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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, 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.)

 

 

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, 2021, there were 40,804,379 shares of Common Stock outstanding.

 



 

 

 
 

 

STARTEK, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q

 

 

PART I - FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

Page

 

Consolidated Statement of Income (Loss) and Other Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)

4

 

Consolidated Balance Sheets as of September 30, 2021(Unaudited) and December 31, 2020 

5

 

Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited)

6

 

Consolidated Statement of Stockholders' Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)

7

 

Note 1 Overview and Basis of Preparation

8

  Note 2 Summary of Accounting Policies 9
  Note 3 Goodwill and Intangible Assets 12
  Note 4 Revenue 13
  Note 5 Net Income / (Loss) Per Share 15
  Note 6 Impairment and Restructuring / Exit cost 15
  Note 7 Derivative Instruments 16
  Note 8 Fair Value Measurements 17
  Note 9 Debt 18
  Note 10 Share-Based Compensation 20
  Note 11 Accumulated Other Comprehensive Loss 21
  Note 12 Segment Reporting 22
  Note 13 Leases 23
  Note 14 Investment in Equity-Accounted Investees 24
  Note 15 Common Stock  25
  Note 16 Subsequent Events 26

ITEM 2.

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

27

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

33

ITEM 4.

Controls and Procedures

33

 

 

 

PART II - OTHER INFORMATION

 

 

 

ITEM 1.

Legal proceeding

34

ITEM 1A.

Risk Factors

34

ITEM 2. Unregistered sales of equity securities and use of proceeds 34

ITEM 3.

Defaults upon senior securities 34
ITEM 4. Mine safety disclosure 34

ITEM 5. 

Other Information

34

ITEM 6.

Exhibits

35

SIGNATURES

 

36

 

 

 

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, 2020 filed with the Securities and Exchange Commission ("SEC") on March 16, 2021 and this Quarterly Report on Form 10-Q for the quarter ended September 30, 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 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

 CONSOLIDATED STATEMENT OF INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Revenue

  172,948   163,097   525,879   466,926 

Warrant contra revenue

  (161)  (410)  (991)  (1,173)

Net revenue

 $172,787  $162,687  $524,888  $465,753 

Cost of services

  (151,264)  (140,392)  (454,124)  (408,747)

Gross profit

 $21,523  $22,295  $70,764  $57,006 
                 

Selling, general and administrative expenses

  (13,099)  (14,292)  (39,568)  (45,030)

Impairment losses and restructuring/exit cost

  (85)  12   (1,964)  (24,545)

Operating income/ (loss)

 $8,339  $8,015  $29,232  $(12,569)
                 

Share of loss of equity-accounted investees

  (46)  (5)  (1)  (25)

Interest expense, net

  (2,236)  (3,988)  (18,489)  (10,683)

Exchange gain / (loss), net

  (533)  (621)  42   (331)

Income/ (loss) before income taxes

 $5,524  $3,401  $10,784  $(23,609)

Income tax expense

  (2,402)  (1,649)  (9,397)  (5,808)

Net income/ (loss)

 $3,122  $1,752  $1,387  $(29,417)
                 

Net income/ (loss)

                

Net income attributable to non-controlling interests

  3,046   1,385   6,581   1,990 

Net income/ (loss) attributable to Startek shareholders

  76   367   (5,194)  (31,407)
                 

Net income/ (loss) per common share - basic

 $0.00  $0.01  $(0.13) $(0.80)

Net income/ (loss) per common share - diluted

 $0.00  $0.01  $(0.13) $(0.80)
                 

Weighted average common shares outstanding - basic

  40,788   40,275   40,723   39,143 

Weighted average common shares outstanding - diluted

  41,094   40,626   41,171   39,143 

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net income/ (loss)

 $3,122  $1,752  $1,387  $(29,417)

Net income attributable to non-controlling interests

  3,046   1,385   6,581   1,990 

Net income/ (loss) attributable to Startek shareholders

  76   367   (5,194)  (31,407)
                 

Other comprehensive income/ (loss), net of taxes:

                

Foreign currency translation adjustments

  (179)  936   (2,147)  (2,729)

Change in fair value of derivative instruments

  -   103   8   (577)

Pension amortization

  (669)  774   (1,090)  (1,856)

Other comprehensive income/ (loss)

 $(848) $1,813  $(3,229) $(5,162)
                 

Other comprehensive income/ (loss), net of taxes

                

Other comprehensive income/ (loss) attributable to non-controlling interests

  (374)  413   (443)  (1,211)

Other comprehensive income/ (loss) attributable to Startek shareholders

  (474)  1,400   (2,786)  (3,951)
  $(848) $1,813  $(3,229) $(5,162)

Comprehensive income/ (loss)

                

Comprehensive income attributable to non-controlling interests

  2,672   1,798   6,138   779 

Comprehensive income/ (loss) attributable to Startek shareholders

  (398)  1,767   (7,980)  (35,358)
  $2,274  $3,565  $(1,842) $(34,579)

 

See Notes to Consolidated Financial Statements.

 

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

(Unaudited)

 

  

September 30,

  

December 31,

 
  

2021

  

2020

 

Assets

        

Current assets

        

Cash and cash equivalents

  56,840   44,507 

Restricted cash

  6,634   6,052 

Trade accounts receivables, net

  68,504   83,560 

Unbilled revenue

  62,066   49,779 

Prepaid and other current assets

  13,928   14,542 

Total current assets

 $207,972  $198,440 
         

Non-current assets

        

Property, plant and equipment, net

  35,228   34,225 

Operating lease right-of-use assets

  56,775   69,376 

Intangible assets, net

  92,695   100,440 

Goodwill

  183,397   183,397 

Investment in equity-accounted investees

  25,006   111 

Deferred tax assets, net

  3,273   5,294 

Prepaid expenses and other non-current assets

  15,482   13,370 

Total non-current assets

 $411,856  $406,213 

Total assets

  619,828  $604,653 
         

Liabilities and Shareholders' Equity

        

Current liabilities

        

Trade accounts payables

  6,351   20,074 

Accrued expenses

  57,193   57,118 

Short term debt

  3,929   15,505 

Current maturity of long term debt

  2,217   2,180 

Current maturity of operating lease obligation

  17,825   19,327 

Other current liabilities

  43,801   39,987 

Total current liabilities

 $131,316  $154,191 
         

Non-current liabilities

        

Long term debt

  164,240   118,315 

Operating lease liabilities

  41,176   52,052 

Other non-current liabilities

  17,412   15,498 

Deferred tax liabilities, net

  17,616   17,715 

Total non-current liabilities

 $240,444  $203,580 

Total liabilities

 $371,760  $357,771 
         

Stockholders’ equity:

        

Common stock, 60,000,000 non-convertible shares, $0.01 par value, authorized; 40,859,738 and 40,453,462 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

  409   405 

Additional paid-in capital

  292,053   288,700 

Accumulated deficit

  (90,737)  (85,543)

Treasury stock, 57,759 shares and nil shares at September 30, 2021 and December 31, 2020, respectively, at cost

  (329)  - 

Accumulated other comprehensive loss

  (10,072)  (7,286)

Equity attributable to Startek shareholders

 $191,324  $196,276 

Non-controlling interests

  56,744   50,606 

Total stockholders’ equity

 $248,068  $246,882 

Total liabilities and stockholders’ equity

 $619,828  $604,653 

 

See Notes to Consolidated Financial Statements.

 

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Operating Activities

        
Net income/ (loss) $1,387  $(29,417)
         

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

        

Depreciation and amortization

  20,398   21,279 

Impairment of goodwill

  -   22,708 

Profit on sale of property, plant and equipment

  (37)  181 

Provision for doubtful accounts

  23   2,089 

Amortisation of debt issuance cost

  2,980   1,148 

Amortisation of call option premium

  360   - 

Warrant contra revenue

  991   1,173 

Share-based compensation expense

  932   447 

Deferred income taxes

  1,838   1,192 

Share of loss of equity-accounted investees

  1   25 
         

Changes in operating assets and liabilities:

        

Trade accounts receivables

  13,120   26,171 

Prepaid expenses and other assets

  (11,968)  (117)

Trade accounts payables

  (13,409)  (10,155)

Income taxes, net

  (602)  1,300 

Accrued expenses and other liabilities

  6,543   27,421 

Net cash generated from operating activities

 $22,557  $65,445 
         

Investing Activities

        

Purchase of property, plant and equipment

  (13,358)  (10,141)

Investment in equity-accounted investees

  (25,000)  - 

Payments for call option premium

  (3,000)  - 

Proceeds from equity-accounted investees

  102   429 

Net cash used in investing activities

 $(41,256) $(9,712)
         

Financing Activities

        

Proceeds from the issuance of common stock

  1,434   8,379 

Proceeds from long term debt

  165,000   - 

Payments on long term debt

  (117,600)  (4,200)

Payments for loan fees related to long term debt

  (2,794)  - 

Payments on other debt, net

  (13,145)  (35,697)

Common stock repurchase

  (329)  0 

Net cash generated from/ (used in) financing activities

 $32,566  $(31,518)
         

Net increase in cash and cash equivalents

  13,867   24,215 

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

  (952)  (256)

Cash and cash equivalents and restricted cash at beginning of period

  50,559   32,626 

Cash and cash equivalents and restricted cash at end of period

 $63,474  $56,585 
         

Components of cash and cash equivalents and restricted cash

        

Balance with banks

  56,840   48,463 

Restricted cash

  6,634   8,122 

Total cash and cash equivalents and restricted cash

 $63,474  $56,585 
         

Supplemental disclosure of cash flow information

        

Cash paid for interest and other finance costs

  19,985   10,392 

Cash paid for income taxes

  7,884   2,752 

Non-cash warrant contra revenue

  991   1,173 

Non-cash share-based compensation expenses

  932   447 

 

See Notes to Consolidated Financial Statements.

 

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

  

Common Stock

  

Treasury Stock

          

Other Items of OCI

             
  

Shares

  

Amount

  

Shares

  

Amount

  

Additional paid-in capital

  

Accumulated deficit

  

Foreign currency translation

  

Change in fair value of derivative instruments

  

Unrecognised pension cost

  

Equity attributable to Startek shareholders

  

Non-controlling interest

  

Total stockholders' equity

 

Three months ended

                                                

Balance at June 30, 2021

  40,796,179  $408   -  $-  $291,401  $(90,813) $(6,497) $-  $(3,101) $191,398  $54,072  $245,470 

Issuance of common stock

  63,559   1   -   -   150   -   -   -   -   151   -   151 

Share-based compensation expenses

  -   -   -   -   341   -   -   -   -   341   -   341 

Warrant expenses

  -   -   -   -   161   -   -   -   -   161   -   161 

Net income (loss)

  -   -   -   -   -   76   -   -   -   76   3,046   3,122 

Other comprehensive loss for the period

  -   -   -   -   -   -   (179)  -   (295)  (474)  (374)  (848)

Repurchase of common stock

     -   57,759   (329)  -   -   -   -   -   (329)  -   (329)

Balance at September 30, 2021

  40,859,738  $409   57,759  $(329) $292,053  $(90,737) $(6,676) $-  $(3,396) $191,324  $56,744  $248,068 
                                                 

Balance at June 30, 2020

  40,210,299  $401   -  $-  $286,205  $(78,332) $(8,233) $(205) $(2,935) $196,901  $45,720  $242,621 

Issuance of common stock

  78,154   2   -   -   368   -   -   -   -   370   -   370 

Share-based compensation expenses

  -   -   -   -   238   -   -   -   -   238   -   238 

Warrant expenses

  -   -   -   -   410   -   -   -   -   410   -   410 

Net income (loss)

  -   -   -   -   -   367   -   -   -   367   1,385   1,752 

Other comprehensive loss for the period

  -   -   -   -   -   -   936   103   361   1,400   413   1,813 

Balance at September 30, 2020

  40,288,453  $403   -  $-  $287,221  $(77,965) $(7,297) $(102) $(2,574) $199,686  $47,518  $247,204 
                                                 

Nine months ended

                                                

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

  406,276   4   -   -   1,430   -   -   -   -   1,434   -   1,434 

Share-based compensation expenses

  -   -   -   -   932   -   -   -   -   932   -   932 

Warrant expenses

  -   -   -   -   991   -   -   -   -   991   -   991 

Net income (loss)

  -   -   -   -   -   (5,194)  -   -   -   (5,194)  6,581   1,387 

Other comprehensive loss for the period

  -   -   -   -   -   -   (2,147)  8   (647)  (2,786)  (443)  (3,229)

Repurchase of common stock

     -   57,759  $(329)  -   -   -   -   -   (329)  -   (329)

Balance at September 30, 2021

  40,859,738  $409   57,759  $(329) $292,053  $(90,737) $(6,676) $-  $(3,396) $191,324  $56,744  $248,068 
                                                 

Balance at December 31, 2019

  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)  -   -   -   -   -   - 

Issuance of common stock

  1,762,817   18   -   -   8,361   -   -   -   -   8,379   -   8,379 

Share-based compensation expenses

  -   -   -   -   447   -   -   -   -   447   -   447 

Warrant expenses

  -   -   -   -   1,173   -   -   -   -   1,173   -   1,173 

Net income (loss)

  -   -   -   -   -   (31,407)  -   -   -   (31,407)  1,990   (29,417)

Other comprehensive loss for the period

  -   -   -   -   -   -   (2,729)  (577)  (645)  (3,951)  (1,211)  (5,162)

Balance at September 30, 2020

  40,288,453  $403   -  $-  $287,221  $(77,965) $(7,297) $(102) $(2,574) $199,686  $47,518  $247,204 

 

 

STARTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 management solutions. The Company provides omni-channel customer experience, digital transformation, and technology services 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 touchpoints and channels. Startek has more than 46,000 CX experts globally spread across 46 delivery campuses in 13 countries. The Company services over 200 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 repository of digital and omnichannel solutions based on decades of experience in driving growth by putting the customer at the center of our business. Because no one solution fits all, we have crafted solution delivery to suit various industries. Startek has delivery 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 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 sheet. The non-controlling interest in our consolidated net income is reported as "Net income (loss) attributable to non-controlling interests" in our consolidated statement of income (loss).

 

As of December 31, 2020, the consolidated balance sheet 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, 2020.

 

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 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 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 consolidated financial statements.

 

Revenue

 

The Company 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 to Note 4 on "Revenue from Contracts with Customers" for further information.

 

Leases

 

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 sheet. Finance leases are included in property plant and equipment, long-term debt, accrued expenses, and other current liabilities in our consolidated balance 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 the 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 to 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.

 

Rent discounts and deferment of rent that 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.

 

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 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 the 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 to 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 where 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 re-measurement of the local books to USD. Exchange gains and losses are recorded through net income instead 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 the equity method of accounting. Under the equity method, the investment in equity-accounted investees 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 an 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 (loss) 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 the application of the equity method, the Company determines at each reporting date whether there is any objective evidence that the investment in equity-accounted investees is impaired if there has been other than a 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 income/ (loss) of equity-accounted investees' in the consolidated statement of income (loss).

 

Stock-Based Compensation

 

We recognize expenses 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 expenses. We use the Black-Scholes method for valuing stock-based awards. See Note 10, “Share-Based Compensation” for further information.

 

10

 

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 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. 2020-04, “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, 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 as follows:

 

Reporting Units

 

September 30, 2021

  

December 31, 2020

 

Americas

  64,315   64,315 

India

  12,554   12,554 

Malaysia

  47,543   47,543 

Saudi Arabia

  54,840   54,840 

Australia

  4,145   4,145 

Total

 $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 assumptions used in the analysis are based on the Company’s internal budget. The Company projects revenue, operating margins, and cash flows for a period of five years and applies 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 considers past experience, economic trends and inflation, and industry and market trends, including the outbreak of COVID-19. The projections also take 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 markets in which each business operates.

 

As of September 30, 2021, based on the management assessment, we concluded that there is no impairment of goodwill.

 

The following table presents the changes in goodwill during the nine months ended September 30, 2021 and year ended December 31, 2020:

 

  

September 30, 2021

  

December 31, 2020

 

Opening balance

  183,397   219,341 

Impairment

  -   (35,944)

Ending balance

 $183,397  $183,397 

 

Intangible Assets

 

The following table presents our intangible assets:

 

  

As of September 30, 2021

 
  

Gross Intangibles

  Accumulated Amortization  Net Intangibles  Weighted Average Amortization Period (years) 

Customer relationships

  66,220   20,479   45,741   6.5 

Brand

  49,500   14,150   35,350   7.1 

Trademarks

  13,210   2,816   10,394   7.5 

Other intangibles

  2,130   920   1,210   4.9 
  $131,060  $38,365  $92,695     

 

  

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  $30,620  $100,440     

 

As of September 30, 2021, based on the qualitative assessment, we concluded there is no impairment of the Company's intangible assets.

 

Expected future amortization of intangible as of  September 30, 2021 is as follows:

 

Years ending December 31,

 

Amount

 

Remainder of 2021

  2,602 

2022

  10,350 

2023

  10,306 

2024

  10,252 

2025

  10,252 

Thereafter

  48,933 

 

 

 

4.  REVENUE

 

The Company follows a five-step process in accordance with ASC 606, for revenue recognition that focuses on the transfer of control, rather than the 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 most 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.

 

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 the 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 the 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 verticals for the three and nine months ended  September 30, 2021 and 2020 respectively:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

Vertical:

 

2021

  

2020

  

2021

  

2020

 

Telecom

  56,676   54,834   161,961   160,362 

E-commerce & Consumer

  22,434   23,320   74,757   71,884 

Healthcare & Education

  15,315   18,774   73,020   44,757 

Media & Cable

  22,863   25,536   72,435   70,801 

Financial & Business Services

  17,161   12,208   48,374   36,034 

Travel & Hospitality

  12,027   15,063   33,066   45,028 

Technology, IT & Related Services

  5,125   4,813   15,064   14,310 

All other verticals

  21,347   8,549   47,202   23,750 

Gross revenue

  172,948   163,097   525,879   466,926 

Less: Warrant contra revenue

  (161)  (410)  (991)  (1,173)

Net revenue

 $172,787  $162,687  $524,888  $465,753 

 

 

 

5. NET INCOME / (LOSS) PER SHARE

 

Basic earnings per common share are computed based on our weighted average number of common shares outstanding. Diluted earnings per share are 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 and nine months ended  September 30, 2021 and 2020, the following number of shares were used in the computation of basic and diluted earnings per share calculation (in thousands): 

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Shares used in basic earnings per share calculation

  40,788   40,275   40,723   39,143 

Effect of dilutive securities:

                

Stock options

  306   351   448   - 

Restricted stock/Deferred stock units

  -   -   -   - 

Total effects of dilutive securities

  306   351   448   - 

Shares used in dilutive earnings per share calculation

  41,094   40,626   41,171   39,143 

 

The Company always maintained Startek's 2008 Equity Incentive Plan (see Note 10, "Share-based compensation and employee benefit plans" for more information).

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Anti-dilutive securities:

                

Stock options and warrants

  48   211   70   2,334 

 

 

6. IMPAIRMENT LOSSES & RESTRUCTURING/EXIT COST

 

Impairment Loss

 

As of September 30, 2021, based on the management assessment, we concluded that there is no impairment of goodwill.

 

Restructuring / Exit Cost

 

The table below summarizes the balance of accrued restructuring cost, voluntary/involuntary termination costs, and other acquisition-related costs, which are included in other accrued liabilities in our consolidated balance sheet. The changes during the nine months ended  September 30, 2021 and the year ended December 31, 2020.

 

  

Employee related

  

Facilities related

  

Total

 

Balance as of December 31, 2020

  -   25   25 

Accruals/(reversals)

  1,926   38   1,964 

Payments

  (1,868)  (63)  (1,931)

Balance as of September 30, 2021

 $58  $-  $58 

 

  

Employee related

  

Facilities related

  

Total