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Startek, Inc. - Quarter Report: 2022 June (Form 10-Q)

srt20220630_10q.htm
 
 

Table of Contents



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 


 

Form 10-Q

(Mark One) 

 

 

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

 

For the quarterly period ended June 30, 2022

or 

 

 

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

 

For the transition period from                to                

 

Commission file number 1-12793


 

StarTek, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

84-1370538

(State or other jurisdiction of

(I.R.S. employer

incorporation or organization)

Identification No.)

 

 

4610 South Ulster Street,

 

Suite 150

, Denver, Colorado

80237

(Address of principal executive offices)

(Zip code)

 

(303) 262-4500

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

SRT

New York Stock Exchange, Inc.

 

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

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer  ☐

Smaller reporting company  ☒

 

Emerging growth company  ☐

 

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

 

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

 

As of July 30, 2022, there were 40,336,417 shares of Common Stock outstanding.

 



 

  

 

 

STARTEK, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q

 

 

PART I - FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

Page

 

Consolidated Statement of Income (Loss) and Other Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)

4

 

Consolidated Balance Sheets as of June 30, 2022(Unaudited) and December 31, 2021 

5

 

Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited)

6

 

Consolidated Statement of Stockholders' Equity for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)

7

 

Note 1 Overview and Basis of Preparation

8

  Note 2 Summary of Significant Accounting Policies 9
  Note 3 Goodwill and Intangible Assets 12
  Note 4 Revenue 13
  Note 5 Net Income / (Loss) Per Share 15
  Note 6 Impairment Losses and Restructuring / Exit cost 15
  Note 7 Derivative Instruments 16
  Note 8 Fair Value Measurements 17
  Note 9 Debt 18
  Note 10 Share-Based Compensation 20
  Note 11 Accumulated Other Comprehensive Loss 21
  Note 12 Segment Reporting 22
  Note 13 Leases 23
  Note 14 Investment in Equity-Accounted Investees 24
  Note 15 Common Stock  25
  Note 16 Private Offer Transaction Cost 26
  Note 17 Subsequent Events 26

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

27

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

34

ITEM 4.

Controls and Procedures

34

 

 

 

PART II - OTHER INFORMATION

 

 

 

ITEM 1.

Legal proceeding

35

ITEM 1A.

Risk Factors

35

ITEM 2. Unregistered sales of equity securities and use of proceeds 35

ITEM 3.

Defaults upon senior securities 35
ITEM 4. Mine safety disclosure 35

ITEM 5. 

Other Information

35

ITEM 6.

Exhibits

36

SIGNATURES

 

37

 

 

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including the following:

 

 

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

 

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

 

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

 

other statements regarding matters that are not historical facts.

 

Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. Important factors that could cause actual results to differ materially from our expectations and may adversely affect our business and results of operations, include, but are not limited to, those items described herein or set forth in the Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission ("SEC") on March 14, 2022 and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. Unless otherwise noted in this report, any description of "us," "we," or "our," refers to Startek, Inc. ("Startek") and its subsidiaries.

 

 

FILING STATUS

 

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

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF INCOME (LOSS)

(In thousands, except share and per share data)

(Unaudited)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenue

  167,641   189,436   334,958   352,931 

Warrant adjustment

  -   (405)  -   (830)

Net revenue

 $167,641  $189,031  $334,958  $352,101 

Cost of services

  (150,914)  (164,477)  (297,174)  (302,860)

Gross profit

 $16,727  $24,554  $37,784  $49,241 
                 

Selling, general and administrative expenses

  (13,743)  (12,298)  (29,624)  (26,469)

Impairment losses and restructuring/exit cost

  (745)  19   (2,152)  (1,879)

Operating income

 $2,239  $12,275  $6,008  $20,893 
                 

Share of income of equity accounted investee

  3,833   59   3,825   45 

Interest expense, net and other income

  (2,103)  (2,484)  (3,077)  (16,253)

Foreign exchange gains (losses), net

  82   363   (326)  575 

Income before tax expense

 $4,051  $10,213  $6,430  $5,260 

Tax expense

  (1,423)  (2,093)  (3,516)  (6,995)

Net income (loss)

 $2,628  $8,120  $2,914  $(1,735)
                 

Net income (loss)

                

Net income attributable to noncontrolling interests

  761   1,235   2,290   3,535 

Net income (loss) attributable to Startek shareholders

  1,867   6,885   624   (5,270)
                 

Net incom (loss) per common share

                

Basic net income (loss) attributable to Startek shareholders

 $0.05  $0.17  $0.02  $(0.13)

Diluted net income (loss) attributable to Startek shareholders

 $0.05  $0.17  $0.02  $(0.13)
                 

Weighted average common shares outstanding

                

Basic

  40,284   40,786   40,311   40,689 

Diluted

  40,308   41,222   40,366   40,689 

 

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share data)

(Unaudited)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net income (loss)

 $2,628  $8,120  $2,914  $(1,735)

Net income attributable to noncontrolling interests

  761   1,235   2,290   3,535 

Net income (loss) attributable to Startek shareholders

  1,867   6,885   624   (5,270)
                 

Other comprehensive income (loss), net of taxes

                

Foreign currency translation adjustments

  (3,937)  (876)  (3,389)  (1,968)

Change in fair value of derivative instruments

  -   -   -   8 

Pension amortization

  451   (37)  (686)  (421)

Other comprehensive loss

 $(3,486) $(913) $(4,075) $(2,381)
                 

Other comprehensive income (loss), net of taxes

                

Other comprehensive income (loss) attributable to noncontrolling interest

  281   -   (374)  (69)

Other comprehensive loss attributable to Startek shareholders

  (3,767)  (913)  (3,701)  (2,312)
  $(3,486) $(913) $(4,075) $(2,381)

Comprehensive income (loss)

                

Comprehensive income attributable to noncontrolling interests

  1,042   1,235   1,916   3,466 

Comprehensive income (loss) attributable to Startek shareholders

  (1,900)  5,972   (3,077)  (7,582)
  $(858) $7,207  $(1,161) $(4,116)

 

See Notes to Consolidated Financial Statements.

 

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

(Unaudited)

 

  

June 30,

  

December 31,

 
  

2022

  

2021

 

Assets

        

Current assets

        

Cash and cash equivalents

  47,145   47,940 

Restricted cash

  8,646   7,456 

Trade accounts receivables, net

  84,115   106,937 

Unbilled revenue

  67,630   50,074 

Prepaid and other current assets

  19,483   12,611 

Total current assets

 $227,019  $225,018 
         

Non-current assets

        

Property, plant and equipment, net

  32,494   34,168 

Operating lease right-of-use assets

  51,157   63,012 

Intangible assets, net

  84,950   90,092 

Goodwill

  183,397   183,397 

Investment in equity-accounted investees

  35,513   31,688 

Deferred tax assets, net

  4,800   3,664 

Prepaid expenses and other non-current assets

  8,251   11,436 

Total non-current assets

 $400,562  $417,457 

Total assets

 $627,581  $642,475 
         

Liabilities and Stockholders’ Equity

        

Current liabilities

        

Trade accounts payables

  10,615   11,916 

Accrued expenses

  53,493   53,203 

Short term debt

  5,112   3,611 

Current maturity of long term debt

  16,274   6,241 

Current maturity of operating lease liabilities

  22,710   24,393 

Other current liabilities

  45,430   48,265 

Total current liabilities

 $153,634  $147,629 
         

Non-current liabilities

        

Long term debt

  149,283   160,175 

Operating lease liabilities

  32,642   44,263 

Other non-current liabilities

  22,316   19,562 

Deferred tax liabilities, net

  17,802   17,526 

Total non-current liabilities

 $222,043  $241,526 

Total liabilities

 $375,677  $389,155 
         

Stockholders’ equity

        

Common stock, 60,000,000 non-convertible shares, $0.01 par value, authorized; 40,996,566 and 40,893,396 shares issued as of June 30, 2022, and December 31, 2021, respectively

  410   409 

Additional paid-in capital

  292,615   291,537 

Accumulated deficit

  (83,419)  (84,043)

Treasury stock, 692,176 and 412,769 shares as of June 30, 2022, and December 31, 2021, respectively, at cost

  (3,246)  (1,912)

Accumulated other comprehensive loss

  (14,388)  (10,687)

Equity attributable to Startek shareholders

 $191,972  $195,304 

Non-controlling interest

  59,932   58,016 

Total stockholders’ equity

 $251,904  $253,320 

Total liabilities and stockholders’ equity

 $627,581  $642,475 

 

See Notes to Consolidated Financial Statements.

 

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

  

Six Months Ended June 30,

 
  

2022

  

2021

 

Operating activities

        

Net income (loss)

 $2,914  $(1,735)
         

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Depreciation and amortization

  14,558   13,470 

Profit on sale of property, plant and equipment

  (152)  (73)

Provision for doubtful accounts

  (136)  32 

Amortization of debt issuance costs (including loss on extinguishment of debt)

  286   11,302 

Amortization of call option premium

  720   480 

Warrant contra revenue

  -   830 

Share-based compensation expense

  833   591 

Deferred income taxes

  (1,157)  (1,255)

Share of income of equity-accounted investees

  (3,825)  (45)
         

Changes in operating assets and liabilities:

        

Trade accounts receivables

  19,544   (11,412)

Prepaid expenses and other assets

  (25,539)  (2,971)

Trade accounts payable

  (712)  (9,965)

Income taxes, net

  (1,046)  2,724 

Accrued expenses and other liabilities

  2,418   9,505 

Net cash provided by operating activities

 $8,706  $11,478 
         

Investing activities

        

Purchase of property, plant and equipment, net

  (6,191)  (7,513)

Investment in equity-accounted investees

  -   (25,000)

Payments for call option premium

  -   (3,000)

Proceeds from equity-accounted investees

  -   104 

Net cash used in investing activities

 $(6,191) $(35,409)
         

Financing activities

        

Proceeds from the issuance of common stock

  246   1,283 

Proceeds from long term debt (net of debt issuance cost paid to lenders)

  -   156,525 

Payments of long term debt

  -   (117,600)

Payments for loan fees related to long term debt

  -   (2,794)

Proceeds from a line of credit, net

  1,423   - 

Payments of other borrowings, net

  (969)  (9,431)

Common stock repurchases

  (1,334)  - 

Net cash (used in)/ provided by financing activities

 $(634) $27,983 
         

Net increase in cash and cash equivalents

  1,881   4,052 

Effect of exchange rate changes on cash and cash equivalents and restricted cash

  (1,486)  (548)

Cash and cash equivalents and restricted cash at beginning of period

  55,396   50,559 

Cash and cash equivalents and restricted cash at end of period

 $55,791  $54,063 
         

Components of cash and cash equivalents and restricted cash

        

Balances with banks

  47,145   47,018 

Restricted cash

  8,646   7,045 

Total cash and cash equivalents and restricted cash

 $55,791  $54,063 
         

Supplemental disclosure of cash flow information

        

Cash paid for interest and other finance cost

  4,700   17,091 

Cash paid for income taxes

  5,573   5,541 

Supplemental disclosure of non-cash activities

        

Non-cash warrant contra revenue

  -   830 

Non-cash share-based compensation expenses

  833   591 

 

See Notes to Consolidated Financial Statements.

 

 

 

STARTEK, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

  

Common Stock

  

Treasury Stock

          

Other Items of OCI

             
  

Shares

  

Amount

  

Shares

  

Amount

  

Additional paid-in capital

  

Accumulated deficit

  

Foreign currency translation

  

Change in fair value of derivative instruments

  

Unrecognised pension cost

  

Equity attributable to Startek shareholders

  

Non-controlling interest

  

Total stockholders' equity

 

Three months ended

                                                

Balance at March 31, 2022

  40,953,221  $410   672,176  $(3,183) $292,104  $(85,286) $(6,268) $-  $(4,353) $193,424  $58,890  $252,314 

Issuance of common stock

  43,345   0   -   -   106   -   -   -   -   106   -   106 

Share-based compensation expenses

  -   -   -   -   405   -   -   -   -   405   -   405 

Net income (loss)

  -   -   -   -   -   1,867   -   -   -   1,867   761   2,628 

Other comprehensive income (loss)

  -   -   -   -   -   -   (3,937)  -   170   (3,767)  281   (3,486)

Repurchase of common stock

  -   -   20,000   (63)  -   -   -   -   -   (63)  -   (63)

Balance at June 30, 2022

  40,996,566  $410   692,176  $(3,246) $292,615  $(83,419) $(10,205) $-  $(4,183) $191,972  $59,932  $251,904 
                                                 

Balance at March 31, 2021

  40,781,804  $408   -  $-  $290,646  $(97,698) $(5,621) $-  $(3,064) $184,671  $52,837  $237,508 

Issuance of common stock

  14,375   0   -   -   39   -   -   -   -   39   -   39 

Share-based compensation expenses

  -   -   -   -   311   -   -   -   -   311   -   311 

Warrant expense

  -   -   -   -   405   -   -   -   -   405   -   405 

Net income (loss)

  -   -   -   -   -   6,885   -   -   -   6,885   1,235   8,120 

Other comprehensive income (loss)

  -   -   -   -   -   -   (876)  -   (37)  (913)  -   (913)

Balance at June 30, 2021

  40,796,179  $408   -  $-  $291,401  $(90,813) $(6,497) $-  $(3,101) $191,398  $54,072  $245,470 
                                                 

Six months ended

                                                

Balance at December 31, 2021

  40,893,396  $409   412,769  $(1,912) $291,537  $(84,043) $(6,816) $-  $(3,871) $195,304  $58,016  $253,320 

Issuance of common stock

  103,170   1   -   -   245   -   -   -   -   246   -   246 

Share-based compensation expenses

  -   -   -   -   833   -   -   -   -   833   -   833 

Net income (loss)

  -   -   -   -   -   624   -   -   -   624   2,290   2,914 

Other comprehensive income (loss)

  -   -   -   -   -   -   (3,389)  -   (312)  (3,701)  (374)  (4,075)

Repurchase of common stock

  -   -   279,407  $(1,334)  -   -   -   -   -   (1,334)  -   (1,334)

Balance at June 30, 2022

  40,996,566  $410   692,176  $(3,246) $292,615  $(83,419) $(10,205) $-  $(4,183) $191,972  $59,932  $251,904 
                                                 

Balance at December 31, 2020

  40,453,462  $405   -  $-  $288,700  $(85,543) $(4,529) $(8) $(2,749) $196,276  $50,606  $246,882 

Issuance of common stock

  342,717   3   -   -   1,280   -   -   -   -   1,283   -   1,283 

Share-based compensation expenses

  -   -   -   -   591   -   -   -   -   591   -   591 

Warrant expense

  -   -   -   -   830   -   -   -   -   830   -   830 

Net income (loss)

  -   -   -   -   -   (5,270)  -   -   -   (5,270)  3,535   (1,735)

Other comprehensive income (loss)

  -   -   -   -   -   -   (1,968)  8   (352)  (2,312)  (69)  (2,381)

Balance at June 30, 2021

  40,796,179  $408   -  $-  $291,401  $(90,813) $(6,497) $-  $(3,101) $191,398  $54,072  $245,470 

 

As of June 30, 2022 and December 31, 2021, there were 40,304,390 and 40,480,627 shares outstanding respectively of Common Stock, net off treasury stock.

 

 

STARTEK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(In thousands, except share and per share data)

(Unaudited)

 

 

1. OVERVIEW AND BASIS OF PREPARATION

 

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

 

Business

 

Startek is a leading global provider of technology-enabled business process management solutions. The Company provides omni-channel customer experience, digital transformation, and technology services to some of the finest brands globally. Startek is committed to impacting clients’ business outcomes by focusing on enhancing customer experience and digital enablement across all touchpoints and channels. Startek has more than 46,000 employees spread across 42 delivery campuses in 13 countries. The Company services over 175 clients across various industries such as Banking and Financial Services, Insurance, Technology, Telecom, Healthcare, Travel and Hospitality, Consumer Goods, Retail, Media & Cable, E-commerce and Energy and Utilities.

 

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

 

Basis of preparation

 

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

 

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

 

The consolidated financial statements include the accounts of Startek, Inc and its subsidiaries over which the Company exerts control. When the Company does not have majority ownership in an entity but exerts significant influence over that entity, the Company accounts for the entity under the equity method of accounting. All intercompany balances are eliminated on consolidation. Where our ownership of a subsidiary was less than 100%, the non-controlling interest is reported in our consolidated balance sheet. The non-controlling interest in our consolidated net income is reported as "Net income attributable to non-controlling interests" in our consolidated statement of income (loss).

 

As of December 31, 2021, the consolidated balance sheet included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by U.S. GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended  December 31, 2021.

 

The figures for the corresponding previous year have been regrouped/reclassified wherever necessary, to make them comparable.

 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, intangibles, impairment of goodwill, valuation allowances for deferred tax assets, leases, provision for doubtful debts and restructuring costs. Management believes that the estimates used in the preparation of the consolidated financial statements are reasonable and management has made assumption about the possible effect of the global macroeconomic conditions, including heightened inflation, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, labor shortages & challenges in supply chain, have the potential to negatively impact the Company. There current macroeconomic conditions may continue or aggravate and could cause the United States economy or other global economies to experience an economic slowdown or recession. We anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States or other major global economy. Although these estimates and assumptions are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates. Any changes in estimates are adjusted prospectively in the Company’s consolidated financial statements.

 

Revenue

 

The Company utilizes a five-step process given in ASC 606, for revenue recognition that focuses on the transfer of control, rather than the transfer of risks and rewards. It also provided additional guidance on accounting for contract acquisition and fulfillment costs. Refer to Note 4 on "Revenue" for further information.

 

Leases

 

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

  

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

 

ASC 842 requires an entity to apply the guidance on impairment of long-lived assets in ASC 360 to right-of-use assets. Therefore, right-of-use assets must be monitored for impairment, like other long-lived non-financial assets, regardless of whether the lease is an operating lease or a finance lease. When impairment indicators exist, an asset (asset group) should be tested to determine whether there is an impairment.

 

The Company elected the practical expedient permitted under the transition guidance under Topic 842, which among other matters, allowed the Company (i) not to apply the recognition requirements to short-term leases (leases with a lease term of 12 months or less), (ii) not to reassess whether any expired or existing contracts are or contain leases, (iii) not to reassess the lease classification for any expired or existing leases, and (iv) not to reassess initial direct costs for any existing leases. Refer to Note 13, "Leases" for additional information.

 

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

 

9

 

Goodwill and Intangible Assets

 

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


Intangible assets acquired in a business combination were recorded at fair value at the acquisition date using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over the estimated useful lives and are reviewed for impairment at least annually, or more frequently if indicators of impairment arise.

 

Foreign Currency Matters

 

The Company has operations in Argentina and its functional currency has historically been the Argentine Peso. The Company monitors inflation rates in countries where it operates as required by U.S. GAAP. Under ASC 830-10-45-12, an economy must be classified as highly inflationary when the cumulative three-year rate exceeds 100%.  Considering the inflation data of Argentina, the Company has considered Argentina to be highly inflationary beginning on July 1, 2018. In accordance with ASC 830, the functional currency of the Argentina business has been changed to USD, which requires re-measurement of the local books to USD. Exchange gains and losses are recorded through net income instead of through other comprehensive income as had been done historically. Translation adjustments from periods prior to the change in functional currency were not removed from equity.

 

Investment in equity-accounted investees

 

Investment in equity accounted investee is an entity over which the Company has significant influence and which is neither a subsidiary nor a joint arrangement. Significant influence is the power to participate in financial and operating policy decisions of the investee but is not control or joint control over those policies.

 

Investment in equity accounted investees are accounted for using equity method of accounting. Under the equity method, the investment in equity accounted investee is initially recognized at cost and adjusted thereafter for the post acquisition changes in the Company’s share of net assets of the equity accounted investees. Goodwill relating to investment in equity accounted investees, if any, is included in the carrying amount of the investment and is neither amortized nor individually tested for impairment.

 

In case of Limited Partnerships Investments, there is a specific SEC staff guidance which is included in ASC 323-30-S99-1 which provides that investments in all limited partnerships should be accounted for pursuant to paragraph 970-323-25-6. That guidance requires the use of the equity method unless the investor's interest "is so minor that the limited partner may have virtually no influence over partnership operating and financial policies."


The consolidated statement of income reflects the Company’s share of the results of operations of the equity accounted investees. When there has been a change recognized directly in the equity of the equity accounted investees, the Company recognizes its share of any changes and discloses this, when applicable, in the statement of stockholders' equity. Unrealized gains and losses resulting from transactions between the Company and the equity accounted investment are eliminated to the extent of the interest in the equity accounted investees. The Company’s share of income (loss) of equity accounted investee is shown on the face of the consolidated statement of income (loss).


The financial statements of the equity accounted investees are prepared for the same reporting period as the Company. When necessary, adjustments are made to bring the accounting policies in line with those of the Company. After application of the equity method, the Company determines at each reporting date whether there is any objective evidence that the investment in equity accounted investee is impaired, if there has been other than a temporary decline in carrying value. If this is the case, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in the 'share of income (loss) of equity accounted investee in the consolidated statement of income (loss)'. Refer to Note 14, "Investment in Equity-Accounted Investees" for additional information and related disclosures.

 

Stock-Based Compensation

 

We recognize expenses related to all share-based payments to employees, including grants of employee stock options, based on the grant-date fair values amortized straight-line over the period during which the employees are required to provide services in exchange for the equity instruments. We include an estimate of forfeitures when calculating compensation expenses. We use the Black-Scholes method for valuing stock-based awards. See Note 10, “Share-Based Compensation” for further information.

 

Common Stock Warrant Accounting

 

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

 

 

10

 

Consolidated Cash Flow Statement

 

The Company has aligned the cash flow for comparable period for rectifications made in the previous year to presentation of certain transactions arising from the debt re-financing.

 

In the fourth quarter of 2021, a correction was made to present the payment of an amount of $8,475 paid and expensed in the income statement, as debt issuance cost, as a reduction from cash flows from financing activities and a corresponding increase in cash flows from operating activities.

 

The effect of the above reclassifications are an increase in cash flows from operating activities by $8,475 and a corresponding decline in cash flows from financing activities $8,475.

 

The Company has evaluated and concluded that the above corrections were not qualitatively material on previously filed quarterly consolidated financial statements. The above presentation errors within the consolidated statements of cash flows did not impact net income, comprehensive income, earnings per share, total equity, or the balance sheet and also detailed footnotes related to the transaction have been given in all quarters and in the annual financial statements for the year ended December 31, 2021. Also, these presentation errors did not impact Company’s debt covenants, its net debt position, segment reporting and cash and cash equivalents.

 

Restructuring Charges

 

On an ongoing basis, management assesses the profitability and utilization of our facilities and in some cases, management has chosen to close facilities. Severance payments that occur from reductions in the workforce are in accordance with our post-employment policy and/or statutory requirements that are communicated to all employees; therefore, severance liabilities are recognized when termination of employment is communicated to the employee(s). Other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred, instead of upon commitment to an exit plan. A significant assumption used in determining the amount of the estimated liability for closing a facility is the estimated liability for future lease payments on vacant facilities. We determine our estimate of sublease payments based on our ability to successfully negotiate early termination agreements with landlords, a third-party broker, or management’s assessment of our ability to sublease the facility based upon the market conditions in which the facility is located. If the assumptions regarding early termination and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses, or conversely, a future gain. Refer to Note 6, "Impairment Losses and Restructuring/Exit cost" for additional information.

 

Reserves/Contingencies for Litigation and Other Matters

 

We are involved in few claims and legal actions, such as wage and hour, wrongful termination, and other employment-related claims, that arise in the ordinary course of business, some of which may be covered by insurance. The outcomes of these actions are not predictable, but we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity, or capital resources. We record an accrual for legal contingencies when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss. However, if there is a significant increase in the number of these claims, or if we incur greater liabilities than we currently anticipate under one or more claims, it could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

Recent Accounting Pronouncements

 

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

 

In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional expedients and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. The guidance is effective upon issuance and generally can be applied through December 31, 2022. This amendment shall apply to any term loan obtained by the Company which is linked to LIBOR. The Company is closely monitoring the market and the announcements from the bank managing the transition to new benchmark interest rates for its term loan benchmarked to LIBOR. Based on announcements by bank, the transition will take effect. The Company is not expecting any material financial impact of transition from LIBOR to alternative benchmark rates on its floating rate borrowings linked to LIBOR.

 

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This update requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. This standard is effective for annual periods beginning after December 15, 2021 and should be applied either prospectively or retrospectively. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2021-10 within its Form 10-K for the fiscal year 2022.

 

 

 

3. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

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

 

Reporting Units:

 

June 30, 2022

   

December 31, 2021

 

Americas

    64,315       64,315  

India

    12,554       12,554  

Malaysia

    47,543       47,543  

Saudi Arabia

    54,840       54,840  

Australia

    4,145       4,145  

Total

  $ 183,397     $ 183,397  

 

We perform a goodwill impairment analysis at least annually (in the fourth quarter of each year) unless indicators of impairment exist in interim periods. The assumptions used in the analysis are based on the Company’s internal budget. The Company projects revenue, operating margins, and cash flows for a period of five years and applies a perpetual long-term growth rate using discounted cash flows (DCF) method. These assumptions are reviewed annually as part of management’s budgeting and strategic planning cycles. These estimates may differ from actual results. 

 

As of June 30, 2022 and December 31, 2021, based on the qualitative assessment, we concluded that there is no impairment of goodwill.

 

The following table presents the changes in goodwill during the six months ended June 30, 2022 and year ended December 31, 2021:

 

   

June 30, 2022

   

December 31, 2021

 

Opening balance

    183,397       183,397  

Impairment

    -       -  

Closing balance

  $ 183,397     $ 183,397  

 

Intangible Assets

 

The following table presents our intangible assets:

 

   

As of June 30, 2022

 
   

Gross Intangibles

    Accumulated Amortization     Net Intangibles     Weighted Average Amortization Period (years)  

Customer relationships

    66,220       24,670       41,550       6.5  

Brand

    49,500       16,892       32,608       7.1  

Trademarks

    13,210       3,476       9,734       7.5  

Other intangibles

    2,130       1,072       1,058       4.9  
    $ 131,060     $ 46,110     $ 84,950          

 

   

As of December 31, 2021

 
   

Gross Intangibles

    Accumulated Amortization     Net Intangibles     Weighted Average Amortization Period (years)  

Customer relationships

    66,220       21,887       44,333       6.5  

Brand

    49,500       15,074       34,426       7.1  

Trademarks

    13,210       3,036       10,174       7.5  

Other intangibles

    2,130       971       1,159       4.9  
    $ 131,060     $ 40,968     $ 90,092          

 

As of June 30, 2022, based on the management assessment, we concluded there is no impairment on the Company's intangible assets.

 

Expected future amortization of intangible as of  June 30, 2022 is as follows:

 

Year ending December 31,

 

Amount

 

Remainder of 2022

    5,175  

2023

    10,306  

2024

    10,252  

2025

    10,252  

2026

    9,490  

Thereafter

    39,475  

 

 

 

4.  REVENUE

 

The Company follows a five-step process in accordance with ASC 606, for revenue recognition that focuses on the transfer of control, rather than the transfer of risks and rewards.

 

Contracts with Customers

 

All of the Company's revenues are derived generally from written contracts with our customers. Our contracts document our customers' agreement to utilize our services and the relevant terms and conditions under which our services will be provided. Our contracts generally do not contain minimum purchase requirements nor do they include termination penalties. Our customers may generally cancel our contract, without cause, upon written notice (generally ninety days). While our contracts do have stated terms, because of the facts stated above, they are accounted for on a month-to-month basis.

 

Our contracts give us the right to bill for services rendered during the period, which for most of our customers is a calendar month, with a few customers specifying a fiscal month. Our payment terms vary by client and generally range from due upon receipt to 60-90 days.

 

Performance Obligations

 

We have identified one main performance obligation for which we invoice our customers, which is to stand ready to provide care services for our customers’ clients. A stand-ready obligation is a promise that a customer will have access to services as and when the customer decides to use them. Ours is considered a stand-ready obligation because the delivery of the underlying service (that is, receiving customer contact and performing the associated care services) is outside of our control or the control of our customer.

 

Our stand-ready obligation involves outsourcing of the entire customer care life cycle, including:

 

 

The identification, operation, management, and maintenance of facilities, IT equipment, and IT and telecommunications infrastructure

 

Management of the entire human resources function, including recruiting, hiring, training, supervising, evaluating, coaching, retaining, compensating, providing employee benefits programs, and disciplinary activities

 

These activities are all considered an integral part of the production activities required in the service of standing ready to accept calls as and when they are directed to us by our clients.

 

13

 

Revenue Recognition Methods

 

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

 

We are entitled to invoice for our services on a monthly basis. We invoice according to the hourly and/or per-transaction rates stated in each contract for the various activities we perform. Some contracts include opportunities to earn bonuses or include parameters under which we will incur penalties related to performance in any given month. Bonus or penalty amounts are based on the current month’s performance. Formulas are included in the contracts for the calculation of any bonus or penalty. There is no other performance in future periods that will impact the bonus or penalty calculation in the current period. We estimate the amount of the bonus or penalty using the “most likely amount” method and we apply this method consistently. The bonus or penalty calculated is generally approved by the client prior to billing (and revenue being recognized). The unbilled revenue, where the right to invoice has not accrued is recognized based on service delivery estimate.

 

Practical expedients and exemptions

 

Because the Company’s contracts are essentially month-to-month, we have elected the following practical expedients:

 

 

ASC 606-10-50-14 exempts companies from the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less

 

ASC 340-40-25-4 allows companies to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.

 

ASC 606-10-32-2A allows an entity to make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value-added, and some excise taxes)

 

ASC 606-10-55-18 allows an entity that has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice.

 

Disaggregated Revenue

 

Revenues by our clients' industry verticals for the three and six months ended  June 30, 2022 and 2021 respectively:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Vertical

 

2022

   

2021

   

2022

   

2021

 

Telecom

    60,694       53,611       116,746       105,285  

E-commerce & Consumer

    18,851       26,221       39,377       52,324  

Media & Cable

    15,927       23,778       32,869       49,572  

Financial & Business Services

    17,605       15,763       34,300       31,214  

Travel & Hospitality

    13,495       10,542       27,010       21,039  

Healthcare & Education

    7,363       40,018       18,826       57,705  

Technology, IT & Related Services

    5,112       4,858       10,457       9,939  

Other verticals

    28,594       14,645       55,373       25,853  

Gross revenue

    167,641       189,436       334,958       352,931  

Less: Warrant contra revenue

    -       (405 )     -       (830 )

Net revenue

  $ 167,641     $ 189,031     $ 334,958     $ 352,101  

 

 

 

5. NET INCOME / (LOSS) PER SHARE

 

Basic earnings per common share are computed based on our weighted average number of common shares outstanding. Diluted earnings per share are computed based on our weighted average number of common shares outstanding plus the effect of dilutive stock options, non-vested restricted stock, and deferred stock units, using the treasury stock method. 

 

When a net loss is reported, potentially issuable common shares are excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.

 

For three and six months ended  June 30, 2022 and 2021, the following number of shares were used in the computation of basic and diluted earnings per share calculation (in thousands): 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Shares used in basic earnings per share calculation

    40,284       40,786       40,311       40,689  

Effect of dilutive securities:

                               

Stock options

    24       436       55       -  

Restricted stock/Deferred stock units

    -       -       -       -  

Total effects of dilutive securities

    24       436       55       -  

Shares used in dilutive earnings per share calculation

    40,308       41,222       40,366       40,689  

 

The Company always maintained Startek's 2008 Equity Incentive Plan (see Note 10, "Share-based compensation" for more information).

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Anti-dilutive securities

                               

Stock options

    -       62       -       2,114  

 

 

6. IMPAIRMENT LOSSES & RESTRUCTURING/EXIT COST

 

Impairment Loss

 

As of June 30, 2022, based on the qualitative assessment, we concluded there is no impairment of goodwill.

 

Restructuring / Exit Cost

 

The table below summarizes the balance of accrued restructuring cost, voluntary/involuntary termination costs, and other exit-related costs, which are included in other accrued liabilities in our consolidated balance sheet. The changes during the six months ended  June 30, 2022 and the year ended December 31, 2021.

 

   

Employee related

   

Facilities related

   

Total

 

Balance on December 31, 2021

    480       155       635  

Accruals/(reversal)

    1,820       332       2,152  

Payments

    (1,751 )     (465 )     (2,216 )

Balance as of June 30, 2022

  $ 549     $ 22     $ 571  

 

   

Employee related

   

Facilities related

   

Total

 

Balance on December 31, 2020

    -       25       25  

Accruals/(reversal)

    3,519       193       3,712  

Payments

    (3,039 )     (63 )     (3,102 )

Balance on December 31, 2021

  $ 480     $ 155     $ 635  

 

Employee related

 

In 2022, the Company has closed few of its facilities in Argentina and Philippines, where we have terminated service of number of employees. We have recognized a provision for employee-related costs regarding the above termination. We expect to pay the remaining termination costs of $549 by the end of the fourth quarter of 2022.

 

Facility related

 

In 2022, the Company has recognized provision for the remaining costs associated with the lease that has been surrendered in Argentina. We expect to pay the remaining termination costs of $22 by the end of the third quarter of 2022.

 

 

 

7.  DERIVATIVE INSTRUMENTS

 

Cash flow hedges

 

Our locations in Canada and the Philippines primarily serve US-based clients. The revenues from these clients are billed and collected in US Dollars, but the expenses related to these revenues are paid in Canadian Dollars and Philippine Pesos. We had entered into derivative contracts, in the form of forward contracts and range forward contracts (a transaction where both a call option is purchased and a put option is sold) to mitigate this foreign currency exchange risk. The contracts covered periods commensurate with expected exposure, generally three to twelve months. We had elected to designate our derivatives as cash flow hedges to associate the hedges' results with forecasted expenses.

 

As of June 30,2022 and 2021, there were no derivative contract in effect.

 

    Gain (Loss) Recognized in AOCI, net of tax           Gain (loss) reclassified from AOCI into Income        
   

Six Months Ended June 30, 2022

   

Six Months Ended June 30, 2021

   

Six Months Ended June 30, 2022

   

Six Months Ended June 30, 2021

 

Cash flow hedges

                               

Foreign exchange contracts

  $ -     $ -     $ -     $ 8  

 

16

 

 

8.  FAIR VALUE MEASUREMENTS 

 

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are described below:

 

Level 1 - Quoted prices for identical instruments traded in active markets.

 

Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3 - Unobservable inputs that cannot be supported by market activity and are significant to the fair value of the asset, liability, or equity such as the use of certain pricing models, discounted cash flow models, and similar techniques use significant assumptions. These unobservable inputs reflect our own estimates of assumptions that market participants would use in pricing the asset or liability:

 

Derivative Instruments

 

The values of our derivative instruments are derived from pricing models using inputs based upon market information, including contractual terms, market prices, and yield curves. The inputs to the valuation pricing models are observable in the market, and as such the derivatives are classified as Level 2 in the fair value hierarchy.

 

As of  June 30, 2022 and December 31, 2021, there were no derivative assets and liabilities.

 

 

 

9. DEBT

 

The below table presents details of the Company's debt:

 

  

June 30, 2022

  

December 31, 2021

 

Short term debt

        

Working capital facilities

  5,112   3,611 

Current portion of long term debt

        

Current maturity of term loan

  14,438   4,125 

Current maturity of equipment loan

  1,663   1,682 

Current maturity of finance lease obligations

  174   434 

Total

 $21,387   9,852 
         

Long term debt

        

Term loan, net of debt issuance costs

  148,516  $158,543 

Equipment loan

  767   1,632 

Finance lease obligations

  -   - 

Total

 $149,283  $160,175 

 

Working capital facilities

 

The Company has a number of working capital facilities in various countries in which it operates. These facilities provide for a combined borrowing capacity of approximately $30 million for a number of working capital products. These facilities bear interest at benchmark rate plus margins between 3.0% and 4.5% and are due on demand. These facilities are collateralized by various Company assets and have a total outstanding balance of $5.1 million as of June 30, 2022.

 

Term loan

 

On February 18, 2021, the Company completed a debt refinancing with a newly secured $185 million senior debt facility, comprising a $165 million term loan and a $20 million revolving credit facility. Under the new senior debt, borrowings will bear a tiered interest rate based on the Company’s consolidated net leverage ratio and is initially set at LIBOR plus 450 basis points.

 

The term loan facility amortizes 2.5% on the date that is 21, and 24 months from closing, 3.75% on the date that is 27, 30, 33, and 36 months from closing, 5.0% on the date that is 39, 42, 45, 48 and 51 months from closing, 10% on the date that is 54 months from closing and 15% on the date that is 57 months from closing and balance will be paid on the closure of term loan.

 

On February 22, 2021, the Company used proceeds from the above facilities agreement to prepay and terminate the existing credit facility made available to it under that certain Amended and Restated Senior Term and Revolving Facilities Agreement, dated October 27, 2017.

 

Principal payments due on the term loan are as follows:

 

Years

 

Amount

 

Remainder of 2022

    4,125  

2023

    22,688  

2024

    30,937  

2025

    57,750  

2026

    49,500  

Total

  $ 165,000  

 

The Term loan has a floating interest rate of USD LIBOR plus 4.5% annually for the first year and thereafter the margin will range between 3.75% and 4.5% subject to certain financial ratios.

 

In 2021, the Company incurred debt issuance costs of $11.3 million in connection with the new term loan. As per ASC 470, accounting guidance on term loan extinguishment, the Company has expensed off the debt issuance cost of $8.5 million paid to the lenders towards the new term loan and $2.5 million remaining unamortized debt issuance cost of the old term loan in interest expense, net in the consolidated statement of income (loss). Debt issuance costs paid to the Company’s counsel and other third parties of $2.8 million is being amortized over the period of the new term loan. The balance unamortized portion of such costs as of June 30, 2022, amounted to $2.1 million which has been netted off against long-term debt on the consolidated balance sheet.

 

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 June 30, 2022, the Company was in compliance with all financial covenants.

 

Following table presents the changes in debt issuance cost during the six months ended  June 30, 2022 and the year ended December 31, 2022:

 

   

June 30, 2022

   

December 31, 2021

 

Opening balance

    2,332       2,670  

Add: Debt issuance cost (refinancing of term loan)

    -       11,269  

Less: Expensed out (ASC 470 - extinguishment or modification)

    -       (10,937 )

Less: Amortization of debt issuance cost

    (286 )     (670 )

Closing balance

    2,046       2,332  

 

18

 

Non-recourse factoring

 

We have entered into factoring agreements with financial institutions to sell certain of our accounts receivable under non-recourse agreements. Under the arrangement, the Company sells the trade receivables on a non-recourse basis and accounts for the transactions as sales of receivables. The applicable receivables are removed from the Company's consolidated balance sheet when the Company receives the cash proceeds. We do not service any factored accounts after the factoring has occurred. We utilize factoring arrangements as part of our management of working capital. The Company has factored receivables of $21.1 million and $21.6 million as of June 30, 2022 and December 31, 2021 under these agreements .

 

BMO Equipment Loan

 

On December 27, 2018, the Company executed an agreement to secure a loan against US and Canadian assets for $2.06 million at the interest of 7.57% per annum, to be repaid over 2.5 years. The loan was funded in January 2019 and fully repaid in May 2022.

 

Equipment Loan

 

On November 2, 2020, the Company executed Master Equipment Finance Agreement to finance the purchase of equipment for $4 million at the interest of 5.27% per annum with a maturity date 34 months after the date of first utilization of equipment loan. The amount outstanding as of June 30, 2022 is $2.1 million.

 

Finance lease obligations

 

From time to time and when management believes it to be advantageous, we may enter into other arrangements to finance the purchase or construction of capital assets.

 

 

 

10. SHARE-BASED COMPENSATION

 

Amazon Warrant

 

On January 23, 2018, Startek entered into the Amazon Transaction Agreement, pursuant to which we agreed to issue to Amazon.com NV Investment Holdings LLC, a wholly-owned subsidiary of Amazon, a warrant (the “Warrant”) to acquire up to 4,000,000 shares of our common stock, subject to certain vesting events. The vesting of the Warrant shares is linked to payments made by Amazon or its affiliates pursuant to a service contract. Since no vesting event occurred in the fiscal year 2021 and we do not anticipate additional vesting in the near future, the Company had not accrued any contra revenue as per ASC 606.

 

Share-based compensation

 

Our share-based compensation arrangements include grants of stock options, restricted stock units and deferred stock units under the Startek, Inc. 2008 Equity Incentive Plan and our Employee Stock Purchase Plan. The compensation expense that has been charged against income for the six months ended June 30, 2022, was $833 and is included in selling, general and administrative expense. As of June 30, 2022, there was $3,160 of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.4 years.

 

 

 

11.  ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Accumulated other comprehensive loss consists of the following items:

 

   

Foreign Currency Translation Adjustments

   

Defined Benefit Plan

   

Equity attributable to Startek shareholders

   

Non-controlling interests

   

Total

 

Balance on December 31, 2021

    (6,816 )     (3,871 )     (10,687 )     (3,887 )     (14,574 )

Foreign currency translation

    (3,389 )     -       (3,389 )     -       (3,389 )

Reclassification to operations

    -       -       -       -       -  

Pension amortization

    -       (312 )     (312 )     (374 )     (686 )

Balance at June 30, 2022

  $ (10,205 )   $ (4,183 )   $ (14,388 )   $ (4,261 )   $ (18,649 )

 

 

 

12.  SEGMENT REPORTING

 

The Company provides business process outsourcing services (“BPO”) to clients in various industries and geographical locations. Our approach is focused on providing our clients with the best possible combination of services and delivery locations to meet our clients' needs in the best and most efficient manner. Our Global Chief Executive Officer (CEO) who has been identified as the Chief Operating Decision Maker ("CODM"), reviews financial information mainly on a geographical basis.

 

Our operating business model is focused on the geographies in which we operate. Our CODM reviews the performance and makes resource allocation geography-wise, hence the geographical level represents the operating segments of Startek Inc.

 

We report our results of operations in six reportable segments, as follows:


a) Americas
b) India and Sri Lanka
c) Malaysia 
d) Middle East 
e) Argentina & Peru
f) Rest of World

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Revenue

                               

Americas

    41,952       84,680       87,367       148,605  

India & Sri Lanka

    26,264       24,079       54,224       45,561  

Malaysia

    11,431       13,816       22,711       28,781  

Middle East

    63,054       45,714       121,741       88,954  

Argentina & Peru

    9,321       9,143       17,626       17,302  

Rest of World

    15,619       11,599       31,289       22,898  

Total

  $ 167,641     $ 189,031     $ 334,958     $ 352,101  

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Operating income (loss)

                               

Americas

    (316 )     5,369       (2,635 )     7,264  

India & Sri Lanka

    1,178       2,594       4,644       1,366  

Malaysia

    2,579       3,414       4,605       7,828  

Middle East

    2,103       3,009       6,404       8,750  

Argentina & Peru

    (949 )     (393 )     (3,269 )     (436 )

Rest of World

    917       865       2,593       1,264  

Segment operating income

    5,512       14,858       12,342       26,036  

Startek consolidation adjustments

                               

Private offer transaction cost

    (692 )     -       (1,192 )     -  

Intangible amortization

    (2,581 )     (2,583 )     (5,142 )     (5,143 )

Total operating income

  $ 2,239     $ 12,275     $ 6,008     $ 20,893  

 

A single client accounted for 19% and 16% of the consolidated total net revenue during the three months ended June 30, 2022 and 2021, respectively, and 18% and 17% during the six months ended June 30, 2022 and 2021, respectively.

 

Property, plant and equipment, net by geography based on the location of the assets are presented below:

 

 

    As on     As on  
    June 30, 2022     December 31, 2021  

Property, plant and equipment, net

               

Americas

    10,838       11,335  

India & Sri Lanka

    9,908       8,712  

Malaysia

    2,558       2,818  

Middle East

    5,201       7,461  

Argentina & Peru

    1,219       1,453  

Rest of World

    2,770       2,389  

Total

  $ 32,494     $ 34,168  

 

Investment in Equity Accounted Investees

On February 25, 2021, the Company made a $25 million strategic investment in CSS Corp LP (“an Investment Limited Liability Partnership”), and the Company accounted this investment under the equity accounted investee method of accounting in accordance with ASC 323-30-S99-1. The CODM receives a partnership statement of CSS Corp LP on quarterly basis and evaluates the carrying value of the investment in equity accounted investees. The carrying value of investment as on June 30, 2022 is $35,513, Refer Note 14 for more details.

 

 

 

13.  LEASES

 

We have operating and finance leases for service centers, corporate offices, and certain equipment. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 3-5 years, and some of which include options to terminate the leases within 1 year.

 

The components of lease expense were as follows:

 

    Three Months Ended June 30, 2022     Three Months Ended June 30, 2021     Six Months Ended June 30, 2022     Six Months Ended June 30, 2021  
                                 

Operating lease cost

  $ 5,722     $ 6,479     $ 11,585     $ 13,288  
                                 

Finance lease cost

                               

Amortization of right-of-use assets

    118       153       261       339  

Interest on lease liabilities

    5       15       65       32  

Total finance lease cost

  $ 123     $ 168     $ 326     $ 371  

 

Supplemental cash flow information related to leases was as follows:

 

    Six Months Ended June 30, 2022     Six Months Ended June 30, 2021  

Cash paid for amounts included in the measurement of lease liabilities

               

Operating cash flows from operating leases

    12,647       13,246  

Operating cash flow from finance leases

    65       32  

Financing cash flows from finance leases

    260       371  
                 

Right-of-use assets obtained in exchange for lease obligations

               

Operating leases

   

2,498

     

2,105

 

Finance leases

    -       -  

 

Supplemental balance sheet information related to leases was as follows:

 

   

As of June 30, 2022

   

As of December 31, 2021

 

Operating leases

               

Operating lease right-of-use assets

  $ 51,157     $ 63,012  
                 

Operating lease liabilities - Current

    22,710       24,393  

Operating lease liabilities - Non-current

    32,642       44,263  

Total operating lease liabilities

  $ 55,352     $ 68,656  
                 

Finance Leases

               

Property and equipment, at cost

    4,118       4,128  

Accumulated depreciation

    (3,870 )     (3,641 )

Property and equipment, at net

  $ 248     $ 487  
                 

Finance lease liabilities - Current

    174       434  

Finance lease liabilities - Non-current

    -       -  

Total finance lease liabilities

  $ 174     $ 434  

 

Weighted average remaining lease term

  As of June 30, 2022     As of December 31, 2021  

Operating leases (in years)

  3.26 years     3.58 years  

Finance leases (in years)

  0.00 years     0.00 years  
                 

Weighted average discount rate

               

Operating leases

    7.0 %     6.8 %

Finance leases

    0.0 %     0.0 %

 

The following table reconciles the undiscounted cash flows for the Company’s finance and operating leases as of June 30, 2022, to the finance and operating lease liabilities recorded on the Company’s balance sheet:

 

   

Operating Leases

   

Finance Leases

 

Year ending December 31,

               

Remainder of 2022

    11,726       174  

2023

    20,100       -  

2024

    15,638       -  

2025

    9,291       -  

2026

    2,717       -  

Thereafter

    2,101       -  

Total lease payments

    61,573       174  

Less: Imputed interest

    (6,221 )     -  

Total present value to lease liabilities

  $ 55,352     $ 174  

 

 

 

14.  INVESTMENT IN EQUITY-ACCOUNTED INVESTEES

 

Following are the entity wise details of equity-accounted investees:

 

   

% of ownership interest

   

Carrying amount

 

Name of entity

 

June 30, 2022

   

December 31, 2021

   

June 30, 2022

   

December 31, 2021

 

a) CSS Corp LP

    61.35 %     61.35 %     35,513       31,688  

b) Immaterial associates

                    -       -  

Carrying amount of investment in equity-accounted investees

                    35,513       31,688  

 

   

Three months ended June 30, 2022

   

Three months ended June 30, 2021

   

Six months ended June 30, 2022

   

Six months ended June 30, 2021

 

Aggregate amounts of the group’s share of income (loss) of equity-accounted investees

    3,833       59       3,825       45  

 

a) CSS Corp LP

 

On February 25, 2021, the Company announced a $25 million strategic minority investment in CSS Corp. (“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, Startek acquired an indirect beneficial interest in CSS of approximately 26%, with Capital Square Partners (“CSP” or “CSP Fund”), a Singapore-based Private Equity Fund Manager, and the Company’s majority shareholder, acquiring the majority controlling stake.

 

The Company and CSP Alpha Holdings Pte. Ltd., a subsidiary of the Company, participated in this transaction by (i) contributing $25 million to acquire approximately 62.5%* in CSS Corp LP, and (ii) paying $5 million to CSP Management Limited to acquire certain call options. These call options to acquire a controlling stake in CSS are only exercisable by the Company during the period from August 19, 2022, to April 19, 2023, without any obligation and are currently considered to be not substantive.

 

*Subsequently reduced to 61.35%

 

The Company has assessed CSS Corp LP to be a variable interest entity (‘VIE’) and per ASC 810-10-25-44 concluded that it is not the primary beneficiary. Amongst other factors, the Company’s basis of this conclusion is that it lacks the power to direct or control any significant activities of the VIE and that the design and structure of the VIE were not specifically for the benefit of the Company. Further, CSS Corp LP’s objectives as an investment company is an extension of the investment activities of CSP Fund. The Company has accordingly, accounted for this transaction under the equity-accounted investee method of accounting in accordance with ASC 323-30-S99-1. The Company's share of income (loss) of equity-accounted investee is accounted under the “equity method” as per which the share of income (loss) of equity-accounted investee has been added to the cost.

 

Summarized financial position

               
   

June 30, 2022

   

December 31, 2021

 

Current assets

    34       42  

Non-current assets

    57,964       51,690  

Current and non-current liabilities

    (111 )     (80 )

Net assets

    57,887       51,652  
      -       -  

Company share in %

    61.35 %     61.35 %

Company share

    35,513       31,688  

Carrying amount of investment in equity-accounted investee

    35,513       31,688  

 

Reconciliation to carrying amounts

        
  

June 30, 2022

  

December 31, 2021

 

Opening net assets

  31,688   - 

Acquired during the year

  -   25,000 

Share of income of equity-accounted investees

  3,825   6,688 

Other comprehensive income

  -   - 
   35,513   31,688 

 

Summarized statement of comprehensive income

                
  

Three months ended June 30, 2022

  

Three months ended June 30, 2021

  

Six months ended June 30, 2022

  

Six months ended June 30, 2021

 

Revenue

  -   -   -   - 

Cost of services

  -   -   -   - 

Gross profit

  -   -   -   - 

Selling, general and administrative expenses

  (26)  (34)  (34)  (54)

Operating loss

  (26)  (34)  (34)  (54)

Unrealised gain on investment

  6,273   139   6,268   139 

Net income

  6,247   105   6,234   85 

Other comprehensive income

  -   -   -   - 

Total comprehensive income for the period

  6,247   105   6,234   85 

Aggregate amounts of the Company share of income of equity-accounted investee at 61.35%

  3,833   64   3,825   52 

 

24

 

b) Individually immaterial associates

 

The Company had individually immaterial investments in equity-accounted investee in Australia. It has 33.33% interest in Queensland Partnership Group Pty. Ltd and 16.67% interest in Services Queensland Partnership in Australia. The Company's share of income (loss) of equity-accounted investee, is accounted under the “equity method” as per which the share of income (loss) of equity-accounted investee had been added to the cost. In 2021 the Company had realized carrying amounts related to investment in individually immaterial associates.

 

Aggregate share of loss of immaterial associates was $5 and $7 for three months ended and six months ended June 30, 2021, respectively.

 

15. COMMON STOCK

 

Share Repurchase Plan

 

In the year 2004, the Company had 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 CFO’s determination as to the appropriate use of our cash.

 

During the six months ended June 30, 2022, we repurchased an aggregate of 279,407 shares of our common stock under our repurchase plan at an average cost of $4.75 per share.

 

Stock repurchase activity during the six months ended June 30, 2022 was as follows:

 

Period Ended

 

Total number of shares purchased

   

Average price paid per share (1) ($)

   

Total number of shares purchased as part of publicly announced program

   

Maximum dollar value that may yet to be purchased under program ($)

 

January 31, 2022

    130,803       5.08       130,803       1,432,822  

February 28, 2022

    75,865       4.90       75,865       1,061,426  

March 31, 2022

    52,739       4.36       52,739       831,229  

April 30, 2022

    -       -       -       831,229  

May 31, 2022

    20,000       3.15       20,000       768,156  

June 30, 2022

    -       -       -       768,156  

Total

    279,407               279,407          

 

1. Excludes broker commission.

 

 

16. PRIVATE OFFER TRANSACTION COST

 

On January 17, 2022, the Company announced that the board of directors has formed a special committee of independent directors that is 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. The special committee has engaged legal and financial advisors to assist in its consideration of the proposal. CSP is currently the beneficial owner of approximately 56% of the outstanding common stock of Startek. The special committee has appointed Foros Securities LLC as a financial advisor in connection with private offer and the Company incurred total expenses of $1,192 during the six months ended June 30, 2022 which is included in selling, general and administrative expenses.

 

 

17. SUBSEQUENT EVENTS.

 

None.

 

 

 

 

ITEM 2.  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 our consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021 and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021. All dollar amounts are presented in thousands other than per share data.

 

BUSINESS DESCRIPTION AND OVERVIEW

 

Startek is a leading global provider of technology-enabled business process management solutions. The Company provides Omni-channel customer experience, digital transformation, and technology services to some of the finest brands globally. Startek is committed to impacting clients’ business outcomes by focusing on enhancing customer experience and digital enablement across all touchpoints and channels. Startek has more than 46,000 employees located across 42 delivery campuses in 13 countries. The Company services over 175 clients across a range of industries such as Banking and Financial Services, insurance, technology, telecom, healthcare, travel and hospitality, consumer goods, retail, media & cable, E-commerce and energy and utilities.

 

SIGNIFICANT DEVELOPMENTS

 

None.

 

RESULTS OF OPERATIONS — three months ended June 30, 2022 AND 2021

 

Revenue

 

Our gross revenues for the three months ended June 30, 2022 decreased by 11.5% to $167,641 as compared to $189,436 for the three months ended June 30, 2021.

 

Our net revenue for the quarter ended June 30, 2022 and 2021:

 

   

For the Three Months Ended June 30, 2022

   

For the Three Months Ended June 30, 2021

 

Revenues

    167,641       189,436  

Warrant contra revenue

    -       (405 )

Net revenue

  $ 167,641     $ 189,031  

 

Our net revenues adjusted for warrant contra revenue for the three months ended June 30, 2022 decreased to $167,641 compared to $189,031 for the three months ended June 30, 2021.

 

 

The breakdown of our net revenues from various segments for the three months ended June 30, 2022 and 2021 is as follows:

 

   

Three Months Ended June 30,

 
   

2022

   

2021

 

Americas

    41,952       84,680  

India & Sri Lanka

    26,264       24,079  

Malaysia

    11,431       13,816  

Middle East

    63,054       45,714  

Argentina & Peru

    9,321       9,143  

Rest of World

    15,619       11,599  

Total

    167,641       189,031  

 

The decline in revenue in the Americas region is primarily due to high base impact in the previous year. Revenue in the previous period included short term government program relating to COVID vaccination that did not continue in the current year. 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 increase in revenues from other clients primarily in the telecom and retail verticals. 

 

Revenue growth in India and Sri Lanka region was driven by continuing ramp-ups in operations with some of the largest digital native clients in this region. Our international operations delivered out of India also continues to grow.

 

Revenue in Malaysia saw a decline due to the termination of the contract with the e-commerce client. Our operations with travel client delivered out of Malaysia saw a strong revival in demand.

 

Our operation in the Middle East continues to deliver strong revenue growth at the back of scaling up of new clients won during the last year.

 

Our revenue in the Rest of World was higher due to ramp-ups with our clients in South Africa and Australia.

 

The breakdown of our net revenues from various industry verticals for three months ended June 30, 2022 and 2021 is as follows:

 

   

For the Three Months Ended June 30, 2022

   

For the Three Months Ended June 30, 2021

   

For the Three Months Ended June 30, 2022

   

For the Three Months Ended June 30, 2021

 
                                 

Verticals:

                               

Telecom

    60,694       53,611       36 %     28 %

E-commerce & Consumer

    18,851       26,221       11 %     14 %

Media & Cable

    15,927       23,778       10 %     13 %

Financial & Business Services

    17,605       15,763       11 %     8 %

Travel & Hospitality

    13,495       10,542       8 %     6 %

Healthcare & Education

    7,363       40,018       4 %     21 %

Technology, IT & Related Services

    5,112       4,858       3 %     3 %

Other verticals

    28,594       14,645       17 %     8 %

Gross revenue

    167,641       189,436                  

Less: Warrant contra revenue

    -       (405 )                

Net revenue

    167,641       189,031                

 

 

Growth in telecom vertical was driven by new wins with our existing telecom clients across US and South Africa.

 

Financial & Business services vertical continues to perform strongly as we strengthen our partnership with key clients in these verticals.

 

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 revenues from the Media vertical was led by change in strategy with a key client who insourced part of their CX activities across vendors.

 

A contract was terminated in 2021 by one of our clients from the e-commerce vertical which led to year-on -year decline in revenues from this vertical. We continue to expand our wallet share within our other clients in this vertical as we deploy customized solution to them.

 

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

 

Others include contracts with public sector enterprises and government entities where we have seen increase in revenues from existing and new contracts.

 

 

 

Cost of services and gross profit

 

Overall, the cost of services as a percentage of revenue increased to 90% for the three months ended June 30, 2022 compared to 87% for the three months ended June 30, 2021. Employee expenses, rent costs, and depreciation and amortization are the most significant costs for the Company, representing 75.6%, 3.7%, and 4% of the total cost of services, respectively. The breakdown of the cost of services is listed in the table below:

 

   

Three Months Ended June 30,

 
   

2022

   

2021

 

Employee benefit expenses

    114,063       126,135  

Rent expense

    5,562       7,473  

Depreciation and amortization

    6,112       6,161  

Other

    25,177       24,708  

Total

  $ 150,914     $ 164,477  

 

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 increased to 68% for the current period as compared to 66.7% for the previous period. This increase was primarily driven by inflation-led wage increases implemented in the fourth quarter of 2021 and first quarter of 2022. The Company has seen aggressive ramp-up with some our clients in ecommerce vertical which led to considerable increase in upfront cost incurred on recruitment and training. Revenue from these ramp-up will start accruing in the future.

 

Rent expense: Rent expense as a percentage of revenue decreased to 3.3% for the current period as compared to 4% for the previous period. The decrease is driven by rationalization of brick-and-mortar sites across geographies as operations moved to our work from home model.

 

Depreciation and amortization: Depreciation and amortization expense as a percentage of revenue for the current period was marginally increased at 3.6% as compared to 3.3% for the previous period. The increase was due to lower revenue base in the current period relative to the previous period.

 

Other expense includes recruitment, technology, utility, travel and outsourcing costs. As a percentage of revenue, these costs increased to 15% from 13.1%. The outsourcing cost for the current period includes pass through cost for delivery of technology services to one of our clients in the Middle East.

 

As a result, gross profit as a percentage of revenue for the current period decreased to 10% as compared to 13% for the previous period.

 

   

Three Months Ended June 30,

 
   

2022

   

2021

 

Gross revenue

    167,641       189,436  

Warrant contra revenue

    -       (405 )

Net revenue

    167,641       189,031  

Cost of services

    150,914       164,477  

Gross profit

  $ 16,727     $ 24,554  

Gross margin

    10.0 %     13.0 %

 

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (SG&A) as a percentage of revenue increased from 6.5% in the previous period to 8.2% in the current period. Increase in SG&A expenses was driven by investments made by the Company on its sales, marketing and digital efforts and also due to increase in insurance premiums relative to previous period. The SG&A costs for the current period includes costs incurred towards the ongoing take private transaction.

 

Impairment losses and restructuring/exit cost, net


Impairment losses and restructuring costs, net totalled $745 for the current period as compared to ($19) for the previous period. The restructuring cost during the quarter include $668 towards the restructuring exercise underway in Argentina.

 

Interest expense, net, and other income

 

Interest expense, net, and other income totalled $2,103 for the current period as compared to $2,484 for the previous period.

 

Income tax expense

 

Income tax expense for the current period was $1,423 compared to $2,093 for the previous period. The movement in the 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. Additionally, the movement of funds between various geographies primarily to service our debt facilities also attracts withholding taxes.

 

RESULTS OF OPERATIONS — Six months ended June 30, 2022 AND 2021

 

Revenue

 

Our gross revenues for the six months ended June 30, 2022 decreased by 5.1% to $334,958 as compared to $352,931 for the six months ended June 30, 2021.

 

Our net revenue for the six months ended June 30, 2022 and 2021:

 

    For the Six Months Ended June 30, 2022     For the Six Months Ended June 30, 2021  

Revenues

    334,958       352,931  

Warrant contra revenue

    -       (830 )

Net revenue

  $ 334,958     $ 352,101  

 

 

The breakdown of our net revenues from various segments for the six months ended June 30, 2022 and 2021 is as follows: 

 

   

Six Months Ended June 30,

 
   

2022

   

2021

 

Americas

    87,367       148,605  

India & Sri Lanka

    54,224       45,561  

Malaysia

    22,711       28,781  

Middle East

    121,741       88,954  

Argentina & Peru

    17,626       17,302  

Rest of World

    31,289       22,898  

Total

    334,958       352,101  

 

The decline in revenue in the Americas region is primarily due to high base impact in the previous year. Revenue in the previous period included short term government program relating to COVID vaccination that did not continue in the current year. 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 increase in revenues from other clients primarily in the telecom and retail verticals.

 

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.

 

Revenue in Malaysia saw a decline due to the termination of the contract with the e-commerce client. Our operations with travel client delivered out of Malaysia saw a strong revival in demand.

 

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.

 

Our revenue in the Rest of World was higher due to ramp-ups with our clients in South Africa and Australia.

 

The breakdown of our net revenues from various industry verticals for six months ended June 30, 2022 and 2021 is as follows:

 

   

For the Six Months Ended June 30, 2022

   

For the Six Months Ended June 30, 2021

   

For the Six Months Ended June 30, 2022

   

For the Six Months Ended June 30, 2021

 
                                 

Verticals:

                               

Telecom

    116,746       105,285       35 %     30 %

E-commerce & Consumer

    39,377       52,324       12 %     15 %

Media & Cable

    32,869       49,572       10 %     14 %

Financial & Business Services

    34,300       31,214       10 %     9 %

Travel & Hospitality

    27,010       21,039       8 %     6 %

Healthcare & Education

    18,826       57,705       6 %     16 %

Technology, IT & Related Services

    10,457       9,939       3 %     3 %

Other verticals

    55,373       25,853       17 %     7 %

Gross revenue

    334,958       352,931                  

Less: Warrant contra revenue

    -       (830 )                

Net revenue

    334,958       352,101                  

 

Growth in telecom vertical was driven by new wins with our existing telecom clients across US and South Africa.

 

Financial & Business services vertical continues to perform strongly as we strengthen our partnership with key clients in these verticals.

 

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 revenues from the Media vertical was led by change in strategy with a key client who insourced part of their CX activities across vendors.

 

A contract was terminated in 2021 by one of our clients from the e-commerce vertical which led to year-on -year decline in revenues from this vertical. The decline in revenue were partially offset by new wins and expansion with our other clients in the e-commerce vertical.

 

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

 

Others include contracts with public sector enterprises and government entities where we have seen increase in revenues from existing and new contracts.

 

Cost of services and gross profit

 

Overall, the cost of services as a percentage of revenue increased to 88.7% for the six months ended June 30, 2022 compared to 86% for the six months ended June 30, 2021. Employee expenses, rent costs, and depreciation and amortization are the most significant costs for the Company, representing 74.9%, 3.8%, and 4.3% of the total cost of services, respectively. The breakdown of the cost of services is listed in the table below:

 

   

Six Months Ended June 30,

 
   

2022

   

2021

 

Employee Benefit Expenses

  $ 222,722     $ 230,881  

Rent expense

    11,332       14,957  

Depreciation and amortization

    12,792       12,315  

Other

    50,328       44,707  

Total

  $ 297,174     $ 302,860  

 

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 increased to 66.5% for the current period as compared to 65.6% for the previous period. This increase was primarily driven by inflation-led wage increases implemented in the fourth quarter of 2021 and first quarter of 2022.

 

Rent expense: Rent expense as a percentage of revenue decreased to 3.4% for the current period as compared to 4.2% for the previous period. 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 for the current period was marginally increased at 3.8% as compared to 3.5% for the previous period. The increase was due to lower revenue base in the current period relative to the previous period.

 

Other expense includes recruitment, technology, utility, travel and outsourcing costs. As a percentage of revenue, these costs increased to 15% from 12.7%. The outsourcing cost for the current period includes pass through cost for delivery of technology services to one of our clients in the Middle East.

 

As a result, gross profit as a percentage of revenue for the current period decreased to 11.3% as compared to 14% for the previous period.

 

 

   

Six Months Ended June 30,

   

2022

 

2021

Gross revenue

 

334,958

 

352,931

Warrant contra revenue

 

-

 

(830)

Net revenue

 

334,958

 

352,101

Cost of services

 

297,174

 

302,860

Gross profit

 

$ 37,784

 

$ 49,241

Gross margin

 

11.3%

 

14.0%

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (SG&A) as a percentage of revenue increased from 7.5% in the previous period to 8.8% in the current period. 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 our technology infrastructure, particularly related to security and cybersecurity aspects. The SG&A costs for the current period includes costs incurred towards the ongoing take private transaction.

 

Impairment losses and restructuring/exit cost, net

 

Impairment losses and restructuring costs, net totalled $2,152 for the current period as compared to $1,879 for the previous period. The restructuring cost during the six months include $2,049 towards the restructuring exercise underway in Argentina.

 

Interest expense, net, and other income

 

Interest expense, net, and other income totalled $3,077 for the current period as compared to $16,253 for the previous period. The expense for the previous period included $11,269 towards the refinancing of debt undertaken in February 2021. 

 

Income tax expense

 

Income tax expense for the current period was $3,516 compared to $6,995 for the previous period. The movement in the 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. Additionally, the movement of funds between various geographies primarily to service our debt facilities also attracts withholding taxes.

 

   

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are cash flows generated by operating activities, our 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. Due to the timing of our collections of receivables due from our major customers, we have historically needed to draw on our working capital facilities periodically for ongoing working capital needs. We have also entered into factoring agreements with financial institutions to sell certain of our accounts receivables under non-recourse agreement. The Company expects to meet all its debt obligations including compliance with all financial covenants in a timely manner.

 

Cash and cash equivalents and restricted cash

 

As of June 30, 2022, cash, cash equivalents, and restricted cash held by the Company and all its foreign subsidiaries increased by $395 to $55,791 compared to $55,396 as of December 31, 2021. The restricted cash balance as of June 30, 2022 stood at $8,646 as compared to $7,456 as of December 31, 2021. The restricted cash pertains to the debt service reserve account (DSRA) that we have to maintain according to the Senior Term Agreement and 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 six months ended June 30, 2022 and 2021 we reported net cash provided by operating activities of $8,706 and $11,478, respectively. The decrease in net cash flows from operating activities was driven by a net increase of $6,784 in net working capital which was partially offset by decrease in non-cash reconciling items such as deferred tax expense, depreciation and amortization and warrant contra revenue, of $14,205.

 

Cash flows used in investing activities

 

For the six months ended June 30, 2022, and 2021, we reported net cash used in investing activities of $(6,191) and $(35,409) respectively. Net cash used in investing activities for current periods primarily towards capital expenditure while the amount for the previous period includes $25,000 towards the investment in CSS Corp and $3,000 towards payment of call option premium.

 

Cash flows from financing activities

 

For the six months ended June 30, 2022 and 2021 we reported net cash flows (used in) and provided by financing activities of $(634) and $27,983, respectively. During the six months ended June 30, 2021 our net borrowings increased mainly due to refinancing of senior term debt completed during the period. During the six months ended June 30, 2022, the Company repurchased an aggregate of 279,407 shares amounting to $1,334.

 

Debt

 

For more information, refer to Note 9, "Debt," to our consolidated financial statements included in Item 1, "Financial Statements."

 

CONTRACTUAL OBLIGATIONS

 

Smaller reporting companies are not required to provide the information required by this item.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Apart from certain non-recourse receivables factoring as mentioned in the Note 9 "Debt" of the notes to the consolidated financial statements, 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 clients; (iii) expiration or termination of client projects or contracts; (iv) timing of existing and future client product launches or service offerings; (v) seasonal and or temporary 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; (vii) due to COVID- 19 pandemic. 

 

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. These judgments are subject to an inherent degree of uncertainty by their nature. Accordingly, actual results may vary significantly from the estimates we have applied.

 

Please refer to Note 2, "Summary of Significant Accounting Policies" of the Notes to the consolidated financial statements included in Item 1 for a complete description of our critical accounting policies and estimates.

 

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures:

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on management's evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022.

 

Changes in Internal Control over Financial Reporting: 

 

There have been no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDING

 

None.

 

ITEM 1A.  RISK FACTORS

 

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In the year 2004, the Company had 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 Directors 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 (CFO) 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 meeting held on August 26, 2021, the Board restricted the CFO from exceeding $2 million of repurchases with any purchases more than $2 million requiring Board review. Further in board meeting held on December 14, 2021 the Board of Director’s approved additional $2 million towards a stock repurchase plan.

 

During the six months ended June 30, 2022, we repurchased an aggregate of 279,407 shares of our common stock under our repurchase plan at an average cost of $4.75 per share. Additional information regarding the Company’s repurchases of common stock during the six months ended June 30, 2022 is set forth in Note 15 to the accompanying consolidated financial statements which is incorporated by reference into this Item 2.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

ITEM 6.  EXHIBITS 

 

INDEX OF EXHIBITS

 

Exhibit

 

 

 

   

Incorporated Herein by Reference

No.

 

     

Exhibit Description

 

Exhibit

 

Filing Date

31.1*

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

32.1*

 

Written Statement of the Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

   

 

 

 

 

 

101*

 

The following materials are formatted in Extensible Business Reporting Language (Inline XBRL): (i) Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited), (ii) Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021, (iii) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited) and (iv) Notes to Consolidated Financial Statements (Unaudited)

 

   

 

 

 

 

 

104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)                

 

 

 

*

Filed with this Form 10-Q.

 

 

 

SIGNATURES

 

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 

     

STARTEK, INC.

 

 

 

 

 

 

 

By:

/s/ Bharat Rao

Date: August 8, 2022

 

Bharat Rao

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

By:

/s/ Nishit Shah

Date: August 8, 2022

 

Nishit Shah

 

 

Chief Financial Officer

 

 

 

 

 

37