[PART I—FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) This section presents Exela Technologies, Inc.'s unaudited condensed consolidated financial statements and related notes [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section details Exela Technologies, Inc.'s unaudited condensed consolidated financial statements and comprehensive notes for the quarter ended June 30, 2019 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This table presents the company's condensed consolidated balance sheets as of June 30, 2019, and December 31, 2018 | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------------------------------------------------------------------------------------ | :----------------------------- | :------------------------------- | | **Assets** | | | | Total current assets | $330,818 | $355,901 | | Property, plant and equipment, net | $125,018 | $132,986 | | Operating lease right-of-use asset, net | $96,498 | — | | Goodwill | $708,246 | $708,258 | | Intangible assets, net | $387,775 | $407,021 | | Total assets | $1,679,250 | $1,639,782 | | **Liabilities and Stockholders' Equity (Deficit)** | | | | Total current liabilities | $434,875 | $432,722 | | Long-term debt, net of current maturities | $1,331,898 | $1,306,423 | | Total liabilities | $1,918,321 | $1,820,788 | | Total stockholders' deficit | $(239,071) | $(181,006) | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This table outlines condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 | Metric | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Revenue | $390,160 | $410,382 | $793,924 | $803,549 | | Cost of revenue | $298,006 | $313,954 | $604,888 | $607,746 | | Operating income | $12,344 | $11,935 | $30,263 | $26,591 | | Net loss before income taxes | $(29,408) | $(23,563) | $(54,595) | $(43,532) | | Income tax (expense) benefit | $(4,738) | $(1,619) | $(9,459) | $(5,644) | | Net loss | $(34,146) | $(25,182) | $(64,054) | $(49,176) | | Net loss attributable to common stockholders | $(35,060) | $(26,096) | $(65,882) | $(51,004) | | Basic and diluted loss per share | $(0.23) | $(0.17) | $(0.44) | $(0.34) | [Condensed Consolidated Statements of Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) This table details condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2019 and 2018 | Metric | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended June 30, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Loss | $(34,146) | $(25,182) | $(64,054) | $(49,176) | | Foreign currency translation adjustments | $(2,288) | $(879) | $1,104 | $(1,147) | | Unrealized pension actuarial gains (losses), net of tax | $256 | $626 | $32 | $223 | | Total other comprehensive loss, net of tax | $(36,178) | $(25,435) | $(62,918) | $(50,100) | [Condensed Consolidated Statements of Stockholders' Deficit](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Deficit) This section presents condensed consolidated statements of stockholders' deficit, highlighting changes from January 1 to June 30, 2019 - Total stockholders' deficit increased from **$(181,006) thousand** at January 1, 2019, to **$(239,071) thousand** at June 30, 2019, primarily due to net loss and foreign currency translation adjustments, partially offset by equity-based compensation[15](index=15&type=chunk) | Metric | Balances at January 1, 2019 (in thousands) | Balances at June 30, 2019 (in thousands) | | :-------------------------------- | :--------------------------------------- | :------------------------------------- | | Common Stock Amount | $15 | $15 | | Preferred Stock Amount | $1 | $1 | | Treasury Stock Amount | $(10,342) | $(10,949) | | Additional Paid in Capital | $482,018 | $482,018 | | Equity-Based Compensation | $41,731 | $47,190 | | Accumulated Deficit | $(678,563) | $(742,616) | | Foreign Currency Translation Adjustment | $(6,565) | $(5,461) | | Unrealized Pension Actuarial Losses, net of tax | $(9,301) | $(9,269) | | Total Stockholders' Deficit | $(181,006) | $(239,071) | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This table summarizes the company's condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 | Cash Flow Activity | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended June 30, 2018 (in thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net loss | $(64,054) | $(49,176) | | Net cash provided by (used) in operating activities | $(4,776) | $48,251 | | Net cash used in investing activities | $(28,499) | $(19,185) | | Net cash provided by (used in) financing activities | $12,736 | $(23,274) | | Net decrease in cash and cash equivalents | $(20,428) | $5,382 | | Cash, restricted cash, and cash equivalents, End of period | $23,426 | $86,871 | [Notes to the Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed notes explaining the accounting policies, significant events, and financial statement components [1. General](index=9&type=section&id=1.%20General) This note outlines the basis of presentation for the unaudited interim financial statements and key accounting principles - The condensed consolidated financial statements are unaudited and prepared using GAAP, with estimates and assumptions that may differ from actual results. The interim financial results are not necessarily indicative of future performance[21](index=21&type=chunk)[22](index=22&type=chunk) - Diluted EPS excludes anti-dilutive securities; for the six months ended June 30, 2019, **5,586,344 shares** of Series A Preferred Stock were anti-dilutive and excluded from diluted loss per share calculation[23](index=23&type=chunk)[24](index=24&type=chunk) [2. New Accounting Pronouncements](index=10&type=section&id=2.%20New%20Accounting%20Pronouncements) This note discusses the adoption of new accounting standards, including ASC 842 Leases, and other upcoming ASUs - Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (ASC 842), which materially impacted the balance sheets by recognizing right-of-use assets and lease liabilities for operating leases, but did not materially affect income statements or cash flows[28](index=28&type=chunk) - The Company is currently evaluating the impact of recently issued ASUs, including ASU No. 2016-13 (Credit Losses), ASU No. 2018-13 (Fair Value Measurement), and ASU No. 2018-15 (Cloud Computing Arrangement implementation costs), which will be effective for fiscal years beginning after December 15, 2019[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) [3. Business Combinations](index=11&type=section&id=3.%20Business%20Combinations) This note details the acquisition of Asterion International Group in April 2018 and its financial impact - On April 10, 2018, Exela acquired Asterion International Group for approximately **$19.5 million**, strategically expanding its European business and leveraging brand awareness, strengthening margins, and expanding sales channels[37](index=37&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk) | Asterion Acquisition (April 10, 2018) | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Total identifiable assets acquired | $51,357 | | Total liabilities assumed | $(31,889) | | Total Consideration | $19,468 | | Goodwill recognized | $1,493 | | Revenue recognized from Asterion (3 months ended June 30, 2019) | $17,700 | | Revenue recognized from Asterion (6 months ended June 30, 2019) | $39,800 | [4. Significant Accounting Policies](index=12&type=section&id=4.%20Significant%20Accounting%20Policies) This note describes revenue recognition policies and provides a breakdown of revenue by geographic region and contract balances - Revenue is recognized in accordance with ASC 606, primarily from business and transaction processing services, with variable consideration allocated to the distinct service period[42](index=42&type=chunk)[43](index=43&type=chunk) | Revenue by Geographic Region (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $319,546 | $345,114 | $649,638 | $696,296 | | Europe | $63,823 | $58,357 | $130,501 | $93,640 | | Other | $6,791 | $6,911 | $13,785 | $13,613 | | **Total Revenue** | **$390,160** | **$410,382** | **$793,924** | **$803,549** | | Contract Balances (in thousands) | June 30, 2019 | December 31, 2018 | | :------------------------------- | :------------ | :---------------- | | Accounts receivable, net | $266,660 | $270,812 | | Deferred revenues | $19,810 | $16,940 | | Costs to obtain and fulfill a contract | $24,005 | $18,624 | | Customer deposits | $28,914 | $34,235 | - The Company recognized **$10.6 million** in revenue during the first six months of 2019 that had been deferred as of December 31, 2018[46](index=46&type=chunk) | Estimated Remaining Fixed Consideration for Unsatisfied Performance Obligations (in thousands) | | :------------------------------------------------------------------------------------------ | | Remainder of 2019: $21,296 | | 2020: $26,593 | | 2021: $17,008 | | 2022: $7,518 | | 2023: $2,651 | | 2024 and thereafter: $877 | | **Total: $75,943** | [5. Leases](index=15&type=section&id=5.%20Leases) This note explains the impact of adopting the new lease accounting standard (ASC 842) on the balance sheet - The adoption of the new lease accounting standard (ASU 2016-02) on January 1, 2019, resulted in a **material increase** in total assets and liabilities, primarily due to the recognition of operating lease right-of-use assets and corresponding lease liabilities[56](index=56&type=chunk)[57](index=57&type=chunk) | Lease Impact on Balance Sheet (in thousands) | December 31, 2018 | Impact of Lease Standard | January 1, 2019 | | :----------------------------------------- | :---------------- | :----------------------- | :-------------- | | Total assets | $1,639,782 | $102,651 | $1,742,433 | | Total current liabilities | $432,722 | $25,304 | $458,026 | | Total long-term liabilities | $1,820,788 | $79,703 | $1,900,491 | | Lease Liabilities and ROU Assets (June 30, 2019, in thousands) | | :------------------------------------------------------------ | | Operating lease right-of-use asset, net: $96,498 | | Current portion of operating lease liability: $27,444 | | Operating lease liability, net of current portion: $74,290 | | Finance lease right-of-use asset, net: $28,750 | | Current portion of finance lease liability: $15,897 | | Finance lease obligations, net of current portion: $25,772 | | Weighted-average remaining lease term (operating): 4.84 years | | Weighted-average remaining lease term (finance): 3.13 years | | Weighted-average discount rate (operating): 10.19% | | Weighted-average discount rate (finance): 8.43% | | Consolidated Rental Expense (in thousands) | | :--------------------------------------- | | Year ended December 31, 2018: $83,800 | | Three months ended June 30, 2019: $18,500 | | Six months ended June 30, 2019: $37,400 | [6. Intangibles Assets and Goodwill](index=17&type=section&id=6.%20Intangibles%20Assets%20and%20Goodwill) This note provides a breakdown of intangible assets and goodwill by segment, including accumulated impairment losses | Intangible Assets, net (in thousands) | June 30, 2019 | December 31, 2018 | | :------------------------------------ | :------------ | :---------------- | | Customer relationships | $293,087 | $317,239 | | Developed technology | $2,244 | $3,086 | | Trade names | $6,300 | $6,300 | | Outsource contract costs | $24,128 | $18,623 | | Internally developed software | $32,236 | $30,542 | | Trademarks | $9 | $9 | | Assembled workforce | $3,914 | $4,473 | | Purchased software | $25,857 | $26,749 | | **Intangibles, net** | **$387,775** | **$407,021** | - The carrying amount of trade names for 2019 and 2018 is net of accumulated impairment losses of **$43.1 million**, with **$3.7 million** recognized in 2018[68](index=68&type=chunk) | Goodwill by Segment (in thousands) | December 31, 2018 | June 30, 2019 | | :--------------------------------- | :---------------- | :------------ | | ITPS | $571,575 | $571,563 | | HS | $86,786 | $86,786 | | LLPS | $49,897 | $49,897 | | **Total Goodwill** | **$708,258** | **$708,246** | | *Note: Goodwill is net of accumulated impairment losses of $137.9 million.* | | | [7. Long-Term Debt and Credit Facilities](index=18&type=section&id=7.%20Long-Term%20Debt%20and%20Credit%20Facilities) This note details the company's long-term debt, credit facilities, and recent incremental term loan borrowings - The Company has **$1.0 billion** in **10.0%** First Priority Senior Secured Notes due 2023 and a **$350.0 million** senior secured term loan maturing July 12, 2023, along with a **$100.0 million** senior secured revolving facility maturing July 12, 2022[72](index=72&type=chunk)[74](index=74&type=chunk) - In July 2018, the Company repriced **$343.4 million** of term loans, reducing interest rates by **100 basis points**, and borrowed an additional **$30.0 million** in incremental term loans. In April 2019, another **$30.0 million** in incremental term loans were borrowed for acquisitions and general corporate purposes[76](index=76&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk)[83](index=83&type=chunk) | Long-Term Debt Outstanding (in thousands) | June 30, 2019 | December 31, 2018 | | :---------------------------------------- | :------------ | :---------------- | | Other debt | $29,144 | $25,321 | | First lien credit agreement | $365,013 | $335,896 | | Senior secured notes | $976,670 | $974,443 | | **Total debt** | **$1,370,827** | **$1,335,660** | | Less: Current portion of long-term debt | $(38,929) | $(29,237) | | **Long-term debt, net of current maturities** | **$1,331,898** | **$1,306,423** | [8. Income Taxes](index=21&type=section&id=8.%20Income%20Taxes) This note presents income tax expense and the effective tax rate, explaining deviations from the U.S. statutory rate | Income Tax Expense (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense | $4,738 | $1,619 | $9,459 | $5,644 | | Effective Tax Rate (ETR) | (16.1%) | (6.9%) | (17.3%) | (13.0%) | - The ETR differed from the U.S. statutory rate of **21.0%** primarily due to permanent tax adjustments, state and local current expense, foreign operations, and increased valuation allowances, particularly on deferred tax assets related to disallowed interest expense carryforwards from the TCJA[89](index=89&type=chunk)[90](index=90&type=chunk)[91](index=91&type=chunk) [9. Employee Benefit Plans](index=21&type=section&id=9.%20Employee%20Benefit%20Plans) This note describes the company's unfunded pension plans and the net periodic benefit cost for the reported periods - The Company operates unfunded pension plans in Germany, the U.K., and Norway, and acquired pension obligations from the Asterion Business Combination. Actuarial losses of **$9.3 million** were recorded in accumulated other comprehensive loss as of June 30, 2019[92](index=92&type=chunk)[93](index=93&type=chunk)[94](index=94&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk) | Net Periodic Benefit Cost (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Service cost | $23 | $158 | $46 | $160 | | Interest cost | $602 | $638 | $1,203 | $1,149 | | Expected return on plan assets | $(622) | $(804) | $(1,244) | $(1,429) | | Amortization of prior service cost | $26 | $(31) | $52 | $(63) | | Amortization of net (gain) loss | $413 | $403 | $826 | $807 | | **Net periodic benefit cost** | **$442** | **$364** | **$883** | **$624** | | Employer Contributions | $1,500 | $1,200 | | | [10. Commitments and Contingencies](index=22&type=section&id=10.%20Commitments%20and%20Contingencies) This note discusses the ongoing Appraisal Action related to the Novitex Business Combination and its implications - The Company is involved in an **Appraisal Action** related to the Novitex Business Combination, where former SourceHOV stockholders seek a determination of fair value for their shares. A trial was held in June 2019, with post-trial arguments scheduled for October 2019. The outcome and fair value determination are currently **unpredictable**[100](index=100&type=chunk)[101](index=101&type=chunk) - As a result of the Appraisal Action, **4,570,734 shares** of Common Stock issued to Ex-Sigma 2 LLC will be forfeited upon repayment of the PIPE Financing[102](index=102&type=chunk) [11. Fair Value Measurement](index=23&type=section&id=11.%20Fair%20Value%20Measurement) This note outlines fair value measurements for financial instruments, including long-term debt and acquisition contingent liabilities - The fair value of long-term debt is estimated using **Level 2 inputs**, including recent debt issues, credit rating, and current risk-free rates. Goodwill and acquisition contingent liabilities are classified as **Level 3 measurements**[103](index=103&type=chunk)[104](index=104&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk) | Financial Instruments Fair Value (in thousands) | Carrying Amount (June 30, 2019) | Fair Value (June 30, 2019) | Carrying Amount (December 31, 2018) | Fair Value (December 31, 2018) | | :-------------------------------------------- | :------------------------------ | :------------------------- | :---------------------------------- | :------------------------------- | | Long-term debt | $1,331,898 | $1,133,899 | $1,306,423 | $1,316,306 | | Interest rate swap liability | $549 | $549 | $3,836 | $3,836 | | Goodwill | $708,246 | $708,246 | $708,258 | $708,258 | | Acquisition contingent liability | $721 | $721 | $721 | $721 | [12. Stock-Based Compensation](index=24&type=section&id=12.%20Stock-Based%20Compensation) This note details stock-based compensation plans, outstanding awards, and the associated compensation expense - All unvested restricted stock units (RSUs) from the 2013 Long Term Incentive Plan vested in April 2019, with **no nonvested shares remaining** as of June 30, 2019[109](index=109&type=chunk) - The Exela 2018 Stock Incentive Plan authorizes up to **8,323,764 shares** of Common Stock for various equity awards. As of June 30, 2019, there were **935,687 restricted stock units** and **3,062,100 stock options** outstanding[110](index=110&type=chunk)[112](index=112&type=chunk)[113](index=113&type=chunk) | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total compensation expense | $2,600 | $1,900 | $5,500 | $2,900 | | Unrecognized compensation expense (2018 Plan, June 30, 2019) | | | $7,200 | | [13. Stockholders' Equity](index=26&type=section&id=13.%20Stockholders'%20Equity) This note provides information on authorized and outstanding shares, preferred stock dividends, and the share buyback program - The Company is authorized to issue **1,600,000,000 shares** of Common Stock and **20,000,000 shares** of Preferred Stock. As of June 30, 2019, there were **150,007,085 shares** of Common Stock outstanding and **4,569,233 shares** of Series A Preferred Stock outstanding[117](index=117&type=chunk)[118](index=118&type=chunk) - Holders of Series A Preferred Stock are entitled to cumulative dividends at **10% per annum**, which are added to the Liquidation Preference. Cumulative accrued but unpaid dividends since inception (July 12, 2017) total **$7.9 million**[119](index=119&type=chunk) - Under the Share Buyback Program, **237,962 shares** were repurchased during the three months ended June 30, 2019, at an average price of **$2.51**. A total of **2,787,147 shares** have been repurchased and held in treasury stock as of June 30, 2019[121](index=121&type=chunk)[122](index=122&type=chunk) - As of June 30, 2019, there were **34,988,302 warrants** outstanding, each entitling the holder to purchase one-half of one share of Common Stock at **$5.75 per half share**, expiring July 12, 2022[123](index=123&type=chunk)[124](index=124&type=chunk) [14. Related-Party Transactions](index=27&type=section&id=14.%20Related-Party%20Transactions) This note describes various transactions with affiliated companies, including leasing, consulting, and service agreements - The Company engages in various related-party transactions, including leasing operating facilities from affiliates (HOV RE, LLC and HOV Services Limited), receiving consulting services from Oakana Holdings, Inc., and marketing services from Rule 14, LLC (an HGM portfolio company)[126](index=126&type=chunk)[127](index=127&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk) - The Company provides services to and receives services from Apollo Global Management, LLC affiliated companies, including printer supplies and maintenance, managed print services, mailroom and onsite mail delivery, and commercial print/promotional product procurement[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk) | Payable and Receivable Balances with Affiliates (in thousands) | June 30, 2019 (Receivable) | June 30, 2019 (Payable) | December 31, 2018 (Payable) | | :----------------------------------------------------------- | :------------------------- | :---------------------- | :-------------------------- | | HOV Services, Ltd | $189 | — | $405 | | Rule 14 | — | $145 | $127 | | HGM | $17 | — | $6,998 | | Apollo affiliated company | — | $91 | $205 | | Oakana | — | $2 | — | | **Total** | **$206** | **$238** | **$7,735** | [15. Segment and Geographic Area Information](index=29&type=section&id=15.%20Segment%20and%20Geographic%20Area%20Information) This note presents financial information by reportable segment (ITPS, HS, LLPS) and geographic area - Exela operates through three reportable segments: Information & Transaction Processing Solutions (ITPS), Healthcare Solutions (HS), and Legal & Loss Prevention Services (LLPS), aligning products and services with market approach and customer interaction[140](index=140&type=chunk) - ITPS provides information capture, processing, decisioning, and distribution solutions, serving financial services, commercial, public sector, and legal industries. HS specializes in consulting and outsourcing for healthcare providers and payers. LLPS offers legal support services for class action, bankruptcy, and other legal matters[141](index=141&type=chunk)[142](index=142&type=chunk) | Revenue by Segment (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | ITPS | $309,152 | $330,132 | $633,731 | $642,068 | | HS | $63,440 | $56,314 | $124,783 | $114,946 | | LLPS | $17,568 | $23,936 | $35,410 | $46,535 | | **Total Revenue** | **$390,160** | **$410,382** | **$793,924** | **$803,549** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses the Company's business, history, segments, KPIs, and financial results for Q2 and H1 2019 [Overview](index=31&type=section&id=Overview) This section introduces Exela as a business process automation leader, providing digital transformation solutions globally - Exela is a business process automation (BPA) leader, providing digital transformation solutions globally to over 4,000 customers, including 60% of the Fortune 100, across 50 countries[147](index=147&type=chunk) - The Company's solutions span information management, workflow automation, and integrated communications, addressing finance, human capital, legal management, and industry-specific needs for banking, healthcare, insurance, and public sectors[147](index=147&type=chunk) [History](index=32&type=section&id=History) This section outlines the company's formation through the acquisition of SourceHOV and Novitex Holdings in July 2017 - Exela Technologies, Inc. (formerly Quinpario Acquisition Corp. 2) completed its acquisition of SourceHOV Holdings, Inc. and Novitex Holdings, Inc. in July 2017, forming one of the largest global providers of information processing solutions[149](index=149&type=chunk)[150](index=150&type=chunk) - The Novitex Business Combination was accounted for as a reverse merger, with SourceHOV as the accounting acquirer, and the acquisition of Novitex treated as a business combination under ASC 805[150](index=150&type=chunk) [Our Segments](index=32&type=section&id=Our%20Segments) This section describes Exela's three reportable segments: ITPS, HS, and LLPS, and their respective customer bases - Exela's three reportable segments are Information & Transaction Processing Solutions (ITPS), Healthcare Solutions (HS), and Legal & Loss Prevention Services (LLPS)[151](index=151&type=chunk) - ITPS serves major U.S. banks, insurance companies, telecom companies, utility companies, and government entities. HS serves top healthcare insurance payers and over 900 healthcare providers. LLPS serves corporate counsel, government attorneys, and law firms[152](index=152&type=chunk)[153](index=153&type=chunk) [Acquisitions](index=32&type=section&id=Acquisitions) This section details the acquisition of Asterion International Group in April 2018, expanding the company's European presence - On April 10, 2018, Exela acquired Asterion International Group for approximately **$19.5 million**, expanding its European business and offering a broader portfolio of BPA solutions to over 250 key customers[154](index=154&type=chunk) [Revenues](index=33&type=section&id=Revenues) This section explains the primary revenue recognition methods across the ITPS, HS, and LLPS segments - ITPS revenues are primarily transaction-based, with licensing and maintenance fees for technology sales, and a mix of fixed management and transactional revenue for document logistics. HS revenues are transaction-based for healthcare payers and providers. LLPS revenues are mainly based on time and materials pricing and transactional services[155](index=155&type=chunk) [People](index=33&type=section&id=People) This section highlights personnel costs as the most significant expense, with the majority being variable - Personnel costs are the most significant expense, totaling **$181.0 million** for Q2 2019 (vs. **$180.6 million** in Q2 2018) and **$359.0 million** for H1 2019 (vs. **$347.7 million** in H1 2018). The majority of these costs are variable[157](index=157&type=chunk) [Key Performance Indicators](index=33&type=section&id=Key%20Performance%20Indicators) This section identifies revenue by segment, EBITDA, and Adjusted EBITDA as key metrics for performance assessment - Management uses revenue by segment, EBITDA, and Adjusted EBITDA to assess performance, identify areas for improvement, and ensure segments meet expectations[158](index=158&type=chunk)[159](index=159&type=chunk) - Adjusted EBITDA is defined as EBITDA plus optimization and restructuring charges, transaction and integration costs, other non-cash charges (including non-cash compensation, gain/loss from asset disposal, impairment charges), and management fees and expenses[159](index=159&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance for the three and six months ended June 30, 2019 versus prior year [Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 2018](index=34&type=section&id=Three%20Months%20Ended%20June%2030%2C%202019%20compared%20to%20Three%20Months%20Ended%20June%2030%2C%202018) This section provides a detailed comparison of financial results for the three months ended June 30, 2019 and 2018 | Metric (in thousands) | 2019 | 2018 | Change | % Change | | :------------------------------------------ | :----- | :----- | :----- | :------- | | Total Revenue | $390,160 | $410,382 | $(20,222) | -4.93% | | ITPS Revenue | $309,152 | $330,132 | $(20,980) | -6.36% | | HS Revenue | $63,440 | $56,314 | $7,126 | 12.65% | | LLPS Revenue | $17,568 | $23,936 | $(6,368) | -26.60% | | Total Cost of Revenues | $298,006 | $313,954 | $(15,948) | -5.08% | | Selling, general and administrative expenses | $51,564 | $46,723 | $4,841 | 10.36% | | Depreciation and amortization | $27,191 | $36,368 | $(9,177) | -25.23% | | Operating income | $12,344 | $11,935 | $409 | 3.43% | | Net loss | $(34,146) | $(25,182) | $(8,964) | 35.60% | - ITPS revenue **decreased by $21.9 million** due to a decline in certain statements of work from one customer and lower postage revenue, partially offset by 2018 acquisitions and new customer ramp-up. HS revenue increased due to new customer ramp-up and acquisitions. LLPS revenue decreased due to event-driven projects generating lower revenue[161](index=161&type=chunk)[162](index=162&type=chunk) - SG&A expenses **increased by $4.8 million**, mainly due to higher stock compensation expense and a one-time customer exit cost **write-off of $1.9 million**. Depreciation and amortization **decreased by $9.2 million** due to the end of an accelerated trade name write-off[165](index=165&type=chunk)[166](index=166&type=chunk) - Net loss **increased by $8.96 million**, driven by a **$3.4 million decrease in other income due to an interest rate swap** not designated as a hedge, and a **$3.1 million increase in income tax expense** due to changes in judgment regarding deferred tax asset realizability[160](index=160&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk) [Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018](index=36&type=section&id=Six%20Months%20Ended%20June%2030%2C%202019%20compared%20to%20Six%20Months%20Ended%20June%2030%2C%202018) This section provides a detailed comparison of financial results for the six months ended June 30, 2019 and 2018 | Metric (in thousands) | 2019 | 2018 | Change | % Change | | :------------------------------------------ | :----- | :----- | :----- | :------- | | Total Revenue | $793,924 | $803,549 | $(9,625) | -1.20% | | ITPS Revenue | $633,731 | $642,068 | $(8,337) | -1.30% | | HS Revenue | $124,783 | $114,946 | $9,837 | 8.56% | | LLPS Revenue | $35,410 | $46,535 | $(11,125) | -23.91% | | Total Cost of Revenues | $604,888 | $607,746 | $(2,858) | -0.47% | | Selling, general and administrative expenses | $101,512 | $92,318 | $9,194 | 9.96% | | Depreciation and amortization | $55,211 | $74,386 | $(19,175) | -25.78% | | Operating income | $30,263 | $26,591 | $3,672 | 13.81% | | Net loss | $(64,054) | $(49,176) | $(14,878) | 30.25% | - ITPS revenue **decreased by $39.4 million** due to a decline in certain statements of work from one customer, partially offset by 2018 acquisitions and new customer ramp-up. HS revenue increased due to new customer ramp-up and acquisitions, offset by a volume decline from a single customer. LLPS revenue **decreased by $8.6 million** in legal claims administration services[175](index=175&type=chunk)[176](index=176&type=chunk) - SG&A expenses **increased by $9.2 million** due to higher stock compensation expense and increased investments in sales and strategy teams. Depreciation and amortization **decreased by $19.2 million** due to the end of an accelerated trade name write-off[179](index=179&type=chunk)[180](index=180&type=chunk) - Net loss **increased by $14.88 million**, primarily due to an **$8.4 million decrease in other income from an interest rate swap** and a **$3.8 million increase in income tax expense** due to changes in deferred tax asset realizability[173](index=173&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) [Other Financial Information (Non-GAAP Financial Measures)](index=37&type=section&id=Other%20Financial%20Information%20(Non-GAAP%20Financial%20Measures)) This section discusses the Company's use of non-GAAP financial measures, EBITDA and Adjusted EBITDA, to assess performance - EBITDA and Adjusted EBITDA are **non-GAAP measures** used by management and the board to assess financial performance and compare operating performance across periods, by removing effects of capital structure, asset base, and items outside management's control[186](index=186&type=chunk)[188](index=188&type=chunk) | Non-GAAP Financial Measures (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Loss | $(34,146) | $(25,182) | $(64,054) | $(49,176) | | EBITDA | $36,915 | $51,332 | $78,647 | $107,399 | | Adjusted EBITDA | $69,404 | $70,094 | $143,466 | $139,660 | - The **decrease in EBITDA** for both periods was primarily due to a higher net loss and a decrease in depreciation and amortization resulting from the end of an accelerated trade name write-off on December 31, 2018[192](index=192&type=chunk)[196](index=196&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) This section outlines the company's primary liquidity sources, capital expenditure expectations, and debt facilities - Primary liquidity sources are cash from operating activities and borrowings from the senior secured revolving credit facility. The Company expects **$40-$45 million** in capital expenditures over the next twelve months, believing current cash and financing capabilities are sufficient[197](index=197&type=chunk)[200](index=200&type=chunk) - As of June 30, 2019, cash and cash equivalents totaled **$23.4 million**, with **$79.0 million** available under the senior secured revolving credit facility[204](index=204&type=chunk) | Cash Flows (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Change | % Change | | :---------------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Cash flow from operating activities | $(4,776) | $48,251 | $(53,027) | -109.90% | | Cash flow used in investing activities | $(28,499) | $(19,185) | $(9,314) | 48.55% | | Cash flows (used in) provided by financing activities | $12,736 | $(23,274) | $36,010 | -154.72% | | Net increase/(decrease) in cash | $(20,428) | $5,382 | $(25,810) | -479.56% | - The **decrease in operating cash flow** was due to higher cash inflows in 2018 from legal business settlement funds, changes in accounts payable/accrued liabilities, and a decrease in related party payables in 2019. Investing cash flow **increased** due to additional outsourcing contract costs, offset by lower cash paid for acquisitions. Financing cash flow **increased** due to incremental term loan proceeds and lower equity issuance costs, offset by higher principal payments and a stock repurchase payment[206](index=206&type=chunk)[207](index=207&type=chunk)[208](index=208&type=chunk) - The Company's debt facilities include **$1.4 billion** from the Novitex Business Combination, comprising senior secured notes and a first lien credit agreement. Incremental term loans of **$30.0 million** were borrowed in July 2018 and April 2019[209](index=209&type=chunk)[210](index=210&type=chunk)[215](index=215&type=chunk)[216](index=216&type=chunk) - As of June 30, 2019, outstanding irrevocable letters of credit totaled approximately **$21.0 million** under the revolving credit facility. The Company has no other material off-balance sheet arrangements[220](index=220&type=chunk)[222](index=222&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discusses the Company's exposure to market risks from changes in interest rates and foreign currency exchange rates - As of June 30, 2019, the Company had **$1,331.9 million** of debt outstanding with a weighted average interest rate of **9.57%**. A **1%** increase or decrease in this rate would impact interest expense by approximately **$13.3 million** annually[223](index=223&type=chunk) - To mitigate interest rate fluctuations, the Company entered into a three-year one-month LIBOR interest rate swap contract with a notional amount of **$347.8 million**, fixing the interest rate at **1.9275%** effective January 12, 2018. This swap was **not designated as a hedge**, so fair value changes are recorded directly in earnings[224](index=224&type=chunk)[225](index=225&type=chunk) - The Company is exposed to **foreign currency risks** from intercompany loans and transactions denominated in non-functional currencies, but does not use derivatives for trading or speculative purposes[226](index=226&type=chunk)[227](index=227&type=chunk) [Item 4. Internal Controls and Procedures](index=44&type=section&id=Item%204.%20Internal%20Controls%20and%20Procedures) This section addresses the effectiveness of the Company's disclosure controls and internal control over financial reporting - As of June 30, 2019, management concluded that disclosure controls and procedures were **not effective** due to **material weaknesses** in internal control over financial reporting, as described in the 2018 Form 10-K[229](index=229&type=chunk) - Despite the material weaknesses, management affirmed that the consolidated financial statements **fairly present** the Company's financial position, results of operations, and cash flows in conformity with GAAP[230](index=230&type=chunk) - The Company is implementing a **remediation plan** to address the identified material weaknesses, which will not be considered remediated until controls operate effectively for a sufficient period and are tested[232](index=232&type=chunk) - There have been **no changes** in internal control over financial reporting during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[233](index=233&type=chunk) [PART II — OTHER INFORMATION](index=45&type=section&id=PART%20II%20%E2%80%94%20OTHER%20INFORMATION) This section provides additional information including legal proceedings, risk factors, equity sales, and other disclosures [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) This section details the ongoing Appraisal Action related to the Novitex Business Combination, seeking fair value determination - The Company is a defendant in an **Appraisal Action** filed by former SourceHOV stockholders seeking a determination of the fair value of their shares at the time of the July 2017 Novitex Business Combination[235](index=235&type=chunk)[236](index=236&type=chunk) - A trial was conducted in June 2019, with post-trial arguments scheduled for October 2019. The Company is **unable to predict the outcome** or the determined fair value[236](index=236&type=chunk) - **4,570,734 shares** of Common Stock issued to Ex-Sigma 2 LLC will be forfeited as a result of the Appraisal Action when the PIPE Financing is repaid[237](index=237&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) This section refers readers to the comprehensive risk factors detailed in the Company's Annual Report on Form 10-K - Readers should carefully consider the **risk factors** described in Part I, 'Item 1A. Risk Factors' of the Annual Report on Form 10-K for December 31, 2018, as supplemented by this quarterly report, which could materially affect the Company's business, financial condition, and operating results[239](index=239&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section outlines the Company's Share Buyback Program, detailing repurchased shares and average prices - The Company's board of directors authorized a Share Buyback Program on November 8, 2017, to purchase up to **5,000,000 shares** of Common Stock, expiring in 24 months[241](index=241&type=chunk) - During the three and six months ended June 30, 2019, the Company repurchased **237,962 shares** at an average price of **$2.74 per share**[241](index=241&type=chunk) - As of June 30, 2019, a total of **2,787,147 shares** had been repurchased under the program and are held in treasury stock[241](index=241&type=chunk) [Item 3. Defaults Upon Senior Securities](index=46&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities during the reported period - There were **no defaults** upon senior securities[242](index=242&type=chunk) [Item 4. Mine Safety Disclosures](index=46&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the Company - Mine safety disclosures are **not applicable**[243](index=243&type=chunk) [Item 5. Other Information](index=46&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report - **No other information** to report[244](index=244&type=chunk) [Item 6. Exhibits](index=47&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including business agreements and certifications - The exhibits include the Business Combination Agreement, Restated Certificate of Incorporation, Amended and Restated Bylaws, Specimen Common Stock and Warrant Certificates, Indentures, First and Second Amendments to First Lien Credit Agreement, Exela Technologies Inc. 2018 Stock Incentive Plan, and various certifications[246](index=246&type=chunk)

Financial Data and Key Metrics Changes - Revenue for Q1 2019 totaled $403.8 million, an increase of 2.7% compared to $393.2 million in Q1 2018. On a constant currency basis, revenue was $409.8 million, reflecting a 4.2% increase [25][10] - Adjusted EBITDA for the quarter was $74.1 million, up 6.5% year-over-year, with an adjusted EBITDA margin of 18.3%, an increase from 17.7% in Q1 2018 [31][10] - Gross margin for Q1 2019 was 24%, down from 25.3% in Q1 2018, primarily due to higher initial costs related to new revenue [29][10] Business Line Data and Key Metrics Changes - Revenue for the ITPS segment was $324.6 million, a 4.1% year-over-year increase, driven by the ramp-up of contracts using the Digital Now model [26] - The Healthcare Solutions segment grew 4.6% year-over-year, totaling $61.3 million, consistent with expectations [27] - The Legal and Loss Prevention segment saw a decline of 21.2% year-over-year to $17.8 million, attributed to the lack of large projects compared to the previous year [28] Market Data and Key Metrics Changes - At the end of Q1 2019, 83% of revenue was generated in the Americas, while 17% came from Europe, a shift from 90% and 10% respectively in Q1 2018 [25][22] - The company reported that its top 20 customers accounted for 36% of revenue, with the top 100 and top 200 customers representing 61% and 73% of revenue respectively [21] Company Strategy and Development Direction - The company aims to accelerate the digital transformation of its customers through its Digital Now strategy, which has been successful in winning new business [11][10] - Exela launched the Smart Office initiative to enhance user experience and integrate disconnected technologies in the workplace [16][10] - The company is focused on executing cost savings initiatives, with a target of achieving $56.4 million in identified savings during 2019 [15][10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strong pipeline for the remainder of 2019, expecting revenue to improve materially in the third and fourth quarters [12][38] - The company reaffirmed its full-year 2019 guidance, anticipating similar revenue in Q2 and significant growth later in the year [38][10] - Management acknowledged the challenges in the legal segment but indicated potential for growth in the second half of the year [49][10] Other Important Information - The company added approximately 929 full-time employees in Q1 2019, increasing total headcount to 22,976 [13][10] - Liquidity at the end of Q1 was $57.9 million, with total net debt at $1.459 billion [34][10] - Capital expenditures for the quarter were $13 million, or 3.2% of revenue, slightly higher due to the ramp-up of new revenue [36][10] Q&A Session Summary Question: Impact of M&A in the quarter - Management indicated that excluding low-margin contracts exited during the year, the organic growth rate was approximately 3% [45][46] Question: Performance of the legal segment - Management noted that the legal segment's revenue is project-based and lumpy, with expectations for growth in the second half of the year [48][49] Question: Pipeline growth due to Digital Now - Management reported that the growth in the pipeline year-over-year has almost doubled for opportunities related to Digital Now [54][55] Question: Synergies and savings initiatives - Management expects to realize a majority of the identified savings of $56.4 million during 2019, with a cautious approach to cash implementation [56][57] Question: Relationships with existing customers - Management highlighted the importance of existing customer relationships in driving new business and expanding service offerings [60][61] Question: Seasonality and revenue expectations - Management acknowledged typical softness in Q3 but expressed confidence in material growth in the back half of the year [64][65] Question: Legal division integration and growth - Management sees significant revenue synergy opportunities by integrating legal services with enterprise solutions [84][10] Question: Optimization and restructuring costs - Management clarified that optimization and restructuring charges are primarily related to headcount as the company transitions to a digital solution [87][88]

[PART I—FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) This section presents the company's financial statements, management's discussion and analysis, market risk disclosures, and internal controls for the period [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) Exela Technologies reported $403.8 million revenue and a $29.9 million net loss for Q1 2019, with balance sheet impacted by ASC 842 adoption and $37.1 million cash used in operations Condensed Consolidated Balance Sheets ($ in thousands) Total assets reached $1.70 billion and liabilities $1.91 billion as of March 31, 2019, primarily due to ASC 842 adoption, widening the stockholders' deficit to $204.3 million | | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Total current assets** | $332,975 | $355,901 | | **Total assets** | $1,702,889 | $1,639,782 | | **Total current liabilities** | $417,622 | $432,722 | | **Total liabilities** | $1,907,153 | $1,820,788 | | **Total stockholders' deficit** | $(204,264) | $(181,006) | - The adoption of the new lease standard (ASU 2016-02) on January 1, 2019, resulted in the recognition of operating lease right-of-use assets of **$100.7 million** and corresponding lease liabilities[7](index=7&type=chunk)[29](index=29&type=chunk) Condensed Consolidated Statements of Operations ($ in thousands) Q1 2019 revenue increased 2.7% to $403.8 million, with operating income rising to $17.9 million, but net loss widened to $30.8 million due to higher other expenses | | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | **Revenue** | $403,765 | $393,167 | | **Operating income** | $17,920 | $14,656 | | **Net loss** | $(29,907) | $(23,994) | | **Net loss attributable to common stockholders** | $(30,821) | $(24,908) | | **Loss per share (Basic and diluted)** | $(0.21) | $(0.16) | Condensed Consolidated Statements of Cash Flows ($ in thousands) Net cash used in operating activities increased to $37.1 million in Q1 2019, with $13.0 million used in investing and $19.6 million from financing, resulting in a $30.6 million cash decrease | | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | **Net cash used in operating activities** | $(37,139) | $(20,083) | | **Net cash used in investing activities** | $(13,005) | $(8,643) | | **Net cash provided by (used in) financing activities** | $19,582 | $(13,387) | | **Net decrease in cash and cash equivalents** | $(30,594) | $(42,058) | | **Cash, restricted cash, and cash equivalents, end of period** | $13,260 | $39,431 | [Notes to the Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) Notes detail financial statement basis, ASC 842 adoption impacting the balance sheet, revenue, intangible assets, and long-term debt, including $1.0 billion in Senior Secured Notes and a subsequent $30.0 million term loan borrowing - Effective January 1, 2019, the Company adopted ASU no. 2016-02, Leases (ASC 842), which had a **material impact** on the balance sheet, resulting in the recognition of right-of-use assets and lease liabilities for operating leases[29](index=29&type=chunk) - As of March 31, 2019, total long-term debt was approximately **$1.37 billion**, primarily composed of **$1.0 billion** in 10.0% Senior Secured Notes due 2023 and a senior secured term loan[67](index=67&type=chunk)[68](index=68&type=chunk)[78](index=78&type=chunk) - On April 16, 2019, the Company borrowed an additional **$30.0 million** pursuant to incremental term loans under its First Lien Credit Agreement[137](index=137&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2019 revenue growth of 2.7% to $403.8 million, a widened net loss of $29.9 million, and an Adjusted EBITDA increase to $74.1 million, with liquidity from operations and a $49.0 million revolving credit facility Results of Operations ($ in thousands) Q1 2019 total revenue grew 2.7% to $403.8 million, driven by ITPS and HS segments, while LLPS declined; operating income increased 22.27% to $17.9 million, aided by lower D&A expenses | | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | % Change | | :--- | :--- | :--- | :--- | | **Total revenue** | $403,765 | $393,167 | 2.70% | | ITPS Revenue | $324,580 | $311,937 | 4.05% | | HS Revenue | $61,343 | $58,632 | 4.62% | | LLPS Revenue | $17,842 | $22,598 | -21.05% | | **Operating income** | $17,920 | $14,656 | 22.27% | | **Net loss** | $(29,907) | $(23,994) | 24.64% | - The increase in ITPS revenue was primarily attributable to 2018 acquisitions, which added **$31.3 million**, offset by a **$16.6 million** decline from a specific customer's statement of work[160](index=160&type=chunk) - Depreciation and amortization expenses were lower in Q1 2019 because an accelerated trade name write-off that occurred in 2018 was completed by December 31, 2018[166](index=166&type=chunk) Non-GAAP Financial Measures ($ in thousands) Q1 2019 EBITDA decreased to $41.7 million, but Adjusted EBITDA increased to $74.1 million, with key adjustments including $25.8 million in optimization and restructuring expenses | | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | **Net Loss** | $(29,907) | $(23,994) | | **EBITDA** | $41,732 | $56,067 | | **Adjusted EBITDA** | $74,062 | $69,567 | - Key adjustments from EBITDA to Adjusted EBITDA for Q1 2019 include **$25.8 million** in optimization and restructuring expenses, **$1.0 million** in transaction costs, and **$2.8 million** in non-cash equity compensation[175](index=175&type=chunk) [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is supported by cash from operations and a $49.0 million revolving credit facility, with $13.3 million cash as of March 31, 2019, and expected capital expenditures of $40-45 million, plus a subsequent $30.0 million term loan - As of March 31, 2019, the company had **$13.3 million** in cash and cash equivalents and **$49.0 million** available under its senior secured revolving credit facility[183](index=183&type=chunk) - The company expects to spend approximately **$40 to $45 million** on total capital expenditures over the next twelve months[179](index=179&type=chunk) - In July 2018, the company repriced its **$343.4 million** term loan, lowering the interest rate by 100 basis points, and borrowed an additional **$30.0 million**; another **$30.0 million** was borrowed in April 2019[180](index=180&type=chunk)[181](index=181&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks from interest rates and foreign currency, with $1.37 billion in debt at 9.59% weighted average interest, partially hedged by an interest rate swap on a $347.8 million notional amount - As of March 31, 2019, the company had **$1.37 billion** of debt outstanding with a weighted average interest rate of **9.59%**; a **1%** change in the interest rate would impact annual interest expense by approximately **$13.7 million**[203](index=203&type=chunk) - The company uses a three-year interest rate swap with a notional amount of **$347.8 million** to hedge against LIBOR fluctuations on its term loan, fixing the rate at **1.9275%**; this swap is not designated as a hedge for accounting purposes, and its fair value changes are recorded in earnings[203](index=203&type=chunk)[204](index=204&type=chunk) [Internal Controls and Procedures](index=38&type=section&id=Item%204.%20Internal%20Controls%20and%20Procedures) Management concluded that disclosure controls were ineffective as of March 31, 2019, due to material weaknesses in internal control over financial reporting identified in the 2018 10-K, with ongoing remediation efforts - The CEO and CFO concluded that the company's disclosure controls and procedures were **not effective** as of March 31, 2019, due to **material weaknesses** in internal control over financial reporting previously identified in the 2018 10-K[209](index=209&type=chunk) - The company is implementing a remediation plan to address the identified material weaknesses, but these weaknesses will not be considered remediated until the controls operate effectively for a sufficient period[211](index=211&type=chunk) [PART II — OTHER INFORMATION](index=38&type=section&id=PART%20II%20%E2%80%94%20OTHER%20INFORMATION) This section provides information on legal proceedings, risk factors, and unregistered sales of equity securities [Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) The company is defending an appraisal action by former SourceHOV stockholders seeking fair value determination for their shares post-2017 business combination, with a trial scheduled for June 2019 - The company is defending an "**Appraisal Action**" brought by former SourceHOV stockholders who are seeking a court determination of the **fair value** of their shares at the time of the 2017 Novitex Business Combination; a trial is scheduled for June 2019[214](index=214&type=chunk)[217](index=217&type=chunk) [Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported from those disclosed in the 2018 Annual Report on Form 10-K, advising investors to consider previously identified risks - The report refers to the risk factors described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018, indicating **no material changes** during the quarter[219](index=219&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No shares were repurchased under the 5,000,000-share buyback program during Q1 2019, with 2,549,185 shares cumulatively repurchased since its November 2017 inception - **No shares** were repurchased under the company's Share Buyback Program during the three months ended March 31, 2019[220](index=220&type=chunk) - As of March 31, 2019, a cumulative total of **2,549,185 shares** have been repurchased under the program, which authorizes up to **5,000,000 shares**[220](index=220&type=chunk)

Part I [Business](index=5&type=section&id=Item%201.%20Business) Exela Technologies, a global BPA leader, generated **$1.586 billion** in **2018** revenue across **ITPS**, **HS**, and **LLPS** segments, serving over **4,000 customers** - Exela is a business process automation leader serving over **4,000 customers**, including over **60% of the Fortune® 100**, with revenues of **$1.586 billion** in fiscal year **2018**[19](index=19&type=chunk) 2018 Revenue by Business Segment | Segment | Revenue (in millions) | Percentage of Total Revenue | | :--- | :--- | :--- | | Information and Transaction Processing Solutions (ITPS) | $1,273.6 | 80% | | Healthcare Solutions (HS) | $228.0 | 15% | | Legal & Loss Prevention Services (LLPS) | $84.6 | 5% | 2018 Revenue by Geography | Geography | Revenue (in millions) | Percentage of Total Revenue | | :--- | :--- | :--- | | United States | $1,347.5 | 85.0% | | Europe | $211.3 | 13.2% | | Rest of the World | $27.4 | 1.7% | - The company was formed in **July 2017** through the business combination of **SourceHOV Holdings, Inc.** and **Novitex Holding, Inc.**, with **SourceHOV** being the accounting acquirer[71](index=71&type=chunk)[72](index=72&type=chunk) [Our Solutions and Services](index=6&type=section&id=Our%20Solutions%20and%20Services) Exela offers diverse solutions like F&A, EIM, RPA, and Digital Mailroom, with new platforms like 'Exela Smart Office' launching in **2019** - The company offers a wide range of multi-industry solutions such as Finance & Accounting (P2P, O2C), Enterprise Information Management, Robotic Process Automation, Digital Mailroom, and Contract Management[23](index=23&type=chunk)[24](index=24&type=chunk)[29](index=29&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk)[40](index=40&type=chunk) 2018 Revenue Contribution by Industry | Industry | Percentage of 2018 Revenue | | :--- | :--- | | Banking and Financial | ~23% | | Healthcare | ~21% | | Commercial | ~20% | | Insurance | ~16% | | Technology and Manufacturing | ~8% | | Public Sector | ~7% | | Legal | ~6% | - New solutions developed in **2018**, including '**Exela Smart Office**' (an enterprise IoT platform) and a proprietary human capital management platform, are planned for commercial launch in **2019**[47](index=47&type=chunk)[49](index=49&type=chunk) [Key Business Strategies](index=13&type=section&id=Key%20Business%20Strategies) Exela's '**Digital Now**' strategy focuses on accelerating customer digital transformation, expanding solution penetration, cross-selling, and realizing acquisition synergies - The primary strategy is the '**Digital Now**' model, focusing on accelerating customer digital transformation through a single, cloud-hosted platform[75](index=75&type=chunk) - A key growth driver is to expand penetration of its '**seven layers of technology enabled solutions and services stack**,' moving customers up the value chain from data aggregation to front-end software[76](index=76&type=chunk) - The company aims to pursue cross-sell and up-sell opportunities within its existing **4,000+ customer base** and leverage its on-site presence of approximately **5,000 employees** to deploy its BPA software[77](index=77&type=chunk)[79](index=79&type=chunk) - A significant focus is on realizing cost synergies from the **Novitex Business Combination** across IT, operations, facilities, and corporate functions[81](index=81&type=chunk) [Competition, Regulation, and Employees](index=17&type=section&id=Competition%2C%20Regulation%2C%20and%20Employees) Exela competes with diverse IT and BPO firms, is subject to strict data privacy laws like **GDPR**, and employed approximately **22,000** globally in **2018** - The competitive landscape includes multi-national IT companies (IBM, Canon), consulting firms (Accenture, Cognizant), platform providers (Workday, Salesforce), and multi-shore BPO companies (Genpact, Conduent)[89](index=89&type=chunk)[92](index=92&type=chunk) - The company's operations are subject to significant data privacy and security laws, including **HIPAA**, the **HITECH Act**, the **Gramm-Leach-Bliley Act**, and the EU's **GDPR**, which went into effect in **May 2018**[90](index=90&type=chunk)[94](index=94&type=chunk)[96](index=96&type=chunk) - As of **December 31, 2018**, the company had approximately **22,000 employees**, with a majority located in the United States and the remainder in Europe, Northern Africa, India, the Philippines, Mexico, and China[98](index=98&type=chunk) [Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from economic conditions, cybersecurity, high leverage, customer concentration, foreign operations, and complex regulatory changes - Business operations are sensitive to global economic and political conditions, cybersecurity threats, and potential data breaches which could lead to liability and reputational damage[113](index=113&type=chunk)[117](index=117&type=chunk) - The **HGM Group** beneficially owns over **50%** of the company's **Common Stock**, giving it significant influence over corporate actions and director nominations[122](index=122&type=chunk) - The company has elevated levels of leverage, with approximately **$1.3 billion** of long-term debt as of **December 31, 2018**, which could harm its financial condition and limit flexibility[146](index=146&type=chunk) - A significant portion of revenues are derived from a small number of customers, with the ten largest customers accounting for approximately **30% of revenues** in **2018**[172](index=172&type=chunk) - Operations are exposed to risks in foreign jurisdictions, particularly India, the Philippines, China, and Mexico, including regulatory, economic, and political uncertainties, as well as currency fluctuations[191](index=191&type=chunk)[206](index=206&type=chunk) - The **Tax Cuts and Jobs Act (TCJA) of 2017** presents uncertainty, with the limitation on interest expense deductions being a key potential impact due to the company's significant leverage[199](index=199&type=chunk)[200](index=200&type=chunk) [Properties](index=40&type=section&id=Item%202.%20Properties) As of **December 31, 2018**, Exela's global property portfolio included approximately **4.4 million square feet** across **178 leased and 7 owned facilities** - The company's global property portfolio covers approximately **4.4 million square feet** across **178 leased and 7 owned facilities** as of year-end **2018**[225](index=225&type=chunk) - Owned properties include facilities in India, Alabama, Florida, Michigan, England, and New York[225](index=225&type=chunk) [Legal Proceedings](index=40&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in an appraisal action by former **SourceHOV** stockholders seeking fair value determination, which it intends to vigorously defend - A petition for appraisal was filed in **September 2017** by former **SourceHOV** stockholders related to the **Novitex Business Combination**, seeking determination of the fair value of their shares. The company is unable to estimate any potential loss and intends to vigorously defend against the action[227](index=227&type=chunk)[229](index=229&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=42&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Exela's **Common Stock** (**XELA**) traded between **$3.46** and **$7.34** in **2018**, with no dividends paid and ongoing share repurchases 2018 Quarterly Common Stock Price Range | Quarter | High ($) | Low ($) | | :--- | :--- | :--- | | First Quarter | 6.42 | 5.08 | | Second Quarter | 5.87 | 4.32 | | Third Quarter | 7.34 | 4.65 | | Fourth Quarter | 7.02 | 3.46 | - The company has not paid any cash dividends on its common stock[236](index=236&type=chunk) - Under a share buyback program authorized in **November 2017** for up to **5 million shares**, the company repurchased **2,549,185 shares** as of **December 31, 2018**, with **2,450,815 shares** remaining available for repurchase[240](index=240&type=chunk)[241](index=241&type=chunk) [Selected Financial Data](index=46&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents a five-year financial summary, highlighting **2018** revenues of **$1.586 billion** and a net loss of **$162.5 million**, impacted by acquisitions Selected Historical Financial Data (in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenue** | $1,586,222 | $1,152,324 | $789,926 | $805,232 | $650,918 | | **Operating (Loss) Income** | $(6,249) | $(99,532) | $50,236 | $40,310 | $(171,246) | | **Net Loss** | $(162,517) | $(204,285) | $(48,103) | $(44,904) | $(197,635) | | **Total Assets** | $1,639,782 | $1,714,838 | $969,486 | $960,048 | $1,119,468 | | **Long-Term Debt** | $1,306,423 | $1,276,094 | $983,502 | $975,142 | $952,071 | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=47&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) MD&A details **2018** revenue growth to **$1.586 billion**, a narrowed net loss, increased **Adjusted EBITDA**, and liquidity from operations and credit facilities - The financial data for **2017** is only partially comparable to **2018** and **2016**, as it includes **SourceHOV's** results for the full year but **Novitex's** results only from **July 13, 2017**, onwards[253](index=253&type=chunk) - In **April 2018**, Exela acquired **Asterion International Group** to expand its European business[258](index=258&type=chunk) Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Net Loss** | $(162,517) | $(204,285) | $(48,103) | | **EBITDA** | $144,470 | $(37,152) | $129,163 | | **Adjusted EBITDA** | $283,845 | $208,825 | $173,237 | - As of **December 31, 2018**, the company had **$43.9 million** in cash and cash equivalents (including restricted cash) and **$79.4 million** available under its senior secured revolving credit facility[316](index=316&type=chunk) [Results of Operations](index=50&type=section&id=Results%20of%20Operations) **2018** revenue increased **37.7%** to **$1.586 billion**, driven by **ITPS** acquisitions, while net loss improved due to lower one-time professional fees and impairment charges Comparison of Operations: 2018 vs. 2017 (in millions) | Metric | 2018 | 2017 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Revenue** | $1,586.2 | $1,152.3 | 37.7% | | **Cost of Revenue** | $1,209.9 | $829.1 | 45.9% | | **SG&A Expenses** | $184.7 | $221.0 | (16.4%) | | **Operating Loss** | $(6.2) | $(99.5) | 93.8% | | **Net Loss** | $(162.5) | $(204.3) | 20.5% | - The **ITPS** segment revenue grew by **54.0%** in **2018**, primarily due to acquisitions contributing **$445.0 million** of the increase[272](index=272&type=chunk) - SG&A expenses decreased by **$36.3 million** in **2018**, mainly because **2017** included **$60.0 million** in professional fees related to the **Novitex Business Combination**[278](index=278&type=chunk) - An impairment charge of **$48.1 million** was recorded in **2018**, related to goodwill (**$44.4 million**) for the **LLPS** reporting unit and trade names (**$3.7 million**)[280](index=280&type=chunk) [Liquidity and Capital Resources](index=57&type=section&id=Liquidity%20and%20Capital%20Resources) Primary liquidity comes from operations and a revolving credit facility, with total debt at approximately **$1.34 billion** as of **December 31, 2018** - In **July 2018**, the company repriced its senior secured term loans, reducing the applicable interest rates by **100 basis points**, and borrowed an additional **$30.0 million**[315](index=315&type=chunk)[334](index=334&type=chunk) Cash Flow Summary (in thousands) | Cash Flow Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Operating Activities** | $30,457 | $23,455 | $72,147 | | **Investing Activities** | $(66,304) | $(452,374) | $(31,602) | | **Financing Activities** | $(1,910) | $475,727 | $(43,255) | - The decrease in cash used in investing activities in **2018** was primarily due to the significant cash paid for the **Novitex Business Combination** in **2017**[323](index=323&type=chunk) [Critical Accounting Policies and Estimates](index=60&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Key accounting estimates include goodwill and intangible asset impairment, outsourced contract costs, revenue recognition (**ASC 606**), and income taxes - Key estimates involve goodwill and intangible asset valuation, outsourced contract costs, revenue recognition, and income taxes[338](index=338&type=chunk) - Goodwill and indefinite-lived intangible assets are tested for impairment annually on **October 1st**. In **2018**, this resulted in a **$44.4 million** goodwill impairment for the **LLPS** unit and a **$3.7 million** impairment of trade names[343](index=343&type=chunk)[345](index=345&type=chunk) - The company adopted **ASC 606** (Revenue from Contracts with Customers) on **January 1, 2018**, using the modified retrospective approach, which did not have a material impact on financial results[347](index=347&type=chunk)[484](index=484&type=chunk) [Quantitative and Qualitative Disclosure About Market Risk](index=64&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) Exela is exposed to interest rate and foreign currency risks, with an interest rate swap hedging a portion of its **$1.338 billion** debt - The company's main market risks are interest rate risk and foreign currency risk[367](index=367&type=chunk) - As of **December 31, 2018**, the company had **$1.338 billion** of debt outstanding. A **1%** change in the weighted average interest rate would impact annual interest expense by approximately **$13.3 million**[364](index=364&type=chunk) - To hedge interest rate risk, the company entered into a three-year interest rate swap in **November 2017** on a notional amount of **$347.8 million**, swapping floating LIBOR for a fixed rate of **1.9275%**[364](index=364&type=chunk) [Financial Statements and Supplementary Data](index=65&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents consolidated financial statements and **KPMG's** audit report, which issued an **adverse opinion** on internal controls due to **material weaknesses** - The independent auditor, **KPMG LLP**, issued an **unqualified opinion** on the consolidated financial statements[370](index=370&type=chunk) - **KPMG LLP** issued an **adverse opinion** on the effectiveness of the company's internal control over financial reporting as of **December 31, 2018**, due to identified **material weaknesses**[371](index=371&type=chunk)[376](index=376&type=chunk) Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | **Total Current Assets** | $355,901 | $347,711 | | **Goodwill** | $708,258 | $747,325 | | **Total Assets** | $1,639,782 | $1,714,838 | | **Total Current Liabilities** | $432,722 | $373,760 | | **Long-Term Debt** | $1,306,423 | $1,276,094 | | **Total Liabilities** | $1,820,788 | $1,724,844 | | **Total Stockholders' Deficit** | $(181,006) | $(10,006) | Consolidated Statement of Operations Highlights (in thousands) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Revenue** | $1,586,222 | $1,152,324 | $789,926 | | **Operating (Loss) Income** | $(6,249) | $(99,532) | $50,236 | | **Net Loss** | $(162,517) | $(204,285) | $(48,103) | | **Loss Per Share (Basic & Diluted)** | $(1.09) | $(2.08) | $(0.75) | [Controls and Procedures](index=122&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls were **not effective** as of **December 31, 2018**, due to **material weaknesses** in internal controls, with remediation efforts underway - Management concluded that disclosure controls and procedures were **not effective** as of **December 31, 2018**, due to **material weaknesses** in internal control over financial reporting[643](index=643&type=chunk)[649](index=649&type=chunk) - **Material weaknesses** were identified across all five components of the **COSO 2013 Framework**: Control Environment, Risk Assessment, Information and Communication, Monitoring Activities, and Control Activities[650](index=650&type=chunk)[652](index=652&type=chunk)[653](index=653&type=chunk)[654](index=654&type=chunk)[655](index=655&type=chunk) - Specific control deficiencies were cited in the financial statement close process, general IT controls (**GITCs**) for systems managed by service organizations, and controls over revenue, procurement, payroll, and leases[657](index=657&type=chunk)[658](index=658&type=chunk)[660](index=660&type=chunk) - A remediation plan is in progress, which includes hiring additional resources, enhancing training on the **COSO framework**, strengthening **GITCs**, and designing improved review policies and procedures[671](index=671&type=chunk)[674](index=674&type=chunk) Part III [Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees](index=127&type=section&id=Items%2010-14) Information for these items is incorporated by reference from the company's upcoming **2019 Proxy Statement** - Information required for **Item 10** (Directors, Executive Officers, and Corporate Governance), **Item 11** (Executive Compensation), **Item 12** (Security Ownership), **Item 13** (Certain Relationships and Related Transactions), and **Item 14** (Principal Accounting Fees and Services) is incorporated by reference from the company's upcoming **2019 Proxy Statement**[678](index=678&type=chunk)[679](index=679&type=chunk)[680](index=680&type=chunk)[682](index=682&type=chunk)[683](index=683&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=129&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and key exhibits, including corporate governance documents and **SOX** certifications - This section provides a list of all financial statements and exhibits filed with the annual report[685](index=685&type=chunk) - Key filed exhibits include corporate governance documents, debt agreements, and certifications required by the **Sarbanes-Oxley Act**[686](index=686&type=chunk)[687](index=687&type=chunk)