StarTek(SRT) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company reported a net loss in Q3 2023 and for the nine months, driven by significant impairment charges and asset reclassifications due to divestitures Consolidated Statement of Income (Loss) Startek reported a Q3 2023 net loss of $24.2 million due to a $24.9 million impairment charge, reversing prior year's net income Consolidated Statement of Income (Loss) Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $93,629 | $94,878 | $276,915 | $292,117 | | Gross Profit | $12,488 | $14,567 | $37,133 | $38,935 | | Operating Income (Loss) | $(22,728) | $1,540 | $(19,065) | $4,475 | | Impairment Losses | $(24,894) | $(37) | $(24,769) | $(110) | | Income (Loss) from Continuing Operations | $(24,597) | $133 | $(25,186) | $1,813 | | Net Income (Loss) Attributable to Startek Shareholders | $(24,230) | $243 | $(18,365) | $867 | | Basic Net Income (Loss) per Share | $(0.60) | $0.01 | $(0.45) | $0.02 | Consolidated Balance Sheet Total assets decreased to $369.5 million due to asset reclassification and sales, while liabilities and equity also declined following debt repayments and net loss Consolidated Balance Sheet Highlights (in thousands) | Metric | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $130,921 | $355,738 | | Assets classified as held for sale | $7,783 | $202,831 | | Total Assets | $369,485 | $626,043 | | Total Current Liabilities | $105,630 | $288,461 | | Current maturity of long term debt | $12,269 | $120,466 | | Total Liabilities | $199,049 | $374,477 | | Total Stockholders' Equity | $170,436 | $251,566 | Consolidated Statement of Cash Flows Operating cash flow decreased to $5.2 million, while investing activities provided $21.5 million from divestitures, and financing used $98.7 million for debt repayment Consolidated Statement of Cash Flows Highlights (in thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $5,226 | $22,268 | | Net cash from investing activities | $21,489 | $(11,939) | | Proceeds from sale of discontinued operations | $35,782 | - | | Net cash from financing activities | $(98,711) | $(1,963) | | Payments of long term debt | $(93,466) | - | | Net (decrease) in cash and cash equivalents | $(71,996) | $8,366 | Notes to Consolidated Financial Statements Key notes include the CCC divestiture, goodwill impairment, Argentina operations held for sale, a merger agreement to go private, and a $20 million share repurchase program - On April 3, 2023, the company completed the sale of its 51% ownership interest in Contact Center Company (CCC) for a final consideration of $69.8 million, recognizing a pre-tax gain on disposal of $11.7 million[84][89] - The company has classified its Argentina operations as 'Held for Sale and Discontinued Operations' and is in advanced discussions with potential buyers[91][92] - Due to a decline in the forecasted business outlook, the company recorded a goodwill impairment charge of $19.6 million across its Americas, India, Malaysia, and Australia reporting units[98][99][119] - On October 10, 2023, Startek entered into a merger agreement to be acquired by affiliates of CSP Alpha and taken private. Shareholders will receive $4.30 in cash per share. The transaction is expected to close before the end of 2023[164][167] - In April 2023, the Board approved a new share repurchase program authorizing the company to buy back up to $20 million of its common stock[161] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2023 revenue decline, gross margin compression, significant impairment charges, the pending merger, and strengthened liquidity - A definitive merger agreement was signed on October 10, 2023, for the company to be taken private by affiliates of CSP Alpha and CSP Victory at a price of $4.30 per share in cash[173] - The company completed the sale of its stake in the Saudi Arabia joint venture (CCC) on April 3, 2023, for $69.8 million[178] - Q3 2023 revenue decreased by 1.3% YoY, driven by declines in India & Sri Lanka, Australia, and South Africa, while the Americas region grew[179][181] - A major impairment charge of $24.9 million was recorded in Q3 2023, consisting of $19.6 million for goodwill and $4.8 million for right-of-use assets, due to a revised business forecast and infrastructure rationalization[195] - The company significantly reduced its leverage by repaying about 60% of its debt outstanding at the start of the year, using proceeds from divestments[226] Results of Operations — Three Months Ended September 30, 2023 and 2022 Q3 2023 revenue declined 1.3% to $93.6 million due to regional volume reductions, while gross margin compressed and a significant impairment charge led to an operating loss Revenue by Segment (in thousands) | Segment | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Americas | $47,860 | $39,444 | | India & Sri Lanka | $22,365 | $27,888 | | Malaysia | $11,262 | $11,357 | | Australia | $7,680 | $9,845 | | South Africa | $4,460 | $5,392 | | Total | $93,629 | $94,878 | Revenue by Industry Vertical (in thousands) | Vertical | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Telecom | $24,134 | $25,309 | | E-commerce & Consumer | $15,524 | $20,276 | | Media & Cable | $15,439 | $10,748 | | Financial & Business Services | $11,040 | $13,372 | | Total | $93,629 | $94,878 | - Gross margin decreased to 13.3% in Q3 2023 from 15.4% in Q3 2022, as cost of services increased as a percentage of revenue[192][193] - SG&A expenses decreased to 11.0% of revenue from 13.7% in the prior year, partly due to a one-time $1.4 million take-private transaction cost in Q3 2022[194] Results of Operations — Nine Months Ended September 30, 2023 and 2022 Nine-month revenue decreased 5.2% to $276.9 million, with regional declines offsetting Americas growth, while gross margin slightly improved despite a $24.8 million impairment charge Revenue by Segment - Nine Months (in thousands) | Segment | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | | Americas | $137,894 | $126,811 | | India & Sri Lanka | $67,770 | $82,112 | | Malaysia | $32,541 | $34,068 | | Australia | $24,939 | $28,952 | | South Africa | $13,734 | $17,574 | | Total | $276,915 | $292,117 | - Gross profit as a percentage of revenue for the nine-month period increased slightly to 13.4% from 13.3% in the prior year[215][216] - Impairment losses and restructuring costs totaled $24.8 million for the nine months ended Sep 30, 2023, compared to just $110 thousand in the prior year period[218] Liquidity and Capital Resources Liquidity sources include cash from operations and debt facilities, with $96.3 million in debt repayments made from divestment proceeds, and the company remains covenant compliant - The company made a prepayment of $96.3 million towards its term loan and revolving credit facility from the proceeds of divestments[227] - Cash provided by operating activities for the nine months ended Sep 30, 2023, was $12.9 million, compared to $10.8 million in the same period of 2022[228] - As of September 30, 2023, the company was in compliance with all financial covenants related to its term loan[226] Quantitative and Qualitative Disclosures About Market Risk As a Smaller Reporting Company, Startek is not required to provide this information - The company qualifies as a Smaller Reporting Company and is therefore not required to provide this disclosure[237] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of September 30, 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[238] - No material changes were made to the company's internal control over financial reporting during the third quarter of 2023[240] PART II - OTHER INFORMATION Legal Proceedings The company reported no legal proceedings during the period - None[242] Risk Factors New material risk factors relate to the pending merger, including non-completion risks, adverse impacts, and potential termination fees - The consummation of the merger is subject to conditions that are largely outside the company's control, and failure to meet them could lead to termination of the agreement[244] - Failure to complete the merger could adversely affect the company's stock price, business, and financial condition due to incurred transaction costs and business disruptions[246] - While the merger is pending, the company is subject to contractual restrictions that could prevent it from pursuing beneficial strategic transactions or responding to competitive pressures[248] - The company may be required to pay a termination fee of $1.85 million to the acquirer if the merger agreement is terminated under specific circumstances, such as the board changing its recommendation[253] Unregistered Sales of Equity Securities and Use of Proceeds A new $20 million share repurchase program was approved, with 65,990 shares repurchased at $2.94 per share - A new share repurchase program was approved on April 24, 2023, authorizing up to $20 million in common stock repurchases[257] - During the first nine months of 2023, the company repurchased 65,990 shares at an average cost of $2.94 per share[256] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[259] Mine Safety Disclosure This item is not applicable to the company - Not applicable[260] Other Information No director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended September 30, 2023 - No director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended September 30, 2023[261] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications (Sections 302 and 906) and the Inline XBRL financial data