Startek Earnings 2020-09-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

srt20190630_10q.htm

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒

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

For the quarterly period ended September 30, 2020

☐

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

For the transition period from to

Commission file number 1-12793

StarTek, Inc.

(Exact name of registrant as specified in its charter)

Delaware	84-1370538
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	Identification No.)

6200 South Syracuse Way, Suite 485
Greenwood Village, Colorado	80111
(Address of principal executive offices)	(Zip code)

(303) 262-4500

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

As of October 31, 2020, there were 40,292,755 shares of Common Stock outstanding.

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STARTEK, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q

PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	Page
	Condensed Consolidated Statements of Income(Loss) and Other Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	4
	Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (Unaudited)	6
	Condensed Consolidated Statement of Stockholders' Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	7
	Note 1 Overview and Basis of Preparation	8
	Note 2 Summary of Accounting Policies	9
	Note 3 Goodwill and Intangible Assets	12
	Note 4 Revenue	13
	Note 5 Net Gain/(Loss) Per Share	15
	Note 6 Impairment and Restructuring/Exit cost	15
	Note 7 Derivative Instruments	16
	Note 8 Fair Value Measurements	16
	Note 9 Debt	18
	Note 10 Share-Based Compensation	19
	Note 11 Accumulated Other Comprehensive Loss	19
	Note 12 Segment Reporting	20
	Note 13 Leases	20
	Note 14 Subsequent Event	21
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	29
ITEM 4.	Controls and Procedures	29

PART II - OTHER INFORMATION

ITEM 1.	Legal proceeding
ITEM 1A.	Risk Factors	30
ITEM 2.	Unregistered sales of equity securities and use of proceeds
ITEM 3.	Defaults upon senior securities
ITEM 4.	Mine safety disclosure
ITEM 5.	Other Information	30
ITEM 6.	Exhibits	31
SIGNATURES		32

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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:

•

certain statements, including possible or assumed future results of operations, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

•

any statements regarding the prospects for our business or any of our services;

•

any statements preceded by, followed by or that include the words “may,” “will,” “should,” “seeks,” “believes,” “expects,” “anticipates,” “intends,” “continue,” “estimate,” “plans,” “future,” “targets,” “predicts,” “budgeted,” “projections,” “outlooks,” “attempts,” “is scheduled,” or similar expressions; and

•

other statements regarding matters that are not historical facts.

Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations, include, but are not limited to, those items described herein or set forth in the Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission ("SEC") on March 12, 2020 and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020. Unless otherwise noted in this report, any description of "us," "we," or "our," refers to StarTek, Inc. ("Startek") and its subsidiaries.

CHANGE IN FILING STATUS

In accordance with the SEC's expanded definition of Smaller Reporting Companies effective September 10, 2018, Startek qualifies for Smaller Reporting Company status. As such, it has decided to take advantage of the relief provided from Part 1, Item 3.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2020*			*2019*			*2020*			*2019*
Revenue		163,097			164,630			466,926			487,054
Warrant contra revenue		(410	)		-			(1,173	)		(730	)
Net Revenue		162,687			164,630			465,753			486,324
Cost of services		(139,808	)		(136,142	)		(407,003	)		(403,064	)
Gross profit		22,879			28,488			58,750			83,260
Selling, general and administrative expenses		(14,876	)		(22,926	)		(46,774	)		(71,938	)
Impairment losses and restructuring/exit cost		12			(220	)		(24,545	)		(2,069	)
Acquisition related cost		-			-			-			11
Operating Income/ (Loss)		8,015			5,342			(12,569	)		9,264
Share of (loss) / profit of equity accounted investees		(5	)		(16	)		(25	)		988
Interest expense, net		(3,988	)		(3,372	)		(10,684	)		(11,864	)
Exchange loss, net		(621	)		(1,880	)		(331	)		(2,558	)
Income /(Loss) before income taxes		3,401			74			(23,609	)		(4,170	)
Income tax expense		1,649			3,436			5,808			4,550
Net lncome / (Loss)		1,752			(3,362	)		(29,417	)		(8,720	)

Net income/ (Loss)
Net income /(loss) attributable to non-controlling interests		1,385			(575	)		1,990			1,007
Net income/ (loss) attributable to Startek shareholders		367			(2,787	)		(31,407	)		(9,727	)

Net gain /(loss) per common share - basic		0.01			(0.07	)		(0.80	)		(0.26	)
Net gain /(loss) per common share - diluted		0.01			(0.07	)		(0.80	)		(0.26	)
Weighted average common shares outstanding - basic		40,275			38,467			39,143			38,011
Weighted average common shares outstanding - diluted		40,626			38,467			39,143			38,011

STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

	*Three Months Ended September 30,*					*Nine Months Ended September 30,*
	*2020*		*2019*			*2020*			*2019*
Net Income / (Loss)		1,752		(3,362	)		(29,417	)		(8,720	)
Net income/ (Loss) attributable to non-controlling interests		1,385		(575	)		1,990			1,007
Net Income/ (Loss) attributable to Startek shareholders		367		(2,787	)		(31,407	)		(9,727	)

Other comprehensive (loss) / income, net of taxes:
Foreign currency translation adjustments		936		(1,899	)		(2,729	)		(1,299	)
Change in fair value of derivative instruments		103		(298	)		(577	)		50
Pension amortization		774		(9	)		(1,856	)		(70	)
Comprehensive (loss) / income		1,813		(2,206	)		(5,162	)		(1,319	)

Other comprehensive (loss) / income, net of taxes
Other comprehensive (loss) / income attributable to non-controlling interest		413		(19	)		(1,211	)		(45	)
Other comprehensive (loss) / income attributable to Startek shareholders		1,400		(2,187	)		(3,951	)		(1,274	)
		1,813		(2,206	)		(5,162	)		(1,319	)
Comprehensive (loss) / income
Comprehensive (loss)/income attributable to non-controlling interests		1,798		(594	)		779			962
Comprehensive (loss)/ income attributable to Startek shareholders		1,767		(4,974	)		(35,358	)		(11,001	)
		3,565		(5,568	)		(34,579	)		(10,039	)

See Notes to Consolidated Financial Statements.

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STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

(Unaudited)

	*September 30,*			*December 31,*
	*2020*			*2019*
ASSETS
Current assets:
Cash and cash equivalents		48,463			20,464
Restricted cash		8,122			12,162
Trade accounts receivable, net		77,767			108,479
Unbilled revenue		40,126			41,449
Prepaid and other current assets		12,612			12,008
Total current assets		187,090			194,562
Property, plant and equipment, net		34,423			37,507
Operating lease right-of-use assets		70,256			73,692
Intangible assets, net		103,042			110,807
Goodwill		196,633			219,341
Investment in associates		109			553
Deferred tax assets, net		2,782			5,251
Prepaid expenses and other non-current assets		13,140			16,370
Total assets		607,475			658,083
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payables		14,591			25,449
Accrued expenses		64,375			45,439
Short term debt		15,206			26,491
Current maturity of long term debt		19,142			18,233
Current maturity of operating lease obligation		18,649			19,677
Other current liabilities		39,854			37,159
Total current liabilities		171,817			172,448
Long term debt		101,626			130,144
Operating lease liabilities		52,854			54,341
Other non-current liabilities		17,378			11,140
Deferred tax liabilities, net		16,596			18,226
Total liabilities		360,271			386,299
Commitments and contingencies		—			—
Stockholders’ equity:
Common stock, 60,000,000 non-convertible shares, $0.01 par value, authorized; 40,288,453 and 38,525,636 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		403			385
Additional paid-in capital		287,221			276,827
Accumulated deficit		(77,965	)		(46,145	)
Accumulated other comprehensive loss		(9,973	)		(6,022	)
Equity attributable to Startek shareholders		199,686			225,045
Non-controlling interest		47,518			46,739
Total stockholders’ equity		247,204			271,784
Total liabilities and stockholders’ equity		607,475			658,083

See Notes to Consolidated Financial Statements.

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STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

	*Nine Months Ended September 30,*
	*2020*			*2019*
Operating Activities
Net loss	$	(29,417	)	$	(8,720	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		21,279			22,056
Impairment of goodwill		22,708			-
Loss /(profit) on sale of property, plant and equipment		181			(223	)
Provision for doubtful accounts		2,089			1,238
Warrant contra revenue		1,173			730
Share-based compensation expense		447			1,151
Deferred income taxes		1,192			209
Share of loss / (profit) of equity accounted investees		25			(988	)
Changes in operating assets and liabilities:
Trade accounts receivable, net		26,171			(1,529	)
Prepaid expenses and other assets, current and noncurrent		(117	)		(950	)
Trade accounts payable		(10,155	)		(5,236	)
Income taxes, net		1,300			(2,267	)
Accrued expenses and other liabilities, current and noncurrent		27,421			1,150
Net cash generated from operating activities	$	64,297		$	6,621

Investing Activities
Purchases of property, plant and equipment		(10,141	)		(9,027	)
Proceeds from equity-accounted investees		429			1,317
Net cash used in investing activities	$	(9,712	)	$	(7,710	)

Financing Activities
Proceeds from the issuance of common stock		8,379			6,563
Payments on long term debt		(4,200	)		(7,000	)
Proceeds from (payments on) other debt, net		(34,549	)		5,831
Net cash (used in) / generated from financing activities	$	(30,370	)	$	5,394

Net increase in cash and cash equivalents		24,215			4,305
Effect of exchange rate changes on cash and cash equivalents and restricted cash		(256	)		(497	)
Cash and cash equivalents and restricted cash at the beginning of the period		32,626			24,569
Cash and cash equivalents and restricted cash at the end of the period	$	56,585		$	28,377

Components of cash and cash equivalents and restricted cash
Balances with banks		48,463			17,795
Restricted cash		8,122			10,582
Total cash and cash equivalents and restricted cash		56,585		$	28,377

Supplemental disclosure of Cash Flow Information
Cash paid for Interest and other finance cost		10,392			11,179
Cash paid for income taxes		2,752			6,740
Non cash warrant contra revenue		1,173			730
Non cash share-based compensation expenses		447			1,151

See Notes to Consolidated Financial Statements.

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STARTEK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

	*Common Stock*										*Other Items of OCI*
	*Shares*		*Amount*			*Additional paid-in*		*Accumulated*			*Foreign currency*			*Change in fair value of*			*Unrecognised*			*Equity attributable to Startek*			*Non-controlling*			*Total stockholders'*
						*capital*		*deficit*			*translation*			*derivative instruments*			*pension cost*			*shareholders*			*interest*			*equity*
Three months ended
Balance at June 30, 2020		40,210,299		$	401	$	286,205	$	(78,332	)	$	(8,233	)	$	(205	)	$	(2,935	)	$	196,901		$	45,720		$	242,621
Issuance of common stock		78,154			2		368		-			-			-			-			370			-			370
Share-based compensation expenses		-			-		238		-			-			-			-			238			-			238
Warrant expenses		-			-		410		-			-			-			-			410			-			410
Net income (loss)		-			-		-		367			-			-			-			367			1,385			1,752
Other comprehensive loss for the period		-			-		-		-			936			103			361			1,400			413			1,813
Balance at September 30, 2020		40,288,453		$	403	$	287,221	$	(77,965	)	$	(7,297	)	$	(102	)	$	(2,574	)	$	199,686		$	47,518		$	247,204

Balance at June 30, 2019		38,452,111		$	384	$	275,284	$	(38,067	)	$	(3,389	)	$	333		$	(1,578	)	$	232,967		$	46,912		$	279,879
Issuance of common stock		30,914			1		96		-			-			-			-			97			-			97
Share-based compensation expenses		-			-		370		-			-			-			-			370			-			370
Warrant expenses		-			-		-		-			-			-			-			-			-			-
Net income (loss)		-			-		-		(2,787	)		-			-			-			(2,787	)		(575	)		(3,362	)
Other comprehensive loss for the period		-			-		-		-			(1,899	)		(298	)		10			(2,187	)		(19	)		(2,206	)
Balance at September 30, 2019		38,483,025		$	385	$	275,750	$	(40,854	)	$	(5,288	)	$	35		$	(1,568	)	$	228,460		$	46,318		$	274,778

Nine months ended
Balance at December 31, 2019		38,525,636		$	385	$	276,827	$	(46,145	)	$	(4,568	)	$	475		$	(1,929	)	$	225,045		$	46,739		$	271,784
Transition period adjustment pursuant to ASU 2019-08		-			-		413		(413	)		-			-			-			-			-			-
Issuance of common stock		1,762,817			18		8,361		-			-			-			-			8,379			-			8,379
Share-based compensation expenses		-			-		447		-			-			-			-			447			-			447
Warrant expenses		-			-		1,173		-			-			-			-			1,173			-			1,173
Net income (loss)		-			-		-		(31,407	)		-			-			-			(31,407	)		1,990			(29,417	)
Other comprehensive loss for the period		-			-		-		-			(2,729	)		(577	)		(645	)		(3,951	)		(1,211	)		(5,162	)
Balance at September 30, 2020		40,288,453		$	403	$	287,221	$	(77,965	)	$	(7,297	)	$	(102	)	$	(2,574	)	$	199,686		$	47,518		$	247,204

Balance at December 31, 2018		37,446,323		$	374	$	267,317	$	(31,127	)	$	(3,989	)	$	(15	)	$	(1,543	)	$	231,017		$	45,356		$	276,373
Issuance of common stock		1,036,702			11		6,552		-			-			-			-			6,563			-			6,563
Share-based compensation expenses		-			-		1,151		-			-			-			-			1,151			-			1,151
Warrant expenses		-			-		730		-			-			-			-			730			-			730
Net income (loss)		-			-		-		(9,727	)		-			-			-			(9,727	)		1,007			(8,720	)
Other comprehensive loss for the period		-			-		-		-			(1,299	)		50			(25	)		(1,274	)		(45	)		(1,319	)
Balance at September 30, 2019		38,483,025		$	385	$	275,750	$	(40,854	)	$	(5,288	)	$	35		$	(1,568	)	$	228,460		$	46,318		$	274,778

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STARTEK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(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 touch points and channels. Startek has more than 40,000 CX experts globally spread across 46 delivery campuses in 13 countries. The Company services over 250 clients across a range of industries such as Banking and Financial Services, Insurance, Technology, Telecom, Healthcare, Travel & Hospitality,Consumer Goods, Retail, and Energy & Utilities.

The Company offers a repository of digital and omnichannel solutions based on decades of experience in driving growth by putting the customer at the center of our business. Because no one solution fits all, we have crafted solution delivery to suit a variety of industries. Startek has delivery campuses across India, United States, Malaysia, Philippines,Australia, South Africa, Canada, Honduras, Jamaica, Kingdom of Saudi Arabia, Argentina, Peru and Sri Lanka.

Basis of preparation

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

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

The consolidated financial statements reflect the financial results of all subsidiaries that are more than 50% owned and over which the Company exerts control. When the Company does not have majority ownership in an entity but exerts significant influence over that entity, the Company accounts for the entity under the equity method of accounting. All intercompany balances are eliminated on consolidation. Where our ownership of a subsidiary was less than 100%, the non-controlling interest is reported in our Consolidated Balance Sheets. The non-controlling interest in our consolidated net income is reported as "Net income (loss) attributable to non-controlling interests" in our Consolidated Statement of Income (loss).

The consolidated balance sheet as of December 31, 2019, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by US-GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, valuation allowances for deferred tax assets and restructuring costs. Management believes that the estimates used in the preparation of the condensed consolidated financial statements are reasonable, and management has made assumptions about the possible effects of the novel coronavirus (“COVID-19”) pandemic on critical and significant accounting estimates. Although these estimates are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates. Any changes in estimates are adjusted prospectively in the Company’s condensed consolidated financial statements.

Revenue

The Company utilizes a five-step process given in ASC 606, 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 4 on "Revenue from Contracts with Customers" for further information.

Leases

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

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

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

The Company elected the practical expedient permitted under the transition guidance under Topic 842, which among other matters, allowed the Company (i) not to apply the recognition requirements to short-term leases (leases with a lease term of 12 months or less), (ii) not to reassess whether any expired or existing contracts are or contain leases, (iii) not to reassess the lease classification for any expired or existing leases, and (iv) not to reassess initial direct costs for any existing leases

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

During the first quarter of 2020, the COVID-19 pandemic did not trigger changes to the terms of any of the Company’s leases, however during second quarter we have received partial relief from few landlords in terms of rent discounts for certain periods and deferments of rent for a few facilities. Rent discounts and deferment of rent have been accounted for without lease modification using the practical expedient provided by the FASB.There is no new rent deferments/discounts being received in quarter ending September 30, 2020.

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Business Combinations

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations, by recognizing identifiable tangible and intangible assets acquired, liabilities assumed, and non-controlling interests in the acquired business at their fair values. The excess of the cost of the acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. Acquisition related costs are expensed as incurred.

Goodwill and Intangible Assets

Goodwill represents the cost of acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased. Goodwill is not amortized but is tested for impairment at least on an annual basis on December 31, based on a number of factors, including operating results, business plans and future cash flows. The Company performs an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Based on the assessment of events or circumstances, the Company performs a quantitative assessment of goodwill impairment if it determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on the quantitative impairment analysis, the carrying value of a reporting unit exceeds the fair value of reporting units, an impairment loss is recognized in an amount equal to the excess. In addition, the Company performs a quantitative assessment of goodwill impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Refer to Note 3 for information and related disclosures.

Intangible assets acquired in a business combination were recorded at fair value at 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%. 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 remeasurement of the local books to USD. Exchange gains and losses are recorded through net income as opposed to 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.

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 10, “Share-Based Compensation” for further information.

Common Stock Warrant Accounting

We account for common stock warrants as equity instruments, based on the specific terms of our warrant agreement. For more information refer to Note 10, "Share-Based Compensation."

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Recent Accounting Pronouncements

In December 2019, FASB issued ASU 2019-12 which modifies ASC 740 to simplify accounting for income taxes. ASU 2019-12 amends the requirements related to the accounting for “hybrid” tax regimes. FASB amended ASC 740-10-15-4(a) to state that an entity should include the amount of tax based on income in the tax provision and should record any incremental amount recorded as a tax not based on income. This amendment effectively reverses the order in which an entity determines the type of tax under current U.S. GAAP. The Company does not have a hybrid tax regime currently.

FASB also removed the previous guidance that prohibit recognition of a DTA for a step up in tax basis “except to the extent that the newly deductible goodwill amount exceeds the remaining balance of book goodwill.” Instead, the amended guidance contains a model under which an entity can consider a list of factors in determining whether the step-up in tax basis is related to the business combination that caused the initial recognition of goodwill or to a separate transaction. The Company does not have a step up in tax basis for goodwill.

ASU 2019-12 also modified intra-period tax allocation exception to incremental approach. As per the modification, an entity should determine the tax effect of income from continuing operations without considering the tax effect of items that are not included in continuing operations, such as discontinued operations or other comprehensive income. The Company does not believe this to have material impact on their consolidated financial statements.

The ASU also makes one minor improvements to the Codification topics. Tax benefit of tax-deductible dividends on allocated and unallocated employee stock ownership plan shares shall be recognized in the income statement. FASB decided to change the phrase “recognized in the income statement” to “recognized in income taxes allocated to continuing operations” to clarify where income tax benefits related to tax-deductible dividends should be presented in the income statement. This improvement is not expected to have material impact on the Company.

The above amendments are effective for fiscal years beginning after December 15, 2020.

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.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13"), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2022, and interim periods therein for smaller reporting companies. We do not expect the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments.” This ASU represents changes to clarify or improve the Codification. The amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications in relation to financial instruments. This guidance was effective immediately upon issuance. The additional elements of the ASU did not have a material impact on the Company's consolidated results of operations, cash flows, financial position and or disclosures.

In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional expedients and exceptions to the guidance in US GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is still in the process of assessing the impact of this ASU.

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3. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The carrying value of goodwill is allocated to reporting units is as follows:

Reporting Units	*September 30, 2020*		*December 31, 2019*
Americas		64,315		64,315
India		15,180		31,000
Malaysia		47,543		47,543
Saudi Arabia		54,840		54,840
South Africa		1,578		5,910
Argentina		4,991		4,991
Australia		8,186		10,742
Total	$	196,633	$	219,341

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 Goodwill was allocated to new reporting units using a relative fair value allocation approach. We performed a quantitative assessment to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value.

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 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. 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.

During the first quarter of 2020, the Company reviewed the carrying value of goodwill due to the events and circumstances surrounding the COVID-19 pandemic. As a result of the recent global economic disruption and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the goodwill balances of its reporting units. As quoted market prices are not available for these reporting units, the calculations of their estimated fair values were based on a discounted cash flow model (income approach).

The results of these interim impairment tests indicated that the estimated fair value of the India, South Africa and Australia reporting unit was less than its carrying value. Consequently, a goodwill impairment charge of $15,820, $4,332 and $2,556 was recorded for the India, South Africa and Australia reporting units, respectively.

As of September 30, 2020, based on the qualitative assessment, we concluded there is no additional impairment of goodwill.

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

	*Amount*
Opening balance, December 31, 2019	$	219,341
Impairment		(22,708	)
Ending balance, September 30, 2020	$	196,633

Intangible Assets

The following table presents our intangible assets as of September 30, 2020:

	*Gross Intangibles*		*Accumulated Amortization*		*Net Intangibles*		*Weighted Average Amortization Period (years)*
Customer relationships	$	66,220	$	14,882	$	51,338		6.5
Brand		49,500		10,484		39,016		7.1
Trademarks		13,210		1,935		11,275		7.5
Other intangibles		2,130		717		1,413		4.9
	$	131,060	$	28,018	$	103,042

During the first quarter of 2020, the Company reviewed the carrying value of its intangible assets due to the events and circumstances surrounding the COVID-19 pandemic. As a result of the recent global economic disruption and uncertainty due to the COVID-19 pandemic, the Company concluded a triggering event had occurred as of March 31, 2020, and accordingly, performed interim impairment testing on the all intangible assets. Based on the results of our analyses, the estimated fair values of the intangibles exceeded the carrying values.

As of September 30, 2020, based on the qualitative assessment, we concluded there is no additional impairment of the Company's intangible assets.

Expected future amortization of intangible assets as of September 30, 2020 is as follows:

Years Ending December 31,	*Amount*
Remainder of 2020	$	2,587
2021		10,350
2022		10,350
2023		10,306
2024		10,252
Thereafter		59,197

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4. 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.

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Revenue Recognition Methods

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

We are generally entitled to invoice for our services on a monthly basis. We invoice according to the hourly and/or per transaction rates stated in each contract for the various activities we perform. Some contracts include opportunities to earn bonuses or include parameters under which we will incur penalties related to performance in any given month. Bonus or penalty amounts are based on the current month’s performance. Formulas are included in the contracts for 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

•

Price	6.49	EPS	-0
Shares	38	P/E	-13
MCap	250	P/FCF	23
Net Debt	113	EBIT	-14
TEV	363	TEV/EBIT	-27
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-09-30	Filed 2020-11-09
10-Q	2020-06-30	Filed 2020-08-10
10-Q	2020-03-31	Filed 2020-06-10
10-K	2019-12-31	Filed 2020-03-12
10-Q	2019-09-30	Filed 2019-11-07
10-Q	2019-06-30	Filed 2019-08-08
10-Q	2019-03-31	Filed 2019-05-09
10-Q	2018-09-30	Filed 2018-11-09
10-Q	2018-06-30	Filed 2018-08-08
10-Q	2018-03-31	Filed 2018-05-08
10-K	2017-12-31	Filed 2018-03-16
10-Q	2017-09-30	Filed 2017-11-08
10-Q	2017-06-30	Filed 2017-08-09
10-Q	2017-03-31	Filed 2017-05-10
10-K	2016-12-31	Filed 2017-02-22
10-Q	2016-09-30	Filed 2016-11-08
10-Q	2016-06-30	Filed 2016-08-09
10-Q	2016-03-31	Filed 2016-05-10
10-K	2015-12-31	Filed 2016-03-14
10-Q	2015-09-30	Filed 2015-11-09
10-Q	2015-06-30	Filed 2015-08-10
10-Q	2015-03-31	Filed 2015-05-11
10-K	2014-12-31	Filed 2015-03-06
10-Q	2014-09-30	Filed 2014-11-14
10-Q	2014-06-30	Filed 2014-08-13
10-Q	2014-03-31	Filed 2014-05-09
10-K	2013-12-31	Filed 2014-03-10
10-Q	2013-09-30	Filed 2013-11-08
10-Q	2013-06-30	Filed 2013-08-13
10-Q	2013-03-31	Filed 2013-05-10
10-K	2012-12-31	Filed 2013-03-08
10-Q	2012-09-30	Filed 2012-11-06
10-Q	2012-06-30	Filed 2012-08-07
10-Q	2012-03-31	Filed 2012-05-11
10-K	2011-12-31	Filed 2012-03-09
10-Q	2011-09-30	Filed 2011-11-02
10-Q	2011-06-30	Filed 2011-08-08
10-Q	2011-03-31	Filed 2011-05-03
10-K	2010-12-31	Filed 2011-03-04
10-Q	2010-09-30	Filed 2010-10-29
10-Q	2010-06-30	Filed 2010-07-30
10-Q	2010-03-31	Filed 2010-05-07
10-K	2009-12-31	Filed 2010-02-25

8-K	2020-11-09
8-K	2020-10-22
8-K	2020-08-10
8-K	2020-07-30
8-K	2020-07-09
8-K	2020-07-01
8-K	2020-06-29
8-K	2020-06-10
8-K	2020-05-12
8-K	2020-05-05
8-K	2020-04-17
8-K	2020-03-25
8-K	2020-03-12
8-K	2020-02-04
8-K	2020-01-12
8-K	2019-12-11
8-K	2019-11-06
8-K	2019-07-22
8-K	2019-06-30
8-K	2019-05-17
8-K	2019-05-08
8-K	2019-03-22
8-K	2019-03-21
8-K	2019-03-14
8-K	2019-03-13
8-K	2019-03-01
8-K	2018-12-31
8-K	2018-12-13
8-K	2018-11-08
8-K	2018-09-18
8-K	2018-08-07
8-K	2018-08-07
8-K	2018-07-20
8-K	2018-07-05
8-K	2018-05-08
8-K	2018-03-16
8-K	2018-03-15
8-K	2018-03-15
8-K	2018-03-15
8-K	2018-01-23

EX-31.1	ex_201880.htm
EX-31.2	ex_201881.htm
EX-32.1	ex_201882.htm

SRT 10Q Quarterly Report

Startek Earnings 2020-09-30