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, 2022
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: 001-40482
_______________________
(Exact name of registrant as specified in its charter)
_______________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(888 ) 400-8275
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_______________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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 x No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the 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 | o | Accelerated filer | o | |||||||||||
| x | 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 2, 2022, the number of shares outstanding of the registrant’s common stock was as follows: Class A common stock, par value $0.01 per share: 27,542,032 ; Class B convertible common stock, par value $0.01 per share: 70,032,694 .
TASKUS, INC.
Quarterly Report on Form 10-Q
For Quarterly Period Ended September 30, 2022
Table of Contents
| Page No. | ||||||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve certain known and unknown risks and uncertainties. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates,” "position us" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Our actual results or outcomes may differ materially from those anticipated. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Our actual results may differ significantly from any results expressed or implied by any forward-looking statements. A summary of the principal risk factors that might cause our actual results to differ from our forward-looking statements is set forth below. The following is only a summary of the principal risks that may materially adversely affect our business, financial condition and results of operations. This summary should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “Annual Report”) as filed with the Securities and Exchange Commission (the “SEC”), as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Such risks and uncertainties include, but are not limited to, the following:
•our business is dependent on key clients, and the loss of a key client could have an adverse effect on our business and results of operations;
•our contracts are typically one to three years in length with automatic renewal provisions, but certain contracts may provide for termination at the client's convenience with advance notice and may or may not include penalties or required payments in the event the termination right is exercised. Our clients may terminate contracts before completion or choose not to renew contracts, and our clients may be unable or unwilling to pay for services we performed. A loss of business or non-payment from significant clients could materially affect our results of operations;
•we may fail to cost-effectively acquire new, high-growth clients, which would adversely affect our business, financial condition and results of operations;
•if we provide inadequate service or cause disruptions in our clients’ businesses or fail to comply with the quality standards required by our clients under our agreements, it could result in significant costs to us, the loss of our clients and damage to our corporate reputation;
•global economic and political conditions, especially in the social media and meal delivery and transport industries from which we generate significant revenue, could adversely affect our business, results of operations, financial condition and prospects;
•unauthorized or improper disclosure of personal or other sensitive information, or security breaches and incidents, whether inadvertent or purposeful, including as the result of a cyber-attack, could result in liability and harm our reputation, each of which could adversely affect our business, financial condition, results of operations and prospects;
•content security, including content monitoring and moderation services, is a large portion of our business. The long-term impacts on the mental health and well-being of our employees doing this work are unknown. This work may lead to stress disorders and may create liabilities for us. This work is also subject to significant press and regulatory scrutiny. As a result, we may be subject to negative publicity or liability, or face difficulties retaining and recruiting employees, any of which could have an adverse effect on our reputation, business, financial condition and results of operations;
•our failure to detect and deter criminal or fraudulent activities or other misconduct by our employees, or third parties such as contractors and consultants that may have access to our data, could result in loss of trust from our clients and negative publicity, which would have an adverse effect on our business and results of operations;
•our business is heavily dependent upon our international operations, particularly in the Philippines and India, and any disruption to those operations would adversely affect us;
•our business is subject to a variety of U.S. federal and state, as well as international laws and regulations, including those regarding privacy and data security, and we or our clients may be subject to regulations related to the processing of
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certain types of sensitive and confidential information; any failure to comply with applicable privacy and data security laws and regulations could harm our business, results of operations and financial condition;
•our business depends in part on our capacity to invest in technology as it develops, and substantial increases in the costs of technology and telecommunications services or our inability to attract and retain the necessary technologists could have a material adverse effect on our business, financial condition, results of operations and prospects;
•our results of operations and ability to grow could be materially affected if we cannot adapt our services and solutions to changes in technology and client expectations;
•fluctuations against the U.S. dollar in the local currencies in the countries in which we operate could have a material effect on our results of operations;
•our business depends on a strong brand and corporate reputation, and if we are not able to maintain and enhance our brand, our ability to expand our client base will be impaired and our business and operating results will be adversely affected;
•competitive pricing pressure may reduce our revenue or gross profits and adversely affect our financial results;
•the success of our business depends on our senior management and key employees;
•the ongoing COVID-19 pandemic, including the resulting global economic uncertainty and measures taken in response to the pandemic, has adversely impacted our business, financial condition and results of operations;
•affiliates of Blackstone Inc. and our Co-Founders Bryce Maddock and Jaspar Weir control us and their interests may conflict with ours or yours in the future;
•the dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our common stock prior to the completion of our June 2021 initial public offering (“IPO”), and it may depress the trading price of our Class A common stock; and
•the market price of shares of our Class A common stock has been, and may continue to be, volatile and may decline regardless of our operating performance, which could cause the value of your investment to decline.
We urge you to carefully consider the foregoing summary together with the risks discussed under “Risk Factors” in the Annual Report and in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report.
WEBSITE AND SOCIAL MEDIA DISCLOSURE
We use our website and our social media outlets, such as Facebook, Instagram, LinkedIn, TikTok, YouTube, and Twitter as channels of distribution of Company information. The information we post through these channels may be deemed material. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at ir.taskus.com, its Facebook page at facebook.com/TaskUs/, its Instagram page at instagram.com/taskus/, its LinkedIn page at linkedin.com/company/taskus/, its TikTok page at tiktok.com/@taskusinc, its YouTube account at youtube.com/c/Taskus/, and its Twitter account at twitter.com/taskus. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section of our investor relations website at ir.taskus.com. The contents of our website and social media channels are not, however, a part of this Quarterly Report.
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TASKUS, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share data)
| Assets | September 30, 2022 | December 31, 2021 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | |||||||||||
| Other receivables | |||||||||||
| Prepaid expenses | |||||||||||
| Income tax receivable | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Noncurrent assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred tax assets | |||||||||||
| Intangibles | |||||||||||
| Goodwill | |||||||||||
| Other noncurrent assets | |||||||||||
| Total noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | $ | |||||||||
| Accrued payroll and employee-related liabilities | |||||||||||
| Current portion of debt | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Current portion of income tax payable | |||||||||||
| Deferred revenue | |||||||||||
| Deferred rent | |||||||||||
| Total current liabilities | |||||||||||
| Noncurrent liabilities: | |||||||||||
| Income tax payable | |||||||||||
| Long-term debt | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred rent | |||||||||||
| Accrued payroll and employee-related liabilities | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and Contingencies (See Note 10) | |||||||||||
| Shareholders’ equity: | |||||||||||
Class A common stock, $ | |||||||||||
Class B convertible common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Treasury Stock | ( | ||||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities and shareholders’ equity | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of services | |||||||||||||||||||||||
| Selling, general, and administrative expense | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Loss (gain) on disposal of assets | ( | ( | |||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Other expense | |||||||||||||||||||||||
| Financing expenses | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Provision for (benefit from) income taxes | ( | ||||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Net income (loss) per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ||||||||||||||||||
| Diluted | $ | $ | $ | $ | ( | ||||||||||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Retirement benefit reserves | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | $ | $ | ( | |||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
| Capital stock and additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock | Class B convertible common stock | Additional paid-in capital | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2020 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock in the initial public offering, net of underwriters' fees and offering costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B convertible common stock | ( | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Distribution of dividends ($ | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
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| Capital stock and additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock | Class B convertible common stock | Additional paid-in capital | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of RSUs | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | ( | ( | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | ( | ( | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in acquisition of heloo | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | ( | ( | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
| Nine months ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of intangibles | |||||||||||
| Amortization of debt financing fees | |||||||||||
| Loss (gain) on disposal of assets | ( | ||||||||||
| Provision for losses on accounts receivable | |||||||||||
| Unrealized foreign exchange losses on forward contracts | |||||||||||
| Deferred taxes | ( | ( | |||||||||
| Stock-based compensation expense | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Other receivables, prepaid expenses, and other current assets | ( | ( | |||||||||
| Operating lease right-of-use assets | |||||||||||
| Other noncurrent assets | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ||||||||||
| Accrued payroll and employee-related liabilities | |||||||||||
| Operating lease liabilities and deferred rent | ( | ||||||||||
| Income tax payable | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Other noncurrent liabilities | |||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Acquisition, net of cash acquired | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings, Revolving credit facility | |||||||||||
| Proceeds from long-term debt | |||||||||||
| Payments on long-term debt | ( | ( | |||||||||
| Payments for debt financing fees | ( | ( | |||||||||
| Proceeds from issuance of common stock, net of underwriters’ fees | |||||||||||
| Proceeds from employee stock plans | |||||||||||
| Payments for offering costs | ( | ||||||||||
| Payments for taxes related to net share settlement | ( | ||||||||||
| Payments for stock repurchases | ( | ||||||||||
| Distribution of dividends | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TASKUS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Organization
TaskUs, Inc. (“TaskUs” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) was formed by investment funds affiliated with Blackstone Inc. (“Blackstone”) as a vehicle for the acquisition of TaskUs Holdings, Inc. (“TaskUs Holdings”) on October 1, 2018 (the “Blackstone Acquisition”). Prior to the Blackstone Acquisition, TaskUs had no operations and TaskUs Holdings operated as a standalone entity. TaskUs, Inc. was incorporated in Delaware in July 2018, and is headquartered in New Braunfels, Texas.
The Company is a provider of outsourced digital services and next-generation customer experience to fast-growing technology companies, helping its clients represent, protect and grow their brands. The Company's global, omni-channel delivery model is focused on providing its clients three key services - Digital Customer Experience, Content Security and Artificial Intelligence (“AI”) Services (formerly known as AI Operations). The Company has designed its platform to enable it to rapidly scale and benefit from its clients’ growth. Through its agile and responsive operational model, the Company delivers services from multiple delivery sites that span globally from the United States, Philippines, and other parts of the world.
The Company’s major service offerings are described in more detail below:
•Digital Customer Experience: Principally consists of omni-channel customer care services primarily delivered through digital (non-voice) channels.
•Content Security: Principally consists of review and disposition of user and advertiser generated content for purposes which include removal or labeling of policy violating, offensive or misleading content.
•AI Services: Principally consists of data labeling, annotation and transcription services performed for the purpose of training and tuning AI algorithms through the process of machine learning.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), as filed with the Securities and Exchange Commission (the “SEC”), includes a discussion of the significant accounting policies used in the preparation of our consolidated financial statements. Other than the adoption of the new lease accounting standard, and the business combination and treasury stock accounting policies, there have been no changes to the Company’s significant accounting policies described in the Annual Report that have had a material impact on the Company’s condensed consolidated financial statements and related notes.
These unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with US GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included in the Annual Report. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2022 and its results of operations, comprehensive income (loss) and shareholders’ equity for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. The condensed consolidated balance sheet as of December 31, 2021, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.
The acquisition of Parsec d.o.o. and Q Experience d.o.o. (collectively, “heloo”) was completed on April 15, 2022; therefore, the Company’s consolidated financial statements only include heloo’s results since April 15, 2022.
(b) Use of Estimates
9
currency exchange rate forward contracts; valuation of stock-based compensation; valuation and impairment of intangibles and goodwill and reserves for income tax uncertainties and other contingencies.
As of September 30, 2022, the impact of the novel coronavirus (“COVID-19”) pandemic, including as a result of new strains and variants of the virus and uncertainty regarding vaccines and treatments, continues to unfold. As a result, many of our estimates and assumptions required judgement and carry a higher degree of variability and volatility. We continue to closely monitor the outbreak and the impact on our operations and liquidity. As events continue to evolve and additional information becomes available, our estimates may change materially in the future.
(c) Principles of Consolidation
(d) Concentration Risk
For the three and nine months ended September 30, 2022 and 2021, the following clients represented greater than 10% of the Company’s service revenue:
| Client | Service revenue percentage | |||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| A | % | % | % | % | ||||||||||||||||||||||
| B | Less than 10% | % | Less than 10% | % | ||||||||||||||||||||||
As of September 30, 2022 and December 31, 2021, the following clients represented greater than 10% of the Company’s accounts receivable:
| Accounts receivable percentage | ||||||||||||||
| Client | September 30, 2022 | December 31, 2021 | ||||||||||||
| A | % | % | ||||||||||||
| B | % | % | ||||||||||||
(e) Business Combinations
The Company accounts for business combinations in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The purchase price of the acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over those fair values is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.
During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in the consolidated statements of operations.
(f) Leases
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operate the asset throughout the term of the contract without the lessor having the right to change the terms of the contract. If a lease is identified, the Company determines whether it should be classified as an operating or finance lease at commencement.
The Company has various leases for office spaces under operating lease agreements which have a range of expiration dates from to ten years , and often include a renewal option for an additional term.
Our right of use (“ROU”) lease assets represent our right to use an underlying asset for the lease term and may include any advance lease payments made. Our ROU lease liabilities represent our obligation to make lease payments arising from the contractual terms of the lease. ROU lease assets and lease liabilities are recognized at the commencement of the lease and are calculated using the present value of lease payments over the lease term. Typically, lease agreements do not provide sufficient detail to arrive at an implicit interest rate. Therefore, the Company uses its estimated incremental borrowing rates (“IBR”) based on information available at the commencement date of the lease to calculate the present value of the lease payments. In estimating its IBR, the Company considers the credit rating, the lease term, the currency of the lease payments and market rates of comparable collateralized borrowings for similar terms.
(g) Share Repurchases
(h) Recent Accounting Pronouncements
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. The Company has elected to adopt new or revised accounting guidance within the same time period as private companies.
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") ASU 2016-02, Leases (Topic 842), which supersedes ASC 840. The Company adopted this standard in the second quarter of 2022, effective as of January 1, 2022, using the modified retrospective method and the effective date as the date of initial application. The Company recorded right-of-use assets of $45.8 million and lease liabilities of $48.5 million, respectively to the consolidated balance sheet. The Company elected the "package of practical expedients," which permits the Company not to reassess under Topic 842 any prior conclusions about lease identification, lease classification and initial direct costs. The Company did not apply the short-term lease exception and will therefore recognize a right-of-use asset and lease liability for all leases. The adoption of the lease standard did not have a material impact on the Company's consolidated statement of operations nor on its consolidated cash flow statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires the company acquiring contract assets and contract liabilities obtained in a business combination to recognize and measure them in accordance with ASC 606, Revenue from Contracts with Customers. At the acquisition date, the company acquiring the business should record related revenue, as if it had originated the contract. Before the update such amounts were recognized by the acquiring company at fair value. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. The Company early adopted ASU 2021-08 as of April 1, 2022. See Note 3, "Business Combination" for additional information and disclosures related to the heloo acquisition.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The revised standard relates to measurement of credit losses on financial instruments, and requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The guidance replaces the incurred loss model with an expected loss model referred to as current expected credit loss (“CECL”). The CECL model requires us to measure lifetime expected credit losses for financial instruments held at the reporting date using historical experience, current conditions and reasonable supportable forecasts. The guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This ASU will be effective for the Company beginning in fiscal year 2023 with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-13 on the Company’s consolidated financial statements.
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3. Business Combination
On April 15, 2022 (the “Closing Date”), the Company completed the acquisition of 100 % of the equity interests of heloo, a Croatia-based Digital Customer Experience solutions provider to European technology companies supporting 20 languages across seven additional Eastern European countries, including Bosnia, Serbia, and Slovenia. The Company believes this acquisition will be complementary to the Company's growth strategy by expanding its global delivery footprint with a suite of multi-lingual, cost-competitive Digital Customer Experience services.
The acquisition date fair value of the consideration transferred was $35.4 million, consisting of the following:
| (in thousands) | ||||||||
Cash consideration(1) | $ | |||||||
Holdback cash consideration(2) | ||||||||
Equity consideration(3) | ||||||||
| Total consideration | $ | |||||||
| (1) | Represents cash consideration paid to the sellers to complete the acquisition. | ||||
| (2) | Represents consideration, which was retained by the Company as security to satisfy sellers' obligations for potential future contractual claims arising under the terms of the purchase agreement; provided that the amount of the holdback shall not serve as any limitation on the indemnification obligations of the sellers under the purchase agreement. The holdback is payable to the sellers, net of any such claims, | ||||
| (3) | Comprised of | ||||
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition:
| (in thousands) | ||||||||
| Cash and cash equivalents | $ | |||||||
| Intangibles | ||||||||
| Goodwill | ||||||||
| Other assets acquired | ||||||||
| Total assets | ||||||||
| Total liabilities assumed | ||||||||
| Net assets acquired | $ | |||||||
The preliminary purchase price allocation was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period (which may be up to twelve months following the acquisition date). The goodwill is derived from anticipated operational synergies and assembled workforce. None of the goodwill recorded is deductible for tax purposes. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the valuation of identifiable intangible assets acquired, the fair value of certain tangible assets acquired and liabilities assumed. The Company expects to continue to obtain information for the purpose of determining the fair value of the assets acquired and liabilities assumed on the acquisition date throughout the remainder of the measurement period. The purchase price allocation is subject to further adjustment until all pertinent information regarding the assets acquired is fully evaluated by the Company, including but not limited to, the fair value accounting.
The preliminary purchase price allocation includes $11.2 million of acquired identifiable intangible assets, consisting of the following:
| (in thousands, except useful lives) | Estimated Fair Value | Estimated Useful Life in Years | ||||||||||||
| Customer relationships | $ | |||||||||||||
| Trade name | ||||||||||||||
| Total | $ | |||||||||||||
The preliminary fair values of the identifiable intangible assets have been estimated using the Excess Earnings Method. The intangible assets are being amortized over their estimated useful lives on a straight-line basis that reflects the economic benefit of the assets. The determination of the useful lives is based upon various industry studies, historical acquisition experience, economic factors, and future forecasted cash flows of the Company following the acquisition of heloo.
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4. Revenue
Disaggregation of Revenue
The Company's revenues are derived from contracts with customers related to business outsourcing services that it provides. The following table presents the breakdown of the Company’s revenues by service offering:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Digital Customer Experience | $ | $ | $ | $ | |||||||||||||||||||
| Content Security | |||||||||||||||||||||||
| AI Services | |||||||||||||||||||||||
| Service revenue | $ | $ | $ | $ | |||||||||||||||||||
The majority of the Company’s revenues are derived from contracts with customers who are located in the United States. However, the Company delivers its services from geographies outside of the United States. The following table presents the breakdown of the Company’s revenues by geographical location, based on where the services are provided from:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Philippines | $ | $ | $ | $ | |||||||||||||||||||
| United States | |||||||||||||||||||||||
| Rest of World | |||||||||||||||||||||||
| Service revenue | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
Accounts receivable, net of allowance for doubtful accounts includes $81.5 million and $75.5 million of unbilled revenues as of September 30, 2022 and December 31, 2021, respectively.
5. Forward Contracts and Fair Value Measurement
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The following table presents the Company's settled forward contracts and realized and unrealized losses (gains) associated with derivative contracts:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Total notional amount of settled forward contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Realized losses (gains) from settlement of forward contracts | $ | $ | $ | $ | ( | |||||||||||||||||||||
| Unrealized losses on forward contracts | $ | $ | $ | $ | ||||||||||||||||||||||
The following table presents the Company's outstanding forward contracts:
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Total notional amount of outstanding forward contracts | $ | $ | |||||||||
By entering into derivative contracts, the Company is exposed to counterparty credit risk, or the failure of the counterparty to perform under the terms of the derivative contract. For the periods presented, the non-performance risk of the Company and the counterparties did not have a material impact on the fair value of the derivative instruments.
The Company has implemented the fair value accounting standard for those assets and liabilities that are re-measured and reported at fair value at each reporting period. This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value based on inputs used, and requires additional disclosures about fair value measurements. This standard applies to fair value measurements already required or permitted by existing standards.
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset and include situations where there is little, if any, market activity for the asset.
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
| Fair value measurements using | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Level 1 inputs | Level 2 inputs | Level 3 inputs | Total | Level 1 inputs | Level 2 inputs | Level 3 inputs | Total | |||||||||||||||||||||||||||||||||||||||
| Forward contracts payable | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
The Company’s derivatives are carried at fair value using various pricing models that incorporate observable market inputs, such as interest rate yield curves and currency rates, which are Level 2 inputs. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or by the Company.
6. Property and Equipment, net
The components of property and equipment, net as of September 30, 2022 and December 31, 2021 were as follows:
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Leasehold improvements | $ | $ | |||||||||
| Technology and computers | |||||||||||
| Furniture and fixtures | |||||||||||
| Construction in process | |||||||||||
| Other property and equipment | |||||||||||
| Property and equipment, gross | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
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The Company’s principal operations are in the Philippines where the majority of property and equipment resides under its wholly owned subsidiaries. The table below presents the Company’s total property and equipment by geographic location as of September 30, 2022 and December 31, 2021:
| (in thousands) | September 30, 2022 | December 31, 2021 | |||||||||
| Philippines | $ | $ | |||||||||
| United States | |||||||||||
| Rest of World | |||||||||||
| Property and equipment, net | $ | $ | |||||||||
7. Goodwill and Intangibles
On April 15, 2022, the Company completed the acquisition of heloo. As a result of the acquisition, the Company recorded approximately $21.6 million of goodwill and $11.2 million of other identifiable intangible assets. See Note 3, “Business Combination” for additional information.
The changes in the carrying amount of goodwill during the period are as follows:
| (in thousands) | |||||
Balance as of December 31, 2021 | $ | ||||
| Acquisition of heloo | |||||
| Foreign currency translation | ( | ||||
Balance as of September 30, 2022 | $ | ||||
The components of intangible assets as of September 30, 2022 and December 31, 2021 were as follows:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (in thousands) | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | ||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Trade name | ( | |||||||||||||||||||||||||||||||||||||