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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, 2022

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

6.00% Series B Cumulative Convertible
Perpetual Preferred Stock, par value $0.0001 per share

Tandem Preferred Stock, par value of $0.0001 per share

XELAP

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 5, 2022, the registrant had 64,967,633 shares of Common Stock outstanding.

Exela Technologies, Inc.

Form 10-Q

For the quarterly period ended June 30, 2022

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

1

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021

2

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2022 and 2021

3

Condensed Consolidated Statements of Stockholders’ Deficit for the three and six months ended June 30, 2022 and 2021

4

Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2022 and 2021

6

Notes to the Condensed Consolidated Financial Statements

7

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

38

Item 3. Quantitative and Qualitative Disclosures about Market Risk

56

Item 4. Internal Controls and Procedures

57

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

58

Item 1A. Risk Factors

59

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

60

Item 3. Defaults Upon Senior Securities

60

Item 4. Mine Safety Disclosures

60

Item 5. Other Information

60

Item 6. Exhibits

62

Exela Technologies, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

As of June 30, 2022 and December 31, 2021

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

June 30, 

December 31, 

2022

    

2021

    

(Unaudited)

    

(Audited)

Assets

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

50,261

$

20,775

Restricted cash

 

42,916

 

27,285

Accounts receivable, net of allowance for doubtful accounts of $6,067 and $6,049, respectively

99,350

184,102

Related party receivables and prepaid expenses

715

715

Inventories, net

16,225

15,215

Prepaid expenses and other current assets

29,785

31,799

Total current assets

 

239,252

 

279,891

Property, plant and equipment, net of accumulated depreciation of $200,064 and $196,683, respectively

70,486

73,449

Operating lease right-of-use assets, net

49,124

53,937

Goodwill

358,172

358,323

Intangible assets, net

222,634

244,539

Deferred income tax assets

1,629

2,109

Other noncurrent assets

 

26,273

 

24,775

Total assets

$

967,570

$

1,037,023

Liabilities and Stockholders' Equity (Deficit)

 

  

 

  

Liabilities

 

  

 

  

Current liabilities

Accounts payable

$

70,093

$

61,744

Related party payables

1,460

1,484

Income tax payable

2,273

3,551

Accrued liabilities

96,341

113,519

Accrued compensation and benefits

54,618

60,860

Accrued interest

64,658

10,075

Customer deposits

20,070

17,707

Deferred revenue

15,448

16,617

Obligation for claim payment

60,001

46,902

Current portion of finance lease liabilities

5,270

6,683

Current portion of operating lease liabilities

14,355

15,923

Current portion of long-term debts

 

124,921

 

144,828

Total current liabilities

 

529,508

 

499,893

Long-term debt, net of current maturities

975,457

1,104,399

Finance lease liabilities, net of current portion

8,374

9,156

Pension liabilities, net

25,463

28,383

Deferred income tax liabilities

12,969

11,594

Long-term income tax liabilities

2,815

3,201

Operating lease liabilities, net of current portion

37,111

41,170

Other long-term liabilities

4,941

5,999

Total liabilities

1,596,638

1,703,795

Commitments and Contingencies (Note 8)

 

  

 

  

Stockholders' equity (deficit)

 

  

 

  

Common Stock, par value of $0.0001 per share; 1,600,000,000 shares authorized; 40,381,860 shares issued and 40,259,274 shares outstanding at June 30, 2022 and 13,382,333 shares issued and 13,259,748 shares outstanding at December 31, 2021

 

91

 

37

Preferred stock, $0.0001 par value per share, 20,000,000 shares authorized at June 30, 2022 and December 31, 2021, respectively

Series A Preferred Stock, 2,778,111 shares issued and outstanding at June 30, 2022 and December 31, 2021

1

1

Series B Preferred Stock, 3,029,900 shares issued and outstanding at June 30, 2022 and 0 shares issued and outstanding at December 31, 2021

Additional paid in capital

 

1,008,300

 

838,853

Less: Common Stock held in treasury, at cost; 122,585 shares at June 30, 2022 and December 31, 2021

(10,949)

(10,949)

Equity-based compensation

56,761

56,123

Accumulated deficit

 

(1,668,583)

 

(1,532,428)

Accumulated other comprehensive loss:

Foreign currency translation adjustment

(4,853)

(7,463)

Unrealized pension actuarial losses, net of tax

(9,836)

(10,946)

Total accumulated other comprehensive loss

(14,689)

(18,409)

Total stockholders’ deficit

 

(629,068)

 

(666,772)

Total liabilities and stockholders’ deficit

$

967,570

$

1,037,023

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, 2022 and 2021

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

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Revenue

$

266,770

$

293,009

$

546,168

$

593,065

Cost of revenue (exclusive of depreciation and amortization)

 

217,277

 

209,080

 

440,781

 

441,667

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

50,195

36,390

93,235

78,275

Depreciation and amortization

17,993

19,420

36,205

39,019

Related party expense

2,186

2,748

4,173

4,455

Operating profit (loss)

(20,881)

25,371

(28,226)

29,649

Other expense (income), net:

Interest expense, net

42,271

42,867

82,031

85,998

Debt modification and extinguishment costs (gain), net

8,117

9,001

Sundry income, net

(741)

(787)

(434)

(574)

Other expense, net

7,375

651

13,534

803

Net loss before income taxes

(77,903)

(17,360)

(132,358)

(56,578)

Income tax expense

(1,296)

(2,007)

(3,797)

(1,989)

Net loss

$

(79,199)

$

(19,367)

$

(136,155)

$

(58,567)

Dividend equivalent on Series A Preferred Stock related to beneficial conversion feature

Cumulative dividends for Series A Preferred Stock

(876)

(798)

(1,740)

98

Cumulative dividends for Series B Preferred Stock

(1,317)

(1,392)

Net loss attributable to common stockholders

$

(81,392)

$

(20,165)

$

(139,287)

$

(58,469)

Loss per share:

Basic and diluted

$

(3.22)

$

(6.56)

$

(6.55)

$

(20.85)

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, 2022 and 2021

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

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Net loss

$

(79,199)

$

(19,367)

$

(136,155)

$

(58,567)

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments

 

1,133

 

(1,444)

 

2,610

 

(1,344)

Unrealized pension actuarial gains (losses), net of tax

 

802

 

(85)

 

1,110

 

(242)

Total other comprehensive loss, net of tax

$

(77,264)

$

(20,896)

$

(132,435)

$

(60,153)

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, 2022 and 2021

(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

Series A Preferred Stock

Series B Preferred Stock

Treasury Stock

Additional

Equity-Based

Translation

Losses,

Accumulated

Stockholders'

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Paid in Capital

  

Compensation

  

Adjustment

  

net of tax

  

Deficit

  

Deficit

Balances at January 1, 2021

2,462,111

$

15

3,290,050

$

1

$

122,585

$

(10,949)

$

446,739

$

52,183

$

(7,419)

$

(17,064)

$

(1,390,038)

$

(926,532)

Net loss January 1 to March 31, 2021

(39,200)

(39,200)

Equity-based compensation

387

387

Foreign currency translation adjustment

100

100

Net realized pension actuarial gains, net of tax

(157)

(157)

Series A Preferred Stock converted to Common Stock

11,171

(510,681)

Payment for fractional shares on Reverse Stock Split

(272)

(14)

(14)

Issuance of Common Stock

486,591

1

25,079

25,080

Balances at March 31, 2021

2,959,601

16

2,779,369

1

122,585

(10,949)

471,804

52,570

(7,319)

(17,221)

(1,429,238)

(940,336)

Net loss April 1, 2021 to June 30, 2021

(19,367)

(19,367)

Equity-based compensation

593

593

Foreign currency translation adjustment

(1,444)

(1,444)

Net realized pension actuarial gains, net of tax

(85)

(85)

Series A Preferred Stock converted to Common Stock

28

(1,258)

Issuance of Common Stock from at the market offerings, net of offering costs

560,835

1

17,372

17,373

Balances at June 30, 2021

3,520,464

$

17

2,778,111

$

1

$

122,585

$

(10,949)

$

489,176

$

53,163

$

(8,763)

$

(17,306)

$

(1,448,605)

$

(943,266)

4

Accumulated Other
Comprehensive Loss

Unrealized

Foreign

Pension

Currency

Actuarial

Total

Common Stock

Series A Preferred Stock

Series B Preferred Stock

Treasury Stock

Additional

Equity-Based

Translation

Losses,

Accumulated

Stockholders'

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Paid in Capital

  

Compensation

  

Adjustment

  

net of tax

  

Deficit

  

Deficit

Balances at January 1, 2022

13,259,748

$

37

2,778,111

$

1

$

122,585

$

(10,949)

$

838,853

$

56,123

$

(7,463)

$

(10,946)

$

(1,532,428)

$

(666,772)

Net loss January 1 to March 31, 2022

(56,956)

(56,956)

Equity-based compensation

302

302

Foreign currency translation adjustment

1,477

1,477

Net realized pension actuarial gains, net of tax

308

308

Common Stock exchanged for Series B Preferred Stock

(900,328)

(2)

900,328

2

Issuance of Common Stock from at the market offerings, net of offering costs

11,814,075

24

114,509

114,533

Withholding of employee taxes on vested RSUs

(190)

(190)

Common Stock issued for vested RSUs

54,360

Balances at March 31, 2022

24,227,855

$

59

2,778,111

$

1

900,328

$

122,585

$

(10,949)

$

953,364

$

56,235

$

(5,986)

$

(10,638)

$

(1,589,384)

$

(607,298)

Net loss April 1 to June 30, 2022

(79,199)

(79,199)

Equity-based compensation

528

528

Foreign currency translation adjustment

1,133

1,133

Net realized pension actuarial gains, net of tax

802

802

Dividend declared and paid on Series B Preferred Stock ($0.46 per share)

(1,396)

(1,396)

Common Stock exchanged for Series B Preferred Stock

(2,129,572)

(4)

2,129,572

4

Issuance of Common Stock from at the market offerings, net of offering costs

18,189,580

36

56,328

56,364

Withholding of employee taxes on vested RSUs

(2)

(2)

Common Stock issued for vested RSUs

2,494

Agreed cancellation of Common Stock issued for Director's vested RSUs

(31,082)

Balances at June 30, 2022

40,259,275

$

91

2,778,111

$

1

3,029,900

$

122,585

$

(10,949)

$

1,008,300

$

56,761

$

(4,853)

$

(9,836)

$

(1,668,583)

$

(629,068)

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, 2022 and 2021

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

(Unaudited)

Six Months Ended June 30, 

    

2022

    

2021

Cash flows from operating activities

Net loss

$

(136,155)

$

(58,567)

Adjustments to reconcile net loss

Depreciation and amortization

36,205

39,019

Original issue discount and debt issuance cost amortization

5,804

7,829

Debt modification and extinguishment costs (gain), net

3,533

Provision for doubtful accounts

285

1,781

Deferred income tax provision

1,383

(41)

Share-based compensation expense

836

980

Unrealized foreign currency losses

 

(989)

 

(485)

Loss (Gain) on sale of assets

508

(238)

Fair value adjustment for interest rate swap

(125)

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

 

 

Accounts receivable

 

80,674

 

2,004

Prepaid expenses and other assets

(10,870)

(3,447)

Accounts payable and accrued liabilities

45,148

(34,785)

Related party payables

(23)

391

Additions to outsource contract costs

(199)

(304)

Net cash provided by (used in) operating activities

 

26,140

 

(45,988)

Cash flows from investing activities

 

  

 

  

Purchase of property, plant and equipment

(10,689)

(3,498)

Additions to patents

(15)

Additions to internally developed software

(1,736)

(820)

Proceeds from sale of assets

194

4,252

Net cash used in investing activities

 

(12,246)

 

(66)

Cash flows from financing activities

 

  

 

  

Proceeds from issuance of Common Stock from private placement

25,065

Proceeds from issuance of Common Stock from at the market offerings

177,388

18,118

Dividend paid on Series B Preferred Stock

(1,396)

Cash paid for equity issuance costs from at the market offerings

(6,493)

(745)

Borrowings under factoring arrangement and Securitization Facility

69,143

66,098

Principal repayment on borrowings under factoring arrangement and Securitization Facility

(160,684)

(68,800)

Cash paid for withholding taxes on vested RSUs

(195)

Lease terminations

(15)

(119)

Cash paid for debt issuance costs

(7,125)

Principal payments on finance lease obligations

(2,884)

(5,600)

Borrowings from senior secured revolving facility and BRCC revolver

12,500

3,000

Repayments on senior secured revolving facility

(49,477)

(55)

Proceeds from issuance of 2026 Notes

56,583

Borrowings from other loans

5,491

4,776

Repayment of BRCC term loan

(46,202)

Principal repayments on senior secured term loans and other loans

 

(15,007)

 

(18,076)

Net cash provided by financing activities

 

31,627

 

23,662

Effect of exchange rates on cash

(404)

(53)

Net increase (decrease) in cash and cash equivalents

 

45,117

 

(22,445)

Cash, restricted cash, and cash equivalents

 

 

Beginning of period

48,060

70,309

End of period

$

93,177

$

47,864

Supplemental cash flow data:

 

 

Income tax payments, net of refunds received

$

4,453

$

1,994

Interest paid

19,103

75,136

Noncash investing and financing activities:

Assets acquired through right-of-use arrangements

231

2,159

Leasehold improvements funded by lessor

125

Accrued capital expenditures

1,400

1,505

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, 2021 included in the Exela Technologies, Inc. (the "Company," "Exela," "we," "our" or "us") annual report on Form 10-K for such period (the “2021 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.

On July 25, 2022, we effected a one-for-twenty reverse split (the “Reverse Stock Split”) of our issued and outstanding shares of common stock, par value $0.0001 per share (“Common Stock”). As a result of the Reverse Stock Split every twenty (20) shares of Common Stock issued and outstanding were automatically combined into one (1) share of issued and outstanding Common Stock, without any change in the par value per share. All information related to Common Stock, stock options, restricted stock units, warrants and earnings per share have been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented.

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 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.

In performing this evaluation, we concluded that under the standards of ASC 205-40 the following conditions raised substantial doubt about our ability to continue as a going concern: a history of net losses, net operating cash outflows, working capital deficits and significant cash payments for interest on our long-term debt. The Company also has cash obligations related to the remaining payments for the guarantee in the form of a true-up mechanism related to the Exchange Notes issued in connection with the Revolver Exchange (described in Note 5) and 2023 Notes and senior secured term loan both of which mature in July 2023. Management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s obligations due before August 10, 2023. As required under ASC 205-40, management’s evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company, such as access to equity financing (despite the Company’s track record in raising nearly $595.0 million of such funds).

7

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

completed the Revolver Exchange (see Note 5);
amended the BRCC Facility to provide up to $51.0 million of additional liquidity through a revolving credit facility which becomes available as the Company pays down the term portion of the facility (which the Company expects to do over the next twelve months);
executed a $150.0 million financing with PNC Bank to replace the existing securitization facility that generated annual interest rate savings of approximately $6.0 million;
raised proceeds of $221.9 million from the sale of equity and debt during the six months ended June 30, 2022; and
paid off its remaining obligations relating to the settlement of the Appraisal Action.

Despite these actions, the Company will need to take further action to raise additional funds in the capital markets. In order to access the capital markets, the Company has filed shelf-registration statements on Form S-3 allowing the Company to raise an additional $750.0 million: a $500.0 million universal shelf registration statement filed in March 2022 providing for the sale of common stock, preferred stock, warrants, debt securities and/or units (of which $250.0 million remains available) and a $500.0 million shelf registration statement filed in October 2021 providing for the sale of preferred stock and debt securities. Based on our experience with the at-the-market programs and our knowledge of the Company and the financial market, we believe that we will be able to raise additional funds from the sale of equity and debt in the future. However, the Company’s ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, the Company’s performance and investor sentiment with respect to the Company and its industry and considering these factors are outside of the Company’s control, substantial doubt about the Company’s ability to continue as a going concern exists under the standards of ASC 205-40. The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

Net Loss per Share

Earnings per share (“EPS”) is computed by dividing net loss attributable to common stockholders by the weighted average number of shares 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 and the if-converted method in periods of earnings. The two class method is an earnings allocation method that determines earnings per share (when there are earnings) for Common Stock and participating securities. The if-converted method assumes all convertible securities are converted into Common Stock. Diluted EPS excludes all dilutive potential 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 Perpetual Convertible Preferred Stock (“Series A Preferred Stock”) and Series B Cumulative Convertible Perpetual Preferred Stock (the “Series B Preferred Stock”), was calculated using the if-converted method. As of June 30, 2022, the outstanding shares of the Company’s Series A Preferred Stock and Series B Preferred Stock, if converted would have resulted in an additional 69,518 shares and 3,029,900 shares of Common Stock outstanding, respectively, however, they were not included in the computation of diluted loss per share as their effects were anti-dilutive (i.e., reduces the net loss per share).

Similarly, the Company also did not include the effect of 35,000,000 warrants sold in the Company’s Initial Public Offering (“IPO”), the effect of 9,731,819 warrants sold in a private placement of securities on March 18, 2021 or the effect of the aggregate number of shares issuable pursuant to outstanding restricted stock units, performance units

8

and options of 497,350 and 110,125 as of June 30, 2022 and 2021, respectively, in the calculation of diluted loss per share for the three and six months ended June 30, 2022 and 2021, because their effects were anti-dilutive.

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Net loss attributable to common stockholders (A)

$

(81,392)

$

(20,165)

$

(139,287)

$

(58,469)

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

25,288,449

3,073,701

21,259,929

2,804,508

Loss Per Share:

Basic and diluted (A/B)

$

(3.22)

$

(6.56)

$

(6.55)

$

(20.85)

Impact of COVID-19

The COVID-19 pandemic continues to persist throughout the world including the U.S., India, Canada, Europe and other locations where we operate. To date, the COVID-19 pandemic has negatively impacted the global economy, created significant financial market volatility, disrupted global supply chains, and resulted in a significant number of deaths and infections worldwide.

The safety and well-being of our associates, employees and our ability to fulfill our service commitments are our highest priorities. After addressing the initial surge of the COVID-19 pandemic, we are now focused on running our business effectively in the new work from home paradigm while preparing for a more flexible workplace model in the future. Accordingly, the Company has taken several measures and expects to take further actions designed to protect the health of our employees and to minimize our operational disruption and resulting provision of services to our customers from the COVID-19 pandemic, including adopting masking, social distancing and cleaning measures in our production facilities. We are compliant with applicable federal, state and local COVID-19 rules, restrictions, orders and guidance, and are promoting vaccination among our associates.

In fiscal year 2022 to date, we continue to see impacts of global supply chain challenges, availability of staff at some of our key operating centers and pending customers’ decision to resume work from office. However, all of our production-related facilities remain operational and are continuing to provide ongoing services to our customers. We continue to engage with our customers to assist with their service demands, including our their needs for any supplemental operational services and/or changes to existing service requirements in response to the COVID-19 pandemic.

Notwithstanding the foregoing, we are unable to precisely predict the impact that COVID-19 will have in the future due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers, and other factors identified in Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K. Given these uncertainties, the global pandemic could disrupt the business of certain of our customers, decrease our their’ demand for our services, impact our business operations and our ability to execute on our associated business strategies and initiatives, and adversely impact our consolidated results of operations and/or our financial condition in the future. We will continue to closely monitor and evaluate the nature and extent of the impact of the global pandemic to our business, consolidated results of operations, and financial condition.

Network Outage

In late June 2022, the Company experienced a network security incident impacting certain of the Company’s operational and information technology systems. The Company immediately took steps to isolate the impact and prevent additional systems from being affected, including taking large parts of its network offline as a precaution and thereby disrupting some access to our applications and services by our employees and customers. Promptly upon our detection of this incident, we initiated response and containment protocols and our security teams, supplemented by leading cyber defense firms, worked to remediate this incident. We notified law enforcement, contacted our customers to apprise them of the situation and will provide any notices that may be required by applicable law.

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We undertook extensive efforts to identify, contain and recover from this incident quickly and securely. We systematically brought our information systems back online in a controlled, phased approach. Our teams worked to maintain our business operations and minimize the impact on our customers, operating partners, and employees. The Company’s systems recovery efforts are substantially complete, and the Company’s operations are fully functional, however, the incident did result in some loss of revenue in the end of the second quarter as well as certain incremental costs, some of which is expected to continue.

We maintain a variety of insurance policies, including cyber insurance and business interruption insurance that may partially off-set the costs related to this incident.

2.    New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Effective January 1, 2022, the Company adopted Accounting Standards Update (“ASU”) no. 2021-05, Leases (Topic 842): Lessors — Certain Leases with Variable Lease Payments. The ASU requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease on the commencement date of the lease if specified criteria are met. The adoption had no material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective January 1, 2022, the Company adopted ASU no. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force). The ASU requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the ASU, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The adoption had no material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Effective January 1, 2022, the Company adopted ASU no. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU eliminates two models in ASC 470-20 for convertible instruments that require separate accounting for embedded conversion features namely cash conversion model and beneficial conversion feature model. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares. The adoption had no material impact on the Company's consolidated results of operations, cash flows, financial position or disclosures.

Recently Issued Accounting Pronouncements

In October 2021, the FASB issued ASU no. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. While primarily related to contract assets and contract liabilities that were accounted for by the acquiree in accordance with ASC 606, the amendments also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply, such as contract liabilities from the sale of nonfinancial assets within the scope of Subtopic 610-20. The ASU should be applied prospectively and is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that adopting this standard will have on the consolidated financial statements.

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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”, is 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 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 2021 Form 10-K.

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, but 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 Company is organized into three segments: Information & Transaction Processing Solutions (“ITPS”), Healthcare Solutions (“HS”), and Legal & Loss Prevention Services (“LLPS”) (See Note 13). The following tables disaggregate revenue from contracts by segment and by geographic region for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, 

2022

2021

ITPS

  

HS

  

LLPS

  

Total

  

ITPS

  

HS

  

LLPS

  

Total

U.S.A.

 

$

139,732

$

56,390

$

20,375

$

216,497

$

162,491

$

56,204

$

19,545

 

$

238,240

EMEA

 

45,691

 

 

 

45,691

 

49,892

 

 

 

49,892

Other

 

4,582

 

 

 

4,582

 

4,877

 

 

 

4,877

Total

 

$

190,005

$

56,390

$

20,375

$

266,770

$

217,260

$

56,204

 

$

19,545

 

$

293,009

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Six Months Ended June 30, 

2022

2021

  

ITPS

  

HS

  

LLPS

  

Total

  

ITPS

  

HS

  

LLPS

  

Total

U.S.A.

 

$

288,076

$

112,986

$

38,170

$

439,232

$

335,414

$

107,297

$

36,633

$

479,344

EMEA

 

97,669

 

 

 

97,669

104,101

 

 

104,101

Other

 

9,267

 

 

 

9,267

9,620

 

 

9,620

Total

 

$

395,012

$

112,986

$

38,170

$

546,168

$

449,135

$

107,297

 

$

36,633

 

$

593,065

Contract Balances

The following table presents contract assets, contract liabilities and contract costs recognized at June 30, 2022 and December 31, 2021:

    

June 30, 

    

December 31, 

2022

2021

Accounts receivable, net

$

99,350

$

184,102

Deferred revenues

 

16,413

 

17,518

Customer deposits

 

20,070

 

17,707

Costs to obtain and fulfill a contract

 

1,958

 

2,328

Accounts receivable, net includes $26.3 million and $22.6 million as of June 30, 2022 and December 31, 2021, respectively, representing amounts not yet 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 contract term. We recognized revenue of $13.5 million during the six months ended June 30, 2022 that had been deferred as of December 31, 2021.

Costs incurred to obtain and fulfill contracts are deferred and presented as part of intangible assets, net and expensed on a straight-line basis over the estimated benefit period. We recognized $0.6 million of amortization for these costs for the six months ended June 30, 2022 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 fulfillment and can be separated into two principal categories: contract commissions and fulfillment 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. These advanced postage deposits are used to cover the costs associated with postage, with the corresponding postage revenue being recognized as services are performed.

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.

A certain number of our contracts have multiple performance obligations, including contracts that combine software implementation services with post-implementation customer support. For contracts with multiple performance

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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. A certain number 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 (a) contracts with an original expected length of one year or less, and (b) 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 distinct services that are substantially the same and have the same pattern of transfer over time, with the corresponding remaining performance obligations as of June 30, 2022 in each of the future periods below:

Estimated Remaining Fixed Consideration for Unsatisfied
Performance Obligations

    

Remainder of 2022

$

21,789

2023

 

36,556

2024

 

31,836

2025

 

28,332

2026

 

570

2027 and thereafter

 

Total

 

$

119,083

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4.     Intangible Assets and Goodwill

Intangible Assets

Intangible assets are stated at cost or acquisition-date fair value less accumulated amortization and consists of the following:

June 30, 2022

Gross Carrying

Accumulated

Intangible

    

Amount (a)

    

Amortization

    

Asset, net

Customer relationships

$

507,906

$

(333,638)

$

174,268

Developed technology

88,553

(87,825)

728

Trade names (b)

8,415

(3,102)

5,313

Outsource contract costs

16,968

(15,011)

1,957

Internally developed software

50,563

(31,262)

19,301

Assembled workforce

4,473

(3,914)

559

Purchased software

26,749

(6,241)

20,508

Intangibles, net

$

703,627

$

(480,993)

$

222,634

December 31, 2021

Gross Carrying

Accumulated

Intangible

    

Amount (a)

    

Amortization

    

Asset, net

Customer relationships

$

508,241

$

(316,084)

$

192,157

Developed technology

88,553

(87,612)

941

Trade names (b)

8,400

(3,100)

5,300

Outsource contract costs

16,814

(14,486)

2,328

Internally developed software

49,108

(27,812)

21,296

Assembled workforce

4,473

(3,355)

1,118

Purchased software

26,749

(5,350)

21,399

Intangibles, net

$

702,338

$

(457,799)

$

244,539

(a)Amounts include intangible assets acquired in business combinations and asset acquisitions.
(b)The carrying amount of trade names for 2022 and 2021 is net of accumulated impairment losses of $44.1 million. Carrying amount of $5.3 million as at June 30, 2022 represents indefinite-lived intangible asset.

Goodwill

The Company’s operating segments are significant strategic business units that align its products and services with how it manages its business, approach the markets and interacts with customers. The Company is organized into three segments: ITPS, HS, and LLPS (See Note 13).

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Goodwill by reporting segment consists of the following:

    

Balances as at January 1, 2021 (a)

Additions

Deletions

Impairments

Currency Translation Adjustments

Balances as at December 31, 2021 (a)

ITPS

$

254,130

$

$

(825)

$

$

(633)

$

252,672

HS

86,786

86,786

LLPS

18,865

18,865

Total

$

359,781

$

$

(825)

$

$

(633)

$

358,323

    

Balances as at January 1, 2022 (a)

Additions

Deletions

Impairments

Currency Translation Adjustments

Balances as at June 30, 2022 (a)

ITPS

$

252,672

$

$

$

$

(151)

$

252,521

HS

86,786

86,786

LLPS

18,865

18,865

Total

$

358,323

$

$

$

$

(151)

$

358,172

(a)The goodwill amount for all periods presented is net of accumulated impairment amounts. Accumulated impairment relating to ITPS is $316.5 million as at June 30, 2022 and December 31, 2021; and $317.5 million as at December 31, 2020. Accumulated impairment relating to LLPS is $243.4 million as at June 30, 2022, December 31, 2021 and December 31, 2020.

The Company tests for goodwill impairment at the reporting unit level on October 1 of each year and between annual tests if a triggering event indicates the possibility of an impairment. The Company monitors changing business conditions as well as industry and economic factors, among others, for events which could trigger the need for an interim impairment analysis. The Company concluded that a sustained decline in its stock price and its debt price, consistent with broad trends in the global financial markets during the first half of 2022 represented triggering event for impairment. Accordingly, the Company performed an interim impairment analysis at June 30, 2022, and concluded that no impairment relating to goodwill existed at June 30, 2022.

5.     Long-Term Debt and Credit Facilities

Senior Credit Facilities

On July 12, 2017, subsidiaries of the Company entered into a First Lien Credit Agreement with Royal Bank of Canada, Credit Suisse AG, Cayman Islands Branch, Natixis, New York Branch and KKR Corporate Lending LLC (the “Credit Agreement”) providing Exela Intermediate LLC, a wholly owned subsidiary of the Company, upon the terms and subject to the conditions set forth in the Credit Agreement, (i) a $350.0 million senior secured term loan maturing July 12, 2023 with an original issue discount of $7.0 million, and (ii) a $100.0 million senior secured revolving facility that matured on July 12, 2022 (the “Revolving Credit Facility”).

The Credit Agreement provided for the following interest rates for borrowings under the senior secured term facility and the Revolving Credit Facility: at the borrower’s option, either (1) an adjusted LIBOR, subject to a 1.0% floor in the case of term loans, or (2) a base rate, in each case plus an applicable margin. The initial applicable margin for the senior secured term facility was 7.5% with respect to LIBOR borrowings and 6.5% with respect to base rate borrowings. The initial applicable margin for the Revolving Credit Facility was 7.0% with respect to LIBOR borrowings and 6.0% with respect to base rate borrowings. The applicable margin for borrowings under the Revolving Credit Facility is subject to step-downs based on leverage ratios. The senior secured term loan is subject to amortization payments, commencing on the last day of the first full fiscal quarter of the Company following the closing date, of 0.6% of the aggregate principal amount for each of the first eight payments and 1.3% of the aggregate original principal amount for payments thereafter, with any balance due at maturity.

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Term Loan Repricing

On July 13, 2018, Exela executed a transaction to reprice the $343.4 million of term loans outstanding under its senior secured credit facilities (the “Repricing”). The Repricing was accomplished pursuant to a First Amendment to the First Lien Credit Agreement (the “First Amendment”), dated as of July 13, 2018, by and among the Company’s subsidiaries Exela Intermediate Holdings LLC, Exela Intermediate, LLC, each “Subsidiary Loan Party” listed on the signature pages thereto, Royal Bank of Canada, as administrative agent, and each of the lenders party thereto, whereby such subsidiaries borrowed $343.4 million of refinancing term loans (the “Repricing Term Loans”) to refinance their existing senior secured term loans.

In accordance with ASC 470 – Debt – Modifications and Extinguishments, as a result of certain lenders that participated in Exela’s debt structure prior to the Repricing and the Company’s debt structure after the Repricing, it was determined that a portion of the refinancing of Exela’s senior secured credit facilities would be accounted for as a debt modification, and the remaining would be accounted for as an extinguishment. The Company incurred $1.0 million in new debt issuance costs related to the refinancing, of which $1.0 million was expensed pursuant to modification accounting. The proportion of debt that was extinguished resulted in a write off of previously recognized debt issue costs of $0.1 million. Additionally, for the new lenders who exceeded the 10% test, less than $0.1 million was recorded as additional debt issue costs. All unamortized costs and discounts will be amortized over the life of the new term loan using the effective interest rate of the term loan.

The Repricing Term Loans will bear interest at a rate per annum of, at the borrower’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans. The interest rates applicable to the Repricing Term Loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on July 12, 2017 pursuant to the Credit Agreement. The Repricing Term Loans will mature on July 12, 2023, the same maturity date as the prior senior secured term loans.

2018 Incremental Term Loans

On July 13, 2018, the Company’s subsidiaries borrowed an additional $30.0 million pursuant to incremental term loans (the “Incremental Term Loans”) under the First Amendment. The proceeds of the Incremental Term Loans may be used by the Company for general corporate purposes and to pay fees and expenses in connection with the First Amendment. The interest rates applicable to the Incremental Term Loans are the same as those for the Repricing Term Loans.

The borrower may voluntarily repay the Repricing Term Loans and the Incremental Term Loans at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans. The Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Repricing Term Loans and prior senior secured term loans.

Other than as described above, the terms, conditions and covenants applicable to the Repricing Term Loans and the Incremental Term Loans are consistent with the terms, conditions and covenants that were applicable to the existing senior secured loans under the Credit Agreement.

2019 Incremental Term Loan

 

On April 16, 2019, the Company’s subsidiaries borrowed an additional $30.0 million pursuant to incremental term loans (the “2019 Incremental Term Loans”) under the Second Amendment to First Lien Credit Agreement (the “Second Amendment”). The proceeds of the 2019 Incremental Term Loans were used to replace the cash spent for acquisitions, pay related fees, expenses and related borrowings and for general corporate purposes. The 2019 Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Incremental Term Loans, Repricing Term Loans and prior senior secured term loans under the Credit Agreement (collectively, the “Term Loans”).

16

 

The 2019 Incremental Term Loans will bear interest at a rate per annum that is the same as the Repricing Term Loans under the senior credit facility. The 2019 Incremental Term Loans will mature on July 12, 2023, the same maturity date as the Term Loans. The borrower may voluntarily repay the 2019 Incremental Term Loans at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans.

 

Other than as described above, the terms, conditions and covenants applicable to the 2019 Incremental Term Loans are consistent with the terms, conditions and covenants that are applicable to the Repricing Term Loans and 2018 Incremental Term Loans under the Credit Agreement. The Repricing and issuance of the 2018 and 2019 Incremental Term Loans resulted in a partial debt extinguishment, for which Exela recognized $1.4 million in debt extinguishment costs during the year ended December 31, 2019, reported within Debt modification and extinguishment costs (gain), net within our consolidated statements of operations.

Third Amendment

On May 18, 2020, subsidiaries of the Company amended the Credit Agreement (the Third Amendment to First Lien Credit Agreement (the “Third Amendment”) 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. Upon the Company’s delivery of the annual and quarterly financial statements within the time frames stated therein (which the Company satisfied during the month of June 2020), the borrower became in compliance with respect to the financial statement delivery requirements set forth in the Credit Agreement. Pursuant to the Third Amendment, the borrowers also amended the Credit Agreement to, among other things: restrict the borrower and its subsidiaries’ ability to designate or invest in unrestricted subsidiaries; incur certain debt; create certain liens; make certain investments; pay certain dividends or other distributions on account of its equity interests; make certain asset sales or other dispositions (or utilize the proceeds of certain asset sales to reinvest in the business); or enter into certain affiliate transactions pursuant to the negative covenants under the Credit Agreement. Further, pursuant to the amendment, the borrower under the Credit Agreement was also required to maintain a minimum Liquidity (as defined in the amendment) of $35.0 million. In connection with this amendment, the borrower paid a forbearance fee of $5.0 million to the consenting lenders. The Company concluded that the amendment represents modification of debt under ASC 470-50. Accordingly, the forbearance fee paid was added to unamortized debt issuance cost which shall be amortized using updated effective interest rate based on modified cash flows.

Private Exchange

On December 9, 2021, in a separate transaction referred to here as the “Private Exchange” (as distinguished from the “Public Exchange” described below), subsidiaries of the Company agreed with three (3) of their Term Loan lenders to exchange $212.1 million of Term Loans under the Credit Agreement for $84.3 million in cash and in $127.8 million principal amount of new 11.500% First-Priority Senior Secured Notes due 2026 (the “2026 Notes”). In connection with the Private Exchange, the exchanging lenders provided consents to amend the Credit Agreement to (i) eliminate all affirmative covenants, (ii) eliminate all negative covenants and (iii) eliminate certain events of default (other than events of default relating to payment obligations).

As a result of the Private Exchange, repurchases (as discussed below) and periodic principal repayments, $82.9 million aggregate principal amount of the Term Loans maturing July 12, 2023 remains outstanding as of June 30, 2022.

Revolving Credit Facility; Letters of Credit

As of December 31, 2021, our $100 million Revolving Credit Facility was fully drawn taking into account letters of credit issued thereunder. As of December 31, 2021, there were outstanding irrevocable letters of credit totaling approximately $0.5 million under the Revolving Credit Facility.

On March 7, 2022, subsidiaries of the Company entered into a Revolving Loan Exchange and Prepayment Agreement with Royal Bank of Canada, Credit Suisse AG, Cayman Islands Branch, KKR Corporate Lending LLC, Granite State Capital Master Fund LP, Credit Suisse Loan Funding LLC and Revolvercap Partners Fund LP exchanging

17

$100.0 million of outstanding Revolving Credit Facility owed by Exela Intermediate LLC, upon the terms and subject to the conditions set forth in the Revolver Exchange agreement, for (i) $50.0 million in cash, and (ii) $50.0 million of 2026 Notes (such exchange, the “Revolver Exchange” and such 2026 Notes, the “Exchange Notes”). Prepayment of Revolving Credit Facility was treated as an extinguishment of debt under ASC 470-50. Accordingly, the Company wrote off the unamortized balance of $0.2 million of debt issuance costs related to Revolving Credit Facility and reported it within Debt modification and extinguishment costs (gain), net in our condensed consolidated statements of operations for the six months ended June 30, 2022.

The Exchange Notes are subject to a guarantee in the form of a true-up mechanism whereby the Company is responsible to make a payment to the holders of the Exchange Notes to true-up the shortfall below certain agreed thresholds if holders of the Exchange Notes sell their notes at a price below that threshold during agreed periods in 2022. As security for the true-up obligation under the Revolver Exchange, the Company issued $10.0 million of principal amount of 2026 Notes as collateral. On March 7, 2022, we recognized $17.4 million (the fair value of the true-up obligation as accounted for under ASC 450, Contingencies and ASC 460, Guarantees) as a liability with an offsetting debit to the original issuance discount of the issued Exchange Notes on the closing date of the Revolver Exchange. We remeasured our obligation under the true-up mechanism as of March 31, 2022 and accrued an additional $6.2 million liability based on fair value of our obligation in Other expense, net on the condensed consolidated statements of operations for the three months ended March 31, 2022.

On May 6, 2022, subsidiaries of the Company entered into amended term of true-up mechanism. Accordingly, the Company placed an additional $20.0 million of principal amount of 2026 Notes as collateral and paid $5.0 million as true-up advance. We remeasured our obligation under the amended terms of true-up mechanism as of June 30, 2022 and accrued an additional $7.4 million liability based on fair value of our obligation as of such date in Other expense, net on the condensed consolidated statements of operations for the three months ended June 30, 2022. As of June 30, 2022, there was a net accrued liability balance of $26.0 million for the true-up obligation included in Accrued liabilities on the condensed consolidated balance sheet after adjusting $5.0 million of true-up advance paid for this liability during the second quarter of 2022. The amounts payable under the true-up mechanism will be settled in cash payments to the holders of the Exchange Notes.

Senior Secured 2023 Notes

On July 12, 2017, subsidiaries of the Company issued $1.0 billion in aggregate principal amount of 10.0% First Priority Senior Secured Notes due 2023 (the “2023 Notes”). The 2023 Notes are guaranteed by nearly all U.S. subsidiaries of the Company. The 2023 Notes bear interest at a rate of 10.0% per year. The issuers pay interest on the 2023 Notes on January 15 and July 15 of each year, commencing on January 15, 2018. The 2023 Notes mature on July 15, 2023.

Public Exchange

On October 27, 2021, the Company launched an offer to exchange (the “Public Exchange”) up to $225.0 million in cash and new 2026 Notes for the Company’s outstanding 2023 Notes. The Public Exchange was for $900 in cash per $1,000 principal amount of 2023 Notes tendered subject to proration. The maximum amount of cash to be paid was $225.0 million and the offer was not subject to any minimum participation condition. In case of oversubscription to the cash offer, tendered 2023 Notes would be accepted for cash on a pro rata basis (as a single class). The balance of any tendered 2023 Notes not accepted for cash would be exchanged into 2026 Notes on the basis of $1,000 principal amount of new 2026 Notes for each $1,000 principal amount of outstanding 2023 Notes tendered.

As of the expiration time of the Public Exchange, $912,660,000 aggregate principal amount, or approximately 91.3%, of the 2023 Notes had been validly tendered pursuant to the Public Exchange. On December 9, 2021, upon the settlement of the Public Exchange, $662,660,000 aggregate principal amount of the 2026 Notes were issued and an aggregate $225.0 million in cash (plus accrued but unpaid interest) was paid to participating holders in respect of the validly tendered 2023 Notes.

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As a result of the Public Exchange and repurchases (as discussed below), $22.8 million aggregate principal amount of the 2023 Notes remains outstanding as of June 30, 2022 maturing on July 15, 2023.

Third Supplemental Indenture

In conjunction with the Public Exchange, the Company also solicited consents to amend certain provisions in the indenture governing the 2023 Notes (“Notes Amendments”). On December 1, 2021, on receipt of the requisite consents to the Notes Amendments, the Company, and Wilmington Trust, National Association, as trustee (the “2023 Notes Trustee”), entered into a third supplemental indenture (the “Third Supplemental Indenture”) to the indenture, dated as of July 12, 2017 (as amended and supplemented by (i) the first supplemental indenture, dated as of July 12, 2017 and (ii) the second supplemental indenture, dated as of May 20, 2020, the “2023 Notes Indenture”) governing the outstanding 2023 Notes. The Third Supplemental Indenture amends the 2023 Notes Indenture and the 2023 Notes to eliminate substantially all of the restrictive covenants, eliminate certain events of default, modify covenants regarding mergers and consolidations and modify or eliminate certain other provisions, including certain provisions relating to future guarantors and defeasance, contained in the 2023 Notes Indenture and the 2023 Notes. In addition, all of the collateral securing the 2023 Notes was released pursuant to the Third Supplemental Indenture.

Senior Secured 2026 Notes

As of December 31, 2021, subsidiaries of the Company had $795.0 million aggregate principal amount of the 2026 Notes outstanding including $790.5 million in aggregate principal amount issued under the Public Exchange and Private Exchange transactions described above.

During the six months ended June 30, 2022, subsidiaries of the Company sold $84.5 million in aggregate of principal amount of the 2026 Notes generating net proceeds of $51.0 million. On March 18, 2022, the subsidiaries of the Company issued $50.0 million of the 2026 Notes to satisfy the exchange obligation under the Revolver Exchange. The 2026 Notes are guaranteed by nearly all U.S. subsidiaries of the Company. The 2026 Notes bear interest at a rate of 11.5% per year. The issuers shall pay interest on the 2026 Notes on January 15 and July 15 of each year, commencing on July 15, 2022. The 2026 Notes mature on July 12, 2026.

On or after December 1, 2022, the issuers may redeem the 2026 Notes in whole or in part from time to time, at a redemption price of 100%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, prior to December 1, 2022, the issuers may redeem the 2026 Notes in whole or in part from time to time, at a redemption price equal to 100% of the principal amount of the 2026 Notes redeemed, plus the Applicable Premium as of, and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. “Applicable Premium” means, with respect to any 2026 Note on any applicable redemption date, as determined by the issuers, the greater of: (1) 1% of the then outstanding principal amount of the 2026 Note; and (2) the excess of: (a) the present value at such redemption date of (i) the redemption price of the 2026 Note, at December 1, 2022 plus (ii) all required interest payments due on the 2026 Note through December 1, 2022 (excluding accrued but unpaid interest), computed using a discount rate equal to the treasury rate as of such redemption date plus 50 basis points; over (b) the then outstanding principal amount of the 2026 Note.

As of June 30, 2022, subsidiaries of the Company had $48.2 million and $30.0 million of principal amount of 2026 Notes placed as collateral (the “Collateral Notes”) for the remaining payment obligation under the Appraisal Action settlement (discussed under Note 8) and the true-up obligation under the Revolver Exchange (discussed above), respectively. These Collateral Notes are not reflected in the condensed consolidated financial statements unless and until they are sold to third parties.

$929.5 million aggregate principal amount of 2026 Notes were outstanding as of June 30, 2022.

Repurchases

In July 2021 the Company commenced a debt buyback program to repurchase 2023 Notes and senior secured term loans under the Credit Agreement, which remains in place. During the year ended December 31, 2021, we

19

repurchased $64.5 million of the outstanding principal amount of our 2023 Notes for a net cash consideration of $48.4 million. During the year ended December 31, 2021, we also repurchased $40.0 million of outstanding principal amount of Term Loans for a net cash consideration of $22.8 million. These repurchases resulted in an early extinguishment of the repurchased 2023 Notes and senior secured term loans. The Company did not repurchase any senior secured term loans, 2023 Notes or 2026 Notes during the six months ended June 30, 2022.

BRCC Facility

On November 17, 2021, GP2 XCV, LLC, a subsidiary of the Company (“GP2 XCV"), entered into a borrowing facility with B. Riley Commercial Capital, LLC pursuant to which the Company was able to borrow an original principal amount of $75.0 million, which was later increased to $115.0 million as of December 7, 2021 (as the same may be amended from time to time, the “BRCC Term Loan”). On June 30, 2022, GP2 XCV entered into an amendment to the borrowing facility with B. Riley Commercial Capital, LLC pursuant to which the Company will be able to borrow up to $51.0 million under a separate revolving loan (the “BRCC Revolver”, collectively with BRCC Term Loan, the “BRCC Facility”).

The BRCC Facility is secured by a lien on all the assets of GP2 XCV and by a pledge of the equity of GP2 XCV. GP2 XCV is a bankruptcy-remote entity and as such its assets are not available to other creditors of the Company or any of its subsidiaries other than GP2 XCV. The BRCC Facility will mature on June 10, 2023. However, the BRCC Revolver is subject to certain automatic maturity extensions of six months, unless B. Riley Commercial Capital, LLC or the Company notifies the other party about its election not to extend. In such event, the outstanding principal amount of the BRCC Revolver as of the maturity shall be due and payable in 12 equal installments on the last business day of each calendar month thereafter. Interest under the BRCC Facility accrues at a rate of 11.5% per annum and is payable quarterly on the last business day of each March, June, September and December. The purpose of BRCC Term Loan was to fund certain repurchases of Term Loan under the Credit Agreement and to provide funding for the Public Exchange transaction and Private Exchange transaction described above. The purpose of BRCC Revolver is to fund general corporate purposes.

During the six months ended June 30, 2022, we repaid $46.2 million of outstanding principal amount under the BRCC Term Loan along with $1.4 million of exit fees. The exit fees paid on the partial prepayment of BRCC Term Loan were treated as a debt extinguishment cost under ASC 470-50 and reported within Debt modification and extinguishment costs (gain), net in our condensed consolidated statements of operations. As of June 30, 2022, there were borrowings of $68.8 million and $12.5 million outstanding under the BRCC Term Loan and BRCC Revolver, respectively, maturing June 10, 2023. There was no availability under the BRCC Revolver as of June 30, 2022.

Securitization Facility

On December 17, 2020, certain subsidiaries of the Company entered into a $145.0 million securitization facility with a five year term (the “Securitization Facility”). Borrowings under the Securitization Facility were subject to a borrowing base definition that consists of receivables and, subject to contribution, further supported by inventory and intellectual property, in each case, subject to certain eligibility criteria, concentration limits and reserves. 

The Securitization Facility provided for an initial funding of approximately $92.0 million supported by the receivables portion of the borrowing base and, subject to contribution, a further funding of approximately $53.0 million supported by inventory and intellectual property. On December 17, 2020, Exela Receivables 3, LLC (the “Securitization Borrower”) made the initial borrowing of approximately $92.0 million under the Securitization Facility and used a portion of the proceeds to repay $83.0 million of the aggregate outstanding principal amount of loans as of December 17, 2020 under a previous $160.0 million accounts receivable securitization facility (“A/R Facility”) and used the remaining proceeds for general corporate purposes. On April 11, 2021, the Company amended the Securitization Loan Agreement and agreed to, among other things, extend the option to access further funding of approximately $53.0 million in additional borrowings from April 10, 2021 to September 30, 2021 upon the contribution of inventory and intellectual property to support the borrowing base.

20

The documentation for the Securitization Facility included (i) a Loan and Security Agreement (the “Securitization Loan Agreement”), dated as of December 10, 2020, by and among the Securitization Borrower, a wholly-owned indirect subsidiary of the Company, the lenders (each, a “Securitization Lender” and collectively the “Securitization Lenders”), Alter Domus (US), LLC, as administrative agent (the “Securitization Administrative Agent”) and the Company, as initial servicer, pursuant to which the Securitization Lenders will make loans to the Securitization Borrower to be used to purchase receivables and related assets from the Securitization Parent SPE (as defined below), (ii) a First Tier Receivables Purchase and Sale Agreement (the, dated as of December 17, 2020, by and among Exela Receivables 3 Holdco, LLC (the “Securitization Parent SPE”), a wholly-owned indirect subsidiary of the Company, and certain other indirect, wholly-owned subsidiaries of the Company listed therein (collectively, the “Securitization Originators”), and the Company, as initial servicer, pursuant to which each Securitization Originator has sold or contributed and will sell or contribute to the Securitization Parent SPE certain receivables and related assets in consideration for a combination of cash and equity in the Securitization Parent SPE, (iii) a Second Tier Receivables Purchase and Sale Agreement, dated as of December 17, 2020, by and among, the Securitization Borrower, the Securitization Parent SPE and the Company, as initial servicer, pursuant to which Securitization Parent SPE has sold or contributed and will sell or contribute to the Securitization Borrower certain receivables and related assets in consideration for a combination of cash and equity in the Securitization Borrower, (iv) the Sub-Servicing Agreement, dated as of December 17, 2020, by and among the Company and each Securitization Originator, (v) the Pledge and Guaranty, dated as of the December 10, 2020, between the Securitization Parent SPE and the Administrative Agent, and (vi) the Performance Guaranty, dated as of December 17, 2020, between the Company, as performance guarantor, and the Securitization Administrative Agent (and together with all other certificates, instruments, UCC financing statements, reports, notices, agreements and documents executed or delivered in connection with the Securitization Loan Agreement, the “Securitization Agreements”).

The Securitization Borrower, the Company, the Securitization Parent SPE and the Securitization Originators provide customary representations and covenants under the Securitization Agreements. The Securitization Loan Agreement provides for certain events of default upon the occurrence of which the Securitization Administrative Agent may declare the facility’s termination date to have occurred and declare the outstanding Securitization Loan and all other obligations of the Securitization Borrower to be immediately due and payable, however the Securitization Facility does not include an ongoing liquidity covenant like the A/R Facility and aligns reporting obligations with the Company’s other material indebtedness agreements.

The Securitization Borrower and Securitization Parent SPE were formed in December 2020, and are identified as VIEs and consolidated into the Company’s financial statements following VIE consolidation model under ASC 810. The Securitization Borrower and Securitization Parent SPE are bankruptcy remote entities and as such their assets are not available to creditors of the Company or any of its subsidiaries. Each loan under the Securitization Facility bears interest on the unpaid principal amount as follows: (i) if a Base Rate Loan, at a rate per annum equal to (x) the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) the Adjusted LIBOR Rate (as defined in the Securitization Loan Agreement) plus 1.00%, plus (y) 8.75%; or (ii) if a LIBOR Rate Loan, at the Adjusted LIBOR Rate plus 9.75%.

On June 17, 2022, the Company repaid in full the loans outstanding under the Securitization Facility. The aggregate outstanding principal amount of loans under the Securitization Facility as of such date was approximately $91.9 million. The early termination of the Securitization Facility triggered a prepayment premium of $2.7 million and required payment of approximately $0.5 million and $1.3 million in respect of accrued interest and fees, respectively. All obligations under the Securitization Facility (other than contingent indemnification obligations that expressly survive termination) terminated upon repayment. The Securitization Facility was replaced by the Amended Receivables Purchase Agreement described below. Repayment of the Securitization Facility was treated as an extinguishment of debt under ASC 470-50. Accordingly, the Company wrote off the unamortized balance of $3.3 million of debt issuance costs related to the Securitization Facility. These early termination charges and unamortized balance of the debt issuance cost written off during the six months ended June 30, 2022 are reported within Debt modification and extinguishment costs (gain), net within our condensed consolidated statements of operations.

On June 17, 2022, the Company entered into an amended and restated receivables purchase agreement (the "Amended Receivables Purchase Agreement") under its accounts receivable securitization facility among certain of the

21

Company's subsidiaries, its wholly-owned, "bankruptcy remote" special purpose subsidiaries ("SPEs") and certain global financial institutions ("Purchasers"). The Amended Receivables Purchase Agreement extends the term of the securitization facility such that the SPE may sell certain receivables to the Purchasers until June 17, 2025. Under the Amended Receivables Purchase Agreement, transfers of accounts receivable from the SPEs are treated as sales and are accounted for as a reduction in accounts receivable because the agreement transfers effective control over and risk related to the accounts receivable to the Purchasers. The Company and related subsidiaries have no continuing involvement in the transferred accounts receivable, other than collection and administrative responsibilities and, once sold, the accounts receivable are no longer available to satisfy creditors of the Company or the related subsidiaries. On June 17, 2022, the Company sold $85.0 million of its accounts receivable and used the whole proceeds from this sale to repay part of the borrowings from the Securitization Facility (as discussed above). These sales were transacted at 100% of the face value of the relevant accounts receivable, resulting in derecognition of the accounts receivable from the Company's condensed consolidated balance sheet. The Company de-recognized $85.0 million of accounts receivable under this agreement through June 30, 2022. Unsold accounts receivable of $46.0 million were pledged by the SPEs as collateral to the Purchasers as of June 30, 2022. The Company paid $0.2 million in legal fee for this transaction reported within Selling, general and administrative expenses within our condensed consolidated statements of operations.

Long-Term Debt Outstanding

As of June 30, 2022 and December 31, 2021, the following long-term debt instruments were outstanding:

June 30, 

December 31, 

2022

    

2021

Other (a)

$

28,033

29,296

Term loan under first lien credit agreement (b)

80,568

89,585

Senior secured 2023 notes (c)

22,687

22,616

Senior secured 2026 notes (d)

887,792

801,306

Secured borrowings under BRCC Facility

81,298

115,000

Secured borrowings under Securitization Facility

91,947

Revolver

99,477

Total debt

1,100,378

1,249,227

Less: Current portion of long-term debt

(124,921)

(144,828)

Long-term debt, net of current maturities

$

975,457

$

1,104,399

(a)Other debt represents outstanding loan balances associated with various hardware, software purchases, maintenance and leasehold improvements along with loans and receivables factoring arrangement entered into by subsidiaries of the Company.
(b)Net of unamortized original issue discount and debt issuance costs of $0.5 million and $1.8 million as of June 30, 2022 and $0.8 million and $2.8 million as of December 31, 2021.
(c)Net of unamortized original issue discount and debt issuance costs of $0.1 million and less than $0.1 million as of June 30, 2022 and $0.2 million and $0.1 million as of December 31, 2021.
(d)Net of unamortized net original issue discount and debt issuance costs of $28.2 million and $13.4 million as of June 30, 2022; and unamortized net debt exchange premium and carried forward debt issuance costs of $15.4 million and $9.0 million as of December 31, 2021.

6.     Income Taxes

The Company applies an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods, as required under GAAP. The Company recorded an income tax expense of $1.3 million and $2.0 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded an income tax expense of $3.8 million and $2.0 million for the six months ended June 30, 2022 and 2021, respectively.

The Company's ETR of (1.7)% and (2.9)% for the three and six months ended June 30, 2022 differed from the expected U.S. statutory tax rate of 21.0% and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the

22

Company’s deferred tax assets on U.S. disallowed interest expense carryforwards created by the provisions of The Tax Cuts and Jobs Act (“TCJA”).

For the three and six months ended June 30, 2021, the Company’s ETR of (11.6%) and (3.5%) differed from the expected U.S. statutory tax rate of 21.0%, and was primarily impacted by permanent tax adjustments, state and local current expense, foreign operations, and valuation allowances, including valuation allowances on a portion of the Company’s U.S. disallowed interest expense carryforwards created by the provisions of the TCJA.

As of June 30, 2022, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2021.

7.     Employee Benefit Plans

German Pension Plan

The Company’s subsidiary in Germany provides pension benefits to certain retirees. Employees eligible for participation include all employees who started working for the Company or its predecessors prior to September 30, 1987 and have finished a qualifying period of at least 10 years. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan. The German pension plan is an unfunded plan and therefore has no plan assets. No new employees are registered under this plan and the participants who are already eligible to receive benefits under this plan are no longer employees of the Company.

U.K. Pension Plan

The Company’s subsidiary in the United Kingdom provides pension benefits to certain retirees and eligible dependents. Employees eligible for participation include all full-time regular employees who were more than three years from retirement prior to October 2001. A retirement pension or a lump-sum payment may be paid dependent upon length of service at the mandatory retirement age. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan. No new employees are registered under this plan and the pension obligation for the existing participants of the plan is calculated based on actual salary of the participants as at the earlier of two dates, the participants leaving the Company or December 31, 2015.

Norway Pension Plan

The Company’s subsidiary in Norway provides pension benefits to eligible retirees and eligible dependents. Employees eligible for participation include all employees who were more than three years from retirement prior to March 2018. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan. No new employees are registered under this plan and the pension obligation for the existing participants of the plan is calculated based on actual salary of the participants as at the later of two dates, the participants leaving the Company or April 30, 2018.

Asterion Pension Plan

In April 2018 through its acquisition of Asterion International Group the Company became obligated to provide pension benefits to eligible retirees and eligible dependents of Asterion. Employees eligible for participation include all full-time regular employees who were more than three years from retirement prior to July 2003. A retirement pension or a lump-sum payment may be paid dependent upon length of service at the mandatory retirement age. The Company accrues the cost of these benefits over the service lives of the covered employees based on an actuarial calculation. The Company uses a December 31 measurement date for this plan. No new employees are registered under this plan and the pension obligation for the existing participants of the plan is calculated based on actual salary of the participants as at the earlier of two dates, the participants leaving the Company or April 10, 2018.

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Tax Effect on Accumulated Other Comprehensive Loss

As of June 30, 2022 and December 31, 2021 the Company recorded actuarial losses of $9.8 million and $10.9 million in accumulated other comprehensive loss on the condensed consolidated balance sheets, respectively, which is net of a deferred tax benefit of $2.0 million for each period.

Pension Expense

The components of the net periodic benefit cost are as follows:

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Service cost

$

16

$

19

$

32

$

38

Interest cost

501

427

1,002

854

Expected return on plan assets

(748)

(609)

(1,496)

(1,218)

Amortization:

Amortization of prior service cost

55

45

110

90

Amortization of net loss

667

843

1,334

1,686

Net periodic benefit cost

$

491

$

725

$

982

$

1,450

The Company records pension interest cost within Interest expense, net. Expected return on plan assets, amortization of prior service costs, and amortization of net losses are recorded within Other income, net. Service cost is recorded within Cost of revenue.

Employer Contributions

The Company’s funding of employer contributions is based on governmental requirements and differs from those methods used to recognize pension expense. The Company made contributions of $1.3 million and $1.8 million to its pension plans during the six months ended June 30, 2022 and 2021, respectively. The Company has funded the pension plans with the required contributions for 2022 based on current plan provisions.

8.     Commitments and Contingencies

Appraisal Action

On September 21, 2017, former stockholders of SourceHOV Holdings, Inc. (“SourceHOV”), who owned 10,304 shares of SourceHOV common stock, filed a petition for appraisal pursuant to 8 Del. C. § 262 in the Delaware Court of Chancery (the “Court”), captioned Manichaean Capital, LLC, et al. v. SourceHOV Holdings, Inc., C.A. No. 2017 0673 JRS (the “Appraisal Action”). The Appraisal Action arose out of a preliminary transaction in connection with the acquisition of SourceHOV and Novitex Holdings, Inc., by Quinpario in July 2017 (“Novitex Business Combination”), and the petitioners sought, among other things, a determination of the fair value of their SourceHOV shares at the time of the Novitex Business Combination; an order that SourceHOV pay that value to the petitioners, together with interest at the statutory rate; and an award of costs, attorneys’ fees, and other expenses. During the trial the parties and their experts offered competing valuations of the SourceHOV shares as of the date of the Novitex Business Combination. SourceHOV argued the value was no more than $1,633.85 per share and the petitioners argued the value was at least $5,079.28 per share. On January 30, 2020, the Court issued its post-trial Memorandum Opinion in the Appraisal Action, in which it found that the fair value of SourceHOV as of the date of the Novitex Business Combination was $4,591 per share, and on March 26, 2020, the Court issued its final order awarding the petitioners $57,698,426 inclusive of costs and interest. Per the Court’s opinion, the legal rate of interest, compounded quarterly, accrues on the per share value from the July 2017 closing date of the Novitex Business Combination until the date of payment to petitioners.

On December 31, 2021, we agreed to settle the Appraisal Action along with a separate case brought by the same plaintiffs for $63.4 million. Accordingly, as of December 31, 2021, the Company accrued a liability of $63.4

24

million for these matters, of which $47.1 million has already been paid as of June 30, 2022. As of June 30, 2022, there was a net outstanding balance of $18.0 million, including interest, for this matter included in Accrued liabilities on the condensed consolidated balance sheet. As of June 30, 2022, the plaintiffs had access to $48.2 million of principal amount of the Collateral Notes (described under Note 5).

Adverse Arbitration Order

In April 2020, one of the Company's Nordic subsidiaries commenced an arbitration in Finland against a customer alleging breach of contract and other damages in connection with an outsourcing services agreement and transition services agreement executed in 2017. In September 2020, the customer submitted counterclaims against the Company in an aggregate amount in excess of €10.0 million. Following an expedited arbitration, in late November 2020, the arbitrator awarded the customer approximately $13.0 million in the aggregate for the counterclaimed damages and costs. The Company filed an application to annul the award in late January 2021 with the relevant court asserting, among other bases, that the arbitrator violated due process and procedural rules by disallowing the Company’s witness and expert testimony and maintaining the expedited format following the assertion of significant counterclaims which would ordinarily have required the application of normal rather than expedited rules. On May 28, 2021, the parties entered into a settlement agreement resolving this dispute for a total of $8.8 million including the reimbursement of certain third party charges. As of June 30, 2022, there was a net outstanding balance of $2.3 million for this matter included in Accrued liabilities on the Condensed Consolidated Balance Sheet.

Contract-Related Contingencies

The Company has certain contingent obligations that arise in the ordinary course of providing services to its customers. These contingencies are generally the result of contracts that require the Company to comply with certain performance measurements or the delivery of certain services to customers by a specified deadline. The Company believes the adjustments to the transaction price, if any, under these contract provisions will not result in a significant revenue reversal or have a material adverse effect on the Company’s consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

9.   Fair Value Measurement

Assets and Liabilities Measured at Fair Value

The carrying amount of assets and liabilities including cash and cash equivalents, accounts receivable, accounts payable and current portion of long-term debt approximated their fair value as of June 30, 2021, and December 31, 2021, due to the relative short maturity of these instruments. Management estimates the fair values of the secured term loan, secured 2023 notes and secured 2026 notes at approximately 67.3%, 65.0% and 33.0% respectively, of the respective principal balance outstanding as of June 30, 2022. The fair values of secured borrowings under the Company’s securitization facility and BRCC facility are equal to the respective carrying values. Other debt represents the Company's outstanding loan balances associated with various hardware, software purchases, maintenance and leasehold improvements along with loans and receivables factoring arrangement entered into by subsidiaries of the Company and as such, the cost incurred would approximate fair value. Property and equipment, intangible assets, capital lease obligations, and goodwill are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the respective asset is written down to its fair value.

The Company determined the fair value of its long-term debt using Level 2 inputs including the recent issue of the debt, the Company’s credit rating, and the current risk-free rate. The Company’s true-up guarantee liability related to true-up guarantee provided on the Exchange Notes issued under Revolver Exchange transaction is re-measured each period and represents a Level 3 measurement as it is based on the estimated true-up obligation amount based on the legal agreement terms less amount already paid, if any.

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The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as of June 30, 2022, and December 31, 2021:

Carrying

Fair

Fair Value Measurements

As of June 30, 2022

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Recurring assets and liabilities:

Long-term debt

$

975,457

$

361,735

$

$

361,735

$

True-up guarantee liability

30,985

30,985

30,985

Nonrecurring assets and liabilities:

Goodwill

358,172

358,172

358,172

Carrying

Fair

Fair Value Measurements

As of December 31, 2021

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Recurring assets and liabilities:

Long-term debt

$

1,104,399

$

895,615

$

$

895,615

$

Nonrecurring assets and liabilities:

Goodwill

358,323

358,323

358,323

10.   Stock-Based Compensation

Exela 2018 Stock Incentive Plan

On January 17, 2018, Exela’s 2018 Stock Incentive Plan (the “2018 Plan”) became effective. The 2018 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, and other stock-based compensation to eligible participants. The Company was initially authorized to issue up to 138,729 shares of Common Stock under the 2018 Plan. On December 31, 2021, the shareholders of the Company approved our Amended and Restated 2018 Stock Incentive Plan increasing the number of shares of Common Stock reserved for issuance from an original 138,729 shares to 892,404.

Restricted Stock Unit

Restricted stock unit awards generally vest ratably over a one to two year period. Restricted stock units are subject to forfeiture if employment terminates prior to vesting and are expensed ratably over the vesting period.

A summary of restricted stock unit activities under the 2018 Plan for the six months ended June 30, 2022 is summarized in the following table:

Average

Weighted

Remaining

Number

Average Grant

Contractual Life

Aggregate

    

of Units

    

Date Fair Value

    

(Years)

    

Intrinsic Value

Outstanding Balance as of December 31, 2021

68,450

$

34.95

 

0.11

$

2,393

Granted

 

 

Forfeited

 

 

Vested

 

(66,935)

 

(33.17)

Outstanding Balance as of June 30, 2022

1,515

$

33.00

 

0.92

$

50

26

The majority of the RSUs that vested during the six months ended June 30, 2022 were net-share settled such that the Company withheld shares with value equivalent to the employee’s minimum statutory obligation for applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were 12,258 shares and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payment for the employee’s tax obligations to taxing authorities were $0.2 million and is reflected as a financing activity within the Condensed Consolidated Statements of Cash Flows.

Options

Under the 2018 Plan, stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying stock at the grant date. The vesting period for each option award is established on the grant date, and the options generally expire 10 years from the grant date. Options granted under the 2018 Plan generally require no less than a two or four year ratable vesting period. Stock option activity for the six months ended June 30, 2022 is summarized in the following table:

Average

Weighted

Weighted

Remaining

Average Grant

Average

Vesting Period

Aggregate

    

Outstanding

    

Date Fair Value

    

Exercise Price

    

(Years)

    

Intrinsic Value (2)

Outstanding Balance as of December 31, 2021

72,265

 

$

112.60

 

$

235.69

 

0.69

 

$

Granted

 

 

 

Exercised

 

Forfeited

 

(1,430)

(118.68)

Expired

Outstanding Balance as of June 30, 2022 (1)

 

70,835

 

$

112.48

 

$

234.92

 

0.40

 

$

(1) 27,107 of the outstanding options are exercisable as of June 30, 2022.

(2) Exercise prices of all of the outstanding options as of June 30, 2022 were higher than the market price of the shares of the Company. Therefore, aggregate intrinsic value is zero.

As of June 30, 2022, there was approximately $0.5 million of total unrecognized compensation expense related to non-vested restricted stock unit awards and stock option awards under the 2018 Plan, which will be recognized over the respective service period. Stock-based compensation expense is recorded within Selling, general, and administrative expenses. The Company incurred total compensation expense of $0.5 million and $0.8 million related to restricted stock unit awards and stock option awards under the 2018 Plan for the three and six months ended June 30, 2022, respectively, and $0.6 million and $1.0 million for the three and six months ended June 30, 2021, respectively.

Market Performance Units

On September 14, 2021, the Company granted its Executive Chairman performance units with a market performance condition, which are notional units representing the right to receive one share of Common Stock (or the cash value of one share of Common Stock). Until such time that the Company obtained the approval of the stockholders of the Company regarding an increase to the number of shares authorized for issuance under its 2018 Plan in accordance with Nasdaq Listing Rule 5635(a), these performance units would be settled in cash, and following such shareholder approval, at the election of the compensation committee of the Company, might be settled in cash or in shares of Common Stock. The performance units provide that until an increase to the share reserve is approved, such performance units are subject to the terms and conditions of the 2018 Plan as though granted thereunder, but not be considered an award that is outstanding under the plan, and following such time that the plan amendment is approved, constitute an award under the 2018 Plan.

Fifty percent of the performance units covered by the award will vest if, at any time during the period commencing September 14, 2021 and ending June 30, 2024, the volume weighted average of the reported closing price of the Company’s Common Stock is $200 per share or greater on (x) 60 consecutive trading days or (y) 90 non-consecutive trading days in any 180 day period (the “Tranche 1”). In addition, the remaining 50% of the performance units will vest if, at any time during the period commencing September 14, 2021 and ending June 30, 2025, the volume weighted average of the reported closing prices of the Company’s Common Stock is $400 per share or greater on (x) 60 consecutive trading days or (y) 90 non-consecutive trading days in any 180 day period (the “Tranche 2”). Any Tranche 1

27

and Tranche 2 units that are not earned by June 30, 2024 and June 30, 2025 (the “Expiration date”), respectively, will be forfeited for no consideration and will no longer be eligible to vest. In addition, if a change in control occurs prior to the applicable expiration date, if the performance units are assumed by the acquirer, the units will remain outstanding and eligible to vest based solely on his continued service to the Company. If in connection with such change in control the performance units are not assumed by an acquirer, a number of performance units will vest based on the per share price paid in the transaction, with 0% vesting if the per share price is equal to or less than $40.00 per share, and 100% of the Tranche 1 vesting if the per share price is equal to or greater than $200 and 100% of the Tranche 2 vesting if the per share price is equal to or greater than $400, and a number of Tranche 1 and Tranche 2 vesting determined based on a straight line interpolation if the share price is between $40.00 and $200.00 or $400.00, respectively. In addition, if there is a change in control that is principally negotiated and approved by, and recommended to the Company’s shareholders by, a special committee of independent directors which committee does not include the Executive Chairman, and neither he nor any of his affiliates is directly or indirectly an equity holder of the acquiring Company, and the Tranche 1 are not assumed by an acquirer in connection with such transaction, all of his then unvested Tranche 1 will vest, and the Tranche 2 would be eligible for the pro rata vesting described above. The Executive Chairman will remain eligible to earn his performance units so long as he remains employed with the Company as Executive Chairman through December 31, 2023 and following such date he remains engaged with the Company in any capacity, including as a non-employee director.

On June 27, 2022, the Company obtained the approval of the stockholders of the Company for the 2018 Plan amendment regarding an increase to the number of shares authorized for issuance under its 2018 Plan. After approval of the amended and restated 2018 Plan, the performance units are an award that is outstanding under the amended and restated 2018 Plan. Therefore, the performance units may be settled in cash or in shares of Common Stock of the Company at the election of the compensation committee of the Company.

The fair value of the awards was determined to be $29.6 and $30.2 for Tranche 1 and Tranche 2, respectively, on the grant date by application of the Monte Carlo simulation model. Until December 31, 2021, the performance units were cash-settled awards and therefore accounted for as a liability classified award. On December 31, 2021, upon the approval of the amended and restated 2018 Plan, the performance units may be settled in cash or in shares of Common Stock of the Company at the election of the compensation committee of the Company, therefore the award was reclassified to equity. On December 31, 2021, the modification date fair value of the awards was determined to be $8.8 and $9.4 for Tranche 1 and Tranche 2, respectively, by application of the Monte Carlo simulation model.

The following table summarizes the activity for the market performance restricted stock units for the six months ended June 30, 2022:

Weighted Average

Weighted

Period Over

Number

Average 

Which Expected

    

of Units

    

Fair Value

to be Recognized

Outstanding Balance as of December 31, 2021

425,000

$

9.10

2.98

Granted

 

 

 

Forfeited

 

 

Vested

 

 

Outstanding Balance as of June 30, 2022

425,000

$

9.10

2.98

As of June 30, 2022, there was approximately $2.2 million of total unrecognized compensation expense related to non-vested performance unit awards, which will be recognized over the requisite service period. We recognized $0.2 million and 0.4 million compensation expense associated with the performance unit award for the three and six months ended June 30, 2022, respectively.

28

11.   Stockholders’ Equity

The following description summarizes the material terms and provisions of the securities that the Company has authorized.

Common Stock

The Company is authorized to issue 1,600,000,000 shares of Common Stock. Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of our Common Stock and Tandem Preferred (that provides a vote to holders of our Series B Preferred Stock, as described below) Stock possess all voting power for the election of our Board of Directors (the “Board”) and all other matters requiring stockholder action and will at all times vote together as one class on all matters submitted to a vote of Exela stockholders. Holders of our Common Stock are entitled to one vote per share on matters to be voted on by stockholders. Holders of our Common Stock will be entitled to receive such dividends and other distributions, if any, as may be declared from time to time by the Board in its discretion out of funds legally available therefor and shall share equally on a per share basis in such dividends and distributions. The holders of the Common Stock have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the Common Stock. As of June 30, 2022 and December 31, 2021, there were 40,259,274 and 13,259,748 shares of Common Stock outstanding, respectively.

Common Stock At-The-Market Sales Program

On May 27, 2021, the Company entered into an At Market Issuance Sales Agreement (“First ATM Agreement”) with B. Riley Securities, Inc. (“B. Riley”) and Cantor Fitzgerald & Co. (“Cantor”), as distribution agents under which the Company may offer and sell shares of the Company’s Common Stock from time to time through the Distribution Agents, acting as sales agent or principal. On September 30, 2021, the Company entered into a second At Market Issuance Sales Agreement with B. Riley, BNP Paribas Securities Corp., Cantor, Mizuho Securities USA LLC and Needham & Company, LLC, as distribution agents (together with the First ATM Agreement, the “ATM Agreement”).

Sales of the shares of Common Stock under the ATM Agreement, will be in “at the market offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through the Nasdaq or on any other existing trading market for the Common Stock, as applicable, or to or through a market maker or any other method permitted by law, including, without limitation, negotiated transactions and block trades. Shares of Common Stock sold under the ATM Agreement are offered pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-255707), filed with the SEC on May 3, 2021, and declared effective on May 12, 2021 (the “2021 Registration Statement”), and the prospectus dated May 12, 2021 included in the 2021 Registration Statement and the related prospectus supplements for sales of shares of Common Stock as follows:

Supplement

Period

Number of Shares Sold

Weighted Average Price Per Share

Gross Proceeds

Net Proceeds

Prospectus supplement dated May 27, 2021 with an aggregate offering price of up to $100.0 million (“Common ATM Program–1”)

May 28, 2021 through July 1, 2021

2,471,185

$40.164

$99.3 million

$95.7 million

Prospectus supplement dated June 30, 2021 with an aggregate offering price of up to $150.0 million (“Common ATM Program–2”)

June 30, 2021 through September 2, 2021

2,879,023

$52.069

$149.9 million

$144.4 million

Prospectus supplement dated September 30, 2021 with an aggregate offering price of up to $250.0 million (“Common ATM Program–3”)

October 6, 2021 through March 31, 2022

16,743,797

$14.931

$250.0 million

$241.0 million

Prospectus supplement dated May 23, 2022 with an aggregate offering price of up to $250.0 million (“Common ATM Program–4”)

May 24, 2022 through June 30, 2022

18,189,580

$3.199

$58.2 million

$56.4 million

29

Reverse Stock Split

 

On July 25, 2022, we effected a one-for-twenty reverse split (the “Reverse Stock Split”) of our issued and outstanding shares of Common Stock. As a result of the Reverse Stock Split every twenty (20) shares of Common Stock issued and outstanding were automatically combined into one (1) share of issued and outstanding Common Stock, without any change in the par value per share. All information related to Common Stock, stock options, restricted stock units, warrants and earnings per share have been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented.

Giving effect to the Reverse Stock Split the Company’s issued and outstanding stock decreased from 805,185,495 to 40,259,274 and 265,194,961 to 13,259,748 at June 30, 2022 and December 31, 2021, respectively.

Series A Preferred Stock

The Company is authorized to issue 20,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board. The Company designated 2,800,000 shares of its authorized preferred stock as Series A Preferred Stock. At June 30, 2022 and December 31, 2021, the Company had 2,778,111 shares of Series A Preferred Stock outstanding. The par value of the Series A Preferred Stock is $0.0001 per share. Each share of Series A Preferred Stock is convertible at the holder's option, at any time into the number of shares of Common Stock determined as of the date of conversion using a certain conversion formula that takes into account the amount of Liquidation Preference per share as adjusted for accrued but unpaid dividends, as described below. As of June 30, 2022, after taking into account the effect of the Reverse Stock Split, each outstanding share of Series A Preferred Stock was convertible into 0.0250 shares of Common Stock using this conversion formula. Accordingly, as of June 30, 2022, 69,518 shares of Common Stock were issuable upon conversion of the remaining 2,778,111 shares of Series A Preferred Stock.

Holders of the Series A Preferred Stock are entitled to receive cumulative dividends at a rate per annum of 10% of the dollar amount of per share liquidation preference (plus accumulated but unpaid dividends, the “Series A Liquidation Preference") per share of Series A Preferred Stock, paid or accrued quarterly in arrears on 15th day of each March, June, September and December. From the issue date through June 30, 2022 the amount of all accrued but unpaid dividends on the Series A Preferred Stock have been added to the Series A Liquidation Preference. The Company shall add the amount of all accrued but unpaid dividends on each quarterly dividend payment date to the Series A Liquidation Preference, except to the extent the Company elects to make all or any portion of such payment in cash on or prior to the applicable dividend payment date, in which case, the amount of the accrued but unpaid dividends that is added to the Series A Liquidation Preference shall be reduced on a dollar-for-dollar basis by the amount of any such cash payment. The Company is not required to make any payment or allowance for unpaid dividends, whether or not in arrears, on converted shares of Series A Preferred Stock or for dividends on the shares of Common Stock issued upon conversion of such shares. The gross dividend accumulation for the three and six months ended June 30, 2022 was $0.9 million and $1.7 million, respectively. The gross dividend accumulation for the three months ended June 30, 2021 was $0.8 million. However, as a result of 511,939 shares of Series A Preferred Stock being converted into 223,413 shares of Common Stock during the six months ended June 30, 2021, accumulated dividend of $1.8 million was reversed, resulting in a net reduction of dividend accumulation of $0.1 million for the six months ended June 30, 2021. As of June 30, 2022, the total accumulated but unpaid dividends on the Series A Preferred Stock since inception on July 12, 2017 is $14.1 million. The per share average of cumulative preferred dividends for the three and six months ended June 30, 2022 is $0.3 and $0.6, respectively. The per share average of cumulative preferred dividends for the three and six months ended June 30, 2021 is $0.3 and less than $(0.1), respectively.

In addition, holders of the Series A Preferred Stock will participate in any dividend or distribution of cash or other property paid in respect of the Common Stock pro rata with the holders of the Common Stock (other than certain dividends or distributions that trigger an adjustment to the conversion rate, as described in the Certificate of Designations), as if all shares of Series A Preferred Stock had been converted into Common Stock immediately prior to the date on which such holders of the Common Stock became entitled to such dividend or distribution.

30

Series B Preferred Stock and Tandem Preferred Stock

In two separate exchange offers made on February 24, 2022 (the “First Share Exchange Offer”) and May 2, 2022 (the “Second Share Exchange Offer”), the Company offered its common stockholders the opportunity to exchange shares of Common Stock for its Series B Preferred Stock, par value $0.0001 per share, with each one shares of Common Stock being exchangeable for one share of Series B Preferred Stock having a liquidation preference of $25.00 per share. On March 11, 2022, the Company designated 5,000,000 shares of its authorized and unissued preferred stock as Series B Preferred Stock and filed a Certificate of Designation of Series B Preferred Stock of Exela Technologies Inc., or the Series B Certificate of Designation. The First Share Exchange Offer expired on March 10, 2022, and 900,328 shares of Common Stock were validly tendered for exchange. On March 11, 2022, the Company issued a total of 900,328 shares of Series B Preferred Stock in exchange of all such tendered and accepted shares of Common Stock. The Second Share Exchange Offer expired on May 17, 2022, and 2,129,572 shares of Common Stock were validly tendered for exchange. On May 18, 2022, the Company issued a total of 2,129,572 shares of Series B Preferred Stock in exchange of all such tendered and accepted shares of Common Stock. The tendered and accepted shares of Common Stock were cancelled. The Series B Preferred Stock are listed on the Nasdaq under the symbol “XelaP”.

At June 30, 2022, the Company had 3,029,900 shares of Series B Preferred Stock outstanding. Each share of Series B Preferred Stock is convertible at the holder's option, at any time into the number of shares of Common Stock determined as of the date of conversion using a certain conversion formula that takes into account the amount of liquidation preference per share as adjusted for accrued but unpaid dividends, as described below. As of June 30, 2022, after taking into account the effect of the Reverse Stock Split and payment of the accrued dividend, each outstanding share of Series B Preferred Stock was convertible into one share of Common Stock using this conversion formula. Accordingly, as of June 30, 2022, 3,029,900 shares of Common Stock were issuable upon conversion of 3,029,900 shares of outstanding Series B Preferred Stock.

Holders of the Series B Preferred Stock are entitled to receive cumulative dividends at a rate per annum of 6% of the dollar amount of per share liquidation preference (plus accumulated but unpaid dividends, the “Series B Liquidation Preference") per share of Series B Preferred Stock, paid or accrued quarterly in arrears on the last day of each of March, June, September and December. The Company shall add the amount of all accrued but unpaid dividends on each quarterly dividend payment date to the Series B Liquidation Preference, except to the extent the Company elects to make all or any portion of such payment in cash on or prior to the applicable dividend payment date, in which case, the amount of the accrued but unpaid dividends that is added to the Series B Liquidation Preference shall be reduced on a dollar-for-dollar basis by the amount of any such cash payment. The Company is not required to make any payment or allowance for unpaid dividends, whether or not in arrears, on converted shares of Series B Preferred Stock or for dividends on the shares of Common Stock issued upon conversion of such shares. The gross dividend accrued for the three and six months ended June 30, 2022 is $1.3 million and $1.4 million, respectively. The per share average of accrued preferred dividends for the three and six months ended June 30, 2022 is $0.43 and $0.46, respectively. On June 30, 2020, the Company paid accumulated dividend of $1.4 million. As of June 30, 2022, there were no accumulated but unpaid dividends on the Series B Preferred Stock.

In addition, holders of the Series B Preferred Stock will participate in any dividend or distribution of cash or other property paid in respect of the Common Stock pro rata with the holders of the Common Stock (other than certain dividends or distributions that trigger an adjustment to the conversion rate, as described in the Certificate of Designations), as if all shares of Series B Preferred Stock had been converted into Common Stock immediately prior to the date on which such holders of the Common Stock became entitled to such dividend or distribution. Holders of Series B Preferred Stock also have rights to vote for the election of one additional director to serve on the Board, if dividends on Series B Preferred Stock are in arrears for eight or more consecutive quarters, until all unpaid and accumulated dividends on the Series B Preferred Stock have been paid or declared and a sum sufficient for payment is set aside for such payment.

On May 17, 2022, the Company issued one share of tandem preferred stock, par value $0.0001 per share (the “Tandem Preferred Stock”), as a dividend on its existing shares of outstanding Series B Preferred Stock. Any issuance of Series B Preferred Stock after this date shall be automatically accompanied by an equal number of shares of Tandem Preferred Stock. Tandem Preferred Stock are embedded in the Series B Preferred Stock and they provide voting rights to

31

the existing shares of Series B Preferred Stock. Each share of Series B Preferred Stock disclosed in the Condensed Consolidated Balance Sheet, the Condensed Consolidated Statements of Stockholders’ Deficit and the Notes to the Condensed Consolidated Financial Statements embeds one share of Tandem Preferred Stock.

On all matters submitted to a vote of the stockholders of the Company, the holders of the Series B Preferred Stock through their holdings of Tandem Preferred Stock will be entitled to vote with the holders of the Common Stock as a single class. Each share of Tandem Preferred Stock entitles the holder to 1 vote per share, subject to adjustment for issuance of any shares of Common Stock pursuant to any dividend or distribution on shares of Common Stock, share split or share combination or other transactions as specified in the Certificate of Designation of Tandem Preferred Stock.

Shares of Tandem Preferred Stock are not entitled to receive dividends of any kind. In the case of a transfer of the underlying Series B Preferred Stock by a holder to any transferee, the Tandem Preferred Stock shall be automatically transferred simultaneously to such transferee without any further action by such Holder. Upon the redemption of a holder’s shares of Series B Preferred Stock or the conversion of shares of Series B Preferred Stock into Common Stock, an equal number of such holder’s shares of Tandem Preferred Stock shall, without any further action required by the holder, be automatically transferred to the Company for cancellation without the payment of any additional consideration by the Company. In the event of any liquidation, winding-up or dissolution of the Company each holder of the Tandem Preferred Stock shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders an amount in cash equal to the par value of such Tandem Preferred Stock with respect to each share of Tandem Preferred Stock held by such holder.

Treasury Stock

On November 8, 2017, the Company’s Board authorized a share buyback program (the “Share Buyback Program”), pursuant to which the Company was permitted to purchase up to 83,333 shares of Common Stock. The Share Buyback Program has expired. As of June 30, 2022, 46,452 shares had been repurchased under the Share Buyback Program and they are held as treasury stock. During the first quarter of 2020, 76,179 shares of Common Stock were returned to the Company in connection with the Appraisal Action. These shares are also included in treasury stock. The Company records treasury stock using the cost method.

Warrants

At June 30, 2022, there were warrants outstanding to purchase 778,258 shares of our Common Stock, consisting of 35,000,000 warrants to purchase one-one hundred twentieth of one share outstanding from our 2015 IPO and 9,731,819 warrants to purchase one-twentieth of one share from the private placement that was completed in March 2021.

IPO Warrants

As part of our IPO, we issued 35,000,000 units comprising one share of Common Stock and one warrant of which 34,976,302 have been separated from the original unit and 23,698 warrants were unseparated as of June 30, 2022 (the Common Stock included in these units (adjusted to reflect the Reverse Stock Split) have been accounted for in the number of shares of Common Stock outstanding referred to above). The warrants traded on the OTC Pink under the symbol “XELAW” as of June 30, 2022.

Each IPO warrant entitled the holder to purchase one-one hundred twentieth of one share of Common Stock for $5.75 per ($690.00 per whole share). IPO Warrants could be exercised only for a whole number of shares of Common Stock. All of the unexercised IPO warrants expired on July 12, 2022.

Private Placement of Unregistered Shares and Warrants

On March 15, 2021, the Company, entered into a securities purchase agreement with certain accredited institutional investors pursuant to which the Company issued and sold to ten accredited institutional investors in a private placement an aggregate of 486,591 unregistered shares of the Company’s Common Stock at a price of $55.00 per share

32

and an equal number of warrants, generating gross proceeds to the Company of $26.8 million. Cantor Fitzgerald acted as underwriter in connection with such sale of unregistered securities and received a placement fee of 5.5% of gross proceeds in connection with such service. In selling the shares without registration, the Company relied on exemptions from registration available under Section 4(a)(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The shares of Common Stock sold together with these warrants are included in the Company’s calculation of total shares outstanding. The Company filed a registration statement on Form S-3 on May 3, 2021 that registered these shares and the shares underlying these private placement warrants.

Each private placement warrant entitles the holder to purchase one-twentieth of one share of Common Stock, at an exercise price of $80.00 per share and will expire on September 19, 2026. The private placement warrants are not traded as of June 30, 2022 and are not subject to redemption by the Company.

12.   Related-Party Transactions

Relationship with HandsOn Global Management

The Company incurred reimbursable travel expenses to HOVS LLC and HandsOn Fund 4 I, LLC (collectively, and together with certain of their affiliated entities managed by HandsOn Global Management LLC, including such entity, “HGM”) of less than $0.1 million for each of the three and six months ended June 30, 2022 and 2021. Certain members of our Board, including our Executive Chairman, Par Chadha, Sharon Chadha, Ron Cogburn, and James Reynolds are, have been, or may be deemed to be affiliated with HGM.

Pursuant to a master agreement dated January 1, 2015 between Rule 14, LLC and a subsidiary of the Company, the Company incurs marketing fees to Rule 14, LLC, a portfolio company of HGM. Similarly, the Company is party to ten master agreements with entities affiliated with HGM’s managed funds, each of which were entered into during 2015 and 2016. Each master agreement provides the Company with use of certain technology and includes a reseller arrangement pursuant to which the Company is entitled to sell these services to third parties. Any revenue earned by the Company in such third-party sale is shared 75%/25% with each of HGM’s venture affiliates in favor of the Company. The brands Zuma, Athena, Peri, BancMate, Spring, Jet, Teletype, CourtQ and Rewardio are part of the HGM managed funds. The Company has the license to use and resell such brands, as described therein. The Company incurred fees of $1.6 million relating to these agreements for each of the three months ended June 30, 2022 and 2021, respectively. The Company incurred fees of $3.1 million and $2.7 million relating to these agreements for the six months ended June 30, 2022 and 2021, respectively.

Certain operating companies lease their operating facilities from HOV RE, LLC and HOV Services Limited, which are affiliates under common control with HGM. The rental expense for these operating leases was less than $0.1 million for each of the three months ended June 30, 2022 and 2021, and $0.1 million for each of the six months ended June 30, 2022 and 2021. In addition, HOV Services, Ltd. provides the Company data capture and technology services. The expense recognized for these services was approximately $0.4 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively, and $0.7 million and $0.6 million for the six months ended June 30, 2022 and 2021, respectively. These expenses are included in cost of revenue in the consolidated statements of operations.

Consulting Agreement

The Company receives services from Oakana Holdings, Inc. The Company and Oakana Holdings, Inc. are related through a family relationship between our Executive Chairman and the president of Oakana Holdings, Inc. The expense recognized for these services was less than $0.1 million for each of the three months ended June 30, 2022 and 2021, and $0.1 million for each of the six months ended June 30, 2022 and 2021.

Subscription Agreements

During the year ended December 31, 2021, the Company entered into separate subscription agreements with five of its directors. Pursuant to these subscription agreements, the Company issued and sold 3,125, 7,936, 3,174, 3,968 and 1,984 shares of Common Stock of the Company to Sharon Chadha, Par Chadha, Martin Akins, J. Coley Clark and

33

John Rexford, respectively, for a purchase price of $0.1 million, $0.2 million, less than $0.1 million, $0.1 million and less than $0.1 million, respectively.

Subscription, Voting and Redemption Agreement

On May 19, 2022, the Company issued 1,000,000 special voting preferred stock, par value $0.0001 per share (“Redeemable Special Voting Preferred Stock”) at par value of $100 to GP-HGM LLC, an entity affiliated to the Executive Chairman of the Company, pursuant to certain subscription, voting and redemption agreement (the “Subscription, Voting and Redemption Agreement”). The Company designated 1,000,000 shares of its authorized and unissued preferred stock as special voting preferred stock and filed a certificate of designations, preferences, rights and limitations of special voting preferred stock. The Executive Chairman of the Company was the designated manager of GP-HGM LLC. As a sole holder of the Redeemable Special Voting Preferred Stock, GP-HGM LLC was entitled to 20,000 votes per share, together with the holder of the Company’s voting capital stock as a single class at the Company’s 2022 annual meeting of the stockholders on two specific proposals: (a) approval of the adoption of an amendment to the Company’s certificate of incorporation to effect a reverse split of its outstanding Common Stock (the “Reverse Stock Split Proposal”) and (b) approval of an amendment to the Company’s certificate of incorporation to increase the number of authorized shares of preferred stock from 20,000,000 shares to 40,000,000 shares (the “Preferred Stock Increase Proposal”). The Redeemable Super Voting Preferred Stock were redeemed at par on June 28, 2022.

Payable and Receivable/Prepayment Balances with Affiliates

Payable and receivable/prepayment balances with affiliates as of June 30, 2022 and December 31, 2021 were as follows:

June 30, 2022

    

December 31, 2021

Receivables and
Prepaid Expenses

Payables

Receivables and
Prepaid Expenses

Payables

HOV Services, Ltd

$

648

$

$

708

$

Rule 14

1,438

1,483

HGM

67

7

Oakana

22

1

$

715

$

1,460

$

715

$

1,484

13. Segment and Geographic Area Information

The Company’s operating segments are significant strategic business units that align its products and services with how it manages its business, approaches the markets and interacts with customers. The Company is organized into three segments: ITPS, HS, and LLPS.

ITPS: The ITPS segment provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning and distribution to customers primarily in the financial services, commercial, public sector and legal industries.

HS: The HS segment operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets.

LLPS: The LLPS segment provides a broad and active array of legal services in connection with class action, bankruptcy, labor claims adjudication and employment and other legal matters.

The chief operating decision maker reviews segment profit to evaluate operating segment performance and determine how to allocate resources to operating segments. “Segment profit” is defined as revenue less cost of revenue (exclusive of depreciation and amortization). The Company does not allocate Selling, general, and administrative

34

expenses, depreciation and amortization, interest expense and sundry, net. The Company manages assets on a total company basis, not by operating segment, and therefore asset information and capital expenditures by operating segments are not presented. A reconciliation of segment profit to net loss before income taxes is presented below.

Three months ended June 30, 2022

    

ITPS

    

HS

    

LLPS

    

Total

Revenue

$

190,005

$

56,390

$

20,375

$

266,770

Cost of revenue (exclusive of depreciation and amortization)

 

156,704

 

45,719

 

14,854

 

217,277

Segment profit

33,301

10,671

5,521

49,493

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

 

50,195

Depreciation and amortization

 

17,993

Related party expense

 

2,186

Interest expense, net

 

42,271

Debt modification and extinguishment costs (gain), net

 

8,117

Sundry income, net

 

(741)

Other expense, net

 

7,375

Net loss before income taxes

 

$

(77,903)

Three months ended June 30, 2021

    

ITPS

    

HS

    

LLPS

    

Total

Revenue

$

217,260

$

56,204

$

19,545

$

293,009

Cost of revenue (exclusive of depreciation and amortization)

 

156,669

 

38,973

 

13,438

 

209,080

Segment profit

60,591

17,231

6,107

83,929

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

 

36,390

Depreciation and amortization

 

19,420

Related party expense

 

2,748

Interest expense, net

 

42,867

Sundry income, net

 

(787)

Other expense, net

 

651

Net loss before income taxes

 

$

(17,360)

Six months ended June 30, 2022

    

ITPS

    

HS

    

LLPS

    

Total

Revenue

$

395,012

$

112,986

$

38,170

$

546,168

Cost of revenue (exclusive of depreciation and amortization)

320,290

 

92,450

 

28,041

440,781

Segment profit

74,722

20,536

10,129

105,387

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

93,235

Depreciation and amortization

36,205

Related party expense

4,173

Interest expense, net

82,031

Debt modification and extinguishment costs (gain), net

9,001

Sundry income, net

(434)

Other expense, net

13,534

Net loss before income taxes

$

(132,358)

35

Six months ended June 30, 2021

    

ITPS

    

HS

    

LLPS

    

Total

Revenue

$

449,135

$

107,297

$

36,633

$

593,065

Cost of revenue (exclusive of depreciation and amortization)

342,171

74,791

24,705

441,667

Segment profit

106,964

32,506

11,928

151,398

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

78,275

Depreciation and amortization

39,019

Related party expense

4,455

Interest expense, net

85,998

Sundry income, net

(574)

Other expense, net

803

Net loss before income taxes

$

(56,578)

14. Subsequent Events

The Company has evaluated all events that occur after the balance sheet date through the date when these condensed consolidated financial statements were issued to determine if they must be reported.

Common Stock At-The-Market Sales Program

During July 1, 2022 through August 12, 2022, we issued an aggregate of 25,792,220 shares of Common Stock under the Common ATM Program–4 at a weighted average price of $2.286 per share, generating gross proceeds of $59.0 million and net proceeds of $57.3 million, after offering expenses.

Repayments on BRCC Facility

In July 2022, we repaid $8.5 million of outstanding principal amount under the BRCC Term Loan and borrowed $2.5 million under the BRCC Revolver.

Repurchase of Exchange Notes

In July 2022, the Company repurchased $15.0 million principal amount of Exchange Notes issued under the Revolver Exchange.

Sale and Return of Collateral Notes

During July 1, 2022 through August 12, 2022, Appraisal Action plaintiffs sold $35.5 million of principal amount of the Collateral Notes and returned $11.2 million of principal amount of the Collateral Notes back to the Company. Similarly, holders of the Exchange Notes sold $9.0 million of principal amount of the Collateral Notes.

Reverse Stock Split

On July 25, 2022, the Company filed a Certificate of Amendment of the Company’s Second Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Amendment”), with the Secretary of State of Delaware, to effect a one share-for-twenty shares reverse stock split of the Company’s Common Stock. The reverse stock split, had no effect on the par value of the Common Stock and did not reduce the number of authorized shares. It also did not affect the number of Series A Preferred Stock and Series B Preferred Stock outstanding; however, it did reduce the conversion factor of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock. The reason for the reverse stock split was to maintain the Company’s listing on The Nasdaq Capital Market, which pursuant to Nasdaq Listing Rule 5550(a)(2)(the “Rule”) requires that if the closing bid price of the Common Stock is below $1.00 for 30 consecutive trading days, then the closing bid price must be $1.00 or more for 10 consecutive trading days during a grace period to regain compliance with the Rule.

36

Expiration of IPO Warrants

All of the unexercised IPO warrants expired on July 12, 2022 and none of the IPO warrants remain outstanding as of the filing date.

Redeemable Super Voting Preferred Stock

As of July 25, 2022, the Company is no longer authorized to issue shares of Redeemable Super Voting Preferred Stock.

37

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

You should read the following discussion and analysis together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q. Among other things, the condensed consolidated financial statements include more detailed information regarding the basis of presentation for the financial data than included in the following discussion. Amounts in thousands of United States dollars.

Forward Looking Statements

Certain statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report are not historical facts but are forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are accompanied by words such as “may”, “should”, “would”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “seem”, “seek”, “continue”, “future”, “will”, “expect”, “outlook” or other similar words, phrases or expressions. These forward-looking statements include statements regarding our industry, future events, estimated or anticipated future results and benefits, future opportunities for Exela, and other statements that are not historical facts. These statements are based on the current expectations of Exela management and are not predictions of actual performance. These statements are subject to a number of risks and uncertainties regarding Exela’s businesses and actual results may differ materially. The factors that may affect our results include, among others: the impact of political and economic conditions on the demand for our services; the impact of the COVID-19 pandemic; the impact of the 2022 network outage, cyber incidents such as a data or security breach; the impact of competition or alternatives to our services on our business pricing and other actions by competitors; our ability to address technological development and change in order to keep pace with our industry and the industries of our customers; the impact of terrorism, natural disasters or similar events on our business; the effect of legislative and regulatory actions in the United States and internationally; the impact of operational failure due to the unavailability or failure of third-party services on which we rely; the effect of intellectual property infringement; and other factors discussed in this quarterly report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ending December 31, 2021 (“Annual Report”) under the heading “Risk Factors”, and otherwise identified or discussed in this quarterly report. You should consider these factors carefully in evaluating forward-looking statements and are cautioned not to place undue reliance on such statements, which speak only as of the date of this quarterly report. It is impossible for us to predict new events or circumstances that may arise in the future or how they may affect us. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this quarterly report. We are not including the information provided on any websites that may be referenced herein as part of, or incorporating such information by reference into, this quarterly report. In addition, forward-looking statements provide our expectations, plans or forecasts of future events and views as of the date of this quarterly report. We anticipate that subsequent events and developments may cause our assessments to change. These forward-looking statements should not be relied upon as representing our assessments as of any date subsequent to the date of this quarterly report.

Overview

Exela Technologies, Inc. (“Exela,” the “Company”, “we” or “us”) is a global business process automation leader leveraging a global footprint and proprietary technology to help turn the complex into the simple through user friendly software platforms and solutions that enable our customers’ digital transformation. We have decades of expertise earned from serving more than 4,000 customers worldwide, including many of the world’s largest enterprises and over 60% of the Fortune® 100, in many mission critical environments across multiple industries, including banking, healthcare, insurance and manufacturing. Our technology-enabled solutions allow global organizations to address critical challenges resulting from the massive amounts of data obtained and created through their daily operations. Our solutions address the life cycle of transaction processing and enterprise information management, from enabling payment gateways and data exchanges across multiple systems, to matching inputs against contracts and handling exceptions, to ultimately depositing payments and distributing communications. Through cloud-enabled platforms, built on a configurable stack of automation modules, and approximately 17,000 employees operating in 21 countries, Exela rapidly deploys integrated technology and operations as an end-to-end digital journey partner.

38

We believe our process expertise, information technology capabilities and operational insights enable our customers’ organizations to more efficiently and effectively execute transactions, make decisions, drive revenue and profitability, and communicate critical information to their employees, customers, partners, and vendors. Our solutions are location agnostic, and we believe the combination of our hybrid hosted solutions and global work force in the Americas, EMEA and Asia offers a meaningful differentiation in the industries we serve and services we provide.

History

We are a former special purpose acquisition company that completed an initial public offering on January 22, 2015. In July 2017, Exela, formerly known as Quinpario Acquisition Corp. 2 (“Quinpario”), completed its acquisition of SourceHOV Holdings, Inc. (“SourceHOV”) and Novitex Holdings, Inc. (“Novitex”) pursuant to the business combination agreement dated February 21, 2017 (“Novitex Business Combination”). In conjunction with the completion of the Novitex Business Combination, Quinpario was renamed Exela Technologies, Inc.

The Novitex Business Combination was accounted for as a reverse merger for which SourceHOV was determined to be the accounting acquirer. Outstanding shares of SourceHOV were converted into our common stock (“Common Stock”), presented as a recapitalization, and the net assets of Quinpario were acquired at historical cost, with no goodwill or other intangible assets recorded. The acquisition of Novitex was treated as a business combination under ASC 805 and was accounted for using the acquisition method. The strategic combination of SourceHOV and Novitex formed Exela, which is one of the largest global providers of information processing solutions based on revenues.

On July 25, 2022, we effected a one-for-twenty reverse split of our issued and outstanding shares of our Common Stock. At the effective time of the reverse split, every twenty (20) shares of Common Stock issued and outstanding were automatically combined into one (1) share of issued and outstanding Common Stock, without any change in the par value per share. Our Common Stock began trading on The Nasdaq Capital Market on a Reverse Stock Split-adjusted basis on July 26, 2022. There was no change in our ticker symbol as a result of the Reverse Stock Split. All information related to Common Stock, stock options, restricted stock units, warrants and earnings per share have been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented.

Our Segments

Our three reportable segments are Information & Transaction Processing Solutions (“ITPS”), Healthcare Solutions (“HS”), and Legal & Loss Prevention Services (“LLPS”). These segments are comprised of significant strategic business units that align our transaction processing and enterprise information management products and services with how we manage our business, approach our key markets and interact with our customers based on their respective industries.

ITPS: Our largest segment, ITPS, provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning and distribution to customers primarily in the financial services, commercial, public sector and legal industries. Our major customers include many leading banks, insurance companies, and utilities, as well as hundreds of federal, state and local government entities. Our ITPS offerings enable companies to increase availability of working capital, reduce turnaround times for application processes, increase regulatory compliance and enhance consumer engagement.

HS: HS operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets. We serve the top healthcare insurance payers and hundreds of healthcare providers.

LLPS: Our LLPS segment provides a broad and active array of support services in connection with class action, bankruptcy, labor claims adjudication and employment and other legal matters. Our customer base consists of corporate counsel, government attorneys, and law firms.

39

Revenues

ITPS revenues are primarily generated from a transaction based pricing model for the various types of volumes processed, licensing and maintenance fees for technology sales, and a mix of fixed management fee and transactional revenue for document logistics and location services. HS revenues are primarily generated from a transaction based pricing model for the various types of volumes processed for healthcare payers and providers. LLPS revenues are primarily based on time and materials pricing as well as through transactional services priced on a per item basis.

People

We draw on the business and technical expertise of our talented and diverse global workforce to provide our customers with high-quality services. Our business leaders bring a strong diversity of experience in our industry and a track record of successful performance and execution.

As of June 30, 2022, we had approximately 17,000 employees globally, with 53% located in Americas and EMEA, and the remainder located primarily in India, the Philippines and China.

Costs associated with our employees represent the most significant expense for our business. We incurred personnel costs of $136.6 million and $125.8 million for the three months ended June 30, 2022 and 2021, respectively. We incurred personnel costs of $269.6 million and $265.3 million for the six months ended June 30, 2022 and 2021, respectively. The majority of our personnel costs are variable and incurred only while we are providing our services.

Key Performance Indicators

We use a variety of operational and financial measures to assess our performance. Among the measures considered by our management are the following:

Revenue by segment;
EBITDA; and
Adjusted EBITDA

Revenue by segment

We analyze our revenue by comparing actual monthly revenue to internal projections and prior periods across our operating segments in order to assess performance, identify potential areas for improvement, and determine whether our segments are meeting management’s expectations.

EBITDA and Adjusted EBITDA

We view EBITDA and Adjusted EBITDA as important indicators of performance of our consolidated operations. We define EBITDA as net income, plus taxes, interest expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus optimization and restructuring charges, including severance and retention expenses; transaction and integration costs; other non-cash charges, including non-cash compensation, (gain) or loss from sale or disposal of assets, and impairment charges; and management fees and expenses. See “—Other Financial Information (Non-GAAP Financial Measures)” for more information and a reconciliation of EBITDA and Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

40

Results of Operations

Three Months Ended June 30, 2022 compared to Three Months Ended June 30, 2021:

Three Months Ended June 30, 

    

2022

    

2021

    

Change

    

% Change

Revenue:

 

  

 

  

  

 

  

ITPS

$

190,005

$

217,260

$

(27,255)

(12.54)%

HS

 

56,390

 

56,204

 

186

 

0.33%

LLPS

 

20,375

 

19,545

 

830

 

4.25%

Total revenue

 

266,770

 

293,009

 

(26,239)

 

(8.96)%

Cost of revenue (exclusive of depreciation and amortization):

 

  

 

  

 

  

 

  

ITPS

 

156,704

 

156,669

 

35

 

0.02%

HS

 

45,719

 

38,973

 

6,746

 

17.31%

LLPS

 

14,854

 

13,438

 

1,416

 

10.54%

Total cost of revenues

 

217,277

 

209,080

 

8,197

 

3.92%

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

 

50,195

 

36,390

 

13,805

 

37.94%

Depreciation and amortization

 

17,993

 

19,420

 

(1,427)

 

(7.35)%

Related party expense

 

2,186

 

2,748

 

(562)

 

(20.45)%

Operating profit (loss)

 

(20,881)

 

25,371

 

(46,252)

 

(182.30)%

Interest expense, net

 

42,271

 

42,867

 

(596)

 

(1.39)%

Debt modification and extinguishment costs (gain), net

8,117

8,117

100.00%

Sundry income, net

 

(741)

 

(787)

 

46

 

(5.84)%

Other expense, net

 

7,375

 

651

 

6,724

 

1032.87%

Net loss before income taxes

 

(77,903)

 

(17,360)

 

(60,543)

 

348.75%

Income tax expense

 

(1,296)

 

(2,007)

 

711

 

(35.43)%

Net loss

$

(79,199)

$

(19,367)

$

(59,832)

 

308.94%

Revenue

For the three months ended June 30, 2022, our revenue on a consolidated basis decreased by $26.2 million, or 9.0%, to $266.8 million as compared to $293.0 million for the three months ended June 30, 2021. We experienced revenue decline in our ITPS segment of $27.3 million and revenue increases in our HS and LLPS segments of $0.2 million and $0.8 million respectively. Our ITPS, HS, and LLPS segments constituted 71.2%, 21.1%, and 7.6% of total revenue, respectively, compared to 74.1%, 19.2%, and 6.7% for the three months ended June 30, 2021. The revenue changes by reporting segment were as follows:

ITPS— For the three months ended June 30, 2022, revenue attributable to our ITPS segment decreased by $27.3 million, or 12.5% compared to the same period in the prior year. The majority of this revenue decline is attributable to exiting contracts and statements of work with certain customers that we believe was unpredictable, non-recurring and were not a strategic fit to Company’s long-term success or unlikely to achieve the Company’s long-term target margins (“transition revenue”). In addition, staffing shortages and a network outage (described in Note 1 of the condensed consolidated financial statements) impacted revenue during the quarter. ITPS segment revenue was also impacted adversely by $6.2 million attributable to the depreciation of the Euro and U.K. pound sterling against the U.S. dollar during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

HS— For the three months ended June 30, 2022, revenue attributable to our HS segment increased by $0.2 million, or 0.3% compared to the same period in the prior year primarily driven by higher volumes from our healthcare payer customers.

41

LLPS— For the three months ended June 30, 2022, revenue attributable to our LLPS segment increased by $0.8 million, or 4.2% compared to the same period in the prior year primarily due to an increase in project based engagements in legal claims administration services.

Cost of Revenue

For the three months ended June 30, 2022, our direct costs increased by $8.2 million, or 3.9%, compared to the three months ended June 30, 2021. Costs in our ITPS segment remained flat despite a 12.5% revenue decrease primarily due to cost inflation and idle production costs due to the network outage. HS segment costs increased by $6.7 million, or 17.3% primarily due to increases in employee-related cost on account of higher headcount (bench costs) to meet our customer forecasts and due to idle production costs due to the network outage. LLPS segment cost of revenue increased by $1.4 million, or 10.5%.

The increase in cost of revenues on a consolidated basis was primarily due to an increase in employee-related costs of $5.0 million, higher infrastructure and maintenance costs of $2.6 million, higher operating costs of $2.9 million and lower pass through costs of $2.5 million.

Cost of revenue as a percentage of revenue for the three months ended June 30, 2022 was 81.4% compared to the 71.4% for the same period in the prior year.

Selling, General and Administrative Expenses

SG&A expenses increased by $13.8 million, or 37.9%, to $50.2 million for the three months ended June 30, 2022, compared to $36.4 million for the three months ended June 30, 2021. The increase was primarily attributable to higher employee related costs by $6.6 million, higher legal and professional fees of $4.8 million, higher infrastructure and other costs of $3.1 million, higher travel costs of $0.5 million offset by lower other SG&A expenses of $1.3 million. SG&A expenses increased as a percentage of revenues to 18.8% for the three months ended June 30, 2022 as compared to 12.4% for the three months ended June 30, 2021.

Depreciation & Amortization

Total depreciation and amortization expense was $18.0 million and $19.4 million for the three months ended June 30, 2022 and 2021, respectively. The decrease in total depreciation and amortization expense by $1.4 million was primarily due to a reduction in depreciation expense as a result of the expiration of the lives of assets acquired in prior periods and decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Related Party Expenses

Related party expense was $2.2 million and $2.7 million for the three months ended June 30, 2022 and 2021, respectively.

Interest Expense

Interest expense was $42.3 million and $42.9 million for the three months ended June 30, 2022 and 2021, respectively.

Sundry Income, net

The net change in sundry income of less than $0.1 million over the prior year period was primarily attributable to exchange rate fluctuations on foreign currency transactions.

42

Other Expense, net

Other expense, net was $7.4 million for the three months ended June 30, 2022 compared to other expense, net of 0.7 million for the three months ended June 30, 2021. We remeasured our true-up guarantee obligation under the Revolver Exchange as of June 30, 2022 and accrued an additional net $7.4 million of true-up liability based on the market price for the 2026 Notes in Other expense, net.

Income Tax Expense

We had an income tax expense of $1.3 million for the three months ended June 30, 2022 compared with an income tax expense of $2.0 million for the three months ended June 30, 2021. The change in income taxes was primarily attributable to our change in judgment in 2022 related to the realizability of deferred tax assets in certain state and foreign jurisdictions.

Six Months Ended June 30, 2022 compared to Six Months Ended June 30, 2021:

Six Months Ended June 30, 

    

2022

    

2021

    

Change

    

% Change

Revenue:

 

  

 

  

  

 

  

ITPS

$

395,012

$

449,135

$

(54,123)

(12.05)%

HS

 

112,986

 

107,297

 

5,689

 

5.30%

LLPS

 

38,170

 

36,633

 

1,537

 

4.20%

Total revenue

 

546,168

 

593,065

 

(46,897)

 

(7.91)%

Cost of revenue (exclusive of depreciation and amortization):

 

  

 

  

 

  

 

  

ITPS

 

320,290

 

342,171

 

(21,881)

 

(6.39)%

HS

 

92,450

 

74,791

 

17,659

 

23.61%

LLPS

 

28,041

 

24,705

 

3,336

 

13.50%

Total cost of revenues

 

440,781

 

441,667

 

(886)

 

(0.20)%

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

 

93,235

 

78,275

 

14,960

 

19.11%

Depreciation and amortization

 

36,205

 

39,019

 

(2,814)

 

(7.21)%

Related party expense

 

4,173

 

4,455

 

(282)

 

(6.33)%

Operating profit (loss)

 

(28,226)

 

29,649

 

(57,875)

 

(195.20)%

Interest expense, net

 

82,031

 

85,998

 

(3,967)

 

(4.61)%

Debt modification and extinguishment costs (gain), net

9,001

9,001

100.00%

Sundry income, net

 

(434)

 

(574)

 

140

 

(24.39)%

Other expense, net

 

13,534

 

803

 

12,731

 

1585.43%

Net loss before income taxes

 

(132,358)

 

(56,578)

 

(75,780)

 

133.94%

Income tax expense

 

(3,797)

 

(1,989)

 

(1,808)

 

90.90%

Net loss

$

(136,155)

$

(58,567)

$

(77,588)

 

132.48%

Revenue

For the six months ended June 30, 2022, our revenue on a consolidated basis decreased by $46.9 million, or 7.9%, to $546.2 million from $593.1 million for the six months ended June 30, 2021. We experienced revenue decline in ITPS segment and revenue growth in HS and LLPS segments. Our ITPS, HS, and LLPS segments constituted 72.3%, 20.7%, and 7.0% of total revenue, respectively, for the six months ended June 30, 2022, compared to 75.7%, 18.1%, and 6.2%, respectively, for the six months ended June 30, 2021. The revenue changes by reporting segment were as follows:

ITPS— For the six months ended June 30, 2022, revenue attributable to our ITPS segment decreased by $54.1 million, or 12.1% compared to the same period in the prior year. The majority of this revenue decline is attributable to exiting contracts and statements of work from certain customers with revenue that we believe was unpredictable, non-

43

recurring and were not a strategic fit to Company’s long-term success or unlikely to achieve the Company’s long-term target margins (“transition revenue”). In addition, staffing shortages during the six months ended June 30, 2022 and a network outage during the three months ended June 30,2022 impacted revenue during the period. ITPS segment revenue was also impacted adversely by $9.9 million attributable to the depreciation of the Euro and U.K. pound sterling against the U.S. dollar during the six months ended June 30, 2022, compared to the six months ended June 30, 2021

HS— For the six months ended June 30, 2022, revenue attributable to our HS segment increased by $5.7 million, or 5.3% compared to the same period in the prior year primarily due to higher volumes from our new and existing healthcare customers.

LLPS— For the six months ended June 30, 2022, revenue attributable to our LLPS segment increased by $1.5 million, or 4.2% compared to the same period in the prior year primarily due to an increase in project based engagements in legal claims administration services.

Cost of Revenue

For the six months ended June 30, 2022, our cost of revenue decreased by $0.9 million, or 0.2%, compared to the six months ended June 30, 2021. Costs in our ITPS segment decreased by $21.9 million, or 6.4%, primarily attributable to the corresponding decline in revenues. HS segment costs increased by $17.7 million, or 23.6% primarily due to increases in employee-related cost on account of higher headcount (bench costs) to meet our customer forecasts. LLPS segment cost of revenue increased by $3.3 million, or 13.5%. Higher costs due to inflationary pressure during the six months ended June 30, 2022 and idle production costs due to network outage in June impacted both ITPS and HS segments during the six months ended June 30, 2022.

The decrease in cost of revenues on a consolidated basis was primarily due to a decrease in employee-related costs of $2.8 million and lower pass through costs of $4.4 million offset by higher infrastructure and maintenance costs of $1.0 million and higher other operating costs of $5.4 million.

Cost of revenue for the six months ended June 30, 2022 was 80.7% of revenue compared to the 74.5% for the comparable same period in the prior year.

Selling, General and Administrative Expenses

SG&A expenses increased $15 million, or 19.1%, to $93.2 million for the six months ended June 30, 2022, compared to $78.3 million for the six months ended June 30, 2021. The increase was primarily attributable to higher employee related costs by $8.2 million, higher travel costs of $1.2 million, higher infrastructure, maintenance and operating costs of $3.4 million, higher legal and professional fees of $3.4 million offset by lower other SG&A expenses of $1.3 million. SG&A expenses increased as a percentage of revenues to 17.1% for the six months ended June 30, 2022 as compared to 13.2% for the six months ended June 30, 2021.

Depreciation & Amortization

Total depreciation and amortization expense was $36.2 million and $39.0 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in total depreciation and amortization expense by $2.8 million was primarily due to a reduction in depreciation expense as a result of the expiration of the lives of assets acquired in prior periods and decrease in intangibles amortization expense due to end of useful lives for certain intangible assets during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Related Party Expenses

Related party expense was $4.2 million for the six months ended June 30, 2022 compared to $4.5 million for the six months ended June 30, 2021.

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Interest Expense

Interest expense was $82.0 million for the six months ended June 30, 2022 compared to $86.0 million for the six months ended June 30, 2021.

Debt modification and extinguishment costs (gain), net  

The Company recorded a debt extinguishment cost of $9.0 million in connection with partial prepayment of $50.0 million in cash on $100.0 million senior secured revolving facility maturing July 12, 2022 during the six months ended June 30, 2022 and the exit fee paid on the partial prepayment of BRCC Term Loan was treated as a debt extinguishment cost.

Sundry Income, net

The decrease in income by $0.1 million over the prior year period was primarily attributable to exchange rate fluctuations on foreign currency transactions.

Other Expense, net

Other expense, net was $13.5 million for the six months ended June 30, 2022 compared to other expense, net of 0.8 million for the six months ended June 30, 2021. We remeasured our true-up guarantee obligation under the Revolver Exchange as of June 30, 2022 and accrued $13.5 million of true-up liability based on the market price for the 2026 Notes in Other expense, net.

Income Tax Expense

The Company recorded income tax expense of $3.8 million for the six months ended June 30, 2022 and an income tax expense of $2.0 million for the six months ended June 30, 2021. The tax expense for the six months ended June 30, 2022 is higher than the six months ended June 30, 2021 largely due to year-over-year increase in profitability in non-US jurisdictions.

Other Financial Information (Non-GAAP Financial Measures)

We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income, plus taxes, interest expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA plus optimization and restructuring charges, including severance and retention expenses; transaction and integration costs; other non-cash charges, including non-cash compensation, (gain) or loss from sale or disposal of assets, and impairment charges; and management fees and expenses.

We present EBITDA and Adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. Additionally, our credit agreement requires us to comply with certain EBITDA related metrics.

Note Regarding Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non GAAP financial measures will provide useful information to investors in assessing our financial performance and results of operations as our Board of Directors (the “Board”) and management use EBITDA and Adjusted EBITDA to assess our financial performance, because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control of our management team. Net loss is the GAAP measure most directly comparable to EBITDA and Adjusted EBITDA. Our non GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non GAAP financial measures has important limitations as analytical tools because they exclude some but

45

not all items that affect the most directly comparable GAAP financial measures. These non GAAP financial measures are not required to be uniformly applied, are not audited and should not be considered in isolation or as substitutes for results prepared in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the three months ended June 30, 2022 and 2021.

Three Months Ended June 30, 

    

2022

    

2021

Net Loss

$

(79,199)

$

(19,367)

Taxes

 

1,296

 

2,007

Interest expense

 

42,271

 

42,867

Depreciation and amortization

 

17,993

 

19,420

EBITDA

 

(17,639)

 

44,927

Optimization and restructuring expenses (1) 

 

6,570

 

4,928

Transaction and integration costs (2) 

 

8,622

 

1,350

Non-cash equity compensation (3) 

 

528

 

593

Other charges including non-cash (4) 

24,797

379

Loss/(Gain) on sale of assets (5)

636

(2,138)

Loss/(Gain) on business disposals (6)

1,296

Debt modification and extinguishment costs (gain), net

8,117

Contract costs (7)

4,826

502

Litigation reserve

(925)

Adjusted EBITDA

 

$

36,457

$

50,912

1.Adjustment represents net salary and benefits associated with positions, current vendor expenses and existing lease contracts that are part of the on-going savings and productivity improvement initiatives in process transformation, customer transformation and post-merger or acquisition integration.
2.Represents costs incurred related to transactions for completed or contemplated transactions during the period.
3.Represents the non-cash charges related to restricted stock units and options that vested under the 2018 Stock Incentive Plan.
4.Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase accounting and other non-cash charges. Other charges include severance, retention bonus, facility consolidation and other transition costs.
5.Represents a loss/(gain) recognized on the disposal of property, plant, and equipment and other assets.
6.Represents a loss/(gain) recognized on the disposal of noncore-business assets.
7.Represents costs incurred on new projects, contract start-up costs and project ramp costs.

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Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net loss, the most directly comparable GAAP measure, for the six months ended June 30, 2022 and 2021.

Six Months Ended June 30, 

    

2022

    

2021

Net Loss

$

(136,155)

$

(58,567)

Taxes

 

3,797

 

1,989

Interest expense

 

82,031

 

85,998

Depreciation and amortization

 

36,205

 

39,019

EBITDA

 

(14,122)

 

68,439

Optimization and restructuring expenses (1) 

 

13,407

 

10,295

Transaction and integration costs (2) 

 

12,327

 

5,998

Non-cash equity compensation (3) 

 

845

 

980

Other charges including non-cash (4) 

38,030

12,406

Loss/(Gain) on sale of assets (5)

522

(2,440)

Loss/(Gain) on business disposals (6)

1,296

Debt modification and extinguishment costs (gain), net

9,001

Loss/(Gain) on derivative instruments (7)

 

 

(125)

Contract costs (8)

12,577

1,454

Litigation reserve

(925)

Adjusted EBITDA

$

72,587

$

97,378

1.Adjustment represents net salary and benefits associated with positions, current vendor expenses and existing lease contracts that are part of the on-going savings and productivity improvement initiatives in process transformation, customer transformation and post-merger or acquisition integration.
2.Represents costs incurred related to transactions for completed or contemplated transactions during the period.
3.Represents the non-cash charges related to restricted stock units and options that vested during the year under the 2018 Stock Incentive Plan.
4.Represents fair value adjustments to deferred revenue and deferred rent accounts established as part of purchase accounting and other non-cash charges. Other charges include severance, retention bonus, facility consolidation and other transition costs.
5.Represents a loss/(gain) recognized on the disposal of property, plant, and equipment and other assets.
6.Represents a loss/(gain) recognized on the disposal of noncore-business assets.
7.Represents the impact of changes in the fair value of an interest rate swap entered into during the fourth quarter of 2017.
8.Represents costs incurred on new projects, contract start-up costs and project ramp costs.

Liquidity and Capital Resources

Overview

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. The following conditions raised substantial doubt about our ability to continue as a going concern: a history of net losses, net operating cash outflows, working capital deficits and significant cash payments for interest on our long-term debt. The Company has undertaken and completed several plans and actions to improve our available cash balances, liquidity or cash generated from operations, over the twelve month period from the date these financial statements are issued. Going concern matters are more fully discussed in Note 1, General.

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At June 30, 2022, cash and cash equivalents totaled $93.2 million including restricted cash of $42.9 million. We also had borrowing capacity of up to $51.0 million under our BRCC Revolver which, the Company anticipates, will become fully available in the course of 2022, of which $12.5 million was drawn by the Company as of June 30, 2022.

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of June 30, 2022, our working capital deficit amounted to $290.3 million an increase of $70.3 million as compared to working capital deficit of $220.0 million as of December 31, 2021. This increase in working capital deficit is primarily a result of decreases in accounts receivables due to sale of accounts receivables and increases in accrued interest, accounts payable, and obligation for claim payment.

In the ordinary course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations include borrowings, interest obligations, purchase commitments, operating and finance lease commitments, employee benefit payments and taxes. Specifically, $68.8 million of BRCC Term Loan and $12.5 million outstanding under the BRCC Revolver both mature in June 2023. Also, maturing in July 2023 are $22.8 million aggregate principal amount of the 2023 Notes and $82.9 million aggregate principal amount of the Term Loans. The Company’s Term Loans also require us to make periodic principal repayments. In addition, we are carrying a net accrued liability of $26.0 million for the true-up obligation for the Revolver Exchange which we expect to settle over the next twelve months. See Note 5 - Long-Term Debt and Credit Facilities, Note 7 - Employee Benefit Plans, and Note 8- Commitments and Contingencies to our condensed consolidated financial statements herein for further information on material cash requirements from known contractual and other obligations.

We currently expect to spend approximately $15.0 to $20.0 million on total capital expenditures over the next twelve months. We will continue to evaluate additional capital expenditure needs that may arise due to changes in the business model. Our future cash requirements will depend on many factors, including our rate of revenue growth, our investments in strategic initiatives, applications or technologies, operation centers and acquisition of complementary businesses, which may require the use of significant cash resources and/or additional financing.

As of June 30, 2022 and in comparison to December 31, 2021, the Company has reduced debt by $149.8 million, including liabilities accrued for the Appraisal Action. With an objective to increase free cash flows and in order to maintain sufficient liquidity to support profitable growth, the Company is pursuing further reduction in debt and repricing of existing debt. The Company will continue to pursue the sale of certain non-core businesses that are not central to the Company’s long-term strategic vision and invest in acquisition of businesses that enhance the value proposition. The Company also plans to take further action to raise additional funds in the debt and equity capital markets. Based on our experience with the at-the-market programs and our knowledge of the Company and the financial market, we believe that we will be able to raise those additional funds. There can be no assurances, however, that any of these initiatives will be consummated or will achieve its desired result.

On March 26, 2020, the Delaware Court of Chancery entered a judgment against one of our subsidiaries in the amount of $57.7 million inclusive of costs and interest arising out of the petition for appraisal pursuant to 8 Del. C. § 262 in the Delaware Court of Chancery, captioned Manichaean Capital, LLC, et al. v. SourceHOV Holdings, Inc., C.A. No. 2017 0673 JRS (pursuant to which former stockholders of SourceHOV sought, among other things, a determination of the fair value of their 10,304 SourceHOV shares at the time of the Novitex Business Combination) (the “Appraisal Action”). On December 31, 2021, we agreed to settle the Appraisal Action along with a separate case brought by the same plaintiffs for $63.4 million. Accordingly as of December 31, 2021, the Company accrued a liability of $63.4 million for these matters, of which $47.1 million had been paid as of June 30, 2022, with no amount remaining to be paid as of the date of this report.

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 Company has implemented favorable provisions of the CARES Act, including the refundable payroll tax credits and the deferment of employer social security payments. At the end of 2021, the Company paid a portion of the deferred employer social security due as per IRS guidance. The

48

remaining balance of deferred employer social security taxes will be paid by the end of fiscal 2022. The Company has utilized recently enacted COVID-19 relief measures in various European jurisdictions, including permitted deferrals of certain payroll, social security and value added taxes. At the end of 2021, the Company paid a portion of these deferred payroll taxes, social security and value added taxes. The remaining balance of deferred payroll taxes, social security and value added taxes will be paid by the end of fiscal 2022 as per deferment timeline.

On December 17, 2020, certain subsidiaries of the Company entered into a $145.0 million securitization facility with a five year term (the “Securitization Facility”). On December 17, 2020 the Company made the initial borrowing of approximately $92.0 million under the Securitization Facility and used a portion of the proceeds to repay previous securitization facility, which terminated on such date. The Company used the remaining proceeds for general corporate purposes. On June 17, 2022, the Company repaid in full the loans outstanding under the Securitization Facility. The aggregate outstanding principal amount of loans under the Securitization Facility as of such date was approximately $91.9 million.

On March 15, 2021, the Company, entered into a securities purchase agreement with certain accredited institutional investors pursuant to which the Company issued and sold to ten accredited institutional investors in a private placement an aggregate of 486,591 unregistered shares of the Company’s Common Stock at a price of $55.0 per share and an equal number of warrants, generating gross proceeds to the Company of $26.8 million. Cantor Fitzgerald acted as underwriter in connection with such sale of unregistered securities and received a placement fee of 5.5% of gross proceeds in connection with such service. In selling the shares without registration, the Company relied on exemptions from registration available under Section 4(a)(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. Each private placement warrant entitles the holder to purchase one share of Common Stock, will be exercisable at an exercise price of $80.00 per share beginning on September 19, 2021 and will expire on September 19, 2026.

On May 27, 2021, the Company entered into an At Market Issuance Sales Agreement (“First ATM Agreement”) with B. Riley Securities, Inc. (“B. Riley”) and Cantor Fitzgerald & Co. (“Cantor”), as distribution agents under which the Company may offer and sell shares of the Company’s Common Stock from time to time through the Distribution Agents, acting as sales agent or principal. On September 30, 2021, the Company entered into a second At Market Issuance Sales Agreement with B. Riley, BNP Paribas Securities Corp., Cantor, Mizuho Securities USA LLC and Needham & Company, LLC, as distribution agents (together with the First ATM Agreement, the “ATM Agreement”).

Sales of the shares of Common Stock under the ATM Agreement, will be in “at the market offerings” as defined in Rule 415 under the Securities Act, including, without limitation, sales made directly on or through the Nasdaq or on any other existing trading market for the Common Stock, as applicable, or to or through a market maker or any other method permitted by law, including, without limitation, negotiated transactions and block trades. Shares of Common Stock sold under the ATM Agreement are offered pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-255707), filed with the SEC on May 3, 2021, and declared effective on May 12, 2021 (the “2021

49

Registration Statement”), and the prospectus dated May 12, 2021 included in the 2021 Registration Statement and the related prospectus supplements for sales of shares of Common Stock as follows:

Supplement

Period

Number of Shares Sold

Weighted Average Price Per Share

Gross Proceeds

Net Proceeds

Prospectus supplement dated May 27, 2021 with an aggregate offering price of up to $100.0 million (“Common ATM Program–1”)

May 28, 2021 through July 1, 2021

2,471,185

$40.164

$99.3 million

$95.7 million

Prospectus supplement dated June 30, 2021 with an aggregate offering price of up to $150.0 million (“Common ATM Program–2”)

June 30, 2021 through September 2, 2021

2,879,023

$52.069

$149.9 million

$144.4 million

Prospectus supplement dated September 30, 2021 with an aggregate offering price of up to $250.0 million (“Common ATM Program–3”)

October 6, 2021 through March 31, 2022

16,743,797

$14.931

$250.0 million

$241.0 million

Prospectus supplement dated May 23, 2022 with an aggregate offering price of up to $250.0 million (“Common ATM Program–4”)

May 24, 2022 through June 30, 2022

18,189,580

$3.199

$58.2 million

$56.4 million

On June 17, 2022, the Company entered into an amended and restated receivables purchase agreement (the "Amended Receivables Purchase Agreement") under its accounts receivable securitization facility among certain of the Company's subsidiaries, its wholly-owned, "bankruptcy remote" special purpose subsidiaries ("SPEs") and certain global financial institutions ("Purchasers"). The Amended Receivables Purchase Agreement extends the term of the securitization facility such that the SPE may sell certain receivables to the Purchasers until June 17, 2025. Under the Amended Receivables Purchase Agreement, transfers of accounts receivable from the SPEs are treated as sales and are accounted for as a reduction in accounts receivable because the agreement transfers effective control over and risk related to the accounts receivable to the Purchasers. On June 17, 2022, the Company sold $85.0 million of its accounts receivable and used the whole proceeds from this sale to repay part of the borrowings from the Securitization Facility (as discussed above).

Cash Flows

The following table summarizes our cash flows for the periods indicated:

Six Months Ended June 30, 

    

2022

    

2021

    

Change

Net cash provided by (used in) operating activities

$

26,140

$

(45,988)

$

72,128

Net cash used in investing activities

 

(12,246)

 

(66)

(12,180)

Net cash provided by financing activities

 

31,627

 

23,662

 

7,965

Subtotal

 

45,521

 

(22,392)

 

67,913

Effect of exchange rates on cash

 

(404)

 

(53)

 

(351)

Net increase (decrease) in cash and cash equivalents

 

45,117

 

(22,445)

 

67,562

Analysis of Cash Flow Changes between the six months ended June 30, 2022 and June 30, 2021

Operating Activities—The increase of $72.3 million in net cash provided by operating activities for the six months ended June 30, 2022 was primarily due to sale of accounts receivable, cash inflow from accounts payable and accrued liabilities and reduction in cash outflow for interest payments. This cash inflow is despite $45.5 million payment for the Appraisal Action made during the six months ended June 30, 2022. This increase in cash provided by operating activities was partially offset by lower cash provided by lower revenue and higher cash outflow on employees-related investments on account of higher headcount (bench costs) to meet our customer forecasts.

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Investing Activities—The increase of $12.4 million in net cash used in investing activities for the six months ended June 30, 2022 was primarily due to higher additions to property, plant and equipment, patents and development of internal software in 2022 offset by cash proceeds received from asset sales. Property additions were primarily related to a purchase of the Company’s Irish headquarters in Dublin, Ireland.

Financing Activities— Cash provided by financing activities during the six months ended June 30, 2022 was $31.6 million, primarily as a result of $170.9 million of net proceeds from equity offerings and $51.0 million of net proceeds from the issuance of 2026 Notes offset by repayments of our senior secured revolving facility, Securitization Facility and BRCC Facility of $188.1 million.

Cash provided by financing activities during the six months ended June 30, 2021 was $23.7 million, primarily as a result of $42.4 million of net proceeds from equity offerings and $7.8 million borrowings from senior secured revolving facility and other loans offset by $20.8 million of repayments on our loans and $5.6 million of finance lease obligation payments.

Indebtedness

In connection with the Novitex Business Combination, we acquired debt facilities and issued notes totaling $1.4 billion. Proceeds from the indebtedness were used to pay off credit facilities existing immediately before the Novitex Business Combination.

Senior Credit Facilities

On July 12, 2017, subsidiaries of the Company entered into a First Lien Credit Agreement with Royal Bank of Canada, Credit Suisse AG, Cayman Islands Branch, Natixis, New York Branch and KKR Corporate Lending LLC (the “Credit Agreement”) providing Exela Intermediate LLC, a wholly owned subsidiary of the Company, upon the terms and subject to the conditions set forth in the Credit Agreement, (i) a $350.0 million senior secured term loan maturing July 12, 2023 with an original issue discount of $7.0 million, and (ii) a $100.0 million senior secured revolving facility that matured on July 12, 2022 (the “Revolving Credit Facility”).

On July 13, 2018, we were able to refinance the $343.4 million of term loans then outstanding under the Credit Agreement (the “Repricing Term Loans”) and borrowed an additional $30.0 million pursuant to incremental term loans (the “2018 Incremental Term Loans”). The proceeds of the 2018 Incremental Term Loans were used by the Company for general corporate purposes and to pay related fees and expenses.

On April 16, 2019, subsidiaries of the Company borrowed a further $30.0 million pursuant to incremental term loans (the “2019 Incremental Term Loans”, and, together with the 2018 Incremental Terms Loans and Repricing Term Loans, the “Term Loans”). The proceeds of the 2019 Incremental Term Loans were used to replace cash spent for acquisitions, pay related fees, expenses and related borrowings for general corporate purposes.

The Term Loans bear interest at a rate per annum of, at the borrower’s option, either (a) a LIBOR rate determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, subject to a 1.0% floor, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate and (iii) the one-month adjusted LIBOR plus 1.0%, in each case plus an applicable margin of 6.5% for LIBOR loans and 5.5% for base rate loans. The Term Loans will mature on July 12, 2023. As of June 30, 2022, the interest rate applicable for the first lien senior secured term loan was 7.5%.

The Term Loans are jointly and severally, irrevocably and unconditionally guaranteed by the nearly all of Company’s U.S. subsidiaries, as a primary obligors and not merely as a sureties.

The borrower may voluntarily repay the Term Loans at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to LIBOR rate loans. Other than as described above, the terms, conditions and covenants applicable to the Incremental Term Loans are consistent with the terms, conditions and covenants that were applicable to the Repricing Term Loans under the Credit Agreement.

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On May 18, 2020, we amended the 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. Pursuant to the amendment, we also agreed to amend the Credit Agreement to, among other things: restrict the borrower and its subsidiaries’ ability to designate or invest in unrestricted subsidiaries; incur certain debt; create certain liens; make certain investments; pay certain dividends or other distributions on account of its equity interests; make certain asset sales or other dispositions (or utilize the proceeds of certain asset sales to reinvest in the business); or enter into certain affiliate transactions pursuant to the negative covenants under the Credit Agreement. In addition, pursuant to the amendment, the borrower under the Credit Agreement was required to maintain minimum Liquidity (as defined in the amendment) of $35.0 million.

On December 9, 2021, in a separate transaction referred to here as the “Private Exchange” (as distinguished from the “Public Exchange” described below), subsidiaries of the Company agreed with three (3) of their Term Loan lenders to exchange $212.1 million of Term Loans under the Credit Agreement for $84.3 million in cash and in $127.8 million principal amount of new 11.500% First-Priority Senior Secured Notes due 2026 (the “2026 Notes”). In connection with the Private Exchange, the exchanging lenders provided consents to amend the Credit Agreement to (i) eliminate all affirmative covenants, (ii) eliminate all negative covenants and (iii) eliminate certain events of default (other than events of default relating to payment obligations).

As a result of the Private Exchange, repurchases (as discussed below) and periodic principal repayments, $82.9 million aggregate principal amount of the Term Loans maturing July 12, 2023 remains outstanding as of June 30, 2022.

Revolving Credit Facility; Letters of Credit

As of December 31, 2021, our $100 million Revolving Credit Facility was fully drawn taking into account letters of credit issued thereunder. As of December 31, 2021, there were outstanding irrevocable letters of credit totaling approximately $0.5 million under the Revolving Credit Facility.

On March 7, 2022, subsidiaries of the Company entered into a Revolving Loan Exchange and Prepayment Agreement with Royal Bank of Canada, Credit Suisse AG, Cayman Islands Branch, KKR Corporate Lending LLC, Granite State Capital Master Fund LP, Credit Suisse Loan Funding LLC and Revolvercap Partners Fund LP exchanging $100.0 million of outstanding Revolving Credit Facility owed by Exela Intermediate LLC, upon the terms and subject to the conditions set forth in the Revolver Exchange agreement, for (i) $50.0 million in cash, and (ii) $50.0 million of 2026 Notes (such exchange, the “Revolver Exchange” and such 2026 Notes, the “Exchange Notes”).

The Exchange Notes are subject to a guarantee in the form of a true-up mechanism whereby the Company is responsible to make a payment to the holders of the Exchange Notes to true-up the shortfall below certain agreed thresholds if holders of the Exchange Notes sell their notes at a price below that threshold during agreed periods in 2022. As of June 30, 2022, there was a net accrued liability of $26.0 million for the true-up obligation included in Accrued liabilities on the condensed consolidated balance sheet after adjusting $5.0 million of true-up advance paid for this liability during the second quarter of 2022.

Senior Secured 2023 Notes

Upon the closing of the Novitex Business Combination on July 12, 2017, subsidiaries of the Company issued $1.0 billion in aggregate principal amount of 10.0% First Priority Senior Secured Notes due 2023 (the “2023 Notes”). The 2023 Notes bear interest at a rate of 10.0% per year. We pay interest on the 2023 Notes on January 15 and July 15 of each year, commencing on January 15, 2018. The 2023 Notes are jointly and severally, irrevocably and unconditionally guaranteed by the nearly all of Company’s U.S. subsidiaries, on a senior basis, as a primary obligors and not merely as a sureties. The 2023 Notes mature on July 15, 2023.

On October 27, 2021, we launched an offer to exchange (the “Public Exchange”) up to $225.0 million in cash and new 11.500% First-Priority Senior Secured Notes due 2026 (the “2026 Notes”) issued by subsidiaries of the Company’s for the outstanding 2023 Notes. The Public Exchange was for $900 in cash per $1,000 principal amount of 2023 Notes tendered subject to proration. The maximum amount of cash to be paid was $225.0 million and the offer was

52

not subject to any minimum participation condition. In case of oversubscription to the cash offer, tendered 2023 Notes would be accepted for cash on a pro rata basis (as a single class). The balance of any tendered 2023 Notes not accepted for cash would be exchanged into 2026 Notes on the basis of $1,000 principal amount of new 2026 Notes for each $1,000 principal amount of outstanding 2023 Notes tendered.

As of the expiration time of the Public Exchange, $912,660,000 aggregate principal amount, or approximately 91.3%, of the 2023 Notes had been validly tendered pursuant to the Public Exchange. On December 9, 2021, upon the settlement of the Public Exchange, $662,660,000 aggregate principal amount of the 2026 Notes were issued and an aggregate $225.0 million in cash (plus accrued but unpaid interest) was paid to participating holders in respect of the validly tendered 2023 Notes.

As a result of the Public Exchange and repurchases (as discussed below), $22.8 million aggregate principal amount of the 2023 Notes remains outstanding as of June 30, 2022.

In conjunction with the Public Exchange, we also solicited consents to amend certain provisions in the indenture governing the 2023 Notes (“Notes Amendments”). On December 1, 2021, on receipt of the requisite consents to the Notes Amendments, the Company, and Wilmington Trust, National Association, as trustee (the “2023 Notes Trustee”), entered into a third supplemental indenture (the “Third Supplemental Indenture”) to the indenture, dated as of July 12, 2017 (as amended and supplemented by (i) the first supplemental indenture, dated as of July 12, 2017 and (ii) the second supplemental indenture, dated as of May 20, 2020, the “2023 Notes Indenture”) governing the outstanding 2023 Notes. The Third Supplemental Indenture amends the 2023 Notes Indenture and the 2023 Notes to eliminate substantially all of the restrictive covenants, eliminate certain events of default, modify covenants regarding mergers and consolidations and modify or eliminate certain other provisions, including certain provisions relating to future guarantors and defeasance, contained in the 2023 Notes Indenture and the 2023 Notes. In addition, all of the collateral securing the 2023 Notes was released pursuant to the Third Supplemental Indenture.

Senior Secured 2026 Notes

As of December 31, 2021, subsidiaries of the Company had $795.0 million aggregate principal amount of the 2026 Notes outstanding including $790.5 million in aggregate principal amount issued under the Public Exchange and Private Exchange transactions described above.

During the six months ended June 30, 2022, subsidiaries of the Company sold $84.5 million in aggregate of principal amount of the 2026 Notes generating net proceeds of $51.0 million. On March 18, 2022, the subsidiaries of the Company issued $50.0 million of the 2026 Notes to satisfy the exchange obligation under the Revolver Exchange. The 2026 Notes are guaranteed by certain subsidiaries of the Company. The 2026 Notes bear interest at a rate of 11.5% per year. We will pay interest on the 2026 Notes on January 15 and July 15 of each year, commencing on July 15, 2022. The 2026 Notes mature on July 12, 2026.

On or after December 1, 2022, we may redeem the 2026 Notes in whole or in part from time to time, at a redemption price of 100%, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, prior to December 1, 2022, we may redeem the 2026 Notes in whole or in part from time to time, at a redemption price equal to 100% of the principal amount of the 2026 Notes redeemed, plus the Applicable Premium as of, and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. “Applicable Premium” means, with respect to any 2026 Note on any applicable redemption date, as determined by us, the greater of: (1) 1% of the then outstanding principal amount of the 2026 Note; and (2) the excess of: (a) the present value at such redemption date of (i) the redemption price of the 2026 Note, at December 1, 2022 plus (ii) all required interest payments due on the 2026 Note through December 1, 2022 (excluding accrued but unpaid interest), computed using a discount rate equal to the treasury rate as of such redemption date plus 50 basis points; over (b) the then outstanding principal amount of the 2026 Note.

As of June 30, 2022, subsidiaries of the Company had $48.2 million and $30.0 million of principal amount of 2026 Notes placed as collateral (the “Collateral Notes”) for the remaining payment obligation under the Appraisal Action settlement and the true-up obligation under the Revolver Exchange, respectively.

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$929.5 million aggregate principal amount of 2026 Notes were outstanding as of June 30, 2022.

Repurchases

In July 2021 we commenced a debt buyback program to repurchase 2023 Notes and senior secured term loans under the Credit Agreement, which remains in place. During the year ended December 31, 2021, we repurchased $64.5 million of the outstanding principal amount of our 2023 Notes for a net cash consideration of $48.4 million. During the year ended December 31, 2021, we also repurchased $40.0 million of outstanding principal amount of Term Loans for a net cash consideration of $22.8 million. These repurchases resulted in an early extinguishment of the repurchased 2023 Notes and senior secured term loans. The Company did not repurchase any senior secured term loans, 2023 Notes or 2026 Notes during the six months ended June 30, 2022.

BRCC Facility

On November 17, 2021, GP2 XCV, LLC, a subsidiary of the Company (“GP2 XCV"), entered into a borrowing facility with B. Riley Commercial Capital, LLC pursuant to which the Company was able to borrow an original principal amount of $75.0 million, which was later increased to $115.0 million as of December 7, 2021 (as the same may be amended from time to time, the “BRCC Term Loan”). On June 30, 2022, GP2 XCV entered into an amendment to the borrowing facility with B. Riley Commercial Capital, LLC pursuant to which the Company will be able to borrow up to $51.0 million under a separate revolving loan (the “BRCC Revolver”, collectively with BRCC Term Loan, the “BRCC Facility”).

The BRCC Facility is secured by a lien on all the assets of GP2 XCV and by a pledge of the equity of GP2 XCV. GP2 XCV is a bankruptcy-remote entity and as such its assets are not available to other creditors of the Company or any of its subsidiaries other than GP2 XCV. The BRCC Facility will mature on June 10, 2023. However, the BRCC Revolver is subject to certain automatic maturity extensions of six months, unless B. Riley Commercial Capital, LLC or the Company notifies the other party about its election not to extend. In such event, the outstanding principal amount of the BRCC Revolver as of the maturity shall be due and payable in 12 equal installments on the last business day of each calendar month thereafter. Interest under the BRCC Facility accrues at a rate of 11.5% per annum and is payable quarterly on the last business day of each March, June, September and December. The purpose of BRCC Term Loan was to fund certain repurchases of Term Loan under the Credit Agreement and to provide funding for the Public Exchange transaction and Private Exchange transaction described above. The purpose of BRCC Revolver is to fund general corporate purposes.

During the six months ended June 30, 2022, we repaid $46.2 million of outstanding principal amount under the BRCC Term Loan along with $1.4 million of exit fees. As of June 30, 2022, there were borrowings of $68.8 million and $12.5 million outstanding under the BRCC Term Loan and BRCC Revolver, respectively, maturing June 10, 2023. There was no availability under the BRCC Revolver as of June 30, 2022.

Securitization Facility

On December 17, 2020, certain subsidiaries of Company closed on Securitization Facility with a five year term. The Securitization Facility provided for an initial funding of approximately $92.0 million supported by the receivables portion of the borrowing base and, subject to contribution, a further funding of approximately $53.0 million supported by inventory and intellectual property. On December 17, 2020 we made the initial borrowing of approximately $92.0 million under the Securitization Facility and used a portion of the proceeds to repay $83.0 million of the aggregate outstanding principal amount of loans as of December 17, 2020 under a previous $160.0 million accounts receivable securitization facility (“A/R Facility”) and used the remaining proceeds for general corporate purposes.

The documentation for the Securitization Facility included (i) a Loan and Security Agreement (the “Securitization Loan Agreement”), dated as of December 10, 2020, by and among Exela Receivables 3, LLC (the “Securitization Borrower”), a wholly-owned indirect subsidiary of the Company, the lenders (each, a “Securitization Lender” and collectively the “Securitization Lenders”), Alter Domus (US), LLC, as administrative agent (the “Securitization Administrative Agent”) and the Company, as initial servicer, pursuant to which the Securitization

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Lenders will make loans to the Securitization Borrower to be used to purchase receivables and related assets from the Securitization Parent SPE (as defined below), (ii) a First Tier Receivables Purchase and Sale Agreement (the, dated as of December 17, 2020, by and among Exela Receivables 3 Holdco, LLC (the “Securitization Parent SPE”), a wholly-owned indirect subsidiary of the Company, and certain other indirect, wholly-owned subsidiaries of the Company listed therein (collectively, the “Securitization Originators”), and the Company, as initial servicer, pursuant to which each Securitization Originator has sold or contributed and will sell or contribute to the Securitization Parent SPE certain receivables and related assets in consideration for a combination of cash and equity in the Securitization Parent SPE, (iii) a Second Tier Receivables Purchase and Sale Agreement, dated as of December 17, 2020, by and among, the Securitization Borrower, the Securitization Parent SPE and the Company, as initial servicer, pursuant to which Securitization Parent SPE has sold or contributed and will sell or contribute to the Securitization Borrower certain receivables and related assets in consideration for a combination of cash and equity in the Securitization Borrower, (iv) the Sub-Servicing Agreement, dated as of December 17, 2020, by and among the Company and each Securitization Originator, (v) the Pledge and Guaranty, dated as of the December 10, 2020, between the Securitization Parent SPE and the Administrative Agent, and (vi) the Performance Guaranty, dated as of December 17, 2020, between the Company, as performance guarantor, and the Securitization Administrative Agent (and together with all other certificates, instruments, UCC financing statements, reports, notices, agreements and documents executed or delivered in connection with the Securitization Loan Agreement, the “Securitization Agreements”). On April 11, 2021, the Company amended the Securitization Loan Agreement and agreed to, among other things, extend the option to contribute inventory and intellectual property to the borrowing base from April 10, 2021 to September 30, 2021 (which did not occur).

The Securitization Borrower, the Company, the Securitization Parent SPE and the Securitization Originators provide customary representations and covenants under the Securitization Agreements. The Securitization Loan Agreement provides for certain events of default upon the occurrence of which the Securitization Administrative Agent may declare the facility’s termination date to have occurred and declare the outstanding Securitization Loan and all other obligations of the Securitization Borrower to be immediately due and payable, however the Securitization Facility does not include an ongoing liquidity covenant like the A/R Facility and aligns reporting obligations with the Company’s other material indebtedness agreements.

The Securitization Borrower and Securitization Parent SPE were formed in December 2020, and are consolidated into the Company’s financial statements. The Securitization Borrower and Securitization Parent SPE are bankruptcy remote entities and as such their assets are not available to creditors of the Company or any of its subsidiaries. Each loan under the Securitization Facility bears interest on the unpaid principal amount as follows: (i) if a Base Rate Loan, at a rate per annum equal to (x) the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) the Adjusted LIBOR Rate (as defined in the Securitization Loan Agreement) plus 1.00%, plus (y) 8.75%; or (ii) if a LIBOR Rate Loan, at the Adjusted LIBOR Rate plus 9.75%.

On June 17, 2022, the Company repaid in full the loans outstanding under the Securitization Facility. The aggregate outstanding principal amount of loans under the Securitization Facility as of such date was approximately $91.9 million. The early termination of the Securitization Facility triggered a prepayment premium of $2.7 million and required payment of approximately $0.5 million and $1.3 million in respect of accrued interest and fees, respectively. All obligations under the Securitization Facility (other than contingent indemnification obligations that expressly survive termination) terminated upon repayment. The Securitization Facility was replaced by the Amended Receivables Purchase Agreement described below.

On June 17, 2022, the Company entered into an amended and restated receivables purchase agreement (the "Amended Receivables Purchase Agreement") under its accounts receivable securitization facility among certain of the Company's subsidiaries, its wholly-owned, "bankruptcy remote" special purpose subsidiaries ("SPEs") and certain global financial institutions ("Purchasers"). The Amended Receivables Purchase Agreement extends the term of the securitization facility such that the SPE may sell certain receivables to the Purchasers until June 17, 2025. Under the Amended Receivables Purchase Agreement, transfers of accounts receivable from the SPEs are treated as sales and are accounted for as a reduction in accounts receivable because the agreement transfers effective control over and risk related to the accounts receivable to the Purchasers. The Company and related subsidiaries have no continuing involvement in the transferred accounts receivable, other than collection and administrative responsibilities and, once sold, the accounts receivable are no longer available to satisfy creditors of the Company or the related subsidiaries. On

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June 17, 2022, the Company sold $85.0 million of its accounts receivable and used the whole proceeds from this sale to repay part of the borrowings from the Securitization Facility (as discussed above). These sales were transacted at 100% of the face value of the relevant accounts receivable, resulting in derecognition of the accounts receivable from the Company's condensed consolidated balance sheet. The Company de-recognized $85.0 million of accounts receivable under this agreement through June 30, 2022. Unsold accounts receivable of $46.0 million were pledged by the SPEs as collateral to the Purchasers as of June 30, 2022.

Potential Future Transactions

We may, from time to time explore and evaluate possible strategic transactions, which may include joint ventures, as well as business combinations or the acquisition or disposition of assets. In order to pursue certain of these opportunities, additional funds will likely be required. Subject to applicable contractual restrictions, to obtain such financing, we may seek to use cash on hand, borrowings under our revolving credit facilities, or we may seek to raise additional debt or equity financing through private placements or through underwritten offerings. There can be no assurance that we will enter into additional strategic transactions or alliances, nor do we know if we will be able to obtain the necessary financing for transactions that require additional funds on favorable terms, if at all. In addition, pursuant to the Registration Rights Agreement that we entered into in connection with the closing of the Novitex Business Combination, certain of our stockholders may have the right to demand underwritten offerings of our Common Stock. We may from time to time in the future explore, with certain of those stockholders the possibility of an underwritten public offering of our Common Stock held by those stockholders. There can be no assurance as to whether or when an offering may be commenced or completed, or as to the actual size or terms of the offering.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

At June 30, 2022, we had $1,144.5 million of principal amount of debt outstanding, with a weighted average interest rate of 11.2%. Interest is calculated under the terms of our credit agreements based on the greatest of certain specified base rates plus an applicable margin that varies based on certain factors. Assuming no change in the amount outstanding, the impact on interest expense of a 1% increase or decrease in the assumed weighted average interest rate would be approximately $11.4 million per year. In order to mitigate interest rate fluctuations with respect to term loan borrowings under the Credit Agreement, in November 2017, we entered into a three year one-month LIBOR interest rate swap contract with a notional amount of $347.8 million, which at the time was the remaining principal balance of the term loan. The swap contract swapped out the floating rate interest risk related to the LIBOR with a fixed interest rate of 1.9275% effective January 12, 2018, but expired in January 2021.

The interest rate swap, which was used to manage our exposure to interest rate movements and other identified risks, was not designated as a hedge. As such, changes in the fair value of the derivative were recorded directly to other expense (income), net. Other expense (income), net includes a gain of $0.1 million related to changes in the fair value of the interest rate swap for the six months ended June 30, 2021.

Foreign Currency Risk

We are exposed to foreign currency risks that arise from normal business operations. These risks include transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location’s functional currency. Our contracts are denominated in currencies of major industrial countries.

Market Risk

We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.

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Item 4. Internal Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Executive Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Executive Chairman and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Executive Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting that are described in our Annual Report.

Notwithstanding such material weaknesses in internal control over financial reporting, our management, including our Executive Chairman and Chief Financial Officer, has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Quarterly Report, in conformity with U.S. generally accepted accounting principles.

Remediation

As previously described in Part II—Item 9A – Controls and Procedures of our Annual Report, we continue to implement a remediation plan to address the material weaknesses mentioned above. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter-ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

Appraisal Action

On September 21, 2017, former stockholders of SourceHOV, who owned 10,304 shares of SourceHOV common stock, filed an Appraisal Action. The Appraisal Action arose out of a preliminary transaction in connection with the Novitex Business Combination, and the petitioners sought, among other things, a determination of the fair value of their shares at the time of the Novitex Business Combination; an order that SourceHOV pay that value to the petitioners, together with interest at the statutory rate; and an award of costs, attorneys’ fees, and other expenses. During the trial the parties and their experts offered competing valuations of the SourceHOV shares as of the date of the Novitex Business Combination. SourceHOV argued the value was no more than $1,633.85 per share and the petitioners argued the value was at least $5,079.28 per share. On January 30, 2020, the Court issued its post-trial Memorandum Opinion in the Appraisal Action, in which it found that the fair value of SourceHOV as of the date of the Novitex Business Combination was $4,591 per share, and on March 26, 2020, the Court issued its final order awarding the petitioners $57,698,426 inclusive of costs and interest. Per the Court’s opinion, the legal rate of interest, compounded quarterly, accrues on the per share value from the July 2017 closing date of the Novitex Business Combination until the date of payment to petitioners. SourceHOV appealed the judgment in the Appraisal Action on September 30, 2020. On January 22, 2021, the Delaware Supreme Court affirmed the judgment of the Delaware Court of Chancery in favor of the petitioners.

The petitioners filed several additional actions to recognize or collect the Appraisal Action judgment against SourceHOV, and on December 31 2021, SourceHOV agreed to settle the Appraisal Action, along with all related claims and a separate case brought by the same plaintiffs for $63.4 million. As of August 12, 2022, the Company had paid all of the settlement amount remaining.

Class Action

On March 23, 2020, the Plaintiff, Bo Shen, filed a putative class action against the Company, Ronald Cogburn, the Company’s former Chief Executive Officer, and James Reynolds, the Company’s former Chief Financial Officer. Plaintiff claimed to be a holder of 67 shares of Company stock, purchased on October 4, 2019 at $80.40 per share. Plaintiff asserts two claims covering the purported class period of March 16, 2018 to March 16, 2020: (1) a violation of Section 10(b) and Rule 10b-5 of the Exchange Act against all defendants; and (2) a violation of Section 20(a) of the Exchange Act against Mr. Cogburn and Mr. Reynolds. The allegations stem from the Company’s press release, dated March 16, 2020 (announcing the postponement of the earnings call and delay in filing of its annual report on Form 10-K for the fiscal year ended December 31, 2019), and press release and related SEC filings, dated March 17, 2020 (announcing its intent to restate its financial statements for 2017, 2018 and interim periods through September 30, 2019) and certain other matters. The Company moved to dismiss the case and the Company’s motion was granted in its entirety on June 24, 2021. Plaintiffs filed an amended complaint by the Court’s deadline on August 5, 2021, and the Company moved to dismiss this amended complaint on September 3, 2021, which dismissal was denied on January 21, 2022, permitting the case to move forward. At this time, it is not practicable to render an opinion about whether an unfavorable outcome is probable or remote with respect to this matter; however, the Company believes it has meritorious defenses and will continue to vigorously assert them.

Derivative Action

On July 8, 2020 Plaintiff Gregory McKenna filed a shareholder derivative action asserting the following claims against current and former directors and officers of Exela: (1) Violations of Section 14(a) of the Exchange Act; (2) Violations of Section 10(b) and Rule 10b-5 of the Exchange Act; (3) Violations of Section 20(a) of the Exchange Act; (4) breach of fiduciary duty; (5) unjust enrichment; and (6) waste of corporate assets. On December 21, 2020, Plaintiffs Richard W. Moser and Jonathan Gonzalez filed a substantially similar shareholder derivative action, which has been consolidated with the McKenna action. The claims stem from substantially the same factual allegations set forth in the Shen securities class action lawsuit, described above. At this time, it is not practicable to render an opinion about

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whether an unfavorable outcome is probable or remote with respect to this matter; however, the Company believes it has meritorious defenses and will vigorously assert them.

Inquiry

Since May 2020, the Company has received and been responding to various document and information requests from the staff of the SEC in connection with an inquiry relating to the Company’s accounting treatment of the Appraisal Action, as well as the Company’s identification, classification and disclosure of certain related party transactions, both of which were the subject of the above described restatement. In June 2022, the Company reached an agreement in principle with the SEC Staff to resolve the matter. Under the terms of the settlement, the Company would consent, without admitting or denying the SEC’s allegations, to the entry of a cease-and-desist order for violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13 and 13a-15 thereunder, and the payment of a $175,000 penalty. In addition, the Company’s former Chief Financial Officer would consent, without admitting or denying the SEC’s allegations, to the entry of a cease-and-desist order for causing certain of the Company’s violations of Section 13(a) of the Exchange Act, and the payment of a $10,000 penalty. These settlements are subject to finalization and then approval by the SEC, and there can be no assurance that any settlement will be agreed or approved.

Other

We are, from time to time, involved in other legal proceedings, inquiries, claims and disputes, which arise in the ordinary course of business. Although our management cannot predict the outcomes of these matters, our management believes these actions will not have a material, adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors.

The Risk Factor entitled “Cybersecurity issues, vulnerabilities, and criminal activity resulting in a data or security breach could result in risks to our systems, networks, products, solutions and services resulting in liability or reputational damage” in our Annual Report is amended as follows:

Cybersecurity issues, vulnerabilities, and criminal activity resulting in a data or security breach could result in risks to our systems, networks, products, solutions and services resulting in liability or reputational damage.

We collect and retain large volumes of internal and customer data, including personally identifiable information and other sensitive data both physically and electronically, for business purposes, and our various information technology systems enter, process, summarize and report such data. We also maintain personally identifiable information about our employees. Safeguarding customer, employee and our own data is a key priority for us, and our customers and employees have come to rely on us for the protection of their personal information. Augmented vulnerabilities, threats and more sophisticated and targeted cyber-related attacks pose a risk to our security and the security of our customers, partners, suppliers and third-party service providers, and to the confidentiality, availability and integrity of data owned by us or our customers. Despite our efforts to protect sensitive, confidential or personal data or information, we may be vulnerable to material security breaches, theft, misplaced or lost data, programming errors, employee errors and/or malfeasance that could potentially lead to the compromise of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions. Despite protective measures, we may not be successful in preventing security breaches which compromise the confidentiality and integrity of this data, and in June 2022 we experienced a network security incident which required us, among other things, to incur costs to respond to the incident and to limit access to our applications and services by our employees and customers. While an attempt is made to mitigate the risks and effects of any security breach by employing a number of measures, including employee training, monitoring and testing, and maintenance of protective systems and contingency plans, we remain vulnerable to such threats. The risk of such threats may be heightened as a result of the extended period of remote work arrangements occasioned by the COVID-19 pandemic.

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The sensitive, confidential or personal data or information that we have access to is also subject to privacy and security laws, regulations or customer-imposed controls. The regulatory environment, as well as the requirements imposed on us by the industries we serve governing information, security and privacy laws is increasingly demanding. Maintaining compliance with applicable security and privacy regulations may increase our operating costs and/or adversely impact our ability to provide services to our customers.

Furthermore, a compromised data system or the intentional, inadvertent or negligent release or disclosure of data could result in theft, loss, fraudulent or unlawful use of customer, employee or our data. In addition, a cyber-related attack, including the June 2022 network security incident, could result in media reports or customer perceptions of security vulnerabilities and other negative consequences. Fraud, employee negligence, and unauthorized access, including, malfunctions, viruses and other events beyond our control, may lead to the misappropriation or unauthorized disclosure of sensitive or confidential information we process, store and transmit, including personal information, for our customers, failure to prevent or mitigate data loss or other security breaches, including breaches of our vendors’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information. Any of these events could result in negative consequences, including significant legal and financial exposure, litigation, regulatory intervention, remediation costs, damage to our reputation or loss of confidence in the security of our systems, products and services, and loss of customers and revenue that in each case could adversely affect our business, financial condition or results of operations. We are subject to substantial regulation in this area, including the Gramm-Leach-Bliley Act and HIPAA, as well as various states’ laws, such as the California Consumer Privacy Act (“CCPA”), which became effective on January 1, 2020 or under the GDPR in Europe. Similarly, regulations such as the Health Information Technology for Economic and Clinical Health Act provisions of the American Recovery and Reinvestment Act of 2009 expand the obligations of “covered entities” and their business associates, including certain mandatory breach notification requirements. In addition to any legal liability, data or security breaches may lead to negative publicity, reputational damage and otherwise adversely affect our business, financial condition and results of our operations.

Except as set forth above and as previously reported in the “Risk Factors” section of our prospectus supplement filed with the SEC on May 23, 2022, there have been no material changes to the risk factors previously described in Part I, “Item 1A. Risk Factors” in our Annual Report. The risks described in those Risk Factors are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On August 10, 2022, John Rexford resigned from the Board of the Company and all committees of the Board, effective immediately. Mr. Rexford did not resign due to any disagreement with the Company on any matter relating to its operations, policies or practices. The Company notified Nasdaq that as a result of John Rexford’s resignation from the Company’s Board, the Company was no longer in compliance with Nasdaq Listing Rule 5605(b)(1), which requires the Company’s Board to be composed of a majority of independent directors.

Pursuant to Nasdaq Listing Rule 5605(b)(1)(A), the Company is entitled to a cure period to regain compliance with Listing Rule 5605(b)(1), which cure period will expire upon (1) the earlier of the Company’s next annual

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stockholders’ meeting or August 10, 2023; or (2) if the next annual stockholders meeting is held on or before February 6, 2023, then the Company must evidence compliance no later than February 6, 2023.

The Company expects to be compliant with the Board composition requirements of Nasdaq Listing Rule 5605(b)(1) by or before the end of the cure period.

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Item 6.Exhibits.

Exhibit No.

    

Description

3.1

Certificate of Decrease of Series A Perpetual Convertible Preferred Stock (1)

3.2

Certificate of Designations, Preferences, Rights and Limitations of Tandem Preferred Stock (1)

3.3

Certificate of Designations, Preferences, Rights and Limitations of Special Voting Preferred Stock (1)

3.4

Third Amended and Restated Bylaws (1)

3.5

Amendment to Bylaws of Exela Technologies, Inc. (3)

3.6

Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Exela Technologies, Inc., effective July 25, 2022 (4)

3.7

Certificate of Elimination of Special Voting Preferred Stock of Exela Technologies, Inc., effective July 25, 2022 (4)

3.8

Certificate of Increase of Authorized Number of Shares of Tandem Preferred Stock of Exela Technologies, Inc., effective July 25, 2022 (4)

3.9

Certificate of Increase of Authorized Number of Shares of Series B Cumulative Convertible Perpetual Preferred Stock of Exela Technologies, Inc., effective July 25, 2022 (4)

10.1

Subscription, Voting and Redemption Agreement, dated as of May 19, 2022, by and between Exela Technologies, Inc. and GP-HGM LLC (1)

10.2

Amended and Restated Receivables Purchase Agreement, dated as of June 17, 2022, by and among the Seller, the Purchasers, PNC Bank, National Association, as Administrative Agent and the Company, as initial servicer (2)

10.3

First Tier Receivable Purchase and Sale Agreement, dated as of June 17, 2022, by and among Parent SPE, and certain other indirect, wholly-owned subsidiaries of the Company listed therein, and the Company, as initial servicer (2)

10.4

Second Tier Receivables Purchase and Sale Agreement, dated as of June 17, 2022, by and among, the Seller, the Parent SPE and the Company, as initial servicer, pursuant to which Parent SPE has sold or contributed and will sell or contribute to the Seller certain receivables and related assets in consideration for a combination of cash and equity in the Seller (2)

10.5

Amended and Restated Sub-Servicing Agreement, dated as of June 17, 2022, by and among the Company and each Originator (2)

10.6

Amended and Restated Pledge and Guaranty, dated as of the June 17, 2022, between the Parent SPE and the Administrative Agent (2)

10.7

Performance Guaranty, dated as of June 17, 2022, between the Company, as performance guarantor, and the Administrative Agent (2)

10.8

Employment Agreement, dated as of July 26, 2022, between Exela Technologies BPA, LLC and Suresh Yannamani

10.9

Amendment No. 3 to Amended and Restated Secured Promissory Note, dated as of May 9, 2022 by and between GP 2XCV LLC and B. Riley Commercial Capital, LLC.

31.1

Certification of the Principal Executive Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002

31.2

Certification of the Principal Financial and Accounting Officer required by Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002

32.1

Certification of the Principal Executive Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

32.2

Certification of the Principal Financial and Accounting Officer required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

101.INS

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

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101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

104

Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)

(1)Incorporated by reference from the Current Report on Form 8-K, filed by the Company with the Securities and Exchange Commission on May 19, 2022.
(2)Incorporated by reference from the Current Report on Form 8-K, filed by the Company with the Securities and Exchange Commission on June 21, 2022.
(3)Incorporated by reference from the Current Report on Form 8-K, filed by the Company with the Securities and Exchange Commission on June 29, 2022.
(4)Incorporated by reference from the Current Report on Form 8-K, filed by the Company with the Securities and Exchange Commission on July 26, 2022.

63

SIGNATURES

Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 12th day of August 2022.

EXELA TECHNOLOGIES, INC.

By:

/s/ Par Chadha

Par Chadha

Executive Chairman (Principal Executive Officer)

By:

/s/ Shrikant Sortur

Shrikant Sortur

Chief Financial Officer (Principal Financial and Accounting Officer)

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