srt20190630_10q.htm
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Table of Contents



 

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 September 30, 2019

or 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                

 

Commission file number 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.)

 

 

6200 South Syracuse Way, Suite 485

 

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  October 31, 2019, there were 38,483,025 shares of Common Stock outstanding.

 



 

1

Table of Contents
 

 

STARTEK, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q

 

 

PART I - FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

Page

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

4

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 (Audited)

5

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)

4

 

Condensed Consolidated Statement of Stockholders' equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

7

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

28

ITEM 4.

Controls and Procedures

28

 

 

 

PART II - OTHER INFORMATION

 

 

 

ITEM 1.

Legal proceeding

 

ITEM 1A.

Risk Factors

29

ITEM 2. Unregistered sales of equity securities and use of proceeds  

ITEM 3.

Defaults upon senior securities  
ITEM 4. Mine safety disclosure  

ITEM 5. 

Other Information

29

ITEM 6.

Exhibits

30

SIGNATURES

 

31

 

2

Table of Contents
 

 

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-KT for the fiscal year ended December 31, 2018 filed with the Securities and Exchange Commission ("SEC") on March 14, 2019, the Quarterly report on Form 10-Q for the quarter ended March 31, 2019,  June 30, 2019, and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. 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.

 

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Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

 

STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenue

    164,630       151,509       487,054       376,827  

Warrant contra revenue

    -       -       (730 )     -  

Net Revenue

    164,630       151,509       486,324       376,827  

Cost of services

    (136,142 )     (128,747 )     (403,064 )     (316,025 )

Gross profit

    28,488       22,762       83,260       60,802  

Selling, general and administrative expenses

    (22,926 )     (22,818 )     (71,938 )     (52,480 )

Restructuring and other acquisition related cost

    (220 )     (6,519 )     (2,058 )     (12,776 )

Operating income/ (loss)

    5,342       (6,575 )     9,264       (4,454 )

Share of profit / (loss) of associates

    (16 )     47       988       86  

Interest expense, net

    (3,372 )     (4,114 )     (11,864 )     (11,518 )

Exchange gain / (loss), net

    (1,880 )     705       (2,558 )     (2,441 )

Profit/(Loss) before income taxes

    74       (9,937 )     (4,170 )     (18,327 )

Income tax expense

    3,436       953       4,550       1,519  

Net loss

    (3,362 )     (10,890 )     (8,720 )     (19,846 )

Net income/(loss) attributable to non-controlling interests

    (575 )     11       1,007       916  

Net loss attributable to Startek shareholders

    (2,787 )     (10,901 )     (9,727 )     (20,762 )
                                 

Other comprehensive income (loss), net of tax:

                               

Foreign currency translation adjustments

    (1,899 )     (2,049 )     (1,299 )     (5,528 )

Change in fair value of derivative instruments

    (298 )     (562 )     50       (562 )

Pension amortization

    (9 )     (483 )     (70 )     (1,263 )

Comprehensive loss

    (5,568 )     (13,984 )     (10,039 )     (27,199 )

Comprehensive income (loss) attributable to non-controlling interests

    (594 )     (251 )     962       297  

Comprehensive loss attributable to Startek shareholders

    (4,974 )     (13,733 )     (11,001 )     (27,496 )
                                 

Net loss per common share - basic and diluted

    (0.07 )     (0.32 )     (0.26 )     (0.76 )
Weighted average common shares outstanding - basic and diluted     38,467       33,812       38,011       27,289  

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents
 

 

STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

(Unaudited)

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

    17,795       16,617  

Restricted cash

    10,582       7,952  

Trade accounts receivable, net

    105,574       107,836  

Unbilled Revenue

    42,814       42,135  

Prepaid and other current assets

    15,082       18,850  

Total current assets

    191,847       193,390  

Property, plant and equipment, net

    35,745       42,242  

Operating lease Right-of-use assets

    66,647       -  

Intangible assets, net

    113,410       121,336  

Goodwill

    226,513       225,450  

Investment in associates

    1,739       2,097  

Deferred tax assets, net

    5,052       5,048  

Prepaid expenses and other non-current assets

    18,761       15,076  

Total assets

    659,714       604,639  

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Trade accounts payable

    20,965       26,886  

Accrued expenses and other current liabilities

    79,805       84,881  

Short term debt

    25,213       21,975  

Current maturity of long term debt

    16,900       9,800  

Current maturity of operating lease liabilities

    19,838       -  

Current maturity of finance lease obligations

    658       1,816  

Total current liabilities

    163,379       145,358  

Long term debt

    141,632       152,100  

Operating lease liabilities

    47,782       -  

Other non-current liabilities

    12,581       11,907  

Deferred tax liabilities, net

    19,562       18,901  

Total liabilities

    384,936       328,266  

Commitments and contingencies

           

Stockholders’ equity:

               

Common stock, 60,000,000 non-convertible shares, $0.01 par value, authorized; 38,483,025 and 37,446,323 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

    385       374  

Additional paid-in capital

    275,750       267,317  

Accumulated other comprehensive loss

    (6,821 )     (5,547 )

Accumulated deficit

    (40,854 )     (31,127 )

Equity attributable to Startek shareholders

    228,460       231,017  

Non-controlling interest

    46,318       45,356  

Total stockholders’ equity

    274,778       276,373  

Total liabilities and stockholders’ equity

    659,714       604,639  

 

See Notes to Consolidated Financial Statements.

 

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STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Operating Activities

               

Net loss

  $ (8,720 )   $ (19,846 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    22,056       18,668  

Profit on sale of property, plant and equipment

    (223 )     -  

Provision for doubtful accounts

    1,238       2,100  

Warrant contra revenue

    730       -  

Share-based compensation expense

    1,151       249  

Deferred income taxes

    209       (1,284 )

Share of profit of associates

    (988 )     (86 )

Changes in operating assets and liabilities:

               

Trade accounts receivable

    (1,529 )     3,406  

Prepaid expenses and other assets

    (950 )     5,864  

Trade accounts payable

    (5,236 )     796  

Income taxes, net

    (2,267 )     (5,494 )

Accrued expenses and other current liabilities

    1,150       (158 )

Net cash provided by operating activities

  $ 6,621     $ 4,215  
                 

Investing Activities

               

Purchases of property, plant and equipment

    (9,027 )     (7,430 )
Cash and cash equivalents acquired on reverse acquisition     -       1,496  

Distributions received from associates

    1,317       22  

Net cash used in investing activities

  $ (7,710 )   $ (5,912 )
                 

Financing Activities

               

Proceeds from the issuance of common stock

    6,563       115  

Payments on long term debt

    (7,000 )     (2,800 )

Proceeds from (payments on) other debt, net

    5,831       4,577  

Net cash provided by financing activities

  $ 5,394     $ 1,892  

Net increase (decrease) in cash and cash equivalents

    4,305       195  

Effect of exchange rate changes on cash and cash equivalents and restricted cash

    (497 )     (1,271 )

Cash and cash equivalents and restricted cash at beginning of period

    24,569       21,601  

Cash and cash equivalents and restricted cash at end of period

  $ 28,377     $ 20,525  
                 

Components of cash and cash equivalents and restricted cash

               

Balances with banks

    17,795       14,133  

Restricted cash

    10,582       6,392  

Total cash and cash equivalents and restricted cash

  $ 28,377     $ 20,525  

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents
 

 

STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

   

Common Stock

   

Additional paid-in

    Accumulated other comprehensive    

Accumulated

    Equity attributable to Startek    

Non-controlling

    Total stockholders'  
   

Shares

   

Amount

   

capital

   

loss

   

deficit

   

shareholders

   

interest

   

equity

 
Three months ended                                                                
Balance at June 30, 2019     38,452,111     $ 384     $ 275,284     $ (4,634 )   $ (38,067 )   $ 232,967     $ 46,912     $ 279,879  
Issuance of common stock     30,914       1       96       -       -       97       -       97  
Share-based compensation expenses     -       -       370       -       -       370       -       370  
Warrant expenses     -       -       -       -       -       -       -       -  
Net income (loss)     -       -       -       -       (2,787 )     (2,787 )     (575 )     (3,362 )
Other comprehensive loss for the period     -       -       -       (2,187 )     -       (2,187 )     (19 )     (2,206 )
Balance at September 30, 2019     38,483,025     $ 385     $ 275,750     $ (6,821 )   $ (40,854 )   $ 228,460     $ 46,318     $ 274,778  
                                                                 
Balance at June 30, 2018     20,600,100     $ 206     $ 153,704     $ (3,185 )   $ (10,524 )   $ 140,201     $ 47,167     $ 187,368  
Purchase accounting entries due to the Aegis Transactions     16,226,392     $ 162     $ 142,119     $ -     $ -     $ 142,281     $ -     $ 142,281  
Issuance of common stock     234,066       3       113       -       -       116       -       116  
Share-based compensation expenses     -       -       249       -       -       249       -       249  
Net income (loss)     -       -       -       -       (10,901 )     (10,901 )     11       (10,890 )
Other comprehensive loss for the period     -       -       -       (2,832 )     -       (2,832 )     (262 )     (3,094 )
Balance at September 30, 2018     37,060,558     $ 371     $ 296,185     $ (6,017 )   $ (21,425 )   $ 269,114     $ 46,916     $ 316,030  
                                                                 
Nine months ended                                                                
Balance at December 31, 2018     37,446,323     $ 374     $ 267,317     $ (5,547 )   $ (31,127 )   $ 231,017     $ 45,356     $ 276,373  
Issuance of common stock     1,036,702       11       6,552       -       -       6,563       -       6,563  
Share-based compensation expenses     -       -       1,151       -       -       1,151       -       1,151  
Warrant expenses     -       -       730       -       -       730       -       730  
Net income (loss)     -       -       -       -       (9,727 )     (9,727 )     1,007       (8,720 )
Other comprehensive loss for the period     -       -       -       (1,274 )     -       (1,274 )     (45 )     (1,319 )
Balance at September 30, 2019     38,483,025     $ 385     $ 275,750     $ (6,821 )   $ (40,854 )   $ 228,460     $ 46,318     $ 274,778  
                                                                 
Balance at December 31, 2017     20,600,100     $ 206     $ 153,704     $ 717     $ (663 )   $ 153,964     $ 46,619     $ 200,583  
Purchase accounting entries due to the Aegis Transactions     16,226,392     $ 162     $ 142,119     $ -     $ -     $ 142,281     $ -     $ 142,281  
Issuance of common stock     234,066       3       113       -       -       116       -       116  
Share-based compensation expenses     -       -       249       -       -       249       -       249  
Net income (loss)     -       -       -       -       (20,762 )     (20,762 )     916       (19,846 )
Other comprehensive loss for the period     -       -       -       (6,734 )     -       (6,734 )     (619 )     (7,353 )
Balance at September 30, 2018     37,060,558     $ 371     $ 296,185     $ (6,017 )   $ (21,425 )   $ 269,114     $ 46,916     $ 316,030  

 

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Table of Contents

 

STARTEK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(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 global business process outsourcing company that provides omnichannel customer interactions, technology and back-office support solutions for some of the world’s most iconic brands in a variety of vertical markets. Operating under the Startek 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 powered by the science of dialogue, we deliver personalized experiences at the point of conversation between our clients and their customers across every interaction channel 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.

 

We operate in a single operating segment providing business outsourcing solutions in the customer experience management space.

 

On July 20, 2018, Company completed the acquisition of all of the issued and outstanding shares of capital stock of CSP Alpha Midco Pte Ltd, a Singapore private limited company (“Aegis”), from CSP Alpha Holdings Parent Pte Ltd, a Singapore private limited company (the “Aegis Stockholder”), in exchange for the issuance of 20,600,000 shares of common stock of the Company, par value $.01 per share (the “Common Stock”). Concurrently, the Aegis Stockholder purchased 166,667 newly issued shares of Common Stock at a price of $12 per share for a total cash payment of $2,000.  As a result of the consummation of such transactions (the “Aegis Transactions”), the Aegis Stockholder became the holder of 20,766,667 shares of Common Stock, representing approximately 55% of the outstanding Common Stock.  For accounting purposes, the Aegis Transactions are treated as a reverse acquisition and Aegis is considered the accounting acquirer.  Accordingly, Aegis’ historical financial statements replace the Company’s historical financial statements following the completion of the Aegis Transactions, and the results of operations of both companies will be included in the Company’s financial statements for all periods following the completion of the Aegis Transactions. The historical financial information presented for the periods and dates prior to July 20, 2018 is that of Aegis, and for periods subsequent to July 20, 2018 is that of the combined company

 

In addition, on July 20, 2018, in connection with the consummation of the Aegis Transactions, the Company and the Aegis Stockholder entered into a Stockholders Agreement, pursuant to which the Company and the Aegis Stockholder agreed to, among other things: (i) certain rights, duties and obligations of the Aegis Stockholder and the Company as a result of the transactions contemplated by the Transaction Agreement and (ii) certain aspects of the management, operation and governance of the Company after consummation of the Aegis Transactions.

 

On December 13, 2018, the Company, and Aegis Stockholder, entered into a Securities Purchase Agreement, pursuant to which Aegis Stockholder purchased, and the Company issued and sold, 368,098 shares of Common Stock at a purchase price of $6.52 per share, or a total purchase price of $2,400, taking its holding to approximately 56% of the Company’s outstanding Common Stock (the “2018 Equity Offering”). The Company used the proceeds for general corporate purposes.

 

On May 17, 2019, the Company entered into a Stock Purchase Agreement with the Aegis stockholder and certain additional investors, pursuant to which the Company issued and sold 692,520 shares of Common Stock at a purchased price of $7.48 per share, or a total purchase price of $5,180 (the “ 2019 Equity Offering”). The Aegis stockholder purchased 100,267 shares of Common Stock in the 2019 Equity Offering.

 

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 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 balance sheet as of  December 31, 2018, 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-KT for the nine months period ended  December 31, 2018.

 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

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 Condensed Consolidated Balance Sheets. The non-controlling interest in our consolidated net income is reported as "Net income (loss) attributable to non-controlling interests" in our Condensed Consolidated Statements of Comprehensive Income (Loss). These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Form 10-KT for the nine months period ended December 31, 2018 filed with the SEC on March 14, 2019.

 

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, purchase price allocations, provision for doubtful receivables, valuation allowances for deferred tax assets, the valuation of derivative financial instruments, measurements of stock-based compensation, assets and obligations related to employee benefits, lease termination liabilities, restructuring costs, and income tax uncertainties and other contingencies. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable. 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 consolidated financial statements.

 

Revenue

 

On April 1, 2018, the Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers, (Topic 606) using the modified retrospective method. Topic 606 utilizes a five-step process, for revenue recognition that focuses on transfer of control, rather than transfer of risks and rewards. It also provided additional guidance on accounting for contract acquisition and fulfillment costs. Refer Note 5 on "Revenue from Contracts with Customers" for further information.

 

Consistent with the modified retrospective method of adoption, the Company has not adjusted prior period amounts which continue to be reported in accordance with the Company’s historic revenue accounting policy and principles.

 

Leases

 

On January 1, 2019, the Company adopted Accounting Standards Codification 842, Leases, (Topic 842) with the 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. Finance leases are included in property plant and equipment, long-term debt, accrued expenses and other current liabilities in our consolidated balance sheets.

  

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 will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.

 

We have lease agreements with lease and non-lease components, which are generally accounted for separately.

 

9

 

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 is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed and not amortized but is reviewed for impairment at least annually or more frequently if impairment indicators arise. Our goodwill is allocated by reporting unit and is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit is "more likely than not" less than the carrying amount or if significant changes related to the reporting unit have occurred that could materially impact fair value, a quantitative goodwill impairment test would be required. The Company can elect to forgo the qualitative assessment and perform the quantitative test.

 

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.

 

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 which 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%.

 

In May 2018, a discussion document prepared by the Center for Audit Quality SEC Regulations Committee and its International Practices Task Force describes inflation data for Argentina through April 2018. Considering this data and more recent data for May 2018, all of the three-year cumulative inflation rates commonly used to evaluate Argentina’s inflation currently exceed 100%.

 

Therefore, 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 remeasurement of the local books to USD. Exchange gains and losses is recorded through net income as opposed to through other comprehensive income as had been done historically. Translation adjustments from prior periods will not be removed from equity.

 

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 11, “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 11, "Share-Based Compensation."

 

Recent Accounting Pronouncements

 

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. The Company is evaluating the impact of the adoption of ASU No. 2018-14 on its financial statement disclosures.

 

In June 2016, FASB issued accounting standard updated on Financial Instruments - Credit Losses (Topic 326), 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, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We do not expect the adoption of this standards will have a material impact on our consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU modifies the disclosure requirements with respect to fair value measurements. The ASU is effective for the Company beginning January 1, 2020, including interim periods in fiscal year 2020. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its consolidated results of operations, cash flows, financial position and disclosures.

 

 

 

3. BUSINESS ACQUISITIONS

 

Aegis Transactions

 

On July 20, 2018, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of Aegis from the Aegis Stockholder in exchange for the issuance of 20,600,000 shares of the Common Stock in the Aegis Transactions. Concurrently, the Aegis Stockholder purchased 166,667 newly issued shares of the Common Stock at a price of $12 per share for a total cash payment of $2,000. As a result of the consummation of the Aegis Transactions, the 2018 Equity Offering and the 2019 Equity Offering, the Aegis Stockholder now holds 21,235,032 shares of the Common Stock, which is equivalent to approximately 55% of the total outstanding Common Stock.

 

In accordance with ASC 805, Business Combinations, the transaction was accounted for as a reverse acquisition. As such, Aegis is considered to be the accounting acquirer. Therefore, Aegis’ historical financial statements replace the Company’s historical financial statements following the completion of the Aegis Transactions, and the results of operations of both companies will be included in the Company’s financial statements for all periods subsequent to July 20, 2018.

 

The fair value of the purchase consideration is calculated based on the Company's stock price as it is considered to be more reliably determinable than the fair value of Aegis' private stock. Consideration is calculated based on the Company's closing stock price of $6.81 on July 20, 2018. The allocation of the purchase price was finalized since Aegis Transaction was closed.

 

The following table presents the purchase price and the fair value of the identifiable assets and liabilities:

 

   

Amount

 

Stock consideration (number of shares outstanding immediately prior the closing date)

    16,226,392  

Closing share price on July 20, 2018

  $ 6.81  

Total allocable purchase price

  $ 110,502  

 

   

Amount

 

Cash and cash equivalents

  $ 1,496  

Other current assets

    46,094  

Property, plant and equipment, net

    15,930  

Identifiable intangible assets

    28,960  

Goodwill

    64,345  

Other non-current assets

    3,204  

Current liabilities

    (22,548 )

Non-current liabilities

    (26,979 )

Purchase price

  $ 110,502  

 

The goodwill recognized was attributable primarily to the acquired workforce, increased utilization of our global delivery platform and other synergistic benefits. Goodwill from this acquisition is not expected to be deductible for tax purposes.

 

 

 

4. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

As of September 30, 2019, the carrying value of goodwill relating to business acquisitions is $226,513. The carrying value of goodwill is allocated to reporting units is as follows:

 

Reporting Units

 

Amount

 
Aegis   162,168  
StarTek   64,345  
Ending balance, September 30, 2019   $226,513  

 

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 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 thereafter. These assumptions are reviewed annually as part of management’s budgeting and strategic planning cycles. These estimates may differ from actual results. The values assigned to each 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.

 

As of September 30, 2019, based on the qualitative assessment, we concluded that goodwill was not impaired.

 

The following table presents the changes in goodwill during the period:

 

   

Amount

 

Opening balance, December 31, 2018

  $ 225,450  

Measurement period adjustments

    1,063  

Ending balance, September 30, 2019

  $ 226,513  

 

Intangible Assets

 

The following table presents our intangible assets as of    September 30, 2019

 

    Gross Intangibles     Accumulated Amortization    

Net Intangibles

    Weighted Average Amortization Period (years)  

Customer relationships

  $ 65,050     $ 9,193     $ 55,857       6.5  

Brand

    49,500       6,809       42,691       7.1  

Trademarks

    14,410       1,209       13,201       7.5  

Other intangibles

    2,100       439       1,661       4.9  
    $ 131,060     $ 17,650     $ 113,410     $ -  

 

Expected future amortization of intangible assets as of September 30, 2019 is as follows:

 

Years Ending December 31,

 

Amount

 

Remainder of 2019

  $ 2,584  

2020

    10,277  

2021

    10,277  

2022

    10,277  

2023

    10,236  

Thereafter

    69,759  

 

In August 2019, the management has decided to retain and use Startek as the brand for all its customer/clients, vendors, employees, associates and others, across all geographies including Aegis, to bring uniformity across geographies. The management is planning to phase out the Aegis Brand over a period of time. Any accounting implications on the carrying values and amortization periods of the related intangible assets is currently being estimated and worked out, and will be considered in the following quarter.

 

 

 

5.  REVENUE

 

The company 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 majority 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.

 

13

 

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.

 

Disaggregated Revenue

 

Revenues by our clients' industry vertical for the three and nine months ended September 30, 2019 and 2018, respectively:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Vertical:

 

2019

   

2018

   

2019

   

2018

 

Telecom

    61,439       73,613       191,684       198,374  

E-commerce & Consumer

    27,530       18,206       76,249       34,269  

Financial & Business Services

    12,392       14,250       38,957       42,432  

Media & Cable

    23,408       16,744       68,752       22,752  

Travel & Hospitality

    18,244       15,292       52,133       42,299  

Healthcare & Education

    11,880       7,690       30,761       12,634  

Technology, IT & Related Services

    3,063       2,404       8,958       5,225  

All other segments

    6,674       3,310       19,560       18,842  

Gross Revenue

    164,630       151,509       487,054       376,827  
Less: Warrant Contra Revenue     0       -       (730 )     -  
Net Revenue   $ 164,630     $ 151,509     $ 486,324     $ 376,827  

 

14

 

 

6. NET LOSS PER SHARE

 

Basic net loss 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.

 

In connection with the Aegis Transactions, the Company maintained Startek's 2008 Equity Incentive Plan (see Note 11, "Share-based compensation and employee benefit plans" for more information). For the three and nine months ended September 30, 2019, 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 September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Anti-dilutive securities:

                               

Stock options

    2,637       5       2,637       298  

 

 

7. RESTRUCTURING AND OTHER ACQUISITION RELATED COST

 

The table below summarizes the balance of accrued restructuring and other acquisition related cost, which is included in other accrued liabilities in our consolidated balance sheets, and the changes during the nine months ended September 30, 2019

 

 

   

Employee related

   

Facilities related

   

Total

 

Balance as of December 31, 2018

  $ 760     $ 2,268     $ 3,028  

Accruals/(reversals)

    1,991       78       2,069  

Payments

    (1,973 )     (1,657 )     (3,630 )

Balance as of September 30, 2019

  $ 778     $ 689     $ 1,467  

 

Employee related

 

In 2018, in conjunction with the closing of the Aegis Transactions, we eliminated a number of positions which were considered redundant, under a company-wide restructuring plan. We recognized provision for employee related costs across a number of geographies and we expect to pay the remaining costs of $670 by the end of fourth quarter 2019.

 

In March 2019, the Company has closed one of its sites in Argentina. Upon closure, the Company eliminated a number of positions which were considered redundant and recognized provision for employee related costs and we expect to pay the remaining costs of $108 by the end of fourth quarter 2019.

 

Facilities related

 

In 2018, in conjunction with the closing of the Aegis Transactions, we terminated various leases in the United States and the Philippines. We recognized provision for the remaining costs associated with the leases. We expect to pay the remaining costs of $624 by the end of the first quarter of 2021.

 

Upon closure of site in Argentina, the Company recognized provision for facility related costs and we expect to pay the remaining costs of $65 by the end of the fourth quarter of 2019.

 

 

 

 

8.  DERIVATIVE INSTRUMENTS

 

Cash flow hedges

 

Our locations in Canada and the Philippines primarily serve US-based clients. The revenues from these clients is 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 results of the hedges with forecasted expenses.

 

Unrealized gains and losses are recorded in accumulated other comprehensive income (“AOCI”) and will be re-classified to operations as the forecasted expenses are incurred, typically within one year. During the nine months ended September 30, 2019 and 2018, our cash flow hedges were highly effective and hedge ineffectiveness was not material.

 

The following table shows the notional amount of our foreign exchange cash flow hedging instruments as of September 30, 2019:

 

   

Local Currency Notional Amount

   

U.S. Dollar Notional Amount

 

Philippine Peso

    1,327,000       24,821  
Canadian Dollar     2,171       1,622  
            $ 26,443  

 

Derivative assets and liabilities associated with our hedging activities are measured at gross fair value as described in Note 9, "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.

 

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 Statements of Comprehensive Income (Loss). The following table presents these amounts for the three and nine months ended September 30, 2019 and 2018:

 

Derivatives not designated under ASC 815

 

For the Three Months Ended September 30, 2019

   

For the Three Months Ended September 30, 2018

   

For the Nine Months Ended September 30, 2019

   

For the Nine Months Ended September 30, 2018

 

Foreign currency forward contracts

  $ 393     $ 1,046     $ 536     $ 1,046  

Interest rate swap

  $ (6 )   $ (13 )   $ (636 )   $ (27 )

 

 

9.  FAIR VALUE MEASUREMENTS 

 

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:

 

16

 

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 our 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.

  

   

As of September 30, 2019

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Foreign exchange contracts

  $     $ 1,960     $     $ 1,960  

Total fair value of assets measured on a recurring basis

  $     $ 1,960     $     $ 1,960  
                                 

Liabilities:

                               

Interest rate swap

  $     $ 648     $     $ 648  

Foreign exchange contracts

  $     $ 153     $     $ 153  

Total fair value of liabilities measured on a recurring basis

  $     $ 801     $     $ 801  

 

   

As of December 31, 2018

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Foreign exchange contracts

  $     $ 1,388     $     $ 1,388  

Total fair value of assets measured on a recurring basis

  $     $ 1,388     $     $ 1,388  
                                 

Liabilities:

                               

Interest rate swap

  $     $ 31     $     $ 31  

Foreign exchange contracts

  $     $ 276     $     $ 276  

Total fair value of liabilities measured on a recurring basis

  $     $ 307     $     $ 307  

 

17

 

 

10. DEBT

 

The below table presents details of the Company's debt:

 

   

September 30, 2019

   

December 31, 2018

 

Short term debt and current portion of long term debt

               

Working capital facilities

  $ 25,213     $ 21,975  

Current maturity of long term debt

    16,900       9,800  

Current maturity of finance lease obligations

    658       1,816  

Total

  $ 42,771     $ 33,591  
                 

Long term debt

               

Term loan, net of debt issuance costs

  $ 108,989     $ 120,462  

Equipment loan

    1,611       -  

Secured revolving credit facility

    30,901       31,152  

Finance lease obligations

    131       486  

Total

  $ 141,632     $ 152,100  

 

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 $33 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 $25.2 million as of September 30, 2019.

 

Term loan

 

On October 27, 2017, the Company entered into a Senior Term Agreement ("Term loan") to provide funding for the acquisition of ESM Holdings Limited and its subsidiaries in the amount of $140 million for a five year term. The Term loan was fully funded on November 22, 2017 and is to be repaid based on a quarterly repayment schedule beginning six months after the first utilization date.

 

Principal payments due on the term loan are as follows:

 

Years

 

Amount

 

Remainder of 2019

    2,800  

2020

    16,800  

2021

    21,000  

2022

    88,200  
Total   $ 128,800  

 

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.

 

In connection with the Term loan, the Company incurred issuance costs of $7.3 million which are net against the Term loan on the balance sheet. Unamortized debt issuance costs as of September 30, 2019 amount to $4.4 million.

 

Secured revolving credit facility

 

The Company has a secured revolving credit facility which is effective through March 2022. Under this agreement, we may borrow the lesser of the borrowing base calculation and $50 million. As long as no default has occurred and with lender consent, we may increase the maximum availability to $70 million in $5 million increments, and we may request letters of credit in an aggregate amount equal to the lesser of the borrowing base calculation (minus outstanding advances) and $5 million. The borrowing base is generally defined as 95% of our eligible accounts receivable less certain reserves.

 

As of September 30, 2019, we had $30.9 million of outstanding borrowings and our remaining borrowing capacity was $9.793 million. Our borrowings bear interest at one-month LIBOR plus 1.50% to 1.75%, depending on current availability.

 

We have entered into factoring agreements with financial institutions to sell certain of our accounts receivable under non-recourse agreements. These transactions are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. 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 amount factored under these agreements was $4.83 million for nine months ended September 30, 2019.

 

18

 

BMO Equipment Loan

 

On December 27, 2018, the Company executed an agreement to secure a loan against US and Canadian assets in the amount of $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.

 

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.

 

 

11. SHARE-BASED COMPENSATION

 

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. As a result of an anti-dilution adjustment that was triggered by the 2019 Equity Offering, total number of shares issuable to Amazon have been adjusted from 4,000,000 to 4,002,964. 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 exercise price for all Warrant Shares was originally $9.96 per share but was adjusted to $9.95 per share as a result of an anti-dilution adjustment that was triggered by the 2019 Equity Offering. 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 contra-revenue and equity is 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 505 and ASC 718.

 

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. 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.

 

Because the Warrant contains performance criteria (i.e. aggregate purchase levels) which Amazon and/or any of its affiliates must achieve for the Warrant Shares to vest, as detailed above, the final measurement date for each tranche of the Warrant Shares is the date on which performance is completed. Prior to the final measurement date, when achievement of the performance criteria has been deemed probable, a reduction in revenue equal to the percentage of completion to date will be recognized. The fair value of the Warrant Shares will be adjusted at each reporting period until they are earned.

 

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 nine months ended September 30, 2019 was $1,151, and is included in selling, general and administrative expense. As of September 30, 2019, there was $1,351 of total unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.8 years.

 

 

12.  ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Accumulated other comprehensive loss consisted 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

 

Balance at December 31, 2018

  $ (3,989 )   $ (15 )   $ (1,543 )   $ (5,547 )   $ (1,243 )   $ (6,790 )

Foreign currency translation

    (1,299 )     -       -       (1,299 )     -       (1,299 )

Change in fair value of derivative instruments

    -       50       -       50       -       50  

Pension remeasurement

    -       -       (25 )     (25 )     (45 )     (70 )

Balance at September 30, 2019

  $ (5,288 )   $ 35     $ (1,568 )   $ (6,821 )   $ (1,288 )   $ (8,109 )

 

19

 

 

13.  SEGMENT AND GEOGRAPHICAL INFORMATION

 

The Company provides business process outsourcing services (“BPO”) to clients in a variety of 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 Chief Executive Officer, who has been identified as the Chief Operating Decision Maker ("CODM"), reviews financial information mainly on a consolidated basis.

 

Based on our evaluation of the facts and circumstances, the Company has concluded that it has a single operating and reportable segment (BPO), and two reporting units (Aegis and Startek).

 

The Group prepares its geographical information in conformity with the accounting policies adopted for preparing and presenting the consolidated financial statements of the Group as a whole.

 

Revenues by geography, based on the location of the Company's delivery centers for the three and nine months September 30, 2019 and 2018, is presented below:

 

    Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
   

2019

   

2018

   

2019

   

2018

 

Revenue:

                               

India