Exela Technologies(XELA) - 2019 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION 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 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 $100.7 million and corresponding lease liabilities[7][29] Condensed Consolidated Statements of Operations ($ 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 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] - 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][68][78] - On April 16, 2019, the Company borrowed an additional $30.0 million pursuant to incremental term loans under its First Lien Credit Agreement[137] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 $16.6 million decline from a specific customer's statement of work[160] - Depreciation and amortization expenses were lower in Q1 2019 because an accelerated trade name write-off that occurred in 2018 was completed by December 31, 2018[166] Non-GAAP Financial Measures ($ 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] Liquidity and Capital Resources 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] - The company expects to spend approximately $40 to $45 million on total capital expenditures over the next twelve months[179] - 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][181] Quantitative and Qualitative Disclosures about Market Risk 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] - 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][204] Internal Controls and Procedures 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] - 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] PART II — OTHER INFORMATION This section provides information on legal proceedings, risk factors, and unregistered sales of equity securities Legal Proceedings 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][217] Risk Factors 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] Unregistered Sales of Equity Securities and Use of Proceeds 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] - 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]