Startek, Inc. - Annual Report: 2022 (Form 10-K)

Part I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K contains 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:

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.  All forward-looking statements herein speak only as of the date hereof, and we undertake no obligation to update any such forward-looking statements. 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 set forth in Item 1A. “Risk Factors” appearing in this Form 10-K.

Unless otherwise noted in this report, any description of “us," “we” or "our" refers to Startek, Inc. ("Startek") and its subsidiaries. Financial information in this report is presented in U.S. dollars in thousand unless otherwise stated.

ITEM 1. BUSINESS

BUSINESS OVERVIEW

Startek, Inc. (“Startek”, the Company”, “we”, “our” or “us”) is a global customer experience (CX) solution provider supporting some of the world’s most iconic brands across a variety of markets. Operating under the Startek and Aegis brands, we enable enterprises to create human-centered relationships with their end customers, transform CX and accelerate digital and artificial intelligence (AI) enablement across touchpoints and channels. We do this through CX and analytics services, technology-led innovation, engagement solutions, and a complete range of services that support the customer life cycle management (CLM) process. Our solutions are supported by over 33,000 employees, delivering services in 11 countries. Each day, our CX experts work together to deliver personalized, meaningful brand-led experiences.

The Company was founded in 1987, centered on supply chain management services, including packaging, fulfillment, marketing support, and logistics services. After our initial public offering on June 19, 1997, we increasingly focused on operating customer care contact centers and grew to include our current suite of CX offerings. To remain strategically competitive while expanding our reach with new and existing clients, we acquired several companies from 2013 to 2015. On July 20, 2018, the Company acquired CSP Alpha Midco Pte Ltd, a Singapore private limited company (Aegis), which resulted in CSP Alpha Holdings Parent Pte Ltd, a Singapore private limited company (Capital Square Partners or CSP) owning a majority of the Company's outstanding shares. Capital Square Partners, a Singapore-based private equity fund, owns approximately 56% of our outstanding shares. The combination greatly improved our competitive position in the market by providing us with access to many of the world’s most rapidly growing markets, offering services in many languages, offering a strong footprint and a foundation of operational excellence capabilities and industry best practices.

We offer CX solutions across industries with tailored expertise in the cable and media, telecom, e-commerce and consumer, healthcare and education, technology and related service, financial and business services, travel and hospitality, and utilities sectors. We serve over 140 clients globally, many of whom are industry leaders in their respective verticals and geographies. We understand the industries in which our clients operate and the unique challenges they face, we also understand the culture of the business or geography within which our services are delivered. We believe our knowledge of best practices across different industries coupled with an understanding of the solutions that can be implemented in the context of our clients’ operating environments, enables us to improve processes and performance metrics driving measurable results that differentiate our clients from their competitors. The trust and confidence that our clients have in us are underscored by the long relationships we enjoy with many of our key clients; we have worked with our top five clients for more than nine years on average. We hold the distinction of being a global company with a local approach, one that allows our customers to realize efficiencies by blending onshore, nearshore, and offshore service delivery. Our global capabilities enable us to build customized experiences across cultures and continents. 

During the year, the Company has classified Middle East and Argentina operations as 'Held for Sale and Discontinued Operations' and accordingly discussions in the Business section pertains to continuing operations of the Company.

Service Offerings

Startek offers a broad range of CX, technology and back-office support solutions designed to enable our clients to gain a competitive advantage by transforming their operations. Our solutions are highly configurable, insight-driven, technology-led and vertical-specific and are built to meet each client’s unique needs.

Customer Engagement

To outpace others in their fields, our clients' must constantly find ways to stand apart. For leading brands, CX is an increasingly important differentiator. Our clients rely on Startek to devise and deliver experiences that meet and exceed customer needs, building long-term relationships. We are experts in combining people, data and technology to deliver omnichannel solutions that enable the delivery of world-class experiences across both live and automated channels. 
 

Omnichannel Engagement

Today, customers expect fast, 24/7, personalized experiences through analytics, we enable our clients to understand the customer journey and identify the touchpoints that are ideal for automation while also highlighting those moments that include high emotional effort where the empathy of human-to-human interaction is essential. Combining voice and non-voice live agent contacts with digital interactions in a single 360-degree customer view, Startek enables seamless, personalized omnichannel CX.   

Social Media

From brand building to social commerce, an effective social media presence is a must for brands across the globe. We design and power intelligent social media support solutions that integrate across channels. Recognized as a leader in social media CX, we enable our clients to build social media communities that are performance-driven, brand-aligned and drive loyalty. Our approach is underpinned by our award-winning proprietary platform, Startek LISA, that tracks and monitors social conversation threads across numerous niche digital streams and enables clients to derive actionable intelligence and opportunities. As a trusted partner, we work with brands from inception to maturity ensuring our clients realize true value by creating experiences and business outcomes that meet their needs and exceed their expectations.

Customer Intelligence Analytics

A digitally-driven, customer-centric and data-filled world requires intelligent decision-making. That means leveraging data, next-gen technologies and capabilities. It can be hard for organizations to uncover the insights hidden in their unstructured data. As CX solutions providers, Startek understands the value of the insights revealed by analytics. We leverage the latest technology to shape relationships, scale businesses, predict behaviors, segment customers and augment CX. This translates consumer insights and big data into initiatives that drive transformation and above-market growth.

Work from Home

Volatile market conditions, shortage of talent and unprecedented challenges have driven widespread adoption of work from home (WFH) CX delivery. Our approach is unique because it is highly secure, highly compliant and highly flexible. We leverage a cloud-enabled virtual desktop for our agents with a bring your own device (BYOD) approach. A virtual command center, consisting of functional and business leaders is always on to enable real-time monitoring of business continuity across geographies. Data security is one of our strongest assets, we make use of AI-enabled applications that activate alerts, conduct monitoring, offer facial detection systems, watermark and mask secure content, making our clients' businesses more resilient and agile. We retain client confidence with our proven, secure and compliant WFH technologies, deepening our clients’ connection with their customers through digital, contactless customer communication.

Startek Cloud

In a rapidly changing world, the cloud empowers novel and flexible operating models. As part of our geo-strategy, accelerated by global shifts, we have moved to the Campus on Cloud framework. Startek Cloud is our next-generation, hybrid, omni-cloud platform. Integrated with AI capabilities, Startek Cloud enables agents to work in remote and home-based roles for increased business agility and continuity. With a foundation based on four pillars - virtual desktop cloud, web-enabled contact center, workforce management, and e-learning - it is a system that serves every real-time requirement, on-demand.

Back Office Services

Enhancing a customer-centric approach to relationships while maximizing operating efficiencies, we support clients through finance and accounting services, human resource processing services, data management and spend management services. These back-office services are designed to help our clients achieve their business objectives by automating repetitive processes and aligning human capital with business goals.

Our Clients

We develop long-term relationships with global corporations and medium-sized enterprises across the globe whose business complexities and customer focus require a strategic partner capable of quickly and globally scaling the tools, technology and talent needed to deliver world-class CX. We provide these services to clients from our delivery campuses across North America, South America, Africa, Asia, and Australia.

As of December 31, 2022, we have a diverse client base of more than 140 clients across a variety of verticals, including Fortune 500 companies and disruptive start-ups. We are focused on the continued diversification of our client portfolio, targeting high-growth verticals such as retail and e-commerce, travel and hospitality, financial and business services and exploring emerging opportunities in healthcare and education. Our revenue for the year ended December 31, 2022, by industry served were as follows:

During the year ended, December 31, 2022, our largest client, top five and ten clients represented 10%, 36% and 54% of total revenue, respectively. Master Service Agreements (MSAs) cover all our work for each client and are typically multi-year contracts that may or may not include auto-renewal provisions. Although they typically do not include contractual minimum volumes and can generally be terminated by the client without penalty upon prior written notice, our relationships with our top five clients have averaged around nine years, including multiple contract renewals for several of these clients.

Our clients’ CX needs continue to evolve and expand beyond basic order processing or first-tier contacts to handling complex issues that require advanced problem-solving skills and an in-depth understanding of their customers as well as a need to devise the most appropriate solutions to deliver personalized experiences and build a highly qualified talent pool able to deliver empathy-led CX.

Clients are increasingly seeking out solutions providers with the ability to effectively combine people, data and technology for the best combination of CX and cost efficiency. As such, our focus on attracting and retaining talent, leveraging the latest technology to deliver innovative solutions and the effectiveness of insights gained through the application of analytics, ensures we are a preferred partner for leading brands around the globe.

Key Competitive Differentiators

Our client base is predominantly comprised of leading global and regional brands. We believe our international footprint, world-class technology and human capital solutions are ideally suited for these clients. These brands increasingly seek CX partners who embrace customer-centricity and are capable of driving the innovation agenda to transform their CX delivery. With economic uncertainty driving organizations to consider how they can be more efficient while also continuing to build long-term customer relationships, we believe that our insights and analytics, technology-led innovation and customizable CX solutions differentiate us in the market place and position us for growth. Additionally, we believe our innovative human capital strategies and operational best practices represent key competitive advantages. The successful execution of our principal corporate strategies depends on our competitive strengths, which are briefly described below:

Scale and Global Footprint

We are a truly global business with global clients, global management teams, global best practices and global thinking. Our vast footprint provides clients with access to some of the world’s most rapidly growing markets and multilingual centers while our global approach ensures the institutionalization of operational best practices consistently across the globe. Our scale, breadth and capabilities support clients with global business requirements by providing CX services in the country, in location with close geographic proximity or an offshore location based on their needs.

Customer Experience and Design

Our digital approaches build differentiated CX every step of the way in order to build brand loyalty and lifetime value. We design and deliver CX solutions through an integrated omnichannel customer contact management offering. Our primary focus is enabling brands to devise contact strategies that maximize the benefits of each channel, reducing customer effort and increasing ease of use.

Customer Lifecycle Management

Understanding the lifetime view of the client or customer is key in obtaining enhanced value. From initial lead to building long-term brand loyalty, we enable our clients to build more meaningful relationships with their customers as part of an ongoing relationship. We offer cradle-to-grave multilingual solutions across the customer life cycle and fulfillment across digitally enabled multilingual channels. From data-driven insights, attracting and retaining customers to converting sales, we enable clients to deliver personalized one-to-one experiences.

Process Innovation and Optimization

We free our clients from the burden of repetitive, mundane processes that take up time and effort. We assist them with change management and lead them to streamlined, global processes that drive them to the next level of maturity. We use global best practices, tools and methodologies to automate their business process, and, above all, deliver quality assurance.

Technological Excellence: a Serious Approach to Digital

We believe that Startek provides clients with unmatched infrastructure stability. We utilize a combination of industry best practices, internally developed tools and a globally distributed team of engineers and support staff to centralize and standardize our worldwide delivery capabilities. This architecture enables us to deliver improved scalability and quality of delivery for our clients while lowering capital requirements and information technology operating costs. Through automation and machine learning, we seamlessly identify faults in third-party applications and route around or drive repair. The stability of our infrastructure allows us to provide seamless contact delivery while also focusing on developing and delivering new, innovative offerings, including chatbots, AI and neurolinguistic programming. Our IT solutions are not only technologically sound, but they also embody the principles of human communication science to ensure a more interactive experience for our clients’ customers.

Operational Excellence

Our operating platform provides the core processes that allow us to be consistent in our service offering across sites and geographies. It includes execution and innovation in every area of the operation including on-boarding and enabling employees, executing against goals, evaluating, and improving performance, and enhancing the total experience of our clients’ customers.

Human Capital

We have more than 30 years’ experience managing global talent and offer a consistent, scalable and flexible workforce that is passionate about delivering the world-class CX while meeting or exceeding our clients’ key business objectives. We consistently invest in forward-thinking strategies to attract, develop, reward and retain top talent across our global enterprise. Our talent management processes are based on the latest strategies in the field of human capital management and are designed to create a progressive workplace where employees thrive in a culture of empowerment, inclusion, and diversity. We place a high emphasis on diversity and inclusivity – using our award-winning six-dimensional framework which helps us hire top talent from new sources and drives superior performance, reduced turnover and enhanced levels of engagement.

We recognize our associates as central to our success and provide them with learning opportunities, multicultural exposure, international work opportunities, and multiple career paths. As of December 31, 2022, we employ approximately 33,000 employees in 11 countries. Approximately 96% of our employees are located outside the U.S. We consider our employee relations to be good.

Strategy

We are committed to creating value for our customers, opportunity for our people and profitable growth for our shareholders. We believe we have a built a strong foundation for our success and we continue to realize synergies, revenue growth and operating efficiencies as a result of bringing the two businesses together. To that end, we will continue:

Driving a superior CX for our clients is at the center of everything we do. Our agents are on the front lines every day working to build and maintain strong customer relationships that drive sales, satisfaction, and loyalty for our client's brands. To help us accelerate revenue growth across the globe, we will continue to invest in our core CX solutions, including strengthening our consulting and analytics capabilities, technology-enabled platforms, and embedding findings from research in human communication science.

Seasonality

Our business can be seasonal depending on our clients' marketing programs and product launches. These are often geared toward the end of summer and the winter holiday buying season in the U.S. and during major local festival seasons across our other geographies.

Industry

The industry is evolving to include key strategic elements beyond traditional contact centers and now includes CX consulting and digital CX services. Despite ongoing market consolidation through multiple mergers and acquisitions, this expanded scope of services driven by the digital CX needs of enterprises is likely to increase the market attractiveness for not only incumbent players but also for new providers with differentiated digital CX capabilities, according to industry research firm Everest Group.

Competition

The global customer experience management (CXM) market in which we operate is competitive. While many companies provide customer engagement solutions and services, we believe no single company is dominant in the industry. The industry itself continues to consolidate but remains very fragmented with the five largest competitors combined capturing less than 20% of the global market.

Our competitors vary by geography and business segment, and range from large, multinational corporations to smaller, narrowly focused enterprises. Across our lines of business, the principal competitive factors include client relationships, technology, and process innovation, integrated solutions, operational performance and efficiencies, pricing, and financial strength. We primarily compete with in-house customer management operations and other companies that provide CX management, including Alorica, Concentrix, Sitel Group, TTEC, Teleperformance, and Transcom, among others. We also compete with smaller, specialized companies and divisions of multinational companies such as Accenture, Conduent, Infosys, Tech Mahindra, and Wipro, among others.

Many of these competitors are significantly larger than Startek in revenue, income, number of contact centers and customer service agents, number of product offerings and market capitalization. While Startek is smaller than many of our competitors, our focus, scale and ability to add value to our clients' businesses put us in an enviable position. Everest Group, for example, recently counted Startek among only 14 providers with the capabilities necessary to effectively support global CX delivery. Clients often select Startek to challenge larger players in the CXM space because they want more innovation, flexibility and speed to market.

Government and Environmental Regulation

We are subject to numerous federal, state, and local laws in the countries, states, and territories in which we operate, including tax, employment, environmental and other laws that govern the way we conduct our business. There are risks inherent in conducting business internationally, including significant changes in domestic government programs, policies, regulatory requirements, and taxation with respect to foreign operations; unexpected changes in foreign government programs, policies, regulatory requirements, and labor laws; and difficulties in staffing and effectively managing foreign operations.

CORPORATE INFORMATION

Our principal executive offices are located at 4610, South Ulster Street, Suite 150, Denver, Colorado - 80237. Our telephone number is (303) 262-4500. Our website address is www.startek.com. Our stock currently trades on the New York Stock Exchange (NYSE) under the symbol SRT. 

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) are available free of charge through our website (www.startek.com) as soon as practicable after we furnish it to the Securities and Exchange Commission (SEC). We also make available on the Investor Relations page of our corporate website, the charters for the Compensation Committee, Audit Committee and Governance and Nominating Committee of our Board of Directors, as well as our Corporate Governance Guidelines and our Code of Ethics and Business Conduct.

None of the information on our website or any other website identified herein is part of this report. All website addresses in this report are intended to be inactive textual references only.

ITEM 1A.  RISK FACTORS 

Market and Client Related Risks

A substantial portion of our revenue is generated by a limited number of clients. The loss or reduction in business from any of these clients would adversely affect our business and the results of operations.

During the year ended, December 31, 2022, our largest client, top five and ten clients represented 10%, 36% and 54% of total revenue, respectively. Any loss of business from any major client could reduce our revenue and significantly harm our business.

We may not be able to retain our principal clients. If we were to lose any of our principal clients, we may not be able to replace the revenue on a timely basis. Several factors other than our performance could cause the loss of a client or reduction of business from a client. In certain cases, our business may be impacted when a large client changes its outsourcing strategy by moving more work in-house. Reduced outsourcing spending in response to a challenging economic or competitive environment may also result in our loss of a client.

The future revenue we generate from our principal clients may decline or grow at a slower rate than expected or than it has in the past. In the event we lose any of our principal clients or do not receive call volumes anticipated from these clients, we may suffer from the costs of underutilized capacity because of our inability to eliminate all the costs associated with conducting business with that client. This could exacerbate the effect that the loss of a principal client would have on our operating results and financial condition. Additional, productivity gains could be necessary to offset the negative impact that lower per-minute revenue at higher volume levels would have on our margins in future periods.

We depend on several large clients concentrated in a few industries, as well as clients located in a few geographies. Economic slowdown or factors that affect these industries could reduce our revenues and harm our business.

A substantial portion of our clients is concentrated in the telecom industry. During the year ended December 31, 2022, we derived 26% of our total revenues from the telecommunication industry. We expect to continue to experience volatility with regard to call volumes within our telecom client base in 2023. The shift in client demand from voice-based solutions toward digital CX solutions may increase as digital solutions become more effective at resolving customers’ needs. This may lower the demand for our voice-based services or impact the prices that we can obtain for our services, and this may adversely affect our revenues and profitability. A reduction in the amount of business we receive from our clients could also result in stranded capacity and costs and adversely affect our business, results of operations, and financial condition.

Economic slowdowns in some markets, particularly the U.S., Saudi Arabia, India, Australia, South Africa, Malaysia, and Argentina may cause reductions in spending by our clients. This may impede our ability to maintain existing business, or develop new business, and adversely impact the results of our operations and our financial condition. Three factors could result in a decrease in the demand for our services and adversely affect our results of operations. They are a downturn in any of our targeted industries, particularly telecoms, banking and financial services, travel and leisure industries, a slowdown or reversal of the trend to offshore business process outsourcing in any of these industries, or the introduction of regulation that restricts or discourages companies from outsourcing.

Client consolidation could result in a loss of business that would adversely affect our operating results.

The telecommunications industry has had a significant level of consolidation. We cannot assure that additional consolidations will not occur in which our clients acquire additional businesses or are acquired themselves. Such consolidations may decrease our business volume and revenue, which could have an adverse effect on our business, results of operations, and financial condition.

Our contracts generally do not contain minimum purchase requirements and can generally be terminated by our customers on short notice without penalty.

We enter into written agreements with each client for our services and seek to sign multi-year contracts. However, these contracts generally permit termination upon 30 to 90 days' notice by our clients; they do not designate us as our clients' exclusive outsourced services provider, do not penalize our clients for early termination, hold us responsible for work performed that does not meet predefined specifications, and do not contain minimum purchase requirements or volume commitments. Accordingly, we face the risk that our clients may cancel or renegotiate contracts we have with them, which may adversely affect our results. If a principal client canceled or did not renew their contract with us, our results would suffer. In addition, because the amount of revenue generated from any client is generally dependent on the volume and activity of our clients' customers, as described above, our business depends in part on the success of our client's products. The number of customers who are attracted to the products of our clients may not be sufficient or our clients may not continue to develop new products that will require our services, in which case it may be more likely for our clients to terminate their contracts with us. Clients can generally reduce the volume of services they outsource to us without any penalties, which would have an adverse effect on our revenue, results of operations and overall financial condition.

Our strategy depends on companies continuing to outsource non-core services.

Some of our clients have been decreasing the number of firms they rely on to provide outsourced services. Due to financial uncertainties and the potential reduction in demand for our client's products and services, our clients and prospective clients may decide to further consolidate the number of firms on which they rely for outsourced services. Under these circumstances, our clients may cancel current contracts with us, or we may fail to attract new clients, which will adversely affect our financial condition.

Intense competition in the market for outsourcing services could affect our win rates and pricing, which could reduce our share of business from clients and decrease our revenues and/or our profits.

Our revenues and profits depend, in part, upon the continued demand for our services by our existing and new clients and our ability to meet this demand in a competitive and cost-effective manner. The outsourcing services market is highly competitive. Our competitors include large global outsourcing and technology firms, regional outsourcing services firms, software and solution providers, niche service providers, and in-house customer support services departments of large corporations.

The outsourcing services industry is experiencing rapid changes that are affecting the competitive landscape, including recent divestitures and acquisitions that have resulted in consolidation within the industry. These changes may result in larger competitors with significant resources or competitors with more competitive service offerings in emerging areas of demand, such as digital solutions, cloud-based solutions, and AI-based solutions. In addition, some of our competitors have added offshore capabilities to their service offerings. These competitors may be able to offer their services using offshore and onsite models more efficiently. In addition, many of these competitors are substantially larger than us and have more diversified infrastructure and contact center locations than Startek. We may face competition in countries where we currently operate, as well as in countries in which we expect to expand our operations. Many of our competitors have significantly greater financial, technical, and marketing resources, generate greater revenues, have more extensive existing client relationships and technology partnerships, and have greater brand recognition than Startek. We may be unable to compete successfully against these competitors or may lose clients to these competitors.

Additionally, our ability to compete effectively also depends in part on factors outside our control, such as the price at which our competitors offer comparable services, and the extent of our competitors’ responsiveness to their clients’ needs. Moreover, our ability to maintain or increase pricing is restricted as clients often expect that as we do more business with them, they will receive volume discounts or lower rates. In addition, existing and new customers are also increasingly using third-party consultants with broad market knowledge to assist them in negotiating contractual terms. Any inability to maintain or increase the pricing on account of this practice may also adversely impact our revenues, gross profits, operating margins, and results of operations.

Risks Arising From the Investments We Make in Anticipation of and To Maintain Our Growth

Our business relies heavily on technology and computer systems, which subjects us to various uncertainties, damage, or disruptions within or beyond our control

We have invested in sophisticated and specialized telecoms and computer technology and have focused on the application of this technology to meet our clients' needs. We anticipate that it will be necessary to continue to invest in and develop new and enhanced technology on a timely basis to maintain our competitiveness. There can be no assurance that any of our information systems will be adequate to meet our future needs or that we will be able to incorporate new technology to enhance and develop our existing services. There can be no assurance that any technology or computer system will not encounter outages or disruptions. Any significant failure, damage, or destruction of our equipment or systems or any major disruptions to basic infrastructures, such as power and telecoms systems in the locations in which we operate, could impede our ability to provide services to our clients and thus adversely affect their businesses, have a negative impact on our reputation and may cause us to incur substantial additional expenses to repair or replace damaged equipment or facilities. Our future success will also depend in part on our ability to anticipate and develop information technology solutions, controls, and processes that keep pace with evolving industry standards, changing client demands, and increasing risks.

Our business will be adversely affected if we fail to enhance existing services or anticipate and develop new services and effectively manage the rapid changes in the use of technology.

The outsourcing and technology services market is characterized by rapid technological change leading to automation of services, evolving industry standards, changing client preferences, and new product and service introductions. Our future success will depend on our ability to anticipate these advances and develop new service offerings to meet client needs. We may fail to anticipate or respond to these advances on a timely basis, or, if we do respond, the services or technologies that we develop may not be successful in the marketplace and may need significant investments. We are working to develop several new solutions involving AI-based automation, robotic process automation, social media, analytics and other technologies both in-house and in partnership with smaller companies that have developed niche expertise in these technologies. The complexity of these solutions, our inexperience in developing or implementing them, and significant competition in the markets for these solutions may affect our ability to market these solutions successfully. In addition, the development of some services and technologies may involve significant upfront investments and the failure of these services and technologies may result in our inability to recoup some or all these investments. Further, better or more competitively priced products, services, or technologies that are developed by our competitors may render our services non-competitive or obsolete.

Our operating results may be adversely affected if we are unable to maximize our facility capacity utilization.

Our profitability is influenced by our facility capacity utilization. The majority of our business involves technical support and customer care services initiated by our client's customers. As a result, our capacity utilization varies, and demands on our capacity are, to some degree, beyond our control. We continuously anticipate and forecast business growth and infrastructure requirements and may invest in new facilities with or without contracted business for such facilities. We have experienced, and in the future may experience, periods of idle capacity following the opening of new facilities where forecasted volume levels do not materialize. In addition, we have experienced, and in the future may experience, idle peak period capacity when we open a new facility or terminate or complete a large client program. These periods of idle capacity may be exacerbated if we expand our facilities or open new facilities in anticipation of new client business because we generally cannot to require a client to enter a long-term contract or to require clients to reimburse us for capacity expansion costs if they terminate their relationship with us or do not provide us with anticipated service volumes.

We assess the expected long-term capacity utilization of our facilities and may consolidate or close underperforming facilities to maintain or improve targeted utilization and margins. We may incur impairment losses and restructuring charges in future years as a result of closing facilities. There can be no assurance that we will be able to achieve or maintain optimal facility capacity utilization.

If client demand declines due to economic conditions or otherwise, we may not be able to leverage our fixed costs as effectively, which would have a material adverse effect on our results of operations and financial condition.

Adverse changes to our relationships with the companies with whom we have an alliance or joint venture or in the business of the companies with whom we have an alliance or joint venture could adversely affect our results of operations.

We have a joint venture with a large telecom operator in the Kingdom of Saudi Arabia. On January 11, 2023, we entered into a definitive Sale and Purchase Agreement pursuant to which we will sell our interest in such joint venture to Arabian Internet and Communications Services Company (Solutions). The sale of such joint venture interest is subject to customary closing conditions, and it is anticipated that the closing of the transactions will occur during the second quarter of 2023.  The contemplated sale may not close on the timeframe anticipated or at all.  If such transaction were not to occur, it could significantly hamper our operations in the Kingdom of Saudi Arabia and could have a significant adverse impact on the consolidated results of our operations. (Refer note 3A to financial statements for more details).

Goodwill that we carry on our balance sheet could be subjected to significant impairment charges in the future.

We have and may incur material restructuring charges in the future.

We continually evaluate ways to reduce our operating expenses and adapt to changing industry and market conditions through new restructuring opportunities, including more effective utilization of our assets, workforce, and operating facilities. We have recorded restructuring charges in the past related to involuntary employee terminations, facility closures, and other restructuring activities. We may incur material restructuring charges in the future. The risk that we incur material restructuring charges may be heightened during economic downturns, if clients’ demand, preferences, or expectations change rapidly or with expanded global operations.

Operations Related Risks

Failure to attract and retain key management personnel may adversely impact our strategy execution and financial results.

Our ability to attract, successfully integrate, and retain key management personnel could have a significant impact on our ability to compete or to execute our business strategy. Changes in key management personnel may temporarily disrupt our operations as the new management becomes familiar with our business. Accordingly, our future financial performance will depend to a significant extent on our ability to attract, motivate, train, and retain key management personnel.

If we are not able to hire and retain qualified employees, our ability to service our existing customers and retain new customers will be adversely affected.

Our success is largely dependent on our ability to recruit, hire, train and retain qualified employees. Our business is people-intensive and, as is typical for our industry, continues to experience high employee turnover. Our operations, especially our technical support and customer care services, generally require specially trained employees, which, in turn, requires significant recruiting and training costs. Such turnover adversely affects our operating efficiency, productivity, and ability to fully respond to client demand, adversely impacting our operating results. Some of this turnover can be attributed to the fact that we compete for labor not only with other call centers but also with other similar-paying jobs, including retail, services industries, food service, etc.  As such, improvements in the local economies in which we operate can adversely affect our ability to recruit agents in those locations. Further increases in employee turnover or failure to effectively manage these high attrition rates would have an adverse effect on our results of operations and financial condition.

The addition of new clients or implementation of new projects for existing clients may require us to recruit, hire, and train personnel at accelerated rates. We may not be able to successfully recruit, hire, train, and retain sufficient qualified personnel to adequately staff for an existing business or future growth, particularly if we undertake new client relationships in industries in which we have not previously provided services. Because a substantial portion of our operating expenses consists of labor-related costs, labor shortages or increases in wages (including minimum wages as mandated by the federal governments, employee benefit costs, employment tax rates, and other labor-related expenses) could cause our business, operating profits, and financial condition to suffer. Economic and legislative changes in the U.S. may encourage organizing efforts in the future which, if successful, could further increase our recruiting and training costs and could decrease our operating efficiency and productivity.

Our operating costs may increase as a result of higher employee costs or an increase in minimum wages.

We have sought to contain our employee costs by limiting salary increases and payment of cash bonuses to our employees. The local economies in some of the locations in which we operate may experience growth, which causes pressure on employee rates to remain competitive within the local economies. If these growth trends continue, we may need to further increase salaries or otherwise compensate our employees at higher levels to remain competitive. Higher salaries or other forms of compensation are likely to increase our cost of operations. If such increases are not offset by increased revenue, they will negatively impact our financial results.

Additionally, wage increases in India may prevent us from sustaining this competitive advantage and may negatively affect our profit margins. We have historically experienced significant competition for employees from large multinational companies that have established and continue to establish offshore operations in India, as well as from companies within India. 

Employee strikes, collective bargaining agreements, and other employee-related disruptions may adversely affect our operations.

In certain geographies, like Argentina, our workforce is part of collective bargaining agreements that require us to negotiate wage hikes with labor unions. Our inability to negotiate wage hikes favorable for Startek or our inability to pass 100 percent of these wage hikes completely to our customers in the form of increased pricing will adversely impact our profitability and operating margins. In the past, some of our employees in other geographies have attempted to organize a labor union, and economic and legislative changes may encourage organizing efforts in the future, which, if successful, could further increase our recruiting and training costs and could decrease our operating efficiency and productivity. We cannot assure that there will not be any strike, lockout or material labor dispute in the future. Work interruptions or stoppages could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

We are also a party to various labor disputes and potential disputes. If our provisions for any of our labor claims are insufficient or the claims against us rise significantly in the future, this could have a material adverse effect on our business, financial condition, results of operations, and prospects. (Refer to Note 3B to financial statements for more details). 

Increases in the cost of telephone and data services or significant interruptions in such services could adversely affect our business.

We depend on telephone and data services provided by various local and long-distance telephone companies. Because of this dependence, any change to the telecoms market that would disrupt these services or limit our ability to obtain services at favorable rates could affect our business. For example, the concentration and bargaining power of technology and telecoms suppliers, most of which are beyond our control or which we cannot predict, could increase the cost of telecommunication services. We have taken steps to mitigate our exposure to the risks associated with rate fluctuations and service disruption by entering long-term contracts with various providers for telephone and data services and by investing in redundant circuits. There is no obligation, however, for the vendors to renew their contracts with us or to offer the same or lower rates in the future and such contracts are subject to termination or modification for various reasons outside of our control.

In addition, there is no assurance that a redundant circuit would not also be disrupted. A significant increase in the cost of telephone services that are not recoverable through an increase in the price of our services or any significant interruption in telephone services could adversely affect our business.

Our foreign operations subject us to the risk of currency exchange fluctuations.

Although most of our revenue and costs are in the local currency of the geography we operate in, we do run a currency risk because we deliver a portion of our business in an offshore location relative to the location of our clients. In such offshore deals, in certain geographies revenue is generated in U.S. dollars but operating costs are paid in local currencies. Thus, we are exposed to market risk from changes in the value of these currencies to the U.S. dollar. We engage in hedging activities relating to our exposure to such fluctuations. Our hedging strategy, including our ability to acquire the desired amount of hedge contracts, may not sufficiently protect us from strengthening or weakening these currencies against the U.S. dollar.

Some of the countries we have a presence in have experienced inflation and volatility in the past and some Latin American countries, such as Argentina, had been classified as hyperinflationary economies. While inflation may not have a significant effect on the profit and loss of a local subsidiary itself, depreciation of the local currency against the U.S. dollar would reduce the value of the dividends payable to us from our operating companies. We report our financial results in U.S. dollars and our results of operations would be adversely affected if these local currencies depreciate significantly against the U.S. dollar, which may also affect the comparability of our financial results from period to period, as we convert our subsidiaries’ statements of financial position into U.S. dollars from local currencies at the period end exchange rate and income and cash flow statements at average exchange rates for the year.

We may incur losses due to unanticipated or significant intra-quarter movements in currency markets which could have an adverse impact on our profit margin and results of operations. Also, the volatility in the foreign currency markets may make it difficult to hedge our foreign currency exposures effectively.

Changes in tax laws in the geographies we operate in could have an adverse impact on our financial results.

We are subject to tax audits, including with respect to transfer pricing, in the U.S. and other jurisdictions and our tax positions may be challenged by tax authorities. Although we believe that our current tax provisions are reasonable and appropriate, there can be no assurance that these items will be settled for the amounts accrued, that additional tax exposures will not be identified in the future or that additional tax reserves will not be necessary for any such exposures. Any increase in the amount of taxation incurred as a result of challenges to our tax filing positions could result in a material adverse effect on our business, results of operations, and financial condition. We continuously review the potential impacts of the recent changes; however, we cannot predict any future tax law changes which could have an impact on our future tax liabilities.

The governments of jurisdictions where we have a presence could enact new tax legislation which would have a material adverse effect on our business, results of operations, and financial condition. In addition, our ability to repatriate surplus earnings from our delivery centers in a tax-efficient manner is dependent upon interpretations of local laws, possible changes in such laws, and the renegotiation of existing double tax avoidance treaties. Changes to any of these may adversely affect our overall tax rate, or the cost of our services to our clients, which would have a material adverse effect on our business, results of operations, and financial condition.

We are subject to transfer pricing and other tax-related regulations and any determination that we have failed to comply with them could materially adversely affect our profitability.

Transfer pricing regulations to which we are subject require that any international transaction among our company and its subsidiaries be on arm’s length terms. We believe that the international transactions among the Startek group companies are on arm’s length terms. If, however, the applicable tax authorities determine that the transactions among the Startek group companies do not meet arm’s length criteria, we may incur an increased tax liability, including accrued interest and penalties. This would cause our tax expense to increase, possibly materially, thereby reducing our profitability and cash flows.

Our existing debt may affect our flexibility in operating and developing our business and our ability to satisfy our obligations.

As of December 31, 2022, we had total indebtedness of $176 million. Our level of indebtedness may have significant negative effects on our future operations, including:

If we are unable to generate sufficient cash flow from operations to service our debt, we may be required to refinance all or a portion of our existing debt or obtain additional financing. We can provide no assurance that any such refinancing would be possible or that any additional financing could be obtained. Our inability to obtain such refinancing or financing may have a material adverse effect on our business, financial condition, results of operations, and prospects.

Our financing agreements impose debt covenants which are to be fulfilled by the Company and/or its subsidiaries failing which may have detrimental impact on the potential growth and results of operations.

Our secured revolving credit facility and the senior term loan facility agreement entered by our subsidiaries contains certain affirmative and negative covenants that may limit or restrict our ability to engage in certain activities, including but not limited to, making certain investments, limiting capital expenditures, incurring additional indebtedness, and engaging in mergers and acquisitions. If we are not able to meet these covenants, our ability to respond to changes in the business or economic conditions may be limited, and we may be unable to engage in certain activities that otherwise may be beneficial to our business. We cannot assure that we will be able to meet the financial covenants under our credit facility, or that in the event of noncompliance, we will be able to obtain waivers or amendments from our lenders. If we fail to comply with the terms of the agreement, our lender could decide to call any amounts outstanding immediately, and there can be no assurance that we would have adequate resources or collateral to satisfy the demand. Any such scenario would have a material adverse impact on our financial condition.

If we are unable to fund our working capital requirements and new investments, our business, financial condition, results of operations, and prospects could be adversely affected.

The outsourcing industry is characterized by high working capital requirements and the need to make new investments in operating sites and employee resources to meet the requirements of our clients. We incur significant startup costs related to investments in infrastructure to provide our services and the hiring and training of employees, such expenses being historically incurred before revenue is generated.

In addition, we are exposed to adverse changes in our key clients’ payment policies, which could have a material adverse impact on our ability to fund our working capital needs. During the year ended December 31, 2022, our average days' sales outstanding (DSO) was approximately 45 days. If our key clients implement policies that extend the payment terms of our invoices, our working capital levels could be adversely affected, and our finance costs may increase. If we are unable to fund our working capital requirements, access financing at competitive prices, or make investments to meet the expanding business of our existing and potential new clients, our business, financial condition, results of operations, and prospects could be adversely affected.

Regulatory and Related Risks

Cyberattacks or the improper disclosure or control of personal information could result in liability and harm our reputation, which could adversely affect our business.

We are dependent on networks and systems to process, transmit and store electronic information and to communicate among our locations around the world and with our alliance partners and clients and we may be required to store sensitive or confidential client data in connection with the services we provide. As a result, we are subject to contractual terms and numerous U.S. and foreign laws and regulations designed to protect this information. Furthermore, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services. Although we have implemented appropriate policies and procedures to reduce the possibility of physical, logical, and personnel security breaches, along with appropriate audit oversight for verifying continued operating effectiveness of the same through internal audits and external SSAE16, HIPAA, GDPR, ISAE 3402, ISO27K1, ISO 14K1, and PCI-DSS reviews, no such measures can completely eliminate the risk of cybersecurity attacks, especially in light of advances in criminal capabilities (including cyber-attacks or cyber intrusions over the internet, malware, computer viruses and the like), the discovery of zero-day vulnerabilities or attempts to exploit existing vulnerabilities in interconnected third party systems that are beyond our control systems.

Unauthorized disclosure, either actual or perceived, of a sensitive or confidential client or customer data, whether through systems failure, system intrusion, employee negligence, fraud, or otherwise could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems or those we develop for our clients, whether by our employees or third parties, could result in negative publicity, legal liability, and damage to our reputation, business, financial condition, results of operations, and cash flows.

The Company experienced a cyberattack by a threat actor in 2021. We were able to successfully mitigate the operational and financial damages of such attack and were able to recover a substantial part of the liability from our insurance coverage. During 2022, there were no major incidents experienced by the Company. However, there is no assurance that there may not be a material adverse effect in the future. Although we maintain cyber liability insurance, such insurance may not adequately or timely compensate us for all losses we may incur as any of our client contracts do not contain limitations of liability for such losses. 

Our foreign operations are subject to social, political, and economic risks that differ from those in the U.S.

We conduct a significant portion of our business and employ a substantial number of people outside of the U.S. During the year ended December 31, 2022, we generated approximately 87% or $334 million of our revenue from operations outside the U.S. Circumstances and developments related to foreign operations that could negatively affect our business, financial condition or results of operations include, but are not limited to, the following factors:

Our global growth (including growth in new regions in the U.S.) also subjects us to certain risks, including risks associated with funding increasing headcount, integrating new offices and establishing effective controls and procedures to regulate the operations of new offices and to monitor compliance with regulations such as the Foreign Corrupt Practices Act and similar laws.

Although we have committed substantial resources to expand our global platform, if we are unable to successfully manage the risks associated with our global business or to adequately manage operational fluctuations, our business, financial condition and results of operations could be harmed.

We process, transmit and store personally identifiable information and unauthorized access to or the unintended release of this information could result in a claim for damage or loss of business and create unfavorable publicity.

We process, transmit and store personally identifiable information, both in our role as a service provider and as an employer. This information may include social security numbers, financial and health information, as well as other personal information. As a result, we are subject to certain contractual terms as well as federal, state and foreign laws and regulations designed to protect personally identifiable information. We take measures to protect against unauthorized access and to comply with these laws and regulations. We use the internet as a mechanism for delivering our services to clients, which may expose us to potential disruptive intrusions. Unauthorized access, system denials of service, or failure to comply with data privacy laws and regulations may subject us to contractual liability and damages, loss of business, damages from individual claimants, fines, penalties, criminal prosecution, and unfavorable publicity, any of which could negatively affect our operating results and financial condition. In addition, third party vendors that we engage to perform services for us may have an unintended release of personally identifiable information.

We are required to comply with laws governing the transmission, security, and privacy of protected health information.

We are required to comply with applicable laws governing the transmission, security, and privacy of health information, including, among others, the standards of The Health Insurance Portability and Accountability Act (HIPAA). Failure to comply with any of these laws could make it difficult to expand our healthcare business process outsourcing business and/or cause us to incur significant liabilities.

Argentina has undergone significant political, social, and economic instability in the past several years. If such instability continues or worsens, our Argentine operations could be materially adversely affected.

During the year ended December 31, 2022, our Argentina operations accounted for 4.7% of our total revenue. Argentina has been facing economic difficulty for the past several years. Since 2015, the Argentine economy has experienced a recession, as well as a political and social crisis, and the significant depreciation of the Argentine peso against major international currencies. Depending on the relative impact of other variables affecting our operations, including technological changes, inflation, gross domestic product (GDP) growth, and regulatory changes, the continued depreciation of the Argentine peso may have a negative impact on our business in Argentina.

The country has been experiencing high inflation in recent years and there can be no assurance that Argentina will not experience another recession, higher inflation, devaluation, unemployment, and social unrest in the future.

In the past, Argentina has been under a severe exchange control system that required government approval for any transfer of funds. Although administrations have taken measures to lift foreign exchange controls there can be no assurance that the Argentine government will not impose new restrictions on the transfer of funds from Argentina to preserve and protect foreign exchange reserves. If we are unable to repatriate funds from Argentina for whatever reason, we will not be able to use the cash flow from our Argentine operations to finance our operating requirements elsewhere or to satisfy our debt obligations.

Market Related Risks

Our largest stockholder can significantly influence corporate actions.

Capital Square Partners (CSP), a Singapore-based private equity fund, is our principal shareholder following the combination of Aegis and the Company. CSP owns approximately 56% of our outstanding stock. The Stockholders Agreement dated July 20, 2018, gives CSP the right to appoint a majority directors on our Board of Directors including the Chairman of the Board of Directors. As of December 31, 2022, there are four Directors appointed by CSP, including the Executive Chairman and CEO out of eight directors on the Board.

CSP has a continuing ability to exercise significant influence over our affairs for the foreseeable future, including controlling the election of directors and significant corporate transactions, such as a merger or other sale of our Company or our assets. This concentrated control by CSP limits the ability of other shareholders to influence corporate matters and, as a result, we may take actions that our other shareholders do not view as beneficial.

Future equity issuances may dilute the holdings of ordinary shareholders and could materially affect the market price of our ordinary shares.

We may in the future decide to offer additional equity to raise capital or for other purposes. Any such additional offering could reduce the proportionate ownership and voting interests of holders of our ordinary shares, as well as our earnings per ordinary share and net asset value per ordinary share. Future sales of substantial amounts of our ordinary shares in the public market, whether by us or by our existing shareholders, or the perception that sales could occur, may adversely affect the market price of our shares, which could decline significantly.

Our stock price has been volatile and may decline significantly and unexpectedly.

The market price of our common stock has been volatile, and could be subject to wide fluctuations in response to quarterly variations in our operating results, changes in management, the degree of success in implementing our business and growth strategies, announcements of new contracts or contract cancellations, announcements of technological innovations or new products and services by us or our competitors, changes in financial estimates by securities analysts, the perception that significant stockholders may sell or intend to sell their shares or other events or factors we cannot currently foresee. We are also subject to broad market fluctuations, given the overall volatility of the current U.S. and global economies, where the market prices of equity securities of many companies experience substantial price and volume fluctuations that have often been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock. Additionally, because our common stock trades at relatively low volume levels, any change in demand for our stock can be expected to substantially influence market prices thereof.

ITEM 1B.  UNRESOLVED STAFF COMMENTS 

None.

ITEM 2.  PROPERTIES

As of December 31, 2022, we have operating centers in the following countries, containing in the aggregate approximately 1,804 thousand square feet:

All the above facilities are leased except one site in India which is owned by us. 

Substantially all our facility spaces can be used to support any of our business process outsourced services. We believe our existing facilities are adequate for our current operations. 

ITEM 3.  LEGAL PROCEEDINGS

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable.

Part II

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR COMMON STOCK

Our common stock has been listed on the NYSE under the symbol “SRT” since the effective date of our initial public offering on June 19, 1997.

HOLDERS OF COMMON STOCK

As of March 20, 2023, there were approximately 24 record holders and 40,288,461 shares of common stock outstanding. See Item 1A. “Risk Factors,” set forth in this Form 10-K for a discussion of risks related to control that may be exercised over us by our principal stockholders.

DIVIDEND POLICY

On January 22, 2007, our board of directors announced it would not declare a quarterly dividend on our common stock in the first quarter of 2007 and did not expect to declare dividends in the near future, making the dividend paid in November 2006 as the last dividend paid. We plan to invest in growth initiatives and pay down debt in lieu of paying dividends.

STOCK REPURCHASE PROGRAM

In 2004, the Company announced the “Repurchase plan” that authorized the Company to repurchase up-to $ 25 million of common stock. The program will remain in effect until the same is terminated by the Board of Director’s and will allow the Company to repurchase common stock from time to time on the open market either via block trades or privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives. Repurchases will be implemented by the Chief Financial Officer consistent with the guidelines adopted by the Board of Directors and will depend on market conditions and other factors. Pursuant to the Board of Directors (BOD) meeting held on August 26, 2021, the Board of Director’s approved the Company to carry out a stock repurchase in line with 2004 “Repurchase plan’ up-to $ 2 million. Further in board meeting held on December 14, 2021, the Board of Director’s approved additional $2 million towards a stock repurchase plan.

Our stock repurchase programs are intended to programmatically offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, to make opportunistic and programmatic repurchases of our common stock to reduce our outstanding share count. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, the shares withheld for taxes associated with the vesting of restricted stock, other corporate considerations and management’s determination as to the appropriate use of our cash.

During the year, the Company repurchased an aggregate of 426,455 shares of our common stock under our repurchase plan at an average cost of $4.29 per share. 

Share repurchase activity during the year ended December 31, 2022 was as follows:

(1) Excludes broker commission.

ITEM 6.  [RESERVED]

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the accompanying Consolidated Financial Statements included elsewhere in this annual report.

BUSINESS DESCRIPTION AND OVERVIEW

Startek is a leading global provider of technology-enabled customer experience (CX) solutions. The Company provides omnichannel CX, digital transformation, and technology services to some of the world’s leading brands. Startek is committed to impacting clients’ business outcomes by focusing on enhancing CX and digital enablement across all touch points and channels. Startek has more than 33,000 employees delivering services in 11 countries. The Company services over 140 clients across a range of industries such as banking and financial services, insurance, technology, telecoms, healthcare, travel and hospitality, consumer goods, retail and energy and utilities.

Startek manages over half a billion customer moments of truth each year for the world’s leading brands. We help these brands increase their revenues by enabling better experiences for their customers across multiple channels. As a leading provider of technology-enabled business process management solutions for major global brands—we drive business value through omnichannel CX, digital transformation and technology services.

SIGNIFICANT DEVELOPMENTS

Share Repurchase

During the year, the Company undertook share repurchases under a previously announced and approved Repurchase Plan. During the year, the Company repurchased an aggregate of 426,445 shares of our common stock under our repurchase plan at an average cost of $4.29 per share. The Company believes its liquidity position is strong and will continuously evaluate opportunities to continue with share repurchases in the future.

Private Offer

On January 17, 2022, the Company announced that the Board of Directors formed a special committee of independent directors that was authorized, among other things, to evaluate the non-binding proposal, dated December 20, 2021, by CSP Management Limited (“CSP”) to acquire all outstanding shares of common stock of Startek that it does not already beneficially own for $5.40 in cash per share. On August 8, 2022, CSP issued a revised non-binding proposal to acquire all the shares of Startek for $4.65 per share in cash. The special committee engaged legal and financial advisors to assist in its consideration of the proposal. The special committee appointed Foros Securities LLC as a financial advisor in connection with private offer.

The committee had analyzed various factors such as forecast submitted by the Company, trading history of Startek stock, macroeconomic environment, etc. and determined that the proposed price at $4.65 is inadequate and not in the best interests of the shareholders of Startek. Further, on September 9, 2022, the special committee rejected the non-binding proposal by CSP. Since then, CSP has formally withdrawn their proposal and the special committee has been dissolved. The Company incurred total expenses of $2,867 in relation to the private offer during the year ended December 31, 2022, which is included in selling, general and administrative expenses.

Key Matters Pertaining to Subsidiaries and Equity Accounted Investees

Strategic Divestitures

Sale of stake in Saudi Arabia and potential exit from Aegis Argentina:

On November 10, 2022, the Company accepted a final offer by Arabian Internet and Communications Services Company (Solutions) to acquire the Company’s indirect 51% ownership interest in its subsidiary Contact Center Company (CCC), that operates in the Kingdom of Saudi Arabia. Subsequently, on January 11, 2023, the Company entered into a definitive Sale and Purchase Agreement with Solutions. The Sale and Purchase Agreement provides for a transaction based on an enterprise value for CCC of $120 million (SAR 450 million), on a debt free and cash free basis, to be paid in cash at closing, subject to the adjustments set forth in the Sale and Purchase Agreement. The transaction has been approved by the General Authority for Competition (GAC) in the Kingdom of Saudi Arabia and the Company has also obtained consent from its lenders. It is anticipated that the closing of the transactions contemplated by the Sale and Purchase Agreement will occur during the second quarter of 2023.

On December 14, 2022, the Company has entered into an engagement letter with M/S Estudio A and L LLC (‘the Firm’) pursuant to which the Firm would serve as a non-exclusive advisor in connection with the potential sale of Aegis Argentina. The Firm will perform services for the Company such as advice on the structure, negotiation strategy, valuation analyses, financial terms, and other financial matters etc. If required, the Firm will assist the Company in preparing a brief memorandum for distribution to potential buyers, describing the Company and its business, operations, properties, financial condition, and prospects. The Firm to negotiate and execute on its behalf and/or the Company’s behalf confidentiality agreements with potential parties to a Transaction and to deliver confidential memoranda or other data furnished to the Firm by the Company for distribution to such parties.

After consideration of the relevant facts, the Company concluded the assets and liabilities of CCC and Argentina met the criteria for classification as held for sale. The Company concluded the actual and proposed disposal activities represented a strategic shift that will have a major effect on the Company’s operations and financial results and qualified for presentation as discontinued operations in accordance with FASB Accounting Standards Codification (ASC) 205-20. Accordingly, the financial results of CCC and Argentina are presented in the Consolidated Statements of Income (loss) as discontinued operations for all periods presented. Current and non-current assets and liabilities of these businesses not sold as of the balance sheet date are presented in the Consolidated Balance Sheets as assets and liabilities held for sale for both periods presented. Refer to the Note "3A and 3B — Discontinued Operations and Held for Sale” in our consolidated financial statements for additional information and disclosures.

Disposal of equity accounted investee-CSS Corp LP: 

The Company had made a $25 million minority investment through its subsidiary CSP Alpha in CSS Corp. LP (“CSS”), a new-age IT services and technology support solutions company that harnesses the power of AI, automation, analytics, cloud, and digital to address customer needs. Through this investment, the Company has acquired an indirect beneficial interest in CSS of circa 26%. On December 27, 2022, CSP Alpha, entered into an Acquisition and Redemption Agreement with CSP Fund II LP (acting through its general partner CSP EAF II GP Limited), as incoming additional limited partner, and CSP CSS GP Limited, in its capacity as general partner of CSS Corp LP. Pursuant to the Acquisition and Redemption Agreement, the Company redeemed in full all the partnership interests held by CSP Alpha in the Partnership for a cash redemption price of $45.6 million. Following the Redemption Transaction, CSP Alpha ceased to be a limited partner of the Partnership and has no rights or liabilities relating to the Partnership with respect to periods after the completion of the redemption. Refer to the "Note 18 — Investment in Equity Accounted Investees” in our consolidated financial statements for additional information and disclosures.

RESULTS OF CONTINUING OPERATIONS — YEAR ENDED DECEMBER 31, 2022, AND 2021

Revenue

Our net revenues for the year ended December 31, 2022, was lower by 18.1% at $385,074 compared to $470,329 for the year ended December 31, 2021.

The breakdown of our net revenues from various industry verticals for years ended December 31, 2022, and 2021 is as follows:

Net Revenue in the current year decreased relative to the previous year due to multiple events that were unique to the previous year. We had executed the COVID support program in the previous year that was a temporary program. We also witnessed a couple of large client churns in the previous year.

Telecom vertical continues to be the largest vertical with 26% contribution to revenue. In year 2022, there was an increase in revenue in this vertical driven by addition of new lines of businesses with our large telecom clients across US and South Africa.

The revenues percentage in the e-commerce vertical remains constant as compared to previous year. 

The Financial and Business services vertical continues to perform strongly as we strengthen our partnership with key clients in this vertical.

The decline in revenues from the Media vertical was led by a change in strategy with a key client who insourced their CX activities through 2021 and earlier this year. We added a large client in the media vertical in the current year and will be ramping operations with this client in the next year.

We continue to see year-on-year and sequential improvement in volume in the travel and hospitality sector as activity in these verticals trend to normalize to pre-COVID levels.

Decline in revenue in the Healthcare and Education is primarily due to one-off COVID vaccination support program that the Company delivered in the previous year.

The breakdown of our net revenues from various segments for years ended December 31, 2022, and 2021 is as follows:

The decline in revenue in the Americas region is primarily due to high base impact from the previous year. Revenue in the previous period included short term government program of $25 million relating to COVID vaccination support. The revenue decline was also driven by the termination of operations with one of our e-commerce clients and insourcing of operations by a client in the media vertical. This decline is partly offset by an increase in revenues from other clients primarily in the telecom and retail verticals. We have added two large clients in the Americas region in the current year and operations with these clients will be ramped during the next year.

Revenue growth in India and Sri Lanka region was driven by continuing ramp-up in operations with some of the largest digital native clients in this region. Our international operations delivered out of India also grew during the current period. The increase in revenue was partly offset by depreciation of Indian Rupee relative to the US Dollar.

Revenue in Malaysia saw a decline due to the termination of the contract with the global e-commerce client at the end of the last fiscal year. The decline was partly offset by increase in revenue with our digital native clients in the travel and hospitality vertical.

We ramped the previously won contract with a telecom major in South Africa driving higher revenues in the current year. We also added a large business services client in Australia and scaled operations with a financial services client in this geography.

Cost of Services and Gross Profit

Overall, cost of services as a percentage of revenue marginally decreased to 85% for the year ended December 31, 2022, as compared to 86% for the year ended December 31, 2021. Employee expenses, rent costs, and depreciation and amortization are the most significant costs for the Company, representing 73%, 6%, and 6% of total cost of services, respectively. The breakdown of cost of services is listed in the table below:

Employee expenses: Our business heavily relies on our employees to provide professional services to our clients. Thus, our most significant costs are payments made to agents, supervisors, and trainers who are directly involved in delivering services to the clients. Employee expenses as a percentage of revenues decreased to 62% for the current year as compared to 64% for the previous year. This was led by increase in our employee base in the offshore geographies relative to high-cost onshore delivery geographies. The decrease was despite elevated inflationary environment in many of our geographies.

Rent expense: Rent expense as a percentage of revenue remains constant at 5% as compared to the previous year. The decline was driven by rationalization of some brick-and-mortar facilities across geographies as operations moved to our work from home model.

Depreciation and amortization: Depreciation and amortization expense as a percentage of revenue remains constant at 5% as compared to the previous year. 

Other expenses include recruitment, technology, utility, travel, and outsourcing costs. As a percentage of revenue, these costs increased to 13% from12%. This marginal increase is majorly on account of the increase in professional charges. 

As a result, gross profit as a percentage of revenue for the current period increased to 15% as compared to 14% for the previous period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) as a percentage of revenue increased from 9% in the previous period to 13% in the current year. The increase was due to the investments made by the Company to strengthen sales, marketing, and digital verticals. The Company also increased investments in upgrading technology infrastructure, particularly related to security and cybersecurity aspects. The SG&A costs for the current period include $2,867 incurred in connection with private offer.

Impairment Losses and Restructuring Charges, Net

Impairment losses and restructuring costs, net totaled $9,824 for the current year as compared to $6,456 for the previous year. The expense for the current year is primarily relating to: (i) goodwill impairment of $8,052, arising mainly due to increase in WACC assumption. The steep increase in risk free rates and interest rates in the past few quarters have led to a sharp increase in WACC assumptions (ii) impairment of right of use assets of $1,110 related to operating leases in a few geographies. Given the increasing adoption of the work from home delivery model, we are continuously evaluating our brick-and-mortar infrastructure with a view of rationalizing excess capacity. The Company does not plan to use such sites for 'on premise' operations and as per the existing contractual terms of the lease agreement the Company does not have the right to stop making lease payments for the remaining lease terms or to sublease such premises. The expense for the previous year is majorly related to impairment of right of use assets of $4,514 related to operating leases in a few geographies.

Gain on redemption of Equity Accounted Investee

During the year, the Company redeemed its investment in CSS Corp LP and received proceeds of $45,683. Initial investment made by the Company was $25,000. The Company had recognized fair value gain of $5,496 and $6,688 during the year 2022 and 2021 respectively. The remaining capital gains of $8,499 was recorded in this fiscal year.

Interest Expense and Other Income (Expense), Net
 

Interest expense and other income (expense), net totaled $9,834 for the current year as compared to $17,218 for the previous year. The expense for the previous year included debt issuance cost of $10,937 in relations to the extinguishment of the earlier debt. Adjusting for the debt issuance cost for extinguishment of loan, the interest expense increased year-on-year due to an increase in global rates and yields.

Income Tax Expense (Benefit)

Income tax expense for the current year was $4,087 compared to $6,934 for the previous year. The movement in the implied effective tax rate was primarily due to shifts in earnings among the various jurisdictions in which we operate coupled with utilization of net operating losses for entities having taxable profit and valuation allowance as per the requirement of ASC 740.  Further, the movement of funds between various geographies primarily to service our debt facilities also attracts withholding taxes.

INCOME FROM DISCONTINUED OPERATIONS

Discontinued operations include the results of operations for the CCC and Argentina business that are reported separately as discontinued operations in the Consolidated Statement of Income (loss).

Results of Operations of Saudi Arabia – December 31, 2022, and December 31, 2021

Our net revenue for the year ended December 31, 2022, was higher at $244,324 compared to $201,187 for the year ended December 31, 2021. Our operation in the Middle East saw continuity of government programs that was won during the Pandemic. The Company also secured new clients which continue to ramp up in the current year.

Overall, the cost of services as a percentage of revenue increased to 87% for the year ended December 31, 2022, compared to 84% for the year ended December 31, 2021. The increase in costs is primarily attributable to the increase in employee expenses and increase in outsourcing cost for the current year, which includes certain cost for delivery of technology services to one of our clients.

As a result, gross profit as a percentage of revenue for the current period decreased to 13% as compared to 16% for the previous year.

Selling, general and administrative expenses (SG&A) as a percentage of revenue increased from 5% in the previous year to 6% in the current year. The increase in expense for the current year is primarily relating to the cost incurred in relation to the sale of stake.

Impairment losses and restructuring costs, net totaled $1,218 for the current year as compared to $1,770 for the previous year. The expense for the current year is primarily relating to severance payments made to employees according to the voluntary retirement scheme.

Results of Operations of Argentina – December 31, 2022, and December 31, 2021

Our net revenue for the year ended December 31, 2022, was lower at $30,633 compared to $32,117 for the year ended December 31, 2021. The reduction in revenue was largely driven by significant depreciation of Argentine Peso relative to US Dollar.

Overall, the cost of services as a percentage of revenue increased to 100% for the year ended December 31, 2022, compared to 97% for the year ended December 31, 2021. The increase in costs is primarily attributable to the increase in employee costs as per the collective bargaining agreement. This has resulted in a negative margin for the current year.

Selling, general and administrative expenses (SG&A) as a percentage of revenue are constant at 7% year on year.

Impairment losses and restructuring costs, net totaled $3,250 for the current year is primarily relating to severance payments made to employees and costs associated with the leases that has been surrendered in Argentina according to the restructuring plan.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flows generated from operating activities, working capital facilities, and term debt. We have historically utilized these resources to finance our operations and make capital expenditures associated with capacity expansion, upgrades of information technologies and service offerings, and business acquisitions. We have historically drawn working capital facilities due to timing of collection from few customers. We have also entered into factoring agreements with financial institutions to sell certain of our accounts receivable under a non-recourse agreement. The Company expects to meet all its debt obligations in a timely manner.

The Term loan is subject to certain covenants, whereby the Company is required to meet certain financial ratios and obligations on a quarterly basis. As of December 31, 2022, the Company was in compliance with all financial covenants.

Cash and cash equivalents

As of December 31, 2022, cash, cash equivalents and restricted cash held by the Company and all its foreign subsidiaries increased by $38,321 to $72,404 as compared to $34,083 as of December 31, 2021. The increase in cash balance as at year end was driven by the receipt of proceeds from the redemption of our investment in CSS Corp. The proceeds, net of capital gains tax, shall be utilized to prepay term loan. The restricted cash balance as of December 31, 2022, stood at $49,946 as compared to $2,015 as of December 31, 2021. The restricted cash includes amount to be unlisted towards servicing of the senior debt due to disposal of CSS Corp. LP and amount kept in debt service reserve account (DSRA) that we have to maintain in accordance with the Senior Term Agreement and also for certain term deposits that need to be maintained in accordance with some of our lease and client agreements.

Cash flows from operating activities

For the years ended December 31, 2022, and 2021 we reported net cash flows generated from operating activities of $8,212 and $18,151 respectively. The decrease is majorly due to reduction in operating income. 

Cash flows used in investing activities

For the years ended December 31, 2022, and 2021 we reported net cash provided/used in investing activities of $33,655 and ($37,823) respectively. Cash inflow from investing activities is primarily attributable to proceeds received from redemption of investment in CSS Corp. LP of $45,683. This is offset by utilization of cash towards capital expenditure of $12,330. The amount for the previous period includes $25,000 towards the investment in CSS Corp, $3,000 towards payment of call option premium and $9,928 towards capital expenditure.

Cash flows from financing activities

For the years ended December 31, 2022, and 2021, we reported net cash flows generated from financing activities of $2,903 and $22,003, respectively. During the year ended December 31, 2022, the Company made repayment of $6,589 towards its term loans and withdrew $10,952 for meeting working capital requirements. During the year 2021, the Company entered into a new secured senior debt facility, which has resulted in increase in net borrowings. During the year ended 2022 and 2021, the Company repurchased common stock worth $ 1,837 and $1,912 respectively.

Other factors impacting liquidity

Our business currently has a high concentration in a few principal clients. The loss of a principal client and/or changes in timing or termination of a principal client's product launches or service offerings could have a material adverse effect on our business, liquidity, operating results, or financial condition. These client relationships are further discussed in Item 1A, "Risk Factors". To limit our credit risk, management from time to time will perform credit evaluations of our clients. Management does not believe substantial credit risk existed as of December 31, 2022.

To meet short-term cash needs, we borrow cash from our working capital facilities. These borrowings are typically outstanding for a short period of time before they are repaid. However, our debt balance can fluctuate significantly during any given quarter as part of our ordinary course of business. While we have been successful in bringing our debt levels (net of cash and cash equivalents) down by a considerable amount over the past few quarters, our debt balance at the end of any given period is not necessarily indicative of the debt balance at any other time during that period.

For more information, refer to Note 10, "Debt," to our notes to consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data."

OFF-BALANCE SHEET ARRANGEMENTS

Apart from certain non-recourse receivables factoring as mentioned in theNote 10. "Debt" to our notes to consolidated financial statements included in Item 8, we have no other material off-balance sheet transactions, unconditional purchase obligations or similar instruments, and we are not a guarantor of any other entities’ debt or other financial obligations.

VARIABILITY OF OPERATING RESULTS

We have experienced and expect to continue to experience some quarterly variations in revenue and operating results due to a variety of factors, many of which are outside our control, including: (i) timing and amount of costs incurred to expand capacity in order to provide for volume growth from existing and future clients; (ii) changes in the volume of services provided to principal clients; (iii) expiration or termination of client projects or contracts; (iv) timing of existing and future client product launches or service offerings; (v) seasonal nature of certain clients’ businesses; and (vi) variability in demand for our services by our clients depending on demand for their products or services and/or depending on our performance.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our consolidated financial statements in conformity with US-GAAP, management must undertake decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions upon which accounting estimates are based. Management applies its best judgment based on its understanding and analysis of the relevant circumstances to reach these decisions. By their nature, these judgments are subject to an inherent degree of uncertainty. Accordingly, actual results may vary significantly from the estimates we have applied.

While our significant accounting policies are described in more detail in Note 2, "Summary of Significant Accounting Policies" to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policy is most critical to the judgments and estimates used in the preparation of our financial statements.

Goodwill

Goodwill represents the cost of acquired businesses in excess of the fair value of the identifiable tangible and intangible net assets purchased. Goodwill is tested for impairment at least on an annual basis on December 31, or as circumstances warrant based on several factors, including operating results, business plans and future cash flows. We perform 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 it’s carrying amount. Based on our assessment of events or circumstances, we perform a quantitative assessment of goodwill impairment if it is determined that it is more likely than not that the fair value of a reporting unit is less than it’s carrying amount. As of December 31, 2022, based on the quantitative assessment, we concluded that goodwill was partly impaired. Our annual impairment testing resulted in impairment charge of $4,187 and $3,865 in Americas and Malaysia reporting units. The impairment was mainly attributable to the increase in WACC assumption. The steep increase in risk free rates and interest rates in the past few quarters have led to a sharp increase in WACC assumptions. 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As Startek is qualified for Smaller Reporting Company status, this disclosure is not required.

See Notes to Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.

As of December 31, 2022, and 2021, there were 40,259,242 and 40,480,627 shares outstanding respectively of Common Stock, net off treasury stock.

See Notes to Consolidated Financial Statements.

Assets Held for Sale and Discontinued Operations

The Company reports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the business is sold and classified as held for sale, in accordance with the criteria of Accounting Standard Codification (“ASC”) Topic 205-20 “Presentation of Financial Statements – Discontinued Operations” and ASC Topic 360 -10  “Impairment and Disposal of Long Lived Assets”. The results of discontinued operations are reported in Income from Discontinued Operations, net of tax in the accompanying Consolidated Statements of Income for the current and prior periods and include any gain or loss recognized on closing, or adjustment of the carrying amount to fair value less cost to sell. Assets and liabilities of a business classified as held for sale are recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value less cost to sell, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the current and prior period balance sheet. All assets and liabilities of the operations classified as held for sale are disclosed as current assets and liabilities in the current year and previous year classification has been retained. The Company allocates interest costs on Debt that is required to be repaid as a result of disposal to discontinued operations. Interest cost on Corporate Debt not directly attributable to discontinued operations is allocated between continuing and discontinued operations in the ratio mentioned in ASC 205-20-45-7 which is as follows: 

Net assets to be sold or discontinued less debt that is required to be paid as a result of the disposal /
The sum of total net assets of the entity plus debt other than: 1) debt of the discontinued operation that will be assumed by the buyer; 2) debt that is required to be paid as a result of the disposal transaction; and 3) debt that can be directly attributed to other operations of the entity.

If a business is classified as held for sale after the balance sheet date but before the financial statements are issued or are available to be issued, the business continues to be classified as held and used in those financial statements when issued or when available to be issued.

Refer “Note 3A and 3B – Discontinued Operations in our consolidated financial statements included elsewhere in this report for additional information and disclosures.

3A. Discontinued Operations and Held for Sale - Contact Center Company

On November 10, 2022, the Company has accepted a final offer by Arabian Internet and Communications Services Company (Solutions) to acquire the Company’s indirect 51% ownership interest in its subsidiary Contact Center Company (CCC), which is the Company’s joint venture that operates in the Kingdom of Saudi Arabia. After consideration of the relevant facts, the Company concluded the assets and liabilities of its CCC components met the criteria for classification as held for sale. The Company concluded the actual and proposed disposal activities represented a strategic shift that will have a major effect on the Company’s operations and financial results and qualified for presentation as discontinued operations in accordance with FASB Accounting Standards Codification (ASC) 205-20.

Accordingly, the financial results of the CCC are presented in the Consolidated Statements of Income (loss) as discontinued operations for all periods presented. Current and non-current assets and liabilities of these businesses not sold as of the balance sheet date are presented in the Consolidated Balance Sheets as assets and liabilities held for sale for both periods presented. All assets and liabilities of the operations classified as held for sale are disclosed as current assets and liabilities in the current year and previous year classification has been retained. CCC was forming part of the 'Middle East' segment in the consolidated financial statements for the year ended December 31, 2021.

Subsequently, on January 11, 2023, the Company entered into a definitive Sale and Purchase Agreement with Solutions. The Sale and Purchase Agreement provides for a transaction based on an enterprise value for CCC of $ 120 million (SAR 450 million), on a debt free and cash free basis, to be paid in cash at closing, subject to the adjustments set forth in the Sale and Purchase Agreement. The transaction has been approved by the General Authority for Competition (GAC) in the Kingdom of Saudi Arabia and the Company has also obtained consent from its lenders. It is anticipated that the closing of the transactions contemplated by the Sale and Purchase Agreement will occur during the second quarter of 2023.

The following table summarizes the income statement information of discontinued operations (in thousands):

*It includes allocated interest.

The following table summarizes the carrying values of the assets and liabilities classified as held for sale in our consolidated balance sheet as of December 31, 2022

(in thousands):