UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended January 31, ~~2018~~2019

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

For the transition period from to

Commission File Number001-35319

Steel Connect, Inc.

(Exact name of registrant as specified in its charter)

Delaware

04-2921333

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1601 Trapelo Road, Suite 170

Waltham, Massachusetts

02451

(Address of principal executive offices)

(Zip Code)

(781)663-5000

(Registrant’s telephone number, including area code)

~~ModusLink Global Solutions, Inc.~~

(Former name or former address, if changed since last ~~report)~~report.)

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

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

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 check mark whether the registrant is a shell company (as defined inRule12b-2 of the Exchange Act). Yes ☐ No ☒

As of February 28, ~~2018,~~2019, there were ~~60,205,946~~61,797,807 shares issued and outstanding of the registrant’s Common Stock, $0.01 par value per share.

STEEL CONNECT, INC.

FORM10-Q

TABLE OF CONTENTS


		Page Number

Part I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements		3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2836

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		4046

Item 4.	Controls and Procedures		4148

~~Item 5.~~ Part II.	~~Other Information~~		42

~~Part II.~~	OTHER INFORMATION

Item 1.	Legal Proceedings		4249

Item 1A.	Risk Factors		4349

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		4349

Item 3.	Defaults Upon Senior Securities		4350

Item 4.	Mine Safety Disclosures		4350

Item 5.	Other Information		4350

Item 6.	Exhibits		4350

PART I. FINANCIAL INFORMATION

~~Item 1.~~

~~Condensed Consolidated Financial Statements~~

Item 1. Condensed Consolidated Financial Statements

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)


	January 31, 2018			July 31, 2017				January 31, 2019			July 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	106,433		$	110,670			$	92,899		$	92,138
Trading securities		—			11,898
Accounts receivable, trade, net of allowance for doubtful accounts of $75 and $616 at January 31, 2018 and July 31, 2017, respectively		110,834			81,450
Accounts receivable, trade, net of allowance for doubtful accounts of $574 and $480 at January 31, 2019 and July 31, 2018, respectively									103,359			99,254
Inventories, net		45,211			34,369				29,431			47,786
Funds held for clients		13,074			13,454
Restricted cash									9,308			11,688
Prepaid expenses and other current assets		17,204			6,005				33,278			13,415

Total current assets		292,756			257,846				268,275			264,281
Property and equipment, net		105,411			18,555				100,472			106,632
Goodwill		259,085			—				257,128			254,352
Other intangible assets, net		206,819			—				177,074			192,964
Other assets		6,039			4,897				8,095			8,821

Total assets	$	870,110		$	281,298			$	811,044		$	827,050

LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK & STOCKHOLDERS’ EQUITY							LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK & STOCKHOLDERS’ EQUITY
Accounts payable	$	85,010		$	71,476			$	84,603		$	78,212
Accrued restructuring		112			186
Accrued expenses		74,671			37,898				88,338			88,426
Funds held for clients		13,074			13,454
Restricted cash									9,308			11,688
Current portion of long-term debt		5,725			—				5,729			5,727
Other current liabilities		43,561			26,141				39,605			42,029
Convertible Notes payable									48,626			50,274

Total current liabilities		222,153			149,155				276,209			276,356

Notes payable		62,062			59,758
Convertible Notes payable									14,831			14,256
Long-term debt, excluding current portion		385,975			—				380,246			383,111
Other long-term liabilities		30,693			9,414				10,023			10,507

Long-term liabilities		478,730			69,172
Total long-term liabilities									405,100			407,874

Total liabilities		700,883			218,327				681,309			684,230

Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding shares at January 31, 2018; zero shares authorized, issued and outstanding shares at July 31, 2017 (Note 11)		35,259			—
Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at October 31, 2018 and July 31, 2018									35,198			35,192
Stockholders’ equity:
Preferred stock, $0.01 par value per share. Authorized 4,965,000 and 5,000,000 shares at January 31, 2018 and July 31, 2017, respectively; zero issued and outstanding shares at January 31, 2018 and at July 31, 2017		—			—
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 60,205,946 issued and outstanding shares at January 31, 2018; 55,555,973 issued and outstanding shares at July 31, 2017		603			556
Preferred stock, $0.01 par value per share. 4,965,000 shares authorized, issued and outstanding at January 31, 2019 and July 31, 2018									—			—
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 61,797,807 issued and outstanding shares at January 31, 2019; 60,742,859 issued and outstanding shares at July 31, 2018									618			608
Additionalpaid-in capital		7,464,451			7,457,051				7,468,628			7,467,855
Accumulated deficit		(7,339,367	)		(7,398,949	)			(7,377,622	)		(7,363,569	)
Accumulated other comprehensive income		8,281			4,313				2,913			2,734

Total stockholders’ equity		133,968			62,971				94,537			107,628

Total liabilities, contingently redeemable preferred stock and stockholders’ equity	$	870,110		$	281,298			$	811,044		$	827,050

See accompanying notes to unaudited condensed consolidated financial statements

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended January 31,						Six Months Ended January 31,						Three Months Ended January 31,						Six Months Ended January 31,
	2018			2017			2018			2017			2019			2018			2019			2018
Net revenue	$	151,119		$	117,568		$	253,641		$	238,895		$	206,223		$	153,738		$	421,356		$	256,260
Cost of revenue		134,169			106,370			227,617			218,364			168,680			137,915			345,613			231,363

Gross profit		16,950			11,198			26,024			20,531			37,543			15,823			75,743			24,897

Operating expenses
Selling, general and administrative		30,107			11,926			42,974			25,527			27,711			30,111			54,276			43,015
Amortization of intangible assets		4,107			—			4,107			—			7,791			4,107			15,890			4,107
Gain on sale of property		(12,692	)		—			(12,692	)		—			(85	)		(12,692	)		(85	)		(12,692	)
Restructuring, net		4			776			41			2,150

Total operating expenses		21,526			12,702			34,430			27,677			35,417			21,526			70,081			34,430

Operating loss		(4,576	)		(1,504	)		(8,406	)		(7,146	)
Operating income (loss)														2,126			(5,703	)		5,662			(9,533	)

Other income (expense):
Interest income		92			15			256			180			172			92			495			256
Interest expense		(6,575	)		(2,109	)		(8,682	)		(4,138	)		(10,984	)		(6,575	)		(22,041	)		(8,682	)
Other gains (losses), net		(1,716	)		1,019			(294	)		531
Other losses, net														(1,662	)		(1,717	)		(718	)		(295	)

Total other income (expense)		(8,199	)		(1,075	)		(8,720	)		(3,427	)
Total other expense														(12,474	)		(8,200	)		(22,264	)		(8,721	)

Loss before income taxes		(12,775	)		(2,579	)		(17,126	)		(10,573	)		(10,348	)		(13,903	)		(16,602	)		(18,254	)
Income tax expense (benefit)		(77,664	)		723			(76,577	)		1,772			1,405			(73,521	)		2,536			(72,434	)
Gains on investments in affiliates, net of tax		(200	)		(396	)		(401	)		(896	)		—			(200	)		(20	)		(401	)

Net income (loss)		65,089			(2,906	)		59,852			(11,449	)		(11,753	)		59,818			(19,118	)		54,581

Less: Preferred dividends on redeemable preferred stock		(259	)		—			(259	)		—			(536	)		(270	)		(1,073	)		(270	)

Net income (loss) attributable to common stockholders	$	64,830		$	(2,906	)	$	59,593		$	(11,449	)	$	(12,289	)	$	59,548		$	(20,191	)	$	54,311

Basic net earning (loss) per share attributable to common stockholders:	$	1.11		$	(0.05	)	$	1.05		$	(0.21	)
Diluted net earning (loss) per share attributable to common stockholders:	$	0.85		$	(0.05	)	$	0.87		$	(0.21	)
Basic net earnings (loss) per share attributable to common stockholders:													$	(0.20	)	$	1.02		$	(0.33	)	$	0.96
Diluted net earnings (loss) per share attributable to common stockholders:													$	(0.20	)	$	0.78		$	(0.33	)	$	0.80
Weighted average common shares used in:
Basic earnings per share		58,341			55,083			56,776			55,031			60,935			58,341			60,974			56,776
Diluted earnings per share		79,083			55,083			72,883			55,031			60,935			79,083			60,974			72,883

See accompanying notes to unaudited condensed consolidated financial statements

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)


	Three Months Ended January 31,					Six Months Ended January 31,					Three Months Ended January 31,					Six Months Ended January 31,
	2018		2017			2018		2017			2019			2018		2019			2018
Net income (loss)	$	65,089	$	(2,906	)	$	59,852	$	(11,449	)	$	(11,753	)	$	59,818	$	(19,118	)	$	54,581
Other comprehensive income (loss):
Foreign currency translation adjustment		3,654		(734	)		3,926		(2,003	)		1,952			3,654		332			3,926
Net unrealized holding gain (loss) on securities, net of tax		29		(10	)		16		—			(74	)		29		(89	)		16
Pension liability adjustments, net of tax		—		353			26		750			(469	)		—		(64	)		26

Other comprehensive income (loss)		3,683		(391	)		3,968		(1,253	)
Other comprehensive gain												1,409			3,683		179			3,968

Comprehensive income (loss)	$	68,772	$	(3,297	)	$	63,820	$	(12,702	)	$	(10,344	)	$	63,501	$	(18,939	)	$	58,549

See accompanying notes to unaudited condensed consolidated financial statements

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(in thousands, except share amounts)

(unaudited)


	Number of Shares		Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at July 31, 2018		60,742,859	$	608	$	7,467,855		$	(7,363,569	)	$	2,734	$	107,628
Net loss		—		—		—			(19,118	)		—		(19,118	)
Effect of adoption of accounting standards		—		—		—			6,138			—		6,138
Preferred dividends		—		—		—			(1,073	)		—		(1,073	)
Issuance of common stock pursuant to employee stock purchase plan and stock option exercises		9,405		—		13			—			—		13
Restricted stock grants		1,045,543		10		(10	)		—			—		—
Share-based compensation		—		—		770			—			—		770
Other comprehensive items		—		—		—			—			179		179

Balance at January 31, 2019		61,797,807	$	618	$	7,468,628		$	(7,377,622	)	$	2,913	$	94,537


	Number of Shares			Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at July 31, 2017		55,555,973		$	556	$	7,457,051	$	(7,398,949	)	$	4,313	$	62,971
Net loss		—			—		—		54,581			—		54,581
Preferred dividends		—			—		—		(270	)		—		(270	)
Issuance of common stock pursuant to employee stock purchase plan and stock option exercises		2,445			—		3		—			—		3
Restricted stock grants		4,696,910			47				—			—		47
Restricted stock forfeitures		(49,382	)		—		—		—			—		—
Share-based compensation		—			—		7,397		—			—		7,397
Other comprehensive items		—			—		—		—			3,968		3,968

Balance at January 31, 2018		60,205,946		$	603	$	7,464,451	$	(7,344,638	)	$	8,281	$	128,697

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended January 31,						Six Months Ended January 31,
	2018			2017			2019			2018
Cash flows from operating activities:
Net income (loss)	$	59,852		$	(11,449	)	$	(19,118	)	$	54,581
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		5,656			4,090			10,451			5,656
Amortization of intangible assets		4,107			—			15,890			4,107
Amortization of deferred financing costs		392			281			511			392
Accretion of debt discount		2,117			1,940			2,311			2,117
Impairment of long-lived assets								432			—
Share-based compensation		7,397			381			770			7,397
Non-cash (gains) losses, net		(12,398	)		(531	)
Gains on investments in affiliates		(401	)		(896	)
Changes in operating assets and liabilities, net of business acquired:
Other (gains) losses, net								718			(12,398	)
Gains on investments in affiliates and impairments								(20	)		(401	)
Changes in operating assets and liabilities
Accounts receivable, net		20,388			5,169			(4,618	)		20,388
Inventories, net		17,659			2,349			(2,961	)		13,657
Prepaid expenses and other current assets		(1,535	)		1,330			3,593			(1,915	)
Accounts payable, accrued restructuring and accrued expenses		(15,422	)		(19,358	)		8,129			(15,422	)
Refundable and accrued income taxes, net		3,767			(372	)		(1,833	)		3,767
Deferred tax assets and liabilities		(79,918	)		—			1,563			(79,918	)
Other assets and liabilities		(6,279	)		(35	)		(354	)		2,994

Net cash provided by (used in) operating activities		5,382			(17,101	)
Net cash provided by operating activities								15,464			5,002

Cash flows from investing activities:
Payments to acquire business		(469,221	)		—			—			(469,221	)
Additions to property and equipment		(9,303	)		(3,301	)		(8,953	)		(9,303	)
Proceeds from the disposition of property and equipment		20,589			—			14			20,589
Proceeds from the sale of Trading Securities		13,775			5,832			—			13,775
Proceeds from investments in affiliates		401			896			20			401

Net cash provided by (used in) investing activities		(443,759	)		3,427
Net cash used in investing activities								(8,919	)		(443,759	)

Cash flows from financing activities:
Proceeds from long-term debt		393,000			—			—			393,000
Proceeds from issuance of preferred stock		35,000			—			—			35,000
Proceeds from revolving line of credit		6,000			—
Proceeds from (payment of) revolving line of credit, net								—			6,000
Payment of long-term debt								(3,000	)		—
Payment of deferred financing costs		(1,334	)		—			—			(1,334	)
Purchase of the Company’s Convertible Notes		—			(1,763	)
Payment of preferred dividends								(1,072	)		—
Purchase of the Company's Convertible Notes								(3,700	)		—
Repayments on capital lease obligations		(77	)		(126	)		(76	)		(77	)
Proceeds from issuance of common stock		3			12			13			3

Net cash provided by (used in) financing activities		432,592			(1,877	)		(7,835	)		432,592

Net effect of exchange rate changes on cash and cash equivalents		1,548			(905	)
Net effect of exchange rate changes on cash, cash equivalents, and restricted cash								(329	)		1,548

Net decrease in cash and cash equivalents		(4,237	)		(16,456	)
Cash and cash equivalents at beginning of period		110,670			130,790
Net decrease in cash, cash equivalents, and restricted cash								(1,619	)		(4,617	)
Cash, cash equivalents, and restricted cash, beginning of period								103,826			124,124

Cash and cash equivalents at end of period	$	106,433		$	114,334
Cash, cash equivalents, and restricted cash, end of period							$	102,207		$	119,507

See accompanying notes to unaudited condensed consolidated financial statements

STEEL CONNECT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) NATURE OF OPERATIONS

Steel Connect, Inc. (“Steel Connect” or ~~the” Company”~~the “Company”) together with its consolidated subsidiaries, operates through its wholly owned subsidiaries, ModusLink Corporation and ModusLink PTS, Inc. (together “ModusLink” or “Supply Chain“), and IWCO Direct Holdings, Inc. (“~~IWCO”~~IWCO Direct” or ~~“IWCO Direct”~~“IWCO”). The Company was formerly known as ModusLink Global Solutions, Inc. until it changed its name to Steel Connect, Inc. effective February 27, 2018.

ModusLink is a ~~leader in global~~ supply chain business process management company serving clients in markets such as consumer electronics, communications, computing, medical devices, software, and retail. ~~The Company~~ModusLink designs and executes ~~critical~~ elements in its clients’ global supply chains to improve speed to market, product customization, flexibility, cost, quality and service. These benefits are delivered through a combination of industry expertise, innovative service solutions, and integrated operations, proven business processes, expansive global footprint and world-class technology. The Company also produces and licenses an entitlement management ~~solution powered by its enterprise-class Poetic software, which offers a complete~~ solution for activation, provisioning, entitlement subscription and data collection from physical goods (connected products) and digital products.

ModusLink has an integrated network of strategically located facilities with 20 sites operating in 21 languages in various countries, including numerous sites throughout North America, Europe and Asia. The Company previously operated under the names ModusLink Global Solutions, Inc., CMGI, Inc. and CMG Information Services, Inc. and was incorporated in Delaware in 1986.

IWCO Direct delivers ~~highly-effective~~ data-driven marketing solutions for its ~~customers, which represent some of the largest and most respected brands in the world.~~customers. Its full range of services includes strategy, creative and ~~production~~execution for ~~multichannel~~omnichannel marketing campaigns, along with ~~one of the industry’s most sophisticated~~ postal logistics programs for direct mail. Through its Mail-Gard^® ~~product,~~division, IWCO Direct also offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services. ~~Their solutions enable customers to improve Customer Lifetime Value (CLV), which in turn, has led to and longer customer relationships.~~

IWCO has administrative offices in Chanhassen, MN. and has three facilities in Chanhassen, MN., one facility in Little Falls, MN., one facility in Warminster, PA. and two facilities in Hamburg PA.

Historically, the Company has financed its operations and met its capital requirements primarily through funds generated from operations, the sale of our securities, borrowings from lending institutions, and sale of facilities that were not fully utilized. The Company believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, mandatory debt redemptions and working capital for its existing business for at least twelve months from the date of this filing. These resources include cash and cash equivalents, a credit agreement with PNC Bank (the “Credit Agreement”) the securitization of trade receivables and the revolving credit facility and cash, if any, provided by operating activities.

At January 31, 2019 and July 31, 2018, the Company had cash and cash equivalents of $92.9 million and $92.1 million, respectively. As of January 31, 2019, the Company had a deficiency in working capital which was primarily driven by the reclassification of the Company’s convertible notes from long-term to current, accrued pricing liabilities which the Company believes will not require a cash outlay in the next twelve months and the additional liabilities assumed because of the IWCO acquisition. At January 31, 2019, the Company had a readily available borrowing capacity under its revolving credit and security agreement with PNC Bank and National Association of $4.6 million. At January 31, 2019, IWCO had a readily available borrowing capacity under its revolving credit facility by and among MLGS Merger Company, Inc. (“MLGS”), Instant Web, LLC and Cerberus Business Finance, LLC of $25.0 million. Per that certain financing agreement by and among MLGS, Instant Web, LLC, IWCO and Cerberus Business Finance, LLC (the “Financing Agreement”) and the credit facilities provided thereunder, IWCO is permitted to make distributions to Steel Connect, an aggregate amount not to exceed $5.0 million in any fiscal year and pay reasonable documented expenses incurred by Steel Connect. Steel Connect is entitled to receive additional cash remittances under a “U.S. Federal Income Tax Sharing Agreement.” The Company believes it will generate sufficient cash to meet its debt covenants under the Credit Agreement and the Financing Agreement to which certain of its subsidiaries are a party, to repay or restructure its Notes and that it will be able to obtain cash through its current credit facilities and through securitization of certain trade receivables. The Company’s historical operating results and working capital deficit indicate substantial doubt exists related to the Company’s ability to continue as a going concern. The Company believes that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by the Company’s historical operating results and satisfying the Company’s estimated liquidity needs 12 months from the issuance of the financial statements. However, the Company cannot predict, with certainty, the outcome of its actions to generate liquidity, including the availability of additional debt refinancing or factoring of receivables, or whether such actions would generate the expected liquidity as currently planned.

(2) BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all the information and footnotes

required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the year ended July 31, ~~2017,~~2018, which are contained in the Company’s Annual Report on Form10-K filed with the Securities and Exchange Commission (“SEC”) on ~~October 16, 2017.~~December 4, 2018. The results for the three and six months ended January 31, ~~2018~~2019 are not necessarily indicative of the results to be expected for the full fiscal year. Theyear-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

All significant intercompany transactions and balances have been eliminated in consolidation.

The Company considers events or transactions that occur after the balance sheet date but before the issuance of financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. For the period ended January 31, ~~2018,~~2019, the Company evaluated subsequent events for potential recognition and disclosure through the date these financial statements were ~~filed.~~filed (see note 21).

(3) RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU~~Accounting Standards Update (“ASU”)No. 2014-09, Revenue from Contracts with Customers (Topic ~~606)~~606 or the new standard), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be

entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ~~The~~On August 1, 2018, the Company adopted this guidance and all the related amendments using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, ~~will be~~ the ~~first quarter~~Company reflected the aggregate effect of ~~fiscal year 2019 using one~~all modifications when identifying performance obligations and allocating transaction price in accordance with practical expedient ASC606-10-65-1-(f)-4, which did not have a material effect on the Company’s assessment of ~~two retrospective application methods or a~~the cumulative effect ~~approach.~~adjustment upon adoption. The Company recognized the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and ~~its outside consultants have initiated~~continues to be reported under the ~~process of evaluating the potential effects on the consolidated financial statements.~~accounting standards in effect for those periods.

In August 2014, the FASB issued ASUNo. 2014-15 Presentation of Financial Statements—Going Concern (Subtopic205-40), which amends the accounting guidance related to the evaluation of an entity’s ability to continue as a going concern. The amendment establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. The update also gives guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entity’s ability to continue as a going concern. The Company adopted this guidance as of the first quarter of fiscal year ~~2018. Its adoption did not have an effect on~~2018 and has provided additional disclosures in accordance with the ~~Company’s consolidated financial statements.~~

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging—Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which addresses the significant diversity in practice in the assessment of preferred stock and other hybrid equity instruments. ASU 2014-16 mandates the use of the whole-instrument approach and provides guidance to aid in the qualitative analysis when using the whole-instrument approach. The Company adopted this guidance as of the second quarter of fiscal year 2018. Its adoption did not have an effect on the Company’s consolidated financial statements.new standard.

In July 2015, the FASB issued ASUNo. 2015-11, Simplifying the Measurement of Inventory (Topic 330), which provides guidance related to inventory measurement. The new standard requires entities to measure inventory at the lower of cost and net realizable value thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The Company adopted this guidance beginning the first quarter of fiscal year 2018. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASUNo. 2016-02, Leases, which requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2020. The Company isand its consultants are currently evaluating the effect the guidance will have on the Company’s financial statement disclosures, results of operations and financial position.

~~In March 2016, the FASB issued ASUNo. 2016-08,~~ Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in this update relate to when another party, along with the Company, are involved in providing a good or service to a customer and are intended to improve the operability and understandability of the implementation guidance on principal versus agent. Revenue recognition guidance requires companies to determine whether the nature of its promise is to provide that good or service to the customer (i.e., the Company is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the Company is an agent). This ASU will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company and its outside consultants have initiated the process of evaluating the potential effects on the consolidated financial statements.

In March 2016, the FASB issued ASUNo. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company retrospectively adopted this guidance during the first quarter of fiscal year 2018 by utilizing the modified retrospective transition method. The adoption of ~~this ASU~~the guidance did not ~~materially~~have a material impact on the Company’s consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASUNo. 2016-18, Restricted Cash. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent ~~balances, which is similar to what is required today for SEC Registrants. This ASU will be effective for the Company~~balances. We adopted this accounting standard update beginning in the first quarter of fiscal year ~~2019.~~2019 using a retrospective transition method to each period presented. The ~~Company is currently~~restricted cash balance on our consolidated balance sheets represents funds held on the behalf of the Company’s clients. The application of this accounting standard update did not have a material impact on our Consolidated Statements of Cash Flows. Prior period information has been retrospectively adjusted due to the adoption of ASU2016-18, Statement of Cash Flows, Restricted Cash in the ~~process~~beginning of ~~assessing what impact this new standard may have on its consolidated financial statements but does not believe that implementing this standard will have a significant impact on~~ the ~~Company’s current presentation and disclosures.~~first quarter of fiscal year 2018.

In March 2017, the FASB issued ASUNo. 2017-07, Compensation—Retirement Benefits (Topic 715), which requires that the service cost component of net periodic pension and postretirement benefit cost be presented in the same line item as other employee compensation costs, while the other components be presented separately asnon-operating income (expense). This ASU ~~will be~~became effective ~~for the Company~~ beginning in the first quarter of fiscal year 2019. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

(4) REVENUE RECOGNITION

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On August 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.

The Company recognizes revenue from its contracts with customers primarily from the sale of supply chain management services and marketing solutions offerings. Revenue is ~~currently~~recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For ModusLink’s supply chain management services arrangements and IWCO’s marketing solutions offerings, the goods and services are considered to be transferred over time as they are performed. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

ModusLink’s revenue primarily comes from the sale of supply chain management services to its clients. Under the new standard, the majority of these arrangements consist of two distinct performance obligations (i.e. a warehousing and inventory management service and a separate kitting, packaging and assembly service), each of which is recognized over time as services are performed using an input method based on the level of efforts expended. A significant portion of ModusLink’s revenue from these arrangements continues to be recognized over time as the services are performed based on an input method of efforts expended which corresponds with the transfer of value to the customer. For the limited population of contracts where the Company previously recognized revenues upon completion of all services and historically recognized revenue at a point in time (generally upon product shipment), the new standard accelerates the recognition of revenue as the Company’s performance enhances assets that the customer controls and therefore revenue is recognized over time based on an input method of efforts expended which corresponds with the transfer of value to the customer.

Revenue from the sale of perpetual licenses sold in ModusLink’se-Business operations is now recognized at a point in time upon execution of the relevant license agreement and when delivery has taken place.

Revenue recognized related to the majority of IWCO’s marketing solutions offerings, which typically consist of a single integrated performance obligation, is now recognized over time as the Company performs because the products have no alternative use to the Company.

Revenue Recognition

In accordance with Topic 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities. To achieve this core principle, the Company applies the following five steps:

Identify the contract(s) with a customer—A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to those goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company’s arrangements with customers are typically documented within a master services agreement (MSA) together with a statement of work (SOW) or business requirements document (BRD). Depending on the nature of the goods and/or services being provided, a contract will be created at the time that the Company and the customer have entered into an MSA and SOW or BRD, and the Company has received some form of authorization or acknowledgment from the customer as to the request for the specified services. For certain goods and/or services, a contract does not exist until the Company receives a firm order to commence the specified activities. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

Identify the performance obligations in the contract—Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.

The Company’s contracts typically do not include options that would result in a material right. If options to purchase additional goods or services are included in customer contracts, the Company evaluates the option in order to determine if the Company’s arrangement include promises that may represent a material right and needs to be accounted for as a performance obligation in the ~~process~~contract with the customer. The Company did not note any significant provisions within its typical contracts that would create a material right.

Determine the transaction price—The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts as of March 31, 2017 contained a significant financing component. Determining the transaction price requires significant judgment

Allocate the transaction price to the performance obligations in the contract—If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price (SSP) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, the Company estimates the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

Recognize revenue when (or as) the Company satisfies a performance obligation—The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

Disaggregation of ~~assessing what~~Revenue

The following table presents the Company’s revenues disaggregated by major good or service line, timing of revenue recognition, and sales channel (in thousands). The table also includes a reconciliation of the disaggregated revenue with the reportable segments.


	Three Months Ended January 31, 2019
	Americas		Asia		Europe		Direct Marketing		e-Business		Consolidated Total
	(In thousands)
Major Goods/Service Lines
Supply chain management services	$	16,709	$	44,555	$	20,450	$	—	$	5,452	$	87,166
Perpetual software licenses		—		—		—		—		—		—
Marketing solutions offerings		—		—		—		118,447		—		118,447
Other		—		—		—		—		610		610

	$	16,709	$	44,555	$	20,450	$	118,447	$	6,062	$	206,223
Timing of Revenue Recognition
Goods transferred over time	$	—	$	—	$	—	$	118,447	$	—	$	118,447
Services transferred over time		16,709		44,555		20,450		—		6,062		87,776

	$	16,709	$	44,555	$	20,450	$	118,447	$	6,062	$	206,223
Total Revenue
Revenue from contracts with customers	$	16,709	$	44,555	$	20,450	$	118,447	$	6,062	$	206,223

	$	16,709	$	44,555	$	20,450	$	118,447	$	6,062	$	206,223

Over the three month period ended January 31, 2019, the Company had no revenue recognized at a point in time.


	Six Months Ended January 31, 2019
	Americas		Asia		Europe		Direct Marketing		e-Business		Consolidated Total
	(In thousands)
Major Goods/Service Lines
Supply chain management services	$	34,149	$	88,811	$	39,971	$	—	$	10,861	$	173,792
Perpetual software licenses		—		—		—		—		—		—
Marketing solutions offerings		—		—		—		246,541		—		246,541
Other		—		—		—		—		1,023		1,023

	$	34,149	$	88,811	$	39,971	$	246,541	$	11,884	$	421,356
Timing of Revenue Recognition
Goods transferred over time	$	—	$	—	$	—	$	246,541	$	—	$	246,541
Services transferred over time		34,149		88,811		39,971		—		11,884		174,815

	$	34,149	$	88,811	$	39,971	$	246,541	$	11,884	$	421,356
Total Revenue
Revenue from contracts with customers	$	34,149	$	88,811	$	39,971	$	246,541	$	11,884	$	421,356

	$	34,149	$	88,811	$	39,971	$	246,541	$	11,884	$	421,356

Over the six month period ended January 31, 2019, the Company had no revenue recognized at a point in time.

Prior period amounts have not been adjusted under the modified retrospective method.

Supply chain management services.

ModusLink’s revenue primarily comes from the sale of supply chain management services to its clients. Amounts billed to customers under these arrangements include revenue attributable to the services performed as well as for materials procured on the customer’s behalf as part of its service to them. The majority of these arrangements consist of two distinct performance obligations (i.e. warehousing/inventory management service and a separate kitting/packaging/assembly service), revenue related to each of which is recognized over time as services are performed using an input method based on the level of efforts expended.

Perpetual software licenses.

Revenue from the sale of perpetual software licenses in the Company’se-Business operations is recognized at a point in time upon execution of the relevant license agreement and when delivery has taken place.

Marketing solutions offerings.

IWCO’s revenue is generated through the provision of data-driven marketing solutions, primarily through providing direct mail products to customers. Revenue related to the majority of IWCO’s marketing solutions contracts, which typically consist of a single integrated performance obligation, is recognized over time as the Company performs because the products have no alternative use to the Company.

Other.

Other revenue consists of cloud-based software subscriptions, software maintenance and support service contracts, and fees for professional services. Revenue related to these arrangements is recognized on a straight-line basis over the term of the agreement or over the term of the agreement in proportion to the costs incurred in satisfying the obligations under the contract.

Significant Judgments

The Company’s contracts with customers may include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For arrangements with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company generally determines standalone selling prices based on the prices charged to customers and uses a range of amounts to estimate standalone selling prices when we sell each of the products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative standalone selling prices of the various products and services. The Company typically has more than one range of standalone selling prices for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the type of customer and geographic region in determining the range of standalone selling prices.

The Company may provide credits or incentives to customers, which are accounted for as variable consideration when estimating the transaction price of the contract and amounts of revenue to recognize. The amount of variable consideration to include in the transaction price is estimated at contract inception using either the estimated value method or the most likely amount method based on the nature of the variable consideration. These estimates are updated at the end of each reporting period as additional information becomes available and revenue is recognized only to the extent that it is probable that a significant reversal of any amounts of variable consideration included in the transaction price will not occur.

Practical Expedients and Exemptions

The Company has elected to make the following accounting policy elections through the adoption of the following practical expedients:

Right to Invoice

Where applicable, the Company will recognize revenue from a contract with a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date and the amount to which the entity has a right to invoice.

Sales and Other Similar Taxes

The Company will exclude sales taxes and similar taxes from the measurement of transaction price and will ensure that it complies with the disclosure requirements of ASC235-10-50-1 through50-6.

Significant Financing Component

The Company will not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Cost to Obtain a Contract

The Company will recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less and there are no renewal periods on which the Company does not pay commissions that are not commensurate with those originally paid.

Promised Goods or Services that are Immaterial in the Context of a Contract

The Company has elected to assess promised goods or services as performance obligations that are deemed to be immaterial in the context of a contract. As such, the Company will not aggregate and assess immaterial items at the entity level. That is, when determining whether a good or service is immaterial in the context of a contract, the assessment will be made based on the application of ASC 606 at the contract level.

Contract Balances

Timing of revenue recognition may differ from timing of invoicing to customers. The Company records contract assets and liabilities related to its contracts with customers as follows:

Accounts receivable when revenue is recognized prior to receipt of cash payments and if the right to such amounts is unconditional and solely based on the passage of time

Contract asset when the Company recognizes revenue based on efforts expended but the right to such amount is conditional upon satisfaction of another performance obligation. Contract assets are primarily comprised of fees related to marketing solutions offerings and supply chain management services. The Company notes that its contract assets are all short-term in nature and are included in prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets

Deferred revenue when cash payments are received or due in advance of performance. Deferred revenue is primarily comprised of fees related to supply chain management services, cloud-based software subscriptions and software maintenance and support service contracts, which are generally billed in advance. Deferred revenue also includes other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. The deferred revenue balance is classified as a component of other current liabilities and other long-term liabilities on the balance sheet.

The opening balance of contract assets was $24.0 million as of August 1, 2018. As of January 31, 2019, the contract asset balance was $20.2 million. Contract assets are classified as accounts receivable, trade, upon billing to the customer where such amounts become unconditional.

The opening balance of current deferred revenue and long-term deferred revenue was $3.7 million and $0.2 million, respectively, as of August 1, 2018. As of January 31, 2019, current deferred revenue and long-term deferred revenue was $5.1 million and $0.2 million, respectively.

Changes in deferred revenue during the six months ended January 31, 2019, were as follows (in thousands):


Six Months Ended January 31, 2019
Balance at beginning of period	$	3,858
Deferral of revenue		2,689
Recognition of deferred amounts upon satisfaction of performance obligation		(1,296	)

Balance at end of period	$	5,251

We expect to recognize approximately $5.1 million of the unearned amount over the twelve months ended January 31, 2020 and the remaining $0.2 million beyond January 31, 2020.

Assets Recognized from the Costs to Obtain a Contract with a Customer

Prior to the adoption of Topic 606, the Company expensed incremental costs to obtain a contract, which represented commissions, as the liability was incurred. In accordance with Topic 606, the Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the period over which such costs would be amortized is greater than one year. The Company has determined that certain commissions programs meet the requirements to be capitalized. However, as of August 1, 2018, the total commission expense that had been incurred under the commissions programs identified was not material and therefore, the Company determined that no amounts were required to be capitalized at the date of adoption. For the three and six months ended January 31, 2019, the total commission expense that had been incurred under the commissions programs identified was not material and the Company determined that no amounts were required to be capitalized at January 31, 2019.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

The cumulative effect of the changes made to the Company’s consolidated August 1, 2018 balance sheet for the adoption of Topic 606 were as follows (in thousands):


Balance Sheet
	July 31, 2018			Adjustments Due to ASU 2014-09			August 1, 2018
Assets
Inventories, net	$	47,786		$	(21,233	)	$	26,553
Prepaid expenses and other current assets		13,415			24,041			37,456
Total current assets		264,281			2,808			267,089
Total assets	$	827,050		$	2,808		$	829,858

Liabilities
Other Current Liabilities	$	42,125		$	(3,330	)	$	38,795
Total current liabilities		276,356			(3,330	)		273,026
Total liabilities		684,230			(3,330	)		680,900

Stockholders’ equity
Accumulated deficit		(7,363,569	)		6,138			(7,357,431	)
Total stockholders’ equity		107,628			6,138			113,766
Total liabilities, contingently redeemable preferred stock and stockholders’ equity	$	827,050		$	2,808		$	829,858

The Company reduced opening accumulated deficit by $6.1 million as of August 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact attributable to the acceleration of revenue related to ModusLink’s supply chain management services arrangements and IWCO’s marketing solutions offerings where the Company previously recognized revenues upon completion of all services and historically recognized revenue at a point in time (generally upon product shipment or when the products were complete). The adoption of ASC 606 primarily resulted in an acceleration of revenue as of August 1, 2018, which in turn generated additional deferred tax liabilities that ultimately reduced the Company’s net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of Topic 606, this impact was offset by a corresponding reduction to the valuation allowance.

In accordance with the requirements of the new standard, ~~may have~~the disclosure of the impact of the adoption on ~~its~~the Company’s consolidated ~~financial statements.~~balance sheet and statement of operations was as follows (in thousands, except per share amounts):

~~(4)~~


Balance Sheet:	January 31, 2019
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/(Lower)
Assets
Inventories, net	$	29,431		$	50,317		$	(20,886	)
Prepaid expenses and other current assets		33,278			13,076			20,202
Total current assets		268,275			268,959			(684	)
Total assets	$	811,044		$	811,728		$	(684	)

Liabilities
Other Current Liabilities	$	39,605		$	46,396		$	(6,791	)
Total current liabilities		276,209			283,000			(6,791	)
Total liabilities		681,309			688,100			(6,791	)

Stockholders’ equity
Accumulated deficit		(7,377,622	)		(7,383,729	)		6,107
Total stockholders’ equity		94,537			88,430			6,107
Total liabilities, contingently redeemable preferred stock and stockholders’ equity	$	811,044		$	811,728		$	(684	)


Statement of Operations:	Three Months Ended January 31, 2019
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/(Lower)
Net revenue	$	206,223		$	207,526		$	(1,303	)
Cost of revenue		168,680			169,217			(537	)
Gross profit		37,543			38,309			(766	)
Loss before income taxes		(10,348	)		(9,582	)		(766	)
Net loss		(11,753	)		(10,987	)		(766	)
Net loss attributable to common stockholders	$	(12,289	)	$	(11,523	)	$	(766	)
Basic and diluted net loss per share attributable to common stockholders:	$	(0.20	)	$	(0.19	)	$	(0.01	)

The impact to revenues for the three month period ended January 31, 2019 was a decrease of $1.3 million as a result of applying Topic 606 primarily related to the offset of previous quarters acceleration of revenue related to IWCO’s marketing solutions arrangements for certain contracts with customers that under Topic 606 are being recognized over time based on an input method of efforts expended which depicts the transfer of value to the customer.


Statement of Operations:	Six Months Ended January 31, 2019
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/(Lower)
Net revenue	$	421,356		$	421,734		$	(378	)
Cost of revenue		345,613			345,960			(347	)
Gross profit		75,743			75,774			(31	)
Loss before income taxes		(16,602	)		(16,571	)		(31	)
Net loss		(19,118	)		(19,087	)		(31	)
Net loss attributable to common stockholders	$	(20,191	)	$	(20,160	)	$	(31	)
Basic and diluted net loss per share attributable to common stockholders:	$	(0.33	)	$	(0.33	)	$	(0.00	)

The impact to revenues for the six month period ended January 31, 2019 was a decrease of $0.4 million as a result of applying Topic 606 primarily related to the offset of previous quarters acceleration of revenue related to ModusLink’s supply chain management solutions arrangements for certain contracts with customers that under Topic 606 are being recognized over time based on an input method of efforts expended which depicts the transfer of value to the customer.

(5) INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Cost is determined by both the moving average and thefirst-in,first-out methods. Materials that the Company typically procures on behalf of its clients that are included in inventory include materials such as compact discs, printed materials, manuals, labels, hardware accessories, hard disk drives, phone chassis, consumer packaging, shipping boxes and labels, power cords and cables for client-owned electronic devices.

Inventories, net consisted of the following:


	January 31, 2018		July 31, 2017		January 31, 2019		July 31, 2018
	(In thousands)				(In thousands)
Raw materials	$	25,055	$	24,129	$	26,705	$	23,208
Work-in-process		15,448		713		320		16,147
Finished goods		4,708		9,527		2,406		8,431

	$	45,211	$	34,369	$	29,431	$	47,786

The Company continuously monitors inventory balances and records inventory provisions for any excess of the cost of the inventory over its estimated net realizable value. The Company also monitors inventory balances for obsolescence and excess quantities as compared to projected demands. The Company’s inventory methodology is based on assumptions about average shelf life of inventory, forecasted volumes, forecasted selling prices, contractual provisions with its clients, write-down history of inventory and market conditions. While such assumptions may change from period to period, in determining the net realizable value of its inventories, the Company uses the best information available as of the balance sheet date. If actual market conditions are less favorable than those projected, or the Company experiences a higher incidence of inventory obsolescence because of rapidly changing technology and client requirements, additional inventory provisions may be required. Once established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory and cannot be reversed due to subsequent increases in demand forecasts. Accordingly, if inventory previously written down to its net realizable value is subsequently sold, gross profit margins may be favorably impacted.

IWCO’s inventory consists primarily of raw materials (paper) used to produce direct mail packages andwork-in-process. Finished goods are generally not a significant element of the inventory as they are generally mailed ~~immediately~~ after the production and sorting process. ~~With~~

(6) GOODWILL AND INTANGIBLE ASSETS

The Company’s goodwill of $257.1 million as of January 31, 2019 relates to the Company’s Direct Marketing reporting unit. The purchase price allocation, associated with the acquisition of IWCO Direct during December 2017, has been completed during the 12 months from the acquisition date. Adjustments made during the six months ended January 31, 2019 totaled $2.8 million which primarily related to there-evaluation of equipment that was idle as of the purchase date.

The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the date of the acquisition:


	As Originally Reported			Adjustments			As Revised
	(In thousands)
Accounts receivable	$	47,841		$	(433	)	$	47,408
Inventory		27,165			5,829			32,994
Other current assets		7,427			3,197			10,624
Property and equipment		87,976			477			88,453
Intangible assets		210,920			2,330			213,250
Goodwill		259,085			(1,957	)		257,128
Other assets		3,040			—			3,040
Accounts payable		(31,069	)		—			(31,069	)
Accrued liabilities and other current liabilities		(35,790	)		(30,368	)		(66,158	)
Customer deposits		(7,829	)		—			(7,829	)
Deferred income taxes		(79,918	)		2,755			(77,163	)
Other liabilities		(19,627	)		18,170			(1,457	)

Total consideration	$	469,221		$	—		$	469,221

The Company conducts its goodwill impairment test on July 31 of each fiscal year. In addition, if and when events or circumstances change that could reduce the fair value of any of its reporting units below its carrying value, an interim test is performed. In making this assessment, the Company ~~recorded~~relies on a ~~fair value“step-up”~~ to~~work-in-process~~ ~~inventory~~number of ~~$7.0~~factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data. The Company’s goodwill of $257.1 million as ~~a part~~ of ~~purchase accounting, which was recognized as anon-cash~~ ~~charge~~January 31, 2019 relates to ~~cost~~the Company’s Direct Marketing reporting unit. There were no indicators of ~~revenues~~impairment identified related to the Company’s Direct Marketing reporting unit during the three months ended January 31, ~~2018~~2019.

Intangible assets, as ~~the inventory had been sold by the end of the period.~~

~~(5) INVESTMENTS~~

~~Trading securities~~

During the six months ended January 31, 2018, the Company received $13.8 million in proceeds associated with the sale of publicly traded securities (“Trading Securities”), which included a cash gain of $4.6 million. During the six months ended January 31, 2018, the Company recognized $2.7 million in net~~non-cash~~ ~~net losses associated with its Trading Securities.~~

During the three months ended January 31, 2017, the Company received $4.9 million in proceeds associated with the sale of publicly traded securities (“Trading Securities”), which included a $0.6 million cash gain. During the three months ended January 31, 2017, the Company recognized $0.4 million in net~~non-cash~~ net gains associated with its Trading Securities. During the six months ended January 31, 2017, the Company received $5.8 million in proceeds associated with the sale of Trading Securities, which included a $0.6 million cash gain. During the six months ended January 31, 2017, the Company recognized $0.5 million in net~~non-cash~~ ~~net losses associated with its Trading Securities. These gains and losses were recorded as a component of Other gains (losses), net on the Statements of Operations.~~

As of January 31, ~~2018,~~2019, include trademarks and tradenames with a carrying balance of $12.8 million and customer relationships of $164.2 million. The trademarks and tradenames intangible asset are being amortized on a straight line basis over a 3 year estimated useful life. The customer relationship intangible asset is being amortized on a double-declining basis over an estimated useful life of 15 years. Intangible assets deemed to have finite lives are amortized over their estimated useful lives, where the ~~Company did not have any investments in Trading Securities. As~~useful life is the period over which the asset is expected to contribute directly, or indirectly, to its future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the carrying amount of ~~July~~the intangible asset exceeds its fair value. An analysis was performed with no indicators of impairment identified for the company’s intangible assets at January 31, ~~2017, the Company had $11.9 million in investments in Trading Securities.~~2019.

~~(6)~~

(7) ACCRUED EXPENSES AND OTHER CURRENT ~~AND LONG-TERM~~ LIABILITIES

The following table reflects the components of “Accrued expenses” and “Other current liabilities”:


	January 31, 2018		July 31, 2017		January 31, 2019		July 31, 2018
	(In thousands)				(In thousands)
Accrued taxes	$	5,215	$	2,272
Accrued sales taxes					$	21,704	$	21,390
Accrued other taxes						6,430		8,414
Accrued compensation		30,638		10,678		28,029		25,603
Accrued interest		4,190		1,366		1,192		1,437
Accrued audit, tax and legal		2,693		2,759		2,977		3,264
Accrued contract labor		1,538		1,632		2,058		1,932
Accrued worker’s compensation		6,347		—
Accrued worker's compensation						5,292		6,126
Accrued other		24,050		19,191		20,656		20,260

	$	74,671	$	37,898	$	88,338	$	88,426


	January 31, 2018		July 31, 2017		January 31, 2019		July 31, 2018
	(In thousands)				(In thousands)
Accrued pricing liabilities	$	18,882	$	18,882	$	18,882	$	18,882
Line of credit liability		6,000		—
Customer postage deposits		10,457		—		10,440		12,638
Other		8,222		7,259		10,283		10,509

	$	43,561	$	26,141	$	39,605	$	42,029

As of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, the Company had accrued pricing liabilities of approximately $18.9 ~~million for both periods.~~million. As previously reported by the Company, several principal adjustments were made to its historic financial statements for periods ending on or before January 31, 2012, the most significant of which related to the treatment of vendor rebates in its pricing policies. Where the retention of a rebate or amark-up was determined to have been inconsistent with a client contract (collectively referred to as “pricing adjustments”), the Company concluded that these amounts were not properly recorded as revenue. Accordingly, revenue was reduced by an equivalent amount for the period that the rebate was estimated to have been affected. A corresponding liability for the same amount was recorded in that period (referred to as accrued pricing liabilities). The Company believes that it may not ultimately be required to pay all or any of the accrued pricing liabilities based upon the expiration of statutes of limitations or legal relief, and due in part to the nature of the interactions with its clients. The remaining accrued pricing liabilities at January 31, ~~2018~~2019 will be derecognized when there is sufficient information for the Company to conclude that such liabilities are not subject to escheatment and have been extinguished, which may occur through payment, legal release, or other legal or factual determination.

~~In connection with the acquisition of IWCO the~~ The Company performed an analysis of the liability associated with IWCO’s sales tax. Based on the information currently available, a reserve of $18.0 million was recorded on IWCO’s opening balance sheet. This reservehas not provided for any provision for interest and or penalties related to escheatment as it has concluded that such is subject to review during the measurement period and may be adjusted accordingly. As of January 31, 2018, other long-term liabilities includes sales tax liabilities of approximately $18.0 million as based on the process and evaluation the associated payments are not ~~expected~~probable to occur ~~within the next twelve months.~~

~~(7) RESTRUCTURING, NET~~

~~Restructuring~~ and other costs for the three and six months ended January 31, 2018 primarily included continuing charges for personnel reductions and facility consolidations in an effort to streamline operations across our global supply chain operations. It is expected that the payments of employee-related charges will be substantially completed during the fiscal year ended July 31, 2018. The remaining contractual obligations primarily relate to facility lease obligations for vacant space resulting from the previous restructuring activities of the Company. The Company anticipates that these contractual obligations will be substantially fulfilled by the end of December 2018.

The Company recorded an immaterial restructuring charge during the six months ended January 31, 2018. The $0.8 million restructuring charge recorded during the three months ended January 31, 2017 primarily consisted of $0.2 million, $0.3 million $0.1 million and $0.1 million of employee-related costs in the Americas, Asia, Europe and~~e-Business,~~ respectively, related to the workforce reduction of 18 employees in our global supply chain operations. Of this amount, $0.1 million related to contractual obligations. The $1.4 million restructuring charge recorded during the three months ended October 31, 2016 primarily consisted of $0.2 million, $0.4 million and $0.5 million of employee-related costs in the Americas, Asia and Europe, respectively, related to the workforce reduction of 50 employees in our global supply chain. Of this amount, $0.3 million related to contractual obligations.

~~The following tables summarize the activities related to the restructuring accrual by expense category and by reportable segment for the six months ended January 31, 2018:~~

   Employee
Related
Expenses    Contractual
Obligations    Total
   (In thousands)
Accrued restructuring balance at July 31, 2017
   $ 100    $ 86    $ 186






Restructuring adjustments
   19    22    41
Cash paid
   (12 )    (108 )    (120 )
Non-cash adjustments
   5    —      5






Accrued restructuring balance at January 31, 2018
   $ 112    $ —      $ 112

   Americas Asia Europe Direct marketing    All other Consolidated
Total
   (In thousands)
Accrued restructuring balance at July 31, 2017
   $ 51 $ —   $ 23 $ —      $ 112 $ 186




Restructuring charges
   —   —   —   —      —   —
Restructuring adjustments
   27 1 2 —      11 41
Cash paid
   (12 ) —   —   —      (108 ) (120 )
Non-cash adjustments
   2 (1 ) (25 ) —      29 5




Accrued restructuring balance at January 31, 2018
   $ 68 $ —   $ —   $ —      $ 44 $ 112

The net restructuring charges for the three and six months ended January 31, 2018 and 2017 would have been allocated as follows had the Company recorded the expense and adjustments within the functional department of the restructured activities:

   Three Months Ended
January 31,    Six Months Ended
January 31,
   2018    2017    2018    2017
   (In thousands)
Cost of revenue
   $ —      $ 154    $ 8    $ 735
Selling, general and administrative
   4    622    33    1,415








   $ 4    $ 776    $ 41    $ 2,150

~~(8) ACQUISTION OF IWCO DIRECT~~

On December 15, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, MLGS Merger Company, Inc., a Delaware corporation and newly formed wholly-owned subsidiary of the Company (“MLGS”), IWCO Direct Holdings Inc. a Delaware corporation (“IWCO”), CSC Shareholder Services, LLC, a Delaware limited liability company (solely in its capacity as representative), and the stockholders of IWCO. Pursuant to the Merger Agreement, MLGS was merged with and into IWCO, with IWCO surviving as a wholly-owned subsidiary of the Company (the “IWCO Acquisition”). The Company acquired IWCO as a part of the Company’s overall acquisition strategy to acquire profitable companies to utilize the Company’s tax net operating losses.

The Company acquired IWCO for total consideration of approximately $469.2 million, net of purchase price adjustments. The Company financed the IWCO Acquistion through a combination of cash on hand and proceeds from a $393.0 million term loan made under the below described financing agreement with Cerberus Business Finance, LLC, net of a $2.5 million receivable from escrow for working capital claims. The transaction price included~~one-time~~ transaction incentive awards of $3.5 million paid to executives upon closing that were related to pre-existing management arrangements and were included as an element of the purchase price. In connection with the acquisition, the Company paid transaction costs of $1.5 million at acquisition which was recorded as a component of selling, general and administrative expense. Goodwill related to the acquisition of IWCO is not deductible for tax purposes.

~~The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the date of the acquisition (in thousands):~~

Accounts receivable
   $ 47,841
Inventory
   27,165
Other current assets
   7,427
Property and equipment
   87,976
Intangible assets
   210,920
Goodwill
   259,085
Other assets
   3,040
Accounts payable
   (31,069 )
Accrued liabilities and other current liabilities
   (35,790 )
Customer deposits
   (7,829 )
Deferred income taxes
   (79,918 )
Other liabilities
   (19,627 )


Total consideration
   $ 469,221

Acquired intangible assets include trademarks and tradenames valued at $20.5 million and customer relationships of $190.4 million. The preliminary fair value estimate of trademarks and tradenames was prepared utilizing a relief from royalties method of valuation, while the preliminary fair value estimate of customer relationships was prepared using a multi-period excess earnings method of valuation. The trademarks and tradenames intangible asset will be amortized on a straight line basis over a 3 year estimated useful life. The customer relationship intangible asset will be amortized on a double-declining basis over an estimated useful life of 15 years. The acquired property and equipment consist mainly of machinery and equipment. The fair value of the acquired property and equipment was estimated using the cost approach to value, and applying industry standard normal useful lives and inflationary indices. In the preliminary allocation of the purchase price, the Company recognized $259.1 million of goodwill which arose primarily from the synergies in its business and the assembled workforce of IWCO.

The following unaudited pro forma financial results are based on the Company’s historical consolidated financial statements and IWCO’s historical consolidated financial statements as adjusted to give effect to the Company’s acquisition of IWCO and related transactions. The unaudited pro forma financial information for the three and six months ended January 31, 2018 give effect to these transactions as if they had occurred on August 1, 2016. The unaudited pro forma results presented do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of August 1, 2017, nor do they indicate the results of operations in future periods. Additionally, the unaudited pro forma results do not include the impact of possible business model changes, nor do they consider any potential ~~impacts of current market conditions or revenues, reduction of expenses, asset dispositions, or other factors. The impact of these items could alter the following pro forma results.~~

interest and penalties cannot be reasonably estimated.

The pro forma results were adjusted to reflect incremental depreciation and amortization based on preliminary fair value adjustments for the acquired property, plant and equipment, and intangible assets. A reduction to interest expense is also reflected in the pro forma results to reflect the more favorable terms obtained with the new Credit Facility as compared to the interest rate under the former facility carried by IWCO (in thousands):

   Three Months
Ended    Six Months
Ended    Three Months
Ended    Six Months
Ended
   January 31, 2017    January 31, 2018
   (unaudited)    (unaudited)
Net revenue
   $ 239,375    $ 466,979    $ 208,393    $ 433,006
Net income
   $ (7,034 )    $ (24,268 )    $ 68,827    $ 59,787

~~(9) GOODWILL AND INTANGIBLE ASSETS~~

The Company conducts its goodwill impairment test on July 31 of each fiscal year. In addition, if and when events or circumstances change that could reduce the fair value of any of its reporting units below its carrying value, an interim test is performed. In making this assessment, the Company relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data. The Company’s goodwill of $259.1 million as of January 31, 2018 relates to the Company’s Direct Marketing reporting unit. There were no indicators of impairment identified related to the Company’s Direct Marketing reporting unit during the three and six months ended January 31, 2018.

Intangible assets, as of January 31, 2018, include trademarks and tradenames with a carrying balance of $20.2 million and customer relationships of $186.6 million. The trademarks and tradenames intangible asset are being amortized on a straight line basis over a 3 year estimated useful life. The customer relationship intangible asset are being amortized on a double-declining basis over an estimated useful life of 15 years. Intangible assets deemed to have finite lives are amortized over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to its future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually, the remaining useful life is evaluated.

~~(10)~~(8) DEBT

5.25% Convertible Senior Notes Payable

On March 18, 2014, the Company entered into an indenture (the “Indenture”) with Wells Fargo Bank, National Association, as trustee, relating to the Company’s issuance of $100 million of 5.25% Convertible Senior Notes (the “Notes”). The Notes matured on March 1, 2019, at which time the balance due was paid in full (see note 21). The Notes bear interest at the rate of 5.25% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2014. ~~The Notes will mature on March 1, 2019, unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such maturity date.~~

Holders of the Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business or the business day immediately preceding the maturity date. Each $1,000 of principal of the Notes will initially be convertible into 166.2593 shares of our common stock, which is equivalent to an initial conversion price of approximately $6.01 per share, subject to adjustment upon the occurrence of certain events, or, if the Company obtains the required consent from its stockholders, into shares of the Company’s common stock, cash or a combination of cash and shares of its common stock, at the Company’s election. If the Company has received stockholder approval, and it elects to settle conversions through the payment of cash or payment or delivery of a combination of cash and shares, the Company’s conversion obligation will be based on the volume weighted average prices (“VWAP”) of its common stock for each VWAP trading day in a 40 VWAP trading day observation period. The Notes and any of the shares of common stock issuable upon conversion have not been registered. As of January 31, 2018, the~~if-converted~~ ~~value of the Notes did not exceed the principal value of the Notes.~~

Holders will have the right to require the Company to repurchase their Notes, at a repurchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, upon the occurrence of certain fundamental changes, subject to certain conditions. No fundamental changes occurred during the six months ended January 31, 2018.

The Company may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes. The Company will have the right to elect to cause the mandatory conversion of the Notes in whole, and not in part, at any time on or after March 6, 2017, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company notifies holders of its election to mandatorily convert the Notes, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company notifies holders of its election to mandatorily convert the notes.

~~The Company has~~ valued the debt using similar nonconvertible debt as of the original issuance date of the Notes and bifurcated the conversion option associated with the Notes from the host debt instrument and recorded the conversion option of $28.1 million in stockholders’ equity prior to the allocation of debt issuance costs. The initial value of the equity component, which ~~reflects~~reflected the equity conversion feature, iswas equal to the initial debt discount. The resulting debt discount on the Notes iswas being accreted to interest expense at the effective interest rate over the estimated life of the Notes. The equity component iswas included in the additionalpaid-in-capital portion of stockholders’ equity on the Company’s consolidated balance sheet. In addition, the debt issuance costs of $3.4 million ~~are~~were allocated between the liability and equity components in proportion to the allocation of the proceeds. ~~During the first quarter of fiscal year 2017, the Company adopted ASUNo. 2015-03.~~ ~~As such, the~~The issuance costs allocated to the liability component ($2.5 million) ~~are~~were capitalized as a reduction of the principal amount of the Notes payable on the Company’s balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of the Notes. The issuance costs allocated to the equity component iswas recorded as a reduction to additionalpaid-in capital.

During the six months ended January 31, 2019, the Company purchased $3.7 million in face value of the Notes in the open market at a purchase price of $3.7 million. The loss of $0.1 million on this transaction is presented as a component of other gains and losses. The fair value of the Company’s Notes payable, calculated as of the closing price of the traded securities, was ~~$66.2~~$63.9 million and ~~$63.9~~$66.7 million as of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, respectively. This value does not represent the settlement value of these ~~long-term~~ debt liabilities to the Company. The fair value of the Notes payable could vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The Notes payable are traded and their fair values are based upon traded prices as of the reporting dates. As of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, the net carrying value of the Notes was ~~$62.1~~$63.5 million and ~~$59.8~~$64.5 million, respectively. As of January 31, 2019 and July 31, 2018, SPHG Holdings held $14.9 million principal amount of the Notes.


	January 31,			July 31,
	2018			2017			January 31, 2019			July 31, 2018
	(In thousands)						(In thousands)
Carrying amount of equity component (net of allocated debt issuance costs)	$	26,961		$	26,961		$	26,961		$	26,961
Principal amount of Notes	$	67,625		$	67,625		$	63,925		$	67,625
Unamortized debt discount		(5,110	)		(7,227	)		(430	)		(2,843	)
Unamortized debt issuance costs		(453	)		(640	)		(38	)		(252	)

Net carrying amount	$	62,062		$	59,758		$	63,457		$	64,530

As of January 31, ~~2018,~~2019, the remaining period over which the unamortized discount will be amortized is ~~13 months.~~1 month.


	Three Months Ended				Six Months Ended
	January 31,				January 31,				Three Months Ended January 31,				Six Months Ended January 31,
	2018		2017		2018		2017		2019		2018		2019		2018
	(In thousands)				(In thousands)				(In thousands)				(In thousands)
Interest expense related to contractual interest coupon	$	913	$	888	$	1,827	$	1,823	$	856	$	913	$	1,646	$	1,827
Interest expense related to accretion of the discount		1,076		999		2,117		1,940		1,260		1,076		2,311		2,117
Interest expense related to debt issuance costs		95		89		187		172		112		95		205		187

	$	2,084	$	1,976	$	4,131	$	3,935	$	2,228	$	2,084	$	4,162	$	4,131

During each of the three ~~and six~~ months ended January 31, 2019 and 2018, the Company recognized interest expense associated with the Notes of ~~$2.1~~$2.2 million and ~~$4.1~~$2.1 million, respectively. During the ~~three and~~ six months ended January 31, ~~2017,~~2019 and 2018, the Company recognized interest expense associated with the Notes of ~~$2.0~~$4.2 million and ~~$3.9~~$4.1 million, respectively. The effective interest rate on the Notes, including amortization of debt issuance costs and accretion of the discount, is 13.9%. The ~~notes~~Notes bear interest of 5.25%.

PNC Bank Credit Facility

On June 30, 2014, two direct and wholly owned subsidiaries of the Company (the ~~“ModusLink Borrowers”~~“Borrowers”) entered into a ~~revolving credit and security agreement (as amended, the “Credit Agreement”),~~Credit Agreement, as borrowers and guarantors, with PNC Bank and National Association, as lender and as agent, respectively.

The Credit Agreement has a five (5) year term which expires on June 30, 2019. It includes a maximum credit commitment of $50.0 million, is available for letters of credit (with a sublimit of $5.0 million) and has a $20.0 million uncommitted accordion feature. The actual maximum credit available under the Credit Agreement varies from time to time and is determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable and eligible inventory minus reserves determined by the Agent (including other reserves that the Agent may establish from time to time in its permitted discretion), all as specified in the Credit Agreement.

Generally, borrowings under the Credit Agreement bear interest at a rate per annum equal to, at the ~~ModusLink~~ Borrowers’ option, either (a) LIBOR (adjusted to reflect any required bank reserves) for an interest period equal to one, two or three months (as selected by the ~~ModusLink~~ Borrowers) plus a margin of 2.25% per annum or (b) a base rate determined by reference to the highest of (1) the base commercial lending rate publicly announced from time to time by PNC Bank, National Association, (2) the sum of the Federal Funds Open Rate in effect on such day plus one half of one percent (0.5%) per annum, or (3) the LIBOR rate (adjusted to reflect any required bank reserves) in effect on such day plus 1.00% per annum. In addition to paying interest on outstanding principal under the Credit Agreement, the ~~ModusLink~~ Borrowers are required to pay a commitment fee, in respect of the unutilized commitments thereunder, of 0.25% per annum, paid quarterly in arrears. The ~~ModusLink~~ Borrowers are also required to pay a customary letter of credit fee equal to the applicable margin on revolving credit LIBOR loans and fronting fees.

Obligations under the Credit Agreement are guaranteed by the ~~ModusLink~~ Borrowers’ existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain limited exceptions; and the Credit Agreement is secured by security interests in substantially all the ~~ModusLink~~ Borrowers’ assets and the assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0% of the equity interests of each subsidiary guarantor that is a domestic entity (subject to certain limited exceptions) and 65.0% of the voting equity interests of any direct first tier foreign entity owned by either Borrower or by a subsidiary guarantor. The Company is not a borrower or a guarantor under the Credit Agreement.

The Credit Agreement contains certain customary negative covenants, which include limitations on mergers and acquisitions, the sale of assets, liens, guarantees, investments, loans, capital expenditures, dividends, indebtedness, changes in the nature of business, transactions with affiliates, the creation of subsidiaries, changes in fiscal year and accounting practices, changes to governing documents, compliance with certain statutes, and prepayments of certain indebtedness. The Credit Agreement also contains certain customary affirmative covenants (including periodic reporting obligations) and events of default, including upon a change of control. The Credit Agreement requires compliance with certain financial covenants providing for maintenance of specified liquidity, maintenance of a minimum fixed charge coverage ratio and/or maintenance of a maximum leverage ratio following the occurrence of certain events and/or prior to taking certain actions, all as more fully described in the Credit Agreement. The Company believes that the Credit Agreement provides greater financial flexibility to the Company and the ~~ModusLink~~ Borrowers and may enhance their ability to consummate one or several larger and/or more attractive acquisitions and should provide our clients and/or potential clients with greater confidence in the Company’s and the ~~ModusLink~~ Borrowers’ liquidity. At January 31, 2019, the Company had a readily available borrowing capacity under its PNC Bank Credit Facility of $4.6 million. During the three and six months ended January 31, ~~2018,~~2019, the Company did not meet the criteria that would cause its financial covenants to be applicable. As of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, the Company did not have any balance outstanding on the PNC Bank credit facility.

Cerberus Credit Facility

On December 15, 2017, MLGS, a wholly owned subsidiary of the Company, entered into a Financing Agreement (the “Financing Agreement”), by and among the MLGS (as the initial borrower), Instant Web, LLC, a Delaware corporation and wholly owned subsidiary of IWCO (as “Borrower”), IWCO, and certain of IWCO’s subsidiaries (together with IWCO, the “Guarantors”), the lenders from time to time party thereto, and Cerberus Business Finance, LLC, as collateral agent and administrative agent for the lenders. MLGS was the initial borrower under the Financing Agreement, but immediately upon the consummation of the IWCO Acquisition, as described above, Borrower became the borrower under the Financing Agreement.

The Financing Agreement provides for $393.0 million term loan facility (the “Term Loan”) and a $25.0 million revolving credit facility ~~(collectively,~~(the “Revolving Facility”) (together, the “Cerberus Credit Facility”). Proceeds of the Cerberus Credit Facility were used (i) to finance a portion of the IWCO Acquisition, (ii) to repay certain existing indebtedness of the Borrower and its subsidiaries, (iii) for working capital and general corporate purposes and (iv) to pay fees and expenses related to the Financing Agreement and the IWCO Acquisition.

The Cerberus Credit Facility has a maturity of five years. Borrowings under the Cerberus Credit Facility bear interest, at the Borrower’s option, at a Reference Rate plus 3.75% or a LIBOR Rate plus 6.5%, each as defined the Financing Agreement. The initial interest rate under the Cerberus Credit Facility is at the LIBOR Rate option.

The Term Loan under the Cerberus Credit Facility is repayable in consecutive quarterly installments, each of which will be in an amount equal per quarter of ~~$1,500,000~~$1.5 million and each such installment to be due and payable, in arrears, on the last day of each calendar quarter commencing on March 31, 2018 and ending on the earlier of (a) December 15, 2022 and (b) upon the payment in full of all obligations under the Financing Agreement and the termination of all commitments under the Financing Agreement. Further, the Term

Loan would be permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow, with a step-down to 25% when the Leverage Ratio (as defined in the Financing ~~Agreement)~~agreement) is below 3.50:1.00; provided that, in any calendar year, any voluntary prepayments of the Term Loan shall be credited against the Borrower’s “excess cash flow” prepayment obligations on adollar-for-dollar basis for such calendar year.

Borrowings under the Financing Agreement are fully guaranteed by the Guarantors and are collateralized by substantially all the assets of the Borrower and the Guarantors and a pledge of all of the issued and outstanding equity interests of each of IWCO’s subsidiaries.

The Financing Agreement contains certain representations, warranties, events of default, mandatory prepayment requirements, as well as certain affirmative and negative covenants customary for financing agreements of this type. These covenants include restrictions on borrowings, investments and dispositions, as well as limitations on the ability of the Borrower and the Guarantors to make certain capital expenditures and pay dividends. Upon the occurrence and during the continuation of an event of default under the Financing Agreement, the lenders under the Financing Agreement may, among other things, terminate all commitments and declare all or a portion of the loans under the Financing Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Financing Agreement bear interest. ~~During the three months ended~~

At January 31, 2019, IWCO had a readily available borrowing capacity under its Revolving Facility of $25.0 million. As of January 31, 2019 and July 31, 2018, the Company did not ~~trigger any of these covenants. During the first quarter of fiscal year 2017, the Company adopted ASUNo. 2015-03.~~ ~~As such, the debt issuance costs of $1.3 million are capitalized as a reduction of the principal amount of Term Loan~~have an outstanding balance on the ~~Company’s balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of the Term Loan.~~Revolving Facility. As of January 31, ~~2018, the Company had $6.0 million outstanding on the revolving credit facility. As of January~~2019 and July 31, 2018, the principal amount outstanding on the Term Loan was ~~$393.0 million.~~$387.0 million and $390.0 million, respectively. As of January 31, 2019 and July 31, 2018, the current and long-term net carrying value of the Term Loan was ~~$391.7 million.~~$386.0 million and $388.8 million, respectively.

~~(11)~~


	January 31, 2019			July 31, 2018
	(In thousands)
Principal amount outstanding on the Term Loan	$	387,000		$	390,000
Unamortized debt issuance costs		(1,025	)		(1,162	)

Net carrying value of the Term Loan	$	385,975		$	388,838

(9) CONTINGENCIES

On April 13, 2018, a purported shareholder, Donald Reith, filed a verified complaint, Reith v. Lichtenstein, et al., 2018-0277 (Del. Ch.) in the Delaware Court of Chancery. The complaint alleges class and derivative claims for breach of fiduciary duty and/or aiding and abetting breach of fiduciary duty and unjust enrichment against the Company’s Board of Directors (the “Board”), Warren Lichtenstein, Glen Kassan, William T. Fejes, Jack L. Howard, Jeffrey J. Fenton, Philip E. Lengyel and Jeffrey S. Wald; and stockholders Steel Holdings, Steel Partners, L.P., SPHG Holdings, Handy & Harman Ltd. and WHX CS Corp. (collectively, “Steel Parties”) in connection with the acquisition of $35 million of the Series C Preferred Stock by SPHG Holdings and equity grants made to Lichtenstein, Howard and Fejes on December 15, 2017 (collectively, “Challenged Transactions”). The Company is named as a nominal defendant. The complaint alleges that although the Challenged Transactions were approved by a Special Committee consisting of the independent members of the Board (Messrs. Fenton, Lengyel and Wald), the Steel Parties dominated and controlled the Special Committee, who approved the Challenged Transactions in breach of their fiduciary duty. Plaintiff alleges that the Challenged Transactions unfairly diluted shareholders and therefore unjustly enriched Steel Holdings, SPHG Holdings and Messrs. Lichtenstein, Howard and Fejes. The complaint also alleges that the Board made misleading disclosures in the Company’s proxy statement for the 2017 meeting in connection with seeking approval to amend the 2010 Incentive Award Plan to authorize the issuance of additional shares to accommodate certain shares underlying the equity grants. Remedies requested include rescission of the Series C Convertible Preferred Stock and equity grants, disgorgement of any unjustly obtained property or compensation and monetary damages.

On June 18, 2018, defendants moved to dismiss the complaint for failure to plead demand futility and failure to state a claim. The motions are fully briefed, and argument was held March 5, 2019. On March 5, 2019, the Court of Chancery heard oral argument on (i) the motion to dismiss the Reith complaint and (ii) Ladjevardian’s (see below) motion to intervene and stay. The Court took the motion to dismiss under advisement. Discovery is stayed pending a decision on the motions to dismiss. Because the litigation is at an early stage and motions to dismiss are pending, we are unable at this time to provide a calculation of potential damages or litigation loss that is probable or estimable. Although there can be no assurance as to the ultimate outcome, the Company believes it has meritorious defenses, has denied liability, and intends to defend this litigation vigorously.

On January 18, 2019, Mohammad Ladjevardian, a purported shareholder, filed a verified complaint pursuant to 8 Del. C. § 220. The complaint seeks previously demanded books and records concerning the matters in Ladjevardian’s letters dated January 29, 2018, and August 21, 2018. The complaint does not seek money damages, but does request an award of reasonable attorneys’ fees and costs incurred in pursuing the action. Steel Connect filed an Answer on February 7, 2019. On February 20, 2019, the Court entered a scheduling order. Trial in this matter is scheduled for June 26, 2019. Ladjevardian moved to intervene in the Reith matter. On March 5, 2019, the Court took the motion under advisement and denied Ladjevardian’s motion to intervene.

(10) STOCKHOLDERS’ EQUITY

Preferred Stock

The Company’s Board of Directors (“the “Board”) has the authority, subject to any limitations prescribed by Delaware law, to issue shares of preferred stock in one or more series and to fix and determine the designation, privileges, preferences and rights and the qualifications, limitations and restrictions of those shares, including dividend rights, conversion rights, voting rights, redemption rights, terms of sinking funds, liquidation preferences and the number of shares constituting any series or the designation of the series, without any further vote or action by the stockholders. Any shares of the Company’s preferred stock so issued may have priority over its common stock with respect to dividend, liquidation and other rights. The Company’s board of directors may authorize the issuance of preferred stock with voting rights or conversion features that could adversely affect the voting power or other rights of the holders of its common stock. Although the issuance of preferred stock could provide us with flexibility in connection with possible acquisitions and other corporate purposes, under some circumstances, it could have the effect of delaying, deferring or preventing a change of control.

On December 15, 2017, the Company entered into a Preferred Stock Purchase Agreement (the “Purchase Agreement”) with SPH Group Holdings LLC (“SPHG Holdings”), pursuant to which the Company issued 35,000 shares of the Company’s newly created Series C Convertible Preferred Stock, par value $0.01 per share (the “Preferred Stock”), to SPHG Holdings at a price of $1,000 per share, for an aggregate purchase consideration of $35.0 million (the “Preferred Stock Transaction”). The terms, rights, obligations and preferences of the Preferred Stock are set forth in a Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of the Company (the “Series C Certificate of Designations”), which has been filed with the Secretary of State of the State of Delaware.

Under the Series C Certificate of Designations, each share of Preferred Stock can be converted into shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at an initial conversion price equal to $1.96 per share, subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction. Holders of the Preferred Stock will also receive ~~cumulative~~ dividends at 6% per annum payable in ~~quarterly~~ cash or Common Stock. If at any time the closing bid price of the Company’s Common Stock exceeds 170% of the conversion price for at least five consecutive trading days (subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), the Company has the right to require each holder of Preferred Stock to convert all, or any whole number, of shares of the Preferred Stock into Common Stock.

Upon the occurrence of certain triggering events such as a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or the merger or consolidation of the Company or significant subsidiary, or the sale of substantially all of the assets or capital stock of the Company or a significant subsidiary, the holders of the Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets or funds of the Company to the holders of other equity or equity equivalent securities of the Company other than the Preferred Stock by reason of their ownership thereof, an amount per share in cash equal to the sum of (i) one hundred percent (100%) of the stated value per share of Preferred Stock (initially $1,000 per share) then held by them (as adjusted for any stock split, stock dividend, stock combination or other similar transactions with respect to the Preferred Stock), plus (ii) 100% of all declared but unpaid dividends, and all accrued but unpaid dividends on each such share of Preferred Stock, in each case as the date of the triggering event. On or after December 15, 2022, each holder of Preferred Stock can also require the Company to redeem its Preferred Stock in cash at a price equal to the Liquidation Preference (as defined in Series C Certificate of Designations) ~~and accordingly the Preferred Stock has been classified in the Mezzanine section of the accompanying balance sheet.~~.

Each holder of Preferred Stock has a vote equal to the number of shares of Common Stock into which its Preferred Stock would be convertible as of the record date, provided that the number of shares voted is based upon a conversion price which is no less than the greater of the book or market value of the Common Stock on the closing date of the purchase of the Preferred Stock. In addition, for so long as the Preferred Stock remains outstanding, the Company will not, directly or indirectly, and including in each case with respect to any significant subsidiary, without the affirmative vote of the holders of a majority of the Preferred Stock (i) liquidate, dissolve or wind up the Company or any significant subsidiary; (ii) consummate any transaction that would constitute or result in a Liquidation Event (as defined in the Series C Certificate of Designations); (iii) effect or consummate any Prohibited Issuance (as defined in the Series C Certificate of Designations); or (iv) create, incur, assume or suffer to exist any Indebtedness (as defined in the Series C Certificate of Designations) of any kind, other than certain existing Indebtedness of the Company and any replacement financing thereto, unless any such replacement financing be on substantially similar terms as such existing Indebtedness.

The Purchase Agreement provides that the Company will use its commercially reasonable efforts to effect the piggyback registration of the Common Stock issuable on the conversion of the Preferred Stock and any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing, with the Securities and Exchange Commission in all states reasonably requested by the holder in accordance with certain enumerated conditions. The Purchase Agreement also contains other representations, warranties and covenants, customary for an issuance of Preferred Stock in a private placement of this nature.

The Preferred Stock Transaction was approved and recommended to the Board by a special committee of the Board (the “Special Committee”) consisting of independent directors not affiliated with Steel Partners Holdings GP Inc. (“Steel Holdings GP”), which controls the power to vote and dispose of the securities held by SPHG Holdings and its ~~affiliates (see Note 18).~~affiliates.

Common Stock

Each holder of the Company’s common stock is entitled to:

one vote per share on all matters submitted to a vote of the stockholders, subject to the rights of any preferred stock that may be outstanding;

dividends as may be declared by the Company’s board of directors out of funds legally available for that purpose, subject to the rights of any preferred stock that may be outstanding; and

a pro rata share in any distribution of the Company’s assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding preferred stock in the event of liquidation.

Holders of the Company’s common stock have no cumulative voting rights, redemption rights or preemptive rights to purchase or subscribe for any shares of its common stock or other securities. All of the outstanding shares of common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of its common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any existing series of preferred stock and any series of preferred stock that the Company may designate and issue in the future. There are no redemption or sinking fund provisions applicable to the Company’s common stock.

On March 12, 2013, stockholders of the Company approved the sale of 7,500,000 shares of newly issued ~~common stock~~Common Stock to Steel Partners Holdings L.P. (“Steel Holdings”), an affiliate of SPHG Holdings, at a price of $4.00 per share, resulting in aggregate proceeds of $30.0 million before transaction costs. The Company incurred $2.3 million of transaction costs, which consisted primarily of investment banking and legal fees, resulting in net proceeds from the sale of $27.7 million. In addition, as part of the transaction, the Company issued Steel Holdings a warrant to acquire an additional 2,000,000 shares at an exercise price of $5.00 per share (the “Warrant”). These warrants were to expire after a term of five years after issuance. On December 15, 2017, contemporaneously with the closing of the Preferred Stock Transaction, the Company entered into a Warrant Repurchase Agreement (the “Warrant Repurchase Agreement”) with Steel Holdings pursuant to which the Company repurchased the Warrant for $100. The Warrant was terminated by the Company upon repurchase. ~~The Warrant Repurchase Agreement is more fully described in Note 18 to these Condensed Consolidated Financial Statements.~~

~~(12)~~

(11) OTHER GAINS (LOSSES), NET

The following table reflects the components of “Other gains (losses), net”:

   Three Months Ended
January 31,    Six Months Ended
January 31,
   2018    2017    2018    2017
   (In thousands)
Foreign currency exchange gains (losses)
   $ (1,436 )    $ 29    $ (2,071 )    $ 426
Gains on Trading Securities
   —      1,011    1,876    94
Other, net
   (280 )    (21 )    (99 )    11








   $ (1,716 )    $ 1,019    $ (294 )    $ 531


	Three Months Ended January 31,						Six Months Ended January 31,
	2019			2018			2019			2018
	(In thousands)
Foreign currency exchange losses	$	(1,484	)	$	(1,436	)	$	(568	)	$	(2,071	)
Gains, net on Trading Securities		—			—			—			1,876
Other, net		(178	)		(281	)		150			(100	)

	$	(1,662	)	$	(1,717	)	$	(718	)	$	(295	)

The Company recorded foreign exchange ~~gains (losses)~~losses of approximately ~~$(1.4)~~$1.5 million and ~~$29 thousand~~$1.4 million during the three months ended January 31, 2019 and 2018, respectively. For the three months ended January 31, 2019, the net losses primarily related to realized and ~~2017,~~unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $(1.1) million, $(0.9) million and $0.5 million in Corporate, Asia and Europe, respectively. For the three months ended January 31, 2018, the net losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $(2.3) million, $1.3 million and $(0.7) million in Corporate, Europe and Asia, respectively. ~~For~~

The Company recorded foreign exchange losses of approximately $0.6 million and $2.1 million during the ~~three~~six months ended January 31, ~~2017,~~2019 and 2018, respectively. For the six months ended January 31, 2019, the net ~~gains~~losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $0.6 million, $(0.5) million and ~~$(0.1)~~$(0.5) million in Corporate, Asia and Europe, ~~respectively.~~

~~During the three months ended January 31, 2017, the Company recognized $1.0 million in net gains associated with its Trading Securities.~~

~~The Company recorded foreign exchange gains (losses) of approximately $(2.1) million and $0.4 million during the six months ended January 31, 2018 and 2017,~~ respectively. For the six months ended January 31, 2018, the net ~~gains~~losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $(2.2) million, $1.0 million and $(1.1) million in Corporate, Europe and Asia, respectively. For the six months ended January 31, 2017, the net gains primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $1.3 million, $(0.4) million and $(0.4) million in Corporate, Asia and Europe, respectively.

During the six months ended January 31, 2018, the Company recognized $2.7 million in netnon-cash losses associated with its Trading Securities. During the six months ended January 31, 2018, the Company recognized $4.6 million in net cash gains associated with its Trading Securities.

~~(13)~~(12) INCOME TAXES

The Company operates in multiple taxing jurisdictions, both within and outside of the United States. For the six months ended January 31, ~~2018,~~2019, the Company was profitable in certain jurisdictions, resulting in an income tax expense using enacted rates in those jurisdictions. As of January 31, 2019, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $1.7 million. As of July 31, 2018, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately ~~$1.8 million. As of July 31, 2017, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $0.7~~$1.6 million.

Uncertain Tax Positions

In accordance with the Company’s accounting policy, interest related to unrecognized tax benefits is included in the provision of income taxes line of the Condensed Consolidated Statements of Operations. As of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, the liabilities for interest expense related to uncertain tax positions were ~~immaterial.~~$0.1 million. The Company ~~did not accrue~~has accrued $0.2 million for penalties related to income tax

~~positions as there were no income tax positions that required the Company to accrue penalties.~~ positions. The Company does not expect any unrecognized tax benefits to reverse in the next twelve months. The Company is subject to U.S. federal income tax and various state, local and international income taxes in numerous jurisdictions. The federal and state tax returns are generally subject to tax examinations for the tax years ended July 31, 2013 through July 31, ~~2017.~~2018. To the extent the Company has tax attribute carryforwards, the tax year in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period. In addition, a number of tax years remain subject to examination by the appropriate government agencies for certain countries in the Europe and Asia regions. In Europe, the Company’s 2009 through ~~2016~~2017 tax years remain subject to examination in most locations, while the Company’s 2005 through ~~2016~~2017 tax years remain subject to examination in most Asia locations.

Net Operating Loss

The Company has certain deferred tax benefits, including those generated by net operating losses and certain other tax attributes (collectively, the “Tax Benefits”). The Company’s ability to use these Tax Benefits could be substantially limited if it were to experience an “ownership change,” as defined under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change would occur if there is a greater than50-percentage point change in ownership of securities by stockholders owning (or deemed to own under Section 382 of the Code) five percent or more of a corporation’s securities over a rolling three-year period.

Tax Benefits Preservation Plan

On ~~January 19,~~March 6, 2018, ~~our~~the Board, ~~adopted a Tax Benefits Preservation Plan (the “Tax Plan”) and with American Stock Transfer & Trust Company, LLC, as rights agent (the “Rights Agent”). The Tax Plan is designed~~subject to ~~preserve the Company’s ability to utilize its Tax Benefits and is similar to plans adopted~~approval by ~~other public companies with significant Tax Benefits. at its 2017 Annual Meeting of Stockholders.~~

~~The Board will be asking~~ the Company’s stockholders, approved an amendment to ~~approve~~ the ~~Tax Plan at its 2017 Annual Meeting~~Company’s Restated Certificate of ~~Stockholders~~Incorporation designed to protect the tax benefits of the Company’s net operating loss carryforwards by preventing certain transfers of our securities that could result in an “ownership change” (as defined under Section 382 of the Code) (the ~~2017 Meeting”~~“Protective Amendment”). IfThe Protective Amendment was approved and adopted by the ~~Tax Plan is not approved by~~Company’s stockholders at the 2017 Meeting and was filed with the ~~Tax Plan will automatically expire immediately following the final adjournment~~Secretary of State of the ~~2017 Meeting if stockholder approval is not received.~~State of Delaware on April 12, 2018.

The Company had net operating loss carryforwards for federal and state tax purposes of approximately $2.1 billion and ~~$209.8~~$150.6 million, respectively, as of January 31, ~~2018.~~2019. The Company’s s ability to use its Tax Benefits would be substantially limited if the Company undergoes an “ownership change” (within the meaning of Section 382 of the Internal Revenue Code). The Tax Plan is intended to prevent an “ownership change” of the Company that would impair the Company ability to utilize its Tax Benefits.

As part of the ~~plan~~ Tax Plan, the Board declared a dividend of one right (a “Right”) for each share of Common Stock then outstanding. The dividend was payable to holders of record as of the close of business on January 29, 2018. Any shares of Common Stock issued after January 29, 2018, will be issued together with the Rights. Each Right initially represents the right to purchase oneone-thousandth of a share of newly created Series D Junior Participating Preferred Stock.

Initially, the Rights will be attached to all certificates representing shares of Common Stock then outstanding and no separate rights certificates will be distributed. In the case of book entry shares, the Rights will be evidenced by notations in the book entry accounts. Subject to certain exceptions specified in the Plan, the Rights will separate from the Common Stock and a distribution date (the “Distribution Date”) will occur upon the earlier of (i) ten (10) business days following a public announcement that a stockholder (or group) has become a beneficial owner of4.99-percent or more of the shares of Common Stock then outstanding and (ii) ten (10) business days (or such later date as the Board determines) following the commencement of a tender offer or exchange offer that would result in a person or group becoming a4.99-percent stockholder.

Pursuant to the Tax Plan and subject to certain exceptions, if a stockholder (or group) becomes a4.99-percent stockholder after adoption of the Tax Plan, the Rights would generally become exercisable and entitle stockholders (other than the4.99-percent stockholder or group) to purchase additional shares of ~~Steel Connect, Inc.~~the Company at a significant discount, resulting in substantial dilution in the economic interest and voting power of the4.99-percent stockholder (or group). In addition, under certain circumstances in which ~~Steel Connect, Inc~~the Company is acquired in a merger or other business combination after annon-exempt stockholder (or group) becomes a4.99-percent stockholder, each holder of the Right (other than the4.99-percent stockholder or group) would then be entitled to purchase shares of the acquiring company’s common stock at a discount.

The Rights are not exercisable until the Distribution Date and will expire at the earliest of (i) 11:59 p.m. on the date that the votes of the stockholders of the Company with respect to the Company’s next annual meeting or special meeting of stockholders are certified (which date will be no later than January 18, ~~2019),~~2019 - the annual meeting or special meeting of stockholders did not take place prior to this date ), unless the continuation of the Tax Plan is approved by the affirmative vote of the majority of shares of Common Stock present at such meeting of stockholders (in which case clause (ii) will govern); (ii) 11:59 p.m., on January 18, 2021; (iii) the time at which the Rights are redeemed or exchanged as provided in the Tax Plan; and (iv) the time at which the Board determines that the Tax Plan is no longer necessary or desirable for the preservation of Tax Benefits.

Protective Amendment

On December 9, 2014, the Company’s stockholders voted in favor of an amendment to the Restated Certificate of Incorporation of the Company that was designed to protect the long-term tax benefits presented by our NOLs and the Certificate of Amendment of the Restated Certificate of Incorporation of the Company effecting such amendment was filed with the State of Delaware on December 29, 2014 (the “Original Protective Amendment”). The Original Protective Amendment expired in December 29, 2017. The Board has determined to replace the Original Protective Amendment with a new similar amendment to our Restated Certificate of Incorporation (the “Protective Amendment”). On March 6, 2018, the Board, subject to approval by the Company’s stockholders, approved ~~a Protective Amendment.~~

~~The~~the Protective Amendment ~~which is~~to the Company’s Restated Certificate of Incorporation designed to ~~prevent~~protect the tax benefits of the Company’s net operating loss carryforwards by preventing certain transfers of our securities that could result in an ~~ownership change.~~“ownership change” (as defined under Section 382 of the Code). The Protective Amendment ~~will not be put into effect unless~~was approved and ~~until it is approved~~adopted by the Company’s stockholders at the 2017 ~~Meeting. Our new Tax Benefits Preservation Plan, dated as~~meeting and was filed with the Secretary of January 19, 2018, with American Stock Transfer & Trust Company, LLC was entered into on January 19, 2018 following Board approval. The Tax Plan requires stockholder approval to remain in effect after the 2017 Meeting, and will expire immediately following the final adjournmentState of the ~~2017 Meeting if stockholder approval is not received.~~State of Delaware on April 12, 2018.

~~IWCO Acquisition~~

As more fully described in Note 8 to these unaudited Condensed Consolidated Financial Statements, the Company completed the IWCO Acquisition on December 15, 2017. Going forward, the Company and IWCO will file a consolidated federal tax return. In purchase accounting, a deferred tax liability of $79.9 million was computed for IWCO, Inc. After considering the transaction, the projected combined results and available temporary differences from the acquired business, the Company has determined in accordance with ASC~~805-740-30-3~~ ~~that its valuation allowance in the same amount of IWCO’s full deferred tax liability may be released and the benefit be recognized in income.~~

The Tax Cuts and Jobs Act

In December 2017, the Tax Cuts and Jobs Act, or the Tax Act (“TCJA”), was signed into law. Among other things, the Tax Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. This revaluation resulted in a provision of ~~$266.3~~$280.4 million to income tax expense in continuing operations and a corresponding reduction in the valuation allowance. As a result, there was no impact to the Company’s ~~Statement of Operations~~income statement as a result of reduction in tax rates. The total provision of ~~$266.3~~$280.4 million included a provision of ~~$296.1~~$305.9 million to income tax expense for the Company and a benefit of ~~$29.8~~$25.5 million to income tax expense for IWCO. As noted above, the net tax expense of $280.4 was offset completely by a corresponding reduction in the valuation allowance.

Beginning on January 1, 2018, the TCJA also requires a minimum tax on certain future earnings generated by foreign subsidiaries while providing for futuretax-free repatriation of such earnings through a 100% dividends-received deduction.

The TCJA also requires a Transition Tax on any net accumulated earnings and profits as of the two required measurement dates, November 2, 2017 and December 31, 2017. As such, as of July 31, 2018, all of the Company’s accumulated earnings and profits are deemed repatriated. Therefore, there is no deferred tax liability for earnings oversees that have not been remitted. The Company will utilize NOLs to offset any Transition Tax assessed.

In ~~accordance with ASC Topic 740, Income Taxes, and~~December 2017, the SEC staff issued SAB 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of H.R.1. The Company ~~has estimated~~did not record any adjustments in the year ended December 31, 2018 to provisional amounts that ~~no provisional charge will be recorded related~~were material to ~~the TCJA based on~~ its ~~initial analysis using available information and estimates. Given the significant complexity~~financial statements. As of the TCJA, anticipated guidance from the U.S. Treasury Department about implementing the TCJA and the potential for additional guidance from the SEC or the FASB related to the TCJA or additional information becoming available,December 31, 2018, the Company’s ~~provisional charge may be adjusted during 2018 and~~accounting treatment is ~~expected to be finalized no later than December 31, 2018. Other provisions of the TCJA that impact future tax years are still being assessed.~~complete.

Our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TCJA may require further adjustments and changes in our estimates. The final determination of the TCJA and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA.

~~(14)~~(15) EARNINGS (LOSS) PER SHARE

The Company calculates earnings per share in accordance with ASC Topic 260, “Earnings per Share.” The following table reconciles earnings per share for the three and six months ended January 31, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended January 31,						Six Months Ended January 31,						Three Months Ended January 31,						Six Months Ended January 31,
	2018			2017			2018			2017			2019			2018			2019			2018
	(In thousands, except per share data)												(In thousands, except per share data)
Net income (loss)	$	65,089		$	(2,906	)	$	59,852		$	(11,449	)	$	(11,753	)	$	59,818		$	(19,118	)	$	54,581
Less: Preferred dividends on redeemable preferred stock		(259	)		—			(259	)		—			(536	)		(270	)		(1,073	)		(270	)

Net income (loss) attributable to common stockholders	$	64,830		$	(2,906	)	$	59,593		$	(11,449	)		(12,289	)		59,548			(20,191	)		54,311

Effect of dilutive securities:
5.25% Convertible Senior Notes		1,748			—			3,459			—			—			1,748			—			3,459
Redeemable preferred stock		259			—			259			—			—			259			—			259

Net income (loss) attributable to common stockholders after assumed conversions	$	66,837		$	(2,906	)	$	63,311		$	(11,449	)	$	(12,289	)	$	61,555		$	(20,191	)	$	58,029


Weighted average common shares outstanding		58,341			55,083			56,776			55,031			60,935			58,341			60,974			56,776
Weighted average common equivalent shares arising from dilutive stock options, restricted stock, convertible notes and convertible preferred stock		20,742			—			16,107			—			—			20,742			—			16,107

Weighted average number of common and potential common shares		79,083			55,083			72,883			55,031			60,935			79,083			60,974			72,883

Basic net earning (loss) per share attributable to common stockholders:	$	1.11		$	(0.05	)	$	1.05		$	(0.21	)
Diluted net earning (loss) per share attributable to common stockholders:	$	0.85		$	(0.05	)	$	0.87		$	(0.21	)
Basic net earnings (loss) per share attributable to common stockholders:													$	(0.20	)	$	1.02		$	(0.33	)	$	0.96
Diluted net earnings (loss) per share attributable to common stockholders:													$	(0.20	)	$	0.78		$	(0.33	)	$	0.80

Basic earnings per common share is calculated using the weighted-average number of common shares outstanding during the period. Diluted earnings per common share, if any, gives effect to diluted stock options (calculated based on the treasury stock method),non-vested restricted stock shares purchased under the employee stock purchase plan and shares issuable upon debt or preferred stock conversion (calculated using anas-if converted method).

For both the three and six months ended January 31, 2019, approximately 28.9 million, common stock equivalent shares were excluded from the denominator in the calculation of diluted earnings per share as their inclusion would have been antidilutive.

For both the three and six months ended January 31, 2018, approximately 0.5 million common stock equivalent shares were excluded from the denominator in the calculation of diluted earnings per share as their inclusion would have been antidilutive.

For the three and six months ended January 31, 2017, approximately 14.2 million and 14.5 million, respectively, common stock equivalent shares were excluded from the denominator in the calculation of diluted earnings per share as their inclusion would have been antidilutive.

~~(15)~~

(16) SHARE-BASED PAYMENTS

The following table summarizes share-based compensation expense related to employee stock options, employee stock purchases and ~~employee and non-employee~~non-vested ~~and vested~~ shares for the three and six months ended January 31, ~~2018~~2019 and ~~2017,~~2018, which was allocated as follows:


	Three Months Ended January 31,				Six Months Ended January 31,				Three Months Ended January 31,					Six Months Ended January 31,
	2018		2017		2018		2017		2019			2018		2019		2018
	(In thousands)								(In thousands)
Cost of revenue	$	1	$	15	$	12	$	31	$	—		$	1	$	—	$	12
Selling, general and administrative		7,104		174		7,385		350		(22	)		7,104		770		7,385

	$	7,105	$	189	$	7,397	$	381	$	(22	)	$	7,105	$	770	$	7,397

During December 2017, the Board, upon the recommendation of the Special Committee and the Human Resources and Compensation Committee of the Board (the “Compensation Committee”), approved equity grants to certain members of the Board, in each case effective upon the closing of the IWCO Acquisition and in consideration for current and future services to the Company and which are being accounted for in accordance with ASC 505-50, Equity—Equity Based Payments to Non-Employees. Certain of these non-employee awards are subject to market conditions in order to vest. Additionally, some of the awards are subject to shareholder approval. The expense for the three months ended January 31, 2018 related to these non-employee awards was $6.6 million.Company.

At January 31, ~~2018,~~2019, there was an immaterial ~~balance of total~~amount unrecognized compensation cost related to Stock Options issued under the Company’s plans. At January 31, ~~2018,~~2019, there was approximately ~~$1.1~~$0.7 million of total unrecognized compensation cost related tonon-vested share-based compensation awards under the Company’s plans.

~~(16)~~(17) COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) combines net income (loss) and other comprehensive items. Other comprehensive items represent certain amounts that are reported as components of stockholder’s equity in the accompanying condensed consolidated balance sheets.

Accumulated other comprehensive items consist of the following:


	Foreign currency items		Pension items			Unrealized gains (losses) on securities		Total		Foreign currency items		Pension items			Unrealized gains (losses) on securities			Total
	(In thousands)									(In thousands)
Accumulated other comprehensive income (loss) at July 31, 2017	$	7,522	$	(3,376	)	$	167	$	4,313
Accumulated other comprehensive income (loss) at July 31, 2018										$	6,348	$	(3,795	)	$	181		$	2,734
Foreign currency translation adjustment		3,926		—			—		3,926		332		—			—			332
Net unrealized holding gain on securities		—		—			16		16		—		—			(89	)		(89	)
Pension liability adjustments		—		26			—		26		—		(64	)		—			(64	)

Net current-period other comprehensive income		3,926		26			16		3,968
Net current-period other comprehensive income (loss)											332		(64	)		(89	)		179

Accumulated other comprehensive income (loss) at January 31, 2018	$	11,448	$	(3,350	)	$	183	$	8,281
Accumulated other comprehensive income (loss) at January 31, 2019										$	6,680	$	(3,859	)	$	92		$	2,913

~~(17)~~(18) SEGMENT INFORMATION

The Company has five operating segments: Americas; Asia; Europe; Direct Marketing; ande-Business. ~~Direct Marketing is a new operating segment which represents IWCO.~~ Based on the information provided to the Company’s chief operating decision-maker (“CODM”) for purposes of making decisions about allocating resources and assessing performance and quantitative thresholds, the Company has determined that it has ~~four~~five reportable segments: Americas, Asia, Europe, ~~and~~ Direct ~~Marketing. In addition to its four reportable segments, the Company reports an All Other category. The All Other category primarily represents the~~Marketing and~~e-Business~~e-Business. ~~operating segment.~~ The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance, share-based compensation and acquisition costs which are not allocated to the Company’s reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, Notes payables and other assets and liabilities which are not identifiable to the operations of the Company’s operating segments. All significant intra-segment amounts have been eliminated.

Management evaluates segment performance based on segment net revenue, operating income (loss) and “adjusted operating income (loss)”, which is defined as the operating income (loss) excluding net charges related to depreciation, amortization of intangible assets, long-lived asset impairment, share-based compensation ~~acquisition related costs~~ and restructuring. These items are excluded because they may be considered to be of anon-operational ornon-cash nature. Historically, the Company has recorded significant impairment and restructuring charges and therefore management uses adjusted operating income to assist in evaluating the performance of the Company’s core operations.

Summarized financial information of the Company’s continuing operations by operating segment is as follows:


	Three Months Ended January 31,						Six Months Ended January 31,						Three Months Ended January 31,						Six Months Ended January 31,
	2018			2017			2018			2017			2019			2018			2019			2018
	(In thousands)												(In thousands)
Net revenue:
Americas	$	13,764		$	27,183		$	28,603		$	53,061		$	16,709		$	13,764		$	34,149		$	28,603
Asia		36,290			38,861			79,802			81,734			44,555			36,290			88,811			79,802
Europe		37,893			44,910			76,283			90,091			20,450			37,893			39,971			76,283
Direct Marketing		56,913			—			56,913			—			118,447			59,532			246,541			59,532
All Other		6,259			6,614			12,040			14,009
e-Business														6,062			6,259			11,884			12,040

	$	151,119		$	117,568		$	253,641		$	238,895		$	206,223		$	153,738		$	421,356		$	256,260

Operating income (loss):
Americas	$	(2,285	)	$	(1,720	)	$	(4,484	)	$	(5,576	)	$	(3,193	)	$	(2,287	)	$	(4,019	)	$	(4,486	)
Asia		15,730			2,312			19,899			4,089			5,367			15,723			10,495			19,892
Europe		(3,464	)		40			(6,324	)		(2,551	)		(1,354	)		(3,459	)		(2,826	)		(6,319	)
Direct Marketing		(2,825	)		—			(2,825	)		—			6,695			(3,952	)		11,462			(3,952	)
All Other		(1,350	)		(889	)		(2,795	)		(545	)
e-Business														(961	)		(1,346	)		(2,109	)		(2,791	)

Total Segment operating income (loss)		5,806			(257	)		3,471			(4,583	)		6,554			4,679			13,003			2,344
Corporate-level activity		(10,382	)		(1,247	)		(11,877	)		(2,563	)		(4,428	)		(10,382	)		(7,341	)		(11,877	)

Total operating loss		(4,576	)		(1,504	)		(8,406	)		(7,146	)
Total operating income (loss)														2,126			(5,703	)		5,662			(9,533	)

Total other expense		8,199			1,075			8,720			3,427			(12,474	)		(8,200	)		(22,264	)		(8,721	)

Loss before income taxes	$	(12,775	)	$	(2,579	)	$	(17,126	)	$	(10,573	)	$	(10,348	)	$	(13,903	)	$	(16,602	)	$	(18,254	)

~~Net~~For the three and six months ended January 31, 2018, the net revenue and operating loss associated with Direct Marketing is for the period from December 15, 2017 to January 31, 2018. ~~The~~For this period, the Direct Marketing operating loss includes certain purchase accounting adjustments associated with the IWCO acquisition.


	January 31, 2018		July 31, 2017		January 31, 2019		July 31, 2018
	(In thousands)				(In thousands)
Total assets:
Americas	$	21,944	$	21,876	$	21,886	$	22,820
Asia		51,805		63,819		42,475		44,322
Europe		57,039		64,639		37,026		37,223
Direct Marketing		646,840		—		620,036		642,820
All Other		20,020		20,703
e-Business						15,266		15,758

Sub-total - segment assets		797,648		171,037
Sub-total—segment assets						736,689		762,943
Corporate		72,462		110,261		74,355		64,107

	$	870,110	$	281,298	$	811,044	$	827,050

Summarized financial information of the Company’s net revenue from external customers by group of services is as follows:


	Three Months Ended January 31,				Six Months Ended January 31,				Three Months Ended January 31,				Six Months Ended January 31,
	2018		2017		2018		2017		2019		2018		2019		2018
	(In thousands)								(In thousands)
Supply chain services	$	87,947	$	110,954	$	184,688	$	224,886	$	81,714	$	87,947	$	162,931	$	184,688
e-Business services										6,062		6,259		11,884		12,040
Direct Marketing		56,913		—		56,913		—		118,447		59,532		246,541		59,532
e-Business services		6,259		6,614		12,040		14,009

	$	151,119	$	117,568	$	253,641	$	238,895	$	206,223	$	153,738	$	421,356	$	256,260

As of January 31, ~~2018,~~2019, approximately ~~$567.6~~$95.2 million of the Company’s long-lived assets were located in the U.S.A. As of July 31, ~~2017,~~2018, approximately ~~$9.3~~$101.8 million of the Company’s long-lived assets were located in the U.S.A.

For the three months ended January 31, 2019, the Company’s net revenues within U.S.A., China and Netherlands were $136.3 million, $37.9 million and $14.4 million, respectively. For the three months ended January 31, 2018, the Company’s net revenues within U.S.A., China ~~Netherlands~~ and ~~Czech Republic~~Netherlands were $72.0 million, $28.2 million and $16.5 million, ~~and $18.3 million,~~ respectively.

For the ~~three~~six months ended January 31, ~~2017,~~2019, the Company’s net revenues within U.S.A., China and Netherlands ~~and Czech Republic~~ were ~~$27.5~~$282.4 million, ~~$31.9 million, $20.0~~$74.5 million and ~~$21.7~~$29.3 million, respectively.

For the six months ended January 31, 2018, the Company’s net revenues within U.S.A., China ~~Netherlands~~ and ~~Czech Republic~~Netherlands were $87.1 million, $63.0 million ~~$31.8 million~~ and $40.8 million, respectively. For the six months ended January 31, 2017, the Company’s net revenues within U.S.A., China, Netherlands and Czech Republic were $54.3 million, $68.1 million, $36.8 million and $48.0$31.8 million, respectively.

~~(18)~~(19) RELATED PARTY TRANSACTIONS

As of January 31, 2019, SPHG Holdings and its affiliates beneficially owned approximately 52% of our outstanding capital stock which includes restricted stock held by Warren G. Lichtenstein, our Interim Chief Executive Officer and the Executive Chairman of our Board, is also the Executive Chairman of Steel Holdings GP. Glen Kassan, a Director and our Vice Chairman of the Board and former Chief Administrative Officer, is also affiliated with Steel Holdings GP. Jack L. Howard and William T. Fejes, Jr., directors of the Company, are also affiliated with Steel Holdings GP.

As of January 31, 2019, and July 31, 2018, SPHG Holdings held $14.9 million principal amount of the Company’s 5.25% Convertible Senior Notes On February 28, 2019, the Company issued a 7.5% Convertible Senior Unsecured Note in the amount of $14.9 million to SPHG Holdings (see note 21).

Preferred Stock Transaction and Warrant Repurchase

On December 15, 2017, the Company entered into a Preferred Stock Purchase Agreement with SPHG Holdings, pursuant to which the Company issued 35,000 shares of the Company’s newly created Series C Convertible Preferred Stock, par value $0.01 per share, ~~(the Preferred Stock),~~ to SPHG Holdings at a price of $1,000 per share, for an aggregate purchase consideration of $35.0 million. The terms, rights, obligations and preferences of the Preferred Stock are set forth in a Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of the Company (the a Series C Certificate of Designations), which has been filed with the Secretary of State of the State of Delaware.

Under the Series C Certificate of Designations, each share of Preferred Stock can be converted into shares of the our Common Stock, at an initial conversion price equal to $1.96 per share, subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction. Holders of the Preferred Stock will also receive cumulative dividends at 6% per annum payable in cash or Common Stock. If at any time the closing bid price of the Company’s Common Stock exceeds 170% of the conversion price for at least five consecutive trading days (subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), the Company has the right to require each holder of Preferred Stock to convert all, or any whole number, of shares of the Preferred Stock into Common Stock.

The Preferred Stock Transaction was approved and recommended to the Board by the Special Committee of the Board. Each member of the Special Committee was independent and not affiliated with Steel Holdings GP, which controls the power to vote and dispose of the securities held by SPHG Holdings and its affiliates.

On December 15, 2017, contemporaneously with the closing of the Preferred Stock Transaction, the Company entered into a Warrant Repurchase Agreement with Steel Holdings, an affiliate of SPHG Holdings, pursuant to which the Company repurchased for $100 the warrant to acquire 2,000,000 shares of the Common Stock that the Company had previously issued to Steel Holdings. The Warrant, which was to expire in 2018, was terminated by the Company upon repurchase.

Management Services Agreement

On December 24, 2014, the Company entered into a Management Services Agreement with SP Corporate Services LLC (“SP Corporate”), effective as of January 1, 2015 (as amended, the “Management Services Agreement”). SP Corporate iswas at the time of signing an indirect wholly owned subsidiary of Steel Partners Holdings L.P. and iswas a related party. Pursuant to the Management Services Agreement, SP Corporate provided the Company and its subsidiaries with the services of certain employees, including certain executive officers, and other corporate services.

The Management Services Agreement had an initial term of six months. On June 30, 2015, the Company entered into an amendment that extended the term of the Management Services Agreement to December 31, 2015 and provided for automatic renewal for successive one year periods, unless and until terminated in accordance with the terms set forth therein, which include, under certain circumstances, the payment by the Company of certain termination fees to SP Corporate. On March 10, 2016, the Company entered into a Second Amendment to the Management Services Agreement with SPH Services, Inc. (“SPH Services”) pursuant to which SPH Services assumed rights and responsibilities of SP Corporate and the services provided by SPH Services to the Company were modified pursuant to the terms of the amendment. SPH Services is the parent of SP Corporate and an affiliate of SPHG Holdings. On March 10, 2016, the Company entered into a Transfer Agreement with SPH Services pursuant to which the parties agreed to transfer to the Company certain individuals who provide corporate services to the Company (the “Transfer Agreement”). SP Corporate and Steel Partners LLC merged with and into SPH Services, with SPH Services surviving. SPH Services has since changed its name to Steel Services Ltd. (“Steel Services”).

On September 1, 2017, the Company entered into a Third Amendment to the Management Services Agreement, with Steel Services Ltd. (“Steel Services”) a related party, which reduced the fixed monthly fee paid by the Company to Steel Services under the Management Services Agreement from $175,000 per month to $95,641 per month. The monthly fee is subject to review and adjustment by agreement between the Company and Steel Services for periods commencing in fiscal 2016 and beyond. Additionally, the Company may be required to reimburse Steel Services and its affiliates for all reasonable and necessary business expenses incurred on our behalf in connection with the performance of the services under the Management Services Agreement, including travel expenses. The Management Services Agreement provides that, under certain circumstances, the Company may be required to indemnify and hold harmless Steel Services and its affiliates and employees from any claims or liabilities by a third party in connection with activities or the rendering of services under the Management Services Agreement. Total expenses incurred related to this agreement for the three ~~and six~~ months ended January 31, 2019 and 2018 were $0.4 million and ~~$0.9~~$0.5 million, respectively. Total expenses incurred related to this agreement for the ~~three and~~ six months ended January 31, ~~2017~~2019 and 2018 were ~~$0.5~~$0.7 million and ~~$1.1~~$0.8 million, respectively. As of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, amounts due to ~~SP Corporate and~~ Steel Services were ~~$0.5~~$0.1 million and ~~$0.3~~$0.2 million, respectively.

The Related Party Transactions Committee of the Board (the “Related Party Transactions Committee”) approved the entry into the Management Services Agreement (and the first two amendments thereto) and the Transfer Agreement. The Audit Committee of the Board of Directors (the “Audit Committee”) approved the third amendment to the Management Services Agreement. The Related Party Transactions Committee held the responsibility to review, approve and ratify related party transactions from November 20, 2014, until October 11, 2016. On October 11, 2016, the Board adopted a Related Person Transaction Policy that is administered by the Audit Committee and applies to all related party transactions. As of October 11, 2016, the Audit Committee reviews all related party transactions on an ongoing basis and all such transactions must be approved or ratified by the Audit Committee.

On December 15, 2017, the Board, upon the recommendation of the Special Committee and the Compensation Committee, approved ~~a total of 5.5 million~~ restricted stock grants and market performance based restricted stock grants tonon-employee directors Messrs. Howard, Fejes and Lichtenstein, the Executive Chairman of the Board, in each case effective upon the closing of the IWCO Acquisition (the “Grant Date”) and in consideration for current and future services to the Company. Messrs. Howard ~~Fejes~~ and Lichtenstein are ~~all~~ affiliated with Steel Holdings GP, which is a wholly-owned subsidiary of Steel Holdings. Mr. Fejes is currently affiliated with Steel Services, an indirect wholly owned subsidiary of Steel Holdings. These awards were measured based on the fair market value on the Grant Date. ~~Total expense incurred relating to these grants for the three and six months ended January 31, 2018 was $6.6 million.~~

Mutual Securities, Inc. (“Mutual Securities”) serves as the broker and record-keeper for all the transactions associated with the Trading Securities. ~~An officer of SP Corporate and~~Mr. Howard, a director of the ~~General Partner of Steel Holdings~~Company, is a registered principal of Mutual Securities. Commissions charged by Mutual Securities are generally commensurate with commissions charged by other institutional brokers, and the Company believes its use of Mutual Securities is consistent with its desire to obtain best price and execution. During the three and six months ended January 31, ~~2018~~2019 and ~~2017,~~2018, Mutual Securities received an immaterial amount in commissions associated with these transactions.

~~(19)~~(20) FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES

ASC Topic 820 provides that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

Level 1:

Observable inputs such as quoted prices for identical assets or liabilities in active markets

Level 2:

Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs

Level 3:

Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price the assets or liabilities

The carrying value of cash and cash equivalents, accounts receivable, ~~funds held for clients,~~restricted cash, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the short maturity of these instruments. We believe that the carrying value of our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on

the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The ~~fair values of the Company’s Trading Securities are estimated using quoted market prices. The~~ defined benefit plans have 100% of their assets invested in ~~insurance contracts~~bank-managed portfolios of debt securities and ~~bank-managed portfolios.~~other assets. Conservation of capital with some conservative growth potential is the strategy for the plans. The Company’s pension plans are outside the United States, where asset allocation decisions are typically made by an independent board of trustees. Investment objectives are aligned to generate returns that will enable the plans to meet their future obligations. The Company acts in a consulting and governance role in reviewing investment strategy and providing a recommended list of investment managers for each plan, with final decisions on asset allocation and investment manager made by local trustees.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following tables present the Company’s financial assets measured at fair value on a recurring basis as of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, classified by fair value hierarchy:


			Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
(In thousands)	January 31, 2018		Level 1		Level 2		Level 3		January 31, 2019		Level 1		Level 2		Level 3
Assets:
Money market funds	$	41,034	$	41,034	$	—	$	—	$	29,653	$	29,653	$	—	$	—

			Fair Value Measurements at Reporting Date Using
(In thousands)	July 31, 2017		Level 1		Level 2		Level 3
Assets:
Marketable equity securities	$	11,898	$	11,898	$	—	$	—
Money market funds		85,683		85,683		—		—


			Fair Value Measurements at Reporting Date Using
(In thousands)	July 31, 2018		Level 1		Level 2		Level 3
Assets:
Money market funds	$	47,186	$	47,186	$	—	$	—

There were no transfers between Levels 1, 2 or 3 during any of the periods presented.

When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

The Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were certain assets subject to long-lived asset impairment. The Company reviews the carrying amounts of these assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount of the asset group or reporting unit is not recoverable and exceeds its fair value. The Company estimated the fair values of assets subject to impairment based on the Company’s own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available.

Fair Value of Financial Instruments

The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, customer deposits, accounts payable, ~~funds held for clients~~restricted cash and debt, and are reflected in the financial statements at cost. With the exception of the Notes payable and long-term debt, cost approximates fair value for these items due to their short-term nature. We believe that the carrying value of our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates.

~~Included in Trading Securities in the accompanying balance sheet are marketable equity securities. These instruments are valued at quoted market prices in active markets.~~

Included in cash and cash equivalents in the accompanying balance sheet are money market funds. These are valued at quoted market prices in active markets.

The following table presents the Company’s Notes payable not carried at fair value:

   January 31, 2018    July 31, 2017
   Carrying
Amount    Fair Value    Carrying
Amount    Fair Value    Fair Value
Hierarchy
   (In thousands)
Notes payable
   $ 62,062    $ 66,188    $ 59,758    $ 63,852    Level 1


	January 31, 2019				July 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Fair Value Hierarchy
	(In thousands)
Notes payable	$	63,457	$	63,936	$	64,530	$	66,658		Level 1

The fair value of ~~our~~the Company’s Notes payable represents the value at which ~~our~~its lenders could trade ~~our~~its debt within the financial markets, and does not represent the settlement value of these ~~long-term~~ debt liabilities to us. The fair value of the Notes payable could vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The Notes payable are traded and their fair values are based upon traded prices as of the reporting dates.

(21) SUBSEQUENT EVENTS

On March 18, 2014, the Company entered an indenture with Wells Fargo Bank, National Association, as trustee relating to the Company’s issuance of $100 million of 5.25% Convertible Senior Notes (the Notes). The Notes matured on March 1, 2019, with a balance due of $65.603 million, including interest to the March 1, 2019 maturity date. Included in the balance due was a Note held by SPHG Holdings in the principal amount of $14.9 million. The total $65.6 million balance due was paid in full by the Company from available cashon-hand, including the $14.9 million from the proceeds of the Steel Note Transaction entered into on February 28, 2019, and described below.

Steel Note Transaction

On February 28, 2019, the Company entered into that certain 7.50% Convertible Senior Note Due 2024 Purchase Agreement (the “Steel Note Purchase Agreement”) with SPHG Holdings, whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for a 7.50% Convertible Senior Note due 2024 (the “Steel Note”) (the “ Steel Note Transaction”).

On February 28, 2019, the Company issued the Steel Note in the amount of $14.9 million to SPHG Holdings. The Steel Note bears interest at the rate of 7.50% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019. The Steel Note will mature on March 1, 2024 (the “Steel Note Maturity Date”), unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such maturity date.

The Company has the right to prepay the Steel Note at any time, upon 10 days’ prior written notice, in whole or in part, without penalty or premium, at a price equal to 100% of the then outstanding principal amount of the Steel Note plus accrued and unpaid interest. The Steel Note is an unsecured and unsubordinated obligation of the Company, and will rank equal in right of payment with the Company’s other unsecured and unsubordinated indebtedness, but will be effectively subordinated in right of payment to any existing and future secured indebtedness and liabilities to the extent of the value of the collateral securing those obligations, and structurally subordinated to the indebtedness and other liabilities of the Company’s subsidiaries. The Steel Note contains other customary terms and conditions, including customary events of default.

At its election, the Company may pay some or all of the interest due on each Interest Payment Date by increasing the principal amount of the Steel Note in the amount of such interest due or any portion thereof (such payment of interest by increasing the principal amount of the Steel Note referred to as (“PIK Interest”), with the remaining portion of the interest due on such Interest Payment Date (or, at the Company’s election, the entire amount of interest then due) to be paid in cash by the Company. Following an increase in the principal amount of the Steel Note as a result of a payment of PIK Interest, the Steel Note will bear interest on such increased principal amount from and after the date of such payment of PIK Interest.

SPHG Holdings has the right to require the Company to repurchase the Steel Note upon the occurrence of certain fundamental changes, subject to certain conditions, at a repurchase price equal to 100% of the principal amount of the Steel Note plus accrued and unpaid interest. The Company will have the right to elect to cause the mandatory conversion of the Steel Note in whole, and not in part, at any time on or after March 6, 2022, subject to certain conditions including that the stock price of the Company exceeds a certain threshold.

SPHG Holdings has the right, at its option, prior to the close of business on the business day immediately preceding the Steel Note Maturity Date, to convert the Steel Note or a portion thereof that is $1,000 or an integral multiple thereof, into shares of common stock (if the Company has not received a required stockholder approval) or cash, shares of common stock or a combination of cash and shares of common stock, as applicable (if the Company has received a required stockholder approval), at an initial conversion rate of 421.2655 shares of common stock, which is equivalent to an initial conversion price of approximately $2.37 per share (subject to adjustment as provided in the Steel Note) per $1,000 principal amount of the Steel Note (the “Conversion Rate”)(subject to, and in accordance with, the settlement provisions of the Steel Note).

For any conversion of the Steel Note, if the Company is required to obtain and has not received approval from its stockholders in accordance with NASDAQ Stock Market Rule 5635 to issue 20% or more of the total shares of common stock outstanding upon conversion (including upon any mandatory conversion) of the Steel Note prior to the relevant conversion date (or, if earlier, the 45th Scheduled trading day immediately preceding the Steel Note Maturity Date), the Company shall deliver to the converting holder, in respect of each $1,000 principal amount of Steel Note being converted, a number of shares of common stock determined by reference to the Conversion Rate, together with a cash payment, if applicable, in lieu of delivering any fractional share of common stock based on the volume weighted average price (VWAP) of its common stock on the relevant conversion date, on the third Business Day immediately following the relevant conversion date.

The Company’s Board of Directors established a special committee (the “Special Committee”), consisting solely of independent directors not affiliated with SPHG Holdings, to review and consider a financing transaction including SPHG Holdings. The terms and conditions of the Steel Note Transaction were determined by the Special Committee to be fair and in the best interests of the Company, and the Special Committee recommended that the Board approve the Steel Note Transaction and the transactions contemplated thereby. The Board approved such transactions. Warren G. Lichtenstein, our Interim Chief Executive Officer and the Executive Chairman of our Board, is also the Executive Chairman of Steel Holdings GP. Jack L. Howard and William T. Fejes, Jr., directors of the Company, are also affiliated with Steel Holdings GP. Glen Kassan, a Director and our Vice Chairman of the Board and former Chief Administrative Officer, is also affiliated with Steel Holdings GP.

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The matters discussed in this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended that involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in Part II—Item 1A below and elsewhere in this report and the risks discussed in the Company’s Annual Report on Form10-K filed with the ~~SEC~~Securities and Exchange Commission (the “SEC”) on ~~October 16, 2017.~~December 4, 2018. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof, except as required by applicable securities laws and regulations.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form10-Q.

Overview

Steel Connect, Inc. (“Steel Connect” or the “Company”) is a diversified holding company with two wholly-owned subsidiaries, ModusLink Corporation (“ModusLink”) and IWCO Direct Holdings, Inc. (“IWCO” or “IWCO Direct”), that have market-leading positions in supply chain management and direct marketing.

ModusLink provides comprehensive physical and digital supply chain optimization services (the “Supply Chain ~~Business”~~business”) that are designed to improve clients’ revenue, cost, sustainability and customer experience objectives. We provide services to leading companies across a wide spectrum of industries, including consumer electronics, communications, computing, medical devices, software, and retail, among others. The Supply Chain ~~Business~~business operations are supported by a global footprint that includes more than 20 sites across North America, Europe, and the Asia Pacific region.

IWCO Direct delivers highly-effective data-driven marketing solutions for its customers, which represent some of the largest and most respected brands in the world. Its full range of services includes strategy, creative and production for multichannel marketing campaigns, along with one of the industry’s most sophisticated postal logistics programs for direct mail. Through its Mail-Gard^® product, IWCO Direct also offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services. IWCO Direct is the largest direct mail production provider in North America, with the largest platform of continuous digital print technology and a growing direct marketing agency service. Their solutions enable customers to improve Customer Lifetime Value (CLV), which in turn, has led to and longer customer relationships.

~~IWCO has administrative offices in Chanhassen, MN. and has three facilities in Chanhassen MN., one facility in Little Falls, MN., one facility in Warminster, PA. and two facilities in Hamburg PA.~~

~~ModusLink operates~~We operate an integrated physical and digital supply chain system infrastructure that extends fromfront-end order management through distribution and returns management. Thisend-to-end solution enables clients to link supply and demand in real-time, improve visibility and performance throughout the supply chain, and provide real-time access to information for greater collaboration and making informed business decisions. We believe that our clients can benefit from our global integrated business solution, especially given the increased usage of connected devices and digitalized solutions.

Historically, a significant portion of our revenue from our Supply Chain ~~Business~~business has been generated from clients in the computer and software markets. These markets, while large in size, are mature and, as a result, gross margins in these markets tend to be lower than other markets the Company operates in. To address this, in addition to the computer and software markets, we have expanded our sales focus to include additional markets such as communications and consumer electronics, with a long-term focus on expanding in growth industries, such as the connected home, and connected healthcare, among others. We believe these markets, and other verticals we operate in, may experience faster growth than our historical markets, and represent opportunities to realize higher gross margins on the services we offer. Companies in these markets often have significant need for a supply chain partner who will be an extension to their business models. We believe the scope of our service offerings, including value-added warehousing and distribution, repair and recovery, aftersales, returns management, financial management, entitlement management, contact center support, material planning and factory supply, ande-Business will increase the overall value of the supply chain solutions we deliver to our existing clients and to new clients.

Many of ModusLinks clients’ products are subject to seasonal consumer buying patterns. As a result, the services we provide to our clients are also subject to seasonality, with higher revenue and operating income typically being realized from handling our clients’ products during the first half of our fiscal year, which includes the holiday selling season. Furthermore, many of our clients’ have global operations and we believe they have been adversely impacted by continued economic pressures in certain global regions.

As a large portion of ~~ModusLink’s~~the Supply Chain business’ revenue comes from outsourcing services provided to clients such as retail products and consumer electronics companies, our operating performance has been and may continue to be adversely affected by declines in the overall performance within these sectors and uncertainty affecting the world economy. In addition, the drop in consumer demand for products of certain clients has had and may continue to have the effect of reducing our volumes and adversely affecting our revenue, gross margin and overall operating performance. Additionally, the markets for our supply chain services are generally very competitive, though we believe we have a compelling and differentiated offering due to the value-added services we provide, our commitment to client management, and our global reach. We also face pressure from our clients to continually realize efficiency gains in order to help our clients maintain their profitability objectives. Increased competition and client demands for efficiency improvements may result in price reductions, reduced gross margins and, in some cases, loss of market share. In addition, our profitability varies based on the types of services we provide and the regions in which we perform them. Therefore, the mix of revenue derived from our various services and locations can impact our gross margin results. Also, form factor changes, which we describe as the reduction in the amount of materials and product components used in our clients’ completed packaged product, can also have the effect of reducing our revenue and gross margin opportunities. As a result of these competitive and client pressures the gross margins in our supply chain business are low.

Many of the Supply Chain’s business’ clients products are subject to seasonal consumer buying patterns. As a result, the services we provide to our clients are also subject to seasonality, with higher revenue and operating income typically being realized from handling our clients’ products during the first half of our fiscal year, which includes the holiday selling season.

As a leading provider of data-driven direct marketing solutions, IWCO Direct’s products and services help clients create more effective marketing offers and communications across all marketing channels to create new and more loyal customers. With a nearly50-year legacy of printing and mailing services, the Company’s full range of expanded marketing services includes strategy, creative, and execution for omnichannel marketing campaigns, along with one of the industry’s most sophisticated postal logistics strategies for direct mail. Through Mail-Gard^®, IWCO Direct offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services.

IWCO Direct’s services include (a) development of direct mail and omnichannel marketing strategies (b) creative services to design direct mail, email, and online marketing (c) printing and compiling of direct mail pieces into envelopes ready for mailing (d) commingling services to sort mail produced for various customers, by destination to achieve optimized postal savings (e) and business continuity and disaster recovery services for critical communications to protect against unexpected business interruptions. The major markets served by IWCO Direct include financial services, Multiple-System Operations (MSO) (cable or direct-broadcast satellite TV systems), insurance and to a lesser extent subscription/services, healthcare, travel/hospitality and other. Direct mail is a critical piece of marketing for most of its current customers who use direct mail to acquire new customers. Management believes that direct mail will remain an important part of its customer’s budgets for the foreseeable future, based on its proven ability to enhance results when used as part of an omnichannel marketing strategy.

The printing, mailing, and marketing services industries are highly competitive and are expected to remain so. The printing industry has more than 40,000 companies in the U.S. and IWCO Direct is the largest printer in the direct mail category, according to the December 2017 PI 400, an annual ranking of all printers by industry trade publication, Printing Impressions. While the printing industry as a whole is experiencing a shift from paper-based to digital content, direct mail continues to drive the highest response rate for campaigns designed to acquire new customers, according to the Data and Marketing Association’s (DMA) 2018 Response Rate Report. IWCO Direct is expanding its services to provide omnichannel marketing solutions to leverage its leadership role in acquisition marketing for direct mail to include digital marketing campaigns that complement direct mail to drive a higher response across all channels. Significant downward pricing pressure, a significant shift from paper-based to digital marketing for acquisition marketing, availability of paper and price increases for this raw material, the ability to acquire and retain a skilled work force and/or regulatory issues that impact use of consumer data for marketing could adversely affect IWCO Direct’s earnings. IWCO Direct’s business is not typically subject to seasonal buying patterns.

IWCO is ISO/IEC 27001 Information Security Management System (ISMS) certified through BSI, reflecting its commitment to data security. IWCO has administrative offices in Chanhassen, MN. and has three facilities in Chanhassen MN., one facility in Little Falls, MN., one facility in Warminster, PA. and two facilities in Hamburg, PA.

Management evaluates operating performance based on net revenue, operating income (loss) and net income (loss) and a measure that we refer to as Adjusted EBITDA, defined as net income (loss) excluding net charges related to interest income, interest expense, income tax expense, depreciation, amortization of intangible assets, strategic consulting and other related professional fees, executive severance and employee retention, restructuring,non-cash charge related to a fair valuestep-up towork-in-process inventory, share-based compensation, impairment, unrealized foreign exchange gains and losses, net, othernon-operating gains and losses, net, and gains and losses on investments in affiliates and impairments. Among the key factors that will influence our performance are successful execution and implementation of our strategic initiatives, global economic conditions, especially in the technology sector, financial services, MSO and insurance.

We have developed plans and will continue to monitor plans to address process improvements and realize other efficiencies throughout our global footprint with a goal to reduce cost, remove waste and improve our overall gross margins. There can be no assurance that these actions will improve gross margins. For the three months ended January 31, 2019 and 2018, our gross margin percentage was 18.2% and 10.3%, respectively. Increased competition as well as industry consolidation and/or low demand for our clients’ products and services may hinder our ability to maintain or improve our gross margins, profitability and cash flows. We must continue to focus on margin improvement, through implementation of our strategic initiatives, cost reductions and asset and employee productivity gains in order to improve the profitability of our business and maintain our competitive position. We generally manage margin and pricing pressures in several ways, including efforts to target new markets, expand and enhance our service offerings, improve the efficiency of our processes and to lower our infrastructure costs. We seek to lower our cost to service clients by moving work to lower-cost venues, consolidating and leveraging our global facility footprint, drive process and efficiency reforms and other actions designed to improve the productivity of our operations.

IWCO’s services include (a) development of direct mail marketing strategies (b) creative services to design direct mail (c) printing and compiling of direct mail pieces into envelopes ready for mailing (d) comingling services to sort mail produced for various customers, by destination to achieve postal savings (e) also business continuity and disaster recovery services to protect against unexpected business interruptions. The major markets served by IWCO include Financial Services, Multiple-System Operations (cable or direct-broadcast satellite TV systems) Insurance and to a lesser extent Subscription/ Services, Healthcare, Travel/Hospitality and other. Direct mail is a critical piece of marketing for most of its current customers. The customers served by IWCO include some of the biggest brands in the world with the top ten customers accounting for 52% of its revenues, with no single customer accounting for greater than 7% of its revenues included in the period from the acquisition date of December 15, 2017 to January 31, 2018. IWCO’s differentiators include but not limited to its capacity to satisfy Tier 1 marketers, provide attractive economics to its clients and provides innovation on various formats. Management believes that direct mail will remain an important part of its customer’s budgets for the foreseeable future.

Historically, a limited number of key clients ~~have~~had accounted for a significant percentage of our revenue. For the three months ended January 31, ~~2018, our top~~2019, the Company’s ten largest clients ~~collectively~~ accounted for approximately ~~48%~~48.5% of ~~our~~consolidated net revenue. ~~We expect to continue to derive~~One client from the ~~vast majority~~computing market accounted for more than 10% of ~~our~~the Company’s consolidated net revenue ~~from sales to a small number of key clients, and we plan to expand into new markets and over time, diversify~~for the ~~concentration of revenue across additional clients.~~three months ended January 31, 2019. In general, we do not have any agreements which obligate any client to buy a minimum amount of services from us or designate us as an exclusive service provider. Consequently, our net revenue is subject to demand variability by our clients. The level and timing of orders placed by our clients vary for a variety of reasons, including seasonal buying byend-users, the introduction of new technologies and general economic conditions. By diversifying into new markets and improving the operational support structure for our clients, we expect to offset the adverse financial impact such factors may bring about.

For the three months ended January 31, 2019, the Company reported net revenue of $206.2 million, operating income of $2.1 million, loss before income taxes of $10.3 million and net loss of $11.8 million. For the six months ended January 31, 2019, the Company reported net revenue of $421.4 million, operating income of $5.7 million, loss before income taxes of $16.6 million and net loss of $19.1 million. For the three months ended January 31, 2018, the Company reported net revenue of ~~$151.1~~$153.7 million, operating loss of ~~$4.6~~$5.7 million, loss before income taxes of ~~$12.8~~$13.9 million and net income of ~~$65.1~~$59.8 million. For the six months ended January 31, 2018, the Company reported net revenue of ~~$253.6~~$256.3 million, operating loss of ~~$8.4~~$9.5 million, loss before income taxes of ~~$17.1~~$18.3 million and net income of ~~$59.9~~$54.6 million.

For the three months ended January 31, 2017, the Company reported net revenue of $117.6 million, operating loss of $1.5 million, loss before income taxes of $2.6 million and net loss of $2.9 million. For the six months ended January 31, 2017, the Company reported net revenue of $238.9 million, operating loss of $7.1 million, loss before income taxes of $10.6 million and net loss of $11.4 million.

At January 31, ~~2018,~~2019, we had cash and cash equivalents of ~~$106.4~~$92.9 million, and working capital of ~~$70.6~~$(7.9) million.

Basis of Presentation

The Company presents its financial information in accordance with accounting principles generally accepted in the United States, U.S. GAAP (or “GAAP”). The Company has five operating segments: Americas; Asia; Europe; Direct Marketing; ande-Business. ~~The~~Based on the information provided to the Company’s chief operating decision-maker for purposes of making decisions about allocating resources and assessing performance and quantitative thresholds, the Company has ~~four~~determined that it has five reportable segments: Americas, Asia, Europe, ~~and~~ Direct ~~Marketing. In addition to its four reportable segments, the Company reports an All Other category. The All Other category primarily represents the~~Marketing and~~e-Business~~e-Business. ~~operating segment.~~ The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance, share-based compensation and ~~finance,~~acquisition costs which are not allocated to the Company’s reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, ~~Notes~~notes payables and other assets and liabilities which are not identifiable to the operations of the Company’s operating segments.

All significant intercompany transactions and balances have been eliminated in consolidation.

Results of Operations

Three months ended January 31, ~~2018~~2019 compared to the three months ended January 31, ~~2017~~2018

Net Revenue:


	Three Months Ended January 31, 2018		As a % of Total Net Revenue			Three Months Ended January 31, 2017		As a % of Total Net Revenue			$ Change			% Change			Three Months Ended January 31, 2019		As a % of Total Net Revenue			Three Months Ended January 31, 2018		As a % of Total Net Revenue			$ Change			% Change
	(In thousands)																(In thousands)
Americas	$	13,764		9.1	%	$	27,183		23.1	%	$	(13,419	)		(49.4	%)	$	16,709		8.1	%	$	13,764		9.0	%	$	2,945			21.4	%
Asia		36,290		24.0	%		38,861		33.1	%		(2,571	)		(6.6	%)		44,555		21.6	%		36,290		23.6	%		8,265			22.8	%
Europe		37,893		25.1	%		44,910		38.2	%		(7,017	)		(15.6	%)		20,450		9.9	%		37,893		24.6	%		(17,443	)		(46.0	%)
Direct Marketing		56,913		37.7	%		—		0.0	%		56,913			—			118,447		57.4	%		59,532		38.7	%		58,915			99.0	%
All Other		6,259		4.1	%		6,614		5.6	%		(355	)		(5.4	%)
e-Business																		6,062		3.0	%		6,259		4.1	%		(197	)		(3.1	%)

Total	$	151,119		100.0	%	$	117,568		100.0	%	$	33,551			28.5	%	$	206,223		100.0	%	$	153,738		100.0	%	$	52,485			34.1	%

Net revenue increased by approximately ~~$33.6~~$52.5 million during the three months ended January 31, ~~2018,~~2019, as compared to the same period in the prior year. ~~This~~The change in net revenue was ~~primarily~~ driven by the increase in revenue associated with the acquisition of IWCO in December 2017, offset primarily by decreased revenues from ~~clients~~a client in the consumer electronics ~~and consumer products industries.~~industry. Fluctuations in foreign currency exchange rates had an insignificant impact on net revenues for the quarter ended January 31, ~~2018~~2019 as compared to the same period in the prior year.

During the three months ended January 31, ~~2018,~~2019, net revenue in the Americas region ~~decreased~~increased by approximately ~~$13.4~~$2.9 million. This ~~decrease~~increase in net revenue was primarily driven by ~~decreased revenues~~clients in the computing market, offset partially by a decrease in revenue from clients in the consumer electronics ~~and consumer products industries.~~market. Within the Asia region, the net revenue ~~decrease~~increase of approximately ~~$2.6~~$8.3 million primarily resulted from ~~lower~~higher revenues from programs in the computing and consumer electronics ~~market,~~markets, offset partially ~~offset~~ by ~~increase in~~lower revenues from ~~a program~~other clients in the ~~computing industry.~~consumer electronics industries. Within the Europe region, net revenue decreased by approximately ~~$7.0~~$17.4 million primarily due to ~~lower revenues from clients~~a client loss in the consumer electronics ~~and computing industries.~~industry. The loss of this client did not have a significant negative affect on income from operations. Net revenue for ~~All Other decreased by approximately $0.4 million primarily due to lower revenues from clients in~~e-Business remained consistent for the ~~consumer electronics and consumer products industries.~~three-month period.

Cost of Revenue:


	Three Months Ended January 31, 2018		As a % of Segment Net Revenue			Three Months Ended January 31, 2017		As a % of Segment Net Revenue			$ Change			% Change			Three Months Ended January 31, 2019		As a % of Segment Net Revenue			Three Months Ended January 31, 2018		As a % of Segment Net Revenue			$ Change			% Change
	(In thousands)																(In thousands)
Americas	$	14,330		104.1	%	$	26,177		96.3	%	$	(11,847	)		(45.3	%)	$	18,506		110.8	%	$	14,332		104.1	%	$	4,174			29.1	%
Asia		28,935		79.7	%		32,085		82.6	%		(3,150	)		(9.8	%)		35,453		79.6	%		28,942		79.8	%		6,511			22.5	%
Europe		37,792		99.7	%		41,135		91.6	%		(3,343	)		(8.1	%)		19,490		95.3	%		37,787		99.7	%		(18,297	)		(48.4	%)
Direct Marketing		47,505		83.5	%		—		0.0	%		47,505			—			89,930		75.9	%		51,251		86.1	%		38,679			75.5	%
All Other		5,607		89.6	%		6,973		105.4	%		(1,366	)		(19.6	%)
e-Business																		5,301		87.4	%		5,603		89.5	%		(302	)		(5.4	%)

Total	$	134,169		88.8	%	$	106,370		90.5	%	$	27,799			26.1	%	$	168,680		81.8	%	$	137,915		89.7	%	$	30,765			22.3	%

Cost of revenue consists primarily of expenses related to the cost of materials purchased in connection with the provision of supply chain management and direct marketing services as well as costs for salaries and benefits, contract labor, consulting, paper for direct mailing, fulfillment and shipping, and applicable facilities costs. Cost of revenue for the three months ended January 31, ~~2018~~2019 included materials procured on behalf of our supply-chain clients of ~~$55.0~~$50.4 million, as compared to ~~$68.0~~$55.0 million for the same period in the prior year, a decrease of ~~$13.0~~$4.6 million. Total cost of revenue increased by ~~$27.8~~$30.8 million for the three months ended January 31, ~~2018,~~2019, as compared to the same period in the prior year, primarily due to the increase in cost of revenue associated with the acquisition of IWCO, ~~which included a $7.0 million a non-cash charge related to a fair value “step-up” to work-in-process inventory which was recognized during the three month period ended January 31, 2018,~~ partially offset by lower material and labor costs associated with lower volume from clients in the consumer electronics and consumer products industries. Gross margin percentage for the current quarter increased to ~~11.2%~~18.2% from ~~9.5%~~10.3% in the prior year quarter, primarily due to the acquisition of ~~IWCO, partially offset by a reduction in revenues in the Americas and Europe.~~IWCO. For the three months ended January 31, ~~2018,~~2019, the Company’s gross margin percentages within the Americas, Asia, Europe and Direct Marketing segments were~~-4.1%,~~ ~~20.3%~~ -10.8%, ~~0.3%~~20.4%, 4.7% and ~~16.5%~~24.1%, respectively, as compared to gross margin percentages within the Americas, Asia, Europe and ~~Europe~~Direct Marketing segments of ~~3.7%~~-4.1%, ~~17.4%~~20.2%, 0.3% and ~~8.4%~~13.9%, respectively, for the same period of the prior year. Fluctuations in foreign currency exchange rates had an insignificant impact on gross margin for the quarter ended January 31, ~~2018.~~2019.

In the Americas, the ~~7.8~~6.7 percentage point decrease in gross margin, from ~~3.7%~~-4.1% to~~-4.1%~~ -10.8%, was primarily due to ~~declines in material costs and~~ a ~~reduction in force, offset by a corresponding unfavorable~~favorable shift in volumes ~~from clients~~offset by an increase in ~~the consumer electronics~~material and ~~consumer products industries.~~labor costs and certain client exit costs. In Asia, the ~~2.9~~0.2 percentage point increase in gross margin, from ~~17.4%~~20.2% to ~~20.3%~~20.4%, was primarily due to product ~~mix despite the decline in revenues.~~mix. In Europe, the ~~8.1~~4.4 percentage point ~~decrease~~increase in gross margin, from ~~8.4%~~0.3% to ~~0.3%~~4.7%, was attributable to ~~an unfavorable revenue mix~~a decline in the cost of materials associated with ~~clients~~a client loss in the consumer electronics ~~market.~~industry. Direct Marketing’s gross margins increased by 10.2 percentage points, from 13.9% to 24.1%, primarily due to a $7.0 millionnon-cash charge related to a fair value“step-up” towork-in-process inventory which was recorded during the three months ended January 31, 2018. The gross margin for ~~All Other~~e-Business was ~~10.4%~~12.6% for the three months ended January 31, ~~2018~~2019 as compared to~~-5.4%~~ 10.5% for the same period of the prior year. This increase of ~~15.8~~2.1 percentage points was due to a favorable revenue ~~mix primarily associated with clients in the consumer products and computing industries.~~mix.

Selling, General and Administrative Expenses:


	Three Months Ended January 31, 2018		As a % of Segment Net Revenue			Three Months Ended January 31, 2017		As a % of Segment Net Revenue			$ Change			% Change			Three Months Ended January 31, 2019		As a % of Segment Net Revenue			Three Months Ended January 31, 2018		As a % of Segment Net Revenue			$ Change			% Change
	(In thousands)																(In thousands)
Americas	$	1,719		12.5	%	$	2,537		9.3	%	$	(818	)		(32.2	%)	$	1,396		8.4	%	$	1,719		12.5	%	$	(323	)		(18.8	%)
Asia		4,317		11.9	%		4,119		10.6	%		198			4.8	%		3,820		8.6	%		4,317		11.9	%		(497	)		(11.5	%)
Europe		3,565		9.4	%		3,583		8.0	%		(18	)		(0.5	%)		2,314		11.3	%		3,565		9.4	%		(1,251	)		(35.1	%)
Direct Marketing		8,126		14.3	%		—		—			8,126			—			14,031		11.8	%		8,126		13.6	%		5,905			72.7	%
All Other		1,998		31.9	%		440		6.7	%		1,558			354.1	%

e-Business																		1,722		28.4	%		2,002		32.0	%		(280	)		(14.0	%)
Sub-total		19,725		13.1	%		10,679		9.1	%		9,046			84.7	%		23,283		11.3	%		19,729		12.8	%		3,554			18.0	%
Corporate-level activity		10,382					1,247					9,135			732.6	%		4,428					10,382					(5,954	)		(57.3	%)

Total	$	30,107		19.9	%	$	11,926		10.1	%	$	18,181			152.4	%	$	27,711		13.4	%	$	30,111		19.6	%	$	(2,400	)		(8.0	%)

Selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, information technology expenses, travel expenses, facilities costs, consulting fees, fees for professional services, depreciation expense, marketing expenses, share-based compensation expense, transaction costs and public reporting costs. Selling, general and administrative expenses during the three months ended January 31, ~~2018 increased~~2019 decreased by approximately ~~$18.2~~$2.4 million compared to the ~~three-month~~three months period ended January 31, ~~2017,~~2018, primarily due to lower share-based compensation expense ($7.1 million) which was recorded as part of Corporate-level-activity, lower professional fees ($1.1 million), lower employee related costs ($0.4 million), offset by the additional selling, general and administrative expenses associated with the Direct Marketing segment ($~~8.1~~5.9 million), ~~higher professional fees associated with the acquisition of IWCO ($2.2 million), higher share-based compensation expense ($6.9 million) which are recorded as part of Corporate-level-activity,~~ as well as other general and administrative costs. Direct Marketing expenses represent three months of expenses for January 31, 2019 as opposed to 1.5 months in fiscal year 2018, as the acquisition of IWCO was completed December 15, 2017. Fluctuations in foreign currency exchange rates had an insignificant impact on selling, general and administrative expenses for the quarter ended January 31, ~~2018.~~2019.

Amortization of Intangible Assets:

The intangible asset amortization of $7.8 million and $4.1 million, respectively, during the three months ended January 31, 2019 and 2018, relates to amortizable intangible assets acquired by the Company in connection with its acquisition of IWCO. Acquired intangible assets include trademarks, tradenames and customer relationships. The trademarks and tradenames intangible asset are being amortized on a straight line basis over a 3 year estimated useful life. The customer relationship intangible asset are being amortized on a double-declining basis over an estimated useful life of 15 years.

~~Restructuring, net:~~

   Three Months
Ended
January 31,
2018    As a %
of Segment
Net
Revenue Three Months
Ended
January 31,
2017    As a %
of Segment
Net
Revenue $ Change % Change
   (In thousands)
Americas
   $ —      0.0 % $ 189    0.7 % $ (189 ) (100.0 %)
Asia
   —      0.0 % 345    0.9 % (345 ) (100.0 %)
Europe
   —      0.0 % 152    0.3 % (152 ) (100.0 %)
All Other
   4    0.1 % 90    1.4 % (86 ) (95.6 %)






Total
   $ 4    0.0 % $ 776    0.7 % $ (772 ) (99.5 %)

The $0.8 million restructuring charge recorded during the three months ended January 31, 2017 primarily consisted of $0.2 million, $0.3 million $0.1 million and $0.1 million of employee-related costs in the Americas, Asia, Europe and~~e-Business,~~ ~~respectively, related to the workforce reduction of 18 employees in our global supply chain operations. Of this amount, $0.1 million related to contractual obligations.~~

Interest Income/Expense:

During the three months ended January 31, ~~2018~~2019 and ~~2017,~~2018, interest expense totaled approximately ~~$6.6~~$11.0 million and ~~$2.1~~$6.6 million, respectively. The increase in interest expense is primarily due to the additional debt associated with the acquisition of IWCO.

Other Gains (Losses), net:

The Company recorded foreign exchange ~~gains (losses)~~losses of approximately ~~$(1.4)~~$(1.5) million and ~~$29 thousand~~$(1.4) million during the three months ended January 31, 2019 and 2018, respectively. For the three months ended January 31, 2019, the net losses primarily related to realized and ~~2017,~~unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $(1.1) million, $(0.9) million and $0.5 million in Corporate, Asia and Europe, respectively. For the three months ended January 31, 2018, the net ~~gains~~losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $(2.3) million, $1.3 million and $(0.7) million in Corporate, Europe and Asia, respectively. For the three months ended January 31, 2017, the net gains primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $0.6 million, $(0.5) million and $(0.1) million in Corporate, Asia and Europe, respectively.

~~During the three months ended January 31, 2017, the Company recognized $1.0 million in net gains associated with its Trading Securities.~~

Income Tax Expense:

During the three months ended January 31, ~~2018,~~2019, the Company recorded income tax ~~benefit~~expense of approximately ~~$77.7~~$1.4 million, as compared to income tax ~~expense~~benefit of ~~$0.7~~$73.5 million for the same period in the prior fiscal year. The income tax benefit in the ~~current~~prior year quarter is related to the reduction of the Company’s valuation allowance associated with the IWCO acquisition of approximately $79.9 million, partially offset by income tax expense in certain jurisdictions where the Company operates, using the enacted tax rates in those jurisdictions.

The Company provides for income tax expense related to federal, state, and foreign income taxes. The Company continues to maintain a full valuation allowance against its deferred tax assets in the U.S. and certain of its foreign subsidiaries due to the uncertainty of realizing such benefits.

Results of Operations

Six months ended January 31, ~~2018~~2019 compared to the six months ended January 31, ~~2017~~2018

Net Revenue:


	Six Months Ended January 31, 2018		As a % of Total Net Revenue			Six Months Ended January 31, 2017		As a % of Total Net Revenue			$ Change			% Change			Six Months Ended January 31, 2019		As a % of Total Net Revenue			Six Months Ended January 31, 2018		As a % of Total Net Revenue			$ Change			% Change
	(In thousands)																(In thousands)
Americas	$	28,603		11.3	%	$	53,061		22.2	%	$	(24,458	)		(46.1	%)	$	34,149		8.1	%	$	28,603		11.2	%	$	5,546			19.4	%
Asia		79,802		31.5	%		81,734		34.2	%		(1,932	)		(2.4	%)		88,811		21.1	%		79,802		31.1	%		9,009			11.3	%
Europe		76,283		30.1	%		90,091		37.7	%		(13,808	)		(15.3	%)		39,971		9.5	%		76,283		29.8	%		(36,312	)		(47.6	%)
Direct Marketing		56,913		22.4	%		—		0.0	%		56,913			—			246,541		58.5	%		59,532		23.2	%		187,009			314.1	%
All Other		12,040		4.7	%		14,009		5.9	%		(1,969	)		(14.1	%)
e-Business																		11,884		2.8	%		12,040		4.7	%		(156	)		(1.3	%)

Total	$	253,641		100.0	%	$	238,895		100.0	%	$	14,746			6.2	%	$	421,356		100.0	%	$	256,260		100.0	%	$	165,096			64.4	%

Net revenue increased by approximately ~~$14.8~~$165.1 million during the six months ended January 31, ~~2018,~~2019, as compared to the same period in the prior year. ~~This~~The change in net revenue was ~~primarily~~ driven by the increase in revenue associated with the acquisition of IWCO in December 2017, offset primarily by decreased revenues from ~~clients~~a client in the consumer electronics ~~and consumer products industries.~~industry, which did not have a significant negative affect on income from operations. Fluctuations in foreign currency exchange rates had an insignificant impact on net revenues for the ~~quarter~~six months ended January 31, ~~2018~~2019 as compared to the same period in the prior year.

During the six months ended January 31, ~~2018,~~2019, net revenue in the Americas region ~~decreased~~increased by approximately ~~$24.5~~$5.5 million. This ~~decrease~~increase in net revenue was primarily driven by ~~decreased revenues~~clients in the computing market, offset partially by a decrease in revenue from clients in the consumer electronics ~~and consumer products industries.~~market. Within the Asia region, the net revenue ~~decrease~~increase of approximately ~~$1.9~~$9.0 million primarily resulted from ~~lower~~higher revenues from programs in the computing and consumer electronics ~~market,~~markets, offset partially ~~offset~~ by ~~increase in~~lower revenues from ~~a program~~other clients in the ~~computing industry.~~consumer electronics industries. Within the Europe region, net revenue decreased by approximately ~~$13.8~~$36.3 million primarily due to ~~lower revenues from clients~~a client loss in the consumer electronics industry. Net revenue for ~~All Other decreased by approximately $2.0 million primarily due to lower revenues from clients in~~e-Business remained consistent for the ~~consumer electronics industry.~~three month period.

Cost of Revenue:


	Six Months Ended January 31, 2018		As a % of Segment Net Revenue			Six Months Ended January 31, 2017		As a % of Segment Net Revenue			$ Change			% Change			Six Months Ended January 31, 2019		As a % of Segment Net Revenue			Six Months Ended January 31, 2018		As a % of Segment Net Revenue			$ Change			% Change
	(In thousands)																(In thousands)
Americas	$	29,632		103.6	%	$	52,965		99.8	%	$	(23,333	)		(44.1	%)	$	35,371		103.6	%	$	29,634		103.6	%	$	5,737			19.4	%
Asia		63,960		80.1	%		67,714		82.8	%		(3,754	)		(5.5	%)		70,948		79.9	%		63,967		80.2	%		6,981			10.9	%
Europe		75,520		99.0	%		84,392		93.7	%		(8,872	)		(10.5	%)		38,178		95.5	%		75,515		99.0	%		(37,337	)		(49.4	%)
Direct Marketing		47,505		83.5	%		—		—			47,505			—			190,611		77.3	%		51,251		86.1	%		139,360			271.9	%
All Other		11,000		91.4	%		13,293		94.9	%		(2,293	)		(17.2	%)
e-Business																		10,505		88.4	%		10,996		91.3	%		(491	)		(4.5	%)

Total	$	227,617		89.7	%	$	218,364		91.4	%	$	9,253			4.2	%	$	345,613		82.0	%	$	231,363		90.3	%	$	114,250			49.4	%

2019, as compared to the same period in the prior year, primarily due to the increase in cost of revenue associated with the acquisition of IWCO, partially offset by lower material and labor costs associated with lower volume from clients in the consumer electronics and consumer products ~~industries, offset by an increase in cost of revenue associated with the acquisition of IWCO.~~industries. Gross margin percentage for the current quarter increased to ~~10.3%~~18.0% from ~~8.6%~~9.7% in the prior year quarter, primarily due to the acquisition of ~~IWCO, partially offset by a reduction in revenues in the Americas and Europe.~~IWCO. For the six months ended January 31, ~~2018,~~2019, the Company’s gross margin percentages within the Americas, Asia, Europe and Direct Marketing segments were-3.6%, ~~19.9%~~20.1%, ~~1.0%~~4.5% and ~~16.5%~~22.7%, respectively, as compared to gross margin percentages within the Americas, Asia, Europe and ~~Europe~~Direct Marketing segments of ~~0.2%~~-3.6%, ~~17.2%~~19.8%, 1.0% and ~~6.3%~~13.9%, respectively, for the same period of the prior year. Fluctuations in foreign currency exchange rates had an insignificant impact on gross margin for the quarter ended January 31, ~~2018.~~2019.

In the Americas, the~~-3.8~~ ~~percentage point decline in~~ gross margin ~~from 0.2% to-3.6%,~~remained consistent, which was primarily due to ~~declines in material costs and~~ a ~~reduction in force, offset by a corresponding unfavorable~~favorable shift in volumes ~~from clients~~offset by an increase in ~~the consumer electronics~~material, labor and ~~consumer products industries.~~certain client exit costs. In Asia, the ~~2.7~~0.3 percentage point increase in gross margin, from ~~17.2%~~19.8% to ~~19.9%~~20.1%, was primarily due to product ~~mix despite a decline in revenues.~~mix. In Europe, the ~~5.3~~3.5 percentage point ~~decrease~~increase in gross margin, from ~~6.3%~~1.0% to ~~1.0%~~4.5%, was attributable to ~~an unfavorable revenue mix~~a decline in the cost of materials associated with ~~clients~~a client loss in the consumer electronics ~~market.~~industry. Direct Marketing’s gross margins increased by 8.8 percentage points, from 13.9% to 22.7%, primarily due to a $7.0 million non-cash charge related to a fair value “step-up” to work-in-process inventory which was recorded during the six months ended January 31, 2018. The gross margin for ~~All Other~~e-Business was ~~8.6%~~11.6% for the six months ended January 31, ~~2018~~2019 as compared to ~~5.1%~~8.7% for the same period of the prior year. This increase of ~~3.5~~2.9 percentage points was due to a favorable ~~revenue mix primarily associated with clients~~reduction in ~~the consumer products and computing industries.~~labor costs.

Selling, General and Administrative Expenses:


	Six Months Ended January 31, 2018		As a % of Segment Net Revenue			Six Months Ended January 31, 2017		As a % of Segment Net Revenue			$ Change			% Change			Six Months Ended January 31, 2019		As a % of Segment Net Revenue			Six Months Ended January 31, 2018		As a % of Segment Net Revenue			$ Change			% Change
	(In thousands)																(In thousands)
Americas	$	3,428		12.0	%	$	5,186		9.8	%	$	(1,758	)		(33.9	%)	$	2,797		8.2	%	$	3,455		12.1	%	$	(658	)		(19.0	%)
Asia		8,634		10.8	%		9,077		11.1	%		(443	)		(4.9	%)		7,453		8.4	%		8,635		10.8	%		(1,182	)		(13.7	%)
Europe		7,085		9.3	%		7,557		8.4	%		(472	)		(6.2	%)		4,619		11.6	%		7,087		9.3	%		(2,468	)		(34.8	%)
Direct Marketing		8,126		14.3	%		—		—			8,126			—			28,578		11.6	%		8,126		13.6	%		20,452			251.7	%
All Other		3,824		31.8	%		1,144		8.2	%		2,680			234.3	%
e-Business																		3,488		29.4	%		3,835		31.9	%		(347	)		(9.0	%)

Sub-total		31,097		12.3	%		22,964		9.6	%		8,133			35.4	%		46,935		11.1	%		31,138		12.2	%		15,797			50.7	%
Corporate-level activity		11,877					2,563					9,314			363.4	%		7,341					11,877					(4,536	)		(38.2	%)

Total	$	42,974		16.9	%	$	25,527		10.7	%	$	17,447			68.3	%	$	54,276		12.9	%	$	43,015		16.8	%	$	11,261			26.2	%

Selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, information technology expenses, travel expenses, facilities costs, consulting fees, fees for professional services, depreciation expense, marketing expenses, share-based compensation expense, transaction costs and public reporting costs. Selling, general and administrative expenses during the six months ended January 31, ~~2018~~2019 increased by approximately ~~$17.4~~$11.3 million compared to the six ~~month~~months period ended January 31, ~~2017,~~2018, primarily due to ~~the~~ additional selling, general and administrative expenses associated with the Direct Marketing segment ($~~8.1~~20.5 million), ~~higher professional fees associated with the acquisition of IWCO ($2.2 million), higher~~offset by lower share-based compensation expense ($~~6.9~~6.6 million) which ~~are~~was recorded as part of Corporate-level-activity, lower professional fees ($2.1 million), lower employee related costs ($1.1 million), as well as other general and administrative costs. Direct Marketing expenses represent of a full six months of expenses in fiscal year 2019 as opposed to 1.5 months in fiscal year 2018. Fluctuations in foreign currency exchange rates had an insignificant impact on selling, general and administrative expenses for the quarter ended January 31, ~~2018.~~2019.

Amortization of Intangible Assets:

The intangible asset amortization of $15.9 million and $4.1 million, respectively, during the six months ended January 31, 2019 and 2018, relates to amortizable intangible assets acquired by the Company in connection with its acquisition of ~~IWCO.~~IWCO on December 15, 2017. Acquired intangible assets include trademarks, tradenames and customer relationships. The trademarks and tradenames intangible asset are being amortized on a ~~straight line~~straight-line basis over a 3 year estimated useful life. The customer relationship intangible asset ~~are~~is being amortized on a double-declining basis over an estimated useful life of 15 years.

~~Restructuring, net:~~

   Six Months
Ended
January 31,
2018    As a %
of Segment
Net
Revenue Six Months
Ended
January 31,
2017    As a %
of Segment
Net
Revenue $ Change % Change
   (In thousands)
Americas
   $ 27    0.1 % $ 486    0.9 % $ (459 ) (94.4 %)
Asia
   1    0.0 % 854    1.0 % (853 ) (99.9 %)
Europe
   2    0.0 % 693    0.8 % (691 ) (99.7 %)
All Other
   11    0.1 % 117    0.8 % (106 ) (90.6 %)






Total
   $ 41    0.0 % $ 2,150    0.9 % $ (2,109 ) (98.1 %)

The $2.2 million restructuring charge recorded during the six months ended January 31, 2017 primarily consisted of $0.4 million, $0.7 million, $0.6 million and $0.1 million of employee-related costs in the Americas, Asia, Europe and~~e-Business,~~ ~~respectively, related to the workforce reduction of 68 employees in our global supply chain. Of this amount, $0.4 million related to contractual obligations.~~

Interest Income/Expense:

During the six months ended January 31, ~~2018~~2019 and ~~2017,~~2018, interest income was ~~$0.3~~$0.5 million and ~~$0.2~~$0.3 million, respectively.

During the six months ended January 31, ~~2018~~2019 and ~~2017,~~2018, interest expense totaled approximately ~~$8.7~~$22.0 million and ~~$4.1~~$8.7 million, respectively. The increase in interest expense primarily due to the additional debt associated with the acquisition of IWCO.

Other Gains (Losses), net:

The Company recorded foreign exchange ~~gains (losses)~~losses of approximately ~~$(2.1)~~$0.6 million and ~~$0.4~~$2.1 million during the six months ended January 31, 2019 and 2018, respectively. For the six months ended January 31, 2019, the net losses primarily related to realized and ~~2017,~~unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $0.6 million, $(0.5) million and $(0.5) million in Corporate, Asia and Europe, respectively. For the six months ended January 31, 2018, the net ~~gains~~losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $(2.2) million, $1.0 million and $(1.1) million in Corporate, Europe and Asia, respectively. For the six months ended January 31, 2017, the net gains primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $1.3 million, $(0.4) million and $(0.4) million in Corporate, Asia and Europe, respectively.

Income Tax Expense:

During the six months ended January 31, 2019, the Company recorded income tax expense of approximately $2.5 million. During the six months ended January 31, 2018, the Company recorded income tax benefit of approximately ~~$76.6 million. During the six months ended January 31, 2017, the Company recorded income tax expense of approximately $1.8~~$72.4 million. The income tax benefit during the six months ended January 31, 2018 is related to the reduction of the Company’s valuation allowance associated with the IWCO acquisition of approximately $79.9 million partially offset by income tax expense in certain jurisdictions where the Company operates, using the enacted tax rates in those jurisdictions.

Liquidity and Capital Resources

Historically, the Company has financed its operations and met its capital requirements primarily through funds generated from operations, the sale of our securities, ~~and~~ borrowings from lending ~~institutions.~~institutions and sale of facilities that were not fully utilized. As of January 31, ~~2018,~~2019, the ~~Company had available~~Company’s primary sources of liquidity consisted of cash and cash equivalents of ~~$106.4~~$92.9 million. AsThe Company’s ModusLink Corporation subsidiary has undistributed earnings from its foreign subsidiaries of approximately $11.6 million at January 31, ~~2018, the Company had~~2019, of which approximately ~~$27.0 million of cash and cash equivalents held outside of the U.S. Of this amount, approximately $2.5~~$2.4 million is considered to be permanently ~~invested~~reinvested due to certain restrictions under local laws ~~and $24.5 million is not subject~~as well as the Company’s plans to ~~permanent reinvestment.~~reinvest such earnings for future expansion in certain foreign jurisdictions. Due to the ~~Company’s U.S. net operating~~

~~loss carryforward~~changes reflected in the new tax law there is no U.S. tax payable upon repatriating the undistributed earnings of foreign subsidiaries considered not subject to permanent investment. Foreign withholding taxes would range from 0% to 10% on any repatriated funds.

For the Company, earnings and profits have been calculated at each subsidiary. The Company’s foreign subsidiaries are in an overall net deficit for earnings and profits purposes. As such, no adjustment has been made to U.S. taxable income in ~~2017~~2018 relating to this aspect of the new tax law. In future years, under the new tax law the Company will be able to repatriate its foreign earnings without incurring additional U.S. tax as a result of a 100% dividends received deduction. The Company believes that any future withholding taxes or state taxes associated with such a repatriation would be minor.

On June 30, 2014, two direct and wholly owned subsidiaries of the Company (the ~~ModusLink Borrowers)~~“ModusLink Borrowers”) entered into a revolving credit and security agreement (the ~~Credit Agreement)~~“Credit Agreement”), as borrowers and guarantors, with PNC Bank and National Association, as lender and as agent, respectively. The Credit Agreement has a five (5) year term which expires on June 30, 2019. It includes a maximum credit commitment of $50.0 million, is available for letters of credit (with a sublimit of $5.0 million) and has a $20.0 million uncommitted accordion ~~feature.~~feature (the “PNC Bank Credit Facility”). The actual maximum credit available under the Credit Agreement varies from time to time and is determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable and eligible inventory minus reserves determined by the Agent (including other reserves that the Agent may establish from time to time in its permitted discretion), all as specified in the Credit Agreement.

certain events and/or prior to taking certain actions. For greater clarity, if the undrawn availability, as more fully described in the Credit Agreement, is either equal to or less than $10.0 million, or the aggregate principal balance of the loans plus the undrawn amount of all letters of credit in each case outstanding on any date is equal to or greater than $30.0 million; then compliance with the minimum fixed charge coverage ratio is required. If triggered, the minimum fixed charge coverage ratio to be maintained, as of the end of each fiscal month, for the trailing period of twelve consecutive fiscal months then ended, would be not less than 1.0 to 1.0. During the quarter ended January 31, 2019, the Company did not meet the criteria that would cause its financial covenants to be applicable. As of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, the Company did not have any balance outstanding on the PNC Bank credit facility. At January 31, 2019, the Company had a readily available borrowing capacity under its PNC Bank Credit Facility of $4.6 million.

On March 18, 2014, the Company entered into an indenture (the ~~Indenture)~~“Indenture”) with Wells Fargo Bank, National Association, as trustee (the “Trustee”), relating to the Company’s issuance of $100 million of 5.25% Convertible Senior Notes (the ~~Notes)~~“Notes”). The Notes ~~bear~~bore interest at the rate of 5.25% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2014. The Notes ~~will mature~~matured on March 1, 2019, ~~unless earlier repurchased by~~at which time the ~~Company or converted by~~balance due was paid in full.

During the holder in accordance with their terms prior to such maturity date. Holders of the Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time prior to the close of business or the business day immediately preceding the maturity date. Each $1,000 of principal of the Notes will initially be convertible into 166.2593 shares of our common stock, which is equivalent to an initial conversion price of approximately $6.01 per share, subject to adjustment upon the occurrence of certain events, or, if the Company obtains the required consent from its stockholders, into shares of the Company’s common stock, cash or a combination of cash and shares of its common stock, at the Company’s election. If the Company has received stockholder approval, and it elects to settle conversions through the payment of cash or payment or delivery of a combination of cash and shares, the Company’s conversion obligation will be based on the volume weighted average prices (“VWAP”) of its common stock for each VWAP trading day in a 40 VWAP trading day observation period. The Notes and any of the shares of common stock issuable upon conversion have not been registered. Holders will have the right to require the Company to repurchase their Notes, at a repurchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, upon the occurrence of certain fundamental changes, subject to certain conditions. No fundamental changes occurred during the threesix months ended January 31, ~~2018. The~~2019, the Company ~~may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes. The Company will have the right to elect to cause the mandatory conversion~~purchased $3.7 million in face value of the Notes in ~~whole, and not in part,~~the open market at ~~any time on or after March 6, 2017, if the last reported sale~~a purchase price of ~~its common stock has been at least 130%~~$3.7 million. The loss of ~~the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date~~$0.1 million on ~~which the Company notifies holders~~this transaction is presented as a component of ~~its election to mandatorily convert the Notes, during any 30 consecutive trading day period ending on,~~other gains and ~~including, the trading day immediately preceding the date on which the Company notifies holders of its election to mandatorily convert the notes.~~losses. As of January 31, ~~2018~~2019 and July 31, ~~2017, the principal amount of the Notes was $67.6 million, for both periods. As of January 31,~~ 2018, ~~and July 31, 2017,~~ the net carrying value of the Notes was ~~$62.1~~$63.5 million and ~~$59.8~~$64.5 million, respectively.

As of January 31, 2019 and July 31, 2018, “SPHG Group Holdings LLC (“SPHG Holdings”) held $14.9 million principal amount of the Notes.

As previously mentioned the Notes matured on March 1, 2019. The balance due was $65.6 million including interest to the March 1st date. Included in the balance due was a Note held by SPH Group Holdings LLC in the principal amount of $14.9 million. The total amount was paid in full from available cash on hand including the $14.9 million from the proceeds of the SPHG Holdings Note.

On December 15, 2017, MLGS Merger Company, Inc., a ~~wholly owned~~Delaware corporation and newly formed wholly-owned subsidiary of the Company (“MLGS”), entered into a Financing Agreement (the Financing Agreement), by and among the MLGS (as the initial borrower), Instant Web, LLC, a Delaware corporation and wholly owned subsidiary of IWCO (as Borrower), IWCO, and certain of IWCO’s subsidiaries (together with IWCO, the Guarantors), the lenders from time to time party thereto, and Cerberus Business Finance, LLC, as collateral agent and administrative agent for the lenders. MLGS was the initial borrower under the Financing Agreement, but immediately upon the consummation of the acquisition of IWCO, ~~Acquisition,~~ as described above, Borrower became the borrower under the Financing Agreement

The Financing Agreement provides for $393.0 million term loan facility (the ~~Term Loan)~~“Term Loan”) and a $25.0 million revolving credit facility ~~(collectively,~~(the “Revolving Facility”) (together, the Cerberus Credit Facility). Proceeds of the Cerberus Credit Facility were used (i) to finance a portion of the IWCO Acquisition, (ii) to repay certain existing indebtedness of the Borrower and its subsidiaries, (iii) for working capital and general corporate purposes and (iv) to pay fees and expenses related to the Financing Agreement and the IWCO Acquisition. The Cerberus Credit Facility has a maturity of five years. Borrowings under the Cerberus Credit Facility bear interest, at the Borrower’s option, at a Reference Rate plus 3.75% or a LIBOR Rate plus 6.5%, each as defined the Financing Agreement. The initial interest rate under the Cerberus Credit Facility ~~will be~~is at the LIBOR Rate option. The Term Loan under the Cerberus Credit Facility is repayable in consecutive quarterly installments, each of which will be in an amount equal per quarter of ~~$1,500,000~~$1.5 million and each such installment to be due and payable, in arrears, on the last day of each calendar quarter commencing on March 31, 2018 and ending on the earlier of (a) December 15, 2022 and (b) upon the payment in full of all obligations under the Financing Agreement and the termination of all commitments under the Financing Agreement. Further, the Term Loan would be permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow, with a step-down to 25% when the Leverage Ratio (as defined in the Financing Agreement) is below 3.50:1.00; provided that, in any ~~fiscal~~calendar year, any voluntary prepayments of the Term Loan shall be credited against the Borrower’s “excess cash flow” prepayment obligations on adollar-for-dollar basis for such calendar year. Borrowings under the Financing Agreement are fully guaranteed by the Guarantors and are collateralized by substantially all the assets of the Borrower and the Guarantors and a pledge of all of the issued and outstanding equity interests of each of IWCO’s subsidiaries. The Financing Agreement contains certain representations, warranties, events of default, mandatory prepayment requirements, as well as certain affirmative and negative covenants customary for financing agreements of this type. These covenants include restrictions on borrowings, investments and dispositions, as well as limitations on the ability of the Borrower and the Guarantors to make certain capital expenditures and pay dividends. Upon the occurrence and during the continuation of an event of default under the Financing Agreement, the lenders under the Financing Agreement may, among other things, terminate all commitments and declare all or a portion of the loans under the Financing Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Financing Agreement bear interest. During the ~~three months~~twelve month ended January 31, ~~2018,~~2019, the Company did not trigger any of these covenants. During the first quarter of fiscal year 2017, the Company adopted ASUNo. 2015-03. As such, the debt issuance costs are capitalized as a reduction of

the principal amount of Term Loan on the Company’s balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of the Term Loan. As of January 31, 2019 and July 31, 2018, the Company ~~had $6.0 million~~did not have an outstanding balance on the ~~revolving credit facility.~~Revolving Facility. As of January 31, 2019 and July 31, 2018, the principal amount outstanding on the Term Loan was ~~$393.0 million.~~$387.0 million and $390.0 million, respectively. As of January 31, 2019 and July 31, 2018, the current and long-term net carrying value of the Term Loan was ~~$391.7 million.~~$386.0 million and $388.8 million, respectively.

Consolidated working capital (deficit) was ~~$70.6~~$(7.9) million at January 31, ~~2018,~~2019, compared with ~~$108.7~~$(12.1) million at July 31, ~~2017.~~2018. Included in working capital were cash and cash equivalents of ~~$106.4~~$92.9 million at January 31, ~~2018~~2019 and ~~$110.7~~$92.1 million at July 31, ~~2017.~~2018. The working capital deficit is driven by classification of the Company’s convertible notes as current liabilities.

Net cash provided by ~~(used in)~~ operating activities was ~~$5.4~~$15.5 million for the six months ended January 31, ~~2018,~~2019, as compared to ~~$(17.1)~~net cash provided by operating activities of $5.0 million infor the ~~prior year period.~~six months ended January 31, 2018. The ~~$22.5~~$10.5 million ~~change~~increase in net cash provided by operating activities as compared with the same period in the prior year was primarily due to the ~~$71.3 million improvement~~cash provided by the operating activities of IWCO subsequent to its acquisition, as well as, a reduction in the ~~Company’s~~cash used in the operating activities of ModusLink Corporation. During the six months ended January 31, 2019,non-cash items within net ~~income associated with the tax benefit related to the acquisition~~cash provided by operating activities included depreciation expense of ~~IWCO.~~$10.5 million, amortization of intangible assets of $15.9 million, amortization of deferred financing costs of $0.5 million, accretion of debt discount of $2.3 million, impairment of long-lived assets of $0.4 million, share-based compensation of $0.8 million and other losses, net, of $0.7 million. During the six months ended January 31, 2018,non-cash items within net cash provided by operating activities included depreciation expense of $5.6 million, amortization of intangible assets of $4.1, amortization of deferred financing costs of $0.4 million, accretion of debt discount of $2.1 million, share-based compensation of $7.4 million,non-cash gains, net, of $12.4 million and gains on investments in affiliates of $0.4 ~~million. During the six months ended January 31, 2017,non-cash~~ items within net cash provided by operating activities included depreciation expense of $4.1 million, amortization of deferred financing costs of $0.3 million, accretion of debt discount of $1.9 million, share-based compensation of $0.4 million,~~non-cash~~ ~~gains, net, of $0.5 million and gains on investments in affiliates of $0.9~~ million.

The Company believes that its cash flows related to operating activities of continuing operations are dependent on several factors, including profitability, accounts receivable collections, effective inventory management practices, and optimization of the credit terms of certain vendors of the Company. Our cash flows from operations are also dependent on several factors including the overall performance of the technology sector, the market for outsourcing services and the continued positive operations of ~~IWCO, as discussed above in the “Overview” section.~~IWCO.

Investing activities ~~provided (used)~~used cash of ~~$(443.8)~~$8.9 million and ~~$3.4~~$443.8 million during the six months ended January 31, 2019 and 2018, ~~and 2017,~~ respectively. The $8.9 million of cash used in investing activities during the six months ended January 31, 2019 was primarily comprised of $9.0 million in capital expenditures. The $443.8 million of cash used in investing activities during the six months ended January 31, 2018 was primarily comprised of $469.2 in payments associated with the acquisition of IWCO, $9.3 million in capital expenditures, offset by $20.6 million in proceeds associated with the sale of property and equipment, $13.8 in proceeds from the sale of Trading Securities and $0.4 million in proceeds from investments in affiliates. The $3.4 million of cash provided in investing activities during the six months ended January 31, 2017 was comprised of $5.8 million in proceeds from the sale of Trading Securities and $0.9 million in proceeds from investments in affiliates, offset by $3.3 million in capital expenditures.

Financing activities provided (used) cash of $(7.8) million and $432.6 million during the six months ended January 31, ~~2017, which~~2019 and 2018, respectively. The $7.8 million of cash used in financing activities during the six months ended January 31, 2019 was primarily ~~related to~~comprised of $3.0 million in payments of long-term debt, $1.1 million in payment of preferred dividends and $3.7 million in purchase of the Company’s Convertible Notes. The $432.6 million of cash provided by financing activities during the six months ended January 31, 2018 was primarily comprised of $393.0 million in net proceeds from the Term Loan associated with the IWCO Acquisition, $35.0 million in in proceeds associated with the issuance of convertible preferred stock and $6.0 million in proceeds from the revolving line of credit. Financing activities used cash of $1.9 million during the six months ended January 31, 2017, which primarily related to the purchase of the Company’s Convertible Notes of $1.8 million and payments on capital lease obligations of $0.1 million.

The Company believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, mandatory debt redemptions and working capital for its existing business for at least the next twelve months. These resources include cash and cash equivalents, the PNC Credit Agreement, the revolving credit facility noted above and cash, if any, provided by operating activities. At January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, the Company had cash and cash equivalents ~~and Trading Securities~~ of ~~$106.6~~$92.9 million and ~~$122.6~~$92.1 million, respectively. At January 31, ~~2018 and July 31, 2017,~~2019, the Company had a readily available borrowing capacity under its PNC Bank Credit Facility of ~~$6.8 million and $16.0 million, respectively.~~$4.6 million. At January 31, ~~2018, the Company~~2019, IWCO had a readily available borrowing capacity under its Revolving Facility of $25.0 million. Per the Cerberus ~~revolving~~ Credit Facility, IWCO is permitted to make distributions to the Parent, Steel Connect, Inc., an aggregate amount not to exceed $5.0 million in any fiscal year and pay reasonable documented expenses incurred by the Parent. The Parent is entitled to receive additional cash remittances under a “U.S. Federal Income Tax Sharing Agreement.” As of ~~$19.0.~~January 31, 2019, the Company believes it will generate sufficient cash to meet its debt covenants under the Credit Agreement with PNC Bank and the Financing Agreement to which certain of its subsidiaries are a party, to repay or restructure its the Notes, and that it will be able to obtain cash through its current credit facilities and through securitization of certain trade receivables.

The Company believes that it has adequate cash and available resources to meet its obligations for one year from the date of this filing. In order to obtain funding for strategic initiatives, which may include capital expenditures or acquisitions, we may seek to raise additional funds through divestitures, public or private equity offerings, debt financings, or other means. In addition, as part of our strategic initiatives, our management may seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise if we believe that it is in our best interests. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Management is utilizing the following strategies to continue to enhance liquidity: (1) continuing to implement process improvements throughout all of the Company’s operations, (2) supporting profitable revenue growth both internally and potentially through acquisitions and (3) evaluating from time to time and as appropriate, strategic alternatives with respect to its businesses and/or assets and capital raising opportunities. The Company continues to examine all of its options and strategies, including acquisitions, divestitures and other corporate transactions, to increase cash flow and stockholder value.

Off-Balance Sheet Arrangements

The Company does not have anyoff-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Contractual Obligations

A summary of the Company’s contractual obligations is included in the Company’s Annual Report on Form10-K for the fiscal year ended July 31, ~~2017.~~2018. The Company’s contractual obligations and other commercial commitments did not change materially between July 31, ~~2017~~2018 and January 31, ~~2018.~~2019. The Company’s gross liability for unrecognized tax benefits and related accrued interest was approximately ~~$1.8~~$1.7 million as of January 31, ~~2018.~~2019. The Company is unable to reasonably estimate the amount or timing of payments for the liability.

From time to time, the Company agrees to indemnify its clients in the ordinary course of business. Typically, the Company agrees to indemnify its clients for losses caused by the Company. As of January 31, ~~2018,~~2019, the Company had no recorded liabilities with respect to these arrangements.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventory, restructuring, share-based compensation expense, long-lived assets, investments, and income taxes. Of the accounting estimates we routinely make relating to our critical accounting policies, those estimates made in the process of: determining the valuation of inventory and related reserves; determining future lease assumptions related to restructured facility lease obligations; measuring share-based compensation expense; preparing investment valuations; and establishing income tax valuation allowances and liabilities are the estimates most likely to have a material impact on our financial position and results of operations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. However, because these estimates inherently involve judgments and uncertainties, there can be no assurance that actual results will not differ materially from those estimates.

During the six months ended January 31, ~~2018,~~2019, other than the adoption of accounting standards updates discussed in the Condensed Consolidated Financial Statements, we believe that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form10-K for the fiscal year ended July 31, ~~2017.~~2018.

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to the impact of interest rate changes, foreign currency exchange rate fluctuations and changes in the market values of its investments. The carrying ~~values~~value of ~~financial instruments including~~ cash and cash equivalents, ~~Trading Securities,~~ accounts receivable, restricted cash, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the ~~short-term nature~~short maturity of these instruments. We believe that the carrying value of our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Interest Rate Risk

At January 31, 2019, the Company did not have an outstanding balance under its PNC Bank Credit Facility and the Company did not have any open derivative positions with respect to its borrowing arrangements. As of January 31, ~~2018 and July 31, 2017,~~2019, the Company did not have an outstanding balance on the ~~PNC Bank credit facility.~~Revolving Facility. As of January 31, ~~2018, the Company had $6.0 million outstanding on the Cerberus revolving credit facility. As of January 31, 2018,~~2019, the principal amount outstanding on the Term Loan was ~~$393.0~~$387.0 million. ~~Based on outstanding borrowings as of January 31, 2018, the effect of a 100 basis point change in current interest rates on annualized interest expense would be approximately $4.0 million.~~

The Company maintains a portfolio of highly liquid cash equivalents typically maturing in three months or less as of the date of purchase. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy and include corporate and state municipal obligations such as commercial paper, certificates of deposit and institutional money market funds.

Our exposure to market risk for changes in interest rates relates primarily to our investment in short-term investments. Our short-term investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to our investment guidelines and market conditions.

Foreign Currency Risk

The Company has operations in various countries and currencies throughout the world and its operating results and financial position are subject to exposure from fluctuations in foreign currency exchange rates. From time to time, the Company has used derivative financial instruments on a limited basis, principally foreign currency exchange rate contracts, to minimize the transaction exposure that results from such fluctuations. As of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, there were no foreign currency forward contracts outstanding.

Revenues from our foreign operating segments accounted for approximately ~~49.1%~~31.5% and ~~71.3%~~48.2% of total revenues during the three months ended January 31, ~~2018~~2019 and ~~2017,~~2018, respectively. A portion of our international sales made by our foreign business units in their respective countries is denominated in the local currency of each country. These business units also incur a portion of their expenses in the local currency.

The primary foreign currencies in which the Company operates include Chinese Renminbi, Euros, Czech Koruna and Singapore Dollars. The income statements of our international operations that are denominated in foreign currencies are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions results in increased revenues and operating expenses for our international operations. Similarly, our revenues and operating expenses will decrease for our international operations when the U.S. dollar strengthens against foreign currencies. While we attempt to balance local currency revenue to local currency expenses to provide in effect a natural hedge, it is not always possible to completely reduce the foreign currency exchange rate risk due to competitive and other reasons.

The conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income (loss). For the three months ended January 31, ~~2018~~2019 and ~~2017,~~2018, we recorded a foreign currency translation gain ~~(loss)~~ of approximately ~~$3.6~~$1.9 million and ~~$(0.7)~~$3.7 million, respectively, which is recorded within

accumulated other comprehensive income in stockholders’ equity in our condensed consolidated balance sheet. In addition, certain of our subsidiaries have assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the relative exchange rates between the currencies result in remeasurement gains or losses at each balance sheet date and transaction gains or losses upon settlement. For the three months ended January 31, ~~2018~~2019 and ~~2017,~~2018, we recorded net realized and unrealized foreign currency transaction and remeasurement ~~gains (losses)~~losses of approximately ~~$(1.4)~~$1.5 million and ~~$29 thousand,~~$1.4 million, respectively, which are recorded in “Other gains (losses), net” in our condensed consolidated statements of operations.

Our international business is subject to risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign currency exchange rate volatility when compared to the United States. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. As exchange rates vary, our international financial results may vary from expectations and adversely impact our overall operating results.

~~Item 4.~~

~~Controls and Procedures.~~

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer ~~(“Principal Executive Officer”)~~ and Chief Financial Officer ~~(“Principal Financial Officer”),~~ of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules13a-15(e) and15d-15(e) of the Exchange Act) as of the end of the period covered by this report. ~~Disclosure~~“Disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the 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 a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that, due to the material weakness described below as well as ~~a material weakness~~previously disclosed in internal controls over financial reporting as reported in the Company’s10-K for the period ended July 31, ~~2017,~~2018, as filed with the SEC on ~~October 16, 2017,~~December 4, 2018, our disclosure controls and procedures were not effective as of July 31, 2018 and January 31, ~~2018.~~2019.

A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement to the annual or interim financial statements will not be prevented or detected on a timely basis. In ~~connection with the preparation~~its evaluation of the ~~Form 10-Q for the three and six months ended January~~effectiveness of its internal control over financial reporting as of July 31, 2018, management determined that the Company determined that, due to certain communication and monitoring errors in connection with the preparation and review of our income tax provision that was specific to our acquisition of IWCO Direct Holdings, Inc. the tax provision for the Company would have been incorrect and would have resulted in the income tax benefit being materially overstated by $6.9 million for the current quarter ended January 31, 2018. Specifically, we did not ~~design~~maintain effective internal controls ~~related~~over the assessment, timely review and evaluation of a material complexnon-routine transaction, specifically relating to the review of the fair value adjustments used in the calculation of our income tax provision and failed to recognize the tax expense associated with an estimate for non-routine transactions. This error was detected prior to the issuance of our Form 10-Q for the quarter ended January 31, 2018.

~~As a result of the item described above, we corrected our consolidated financial statements for the quarter ended January 31, 2018. The errors did not impact any prior periods.~~

~~These clerical errors resulted from the deficiency referenced in the above paragraph. We have concluded that such deficiency constituted a material weakness in the~~ Company’s internal controls. Management is in the process of remediating the internal controls weakness related to income tax. Nevertheless, the Company may continue to report the above material weakness while sufficient evaluation of newly established procedures and controls occurs.accrued pricing liability.

Notwithstanding the material weakness, management has concluded that the consolidated financial statements included in this Form10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Remediation of the Material Weakness in Internal Control Over Financial Reporting

~~Management~~The Company has ~~been actively engaged in~~created creating a formal process related to the ~~planning for,~~design and implementation of ~~remediation efforts to address~~controls over the ~~material weakness in~~accounting policies for complex,non-routine transactions. This process includes the ~~e-Business segment throughout the fiscal year 2017~~early evaluation of complex,non-routine transactions and ~~2018. These remediation efforts, outlined below, are intended both to address the identified material weakness and to enhance~~documentation by the Company’s ~~overall financial control environment.~~

~~Management has enhanced~~accounting staff. Regular meetings with accounting staff and executive level officers involved and familiar with accounting issues related to complex,non-routine transactions will be held. As necessary, outside legal and/or accounting advice will be obtained. The Company will also revise our current risk assessment process to identify potentialnon-routine transactions that need to be monitored and incorporated under the formality and rigor of the reconciliation procedures and the evaluation of certain accounts and transactions, controls, including access controls. This deficiency was not effectively remediated during the three months ended January 31, 2018 primarily due to the number of access rights, segregation of duties and review controls not sufficiently documented for a sufficient period of time, primarily within the e-Business segment.

~~Management has enhanced the design and precision level of existing monitoring controls to provide additional controls supporting the reporting~~planned new formal process.

A significant amount of remediation was performed in implementing additional policies, improved processes and documented procedures relating to our financial statement close processes and procedures within the e-Business and Americas segments.

~~We will continue to engage a nationally recognized accounting firm to provide assistance and guidance in designing, implementing and testing the Company’s internal controls during the year.~~

Under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of the Company’s internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.

Management believes the measures described above and others that will be implemented will remediate the control deficiencies the Company has identified and strengthen its internal control over financial reporting. Management is committed to continuous improvement of the Company’s internal control processes and will continue to diligently review the Company’s financial reporting controls and procedures. The material weakness in our internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. WeThe Company and its outside legal counsel are working to have the material weakness remediated as soon as ~~possible and significant progress has been made to date. We are~~possible. The Company is committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, the Company may decide to take additional measures to address control deficiencies or decide to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

Changes in Internal Control over Financial Reporting

~~On December 15, 2017,~~Beginning August 1, 2018, the Company ~~acquired IWCO Direct as more fully described in Note 8. During~~implemented ASC Topic 606, Revenue from Contracts with Customers. Although the ~~initial transition period following~~new revenue standard did not have a material impact on consolidated financial statements, the ~~acquisition, we enhanced~~Company did implement changes to our ~~internal controls to ensure all financial information~~processes related to revenue recognition and the ~~acquisition was properly reflected~~control activities within them. These included the development of new policies based on the five-step model provided in ~~our consolidated financial statements.~~the new revenue standard, new training, ongoing contract review requirements, and the gathering of information necessary provided for expanded disclosures.

Except as described in the preceding paragraph, there have been no changes in our internal controls over financial reporting (as defined in Rule13(a)-15(f) or Rule15d-15(f) of the Exchange Act) during the three months ended January 31, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

~~Item 5.~~

~~Other Information:~~

As previously reported by Steel Connect, Inc. (the “Company”) on October 5, 2017, the Company received a letter from The NASDAQ Stock Market LLC (the “Nasdaq”) notifying the Company that it was not in compliance with Nasdaq Listing Rule 5605(c)(2) (the “Rule”), which requires that an audit committee consist of at least three members, each of whom is independent. As previously reported, this deficiency was caused by the September 29, 2017, passing of Anthony Bergamo, who served as an independent director on the Company’s Board of Directors (the “Board”) and as the chair of the Board’s audit committee (the “Audit Committee”). Prior to his passing, Mr. Bergamo also served on the Board’s Human Resources and Compensation Committee (the “Compensation Committee”) and Nominating and Corporate Governance Committee (the “Governance Committee”).

On March 6, 2018, the Board appointed Philip E. Lengyel to the Audit Committee to fill the vacancy created by Mr. Bergamo’s passing. Mr. Lengyel has served on the Board since May 2014 and also serves on the Compensation Committee and Governance Committee. As a result of Mr. Lengyel’s appointment to the Audit Committee, the Audit Committee is now composed of three independent directors.

On March 8, 2018, the Company notified the Nasdaq concerning Mr. Lengyel’s appointment to the Audit Committee. On March 13, 2018, the Company received a letter from the Nasdaq notifying the Company that, based on the information the Company provided to the Nasdaq regarding the appointment of Mr. Lengyel to the Audit Committee, the Nasdaq has determined that the Company has regained compliance with the Rule and this matter is now closed.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

~~Legal Proceedings.~~

~~None.~~

~~Item 1A.~~

~~Risk Factors.~~

~~Except as provided below, there~~Item 1A. Risk Factors.

There have not been any material changes from the risk factors previously disclosed in Part I, “Item 1A, Risk Factors” in our Annual Report on Form10-K for the year ended July 31, ~~2017.~~2018. In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, “Item 1A. Risk Factors” discussed in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form10-K ~~and this Quarterly Report on Form 10-Q~~ are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and/or operating results.

~~Risks Related to Acquisitions~~

~~We may not be able to achieve the anticipated synergies and benefits from business acquisitions, including our recent acquisition of IWCO Direct Holdings Inc.~~

Part of our business strategy is to acquire businesses that we believe can complement our current business activities, both financially and strategically. On December 15, 2017, we acquired IWCO Direct Holdings Inc. and its subsidiaries. Acquisitions involve many complexities, including, but not limited to, risks associated with the acquired business’ past activities, loss of customers, regulatory changes that are not anticipated, difficulties in integrating personnel and human resource programs, integrating ERP systems and other infrastructures under Company control, unanticipated expenses and liabilities, and the impact on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002. There is no guarantee that our acquisitions will increase the profitability and cash flow of the Company, and our efforts could cause unforeseen complexities and additional cash outflows, including financial losses. As a result, the realization of anticipated synergies or benefits from acquisitions may be delayed or substantially reduced.

~~Risks Related to our Indebtedness~~

On December 15, 2017, MLGS, a wholly owned subsidiary of the Company, entered into a Financing Agreement by and among the MLGS (as the initial borrower), Instant Web, LLC, a Delaware corporation and wholly owned subsidiary of IWCO (as Borrower), IWCO, and certain of IWCO’s subsidiaries (together with IWCO, the Guarantors), the lenders from time to time party thereto, and Cerberus Business Finance, LLC, as collateral agent and administrative agent for the lenders. MLGS was the initial borrower under the Financing Agreement, but immediately upon the consummation of the IWCO Acquisition, Borrower became the borrower under the Financing Agreement. The Financing Agreement provides for $393.0 million term loan facility and a $25.0 million revolving credit facility (collectively, the Cerberus Credit Facility). Proceeds of the Cerberus Credit Facility were used (i) to finance a portion of the IWCO Acquisition, (ii) to repay certain existing indebtedness of the Borrower and its subsidiaries, (iii) for working capital and general corporate purposes and (iv) to pay fees and expenses related to the Financing Agreement and the IWCO Acquisition. The Cerberus Credit Facility has a maturity of five years.

On June 30, 2014, two direct and wholly owned subsidiaries of the Company (the ModusLink Borrowers) entered into a revolving credit and security agreement (the Credit Agreement), as borrowers and guarantors, with PNC Bank and National Association, as lender and as agent, respectively. The Credit Agreement has a five (5) year term which expires on June 30, 2019. It includes a maximum credit commitment of $50.0 million, is available for letters of credit (with a sublimit of $5.0 million) and has a $20.0 million uncommitted accordion feature.

As of January 31, 2018 and July 31, 2017, the Company did not have an outstanding balance on the PNC Bank credit facility. As of January 31, 2018, the Company had $6.0 million outstanding on the Cerberus revolving credit facility. As of January 31, 2018, the principal amount outstanding on the Term Loan was $393.0 million.

~~Our indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.~~

Our indebtedness could have important consequences for us and our stockholders. For example, our Financing Agreement and our Credit Agreement (together, the “Debt Agreements”) require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and acquisitions, and for other general corporate purposes. In addition, our indebtedness could:

~~increase our vulnerability to adverse economic and competitive pressures in our industry;~~

~~place us at a competitive disadvantage compared to our competitors that have less debt;~~

~~limit our flexibility in planning for, or reacting to, changes in our business and our industry; and~~

~~limit our ability to borrow additional funds on terms that are acceptable to us or at all.~~

The Debt Agreements governing our indebtedness contain restrictive covenants that will restrict our operational flexibility and require that we maintain specified financial ratios. If we cannot comply with these covenants, we may be in default under the Debt Agreements.

The Debt Agreements governing our indebtedness contain affirmative and negative covenants, including with regard to specified financial ratios, that limit and restrict our operations and may hamper our ability to engage in activities that may be in our long-term best interests. Events beyond our control could affect our ability to meet these and other covenants under the Debt Agreements. Our failure to comply with our covenants and other obligations under the Debt Agreements may result in an event of default thereunder. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness (together with accrued interest and fees), or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This could have serious consequences to our financial condition, operating results, and business, and could cause us to become insolvent or enter bankruptcy proceedings, and shareholders may lose all or a portion of their investment because of the priority of the claims of our creditors on our assets.

If we are unable to generate or borrow sufficient cash to make payments on our indebtedness, our financial condition would be materially harmed, our business could fail, and shareholders may lose all of their investment.

Our ability to make scheduled payments on or to refinance our obligations will depend on our financial and operating performance, which will be affected by economic, financial, competitive, business, and other factors, some of which are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations to service our indebtedness or to fund our other liquidity needs. If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our indebtedness on or before maturity or sell certain of our assets. We cannot assure you that we will be able to restructure or refinance any of our indebtedness on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.

~~Increases in interest rates could adversely affect our results from operations and financial condition.~~

An increase in prevailing interest rates would have an effect on the interest rates charged on our variable rate debt, which rise and fall upon changes in interest rates. If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our indebtedness.

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds.~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

~~Item 3.~~

~~Default Upon Senior Securities.~~

Item 3. Default Upon Senior Securities.

None.

~~Item 4.~~

~~Mine Safety Disclosures.~~

Item 4. Mine Safety Disclosures.

Note applicable.

~~Item 5.~~

~~Other Information.~~

Item 5. Other Information.

None.

~~Item 6.~~

~~Exhibits.~~

Item 6. Exhibits.


Exhibit Number		Description

~~2.1~~4.1		~~Agreement and Plan~~Form of ~~Merger, dated December 15, 2017,~~7.50% Convertible Senior Note due 2024 issued by ~~and among ModusLink Global Solutions,~~Steel Connect, Inc.~~, MLGS Merger Company, Inc., IWCO Direct~~ to SPH Group Holdings ~~Inc.~~LLC., CSC Shareholder Services, LLC (solely in its capacity as representative), and the stockholders of IWCO Direct Holdings Inc. is incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on~~Form 8-K~~ ~~filed on December 19, 2017 (FileNo. 001-35319).~~ ~~Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of RegulationS-K.~~ ~~The Company hereby agrees to furnish supplementary copies of any of the omitted schedules or exhibits upon request by the Securities and Exchange Commission.~~

~~3.1~~		Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of ModusLink Global Solutions, Inc. filed with the Secretary of State of the State of Delaware on December 15, 2017, is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form~~Form~~ 8-K filed on ~~December 19, 2017 (FileNo. 001-35319).~~February 28, 2019.

~~3.2~~10.1		Certificate of Designation of Rights, Preferences and Privileges of Series D Junior Participating Preferred Stock filed with the Secretary of State of the State of Delaware on January 19, 2018, is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on~~Form 8-K~~ ~~filed on January 19, 2018 (FileNo. 001-35319).~~

~~3.3~~		Certificate of Ownership and Merger filed with the Secretary of State of the State of Delaware on February 20, 2018, is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on~~Form 8-K~~ ~~filed on February 26, 2018 (FileNo. 001-35319).~~

~~4.1~~		Tax Benefits Preservation Plan, dated as of January 19, 2018, by and between ModusLink Global Solutions, Inc. and American Stock Transfer & Trust Company, LLC, as rights agent is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on~~Form 8-K~~ ~~filed on January 19, 2018 (FileNo. 001-35319).~~

10.1*		~~Sale and Purchase Agreement, dated October 5, 2017, between ModusLink Pte. Ltd. and Far East Group Limited.~~

~~10.2~~		Financing Agreement dated as of December 15, 2017, by and among IWCO Direct Holdings Inc., MLGS Merger Company, Inc., Instant Web, LLC, certain subsidiaries of IWCO Direct Holdings Inc. identified on the signature pages thereto, the lenders from time to time party hereto, and Cerberus Business Finance, LLC, as collateral agent and administrative agent for the lenders, is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on~~Form 8-K~~ ~~filed on December 19, 2017 (FileNo. 001-35319).~~

~~10.3~~		~~Preferred Stock~~7.50% Convertible Senior Note Due 2024 Purchase Agreement, dated as of ~~December 15, 2017,~~February 28, 2019, by and between ~~ModusLink Global Solutions,~~Steel Connect, Inc. and SPH Group Holdings ~~LLC~~LLC., is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form~~Form~~ 8-K filed on ~~December 19, 2017 (FileNo. 001-35319).~~February 28, 2019.

31.1*		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1±		Certification of the Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2±		Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*		Interactive Data Files Pursuant to Rule 405 of RegulationS-T: (i) Unaudited Condensed Consolidated Balance Sheets as of January 31, ~~2018~~2019 and July 31, ~~2017,~~2018, (ii) Unaudited Condensed Consolidated Statements of Operations for the three and six months ended January 31, ~~2018~~2019 and ~~2017,~~2018, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended January 31, ~~2018~~2019 and ~~2017~~2018 (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended January 31, ~~2018~~2019 and ~~2017~~2018 and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

*	Filed herewith.

±	Furnished herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	STEEL CONNECT, INC.

Date: March ~~15, 2018~~11, 2019	By:	/S/ LOUIS J. BELARDI
		Louis J. Belardi
		Chief Financial Officer
		(Duly Authorized Officer, Principal Financial and Accounting Officer)

4451


	Employee Related Expenses			Contractual Obligations			Total
	(In thousands)
Accrued restructuring balance at July 31, 2017	$	100		$	86		$	186

Restructuring adjustments		19			22			41
Cash paid		(12	)		(108	)		(120	)
Non-cash adjustments		5			—			5

Accrued restructuring balance at January 31, 2018	$	112		$	—		$	112


	Three Months Ended			Six Months Ended			Three Months Ended		Six Months Ended
	January 31, 2017						January 31, 2018
	(unaudited)						(unaudited)
Net revenue	$	239,375		$	466,979		$	208,393	$	433,006
Net income	$	(7,034	)	$	(24,268	)	$	68,827	$	59,787


	Three Months Ended January 31, 2018		As a % of Segment Net Revenue			Three Months Ended January 31, 2017		As a % of Segment Net Revenue			$ Change			% Change
	(In thousands)
Americas	$	—		0.0	%	$	189		0.7	%	$	(189	)		(100.0	%)
Asia		—		0.0	%		345		0.9	%		(345	)		(100.0	%)
Europe		—		0.0	%		152		0.3	%		(152	)		(100.0	%)
All Other		4		0.1	%		90		1.4	%		(86	)		(95.6	%)

Total	$	4		0.0	%	$	776		0.7	%	$	(772	)		(99.5	%)

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