Exela Technologies(XELA) - 2019 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents Exela Technologies, Inc.'s unaudited condensed consolidated financial statements and related notes Item 1. Financial Statements 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 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 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 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 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] | 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 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 This section provides detailed notes explaining the accounting policies, significant events, and financial statement components 1. General 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][22] - 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][24] 2. New Accounting Pronouncements 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] - 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][35][36] 3. Business Combinations 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][38][39] | 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 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][43] | 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] | 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 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][57] | 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 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] | 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 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][74] - 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][78][79][83] | 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 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][90][91] 9. Employee Benefit Plans 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][93][94][96][97] | 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 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][101] - 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] 11. Fair Value Measurement 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][104][106][107] | 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 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] - 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][112][113] | 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 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][118] - 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] - 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][122] - 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][124] 14. Related-Party Transactions 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][127][129][130] - 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][133][134][135] | 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 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] - 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][142] | 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 This section discusses the Company's business, history, segments, KPIs, and financial results for Q2 and H1 2019 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] - 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] 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][150] - 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] Our Segments 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] - 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][153] 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] 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] 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] Key Performance Indicators 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][159] - 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] Results of Operations 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 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][162] - 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][166] - 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][170][171] Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018 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][176] - 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][180] - 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][184][185] Other Financial Information (Non-GAAP Financial Measures) 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][188] | 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][196] Liquidity and Capital Resources 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][200] - 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] | 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][207][208] - 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][210][215][216] - 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][222] Item 3. Quantitative and Qualitative Disclosures about Market Risk 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] - 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][225] - 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][227] Item 4. Internal Controls and Procedures 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] - 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] - 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] - 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] PART II — OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and other disclosures Item 1. Legal Proceedings 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][236] - 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] - 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - 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] - 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] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reported period - There were no defaults upon senior securities[242] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[243] Item 5. Other Information This section states that there is no other information to report - No other information to report[244] Item 6. Exhibits 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]