UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
StarTek, Inc.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. employer |
incorporation or organization) | Identification No.) |
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Suite 150, | |
(Address of principal executive offices) | (Zip code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | 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
As of May 5, 2023, there were
STARTEK, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
PART I - FINANCIAL INFORMATION |
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ITEM 1. |
FINANCIAL STATEMENTS |
Page |
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Consolidated Statement of Income (Loss) and Other Comprehensive Income (Loss) for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
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Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022 |
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Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
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Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
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Note 1 Overview and Basis of Preparation |
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Note 2 Summary of Significant Accounting Policies | 10 | |
Note 3A Discontinued Operations and Held for Sale-Contact Center Company | 14 | |
Note 3B Discontinued Operations and Held for Sale- Argentina | 16 | |
Note 4 Goodwill and Intangible Assets | 18 | |
Note 5 Revenue | 19 | |
Note 6 Net Income / (Loss) Per Share | 21 | |
Note 7 Impairment Losses and Restructuring / Exit cost | 21 | |
Note 8 Derivative Instruments | 22 | |
Note 9 Fair Value Measurements | 22 | |
Note 10 Debt | 23 | |
Note 11 Share-Based Compensation | 24 | |
Note 12 Accumulated Other Comprehensive Loss | 24 | |
Note 13 Segment Reporting | 25 | |
Note 14 Leases | 26 | |
Note 15 Common Stock | 27 | |
Note 16 Subsequent Events | 27 | |
ITEM 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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ITEM 4. |
Controls and Procedures |
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PART II - OTHER INFORMATION |
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ITEM 1. |
Legal proceeding | |
ITEM 1A. |
Risk Factors |
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ITEM 2. | Unregistered sales of equity securities and use of proceeds | 34 |
ITEM 3. |
Defaults upon senior securities | 34 |
ITEM 4. | Mine safety disclosure | 34 |
ITEM 5. |
Other Information |
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ITEM 6. |
Exhibits |
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SIGNATURES |
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the following:
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certain statements, including possible or assumed future results of operations, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; |
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any statements regarding the prospects for our business or any of our services; |
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any statements preceded by, followed by or that include the words “may,” “will,” “should,” “seeks,” “believes,” “expects,” “anticipates,” “intends,” “continue,” “estimate,” “plans,” “future,” “targets,” “predicts,” “budgeted,” “projections,” “outlooks,” “attempts,” “is scheduled,” or similar expressions; and |
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other statements regarding matters that are not historical facts. |
Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations, include, but are not limited to, those items described herein or set forth in the Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission ("SEC") on March 28, 2023 and this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. Unless otherwise noted in this report, any description of "us," "we," or "our," refers to Startek, Inc. ("Startek") and its subsidiaries.
FILING STATUS
In accordance with the SEC's expanded definition of Smaller Reporting Companies effective September 10, 2018, Startek qualifies for Smaller Reporting Company status. As such, it has decided to take advantage of the relief provided from Part 1, Item 3.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Revenue | ||||||||
Cost of services | ( | ) | ( | ) | ||||
Gross profit | ||||||||
Selling, general and administrative expenses | ( | ) | ( | ) | ||||
Impairment losses and restructuring/exit cost | ( | ) | ||||||
Operating income (loss) | ||||||||
Share of income (loss) of equity accounted investee | ( | ) | ||||||
Interest expense and other income (expense), net | ( | ) | ( | ) | ||||
Foreign exchange gains (losses), net | ( | ) | ||||||
Income (loss) from continuing operations before tax expenses | ( | ) | ||||||
Tax expenses | ( | ) | ( | ) | ||||
Income (loss) from continuing operations, net of tax (A) | ( | ) | ( | ) | ||||
Income (loss) before income tax expenses from discontinued operations | ||||||||
Tax expenses of discontinued operations | ( | ) | ( | ) | ||||
Income (loss) from discontinued operations, net of tax (B) | ||||||||
Net income (loss) (A+B) | ||||||||
Income (loss) from continuing operations (A) | ||||||||
Income (loss) attributable to noncontrolling interests | ||||||||
Income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
( | ) | ( | ) | |||||
Income (loss) from discontinued operations (B) | ||||||||
Income (loss) attributable to noncontrolling interests | ||||||||
Income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
Net income (loss) (A+B) | ||||||||
Net income (loss) attributable to noncontrolling interests | ||||||||
Net income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
Net income (loss) per common share from continuing operations | ||||||||
Basic net income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
Diluted net income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
Net income (loss) per common share from discontinued operations | ||||||||
Basic net income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
Diluted net income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
Net income (loss) per common share from continuing and discontinued operations | ||||||||
Basic net income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
Diluted net income (loss) attributable to Startek shareholders | ( | ) | ( | ) | ||||
Weighted average common shares outstanding | ||||||||
Basic | ||||||||
Diluted |
See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31, |
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2023 |
2022 |
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Net income (loss) (A+B) |
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Net income (loss) attributable to non-controlling interests |
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Net income (loss) attributable to Startek shareholders |
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Other comprehensive income (loss), net of taxes from continuing operations: |
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Foreign currency translation adjustments |
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Pension amortization |
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Other comprehensive income (loss) from continuing operations |
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Other comprehensive income (loss), net of taxes from discontinued operations: |
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Foreign currency translation adjustments |
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Pension amortization |
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Other comprehensive income (loss) from discontinuing operations |
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Other comprehensive income (loss) from continuing and discontinuing operations |
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Other comprehensive income (loss), net of taxes from continuing operations |
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Attributable to noncontrolling interest |
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Attributable to Startek shareholders |
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Other comprehensive income (loss), net of taxes from discontinued operations |
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Attributable to noncontrolling interests |
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Attributable to Startek shareholders |
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Comprehensive income (loss) from continuing and discontinuing operations |
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Attributable to noncontrolling interests |
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Attributable to Startek shareholders |
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See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
March 31, | December 31, | |||||||
2023 | 2022 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | ||||||||
Restricted cash | ||||||||
Trade accounts receivables, net | ||||||||
Unbilled revenue | ||||||||
Prepaid expenses and other current assets | ||||||||
Assets classified as held for sale | ||||||||
Total current assets | ||||||||
Non-current assets | ||||||||
Property, plant and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Intangible assets, net | ||||||||
Goodwill | ||||||||
Deferred tax assets, net | ||||||||
Prepaid expenses and other non-current assets | ||||||||
Total non-current assets | ||||||||
Total assets | ||||||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities | ||||||||
Trade accounts payables | ||||||||
Accrued expenses | ||||||||
Short term debt | ||||||||
Current maturity of long term debt | ||||||||
Current maturity of operating lease liabilities | ||||||||
Other current liabilities | ||||||||
Liabilities classified as held for sale | ||||||||
Total current liabilities | ||||||||
Non-current liabilities | ||||||||
Long term debt | ||||||||
Operating lease liabilities | ||||||||
Other non-current liabilities | ||||||||
Deferred tax liabilities, net | ||||||||
Total non-current liabilities | ||||||||
Total liabilities | ||||||||
Stockholders’ equity | ||||||||
Common stock, non-convertible shares, $ par value, authorized; and shares issued as of March 31, 2023 and December 31, 2022 respectively. | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Treasury stock, shares as of March 31, 2023 and December 31, 2022, at cost | ( | ) | ( | ) | ||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Equity attributable to Startek shareholders | ||||||||
Non-controlling interest | ||||||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity |
See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Operating activities | ||||||||
Income from continuing and discontinued operations | ||||||||
less: Income (loss) from discontinued operations, net of tax | ||||||||
Income (loss) from continuing operations, net of tax | ( | ) | ( | ) | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | ||||||||
Profit on sale of property, plant and equipment | ( | ) | ( | ) | ||||
Provision/(reversal) for doubtful accounts | ( | ) | ||||||
Amortization of debt issuance costs (including loss on extinguishment of debt) | ||||||||
Amortization of call option premium | ||||||||
Mark to market gain on derivative instrument | ( | ) | ||||||
Share-based compensation expense | ||||||||
Deferred income taxes | ( | ) | ( | ) | ||||
Share of income (loss) of equity accounted investee | ||||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivables (including unbilled revenue) | ( | ) | ||||||
Prepaid expenses and other assets | ( | ) | ( | ) | ||||
Trade accounts payable | ( | ) | ||||||
Income taxes, net | ( | ) | ( | ) | ||||
Accrued expenses and other liabilities | ( | ) | ||||||
Net cash generated from/used in by operating activities from continuing operations | ( | ) | ||||||
Net cash generated from/used in operating activities from discontinued operations | ( | ) | ||||||
Net cash generated from operating activities | ( | ) | ||||||
Investing activities | ||||||||
Purchase of property, plant and equipment and intangible assets, net | ( | ) | ( | ) | ||||
Net cash generated from/used in investing activities from continuing operations | ( | ) | ( | ) | ||||
Net cash generated from/used in investing activities from discontinued operations | ( | ) | ( | ) | ||||
Net cash generated from/used in investing activities | ( | ) | ( | ) | ||||
Financing activities | ||||||||
Proceeds from the issuance of common stock | ||||||||
Payments of long term debt | ( | ) | ||||||
Proceeds from a line of credit, net | ||||||||
Payments of other borrowings, net | ( | ) | ( | ) | ||||
Common stock repurchases | ( | ) | ||||||
Net cash generated from/used in financing activities from continuing operations | ( | ) | ( | ) | ||||
Net cash generated from/used in financing activities from discontinued operations | ( | ) | ( | ) | ||||
Net cash generated from/used in financing activities | ( | ) | ( | ) | ||||
Net increase in cash and cash equivalents | ( | ) | ( | ) | ||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ) | ( | ) | ||||
Cash and cash equivalents and restricted cash at beginning of period | ||||||||
Cash and cash equivalents and restricted cash at end of period | ||||||||
Less: Cash and cash equivalents from discontinued operations | ( | ) | ( | ) | ||||
Cash and cash equivalents and restricted cash of continuing operations at end of period | ||||||||
Components of cash and cash equivalents and restricted cash | ||||||||
Balances with banks | ||||||||
Restricted cash | ||||||||
Total cash and cash equivalents and restricted cash | ||||||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest and other finance cost | ||||||||
Cash paid for income taxes | ||||||||
Supplemental disclosure of non-cash activities | ||||||||
Non-cash share-based compensation expenses |
See Notes to Consolidated Financial Statements.
STARTEK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
Common stock |
Treasury Stock |
Additional paid in capital |
Accumulated earnings (deficit) |
Other items of OCI |
Non controlling interest |
Total equity |
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Shares |
Amount |
Shares |
Amount |
Foreign currency translation |
Change in fair value of derivative instruments |
Unrecognised pension cost |
Total |
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Balance at December 31, 2022 |
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Transition period adjustment pursuant to ASC 326, net of tax |
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Issuance of common stock |
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Share-based compensation expenses |
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Income (loss) from continuing operations |
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Income (loss) from discontinued operations |
- | - | ( |
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Other comprehensive income (loss) from continuing operations |
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Other comprehensive income (loss) from discontinued operations |
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Repurchase of common stock |
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Balance at March 31, 2023 |
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Balance at December 31, 2021 |
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Issuance of common stock |
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Share-based compensation expenses |
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Net income (loss) from continuing operations |
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Income (loss) from discontinued operations |
- | - | ( |
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Other comprehensive income (loss) from Continuing operations |
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Other comprehensive income (loss) from discontinued operations |
- | - | ( |
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Repurchase of common stock |
( |
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Balance at March 31, 2022 |
( |
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As of March 31, 2023 and March 31, 2022, there were 40,294,010 and 40,281,045 shares outstanding respectively of Common Stock, net off treasury stock.
*Total face value of common stock issued during the three months ended March 31, 2023 is $0.35.
STARTEK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(In thousands, except share and per share data)
(Unaudited)
1. OVERVIEW AND BASIS OF PREPARATION
Unless otherwise noted in this report, any description of "us," "we," or "our," refers to Startek, Inc. and its subsidiaries (the "Company"). Financial information in this report is presented in U.S. dollars.
Business
Startek is a leading global provider of technology-enabled business process management solutions. The Company provides omni-channel customer experience, digital transformation, and technology services to some of the finest brands globally. Startek is committed to impacting clients’ business outcomes by focusing on enhancing customer experience and digital enablement across all touchpoints and channels. Startek has more than 32,000 employees globally, spread across in
The Company offers a repository of digital and omnichannel solutions based on decades of experience in driving growth by putting the customer at the center of our business. Because no one solution fits all, we have crafted solution delivery to suit a variety of industries. Startek has delivery campuses across India, United States, Malaysia, Philippines, Australia, South Africa, Canada, Honduras, Jamaica, Peru and Sri Lanka.
During the previous year, the Company had classified Middle East and Argentina operations as 'Held for Sale and Discontinued Operations' and accordingly discussion in the business section pertains to continuing operations of the Company.
Basis of preparation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by U.S. GAAP for complete financial statements.
These consolidated financial statements reflect all adjustments (consisting only of normal recurring entries, except as noted) which, in the opinion of management, are necessary for fair presentation. The results of operations for interim periods are not necessarily indicative of full-year results.
The consolidated financial statements reflects the financial results of all subsidiaries that are more than 50% owned and over which the Company exerts control. When the Company does not have majority ownership in an entity but exerts significant influence over that entity, the Company accounts for the entity under the equity method of accounting. All intercompany balances are eliminated on consolidation. Where our ownership of a subsidiary was less than 100%, the non-controlling interest is reported in our consolidated balance sheet. The non-controlling interest in our consolidated net income is reported as "Net income attributable to non-controlling interests" in our consolidated statement of income (loss).
As of December 31, 2022, the consolidated balance sheet included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by U.S. GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.
The figures for the corresponding previous year have been regrouped/reclassified wherever necessary, to make them comparable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, intangibles, impairment of goodwill, valuation allowances for deferred tax assets, leases, provision for doubtful debts and restructuring costs. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable and management has made assumption about the possible effect of the global macroeconomic conditions, including heightened inflation, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, labor shortages & challenges in supply chain, have the potential to negatively impact the Company. There current macroeconomic conditions may continue or aggravate and could cause the United States economy or other global economies to experience an economic slowdown or recession. We anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States or other major global economy. Although these estimates and assumptions are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates. Any changes in estimates are adjusted prospectively in the Company’s consolidated financial statements.
Revenue
The Company utilizes a five-step process given in ASC 606, for revenue recognition that focuses on the transfer of control, rather than the transfer of risks and rewards. It also provided additional guidance on accounting for contract acquisition and fulfillment costs. Refer Note 5 on "Revenue" for further information.
Allowance for Expected Credit Losses
The Company maintains an allowance for current expected credit losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses which are adjusted to current market and economic conditions and a reasonable and supportable forecast. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Refer Note 5 on "Revenue" for further information.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use (“ROU”) assets, current maturity of operating lease liabilities, and operating lease liabilities in our consolidated balance sheet. Finance leases are included in property plant and equipment, long-term debt, accrued expenses and other current liabilities in our consolidated balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the balance lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the date of initial application on determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain to exercise that option. Lease expense is recognized on a straight-line basis over the lease term.
ASC 842 requires an entity to apply the guidance on impairment of long-lived assets in ASC 360 to right-of-use assets. Therefore, right-of-use assets must be monitored for impairment, like other long-lived non-financial assets, regardless of whether the lease is an operating lease or a finance lease. When impairment indicators exist, an asset (asset group) should be tested to determine whether there is an impairment.
We have lease agreements with lease and non-lease components, which are generally accounted for separately.
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Property, Plant and Equipment
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Property, plant, and equipment, are stated at depreciated cost. Additions and improvement activities are capitalized. Maintenance and repairs are expensed as incurred. Assets held under finance leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Depreciation and amortization is computed using the straight-line method based on their estimated useful lives, as follows: |
Estimated Useful Life | |||
Buildings and building improvements |
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Telephone and computer equipment |
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Furniture, fixtures, and miscellaneous equipment |
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Software |
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We depreciate leasehold improvements associated with operating leases over the shorter of 15 years or remaining life of the lease. Amortization expense related to assets recorded under capital leases is included in depreciation and amortization expense. |
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Impairment of Long-Lived Assets
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The Company evaluates potential impairments of long-lived assets when it determines that the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more indicators of impairment (for examples, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group, a significant decrease in the market price of a long-lived asset or asset group, a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life), we evaluate the projected undiscounted cash flows related to the assets. If these cash flows are less than the carrying values of the assets, we measure the impairment based on the excess of the carrying value of the long-lived asset over the long-lived asset’s fair value. Our projections contain assumptions pertaining to anticipated levels of utilization and revenue that may or may not be under contract but are based on our experience and/or projections received from our customers. |
Goodwill and Intangible Assets
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Goodwill |
Goodwill represents the cost of acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased. Goodwill is not amortized but is tested for impairment at least on an annual basis on December 31, based on a number of factors, including operating results, business plans and future cash flows. The Company performs an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Based on the assessment of events or circumstances, the Company performs a quantitative assessment of goodwill impairment if it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on the quantitative impairment analysis, the carrying value of a reporting unit exceeds the fair value of the reporting unit, an impairment loss is recognized in an amount equal to the excess. In addition, the Company performs a quantitative assessment of goodwill impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Refer Note 4, "Goodwill and Intangible Assets" and Note 7, "Impairment Losses and Restructuring/Exit cost" for information and related disclosures. |
Intangible Assets |
We amortize all acquisition-related intangible assets that are subject to amortization using the straight-line method over the estimated useful life based on economic benefit as follows: |
Estimated Useful Life | |||
Customer Relationship | 8 - 13.5 years | ||
Brand | 13.5 years | ||
Trademarks |
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Developed Technology |
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We perform a review of intangible assets to determine if facts and circumstances indicate that the useful life is shorter than we had originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, we assess recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, we accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. 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 if indicators of impairment arise. Refer Note 4, "Goodwill and Intangible Assets" for information and related disclosures. |
Fair Value Measurements
The carrying value of our cash and cash equivalents, accounts receivable, notes receivable, accounts payable, and restructuring liabilities approximate fair value because of their short-term nature. Our debt has a variable interest rate, so the carrying amount approximates fair value because interest rates on these instruments approximate the interest rate on debt with similar terms available to us.
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Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.
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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:
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Level 1 - Quoted prices for identical instruments traded in active markets.
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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.
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Level 3 - Unobservable inputs that cannot be supported by market activity and that are significant to the fair value of the asset or liability, 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.
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Refer to Note 9, “Fair Value Measurements,” for additional information on how we determine fair value for our assets and liabilities. |
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Cash and cash equivalents and restricted cash |
We consider cash equivalents to be short-term, highly liquid investments readily convertible to known amounts of cash and so near their maturity at purchase that they present insignificant risk of changes in value because of changes in interest rates. Restricted cash consists of margin money deposit that is contractually restricted as to usage or withdrawal. |
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Borrowing costs |
Borrowing costs include interest as well as ancillary costs such as amortization of financing fees or charges and premium or discount on the borrowings. Borrowing costs (loan processing fee) are capitalized and amortized in the consolidated statement of income using effective interest method. Refer to Note 10, "Debt" for further information and disclosures. |
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Interest and dividend income
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Interest revenue is recognized on an accrual basis taking into account the interest rates applicable to the financial assets. |
Dividend income is recognized when the Company’s right to receive such income is established by the reporting date. |
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Government grants and subsidies
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Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received, and the Company will comply with all attached conditions. Government grants received on capital expenditure are generally deducted in arriving at the carrying amount of the asset purchased. Grants for revenue expenditure are netted against the cost incurred by the Company. Where retention of a government grant is dependent on the Company satisfying certain criteria, it is initially recognized as deferred income. When the criteria for retention have been satisfied, the deferred income balance is netted against the asset purchased. Government grant in the nature of export incentive is recognized as revenue. |
Restructuring Charges
On an ongoing basis, management assesses the profitability and utilization of our facilities and in some cases, management has chosen to close facilities. Severance payments that occur from reductions in the workforce are in accordance with our post-employment policy and/or statutory requirements that are communicated to all employees; therefore, severance liabilities are recognized when termination of employment is communicated to the employee(s). Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, instead of upon commitment to an exit plan. A significant assumption used in determining the amount of the estimated liability for closing a facility is the estimated liability for future lease payments on vacant facilities. We determine our estimate of sublease payments based on our ability to successfully negotiate early termination agreements with landlords, a third-party broker, or management’s assessment of our ability to sublease the facility based upon the market conditions in which the facility is located. If the assumptions regarding early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain. Refer to Note 7, "Impairment Losses and Restructuring/Exit cost" for additional information.
Derivative Instruments and Hedging Activities
In the ordinary course of business, the Company uses certain derivative financial instruments to reduce business risks which arise from its exposure to foreign exchange and interest rate fluctuations associated with borrowings (cash flow hedges). When the Company opts to undertake hedge accounting, the Company documents, at the inception of the hedging transaction, the economic relationship between hedging instruments and hedged items including whether the hedging instrument is expected to offset changes in cash flows or fair values of hedged items. The Company documents its risk management objective and strategy for undertaking various hedge transactions at the inception of each hedge relationship. Derivatives are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged and the type of hedge relationship designated.
Cash flow hedges that qualify for hedge accounting
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges, is recognised through OCI and as cash flow hedging reserve within equity, limited to the cumulative change in fair value of the hedged item on a present value basis from the inception of the hedge. The gain or loss relating to the ineffective portion is recognised immediately in the Statement of Income (loss). Amounts accumulated in equity are reclassified to the Statement of Income (loss).
Derivatives that are not designated as hedges
When derivative contracts to hedge risks are not designated as hedges, the gains or losses on subsequent measurement of such contracts are recognised through Consolidated Statement of Income (loss). |
Presentation |
The entire fair value of a derivative contract is classified as a noncurrent asset or liability when the remaining maturity of the contract exceeds 12 months; it is classified as a current asset or liability when the remaining maturity of the contract does not exceed 12 months. Refer to Note 8 "Derivative Instruments" to the financial statements for more details.
Foreign Currency Matters
The Company has operations in Argentina (classified as discontinued operations) and its functional currency has historically been the Argentine Peso. The Company monitors inflation rates in countries where it operates as required by U.S. GAAP. Under ASC 830-10-45-12, an economy must be classified as highly inflationary when the cumulative three-year rate exceeds 100%. Considering the inflation data of Argentina, the Company has considered Argentina to be highly inflationary beginning on July 1, 2018. In accordance with ASC 830, the functional currency of the Argentina business has been changed to USD, which requires re-measurement of the local books to USD. Exchange gains and losses are recorded through net income instead of through other comprehensive income as had been done historically. Translation adjustments from periods prior to the change in functional currency were not removed from equity.
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Income Taxes |
Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect net effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. We are subject to foreign income taxes on our foreign operations. We are required to estimate our income taxes in each jurisdiction in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. The tax effects of these temporary differences are recorded as deferred tax assets or deferred tax liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the consolidated statement of income (loss) in the period during which such rates are enacted. We record a valuation allowance when it is more likely than not that we will not realize the net deferred tax assets in a certain jurisdiction. |
We consider all available evidence to determine whether it is "more likely than not" that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods) and projected taxable income in assessing the validity of deferred tax assets. In making such judgments, significant weight is given to evidence that can be objectively verified. In order to fully realize the U.S. deferred tax assets, we will need to generate sufficient taxable income in future periods before the expiration of the deferred tax assets governed by the tax code. |
We do not provide for deferred taxes on the excess of the financial reporting basis over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration or not subject to taxation in the US or in the local country. Within consolidated retained earnings are undistributed after-tax earnings from certain non-U.S. subsidiaries that are not indefinitely reinvested. Generally, the earnings of our foreign subsidiaries become subject to taxation based on certain provisions in U.S. or local tax law under certain circumstances. |
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Employee benefits
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Contributions to defined contribution plans are charged to consolidated statements of operations in the period in which services are rendered by the covered employees. Current service costs for defined benefit plans are accrued in the period to which they relate. The liability in respect of defined benefit plans is calculated annually by the Company using the projected unit credit method. Prior service cost, if any, resulting from an amendment to a plan is recognized and amortized over the remaining period of service of the covered employees. The Company recognizes its liabilities for compensated absences dependent on whether the obligation is attributable to employee services already rendered, relates to rights that vest or accumulate and payment is probable and estimable.
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The Company records annual amounts relating to its defined benefit plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, compensation increases and turnover rates. The Company reviews its assumptions on quarterly basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions. |
Stock-Based Compensation
We recognize expenses related to all share-based payments to employees, including grants of employee stock options, based on the grant-date fair values amortized straight-line over the period during which the employees are required to provide services in exchange for the equity instruments. We include an estimate of forfeitures when calculating compensation expenses. We use the Black-Scholes method for valuing stock-based awards. See Note 11, “Share-Based Compensation” for further information.
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Net Income (Loss) Per Share
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Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. For the purposes of calculating diluted earnings per share, the treasury stock method is used for stock-based awards except where the results would be anti-dilutive. When a net loss is reported, potentially issuable common shares are generally excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. Refer to Note 6, "Net Income/ (Loss) Per Share" for additional information. |
Assets Held for Sale and Discontinued Operations
The Company reports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the business is sold and classified as held for sale, in accordance with the criteria of Accounting Standard Codification ("ASC") Topic 205-20 "Presentation of Financial Statements - Discontinued Operations" and ASC Topic 360-10 "Impairment and Disposal of Long Lived Assets". The results of discontinued operations are reported in Income from Discontinued Operations, net of tax in the accompanying Consolidated Statement of Income for the current and prior period and include any gain or loss recognized on closing, or adjustment of the carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value less cost to sell, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the current and prior-period balance sheet. All assets and liabilities of the operations classified as held for sale are disclosed as current assets and liabilities in the current year and previous year classification has been retained. The Company allocate interest cost on Debt that is required to be repaid as a result of disposal to discontinued operations. Interest cost on Corporate Debt not directly attributable to discontinued operations is allocated between continuing and discontinued operations in the ratio mentioned in ASC 205-20-45-7 which as follows:
Net assets to be sold or discontinued less debt that is required to be paid as a result of the disposal /
The sum of total net assets of the entity plus debt other than: 1) debt of the discontinued operations that will be assumed by the buyer; 2) debt that is required to be paid as a result of the disposal transaction; and 3) debt that can be directly attributable to other operations of the entity.
If a business is classified as held for sale after the balance sheet but before the financial statements are issued or are available to be issued, the business continues to be classified as held and used in those financial statements when issued or when available to be issued.
Refer “Note 3A & 3B – "Discontinued Operations and Held for Sale" in our consolidated financial statements included elsewhere in this report for additional information and disclosures.
Changes in Accounting Policies
Except as described below, the Company has applied accounting policies consistently to all periods presented in these consolidated financial statements. The Company adopted ASC Topic 326, Financial Instruments—Credit Losses (“Topic326”), effective January 1, 2023. As a result of the Company’s adoption of this new standard, current expected credit losses(“CECL”) are measured using lifetime “expected credit loss” methodology, replacing the incurred loss model that recognized losses only when they became probable and estimable. The Company changed its accounting policy for recognition and measurement of CECL as detailed below. Topic 326 is applicable to financial assets measured at amortized cost. It requires historical loss data to be adjusted to reflect changes in asset-specific considerations, current conditions and reasonable and supportable forecasts of future economic conditions. To analyse credit losses on financial assets, the Company applied aging Schedule method to determine expected credit losses. The Company applied Topic 326 using the modified retrospective transition approach, which involves recognizing the cumulative effect of initial adoption of Topic 326 as an adjustment to its opening retained earnings as of January 1, 2023.Therefore, comparative information prior to the adoption date has not been adjusted.
Recent Accounting Pronouncements
In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and London Inter-Bank Offered Rate (“LIBOR”). The ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are elective and are effective upon issuance for all entities through December 31, 2022. In December 2022, FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to defer the sunset date of Topic 848 until December 31, 2024. The Company is still in the process of assessing the impact of this ASU 2020-04.
3A. Discontinued Operations and Held for Sale - Contact Center Company
On November 10, 2022, the Company has accepted a final offer by Arabian Internet and Communications Services Company (Solutions) to acquire Startek’s indirect
Subsequently, on January 11, 2023, the Company entered into a definitive Sale and Purchase Agreement with Solutions. The Sale and Purchase Agreement provided for a transaction based on an enterprise value for CCC of $
On April 3, 2023, the Company completed its sale of ownership interest in “CCC” to “Solutions”. At closing, the Company received cash proceeds of approximately $
The following table summarizes the income statement information of discontinued operations:
Statement of income (loss) | Three Months Ended March 31, | |||||||
2023 | 2022 | |||||||
Revenue | ||||||||
Cost of services | ( | ) | ( | ) | ||||
Gross profit | ||||||||
Selling, general and administrative expenses | ( | ) | ( | ) | ||||
Impairment losses and restructuring/exit cost | ( | ) | ( | ) | ||||
Operating income | ||||||||
Interest expense and other income (expense), net* | ( | ) | ( | ) | ||||
Foreign exchange gains (losses), net | ( | ) | ( | ) | ||||
Income before tax expenses | ||||||||
Tax expenses | ( | ) | ( | ) | ||||
Net income |
*includes allocated interest.
The following table summarizes the carrying values of the assets and liabilities classified as held for sale in our consolidated balance sheet:
March 31, 2023 | December 31, 2022 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | ||||||||
Restricted cash | ||||||||
Trade accounts receivables, net | ||||||||
Unbilled revenue | ||||||||
Prepaid and other current assets | ||||||||
Total current assets | ||||||||
Non-current assets | ||||||||
Property, plant and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Goodwill | ||||||||
Deferred tax assets, net | ||||||||
Prepaid expenses and other non-current assets | ||||||||
Total non-current assets | ||||||||
Total assets classified as held for sale in the consolidated balance sheet | ||||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Trade accounts payables | ||||||||
Accrued expenses | ||||||||
Current maturity of operating lease liabilities | ||||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Non-current liabilities | ||||||||
Operating lease liabilities | ||||||||
Other non-current liabilities | ||||||||
Deferred tax liabilities, net | ||||||||
Total non-current liabilities | ||||||||
Total liabilities classified as held for sale in the consolidated balance sheet | ||||||||
Net cash flows attributable to the discontinued operations: | ||||||||
March 31, 2023 | March 31, 2022 | |||||||
Net cash generated from/used in operating activities | ( | ) | ||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Net cash (used in) / provided by financing activities | ||||||||
Net Cash Inflow | ( | ) |
3B. Discontinued Operations and Held for Sale - Argentina
On December 14, 2022, the Company has entered into an engagement letter with M/S Estudio A & L LLC (‘the Firm’) pursuant to which the Firm would serve as a non-exclusive advisor in connection with the potential sale of Aegis Argentina. The Firm will perform services for the Company such as advice on the structure, negotiation strategy, valuation analyses, financial terms, and other financial matters etc. If required, the Firm will assist the Company in preparing a brief memorandum, for distribution to potential buyers, describing the Company and its business, operations, properties, financial condition, and prospects. The Firm to negotiate and execute on its behalf and/or the Company’s behalf confidentiality agreements with potential parties to a Transaction and to deliver confidential memoranda or other data furnished to the Firm by the Company for distribution to such parties. During the first quarter, the Company entered into discussions with potential buyers. The discussions are still ongoing and the Company expects to enter in diligence phase in near future.
After consideration of the relevant facts, the Company concluded the assets and liabilities of Argentina met the criteria for classification as held for sale. The Company concluded the actual and proposed disposal activities represented a strategic shift that will have a major effect on the Company’s operations and financial results and qualified for presentation as discontinued operations in accordance with FASB Accounting Standards Codification (ASC) 205-20. Accordingly, the financial results of the Argentina are presented in the Consolidated Statements of Operations as discontinued operations for all periods presented. Current and non-current assets and liabilities of the business not sold as of the balance sheet date are presented in the Consolidated Balance Sheet as current assets and liabilities held for sale for both periods presented. Argentina was forming part of the 'Argentina and Peru' segment in the consolidated financial statements for the period ended March 31, 2022.
The following table summarizes the income statement information of discontinued operations:
Statement of income (loss) | Three Months Ended March 31, | |||||||
2023 | 2022 | |||||||
Revenue | ||||||||
Cost of services | ( | ) | ( | ) | ||||
Gross profit (loss) | ( | ) | ( | ) | ||||
Selling, general and administrative expenses | ( | ) | ( | ) | ||||
Impairment losses and restructuring/exit cost | ( | ) | ( | ) | ||||
Operating income (loss) | ( | ) | ( | ) | ||||
Interest expense and other income (expense), net | ||||||||
Foreign exchange gains (losses), net | ( | ) | ( | ) | ||||
Income (loss) | ( | ) | ( | ) | ||||
Tax expense | ||||||||
Net (loss) | ( | ) | ( | ) |
The following table summarizes the carrying values of the assets and liabilities classified as held for sale in our consolidated balance sheet as:
March 31, 2023 | December 31, 2022 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | ||||||||
Trade accounts receivables, net | ||||||||
Unbilled revenue | ||||||||
Prepaid and other current assets | ||||||||
Total current assets | ||||||||
Non-current assets | ||||||||
Property, plant and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Prepaid expenses and other non-current assets | ||||||||
Total non-current assets | ||||||||
Total assets classified as held for sale in the consolidated balance sheet | ||||||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities | ||||||||
Trade accounts payables | ||||||||
Accrued expenses | ||||||||
Short term debt | ||||||||
Current maturity of operating lease liabilities | ||||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Non-current liabilities | ||||||||
Operating lease liabilities | ||||||||
Other non-current liabilities | ||||||||
Total non-current liabilities | ||||||||
Total liabilities classified as held for sale in the consolidated balance sheet | ||||||||
March 31, 2023 | March 31, 2022 | |||||||
Net cash generated from / used in operating activities | ( | ) | ( | ) | ||||
Net cash generated from / used in investing activities | ( | ) | ||||||
Net cash generated from / used in financing activities | ( | ) | ( | ) | ||||
Net Cash outflow | ( | ) | ( | ) |
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The carrying value of goodwill is allocated to reporting units as follows:
Reporting Units: | March 31, 2023 | December 31, 2022 | ||||||
Americas | ||||||||
India | ||||||||
Malaysia | ||||||||
Australia | ||||||||
Total |
We perform a goodwill impairment analysis at least annually (in the fourth quarter of each year) unless indicators of impairment exist in interim periods. The assumptions used in the analysis are based on the Company’s internal budget. The Company projects revenue, operating margins, and cash flows for a period of
years and applies a perpetual long-term growth rate using discounted cash flows (DCF) method. These assumptions are reviewed annually as part of management’s budgeting and strategic planning cycles. These estimates may differ from actual results.
As of March 31, 2023, based on the qualitative assessment, we concluded that there is no impairment of goodwill.
The following table presents the changes in goodwill during the three months ended March 31, 2023 and year ended December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
Opening balance | ||||||||
Impairment | ( | ) | ||||||
Closing balance |
Intangible Assets
The following table presents our intangible assets:
As of March 31, 2023 | ||||||||||||||||
Gross Intangibles | Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | |||||||||||||
Customer relationships | ||||||||||||||||
Brand | ||||||||||||||||
Trademarks | ||||||||||||||||
Other intangibles | ||||||||||||||||
As of December 31, 2022 | ||||||||||||||||
Gross Intangibles | Accumulated Amortization | Net Intangibles | Weighted Average Amortization Period (years) | |||||||||||||
Customer relationships |