|
— |
|
|
(89) |
Issuance of Common Stock from at the market offerings, net of offering costs |
|
4,977,744 |
|
|
99 |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
66,929 |
|
|
— |
|
|
— |
|
|
— |
|
|
67,028 |
Balances at March 31, 2023 |
|
6,371,020 |
|
$ |
261 |
|
2,778,111 |
|
$ |
1 |
|
3,029,900 |
|
$ |
— |
|
|
612 |
|
$ |
(10,949) |
|
$ |
1,226,617 |
|
$ |
(6,893) |
|
$ |
(3,672) |
|
$ |
(1,993,445) |
|
$ |
(788,080) |
Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(30,886) |
|
|
(30,886) |
Equity-based compensation expense |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
203 |
|
|
— |
|
|
— |
|
|
— |
|
|
203 |
Foreign currency translation adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,901 |
|
|
— |
|
|
— |
|
|
1,901 |
Net realized pension actuarial loss, net of tax |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(116) |
|
|
— |
|
|
(116) |
Payment for fractional shares on reverse stock split in May 2023 |
|
(5,667) |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(31) |
|
|
— |
|
|
— |
|
|
— |
|
|
(31) |
Balances at June 30, 2023 |
|
6,365,353 |
|
$ |
261 |
|
2,778,111 |
|
$ |
1 |
|
3,029,900 |
|
$ |
— |
|
|
612 |
|
$ |
(10,949) |
|
$ |
1,226,789 |
|
$ |
(4,992) |
|
$ |
(3,788) |
|
$ |
(2,024,331) |
|
$ |
(817,009) |
4
Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Deficit
For the three and six months ended June 30, 2024 and 2023
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
Pension |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
Actuarial |
|
|
|
|
Non- |
|
Total |
|||||
|
|
Common Stock |
|
Series A Preferred Stock |
|
Series B Preferred Stock |
|
Additional |
|
Translation |
|
Gains (Losses), |
|
Accumulated |
|
Controlling Interest |
|
Stockholders' |
|||||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Paid in Capital |
|
Adjustment |
|
net of tax |
|
Deficit |
|
in XBP Europe |
|
Deficit |
|||||||||
Balances at January 1, 2024 |
|
6,365,355 |
|
$ |
261 |
|
2,778,111 |
|
$ |
1 |
|
3,029,900 |
|
$ |
— |
|
$ |
1,236,171 |
|
$ |
(7,648) |
|
$ |
(174) |
|
$ |
(2,084,114) |
|
$ |
(3,332) |
|
$ |
(858,835) |
Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(24,879) |
|
|
(694) |
|
|
(25,573) |
Equity-based compensation expense |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
1,183 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,183 |
Foreign currency translation adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
1,226 |
|
|
— |
|
|
— |
|
|
77 |
|
|
1,303 |
Net realized pension actuarial gains, net of tax |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
211 |
|
|
— |
|
|
79 |
|
|
290 |
Balances at March 31, 2024 |
|
6,365,355 |
|
$ |
261 |
|
2,778,111 |
|
$ |
1 |
|
3,029,900 |
|
$ |
— |
|
$ |
1,237,354 |
|
$ |
(6,422) |
|
$ |
37 |
|
$ |
(2,108,993) |
|
$ |
(3,870) |
|
$ |
(881,632) |
Net loss |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(25,677) |
|
|
(1,228) |
|
|
(26,905) |
Equity-based compensation expense |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
333 |
|
|
— |
|
|
— |
|
|
— |
|
|
44 |
|
|
377 |
Foreign currency translation adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(860) |
|
|
— |
|
|
— |
|
|
40 |
|
|
(820) |
Net realized pension actuarial gains, net of tax |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
178 |
|
|
— |
|
|
68 |
|
|
246 |
Restricted stock units vested |
|
8 |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Balances at June 30, 2024 |
|
6,365,363 |
|
$ |
261 |
|
2,778,111 |
|
$ |
1 |
|
3,029,900 |
|
$ |
— |
|
$ |
1,237,687 |
|
$ |
(7,282) |
|
$ |
215 |
|
$ |
(2,134,670) |
|
$ |
(4,946) |
|
$ |
(908,734) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2024 and 2023
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
|
|
Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
2023 |
|
|||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(52,478) |
|
$ |
(76,322) |
|
|
Adjustments to reconcile net loss to cash used in operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
28,490 |
|
|
31,450 |
|
|
Original issue discount, debt premium and debt issuance cost amortization |
|
|
(20,022) |
|
|
16,064 |
|
|
Interest on BR Exar AR Facility |
|
|
(2,558) |
|
|
(5,066) |
(1) |
|
Debt modification and extinguishment gain, net |
|
|
— |
|
|
(16,964) |
|
|
Credit loss expense |
|
|
14,683 |
|
|
2,865 |
|
|
Deferred income tax provision |
|
|
757 |
|
|
776 |
|
|
Equity-based compensation expense |
|
|
1,560 |
|
|
314 |
|
|
Unrealized foreign currency (gain) loss |
|
|
(131) |
|
|
521 |
|
|
Gain on sale of assets |
|
|
(533) |
|
|
(5,831) |
|
|
Fair value adjustment for private warrants liability of XBP Europe |
|
|
(40) |
|
|
— |
|
|
Change in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,379 |
|
|
(7,703) |
|
|
Prepaid expenses and other current assets |
|
|
(6,842) |
|
|
6,495 |
|
|
Accounts payable and accrued liabilities |
|
|
13,427 |
|
|
(639) |
|
|
Related party payables |
|
|
955 |
|
|
(403) |
|
|
Additions to outsource contract costs |
|
|
(573) |
|
|
(298) |
|
|
Net cash used in operating activities |
|
|
(16,926) |
|
|
(54,741) |
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(4,033) |
|
|
(3,357) |
|
|
Additions to internally developed software |
|
|
(1,947) |
|
|
(1,976) |
|
|
Proceeds from sale of assets |
|
|
2,893 |
|
|
29,811 |
|
|
Net cash (used in) provided by investing activities |
|
|
(3,087) |
|
|
24,478 |
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of Common Stock from at the market offerings |
|
|
— |
|
|
69,260 |
|
|
Cash paid for equity issuance costs from at the market offerings |
|
|
— |
|
|
(2,232) |
|
|
Payment for fractional shares on reverse stock split |
|
|
— |
|
|
(31) |
|
|
Borrowings under factoring arrangement and Securitization Facility |
|
|
496 |
|
|
62,858 |
|
|
Principal repayment on borrowings under factoring arrangement and Securitization Facility |
|
|
(511) |
|
|
(63,577) |
|
|
Cash paid for debt issuance costs |
|
|
(237) |
|
|
(6,398) |
|
|
Principal payments on finance lease obligations |
|
|
(3,837) |
|
|
(2,150) |
|
|
Borrowings from senior secured term loans and BRCC revolver |
|
|
— |
|
|
9,600 |
|
|
Borrowings from other loans |
|
|
20,594 |
|
|
4,289 |
(1) |
|
Cash paid for debt repurchases |
|
|
— |
|
|
(11,858) |
|
|
Proceeds from Second Lien Note |
|
|
— |
|
|
31,500 |
|
|
Borrowing under BR Exar AR Facility |
|
|
30,614 |
|
|
20,000 |
(1) |
|
Repayments under BR Exar AR Facility |
|
|
(25,580) |
|
|
(12,484) |
(1) |
|
Repayment of BRCC term loan |
|
|
— |
|
|
(44,775) |
|
|
Principal repayments on senior secured term loans, BRCC revolver and other loans |
|
|
(17,763) |
|
|
(15,441) |
(1) |
|
Net cash provided by financing activities |
|
|
3,776 |
|
|
38,561 |
|
|
Effect of exchange rates on cash, restricted cash and cash equivalents |
|
|
344 |
|
|
145 |
|
|
Net (decrease) increase in cash, restricted cash and cash equivalents |
|
|
(15,893) |
|
|
8,443 |
|
|
Cash, restricted cash, and cash equivalents |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
67,153 |
|
|
45,067 |
|
|
End of period |
|
$ |
51,260 |
|
$ |
53,510 |
|
|
Supplemental cash flow data: |
|
|
|
|
|
|
|
|
Income tax payments, net of refunds received |
|
$ |
1,978 |
|
$ |
2,898 |
|
|
Interest paid |
|
|
38,694 |
|
|
72,608 |
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Assets acquired through right-of-use arrangements |
|
$ |
7,673 |
|
$ |
405 |
|
|
Accrued PIK interest paid through issuance of PIK Notes |
|
|
23,342 |
|
|
— |
|
|
Waiver and consent fee payable added to outstanding balance of Senior Secured Term Loan |
|
|
1,000 |
|
|
— |
|
|
Accrued capital expenditures |
|
|
288 |
|
|
2,167 |
|
|
| (1) | Exela restated the condensed consolidated statement of cash flows for the six months ended June 30, 2023 by reclassifying borrowing and repayments under BR Exar AR Facility as separate line items which were previously included in borrowings from other loans and principal repayments on senior secured term loans and other loans, respectively under cash flow from financing activities. Interest on BR Exar AR Facility which was previously included in principal repayments on senior secured term loans and other loans under cash flow from financing activities is restated by reclassification as cash flow from operating activities. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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, 2023 included in the Exela Technologies, Inc. (the “Company” or “Exela”) annual report on Form 10-K for such period (the “2023 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on April 3, 2024 and available at the SEC’s website at http://www.sec.gov.
The accompanying condensed consolidated financial statements and related notes to the condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and XBP Europe Holdings, Inc. (“XBP Europe”), a publicly traded company that is majority-owned by the Company. The accompanying condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”), 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 the Company 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 the Company’s estimates.
The condensed consolidated financial statements are unaudited, but 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.
Going Concern
The Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its obligations as they become due within one year after the date that the financial statements are issued. Management’s evaluation does not initially 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.
In performing this evaluation, the Company concluded that the following conditions raise substantial doubt about its ability to continue as a going concern:
| ● | a history of net losses, including net losses of $52.5 million for the six months ended June 30, 2024; |
| ● | net operating cash outflow of $16.9 million for the six months ended June 30, 2024; |
| ● | a working capital deficit of $254.4 million as of June 30, 2024; and |
| ● | an accumulated deficit of $2,134.7 million as of June 30, 2024. |
The Company has undertaken and/or completed the following plans and actions to improve its available cash balances, liquidity or cash generated from operations:
7
| ● | identified and in the process of executing on cost savings for fiscal year 2024; and |
| ● | issued approximately $764.8 million aggregate principal amount of April 2026 Notes (as defined in Note 5 – Long-Term Debt and Credit Facilities) in exchange for $956.0 million aggregate principal amount of existing 2026 Notes that provide flexibility to pay up to 50% of the interest payments in 2024 using April 2026 Notes instead of cash. |
In addition to these actions, management has reviewed the Company's operational plans which include executing on price increases, and projected growth of margins. The Company will have to achieve positive operating cash flows and restore profitability over the next twelve months and otherwise execute its business plan. However, the Company’s ability to execute its operational plans is uncertain and its ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, the Company’s performance and investor sentiment with respect to the Company and its industry, and considering these factors are outside of the Company’s control, substantial doubt about the Company’s ability to continue as a going concern exists. The condensed consolidated financial statements do not, however, include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
Net Loss per Share
Earnings per share (“EPS”) is computed by dividing net loss attributable to common stockholders 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 and the if-converted method in the period 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 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 Perpetual Convertible Preferred Stock (“Series A Preferred Stock”) and Series B Cumulative Convertible Perpetual Preferred Stock (the “Series B Preferred Stock”), was calculated using the if-converted method. As of June 30, 2024, the outstanding shares of the Company’s Series A Preferred Stock and Series B Preferred Stock, if converted would have resulted in an additional 424 shares and 16,814 shares of the Company’s Common Stock outstanding, respectively, however, they were not included in the computation of diluted loss per share as their effects were anti-dilutive (i.e., if included, would reduce the net loss per share).
Similarly, the Company also did not include the effect of 1,978 and 2,433 shares of Common Stock issuable upon exercise of 7,913,637 and 9,731,819 outstanding warrants as of June 30, 2024 and 2023, respectively, 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, performance units and options (1,367 and 2,472 as of June 30, 2024 and 2023, respectively) in the calculation of diluted loss per share for the three and six months ended June 30, 2024 and 2023, because their effects were also anti-dilutive.
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Net loss attributable to common stockholders (A) |
|
$ |
(27,986) |
|
$ |
(33,024) |
|
$ |
(55,142) |
|
$ |
(80,567) |
Weighted average common shares outstanding – basic and diluted (B) |
|
|
6,365,356 |
|
|
6,367,969 |
|
|
6,365,356 |
|
|
5,595,352 |
Loss Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (A/B) |
|
$ |
(4.40) |
|
$ |
(5.19) |
|
$ |
(8.66) |
|
$ |
(14.40) |
8
Merger Agreement
On October 9, 2022, the Company entered into a definitive merger agreement to merge its European business with CF Acquisition Corp. VIII (“CFFE”), a special purpose acquisition company, to form a new publicly-traded company XBP Europe Holdings, Inc. (“XBP Europe”), which is a part of the ITPS segment (as defined in Note 3 – Significant Accounting Policies). The business combination was accounted for as a reverse capitalization in accordance with GAAP. Under this method of accounting, CFFE was treated as the “acquired” company for financial reporting purposes with XBP Europe surviving as a direct wholly-owned subsidiary of CFFE.
Following the closing of the transaction on November 29, 2023, the Company’s European business operates as XBP Europe, and the Company owns 72.3% of the outstanding capital stock of XBP Europe as of June 30, 2024. The noncontrolling stockholders' proportionate share of stockholder’s deficit in XBP Europe of $4.9 million and $3.3 million, as of June 30, 2024 and December 31, 2023, respectively, is reflected as noncontrolling interest in XBP Europe in the accompanying condensed consolidated balance sheets. Beginning on November 30, 2023, XBP Europe shares started trading on the Nasdaq Stock Market under the ticker symbol “XBP” and its warrants started trading on the Nasdaq Stock Market under the ticker symbol “XBPEW”.
Sale of Non-core Assets
On June 8, 2023, the Company completed the sale of its high-speed scanner business, which was a part of its ITPS segment (as defined in Note 3 – Significant Accounting Policies), for a purchase price of approximately $30.1 million. The sale of the high-speed scanner business does not represent a strategic shift that will have a major effect on the Company’s operations and financial results. As a result of this transaction, the Company disposed of $16.5 million of goodwill based on the relative fair value of the high-speed scanner business to the total fair value of the ITPS reporting unit. This transaction resulted in a total pre-tax gain of $7.2 million. Per the terms of the sales agreement, the Company may receive additional cash consideration (“Contingent Consideration”) upon the future occurrence of certain earn out events described in the sales agreement. The Contingent Consideration, if any, will be recognized in the period the earn out event occurs, and the Contingent Consideration is realizable.
2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective January 1, 2024, the Company adopted Accounting Standards Update (“ASU”) No. 2023-01, Leases (Topic 842): Common Control Arrangements that clarifies the accounting for leasehold improvements associated with common control leases by requiring that leasehold improvements associated with common control leases be amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term), as long as the lessee controls the use of the underlying asset through a lease. Additionally, leasehold improvements associated with common control leases should be accounted for as a transfer between entities under common control through an adjustment to equity, if, and when, the lessee no longer controls the use of the underlying asset. The adoption had no impact on the Company’s consolidated results of operations, cash flows, financial position or disclosures.
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires retrospective disclosure of significant segment expenses and other segment items on an annual and interim basis. Additionally, it requires disclosure of the title and position of the Chief Operating Decision Maker (“CODM”). This ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that adopting this standard will have on its consolidated financial statements.
9
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires an annual tabular effective tax rate reconciliation disclosure including information for specified categories and jurisdiction levels, as well as, disclosure of income taxes paid, net of refunds received, disaggregated by federal, state/local, and significant foreign jurisdiction. This ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that adopting this standard will have on its consolidated financial statements.
3. Significant Accounting Policies
The information presented below supplements the Significant Accounting Policies information presented in the 2023 Form 10-K.
Revenue Recognition
The Company accounts for revenue by first evaluating whether a performance obligation exists. 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. Revenue is measured as the amount of consideration the Company 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 the Company’s material sources of revenue are derived from contracts with customers, primarily relating to the provision of business and transaction processing services within each of the Company’s segments. The Company does not have any significant extended payment terms, as payment is received shortly after goods are delivered or services are provided.
Nature of Services
The Company’s 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. The Company’s obligation to its 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. The Company allocates variable fees to the single performance obligation charged to the distinct service period in which the Company has the contractual right to bill under the contract.
Disaggregation of Revenues
The Company is organized into three segments: Information & Transaction Processing Solutions (“ITPS”), Healthcare Solutions (“HS”), and Legal & Loss Prevention Services (“LLPS”) (See Note 13 – Segment and Geographic Area Information). The following tables disaggregate revenue from contracts by segment and by geographic region for the three and six months ended June 30, 2024 and 2023:
|
|
Three Months Ended June 30, |
||||||||||||||||||||||
|
|
2024 |
|
2023 |
||||||||||||||||||||
|
|
|
ITPS |
|
|
HS |
|
|
LLPS |
|
|
Total |
|
|
ITPS |
|
|
HS |
|
|
LLPS |
|
|
Total |
U.S.A. |
|
$ |
115,667 |
|
$ |
62,935 |
|
$ |
25,878 |
|
$ |
204,480 |
|
$ |
137,498 |
|
$ |
63,608 |
|
$ |
24,340 |
|
$ |
225,446 |
EMEA |
|
|
36,031 |
|
|
— |
|
|
— |
|
|
36,031 |
|
|
42,294 |
|
|
— |
|
|
— |
|
|
42,294 |
Other |
|
|
5,142 |
|
|
— |
|
|
— |
|
|
5,142 |
|
|
5,198 |
|
|
— |
|
|
— |
|
|
5,198 |
Total |
|
$ |
156,840 |
|
$ |
62,935 |
|
$ |
25,878 |
|
$ |
245,653 |
|
$ |
184,990 |
|
$ |
63,608 |
|
$ |
24,340 |
|
$ |
272,938 |
|
|
Six Months Ended June 30, |
||||||||||||||||||||||
|
|
2024 |
|
2023 |
||||||||||||||||||||
|
|
|
ITPS |
|
|
HS |
|
|
LLPS |
|
|
Total |
|
|
ITPS |
|
|
HS |
|
|
LLPS |
|
|
Total |
U.S.A. |
|
$ |
246,388 |
|
$ |
127,787 |
|
$ |
43,697 |
|
$ |
417,872 |
|
$ |
283,523 |
|
$ |
126,650 |
|
$ |
41,210 |
|
$ |
451,383 |
EMEA |
|
|
76,077 |
|
|
— |
|
|
— |
|
|
76,077 |
|
|
85,072 |
|
|
— |
|
|
— |
|
|
85,072 |
Other |
|
|
10,515 |
|
|
— |
|
|
— |
|
|
10,515 |
|
|
10,103 |
|
|
— |
|
|
— |
|
|
10,103 |
Total |
|
$ |
332,980 |
|
$ |
127,787 |
|
$ |
43,697 |
|
$ |
504,464 |
|
$ |
378,698 |
|
$ |
126,650 |
|
$ |
41,210 |
|
$ |
546,558 |
10
Contract Balances
The following table presents contract assets, contract liabilities and contract costs recognized at June 30, 2024, December 31, 2023 and January 1, 2023:
|
|
June 30, |
|
December 31, |
|
January 1, |
|||
|
|
2024 |
|
2023 |
|
2023 |
|||
Accounts receivable, net |
|
$ |
61,501 |
|
$ |
76,893 |
|
$ |
101,616 |
Deferred revenues |
|
|
15,166 |
|
|
13,107 |
|
|
17,585 |
Customer deposits |
|
|
27,898 |
|
|
23,838 |
|
|
16,955 |
Costs to obtain and fulfill a contract |
|
|
1,459 |
|
|
1,400 |
|
|
1,674 |
The following table describes the changes in the allowance for expected credit losses for the six months ended June 30, 2024 (all related to accounts receivables):
Balance at January 1, 2024 of the allowance for expected credit losses |
$ |
6,628 |
Provision for expected loss |
|
14,683 |
Write-off charged against the allowance |
|
(13,872) |
Recoveries collected |
|
(594) |
Foreign currency exchange rate adjustment |
|
(32) |
Balance at June 30, 2024 of the allowance for expected credit losses |
$ |
6,813 |
Accounts receivable, net includes $23.1 million and $23.9 million as of June 30, 2024 and December 31, 2023, respectively, representing amounts not yet billed to customers. The Company has 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 the Company 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. The Company recognized revenue of $3.4 million and $7.8 million during the three and six months ended June 30, 2024 that had been deferred as of December 31, 2023. The Company recognized revenue of $8.0 million and $14.8 million during the three and six months ended June 30, 2023 that had been deferred as of January 1, 2023. The Company recognized revenue of $17.3 million during the year ended December 31, 2023 that had been deferred as of January 1, 2023.
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. The Company recognized $0.2 million and $0.2 million of amortization for these costs for the three months ended June 30, 2024 and 2023, respectively, within depreciation and amortization expense in the Company’s condensed consolidated statements of operations. The Company recognized $0.5 million and $0.4 million of amortization for these costs for the six months ended June 30, 2024 and 2023, respectively, within depreciation and amortization expense in the Company’s condensed consolidated statements of operations. 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, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred, if the amortization period would have been one year or less. These costs are included in selling, general and administrative expenses. The effect of applying this practical expedient was not material.
Customer deposits consist primarily of amounts received from customers in advance for postage. These advanced postage deposits are used to cover the costs associated with postage, with the corresponding postage revenue being recognized as services are performed.
11
Performance Obligations
At the inception of each contract, the Company assesses the goods and services promised in its contracts and identify each distinct performance obligation. The majority of the Company’s 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 the Company’s business and transaction processing service contracts, revenues are recognized as services are provided based on an appropriate input or output method, typically based on the related labor or transactional volumes.
Certain of the Company’s contracts have multiple performance obligations, including contracts that combine software implementation services with post-implementation customer support. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its 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 the Company estimates its expected costs of satisfying a performance obligation and add an appropriate margin for that distinct good or service. The Company also uses the adjusted market approach whereby it estimates 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, the Company considers the nature of the variable payment and whether it relates specifically to its efforts to satisfy a specific part of the contract. Certain of the Company’s software implementation performance obligations are satisfied at a point in time, typically when customer acceptance is obtained.
When evaluating the transaction price, the Company analyzes, on a contract-by-contract basis, all applicable variable consideration. The nature of the Company’s contracts gives rise to variable consideration, including volume discounts, contract penalties, and other similar items that generally decrease the transaction price. The Company estimates these amounts based on the expected amount to be provided to customers and reduce revenues recognized. The Company does not anticipate significant changes to its estimates of variable consideration.
The Company includes 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 GAAP, the Company does 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 the Company’s contracts. The Company has certain non-cancellable contracts where the Company receives 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, 2024 in each of the future periods below:
Estimated Remaining Fixed Consideration for Unsatisfied | |||
|
|
|
|
Remainder of 2024 |
|
$ |
6,152 |
2025 |
|
|
7,987 |
2026 |
|
|
4,629 |
2027 |
|
|
2,554 |
2028 |
|
|
1,519 |
2029 and thereafter |
|
|
— |
Total |
|
$ |
22,841 |
12
4. Intangible 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, 2024 |
|||||||
|
|
|
Gross Carrying |
|
Accumulated |
|
Intangible |
|||
|
|
|
Amount (a) |
|
Amortization |
|
Asset, net |
|||
Customer relationships |
|
|
$ |
507,679 |
|
$ |
(393,065) |
|
$ |
114,614 |
Developed technology |
|
|
|
88,553 |
|
|
(88,382) |
|
|
171 |
Trade names (b) |
|
|
|
5,300 |
|
|
— |
|
|
5,300 |
Outsource contract costs |
|
|
|
18,272 |
|
|
(16,813) |
|
|
1,459 |
Internally developed software |
|
|
|
57,670 |
|
|
(47,791) |
|
|
9,879 |
Purchased software |
|
|
|
26,749 |
|
|
(9,808) |
|
|
16,941 |
Intangibles, net |
|
|
$ |
704,223 |
|
$ |
(555,859) |
|
$ |
148,364 |
|
|
|
December 31, 2023 |
|||||||
|
|
|
Gross Carrying |
|
Accumulated |
|
Intangible |
|||
|
|
|
Amount (a) |
|
Amortization |
|
Asset, net |
|||
Customer relationships |
|
|
$ |
507,930 |
|
$ |
(380,580) |
|
$ |
127,350 |
Developed technology |
|
|
|
88,554 |
|
|
(88,085) |
|
|
469 |
Patent |
|
|
|
15 |
|
|
(14) |
|
|
1 |
Trade names (b) |
|
|
|
5,300 |
|
|
— |
|
|
5,300 |
Outsource contract costs |
|
|
|
17,734 |
|
|
(16,334) |
|
|
1,400 |
Internally developed software |
|
|
|
56,066 |
|
|
(43,499) |
|
|
12,567 |
Purchased software |
|
|
|
26,749 |
|
|
(8,916) |
|
|
17,833 |
Intangibles, net |
|
|
$ |
702,348 |
|
$ |
(537,428) |
|
$ |
164,920 |
| (a) | Amounts include intangible assets acquired in business combinations and asset acquisitions. |
| (b) | The carrying amount of trade names for 2024 and 2023 is net of accumulated impairment losses of $44.1 million. Carrying amount of $5.3 million as at June 30, 2024 represents indefinite-lived intangible assets. |
Aggregate amortization expense related to intangible assets was $9.9 million and $19.0 million for the three and six months ended June 30, 2024, respectively. Aggregate amortization expense related to intangible assets was $10.0 million and $21.0 million for the three and six months ended June 30, 2023, respectively.
Estimated intangibles amortization expense for the next five years and thereafter consists of the following:
|
|
Estimated |
|
|
|
Amortization |
|
|
|
Expense |
|
Remainder of 2024 |
|
$ |
15,632 |
2025 |
|
|
25,927 |
2026 |
|
|
21,226 |
2027 |
|
|
17,430 |
2028 |
|
|
13,778 |
Thereafter |
|
|
49,071 |
Total |
|
$ |
143,064 |
Goodwill
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 customers. The Company is organized into three segments: ITPS, HS, and LLPS (See Note 13 – Segment and Geographic Area Information).
13
Goodwill by reporting segment consists of the following:
|
|
Balances as at January 1, 2024 (a) |
|
|
Additions |
|
|
Deletions |
|
|
Impairments |
|
|
Currency Translation Adjustments |
|
|
Balances as at June 30, 2024 (a) |
|
ITPS |
|
$ |
64,801 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(98) |
|
$ |
64,703 |
HS |
|
|
86,786 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
86,786 |
LLPS |
|
|
18,865 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
18,865 |
Total |
|
$ |
170,452 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(98) |
|
$ |
170,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as at January 1, 2023 (a) |
|
|
Additions |
|
|
Deletions |
|
|
Impairments |
|
|
Currency Translation Adjustments |
|
|
Balances as at December 31, 2023 (a) |
|
ITPS |
|
$ |
81,151 |
|
$ |
— |
|
$ |
(16,500) |
(b) |
$ |
— |
|
$ |
150 |
|
$ |
64,801 |
HS |
|
|
86,786 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
86,786 |
LLPS |
|
|
18,865 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
18,865 |
Total |
|
$ |
186,802 |
|
$ |
— |
|
$ |
(16,500) |
|
$ |
— |
|
$ |
150 |
|
$ |
170,452 |
| (a) | The goodwill amount for all periods presented is net of accumulated impairment amounts. Accumulated impairment relating to ITPS was $487.7 million as at June 30, 2024 and December 31, 2023. Accumulated impairment relating to LLPS was $243.4 million as at June 30, 2024 and December 31, 2023. |
| (b) | The deletion in goodwill is due to derecognition of allocated goodwill on sale of the high-speed scanner business in the second quarter of 2023. Refer to Note 1—General. |
5. Long-Term Debt and Credit Facilities
July 2026 Notes
As of January 1, 2023, there was outstanding $980.0 million aggregate principal amount of 11.5% First-Priority Senior Secured Notes scheduled to mature July 15, 2026 (the “July 2026 Notes”) issued by Exela Intermediate LLC and Exela Finance Inc. (together, the “Issuers”), wholly-owned subsidiaries of the Company. The July 2026 Notes are guaranteed by nearly all U.S. subsidiaries of Exela Intermediate LLC. The July 2026 Notes bear interest at a rate of 11.5% per year. The Company is required to pay interest on the July 2026 Notes on January 15 and July 15 of each year, and commenced making such interest payments on July 15, 2022. The Issuers may redeem the July 2026 Notes in whole or in part from time to time, at a redemption price of 100%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
On July 11, 2023, the Issuers, certain guarantors and U.S. Bank Trust Company, National Association, as trustee, entered into an indenture (the “April 2026 Notes Indenture”) governing the 11.5% First-Priority Senior Secured Notes scheduled to mature July 15, 2026 (the “April 2026 Notes”), and the Issuers issued approximately $764.8 million aggregate principal amount of the April 2026 Notes as consideration for the exchange of $956.0 million aggregate principal amount of the Issuers’ existing July 2026 Notes pursuant to a public exchange offer (the “2023 Exchange”), which was equivalent to issuing $800 of the April 2026 Notes per $1,000 principal amount of the existing July 2026 Notes. The Company performed an assessment of the 2023 Exchange and determined that it met the criteria to be accounted for as a troubled debt restructuring under GAAP. The undiscounted cash flows associated with the April 2026 Notes issued were compared to the carrying value of the exchanged July 2026 Notes and since the undiscounted cash flows of the April 2026 Notes exceeded the carrying value of the exchanged July 2026 Notes, the carrying value of the April 2026 Notes was established at the carrying value of the exchanged July 2026 Notes and the Company established new effective interest rates based on the carrying value of the exchanged July 2026 Notes prior to the 2023 Exchange. The difference between the principal amount of the issued April 2026 Notes and their carrying value was recorded as a premium and is included in long-term debt on the Company’s condensed consolidated balance sheets. The Company recorded a premium of $142.3 million on the notes exchange, which will be reduced as contractual interest payments are made on the April 2026 Notes.
14
On July 11, 2023, the Company entered into a seventh supplemental indenture to the indenture governing the July 2026 Notes which eliminated substantially all of the restrictive covenants, eliminated certain events of default, modified covenants regarding mergers and consolidations and modified or eliminated certain other provisions, including certain provisions relating to future guarantors and defeasance, contained in the July 2026 Notes Indenture and the July 2026 Notes. In addition, all of the collateral securing the July 2026 Notes was released pursuant to the seventh supplemental indenture.
The July 11, 2023 transaction resulted in cancellation of debt income (“CODI”) for tax purposes. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than the outstanding debt. The Internal Revenue Code of 1986, as amended, (the “Code”), provides that a debtor may wholly or partially exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of CODI excluded from taxable income. Pursuant to the U.S. tax rules, the Company computes the final CODI calculation based on the tax basis as of the last day of the fiscal tax year (i.e., December 31, 2023) which includes the date in which the debt transaction occurred. For the year ended December 31, 2023, the Company generated CODI in the amount of $780.0 million, of which $54.0 million was included in the fiscal year 2023 taxable income and $726.0 million was excluded from taxable income, resulting in the elimination of $624.0 million gross federal and state net operating losses.
As a result of the 2023 Exchange and periodic repurchases, $24.0 million aggregate principal amount of the July 2026 Notes maturing July 15, 2026 remained outstanding as of June 30, 2024.
Senior Secured April 2026 Notes
On July 11, 2023, the Issuers issued approximately $767.8 million aggregate principal amount of the April 2026 Notes under the April 2026 Notes Indenture, which includes the April 2026 Notes issued pursuant to the 2023 Exchange (as described above) and $3.0 million issued in exchange of other indebtedness. The April 2026 Notes are scheduled to mature on April 15, 2026.
Interest on the April 2026 Notes will accrue at 11.5% per annum and will be paid semi-annually, in arrears, on January 15 and July 15 of each year, beginning July 15, 2023. Interest will be payable in cash or in kind by issuing additional April 2026 Notes (or increasing the principal amount of the outstanding April 2026 Notes) (“PIK Interest”) as described below: (A) for the July 15, 2023 interest payment date, such interest was paid in kind as PIK Interest, (B) for each interest payment date from and including the January 15, 2024 interest payment date through and including the July 15, 2024 interest payment date, such interest shall be paid in cash in an amount equal to (i) 50% of such interest plus (ii) an amount not to exceed an amount that, pro forma for such payment, would leave the issuers with Unrestricted Cash (as defined in the April 2026 Notes Indenture) of at least $15.0 million, with the remaining interest paid in kind as PIK Interest, and (C) for interest payment dates falling on or after January 15, 2025, such interest shall be paid in cash.
On July 15, 2023, the Company issued $44.1 million in aggregate principal amount of the April 2026 Notes as a payment for PIK Interest that would otherwise have been due to holders of the July 2026 Notes that participated in the Public Exchange on July 15, 2023. On January 15, 2024, the Company issued $23.3 million in aggregate principal amount of the April 2026 Notes as a payment for PIK Interest due on January 15, 2024 in respect of the April 2026 Notes. $835.3 million aggregate principal amount of the April 2026 Notes remained outstanding as of June 30, 2024.
The Issuers’ obligations under the April 2026 Notes and the April 2026 Notes Indenture are irrevocably and unconditionally guaranteed, jointly and severally, by the same guarantors (the “Guarantors”) that guarantee the July 2026 Notes (other than certain guarantors that have ceased to have operations or assets) and by certain of the Issuers’ other affiliates (the “Affiliated Guarantors”). The April 2026 Notes and the related guarantees are first-priority senior secured obligations of the Issuers, the Guarantors and Affiliated Guarantors.
The issuers may redeem the April 2026 Notes at their option, in whole at any time or in part from time to time, at a redemption price of 100%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
15
In addition, the April 2026 Notes will be mandatorily redeemable in part upon the sale of certain assets that constitute additional credit support.
The April 2026 Notes Indenture contains covenants that limit the Issuers’ and the Affiliated Guarantors and their respective subsidiaries’ ability to, among other things, (i) incur or guarantee additional indebtedness, (ii) pay dividends or distributions on, or redeem or repurchase, capital stock and make other restricted payments, (iii) make investments, (iv) consummate certain asset sales, (v) engage in certain transactions with affiliates, (vi) grant or assume certain liens and (vii) consolidate, merge or transfer all or substantially all of their assets. These covenants are subject to a number of important limitations and exceptions. In addition, upon the occurrence of specified change of control events, the Issuers must offer to repurchase the April 2026 Notes at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. The April 2026 Notes Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all of the then outstanding April 2026 Notes to be due and payable immediately.
Repurchases
In July 2021 the Company commenced a debt buyback program to repurchase senior secured indebtedness, which is ongoing.
During the six months ended June 30, 2023, the Company repurchased $13.8 million principal amount of the Issuers’ 10.0% First Priority Senior Secured Notes due 2023 (“2023 Notes”) for a net cash consideration of $4.4 million. The gain on early extinguishment of debt during the six months ended June 30, 2023 totaled $9.9 million and is inclusive of less than $0.1 million write off of original issue discount and debt issuance costs, respectively. During the six months ended June 30, 2023, the Company repurchased $15.1 million principal amount of the term loans outstanding under its credit agreement (“2023 Term Loan”) for net cash consideration of $8.0 million. The gain on early extinguishment of debt during the six months ended June 30, 2023 totaled $7.1 million and is inclusive of less than $0.1 million write off of original issue discount and debt issuance costs, respectively. Gain on the early extinguishment of debt during the six months ended June 30, 2023 is reported within debt modification and extinguishment costs (gain), net within the Company’s condensed consolidated statements of operations.
BRCC Facility
On November 17, 2021, GP2 XCV, LLC, a subsidiary of the Company (“GP2 XCV”), entered into a borrowing facility with B. Riley Commercial Capital, LLC (which was subsequently assigned to BRF Finance Co., LLC (“BRF Finance”)) pursuant to which such subsidiary was able to borrow an original principal amount of $75.0 million, which was later increased to $115.0 million as of December 7, 2021 (as the same may be amended from time to time, the “BRCC Term Loan”). On March 31, 2022, GP2 XCV and B. Riley Commercial Capital, LLC amended this facility to permit GP2 XCV to borrow up to $51.0 million under a separate revolving loan (the “BRCC Revolver”, collectively with the BRCC Term Loan, the “BRCC Facility”).
The BRCC Facility is secured by a lien on all the assets of GP2 XCV and by a pledge of the equity of GP2 XCV. GP2 XCV is a bankruptcy-remote entity and as such its assets are not available to other creditors of the Company or any of its subsidiaries other than GP2 XCV. Interest under the BRCC Facility accrues at a rate of 11.5% per annum (13.5% per annum default rate) and is payable quarterly on the last business day of each March, June, September and December. The purpose of BRCC Term Loan was to fund certain repurchases of the secured indebtedness and to provide funding for certain debt exchange transactions. The purpose of BRCC Revolver is to fund general corporate purposes.
The BRCC Facility matured on June 10, 2023. As of December 31, 2023, the Company had fully repaid the outstanding balance under the BRCC Term Loan. During the six months ended June 30, 2024, the Company repaid $12.0 million of outstanding principal amount under the BRCC Revolver. As of June 30, 2024, there remained borrowings of $7.9 million outstanding under the BRCC Revolver. The outstanding principal amount under the BRCC Revolver is payable in two (2) monthly installments of $2.0 million in July 2024 and August 2024, with the remaining outstanding principal balance of $3.9 million payable on September 30, 2024.
16
Senior Secured Term Loan
On July 11, 2023, Exela Intermediate LLC and Exela Finance Inc., wholly-owned subsidiaries of the Company, entered into a financing agreement with certain lenders and Blue Torch Finance LLC, as administrative agent, pursuant to which the lenders extended a $40.0 million term loan (“Senior Secured Term Loan”). On the same date, the Company used proceeds of this term loan to repay a corresponding amount of its existing debt. On January 12, 2024, $1.0 million of certain waiver and consent fee payable by subsidiaries of the Company under the term of Senior Secured Term Loan were added to outstanding balance of the Senior Secured Term Loan.
The Senior Secured Term Loan shall be, at the option of the Company, either a Reference Rate Loan, or a Secured Overnight Financing Rate (“SOFR”) Loan. Each portion of the Senior Secured Term Loan that is a Reference Rate Loan bears interest on the principal amount outstanding from the date of the Senior Secured Term Loan until repaid, at a rate per annum equal to the Reference Rate plus the Applicable Margin. “Reference Rate” for any period means the greatest of (i) 4.00% per annum, (ii) the federal funds rate plus 0.50% per annum, (iii) the Adjusted Term SOFR (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis) plus 1.00% per annum, and (iv) the rate last quoted by the Wall Street Journal as the "Prime Rate" in the United States. “Applicable Margin,” with respect to the interest rate of (a) any Reference Rate Loan is 10.39% per annum, and (b) any SOFR Rate Loan is 11.39% per annum. SOFR Rate Loans shall bear interest on the principal amount outstanding, at a rate per annum equal to the Adjusted Term SOFR rate for the Interest Period in effect for the Term Loan plus Applicable Margin. “Adjusted Term SOFR” means the rate per annum equal to Term SOFR for such calculation, plus 0.26161%. “Term SOFR,” for calculation with respect to a SOFR Rate Loan, is the per annum forward-looking term rate based on secured overnight financing rate for a tenor comparable to the applicable interest period on the day that is two business days prior to the first day of such interest period. However, with respect to a Reference Rate Loan, “Term SOFR” means the per annum forward-looking term rate based on secured overnight financing rate for a tenor of three months on the day that is two business days prior to such day. If Term SOFR as so determined shall ever be less than 4.00%, then Term SOFR shall be deemed to be 4.00%.
The Company may, at any time, elect to have interest on all or a portion of the loans be charged at a rate of interest based upon Term SOFR (the “SOFR Option”) by notifying the administrative agent at least three (3) business days prior to the proposed change. Such notice needs to be provided in the case of the continuation of a SOFR Rate Loan as a SOFR Rate Loan on the last day of the then current interest period. The Company shall have not more than 5 SOFR Rate Loans in effect at any given time, and only may exercise the SOFR Option for SOFR Rate Loans of at least $500,000 and integral multiples of $100,000 in excess thereof.
As of June 30, 2024, there were borrowings of $40.0 million outstanding under the Senior Secured Term Loan. The outstanding principal amount of the Senior Secured Term Loan shall be repaid in nine (9) equal quarterly installments of $0.5 million commencing July 1, 2024, with the remaining outstanding principal amount of $35.5 million payable at maturity along with accrued and unpaid interest. The maturity date of the Senior Secured Term Loan is January 14, 2026.
The Company may, at any time, prepay the principal of the Senior Secured Term Loan. Each prepayment shall be accompanied by the payment of accrued interest and the applicable premium, if any. Each prepayment shall be applied against the remaining installments of principal due on the Senior Secured Term Loan in the inverse order of maturity. The applicable premium shall be payable in the form of a make-whole amount if prepayment is made within one year of the borrowing date (the “First Period”). If optional prepayment is made after the year one anniversary of the borrowing date to the date of the two-year anniversary (the “Second Period”), the applicable premium shall be an amount equal to 1% times the amount of the principal amount of the Senior Secured Term Loan being paid on such date. The applicable premium shall be zero in case of prepayment after the date of the two-year anniversary of the borrowing date. Further, during the Second Period, if the prepayment is because of an event of default or termination of contract for any reason, the applicable premium shall be 1% times the aggregate principal amount of the Senior Secured Term Loan outstanding on such date.
The Senior Secured Term Loan contains customary events of default, affirmative and negative covenants, including limitation on the Company’s and certain of its subsidiaries’ ability to create, incur or allow certain liens; enter into sale and lease-back transactions; make any restricted payments; undergo fundamental changes, as well as certain financial covenants.
17
The Company was in compliance with all financial covenants as of June 30, 2024.
Securitization Facility
On June 17, 2022, the Company entered into an amended and restated receivables purchase agreement (as amended, the “Amended Receivables Purchase Agreement”) under an existing $150.0 million securitization facility (the “Securitization Facility”) among certain of the Company’s subsidiaries, Exela Receivables 3, LLC (the “Securitization Borrower”), Exela Receivables 3 Holdco, LLC (the “Securitization Parent SPE,” and together with the Securitization Borrower, the “SPEs”) and certain global financial institutions (“Purchasers”). The Amended Receivables Purchase Agreement extended the term of the Securitization Facility such that the SPEs may sell certain accounts receivable to the Purchasers until June 17, 2025. Under the Amended Receivables Purchase Agreement, transfers of accounts receivable from the SPEs are treated as sales and are accounted for as a reduction in accounts receivable, because the agreement transfers effective control over and risk related to the accounts receivable to the Purchasers. The Company and related subsidiaries have no continuing involvement in the transferred accounts receivable, other than collection and administrative responsibilities, and, once sold, the accounts receivable are no longer available to satisfy creditors of the Company, the operating subsidiaries of the Company that agreed to sell receivables in connection with the Securitization Facility (the “Securitization Originators”), or any other relevant subsidiaries.
The sales of accounts receivable under the Amended Receivables Purchase Agreement are transacted at 100% of the face value of the relevant accounts receivable, resulting in derecognition of the accounts receivable from the Company’s condensed consolidated balance sheet. The Company de-recognized $522.7 million of accounts receivable under this agreement during the year ended December 31, 2023. The amount remitted to the Purchasers during fiscal year 2023 was $507.6 million. The Company de-recognized $123.2 million and $250.5 million of accounts receivable under this agreement during the three and six months ended June 30, 2024, respectively. The Company de-recognized $122.9 million and $262.9 million of accounts receivable under this agreement during the three and six months ended June 30, 2023, respectively. The amount remitted to the Purchasers during the three and six months ended June 30, 2024 was $113.4 million and $249.3 million, respectively. The amount remitted to the Purchasers during the three and six months ended June 30, 2023 was $125.2 and $266.5 million, respectively. Unsold accounts receivable of $34.0 million and $41.2 million were pledged by the SPEs as collateral to the Purchasers as of June 30, 2024 and December 31, 2023, respectively. These pledged accounts receivables are included in accounts receivable, net in the condensed consolidated balance sheets. The program resulted in a pre-tax loss of $2.6 million and $4.2 million for the three and six months ended June 30, 2024, respectively. The program resulted in a pre-tax loss of $2.0 million and $3.9 million for the three and six months ended June 30, 2023, respectively.
The fair value of the sold accounts receivable approximated their book value due to their short-term nature. Sold accounts receivable are presented as a change in receivables within operating activities in the condensed consolidated statements of cash flows.
BR Exar AR Facility
On February 12, 2024, certain of the Company’s subsidiaries entered into a receivables purchase agreement with BR Exar, LLC (“BREL”), an affiliate of B. Riley Commercial Capital, LLC (as subsequently amended on February 29, 2024, March 29, 2024, March 31, 2024, April 24, 2024, May 24, 2024 and June 25, 2024, the “BR Exar AR Facility”). The Company received an aggregate of $30.4 million, net of legal and other fees of $0.2 million, under the BR Exar AR Facility. Under the terms of the BR Exar AR Facility, certain of the Company’s subsidiaries agreed to sell certain existing receivables and all of their future receivables to BREL until such time as BREL shall have collected $33.7 million, net of any costs, expenses or other amounts paid to or owing to the buyer under the agreement. BREL collected $28.1 million under the BR Exar AR Facility during the period from February 2024 to June 2024. As of June 30, 2024, there was a $5.6 million outstanding balance under the BR Exar AR Facility.
Under the BR Exar AR Facility, transfers of accounts receivable from certain of the Company’s subsidiaries are treated as secured borrowings under ASC 860, Transfers and Servicing and are not accounted for as a reduction in accounts receivable because the agreements do not transfer effective control over and risk related to the accounts receivable to BREL.
18
Accordingly, the Company treated total of $0.2 million of legal fee and other expense incurred under the BR Exar AR Facility as debt issuances cost and $3.1 million of difference between the net proceeds received by the Company and total amount collected by BREL under the BR Exar AR Facility as original issue discount. Debt issuance cost and original issue discount relating to the BR Exar AR Facility are included in interest expense, net in the condensed consolidated statements of operations for the three and six months ended June 30, 2024.
Second Lien Note
On February 27, 2023, the SPEs and B. Riley Commercial Capital, LLC entered into a new Secured Promissory Note (which was subsequently assigned to BRF Finance) pursuant to which B. Riley Commercial Capital, LLC agreed to lend up to $35.0 million secured by a second lien pledge of the Securitization Borrower (the “Second Lien Note”). The Second Lien Note is scheduled to mature on June 17, 2025 and bears interest at a per annum rate of one-month Term SOFR plus 7.5%. The SPEs are party to the Amended Receivables Purchase Agreement, thus the transactions necessitated amendments to that agreement and related documents to permit the addition of subordinated debt and additional borrowing capacity into that transaction structure, in addition to providing for a $5.0 million fee to the lenders for facilitating the transaction. In connection with the above-described facility, the Company also amended the BRCC Term Loan and BRCC Revolver to provide for $9.6 million of borrowing capacity, which was drawn as described above.
As of June 30, 2024, there were borrowings of $31.5 million outstanding under the Second Lien Note payable at maturity.
Long-Term Debt Outstanding
As of June 30, 2024 and December 31, 2023, the following long-term debt instruments were outstanding:
|
|
|
|
||
|
June 30, |
|
December 31, |
||
|
2024 |
|
2023 |
||
Other (a) |
$ |
36,428 |
|
$ |
21,101 |
Secured borrowings under BR Exar AR Facility (b) |
|
5,022 |
|
|
— |
Senior secured term loan maturing January 14, 2026 (c) |
|
37,919 |
|
|
37,921 |
July 2026 Notes maturing July 15, 2026 (d) |
|
22,985 |
|
|
22,788 |
April 2026 Notes maturing April 15, 2026 (e) |
|
929,791 |
|
|
931,293 |
Secured borrowings under BRCC Facility matured on June 10, 2023 |
|
7,896 |
|
|
19,898 |
Second lien note maturing June 17, 2025 (f) |
|
28,934 |
|
|
27,608 |
Total debt |
|
1,068,975 |
|
|
1,060,609 |
Less: Current portion of long-term debt |
|
(53,723) |
|
|
(30,029) |
Long-term debt, net of current maturities |
$ |
1,015,252 |
|
$ |
1,030,580 |
| (a) | Other debt represents outstanding loan balances associated with various hardware and software purchases, and maintenance and leasehold improvements, along with other loans and receivables factoring arrangements entered into by subsidiaries of the Company. Other debt includes $28.9 million and $12.8 million of outstanding balances under certain revolving credit facilities of XBP Europe as of June 30, 2024 and December 31, 2023, respectively, and $3.3 million and $3.8 million of outstanding term loans of XBP Europe as of June 30, 2024 and December 31, 2023, respectively. |
| (b) | Net of unamortized net original issue discount of $0.5 million and less than $0.1 million of debt issuance as of June 30, 2024. |
| (c) | Net of unamortized debt issuance costs of $2.1 million as of June 30, 2024 and unamortized debt issuance costs of $1.6 million as of December 31, 2023. |
| (d) | Net of unamortized net original issue discount of $0.8 million and debt issuance costs of $0.2 million as of June 30, 2024; and unamortized net original issue discount of $0.9 million and debt issuance costs of $0.2 million as of December 31, 2023. |
| (e) | Inclusive of unamortized net debt exchange premium of $94.6 million and $119.4 million as of June 30, 2024 and December 31, 2023, respectively. |
19
| (f) | Net of unamortized debt issuance costs of $2.6 million and $3.9 million as of June 30, 2024 and December 31, 2023, respectively. |
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 expense of $2.0 million and $2.5 million for the three months ended June 30, 2024 and 2023, respectively. The Company recorded an income tax expense of $5.2 million and $5.2 million for the six months ended June 30, 2024 and 2023, respectively.
The Company expects U.S. consolidated taxable income for the year ended December 31, 2024, primarily due to inability to deduct most interest expense in accordance with Internal Revenue Code (IRC) Section 163(j). Since the enactment of IRC 163(j), the Company has been able to claim net operating loss deductions to eliminate U.S. consolidated tax liabilities. On July 11, 2023, a supplemental indenture was entered into with respect to the July 2026 Notes, which generated significant cancellation of indebtedness income (CODI) for tax purposes, most of which was excluded from taxable income. Under the provisions of IRC Section 108, on January 1, 2024 the Company reduced tax attributes, including all its Exela U.S. consolidated net operating loss carryforwards and tax credits. Accordingly, in 2024 the Company will generate current U.S consolidated tax liabilities, which is reflected in the income tax expense for the three and six months ended June 30, 2024.
The Company's ETR of (8.2)% and (10.9)% for the three and six months ended June 30, 2024 differed from the expected U.S. statutory tax rate of 21.0% and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s deferred tax assets on U.S. disallowed interest expense carryforwards under the provisions of The Tax Cuts and Jobs Act (“TCJA”).
For the three and six months ended June 30, 2023, the Company's ETR of (8.9)% and (7.3)% differed from the expected U.S. statutory tax rate of 21.0% and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s deferred tax assets on U.S. disallowed interest expense carryforwards under the provisions of the TCJA.
As of June 30, 2024, 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, 2023.
7. Employee Benefit Plans
German Pension Plan
The Company’s subsidiary in Germany provides pension benefits to certain retirees. Employees eligible for participation include all employees who started working for the Company or its predecessors prior to September 30, 1987 and have finished a qualifying period of at least 10 years. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan. The German pension plan is an unfunded plan and therefore has no plan assets. No new employees are registered under this plan and the participants who are already eligible to receive benefits under this plan are no longer employees of the Company.
U.K. Pension Plan
The Company’s subsidiary in the United Kingdom provides pension benefits to certain retirees and eligible dependents. Employees eligible for participation include 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.
20
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 later 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 include 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 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.
Tax Effect on Accumulated Other Comprehensive Loss
As of June 30, 2024 and December 31, 2023 the Company recorded actuarial gain of $0.4 million and actuarial losses of $0.2 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which is net of a deferred tax benefit of $2.0 million 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, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Service cost |
|
$ |
9 |
|
$ |
10 |
|
$ |
19 |
|
$ |
20 |
Interest cost |
|
|
739 |
|
|
760 |
|
|
1,482 |
|
|
1,509 |
Expected return on plan assets |
|
|
(726) |
|
|
(676) |
|
|
(1,455) |
|
|
(1,343) |
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
— |
|
|
89 |
|
|
— |
|
|
177 |
Amortization of net loss |
|
|
305 |
|
|
391 |
|
|
612 |
|
|
776 |
Net periodic benefit cost |
|
$ |
327 |
|
$ |
574 |
|
$ |
658 |
|
$ |
1,139 |
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 expense (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 $0.2 million and $1.2 million to its pension plans during the six months ended June 30, 2024 and 2023, respectively. The Company has plans to fund the pension plans with the required contributions for 2024 based on current plan provisions.
21
8. Commitments and Contingencies
Contract Claim
On October 24, 2018, HOV Services, Inc., a subsidiary of the Company (“HOV Services”), filed a lawsuit against ASG Technologies Group, Inc. (“ASG”) that sought to terminate the renewal of licensing agreement between the parties. HOV Services alleged that the licensing agreement was renewed under duress and brought claims against ASG under the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq., the Stored Communications Act, 18 U.S.C. § 2701 et seq., and various common law doctrines. ASG subsequently brought counterclaims asserting breach of contract and other allegations. On February 27, 2024, a judge granted ASG’s motion for directed verdict on its breach of contract claim and awarded ASG $2.5 million in damages plus interest. On February 29, 2024, the jury found in favor of ASG on all remaining claims and awarded ASG damages in the amount of approximately $0.7 million plus interest, for a total award of approximately $4.7 million in the case. As of June 30, 2024 and December 31, 2023, the Company accrued $4.7 million for this matter included in accrued liabilities on the condensed consolidated balance sheets, but has not discharged the amount due under this case.
Business Interruption Insurance Claim
During the second half of 2022, the Company experienced a network security incident (the “2022 Network Outage”) impacting certain of the Company’s operational and information technology systems. As a result of the 2022 Network Outage, the Company experienced lost revenue and incurred certain incremental costs. On August 29, 2023, the Company submitted a claim to its insurers for $44.6 million in covered losses related to the 2022 Network Outage (the “August 2023 Claim”). During the year 2023, the Company received insurance proceeds of $10.8 million in respect of business interruption claims from its underlying and first excess carriers. The August 2023 Claim is currently under review by two additional insurers (collectively, the “Second Excess Insurers”), which the Company expects to provide the next layer of coverage under applicable policies. On April 17, 2024, the Company commenced an action against the Second Excess Insurers seeking a declaratory judgment and alleging breach of contract and bad faith for failing to pay out their share of losses connected to the August 2023 Claim. On August 9, 2024, the Company settled its claim against one of the Second Excess Insurers for $3.6 million. At this time, it is not practicable to render an opinion regarding the outcome of this matter with respect to the remaining Second Excess Insurer; however, the Company believes it has meritorious claims and plans to vigorously assert them.
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 condensed consolidated balance sheets, condensed consolidated statements of operations or condensed consolidated statements of cash flows.
9. Fair Value Measurement
Assets and Liabilities Measured at Fair Value
The carrying amount of assets and liabilities including current portion of other debt approximated their fair value as of June 30, 2024 and December 31, 2023, due to the relative short maturity of these instruments. Management estimates the fair values of the July 2026 Notes and the April 2026 Notes at approximately 20.0% and 15.5%, respectively, of the respective principal balances outstanding as of June 30, 2024. Management estimated the fair values of the July 2026 Notes and the April 2026 Notes at approximately 24.0% and 16.5%, respectively, of the respective principal balance outstanding as of December 31, 2023. The fair values of secured borrowings under the Company’s securitization facility, BRCC Facility, Second Lien Note and Senior Secured Term Loan are equal to the respective carrying values. Other debt represents the Company’s outstanding loan balances associated with various hardware, 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.
22
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 and current portion of long-term debts using Level 2 inputs, including any recent issuance of the debt, the Company’s credit rating, and the current market rate.
The Company determined the fair value of private warrants liability of XBP Europe included in the other long-term liabilities in the condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023 under Level 3 fair value measurement using the Black-Scholes option pricing model.
The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as of June 30, 2024 and December 31, 2023:
|
|
Carrying |
|
Fair |
|
Fair Value Measurements |
|||||||||
As of June 30, 2024 |
|
Amount |
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|||||
Recurring assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
1,015,252 |
|
$ |
196,730 |
|
$ |
— |
|
$ |
196,730 |
|
$ |
— |
Current portion of long-term debts |
|
|
53,723 |
|
|
53,723 |
|
|
— |
|
|
53,723 |
|
|
— |
Private warrants liability of XBP Europe |
|
|
10 |
|
|
10 |
|
|
— |
|
|
— |
|
|
10 |
|
|
Carrying |
|
Fair |
|
Fair Value Measurements |
|||||||||
As of December 31, 2023 |
|
Amount |
|
Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|||||
Recurring assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
1,030,580 |
|
$ |
216,213 |
|
$ |
— |
|
$ |
216,213 |
|
$ |
— |
Current portion of long-term debts |
|
|
30,029 |
|
|
30,029 |
|
|
— |
|
|
30,029 |
|
|
— |
Private warrants liability of XBP Europe |
|
|
50 |
|
|
50 |
|
|
— |
|
|
— |
|
|
50 |
The significant unobservable inputs used in the fair value of the private warrants liability of XBP Europe are assumptions related to the inputs of exercise price, fair value of the underlying XBP Europe common stock, risk-free interest rate, expected term, expected volatility, and expected dividend yield. 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 fair value.
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, |
||
|
|
2024 |
|
2023 |
||
Balance at beginning of period |
|
$ |
50 |
|
$ |
647 |
Reduction in the fair value of the private warrants liability of XBP Europe |
|
|
(40) |
|
|
(597) |
Balance at end of period |
|
$ |
10 |
|
$ |
50 |
10. Stock-Based Compensation
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 was initially authorized to issue up to 694 shares of Common Stock under the 2018 Plan. On June 27, 2022, the shareholders of the Company approved the Company’s Amended and Restated 2018 Stock Incentive Plan increasing the number of shares of Common Stock reserved for issuance from an original 694 shares to 4,462.
23
Exela 2024 Stock Incentive Plan
On June 13, 2024, Exela’s 2024 Stock Incentive Plan (the “2024 Plan”) became effective. Under the 2024 Plan, subject to adjustment for certain changes in capitalization or other corporate events, Exela is authorized to issue up to 500,000 shares of Common Stock pursuant to equity-based awards, which may be granted to eligible participants in furtherance of Exela’s broader compensation strategy and philosophy. Awards granted under the 2024 Plan will be granted upon terms approved by Exela’s Compensation Committee and set forth in an award agreement or other evidence of an award. As of June 30, 2024, there were no awards and no shares of Common Stock issued under the 2024 Plan.
Restricted Stock Unit granted under the 2018 Plan
Restricted stock unit awards generally vest ratably over a one to two year period. Restricted stock units are subject to forfeiture if employment or service terminates prior to vesting and are expensed ratably over the vesting period.
A summary of restricted stock unit activities under the 2018 Plan for the six months ended June 30, 2024 is summarized in the following table:
|
|
|
|
|
|
|
Average |
|
|
|
|
Weighted |
|
Remaining |
|
|
|
Number |
|
Average Grant |
|
Contractual Life |
|
|
|
of Units |
|
Date Fair Value |
|
(Years) |
|
Outstanding Balance as of December 31, 2023 |
|
8 |
|
$ |
6,600.00 |
|
— |
Granted |
|
— |
|
|
— |
|
|
Forfeited |
|
— |
|
|
— |
|
|
Vested |
|
(8) |
|
|
6,600.00 |
|
|
Outstanding Balance as of June 30, 2024 |
|
— |
|
$ |
— |
|
— |
Options granted under the 2018 Plan
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 for the six months ended June 30, 2024 is summarized in the following table:
|
|
|
|
|
|
|
|
Average |
||
|
|
|
|
Weighted |
|
Weighted |
|
Remaining |
||
|
|
|
|
Average Grant |
|
Average |
|
Vesting Period |
||
|
|
Outstanding |
|
Date Fair Value |
|
Exercise Price |
|
(Years) |
||
Outstanding Balance as of December 31, 2023 |
|
313 |
|
$ |
22,224 |
|
$ |
46,485 |
|
0.02 |
Granted |
|
— |
|
|
— |
|
|
|
|
|
Exercised |
|
— |
|
|
— |
|
|
|
|
|
Forfeited |
|
(8) |
|
|
36,260 |
|
|
|
|
|
Expired |
|
— |
|
|
— |
|
|
|
|
|
Outstanding Balance as of June 30, 2024 (1) |
|
305 |
|
$ |
22,044 |
|
$ |
45,995 |
|
0.01 |
(1) 297 of the outstanding options are exercisable as of June 30, 2024.
24
As of June 30, 2024, there was less than $0.1 million of total unrecognized compensation expense related to non-vested stock option awards under 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 less than $0.1 million and $1.0 million related to restricted stock unit awards and stock option awards under the 2018 Plan for the three and six months ended June 30, 2024, respectively. The Company recorded net reversal of compensation expense of less than $0.1 million and $0.1 million related to stock option awards under the 2018 Plan for the three and six months ended June 30, 2023, respectively, due to forfeiture of options.
25
XBP Europe 2024 Stock Incentive Plan
On June 13, 2024, the stockholders of XBP Europe approved and adopted XBP Europe’s 2024 Stock Incentive Plan (the “XBP 2024 Equity Plan”) at XBP Europe’s 2024 Annual Meeting of Stockholders. Under the XBP 2024 Equity Plan, subject to adjustment for certain changes in capitalization or other corporate events, XBP Europe is authorized to issue up to 5,520,270 shares of common stock pursuant to equity-based awards, which may be granted to eligible participants in furtherance of XBP Europe’s broader compensation strategy and philosophy. Awards granted under the 2024 Equity Plan will be granted upon terms approved by XBP Europe’s Compensation Committee and set forth in an award agreement or other evidence of an award. As of June 30, 2024, there were no shares of XBP Europe’s common stock issued under the XBP 2024 Equity Plan. However, restricted stock unit and stock options were issued under the XBP 2024 Equity Plan.
Restricted Stock Unit granted under the XBP 2024 Equity Plan
Restricted stock unit awards generally vest ratably over a less than a year to three year period. Restricted stock units are subject to forfeiture if employment or service terminates prior to vesting and are expensed ratably over the vesting period.
A summary of restricted stock unit activities under the XBP 2024 Equity Plan for the six months ended June 30, 2024 is summarized in the following table:
|
|
|
|
|
|
|
Average |
|
|
|
|
Weighted |
|
Remaining |
|
|
|
Number |
|
Average Grant |
|
Contractual Life |
|
|
|
of Units |
|
Date Fair Value |
|
(Years) |
|
Granted |
|
3,325,329 |
|
$ |
1.24 |
|
|
Forfeited |
|
— |
|
|
— |
|
|
Vested |
|
— |
|
|
— |
|
|
Outstanding Balance as of June 30, 2024 |
|
3,325,329 |
|
$ |
1.24 |
|
2.70 |
Options granted under the XBP 2024 Equity Plan
Under the XBP 2024 Equity 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 ten (10) years from the grant date. Stock options granted under the XBP 2024 Equity Plan generally require no less than a four (4) year ratable vesting period. Stock option activity for the six months ended June 30, 2024 is summarized in the following table:
|
|
|
|
|
|
|
|
Average |
||
|
|
|
|
Weighted |
|
Weighted |
|
Remaining |
||
|
|
|
|
Average Grant |
|
Average |
|
Vesting Period |
||
|
|
Outstanding |
|
Date Fair Value |
|
Exercise Price |
|
(Years) |
||
Granted |
|
95,000 |
|
$ |
0.58 |
|
$ |
|
|
|
Exercised |
|
— |
|
|
— |
|
|
|
|
|
Forfeited |
|
— |
|
|
— |
|
|
|
|
|
Expired |
|
— |
|
|
— |
|
|
|
|
|
Outstanding Balance as of June 30, 2024 (1) |
|
95,000 |
|
$ |
0.58 |
|
$ |
1.31 |
|
3.84 |
| (1) | None of the outstanding options are exercisable as of June 30, 2024. |
As of June 30, 2024, there was $4.0 million of total unrecognized compensation expense related to non-vested restricted stock unit awards and stock option awards issued by XBP Europe under the XBP 2024 Equity Plan, which will be recognized over the respective service period. Stock-based compensation expense is recorded within selling, general, and administrative expenses. The Company recorded total compensation expense of $0.2 million related to restricted stock unit awards and stock option awards issued by XBP Europe under the XBP 2024 Equity Plan for the three and six months ended June 30, 2024.
26
Market Performance Units
On September 14, 2021, the Company granted its Executive Chairman performance units with a market performance condition, which are notional units representing the right to receive one share of Common Stock (or the cash value of one share of Common Stock). At the election of the compensation committee of the Company, these performance units might be settled in cash or in shares of Common Stock.
Fifty percent of the performance units covered by the award will vest if, at any time during the period commencing September 14, 2021 and ending June 30, 2024, the volume weighted average of the reported closing price of the Common Stock is $40,000 per share or greater on (x) 60 consecutive trading days or (y) 90 non-consecutive trading days in any 180 day period (the “Tranche 1”). In addition, the remaining 50% of the performance units will vest if, at any time during the period commencing September 14, 2021 and ending June 30, 2025, the volume weighted average of the reported closing prices of the Common Stock is $80,000 per share or greater on (x) 60 consecutive trading days or (y) 90 non-consecutive trading days in any 180 day period (the “Tranche 2”). Any Tranche 1 and Tranche 2 units that are not earned by June 30, 2024 and June 30, 2025, respectively, will be forfeited for no consideration and will no longer be eligible to vest. Tranche 1 was not earned as of June 30, 2024 and accordingly, was forfeited for no consideration. In addition, if a change in control occurs prior to the applicable expiration date, if the performance units are assumed by the acquirer, the units will remain outstanding and eligible to vest based solely on his continued service to the Company. If in connection with such change in control the performance units are not assumed by an acquirer, a number of performance units will vest based on the per share price paid in the transaction, with 0% vesting if the per share price is equal to or less than $8,000 per share, and 100% of the Tranche 2 vesting if the per share price is equal to or greater than $80,000, and a number of Tranche 2 vesting determined based on a straight line interpolation if the share price is between $8,000 and $80,000, respectively. The Executive Chairman will remain eligible to earn his performance units so long as he remains engaged with the Company in any capacity, including as a non-employee director.
The fair value of the awards was determined to be $5,920 and $6,040 per unit for Tranche 1 and Tranche 2, respectively, on the grant date by application of the Monte Carlo simulation model. On December 31, 2021, the modification date fair value of the awards was determined to be $1,760 and $1,880 per unit for Tranche 1 and Tranche 2, respectively, by application of the Monte Carlo simulation model.
The following table summarizes the activity for the market performance restricted stock units for the six months ended June 30, 2024:
|
|
|
|
|
|
|
|
Remaining Service |
|
|
|
|
|
Weighted |
|
Period Over |
|
|
|
|
Number |
|
Average |
|
Which Expected |
|
|
|
|
of Units |
|
Fair Value |
|
to be Recognized |
|
Outstanding Balance as of December 31, 2023 |
|
|
2,125 |
|
$ |
1,820 |
|
0.98 |
Granted |
|
|
— |
|
|
— |
|
|
Forfeited |
|
|
(1,062) |
|
|
1,760 |
|
|
Vested |
|
|
— |
|
|
— |
|
|
Outstanding Balance as of June 30, 2024 |
|
|
1,063 |
|
$ |
1,880 |
|
0.98 |
As of June 30, 2024, there was approximately $0.4 million of unrecognized compensation expense related to non-vested performance unit awards, which will be recognized over the requisite service period. The Company recognized $0.2 million and $0.4 million of compensation expense associated with the performance unit award for the three and six months ended June 30, 2024, respectively. The Company recorded total compensation expense of $0.2 million and $0.4 million associated with the performance unit award for the three and six months ended June 30, 2023, respectively.
27
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, the holders of the Company’s Common Stock and Tandem Preferred Stock (that provides a vote to holders of the Company’s Series B Preferred Stock, as described below) possess all voting power for the election of the Company’s board of directors (the “Board”) 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 the Company’s Common Stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of the Company’s 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 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. As of June 30, 2024, there were 6,365,363 shares of Common Stock outstanding.
Share Buyback Program
On August 10, 2022, the Board authorized a share buyback program (the “2022 Share Buyback Program”), pursuant to which the Company is permitted to repurchase up to 50,000 shares of Common Stock over the next two-year period. The 2022 Share Buyback Program does not obligate the Company to repurchase any shares of Common Stock. No shares were repurchased under the 2022 Share Buyback Program during the six months ended June 30, 2024 and 2023. As of June 30, 2024, the Company had repurchased and concurrently retired 1,787 shares of Common Stock pursuant to the 2022 Share Buyback Program.
The Company records such stock repurchases as a reduction to stockholders’ equity. The Company allocates the excess of the repurchase price over the par value of shares acquired to accumulated deficit and additional paid-in capital. The portion allocated to additional paid-in capital is determined by dividing the number of shares to be retired by the number of shares issued multiplied by the balance of additional paid-in capital as of the retirement date.
Series A 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. The Company has designated 2,800,000 shares of its authorized preferred stock as Series A Preferred Stock. The rights and preferences of the Series A Preferred Stock are defined in the Certificate of Designations, Preferences, Rights and Limitations of Series A Perpetual Convertible Preferred Stock of the Company, dated July 12, 2017 (the "Series A Certificate of Designations"). At June 30, 2024, the Company had 2,778,111 shares of Series A Preferred Stock outstanding. The par value of the Series A Preferred Stock is $0.0001 per share. Each share of Series A Preferred Stock is convertible at the holder’s option, at any time into the number of shares of Common Stock determined as of the date of conversion using a certain conversion formula that takes into account the amount of Liquidation Preference per share as adjusted for accrued but unpaid dividends, as described below. As of June 30, 2024, after taking into account the effect of the Reverse Stock Split, each outstanding share of Series A Preferred Stock was convertible into 0.000152 shares of Common Stock using this conversion formula. Accordingly, as of June 30, 2024, 424 shares of Common Stock were issuable upon conversion of 2,778,111 shares of outstanding Series A Preferred Stock.
Holders of the Series A Preferred Stock are entitled to receive cumulative dividends at a rate per annum of 10% of the dollar amount of per share liquidation preference (plus accumulated but unpaid dividends, the “Series A Liquidation Preference”) per share of Series A Preferred Stock, paid or accrued quarterly in arrears on the 15th day of each March, June, September and December. From the issue date through June 30, 2024, the amount of all accrued but unpaid dividends on the Series A Preferred Stock have been added to the Series A Liquidation Preference.
28
The Company shall add the amount of all accrued but unpaid dividends on each quarterly dividend payment date to the Series A 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 Series A Liquidation Preference shall be reduced on a dollar-for-dollar basis by the amount of any such cash payment. The aggregate Series A Liquidation Preference amount was $44.2 million as of June 30, 2024 (at $8 per share inclusive of accrued dividends as of such date as described below). The Company is not required to make any payment or allowance for unpaid dividends, whether or not in arrears, on converted shares of Series A Preferred Stock or for dividends on the shares of Common Stock issued upon conversion of such shares. The gross dividend accumulation for the three and six months ended June 30, 2024 was $1.1 million and $2.1 million, respectively. The gross dividend accumulation for the three and six months ended June 30, 2023 was $1.0 million and $1.9 million, respectively. As of June 30, 2024, the total accumulated but unpaid dividends on the Series A Preferred Stock since inception on July 12, 2017 was $22.0 million. The per share average of cumulative preferred dividends for the three and six months ended June 30, 2024 was $0.38 and $0.76, respectively. The per share average of cumulative preferred dividends for the three and six months ended June 30, 2023 was $0.35 and $0.69, respectively.
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 Series A 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.
Following the occurrence of a "Fundamental Change," as defined in the Series A Certificate of Designations, if the Company does not redeem the Series A Preferred Stock, holders of the Series A Preferred Stock may convert their entire accumulated Series A Liquidation Preference into Common Stock for fifteen days following the effective date of the Fundamental Change based on the greater of (i) the price to be paid (or deemed paid) per share of Common Stock in such transaction or the average closing price of the Common Stock on the 20 consecutive trading days immediately preceding the effective date of the Fundamental Change (or, such lesser number of trading days as shall follow the public announcement of such transaction) and (ii) $0.10. The maximum number of shares of Common Stock issuable upon such conversion will not exceed 85% of the total number of shares of Common Stock outstanding on a fully-diluted basis.
Series B Preferred Stock and Tandem Preferred Stock
The Company has designated 8,100,000 shares of its authorized preferred stock as Series B Preferred Stock. The rights and preferences of the Series B Preferred Stock are defined in the Certificate of Designations, Preferences, Rights and Limitations of Series B Cumulative Convertible Perpetual Preferred Stock of the Company, dated March 10, 2022 (the "Series B Certificate of Designations"). At June 30, 2024, the Company had 3,029,900 shares of Series B Preferred Stock outstanding. The par value of the Series B Preferred Stock is $0.0001 per share. Each share of Series B Preferred Stock is convertible at the holder’s option, at any time into the number of shares of Common Stock determined as of the date of conversion using a certain conversion formula that takes into account the amount of liquidation preference per share as adjusted for accrued but unpaid dividends, as described below. As of June 30, 2024, after taking into account the effect of the Reverse Stock Split and payment of the accrued dividend, each outstanding share of Series B Preferred Stock was convertible into 0.00555 of one share of Common Stock using this conversion formula. Accordingly, as of June 30, 2024, 16,814 shares of Common Stock were issuable upon conversion of 3,029,900 shares of outstanding Series B Preferred Stock. The shares of Series B Preferred Stock are listed on the Nasdaq under the symbol “XELAP.”
Holders of the Series B Preferred Stock are entitled to receive cumulative dividends at a rate per annum of 6% of the dollar amount of per share liquidation preference (plus accumulated but unpaid dividends, the “Series B Liquidation Preference”) per share of Series B Preferred Stock, paid or accrued quarterly in arrears on the last day of each of March, June, September and December. The Company shall add the amount of all accrued but unpaid dividends on each quarterly dividend payment date to the Series B 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 Series B Liquidation Preference shall be reduced on a dollar-for-dollar basis by the amount of any such cash payment.
29
The aggregate Series B Liquidation Preference was $84.1 million as of June 30, 2024 (at $25 per share inclusive of accrued dividends as of such date as described below). The Company is not required to make any payment or allowance for unpaid dividends, whether or not in arrears, on converted shares of Series B Preferred Stock or for dividends on the shares of Common Stock issued upon conversion of such shares. The gross dividend accumulation was $1.2 million and $2.5 million for the three and six months ended June 30, 2024, respectively, as reflected on the condensed consolidated statements of operations. The gross dividend accumulation was $1.2 million and $2.3 million for the three and six months ended June 30, 2023, respectively, as reflected on the condensed consolidated statements of operations. As of June 30, 2024, the total accumulated but unpaid dividends on the Series B Preferred Stock since inception on March 23, 2022 was $8.3 million. The per share average of cumulative preferred dividends for the three and six months ended June 30, 2024 was $0.41 and $0.81, respectively. The per share average of cumulative preferred dividends for the three and six months ended June 30, 2023 was $0.39 and $0.77, respectively.
In addition, holders of the Series B 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 Series B Certificate of Designations), as if all shares of Series B 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. Holders of Series B Preferred Stock also have rights to vote for the election of one additional director to serve on the Board, if dividends on Series B Preferred Stock are in arrears for eight or more consecutive quarters, until all unpaid and accumulated dividends on the Series B Preferred Stock have been paid or declared and a sum sufficient for payment is set aside for such payment.
On May 17, 2022, the Company issued one share of tandem preferred stock, par value $0.0001 per share (the “Tandem Preferred Stock”), as a dividend on its existing shares of outstanding Series B Preferred Stock. The rights and preferences of the Tandem Preferred Stock are defined in the Certificate of Designations, Preferences, Rights and Limitations of the Tandem Preferred Stock of the Company, dated May 17, 2022 (the "Tandem Certificate of Designations"). Any issuance of Series B Preferred Stock after this date shall be automatically accompanied by an equal number of shares of Tandem Preferred Stock. Tandem Preferred Stock are embedded in the Series B Preferred Stock and they provide voting rights to the existing shares of Series B Preferred Stock. Each share of Series B Preferred Stock disclosed in the condensed consolidated balance sheet, the condensed consolidated statements of stockholders’ deficit and the notes to the condensed consolidated financial statements embeds one share of Tandem Preferred Stock.
On all matters submitted to a vote of the stockholders of the Company, the holders of the Series B Preferred Stock through their holdings of Tandem Preferred Stock will be entitled to vote with the holders of the Common Stock as a single class. Each share of Tandem Preferred Stock entitles the holder to one vote per share, subject to adjustment for issuance of any shares of Common Stock pursuant to any dividend or distribution on shares of Common Stock, share split or share combination or other transactions as specified in the Tandem Certificate of Designations.
Shares of Tandem Preferred Stock are not entitled to receive dividends of any kind. In the case of a transfer of the underlying Series B Preferred Stock by a holder to any transferee, the Tandem Preferred Stock shall be automatically transferred simultaneously to such transferee without any further action by such Holder. Upon the redemption of a holder’s shares of Series B Preferred Stock or the conversion of shares of Series B Preferred Stock into Common Stock, an equal number of such holder’s shares of Tandem Preferred Stock shall, without any further action required by the holder, be automatically transferred to the Company for cancellation without the payment of any additional consideration by the Company. In the event of any liquidation, winding-up or dissolution of the Company each holder of the Tandem Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders an amount in cash equal to the par value of such Tandem Preferred Stock with respect to each share of Tandem Preferred Stock held by such holder.
30
Special Voting Preferred Stock
On October 9, 2023, the Company entered into the Subscription, Voting and Redemption Agreement with GP-HGM LLC, an entity affiliated to the Executive Chairman of the Company, pursuant to which GP-HGM LLC purchased 1,000,000 shares of a new class of preferred stock designated as “Special Voting Stock” for an aggregate purchase price of $100 and agreed to vote all of the shares of Special Voting Stock at the annual meeting of stockholders, held on June 13, 2024 (the “Annual Meeting"), in proportion to the votes cast at the Annual Meeting. Each share of Special Voting Stock was entitled to 20,000 votes per share. The Special Voting Stock were deemed redeemed for an aggregate price of $100 on the first business day following the Annual Meeting. There were no Special Voting Stock outstanding as of June 30, 2024.
Warrants
At June 30, 2024, there were warrants outstanding to purchase 1,978 shares of the Company’s Common Stock, consisting of 7,913,637 warrants to purchase one-four thousandth of one share of Common Stock from the private placement that was completed in March 2021. Each private placement warrant entitles the holder to purchase one-four thousandth of one share of Common Stock, at an exercise price of $16,000.00 per share and will expire on September 19, 2026. The private placement warrants are not listed or traded as of June 30, 2024, and are not subject to mandatory 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, and together with certain of their affiliated entities managed by HandsOn Global Management LLC, including such entity, “HGM”) of $0 for each of the three months ended June 30, 2024 and 2023, and $0 and less than $0.1 million for the six months ended June 30, 2024 and 2023, respectively. Certain members of the Company’s Board and management, including the Company’s Executive Chairman and Interim Chief Financial Officer, (Par Chadha, Matthew Brown, Sharon Chadha, Ron Cogburn, and James Reynolds) are or have been affiliated with HGM. The Company’s Executive Chairman, Par Chadha and his wife, Sharon Chadha, are currently affiliated with HGM. Messrs. Cogburn and Reynolds were affiliated with HGM until 2020, and Mr. Brown was affiliated with HGM until 2017.
Pursuant to a master agreement dated January 1, 2015 between Rule 14, LLC and a subsidiary of the Company, the Company incurs marketing fees to Rule 14, LLC, a portfolio company of HGM. Similarly, the Company is party to ten master agreements with entities affiliated with HGM’s managed funds, each of which were entered into during 2015 and 2016. Each master agreement provides the Company with use of certain technology and includes a reseller arrangement pursuant to which the Company is entitled to sell these services to third parties. Any revenue earned by the Company in such third-party sales is shared 75%/25% with each of HGM’s venture affiliates in favor of the Company. The brands Zuma, Athena, Peri, BancMate, Spring, Jet, Teletype, CourtQ and Rewardio are part of the HGM managed funds. The Company has the license to use and resell such brands, as described therein. The Company incurred fees relating to these agreements of $2.4 million and $2.1 million for the three months ended June 30, 2024 and 2023, respectively, and $4.1 million and $4.5 million for the six months ended June 30, 2024 and 2023, respectively. The Company earned no revenue from third-party sales under the reseller arrangement for the three and six months ended June 30, 2024 and 2023.
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 for each of the three months ended June 30, 2024 and 2023, and $0.1 million for each of the six months ended June 30, 2024 and 2023. In addition, HOV Services, Ltd. provides the Company data capture and technology services. The expense recognized for these services was approximately $0.7 million and $0.5 million for the three months ended June 30, 2024 and 2023, respectively, and $1.2 million and $0.8 million for the six months ended June 30, 2024 and 2023, respectively. These expenses are included in cost of revenue in the condensed consolidated statements of operations.
31
Subscription, Voting and Redemption Agreement
On October 9, 2023, the Company entered into the Subscription, Voting and Redemption Agreement with GP-HGM LLC, an entity affiliated to the Executive Chairman of the Company, pursuant to which GP-HGM LLC purchased 1,000,000 shares of a new class of preferred stock designated as “Special Voting Stock” for an aggregate purchase price of $100 and agreed to vote all of the shares of Special Voting Stock at the Annual Meeting in proportion to the votes cast at the Annual Meeting. Each share of Special Voting Stock was entitled to 20,000 votes per share.
At the Annual Meeting, stockholders were asked to approve an amendment to the Series B Certificate of Designations to allow the Company to have the ability to (a) pay dividends in shares of Common Stock, (b) pay less than all of the accrued dividends, and (c) pay dividends on any date designated by the Company’s Board for the payment of dividends. The proposal did not pass, and the Special Voting Stock were deemed redeemed for an aggregate price of $100 on the first business day following the Annual Meeting. There were no Special Voting Stock outstanding as of June 30, 2024.
Invoicing Support and Collection Services
On September 1, 2023, the Company, through one of its subsidiaries, entered into a Master Services Agreement with Doctors of Waikiki LLP (the “DOW”), which is an affiliate under common control with HGM, where the Company could provide services under one or more statement(s) of work (each, a “SOW”) to DOW. Each SOW, together with the terms of this Agreement, shall be deemed a separate contract that is effective as of date set forth in the SOW. The Company, acting under the first statement of work (SOW-1), provides collection services to DOW to collect past-due medical debts from its patients and insurance companies for which the Company receives a commission of 15% for accounts assigned within one year of the service date and 25% for accounts assigned after one year. Under the second statement of work (SOW-2), the Company manages DOW's insurance billing and denial management for medical bills generated after patients receive treatment from DOW for which the Company invoices $2,000 per month for each full-time employee assigned to the project. For the three and six months ended June 30, 2024, the Company has recognized $0 and less than $0.1 million of income, respectively, under these two SOWs.
Payable and Receivable/Prepaid Balances with Affiliates
Payable and receivable/prepaid balances with affiliates as of June 30, 2024 and December 31, 2023 were as follows:
|
|
|
|
|
||||||||
|
|
June 30, 2024 |
|
December 31, 2023 |
||||||||
|
|
Receivables and |
|
Payables |
|
Receivables and |
|
Payables |
||||
HOV Services, Ltd |
|
$ |
403 |
|
$ |
— |
|
$ |
296 |
|
$ |
— |
Rule 14 |
|
|
— |
|
|
3,019 |
|
|
— |
|
|
1,918 |
HGM |
|
|
— |
|
|
28 |
|
|
— |
|
|
9 |
DOW |
|
|
46 |
|
|
— |
|
|
— |
|
|
11 |
|
|
$ |
449 |
|
$ |
3,047 |
|
$ |
296 |
|
$ |
1,938 |
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 customers. The Company is organized into three segments: ITPS, HS, and LLPS.
ITPS: The ITPS segment provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning and distribution to customers primarily in the financial services, commercial, public sector and legal industries.
32
HS: The HS segment operates and maintains an outsourcing business specializing in both the healthcare provider and payer markets.
LLPS: The LLPS segment provides a broad array of support services in connection with class action settlement administration, claims adjudication, labor, 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, net and sundry expenses (income), 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, 2024 |
||||||||||
|
|
ITPS |
|
HS |
|
LLPS |
|
Total |
||||
Revenue |
|
$ |
156,840 |
|
$ |
62,935 |
|
$ |
25,878 |
|
$ |
245,653 |
Cost of revenue (exclusive of depreciation and amortization) |
|
|
129,787 |
|
|
42,573 |
|
|
15,604 |
|
|
187,964 |
Segment profit |
|
|
27,053 |
|
|
20,362 |
|
|
10,274 |
|
|
57,689 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
|
|
|
|
|
|
|
|
|
41,778 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
14,983 |
Related party expense |
|
|
|
|
|
|
|
|
|
|
|
3,282 |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
23,129 |
Sundry income, net |
|
|
|
|
|
|
|
|
|
|
|
(204) |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
(423) |
Net loss before income taxes |
|
|
|
|
|
|
|
|
|
|
$ |
(24,856) |
|
|
Three months ended June 30, 2023 |
||||||||||
|
|
ITPS |
|
HS |
|
LLPS |
|
Total |
||||
Revenue |
|
$ |
184,990 |
|
$ |
63,608 |
|
$ |
24,340 |
|
$ |
272,938 |
Cost of revenue (exclusive of depreciation and amortization) |
|
|
150,035 |
|
|
47,016 |
|
|
15,008 |
|
|
212,059 |
Segment profit |
|
|
34,955 |
|
|
16,592 |
|
|
9,332 |
|
|
60,879 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
|
|
|
|
|
|
|
|
|
32,026 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
14,890 |
Related party expense |
|
|
|
|
|
|
|
|
|
|
|
2,739 |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
45,092 |
Debt modification and extinguishment costs (gain), net |
|
|
|
|
|
|
|
|
|
|
|
(6,785) |
Sundry expense, net |
|
|
|
|
|
|
|
|
|
|
|
1,500 |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
(232) |
Net loss before income taxes |
|
|
|
|
|
|
|
|
|
|
$ |
(28,351) |
33
|
|
|
Six months ended June 30, 2024 |
|||||||||
|
|
ITPS |
|
HS |
|
LLPS |
|
Total |
||||
Revenue |
|
$ |
332,980 |
|
$ |
127,787 |
|
$ |
43,697 |
|
$ |
504,464 |
Cost of revenue (exclusive of depreciation and amortization) |
|
|
274,199 |
|
|
88,729 |
|
|
27,024 |
|
|
389,952 |
Segment profit |
|
|
58,781 |
|
|
39,058 |
|
|
16,673 |
|
|
114,512 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
|
|
|
|
|
|
|
|
|
82,632 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
28,490 |
Related party expense |
|
|
|
|
|
|
|
|
|
|
|
5,673 |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
44,217 |
Sundry expense, net |
|
|
|
|
|
|
|
|
|
|
|
1,677 |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
(874) |
Net loss before income taxes |
|
|
|
|
|
|
|
|
|
|
$ |
(47,303) |
|
|
|
Six months ended June 30, 2023 |
|||||||||
|
|
ITPS |
|
HS |
|
LLPS |
|
Total |
||||
Revenue |
|
$ |
378,698 |
|
$ |
126,650 |
|
$ |
41,210 |
|
$ |
546,558 |
Cost of revenue (exclusive of depreciation and amortization) |
|
|
308,546 |
|
|
93,752 |
|
|
26,228 |
|
|
428,526 |
Segment profit |
|
|
70,152 |
|
|
32,898 |
|
|
14,982 |
|
|
118,032 |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
|
|
|
|
|
|
|
|
|
76,407 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
31,450 |
Related party expense |
|
|
|
|
|
|
|
|
|
|
|
5,851 |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
89,272 |
Debt modification and extinguishment costs (gain), net |
|
|
|
|
|
|
|
|
|
|
|
(15,558) |
Sundry expense, net |
|
|
|
|
|
|
|
|
|
|
|
2,248 |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
(514) |
Net loss before income taxes |
|
|
|
|
|
|
|
|
|
|
$ |
(71,124) |
14. Subsequent Events
BR Exar AR Facility Amendment
During July 1, 2024 through August 14, 2024, certain of the Company’s subsidiaries entered into two (2) additional amendments to the BR Exar AR Facility (the “Amendments”), pursuant to which they agreed to sell certain existing and future receivables to BREL until such time as BREL shall have collected $10.5 million, net of any costs, expenses or other amounts paid to or owing to the buyer under the agreement. The Company received an aggregate of $9.5 million in net proceeds under the Amendments.
Repayments on BRCC Facility and BR Exar AR Facility
During July 1, 2024 through August 14, 2024, the Company repaid $2.0 million of outstanding principal amount under the BRCC Revolver. Accordingly, the amount outstanding under the BRCC Revolver is $5.9 million, as of August 14, 2024.
During July 1, 2024 through August 14, 2024, the Company repaid approximately $7.1 million of outstanding principal amount under the BR Exar AR Facility. Accordingly, the amount outstanding under the BR Exar AR Facility is approximately $8.9 million, as of August 14, 2024.
34
Potential Spin-off
On July 1, 2024, the Company announced that its Board has authorized the Company to consider a spin-off of its wholly-owned subsidiary Exela Technologies BPA, LLC (the holding company for the Company’s business process automation business which includes our HS and LLPS segments and part of our ITPS segment, and collectively with all of its subsidiaries, the “BPA Business”). In the event the spin-off is effected, Exela will distribute all of the shares of common stock held by it of a holding company (“Holdco”) owning the BPA Business, pro rata determined on an as coverted fully diluted basis, to Exela’s stockholders and warrantholders. As a result, if the spin-off is consummated, Exela’s stockholders and warrantholders prior to the spin-off will become the stockholders of Holdco after the spin-off. The announcement of the potential spin-off did not have any impact to the Company’s condensed consolidated financial statements or segment reporting.
The spin-off, if it occurs, may be deemed a "Fundamental Change" under the Series A Certificate of Designations, and thus could provide Series A Preferred Stockholders with special conversion rights that could substantially dilute the existing holders of Common Stock, as described above. At this time, there can be no assurance that the spin-off will be consummated, and the Company has not yet completed its analysis of whether the spin-off, if consummated, would constitute a Fundamental Change.
35
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.
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; cyber incidents such as 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; the consummation, failure or abandonment of the spin-off described below, potential delisting from Nasdaq and other factors discussed in this quarterly report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Form 10-K”) 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 our 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.
Overview
Exela Technologies, Inc. (“Exela”, the “Company”, “we”, “our” or “us”) is a business process outsourcing and 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 approximately 13,100 employees operating in 20 countries, Exela rapidly deploys integrated technology and operations as an end-to-end digital journey partner.
36
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 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 meaningful differentiation in the industries we serve and services we provide.
History
We are a former special 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 a 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 shares of our common stock (“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, Business Combinations (“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 November 29, 2023, we completed the merger of our European business with CF Acquisition Corp. VIII. After this merger, our European business operates as XBP Europe Holdings, Inc. (“XBP Europe”), a majority-owned consolidated subsidiary of the Company. Beginning on November 30, 2023, XBP Europe shares started trading on the Nasdaq Stock Market under the ticker symbol “XBP” and its warrants started trading on the Nasdaq Stock Market under the ticker symbol “XBPEW”. We own a majority of the outstanding capital stock of XBP Europe.
Sale of Non-core Assets
On June 8, 2023, the Company completed the sale of its high-speed scanner business for a purchase price of approximately $30.1 million. As a result of this transaction, the Company disposed of $16.5 million of goodwill based on the relative fair value of the high-speed scanner business to the total fair value of the ITPS reporting unit. This transaction resulted in a total pre-tax gain of $7.2 million. Per the terms of the sales agreement, the Company may receive additional cash consideration upon the future occurrence of certain earn out events described in the sales agreement.
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 transaction processing and enterprise information management 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 local 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.
37
HS: HS operates and maintains an 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 array of support services in connection with class action settlement administration, claims adjudication, labor, 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 based pricing model for the various types of volumes processed, licensing and maintenance fees for technology sales, and a mix of fixed management fee and transactional revenue for document logistics and location services. HS revenues are primarily generated from a transaction based pricing model for the various types of volumes processed for healthcare payers and providers. LLPS revenues are primarily based on time and materials pricing as well as through transactional services priced on a per item basis.
People
We draw on the business and technical expertise of our talented and diverse global workforce to provide our 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, 2024, we had approximately 13,100 employees globally, with 6,800 employees located in Americas and EMEA, and the remainder located primarily in India and the Philippines.
Costs associated with our employees represent the most significant expense for our business. We incurred personnel costs of $107.9 million and $125.2 million for the three months ended June 30, 2024 and 2023, respectively. We incurred personnel costs of $222.1 million and $254.6 million for the six months ended June 30, 2024 and 2023, respectively. The majority of our personnel costs are variable and are incurred only while we are providing our services. In certain jurisdictions, for example many countries in Europe, there is a statutory payment requirement for any people made redundant due to automation or relocation of delivery locations.
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; |
| ● | 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 loss, plus income tax expense, interest expense, net, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus transaction and integration costs; non cash equity compensation, (gain) or loss from sale or disposal of assets or business, non-recurring charges and impairment charges; and other infrequent, or unusual costs and expenses.
38
See “—Other Financial Information (Non GAAP Financial Measures)” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.
Results of Operations
Three months ended June 30, 2024 compared to Three months ended June 30, 2023:
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
||||
|
|
2024 |
|
2023 |
|
Change |
|
% Change |
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
ITPS |
|
$ |
156,840 |
|
$ |
184,990 |
|
$ |
(28,150) |
|
|
(15.2)% |
HS |
|
|
62,935 |
|
|
63,608 |
|
|
(673) |
|
|
(1.1)% |
LLPS |
|
|
25,878 |
|
|
24,340 |
|
|
1,538 |
|
|
6.3% |
Total revenue |
|
|
245,653 |
|
|
272,938 |
|
|
(27,285) |
|
|
(10.0)% |
Cost of revenue (exclusive of depreciation and amortization): |
|
|
|
|
|
|
|
|
|
|
|
|
ITPS |
|
|
129,787 |
|
|
150,035 |
|
|
(20,248) |
|
|
(13.5)% |
HS |
|
|
42,573 |
|
|
47,016 |
|
|
(4,443) |
|
|
(9.4)% |
LLPS |
|
|
15,604 |
|
|
15,008 |
|
|
596 |
|
|
4.0% |
Total cost of revenues |
|
|
187,964 |
|
|
212,059 |
|
|
(24,095) |
|
|
(11.4)% |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
41,778 |
|
|
32,026 |
|
|
9,752 |
|
|
30.5% |
Depreciation and amortization |
|
|
14,983 |
|
|
14,890 |
|
|
93 |
|
|
0.6% |
Related party expense |
|
|
3,282 |
|
|
2,739 |
|
|
543 |
|
|
19.8% |
Operating profit (loss) |
|
|
(2,354) |
|
|
11,224 |
|
|
(13,578) |
|
|
(121.0)% |
Interest expense, net |
|
|
23,129 |
|
|
45,092 |
|
|
(21,963) |
|
|
(48.7)% |
Debt modification and extinguishment costs (gain), net |
|
|
— |
|
|
(6,785) |
|
|
6,785 |
|
|
(100.0)% |
Sundry (income) expense, net |
|
|
(204) |
|
|
1,500 |
|
|
(1,704) |
|
|
(113.6)% |
Other income, net |
|
|
(423) |
|
|
(232) |
|
|
(191) |
|
|
82.3% |
Net loss before income taxes |
|
|
(24,856) |
|
|
(28,351) |
|
|
3,495 |
|
|
(12.3)% |
Income tax expense |
|
|
(2,049) |
|
|
(2,535) |
|
|
486 |
|
|
(19.2)% |
Net loss |
|
$ |
(26,905) |
|
$ |
(30,886) |
|
$ |
3,981 |
|
|
(12.9)% |
Revenue
For the three months ended June 30, 2024, our revenue on a consolidated basis decreased by $27.3 million, or 10.0%, to $245.7 million from $272.9 million for the three months ended June 30, 2023. We experienced revenue decline in ITPS and HS segments and revenue growth in LLPS segment. Our ITPS, HS, and LLPS segments constituted 63.8%, 25.6%, and 10.6% of total revenue, respectively, for the three months ended June 30, 2024, compared to 67.8%, 23.3%, and 8.9%, respectively, for the three months ended June 30, 2023. The revenue changes by reporting segment were as follows:
ITPS— For the three months ended June 30, 2024, revenue attributable to our ITPS segment decreased by $28.2 million, or 15.2% compared to the same period in the prior year. The majority of this revenue decline is attributable to exiting contracts and statements of work from certain customers with revenue that we believe was unpredictable, non-recurring and were not a strategic fit to the Company’s long-term success. In June 2023, we sold our high-speed scanner business and this resulted in $2.0 million lower revenue in the current period as compared to the period ended June 30, 2023. The reported ITPS segment revenue decreased by $0.3 million from currency conversion during the three months ended June 30, 2024, compared to the three months ended June 30, 2023.
39
HS— For the three months ended June 30, 2024, revenue attributable to our HS segment marginally decreased by $0.6 million, or 1.1% compared to the same period in the prior year.
LLPS— For the three months ended June 30, 2024, revenue attributable to our LLPS segment increased by $1.5 million, or 6.3% compared to the same period in the prior year primarily due to an increase in project based engagements in legal claims administration services.
Cost of Revenue
For the three months ended June 30, 2024, our cost of revenue decreased by $24.1 million, or 11.4%, compared to the three months ended June 30, 2023. Costs in our ITPS segment decreased by $20.2 million, or 13.5%, primarily attributable to the corresponding decline in revenues. HS segment costs decreased by $4.4 million, or 9.4% primarily due to decrease in employee-related cost. LLPS segment cost of revenue increased by $0.6 million, or 4.0% primarily attributable to the corresponding increase in revenues.
The decrease in cost of revenues on a consolidated basis was primarily due to a decrease in employee-related costs of $14.1 million, lower infrastructure and maintenance costs of $5.8 million, lower other operating costs of $1.4 million and lower pass through costs of $2.8 million.
Cost of revenue for the three months ended June 30, 2024 was 76.5% of revenue compared to the 77.7% for the comparable same period in the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A expenses”) increased $9.8 million, or 30.5%, to $41.8 million for the three months ended June 30, 2024, compared to $32.0 million for the three months ended June 30, 2023. The increase was primarily attributable due to profit on sale of our high-speed scanner business of $6.6 million recognized in June 2023 and higher other SG&A expenses of $9.0 million due to bad debts provision and $0.2 million due to travel cost, offset by lower legal and professional fees of $3.3 million, lower infrastructure, maintenance and operating costs of $0.1 million, lower employee related costs by $2.9 million. SG&A expenses increased as a percentage of revenues to 17.0% for the three months ended June 30, 2024 as compared to 11.7% for the three months ended June 30, 2023.
Depreciation & Amortization
Total depreciation and amortization expenses were $15.0 million and $14.9 million for the three months ended June 30, 2024 and 2023, respectively.
Related Party Expenses
Related party expense was $3.3 million for the three months ended June 30, 2024 compared to $2.7 million for the three months ended June 30, 2023.
Interest Expense
Interest expense was $23.1 million for the three months ended June 30, 2024 compared to $45.1 million for the three months ended June 30, 2023. The decrease in total interest expense by $22.0 million was primarily due to amortization of debt exchange premium and reduction in interest costs due to exchange of notes in July 2023, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.
Debt modification and extinguishment costs (gain), net
There was no debt modification and extinguishment cost/(gain) for the three months ended June 30, 2024 compared to a gain of $6.8 million for the three months ended June 30, 2023. During the three months ended June 30, 2023, we repurchased $0.4 million principal amount of 2023 Notes for a cash consideration of $0.3 million. The gain on early extinguishment of debt for the 2023 Notes during the three months ended June 30, 2023 totaled $0.1 million.
40
During the three months ended June 30, 2023, we repurchased $15.1 million principal amount of the term loans outstanding under the Credit Agreement (the “2023 Term Loans”) for a cash consideration of $8.0 million. The gain on early extinguishment of debt for the 2023 Term Loans during the three months ended June 30, 2023 totaled $7.1 million and is inclusive of less than $0.1 million write off of original issue discount and debt issuance costs. During the three months ended June 30, 2023, we paid $0.4 million of exit fees on the partial prepayment of the BRCC Term Loan (as defined and further described in “Indebtedness” below) which was treated as a debt extinguishment cost.
Sundry (income) expense, net
The decrease in sundry expense, net by $1.7 million over the prior year period was primarily attributable to exchange rate fluctuations on foreign currency transactions.
Other Income, net
Other income, net was $0.4 million for the three months ended June 30, 2024 compared to other income, net of $0.2 million for the three months ended June 30, 2023.
Income Tax Expense
The Company recorded an income tax expense of $2.0 million for the three months ended June 30, 2024 and an income tax expense of $2.5 million for the three months ended June 30, 2023. The tax expense for the three months ended June 30, 2024 is lower than the three months ended June 30, 2023 largely due to decrease in Canadian taxes over prior year which is partially offset by increase in U.S. taxes in current period due to loss of U.S. tax attributes. The Company's estimated annual effective tax rate of (8.2)% for the three months ended June 30, 2024 differed from the expected U.S. statutory tax rate of 21.0% and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s deferred tax assets on U.S. disallowed interest expense carryforwards under by the provisions of The Tax Cuts and Jobs Act (“TCJA”).
41
Six Months Ended June 30, 2024 compared to Six Months Ended June 30, 2023:
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
||||
|
|
2024 |
|
2023 |
|
Change |
|
% Change |
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
ITPS |
|
$ |
332,980 |
|
$ |
378,698 |
|
$ |
(45,718) |
|
|
(12.1)% |
HS |
|
|
127,787 |
|
|
126,650 |
|
|
1,137 |
|
|
0.9% |
LLPS |
|
|
43,697 |
|
|
41,210 |
|
|
2,487 |
|
|
6.0% |
Total revenue |
|
|
504,464 |
|
|
546,558 |
|
|
(42,094) |
|
|
(7.7)% |
Cost of revenue (exclusive of depreciation and amortization): |
|
|
|
|
|
|
|
|
|
|
|
|
ITPS |
|
|
274,199 |
|
|
308,546 |
|
|
(34,347) |
|
|
(11.1)% |
HS |
|
|
88,729 |
|
|
93,752 |
|
|
(5,023) |
|
|
(5.4)% |
LLPS |
|
|
27,024 |
|
|
26,228 |
|
|
796 |
|
|
3.0% |
Total cost of revenues |
|
|
389,952 |
|
|
428,526 |
|
|
(38,574) |
|
|
(9.0)% |
Selling, general and administrative expenses (exclusive of depreciation and amortization) |
|
|
82,632 |
|
|
76,407 |
|
|
6,225 |
|
|
8.1% |
Depreciation and amortization |
|
|
28,490 |
|
|
31,450 |
|
|
(2,960) |
|
|
(9.4)% |
Related party expense |
|
|
5,673 |
|
|
5,851 |
|
|
(178) |
|
|
(3.0)% |
Operating profit |
|
|
(2,283) |
|
|
4,324 |
|
|
(6,607) |
|
|
(152.8)% |
Interest expense, net |
|
|
44,217 |
|
|
89,272 |
|
|
(45,055) |
|
|
(50.5)% |
Debt modification and extinguishment costs (gain), net |
|
|
— |
|
|
(15,558) |
|
|
15,558 |
|
|
(100.0)% |
Sundry expense, net |
|
|
1,677 |
|
|
2,248 |
|
|
(571) |
|
|
(25.4)% |
Other income, net |
|
|
(874) |
|
|
(514) |
|
|
(360) |
|
|
70.0% |
Net loss before income taxes |
|
|
(47,303) |
|
|
(71,124) |
|
|
23,821 |
|
|
(33.5)% |
Income tax expense |
|
|
(5,175) |
|
|
(5,198) |
|
|
23 |
|
|
(0.4)% |
Net loss |
|
$ |
(52,478) |
|
$ |
(76,322) |
|
$ |
23,844 |
|
|
(31.2)% |
Revenue
For the six months ended June 30, 2024, our revenue on a consolidated basis decreased by $42.1 million, or 7.7%, to $504.5 million from $546.6 million for the six months ended June 30, 2023. We experienced revenue decline in ITPS segment and revenue growth in HS and LLPS segments. Our ITPS, HS, and LLPS segments constituted 66.0%, 25.3%, and 8.7% of total revenue, respectively, for the six months ended June 30, 2024, compared to 69.3%, 23.2%, and 7.5%, respectively, for the six months ended June 30, 2023. The revenue changes by reporting segment were as follows:
ITPS— For the six months ended June 30, 2024, revenue attributable to our ITPS segment decreased by $45.7 million, or 12.1% compared to the same period in the prior year. The majority of this revenue decline is attributable to exiting contracts and statements of work from certain customers with revenue that we believe was unpredictable, non-recurring and were not a strategic fit to the Company’s long-term success. In June 2023, we sold our high-speed scanner business and this resulted in $5.0 million lower revenue in the current period as compared to the period ended June 30, 2023. The reported ITPS segment revenue benefited by $0.4 million from currency conversion during the six months ended June 30, 2024, compared to the six months ended June 30, 2023.
HS— For the six months ended June 30, 2024, revenue attributable to our HS segment increased by $1.1 million, or 0.9% compared to the same period in the prior year primarily due to higher volumes from our new and existing healthcare customers.
LLPS— For the six months ended June 30, 2024, revenue attributable to our LLPS segment increased by $2.5 million, or 6.0% compared to the same period in the prior year primarily due to an increase in project based engagements in legal claims administration services.
42
Cost of Revenue
For the six months ended June 30, 2024, our cost of revenue decreased by $38.6 million, or 9.0%, compared to the six months ended June 30, 2023. Costs in our ITPS segment decreased by $34.3 million, or 11.1%, primarily attributable to the corresponding decline in revenues. HS segment costs decreased by $5.0 million, or 5.4% primarily due to decrease in employee-related cost. LLPS segment cost of revenue increased by $0.8 million, or 3.0% primarily attributable to the corresponding increase in revenues.
The decrease in cost of revenues on a consolidated basis was primarily due to a decrease in employee-related costs of $29.1 million, lower infrastructure and maintenance costs of $10.1 million, lower other operating costs of $2.3 million and lower travel costs of $0.1 million, which was offset by higher pass through costs of $3.0 million.
Cost of revenue for the six months ended June 30, 2024 was 77.3% of revenue compared to the 78.4% for the comparable same period in the prior year.
Selling, General and Administrative Expenses
SG&A expenses increased by $6.2 million, or 8.1%, to $82.6 million for the six months ended June 30, 2024, compared to $76.4 million for the six months ended June 30, 2023. The increase was primarily attributable due to profit on sale of our high-speed scanner business of $6.6 million recognized in June 2023, higher bad debts provisions by $11.2 million, other SG&A expenses of $2.3 million, higher infrastructure, maintenance and operating costs of $0.6 million, higher travel costs of $0.4 million offset by lower legal and professional fees of $12.1 million and lower employee related cost by $2.8 million. SG&A expenses increased as a percentage of revenues to 16.4% for the six months ended June 30, 2024 as compared to 14.0% for the six months ended June 30, 2023.
Depreciation & Amortization
Total depreciation and amortization expenses were $28.5 million and $31.5 million for the six months ended June 30, 2024 and 2023, respectively. The decrease in total depreciation and amortization expenses by $3.0 million was primarily due to a reduction in depreciation expense as a result of the expiration of the lives of assets acquired in prior periods and decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Related Party Expenses
Related party expense was $5.7 million for the six months ended June 30, 2024 compared to $5.9 million for the six months ended June 30, 2023.
Interest Expense
Interest expense was $44.2 million for the six months ended June 30, 2024 compared to $89.3 million for the six months ended June 30, 2023. The decrease in total interest expense by $45.1 million was primarily due to amortization of debt exchange premium and reduction in interest costs due to exchange of notes in July 2023, during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Debt modification and extinguishment costs (gain), net
There was no debt modification and extinguishment cost/(gain) for the six months ended June 30, 2024 compared to a gain of $15.6 million for the six months ended June 30, 2023. During the six months ended June 30, 2023, we repurchased $13.8 million principal amount of 2023 Notes for a cash consideration of $4.4 million. The gain on early extinguishment of debt for the 2023 Notes during the six months ended June 30, 2023 totaled $9.9 million and is inclusive of less than $0.1 million write off of original issue discount and debt issuance costs. During the six months ended June 30, 2023, we repurchased $15.1 million principal amount of the 2023 Term Loans outstanding under the Credit Agreement for a cash consideration of $8.0 million. The gain on early extinguishment of debt for the 2023 Term Loans during the six months ended June 30, 2023 totaled $7.1 million and is inclusive of less than $0.1 million write off of original issue discount and debt issuance costs.
43
During the six months ended June 30, 2023, we paid $1.4 million of exit fees on the partial prepayment of the BRCC Term Loan (as defined and further described in “Indebtedness” below) which was treated as a debt extinguishment cost.
Sundry Expense, net
The decrease in sundry expense, net by $0.6 million over the prior year period was primarily attributable to exchange rate fluctuations on foreign currency transactions.
Other Income, net
Other income, net was $0.9 million for the six months ended June 30, 2024 compared to other income, net of $0.5 million for the six months ended June 30, 2023.
Income Tax Expense
The Company recorded an income tax expense of $5.2 million for the six months ended June 30, 2024 and an income tax expense of $5.2 million for the six months ended June 30, 2023. The tax expense for the six months ended June 30, 2024 is approximately the same as the six months ended June 30, 2023. The increase in U.S. tax due to loss of attributes is offset by the decrease in foreign earnings which is largely driven by decrease in Canadian tax expense from prior period. The Company's estimated annual effective tax rate of (10.9)% for the six months ended June 30, 2024 differed from the expected U.S. statutory tax rate of 21.0% and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s deferred tax assets on U.S. disallowed interest expense carryforwards under the provisions of the TCJA.
Other Financial Information (Non-GAAP Financial Measures)
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net (loss) or income, plus income tax expense, interest expense, net, and depreciation and amortization. We have historically defined Adjusted EBITDA, including in the Form 10-Q for the quarter ended June 30, 2023, 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 consistent with the definitions contained in our debt agreements.
Beginning with the 2023 Form 10-K, the Company has made certain changes to the way it defines Adjusted EBITDA that impact the comparability of the metrics to prior periods. Specifically, the Company will no longer include optimization and restructuring expenses, contract costs and certain other charges that we historically added back to our computation of Adjusted EBITDA consistent with the definitions in our debt agreements. The Company’s presentation of Adjusted EBITDA for same period in the prior year also reflects this updated definition of Adjusted EBITDA (i.e., will not be the same as set forth in prior filings due to the change of definition).
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.
Note Regarding Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations as our Board 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.
44
Our non GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non GAAP financial measures have important limitations as analytical tools because they exclude some but not all items that affect the most directly comparable GAAP financial measures. These non 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 GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Three Months Ended June 30, 2024 compared to the Three Months Ended June 30, 2023
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 ended June 30, 2024 and 2023.
|
|
Three Months Ended June 30, |
||||
|
|
2024 |
|
2023 |
||
Net Loss |
|
$ |
(26,905) |
|
$ |
(30,886) |
Income tax expense |
|
|
2,049 |
|
|
2,535 |
Interest expense, net |
|
|
23,129 |
|
|
45,092 |
Depreciation and amortization |
|
|
14,983 |
|
|
14,890 |
EBITDA |
|
|
13,256 |
|
|
31,631 |
Transaction and integration costs (1) |
|
|
17 |
|
|
2,905 |
Non-cash equity compensation (2) |
|
|
377 |
|
|
202 |
Other charges including non-cash (3) |
|
|
— |
|
|
271 |
Loss/(gain) on sale of assets (4) |
|
|
69 |
|
|
739 |
Loss/(gain) on business disposals (5) |
|
|
— |
|
|
(6,473) |
Debt modification and extinguishment costs (gain), net |
|
|
— |
|
|
(6,785) |
Adjusted EBITDA |
|
$ |
13,719 |
|
$ |
22,490 |
| (1) | Represents non-recurring legal, consulting and other fees and expenses incurred in connection with acquisitions, dispositions, debt-exchanges and other extraordinary transactions and events during the applicable period. |
| (2) | Represents the non-cash charges related to restricted stock units and options. |
| (3) | Represents 2022 network outage related insurance recoveries. |
| (4) | Represents a loss/(gain) recognized on the disposal of property, plant, and equipment and other assets. |
| (5) | Represents a loss/(gain) recognized on the sale of high-speed scanner business in the second quarter of 2023. |
Six Months Ended June 30, 2024 compared to the Six Months Ended June 30, 2023
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 ended June 30, 2024 and 2023.
|
|
Six Months Ended June 30, |
||||
|
|
2024 |
|
2023 |
||
Net Loss |
|
$ |
(52,478) |
|
$ |
(76,322) |
Income tax expense |
|
|
5,175 |
|
|
5,198 |
Interest expense, net |
|
|
44,217 |
|
|
89,272 |
Depreciation and amortization |
|
|
28,490 |
|
|
31,450 |
EBITDA |
|
|
25,404 |
|
|
49,598 |
Transaction and integration costs (1) |
|
|
151 |
|
|
8,061 |
Non-cash equity compensation (2) |
|
|
1,560 |
|
|
313 |
Other charges including non-cash (3) |
|
|
— |
|
|
182 |
Loss/(gain) on sale of assets (4) |
|
|
(533) |
|
|
827 |
Loss/(gain) on business disposals (5) |
|
|
— |
|
|
(6,473) |
Debt modification and extinguishment costs (gain), net |
|
|
— |
|
|
(15,558) |
Adjusted EBITDA |
|
$ |
26,582 |
|
$ |
36,950 |
45
| (1) | Represents non-recurring legal, consulting and other fees and expenses incurred in connection with acquisitions, dispositions, debt-exchanges and other extraordinary transactions and events during the applicable period. |
| (2) | Represents the non-cash charges related to restricted stock units and options. |
| (3) | Represents 2022 network outage related insurance recoveries. |
| (4) | Represents a loss/(gain) recognized on the disposal of property, plant, and equipment and other assets. |
| (5) | Represents a loss/(gain) recognized on the sale of high-speed scanner business in the second quarter of 2023. |
Liquidity and Capital Resources
Overview
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 raise substantial doubt about our ability to continue as a going concern: a history of continuing net losses, net operating cash outflows, working capital deficits and accumulated deficit. Going concern matters are more fully discussed in Note 1, General of the condensed consolidated financial statements.
Liquidity is the availability of adequate amounts of cash with an enterprise to meet its needs for cash requirements. At June 30, 2024, cash, restricted cash, and cash equivalents totaled $51.3 million, including restricted cash of $20.9 million. As of June 30, 2024, our working capital deficit amounted to $254.4 million, an increase of $40.7 million as compared to working capital deficit of $213.7 million as of December 31, 2023 mainly due to current maturities of our long term debts.
In the ordinary course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations include borrowings, interest obligations, purchase commitments, operating and finance lease commitments, employee benefit payments and taxes. Specifically, $7.9 million outstanding under the BRCC Revolver (as defined and described further in the description of “Indebtedness” below) is payable in two (2) monthly installments of $2.0 million in July 2024 and August 2024, with the remaining outstanding principal balance of $3.9 million payable on September 30, 2024. We have paid $2.0 million of July 2024 installment on the BRCC Revolver. The current maturities under the Senior Secured Term Loan, the Second Lien Note, the secured borrowings under BR Exar AR Facility (as defined and further described in “Indebtedness” below) and the other debts are $2.5 million, $31.5 million, $5.5 million and $9.3 million, respectively. See Note 5 – Long-Term Debt and Credit Facilities, Note 7 – Employee Benefit Plans, and Note 8 – Commitments and Contingencies, to our condensed consolidated financial statements herein for further information on material cash requirements from known contractual and other obligations.
We plan to spend approximately 1.5% of total revenue on total capital expenditures over the next twelve months. Our business model has evolved to leverage cloud hosted platforms. This has reduced our capital expenditures and increased our operating expenses. This is the primary driver of changes in our capital expenditures when compared with historical periods. Our future cash requirements will depend on many factors, including our rate of revenue growth, our investments in strategic initiatives, applications or technologies, operation centers and acquisition of complementary businesses, which may require the use of significant cash resources and/or additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all adversely impacting our plans.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company has implemented favorable provisions of the CARES Act, including the refundable payroll tax credits and the deferment of employer social security payments. At the end of 2021, the Company paid a portion of the deferred employer social security due as per Internal Revenue Service’s guidance.
46
The remaining balance of deferred employer social security taxes will need to be paid by fiscal year 2024. The Company similarly used COVID-19 relief measures in various European jurisdictions, including permitted deferrals of certain payroll, social security and value added taxes. At the end of 2021, the Company paid a portion of these deferred payroll taxes, social security and value added taxes. The remaining balance of European deferred payroll taxes, social security and value added taxes will need to be paid by April 2027 as per deferment timeline.
On May 27, 2021, the Company entered into an At Market Issuance Sales Agreement (“First ATM Agreement”) with B. Riley Securities, Inc. (“B. Riley”) and Cantor Fitzgerald & Co. (“Cantor”), as distribution agents under which the Company may offer and sell shares of the Common Stock from time to time through the Distribution Agents, acting as sales agent or principal. On September 30, 2021, the Company entered into a second At Market Issuance Sales Agreement with B. Riley, BNP Paribas Securities Corp., Cantor, Mizuho Securities USA LLC and Needham & Company, LLC, as distribution agents (together with the First ATM Agreement, the “ATM Agreement”).
Sales of the shares of Common Stock under the ATM Agreement, have been in “at the market offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through the Nasdaq or on any other existing trading market for the Common Stock, as applicable, or to or through a market maker or any other method permitted by law, including, without limitation, negotiated transactions and block trades. Shares of Common Stock sold under the ATM Agreement have been offered pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-255707), filed with the SEC on May 3, 2021 and declared effective on May 12, 2021, and the Company’s Registration Statement on Form S-3 (File No. 333-263909), filed with the SEC on March 28, 2022 and declared effective on May 10, 2022, and the prospectuses and related prospectus supplements included therein for sales of shares of Common Stock as follows:
Supplement |
Period |
Number of Shares Sold |
Weighted Average Price Per Share |
Gross Proceeds |
Net Proceeds |
Prospectus supplement dated May 27, 2021 with an aggregate offering price of up to $100.0 million (“Common ATM Program–1”) |
May 28, 2021 through July 1, 2021 |
12,356 |
$8,032.74 |
$99.3 million |
$95.7 million |
Prospectus supplement dated June 30, 2021 with an aggregate offering price of up to $150.0 million (“Common ATM Program–2”) |
June 30, 2021 through September 2, 2021 |
14,395 |
$10,413.79 |
$149.9 million |
$144.4 million |
Prospectus supplement dated September 30, 2021 with an aggregate offering price of up to $250.0 million (“Common ATM Program–3”) |
October 6, 2021 through March 31, 2022 |
83,719 |
$2,986.18 |
$250.0 million |
$241.0 million |
Prospectus supplement dated May 23, 2022 with an aggregate offering price of up to $250.0 million (“Common ATM Program–4”) (1) |
May 24, 2022 through March 31, 2023 |
6,262,182 |
$36.15 |
$226.4 million |
$219.3 million |
| (1) | Due to the late filing of 2022 Form 10-K the Company lost eligibility to use Form S-3 (and thereby the ability to conduct at the market offerings and one of its sources of liquidity) for a period of time which was extended, as a result of subsequent delinquent quarterly reports on Form 10-Q, including for the period ended September 30, 2023 (the “Q3 Form 10-Q”). As of the date of this filing, the Company does not expect to regain eligibility to use Form S-3 until twelve full calendar months following the date the Q3 Form 10-Q was due. Any future delinquency with respect to the filing of a Form 10-K, Form 10-Q, or certain Form 8-Ks will cause the Company to lose Form S-3 eligibility for at least twelve (12) calendar months from the due date of the delinquent filing. |
The Amended Receivables Purchase Agreement (as defined and described further in the description of “Indebtedness” below) entered into on June 17, 2022 provides us access to liquidity through the sale of receivables. Under the Amended Receivables Purchase Agreement, transfers of accounts receivable are treated as sales and are accounted for as a reduction in accounts receivable because the agreement transfers effective control over and risk related to the accounts receivable to the purchasers of the receivables. The Company de-recognized $123.2 million and $250.5 million of accounts receivable under this agreement during the three and six months ended June 30, 2024, respectively.
47
The Company de-recognized $122.9 million and $262.9 million of accounts receivable under this agreement during the three and six months ended June 30, 2023, respectively. The amount remitted to the Purchasers during the three and six months ended June 30, 2024 was $113.4 million and $249.3 million, respectively. The amount remitted to the Purchasers during the three and six months ended June 30, 2023 was $125.2 and $266.5 million, respectively. Unsold accounts receivable of $34.0 million and $41.2 million were pledged by the SPEs as collateral to the Purchasers as of June 30, 2024 and December 31, 2023, respectively.
With an objective to increase free cash flows and in order to maintain sufficient liquidity to support profitable growth, the Company is pursuing further reduction in debt and repricing of existing debt. The Company will continue to pursue the sale of certain non-core businesses that are not central to the Company’s long-term strategic vision and invest in the acquisition of businesses that enhance the value proposition. The Company also plans to take further action to raise additional funds in the debt and equity capital markets. Based on our experience with the at-the-market programs and our knowledge of the Company and the financial market, we believe that we will be able to raise those additional funds. There can be no assurances, however, that any of these initiatives will be consummated or will achieve its desired result.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
|
Six Months Ended June 30, |
|||||||
|
|
2024 |
|
2023 |
|
Change |
|||
Net cash used in operating activities |
|
$ |
(16,926) |
|
$ |
(54,741) |
|
$ |
37,815 |
Net cash (used in) provided by investing activities |
|
|
(3,087) |
|
|
24,478 |
|
|
(27,565) |
Net cash provided by financing activities |
|
|
3,776 |
|
|
38,561 |
|
|
(34,785) |
Subtotal |
|
$ |
(16,237) |
|
|
8,298 |
|
$ |
(24,535) |
Effect of exchange rates on cash, restricted cash and cash equivalents |
|
|
344 |
|
|
145 |
|
|
199 |
Net (decrease) increase in cash, restricted cash and cash equivalents |
|
$ |
(15,893) |
|
$ |
8,443 |
|
$ |
(24,336) |
Analysis of Cash Flow Changes between the six months ended June 30, 2024 and June 30, 2023
Operating Activities—The decrease of $37.8 million in net cash used in operating activities for the six months ended June 30, 2024 was primarily due to improvement in debt amortization cost by $20.0 million, lower cost of revenue, lower selling, general and administrative expenses and other expenses, improvement in operating cycle for accounts receivable and accounts payable and accrued liabilities. This increase in cash generated in operating activities was partially offset by lower realization from prepaid expenses during the six months ended June 30, 2024.
Investing Activities—The decrease of $27.6 million in net cash provided by investing activities for the six months ended June 30, 2024 was primarily due to sale of our high-speed scanner business in June 2023.
Financing Activities— Cash provided by financing activities during the six months ended June 30, 2024 was $3.8 million, primarily as a result of $30.6 million of proceeds from borrowings under BR Exar AR Facility and net proceeds of $20.6 million from other loans offset by $17.8 million of principal repayments on senior secured term loans, BRCC Revolver and other loans and $25.6 million of repayment under BR Exar AR Facility.
Cash provided by financing activities during the six months ended June 30, 2023 was $38.6 million, primarily as a result of $67.0 million of net proceeds from equity offerings, $20.0 million of proceeds from borrowings under BR Exar AR Facility, $31.5 million of proceeds from the Second Lien Note, $9.6 million of proceeds from borrowings under the BRCC revolver and $4.3 million of proceeds from borrowings from other loans, partially offset by debt issuance costs of $6.4 million, $12.5 million of repayment under BR Exar AR Facility, repayments on the BRCC Facility and senior secured term loans and other loans of $60.2 million and cash outflow of $11.9 million for debt repurchases.
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Indebtedness
Following is a description of the Company’s key indebtness.
July 2026 Notes
As of January 1, 2023, there was outstanding $980.0 million aggregate principal amount of 11.5% First-Priority Senior Secured Notes scheduled to mature July 15, 2026 (the “July 2026 Notes”) issued by Exela Intermediate LLC and Exela Finance Inc. (together, the “Issuers”), wholly-owned subsidiaries of the Company . The July 2026 Notes are guaranteed by nearly all U.S. subsidiaries of Exela Intermediate LLC. The July 2026 Notes bear interest at a rate of 11.5% per year. We are required to pay interest on the July 2026 Notes on January 15 and July 15 of each year, and commenced making such interest payments on July 15, 2022. The Issuers may redeem the July 2026 Notes in whole or in part from time to time, at a redemption price of 100%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
On July 11, 2023, the Issuers, certain guarantors and U.S. Bank Trust Company, National Association, as trustee, entered into an indenture (the “April 2026 Notes Indenture”) governing the 11.5% First-Priority Senior Secured Notes scheduled to mature July 12, 2026 (the “April 2026 Notes”), and the Issuers issued approximately $764.8 million aggregate principal amount of the April 2026 Notes as consideration for the exchange of $956.0 million aggregate principal amount of the Issuers’ existing July 2026 Notes pursuant to a public exchange offer (the “2023 Exchange”), which was equivalent to issuing $800 of the April 2026 Notes per $1,000 principal amount of the existing July 2026 Notes. The Company performed an assessment of the 2023 Exchange and determined that it met the criteria to be accounted for as a troubled debt restructuring under ASC 470-60. The undiscounted cash flows associated with the April 2026 Notes issued were compared to the carrying value of the exchanged July 2026 Notes and since the undiscounted cash flows of the April 2026 Notes exceeded the carrying value of the exchanged July 2026 Notes, the carrying value of the April 2026 Notes was established at the carrying value of the exchanged July 2026 Notes and the Company established new effective interest rates based on the carrying value of the exchanged July 2026 Notes prior to the 2023 Exchange. The difference between the principal amount of the issued April 2026 Notes and their carrying value was recorded as a premium and is included in long-term debt on the Company’s condensed consolidated balance sheets. The Company recorded a premium of $142.3 million on the notes exchange, which will be reduced as contractual interest payments are made on the April 2026 Notes.
On July 11, 2023, the Company entered into a seventh supplemental indenture to the indenture governing the July 2026 Notes which eliminated substantially all of the restrictive covenants, eliminated certain events of default, modified covenants regarding mergers and consolidations and modified or eliminated certain other provisions, including certain provisions relating to future guarantors and defeasance, contained in the July 2026 Notes Indenture and the July 2026 Notes. In addition, all of the collateral securing the July 2026 Notes was released pursuant to the seventh supplemental indenture.
The July 11, 2023 transaction resulted in cancellation of debt income (“CODI”) for tax purposes. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than the outstanding debt. The Internal Revenue Code of 1986, as amended, (the “Code”), provides that a debtor may wholly or partially exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of CODI excluded from taxable income. Pursuant to the U.S. tax rules, the Company computes the final CODI calculation based on the tax basis as of the last day of the fiscal tax year (i.e., December 31, 2023) which includes the date in which the debt transaction occurred. For the year ended December 31, 2023, the Company generated CODI in the amount of $780.0 million, of which $54.0 million was included in the fiscal year 2023 taxable income and $726.0 million was excluded from taxable income, resulting in the elimination of $624.0 million gross federal and state net operating losses.
As a result of the 2023 Exchange and periodic repurchases, $24.0 million aggregate principal amount of the July 2026 Notes maturing July 15, 2026 remained outstanding as of June 30, 2024.
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Senior Secured April 2026 Notes
On July 11, 2023, the Issuers issued approximately $767.8 million aggregate principal amount of the April 2026 Notes under the April 2026 Notes Indenture, which includes the April 2026 Notes issued pursuant to the 2023 Exchange (as described above) and $3.0 million issued in exchange of other indebtedness. The April 2026 Notes are scheduled to mature on April 15, 2026.
Interest on the April 2026 Notes will accrue at 11.5% per annum and will be paid semi-annually, in arrears, on January 15 and July 15 of each year, beginning July 15, 2023. Interest will be payable in cash or in kind by issuing additional April 2026 Notes (or increasing the principal amount of the outstanding April 2026 Notes) (“PIK Interest”) as described below: (A) for the July 15, 2023 interest payment date, such interest was paid in kind as PIK Interest, (B) for each interest payment date from and including the January 15, 2024 interest payment date through and including the July 15, 2024 interest payment date, such interest shall be paid in cash in an amount equal to (i) 50% of such interest plus (ii) an amount not to exceed an amount that, pro forma for such payment, would leave the issuers with Unrestricted Cash (as defined in the April 2026 Notes Indenture) of at least $15.0 million, with the remaining interest paid in kind as PIK Interest, and (C) for interest payment dates falling on or after January 15, 2025, such interest shall be paid in cash.
On July 15, 2023, the Company issued $44.1 million in aggregate principal amount of the April 2026 Notes as a payment for PIK Interest that would otherwise have been due to holders of the July 2026 Notes that participated in the Public Exchange on July 15, 2023. On January 15, 2024, the Company issued $23.3 million in aggregate principal amount of the April 2026 Notes as a payment for PIK Interest due on January 15, 2024 in respect of the April 2026 Notes. $835.3 million aggregate principal amount of the April 2026 Notes remained outstanding as of June 30, 2024.
The Issuers’ obligations under the April 2026 Notes and the April 2026 Notes Indenture are irrevocably and unconditionally guaranteed, jointly and severally, by the same guarantors (the “Guarantors”) that guarantee the July 2026 Notes (other than certain guarantors that have ceased to have operations or assets) and by certain of the Issuers’ other affiliates (the “Affiliated Guarantors”). The April 2026 Notes and the related guarantees are first-priority senior secured obligations of the Issuers, the Guarantors and Affiliated Guarantors.
The issuers may redeem the April 2026 Notes at their option, in whole at any time or in part from time to time, at a redemption price of 100%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, the April 2026 Notes will be mandatorily redeemable in part upon the sale of certain assets that constitute additional credit support.
The April 2026 Notes Indenture contains covenants that limit the Issuers’ and the Affiliated Guarantors and their respective subsidiaries’ ability to, among other things, (i) incur or guarantee additional indebtedness, (ii) pay dividends or distributions on, or redeem or repurchase, capital stock and make other restricted payments, (iii) make investments, (iv) consummate certain asset sales, (v) engage in certain transactions with affiliates, (vi) grant or assume certain liens and (vii) consolidate, merge or transfer all or substantially all of their assets. These covenants are subject to a number of important limitations and exceptions. In addition, upon the occurrence of specified change of control events, the Issuers must offer to repurchase the April 2026 Notes at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. The April 2026 Notes Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all of the then outstanding April 2026 Notes to be due and payable immediately.
Repurchases
In July 2021 the Company commenced a debt buyback program to repurchase senior secured indebtedness, which is ongoing.
During the six months ended June 30, 2023, we repurchased $13.8 million principal amount of the Issuers’ 10.0% First Priority Senior Secured Notes due 2023 (“2023 Notes”) for a net cash consideration of $4.4 million. The gain on early extinguishment of debt during the six months ended June 30, 2023 totaled $9.9 million and is inclusive of less than $0.1 million write off of original issue discount and debt issuance costs, respectively. During the six months ended June 30, 2023, we repurchased $15.1 million principal amount of the term loans outstanding under the Credit Agreement due July 2023 (“2023 Term Loan”) for net cash consideration of $8.0 million.
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The gain on early extinguishment of debt during the six months ended June 30, 2023 totaled $7.1 million and is inclusive of less than $0.1 million write off of original issue discount and debt issuance costs, respectively.
BRCC Facility
On November 17, 2021, GP2 XCV, LLC, a subsidiary of the Company (“GP2 XCV”), entered into a borrowing facility with B. Riley Commercial Capital, LLC (which was subsequently assigned to BRF Finance Co., LLC (“BRF Finance”)) pursuant to which such subsidiary was able to borrow an original principal amount of $75.0 million, which was later increased to $115.0 million as of December 7, 2021 (as the same may be amended from time to time, the “BRCC Term Loan”). On March 31, 2022, GP2 XCV and B. Riley Commercial Capital, LLC amended this facility to permit GP2 XCV to borrow up to $51.0 million under a separate revolving loan (the “BRCC Revolver”, collectively with the BRCC Term Loan, the “BRCC Facility”).
The BRCC Facility is secured by a lien on all the assets of GP2 XCV and by a pledge of the equity of GP2 XCV. GP2 XCV is a bankruptcy-remote entity and as such its assets are not available to other creditors of the Company or any of its subsidiaries other than GP2 XCV. Interest under the BRCC Facility accrues at a rate of 11.5% per annum (13.5% per annum default rate) and is payable quarterly on the last business day of each March, June, September and December. The purpose of BRCC Term Loan was to fund certain repurchases of the secured indebtedness and to provide funding for certain debt exchange transactions. The purpose of BRCC Revolver is to fund general corporate purposes.
The BRCC Facility matured on June 10, 2023. As of December 31, 2023, the Company had fully repaid the outstanding balance under the BRCC Term Loan. During the six months ended June 30, 2024, we repaid $12.0 million of outstanding principal amount under the BRCC Revolver. As of June 30, 2024, there remained borrowings of $7.9 million outstanding under the BRCC Revolver. The outstanding principal amount under the BRCC Revolver is payable in two (2) monthly installments of $2.0 million in July 2024 and August 2024, with the remaining outstanding principal balance of $3.9 million payable on September 30, 2024.
Senior Secured Term Loan
On July 11, 2023, Exela Intermediate LLC and Exela Finance Inc., wholly-owned subsidiaries of the Company, entered into a financing agreement with certain lenders and Blue Torch Finance LLC, as administrative agent, pursuant to which the lenders extended a $40.0 million term loan (“Senior Secured Term Loan”). On the same date, the Company used proceeds of this term loan to repay a corresponding amount of its existing debt. On January 12, 2024, $1.0 million of certain waiver and consent fee payable by subsidiaries of the Company under the term of Senior Secured Term Loan were added to outstanding balance of the Senior Secured Term Loan.
The Senior Secured Term Loan shall be, at the option of the Company, either a Reference Rate Loan, or a Secured Overnight Financing Rate (“SOFR”) Loan. Each portion of the Senior Secured Term Loan that is a Reference Rate Loan bears interest on the principal amount outstanding from the date of the Senior Secured Term Loan until repaid, at a rate per annum equal to the Reference Rate plus the Applicable Margin. “Reference Rate” for any period means the greatest of (i) 4.00% per annum, (ii) the federal funds rate plus 0.50% per annum, (iii) the Adjusted Term SOFR (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis) plus 1.00% per annum, and (iv) the rate last quoted by the Wall Street Journal as the "Prime Rate" in the United States. “Applicable Margin,” with respect to the interest rate of (a) any Reference Rate Loan is 10.39% per annum, and (b) any SOFR Rate Loan is 11.39% per annum. SOFR Rate Loans shall bear interest on the principal amount outstanding, at a rate per annum equal to the Adjusted Term SOFR rate for the Interest Period in effect for the Term Loan plus Applicable Margin. “Adjusted Term SOFR” means the rate per annum equal to Term SOFR for such calculation, plus 0.26161%. “Term SOFR,” for calculation with respect to a SOFR Rate Loan, is the per annum forward-looking term rate based on secured overnight financing rate for a tenor comparable to the applicable interest period on the day that is two business days prior to the first day of such interest period. However, with respect to a Reference Rate Loan, “Term SOFR” means the per annum forward-looking term rate based on secured overnight financing rate for a tenor of three months on the day that is two business days prior to such day.
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If Term SOFR as so determined shall ever be less than 4.00%, then Term SOFR shall be deemed to be 4.00%.
The Company may, at any time, elect to have interest on all or a portion of the loans be charged at a rate of interest based upon Term SOFR (the “SOFR Option”) by notifying the administrative agent at least three (3) business days prior to the proposed change. Such notice needs to be provided in the case of the continuation of a SOFR Rate Loan as a SOFR Rate Loan on the last day of the then current interest period. The Company shall have not more than 5 SOFR Rate Loans in effect at any given time, and only may exercise the SOFR Option for SOFR Rate Loans of at least $500,000 and integral multiples of $100,000 in excess thereof.
As of June 30, 2024, there were borrowings of $40.0 million outstanding under the Senior Secured Term Loan. The outstanding principal amount of the Senior Secured Term Loan shall be repaid in nine (9) equal quarterly installments of $0.5 million commencing July 1, 2024, with the remaining outstanding principal amount of $35.5 million payable at maturity along with accrued and unpaid interest. The maturity date of the Senior Secured Term Loan is January 14, 2026.
The Company may, at any time, prepay the principal of the Senior Secured Term Loan. Each prepayment shall be accompanied by the payment of accrued interest and the applicable premium, if any. Each prepayment shall be applied against the remaining installments of principal due on the Senior Secured Term Loan in the inverse order of maturity. The applicable premium shall be payable in the form of a make-whole amount if prepayment is made within one year of the borrowing date (the “First Period”). If optional prepayment is made after the year one anniversary of the borrowing date to the date of the two-year anniversary (the “Second Period”), the applicable premium shall be an amount equal to 1% times the amount of the principal amount of the Senior Secured Term Loan being paid on such date. The applicable premium shall be zero in case of prepayment after the date of the two-year anniversary of the borrowing date. Further, during the Second Period, if the prepayment is because of an event of default or termination of contract for any reason, the applicable premium shall be 1% times the aggregate principal amount of the Senior Secured Term Loan outstanding on such date.
The Senior Secured Term Loan contains customary events of default, affirmative and negative covenants, including limitation on the Company’s and certain of its subsidiaries’ ability to create, incur or allow certain liens; enter into sale and lease-back transactions; make any restricted payments; undergo fundamental changes, as well as certain financial covenants. The Company was in compliance with all financial covenants as of June 30, 2024.
Securitization Facility
On June 17, 2022, the Company entered into an amended and restated receivables purchase agreement (as amended, the “Amended Receivables Purchase Agreement”) under an existing $150.0 million securitization facility (the “Securitization Facility”) among certain of the Company’s subsidiaries, Exela Receivables 3, LLC (the “Securitization Borrower”), Exela Receivables 3 Holdco, LLC (the “Securitization Parent SPE,” and together with the Securitization Borrower, the “SPEs”) and certain global financial institutions (“Purchasers”). The Amended Receivables Purchase Agreement extended the term of the Securitization Facility such that the SPEs may sell certain accounts receivable to the Purchasers until June 17, 2025. Under the Amended Receivables Purchase Agreement, transfers of accounts receivable from the SPEs are treated as sales and are accounted for as a reduction in accounts receivable, because the agreement transfers effective control over and risk related to the accounts receivable to the Purchasers. The Company and related subsidiaries have no continuing involvement in the transferred accounts receivable, other than collection and administrative responsibilities, and, once sold, the accounts receivable are no longer available to satisfy creditors of the Company, the operating subsidiaries of the Company that agreed to sell receivables in connection with the Securitization Facility (the “Securitization Originators”), or any other relevant subsidiaries.
The sales of accounts receivable under the Amended Receivables Purchase Agreement are transacted at 100% of the face value of the relevant accounts receivable, resulting in derecognition of the accounts receivable from the Company’s condensed consolidated balance sheet. The Company de-recognized $522.7 million of accounts receivable under this agreement during the year ended December 31, 2023. The amount remitted to the Purchasers during fiscal year 2023 was $507.6 million. The Company de-recognized $123.2 million and $250.5 million of accounts receivable under this agreement during the three and six months ended June 30, 2024, respectively.
52
The Company de-recognized $122.9 million and $262.9 million of accounts receivable under this agreement during the three and six months ended June 30, 2023, respectively. The amount remitted to the Purchasers during the three and six months ended June 30, 2024 was $113.4 million and $249.3 million, respectively. The amount remitted to the Purchasers during the three and six months ended June 30, 2023 was $125.2 and $266.5 million, respectively. Unsold accounts receivable of $34.0 million and $41.2 million were pledged by the SPEs as collateral to the Purchasers as of June 30, 2024 and December 31, 2023, respectively. The program resulted in a pre-tax loss of $2.6 million and $4.2 million for the three and six months ended June 30, 2024, respectively. The program resulted in a pre-tax loss of $2.0 million and $3.9 million for the three and six months ended June 30, 2023, respectively.
BR Exar AR Facility
On February 12, 2024, certain of the Company’s subsidiaries entered into a receivables purchase agreement with BR Exar, LLC (“BREL”), an affiliate of B. Riley Commercial Capital, LLC (as subsequently amended on February 29, 2024, March 29, 2024, March 31, 2024, April 24, 2024, May 24, 2024 and June 25, 2024, the “BR Exar AR Facility”). The Company received an aggregate of $30.4 million, net of legal and other fees of $0.2 million, under the BR Exar AR Facility. Under the terms of the BR Exar AR Facility, certain of the Company’s subsidiaries agreed to sell certain existing receivables and all of their future receivables to BREL until such time as BREL shall have collected $33.7 million, net of any costs, expenses or other amounts paid to or owing to the buyer under the agreement. BREL collected $28.1 million under the BR Exar AR Facility during the period from February 2024 to June 2024. As of June 30, 2024, there was a $5.6 million outstanding balance under the BR Exar AR Facility.
Second Lien Note
On February 27, 2023, the SPEs and B. Riley Commercial Capital, LLC entered into a new Secured Promissory Note (which was subsequently assigned to BRF Finance) pursuant to which B. Riley Commercial Capital, LLC agreed to lend up to $35.0 million secured by a second lien pledge of the Securitization Borrower (the “Second Lien Note”). The Second Lien Note is scheduled to mature on June 17, 2025 and bears interest at a per annum rate of one-month Term SOFR plus 7.5%. The SPEs are party to the Amended Receivables Purchase Agreement, thus the transactions necessitated amendments to that agreement and related documents to permit the addition of subordinated debt and additional borrowing capacity into that transaction structure, in addition to providing for a $5.0 million fee to the lenders for facilitating the transaction. In connection with the above-described facility, we also amended the BRCC Term Loan and BRCC Revolver to provide for $9.6 million of borrowing capacity, which was drawn as described above.
As of June 30, 2024, there were borrowings of $31.5 million outstanding under the Second Lien Note payable at maturity.
Potential Future Transactions
We may, from time to time explore and evaluate possible strategic transactions, which may include joint ventures, as well as business combinations or the acquisition or disposition of assets. In order to pursue certain of these opportunities, additional funds will likely be required. Subject to applicable contractual restrictions, to obtain such financing, we may seek to use cash on hand, 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 registration rights agreements that we have entered into, or may enter into in the future, certain of our stockholders may 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 such transactions may be commenced or completed, or as to the actual size or terms of the offering.
On July 1, 2024, the Company announced that its Board has authorized the Company to consider a spin-off of its wholly-owned subsidiary Exela Technologies BPA, LLC (the holding company for the Company’s business process automation business which includes our HS and LLPS segments and part of our ITPS segment, and collectively with all of its subsidiaries, the “BPA Business”).
53
In the event the spin-off is effected, Exela will distribute all of the shares of common stock held by it of a holding company (“Holdco”) owning the BPA Business, pro rata determined on an as coverted fully diluted basis, to Exela’s stockholders and warrantholders. As a result, if the spin-off is consummated, Exela’s stockholders and warrantholders prior to the spin-off will become the stockholders of Holdco after the spin-off. The announcement of the potential spin-off did not have any impact to the Company’s condensed consolidated financial statements or segment reporting.
The spin-off, if consummated, may be deemed a "Fundamental Change" under the Certificate of Designations, Preferences, Rights and Limitations of Series A Perpetual Convertible Preferred Stock of the Company (filed as an exhibt to the Company's Current Report on Form 8-K, dated July 18, 2017), and thus could provide Series A Preferred Stockholders with special conversion rights that could substantially dilute the existing holders of Common Stock, as described in Item 1A. Risk Factors, below. At this time, there can be no assurance that the spin-off will be consummated, and the Company has not yet completed its analysis of whether the spin-off, if consummated, would constitute a Fundamental Change.
Critical Accounting Policies and Estimates
The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies and estimates provide a better understanding of how we develop our assumptions and judgments about future events and related estimations and how they can impact our financial statements. A critical accounting estimate is one that requires subjective or complex estimates and assessments, and is fundamental to our results of operations. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the current assumptions, judgments and estimates used to determine amounts reflected in our condensed consolidated financial statements are appropriate; however, actual results may differ under different conditions. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in this document. Refer to "Critical Accounting Policies and Estimates" contained in Part II, Item 7 of the 2023 Form 10-K for a complete discussion of our critical accounting estimates. There have been no material changes to the Company’s critical accounting estimates since the 2023 Form 10-K.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes to the Company’s market risk during the six months ended June 30, 2024. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the 2023 Form 10-K.
Item 4. 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 Executive Chairman and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Executive Chairman and Interim 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.
54
Based upon that evaluation, our Executive Chairman and Interim 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 the 2023 Form 10-K.
Notwithstanding such material weaknesses in internal control over financial reporting, our management, including our Executive Chairman and Interim Chief Financial Officer, has concluded that our condensed 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 the 2023 Form 10-K, we continue to implement a remediation plan to address the material weaknesses mentioned above. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2024, 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
Derivative Actions
On July 8, 2020, Plaintiff Gregory McKenna 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 relating to the Company’s 2020 restatement of its financial statements for 2017, 2018 and interim periods through September 30, 2019 that were the subject of the Shen securities class action lawsuit which was settled in December 2023. These claims were not discharged by the settlement, however, and 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.
Business Interruption Insurance Claim
During the second half of 2022, the Company experienced a network security incident (the “2022 Network Outage”) impacting certain of the Company’s operational and information technology systems. As a result of the 2022 Network Outage, the Company experienced lost revenue and incurred certain incremental costs. On August 29, 2023, the Company submitted a claim to its insurers for $44.6 million in covered losses related to the 2022 Network Outage (the “August 2023 Claim”). During the year 2023, the Company received insurance proceeds of $10.8 million in respect of business interruption claims from its underlying and first excess carriers. The August 2023 Claim is currently under review by two additional insurers (collectively, the “Second Excess Insurers”), which the Company expects to provide the next layer of coverage under applicable policies. On April 17, 2024, the Company commenced an action against the Second Excess Insurers seeking a declaratory judgment and alleging breach of contract and bad faith for failing to pay out their share of losses connected to the August 2023 Claim. On August 9, 2024, the Company settled its claim against one of the Second Excess Insurers for $3.6 million. At this time, it is not practicable to render an opinion regarding the outcome of this matter with respect to the remaining Second Excess Insurer; however, the Company believes it has meritorious claims and plans to 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 quarterly report, you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in the 2023 Form 10‑K, which could materially affect our business, financial condition and/or operating results. The risks described in those 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.
Our securities may be delisted from Nasdaq
Our Common Stock is currently listed for trading on the Nasdaq, and the continued listing of our Common Stock on the Nasdaq is subject to our compliance with a number of listing standards, including Nasdaq Listing Rule 5550(b)(2), which requires that the Company maintain a market value of listed securities (“MVLS”) of at least $35 million (the “MVLS requirement”).
56
On November 13, 2023, the Company received a notice (the “MVLS Notice”) from Nasdaq notifying it that it was not in compliance with Nasdaq Listing Rule 5550(b)(2) because, for the last 30 consecutive business days, the Company’s MVLS was below the minimum requirement of $35 million. In the MVLS Notice, Nasdaq indicated that the Company had 180 calendar days from the date of the MVLS Notice (or until May 13, 2024) to regain compliance with the MVLS Rule by having our MVLS close at or above $35 million for a minimum of ten consecutive business days. On May 14, 2024, we received a second notice stating that the Company had not regained compliance with the MVLS Rule, and its securities would be delisted from the Nasdaq Capital Market unless the Company requested an appeal of the delisting determination by May 21, 2024. The Company appealed the determination and the Nasdaq Hearings Panel (the “Panel”) held a hearing on this matter on July 2, 2024 (the “Hearing”). At the Hearing, the Company presented its plan for complying with the MVLS Rule, which includes consummating the potential spin-off of the BPA Business described in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Potential Future Transactions.” On July 17, 2024, the Panel determined to grant the Company's request to continue its listing on Nasdaq, provided that, among other things, (i) on or before August 30, 2024, the Company will file a registration statement with the Securities and Exchange Commission for the stock to be issued in the spin-off of the BPA Business and (ii) on or before October 25, 2024, the Company will complete the spin-off of the BPA Business to demonstrate compliance with the MVLS Rule.
There can be no assurance that we will consummate the spin-off or that we will otherwise be able to remedy and continue to satisfy the MVLS Rule and other continuing listing requirements and remain listed on the Nasdaq. If our Common Stock or Series B Preferred Stock were no longer listed on the Nasdaq, investors might only be able to trade on one of the over-the-counter markets. This would likely impair the liquidity of our securities not only in the number of shares that could be bought and sold at a given price, which might be depressed by the relative illiquidity, but also through delays in the timing of transactions and reduction in media and analyst coverage. In addition, we could face significant material adverse consequences, including limited availability of market quotations for our securities and a decreased ability to issue additional securities or obtain additional financing in addition to negative perceptions about us and our business that may result from delisting.
The conversion of Exela's Series A Convertible Preferred Stock following a “Fundamental Change” could substantially dilute the existing holders of Exela Common Stock.
The conversion of our Series A Perpetual Convertible Preferred Stock (the "Series A Preferred Stock) following the occurrence of a "Fundamental Change," as defined in the Certificate of Designations, Preferences, Rights and Limitations of the Series A Preferred Stock (filed as an exhibit to the Company's Current Report on Form 8-K, dated July 18, 2017)(the "Certificate of Designations") could result in substantial dilution of the outstanding Exela Common Stock. Upon a Fundamental Change, if Exela does not redeem the Series A Preferred Stock, the Certificate of Designations allows holders to convert their entire accumulated liquidation preference (approximately $44.2 million in the aggregate as of June 30, 2024) into Common Stock at a favorable rate for 15 days following the effective date of the Fundamental Change based on the greater of (i) the price to be paid (or deemed paid) per share of Common Stock in such transaction or the average closing price of Common Stock on the 20 consecutive trading days immediately preceding the effective date of the Fundamental Change (or, such lesser number of trading days as shall follow the public announcement of such transaction) and (ii) $0.10. The maximum number of shares of Common Stock issuable upon conversion will not exceed 85% of the total number of shares of Common Stock outstanding on a fully-diluted basis. As a result, if Exela does not redeem the Series A Preferred Stock following a Fundamental Change, the holders of Exela Series A Preferred Stock could receive up to 85% of the Exela Common Stock after exercising their conversion rights.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds, and Issuer Purchases of Equity Securities.
On August 10, 2022, the Board authorized a share buyback program (the “2022 Share Buyback Program”), pursuant to which the Company was authorized to repurchase, from time to time, up to 50,000 shares of the Common Stock over a two-year period through various means, including, open market transactions and privately negotiated transactions. The 2022 Share Buyback Program does not obligate the Company to repurchase any shares. The decision as to whether to repurchase any shares and the timing of repurchases will be based on the price of the Common Stock, general business and market conditions and other investment considerations and factors. No shares were repurchased under the 2022 Share Buyback Program during the six months ended June 30, 2024. As of June 30, 2024, we had repurchased and concurrently retired a total of 1,787 shares of Common Stock pursuant to the 2022 Share Buyback Program.
57
Share repurchase activity during the three months ended June 30, 2024 was as follows:
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Total Number |
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Maximum |
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|
|
|
|
|
of Shares |
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Number of |
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|
|
|
|
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Purchased as |
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Shares that |
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|
|
|
|
|
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Part of |
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May Yet Be |
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|
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Average |
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Publicly |
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Purchased |
|
|
|
Number |
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Price |
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Announced |
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Under the |
|
|
|
of Shares |
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Paid per |
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Plans or |
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Plans or |
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Period |
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Purchased |
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Share |
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Programs |
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Programs |
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April 1, 2024-April 30, 2024 |
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— |
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$ |
— |
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1,787 |
|
48,213 |
May 1, 2024-May 31, 2024 |
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— |
|
|
— |
|
1,787 |
|
48,213 |
June 1, 2024-June 30, 2024 |
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— |
|
$ |
— |
|
1,787 |
|
48,213 |
Total |
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— |
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|
|
|
|
|
|
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
58
Item 6. Exhibits.
Exhibit No. |
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Description |
10.1 |
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10.2 |
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31.1* |
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31.2* |
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32.1** |
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32.2** |
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101.INS |
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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 |
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Inline XBRL Taxonomy Extension Schema |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
* Filed herewith.
** Furnished herewith.
59
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 14th day of August 2024.
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EXELA TECHNOLOGIES, INC. |
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By: |
/s/ Par Chadha |
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Par Chadha |
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Executive Chairman (Principal Executive Officer) |
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By: |
/s/ Matthew T. Brown |
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Matthew T. Brown |
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Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
60
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a) or RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Par Chadha, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Exela Technologies, Inc. for the quarter ended June 30, 2024;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2024
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/s/ Par Chadha |
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Name: |
Par Chadha |
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Title: |
Executive Chairman |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a) or RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Matthew T. Brown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Exela Technologies, Inc. for the quarter ended June 30, 2024;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2024 |
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/s/ Matthew T. Brown |
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Name: |
Matthew T. Brown |
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Title: |
Interim Chief Financial Officer |
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|
(Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Exela Technologies, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Par Chadha, Executive Chairman of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2024
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|
/s/ Par Chadha |
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Name: |
Par Chadha |
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Title: |
Executive Chairman |
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|
(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Exela Technologies, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Matthew T. Brown, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2024
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|
/s/ Matthew T. Brown |
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Name: |
Matthew T. Brown |
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Title: |
Interim Chief Financial Officer |