NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(In thousands, except 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 business process outsourcing company operating in
thirteen
countries and employing over
45,000
employees worldwide, serving over
250
clients in a variety of industries.
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.
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, par value
$0.01
per share, at a purchase price of
$6.52
per share, or a total purchase price of
$2,400
, taking its holding approximately
56%
of outstanding common stock. The Company used the proceeds for general corporate purposes.
Please see Note 3, "Business Acquisitions," for further information.
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 ("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 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 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 and equipment, other current liabilities, and other long-term 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 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, 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 ASU 2016-13 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 Aegis Stockholder now holds
20,766,667
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:
|
|
|
|
|
|
|
|
|
Amount
|
|
Stock consideration (number of shares outstanding immediately prior the closing date)
|
16,226,392
|
|
|
Closing share price on July 20, 2018
|
$
|
6.81
|
|
|
Total allocable purchase price
|
$
|
110,502
|
|
|
|
|
|
|
Amount
|
|
Cash and cash equivalents
|
$
|
1,496
|
|
|
Other current assets
|
46,094
|
|
|
Property, plant and equipment, net
|
15,930
|
|
|
Identifiable intangible assets
|
28,960
|
|
|
Goodwill
|
64,337
|
|
|
Other non-current assets
|
3,204
|
|
|
Current liabilities
|
(22,540
|
)
|
|
Non-current liabilities
|
(26,979
|
)
|
|
Preliminary purchase price
|
$
|
110,502
|
|
The goodwill recognized was attributable primarily to the acquired workforce, increased utilization of our global delivery platform and other synergistic benefits. Goodwill from this acquisition is not expected to be deductible for tax purposes.
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill
As of March 31, 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:
|
|
|
|
|
|
|
|
|
Reporting Units
|
|
Amount
|
|
Aegis
|
|
162,168
|
|
|
StarTek
|
|
64,337
|
|
|
Ending balance, March 31, 2019
|
|
$
|
226,505
|
|
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
March 31, 2019
, based on the qualitative assessment, we concluded that goodwill was not impaired.
The following table presents the changes in goodwill during the period:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Opening balance, December 31, 2018
|
|
$
|
225,450
|
|
|
Measurement period adjustments
|
|
1,055
|
|
|
Ending balance, March 31, 2019
|
|
$
|
226,505
|
|
Intangible Assets
The following table presents our intangible assets as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Intangibles
|
|
Accumulated Amortization
|
|
Net Intangibles
|
|
Weighted Average Amortization Period (years)
|
|
Customer relationships
|
|
$
|
65,050
|
|
|
$
|
6,367
|
|
|
$
|
58,683
|
|
|
6.5
|
|
Brand
|
|
49,500
|
|
|
4,971
|
|
|
44,529
|
|
|
7.2
|
|
Trademarks
|
|
14,410
|
|
|
670
|
|
|
13,740
|
|
|
7.6
|
|
Other intangibles
|
|
2,100
|
|
|
326
|
|
|
1,774
|
|
|
4.9
|
|
|
|
$
|
131,060
|
|
|
$
|
12,334
|
|
|
$
|
118,726
|
|
|
|
Expected future amortization of intangible assets as of
March 31, 2019
is as follows:
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Amount
|
|
Remainder of 2019
|
|
$
|
7,816
|
|
|
2020
|
|
10,277
|
|
|
2021
|
|
10,277
|
|
|
2022
|
|
10,277
|
|
|
2023
|
|
10,236
|
|
|
Thereafter
|
|
69,843
|
|
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 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 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 months ended March 31, 2019 and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Vertical:
|
|
2019
|
2018
|
|
Telecom
|
|
65,824
|
|
66,323
|
|
|
E-commerce & Consumer
|
|
24,344
|
|
8,113
|
|
|
Financial & Business Services
|
|
13,320
|
|
15,264
|
|
|
Media & Cable
|
|
21,757
|
|
3,317
|
|
|
Travel & Hospitality
|
|
16,514
|
|
13,641
|
|
|
Healthcare & Education
|
|
10,529
|
|
2,630
|
|
|
Energy, Power & utility
|
|
2,485
|
|
3,016
|
|
|
All other segments
|
|
6,369
|
|
2,791
|
|
|
Total
|
|
$
|
161,142
|
|
$
|
115,095
|
|
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 months ended March 31, 2019, the following shares were not included in the computation of diluted earnings per share because we reported a net loss and the effect would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
Three Months Ended March 31, 2018
|
|
Anti-dilutive securities:
|
|
|
|
|
Stock options
|
|
2,782
|
|
—
|
|
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 three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee related
|
Facilities related
|
Total
|
|
Balance as of December 31, 2018
|
$
|
760
|
|
$
|
2,356
|
|
$
|
3,116
|
|
|
Accruals/(reversals)
|
1,362
|
|
(269
|
)
|
1,093
|
|
|
Payments
|
(735
|
)
|
(614
|
)
|
(1,349
|
)
|
|
Balance as of March 31, 2019
|
$
|
1,387
|
|
$
|
1,473
|
|
$
|
2,860
|
|
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
$446
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
$941
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
$832
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
$162
by the end of the fourth quarter of 2019.
The Company has ceased operations in the United Kingdom on January 12, 2018. Upon closure, the Company recognized provision for the remaining costs associated with the lease of
$1,868
as of March 31, 2018. We expect to pay the remaining costs of
$479
by the end of the second quarter 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 three months ended March 31, 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
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Local Currency Notional Amount
|
|
U.S. Dollar Notional Amount
|
|
Canadian Dollar
|
1,600
|
|
|
$
|
1,254
|
|
|
Philippine Peso
|
2,736,000
|
|
|
51,642
|
|
|
|
|
|
$
|
52,896
|
|
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 months ended March 31, 2019:
|
|
|
|
|
|
|
|
Derivatives not designated under ASC 815
|
For the Three Months Ended March 31, 2019
|
|
Foreign currency forward contracts
|
$
|
26
|
|
|
Interest rate swap
|
$
|
228
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
1,311
|
|
|
$
|
—
|
|
|
$
|
1,311
|
|
|
Total fair value of assets measured on a recurring basis
|
$
|
—
|
|
|
$
|
1,311
|
|
|
$
|
—
|
|
|
$
|
1,311
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
259
|
|
|
$
|
—
|
|
|
$
|
259
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
292
|
|
|
$
|
—
|
|
|
$
|
292
|
|
|
Total fair value of liabilities measured on a recurring basis
|
$
|
—
|
|
|
$
|
551
|
|
|
$
|
—
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
1,388
|
|
|
$
|
—
|
|
|
$
|
1,388
|
|
|
Total fair value of assets measured on a recurring basis
|
$
|
—
|
|
|
$
|
1,388
|
|
|
$
|
—
|
|
|
$
|
1,388
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
276
|
|
|
$
|
—
|
|
|
$
|
276
|
|
|
Total fair value of liabilities measured on a recurring basis
|
$
|
—
|
|
|
$
|
307
|
|
|
$
|
—
|
|
|
$
|
307
|
|
10. DEBT
The below table presents details of the Company's debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Short term debt and current portion of long term debt
|
|
|
|
|
|
Working capital facilities
|
|
$
|
26,522
|
|
|
$
|
21,975
|
|
|
Term loan
|
|
12,600
|
|
|
9,800
|
|
|
Capital lease obligations
|
|
1,394
|
|
|
1,816
|
|
|
Total
|
|
$
|
40,516
|
|
|
$
|
33,591
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
|
|
|
Term loan, net of debt issuance costs
|
|
$
|
116,631
|
|
|
$
|
120,462
|
|
|
Equipment loan
|
|
1,551
|
|
|
—
|
|
|
Secured revolving credit facility
|
|
31,215
|
|
|
31,152
|
|
|
Capital lease obligations
|
|
185
|
|
|
486
|
|
|
Total
|
|
$
|
149,582
|
|
|
$
|
152,100
|
|
Working capital facilities
The Company has a number of working capital facilities in various countries in which it operates. These facilities provide for a combined borrowing capacity of approximately
$33.6 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
$26.5 million
as of March 31, 2019.
Term loan
On October 27, 2017, the Company entered into a Senior Term Agreement ("Term loan") to provide funding for the acquisition of ESM Holdings Limited and its subsidiaries in the amount of
$140 million
for a
five
year term. The Term loan was fully funded on November 22, 2017 and is to be repaid based on a quarterly repayment schedule beginning six months after the first utilization date.
Principal payments due on the term loan are as follows:
|
|
|
|
|
|
|
|
Years
|
Amount
|
|
|
2019
|
8,400
|
|
|
2020
|
16,800
|
|
|
2021
|
21,000
|
|
|
2022
|
88,200
|
|
|
|
$
|
134,400
|
|
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 March 31, 2019 amount to
$5.2 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
March 31, 2019
, we had
$31.22 million
of outstanding borrowings and our remaining borrowing capacity was
$8.82 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
$1.55 million
for three months ended March 31, 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
$1.65 million
at the interest of
7.568%
per annum, to be repaid over
2.5 years
. The loan was funded in January 2019.
Capital 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. 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 will be
$9.96
per share. The Warrant Shares are exercisable through January 23, 2026. As of
March 31, 2019
, no additional Warrant Shares have vested.
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 three months ended March 31, 2019 was
$425
, and is included in selling, general and administrative expense. As of March 31, 2019, there was
$1,730
of total unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of
2.29
years.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment
|
|
Derivatives Accounted for as Cash Flow Hedges
|
|
Defined Benefit Plan
|
|
Equity attributable to Startek shareholders
|
|
Non-controlling interests
|
|
Total
|
|
Balance at December 31, 2018
|
$
|
(3,989
|
)
|
|
$
|
(15
|
)
|
|
$
|
(1,543
|
)
|
|
$
|
(5,547
|
)
|
|
$
|
(1,243
|
)
|
|
$
|
(6,790
|
)
|
|
Foreign currency translation
|
567
|
|
|
—
|
|
|
—
|
|
|
567
|
|
|
—
|
|
|
567
|
|
|
Unrealized losses
|
—
|
|
|
(65
|
)
|
|
—
|
|
|
(65
|
)
|
|
—
|
|
|
(65
|
)
|
|
Pension remeasurement
|
—
|
|
|
—
|
|
|
90
|
|
|
90
|
|
|
86
|
|
|
176
|
|
|
Balance at March 31, 2019
|
$
|
(3,422
|
)
|
|
$
|
(80
|
)
|
|
$
|
(1,453
|
)
|
|
$
|
(4,955
|
)
|
|
$
|
(1,157
|
)
|
|
$
|
(6,112
|
)
|
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, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
Revenue:
|
|
|
|
|
India
|
27,346
|
|
|
32,934
|
|
|
Middle East
|
31,118
|
|
|
32,248
|
|
|
Malaysia
|
17,079
|
|
|
14,490
|
|
|
Argentina
|
11,111
|
|
|
16,344
|
|
|
United States
|
29,744
|
|
|
—
|
|
|
Australia
|
7,356
|
|
|
9,809
|
|
|
Philippines
|
12,809
|
|
|
—
|
|
|
Rest of World
|
24,579
|
|
|
9,270
|
|
|
Total
|
$
|
161,142
|
|
|
$
|
115,095
|
|
Property, plant and equipment, net by geography based on the location of the assets is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
As on March 31, 2019
|
|
As on December 31, 2018
|
|
Property, plant and equipment, net:
|
|
|
|
|
India
|
12,442
|
|
|
13,287
|
|
|
Middle East
|
5,983
|
|
|
6,507
|
|
|
Malaysia
|
5,093
|
|
|
5,058
|
|
|
Argentina
|
1,277
|
|
|
1,341
|
|
|
United States
|
5,341
|
|
|
5,349
|
|
|
Australia
|
311
|
|
|
345
|
|
|
Philippines
|
2,376
|
|
|
2,835
|
|
|
Rest of World
|
8,815
|
|
|
7,520
|
|
|
Total
|
$
|
41,638
|
|
|
$
|
42,242
|
|
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:
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
|
|
|
Operating lease cost
|
$
|
7,540
|
|
|
|
|
|
Finance lease cost:
|
|
|
Amortization of right-of-use assets
|
484
|
|
|
Interest on lease liabilities
|
28
|
|
|
Total finance lease cost
|
$
|
512
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
7,563
|
|
|
Operating cash flow from finance leases
|
28
|
|
|
Financing cash flows from finance leases
|
653
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
76,983
|
|
|
Finance lease
|
—
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
Operating Leases
|
|
|
Operating lease right-of-use assets
|
$
|
76,983
|
|
|
Other current liabilities
|
23,204
|
|
|
Operating lease liabilities
|
55,016
|
|
|
Total operating lease liabilities
|
$
|
78,220
|
|
|
|
|
|
Finance Leases
|
|
|
Property and equipment, at cost
|
10,899
|
|
|
Accumulated depreciation
|
(8,679
|
)
|
|
Property and equipment, at net
|
$
|
2,220
|
|
|
Other current liabilities
|
1,394
|
|
|
Other long-term liabilities
|
184
|
|
|
Total finance lease liabilities
|
$
|
1,578
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
Weighted average remaining lease term
|
|
|
Operating leases
|
5 years
|
|
|
Finance leases
|
1 year
|
|
|
|
|
|
Weighted average discount rate
|
|
|
Operating leases
|
7.48
|
%
|
|
Finance leases
|
4.38
|
%
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
Finance leases
|
|
Year ending December, 31
|
|
|
|
Remaining of 2019
|
$
|
28,054
|
|
$
|
1,295
|
|
|
2020
|
20,525
|
|
312
|
|
|
2021
|
13,316
|
|
14
|
|
|
2022
|
10,132
|
|
—
|
|
|
2023
|
6,636
|
|
—
|
|
|
Thereafter
|
13,202
|
|
—
|
|
|
Total lease payments
|
$
|
91,865
|
|
$
|
1,621
|
|
|
Less imputed interest
|
(13,645
|
)
|
(43
|
)
|
|
Total
|
$
|
78,220
|
|
$
|
1,578
|
|
15. SUBSEQUENT EVENT
The Company evaluated subsequent events through May 07, 2019, the date of these financial statements were issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements.