EXELA TECHNOLOGIES, INC. Forward Looking Statements
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with a review of the other Items included in this Annual Report and ourDecember 31, 2021 Consolidated Financial Statements included elsewhere in this report. Certain statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" may be deemed to be forward-looking statements. See "Special Note Regarding Forward-Looking Statements."
Overview
We are a global provider of transaction processing solutions, enterprise information management, document management and digital business process services. 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. 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.
History
We are a former special purpose acquisition company that completed our initial public offering onJanuary 22, 2015 . InJuly 2017 ,Exela Technologies, Inc. ("Exela"), formerly known asQuinpario Acquisition Corp. 2 ("Quinpario"), completed its acquisition ofSourceHOV Holdings, Inc. ("SourceHOV") andNovitex Holdings, Inc. ("Novitex") pursuant to the business combination agreement datedFebruary 21, 2017 ("Novitex Business Combination"). In conjunction with the completion of the Novitex Business Combination, Quinpario was renamedExela Technologies, Inc. The Novitex Business Combination was accounted for as a reverse merger for whichSourceHOV was determined to be the accounting acquirer. Outstanding shares ofSourceHOV were converted into our 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 ofNovitex was treated as a business combination under ASC 805 and was accounted for using the acquisition method. The strategic combination ofSourceHOV andNovitex formedExela , which is one of the largest global providers of information processing solutions based on revenues. Sale of Non-core Assets
OnMarch 16, 2020 , the Company and its indirect wholly owned subsidiaries,Merco Holdings, LLC andSourceHOV Tax, LLC entered into a Membership Interest Purchase Agreement withGainline Source Intermediate Holdings LLC at which timeGainline Source Intermediate Holdings LLC acquired all of the outstanding membership interests ofSourceHov Tax, LLC for$40.0 million subject to adjustment as set forth in the purchase agreement. OnJuly 22, 2020 , the Company completed the sale of its physical records storage and logistics business for a purchase
price of$12.3 million . 43 Table of Contents Reverse Stock Split OnJanuary 25, 2021 , we effected a one-for-three reverse split of our issued and outstanding shares of our Common Stock. At the effective time of the reverse split, every three (3) 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 on a Reverse Stock Split-adjusted basis onJanuary 26, 2021 . There was no change in our ticker symbol as a result of the Reverse Stock Split. 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 TPS and EIM 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 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.
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 ofDecember 31, 2021 , we had approximately 17,000 employees globally, with 54% located inAmericas and EMEA, and the remainder located primarily inIndia ,the Philippines andChina . Costs associated with our employees represent the most significant expense for our business. We incurred personnel costs of$542.6 million ,$632.4 million and$721.9 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The majority of our personnel costs are variable and are incurred only while we are providing our services. 44 Table of Contents Facilities We lease and own numerous facilities worldwide with larger concentrations of space inTexas, Michigan ,Connecticut ,California ,India ,Mexico ,the Philippines , andChina . Our owned and leased facilities house general offices, sales offices, service locations, and production facilities. The size of our active property portfolio as ofDecember 31, 2021 was approximately 3 million square feet, down by approximately 0.9 million square feet compared toDecember 31, 2020 . As ofDecember 31, 2021 , our active property portfolio comprised of 122 leased properties and 8 owned properties. We reduced our active portfolio of leased properties by 21 properties during 2021 with the adoption of our work from anywhere program. We believe that our current facilities are suitable and adequate for our current businesses. Because of the interrelation of our business segments, each of the segments uses substantially all of these properties at least in part.
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 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 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.
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Results of Operations
Year Ended
Year Ended December 31,
2021 2020
Revenue:
ITPS $ 874,126 $ 1,005,043
HS 217,839 219,047
LLPS 74,641 68,472
Total revenue 1,166,606 1,292,562
Cost of revenue (exclusive of depreciation and
amortization):
ITPS 672,191 815,013
HS 163,445 159,917
LLPS 53,459 48,614
Total cost of revenues 889,095 1,023,544
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 169,781 186,104
Depreciation and amortization 77,150
93,953 Related party expense 9,191 5,381 Operating profit (loss) 21,389 (16,420) Interest expense, net 168,048 173,878 Debt modification and extinguishment costs (gain), net (16,689) 9,589 Sundry expense (income), net 363 (153) Other expense (income), net 401 (34,788) Net loss before income taxes (130,734) (164,946) Income tax expense (11,656) (13,584) Net loss$ (142,390) $ (178,530) Revenue For the year endedDecember 31, 2021 , our revenue on a consolidated basis decreased by$126.0 million , or 9.7%, to$1,166.6 million from$1,292.6 million for the year endedDecember 31, 2020 . We experienced revenue decline in our ITPS segment and HS segment of$130.9 million and$1.2 million , respectively while revenue increased in our LLPS segment by$6.2 million . Our ITPS, HS, and LLPS segments constituted 74.9%, 18.7%, and 6.4% of total revenue, respectively, for the year endedDecember 31, 2021 , compared to 77.8%, 16.9%, and 5.3%, respectively, for the year endedDecember 31, 2020 . The revenue changes by reporting segment were as follows: ITPS-Revenue attributable to our ITPS segment was$874.1 million for the year endedDecember 31, 2021 compared to$1,005.0 million for the year endedDecember 31, 2020 . The revenue decline of$130.9 million , or 13.0%, is primarily attributable to lower volumes and underutilization of resources as a result of COVID-19 in addition to the impact of 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"). HS-For the year endedDecember 31, 2021 , revenue attributable to our HS segment decreased by$1.2 million , or 0.6%, to$217.8 million from$219.0 million for the year endedDecember 31, 2020 . The decrease in revenue was primarily driven by lower transaction volumes from the impact of COVID-19 on our healthcare customers. LLPS-Revenue attributable to our LLPS segment was$74.6 million for the year endedDecember 31, 2021 compared to$68.5 million for the year endedDecember 31, 2020 . The increase in revenue by$6.2 million , or 9.0%, is primarily due to an increase in legal claims administration services. 46 Table of Contents Cost of Revenue For the year endedDecember 31, 2021 , our cost of revenue decreased by$134.4 million , or 13.1%, compared to the year endedDecember 31, 2020 . In our ITPS and HS segments, the decrease was primarily attributable to the corresponding decline in revenues and operational efficiencies. Costs to our ITPS segment decreased by$142.8 million , or 17.5% while costs related to our HS and LLPS segments increased by$3.5 million , or 2.2% and$4.8 million , or 10.0%, respectively. The decrease in cost of revenues on a consolidated basis was primarily due to a decrease in employee-related costs of$77.7 million , lower travel costs of$1.2 million , lower infrastructure and maintenance costs of$26.0 million and lower pass through and other operating costs of$29.6 million which primarily include supplies, cost of products, service expenses, postage and delivery. The lower costs were attributable to cost and capacity management as a result of COVID-19 and transition revenue impact during the year endedDecember 31, 2021 . Cost of revenue for the year endedDecember 31, 2021 was 76.2% of revenue compared to the 79.2% of revenue for the comparable same period in the prior year. The decrease in cost of revenues, as a percentage of revenues by 3.0% was primarily due to the impact of lower costs related to transition revenue that continues to be gradually removed to further improve the gross margin profile of the business.
Selling, General and Administrative Expenses
SG&A expenses decreased$16.3 million , or 8.8%, to$169.8 million for the year endedDecember 31, 2021 , compared to$186.1 million for the year endedDecember 31, 2020 . The decrease was primarily attributable to lower employee related costs by$15.5 million , lower travel costs of$0.5 million , lower legal and professional fees of$2.0 million , lower infrastructure, maintenance and operating costs of$6.3 million , offset by higher other costs of$7.9 million that included a charge of$3.8 million for a settlement loss on our LLPS segment. SG&A expenses increased as a percentage of revenues to 14.6% for the year endedDecember 31, 2021 as compared to 14.4% for the year endedDecember 31, 2020 . Depreciation & Amortization Total depreciation and amortization expense was$77.1 million and$94.0 million for the years endedDecember 31, 2021 and 2020, respectively. The decrease in total depreciation and amortization expense by$16.8 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 year endedDecember 31, 2021 compared to the year ended December
31, 2020. Related Party Expenses
Related party expense was$9.2 million for the year endedDecember 31, 2021 compared to$5.4 million for the year endedDecember 31, 2020 . The increase in expense is due to higher amount of fees payable to Rule 14, LLC under the master service agreement for higher usage of services.
Interest Expense
Interest expense was$168.0 million for the year endedDecember 31, 2021 compared to$173.9 million for the year endedDecember 31, 2020 . The decrease in interest costs was partially attributable to lower interest on senior secured term loan facility and other interest accruals incurred during the year endedDecember 31, 2020 .
Debt Modification and Extinguishment Costs (Gain), net
A net gain of
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For the year endedDecember 31, 2021 , the Company recorded a gain on early extinguishment of debt of$30.6 million in connection with the repurchases of senior secured term loans and secured 2023 notes. This gain was offset by$12.9 million in modification of debt under ASC 470-50 for the cost of exchange of notes under the Public Exchange in December of 2021. The Company recognized$1.3 million and$8.3 million in debt extinguishment costs during 2020, for the partial debt extinguishment resulting from amendment to the senior secured term loan in 2020 and the extinguishment of A/R Facility, respectively. Sundry Expense (Income), net
The increase in income by
Other Expense (Income), net
Other expense, net was$0.4 million for the year endedDecember 31, 2021 compared to other income of$34.8 million for the year endedDecember 31, 2020 . Other income for the year endedDecember 31, 2020 was primarily due to the Company's divestment inSourceHOV Tax, LLC as part of our strategic plan to sell non-core business assets as well as gains on the sale of physical records storage and logistics business.
Income Tax Expense
We had an income tax expense of$11.7 million for the year endedDecember 31, 2021 compared to income tax expense of$13.6 million for the year endedDecember 31, 2020 . The decrease in tax expense from the prior year was attributable to the impact of the change in our judgment in 2021 related to the realizability of deferred tax assets in certain state and foreign jurisdictions. 48 Table of Contents Results of Operations
Year Ended
Year Ended December 31,
2020 2019
Revenue:
ITPS $ 1,005,043 $ 1,234,284
HS 219,047 256,721
LLPS 68,472 71,332
Total revenue 1,292,562 1,562,337
Cost of revenue (exclusive of depreciation and
amortization):
ITPS 815,013 1,001,655
HS 159,917 180,045
LLPS 48,614 43,035
Total cost of revenues 1,023,544 1,224,735
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 186,104 198,864
Depreciation and amortization 93,953
100,903
Impairment of goodwill and other intangible assets -
349,557 Related party expense 5,381 9,501 Operating profit (loss) (16,420) (321,223) Interest expense, net 173,878 163,449 Debt modification and extinguishment costs (gain), net 9,589 1,404 Sundry expense (income), net (153) 969 Other expense (income), net (34,788) 14,429 Net loss before income taxes (164,946) (501,474) Income tax expense (13,584) (7,642) Net loss$ (178,530) $ (509,116) Revenue For the year endedDecember 31, 2020 , our revenue decreased by$269.8 million , or 17.3%, to$1,292.6 million from$1,562.3 million for the year endedDecember 31, 2019 . We experienced revenue declines in all of our segments primarily due to lower transaction volumes since mid-March as a result of COVID-19. Our ITPS, HS, and LLPS segments constituted 77.8%, 16.9%, and 5.3% of total revenue, respectively, for the year endedDecember 31, 2020 , compared to 79.0%, 16.4%, and 4.6%, respectively, for the year endedDecember 31, 2019 . The revenue changes by reporting segment were as follows: ITPS- For the year endedDecember 31, 2020 , revenue attributable to our ITPS segment decreased by$229.2 million , or 18.6% compared to the same period in the prior year. The majority of this revenue decline is attributable to exiting contracts and statements of work in late 2019 from certain customers with revenue 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 to lower transaction volumes since mid-March as a result of COVID-19. HS- For the year endedDecember 31, 2020 , revenue attributable to our HS segment decreased by$37.7 million , or 14.7% compared to the same period in the prior year primarily due to impact of COVID-19 on our healthcare customers. LLPS- For the year endedDecember 31, 2020 , revenue attributable to our LLPS segment decreased by$2.9 million , or 4.0% compared to the same period in the prior year primarily due to a decline in legal claims administration services. 49 Table of Contents Cost of Revenue
For the year ended
The decrease in cost of revenues was primarily due to a decrease in employee-related costs of$103.1 million , lower travel costs of$4.4 million , lower infrastructure and maintenance costs of$17.6 million and other operating costs of$29.5 million . The lower costs were attributable to cost and capacity management as a result of COVID-19 and transition revenue impact during the year endedDecember 31, 2020 . Cost of revenue includes accelerated amortization of$3.7 million for an operating lease right-of-use asset as the Company decided to permanently close one of its production facilities. Cost of revenue for the year endedDecember 31, 2020 was 79.2% compared to 78.4% for the comparable same period in the prior year. The increase in cost of revenues, as a percentage of revenues by 0.8% was primarily due to the impact of costs related to the transition revenue that we expect to be gradually removed to further improve the gross margin profile of the business.
Selling, General and Administrative Expenses
SG&A expenses decreased$12.7 million , or 6.4%, to$186.1 million for the year endedDecember 31, 2020 , compared to$198.9 million for the year endedDecember 31, 2019 . The decrease was primarily attributable to lower employee related costs by$13.0 million , lower travel costs of$4.0 million , lower infrastructure and maintenance costs of$1.8 million and lower other costs of$4.3 million offset by higher professional fees of$10.4 million . SG&A expenses increased as a percentage of revenues to 14.4% in 2020 as compared to 12.7% in 2019. The increase, as a percentage of revenues by 1.7%, was primarily due to the decline in revenues brought on by the COVID-19 pandemic and the transition revenue. Depreciation & Amortization Total depreciation and amortization expense was$94.0 million and$100.9 million for the year endedDecember 31, 2020 and 2019, respectively. The decrease in total depreciation and amortization expense by$7.0 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 year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 .
Impairment of
The Company recorded no impairment of goodwill and other intangible assets
during the year 2020. Impairment of goodwill and other intangible assets for the
year ended
Related Party Expenses
Related party expense was$5.4 million and$9.5 million for the year endedDecember 31, 2020 and 2019, respectively. The lower related party expense in 2020 is attributable to lower reimbursements made to Ex-Sigma and Ex-Sigma 2. In 2019 the Company paid approximately$4.3 million in respect of legal expenses, premium payments on the$55.8 million margin loan (obtained by Ex-Sigma 2 in 2017 to purchase additional common and preferred shares from the Company to help meet the minimum cash requirements needed to close the Novitex Business Combination) and other expenses related to secondary offerings that did not
recur in 2020.
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Interest Expense
Interest expense was $173.9 million and $163.4 million for the year ended
December 31, 2020 and 2019, respectively. The increase in interest costs was
partially attributable to the interest on securitization facilities and other
interest accruals that was not incurred during the corresponding period in 2019.
Debt Modification and Extinguishment Costs (Gain), net
Loss on extinguishment of debt for the years endedDecember 31, 2020 and 2019 was$9.6 million and$1.4 million respectively. The Company recognized$1.3 million and$8.3 million in debt extinguishment costs during 2020, for the partial debt extinguishment resulting from amendment to the Term Loan in 2020 and the extinguishment of A/R Facility, respectively. The repricing and issuance of the 2019 incremental Term Loans resulted in the partial debt extinguishment, for whichExela recognized$1.4 million in debt extinguishment costs during 2019.
Sundry Expense (Income)
The decrease of
Other Expense (Income)
Other expense (income), net was$(34.8) million and$14.4 million for the year endedDecember 31, 2020 and 2019, respectively. The change was primarily due to the$35.5 million resulting from gain recognized on the sale ofSourceHOV Tax, LLC and the$8.7 million gain on the sale of the physical records storage and logistics business. Other expense (income) also includes an interest rate swap entered into in 2017. The interest rate swap was not designated as a hedge. As such, changes in the fair value of this derivative instrument are recorded directly in earnings. For the year endedDecember 31, 2020 , the fair value of the interest swap liability decreased resulting in a gain of$0.4 million .
Income Tax Expense
We had an income tax expense of$13.6 million and$7.6 million for the year endedDecember 31, 2020 and 2019, respectively. The change in the income tax expense was primarily attributable to our change in judgment related to the realizability of certain deferred tax assets. The change in the effective tax rate for the year endedDecember 31, 2020 , resulted from permanent tax adjustments and valuation allowances, including valuation allowances against disallowed interest expense deferred tax assets that are not more-likely-than-not to be realized.
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. Refer to-"Liquidity and Capital Resources-Indebtedness."
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 and management
use EBITDA and Adjusted
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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 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.
The following tables present a reconciliation of EBITDA and Adjusted EBITDA to
our net loss, the most directly comparable GAAP measure, for the years ended
December 31, 2021 , 2020, and 2019:
Year Ended December 31,
2021 2020 2019
Net Loss $ (142,390) $ (178,530) $ (509,116)
Taxes 11,656 13,584 7,642
Interest expense 168,048 173,878 163,449
Depreciation and amortization 77,150 93,953 100,903
EBITDA 114,464 102,885 (237,122)
Optimization and restructuring expenses (1) 22,246 45,616 73,936
Transaction and integration costs (2) 15,872 16,620 5,703
Non-cash equity compensation (3) 3,940 2,846 7,827
Other charges including non-cash (4) 32,484 26,154 21,382
Loss/(Gain) on sale of assets (5) (2,779) 114 301
Loss/(Gain) on business disposals (6) 1,296 (44,595) -
Debt modification and extinguishment costs (gain), net
(16,689) 9,589 1,404
Loss/(Gain) on derivative instruments (7) (893) 375 4,337
Contract costs (8) 4,268 4,317 17,046
Dissenting shareholders expense (relating to the
Appraisal Action) - - 10,431
Litigation reserve (925) 9,624 -
Impairment of goodwill and other intangible assets - - 349,557 Adjusted EBITDA 173,284 173,545 254,802
Adjustment represents net salary and benefits associated with positions,
current vendor expenses and existing lease contracts that are part of the (1) 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.
Represents the non-cash charges related to restricted stock units and options
(3) that vested during the year at Ex-Sigma in the case of the
Long Term Incentive Plan assumed by it in connection with the
Business Combination and the Company under the 2018 Stock Incentive Plan.
Represents fair value adjustments to deferred revenue and deferred rent (4) 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.
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(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
At
We currently expect to spend approximately
As ofDecember 31, 2021 and in comparison toDecember 31, 2020 , the Company has reduced debt by$338.5 million under previously announced initiatives. 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. There can be no assurances that any of these initiatives will be consummated or will achieve its desired result. OnMarch 26, 2020 , theDelaware 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 theDelaware Court of Chancery , captionedManichaean Capital, LLC , et al. v.SourceHOV Holdings, Inc. , C.A. No. 2017 0673 JRS (pursuant to which former stockholders ofSourceHOV sought, among other things, a determination of the fair value of their 10,304SourceHOV shares at the time of the Novitex Business Combination) (the "Appraisal Action"). OnDecember 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 ofDecember 31, 2021 , the Company accrued a liability of$63.4 million for these matters, all of which is expected to be paid during the first half of 2022 ($40 million having already been paid as ofMarch 16, 2022 ). OnMarch 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 perIRS guidance. The 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. OnDecember 17, 2020 , certain subsidiaries of the Company entered into a$145.0 million securitization facility with a five year term (the "Securitization Facility"). OnDecember 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. OnMarch 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 53
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placement an aggregate of 9,731,819 unregistered shares of the Company's Common Stock at a price of$2.75 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$4.00 per share beginning onSeptember 19, 2021 and will expire onSeptember 19, 2026 . OnMay 27, 2021 , the Company entered into an At Market Issuance Sales Agreement ("First ATM Agreement") withB. Riley Securities, Inc. ("B. Riley") andCantor 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. OnSeptember 30, 2021 , the Company entered into a second At Market Issuance Sales Agreement withB. Riley ,BNP Paribas Securities Corp. , Cantor,Mizuho Securities USA LLC andNeedham & 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 theSEC onMay 3, 2021 , and declared effective onMay 12, 2021 (the "2021 Registration Statement"), and the prospectus datedMay 12, 2021 included in the 2021 Registration Statement and the related prospectus supplements for sales of shares of Common Stock
as
follows:
Weighted
Number of Average
Shares Price Per Gross Net
Supplement Period Sold Share Proceeds Proceeds
Prospectus supplement dated
million million
aggregate offering price ofJuly 1, 2021 up to$100 million ("Common ATM Program-1") Prospectus supplement dated June 30, 2021 57,580,463$2.603 $149.9 $144.4 June 30, 2021 with an and through million
million
aggregate offering price ofSeptember 2 , up to$150 million ("Common 2021 ATM Program-2") Prospectus supplement dated October 6, 98,594,447$1.327 $130.8 $126.4 September 30, 2021 with an 2021 through million
million
aggregate offering price ofDecember 31 , up to$250.0 million 2021 ("Common ATM Program-3") Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year Ended
2021 2020 2019
Net cash used in operating activities$ (111,534) $ (29,781) $ (63,851) Net cash provided by (used in) investing activities (9,261) 21,438 (25,182) Net cash provided by financing activities 98,651 63,362 59,139 Subtotal (22,144) 55,019 (29,894) Effect of exchange rates on cash (105) 1,191 139
Net increase (decrease) in cash and cash equivalents (22,249) 56,210 (29,755)
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Analysis of Cash Flow Changes between the years ended
Operating Activities- Net cash used in operating activities was$111.5 million for the year endedDecember 31, 2021 , compared to cash used in operating activities of$29.8 million for the year endedDecember 31, 2020 . The increase of$81.7 million in cash used in operating activities for the year endedDecember 31, 2021 was due to lower cash flow from accounts receivable and lower cash flows from accounts payable and accrued liabilities. Net cash used in operating activities was$29.8 million for the year endedDecember 31, 2020 , compared to cash used in operating activities of$63.8 million for the year endedDecember 31, 2019 . The increase of$34.0 million in cash flows from operating activities for the year endedDecember 31, 2020 was due to lower Gross profits in the corresponding period offset by higher cash flow from working capital primarily driven by$46 million improvement in our accounts receivables. "Gross profit" is defined as revenue less cost of revenue (exclusive of depreciation and amortization). This decrease in cash flow was significantly offset by higher cash flows from accounts receivables. Investing Activities- Net cash used in investing activities was$9.2 million for the year endedDecember 31, 2021 , compared to cash provided by investing activities of$21.4 million for the year endedDecember 31, 2020 . The increase of$30.6 million in cash used in investing activities for the year endedDecember 31, 2021 was primarily due to$50.1 million total cash proceeds received from asset sales in 2020, higher additions to Property, plant and equipment and development of internal software, offset by$12.5 million used in partial settlement of the liabilities related to the healthcare acquisition announced early in the first quarter of 2019. Net cash provided by investing activities was$21.4 million for the year endedDecember 31, 2020 , compared to cash used in investing activities of$25.2 million for the year endedDecember 31, 2019 . The increase of$46.6 million in cash used in investing activities for the year endedDecember 31, 2020 was primarily due to$50.1 million total cash proceeds received from asset sales, lower additions to Property, plant and equipment and development of internal software offset by partial settlement of the liabilities related to the healthcare acquisition announced early in the first quarter of 2019. Financing Activities- Net cash provided by financing activities was$98.7 million for the year endedDecember 31, 2021 , compared to cash provided by financing activities of$63.4 million for the year endedDecember 31, 2020 . The increase of$35.3 million in cash provided by financing activities for the year endedDecember 31, 2021 was primarily result of$391.6 million of net proceeds from equity offerings offset by debt repurchases and repayments of our term loans and senior notes of$380.5 million . Net cash provided by financing activities was$63.4 million for the year endedDecember 31, 2020 , compared to cash provided by financing activities of$59.1 million for the year endedDecember 31, 2019 . The increase of$4.3 million in cash provided by financing activities for the year endedDecember 31, 2020 was primarily due to the proceeds from securitization facilities and revolving credit facility offset by principal payments made on debt.
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 OnJuly 12, 2017 , subsidiaries of the Company entered into a FirstLien 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") providingExela 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 maturingJuly 12, 2023 with an original issue discount of$7.0 million , and (ii) a$100.0 million senior secured revolving facility maturingJuly 12, 2022 (the "Revolving Credit Facility"). 55 Table of Contents OnJuly 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. OnApril 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 onJuly 12, 2023 . As ofDecember 31, 2021 , 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
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. OnMay 18, 2020 , we amended the Credit Agreement to, among other things, extend the time for delivery of its audited financial statements for the year endedDecember 31, 2019 and its financial statements for the quarter endedMarch 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 . OnDecember 9, 2021 , in a separate transaction referred to as "Private Exchange" (outside of the Public Exchange as discussed below), we agreed with three (3) of its term loan lenders for partial repayment and partial exchange of their outstanding balance of senior secured term loan under Credit Agreement for the new 2026 Notes. The Company agreed with these participating lenders to repay outstanding balance of$212.1 million of senior secured term loan under Credit Agreement payable to them in cash consideration of$84.3 million and in new 2026 Notes of$127.8 million . In connection with the Private Exchange transaction, 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,
Revolving Credit Facility; Letters of Credit
As ofDecember 31, 2021 andDecember 31, 2020 , our$100 million Revolving Credit Facility was fully drawn taking into account letters of credit issued thereunder. As ofDecember 31, 2021 andDecember 31, 2020 , we had outstanding irrevocable letters of credit totaling approximately$0.5 million and$19.5 million , respectively, under the Revolving Credit Facility. 56 Table of Contents Senior Secured 2023 Notes Upon the closing of the Novitex Business Combination onJuly 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 onJanuary 15 andJuly 15 of each year, commencing onJanuary 15, 2018 . The 2023 Notes are jointly and severally, irrevocably and unconditionally guaranteed by the nearly all of Company'sU.S. subsidiaries, on a senior basis, as a primary obligors and not merely as a sureties. The 2023 Notes will mature onJuly 15, 2023 . OnOctober 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 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 were validly tendered pursuant to the Public Exchange. OnDecember 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 ofDecember 31, 2021 . In conjunction with the Public Exchange, we also solicited consents to amend certain provisions in the indenture governing the 2023 Notes ("Notes Amendments"). OnDecember 1, 2021 , on receipt of the requisite consents to the Notes Amendments, the Company, andWilmington Trust, National Association , as trustee (the "2023 Notes Trustee"), entered into a third supplemental indenture (the "Third Supplemental Indenture") to the indenture, dated as ofJuly 12, 2017 (as amended and supplemented by (i) the first supplemental indenture, dated as ofJuly 12, 2017 and (ii) the second supplemental indenture, dated as ofMay 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
OnDecember 9, 2021 , subsidiaries of the Company issued$790.5 million in aggregate principal amount of 2026 Notes under the Public Exchange and Private Exchange transactions discussed above. Apart from this, duringDecember 2021 the Company issued and sold$4.5 million in aggregate principal amount of 2026 Notes generating net proceeds of$3.6 million . 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 onJanuary 15 andJuly 15 of each year, commencing onJuly 15, 2022 . The 2026 Notes will mature onJuly 12, 2026 . As ofDecember 31, 2021 , we were in compliance with all covenants required under the 2026 Notes. On or afterDecember 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 toDecember 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" 57
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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, atDecember 1, 2022 plus (ii) all required interest payments due on the 2026 Note throughDecember 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.
Repurchases
InJuly 2021 we commenced a debt buyback program to repurchase 2023 Notes and senior secured term loans under the Credit Agreement, which is ongoing. During the year endedDecember 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 . The gain on early extinguishment of debt for the 2023 Notes during the year endedDecember 31, 2021 totaled$15.3 million and is inclusive of$0.6 million and$0.2 million write off of original issue discount and debt issuance costs, respectively. During the year endedDecember 31, 2021 , we also repurchased$40.0 million of the outstanding principal amount of our senior secured term loans under the Credit Agreement for a net cash consideration of$22.8 million . The gain on early extinguishment of debt for the senior secured term loan during the year endedDecember 31, 2021 totaled$15.3 million and is inclusive of$0.4 million and$1.5 million write off of original issue discount and debt issuance costs, respectively.
BRCC Facility
OnNovember 17, 2021 ,GP2 XCV, LLC , a subsidiary of the Company ("GP2 XCV"), entered into a borrowing facility withB. 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 ofDecember 7, 2021 (as the same may be amended from time to time, 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 facility will mature onMarch 31, 2023 . 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 this facility was to fund certain repurchases of senior secured term loan under the Credit Agreement and to provide funding of Public Exchange transaction and Private Exchange transaction as discussed above. As ofDecember 31, 2021 , there were borrowings of$115.0 million outstanding under the BRCC Facility. Securitization Facilities OnDecember 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. OnDecember 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 a previous securitization facility and used the remaining proceeds for general corporate purposes. The initial documentation for the Securitization Facility includes (i) a Loan and Security Agreement (the "Securitization Loan Agreement"), dated as ofDecember 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 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 ofDecember 17, 2020 , by and among Exela Receivables 3Holdco, 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) 58 Table of Contents
a Second Tier Receivables Purchase and Sale Agreement, dated as ofDecember 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 ofDecember 17, 2020 , by and among the Company and each Securitization Originator, (v) the Pledge and Guaranty, dated as of theDecember 10, 2020 , between the Securitization Parent SPE and the Administrative Agent, and (vi) the Performance Guaranty, dated as ofDecember 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"). OnApril 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 fromApril 10, 2021 toSeptember 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 inDecember 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%. As ofDecember 31, 2021 , there were borrowings of$91.9 million outstanding under the Securitization Facility.
Selected Financial Information
The following selected consolidated financial data should be read in conjunction with Item 8, "Financial Statements and Supplementary Data" of this Annual Report in order to fully understand factors that may affect the comparability of the financial data. The following selected Consolidated Balance Sheet data as ofDecember 31, 2021 and 2020 and selected Consolidated Statements of Operations for the years endedDecember 31, 2021 , 2020 and 2019 are derived from our audited financial statements included in Item 8 of this Annual Report. The following selected consolidated financial data is provided here as historical trend information. The historical results do not necessarily indicate results expected for any future period. Year Ended December 31, (in thousands, except share and per share data) 2021 2020 2019 2018 2017 Statements of Operations Information: Revenue$ 1,166,606 $ 1,292,562 $ 1,562,337 $ 1,586,222 $ 1,145,891 Cost of revenue (exclusive of depreciation and amortization) 889,095 1,023,544 1,224,735 1,213,403 827,544 Selling, general and administrative expenses (exclusive of depreciation and amortization) 169,781 186,104 198,864 184,908 220,955 Depreciation and amortization 77,150 93,953 100,903 138,077 98,890 Impairment of goodwill and other intangible assets - - 349,557 48,127 69,437 Related party expense 9,191 5,381 9,501 12,403 33,431 Operating (loss) income 21,389 (16,420) (321,223) (10,696) (104,366) Other expense (income), net: Interest expense, net 168,048 173,878 163,449 155,991 129,676 Debt modification and extinguishment costs (gain) (16,689) 9,589 1,404
1,067 35,512
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Sundry expense (income), net 363 (153) 969 (3,271) 2,295
Other expense (income), net 401 (34,788) 14,429 (3,030) (1,297)
Net loss before income taxes (130,734) (164,946) (501,474) (161,453) (270,552)
Income tax (expense) benefit (11,656) (13,584) (7,642) (8,353) 61,068
Net loss (142,390) (178,530) (509,116) (169,806) (209,484)
Dividend equivalent on Series
A Preferred Stock related to
beneficial conversion feature - - - - (16,375)
Cumulative dividends for
Series A Preferred Stock (1,576) (1,309) (3,309) (3,655) (2,489)
Net loss attributable to
common stockholders (143,966) (179,839) (512,425) (173,461) (228,348)
Loss per share:
Basic (1.22) (3.66) (10.55) (3.52) (6.53)
Diluted (1.22) (3.66) (10.55) (3.52) (6.53)
Weighted average number of
shares outstanding (1):
Basic 118,001,162 49,144,429 48,572,979 49,257,696 34,971,461
Diluted 118,001,162 49,144,429 48,572,979 49,257,696 34,971,461
Excluding in each case the 1,523,578 shares returned to the Company in the
(1) first quarter of 2020 in connection with the Appraisal Action, which were
treated as outstanding until they were returned to the Company.
As of December 31,
(in thousands) 2021 2020 2019 2018 2017
Balance Sheet Data:
Cash and cash equivalents $ 20,775 $ 68,221 $ 6,198 $ 36,206 $ 39,000
Accounts receivable, net of
allowance for doubtful accounts 184,102 206,868 261,400 270,812 229,704
Working capital (220,002) (131,446) (147,056) (123,502) (68,634)
Total Assets 1,037,023 1,157,779 1,258,324 1,627,823 1,717,232
Longterm debt, net of current
maturities 1,104,399 1,498,004 1,398,385 1,306,423 1,276,094
Total liabilities 1,703,795 2,084,311 2,001,365 1,869,082 1,769,029
Total stockholders' deficit (666,772) (926,532) (743,041) (241,259) (51,797)
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 registered "at-the-market" or 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 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.
Critical Accounting Policies and Estimates
The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimations and how they can impact our financial statements. A critical accounting estimate is one that requires subjective or complex estimates and assessments, and is fundamental to our results of operations. We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the current assumptions, judgments and estimates used to determine amounts reflected in our consolidated financial statements are
appropriate; however,
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actual results may differ under different conditions. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this document.
Goodwill and other intangible assets:Goodwill and other intangible assets are initially recorded at their fair values.Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Our goodwill atDecember 31, 2021 and 2020 was$358.3 million and$359.8 million , respectively.Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset's estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible assets are realized. Impairment of goodwill, long-lived and other intangible assets: Long-lived assets, such as property and equipment and finite-lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability is measured by a comparison of their carrying amount to the estimated undiscounted cash flows to be generated by those assets. If the undiscounted cash flows are less than the carrying amount, we record impairment losses for the excess of the carrying value over the estimated fair value. Fair value is determined, in part, by the estimated cash flows to be generated by those assets. Our cash flow estimates are based upon, among other things, historical results adjusted to reflect our best estimate of future market rates, and operating performance. Development of future cash flows also requires us to make assumptions and to apply judgment, including timing of future expected cash flows, using the appropriate discount rates, and determining salvage values. The estimate of fair value represents our best estimates of these factors, and is subject to variability. Assets are generally grouped at the lowest level of identifiable cash flows, which is the reporting unit level for us. Changes to our key assumptions related to future performance and other economic factors could adversely affect our impairment valuation. We conduct our annual goodwill impairment tests onOctober 1st of each year, or more frequently if indicators of impairment exist. When performing the annual impairment test, we have the option of performing a qualitative or quantitative assessment to determine if an impairment has occurred. If a qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would be required to perform a quantitative impairment test for goodwill. A quantitative test requires comparison of fair value of the reporting unit to its carrying value, including goodwill. We use a combination of the Guideline Public Company Method of the Market Approach and the Discounted Cash Flow Method of the Income Approach to determine the reporting unit fair value. For theGuideline Public Company Method, our annual impairment test utilizes valuation multiples of publicly traded peer companies. For the Discounted Cash Flow Method, our annual impairment test utilizes discounted cash flow projections using market participant weighted average cost of capital calculation. If the fair value of goodwill at the reporting unit level is less than its carrying value, an impairment loss is recorded for the amount by which a reporting unit's carrying amount exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
We conducted our annual goodwill impairment tests for year 2021 and 2020 on
Application of the goodwill impairment test requires judgment, including the identification of reporting units, allocation of assets and liabilities to reporting units, and determination of fair value. The determination of reporting unit fair value is sensitive to the amount of Revenue and EBITDA generated by us, as well as the Revenue and EBITDA market multiples used in the calculation. Additionally, the fair value is sensitive to changes in the valuation assumptions such as expected income tax rate, risk-free rate, asset beta, and various risk premiums. Unanticipated changes, including immaterial revisions, to these assumptions could result in a provision for impairment in a future period. Given the nature of these evaluations and their application to specific assets and time frames, it is not possible to reasonably quantify the impact of changes in these assumptions. In the process of reconciling the fair values of the Company's reporting units to its overall market capitalization, the Company used a combination of both quantitative and qualitative considerations, arriving at the implied control premium of (9.1)%. The implied control premium was computed using the Company's closing stock price as ofOctober 1, 2021 . 61
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Revenue: We account for revenue in accordance with ASC 606. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our material sources of revenue are derived from contracts with customers, primarily 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. Refer to Note 2-Basis of Presentation and Summary of Significant Accounting Policies for additional information regarding our revenue recognition policy.
Income Taxes: We account for income taxes by using the asset and liability method. We account for income taxes regarding uncertain tax positions and recognize interest and penalties related to uncertain tax positions in income tax benefit/(expense) in the consolidated statements of operations.
The Tax Cuts and Jobs Act ("TCJA") was signed by the President of the United
States and enacted into law on December 22, 2017 . The TCJA significantly changes
U.S. tax law by reducing the U.S. corporate income tax rate to 21% from 35%,
adopting a territorial tax regime, creating new taxes on certain foreign sourced
earnings and imposing a one-time transition tax on the undistributed earnings of
certain non-U.S. subsidiaries.
Deferred income taxes are recognized on the tax consequences of temporary
differences by applying enacted statutory tax rates applicable in future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities, as determined under tax laws and
rates. A valuation allowance is provided when it is more likely than not that
all or some portion of the deferred tax assets will not be realized. Due to
numerous ownership changes, we are subject to limitations on existing net
operating losses under Section 382 of the Internal Revenue Code. In the event we
determine that we would be able to realize deferred tax assets that have
valuation allowances established, an adjustment to the net deferred tax assets
would be recognized as a component of income tax expense through continuing
operations.
We engage in transactions (such as acquisitions) in which the tax consequences
may be subject to uncertainty and examination by the varying taxing authorities.
Significant judgment is required by us in assessing and estimating the tax
consequences of these transactions. While our tax returns are prepared and based
on our interpretation of tax laws and regulations, in the normal course of
business the tax returns are subject to examination by the various taxing
authorities. Such examinations may result in future assessments of additional
tax, interest and penalties. For purposes of our income tax provision, a tax
benefit is not recognized if the tax position is not more likely than not to be
sustained based solely on its technical merits. Considerable judgment is
involved in determining which tax positions are more likely than not to be
sustained.
Business Combinations: We allocate the total cost of an acquisition to the
underlying assets based on their respective estimated fair values. Determination
of fair values involves significant estimates and assumptions about highly
subjective variables, including future cash flows, discount rates, and asset
lives. The estimates of the fair values of assets and liabilities acquired are
based upon assumptions believed to be reasonable and, when appropriate, include
assistance from independent third-party valuation firms.
Because we are primarily a services business, our acquisitions typically result
in significant amounts of goodwill and other intangible assets. Fair value
estimates and calculations for these acquisitions will affect the amount of
amortization expense, or possible impairment related charges recognized in
future periods. We base our fair value estimates on assumptions we believe are
reasonable, but recognize that the assumptions are inherently uncertain.
Recently Adopted and Recently Issued Accounting Pronouncements
See Note 2 to the consolidated financial statements.
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Internal Controls and Procedures
As a publicly traded company, we are required to comply with theSEC's rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. For management's assessment of internal control over financial reporting required by Item 308(a) of Regulation S-K for the year endedDecember 31, 2021 see Part II-Item 9A - Controls and Procedures for management's report on the effectiveness of internal controls.
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