UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
StarTek, Inc.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of | (I.R.S. employer |
| incorporation or organization) | Identification No.) |
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4610 South Ulster Street, |
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| Suite 150 | |
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| (Address of principal executive offices) | (Zip code) |
(
(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 |
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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.
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).
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 ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company |
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| 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
As of July 30, 2022, there were
STARTEK, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
| PART I - FINANCIAL INFORMATION |
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| ITEM 1. |
FINANCIAL STATEMENTS |
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Consolidated Statement of Income (Loss) and Other Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) |
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Consolidated Balance Sheets as of June 30, 2022(Unaudited) and December 31, 2021 |
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Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited) |
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Consolidated Statement of Stockholders' Equity for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) |
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Note 1 Overview and Basis of Preparation |
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| Note 2 Summary of Significant 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 Losses 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 Private Offer Transaction Cost | 26 | |
| Note 17 Subsequent Events | 26 | |
| ITEM 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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| ITEM 4. |
Controls and Procedures |
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| PART II - OTHER INFORMATION |
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| ITEM 1. |
Legal proceeding | |
| ITEM 1A. |
Risk Factors |
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| ITEM 2. | Unregistered sales of equity securities and use of proceeds | 35 |
| ITEM 3. |
Defaults upon senior securities | 35 |
| ITEM 4. | Mine safety disclosure | 35 |
| ITEM 5. |
Other Information |
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| ITEM 6. |
Exhibits |
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| SIGNATURES |
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the following:
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certain statements, including possible or assumed future results of operations, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; |
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any statements regarding the prospects for our business or any of our services; |
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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 |
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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, 2021 filed with the Securities and Exchange Commission ("SEC") on March 14, 2022 and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. Unless otherwise noted in this report, any description of "us," "we," or "our," refers to Startek, Inc. ("Startek") and its subsidiaries.
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 share and per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Warrant adjustment | ( | ) | ( | ) | ||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of services | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment losses and restructuring/exit cost | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating income | $ | $ | $ | $ | ||||||||||||
| Share of income of equity accounted investee | ||||||||||||||||
| Interest expense, net and other income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Foreign exchange gains (losses), net | ( | ) | ||||||||||||||
| Income before tax expense | $ | $ | $ | $ | ||||||||||||
| Tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Net income (loss) | ||||||||||||||||
| Net income attributable to noncontrolling interests | ||||||||||||||||
| Net income (loss) attributable to Startek shareholders | ( | ) | ||||||||||||||
| Net incom (loss) per common share | ||||||||||||||||
| Basic net income (loss) attributable to Startek shareholders | $ | $ | $ | $ | ( | ) | ||||||||||
| Diluted net income (loss) attributable to Startek shareholders | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Net income attributable to noncontrolling interests | ||||||||||||||||
| Net income (loss) attributable to Startek shareholders | ( | ) | ||||||||||||||
| Other comprehensive income (loss), net of taxes | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative instruments | ||||||||||||||||
| Pension amortization | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income (loss), net of taxes | ||||||||||||||||
| Other comprehensive income (loss) attributable to noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Other comprehensive loss attributable to Startek shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Comprehensive income (loss) | ||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | ||||||||||||||||
| Comprehensive income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ( | ) | ||||||||||
| $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||
See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Trade accounts receivables, net | ||||||||
| Unbilled revenue | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Investment in equity-accounted investees | ||||||||
| Deferred tax assets, net | ||||||||
| Prepaid expenses and other non-current assets | ||||||||
| Total non-current assets | $ | $ | ||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Trade accounts payables | ||||||||
| Accrued expenses | ||||||||
| Short term debt | ||||||||
| Current maturity of long term debt | ||||||||
| Current maturity of operating lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | $ | $ | ||||||
| Non-current liabilities | ||||||||
| Long term debt | ||||||||
| Operating lease liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Deferred tax liabilities, net | ||||||||
| Total non-current liabilities | $ | $ | ||||||
| Total liabilities | $ | $ | ||||||
| Stockholders’ equity | ||||||||
| Common stock, non-convertible shares, $ par value, authorized; and shares issued as of June 30, 2022, and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, and shares as of June 30, 2022, and December 31, 2021, respectively, at cost | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Equity attributable to Startek shareholders | $ | $ | ||||||
| Non-controlling interest | ||||||||
| Total stockholders’ equity | $ | $ | ||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Profit on sale of property, plant and equipment | ( | ) | ( | ) | ||||
| Provision for doubtful accounts | ( | ) | ||||||
| Amortization of debt issuance costs (including loss on extinguishment of debt) | ||||||||
| Amortization of call option premium | ||||||||
| Warrant contra revenue | ||||||||
| Share-based compensation expense | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Share of income of equity-accounted investees | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Trade accounts receivables | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Trade accounts payable | ( | ) | ( | ) | ||||
| Income taxes, net | ( | ) | ||||||
| Accrued expenses and other liabilities | ||||||||
| Net cash provided by operating activities | $ | $ | ||||||
| Investing activities | ||||||||
| Purchase of property, plant and equipment, net | ( | ) | ( | ) | ||||
| Investment in equity-accounted investees | ( | ) | ||||||
| Payments for call option premium | ( | ) | ||||||
| Proceeds from equity-accounted investees | ||||||||
| Net cash used in investing activities | $ | ( | ) | $ | ( | ) | ||
| Financing activities | ||||||||
| Proceeds from the issuance of common stock | ||||||||
| Proceeds from long term debt (net of debt issuance cost paid to lenders) | ||||||||
| Payments of long term debt | ( | ) | ||||||
| Payments for loan fees related to long term debt | ( | ) | ||||||
| Proceeds from a line of credit, net | ||||||||
| Payments of other borrowings, net | ( | ) | ( | ) | ||||
| Common stock repurchases | ( | ) | ||||||
| Net cash (used in)/ provided by financing activities | $ | ( | ) | $ | ||||
| Net increase in cash and cash equivalents | ||||||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash and cash equivalents and restricted cash at beginning of period | ||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Components of cash and cash equivalents and restricted cash | ||||||||
| Balances with banks | ||||||||
| Restricted cash | ||||||||
| Total cash and cash equivalents and restricted cash | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest and other finance cost | ||||||||
| Cash paid for income taxes | ||||||||
| Supplemental disclosure of non-cash activities | ||||||||
| Non-cash warrant contra revenue | ||||||||
| Non-cash share-based compensation expenses | ||||||||
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 March 31, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expenses | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expenses | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Warrant expense | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Six months ended | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expenses | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expenses | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Warrant expense | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||||
As of June 30, 2022 and December 31, 2021, there were 40,304,390 and 40,480,627 shares outstanding respectively of Common Stock, net off treasury stock.
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(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 employees spread across 42 delivery campuses in 13 countries. The Company services over 175 clients across various industries such as Banking and Financial Services, Insurance, Technology, Telecom, Healthcare, Travel and Hospitality, Consumer Goods, Retail, Media & Cable, E-commerce 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 a variety of 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 ("U.S. 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 U.S. 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 include the accounts of Startek, Inc and its subsidiaries 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 attributable to non-controlling interests" in our consolidated statement of income (loss).
As of December 31, 2021, 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 U.S. 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, 2021.
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, 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 assumption about the possible effect of the global macroeconomic conditions, including heightened inflation, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, labor shortages & challenges in supply chain, have the potential to negatively impact the Company. There current macroeconomic conditions may continue or aggravate and could cause the United States economy or other global economies to experience an economic slowdown or recession. We anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States or other major global economy. Although these estimates and assumptions 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" 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.
ASC 842 requires an entity to apply the guidance on impairment of long-lived assets in ASC 360 to right-of-use assets. Therefore, right-of-use assets must be monitored for impairment, like other long-lived non-financial assets, regardless of whether the lease is an operating lease or a finance lease. When impairment indicators exist, an asset (asset group) should be tested to determine whether there is an impairment.
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. Refer to Note 13, "Leases" for additional information.
We have lease agreements with lease and non-lease components, which are generally accounted for separately.
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 "Goodwill and Intengible Assets" 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.
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 U.S. 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 financial and operating policy decisions of the investee but is not control or joint control over those policies.
Investment in equity accounted investees are accounted for using equity method of accounting. Under the equity method, the investment in equity accounted investee is initially recognized at cost and adjusted thereafter for the post acquisition changes in the Company’s share of net assets of the equity accounted investees. Goodwill relating to investment in equity accounted investees, if any, is included in the carrying amount of the investment and is neither amortized nor individually tested for impairment.
In case of Limited Partnerships Investments, there is a specific SEC staff guidance which is included in ASC 323-30-S99-1 which provides that investments in all limited partnerships should be accounted for pursuant to paragraph 970-323-25-6. That guidance requires the use of the equity method unless the investor's interest "is so minor that the limited partner may have virtually no influence over partnership operating and financial policies."
The consolidated statement of income reflects the Company’s share of the results of operations of the equity accounted investees. When there has been a change recognized directly in the equity of the equity accounted investees, the Company recognizes its share of any changes and discloses this, when applicable, in the statement of stockholders' equity. Unrealized gains and losses resulting from transactions between the Company and the equity accounted investment are eliminated to the extent of the interest in the equity accounted investees. The Company’s share of income (loss) of equity accounted investee is shown on the face of the consolidated statement of income (loss).
The financial statements of the equity accounted investees are prepared for the same reporting period as the Company. When necessary, adjustments are made to bring the accounting policies in line with those of the Company. After application of the equity method, the Company determines at each reporting date whether there is any objective evidence that the investment in equity accounted investee 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 investee in the consolidated statement of income (loss)'. Refer to Note 14, "Investment in Equity-Accounted Investees" for additional information and related disclosures.
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.
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."
Consolidated Cash Flow Statement
The Company has aligned the cash flow for comparable period for rectifications made in the previous year to presentation of certain transactions arising from the debt re-financing.
In the fourth quarter of 2021, a correction was made to present the payment of an amount of $
The effect of the above reclassifications are an increase in cash flows from operating activities by $
The Company has evaluated and concluded that the above corrections were not qualitatively material on previously filed quarterly consolidated financial statements. The above presentation errors within the consolidated statements of cash flows did not impact net income, comprehensive income, earnings per share, total equity, or the balance sheet and also detailed footnotes related to the transaction have been given in all quarters and in the annual financial statements for the year ended December 31, 2021. Also, these presentation errors did not impact Company’s debt covenants, its net debt position, segment reporting and cash and cash equivalents.
Restructuring Charges
On an ongoing basis, management assesses the profitability and utilization of our facilities and in some cases, management has chosen to close facilities. Severance payments that occur from reductions in the workforce are in accordance with our post-employment policy and/or statutory requirements that are communicated to all employees; therefore, severance liabilities are recognized when termination of employment is communicated to the employee(s). Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, instead of upon commitment to an exit plan. A significant assumption used in determining the amount of the estimated liability for closing a facility is the estimated liability for future lease payments on vacant facilities. We determine our estimate of sublease payments based on our ability to successfully negotiate early termination agreements with landlords, a third-party broker, or management’s assessment of our ability to sublease the facility based upon the market conditions in which the facility is located. If the assumptions regarding early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain. Refer to Note 6, "Impairment Losses and Restructuring/Exit cost" for additional information.
Reserves/Contingencies for Litigation and Other Matters
We are involved in few claims and legal actions, such as wage and hour, wrongful termination, and other employment-related claims, that arise in the ordinary course of business, some of which may be covered by insurance. The outcomes of these actions are not predictable, but we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity, or capital resources. We record an accrual for legal contingencies when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss. However, if there is a significant increase in the number of these claims, or if we incur greater liabilities than we currently anticipate under one or more claims, it could materially and adversely affect our business, financial condition, results of operations and cash flows.
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 are currently evaluating the impact of the new guidance 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 U.S. 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. This amendment shall apply to any term loan obtained by the Company which is linked to LIBOR. The Company is closely monitoring the market and the announcements from the bank managing the transition to new benchmark interest rates for its term loan benchmarked to LIBOR. Based on announcements by bank, the transition will take effect. The Company is not expecting any material financial impact of transition from LIBOR to alternative benchmark rates on its floating rate borrowings linked to LIBOR.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This standard is effective for annual periods beginning after December 15, 2021 and should be applied either prospectively or retrospectively. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2021-10 within its Form 10-K for the fiscal year 2022.
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The carrying value of goodwill is allocated to reporting units as follows:
| Reporting Units: |
June 30, 2022 |
December 31, 2021 |
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| Americas |
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| India |
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| Malaysia |
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| Saudi Arabia |
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| Australia |
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| Total |
$ | $ | ||||||
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 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.
As of June 30, 2022 and December 31, 2021, based on the qualitative assessment, we concluded that there is no impairment of goodwill.
The following table presents the changes in goodwill during the six months ended June 30, 2022 and year ended December 31, 2021:
| June 30, 2022 |
December 31, 2021 |
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| Opening balance |
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| Impairment |
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| Closing balance |
$ | $ | ||||||
Intangible Assets
The following table presents our intangible assets:
| As of June 30, 2022 |
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| Gross Intangibles |
Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | |||||||||||||
| Customer relationships |
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| Brand |
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| Trademarks |
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| Other intangibles |
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| $ | $ | $ | ||||||||||||||
| As of December 31, 2021 |
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| Gross Intangibles |
Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | |||||||||||||
| Customer relationships |
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| Brand |
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| Trademarks |
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| Other intangibles |
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| $ | $ | $ | ||||||||||||||
As of June 30, 2022, based on the management assessment, we concluded there is
Expected future amortization of intangible as of June 30, 2022 is as follows:
| Year ending December 31, |
Amount |
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| Remainder of 2022 |
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| 2023 |
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| 2024 |
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| 2025 |
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| 2026 |
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| Thereafter |
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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 generally from written contracts with our customers. Our contracts document our customers' agreement 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.
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 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). The unbilled revenue, where the right to invoice has not accrued is recognized based on service delivery estimate.
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 six months ended June 30, 2022 and 2021 respectively:
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| Vertical |
2022 |
2021 |
2022 |
2021 |
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| Telecom |
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| E-commerce & Consumer |
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| Media & Cable |
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| Financial & Business Services |
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| Travel & Hospitality |
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| Healthcare & Education |
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| Technology, IT & Related Services |
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| Other verticals |
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| Gross revenue |
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| Less: Warrant contra revenue |
( |
) | ( |
) | ||||||||||||
| Net revenue |
$ | $ | $ | $ | ||||||||||||
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 six months ended June 30, 2022 and 2021, the following number of shares were used in the computation of basic and diluted earnings per share calculation (in thousands):
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
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| Shares used in basic earnings per share calculation |
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| Effect of dilutive securities: |
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| Stock options |
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| Restricted stock/Deferred stock units |
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| Total effects of dilutive securities |
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