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 March 31, 2019
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001‑36788
EXELA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
47‑1347291 |
(State of or other Jurisdiction
|
(I.R.S. Employer
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|
|
2701 E. Grauwyler Rd.
|
75061 |
(Address of Principal Executive
|
(Zip Code) |
Registrant's Telephone Number, Including Area Code: (844) 935-2832
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class |
Trading Symbol |
Name of Each Exchange on Which Registered |
Common Stock, Par Value $0.0001 per share |
XELA |
The Nasdaq Stock Market LLC |
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 May 8, 2019 the registrant had 150,142,955 shares of Common Stock outstanding.
Exela Technologies, Inc.
Form 10-Q
For the quarterly period ended March 31, 2019
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PART I—FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 |
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Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 |
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Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of March 31, 2019 and December 31, 2018
(in thousands of United States dollars except share and per share amounts)
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March 31, |
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December 31, |
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2019 |
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2018 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
8,262 |
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$ |
25,615 |
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Restricted cash |
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4,998 |
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18,239 |
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Accounts receivable, net of allowance for doubtful accounts of $5,913 and $4,359 respectively |
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278,064 |
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270,812 |
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Inventories, net |
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16,321 |
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|
16,220 |
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Prepaid expenses and other current assets |
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25,330 |
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25,015 |
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Total current assets |
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332,975 |
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355,901 |
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Property, plant and equipment, net of accumulated depreciation of $163,199 and $154,060 respectively |
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129,621 |
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132,986 |
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Operating lease right-of-use asset, net |
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100,727 |
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— |
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Goodwill |
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708,285 |
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708,258 |
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Intangible assets, net |
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397,412 |
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407,021 |
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Deferred income tax assets |
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16,202 |
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|
16,225 |
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Other noncurrent assets |
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17,667 |
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|
19,391 |
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Total assets |
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$ |
1,702,889 |
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$ |
1,639,782 |
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Liabilities and Stockholders' Equity (Deficit) |
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Liabilities |
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Current liabilities |
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Accounts payable |
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$ |
90,924 |
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$ |
99,853 |
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Related party payables |
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6,184 |
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|
7,735 |
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Income tax payable |
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|
4,898 |
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|
1,996 |
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Accrued liabilities |
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63,138 |
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|
66,008 |
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Accrued compensation and benefits |
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|
57,961 |
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54,583 |
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Accrued interest |
|
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23,928 |
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|
49,071 |
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Customer deposits |
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28,410 |
|
|
34,235 |
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Deferred revenue |
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19,966 |
|
|
16,504 |
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Obligation for claim payment |
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46,063 |
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56,002 |
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Current portion of finance lease obligations |
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15,961 |
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17,498 |
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Current portion of operating lease obligations |
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27,368 |
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— |
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Current portion of long-term debt |
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32,821 |
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|
29,237 |
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Total current liabilities |
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417,622 |
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432,722 |
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Long-term debt, net of current maturities |
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1,336,152 |
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1,306,423 |
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Finance lease obligations, net of current portion |
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27,231 |
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26,738 |
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Pension liability |
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25,514 |
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25,269 |
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Deferred income tax liabilities |
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12,439 |
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11,212 |
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Long-term income tax liability |
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3,158 |
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3,024 |
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Operating lease right-of-use liability, net of current portion |
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|
78,290 |
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— |
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Other long-term liabilities |
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6,747 |
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15,400 |
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Total liabilities |
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1,907,153 |
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1,820,788 |
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Commitment and Contingencies (Note 9) |
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Stockholders' equity (deficit) |
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Common stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 152,692,140 shares issued and 150,142,955 outstanding at March 31, 2019 and December 31, 2018 |
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15 |
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15 |
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Preferred stock, par value of $0.0001 per share; 20,000,000 shares authorized; 4,569,233 shares issued and outstanding at March 31, 2019 and December 31, 2018 |
|
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1 |
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1 |
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Additional paid in capital |
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482,018 |
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482,018 |
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Less: common stock held in treasury, at cost; 2,549,185 shares at March 31, 2019 and December 31, 2018 |
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(10,342) |
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(10,342) |
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Equity-based compensation |
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44,529 |
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41,731 |
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Accumulated deficit |
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(707,787) |
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(678,563) |
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Accumulated other comprehensive loss: |
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Foreign currency translation adjustment |
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(3,173) |
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(6,565) |
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Unrealized pension actuarial losses, net of tax |
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(9,525) |
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(9,301) |
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Total accumulated other comprehensive loss |
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(12,698) |
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(15,866) |
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Total stockholders’ deficit |
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(204,264) |
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(181,006) |
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Total liabilities and stockholders’ deficit |
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$ |
1,702,889 |
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$ |
1,639,782 |
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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 Months Ended March 31, 2019 and 2018
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
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Three Months Ended March 31, |
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2019 |
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2018 |
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Revenue |
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$ |
403,765 |
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$ |
393,167 |
Cost of revenue (exclusive of depreciation and amortization) |
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306,882 |
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293,792 |
Selling, general and administrative expenses |
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49,949 |
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45,595 |
Depreciation and amortization |
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28,020 |
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38,019 |
Related party expense |
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|
994 |
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|
1,105 |
Operating income |
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17,920 |
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14,656 |
Other expense (income), net: |
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Interest expense, net |
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38,899 |
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38,017 |
Sundry expense (income), net |
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2,531 |
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(64) |
Other income, net |
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1,677 |
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(3,328) |
Net loss before income taxes |
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(25,187) |
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(19,969) |
Income tax (expense) benefit |
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(4,720) |
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(4,025) |
Net loss |
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$ |
(29,907) |
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$ |
(23,994) |
Cumulative dividends for Series A Preferred Stock |
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(914) |
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(914) |
Net loss attributable to common stockholders |
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$ |
(30,821) |
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$ |
(24,908) |
Loss per share: |
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Basic and diluted |
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$ |
(0.21) |
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$ |
(0.16) |
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 Months Ended March 31, 2019 and 2018
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
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Three Months Ended March 31, |
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2019 |
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2018 |
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Net Loss |
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$ |
(29,907) |
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$ |
(23,994) |
Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustments |
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3,392 |
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(268) |
Unrealized pension actuarial gains (losses), net of tax |
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(224) |
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|
(403) |
Total other comprehensive loss, net of tax |
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$ |
(26,739) |
|
$ |
(24,665) |
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 Months Ended March 31, 2019 and 2018
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
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Accumulated Other
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Unrealized |
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Foreign |
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Pension |
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Currency |
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Actuarial |
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Total |
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Common Stock |
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Preferred Stock |
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Treasury Stock |
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Additional |
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Equity-Based |
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Translation |
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Losses, |
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Accumulated |
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Stockholders' |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
|
Amount |
|
Paid in Capital |
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Compensation |
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Adjustment |
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net of tax |
|
Deficit |
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Deficit |
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Balances at January 1, 2018 |
|
150,529,151 |
|
$ |
15 |
|
6,194,233 |
|
$ |
1 |
|
49,300 |
|
$ |
(249) |
|
$ |
482,018 |
|
$ |
34,085 |
|
$ |
(194) |
|
$ |
(11,054) |
|
$ |
(514,628) |
|
$ |
(10,006) |
Implementation of ASU 2014-09 (Note 2) |
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(1,419) |
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|
(1,419) |
Net loss January 1 to March 31, 2018 |
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— |
|
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— |
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— |
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— |
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— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(23,994) |
|
|
(23,994) |
Equity-based compensation |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
959 |
|
|
— |
|
|
— |
|
|
— |
|
|
959 |
Foreign currency translation adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(268) |
|
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— |
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|
— |
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(268) |
Net realized pension actuarial gains, net of tax |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
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— |
|
|
— |
|
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— |
|
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(403) |
|
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— |
|
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(403) |
Preferred shares converted to common |
|
1,986,767 |
|
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— |
|
(1,625,000) |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
|
|
— |
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— |
Balances at March 31, 2018 |
|
152,515,918 |
|
$ |
15 |
|
4,569,233 |
|
|
1 |
|
49,300 |
|
$ |
(249) |
|
$ |
482,018 |
|
$ |
35,044 |
|
$ |
(462) |
|
$ |
(11,457) |
|
$ |
(540,041) |
|
$ |
(35,131) |
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Accumulated Other
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Unrealized |
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Foreign |
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Pension |
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Currency |
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Actuarial |
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Total |
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Common Stock |
|
Preferred Stock |
|
Treasury Stock |
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Additional |
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Equity-Based |
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Translation |
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Losses, |
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Accumulated |
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Stockholders' |
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Shares |
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Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Paid in Capital |
|
Compensation |
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Adjustment |
|
net of tax |
|
Deficit |
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Deficit |
|||||||||
Balances at January 1, 2019 |
|
150,142,955 |
|
$ |
15 |
|
4,569,233 |
|
$ |
1 |
|
2,549,185 |
|
$ |
(10,342) |
|
$ |
482,018 |
|
$ |
41,731 |
|
$ |
(6,565) |
|
$ |
(9,301) |
|
$ |
(678,563) |
|
$ |
(181,006) |
Implementation of ASU 2016-02 (Note 4) |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
683 |
|
|
683 |
Net loss January 1 to March 31, 2019 |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(29,907) |
|
|
(29,907) |
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 |
|
150,142,955 |
|
$ |
15 |
|
4,569,233 |
|
$ |
1 |
|
2,549,185 |
|
$ |
(10,342) |
|
$ |
482,018 |
|
$ |
44,529 |
|
$ |
(3,173) |
|
$ |
(9,525) |
|
$ |
(707,787) |
|
$ |
(204,264) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Exela Technologies, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2019 and 2018
(in thousands of United States dollars except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
||||
|
|
2019 |
|
2018 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
|
Net loss |
|
$ |
(29,907) |
|
$ |
(23,994) |
|
Adjustments to reconcile net loss |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
28,020 |
|
|
38,019 |
|
Original issue discount and debt issuance cost amortization |
|
|
2,852 |
|
|
2,595 |
|
Provision for doubtful accounts |
|
|
800 |
|
|
481 |
|
Deferred income tax provision |
|
|
1,076 |
|
|
835 |
|
Share-based compensation expense |
|
|
2,798 |
|
|
959 |
|
Foreign currency remeasurement |
|
|
35 |
|
|
(323) |
|
Loss on sale of assets |
|
|
9 |
|
|
253 |
|
Fair value adjustment for interest rate swap |
|
|
1,677 |
|
|
(3,328) |
|
Change in operating assets and liabilities, net of effect from acquisitions |
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,742) |
|
|
(10,876) |
|
Prepaid expenses and other assets |
|
|
(632) |
|
|
(5,567) |
|
Accounts payable and accrued liabilities |
|
|
(33,574) |
|
|
(18,864) |
|
Related party payables |
|
|
(1,551) |
|
|
(273) |
|
Net cash used in operating activities |
|
|
(37,139) |
|
|
(20,083) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(5,572) |
|
|
(5,957) |
|
Additions to internally developed software |
|
|
(1,879) |
|
|
(1,092) |
|
Additions to outsourcing contract costs |
|
|
(5,561) |
|
|
(1,596) |
|
Proceeds from sale of assets |
|
|
7 |
|
|
2 |
|
Net cash used in investing activities |
|
|
(13,005) |
|
|
(8,643) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
Repurchases of common stock |
|
|
(2,872) |
|
|
— |
|
Proceeds from financing obligation |
|
|
566 |
|
|
1,863 |
|
Cash paid for equity issue costs |
|
|
— |
|
|
(7,500) |
|
Net borrowings under factoring agreement |
|
|
1,118 |
|
|
— |
|
Borrowings from revolver and swing-line loan |
|
|
51,000 |
|
|
25,000 |
|
Repayments from revolver and swing-line loan |
|
|
(21,000) |
|
|
(25,000) |
|
Principal payments on finance lease obligations |
|
|
(5,077) |
|
|
(4,803) |
|
Principal payments on long-term obligations |
|
|
(4,153) |
|
|
(2,947) |
|
Net cash provided by (used in) financing activities |
|
|
19,582 |
|
|
(13,387) |
|
Effect of exchange rates on cash |
|
|
(32) |
|
|
55 |
|
Net decrease in cash and cash equivalents |
|
|
(30,594) |
|
|
(42,058) |
|
Cash, restricted cash, and cash equivalents |
|
|
|
|
|
|
|
Beginning of period |
|
|
43,854 |
|
|
81,489 |
|
End of period |
|
$ |
13,260 |
|
$ |
39,431 |
|
|
|
|
|
|
|
|
|
Supplemental cash flow data: |
|
|
|
|
|
|
|
Income tax payments, net of refunds received |
|
$ |
1,356 |
|
$ |
1,053 |
|
Interest paid |
|
|
60,573 |
|
|
66,192 |
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
Assets acquired through right-of-use arrangements |
|
|
4,097 |
|
|
4,432 |
|
Accrued capital expenditures |
|
|
809 |
|
|
1,101 |
|
Note: Amounts may not foot due to rounding.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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, 2018 included in the Exela Technologies, Inc. (the "Company," "Exela," "we," "our" or "us") annual report on Form 10-K for such period (the “2018 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.
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. 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. Diluted EPS excludes all dilutive potential of shares of Common Stock if their effect is anti-dilutive.
For the three months ended March 31, 2019 outstanding shares of the Series A Preferred Stock, if converted would have resulted in an additional 5,586,344 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 July 12, 2017 as a special purpose acquisition company under the name Quinpario Acquisition Corp 2 (“Quinpario”). The Company has not included the effect of 35,000,000 warrants sold in the Quinpario Initial Public Offering (“IPO”) in the calculation of net income (loss) per share. Warrants are considered anti-dilutive and excluded when the exercise price exceeds the average market value of the Company’s Common Stock price during the applicable period.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
||||
|
|
2019 |
|
2018 |
||
Net loss attributable to common stockholders (A) |
|
$ |
(30,821) |
|
$ |
(24,908) |
Weighted average common shares outstanding - basic and diluted (B) |
|
|
150,142,955 |
|
|
152,140,117 |
Loss Per Share: |
|
|
|
|
|
|
Basic and diluted (A/B) |
|
$ |
(0.21) |
|
$ |
(0.16) |
6
2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, the Company adopted Accounting Standards Update (“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 the leases with an initial term of 12 months 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 income statements 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. See Note 4 for relevant disclosures.
Effective January 1, 2019 the Company adopted ASU no. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this ASU addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this ASU addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. The adoption had no impact on the Company's financial position, results of operations, and cash flows for the quarter ended March 31, 2019.
Effective January 1, 2019 the Company adopted ASU no. 2017-12, Derivatives and Hedging (Topic 815); Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align the risk management activities and financial reporting for these hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The adoption had no impact on the Company's financial position, results of operations, and cash flows for the quarter ended March 31, 2019.
Effective January 1, 2019 the Company adopted ASU no. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . The amendments in this ASU address a narrow-scope financial reporting issue related to the tax effects that may become “stranded” in accumulated other comprehensive income (“AOCI”) as a result of the Tax Cuts and Jobs Act (“TCJA”). A n entity may elect to reclassify the income tax effects of the TCJA on items within AOCI to retained earnings. The adoption had no impact on the Company's financial position, results of operations, and cash flows for the quarter ended March 31, 2019.
Effective January 1, 2019 the Company adopted ASU no. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting to amend the accounting for share-based payment awards issued to nonemployees. Under the revised guidance, the accounting for awards issued to nonemployees will be similar to the model for employee awards, except the ASU allows an entity to elect on an award-by-award basis to use
7
the contractual term as the expected term assumption in the option pricing model, and the cost of the grant is recognized in the same period(s) and in the same manner as if the grantor had paid cash. The adoption had no impact on the Company's financial position, results of operations, and cash flows for the quarter ended March 31, 2019.
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. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for fiscal years beginning after December 15, 2019, 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 August 2018, the FASB issued ASU no. 2018-13, Fair Value Measurement (Topic 82 0); which changes the fair value measurement disclosure requirements of 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, and how changes in fair value measurements affect an entity’s performance and cash flows. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU.
In August 2018, the FASB issued 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 guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. 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 2018 Form 10-K, including Revenue Recognition for the adoption of ASC 606, which became effective January 1, 2018. See our 2018 Form 10-K for a description of our significant accounting policies in effect prior to the adoption of the new accounting standard.
8
Revenue Recognition
We account for revenue in accordance with ASC 606. 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 related 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.
Disaggregation of Revenues
The following tables disaggregate revenue from contracts by geographic region and by segment for the three months ended March 31, 2019 and March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
||||||||||||||||
|
|
2019 |
|
2018 |
||||||||||||||
|
|
|
ITPS |
|
|
HS |
|
|
LLPS |
|
|
ITPS |
|
|
HS |
|
|
LLPS |
United States |
|
$ |
250,908 |
|
$ |
61,343 |
|
$ |
17,842 |
|
$ |
269,939 |
|
$ |
58,632 |
|
$ |
22,598 |
Europe |
|
|
66,678 |
|
|
— |
|
|
— |
|
|
35,283 |
|
|
— |
|
|
— |
Other |
|
|
6,994 |
|
|
— |
|
|
— |
|
|
6,715 |
|
|
— |
|
|
— |
Total |
|
$ |
324,580 |
|
$ |
61,343 |
|
$ |
17,842 |
|
$ |
311,937 |
|
$ |
58,632 |
|
$ |
22,598 |
Contract Balances
The following table presents contract assets and contract liabilities recognized at March 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
|
|
2019 |
|
2018 |
||
Accounts receivable, net |
|
$ |
278,064 |
|
$ |
270,812 |
Deferred revenues |
|
|
20,322 |
|
|
16,940 |
Costs to obtain and fulfill a contract |
|
|
21,964 |
|
|
18,624 |
Customer deposits |
|
|
28,410 |
|
|
34,235 |
Accounts receivable, net includes $43.1 million and $39.5 million as of March 31, 2019 and December 31, 2018, respectively, representing amounts not billed to customers. We have accrued the unbilled receivables for work performed in accordance with the terms of contracts with customers.
Deferred revenues relate to payments received in advance of performance under a contract. A significant portion of this balance relates to maintenance contracts or other service contracts where we received payments for upfront conversions or implementation activities which do not transfer a service to the customer but rather are used in fulfilling the related performance obligations that transfer over time. The advance consideration received from customers is deferred over the
9
contract term. We recognized revenue of $6.4 million during the three months ended March 31, 2019 that had been deferred as of December 31, 2018.
Costs incurred to obtain and fulfill contracts are deferred and expensed on a straight-line basis over the estimated benefit period. We recognized $2.2 million of amortization for these costs in the first three months of 2019 within depreciation and amortization expense. These costs represent incremental external costs or certain specific internal costs that are directly related to the contract acquisition or transition activities and can be separated into two principal categories: contract commissions and transition/set-up costs. Examples of such capitalized costs include hourly labor and related fringe benefits and travel costs. Applying the practical expedient in ASC 340-40-25-4, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in Selling, general and administrative expenses. The effect of applying this practical expedient was not material.
Customer deposits consist primarily of amounts received from customers in advance for postage. The majority of the amounts recorded as of December 31, 2018 were used to pay for postage with the corresponding postage revenue being recognized during the three months ended March 31, 2019.
Performance Obligations
At the inception of each contract, we assess the goods and services promised in our contracts and identify each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts. For the majority of our business and transaction processing service contracts, revenues are recognized as services are provided based on an appropriate input or output method, typically based on the related labor or transactional volumes.
Certain of our contracts have multiple performance obligations, including contracts that combine software implementation services with post-implementation customer support. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we estimate our expected costs of satisfying a performance obligation and add an appropriate margin for that distinct good or service. We also use the adjusted market approach whereby we estimate the price that customers in the market would be willing to pay. In assessing whether to allocate variable consideration to a specific part of the contract, we consider the nature of the variable payment and whether it relates specifically to its efforts to satisfy a specific part of the contract. Certain of our software implementation performance obligations are satisfied at a point in time, typically when customer acceptance is obtained.
When evaluating the transaction price, we analyze, on a contract-by-contract basis, all applicable variable consideration. The nature of our contracts give rise to variable consideration, including volume discounts, contract penalties, and other similar items that generally decrease the transaction price. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We do not anticipate significant changes to our estimates of variable consideration.
We include reimbursements from customers, such as postage costs, in revenue, while the related costs are included in cost of revenue.
Transaction Price Allocated to the Remaining Performance Obligations
In accordance with optional exemptions available under ASC 606, we did not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less, and (2) contracts for which variable consideration relates entirely to an unsatisfied performance obligation, which comprise the majority of our contracts. We have certain non-cancellable contracts where we receive a fixed monthly fee in exchange for a series of
10
distinct services that are substantially the same and have the same pattern of transfer over time, with the corresponding remaining performance obligations as of March 31, 2019 in each of the future periods below:
|
|
|
|
Estimated Remaining Fixed Consideration for Unsatisfied
|
|||
|
|
|
|
Remainder of 2019 |
|
$ |
29,108 |
2020 |
|
|
23,170 |
2021 |
|
|
14,412 |
2022 |
|
|
5,389 |
2023 |
|
|
1,785 |
2024 and thereafter |
|
|
820 |
Total |
|
$ |
74,684 |
4. Leases
The following table summarizes the impact of the changes made to the January 1, 2019 consolidated balance sheet for the adoption of the new accounting standard pertaining to leases. The prior periods have not been restated and have been reported under the accounting standard in effect for those periods.
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Impact of |
|
Balance at |
|||
|
|
December 31, |
|
Lease Standard |
|
January 1, |
|||
|
|
2018 |
|
|