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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

Or

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file number: 001-36788

EXELA TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

47-1347291

(State of or other Jurisdiction
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

2701 E. Grauwyler Rd.
Irving, TX

75061

(Address of Principal Executive
Offices)

(Zip Code)

Registrant's Telephone Number, Including Area Code: (844) 935-2832

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, Par Value $0.0001 per share

XELA

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer    

Accelerated Filer     

Non-Accelerated Filer     

Smaller Reporting Company   

Emerging Growth Company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

As of August 7, 2020 the registrant had 147,511,430 shares of Common Stock outstanding.

Exela Technologies, Inc.

Form 10-Q

For the quarterly period ended June 30, 2020

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

1

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (as restated)

2

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019 (as restated)

3

Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2020 and 2019 (as restated)

4

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (as restated)

6

Notes to the Condensed Consolidated Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 3. Quantitative and Qualitative Disclosures about Market Risk

49

Item 4. Internal Controls and Procedures

50

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

51

Item 1A. Risk Factors

52

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3. Defaults Upon Senior Securities

52

Item 4. Mine Safety Disclosures

52

Item 5. Other Information

52

Item 6. Exhibits

54

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of June 30, 2020 and December 31, 2019

(in thousands of United States dollars except share and per share amounts)

June 30, 

December 31, 

2020

2019

    

(Unaudited)

    

(Audited)

Assets

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

86,470

$

6,198

Restricted cash

 

5,457

 

7,901

Accounts receivable, net of allowance for doubtful accounts of $5,362 and $4,975, respectively

219,433

261,400

Related party receivables

906

716

Inventories, net

17,268

19,047

Prepaid expenses and other current assets

33,695

23,663

Total current assets

 

363,229

 

318,925

Property, plant and equipment, net of accumulated depreciation of $187,260 and $176,995, respectively

100,878

113,637

Operating lease right-of-use assets, net

90,067

93,627

Goodwill

359,009

359,771

Intangible assets, net

317,630

342,443

Deferred income tax assets

11,769

12,032

Other noncurrent assets

 

25,961

 

17,889

Total assets

$

1,268,543

$

1,258,324

Liabilities and Stockholders' Equity (Deficit)

 

  

 

  

Liabilities

 

  

 

  

Current liabilities

Accounts payables

$

67,385

$

86,167

Related party payables

2

1,740

Income tax payable

2,333

352

Accrued liabilities

116,376

121,553

Accrued compensation and benefits

52,636

48,574

Accrued interest

48,127

48,769

Customer deposits

27,301

27,765

Deferred revenue

19,179

16,282

Obligation for claim payment

34,801

39,156

Current portion of finance lease liabilities

12,831

13,788

Current portion of operating lease liabilities

24,271

25,345

Current portion of long-term debts

 

36,101

 

36,490

Total current liabilities

 

441,343

 

465,981

Long-term debt, net of current maturities

1,493,775

1,398,385

Finance lease liabilities, net of current portion

14,437

20,272

Pension liabilities

23,881

25,681

Deferred income tax liabilities

7,685

7,996

Long-term income tax liabilities

2,808

2,806

Operating lease liabilities, net of current portion

71,661

73,282

Other long-term liabilities

12,807

6,962

Total liabilities

2,068,397

2,001,365

Commitments and Contingencies (Note 8)

 

  

 

  

Stockholders' equity (deficit)

 

  

 

  

Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 154,866,550 shares issued and 147,511,430 shares outstanding at June 30, 2020 and 153,638,836 shares issued and 150,851,689 shares outstanding at December 31, 2019

 

15

 

15

Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized; 3,290,050 shares issued and outstanding at June 30, 2020 and 4,294,233 shares issued and outstanding at December 31, 2019

1

1

Additional paid in capital

 

446,739

 

445,452

Less: Common Stock held in treasury, at cost; 7,355,120 shares at June 30, 2020 and 2,787,147 shares at December 31, 2019

(10,949)

(10,949)

Equity-based compensation

51,118

49,336

Accumulated deficit

 

(1,272,869)

 

(1,211,508)

Accumulated other comprehensive loss:

Foreign currency translation adjustment

(6,387)

(7,329)

Unrealized pension actuarial losses, net of tax

(7,522)

(8,059)

Total accumulated other comprehensive loss

(13,909)

(15,388)

Total stockholders’ deficit

 

(799,854)

 

(743,041)

Total liabilities and stockholders’ deficit

$

1,268,543

$

1,258,324

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2020 and 2019

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

    

2019

    

    

2019

    

2020

    

(Restated)

    

2020

    

(Restated)

Revenue

$

307,722

$

390,849

$

673,173

$

795,206

Cost of revenue (exclusive of depreciation and amortization)

 

241,788

 

303,831

 

534,326

 

614,432

Selling, general and administrative expenses (exclusive of depreciation and amortization)

47,014

51,162

97,387

100,839

Depreciation and amortization

22,847

24,779

46,032

51,403

Related party expense

1,146

5,331

2,698

6,329

Operating income (loss)

(5,073)

5,746

(7,270)

22,203

Other expense (income), net:

Interest expense, net

44,440

39,959

86,028

79,660

Debt modification and extinguishment costs

1,404

1,404

Sundry expense (income), net

(899)

(1,311)

183

1,404

Other expense (income), net

(584)

2,527

(35,241)

4,020

Net loss before income taxes

(48,030)

(36,833)

(58,240)

(64,285)

Income tax expense

(661)

(4,738)

(3,120)

(9,458)

Net loss

$

(48,691)

$

(41,571)

$

(61,360)

$

(73,743)

Cumulative dividends for Series A Preferred Stock

(858)

(914)

582

(1,828)

Net loss attributable to common stockholders

$

(49,549)

$

(42,485)

$

(60,778)

$

(75,571)

Loss per share:

Basic and diluted

$

(0.34)

$

(0.29)

$

(0.41)

$

(0.52)

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

For the Three and Six Months Ended June 30, 2020 and 2019

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

    

2019

    

    

2019

    

2020

    

(Restated)

    

2020

    

(Restated)

Net loss

$

(48,691)

$

(41,571)

$

(61,360)

$

(73,743)

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments

 

22

 

(2,288)

 

942

 

1,104

Unrealized pension actuarial gains (losses), net of tax

 

33

 

256

 

537

 

32

Total other comprehensive loss, net of tax

$

(48,636)

$

(43,603)

$

(59,881)

$

(72,607)

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

For the Three and Six Months Ended June 30, 2020 and 2019

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

Accumulated Other
Comprehensive Loss

Unrealized

Foreign

Pension

Currency

Actuarial

Total

Common Stock

Preferred Stock

Treasury Stock

Additional

Equity-Based

Translation

Losses,

Accumulated

Stockholders'

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Paid in Capital

  

Compensation

  

Adjustment

  

net of tax

  

Deficit

  

Deficit

Balances at January 1, 2019, as restated

150,142,955

$

15

4,569,233

$

1

2,549,185

$

(10,342)

$

445,452

$

41,731

$

(6,423)

$

(9,301)

$

(702,391)

$

(241,258)

Net loss January 1, 2019 to March 31, 2019, as restated

(32,172)

(32,172)

Equity-based compensation

2,798

2,798

Foreign currency translation adjustment

3,392

3,392

Net realized pension actuarial gains, net of tax

(224)

(224)

Balances at March 31, 2019, as restated

150,142,955

$

15

4,569,233

1

2,549,185

$

(10,342)

$

445,452

$

44,529

$

(3,031)

$

(9,525)

$

(734,563)

$

(267,464)

Net loss April 1, 2019 to June 30, 2019, as restated

(41,571)

(41,571)

Equity-based compensation

2,661

2,661

Foreign currency translation adjustment

(2,288)

(2,288)

Net realized pension actuarial gains, net of tax

256

256

RSUs Vested

102,092

Shares repurchased

(237,962)

237,962

(607)

(607)

Balances at June 30, 2019, as restated

150,007,085

$

15

4,569,233

1

2,787,147

$

(10,949)

$

445,452

$

47,190

$

(5,319)

$

(9,269)

$

(776,134)

$

(309,013)

4

Accumulated Other
Comprehensive Loss

Unrealized

Foreign

Pension

Currency

Actuarial

Total

Common Stock

Preferred Stock

Treasury Stock

Additional

Equity-Based

Translation

Losses,

Accumulated

Stockholders'

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Paid in Capital

  

Compensation

  

Adjustment

  

net of tax

  

Deficit

  

Deficit

Balances at January 1, 2020

150,851,689

$

15

4,294,233

$

1

2,787,147

$

(10,949)

$

445,452

$

49,336

$

(7,329)

$

(8,059)

$

(1,211,508)

$

(743,041)

Net loss January 1, 2020 to March 31, 2020

(12,670)

(12,670)

Equity-based compensation

861

861

Foreign currency translation adjustment

920

920

Net realized pension actuarial gains, net of tax

504

504

Shares returned in connection with the Appraisal Action following repayment of Margin Loan

(4,570,734)

4,570,734

Preferred shares converted to common shares

1,227,714

(1,004,183)

Balances at March 31, 2020

147,508,669

$

15

3,290,050

$

1

7,357,881

$

(10,949)

$

445,452

$

50,197

$

(6,409)

$

(7,555)

$

(1,224,178)

$

(753,426)

Net loss April 1, 2020 to June 30, 2020

(48,691)

(48,691)

Equity-based compensation

921

921

Foreign currency translation adjustment

22

22

Net realized pension actuarial gains, net of tax

33

33

Settlement gain on related party payable to Ex-Sigma 2

1,287

1,287

Adjustment to number of shares withheld in lieu of tax obligation of RSU holders in the year 2018

2,761

(2,761)

Balances at June 30, 2020

147,511,430

$

15

3,290,050

$

1

7,355,120

$

(10,949)

$

446,739

$

51,118

$

(6,387)

$

(7,522)

$

(1,272,869)

$

(799,854)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Statement of Cash Flows

For the Six Months Ended June 30, 2020 and 2019

(in thousands of United States dollars except share and per share amounts)

(Unaudited)

Six Months Ended June 30, 

    

    

2019

    

2020

    

(Restated)

Cash flows from operating activities

Net loss

$

(61,360)

$

(73,743)

Adjustments to reconcile net loss

Depreciation and amortization

46,032

51,403

Original issue discount and debt issuance cost amortization

6,857

5,749

Debt modification and extinguishment costs

1,049

Provision for doubtful accounts

(110)

3,334

Deferred income tax provision

(338)

4,623

Share-based compensation expense

1,782

5,459

Foreign currency remeasurement

(980)

288

Loss (gain) on sale of assets

 

(34,791)

 

85

Fair value adjustment for interest rate swap

440

4,385

Change in operating assets and liabilities, net effect from acquisitions:

 

 

Accounts receivable

 

38,260

 

624

Prepaid expenses and other assets

(9,157)

1,260

Accounts payable and accrued liabilities

(8,812)

(12,595)

Related party balances

(642)

(3,899)

Additions to outsource contract costs

(297)

(2,860)

Net cash used in operating activities

 

(23,116)

 

(14,838)

Cash flows from investing activities

 

  

 

  

Purchases of property, plant, and equipment

(5,766)

(9,072)

Additions to internally developed software

(2,216)

(4,007)

Cash paid in acquisition, net of cash received

(3,500)

(5,000)

Proceeds from sale of assets

38,222

20

Net cash provided by (used in) investing activities

 

26,740

 

(18,059)

Cash flows from financing activities

 

  

 

Repurchases of Common Stock

(3,480)

Borrowings from other loans

23,248

14,092

Borrowings under factoring arrangement and A/R Facility

149,951

34,050

Principal repayment on borrowings under factoring arrangement and A/R Facility

(66,114)

(31,624)

Proceeds from senior secured term loans

29,850

Lease terminations

(331)

(95)

Cash paid for debt issuance costs

(12,708)

(7)

Borrowings from senior secured revolving facility

29,750

68,000

Repayments on senior secured revolving facility

(14,200)

(68,000)

Principal payments on finance lease obligations

(6,353)

(9,180)

Principal repayments on senior secured term loans and other loans

 

(29,040)

 

(21,248)

Net cash provided by financing activities

 

74,203

 

12,358

Effect of exchange rates on cash

1

111

Net increase (decrease) in cash and cash equivalents

 

77,828

 

(20,428)

Cash, restricted cash, and cash equivalents

 

 

Beginning of period

14,099

43,854

End of period

$

91,927

$

23,426

Supplemental cash flow data:

 

 

Income tax payments, net of refunds received

$

1,339

$

5,181

Interest paid

76,781

71,211

Noncash investing and financing activities:

Assets acquired through right-of-use arrangements

772

6,778

Settlement gain on related party payable to Ex-Sigma 2

1,287

Accrued capital expenditures

1,088

1,083

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Exela Technologies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(in thousands of United States dollars except share and per share amounts or unless otherwise noted)

(Unaudited)

1.     General

These condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements as of and for the year ended December 31, 2019 included in the Exela Technologies, Inc. (the "Company," "Exela," "we," "our" or "us") annual report on Form 10-K for such period (the “2019 Form 10-K”).

The accompanying condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America ("GAAP") and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission ("SEC") Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These accounting principles require us to use estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from our estimates.

The condensed consolidated financial statements are unaudited, but in our opinion include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim period. The interim financial results are not necessarily indicative of results that may be expected for any other interim period or the fiscal year.

Certain amounts in condensed consolidated statements of cash flows have been reclassified for comparability purposes.

Restatement

As described in additional detail in the Explanatory Note to its 2019 Form 10-K, the Company restated its audited consolidated financial statements in the 2019 Form 10-K for the years ended December 31, 2018 and 2017 and its unaudited quarterly results for the first three fiscal quarters in the fiscal year ended December 31, 2019 and each fiscal quarter in the fiscal year ended December 31, 2018. Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. See Note 20, Unaudited Quarterly Financial Data, of the Notes to the consolidated financial statements in the 2019 Form 10-K for the impact of these adjustments on each of the quarterly periods in fiscal 2018 and for the first three quarters of fiscal 2019. These condensed consolidated financial statements include restated results for the corresponding interim periods of fiscal 2019.

Going Concern

Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required under ASC 205-40, management’s evaluation should initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

Substantial Doubt Raised

In performing the first step of the evaluation, we concluded that the following conditions raised substantial doubt about our ability to continue as a going concern:

7

history of net losses of $48.7 million and $61.4 million for the three and six months ended June 30, 2020, respectively, and $509.1 million and $169.8 million for the years ended December 31, 2019 and December 31, 2018, respectively. This is after considering a gain of $35.3 million on the sale of SourceHOV Tax, LLC recognized during the six months ended June 30, 2020, and including goodwill and other intangible asset impairment of $349.6 million, for the year ended December 31, 2019 and $48.1 million for the year ended December 31, 2018;
net operating cash outflow of $23.1 million for the six months ended June 30, 2020, $63.9 million in 2019 and inflow of $23.6 million in 2018;
working capital deficits of $78.1 million as of June 30, 2020, $147.1 million as of December 31, 2019 and $123.5 million as of December 31, 2018;
significant cash payments for interest on our long-term debt of $144.5 million in 2019 and a similar amount expected in 2020;
a liability incurred of $58.5 million for the Appraisal Action (as described further in Note 8);
a requirement that the Company maintain a minimum of $40.0 million and $35.0 million in liquidity, at all times, to not be in default of the A/R Facility and the Credit Agreement (as defined below), respectively; and
an accumulated deficit of $1,272.9 million.

Furthermore, under the terms of each of the First Lien Credit Agreement, dated as of July 12, 2017, as amended and restated as of July 13, 2018 and as further amended and restated as of April 16, 2019 (the “Prior Credit Agreement” and as further amended and restated as of May 18, 2020, the “Credit Agreement”), and the Indenture and First Supplemental Indenture (collectively, the “Indenture”), dated July 12, 2017, the Company was required to deliver to its lenders and bondholders the December 31, 2019 audited financial statements by April 14, 2020, which the Company failed to do. Such failure was an event of default under the Prior Credit Agreement if not cured within 30 days of receiving a notice of default. The Company received such notice on April 15, 2020. Additionally, under the terms of the A/R Facility (as described in Note 5), the Company was required to furnish to each lender the December 31, 2019 audited financial statements by May 11, 2020, which the Company failed to do. During the second quarter of 2020, both the Prior Credit Agreement and the A/R Facility were amended. Refer to Consideration of Management’s Plans section below.

Consideration of Management’s Plans

In performing the second step of this assessment, we are required to evaluate whether it is probable that our plans will be effectively implemented within one year after the financial statements are issued and whether it is probable those plans will alleviate the substantial doubt about our ability to continue as a going concern.

As of August 7, 2020, the Company had approximately $42.0 million in available cash and an additional source of liquidity of approximately $35.8 million from the borrowing facilities.

The Company has undertaken the following plans to improve our available cash balances, liquidity and cash generated flows from operations, over the twelve month period from the date the financial statements are issued, as follows:

On January 10, 2020, certain subsidiaries of the Company entered into a $160.0 million A/R Facility with a five-year term. The Company used the proceeds of the initial borrowings to repay outstanding revolving borrowings under the Company’s senior credit facility and to provide additional liquidity and funding for the ongoing business needs of the Company and its subsidiaries. As of August 7, 2020, the Company has fully drawn on the remaining availability under the A/R Facility. Additionally, the A/R Facility agreement includes a requirement that the Company maintain a minimum of $40.0 million in liquidity, at all times, to not be considered in default.

On March 16, 2020, the Company and its indirect wholly owned subsidiaries, Merco Holdings, LLC and SourceHOV Tax, LLC entered into a Membership Interest Purchase Agreement with Gainline Source

8

Intermediate Holdings LLC at which time Gainline Source Intermediate Holdings LLC acquired all of the outstanding membership interests of SourceHov Tax for $40.0 million, subject to adjustment as set forth in the purchase agreement of approximately $2.0 million.

On March 23, 2020, in response to the potential impact of the COVID-19 pandemic, the Company implemented a temporary freeze on increases to base salaries and wages unless contractually mandated. Additionally, in connection with the incentive program administered by the Company for hourly, non-exempt employees, a new maximum was put in place to limit the amount of incentives that could be earned in any given two (2) week pay period. Although the Company expects these to be short-term actions, it expects these actions will result in a cash savings to the Company of approximately $23.4 million on an annual basis.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The refundable payroll tax credits and deferment of employer side social security payments provisions of the CARES Act will benefit Company’s liquidity by approximately $29.0 million.

On May 18, 2020, the Company amended the Prior Credit Agreement to, among other things, extend the time for delivery of its audited financial statements for the year ended December 31, 2019 and its financial statements for the quarter ended March 31, 2020. Further, pursuant to the amendment, the borrower under the Credit Agreement is also required to maintain a minimum liquidity of $35.0 million. On May 21, 2020, the Company also amended the A/R Facility to, among other things, extend the time for delivery of its audited financial statements for the year ended December 31, 2019 and its financial statements for the quarter ended March 31, 2020. The Company has satisfied its delivery requirements with respect to its audited financial statements for the year ended December 31, 2019 on June 9, 2020 and its quarterly financial statement for the quarter ended March 31, 2020 on June 29, 2020.

On July 22, 2020 the Company completed the sale of its physical records storage and logistics business for a purchase price of $12.3 million.

Substantial Doubt Alleviated

The Company has a history of negative trends in its financial condition and operating results as well as recent noncompliance with covenants with its respective lenders. However, despite these conditions, the Company believes management’s plans, as described fully above, will provide sufficient liquidity to meet its financial obligations and further, maintain levels of liquidity as specifically required under the Credit Agreement and the A/R Facility. Therefore, management concluded these plans alleviate the substantial doubt that was raised about our ability to continue as a going concern for at least twelve months from the date that the financial statements were issued.

Future Plans and Considerations

Our plans to further enhance liquidity, which were not considered for the purposes of our assessment of whether substantial doubt is alleviated, include the potential sale of certain non-core assets that are not central to the Company’s long-term strategic vision, and any potential action with respect to these operations would be intended to allow the Company to better focus on its core businesses. The Company has retained financial advisors to assist with the sale of select assets. The Company expects to use the potential net proceeds from this initiative for the paydown of debt.

Our plans are subject to inherent risks and uncertainties, which become significantly magnified when the effects of the current pandemic and related financial crisis are included in the assessment. Accordingly, there can be no assurance that our future plans can be effectively implemented and, therefore, that the conditions can be effectively mitigated.

9

Net Loss per Share

Earnings per share (“EPS”) is computed by dividing net loss available to holders of the Company’s common stock, par value $0.0001 per share (“Common Stock”) by the weighted average number of shares of Common Stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock, using the more dilutive of the two-class method or if-converted method in periods of earnings. The two class method is an earnings allocation method that determines earnings per share for Common Stock and participating securities. Diluted EPS excludes all dilutive potential of shares of Common Stock if their effect is anti-dilutive.

As the Company experienced net losses for the periods presented, the impact of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”) was calculated based on the if-converted method. As of June 30, 2020 outstanding shares of the Company’s Series A Preferred Stock, if converted would have resulted in an additional 4,022,415 shares of Common Stock outstanding, but were not included in the computation of diluted loss per share as their effects were anti-dilutive.

The Company was originally incorporated as a special purpose acquisition company under the name Quinpario Acquisition Corp 2 (“Quinpario”), which changed its name to Exela Technologies, Inc. in July 2017. The Company has not included the effect of 35,000,000 warrants sold in the Quinpario Initial Public Offering (“IPO”) or the effect of the aggregate number of shares issuable pursuant to outstanding restricted stock units and options of 5,002,747 and 3,997,787 as of June 30, 2020 and 2019, respectively, in the calculation of diluted loss per share for the three and six months ended June 30, 2020 and 2019 as their effects were anti-dilutive.

Three Months Ended June 30, 

Six Months Ended June 30, 

    

    

2019

    

    

2019

    

2020

    

(Restated)

    

2020

    

(Restated)

Net loss attributable to common stockholders (A)

$

(49,549)

$

(42,485)

$

(60,778)

$

(75,571)

Weighted average common shares outstanding - basic and diluted (B)

147,508,669

145,466,193

147,351,917

145,518,914

Loss Per Share:

Basic and diluted (A/B)

$

(0.34)

$

(0.29)

$

(0.41)

$

(0.52)

The weighted average common shares outstanding - basic and diluted, in the table above, exclude in each case the 4,570,734 shares returned to the Company in the first quarter of 2020 in connection with the Appraisal Action (as defined and described further in Note 8 below, such shares, the “Appraisal Shares”), even though the Appraisal Shares were outstanding as of June 30, 2019.

Sale of Non-Core Assets

On March 16, 2020, the Company and its indirect wholly owned subsidiaries, Merco Holdings, LLC and SourceHOV Tax, LLC entered into a Membership Interest Purchase Agreement with Gainline Source Intermediate Holdings LLC at which time Gainline Source Intermediate Holdings LLC acquired all of the outstanding membership interests of SourceHov Tax, LLC for $40.0 million subject to adjustment as set forth in the purchase agreement. The Company recognized a gain of $35.3 million on the sale of SourceHOV Tax, LLC during the first quarter of 2020, which takes into account approximately $2.0 million downwards adjustments to the purchase price in accordance with the purchase agreement. The gain on sale of SourceHOV Tax, LLC is included in Other expense (income), net in the condensed consolidated statements of operations for the six months ended June 30, 2020.

On July 22, 2020, the Company completed the sale of its physical records storage and logistics business for a purchase price of $12.3 million.

10

Impact of COVID-19

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease ("COVID-19") a “Public Health Emergency of International Concern,” and on March 11, 2020, the World Health Organization characterized the outbreak as a “pandemic”.

The Company is dependent on its workforce to deliver its solutions and services. Developments such as social distancing and stay-at-home orders from various jurisdictions may impact the Company’s ability to deploy its workforce effectively.

Additionally, COVID-19 has spread to most of the countries in the world and throughout the United States, creating a serious impact on customers, workforces, suppliers, disrupting economies and financial markets, and potentially leading to a world-wide economic downturn. While expected to be temporary, prolonged workforce disruptions may negatively impact sales in fiscal year 2020 and the Company’s overall liquidity.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global situation and its impact on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate adverse effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.

2.    New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Effective March 12, 2020, the Company adopted Accounting Standards Update (“ASU”) no. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The adoption had no impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective March 9, 2020, the Company adopted ASU no. 2020-03, Codification Improvements to Financial Instruments. This ASU represents changes to clarify or improve the Codification. The amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications in relation to financial instruments. This guidance was effective immediately upon issuance. The additional elements of the ASU did not have a material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective January 1, 2020, the Company adopted ASU no. 2018-13, Fair Value Measurement (Topic 820); which changes the fair value measurement disclosure requirements of Accounting Standards Codification (“ASC 820”). The amendments in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting. The FASB used the guidance in the Concepts Statement to improve the effectiveness of ASC 820’s disclosure requirements. The objective of the disclosure requirements in this subtopic is to provide users of financial statements with information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. The ASU includes but is not limited to the valuation techniques and inputs that a reporting entity uses to arrive at its measures of fair value, including judgments and assumptions that the entity makes, the uncertainty in the fair value measurements as of the reporting date,

11

and how changes in fair value measurements affect an entity’s performance and cash flows. The adoption had no material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective January 1, 2020, the Company adopted ASU no. 2018-15, Intangibles, Goodwill, and Other - Internal Use Software (Subtopic 350-40): Customer's accounting for implementation costs incurred in a Cloud Computing Arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The adoption had no material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective January 1, 2020, the Company adopted ASU no. 2019-08, Codification Improvements — Share-Based Consideration Payable to a Customer. This ASU clarifies the accounting for share-based payments issued as consideration payable to a customer in accordance with ASC 606. Under the ASU, entities apply the guidance in ASC 718 to measure and classify share-based payments issued to a customer that are not in exchange for a distinct good or service (i.e., share-based sales incentives). Accordingly, entities use a fair-value-based measure to calculate such incentives on the grant date, which is the date on which the grantor (the entity) and the grantee (the customer) reach a mutual understanding of the key terms and conditions of the share-based consideration. The result is reflected as a reduction of revenue in accordance with the guidance in ASC 606 on consideration payable to a customer. After initial recognition, the measurement and classification of the share-based sales incentives continue to be subject to ASC 718 unless (1) the award is subsequently modified when vested and (2) the grantee is no longer a customer. The adoption had no impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. The S-X Rule 3-04 requires the presentation of changes in stockholders’ equity in the form of a reconciliation of the beginning balance to the ending balance for each period for which a statement of income is required to be filed with all significant reconciling items. The Company presented changes in stockholders' equity as separate financial statements for the current and comparative year-to-date interim periods beginning on January 1, 2019. This guidance was effective immediately upon issuance. The additional elements of the ASU did not have a material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective January 1, 2019, the Company adopted ASU no. 2016-02, Leases (ASC 842). This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted this guidance effective January 1, 2019, under the modified retrospective transition method provided by ASU 2018-11 with the following practical expedients below:

Not to record leases with an initial term of 12 months or less on the balance sheet; and
Not to reassess the (1) definition of a lease, (2) lease classification, and (3) initial direct costs for existing leases during transition.

The adoption had a material impact on the Company's unaudited consolidated balance sheets, but did not have a material impact on the Company's unaudited consolidated statements of operations and unaudited consolidated statements of cash flows. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases, while the Company's accounting for finance leases remained substantially unchanged.

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Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU no. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. This ASU along with related additional clarificatory guidance in the ASU No. 2019-05, “Financial Instruments—Credit Losses (Topic 326)” and ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, are effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

In December 2019, the FASB issued ASU no. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by eliminating some exceptions to the general approach in ASC 740, Income Taxes, for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. It also clarifies certain aspects of the existing guidance to promote more consistent application, among other things. The ASU is effective for the Company for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption is permitted. The Company is currently in the early stages of evaluating the impact that adopting this standard will have on the consolidated financial statements.

3.     Significant Accounting Policies

The information presented below supplements the Significant Accounting Policies information presented in our 2019 Form 10-K, including Revenue Recognition for the adoption of ASC 606 (ASU 2014-09: Revenue from Contracts with Customers), which became effective January 1, 2018. See our 2019 Form 10-K for a description of our significant accounting policies in effect prior to the adoption of the new accounting standard.

Revenue Recognition

We account for revenue in accordance with ASC 606, Revenue from Contracts with Customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our material sources of revenue are derived from contracts with customers, primarily relating to the provision of business and transaction processing services within each of our segments. We do not have any significant extended payment terms, as payment is received shortly after goods are delivered or services are provided.

Nature of Services

Our primary performance obligations are to stand ready to provide various forms of business processing services, consisting of a series of distinct services that are substantially the same and have the same pattern of transfer over time, and accordingly are combined into a single performance obligation. Our promise to our customers is typically to perform an unknown or unspecified quantity of tasks and the consideration received is contingent upon the customers’ use (i.e., number of transactions processed, requests fulfilled, etc.); as such, the total transaction price is variable. We allocate the variable fees to the single performance obligation charged to the distinct service period in which we have the contractual right to bill under the contract.

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Disaggregation of Revenues

The following tables disaggregate revenue from contracts by geographic region and by segment for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, 

2019

2020

(Restated)

ITPS

HS