StarTek(SRT) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents Startek, Inc.'s unaudited consolidated financial statements, including income, balance sheets, cash flows, and notes on key events like the CCC sale and Argentina operations Consolidated Statement of Income (Loss) Highlights (Unaudited, In thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $91,197 | $96,147 | $183,286 | $197,239 | | Gross Profit | $11,663 | $11,034 | $24,645 | $24,823 | | Operating Income (Loss) | $1,307 | $1,108 | $3,663 | $2,941 | | Income (Loss) from Continuing Operations | ($31) | $2,447 | ($589) | $1,680 | | Income (Loss) from Discontinued Operations | $6,566 | $181 | $9,043 | $1,234 | | Net Income (Loss) Attributable to Startek | $6,535 | $1,867 | $5,865 | $624 | Consolidated Balance Sheet Highlights (Unaudited, In thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $34,908 | $22,457 | | Assets classified as held for sale | $8,416 | $202,831 | | Total Assets | $404,786 | $626,043 | | Total Debt (Short & Long Term) | $78,497 | $175,908 | | Total Liabilities | $209,486 | $374,477 | | Total Stockholders' Equity | $195,300 | $251,566 | Consolidated Statement of Cash Flows Highlights (Unaudited, In thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $491 | $9,650 | | Net cash from/(used in) investing activities | $23,690 | ($7,135) | | Net cash used in financing activities | ($97,959) | ($634) | Note 1: Overview and Basis of Preparation Startek is a global technology-enabled business process management provider, with financial statements prepared under U.S. GAAP, noting Middle East and Argentina operations as discontinued - The company provides omni-channel customer experience, digital transformation, and technology services to over 145 clients in various industries[30] - Operations in the Middle East and Argentina were classified as 'Held for Sale and Discontinued Operations' during the previous year[32] Note 2: Summary of Significant Accounting Policies This note details significant accounting policies, including revenue recognition, impairment testing, and lease accounting, highlighting the adoption of ASC Topic 326 which decreased retained earnings by $101 thousand - The company adopted ASC Topic 326 (Financial Instruments—Credit Losses) on January 1, 2023, using a modified retrospective approach, resulting in a cumulative-effect adjustment decreasing opening retained earnings by $101 thousand[79][108] - Revenue is recognized over time as services are performed, based on a stand-ready obligation to provide care services for customers' clients[101][103] - Goodwill is tested for impairment annually on December 31 or when triggering events occur, using a qualitative assessment followed by a quantitative test if necessary[48] Note 3A: Discontinued Operations and Held for Sale - Contact Center Company (CCC) The company completed the sale of its 51% stake in Contact Center Company (CCC) for $69.8 million, resulting in an $11.7 million pre-tax gain reported within discontinued operations - The sale of the 51% stake in CCC was completed on April 3, 2023, for a final consideration of $69.8 million[83] Gain on Disposal of CCC (June 30, 2023, In thousands) | Description | Amount | | :--- | :--- | | Gross purchase price, as adjusted | $69,800 | | Less: Carrying value of net assets sold | ($55,122) | | Less: Unrecognised pension costs | ($3,062) | | Add: Foreign currency translation | $50 | | Pre-tax gain on disposal | $11,666 | Note 3B: Discontinued Operations and Held for Sale - Argentina The company classified its Argentina operations as held for sale, reporting a net loss of $2.4 million on $13.0 million revenue for the six months ended June 30, 2023 - The company is actively seeking to sell its Aegis Argentina operations and has entered into discussions with potential buyers during Q2 2023[89] Argentina Discontinued Operations Financial Summary (Six Months Ended, In thousands) | Metric | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Revenue | $12,964 | $15,978 | | Operating Loss | ($4,072) | ($3,337) | | Net Loss | ($2,419) | ($2,273) | Note 4: Goodwill and Intangible Assets As of June 30, 2023, the company reported $120.5 million in goodwill and $74.6 million in net intangible assets, with no impairment identified during the period - Based on a qualitative assessment as of June 30, 2023, management concluded there was no impairment of goodwill[94] Goodwill and Intangible Assets (June 30, 2023, In thousands) | Asset | Net Value | | :--- | :--- | | Goodwill | $120,505 | | Net Intangible Assets | $74,602 | Note 10: Debt Total debt significantly reduced to $78.5 million as of June 30, 2023, from $175.9 million at year-end 2022, primarily due to prepayments from CCC disposal proceeds, with the company in compliance with all covenants - In April 2023, the company used proceeds from the CCC sale to make a prepayment of $48 million against its senior term loan and $7 million against revolving credit facilities[134] Debt Summary (In thousands) | Debt Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Short term debt | $11,089 | $14,267 | | Current portion of long term debt | $6,564 | $120,466 | | Long term debt | $60,848 | $41,175 | | Total | $78,501 | $175,908 | Note 14: Segment and Geographical Information The company's operations are segmented geographically, with the Americas being the largest revenue contributor at $90.0 million and highest operating income at $4.8 million for the six months ended June 30, 2023 Revenue by Segment (Six Months Ended June 30, In thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Americas | $90,035 | $87,367 | | India & Sri Lanka | $45,405 | $54,224 | | Malaysia | $21,278 | $22,711 | | Australia | $17,259 | $19,107 | | South Africa | $9,275 | $12,182 | | Total | $183,286 | $197,239 | - A single client in the Americas segment accounted for 10% of the consolidated total net revenue for the six months ended June 30, 2023 and 2022[144] Note 16: Common Stock The Board approved a new $20 million stock repurchase program on April 24, 2023, with 51,979 shares repurchased at an average price of $2.96 per share during the six months ended June 30, 2023 - A new stock repurchase plan was approved on April 24, 2023, authorizing up to $20 million in share buybacks[153] - During the six months ended June 30, 2023, the company repurchased 51,979 shares for a total cost of approximately $154 thousand[155][228] Note 17: Subsequent Events CSP Fund II LP made an open offer on July 18, 2023, to acquire all outstanding Startek common stock not already owned by its affiliates for $3.80 per share in cash - CSP Fund II LP made an open offer to acquire all outstanding common shares it does not already own at a price of $3.80 per share on July 18, 2023[156] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial results, noting revenue decreases in Q2 and H1 2023 due to volume reductions, offset by improved gross margin from favorable geography mix and significant debt reduction post-CCC divestiture Results of Operations — Three Months Ended June 30, 2023 and 2022 Q2 2023 revenue decreased 5.1% to $91.2 million due to volume declines, but gross profit increased to $11.7 million, and gross margin improved to 12.8% due to favorable geography mix and lower employee costs Q2 Revenue by Segment (In thousands) | Segment | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Americas | $45,558 | $41,952 | | India & Sri Lanka | $22,158 | $26,264 | | Malaysia | $10,696 | $11,431 | | Australia | $8,271 | $9,628 | | South Africa | $4,509 | $5,992 | | Total | $91,197 | $96,147 | Q2 Gross Profit and Margin (In thousands) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Revenue | $91,197 | $96,147 | | Cost of services | $79,534 | $85,113 | | Gross profit | $11,663 | $11,034 | | Gross margin | 12.8% | 11.5% | - The decrease in cost of services as a percentage of revenue (to 87.2% from 88.5%) was primarily driven by a change in geography mix with higher revenues from lower-cost offshore and nearshore delivery locations[173][174] Results of Operations — Six Months Ended June 30, 2023 and 2022 H1 2023 revenue decreased 7.1% to $183.3 million, primarily from India & Sri Lanka, South Africa, and Australia, while gross margin improved to 13.4% due to a better geography mix H1 Revenue by Segment (In thousands) | Segment | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Americas | $90,035 | $87,367 | | India & Sri Lanka | $45,405 | $54,224 | | Malaysia | $21,278 | $22,711 | | Australia | $17,259 | $19,107 | | South Africa | $9,275 | $12,182 | | Total | $183,286 | $197,239 | H1 Gross Profit and Margin (In thousands) | Metric | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Revenue | $183,286 | $197,239 | | Cost of services | $158,641 | $172,416 | | Gross profit | $24,645 | $24,823 | | Gross margin | 13.4% | 12.6% | Liquidity and Capital Resources The company's liquidity sources include cash from operations and debt facilities, with cash decreasing to $39.1 million due to using divestment proceeds to repay approximately 60% of outstanding debt, while remaining in compliance with all covenants - The company made a repayment of around 60% of debt outstanding at the beginning of the year from the proceeds of the CSS Corp and CCC divestments[208] - Net cash used in financing activities was $97.7 million for H1 2023, primarily due to the repayment of senior term debt[212] - As of June 30, 2023, the company was in compliance with all financial covenants associated with its term loan[208] Quantitative and Qualitative Disclosures About Market Risk As a Smaller Reporting Company, Startek is not required to provide quantitative and qualitative disclosures about market risk - As a Smaller Reporting Company, Startek is not required to provide the information for this item[220] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[221] - No changes occurred in the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[223] PART II - OTHER INFORMATION Legal Proceedings The company reported no legal proceedings for the period - None[225] Risk Factors No material changes to risk factors were reported, except for the removal of a joint venture-related risk factor following the CCC disposal - A risk factor concerning alliances and joint ventures is no longer applicable due to the disposal of the company's interest in the CCC joint venture[226] Unregistered Sales of Equity Securities and Use of Proceeds The Board approved a new $20 million stock repurchase program on April 24, 2023, with 51,979 shares repurchased at an average price of $2.96 per share during H1 2023 - The Board of Directors approved a new stock repurchase program for up to $20 million on April 24, 2023[229] - In H1 2023, the company repurchased 51,979 shares at an average cost of $2.96 per share[228] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[231] Mine Safety Disclosure This item is not applicable to the company - Not applicable[232] Other Information No director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2023 - No director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2023[233] Exhibits This section lists exhibits filed with Form 10-Q, including consent requests, separation agreements, and CEO/CFO certifications - Key exhibits include CEO and CFO certifications (31.1, 31.2, 32.1) and Inline XBRL data (101)[234]