UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020March 31, 2021
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 1-12793
StarTek, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 84-1370538 |
(State or other jurisdiction of | (I.R.S. employer |
incorporation or organization) | Identification No.) |
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6200 South Syracuse Way, Suite 485 |
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Greenwood Village, Colorado | 80111 |
(Address of principal executive offices) | (Zip code) |
(303) 262-4500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | SRT | New York Stock Exchange, Inc. |
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 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, smaller reporting company, or an emerging growth company. See 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of July 31, 2020,April 30, 2021, there were 40,282,63740,784,673 shares of Common Stock outstanding.
STARTEK, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
PART I - FINANCIAL INFORMATION | ||
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ITEM 1. | FINANCIAL STATEMENTS | Page |
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| Note 1 Overview and Basis of Preparation | |
Note 2 Summary of Accounting Policies | 9 | |
Note 3 Goodwill and Intangible Assets | 12 | |
Note 4 Revenue | 13 | |
Note 5 Net | 15 | |
Note 6 Impairment and | 15 | |
Note 7 Derivative Instruments | 16 | |
Note 8 Fair Value Measurements | 16 | |
Note 9 Debt | ||
Note 10 Share-Based Compensation | ||
Note 11 Accumulated Other Comprehensive Loss | ||
Note 12 Segment | ||
Note 13 Leases | ||
Note 14 | ||
Note 15 Subsequent Events | 26 | |
ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | |
ITEM 4. | Controls and Procedures | |
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PART II - OTHER INFORMATION | ||
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ITEM 1. | Legal proceeding | |
ITEM 1A. | Risk Factors | |
ITEM 2. | Unregistered sales of equity securities and use of proceeds | 32 |
ITEM 3. | Defaults upon senior securities | 32 |
ITEM 4. | Mine safety disclosure | 32 |
ITEM 5. | Other Information | |
ITEM 6. | Exhibits | |
SIGNATURES |
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the following:
• | certain statements, including possible or assumed future results of operations, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; |
• | any statements regarding the prospects for our business or any of our services; |
• | any statements preceded by, followed by or that include the words “may,” “will,” “should,” “seeks,” “believes,” “expects,” “anticipates,” “intends,” “continue,” “estimate,” “plans,” “future,” “targets,” “predicts,” “budgeted,” “projections,” “outlooks,” “attempts,” “is scheduled,” or similar expressions; and |
• | other statements regarding matters that are not historical facts. |
Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations, include, but are not limited to, those items described herein or set forth in the Form 10-K for the fiscal year ended December 31, 20192020 filed with the Securities and Exchange Commission ("SEC") on March 12, 202016, 2021 and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.March 31, 2021. Unless otherwise noted in this report, any description of "us," "we," or "our," refers to StarTek, Inc. ("Startek") and its subsidiaries.
CHANGE IN FILING STATUS
In accordance with the SEC's expanded definition of Smaller Reporting Companies effective September 10, 2018, Startek now qualifies for Smaller Reporting Company status. As such, it has decided to take advantage of the relief provided from Part 1, Item 3.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Revenue | 142,652 | 161,283 | 303,829 | 322,425 | 163,495 | 161,177 | ||||||||||||||||||
Warrant contra revenue | (485 | ) | (730 | ) | (763 | ) | (730 | ) | (425 | ) | (278 | ) | ||||||||||||
Net Revenue | 142,167 | 160,553 | 303,066 | 321,695 | $ | 163,070 | $ | 160,899 | ||||||||||||||||
Cost of services | (126,354 | ) | (132,993 | ) | (267,195 | ) | (266,921 | ) | (138,383 | ) | (140,841 | ) | ||||||||||||
Gross profit | 15,813 | 27,560 | 35,871 | 54,774 | $ | 24,687 | $ | 20,058 | ||||||||||||||||
Selling, general and administrative expenses | (14,644 | ) | (24,936 | ) | (31,899 | ) | (49,015 | ) | (14,171 | ) | (17,255 | ) | ||||||||||||
Impairment losses and restructuring/exit cost | (235 | ) | (721 | ) | (24,557 | ) | (1,850 | ) | (1,898 | ) | (24,322 | ) | ||||||||||||
Acquisition related cost | - | (25 | ) | - | 11 | |||||||||||||||||||
Operating (Loss) / Income | 934 | 1,878 | (20,585 | ) | 3,920 | |||||||||||||||||||
Share of (loss) / profit of equity accounted investees | (12 | ) | 662 | (20 | ) | 1,003 | ||||||||||||||||||
Operating income / (loss) | $ | 8,618 | $ | (21,519 | ) | |||||||||||||||||||
Share of loss of equity-accounted investees | (14 | ) | (8 | ) | ||||||||||||||||||||
Interest expense, net | (3,190 | ) | (4,026 | ) | (6,696 | ) | (8,492 | ) | (13,769 | ) | (3,506 | ) | ||||||||||||
Exchange gain / (loss), net | (1,637 | ) | 14 | 291 | (677 | ) | 212 | 1,928 | ||||||||||||||||
Loss before income taxes | (3,905 | ) | (1,472 | ) | (27,010 | ) | (4,246 | ) | $ | (4,953 | ) | $ | (23,105 | ) | ||||||||||
Income tax expense | 1,283 | 730 | 4,159 | 1,113 | (4,902 | ) | (2,876 | ) | ||||||||||||||||
Net loss | (5,188 | ) | (2,202 | ) | (31,169 | ) | (5,359 | ) | $ | (9,855 | ) | $ | (25,981 | ) | ||||||||||
Net (Loss) / income | ||||||||||||||||||||||||
Net income / (loss) | ||||||||||||||||||||||||
Net income attributable to non-controlling interests | 29 | 1,392 | 605 | 1,581 | 2,300 | 576 | ||||||||||||||||||
Net loss attributable to Startek shareholders | (5,217 | ) | (3,594 | ) | (31,774 | ) | (6,940 | ) | (12,155 | ) | (26,557 | ) | ||||||||||||
Net loss per common share - basic and diluted | (0.14 | ) | (0.10 | ) | (0.82 | ) | (0.18 | ) | (0.30 | ) | (0.69 | ) | ||||||||||||
Weighted average common shares outstanding - basic and diluted | 38,614 | 37,779 | 38,571 | 37,779 | 40,592 | 38,528 | ||||||||||||||||||
STARTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net Loss | (5,188 | ) | (2,202 | ) | (31,169 | ) | (5,359 | ) | ||||||||||||||||
Net income attributable to noncontrolling interests | 29 | 1,392 | 605 | 1,581 | ||||||||||||||||||||
Net loss | $ | (9,855 | ) | $ | (25,981 | ) | ||||||||||||||||||
Net income attributable to non-controlling interests | 2,300 | 576 | ||||||||||||||||||||||
Net loss attributable to Startek shareholders | (5,217 | ) | (3,594 | ) | (31,774 | ) | (6,940 | ) | (12,155 | ) | (26,557 | ) | ||||||||||||
�� | ||||||||||||||||||||||||
Other comprehensive (loss) / income, net of taxes: | ||||||||||||||||||||||||
Foreign currency translation adjustments | 727 | 32 | (3,665 | ) | 599 | (1,092 | ) | (4,392 | ) | |||||||||||||||
Change in fair value of derivative instruments | (8 | ) | 413 | (680 | ) | 348 | 8 | (672 | ) | |||||||||||||||
Pension amortization | (3,026 | ) | (236 | ) | (2,630 | ) | (60 | ) | (384 | ) | 396 | |||||||||||||
Comprehensive (loss) / income | (2,307 | ) | 209 | (6,975 | ) | 887 | ||||||||||||||||||
Other comprehensive loss | $ | (1,468 | ) | $ | (4,668 | ) | ||||||||||||||||||
Other comprehensive (loss) / income, net of taxes | ||||||||||||||||||||||||
Other comprehensive (loss) / income attributable to noncontrolling interest | (1,787 | ) | (111 | ) | (1,624 | ) | (25 | ) | ||||||||||||||||
Other comprehensive (loss) / income attributable to Startek shareholders | (520 | ) | 320 | (5,351 | ) | 912 | ||||||||||||||||||
Other comprehensive (loss) / income attributable to non-controlling interests | (69 | ) | 163 | |||||||||||||||||||||
Other comprehensive loss attributable to Startek shareholders | (1,399 | ) | (4,831 | ) | ||||||||||||||||||||
(2,307 | ) | 209 | (6,975 | ) | 887 | $ | (1,468 | ) | $ | (4,668 | ) | |||||||||||||
Comprehensive (loss) / income | ||||||||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | (1,758 | ) | 1,281 | (1,019 | ) | 1,556 | ||||||||||||||||||
Comprehensive income attributable to non-controlling interests | 2,231 | 739 | ||||||||||||||||||||||
Comprehensive loss attributable to Startek shareholders | (5,737 | ) | (3,274 | ) | (37,125 | ) | (6,028 | ) | (13,554 | ) | (31,388 | ) | ||||||||||||
(7,495 | ) | (1,993 | ) | (38,144 | ) | (4,472 | ) | $ | (11,323 | ) | $ | (30,649 | ) |
See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
June 30, | December 31, | March 31, | December 31, | |||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | 47,451 | 20,464 | 57,665 | 44,507 | ||||||||||||
Restricted cash | 8,966 | 12,162 | 6,981 | 6,052 | ||||||||||||
Trade accounts receivable, net | 70,194 | 108,479 | 69,712 | 83,560 | ||||||||||||
Unbilled revenue | 40,181 | 41,449 | 57,530 | 49,779 | ||||||||||||
Prepaid and other current assets | 14,308 | 12,008 | 12,328 | 14,542 | ||||||||||||
Total current assets | 181,100 | 194,562 | $ | 204,216 | $ | 198,440 | ||||||||||
Non-current assets | ||||||||||||||||
Property, plant and equipment, net | 37,644 | 37,507 | 34,353 | 34,225 | ||||||||||||
Operating lease right-of-use assets | 77,437 | 73,692 | 65,396 | 69,376 | ||||||||||||
Intangible assets, net | 105,644 | 110,807 | 97,879 | 100,440 | ||||||||||||
Goodwill | 196,633 | 219,341 | 183,397 | 183,397 | ||||||||||||
Investment in associates | 109 | 553 | ||||||||||||||
Investment in equity-accounted investees | 25,096 | 111 | ||||||||||||||
Deferred tax assets, net | 2,980 | 5,251 | 4,042 | 5,294 | ||||||||||||
Prepaid expenses and other non-current assets | 17,113 | 16,370 | 16,605 | 13,370 | ||||||||||||
Total non-current assets | $ | 426,768 | $ | 406,213 | ||||||||||||
Total assets | 618,660 | 658,083 | $ | 630,984 | $ | 604,653 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Trade accounts payables | 18,669 | 25,449 | 14,457 | 20,074 | ||||||||||||
Accrued expenses | 54,857 | 45,439 | 58,026 | 57,118 | ||||||||||||
Short term debt | 29,134 | 26,491 | 5,230 | 15,505 | ||||||||||||
Current maturity of long term debt | 9,863 | 18,233 | 2,412 | 2,180 | ||||||||||||
Current maturity of operating lease obligation | 20,223 | 19,677 | 18,724 | 19,327 | ||||||||||||
Other current liabilities | 39,089 | 37,159 | 45,130 | 39,987 | ||||||||||||
Total current liabilities | 171,835 | 172,448 | $ | 143,979 | $ | 154,191 | ||||||||||
Non-current liabilities | ||||||||||||||||
Long term debt | 110,923 | 130,144 | 165,116 | 118,315 | ||||||||||||
Operating lease liabilities | 58,251 | 54,341 | 48,697 | 52,052 | ||||||||||||
Other non-current liabilities | 17,935 | 11,140 | 18,490 | 15,498 | ||||||||||||
Deferred tax liabilities, net | 17,095 | 18,226 | 17,194 | 17,715 | ||||||||||||
Total non-current liabilities | $ | 249,497 | $ | 203,580 | ||||||||||||
Total liabilities | 376,039 | 386,299 | $ | 393,476 | $ | 357,771 | ||||||||||
Commitments and contingencies | — | — | ||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, 60,000,000 non-convertible shares, $0.01 par value, authorized; 40,210,299 and 38,525,636 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | 401 | 385 | ||||||||||||||
Common stock, 60,000,000 non-convertible shares, $0.01 par value, authorized; 40,781,804 and 40,453,462 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 408 | 405 | ||||||||||||||
Additional paid-in capital | 286,205 | 276,827 | 290,646 | 288,700 | ||||||||||||
Accumulated deficit | (78,332 | ) | (46,145 | ) | (97,698 | ) | (85,543 | ) | ||||||||
Accumulated other comprehensive loss | (11,373 | ) | (6,022 | ) | (8,685 | ) | (7,286 | ) | ||||||||
Equity attributable to Startek shareholders | 196,901 | 225,045 | $ | 184,671 | $ | 196,276 | ||||||||||
Non-controlling interest | 45,720 | 46,739 | ||||||||||||||
Non-controlling interests | 52,837 | 50,606 | ||||||||||||||
Total stockholders’ equity | 242,621 | 271,784 | $ | 237,508 | $ | 246,882 | ||||||||||
Total liabilities and stockholders’ equity | 618,660 | 658,083 | $ | 630,984 | $ | 604,653 |
See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Operating Activities | ||||||||||||||||
Net loss | $ | (31,169 | ) | $ | (5,359 | ) | (9,855 | ) | (25,981 | ) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash generated from operating activities: | ||||||||||||||||
Depreciation and amortization | 14,328 | 14,631 | 6,803 | 7,093 | ||||||||||||
Impairment of goodwill | 22,708 | - | 0 | 22,708 | ||||||||||||
Profit on sale of property, plant and equipment | - | (223 | ) | (53 | ) | 0 | ||||||||||
Provision for doubtful accounts | 889 | 1,169 | 63 | 154 | ||||||||||||
Amortisation of debt issuance cost | 2,670 | 378 | ||||||||||||||
Warrant contra revenue | 763 | 730 | 425 | 278 | ||||||||||||
Share-based compensation expense | 209 | 781 | 280 | 291 | ||||||||||||
Deferred income taxes | 1,604 | (1,224 | ) | 558 | 1,879 | |||||||||||
Share of profit of associates | 20 | (1,003 | ) | |||||||||||||
Share of loss of equity-accounted investees | 14 | 8 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Trade accounts receivable | 34,022 | (1,218 | ) | 12,848 | 4,503 | |||||||||||
Prepaid expenses and other assets | (2,301 | ) | (7,677 | ) | (8,844 | ) | (7,658 | ) | ||||||||
Trade accounts payable | (5,920 | ) | (2,091 | ) | (5,447 | ) | (4,722 | ) | ||||||||
Income taxes, net | (2,314 | ) | (2,663 | ) | 2,727 | (672 | ) | |||||||||
Accrued expenses and other current liabilities | 15,558 | (1,280 | ) | 4,908 | 12,287 | |||||||||||
Net cash (used in) / generated from operating activities | $ | 48,397 | $ | (5,427 | ) | |||||||||||
Net cash generated from operating activities | $ | 7,097 | $ | 10,546 | ||||||||||||
Investing Activities | ||||||||||||||||
Purchases of property, plant and equipment | (7,864 | ) | (7,302 | ) | (2,922 | ) | (2,884 | ) | ||||||||
Proceeds from equity-accounted investees | 395 | 1,329 | ||||||||||||||
Net cash used in generated investing activities | $ | (7,469 | ) | $ | (5,973 | ) | ||||||||||
Investment in equity-accounted investees | (25,000 | ) | 0 | |||||||||||||
Net cash used in investing activities | $ | (27,922 | ) | $ | (2,884 | ) | ||||||||||
Financing Activities | ||||||||||||||||
Proceeds from the issuance of common stock | 8,009 | 6,466 | 1,244 | 43 | ||||||||||||
Payments on long term debt | (4,200 | ) | (4,200 | ) | ||||||||||||
Proceeds from (payments on) long term debt | 44,702 | (4,200 | ) | |||||||||||||
Proceeds from (payments on) other debt, net | (20,449 | ) | 10,513 | (10,609 | ) | 4,578 | ||||||||||
Net cash (used in) / generated from financing activities | $ | (16,640 | ) | $ | 12,779 | |||||||||||
Net cash generated from financing activities | $ | 35,337 | $ | 421 | ||||||||||||
Net increase in cash and cash equivalents | 24,288 | 1,379 | $ | 14,512 | $ | 8,083 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash | (497 | ) | (40 | ) | (425 | ) | (1,052 | ) | ||||||||
Cash and cash equivalents and restricted cash at beginning of period | 32,626 | 24,569 | 50,559 | 32,626 | ||||||||||||
Cash and cash equivalents and restricted cash at end of period | $ | 56,417 | $ | 25,908 | $ | 64,646 | $ | 39,657 | ||||||||
Components of cash and cash equivalents and restricted cash | ||||||||||||||||
Balances with banks | 47,451 | 15,452 | 57,665 | 27,795 | ||||||||||||
Restricted cash | 8,966 | 10,456 | 6,981 | 11,862 | ||||||||||||
Total cash and cash equivalents and restricted cash | 56,417 | $ | 25,908 | $ | 64,646 | $ | 39,657 | |||||||||
Supplemental disclosure of Cash Flow Information | ||||||||||||||||
Cash paid for Interest and other finance cost | 6,440 | 8,200 | ||||||||||||||
Cash paid for Interest and other finance costs | 14,443 | 1,988 | ||||||||||||||
Cash paid for income taxes | 4,017 | 4,920 | 1,652 | 963 | ||||||||||||
Non cash warrant contra revenue | 763 | 730 | ||||||||||||||
Non cash share-based compensation expenses | 209 | 781 | ||||||||||||||
Non-cash warrant contra revenue | 425 | 278 | ||||||||||||||
Non-cash share-based compensation expenses | 280 | 291 |
See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
Common Stock | Other Items of OCI | Common Stock | Other Items of OCI | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional paid-in | Accumulated | Foreign currency | Change in fair value of | Unrecognised | Equity attributable to Startek | Non-controlling | Total stockholders' | Shares | Amount | Additional paid-in | Accumulated | Foreign currency | Change in fair value of | Unrecognised | Equity attributable to Startek | Non-controlling | Total stockholders' | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
capital | deficit | translation | derivative instruments | pension cost | shareholders | interest | equity | capital | deficit | translation | derivative instruments | pension cost | shareholders | interest | equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 38,541,724 | $ | 385 | $ | 277,852 | $ | (73,115 | ) | $ | (8,960 | ) | $ | (197 | ) | $ | (1,696 | ) | $ | 194,269 | $ | 47,478 | $ | 241,747 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 40,453,462 | $ | 405 | $ | 288,700 | $ | (85,543 | ) | $ | (4,529 | ) | $ | (8 | ) | $ | (2,749 | ) | $ | 196,276 | $ | 50,606 | $ | 246,882 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock | 1,668,575 | 16 | 7,950 | - | - | - | - | 7,966 | - | 7,966 | 328,342 | 3 | 1,241 | 0 | 0 | 0 | 0 | 1,244 | 0 | 1,244 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expenses | - | - | (82 | ) | - | - | - | - | (82 | ) | - | (82 | ) | - | 0 | 280 | 0 | 0 | 0 | 0 | 280 | 0 | 280 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrant expenses | - | - | 485 | - | - | - | - | 485 | - | 485 | - | 0 | 425 | 0 | 0 | 0 | 0 | 425 | 0 | 425 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | (5,217 | ) | - | - | - | (5,217 | ) | 29 | (5,188 | ) | - | 0 | 0 | (12,155 | ) | 0 | 0 | 0 | (12,155 | ) | 2,300 | (9,855 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss for the period | - | - | - | - | 727 | (8 | ) | (1,239 | ) | (520 | ) | (1,787 | ) | (2,307 | ) | - | 0 | 0 | 0 | (1,092 | ) | 8 | (315 | ) | (1,399 | ) | (69 | ) | (1,468 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 40,210,299 | $ | 401 | $ | 286,205 | $ | (78,332 | ) | $ | (8,233 | ) | $ | (205 | ) | $ | (2,935 | ) | $ | 196,901 | $ | 45,720 | $ | 242,621 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | 40,781,804 | $ | 408 | $ | 290,646 | $ | (97,698 | ) | $ | (5,621 | ) | $ | 0 | $ | (3,064 | ) | $ | 184,671 | $ | 52,837 | $ | 237,508 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 37,561,744 | $ | 375 | $ | 268,256 | $ | (34,473 | ) | $ | (3,422 | ) | $ | (80 | ) | $ | (1,453 | ) | $ | 229,203 | $ | 45,631 | $ | 274,834 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock | 890,367 | 9 | 5,942 | - | - | - | - | 5,951 | - | 5,951 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expenses | - | - | 356 | - | - | - | - | 356 | - | 356 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrant expenses | - | - | 730 | - | - | - | - | 730 | - | 730 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | (3,594 | ) | - | - | - | (3,594 | ) | 1,392 | (2,202 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss for the period | - | - | - | - | 32 | 413 | (125 | ) | 320 | (111 | ) | 209 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 38,452,111 | $ | 384 | $ | 275,284 | $ | (38,067 | ) | $ | (3,390 | ) | $ | 333 | $ | (1,578 | ) | $ | 232,966 | $ | 46,912 | $ | 279,878 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Six months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 38,525,636 | $ | 385 | $ | 276,827 | $ | (46,145 | ) | $ | (4,568 | ) | $ | 475 | $ | (1,929 | ) | $ | 225,045 | $ | 46,739 | $ | 271,784 | 38,525,636 | $ | 385 | $ | 276,827 | $ | (46,145 | ) | $ | (4,568 | ) | $ | 475 | $ | (1,929 | ) | $ | 225,045 | $ | 46,739 | $ | 271,784 | ||||||||||||||||||||||||||||||||||||
Transition period adjustment pursuant to ASU 2019-08 | - | - | 413 | (413 | ) | - | - | - | - | - | - | - | 0 | 413 | (413 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock | 1,684,663 | 16 | 7,993 | - | - | - | - | 8,009 | - | 8,009 | 16,088 | 0 | 43 | 0 | 0 | 0 | 0 | 43 | 0 | 43 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expenses | - | - | 209 | - | - | - | - | 209 | - | 209 | - | 0 | 291 | 0 | 0 | 0 | 0 | 291 | 0 | 291 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrant expenses | - | - | 763 | - | - | - | - | 763 | - | 763 | - | 0 | 278 | 0 | 0 | 0 | 0 | 278 | 0 | 278 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | (31,774 | ) | - | - | - | (31,774 | ) | 605 | (31,169 | ) | - | 0 | 0 | (26,557 | ) | 0 | 0 | 0 | (26,557 | ) | 576 | (25,981 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss for the period | - | - | - | - | (3,665 | ) | (680 | ) | (1,006 | ) | (5,351 | ) | (1,624 | ) | (6,975 | ) | - | 0 | 0 | 0 | (4,392 | ) | (672 | ) | 233 | (4,831 | ) | 163 | (4,668 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 40,210,299 | $ | 401 | $ | 286,205 | $ | (78,332 | ) | $ | (8,233 | ) | $ | (205 | ) | $ | (2,935 | ) | $ | 196,901 | $ | 45,720 | $ | 242,621 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 37,446,323 | $ | 374 | $ | 267,317 | $ | (31,127 | ) | $ | (3,989 | ) | $ | (15 | ) | $ | (1,543 | ) | $ | 231,017 | $ | 45,356 | $ | 276,373 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock | 1,005,788 | 10 | 6,456 | - | - | - | - | 6,466 | - | 6,466 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expenses | - | - | 781 | - | - | - | - | 781 | - | 781 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrant expenses | - | - | 730 | - | - | - | - | 730 | - | 730 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | (6,940 | ) | - | - | - | (6,940 | ) | 1,581 | (5,359 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss for the period | - | - | - | - | 599 | 348 | (35 | ) | 912 | (25 | ) | 887 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 38,452,111 | $ | 384 | $ | 275,284 | $ | (38,067 | ) | $ | (3,390 | ) | $ | 333 | $ | (1,578 | ) | $ | 232,966 | $ | 46,912 | $ | 279,878 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 38,541,724 | $ | 385 | $ | 277,852 | $ | (73,115 | ) | $ | (8,960 | ) | $ | (197 | ) | $ | (1,696 | ) | $ | 194,269 | $ | 47,478 | $ | 241,747 |
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020March 31, 2021
(In thousands, except share and per share data)
(Unaudited)
1. OVERVIEW AND BASIS OF PREPARATION
Unless otherwise noted in this report, any description of "us," "we," or "our," refers to StarTek, Inc. and its subsidiaries (the "Company"). Financial information in this report is presented in U.S. dollars.
Business
Startek is a leading global provider of technology-enabled business process outsourcing company thatmanagement solutions. The Company provides omnichannelomni-channel customer interactions,experience, digital transformation and technology and back-office support solutions forservices to some of the world’s most iconicfinest brands globally. Startek is committed to impacting clients’ business outcomes by focusing on enhancing customer experience and digital enablement across all touch points and channels. Startek has more than 42,000 CX experts globally spread across 46 delivery campuses in 13 countries. The Company services over 220 clients across various industries such as Banking and Financial Services, Insurance, Technology, Telecom, Healthcare, Travel and Hospitality, Consumer Goods, Retail, and Energy and Utilities.
The Company offers a varietyrepository of vertical markets. Operating underdigital and omnichannel solutions based on decades of experience in driving growth by putting the Startek and Aegis brand, we help these large global companies connect emotionally with their customers, solve issues, and improve net promoter scores and other customer-facing performance metrics. Through consulting and analytics services, technology-led innovation, and engagement solutions, we deliver personalized experiencescustomer at the pointcenter of conversation between our clients and their customers across every interaction channel and phase of the customer journey.
business. Because noone solution fits all, we have crafted solution delivery to suit a various industries. Startek has proven results for the multiple services we provide, including sales, order management and provisioning, customer care, technical support, receivables management, and retention programs. We manage programs using a variety of multi-channel customer interactions, including voice, chat, email, social media and back-office support. Startek has facilities indelivery campuses across India, United States, Malaysia, Philippines, Australia, South Africa, Canada, Honduras, Jamaica, Kingdom of Saudi Arabia, Argentina, Peru and Sri Lanka.
Basis of preparation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US-GAAP") for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by US-GAAP for complete financial statements.
These consolidated financial statements reflect all adjustments (consisting only of normal recurring entries, except as noted) which, in the opinion of management, are necessary for fair presentation. The results of operations for interim periods are not necessarily indicative of full year results.
The consolidated financial statements reflect the financial results of all subsidiaries that are more than 50% owned and over which the Company exerts control. When the Company does not have majority ownership in an entity but exerts significant influence over that entity, the Company accounts for the entity under the equity method of accounting. All intercompany balances are eliminated on consolidation. Where our ownership of a subsidiary was less than 100%, the non-controlling interest is reported in our Consolidated Balance Sheets.consolidated balance sheet. The non-controlling interest in our consolidated net income is reported as "Net income (loss) attributable to non-controlling interests" in our Consolidated Statementsconsolidated statement of Comprehensive Incomeincome (loss).
TheAs of December 31,2020, the consolidated balance sheet as of December 31, 2019, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by US-GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 20192020.
The figures for the corresponding previous year have been regrouped/reclassified wherever necessary, to make them comparable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, intangibles, impairment of goodwill, valuation allowances for deferred tax assets, leases and provision for doubtful debts, and restructuring costs. Management believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable, and management has made assumptions about the possible effects of the novel coronavirus (“COVID-19”) pandemic on critical and significant accounting estimates. Although these estimates are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates. Any changes in estimates are adjusted prospectively in the Company’s condensed consolidated financial statements.
Revenue
The companyCompany utilizes a five-step process given in ASC 606, for revenue recognition that focuses on the transfer of control, rather than the transfer of risks and rewards. It also provided additional guidance on accounting for contract acquisition and fulfillment costs. Refer Note 4 on "Revenue from Contracts with Customers" for further information.
Leases
On January 1, 2019, the Company adopted Accounting Standards Codification 842, Leases, (Topic 842)withthe transition approach. However, the Company has accounted the lease for the comparable periods as per the Accounting Standards Codification 840.
We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use (“ROU”) assets, current maturity of operating lease liabilities, and operating lease liabilities in our consolidated balance sheets.sheet. Finance leases are included in property plant and equipment, long-term debt, accrued expenses and other current liabilities in our consolidated balance sheets.sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the balance lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the date of initial application on determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we willto exercise that option. Lease expense is recognized on a straight-line basis over the lease term.
The Company elected the practical expedient permitted under the transition guidance under Topic 842, which among other matters, allowed the Company (i) not to apply the recognition requirements to short-term leases (leases with a lease term of 12 months or less), (ii) not to reassess whether any expired or existing contracts are or contain leases, (iii) not to reassess the lease classification for any expired or existing leases, and (iv) not to reassess initial direct costs for any existing leases
We have lease agreements with lease and non-lease components, which are generally accounted for separately.
During the first quarter of 2020, the COVID-19 pandemic did not trigger changes to the terms of any of the Company’s leases, however during second quarter we have received partial relief from, a few landlords in terms of rent discounts for certain periods and deferments of rent for a few facilities. Rent discounts and deferment of rent which were received due to COVID-19 have been accounted for without lease modification using the practical expedient provided by the FASB. Refer to Note 13 "Leases" for information and related disclosures.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations, by recognizing identifiable tangible and intangible assets acquired, liabilities assumed, and non-controlling interests in the acquired business at their fair values. The excess of the cost of the acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. Acquisition related costs are expensed as incurred.
Goodwill and Intangible Assets
Goodwill represents the cost of acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased. Goodwill is not amortized but is tested for impairment at least on an annual basis on December 31, based on a number of factors, including operating results, business plans and future cash flows. The Company performs an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Based on the assessment of events or circumstances, the Company performs a quantitative assessment of goodwill impairment if it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on the quantitative impairment analysis, the carrying value of a reporting unit exceeds the fair value of reporting units, an impairment loss is recognized in an amount equal to the excess. In addition, the Company performs a quantitative assessment of goodwill impairment between annual tests if an event occurs or circumstances change that would be more likely than not reduce the fair value of a reporting unit below its carrying amount. Refer to Note 3 for information and related disclosures.
Intangible assets acquired in a business combination were recorded at fair value at acquisition date using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over the estimated useful lives and are reviewed for impairment at least annually, or more frequently if indicators of impairment arise. Refer Note 3 on "Goodwill and Intangible assets" for further information.
Foreign Currency Matters
The Company has operations in Argentina and its functional currency has historically been the Argentine Peso. The Company monitors inflation rates in countries in whichwhere it operates as required by US GAAP. Under ASC 830-10-45-12, an economy must be classified as highly inflationary when the cumulative three-year rate exceeds 100%. Considering the inflation data of Argentina, the Company has considered Argentina to be highly inflationary beginning on July 1, 2018. In accordance with ASC 830, the functional currency of the Argentina business has been changed to USD, which requires remeasurementre-measurement of the local books to USD. Exchange gains and losses are recorded through net income as opposed toinstead of through other comprehensive income as had been done historically. Translation adjustments from periods prior to the change in functional currency were not removed from equity.
Investment in equity-accounted investees
Investment in equity-accounted investee is an entity over which the Company has significant influence and which is neither a subsidiary nor a joint arrangement. Significant influence is the power to participate in the investee's financial and operating policy decisions of the investee but is not control or joint control over those policies.
Investment in equity-accounted investee is accounted using equity method of accounting. Under the equity method, the investment in equity-accounted investee is initially recognized at cost and adjusted thereafter for the post acquisition changes in the Company’s share of net assets of the equity-accounted investees. Goodwill relating to investment in equity-accounted investees, if any, is included in the carrying amount of the investment and is neither amortized nor individually tested for impairment.
The consolidated statement of income reflects the Company’s share of the results of operations of the equity-accounted investees. When there has been a change recognized directly in the equity of the equity-accounted investees, the Company recognizes its share of any changes and discloses this, when applicable, in the statement of stockholders' equity. Unrealized gains and losses resulting from transactions between the Company and the equity- accounted investment are eliminated to the extent of the interest in the equity-accounted investees. The Company’s share of profit/loss of equity-accounted investees is shown on the face of the consolidated statement of income/(loss).
The financial statements of the equity-accounted investee are prepared for the same reporting period as the Company. When necessary, adjustments are made to bring the accounting policies in line with those of the Company. After application of the equity method, the ompany determines at each reporting date whether there is any objective evidence that the investment in equity-accounted investees is impaired, if there has been an other than temporary decline in carrying value. If this is the case, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in the ‘share of profit/(loss) of equity-accounted investees in the consolidated statement of income (loss).
Stock-Based Compensation
We recognize expense related to all share-based payments to employees, including grants of employee stock options, based on the grant-date fair values amortized straight-line over the period during which the employees are required to provide services in exchange for the equity instruments. We include an estimate of forfeitures when calculating compensation expense. We use the Black-Scholes method for valuing stock-based awards. See Note 10, “Share-Based Compensation” for further information.
Common Stock Warrant Accounting
We account for common stock warrants as equity instruments, based on the specific terms of our warrant agreement. For more information refer to Note 10, "Share-Based Compensation."
Recent Accounting Pronouncements
In December 2019, FASB issued ASU 2019-12 which modifies ASC 740 to simplify accounting for income taxes. ASU 2019-12 amends the requirements related to the accounting for “hybrid” tax regimes. FASB amended ASC 740-10-15-4(a) to state that an entity should include the amount of tax based on income in the tax provision and should record any incremental amount recorded as a tax not based on income. This amendment effectively reverses the order in which an entity determines the type of tax under current U.S. GAAP. The Company does not have a hybrid tax regime currently.
FASB also removed the previous guidance that prohibit recognition of a DTA for a step up in tax basis “except to the extent that the newly deductible goodwill amount exceeds the remaining balance of book goodwill.” Instead, the amended guidance contains a model under which an entity can consider a list of factors in determining whether the step-up in tax basis is related to the business combination that caused the initial recognition of goodwill or to a separate transaction. The Company does not have a step up in tax basis for goodwill.
ASU 2019-12 also modified intra-period tax allocation exception to incremental approach. As per the modification, an entity should determine the tax effect of income from continuing operations without considering the tax effect of items that are not included in continuing operations, such as discontinued operations or other comprehensive income. The Company does not believe this to have material impact on their consolidated financial statements.
The ASU also makes one minor improvements to the Codification topics. Tax benefit of tax-deductible dividends on allocated and unallocated employee stock ownership plan shares shall be recognized in the income statement. FASB decided to change the phrase “recognized in the income statement” to “recognized in income taxes allocated to continuing operations” to clarify where income tax benefits related to tax-deductible dividends should be presented in the income statement. This improvement is not expected to have material impact on the Company.
The above amendments are effective for fiscal years beginning after December 15, 2020.
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendment makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other post retirement benefit plans. The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU No.2018-14 is effective for fiscal years ending after December 15, 2020.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13"), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2022, and interim periods therein for smaller reporting companies. We do not expect the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments.” This ASU represents changes to clarify or improve the Codification. The amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications in relation to financial instruments. This guidance was effective immediately upon issuance. The additional elements of the ASU did not have a material impact on the Company's consolidated results of operations, cash flows, financial position and or disclosures.
In March 2020, the FASB issued ASU No.2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional expedients and exceptions to the guidance in US GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The guidance is effective upon issuance and generally can be applied through December 31, December 2022.The Company is still in the process of assessing the impact of this ASU.
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The carrying value of goodwill is allocated to reporting units is as follows:
Reporting Units | June 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | ||||||||||||
Americas | 64,315 | 64,315 | 64,315 | 64,315 | ||||||||||||
India | 15,180 | 31,000 | 12,554 | 12,554 | ||||||||||||
Malaysia | 47,543 | 47,543 | 47,543 | 47,543 | ||||||||||||
Saudi Arabia | 54,840 | 54,840 | 54,840 | 54,840 | ||||||||||||
South Africa | 1,578 | 5,910 | 0 | 0 | ||||||||||||
Argentina | 4,991 | 4,991 | 0 | 0 | ||||||||||||
Australia | 8,186 | 10,742 | 4,145 | 4,145 | ||||||||||||
Total | $ | 196,633 | $ | 219,341 | $ | 183,397 | $ | 183,397 |
We perform a goodwill impairment analysis at least annually (in the fourth quarter of each year) unless indicators of impairment exist in interim periods. The Goodwill was allocated to new reporting units using a relative fair value allocation approach. We performed a quantitative assessment to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value.
The assumptions used in the analysis are based on the Company’s internal budget. The Company projected revenue, operating margins and cash flows for a period of five years and applied a perpetual long-term growth rate using discounted cash flows (DCF) method. These assumptions are reviewed annually as part of management’s budgeting and strategic planning cycles. These estimates may differ from actual results. In arriving at its forecasts, the Company considered past experience, economic trends and inflation, and industry and market trends, including the outbreak of COVID-19.The values assigned to eachprojections also took into account factors such as the expected impact from new client wins and expansion from existing clients businesses and efficiency initiatives, and the maturity of the key assumptions reflect the management’s past experience as their assessment of future trends and are consistent with external/internal sources of information.
During the first quarter of 2020, the Company reviewed the carrying value of goodwill due to the events and circumstances surrounding the COVID-19 pandemic. As a result of the recent global economic disruption and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the goodwill balances of its reporting units. As quoted market prices are not available for these reporting units, the calculations of their estimated fair values were based on a discounted cash flow model (income approach).
The results of these interim impairment tests indicated that the estimated fair value of the India, South Africa and Australia reporting unit was less than its carrying value. Consequently, a goodwill impairment charge of $15,820, $4,332 and $2,556 was recorded for the India, South Africa and Australia reporting unit respectively.markets in which each business operates.
As of June 30, 2020,March 31,2021,based on the qualitative assessment, we concluded there is 0 additionalno impairment of goodwill.
The following table presents the changes in goodwill during the period:three months ended March 31, 2021 and year ended December 31, 2020:
Amount | ||||
Opening balance, December 31, 2019 | $ | 219,341 | ||
Impairment | (22,708 | ) | ||
Ending balance, June 30, 2020 | $ | 196,633 |
March 31, 2021 | December 31, 2020 | |||||||
Opening balance | 183,397 | 219,341 | ||||||
Impairment | 0 | (35,944 | ) | |||||
Ending balance | $ | 183,397 | $ | 183,397 |
Intangible Assets
The following table presents our intangible assets as of June 30, 2020assets:
Gross Intangibles | Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | |||||||||||||
Customer relationships | $ | 66,220 | $ | 13,474 | $ | 52,746 | 6.5 | |||||||||
Brand | 49,500 | 9,561 | 39,939 | 7.1 | ||||||||||||
Trademarks | 13,210 | 1,715 | 11,495 | 7.5 | ||||||||||||
Other intangibles | 2,130 | 666 | 1,464 | 4.9 | ||||||||||||
$ | 131,060 | $ | 25,416 | $ | 105,644 |
During the first quarter of 2020, the Company reviewed the carrying value of its intangible assets due to the events and circumstances surrounding the COVID-19 pandemic. As a result of the recent global economic disruption and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the all intangible assets. Based on the results of our analyses, the estimated fair values of the trade names exceeded the carrying values.
As of March 31, 2021 | ||||||||||||||||
Gross Intangibles | Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | |||||||||||||
Customer relationships | 66,220 | 17,675 | 48,545 | 6.5 | ||||||||||||
Brand | 49,500 | 12,312 | 37,188 | 7.1 | ||||||||||||
Trademarks | 13,210 | 2,375 | 10,835 | 7.5 | ||||||||||||
Other intangibles | 2,130 | 819 | 1,311 | 4.9 | ||||||||||||
$ | 131,060 | $ | 33,181 | $ | 97,879 | |||||||||||
As of December 31, 2020 | ||||||||||||||||
Gross Intangibles | Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | |||||||||||||
Customer relationships | 66,220 | 16,289 | 49,931 | 6.5 | ||||||||||||
Brand | 49,500 | 11,408 | 38,092 | 7.1 | ||||||||||||
Trademarks | 13,210 | 2,155 | 11,055 | 7.5 | ||||||||||||
Other intangibles | 2,130 | 768 | 1,362 | 4.9 | ||||||||||||
$ | 131,060 | $ | 30,621 | $ | 100,440 |
As of June 30, 2020,March 31, 2021, based on the qualitative assessment, we concluded there is 0 impairment of the company'sCompany's intangible assets.
Expected future amortization of intangible assets as of June 30, 2020March 31, 2021 is as follows:
Years Ending December 31, | Amount | |||
Remainder of 2020 | $ | 5,175 | ||
2021 | 10,350 | |||
2022 | 10,350 | |||
2023 | 10,306 | |||
2024 | 10,252 | |||
Thereafter | 59,211 |
Years Ending December 31, | Amount | |||
Remainder of 2021 | 7,762 | |||
2022 | 10,350 | |||
2023 | 10,306 | |||
2024 | 10,252 | |||
2025 | 10,252 | |||
Thereafter | 48,957 |
The companyCompany follows a five-step process in accordance with ASC 606, for revenue recognition that focuses on transfer of control, rather than transfer of risks and rewards.
Contracts with Customers
All of the Company's revenues are derived from written contracts with our customers. Generally speaking, our contracts document our customers' intent to utilize our services and the relevant terms and conditions under which our services will be provided. Our contracts generally do not contain minimum purchase requirements nor do they include termination penalties. Our customers may generally cancel our contract, without cause, upon written notice (generally ninety days). While our contracts do have stated terms, because of the facts stated above, they are accounted for on a month-to-month basis.
Our contracts give us the right to bill for services rendered during the period, which for the majoritymost of our customers is a calendar month, with a few customers specifying a fiscal month. Our payment terms vary by client and generally range from due upon receipt to 60-90 days.
Performance Obligations
We have identified one main performance obligation for which we invoice our customers, which is to stand ready to provide care services for our customers’ clients. A stand-ready obligation is a promise that a customer will have access to services as and when the customer decides to use them. Ours is considered a stand-ready obligation because the delivery of the underlying service (that is, receiving customer contact and performing the associated care services) is outside of our control or the control of our customer.
Our stand-ready obligation involves outsourcing of the entire customer care life cycle, including:
• | The identification, operation, management and maintenance of facilities, IT equipment, and IT and telecommunications infrastructure |
• | Management of the entire human resources function, including recruiting, hiring, training, supervising, evaluating, coaching, retaining, compensating, providing employee benefits programs, and disciplinary activities |
These activities are all considered an integral part of the production activities required in the service of standing ready to accept calls as and when they are directed to us by our clients.
Revenue Recognition Methods
Because our customers receive and consume the benefit of our services as they are performed and we have the contractual right to invoice for services performed to date, we have concluded that our performance obligation is satisfied over time. Accordingly, we recognize revenue for our services in the month they are performed. This is consistent with our prior revenue recognition model.
We are generally entitled to invoice for our services on a monthly basis. We invoice according to the hourly and/or per transaction rates stated in each contract for the various activities we perform. Some contracts include opportunities to earn bonuses or include parameters under which we will incur penalties related to performance in any given month. Bonus or penalty amounts are based on the current month’s performance. Formulas are included in the contracts for calculation of any bonus or penalty. There is no other performance in future periods that will impact the bonus or penalty calculation in the current period. We estimate the amount of the bonus or penalty using the “most likely amount” method and we apply this method consistently. The bonus or penalty calculated is generally approved by the client prior to billing (and revenue being recognized).
Practical expedients and exemptions
Because the Company’s contracts are essentially month-to-month, we have elected the following practical expedients:
• | ASC 606-10-50-14 exempts companies from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less |
• | ASC 340-40-25-4 allows companies to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. |
• | ASC 606-10-32-2A allows an entity to make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes) |
• | ASC 606-10-55-18 allows an entity that has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice. |
Our net revenues in the second quarter were negatively impacted by COVID-19, primarily due to lockdowns and lower active workforce in most of the Geographies where we had operations, the Company did see improvement throughout the quarter as few countries and states began to gradually re-open. For example, sales in Malaysia and Australia returned to growth in the second quarter. However, the ultimate COVID-19 impact on the fiscal year sales remains highly fluid and will continue to evolve with geographical re-openings and shutdowns due to volatile virus waves.
Disaggregated Revenue
Revenues by our clients' industry verticalverticals for the three and sixmonths ended June 30, 2020March 31, 2021 and 20192020, respectively:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
Vertical: | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | ||||||||||||||||||
Telecom | 50,186 | 64,421 | 105,527 | 130,245 | 51,674 | 55,697 | ||||||||||||||||||
E-commerce & Consumer | 21,354 | 24,375 | 47,802 | 48,719 | 26,102 | 25,958 | ||||||||||||||||||
Media & Cable | 25,794 | 23,194 | ||||||||||||||||||||||
Healthcare & Education | 17,687 | 13,448 | ||||||||||||||||||||||
Financial & Business Services | 10,438 | 13,245 | 23,833 | 26,565 | 15,450 | 13,439 | ||||||||||||||||||
Media & Cable | 22,099 | 23,587 | 45,265 | 45,344 | ||||||||||||||||||||
Travel & Hospitality | 14,179 | 17,375 | 29,965 | 33,889 | 10,497 | 15,803 | ||||||||||||||||||
Healthcare & Education | 9,178 | 8,352 | 22,617 | 18,881 | ||||||||||||||||||||
Technology, IT & Related Services | 4,402 | 3,458 | 9,497 | 5,896 | 5,081 | 5,050 | ||||||||||||||||||
All other segments | 10,816 | 6,470 | 19,323 | 12,886 | 11,210 | 8,588 | ||||||||||||||||||
Gross Revenue | 142,652 | 161,283 | 303,829 | 322,425 | 163,495 | 161,177 | ||||||||||||||||||
Less: Warrant Contra Revenue | (485 | ) | (730 | ) | (763 | ) | (730 | ) | (425 | ) | (278 | ) | ||||||||||||
Net Revenue | $ | 142,167 | $ | 160,553 | 303,066 | $ | 321,695 | $ | 163,070 | $ | 160,899 |
5. NET LOSSGAIN / (LOSS) PER SHARE
Basic net lossearnings per common share is computed based on our weighted average number of common shares outstanding. Diluted earnings per share is computed based on our weighted average number of common shares outstanding plus the effect of dilutive stock options, non-vested restricted stock, and deferred stock units, using the treasury stock method.
When a net loss is reported, potentially issuable common shares are excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.
For three months ended March 31, 2021 and 2020, following number of shares were used in the computation of basic/diluted earnings per share calculation (in thousands):
Three months ended March 31, | ||||||||
2021 | 2020 | |||||||
Shares used in basic earnings per share calculation: | 40,592 | 38,528 | ||||||
Effect of dilutive securities: | ||||||||
Stock options | 0 | 0 | ||||||
Restricted stock/Deferred stock units | 0 | 0 | ||||||
Total effects of dilutive securities | 0 | 0 | ||||||
Shares used in dilutive earnings per share calculation: | 40,592 | 38,528 |
The Company always maintained Startek's 2008 Equity Incentive Plan (see Note 10, "Share-based compensation and employee benefit plans" for more information). For the three and six months ended June 30, 2020, the following shares were not included in the computation of diluted earnings per share because we reported a net loss and the effect would have been anti-dilutive (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Anti-dilutive securities: | ||||||||||||||||||||||||
Stock options | 1,948 | 2,628 | 1,948 | 2,628 | 2,099 | 2,316 |
6. IMPAIRMENT LOSSES & RESTRUCTURING/EXIT COST
Impairment Loss
During the first quarterAs of 2020,March 31, 2021, the Company reviewed the carrying value of goodwill due to the events and circumstances surrounding the COVID-19 pandemic and performed interim impairment testingbased on the goodwill balancesqualitative assessment, we concluded there is 0 impairment of its reporting units. Accordingly, a goodwill impairment charge of $15,820, $4,332 and $2,556 was recorded for the India, South Africa and Australia reporting unit respectively.goodwill.
Restructuring/Restructuring / Exit Cost
The table below summarizes the balance of accrued restructuring cost, voluntary/involuntary termination costs and other acquisition related cost and involuntary termination cost,costs, which isare included in other accrued liabilities in our consolidated balance sheets, and thesheet. The changes during the sixthree months ended June 30, 2020March 31, 2021 : and year ended December 31,2020.
Employee related | Facilities related | Total | ||||||||||
Balance as of December 31, 2019 | $ | 1,326 | $ | 514 | $ | 1,840 | ||||||
Accruals/(reversals) | 1,797 | 52 | 1,849 | |||||||||
Payments | (2,490 | ) | (325 | ) | (2,815 | ) | ||||||
Balance as of June 30, 2020 | $ | 633 | $ | 241 | $ | 874 |
Employee related | Facilities related | Total | ||||||||||
Balance as of December 31, 2020 | $ | 0 | $ | 25 | $ | 25 | ||||||
Accruals/(reversals) | 1,870 | 28 | 1,898 | |||||||||
Payments | (670 | ) | (53 | ) | (723 | ) | ||||||
Balance as of March 31, 2021 | $ | 1,200 | $ | 0 | $ | 1,200 | ||||||
Employee related | Facilities related | Total | ||||||||||
Balance at December 31, 2019 | $ | 1,326 | $ | 514 | $ | 1,840 | ||||||
Accruals/(reversals) | 1,499 | 356 | 1,855 | |||||||||
Payments | (2,825 | ) | (845 | ) | (3,670 | ) | ||||||
Balance at December 31, 2020 | $ | 0 | $ | 25 | $ | 25 |
Employee related
In 2020,2021, under a company-wide restructuring plan,the Company has closed one of its facilities in Canada, where we eliminated ahave terminated service of number of positions which were considered redundant coupled with changeemployees. We have also offered a voluntary retirement plan to certain employees in key management personnel ,one other geography. We have recognized a provision for employee relatedemployee-related costs across a number of geographies and we expect to payregarding the remaining costs of $633 by the end of third quarter 2020.
Facilities related
In 2018, we terminated various leases in the United States and the Philippines due to closedown of the facilities. We recognized provision for the remaining costs associated with the leases.above voluntary / involuntary termination. We expect to pay the remaining termination costs of $241$1,200 by the end of the firstsecond quarter of 2021.
Cash flow hedges
Our locations in Canada and the Philippines primarily serve US-based clients. The revenues from these clients isare billed and collected in US Dollars, but the expenses related to these revenues are paid in Canadian Dollars and Philippine Pesos. We enter into derivative contracts, in the form of forward contracts and range forward contracts (a transaction where both a call option is purchased and a put option is sold) to mitigate this foreign currency exchange risk. The contracts cover periods commensurate with expected exposure, generally three to twelve months. We have elected to designate our derivatives as cash flow hedges in order to associate the hedges' results of the hedges with forecasted expenses.
The Company hashad terminated all Cashcash flow hedges contracts early in April, 2020 due to a change in counterparty relationship, hence balance as on June 30, 2020March 31,2021is nil.
The following table shows the notional amount of our foreign exchange cash flow hedging instruments as of June 30, 2020:
For the Three Months Ended June 30, 2020 | For the Three Months Ended June 30, 2020 | Year Ended December 31,2019 | Year Ended December 31,2019 | |||||||||||||
Local Currency Notional Amount | U.S. Dollar Notional Amount | Local Currency Notional Amount | U.S. Dollar Notional Amount | |||||||||||||
Philippine Peso | - | - | 769,000 | 14,361 | ||||||||||||
Canadian Dollar | - | - | 1,400 | 1,047 | ||||||||||||
$ | 15,408 |
Derivative assets and liabilities associated with our hedging activities are measured at gross fair value as described in Note 8, "Fair Value Measurements," and are included in prepaid expense and other current assets and accrued expenses and other current liabilities in our condensed consolidated balance sheets, respectively.
Gain (Loss) Recognized in AOCI, net of tax | Gain (Loss) Recognized in AOCI, net of tax | Gain/ (Loss) Reclassified from AOCI into Income | Gain/ (Loss) Reclassified from AOCI into Income | Gain (Loss) Recognized in AOCI, net of tax | Gain (Loss) Recognized in AOCI, net of tax | Gain/ (Loss) Reclassified from AOCI into Income | Gain/ (Loss) Reclassified from AOCI into Income | |||||||||||||||||||||||||
Six months ended June 30, 2020 | Six months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||
Foreign exchange contracts | (434 | ) | 436 | (246 | ) | (88 | ) | 0 | (860 | ) | 8 | 188 |
Non-designated hedges
We have also entered into foreign currency range forward contracts and interest swap contract as required by our lenders. These hedges are not designated hedges under ASC 815, Derivatives and Hedging. These contracts generally do not exceed 3 years in duration.
Unrealized gains and losses and changes in fair value of these derivatives are recognized as incurred in Exchange gains (losses), net in the Consolidated Statementsconsolidated statement of Comprehensive Income (Loss)income (loss). The following table presents these amounts for the three and sixmonths ended June 30,March 31, 2021 and 2020:
Derivatives not designated under ASC 815 | For the Three Months Ended March 31, 2021 | For the Three Months Ended March 31, 2020 | ||||||
Foreign currency forward contracts | $ | 0 | $ | 1,771 | ||||
Interest rate swap | $ | 0 | $ | (340 | ) |
The Company had terminated all derivative (non-designated hedge) contracts in November, 2020 and 2019:realized and accounted for gain and loss on settlement of contracts in consolidated statement of income (loss).
Derivatives not designated under ASC 815 | For the Three Months Ended June 30, 2020 | For the Three Months Ended June 30, 2019 | For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2019 | ||||||||||||
Foreign currency forward contracts | $ | (1,304 | ) | $ | 342 | $ | 468 | $ | 315 | |||||||
Interest rate swap | $ | (83 | ) | $ | (405 | ) | $ | (423 | ) | $ | (630 | ) |
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are described below:
Level 1 - Quoted prices for identical instruments traded in active markets.
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Unobservable inputs that cannot be supported by market activity and that are significant to the fair value of the asset, liability, or equity such as the use of certain pricing models, discounted cash flow models, and similar techniques that use significant assumptions. These unobservable inputs reflect our own estimates of assumptions that market participants would use in pricing the asset or liability:
Derivative Instruments
The values of our derivative instruments are derived from pricing models using inputs based upon market information, including contractual terms, market prices and yield curves. The inputs to the valuation pricing models are observable in the market, and as such the derivatives are classified as Level 2 in the fair value hierarchy.
The following tables set forth ourAs on March 31,2021, the Company has settled all derivative contracts, hence there are no derivative assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. These balances are included in Other current assets and Other current liabilities, respectively, on our balance sheet.liabilities.
As of June 30, 2020 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Foreign exchange contracts | $ | — | $ | 1,834 | $ | — | $ | 1,834 | ||||||||
Total fair value of assets measured on a recurring basis | $ | — | $ | 1,834 | $ | — | $ | 1,834 | ||||||||
Liabilities: | ||||||||||||||||
Interest rate swap | $ | — | $ | 696 | $ | — | $ | 696 | ||||||||
Foreign exchange contracts | $ | — | $ | — | $ | — | $ | — | ||||||||
Total fair value of liabilities measured on a recurring basis | $ | — | $ | 696 | $ | — | $ | 696 |
As of December 31, 2019 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Foreign exchange contracts | $ | — | $ | 1,823 | $ | — | $ | 1,823 | ||||||||
Total fair value of assets measured on a recurring basis | $ | — | $ | 1,823 | $ | — | $ | 1,823 | ||||||||
Liabilities: | ||||||||||||||||
Interest rate swap | $ | — | $ | 544 | $ | — | $ | 544 | ||||||||
Foreign exchange contracts | $ | — | $ | 22 | $ | — | $ | 22 | ||||||||
Total fair value of liabilities measured on a recurring basis | $ | — | $ | 566 | $ | — | $ | 566 |
The below table presents details of the Company's debt:
June 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Short term debt and current portion of long term debt | ||||||||||||||||
Short term debt | ||||||||||||||||
Working capital facilities | $ | 29,134 | $ | 23,179 | 5,230 | 15,506 | ||||||||||
Loan from related parties | - | 3,312 | ||||||||||||||
Current portion of long term debt | ||||||||||||||||
Current maturity of long term loan | 8,400 | 16,800 | 0 | 0 | ||||||||||||
Equipment loan | 832 | 801 | ||||||||||||||
Current maturity of equipment loan | 1,889 | 1,664 | ||||||||||||||
Current maturity of finance lease obligations | 631 | 632 | 523 | 516 | ||||||||||||
Total | $ | 38,997 | $ | 44,724 | $ | 7,642 | $ | 17,686 | ||||||||
Long term debt | ||||||||||||||||
Term loan, net of debt issuance costs | $ | 110,036 | $ | 105,075 | 162,302 | 114,930 | ||||||||||
Equipment loan | 195 | 619 | 2,521 | 2,955 | ||||||||||||
Secured revolving credit facility | - | 23,097 | ||||||||||||||
Finance lease obligations | 692 | 1,353 | 293 | 430 | ||||||||||||
Total | $ | 110,923 | $ | 130,144 | $ | 165,116 | $ | 118,315 |
Working capital facilities
The Company has a number of working capital facilities in various countries in which it operates. These facilities provide for a combined borrowing capacity of approximately $30 million for a number of working capital products. These facilities bear interest at benchmark rate plus margins between 3.0% and 4.5% and are due on demand. These facilities are collateralized by various Company assets and have a total outstanding balance of $29$5.2 million as of June 30, 2020March 31, 2021..
Loan from related parties
On August 26, 2019, the Company entered into a Loan Agreement with Tribus Capital Limited, as lender (“Tribus”), pursuant to which Tribus made a single-draw unsecured term loan to the Company in the aggregate amount of $1.5 million. The Company has paid interest on such loan at the rate of 8.5% per annum. All principal and interest on the loan was paid on April 21, 2020. The amounts outstanding as at June 30, 2020 is nil.
On November 20, 2019, the Company entered into a Loan Agreement with Bluemoss Ergon Limited, as lender (“Bluemoss”), pursuant to which Bluemoss made a single-draw unsecured term loan to the Company in the aggregate amount of $1.75 million. The Company has paid interest on such loan at the rate of 8.5% per annum. All principal and interest on the loan was paid on April 22, 2020. The amounts outstanding as at June 30, 2020 is nil.
Term loan
On October 27, 2017,February 18, 2021, the Company entered intocompleted a Senior Term Agreement ("Term loan") to provide funding fordebt refinancing with a newly secured $185 million senior debt facility, comprising a $165 million term loan and a $20 million revolving credit facility. Under the acquisition of ESM Holdings Limited and its subsidiaries innew senior debt, borrowings will bear a tiered interest rate based on the amount of $140 million for a five year term. The Term loan was fully funded on November 22, 2017 Company’s consolidated net leverage ratio and is to be repaid basedinitially set at LIBOR plus 450 basis points.
The term loan facility amortizes 2.5% on a quarterly repayment schedule beginningthe date that is six21, and 24 months afterfrom closing, 3.75% on the date that is first27, utilization date.30,33 and 36 months from closing, 5.0% on the date that is 39,42,45,48 and 51 months from closing, 10% on the date that is 54 months from closing and 15% on the date that is 57 months from closing and balance will be paid on closure of term loan.
On July 9, 2020,February 22, 2021, the Company entered into anused proceeds from the above facilities agreement to prepay and terminate the existing credit facility made available to it under that certain Amended and Restated FacilitySenior Term and Revolving Facilities Agreement, to amend some of the terms of the Term Loan. The key terms amended include, deferment of principal repayment for the amounts due betweendated May 2020 October 27, 2017.and Jan 2021. Testing of covenants were also waived for the calendar year 2020. Next principal repayment now due in February 2021 and covenant testing will be carried out for the quarter ended March 2021.
Principal payments due on the term loan are as follows:
Years | Amount | Amount | ||||||
Remainder of 2020 | - | |||||||
2021 | 17,850 | |||||||
Remainder of 2021 | 0 | |||||||
2022 | 103,950 | 4,125 | ||||||
2023 | 22,688 | |||||||
2024 | 30,938 | |||||||
2025 | 57,750 | |||||||
2026 | 49,500 | |||||||
Total | $ | 121,800 | $ | 165,000 |
The Term loan has a floating interest rate of USD LIBOR plus 4.5% annually for the first year and thereafter the margin will range between 3.75% and 4.5% subject to certain financial ratios.
The Company incurred a debt issuance costs of $11.3 million in connection with the new term loan. As per ASC 470, accounting guidance on term loan extinguishment, the Company has expensed off the debt issuance cost of $8.5 million paid to the lenders towards the new term loan and $2.5 million remaining unamortised debt issuance cost of the old term loan in interest expenses, net in the consolidated statements of income (loss).
In connection with the Termnew term loan, the Company incurred issuance costs of $7.3 million which are net against the Term loan on the balance sheet. Unamortizedunamortized debt issuance costs as of June 30, 2020March 31, 2021 amount to $3.4 million.The Company agreed$2.7 million paid to pay a onethird time consent fees toparties are net against long term debt on the lender consortium towardsconsolidated balance sheet.
Following table presents the Amendment Agreement entered into onchanges in debt issuance cost during the July 9, 2020. threeThe consent fee would be $0.921 million months ended March 31, 2021 and will be payableyear ended no later than June 30, 2021.December 31, 2020:
Secured revolving credit facility
March 31, 2021 | December 31, 2020 | |||||||
Opening balance | $ | 2,670 | $ | 4,125 | ||||
Add: Debt issuance cost (refinancing of term loan) | 11,269 | 0 | ||||||
Less: Expensed out (ASC 470 - extinguishment or modification) | (10,937 | ) | 0 | |||||
Less: Amortisation of debt issuance cost | (304 | ) | (1,455 | ) | ||||
Closing balance | $ | 2,698 | $ | 2,670 |
The Company had a secured revolving credit facility in Startek USA. Under this agreement, we
Non-recourse factoring
We have entered into factoring agreements with financial institutions to sell certain of our accounts receivable under non-recourse agreements. Under the arrangement, the Company sells the trade receivables on a non-recourse basis and accounts for the transactions as sales of receivables. The applicable receivables are removed from the Company's consolidated balance sheet when the Company receives the cash proceeds are received by the Company.proceeds. We do not service any factored accounts after the factoring has occurred. We utilize factoring arrangements as part of our financing for working capital. The aggregate gross amountbalance of funds received from factored receivables under these agreements was $29.68$26.4 million foras of sixMarch 31, 2021. months ended June 30, 2020.
BMO Equipment Loan
On December 27, 2018, the Company executed an agreement to secure a loan against US and Canadian assets in the amount offor $2.06 million at the interest of 7.57% per annum, to be repaid over 2.5 years. The loan was funded in January 2019.The amount outstanding as at March 31,2021 is $0.4 million.
Equipment Loan
On November 02, 2020, the Company executed Master Equipment Finance Agreement to finance purchase of equipment for $4 million at the interest of 5.27% per annum with a maturity date 34 months after the date of first utilization of equipment loan. Amortization of the equipment loan starts from a date falling in April 2021 i.e. 4 months from the first utilization of the loan.
Finance lease obligations
From time to time and when management believes it to be advantageous, we may enter into other arrangements to finance the purchase or construction of capital assets.
Amazon Warrant
On January 23, 2018, Startek entered into the Amazon Transaction Agreement, pursuant to which we agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon (“NV Investment”), a warrant (the “Warrant”) to acquire up to 4,000,000 shares (the “Warrant Shares”) of our common stock, par value $0.01 per share (“Common Stock”), subject to certain vesting events. On May 17, 2019, the Company issued and sold 692,520 shares of Common Stock to certain investors at a price per share of $7.48. The Warrant contains certain anti-dilution provisions and as a result of such offering, the total number of shares issuable to Amazon was adjusted from 4,000,000 to 4,002,964 and the exercise price of the Warrant was adjusted from $9.96 per share to $9.95 per share. On June 29, 2020, the Company issued and sold 1,540,041 shares of Common Stock to CSP Victory Limited at a price per share of $4.87 per share. As a result of such transaction, the total number of shares issuable to Amazon has been adjusted from 4,002,964 to 4,006,051 and the exercise price of the Warrant was adjusted from $9.95 per share to $9.94 per share. We entered into the Amazon Transaction Agreement in connection with commercial arrangements between us and any of our affiliates and Amazon and/or any of its affiliates pursuant to which we and any of our affiliates provide and will continue to provide commercial services to Amazon and/or any of its affiliates. The vesting of the Warrant shares, described below, is linked to payments made by Amazon or its affiliates (directly or indirectly through third parties) pursuant to the commercial arrangements.
The first tranche of 425,532 Warrant Shares vested upon the execution of the Amazon Transaction Agreement. The remainder of the Warrant Shares will vest in various tranches based on Amazon’s payment of up to $600 million to us or any of our affiliates in connection with the receipt by Amazon or any of its affiliates of commercial services from us or any of our affiliates. The Warrant Shares are exercisable through January 23, 2026.
The second tranche of 212,766 Warrant Shares vested on May 31, 2019. The amount of contra revenue attributed to these Warrant Shares is $730.
The third tranche of 212,953 Warrant Shares vested on Feb 29, 2020. The amount of contra revenue attributed to these Warrant Shares is $278 after adjusting the impact of $413 towards adoption of ASU 2019-08 on January 01, 2020 and $565 towards accrual till December 31, 2019, respectively using initial grant-date fair value.
The fourth tranche of 213,162 Warrant Shares vested on Dec 31, 2020. The amount of contra revenue attributed to these Warrant Shares is $1,257 using initial grant-date fair value.
As per ASC 606, the Company has accrued $485 for$ 425 till three month and $763 for six month respectively ended June 30, 2020March 31, 2021 using initial grant-date fair value.
The contra-revenue and equity isare estimated and recorded, using the Monte Carlo pricing model, when performance completion is probable, with adjustments in each reporting period until performance is complete in conformance with the requirements in ASC 606 and ASC 718.718 requirements.
The Warrant provides for net share settlement that if elected by the holders, will reduce the number of shares issued upon exercise to reflect net settlement of the exercise price.price if elected by the holders. The Warrant provides for certain adjustments that may be made to the exercise price and the number of shares of common stock issuable upon exercise due to customary anti-dilution provisions based on future events. Vested Warrant Shares are classified as equity instruments.
In line with ASU 2019-08, the Company has measured share-based payments at grant-date fair value, which will be the basis for the amount to be reduction in revenue. The Company has given the transitional impact of $413 in Equity in respect of awards wherein measurement date was not established or were not settled as of the beginning of financial year in which ASU is adopted (i.e. Jan 01, 2020).
Share-based compensation
Our share-based compensation arrangements include grants of stock options, restricted stock units and deferred stock units under the StarTek, Inc. 2008 Equity Incentive Plan and our Employee Stock Purchase Plan. The compensation expense that has been charged against income for the three months and six months ended June 30, 2020March 31, 2021 was $(82) & $209.$280 and is included in selling, general and administrative expense. As of June 30, 2020March 31, 2021, , there was 0$1,451 of total unrecognized compensation expense related to non-vested stock options.options, which is expected to be recognized over a weighted-average period of 2.17 years.
11. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consistedconsists of the following items:
Foreign Currency Translation Adjustment | Derivatives Accounted for as Cash Flow Hedges | Defined Benefit Plan | Equity attributable to Startek shareholders | Non-controlling interests | Total | Foreign Currency Translation Adjustment | Derivatives Accounted for as Cash Flow Hedges | Defined Benefit Plan | Equity attributable to Startek shareholders | Non-controlling interests | Total | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | (4,568 | ) | $ | 475 | $ | (1,929 | ) | $ | (6,022 | ) | $ | (1,597 | ) | $ | (7,619 | ) | |||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | (4,529 | ) | $ | (8 | ) | $ | (2,749 | ) | $ | (7,286 | ) | $ | (3,071 | ) | $ | (10,357 | ) | ||||||||||||||||||||||||||||||
Foreign currency translation | (3,665 | ) | - | - | (3,665 | ) | - | (3,665 | ) | (1,092 | ) | 0 | 0 | (1,092 | ) | 0 | (1,092 | ) | ||||||||||||||||||||||||||||||
Reclassification to operations | - | (246 | ) | - | (246 | ) | - | (246 | ) | 0 | 8 | 0 | 8 | 0 | 8 | |||||||||||||||||||||||||||||||||
Unrealized losses | - | (434 | ) | - | (434 | ) | - | (434 | ) | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||
Pension remeasurement | - | - | (1,006 | ) | (1,006 | ) | (1,624 | ) | (2,630 | ) | 0 | 0 | (315 | ) | (315 | ) | (69 | ) | (384 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | (8,233 | ) | $ | (205 | ) | $ | (2,935 | ) | $ | (11,373 | ) | $ | (3,221 | ) | $ | (14,595 | ) | ||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | (5,621 | ) | $ | 0 | $ | (3,064 | ) | $ | (8,685 | ) | $ | (3,140 | ) | $ | (11,825 | ) |
12. SEGMENT AND GEOGRAPHICAL INFORMATIONREPORTING
The Company provides business process outsourcing services (“BPO”) to clients in a variety ofvarious industries and geographical locations. Our approach is focused on providing our clients with the best possible combination of services and delivery locations to meet our clients' needs in the best and most efficient manner. Our Global Chief Executive Officer (CEO) and President,, who havehas been identified as the Chief Operating Decision Maker ("CODM"), reviews financial information mainly on a geographical basis.
In the fourth quarter of 2019, we reorganized our operating business model. Our new operating business model is focused on geographies in which we operate. Our CODM reviews the performance and makes resource allocation geography wise, hence the geographical level represents the operating segments of Startek Inc.
Prior period results have been revised for segment disclosure to conform to current period presentation. We report our results of operations in Six reportable segments, as follows in Six reportable segments:- follows:
a) Americas
b) Middle EastIndia and Sri Lanka
c) Malaysia
d) India and Sri LankaMiddle East
e) Argentina & Peru
f) Rest of World
Three Months Ended | Six Months Ended | Three Months Ended | ||||||||||||||||||||||
June 30, | June 30, | March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Americas | 58,479 | 53,395 | 126,647 | 116,998 | 63,925 | 68,168 | ||||||||||||||||||
India & Sri Lanka | 16,698 | 27,948 | 40,950 | 56,157 | 21,482 | 24,252 | ||||||||||||||||||
Malaysia | 12,017 | 20,748 | 23,902 | 33,196 | 14,965 | 11,885 | ||||||||||||||||||
Middle East | 36,243 | 34,216 | 70,760 | 65,334 | 43,240 | 34,517 | ||||||||||||||||||
Argentina & Peru | 8,997 | 11,839 | 19,205 | 24,423 | 8,159 | 10,208 | ||||||||||||||||||
Rest of World | 9,733 | 12,407 | 21,602 | 25,587 | 11,299 | 11,869 | ||||||||||||||||||
Total | $ 142,167 | $ 160,553 | $ 303,066 | $ 321,695 | $ | 163,070 | $ | 160,899 | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
Operating income (loss): | ||||||||||||||||||||||||
Americas | $ (255) | $ (1,803) | $ 671 | $ (938) | ||||||||||||||||||||
India & Sri Lanka | (210) | (878) | (905) | 252 | ||||||||||||||||||||
Malaysia | 3,305 | 2,428 | 4,940 | 3,872 | ||||||||||||||||||||
Middle East | 598 | 4,127 | 2,215 | 5,384 | ||||||||||||||||||||
Argentina & Peru | (376) | 319 | (360) | (120) | ||||||||||||||||||||
Rest of World | 453 | 433 | 725 | 846 | ||||||||||||||||||||
Segment operating income | 3,515 | 4,626 | 7,286 | 9,297 | ||||||||||||||||||||
Startek consolidation adjustments | ||||||||||||||||||||||||
Goodwill impairment | - | - | 22,708 | - | ||||||||||||||||||||
Intangible amortization | 2,581 | 2,748 | 5,163 | 5,376 | ||||||||||||||||||||
Total operating income | $ 934 | $ 1,878 | $ (20,585) | $ 3,920 |
Three Months Ended | ||||||||
March 31, | ||||||||
2021 | 2020 | |||||||
Operating income (loss): | ||||||||
Americas | 1,895 | 926 | ||||||
India & Sri Lanka | (1,228 | ) | (695 | ) | ||||
Malaysia | 4,414 | 1,635 | ||||||
Middle East | 5,741 | 1,617 | ||||||
Argentina & Peru | (43 | ) | 16 | |||||
Rest of World | 399 | 272 | ||||||
Segment operating income | $ | 11,178 | $ | 3,771 | ||||
Startek consolidation adjustments | ||||||||
Goodwill impairment | 0 | 22,708 | ||||||
Intangible amortization | 2,560 | 2,582 | ||||||
Total operating income | $ | 8,618 | $ | (21,519 | ) |
A single client accounted for 19% and 17% of the consolidated total net revenue during the three months ended March 31, 2021 and 2020, respectively.
Property, plant and equipment, net by geography based on the location of the assets is presented below:
As on | As on | As on | As on | |||||||||||||
June 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Property, plant and equipment, net: | ||||||||||||||||
Americas | 12,750 | 14,156 | 14,111 | 14,455 | ||||||||||||
India & Sri Lanka | 13,219 | 10,772 | 8,669 | 8,069 | ||||||||||||
Malaysia | 4,063 | 4,375 | 3,441 | 3,749 | ||||||||||||
Middle East | 5,071 | 4,722 | 5,195 | 4,736 | ||||||||||||
Argentina & Peru | 1,488 | 1,701 | 1,133 | 1,257 | ||||||||||||
Rest of World | 1,053 | 1,781 | 1,804 | 1,959 | ||||||||||||
Total | $ | 37,644 | $ | 37,507 | $ | 34,353 | $ | 34,225 |
We have operating and finance leases for service centers, corporate offices and certain equipment.equipments. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 3-5 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as follows:
Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||||||||||||
Operating lease cost | 7,111 | 7,901 | 14,370 | 15,441 | 6,809 | 7,259 | ||||||||||||||||||
Finance lease cost: | ||||||||||||||||||||||||
Amortization of right-of-use assets | 342 | 501 | 668 | 985 | 185 | 327 | ||||||||||||||||||
Interest on lease liabilities | 30 | 15 | 74 | 43 | 17 | 43 | ||||||||||||||||||
Total Finance lease cost | 372 | 516 | 742 | 1,028 | $ | 202 | $ | 370 |
Supplemental cash flow information related to leases was as follows:
Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
Operating cash flows from operating leases | 14,062 | 15,235 | 6,782 | 7,183 | ||||||||||||
Operating cash flow from finance leases | 74 | 43 | 17 | 43 | ||||||||||||
Financing cash flows from finance leases | 742 | 1,251 | 203 | 116 | ||||||||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||||
Operating leases | 17,278 | 72,079 | 2,003 | 13,558 | ||||||||||||
Finance leases | - | - | 0 | 0 |
Supplemental balance sheet information related to leases was as follows:
As of June 30, 2020 | As of December 31, 2019 | As of March 31, 2021 | As of December 31, 2020 | |||||||||||||
Operating leases | ||||||||||||||||
Operating lease right-of-use assets | 77,437 | 73,692 | $ | 65,396 | $ | 69,376 | ||||||||||
- | - | |||||||||||||||
Operating lease liabilities - Current | 20,223 | 19,677 | 18,724 | 19,327 | ||||||||||||
Operating lease liabilities - Non-current | 58,251 | 54,341 | 48,697 | 52,052 | ||||||||||||
Total operating lease liabilities | 78,474 | 74,018 | $ | 67,421 | $ | 71,379 | ||||||||||
Finance Leases | ||||||||||||||||
Property and equipment, at cost | 5,173 | 4,391 | 4,351 | 4,351 | ||||||||||||
Accumulated depreciation | (3,411 | ) | (1,984 | ) | (3,208 | ) | (3,010 | ) | ||||||||
Property and equipment, at net | 1,762 | 2,407 | $ | 1,143 | $ | 1,341 | ||||||||||
- | - | |||||||||||||||
Finance lease liabilities - Current | 631 | 632 | 523 | 516 | ||||||||||||
Finance lease liabilities - Non-current | 692 | 1,353 | 293 | 430 | ||||||||||||
Total finance lease liabilities | 1,323 | 1,985 | $ | 816 | $ | 946 |
Weighted average remaining lease term | As of June 30, 2020 | As of December 31, 2019 | As of March 31, 2021 | As of December 31, 2020 | ||||||||||||
Operating leases | 4.49 yrs | 4.66 yrs | ||||||||||||||
Finance leases | 1.42 yrs | 1.92 yrs | ||||||||||||||
Operating leases (in years) | 4.00 yrs | 4.18 yrs | ||||||||||||||
Finance leases (in years) | 0.67 yrs | 0.92 yrs | ||||||||||||||
Weighted average discount rate | ||||||||||||||||
Operating leases | 6.79 | % | 7.27 | % | 6.87 | % | 6.90 | % | ||||||||
Finance leases | 6.01 | % | 6.01 | % | 6.01 | % | 6.00 | % |
Maturities of lease liabilities were as follows:
Operating Leases | Finance Leases | Operating Leases | Finance Leases | |||||||||||||
Year ending December 31, | ||||||||||||||||
Remaining 2020 | 24,690 | 413 | ||||||||||||||
2021 | 15,924 | 577 | ||||||||||||||
Remainder of 2021 | 22,556 | 428 | ||||||||||||||
2022 | 14,877 | 441 | 16,902 | 442 | ||||||||||||
2023 | 12,116 | - | 13,117 | 0 | ||||||||||||
2024 | 9,333 | - | 10,922 | 0 | ||||||||||||
2025 | 4,837 | 0 | ||||||||||||||
Thereafter | 5,969 | - | 2,853 | 0 | ||||||||||||
Total Lease payments | 82,909 | 1,431 | $ | 71,187 | $ | 870 | ||||||||||
Less imputed interest | (4,435 | ) | (108 | ) | (3,766 | ) | (54 | ) | ||||||||
Total | 78,474 | 1,323 | $ | 67,421 | $ | 816 |
14. SUBSEQUENT EVENTINVESTMENT IN EQUITY-ACCOUNTED INVESTEES
Following are the entity wise details of equity-accounted investees:
Name of entity | % of ownership interest | Carrying amount | ||||||||||||||
March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | |||||||||||||
a) CSS Corp LP | 62.50 | % | 0.00 | % | 24,988 | 0 | ||||||||||
b) Immaterial associates | 108 | 111 | ||||||||||||||
Carrying amount of investment in equity-accounted investees | $ | 25,096 | $ | 111 | ||||||||||||
March 31, 2021 | March 31, 2020 | |||||||||||||||
Aggregate amounts of the group’s share of loss of equity-accounted investees (a+b) | $ | (14 | ) | $ | (8 | ) |
a)CSS Corp LP
On July 9, 2020,February 25, 2021, the Company announced a $25 million strategic minority investment in CSS Corp. (“CSS”), a new-age IT services and technology support solutions company that harnesses the power of AI, automation, analytics, cloud, and digital to address customer needs. Through this investment Startek entered intoacquired an amendment agreement for its senior term loanindirect beneficial interest in CSS of approximately 26%, with Capital Square Partners (“CSP” or “CSP Fund”), a Singapore based Private Equity Fund Manager, and revolving credit facility. Refer to Note 9 "Debt".the Company’s majority shareholder, acquiring the majority controlling stake.
The Company and CSP Alpha Holdings Pte. Ltd., a subsidiary of the Company, participated in this transaction by (i) contributing $25 million to acquire approximately 62.5% in CSS Corp LP, and (ii) paying $5 million to CSP Management Limited to acquire certain call options. These call options to acquire controlling stake in CSS are only exercisable by the Company during the period from August 19, 2022, to April 19, 2023, without any obligation and are currently considered to be not substantive.
The Company has assessed CSS Corp LP to be a variable interest entity (‘VIE’) and per ASC 810-10-25-44 concluded that it is not the primary beneficiary. Amongst other factors, the Company’s basis of this conclusion is that it lacks the power to direct or control any significant activities of the VIE and that the design and structure of the VIE was not specifically for the benefit of the Company. Further, CSS Corp LP’s objectives as an investment company is an extension of the investment activities of CSP Fund. The Company has accordingly, accounted for this transaction under equity-accounted investee method of accounting in accordance ASC 323-30-S999-1. The Company's share of profit/loss of equity-accounted investee, is accounted under the “equity method” as per which the share of profit/(loss) of equity-accounted investee has been added to the cost.
Summarized financial position | As of March 31, 2021 | As of December 31, 2020 | ||||||
Current assets | 5 | 0 | ||||||
Non-current assets | 40,000 | 0 | ||||||
Current and non-current liabilities | (25 | ) | 0 | |||||
Net assets | $ | 39,980 | $ | 0 | ||||
Reconciliation to carrying amounts | As of March 31, 2021 | As of December 31, 2020 | ||||||
Opening net assets | 0 | 0 | ||||||
Acquired during the year | 40,000 | 0 | ||||||
Share of loss of equity-accounted investee | (20 | ) | 0 | |||||
Other comprehensive income | 0 | 0 | ||||||
Closing net assets | $ | 39,980 | $ | 0 | ||||
Company share in % | 62.50 | % | 0.00 | % | ||||
Company share | 24,988 | 0 | ||||||
Carrying amount of investment in equity-accounted investee | $ | 24,988 | $ | 0 | ||||
Summarized statement of comprehensive income | March 31, 2021 | March 31, 2020 | ||||||
Revenue | 0 | 0 | ||||||
Expenses | (20 | ) | 0 | |||||
Loss for the period | (20 | ) | 0 | |||||
Other comprehensive income for the period | 0 | 0 | ||||||
Total comprehensive loss for the period | $ | (20 | ) | $ | 0 | |||
Aggregate amounts of the Company share of loss of equity-accounted investee | $ | (12 | ) | $ | 0 |
b) Individually immaterial associates
The Company has individually immaterial investments in equity accounted investee in Australia. It has 33.33% interest in Queensland Partnership Group Pty. Ltd and 16.67% interest in Services Queensland Partnership in Australia. The Company's share of profit/loss of equity accounted investee, is accounted under the “equity method” as per which the share of profit of equity accounted investee has been added to the cost.
March 31, 2021 | March 31, 2020 | |||||||
Carrying amount of individually immaterial investment in equity-accounted investee | 108 | 111 | ||||||
Aggregate amounts of individually immaterial share of: | ||||||||
Loss of equity-accounted investee | (2 | ) | (8 | ) | ||||
Other comprehensive income for the period | 0 | 0 | ||||||
Aggregate amounts of the Company share of loss of equity-accounted investee | $ | (2 | ) | $ | (8 | ) |
None.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 20192020 and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. All dollar amounts are presented in thousands other than per share data.
BUSINESS DESCRIPTION AND OVERVIEW
Startek is a leading global provider of technology-enabled business process outsourcing company thatmanagement solutions. The Company provides omnichannelomni-channel customer interactions,experience, digital transformation and technology and back-office support solutions forservices to some of the finest brands globally. Startek is committed to impacting clients’ business outcomes by focusing on enhancing customer experience and digital enablement across all touch points and channels. Startek has more than 42,000 CX experts globally spread across 46 delivery campuses in 13 countries. The Company services over 220 clients across various industries such as Banking and Financial Services, Insurance, Technology, Telecom, Healthcare, Travel and Hospitality, Consumer Goods, Retail, and Energy and Utilities.
Startek manages over half a billion customer moments of truth each year for the world’s most iconic brands in a variety of vertical markets. Operating under the Startek and Aegis brand, wefinest brands. We help these large global companies connect emotionally withbrands increase their customers, solve issues, and improve net promoter scores and other customer-facing performance metrics. Through consulting and analytics services, technology-led innovation, and engagement solutions, we deliver personalizedrevenues by enabling better experiences at the point of conversation between our clients andfor their customers across every interaction channelmultiple channels. As a leading provider of technology-enabled business process management solutions for major global brands—we drive business value through omni-channel customer experiences, digital transformation, and phase of the customer journey.
Startek has proven results for the multiple services we provide, including sales, order management and provisioning, customer care, technical support, receivables management, and retention programs. We manage programs using a variety of multi-channel customer interactions, including voice, chat, email, social media and back-office support. Startek has facilities in India, United States, Malaysia, Philippines, Australia, South Africa, Canada, Honduras, Jamaica, Kingdom of Saudi Arabia, Argentina, Peru and Sri Lanka.technology services.
SIGNIFICANT DEVELOPMENTS
Coronavirus
On March 11, 2020,The global outbreak of the novel coronavirus (COVID-19) was declared a pandemic by the World Health Organization characterizedand a national emergency by the novel coronavirus (“COVID-19”) a pandemic.U.S. government in March 2020. The global nature, rapid spread and continually evolving response by governments throughout the world to combat the spreadpandemic has had a negative impact onnegatively impacted the global economy.economy, disrupted global supply chains and created significant volatility and disruption of financial markets, and resulted in significant travel restrictions, mandated facility closures and shelter-in-place and social distancing orders in numerous jurisdictions around the world. Certain of our customer engagement centers have been impacted by local government actions restricting facility access or are operating at lower capacity utilization levels. In response to COVID-19, we have prioritized theour employees' safety and well-being, of our employees, business continuity for our clients, and supporting the efforts of governments around the world to contain the spread of the virus. In light of our commitment to help our clients as they navigate unprecedented business challenges while protecting the safety of our employees, we have taken numerous steps, and will continue to take further actions, to address the COVID-19 pandemic. We workedhave taken additional measures to ensure safety of our employees in India who are facing a strong second wave of the Pandemic. We continue to work closely with our clients to support them as they implemented their contingency plans, helping them access our services and solutions remotely. In discussion with our clients, and after obtaining appropriate clearances, we have gradually shiftedcontinue to maintain many of our employees toon a work-at-home model. However,The impact of COVID-19 in respect certain client projects work-from-home scenario maythe first quarter of fiscal 2021 was not be possible due to regulatory or other compliance requirements.
We continue to monitorsignificant on the Company. The extent of the ultimate impact of the COVID-19 situationpandemic on our operational and its impacts globally. We are prioritizingfinancial performance, including our ability to execute our operations within the healthexpected parameters, will depend on future developments, including the duration and safety of our employees. Out of an abundance of caution for the health of our employees and to support local government initiatives to stem the spread of the virus, we implemented several precautions atpandemic and related actions taken by the various centers around the world atgovernments to prevent disease spread, all times in compliance with local government requirementsof which remain uncertain and Centers for Disease Control and Prevention ("CDC") guidelines. These include, but are not limited to:cannot be predicted.
Key matters pertaining to subsidiaries |
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ConsideringDebt Refinancing
On February 18, 2021, CSP Alpha Holdings Pte. Ltd., a subsidiary of the uncertainties,Company entered into a new facility agreement that provided for a $165 million term loan facility and a $20 million revolving credit facility, in each case with a maturity date 60 months after the current resultsdate of first utilization of the term loan facility. Amortization of the term loan starts from a date falling in November 2022, i.e. 21 months from the first utilization date of the loan. The term loan facility and the revolving loan facility each bear interest at a rate per annum equal to a LIBOR rate plus an applicable margin of between 3.75% and 4.50%, depending on an adjusted leverage ratio. The Facilities Agreement also contains financial condition discussed herein maycovenants, including cash flow cover, adjusted leverage and limitations on capital expenditures. ING Bank N.V. and DBS Bank Ltd. served as underwriters for the new senior debt facility and were the lead lenders of the previous senior debt facility, which is now repaid in full.
On February 22, 2021, the Company used proceeds from the above facilities agreement to prepay and terminate the existing credit facility made available to it under that certain Amended and Restated Senior Term and Revolving Facilities Agreement, dated October 27, 2017.
Strategic Investment
On February 25, 2021, the Company has announced a strategic investment in CSS Corp. (“CSS”), a new-age IT services and technology support solutions company that harnesses the power of AI, automation, analytics, cloud and digital to address customer needs. Capital Square Partners (“CSP”), a Singapore based Private Equity Fund Manager and Startek’s majority shareholder, acquired a controlling stake in CSS on February 25, 2021. CSP Alpha Holdings Pte. Ltd., a subsidiary of the Company, participated in this transaction by contributing a total of $30 million in a limited partnership managed by CSP to acquire both an indirect beneficial interest of approximately 26% in CSS, as well as an option to acquire a controlling stake which is currently not be indicativeexercisable. The option to acquire a majority stake in CSS is at the sole discretion of future operating resultsStartek, and trends.the Company has no obligation to do so.
RESULTS OF OPERATIONS — three months ended June 30, 2020 and 2019MaRCh 31, 2021 AND 2021
Revenue
Our gross revenues for the three monthsmonth period ended June 30, 2020 decreasedMarch 31, 2021 increased by 11.55%1.44% to $142,652$163,495 as compared to $161,283$161,677 for the three monthsmonth period ended June 30, 2019.March 31, 2020.
Our net revenue for the quarter ended June 30, 2020March 31, 2021 and 2019:2020:
For the Three Months Ended June 30, 2020 | For the Three Months Ended June 30, 2019 | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||||||
Revenues | $ | 142,652 | $ | 161,283 | 163,495 | 161,177 | ||||||||||
Warrant Contra Revenue | (485 | ) | (730 | ) | (425 | ) | (278 | ) | ||||||||
Net Revenue | 142,167 | 160,553 | $ | 163,070 | $ | 160,899 |
Our net revenues adjusted for warrant contra revenue for the three months ended June 30, 2020 was lowerMarch 31, 2021 were slightly higher at $142,167$163,070 compared to $160,553$160,899 for the three months ended June 30, 2019. March 31, 2020.
The breakdown of our net revenues from various industry verticals for three months ended June 30, 2020March 31, 2021 and June 30, 20192021 is as follows:
For the Three Months Ended June 30, 2020 | For the Three Months Ended June 30, 2019 | |||||||
Verticals: | ||||||||
Telecom | 35 | % | 40 | % | ||||
E-commerce & Consumer | 15 | % | 15 | % | ||||
Financial & Business Services | 7 | % | 8 | % | ||||
Media & Cable | 16 | % | 15 | % | ||||
Travel & Hospitality | 10 | % | 11 | % | ||||
Healthcare & Education | 6 | % | 5 | % | ||||
Technology, IT & Related Services | 3 | % | 2 | % | ||||
Others | 8 | % | 4 | % |
Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||
Verticals: | ||||||||
Telecom | 32 | % | 35 | % | ||||
E-commerce & Consumer | 16 | % | 16 | % | ||||
Media & Cable | 16 | % | 14 | % | ||||
Healthcare & Education | 11 | % | 8 | % | ||||
Financial & Business Services | 9 | % | 8 | % | ||||
Travel & Hospitality | 6 | % | 10 | % | ||||
Technology, IT & Related Services | 3 | % | 3 | % | ||||
All other segments | 7 | % | 5 | % |
Our concentrationThe Company continues to telecom vertical eased considerablysee softness in the past twelve monthstelecom sector volumes in certain emerging geographies while our US telecom clients have rebound. In the e-commerce and consumer sector, we continue to see robust growth with our e-commerce clients across geographies. This growth is partially offset by the telecom vertical contributing to around 35%year-on-year decline in some of our revenue for the three months ended June 30, 2020 as compared to 40% for the comparable three months ended June 30, 2019. The Company has partially offset this contraction in revenue percentage from telecom vertical with expansion in revenues from other verticals.brick and mortar retail and auto clients.
While our net revenuesthe travel and hospitality sector is still reeling under COVID-led restrictions, local transport and logistics providers benefit from social distancing norms. The Company has won large deals in the second quarter were negatively impacted by COVID-19, primarilyhealthcare sector related to lockdowns and lower active workforce,COVID-assistance programs which are driving the Company did see improvement throughout the quarter as countries and states began to gradually re-open. For example, sales in Malaysia and Australia returned to growth in the second quarter. However,healthcare and education sector.
Our clients in the ultimate COVID-19 impact on the fiscal year sales remains highly fluidFinancial and willBusiness services and media and cable sector continue to evolvepost year-on-year growth depicting our increased penetration with geographical re-openings and virus waves.
As of the end of July 2020, approximately 50% of agents who otherwise workour clients in our brick-and-mortar facilities have transitioned to work at home, approximately 30% are working in our facilities and the remaining agents are at home but idle.
these sectors.
Cost of servicesServices and Gross Profit
Overall, the cost of services as a percentage of revenue increaseddecreased to 88.9%84.9% for the three months ended June 30, 2020 asMarch 31, 2021 compared to 82.8%87.5% for the three months ended June 30, 2019.March 31, 2020. Employee expenses, rent costs and Depreciation and amortization are the most significant costs for the Company, representing 78%75.7%, 5.9%5.4% and 4.6%4.4% of the total Costcost of services, respectively. The breakdown of the cost of services is listed in the table below:below
Three Months Ended June 30, | As % of Revenue | Three Months Ended March 31, | As % of Revenue | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Employee Benefit Expenses | $ | 98,579 | $ | 101,397 | 69.3 | % | 63.2 | % | 104,746 | 106,389 | 64.2 | % | 66.1 | % | ||||||||||||||||||
Rent expense | 7,515 | 7,895 | 5.3 | % | 4.9 | % | 7,484 | 8,083 | 4.6 | % | 5.0 | % | ||||||||||||||||||||
Depreciation and amortization | 5,754 | 5,436 | 4.0 | % | 3.4 | % | 6,154 | 5,621 | 3.8 | % | 3.5 | % | ||||||||||||||||||||
Other | 14,506 | 18,265 | 10.2 | % | 11.4 | % | 19,999 | 20,748 | 12.3 | % | 12.9 | % | ||||||||||||||||||||
Total | $ | 126,354 | $ | 132,993 | $ | 138,383 | $ | 140,841 |
Employee Benefit expenses: Our business heavily relies on our employees to provide professional services to our clients. Thus, our most significant costs are payments made to agents, supervisors, and trainers who are directly involved in delivering services to the clients.
Employee expenses as a percentage of revenues increaseddecreased to 69.3%64.2% for the current period as compared to 63.2%66.1% for the previous period. We have started taking mitigating steps to ensure that costs are brought downThe decrease is driven by increasing diversification in line with revenues, such as reduction in support employee cost. The increase in employee costs, as a percentage of revenues, was largely attributable to deleveraging resulting from COVID-19 negative impact on revenues. The Company also had to incur higher costs on ensuring employees had a safeour vertical mix towards new-age verticals like healthcare, media and secure work environmentcable and following all the protocols and guidelines issued by various local authorities across the geographies we operate in. On a year on year basis, the costs were also impacted negatively by increase in minimum wages, primarily in India.e-commerce.
Rent expense: Rent expense as a percentage of revenue increaseddecreased to 5.3%4.6% for the current period as compared to 4.9%5.0% for previous period. Rent expense increased as a percentagedecreased due to the rationalization of sales driven by deleveraging resulting fromcenters during the COVID-19 negative impact on revenues.past few quarters. The Company was ablehas consolidated capacity leading to negotiate partial relief from some landlords in terms ofbetter utilization rates and lower rent waivers for certain periods.costs.
Depreciation and amortization: Depreciation and amortization expense as a percentage of revenue for the current period was marginally higher at 4.0%3.8% as compared 3.4%3.5% for the previous period driven by deleveraging resulting from the COVID-19 negative impact on revenuesperiod.
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Other expense includes technology, utility, travel and outsourcing costs. As a percentage of revenue, these costs marginally decreased from 11.4%12.9% to 10.2%. The decrease was12.3% primarily due to lower travelling expenses, communication expensestravel, utilities and recruitment chargescosts.
As a result, gross profit as a percentage of revenue for the current period decreasedincreased to 11.1%15.1% as compared to 17.2%12.5% for the previous period.
Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Gross Revenue | 163,495 | 161,177 | ||||||
Less: Contra Revenue | (425 | ) | (278 | ) | ||||
Net Revenue | $ | 163,070 | $ | 160,899 | ||||
Cost of Services | (138,383 | ) | (140,841 | ) | ||||
Gross Profit | $ | 24,687 | $ | 20,058 | ||||
Gross Margin | 15.1 | % | 12.5 | % |
Selling, general and administrative expenses
Selling, general and administrative expenses (SG&A) as a percentage of revenue decreased from 15.5%10.7% in the previous period to 10.3%8.7% in the current period. The decrease was driven by savings in travel and meeting expensesreduction is as a result of COVID-19 related travel restrictions and lower incentive compensation.various measures implemented to rationalize costs. Sequentially, SG&A expenses have remained stable.
Impairment Losses and Restructuring/Exit Cost, Net
Impairment losses and restructuringrestructuring/exits costs, net totaled $235$1,898 for the current period as compared to $721$24,322 for the previous period. The expense for the secondfirst quarter of 2021 primarily relates to employee related restructuring/exit expenses. There are no impairment charges during the current period. The expense for the previous period of 2020 primarily relates to employee related restructuring expenses.goodwill impairment losses of $22,708 and restructuring/exit expenses of $1,614.
.Interest expense, net
Interest expense, net totaled $3,190$13,769 for the current period as compared to $4,026$3,506 for the previous period. The expense for the first quarter of 2021 comprises of upfront fees and interest expense is on our term debt and revolving line of credit facilities.
Income tax expense
Income tax expense for the current period was $1,283$4,902 compared to $730$2,876 for the previous period. The movement in interest cost and the implied effective tax rate was primarily due to shifts in earnings among the various jurisdictions in which we operate. Additionally, movement of funds between various geographies primarily to service our debt facilities also attract withholding taxes.
RESULTS OF OPERATIONS — Six months ended June 30, 2020 and 2019RELATED PARTY DISCLOSURE
In 2018, a transaction bonus was payable to Mr. Aparup Sengupta (Chairman & Global CEO) for the six months ended June 30, 2020 decreased by 5.77% to $303,829 as compared to $322,425successful completion of the Startek-Aegis merger. This was accrued in the financial statements for the six monthsyear ended June 30, 2019.
Our net revenue forDecember 31, 2018 as “Acquisition related cost”. An amount of $500 has been paid during the six monthsyear ended June 30,December 31, 2020 to Mr. Aparup Sengupta and 2019:
For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2019 | |||||||
Revenues | $ | 303,829 | $ | 322,425 | ||||
Warrant Contra Revenue | (763 | ) | (730 | ) | ||||
Net Revenue | 303,066 | 321,695 |
Our net revenues adjusted for warrant contra revenue for the six months ended June 30, 2020 was lower at $303,066 compared to $321,695 for the six months ended June 30, 2019. The breakdown of our net revenues from various industry verticals for six months ended June 30, 2020 and June 30, 2019 is as follows:
For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2019 | |||||||
Verticals: | ||||||||
Telecom | 35 | % | 40 | % | ||||
E-commerce & Consumer | 16 | % | 15 | % | ||||
Financial & Business Services | 8 | % | 8 | % | ||||
Media & Cable | 15 | % | 14 | % | ||||
Travel & Hospitality | 10 | % | 11 | % | ||||
Healthcare & Education | 7 | % | 6 | % | ||||
Technology, IT & Related Services | 3 | % | 2 | % | ||||
Others | 6 | % | 4 | % |
Our concentration to telecom vertical eased considerably in the past twelve months with the telecom vertical contributing to around 35% of our revenue for the six months ended June 30, 2020 as compared to 40% for the comparable six months ended June 30, 2019. The Companybalance $350 has partially offsetbeen paid during this contraction in revenue percentage from telecom vertical with expansion in revenues from other verticals.quarter.
While our net revenues in the second quarter were negatively impacted by COVID-19, primarily related to lockdowns and lower active workforce, the Company did see improvement throughout the quarter as countries and states began to gradually re-open. For example, sales in Malaysia and Australia returned to growth in the second quarter. However, the ultimate COVID-19 impact on the fiscal year sales remains highly fluid and will continue to evolve with geographical re-openings and virus waves.
As of the end of July 2020, approximately 50% of agents who otherwise work in our brick-and-mortar facilities have transitioned to work at home, approximately 30% are working in our facilities and the remaining agents are at home but idle.
Cost of services
Overall, cost of services as a percentage of revenue increased to 88.2% for the six months ended June 30, 2020 as compared to 83.0% for the six months ended June 30, 2019. Employee expenses, rent costs and Depreciation and amortization are the most significant costs for the Company, representing 76.7%, 5.8% and 4.3% of total Cost of services, respectively. The breakdown of cost of services is listed in the table below:
Six Months Ended June 30, | As % of Revenue | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Employee Benefit Expenses | $ | 204,968 | $ | 202,262 | 67.6 | % | 62.9 | % | ||||||||
Rent expense | 15,598 | 15,693 | 5.1 | % | 4.9 | % | ||||||||||
Depreciation and amortization | 11,375 | 10,865 | 3.8 | % | 3.4 | % | ||||||||||
Other | 35,254 | 38,101 | 11.6 | % | 11.8 | % | ||||||||||
Total | $ | 267,195 | $ | 266,921 |
Employee Benefit expenses: Our business heavily relies on our employees to provide professional services to our clients. Thus, our most significant costs are payments made to agents, supervisors, and trainers who are directly involved in delivering services to the clients.
Employee expenses as a percentage of revenues increased to 67.6% for the current period as compared to 62.9% for the previous period. The increase in employee costs, as a percentage of revenues, was largely attributable to deleveraging resulting from COVID-19 negative impact on revenues. The Company also had to incur higher costs on ensuring employees had a safe and secure work environment and following all the protocols and guidelines issued by various local authorities across the geographies we operate in. On a year on year basis, the costs were also impacted negatively by increase in minimum wages, primarily in India
Rent expense:Rent expense as a percentage of revenue increased to 5.1% for the current period as compared to 4.9% for previous. Rent expense increased as a percentage of sales driven by deleveraging resulting from the COVID-19 negative impact on revenues.
Depreciation and amortization: Depreciation and amortization expense as a percentage of revenue for the current period was marginally higher at 3.8% as compared 3.4% for the previous period
Other expense includes technology, utility, travel and outsourcing costs. As a percentage of revenue, these costs marginally decreased from 11.8% to 11.6%. The decrease was due to lower outsourcing expenses and recruitment charges.
As a result, gross profit as a percentage of revenue for the current period decreased to 11.8% as compared to 17.0% for the previous period.
Selling, general and administrative expenses
Selling, general and administrative expenses (SG&A) as a percentage of revenue decreased from 15.2% in the previous period to 10.5% in the current period. The decrease was driven by savings in travel and meeting expenses as a result of COVID-19 related travel restrictions and lower incentive compensation.
Impairment Losses and Restructuring/Exit Cost, Net
Impairment losses and restructuring costs, net totaled $24,557 for the current period as compared to $1,850 for the previous period. The expense for current period primarily relates to goodwill impairment losses of $22,708 and restructuring expenses of $1,849. As a result of the recent global economic disruption and uncertainty due to the novel coronavirus ("COVID-19") pandemic the company has taken goodwill impairment charge of $15,820, $4,332 and $2,556, was recorded for India, South Africa and Australia reporting units respectively due to the business outlook.
Interest expense, net
Interest expense, net totaled $6,696 for the current period as compared to $8,492 for the previous period. The interest expense is on our term debt and revolving line of credit facilities.
Income tax expense
Income tax expense for the current period was $4,159 compared to $1,113 for the previous period. The movement in interest cost and the implied effective tax rate was primarily due to shifts in earnings among the various jurisdictions in which we operate. Additionally, movement of funds between various geographies primarily to service our debt facilities also attract withholding taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows generated by operating activities, our working capital facilities, and term debt. We have historically utilized these resources to finance our operations and make capital expenditures associated with capacity expansion, upgrades of information technologies and service offerings, and business acquisitions. Due to the timing of our collections of receivables due from our major customers, we have historically needed to draw on our working capital facilities periodically for ongoing working capital needs. We have also entered into factoring agreements with financial institutions to sell certain of our accounts receivables under non-recourse agreement. The Company expects to meet all its debt obligations in a timely mannermanner.
Considering recent market conditionsThe Company entered into a newly secured $185 million senior debt facility during the quarter, comprising a $165 million term loan and a $20 million revolving credit facility. Under the on-going COVID-19 crisis,new senior debt, Borrowings will bear a tiered interest rate, which is based on the Company’s consolidated net leverage ratio and is initially set at LIBOR plus 450 basis points. The term loan will have a moratorium on principal repayment for 21 months and will amortize quarterly thereafter, beginning November 2022. The loan is subject to certain standardized financial covenants. The Company has re-evaluated its operating cash flows and liquidity profile and does not foresee any significant incremental risk. We continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Our most recent liquidity measures include negotiating an amended and restatedfully repaid the amounts due under the old senior facilities agreement which provides us deferment of principal repayments scheduled between May 2020 and January 2021. This provides us additional short-term liquidity which can be used to meet general working capital requirementsfrom the proceeds of the Company. The Company also raised capital by issuing fresh equity shares on a private placement basis to entities affiliated to Capital Square Partners, the principal shareholderproceeds of the Company. Additionally, we continue to limit discretionary spending across the organization and re-prioritizing our capital projects amid the COVID-19 pandemic.new debt facility.
Cash and cash equivalents and restricted cash
As at June 30, 2020,March 31, 2021, cash, cash equivalents, and restricted cash held by the Company and all its foreign subsidiaries increased by $23,791$14,087 to $56,417 as$64,646 compared to $32,626 on$50,559 as of December 31, 2019. Under current tax laws and regulations, if cash and cash equivalents held outside the United States are distributed to the United States in the form of dividends or otherwise, we may be subject to additional U.S. income taxes and foreign withholding taxes.2020. The restricted cash balance as at June 30, 2020March 31, 2021 stood at $8,966$6,981 as compared to $12,162$6,052 as at December 31, 2019.2020. The restricted cash pertains to debt service reserve account (DSRA) that we have to maintain in accordance withaccording to the Senior Term Agreement and also for certain term deposits that need to be maintained in accordance with some of our lease and client agreements. As part of the negotiated amendment and restated facilities agreement, the existing cash balance in the DSRA shall be temporarily released in phases and can be utilized to meet interest payment obligations towards the senior term facilities. The Company will have to restore DSRA by May 2021.
Cash flows from operating activities
For the sixthree months ended June 30,March 31, 2021 and 2020 and June 30, 2019 we reported net cash flows generated from operating activities of $48,397$7,097 and used in operating activities $5,427$10,546 respectively. The $53,824$3,449 increase in net cash flows from operating activities was due to a net increase of $53,974$2,454 in cash flows from assets and liabilities, a $25,660 increase$(22,029) decrease in non-cash reconciling items such as goodwill impairment, deferred tax expense, depreciation and amortization and warrant contra revenue, and a decreaseincrease of $(25,810)$16,126 in net income. The increase in cash flows from assets and liabilities was driven primarily by sale of certain accounts receivables under a non-recourse factoring arrangement
Cash flows used in investing activities
For the sixthree months ended June 30,March 31, 2021, and 2020 and June 30, 2019 we reported net cash used in investing activities of $7,469$27,922 and $5,973$2,884 respectively. Net cash used in investing activities for both thecurrent periods primarily consisted of strategic investment in equity-accounted investees and capital expenditures.expenditure.
Cash flows generated from financing activities
For the sixthree months ended June 30,March 31, 2021 and 2020 and June 30, 2019 we reported net cash flows used in financing activities of $16,640 and generated from financing activities of $12,779,$35,337 and $421, respectively. During the sixthree months ended June 30, 2020March 31, 2021 our net borrowings decreasedincreased by $24,649$34,093 mainly due to full repaymentrefinancing of asset-backed line of credit facility insenior term debt completed during the USA from the proceeds of the non-recourse factoring arrangement.quarter. The Company collected $8,009$1,244 from the issuance of common stock out of which $7,500 was from the issue of common stock to an affiliate of Capital Square Partners, the principal shareholder of the Company.
Debt
For more information, refer to Note 9, "Debt," and Note 14 "Subsequent events" to our unaudited condensed consolidated financial statements included in Item 1, "Financial Statements."
CONTRACTUAL OBLIGATIONS
Smaller reporting companies are not required to provide the information required by this item.
OFF-BALANCE SHEET ARRANGEMENTS
Apart from certain non-recourse receivables factoring as mentioned in the noteNote 9 "Debt" of the notes to the consolidated financial statements, we have no other material off-balance sheet transactions, unconditional purchase obligations or similar instruments, and we are not a guarantor of any other entities’ debt or other financial obligations obligations.
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VARIABILITY OF OPERATING RESULTS
We have experienced and expect to continue to experience some quarterly variations in revenue and operating results due to a variety of factors, many of which are outside our control, including: (i) timing and amount of costs incurred to expand capacity in order to provide for volume growth from existing and future clients; (ii) changes in the volume of services provided to clients; (iii) expiration or termination of client projects or contracts; (iv) timing of existing and future client product launches or service offerings; (v) seasonal nature of certain clients’ businesses; and (vi) variability in demand for our services by our clients depending on demand for their products or services, and/or depending on our performance; (vii) Due to COVID- 19 pandemic.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our consolidated financial statements in conformity with US-GAAP, management must undertake decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions upon which accounting estimates are based. Management applies its best judgment based on its understanding and analysis of the relevant circumstances to reach these decisions. By their nature, theseThese judgments are subject to an inherent degree of uncertainty.uncertainty by their nature. Accordingly, actual results may vary significantly from the estimates we have applied.
Please refer to Note 2, "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statementsconsolidated financial statements included in our Form 10-K for the year ended December 31, 2019Item 1 for a complete description of our critical accounting policies and estimates.estimates..
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As Startek has now qualified for Smaller Reporting Company status, this disclosure is not required.
ITEM 4. CONTROLS AND PROCEDURES
Pursuant to Rule 13a-15(b)Evaluation of Disclosure Controls and Rule 15d-15(b)Procedures:
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange ActAct) as of 1934, as amended (the “Exchange Act”), weMarch 31, 2021 was carried out an evaluation,under the supervision and with the participation of our management, including our Chief Executive Officer and under the supervision ofChief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were ineffective as of March 31, 2021.
Management’s Report on Internal Control over Financial Reporting:
Management is responsible for establishing and maintaining adequate internal controls over financial reporting, as such terms defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management with the participation of Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our disclosureinternal controls and proceduresover financial reporting as of June 30, 2020. Based upon that evaluation,March 31, 2021 based on the framework in “Internal Control-Integrated Framework”issued by Committee of Sponsoring Organizations of the Treadway Commission (2013). At December 31, 2020, management identified a material weakness in the operation of the Company’s internal controls over revenue recognition. In view of the existence of the material weakness and based on the assessment at the quarter end, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31 2021, our disclosure controls and procedures were effective.ineffective. Notwithstanding the material weakness in internal control over financial reporting relating to revenue process disclosed below, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements present fairly in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
InA material weakness was identified in the processoperation of evaluation, the management also reviewedCompany’s internal financial controls over revenue recognition (and corresponding “unbilled revenue” asset) in certain reporting units. It was observed that for few customers the impactamount of COVID-19 pandemicrevenue accrued in the books of accounts was on lower side than what was billed to those customers. Management carried out measurement adjustments in respect of discounts, penalties etc to revenue recognised in the books of account as the COVID 19 situation gave rise to uncertainties. However, these judgements were not adequately documented.
A material weakness is a deficiency, or a combination of deficiencies, in internal control framework. Accordingly additional compensating controls which were additionally implemented during thisover financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim period were tested and documented.financial statements will not be prevented or detected on a timely basis.
The material weakness identified as of 31st December, 2019 relatingdescribed above did not result in any material misstatements to certain information technology general control was remediated during the quarter ended June 30, 2020, through introduction of necessary access and review controls.company’s previously issued financial statements, nor in the financial statements disclosed in this form 10-Q.
Except as notedRemediation Plan:
The Company’s management is committed to maintaining a strong internal control environment. In response to the identified material weakness, the management immediately performed a detailed root-cause analysis of the highlighted issues and implemented certain corrective actions.The management has redefined the revenue recognition process combining automation and manual controls wherever appropriate. Documentation underlying key judgments is enhanced and “review” controls are further strengthened to reflect appropriate accounting treatment. While the management has completed the implementation of the corrective actions, it will also monitor the effectiveness of the controls through continuous monitoring
Changes in Internal Control over Financial Reporting:
Subject to the above, paragraphs, there has beenwere no changes in our internal controlscontrol over financial reporting that occurred during the quarter ended June 30, 2020March 31, 2021, that hashave materially affected, or isare reasonably expectedlikely to have a material effect onmaterially affect, our internal controlscontrol over financial reporting.
None.
There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, except for the following
The recent Coronavirus or COVID-19 outbreak continues to expand and may adversely affect our financial condition and results of operations for 2020.2021.
The recent government-imposed restrictions around the world have significantly impacted businesses and their workforces. Most of the geographies in which we operate have been affected by local lockdowns or restrictions on facilities access. Other geographies may be impacted as the coronavirus/COVID-19 spreads and/or existing restrictions may be extended/strengthened. At this point, it is impossible to predict the degree to which supply and demand for our outsourcing services will be affected as well asand the duration of such impact. This uncertainty makes it challenging for management to estimate the future performance of our businesses. However, the impact of COVID-19 will have an adverse impact on our results of operations over the near to medium term.
Given the overall uncertainty and fluidity of the current global pandemic response, coupled with how various government-imposed limitations may translate into client service delivery constraints, the Company may identify additional risk factors going forward which will be provided in the Quarterly Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
None.
INDEX OF EXHIBITS
Exhibit |
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10.1 | Form of Stock Purchase Agreement by and between the Company and CSP Victory Limited, dated as of June 29, 2020 | 8-K | 10.1 | July 6, 2020 | Separation Agreement with Rajiv Ahuja dated March 31,2021 | Form 8-K | 10.1 | April 5, 2021 | ||||||||||||||||||
10.2 | Form of Registration Rights Agreement by and between the Company and CSP Victory Limited, dated as of June 29, 2020 | 8-K | 10.2 | July 6, 2020 | ||||||||||||||||||||||
10.3 | Letter Agreement between the company and Aparup Sengupta dated July 1, 2020 | 8-K | 10.3 | July 8, 2020 | ||||||||||||||||||||||
10.4 | Amendment Agreement, dated July 9, 2020, by and among CSP Alpha Holding Pte. Ltd , the company and DBS Bank LTD, as agent | 8-K | 10.4 | July 13, 2020 | ||||||||||||||||||||||
10.5 | Amended and Restated Facilities Agreement, dated July 9, 2020, between, among others, CSP Alpha Holdings Pte Ltd., as Original Borrower, and DBS Bank Ltd., ING Bank N.V., Singapore Branch and Standard Chartered Bank, as Mandated Lead Arrangers and Bookrunners | 8-K | 10.5 | July 13, 2020 | ||||||||||||||||||||||
31.1* |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1* |
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101* |
| The following materials are formatted in Extensible Business Reporting Language (iXBRL): (i) Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended June 30, 2020 and 2019 (Unaudited), (ii) Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019, (iii) Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2020 and 2019 (Unaudited) and (iv) Notes to Consolidated Financial Statements (Unaudited) |
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| The following materials are formatted in Extensible Business Reporting Language (iXBRL): (i) Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2021 and 2020(Unaudited), (ii) Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020, (iii) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (Unaudited) and (iv) Notes to Consolidated Financial Statements (Unaudited) |
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104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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| * | Filed with this Form 10-Q. |
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
STARTEK, INC. |
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By: | /s/ Aparup Sengupta | Date: |
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