Startek, Inc. - Quarter Report: 2019 June (Form 10-Q)

 

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 June 30, 2019

or 

 

☐

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

 

For the transition period from                to                

 

Commission file number 1-12793

---

 

StarTek, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware	84-1370538
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	Identification No.)
6200 South Syracuse Way, Suite 485
Greenwood Village, Colorado	80111
(Address of principal executive offices)	(Zip code)

 

(303) 262-4500

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	SRT	New York Stock Exchange, Inc.

 

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No ☐ 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No  ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer  ☐	Smaller reporting company  ☒
	Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐  No ☒ 

 

As of July 29, 2019, there were 38,460,155 shares of Common Stock outstanding.

---

 

---

 

---

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Revenue		$	161,283			$	110,223			$	322,425			$	225,318
Warrant contra revenue			(730	)			-				(730	)			-
Net Revenue		$	160,553			$	110,223			$	321,695			$	225,318
Cost of services			132,993				93,340				266,921				187,278
Gross profit			27,560				16,883				54,774				38,040
Selling, general and administrative expenses			24,936				15,257				49,015				29,663
Restructuring and other merger related cost			746				-				1,839				6,257
Operating income			1,878				1,626				3,920				2,120
Share of profit of associates			662				(25	)			1,003				39
Interest expense, net			(4,026	)			(3,273	)			(8,492	)			(7,402	)
Exchange gain / (losses), net			14				(1,868	)			(677	)			(3,146	)
Loss before income taxes			(1,472	)			(3,540	)			(4,246	)			(8,389	)
Income tax expense			730				234				1,113				565
Net loss		$	(2,202	)		$	(3,774	)		$	(5,359	)		$	(8,954	)
Net income/(loss) attributable to non-controlling interests			1,392				(66	)			1,581				906
Net loss attributable to Startek shareholders			(3,594	)			(3,708	)			(6,940	)			(9,860	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			32				(2,518	)			599				(3,185	)
Change in fair value of derivative instruments			413				-				348				-
Pension amortization			(236	)			(483	)			(60	)			(780	)
Comprehensive loss		$	(1,993	)		$	(6,775	)		$	(4,472	)		$	(12,919	)
Comprehensive income attributable to non-controlling interests			1,281				(284	)			1,556				549
Comprehensive loss attributable to Startek shareholders			(3,274	)			(6,491	)			(6,028	)			(13,468	)
Net loss per common share - basic and diluted		$	(0.10	)		$	(0.18	)		$	(0.18	)		$	(0.48	)
Weighted average common shares outstanding - basic and diluted			37,779				20,600				37,779				20,600

---

 

		As of June 30,				As of December 31,
		2019				2018
ASSETS
Current assets:
Cash and cash equivalents		$	15,452			$	16,617
Restricted cash			10,456				7,952
Trade accounts receivable, net			107,646				107,836
Unbilled Revenue			49,265				42,135
Prepaid and other current assets			17,567				18,850
Total current assets		$	200,386			$	193,390
Property, plant and equipment, net			39,638				42,242
Operating lease Right-of-use assets			72,079				-
Intangible assets, net			116,026				121,336
Goodwill			226,505				225,450
Investment in associates			1,767				2,097
Deferred tax assets, net			6,116				5,048
Prepaid expenses and other non-current assets			18,153				15,076
Total assets		$	680,670			$	604,639
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	24,810			$	26,886
Accrued expenses and other current liabilities			77,621				84,881
Short term debt			28,295				21,975
Current maturity of long term debt			14,000				9,800
Current maturity of operating lease liabilities			22,000				-
Current maturity of finance lease obligations			1,074				1,816
Total current liabilities		$	167,800			$	145,358
Long term debt			148,726				152,100
Operating lease liabilities			51,400				-
Other non-current liabilities			14,279				11,907
Deferred tax liabilities, net			18,586				18,901
Total liabilities		$	400,791			$	328,266
Commitments and contingencies			—				—
Stockholders’ equity:
Common stock, 60,000,000 non-convertible shares, $0.01 par value, authorized; 38,452,111 and 37,446,323 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		$	384			$	374
Additional paid-in capital			275,284				267,317
Accumulated other comprehensive loss			(4,634	)			(5,547	)
Accumulated deficit			(38,067	)			(31,127	)
Equity attributable to Startek shareholders		$	232,967			$	231,017
Non-controlling interest			46,912				45,356
Total stockholders’ equity		$	279,879			$	276,373
Total liabilities and stockholders’ equity		$	680,670			$	604,639

---

 

		Six Months Ended June 30,
		2019				2018
Operating Activities
Net loss		$	(5,359	)		$	(8,954	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			14,631				10,749
Profit on sale of property, plant and equipment			(223	)			-
Provision for doubtful accounts			1,169				412
Warrant contra revenue			730				-
Share-based compensation expense			781				-
Deferred income taxes			(1,224	)			(1,203	)
Share of profit of affiliates			(1,003	)			(39	)
Changes in operating assets and liabilities:
Trade accounts receivable			(1,218	)			2,934
Prepaid expenses and other assets			(7,677	)			17,303
Accounts payable			(2,091	)			(1,565	)
Income taxes, net			(2,663	)			(1,508	)
Accrued and other liabilities			(1,280	)			(14,985	)
Net cash (used in) provided by operating activities		$	(5,427	)		$	3,144
Investing Activities
Purchases of property, plant and equipment			(7,302	)			(2,353	)
Distributions received from associates			1,329				18
Net cash used in investing activities		$	(5,973	)		$	(2,335	)
Financing Activities
Proceeds from the issuance of common stock			6,466				-
Payments on long term debt			(4,200	)			(1,400	)
Proceeds from (payments on) other debt, net			10,513				(3,290	)
Net cash provided by (used in) financing activities		$	12,779			$	(4,690	)
Net increase (decrease) in cash and cash equivalents			1,379				(3,881	)
Effect of exchange rate changes on cash and cash equivalents and restricted cash			(40	)			(27	)
Cash and cash equivalents and restricted cash at beginning of period			24,569				21,601
Cash and cash equivalents and restricted cash at end of period		$	25,908			$	17,693
Components of cash and cash equivalents and restricted cash
Balances with banks			15,452				10,986
Restricted cash			10,456				6,707
Total cash and cash equivalents and restricted cash		$	25,908			$	17,693

---

 

		Common Stock								Additional paid-in				Accumulated other comprehensive				Accumulated				Equity attributable to Startek				Non-controlling				Total stockholders'
		Shares				Amount				capital				loss				deficit				shareholders				interest				equity
Three months ended
Balance at March 31, 2019			37,561,744			$	375			$	268,256			$	(4,955	)		$	(34,473	)		$	229,203			$	45,631			$	274,834
Issuance of common stock			890,367				9				5,942				-				-				5,951				-				5,951
Warrant expenses			-				-				730				-				-				730				-				730
Share-based compensation expenses			-				-				356				-				-				356				-				356
Net income (loss)			-				-				-				-				(3,594	)			(3,594	)			1,392				(2,202	)
Other comprehensive loss for the period			-				-				-				321				-				321				(111	)			210
Balance at June 30, 2019			38,452,111			$	384			$	275,284			$	(4,634	)		$	(38,067	)		$	232,967			$	46,912			$	279,879
Balance at March 31, 2018			20,600,100			$	206			$	153,704			$	(402	)		$	(6,815	)		$	146,693			$	47,452			$	194,145
Issuance of common stock			-				-				-				-				-				-				-				-
Net income (loss)			-				-				-				-				(3,708	)			(3,708	)			(66	)			(3,774	)
Other comprehensive loss for the period			-				-				-				(2,783	)			-				(2,783	)			(218	)			(3,001	)
Balance at June 30, 2018			20,600,100			$	206			$	153,704			$	(3,185	)		$	(10,523	)		$	140,202			$	47,168			$	187,370
Six months ended
Balance at December 31, 2018			37,446,323			$	374			$	267,317			$	(5,547	)		$	(31,127	)		$	231,017			$	45,356			$	276,373
Issuance of common stock			1,005,788				10				6,456				-				-				6,466				-				6,466
Warrant expenses			-				-				730				-				-				730				-				730
Share-based compensation expenses			-				-				781				-				-				781				-				781
Net income (loss)			-				-				-				-				(6,940	)			(6,940	)			1,581				(5,359	)
Other comprehensive loss for the period			-				-				-				913				-				913				(25	)			888
Balance at June 30, 2019			38,452,111			$	384			$	275,284			$	(4,634	)		$	(38,067	)		$	232,967			$	46,912			$	279,879
Balance at December 31, 2017			20,600,100			$	206			$	153,704			$	717			$	(663	)		$	153,964			$	46,619			$	200,584
Issuance of common stock			-				-				-				-				-				-				-				-
Net income (loss)			-				-				-				-				(9,860	)			(9,860	)			906				(8,954	)
Other comprehensive loss for the period			-				-				-				(3,902	)			-				(3,902	)			(357	)			(4,259	)
Balance at June 30, 2018			20,600,100			$	206			$	153,704			$	(3,185	)		$	(10,523	)		$	140,202			$	47,168			$	187,370

---

 

1. OVERVIEW AND BASIS OF PREPARATION

 

Unless otherwise noted in this report, any description of "us," "we," or "our," refers to StarTek, Inc. and its subsidiaries (the "Company"). Financial information in this report is presented in U.S. dollars.

 

Business

 

Startek is a global business process outsourcing company that provides omnichannel customer interactions, technology and back-office support solutions for some of the world’s most iconic brands in a variety of vertical markets. Operating under the Startek brand, we help these large global companies connect emotionally with their customers, solve issues, and improve net promoter scores and other customer-facing performance metrics. Through consulting and analytics services, technology-led innovation, and engagement solutions powered by the science of dialogue, we deliver personalized experiences at the point of conversation between our clients and their customers across every interaction channel and phase of the customer journey.

 

Startek has proven results for the multiple services we provide, including sales, order management and provisioning, customer care, technical support, receivables management, and retention programs. We manage programs using a variety of multi-channel customer interactions, including voice, chat, email, social media and back-office support. Startek has facilities in India, United States, Malaysia, Philippines, Australia, South Africa, Canada, Honduras, Jamaica, Kingdom of Saudi Arabia, Argentina, Peru and Sri Lanka.

 

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

 

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

 

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

 

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

 

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

 

Basis of preparation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US-GAAP") for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by US-GAAP for complete financial statements.

 

These financial statements reflect all adjustments (consisting only of normal recurring entries, except as noted) which, in the opinion of management, are necessary for fair presentation. The results of operations for interim periods are not necessarily indicative of full year results.

 

The consolidated balance sheet as of December 31, 2018, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by US-GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-KT for the nine months period ended December 31, 2018.

 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

The consolidated financial statements reflect the financial results of all subsidiaries that are more than 50% owned and over which the Company exerts control. When the Company does not have majority ownership in an entity but exerts significant influence over that entity, the Company accounts for the entity under the equity method of accounting. All intercompany balances are eliminated on consolidation. Where our ownership of a subsidiary was less than 100%, the non-controlling interest is reported in our Condensed Consolidated Balance Sheets. The non-controlling interest in our consolidated net income is reported as "Net income (loss) attributable to non-controlling interests" in our Condensed Consolidated Statements of Comprehensive Income (Loss). These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Form 10-KT for the nine months period ended December 31, 2018 filed with the SEC on March 14, 2019.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, intangibles, impairment of goodwill, purchase price allocations, provision for doubtful receivables, valuation allowances for deferred tax assets, the valuation of derivative financial instruments, measurements of stock-based compensation, assets and obligations related to employee benefits, lease termination liabilities, restructuring costs, and income tax uncertainties and other contingencies. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable. Although these estimates are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates. Any changes in estimates are adjusted prospectively in the Company’s consolidated financial statements.

 

Revenue

 

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

 

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

 

Leases

 

On January 1, 2019, the Company adopted Accounting Standards Codification 842, Leases, (Topic 842) with the transition approach. However, the Company has accounted the lease for the comparable periods as per the Accounting Standards Codification 840.

 

We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use (“ROU”) assets, current maturity of operating lease liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property plant and equipment, long-term debt, accrued expenses and other current liabilities in our consolidated balance sheets.

  

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the balance lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the date of initial application on determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.

 

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

 

 

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

 

Intangible assets acquired in a business combination were recorded at fair value at acquisition date using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over the estimated useful lives and are reviewed for impairment at least annually, or more frequently if indicators of impairment arise.

 

Foreign Currency Matters

    

The Company has operations in Argentina and its functional currency has historically been the Argentine Peso. The Company monitors inflation rates in countries in which it operates as required by US GAAP. Under ASC 830-10-45-12, an economy must be classified as highly inflationary when the cumulative three-year rate exceeds 100%.

 

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

 

Therefore, the Company has considered Argentina to be highly inflationary beginning on July 1, 2018. In accordance with ASC 830, the functional currency of the Argentina business has been changed to USD, which requires remeasurement of the local books to USD. Exchange gains and losses is recorded through net income as opposed to through other comprehensive income as had been done historically. Translation adjustments from prior periods will not be removed from equity.

 

Stock-Based Compensation

 

We recognize expense related to all share-based payments to employees, including grants of employee stock options, based on the grant-date fair values amortized straight-line over the period during which the employees are required to provide services in exchange for the equity instruments. We include an estimate of forfeitures when calculating compensation expense. We use the Black-Scholes method for valuing stock-based awards. See Note 11, “Share-Based Compensation” for further information.

 

Common Stock Warrant Accounting

 

We account for common stock warrants as equity instruments, based on the specific terms of our warrant agreement. For more information refer to Note 11, "Share-Based Compensation."

 

Recent Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”).  The amendment makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other post retirement benefit plans. The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020. The Company is evaluating the impact of the adoption of ASU No. 2018-14 on its financial statement disclosures.

 

In June 2016, FASB issued accounting standard updated on Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We do not expect the adoption of this standards will have a material impact on our consolidated financial statements.

 

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

 

 

 

3. BUSINESS ACQUISITIONS

 

Aegis Transactions

 

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

 

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

 

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

 

The following table presents the purchase price and the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date. These estimates are preliminary, pending final evaluation of certain assets, and therefore are subject to revisions that may result in adjustments to the values presented below:

 

 

 

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

 

 

 

4. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

As of June 30, 2019, the carrying value of goodwill relating to business acquisitions is $226,505. The carrying value of goodwill is allocated to reporting units is as follows:

 

 

We perform a goodwill impairment analysis at least annually (in the fourth quarter of each year) unless indicators of impairment exist in interim periods. The assumptions used in the analysis are based on the Company’s internal budget. The Company projected revenue, operating margins and cash flows for a period of five years, and applied a perpetual long-term growth rate thereafter. These assumptions are reviewed annually as part of management’s budgeting and strategic planning cycles. These estimates may differ from actual results. The values assigned to each of the key assumptions reflect the management’s past experience as their assessment of future trends, and are consistent with external/internal sources of information.

 

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

 

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

 

 

Intangible Assets

 

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

 

 

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

 

 

 

 

5.  REVENUE

 

The company follows a five-step process in accordance with ASC 606, for revenue recognition that focuses on transfer of control, rather than transfer of risks and rewards.

 

Contracts with Customers

 

All of the Company's revenues are derived from written contracts with our customers. Generally speaking, our contracts document our customers' intent to utilize our services and the relevant terms and conditions under which our services will be provided. Our contracts generally do not contain minimum purchase requirements nor do they include termination penalties. Our customers may generally cancel our contract, without cause, upon written notice (generally ninety days). While our contracts do have stated terms, because of the facts stated above, they are accounted for on a month-to-month basis.

 

Our contracts give us the right to bill for services rendered during the period, which for the majority of our customers is a calendar month, with a few customers specifying a fiscal month. Our payment terms vary by client and generally range from due upon receipt to 60-90 days.

 

Performance Obligations

 

We have identified one main performance obligation for which we invoice our customers, which is to stand ready to provide care services for our customers’ clients. A stand-ready obligation is a promise that a customer will have access to services as and when the customer decides to use them. Ours is considered a stand-ready obligation because the delivery of the underlying service (that is, receiving customer contact and performing the associated care services) is outside of our control or the control of our customer.

 

Our stand-ready obligation involves outsourcing of the entire customer care life cycle, including:

 

•

The identification, operation, management and maintenance of facilities, IT equipment, and IT and telecommunications infrastructure

•

Management of the entire human resources function, including recruiting, hiring, training, supervising, evaluating, coaching, retaining, compensating, providing employee benefits programs, and disciplinary activities

 

These activities are all considered an integral part of the production activities required in the service of standing ready to accept calls as and when they are directed to us by our clients.

 

 

Revenue Recognition Methods

 

Because our customers receive and consume the benefit of our services as they are performed and we have the contractual right to invoice for services performed to date, we have concluded that our performance obligation is satisfied over time. Accordingly, we recognize revenue for our services in the month they are performed. This is consistent with our prior revenue recognition model.

 

We are generally entitled to invoice for our services on a monthly basis. We invoice according to the hourly and/or per transaction rates stated in each contract for the various activities we perform. Some contracts include opportunities to earn bonuses or include parameters under which we will incur penalties related to performance in any given month. Bonus or penalty amounts are based on the current month’s performance. Formulas are included in the contracts for calculation of any bonus or penalty. There is no other performance in future periods that will impact the bonus or penalty calculation in the current period. We estimate the amount of the bonus or penalty using the “most likely amount” method and we apply this method consistently. The bonus or penalty calculated is generally approved by the client prior to billing (and revenue being recognized).

 

Practical expedients and exemptions

 

Because the Company’s contracts are essentially month-to-month, we have elected the following practical expedients:

 

•

ASC 606-10-50-14 exempts companies from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less

•

ASC 340-40-25-4 allows companies to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.

•

ASC 606-10-32-2A allows an entity to make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes)

•

ASC 606-10-55-18 allows an entity that has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice.

 

Disaggregated Revenue

 

Revenues by our clients' industry vertical for the Three and Six months ended June 30, 2019 and 2018, respectively:

 

 

 

 

6. NET LOSS PER SHARE

 

Basic net loss per common share is computed based on our weighted average number of common shares outstanding. Diluted earnings per share is computed based on our weighted average number of common shares outstanding plus the effect of dilutive stock options, non-vested restricted stock, and deferred stock units, using the treasury stock method. 

 

When a net loss is reported, potentially issuable common shares are excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.

 

In connection with the Aegis Transactions, the Company maintained Startek's 2008 Equity Incentive Plan (see Note 11, "Share-based compensation and employee benefit plans" for more information). For the three and six months ended June 30, 2019, the following shares were not included in the computation of diluted earnings per share because we reported a net loss and the effect would have been anti-dilutive (in thousands):

 

 

 

7. RESTRUCTURING AND OTHER MERGER RELATED COST

 

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

 

 

 

Employee related

 

In 2018, in conjunction with the closing of the Aegis Transactions, we eliminated a number of positions which were considered redundant, under a company-wide restructuring plan. We recognized provision for employee related costs across a number of geographies and we expect to pay the remaining costs of $673 by the end of third quarter 2019.

 

In March 2019, the Company has closed one of its sites in Argentina. Upon closure, the Company eliminated a number of positions which were considered redundant and recognized provision for employee related costs and we expect to pay the remaining costs of $144 by the end of fourth quarter 2019.

 

Facilities related

 

In 2018, in conjunction with the closing of the Aegis Transactions, we terminated various leases in the United States and the Philippines. We recognized provision for the remaining costs associated with the leases. We expect to pay the remaining costs of $849 by the end of the first quarter of 2021.

 

Upon closure of site in Argentina, the Company recognized provision for facility related costs and we expect to pay the remaining costs of $109 by the end of the fourth quarter of 2019.

 

 

 

 

8.  DERIVATIVE INSTRUMENTS

 

Cash flow hedges

 

Our locations in Canada and the Philippines primarily serve US-based clients. The revenues from these clients is billed and collected in US Dollars, but the expenses related to these revenues are paid in Canadian Dollars and Philippine Pesos. We enter into derivative contracts, in the form of forward contracts and range forward contracts (a transaction where both a call option is purchased and a put option is sold) to mitigate this foreign currency exchange risk. The contracts cover periods commensurate with expected exposure, generally three to twelve months.  We have elected to designate our derivatives as cash flow hedges in order to associate the results of the hedges with forecasted expenses.

 

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

 

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

 

 

Derivative assets and liabilities associated with our hedging activities are measured at gross fair value as described in Note 9, "Fair Value Measurements," and are included in prepaid expense and other current assets and accrued expenses and other current liabilities in our condensed consolidated balance sheets, respectively.

 

Non-designated hedges

 

We have also entered into foreign currency range forward contracts and interest swap contract as required by our lenders. These hedges are not designated hedges under ASC 815, Derivatives and Hedging. These contracts generally do not exceed 3 years in duration.

 

Unrealized gains and losses and changes in fair value of these derivatives are recognized as incurred in Exchange gains (losses), net in the Consolidated Statements of Comprehensive Income (Loss). The following table presents these amounts for the three and six months ended June 30, 2019 and 2018:

 

 

 

9.  FAIR VALUE MEASUREMENTS 

 

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are described below:

Level 1 - Quoted prices for identical instruments traded in active markets.

 

Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3 - Unobservable inputs that cannot be supported by market activity and that are significant to the fair value of the asset, liability, or equity such as the use of certain pricing models, discounted cash flow models and similar techniques that use significant assumptions. These unobservable inputs reflect our own estimates of assumptions that market participants would use in pricing the asset or liability:

 

 

Derivative Instruments

 

The values of our derivative instruments are derived from pricing models using inputs based upon market information, including contractual terms, market prices and yield curves. The inputs to the valuation pricing models are observable in the market, and as such the derivatives are classified as Level 2 in the fair value hierarchy.

 

The following tables set forth our assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. These balances are included in Other current assets and Other current liabilities, respectively, on our balance sheet.

  

 

 

 

 

10. DEBT

 

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

 

 

Working capital facilities

 

The Company has a number of working capital facilities in various countries in which it operates. These facilities provide for a combined borrowing capacity of approximately $33.6 million for a number of working capital products. These facilities bear interest at benchmark rate plus margins between 3.0% and 4.5% and are due on demand. These facilities are collateralized by various Company assets and have a total outstanding balance of $28.3 million as of June 30, 2019.

 

Term loan

 

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

 

Principal payments due on the term loan are as follows:

 

 

The Term loan has a floating interest rate of USD LIBOR plus 4.5% annually for the first year and thereafter the margin will range between 3.75% and 4.5% subject to certain financial ratios.

 

In connection with the Term loan, the Company incurred issuance costs of $7.3 million which are net against the Term loan on the balance sheet. Unamortized debt issuance costs as of June 30, 2019 amount to $4.8 million.

 

Secured revolving credit facility

 

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

 

As of June 30, 2019, we had $33.9 million of outstanding borrowings and our remaining borrowing capacity was $8.46 million. Our borrowings bear interest at one-month LIBOR plus 1.50% to 1.75%, depending on current availability.

 

We have entered into factoring agreements with financial institutions to sell certain of our accounts receivable under non-recourse agreements. These transactions are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. We do not service any factored accounts after the factoring has occurred. We utilize factoring arrangements as part of our financing for working capital. The aggregate gross amount factored under these agreements was $3.01 million for six months ended June 30, 2019.

 

 

BMO Equipment Loan

 

On December 27, 2018, the Company executed an agreement to secure a loan against US and Canadian assets in the amount of $1.79 million at the interest of 7.57% per annum, to be repaid over 2.5 years. The loan was funded in January 2019.

 

Finance lease obligations

 

From time to time and when management believes it to be advantageous, we may enter into other arrangements to finance the purchase or construction of capital assets.

 

 

11. SHARE-BASED COMPENSATION

 

Amazon Warrant

 

On January 23, 2018, Startek entered into the Amazon Transaction Agreement, pursuant to which we agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly owned subsidiary of Amazon (“NV Investment”), a warrant (the “Warrant”) to acquire up to 4,000,000 shares (the “Warrant Shares”) of our common stock, par value $0.01 per share (“Common Stock”), subject to certain vesting events. As a result of an anti-dilution adjustment that was triggered by the 2019 Equity Offering, total number of shares issuable to Amazon have been adjusted from 4,000,000 to 4,002,964. We entered into the Amazon Transaction Agreement in connection with commercial arrangements between us and any of our affiliates and Amazon and/or any of its affiliates pursuant to which we and any of our affiliates provide and will continue to provide commercial services to Amazon and/or any of its affiliates. The vesting of the Warrant shares, described below, is linked to payments made by Amazon or its affiliates (directly or indirectly through third parties) pursuant to the commercial arrangements.

 

The first tranche of 425,532 Warrant Shares vested upon the execution of the Amazon Transaction Agreement. The remainder of the Warrant Shares will vest in various tranches based on Amazon’s payment of up to $600 million to us or any of our affiliates in connection with the receipt by Amazon or any of its affiliates of commercial services from us or any of our affiliates. The exercise price for all Warrant Shares was originally $9.96 per share but was adjusted to $9.95 per share as a result of an anti-dilution adjustment that was triggered by the 2019 Equity Offering. The Warrant Shares are exercisable through January 23, 2026.

 

At June 30, 2019, the second tranche of 212,766 Warrant Shares has vested. The amount of contra revenue attributed to these Warrant Shares is $730. The contra-revenue and equity is estimated and recorded, using the Monte Carlo pricing model, when performance completion is probable, with adjustments in each reporting period until performance is complete in conformance with the requirements in ASC 505 and ASC 718.

 

The Warrant provides for net share settlement that, if elected by the holders, will reduce the number of shares issued upon exercise to reflect net settlement of the exercise price. The Warrant provides for certain adjustments that may be made to the exercise price and the number of shares of common stock issuable upon exercise due to customary anti-dilution provisions based on future events. Vested Warrant Shares are classified as equity instruments.

 

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

 

Share-based compensation

 

Our share-based compensation arrangements include grants of stock options, restricted stock units and deferred stock units under the StarTek, Inc. 2008 Equity Incentive Plan and our Employee Stock Purchase Plan. The compensation expense that has been charged against income for the six months ended June 30, 2019 was $781, and is included in selling, general and administrative expense. As of June 30, 2019, there was $1,544 of total unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 2.04 years.

 

12.  ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Accumulated other comprehensive loss consisted of the following items:

 

 

 

 

13.  SEGMENT AND GEOGRAPHICAL INFORMATION

 

The Company provides business process outsourcing services (“BPO”) to clients in a variety of industries and geographical locations. Our approach is focused on providing our clients with the best possible combination of services and delivery locations to meet our clients' needs in the best and most efficient manner. Our Chief Executive Officer, who has been identified as the Chief Operating Decision Maker ("CODM"), reviews financial information mainly on a consolidated basis.

 

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

 

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

 

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

 

 

Property, plant and equipment, net by geography based on the location of the assets is presented below:

 

 

 

 

14.  LEASES

 

We have operating and finance leases for service centers, corporate offices and certain equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 3-5 years, and some of which include options to terminate the leases within 1 year.

 

The components of lease expense were as follows:

 

 

 

Supplemental cash flow information related to leases was as follows:

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

Maturities of lease liabilities were as follows:

 

 

 

15.  SUBSEQUENT EVENT

 

We plan to transition the remaining commercial Aegis branding to Startek over the coming quarters to better reflect our combined business and bring uniformity across geographies. Any accounting implications on the carrying values and amortization periods of the related intangible assets recognized in past periods would be formally evaluated in the upcoming quarter.

 

 

 

---

---

---

---

---

---

---

---

---