Exela Technologies (NASDAQ:XELA) was drowning in debt and needed to do something drastic to cut its interest expenses.
In fact, on page 6 of its latest 10-Q filing, the company admitted that there was a “substantial doubt” about its ability to continue as a going concern. It was burdened by operating losses and $152.7 million in long-term debt and high levels of interest expense. XELA stock dropped precipitously low, bottoming out at $1.28 as of June 18.
But then on June 30 management announced it had closed an equity financing round and started a new $150 million capital raise program. As of June 30, its new cash balance was $205 million. Then Exela reported on July 7 that it had raised an additional $85 million raised under the new equity capital raise program.
Issues With the Capital Raise
However, it did not make clear how much of the $85 million in new capital was included in the June 30 $205 million balance. So it’s unclear how much cash the company has right now.
The company could have $290 million (i.e., $205m + $85m) on hand, or some lower amount, depending on how much of the $85 million raised as of July 7 was accounted for in the $205 million balance. Moreover, the total capital raise hasn’t been 100% transparent, which makes it hard to accurately judge the dilutive effect.
What I mean by that is that this announcement (as well as other press releases from the company) did not indicate at what price Exela sold the shares. As a result, investors have no good idea now how many shares are outstanding, either as of June 30 or as of July 7 (with the new $85 million). In addition, even with the sale of the whole $150 million in new capital, we won’t know the full exact share count.
My best guess right now is that there are about 181.1177 million shares outstanding. Since XELA stock is trading for $3.03 as of Aug. 4, that implies that its market cap now is $548.78 million. And to be generous, if we assume that the company now has $290 million in cash (before cash burn expenses this quarter), that means that cash represents about 53% of its market value.
Interest Expense and Losses Going Forward
However, that isn’t quite realistic. The company did say in its July press release that it would pay down debt. But it did not say how much debt would be paid down. The company said it would cut $25 million in interest expense. That reduces its expenses by just $6.25 million if the $25 million in interest cost savings was an annual cut.
Again, Exela was unclear in its press release. It did not say if the $25 million was a quarterly or annual cut in interest costs. But last quarter the company reported $43 million in interest expense in Q1 alone. So if the $25 million in interest expenses saved was annual, the quarterly $6.25 million is not that significant. In effect, the company has to get more serious about its debt and reduce it further.
What To Do With XELA Stock
Exela likes to report that its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) profits are very healthy. For example, on page 37 of its 10-Q, the company reported that last quarter its adj. EBITDA was $46.466 million.
But that included $43.131 million in interest costs that it added back, assuming that they were not relevant. Moreover, it had $12 million in “other” add-backs, that were presumably one-time events. So, in effect, the company is not really profitable
In fact, its cash flow statement shows that it burnt through $63.9 million in operating cash flow and an additional $1.9 million in capex spending. So, its total quarterly cash burn was $65.5 million. At that rate, the company will eat up $262 million annually just to operate. Even if we deduct $25 million in annual interest expense cuts, the cash burn rate is $237 million. That will use up 82% of its $290 million.
So for the time being, at least until the company has a coherent business operating plan, most defensive investors should stay away from XELA stock.
On the date of publication, Mark R. Hake held a long position in Bitcoin but not in any other security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.