| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
2023
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Delaware | ||||||||
| 04-2921333 (I.R.S. Employer Identification No.) | |||||||
| ||||||||
2000 Midway Ln Smyrna, Tennessee (Address of principal executive offices) | 37167 (Zip Code) | |||||||
(781)663-5000
ModusLink Global Solutions, Inc.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 par value | STCN | Nasdaq Capital Market | ||||||
| Rights to Purchase Series D Junior Participating Preferred Stock | -- | Nasdaq Capital Market | ||||||
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||||||||||||
| Emerging growth company | ☐ | ||||||||||||||
| Page Number | ||||||||||||
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Item 1. | ||||||||||||
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Item 1. | ||||||||||||
(unaudited)
| January 31, 2018 | July 31, 2017 | |||||||
| ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 106,433 | $ | 110,670 | ||||
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 | ||||||
Inventories, net | 45,211 | 34,369 | ||||||
Funds held for clients | 13,074 | 13,454 | ||||||
Prepaid expenses and other current assets | 17,204 | 6,005 | ||||||
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Total current assets | 292,756 | 257,846 | ||||||
Property and equipment, net | 105,411 | 18,555 | ||||||
Goodwill | 259,085 | — | ||||||
Other intangible assets, net | 206,819 | — | ||||||
Other assets | 6,039 | 4,897 | ||||||
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Total assets | $ | 870,110 | $ | 281,298 | ||||
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| LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 85,010 | $ | 71,476 | ||||
Accrued restructuring | 112 | 186 | ||||||
Accrued expenses | 74,671 | 37,898 | ||||||
Funds held for clients | 13,074 | 13,454 | ||||||
Current portion of long-term debt | 5,725 | — | ||||||
Other current liabilities | 43,561 | 26,141 | ||||||
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Total current liabilities | 222,153 | 149,155 | ||||||
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Notes payable | 62,062 | 59,758 | ||||||
Long-term debt, excluding current portion | 385,975 | — | ||||||
Other long-term liabilities | 30,693 | 9,414 | ||||||
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Long-term liabilities | 478,730 | 69,172 | ||||||
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Total liabilities | 700,883 | 218,327 | ||||||
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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 | — | ||||||
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 | ||||||
Additionalpaid-in capital | 7,464,451 | 7,457,051 | ||||||
Accumulated deficit | (7,339,367 | ) | (7,398,949 | ) | ||||
Accumulated other comprehensive income | 8,281 | 4,313 | ||||||
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| |||||
Total stockholders’ equity | 133,968 | 62,971 | ||||||
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Total liabilities, contingently redeemable preferred stock and stockholders’ equity | $ | 870,110 | $ | 281,298 | ||||
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| January 31, 2023 | July 31, 2022 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 62,427 | $ | 53,142 | |||||||
| Accounts receivable, trade, net of allowance for doubtful accounts of $1,008 and $44 at January 31, 2023 and July 31, 2022, respectively | 37,180 | 40,083 | |||||||||
| Inventories, net | 8,916 | 8,151 | |||||||||
| Funds held for clients | 4,354 | 4,903 | |||||||||
| Prepaid expenses and other current assets | 5,223 | 3,551 | |||||||||
| Total current assets | 118,100 | 109,830 | |||||||||
| Property and equipment, net | 3,493 | 3,534 | |||||||||
| Operating lease right-of-use assets | 30,538 | 19,655 | |||||||||
| Other assets | 3,981 | 4,730 | |||||||||
| Total assets | $ | 156,112 | $ | 137,749 | |||||||
| LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT | |||||||||||
| Accounts payable | $ | 32,805 | $ | 30,553 | |||||||
| Accrued expenses | 25,632 | 28,396 | |||||||||
| Funds held for clients | 4,323 | 4,903 | |||||||||
| Current lease obligations | 7,665 | 6,466 | |||||||||
| Other current liabilities | 15,031 | 13,482 | |||||||||
| Total current liabilities | 85,456 | 83,800 | |||||||||
| Convertible note payable | 12,104 | 11,047 | |||||||||
| Long-term lease obligations | 22,904 | 12,945 | |||||||||
| Other long-term liabilities | 5,222 | 3,983 | |||||||||
| Total long-term liabilities | 40,230 | 27,975 | |||||||||
| Total liabilities | 125,686 | 111,775 | |||||||||
| Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at January 31, 2023 and July 31, 2022 | 35,180 | 35,180 | |||||||||
| Stockholders' deficit: | |||||||||||
| Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at January 31, 2023 and July 31, 2022; zero shares issued and outstanding at January 31, 2023 and July 31, 2022 | — | — | |||||||||
| Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 60,784,589 issued and outstanding shares at January 31, 2023; 60,529,558 issued and outstanding shares at July 31, 2022 | 607 | 605 | |||||||||
| Additional paid-in capital | 7,479,719 | 7,479,366 | |||||||||
| Accumulated deficit | (7,489,960) | (7,493,317) | |||||||||
| Accumulated other comprehensive income | 4,880 | 4,140 | |||||||||
| Total stockholders' deficit | (4,754) | (9,206) | |||||||||
| Total liabilities, contingently redeemable preferred stock and stockholders' deficit | $ | 156,112 | $ | 137,749 | |||||||
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
Net revenue | $ | 151,119 | $ | 117,568 | $ | 253,641 | $ | 238,895 | ||||||||
Cost of revenue | 134,169 | 106,370 | 227,617 | 218,364 | ||||||||||||
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Gross profit | 16,950 | 11,198 | 26,024 | 20,531 | ||||||||||||
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Operating expenses | ||||||||||||||||
Selling, general and administrative | 30,107 | 11,926 | 42,974 | 25,527 | ||||||||||||
Amortization of intangible assets | 4,107 | — | 4,107 | — | ||||||||||||
Gain on sale of property | (12,692 | ) | — | (12,692 | ) | — | ||||||||||
Restructuring, net | 4 | 776 | 41 | 2,150 | ||||||||||||
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Total operating expenses | 21,526 | 12,702 | 34,430 | 27,677 | ||||||||||||
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Operating loss | (4,576 | ) | (1,504 | ) | (8,406 | ) | (7,146 | ) | ||||||||
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Other income (expense): | ||||||||||||||||
Interest income | 92 | 15 | 256 | 180 | ||||||||||||
Interest expense | (6,575 | ) | (2,109 | ) | (8,682 | ) | (4,138 | ) | ||||||||
Other gains (losses), net | (1,716 | ) | 1,019 | (294 | ) | 531 | ||||||||||
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Total other income (expense) | (8,199 | ) | (1,075 | ) | (8,720 | ) | (3,427 | ) | ||||||||
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Loss before income taxes | (12,775 | ) | (2,579 | ) | (17,126 | ) | (10,573 | ) | ||||||||
Income tax expense (benefit) | (77,664 | ) | 723 | (76,577 | ) | 1,772 | ||||||||||
Gains on investments in affiliates, net of tax | (200 | ) | (396 | ) | (401 | ) | (896 | ) | ||||||||
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Net income (loss) | 65,089 | (2,906 | ) | 59,852 | (11,449 | ) | ||||||||||
Less: Preferred dividends on redeemable preferred stock | (259 | ) | — | (259 | ) | — | ||||||||||
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Net income (loss) attributable to common stockholders | $ | 64,830 | $ | (2,906 | ) | $ | 59,593 | $ | (11,449 | ) | ||||||
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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 | ) | ||||||
Weighted average common shares used in: | ||||||||||||||||
Basic earnings per share | 58,341 | 55,083 | 56,776 | 55,031 | ||||||||||||
Diluted earnings per share | 79,083 | 55,083 | 72,883 | 55,031 | ||||||||||||
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net revenue | $ | 50,781 | $ | 54,322 | $ | 102,140 | $ | 98,676 | |||||||||||||||
| Cost of revenue | 37,719 | 43,421 | 74,813 | 78,369 | |||||||||||||||||||
| Gross profit | 13,062 | 10,901 | 27,327 | 20,307 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 10,459 | 9,994 | 20,845 | 18,829 | |||||||||||||||||||
| Restructuring | — | 856 | — | 856 | |||||||||||||||||||
| Total operating expenses | 10,459 | 10,850 | 20,845 | 19,685 | |||||||||||||||||||
| Operating income | 2,603 | 51 | 6,482 | 622 | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 332 | 1 | 476 | 5 | |||||||||||||||||||
| Interest expense | (848) | (750) | (1,674) | (1,512) | |||||||||||||||||||
| Other losses, net | (2,959) | (65) | (74) | (546) | |||||||||||||||||||
| Total other expense, net | (3,475) | (814) | (1,272) | (2,053) | |||||||||||||||||||
| (Loss) income from continuing operations before income taxes | (872) | (763) | 5,210 | (1,431) | |||||||||||||||||||
| Income tax (benefit) expense | (346) | 723 | 779 | 1,038 | |||||||||||||||||||
| Net (loss) income from continuing operations | (526) | (1,486) | 4,431 | (2,469) | |||||||||||||||||||
| Net loss from discontinued operations | — | (21,491) | — | (40,002) | |||||||||||||||||||
| Net (loss) income | (526) | (22,977) | 4,431 | (42,471) | |||||||||||||||||||
| Less: Preferred dividends on redeemable preferred stock | (537) | (537) | (1,074) | (1,074) | |||||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (1,063) | $ | (23,514) | $ | 3,357 | $ | (43,545) | |||||||||||||||
| Net (loss) income per common shares - basic | |||||||||||||||||||||||
| Continuing operations | $ | (0.02) | $ | (0.03) | $ | 0.06 | $ | (0.06) | |||||||||||||||
| Discontinued operations | — | (0.36) | — | (0.67) | |||||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (0.02) | $ | (0.39) | $ | 0.06 | $ | (0.73) | |||||||||||||||
| Net (loss) income per common shares - diluted | |||||||||||||||||||||||
| Continuing operations | $ | (0.02) | $ | (0.03) | $ | 0.06 | $ | (0.06) | |||||||||||||||
| Discontinued operations | — | (0.36) | — | (0.67) | |||||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (0.02) | $ | (0.39) | $ | 0.06 | $ | (0.73) | |||||||||||||||
| Weighted-average number of common shares outstanding - basic | 60,178 | 59,748 | 60,129 | 60,027 | |||||||||||||||||||
| Weighted-average number of common shares outstanding - diluted | 60,178 | 59,748 | 60,637 | 60,027 | |||||||||||||||||||
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income (loss) | $ | 65,089 | $ | (2,906 | ) | $ | 59,852 | $ | (11,449 | ) | ||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustment | 3,654 | (734 | ) | 3,926 | (2,003 | ) | ||||||||||
Net unrealized holding gain (loss) on securities, net of tax | 29 | (10 | ) | 16 | — | |||||||||||
Pension liability adjustments, net of tax | — | 353 | 26 | 750 | ||||||||||||
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Other comprehensive income (loss) | 3,683 | (391 | ) | 3,968 | (1,253 | ) | ||||||||||
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Comprehensive income (loss) | $ | 68,772 | $ | (3,297 | ) | $ | 63,820 | $ | (12,702 | ) | ||||||
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| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net (loss) income | $ | (526) | $ | (22,977) | $ | 4,431 | $ | (42,471) | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustment | 4,655 | (13) | 1,818 | 185 | |||||||||||||||||||
| Pension liability adjustments, net of tax | — | — | (1,078) | — | |||||||||||||||||||
| Other comprehensive income (loss) | 4,655 | (13) | 740 | 185 | |||||||||||||||||||
| Comprehensive income (loss) | $ | 4,129 | $ | (22,990) | $ | 5,171 | $ | (42,286) | |||||||||||||||
STOCKHOLDERS' (DEFICIT) EQUITY
thousands, except share amounts)
| Six Months Ended January 31, | ||||||||
| 2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 59,852 | $ | (11,449 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation | 5,656 | 4,090 | ||||||
Amortization of intangible assets | 4,107 | — | ||||||
Amortization of deferred financing costs | 392 | 281 | ||||||
Accretion of debt discount | 2,117 | 1,940 | ||||||
Share-based compensation | 7,397 | 381 | ||||||
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: | ||||||||
Accounts receivable, net | 20,388 | 5,169 | ||||||
Inventories, net | 17,659 | 2,349 | ||||||
Prepaid expenses and other current assets | (1,535 | ) | 1,330 | |||||
Accounts payable, accrued restructuring and accrued expenses | (15,422 | ) | (19,358 | ) | ||||
Refundable and accrued income taxes, net | 3,767 | (372 | ) | |||||
Deferred tax assets and liabilities | (79,918 | ) | — | |||||
Other assets and liabilities | (6,279 | ) | (35 | ) | ||||
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Net cash provided by (used in) operating activities | 5,382 | (17,101 | ) | |||||
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Cash flows from investing activities: | ||||||||
Payments to acquire business | (469,221 | ) | — | |||||
Additions to property and equipment | (9,303 | ) | (3,301 | ) | ||||
Proceeds from the disposition of property and equipment | 20,589 | — | ||||||
Proceeds from the sale of Trading Securities | 13,775 | 5,832 | ||||||
Proceeds from investments in affiliates | 401 | 896 | ||||||
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Net cash provided by (used in) investing activities | (443,759 | ) | 3,427 | |||||
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Cash flows from financing activities: | ||||||||
Proceeds from long-term debt | 393,000 | — | ||||||
Proceeds from issuance of preferred stock | 35,000 | — | ||||||
Proceeds from revolving line of credit | 6,000 | — | ||||||
Payment of deferred financing costs | (1,334 | ) | — | |||||
Purchase of the Company’s Convertible Notes | — | (1,763 | ) | |||||
Repayments on capital lease obligations | (77 | ) | (126 | ) | ||||
Proceeds from issuance of common stock | 3 | 12 | ||||||
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Net cash provided by (used in) financing activities | 432,592 | (1,877 | ) | |||||
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Net effect of exchange rate changes on cash and cash equivalents | 1,548 | (905 | ) | |||||
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Net decrease in cash and cash equivalents | (4,237 | ) | (16,456 | ) | ||||
Cash and cash equivalents at beginning of period | 110,670 | 130,790 | ||||||
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Cash and cash equivalents at end of period | $ | 106,433 | $ | 114,334 | ||||
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| Number of Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||
| Balance at October 31, 2022 | 60,657,539 | $ | 606 | $ | 7,479,542 | $ | (7,488,897) | $ | 225 | $ | (8,524) | ||||||||||||||||||||||||
| Net loss | — | — | — | (526) | — | (526) | |||||||||||||||||||||||||||||
| Preferred dividends | — | — | — | (537) | — | (537) | |||||||||||||||||||||||||||||
| Restricted stock grants | 127,050 | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 178 | — | — | 178 | |||||||||||||||||||||||||||||
| Other comprehensive items | — | — | — | — | 4,655 | 4,655 | |||||||||||||||||||||||||||||
| Balance at January 31, 2023 | 60,784,589 | $ | 607 | $ | 7,479,719 | $ | (7,489,960) | $ | 4,880 | $ | (4,754) | ||||||||||||||||||||||||
| Number of Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||
| Balance at October 31, 2021 | 60,437,654 | $ | 605 | $ | 7,478,855 | $ | (7,500,251) | $ | 7,360 | $ | (13,431) | ||||||||||||||||||||||||
| Net loss | — | — | — | (22,977) | — | (22,977) | |||||||||||||||||||||||||||||
| Preferred dividends | — | — | — | (537) | — | (537) | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to employee stock purchase plan | 331 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Restricted stock grants, net of forfeitures | 19,735 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 218 | — | — | 218 | |||||||||||||||||||||||||||||
| Other comprehensive items | — | — | — | — | (13) | (13) | |||||||||||||||||||||||||||||
| Balance at January 31, 2022 | 60,457,720 | $ | 605 | $ | 7,479,073 | $ | (7,523,765) | $ | 7,347 | $ | (36,740) | ||||||||||||||||||||||||
| Number of Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||
| Balance at July 31, 2022 | 60,529,558 | $ | 605 | $ | 7,479,366 | $ | (7,493,317) | $ | 4,140 | $ | (9,206) | ||||||||||||||||||||||||
| Net income | — | — | — | 4,431 | — | 4,431 | |||||||||||||||||||||||||||||
| Preferred dividends | — | — | — | (1,074) | — | (1,074) | |||||||||||||||||||||||||||||
| Restricted stock grants | 255,031 | 2 | (2) | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 355 | — | — | 355 | |||||||||||||||||||||||||||||
| Other comprehensive items | — | — | — | — | 740 | 740 | |||||||||||||||||||||||||||||
| Balance at January 31, 2023 | 60,784,589 | $ | 607 | $ | 7,479,719 | $ | (7,489,960) | $ | 4,880 | $ | (4,754) | ||||||||||||||||||||||||
| Number of Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders' Equity (Deficit) | ||||||||||||||||||||||||||||||
| Balance at July 31, 2021 | 63,099,496 | $ | 632 | $ | 7,478,638 | $ | (7,480,220) | $ | 7,162 | $ | 6,212 | ||||||||||||||||||||||||
| Net loss | — | — | — | (42,471) | — | (42,471) | |||||||||||||||||||||||||||||
| Preferred dividends | — | — | — | (1,074) | — | (1,074) | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to employee stock purchase plan | 499 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Restricted stock grants, net of forfeitures | (2,642,275) | (27) | 27 | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 408 | — | — | 408 | |||||||||||||||||||||||||||||
| Other comprehensive items | — | — | — | — | 185 | 185 | |||||||||||||||||||||||||||||
| Balance at January 31, 2022 | 60,457,720 | $ | 605 | $ | 7,479,073 | $ | (7,523,765) | $ | 7,347 | $ | (36,740) | ||||||||||||||||||||||||
| Six Months Ended January 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 4,431 | $ | (42,471) | |||||||
| Less: Loss from discontinued operations, net of tax | — | (40,002) | |||||||||
| Income (loss) from continuing operations | 4,431 | (2,469) | |||||||||
| Adjustments to reconcile net income (loss) to cash flows from operating activities: | |||||||||||
| Depreciation | 924 | 1,175 | |||||||||
| Amortization of deferred financing costs | 24 | 68 | |||||||||
| Accretion of debt discount | 1,056 | 800 | |||||||||
| Share-based compensation | 355 | 408 | |||||||||
| Non-cash lease expense | 4,488 | 4,720 | |||||||||
| Bad debt expense (recovery) | 964 | (3) | |||||||||
| Other losses, net | 74 | 759 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | 2,734 | (6,665) | |||||||||
| Inventories, net | (493) | (1,661) | |||||||||
| Prepaid expenses and other current assets | (1,536) | (476) | |||||||||
| Accounts payable, accrued restructuring and accrued expenses | (1,016) | 5,633 | |||||||||
| Refundable and accrued income taxes, net | (845) | (319) | |||||||||
| Other assets and liabilities | (1,572) | (4,692) | |||||||||
| Net cash provided by (used in) operating activities | 9,588 | (2,722) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions of property and equipment | (866) | (826) | |||||||||
| Proceeds from the disposition of property and equipment | 16 | — | |||||||||
| Net cash used in investing activities | (850) | (826) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Preferred dividend payments | (1,074) | (1,074) | |||||||||
| Repayments on capital lease obligations | (38) | (36) | |||||||||
| Net cash used in financing activities | (1,112) | (1,110) | |||||||||
| Net effect of exchange rate changes on cash, cash equivalents and restricted cash | 1,110 | (395) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 8,736 | (5,053) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 58,045 | 66,329 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 66,781 | $ | 61,276 | |||||||
| Cash and cash equivalents, end of period | $ | 62,427 | $ | 55,641 | |||||||
| Restricted cash for funds held for clients, end of period | 4,354 | 5,635 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 66,781 | $ | 61,276 | |||||||
| Cash flows from discontinued operations: | |||||||||||
| Operating activities | $ | — | $ | (20,446) | |||||||
| Investing activities | — | (6,363) | |||||||||
| Financing activities | — | (3,000) | |||||||||
| Net cash used in discontinued operations | $ | — | $ | (29,809) | |||||||
IWCO Direct delivers highly-effective data-driven marketing solutions for its customers, which represent someMerger Agreement.
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.
its terms.
U.S. GAAP.
Please refer to Note 18 - "Subsequent Events" for further details.
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 effective date will be the first quarter of fiscal year 2019 using one of two retrospective application methods or a cumulative effect approach. The Company and its outside consultants have initiated the process of evaluating the potential effects on the consolidated financial statements.
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 relevanthistorical experience, current conditions, and events when there is substantial doubt about an entity’s ability to continue as a going concern. The Company adopted this guidance asreasonable and supportable forecasts that affect the collectability of the first quarter of fiscal year 2018. Its adoption did not have an effect on 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.reported amount. 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.
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 the fiscal year 2020.ending July 31, 2024 on a modified retrospective basis, which requires a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the effect thethis 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 did not materially impact 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 beginning in the first quarter of fiscal year 2019. The Company is currently in the process of assessing what impact this new standardit 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.
statements.
(4) INVENTORIES
Inventories
Inventories consistedthe “IWCO Direct Disposal”). As of the following:
| January 31, 2018 | July 31, 2017 | |||||||
| (In thousands) | ||||||||
Raw materials | $ | 25,055 | $ | 24,129 | ||||
Work-in-process | 15,448 | 713 | ||||||
Finished goods | 4,708 | 9,527 | ||||||
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| |||||
| $ | 45,211 | $ | 34,369 | |||||
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Disposal Date and subject to the terms and conditions of the Transaction Agreement, the parties entered into certain mutual releases as fully set forth in the Transaction Agreement. In addition, as part of the overall transaction, the Buyer issued a note in the principal amount of $6.9 million payable to the Company as consideration for intercompany obligations owed by IWCO Direct to the Company (the “Subordinated Note”). The Subordinated Note is subordinated to the obligations under the Financing Agreement (including any amendments or other modifications thereto) and matures on the date that is the earlier of (a) the later of (i) August 25, 2027 and (ii) the date that is six months after the maturity of the Financing Agreement, or (b) the date that is six months after repayment in full of the obligations under the Financing Agreement. Due to the subordinated nature of the Subordinated Note and the assessment of collectability, the Company determined the fair value of the Subordinated Note was zero.
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 mailed immediately after the production and sorting process. With the acquisition of IWCO the Company recorded a fair value“step-up” towork-in-process inventory of $7.0 million as a part of purchase accounting, which was recognized as anon-cash charge to cost of revenues during the three months ended January 31, 2018 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 netnon-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 netnon-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 netnon-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, thethat date. The Company did not have any investmentsamounts included in Trading Securities. Asaccumulated other comprehensive loss associated with IWCO Direct at the time of July 31, 2017,deconsolidation. The disposal of IWCO Direct represents a strategic shift to exit the Company had $11.9 million in investments in Trading Securities.
(6) OTHER CURRENT AND LONG-TERM LIABILITIES
direct marketing business and its results are reported as discontinued operations for the prior year periods presented.
| Three months ended January 31, | Six months ended January 31, | ||||||||||
| 2022 | 2022 | ||||||||||
| Net revenue | $ | 66,316 | $ | 147,375 | |||||||
| Cost of revenue | 63,617 | 138,802 | |||||||||
| Gross profit | 2,699 | 8,573 | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | 12,523 | 25,355 | |||||||||
| Amortization of intangible assets | 3,903 | 8,085 | |||||||||
| Restructuring | 535 | 873 | |||||||||
| Total operating expenses | 16,961 | 34,313 | |||||||||
| Operating loss | (14,262) | (25,740) | |||||||||
| Other expense: | |||||||||||
| Interest expense | (7,229) | (14,262) | |||||||||
| Total other expense, net | (7,229) | (14,262) | |||||||||
| Loss from discontinued operations before income taxes | (21,491) | (40,002) | |||||||||
| Income tax expense | — | — | |||||||||
| Loss from discontinued operations, net of tax | $ | (21,491) | $ | (40,002) | |||||||
| January 31, 2023 | July 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Raw materials | $ | 7,965 | $ | 7,330 | |||||||
| Work-in-process | 145 | 124 | |||||||||
| Finished goods | 806 | 697 | |||||||||
| $ | 8,916 | $ | 8,151 | ||||||||
| January 31, 2018 | July 31, 2017 | |||||||
| (In thousands) | ||||||||
Accrued taxes | $ | 5,215 | $ | 2,272 | ||||
Accrued compensation | 30,638 | 10,678 | ||||||
Accrued interest | 4,190 | 1,366 | ||||||
Accrued audit, tax and legal | 2,693 | 2,759 | ||||||
Accrued contract labor | 1,538 | 1,632 | ||||||
Accrued worker’s compensation | 6,347 | — | ||||||
Accrued other | 24,050 | 19,191 | ||||||
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| $ | 74,671 | $ | 37,898 | |||||
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| January 31, 2018 | July 31, 2017 | |||||||
| (In thousands) | ||||||||
Accrued pricing liabilities | $ | 18,882 | $ | 18,882 | ||||
Line of credit liability | 6,000 | — | ||||||
Customer postage deposits | 10,457 | — | ||||||
Other | 8,222 | 7,259 | ||||||
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| $ | 43,561 | $ | 26,141 | |||||
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| January 31, 2023 | July 31, 2022 | ||||||||||
| Accrued Expenses | (In thousands) | ||||||||||
| Accrued compensation | $ | 5,983 | $ | 5,099 | |||||||
| Accrued audit, tax and legal | 4,298 | 4,564 | |||||||||
| Accrued price concessions | 2,884 | 4,539 | |||||||||
| Accrued taxes | 2,847 | 3,344 | |||||||||
| Accrued occupancy costs | 1,655 | 1,671 | |||||||||
| Accrued freight | 796 | 782 | |||||||||
| Accrued IT costs | 683 | 1,108 | |||||||||
| Accrued interest | 476 | 476 | |||||||||
| Accrued contract labor | 399 | 792 | |||||||||
| Accrued other | 5,611 | 6,021 | |||||||||
| Total accrued expenses | $ | 25,632 | $ | 28,396 | |||||||
| January 31, 2023 | July 31, 2022 | ||||||||||
| Other Current Liabilities | (In thousands) | ||||||||||
| Accrued pricing liabilities | $ | 9,435 | $ | 9,435 | |||||||
| Deferred revenue - current | 3,489 | 2,705 | |||||||||
| Other | 2,107 | 1,342 | |||||||||
| Total other current liabilities | $ | 15,031 | $ | 13,482 | |||||||
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 expectedprobable to occur, within the next twelve months.
and any potential interest and penalties cannot be reasonably estimated.
| Three months ended January 31, | Six months ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | — | $ | 646 | $ | — | $ | 646 | |||||||||||||||
| Selling, general and administrative | — | 210 | — | 210 | |||||||||||||||||||
| $ | — | $ | 856 | $ | — | $ | 856 | ||||||||||||||||
The Company recorded an immaterial restructuring chargeliability during the six months ended January 31, 2018. 2023 were as follows:
| (in thousands) | |||||
| Balance as of July 31, 2022 | $ | 892 | |||
| Costs incurred | — | ||||
| Cash payments | (722) | ||||
| Non-cash relief of accrual | — | ||||
| Change in estimates | (2) | ||||
| Balance as of January 31, 2023 | $ | 168 | |||
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 | ||||||
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Restructuring adjustments | 19 | 22 | 41 | |||||||||
Cash paid | (12 | ) | (108 | ) | (120 | ) | ||||||
Non-cash adjustments | 5 | — | 5 | |||||||||
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Accrued restructuring balance at January 31, 2018 | $ | 112 | $ | — | $ | 112 | ||||||
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| Americas | Asia | Europe | Direct marketing | All other | Consolidated Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Accrued restructuring balance at July 31, 2017 | $ | 51 | $ | — | $ | 23 | $ | — | $ | 112 | $ | 186 | ||||||||||||
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Restructuring charges | — | — | — | — | — | — | ||||||||||||||||||
Restructuring adjustments | 27 | 1 | 2 | — | 11 | 41 | ||||||||||||||||||
Cash paid | (12 | ) | — | — | — | (108 | ) | (120 | ) | |||||||||||||||
Non-cash adjustments | 2 | (1 | ) | (25 | ) | — | 29 | 5 | ||||||||||||||||
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Accrued restructuring balance at January 31, 2018 | $ | 68 | $ | — | $ | — | $ | — | $ | 44 | $ | 112 | ||||||||||||
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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 | ||||||||||||
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| $ | 4 | $ | 776 | $ | 41 | $ | 2,150 | |||||||||
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(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 includedone-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 wasis recorded as a component of selling, general and administrative expense. Goodwillaccrued expenses in the condensed consolidated balance sheets.
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Operating lease cost | $ | 2,497 | $ | 2,463 | $ | 4,902 | $ | 4,973 | |||||||||||||||
| Short-term lease expense | 437 | 452 | 875 | 739 | |||||||||||||||||||
| Variable lease cost | 3 | 4 | 7 | 15 | |||||||||||||||||||
| Amortization of finance lease assets | — | — | — | — | |||||||||||||||||||
| Interest on finance lease liabilities | — | 1 | — | 2 | |||||||||||||||||||
| Sublease income | (291) | (213) | (564) | (213) | |||||||||||||||||||
| $ | 2,646 | $ | 2,707 | $ | 5,220 | $ | 5,516 | ||||||||||||||||
| Six Months Ended January 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Cash paid for amounts included in measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 4,826 | $ | 5,044 | |||||||
| Operating cash flows from finance leases | $ | — | $ | 2 | |||||||
| Financing cash flows from finance leases | $ | 38 | $ | 36 | |||||||
The following table summarizes the preliminary fair value of assets acquireddebt 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 effectreconciliation to the Company’s acquisitioncarrying amount 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 resultslong-term debt is 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.
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 resultstable below:
| January 31, 2023 | July 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Unsecured | |||||||||||
| 7.50% Convertible Senior Note due March 1, 2024 | $ | 14,940 | $ | 14,940 | |||||||
| Credit Facilities | |||||||||||
| Umpqua Revolver | — | — | |||||||||
Less: unamortized discounts and issuance costs(a) | (2,892) | (3,972) | |||||||||
| Total debt, net | $ | 12,048 | $ | 10,968 | |||||||
| 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 31credit facilities of each fiscal year. In addition, if$56 thousand 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$79 thousand 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 three2023 and six months ended JanuaryJuly 31, 2018.
Intangible2022, respectively, which are presented in Prepaid expenses and other current 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) DEBT
5.25%Other assets.
Note
Holders of the Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at theirits option, at any time prior to the close of business oron the business day immediately preceding March 1, 2024, the maturity date. Each $1,000 of principaldate of the Notes will initially be convertibleSPHG Note, to convert the SPHG Note or a portion thereof that is $1,000 or an integral multiple thereof, into 166.2593 shares of ourcommon 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 $6.01$2.37 per share (subject to adjustment as provided in the SPHG Note) per $1,000 principal amount of the SPHG Note, subject to, adjustment uponand in accordance with, the occurrence of certain events, or, if the Company obtains the required consent from its stockholders, into sharessettlement provisions 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.SPHG Note. As of January 31, 2018,2023, theif-converted value of the NotesSPHG Note 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 the equity conversion feature, is equal to the initial debt discount. The resulting debt discount on the Notes is being accreted to interest expense at the effective interest rate over the estimated life of the Notes. The equity component is 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 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 issuance costs allocated to the liability component ($2.5 million) are 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 is recorded as a reduction to additionalpaid-in capital.
The fair value of the Company’s Notes payable, calculated as of the closing price of the traded securities, was $66.2 million and $63.9 million as of January 31, 2018 and July 31, 2017, 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.SPHG Note. As of January 31, 2018 and July 31, 2017, the net carrying value of the Notes was $62.1 million and $59.8 million, respectively.
| January 31, | July 31, | |||||||
| 2018 | 2017 | |||||||
| (In thousands) | ||||||||
Carrying amount of equity component (net of allocated debt issuance costs) | $ | 26,961 | $ | 26,961 | ||||
Principal amount of Notes | $ | 67,625 | $ | 67,625 | ||||
Unamortized debt discount | (5,110 | ) | (7,227 | ) | ||||
Unamortized debt issuance costs | (453 | ) | (640 | ) | ||||
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Net carrying amount | $ | 62,062 | $ | 59,758 | ||||
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As of January 31, 2018,2023, the remaining period over which the unamortized discount will be amortized is 13 months.
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
Interest expense related to contractual interest coupon | $ | 913 | $ | 888 | $ | 1,827 | $ | 1,823 | ||||||||
Interest expense related to accretion of the discount | 1,076 | 999 | 2,117 | 1,940 | ||||||||||||
Interest expense related to debt issuance costs | 95 | 89 | 187 | 172 | ||||||||||||
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| $ | 2,084 | $ | 1,976 | $ | 4,131 | $ | 3,935 | |||||||||
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During the three and six months ended As of January 31, 2018,2023 and July 31, 2022, the Company recognized interest expense associated withnet carrying value of the Notes of $2.1SPHG Note was $12.1 million and $4.1 million, respectively. During the three and six months ended January 31, 2017, the Company recognized interest expense of $2.0 million and $3.9$11.0 million, respectively. The effective interest rate on the Notes,SPHG Note, including amortization of debt issuance costs and accretion of the discount, is 13.9%27.8%. The notes bear interest of 5.25%.
PNC Bank Credit Facility
On June 30, 2014, two direct and wholly owned subsidiariesfollowing tables reflect the components of the Company (the “ModusLink Borrowers”)SPHG Note:
| January 31, 2023 | July 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Carrying amount of equity component | $ | 8,200 | $ | 8,200 | |||||||
| Principal amount of note | $ | 14,940 | $ | 14,940 | |||||||
| Unamortized debt discount | (2,836) | (3,893) | |||||||||
| Net carrying amount | $ | 12,104 | $ | 11,047 | |||||||
| Three months ended January 31, | Six months ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Interest expense related to contractual interest coupon | $ | 286 | $ | 286 | $ | 573 | $ | 572 | |||||||||||||||
| Interest expense related to accretion of the discount | 547 | 414 | 1,056 | 800 | |||||||||||||||||||
| Interest expense related to revolving credit facilities (see below) | 12 | 34 | 24 | 69 | |||||||||||||||||||
| Other | 3 | 16 | 21 | 71 | |||||||||||||||||||
| Total interest expense | $ | 848 | $ | 750 | $ | 1,674 | $ | 1,512 | |||||||||||||||
agent. The Credit Agreement has a five (5) year term which expires on June 30, 2019. It includesUmpqua Revolver provides for a maximum credit commitment of $50.0$12.5 million isand a sublimit of $5.0 million for letters of credit and expires on March 16, 2024. Concurrent with signing the Umpqua Revolver ModusLink submitted a notice of termination to MidCap Financial Trust for its $12.5 million revolving credit facility (the “MidCap Credit Facility”), which was set to expire on December 31, 2022. There was no balance outstanding on the Midcap Credit Facility at the time of its termination. As of January 31, 2023, ModusLink was in compliance with the Umpqua Revolver's covenants, and believes it will remain in compliance with the Umpqua Revolver’s covenants for the next twelve months. As of January 31, 2023, ModusLink had available borrowing capacity of $11.9 million and there was $0.6 million available for letters of credit (withcredit. See Note 18 – “Subsequent Events” for additional information regarding the Umpqua Revolver.
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%"Challenged Transactions") 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 notnamed as a borrower ornominal defendant. The complaint alleges that although the Challenged Transactions were approved by a guarantor underSpecial Committee consisting of the Credit Agreement.
independent members of the Board of Directors (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 stockholders and therefore unjustly enriched Steel Holdings, SPHG Holdings and Messrs. Lichtenstein, Howard and Fejes. The Credit Agreement contains certain customary negative covenants, which include limitations on mergers and acquisitions,complaint also alleges that the saleBoard of assets, liens, guarantees, investments, loans, capital expenditures, dividends, indebtedness, changesDirectors made misleading disclosures in the natureCompany's proxy statement for the 2017 Annual Meeting of business, transactionsStockholders in connection with affiliates,seeking approval to amend the creation2010 Incentive Award Plan to authorize the issuance of subsidiaries, changes in fiscal yearadditional shares to accommodate certain shares underlying the equity grants. Remedies requested include rescission of the Series C Convertible Preferred Stock and accounting practices, changesequity grants, disgorgement of any unjustly obtained property or compensation and monetary damages. On June 8, 2018, defendants moved to governing documents, compliancedismiss the complaint for failure to plead demand futility and failure to state a claim. On June 28, 2019, the Court denied most of the motion to dismiss allowing the matter to proceed. The defendants answered the complaint on September 6, 2019, denying all liability.
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 “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)also agreed to pay the Plaintiff’s counsel legal 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 befor this matter in an amount equal per quarterup to $2.05 million, if approved by the court.
Borrowings under the Financing Agreement are fully guaranteed by the Guarantors and are collateralized by substantially all the assetscourt ruled that it was denying approval of the Borrowersettlement.
this Quarterly Report on Form 10-Q.
| Three months ended January 31, | Six months ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Major Goods/Service Lines | |||||||||||||||||||||||
| Supply chain management services | $ | 50,427 | $ | 53,719 | 101,358 | 97,661 | |||||||||||||||||
| Other | 354 | 603 | 782 | 1,015 | |||||||||||||||||||
| $ | 50,781 | $ | 54,322 | $ | 102,140 | $ | 98,676 | ||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||
| Services transferred over time | $ | 50,781 | $ | 54,322 | 102,140 | 98,676 | |||||||||||||||||
| $ | 50,781 | $ | 54,322 | $ | 102,140 | $ | 98,676 | ||||||||||||||||
(11) STOCKHOLDERS’ EQUITY
Preferred Stock
agreement in proportion to the costs incurred in satisfying the obligations under the contract.
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 hasif the right to require each holdersuch amounts is unconditional and solely based on the passage of Preferred Stocktime.
Upon the occurrence of certain triggering events suchproduct or service. The deferred revenue balance is classified 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 holderscomponent of other equity or equity equivalent securities of the Companycurrent liabilities and 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 Stocklong-term liabilities 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.
Company's condensed consolidated balance sheets.
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).
Common Stock
Each holder of the Company’s common stock is entitled to:
| January 31, 2023 | July 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Accounts receivable, trade, net | $ | 37,180 | $ | 40,083 | |||||||
| Contract assets | 508 | 369 | |||||||||
| Deferred revenue - current | $ | 3,489 | $ | 2,705 | |||||||
| Deferred revenue - long-term | 88 | 134 | |||||||||
| Total deferred revenue | $ | 3,577 | $ | 2,839 | |||||||
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 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) 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 | |||||||||
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| $ | (1,716 | ) | $ | 1,019 | $ | (294 | ) | $ | 531 | |||||||
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The Company recorded foreign exchange gains (losses) of approximately $(1.4) million and $29 thousand during the three months ended January 31, 2018 and 2017, 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 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.
The Company recorded foreign exchange gains (losses) of approximately $(2.1) million and $0.4 milliondeferred revenue during the six months ended January 31, 20182023 and 2017, respectively. For the six months ended January 31, 2018,2022, were as follows:
| Six Months Ended January 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Balance at beginning of period | $ | 2,839 | $ | 2,320 | |||||||
| Deferral of revenue | 1,483 | 1,656 | |||||||||
| Recognition of deferred amounts upon satisfaction of performance obligation | (745) | (588) | |||||||||
| Balance at end of period | $ | 3,577 | $ | 3,388 | |||||||
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) invoice for services performed.
local governments, individuals and businesses.
positions as there were no income tax positions that required the Company to accrue penalties. The Company does not expect anyexpects $0.2 million of unrecognized tax benefits and related interest 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, 20132019 through July 31, 2017.2022. 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 2009Company's 2014 through 20162021 tax years remain subject to examination in most locations, while the Company’s 2005Company's 2010 through 20162021 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
The Company calculates earnings per share in accordance with ASC Topic 260, “Earnings per Share.”
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
Net income (loss) | $ | 65,089 | $ | (2,906 | ) | $ | 59,852 | $ | (11,449 | ) | ||||||
Less: Preferred dividends on redeemable preferred stock | (259 | ) | — | (259 | ) | — | ||||||||||
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Net income (loss) attributable to common stockholders | $ | 64,830 | $ | (2,906 | ) | $ | 59,593 | $ | (11,449 | ) | ||||||
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5.25% Convertible Senior Notes | 1,748 | — | 3,459 | — | ||||||||||||
Redeemable preferred stock | 259 | — | 259 | — | ||||||||||||
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Net income (loss) attributable to common stockholders after assumed conversions | $ | 66,837 | $ | (2,906 | ) | $ | 63,311 | $ | (11,449 | ) | ||||||
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Weighted average common shares outstanding | 58,341 | 55,083 | 56,776 | 55,031 | ||||||||||||
Weighted average common equivalent shares arising from dilutive stock options, restricted stock, convertible notes and convertible preferred stock | 20,742 | — | 16,107 | — | ||||||||||||
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Weighted average number of common and potential common shares | 79,083 | 55,083 | 72,883 | 55,031 | ||||||||||||
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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 | ) | ||||||
2022:
| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||
| Reconciliation of net (loss) income to net (loss) income attributable to common stockholders after assumed conversions: | |||||||||||||||||||||||
| Net (loss) income from continuing operations | $ | (526) | $ | (1,486) | $ | 4,431 | $ | (2,469) | |||||||||||||||
| Loss from discontinued operations | — | (21,491) | — | (40,002) | |||||||||||||||||||
| Net (loss) income | (526) | (22,977) | 4,431 | (42,471) | |||||||||||||||||||
| Less: Preferred dividends on redeemable preferred stock | (537) | (537) | (1,074) | (1,074) | |||||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (1,063) | $ | (23,514) | $ | 3,357 | $ | (43,545) | |||||||||||||||
| Net (loss) income per common share - basic | |||||||||||||||||||||||
| Net (loss) income from continuing operations | $ | (0.02) | $ | (0.03) | $ | 0.06 | $ | (0.06) | |||||||||||||||
| Net loss from discontinued operations | — | (0.36) | — | (0.67) | |||||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (0.02) | $ | (0.39) | $ | 0.06 | $ | (0.73) | |||||||||||||||
| Net (loss) income per common share - diluted | |||||||||||||||||||||||
| Net (loss) income from continuing operations | $ | (0.02) | $ | (0.03) | $ | 0.06 | $ | (0.06) | |||||||||||||||
| Net loss from discontinued operations | — | (0.36) | — | (0.67) | |||||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (0.02) | $ | (0.39) | $ | 0.06 | $ | (0.73) | |||||||||||||||
| Weighted average common shares outstanding - basic | 60,178 | 59,748 | 60,129 | 60,027 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Common stock equivalents - Restricted stock and restricted stock shares | — | — | 508 | — | |||||||||||||||||||
| Weighted average common shares outstanding - diluted | 60,178 | 59,748 | 60,637 | 60,027 | |||||||||||||||||||
(15) SHARE-BASED PAYMENTS
The following table summarizes share-based compensation expense related to employee stock options, employee stock purchases and employee and non-employeenon-vested and vested shares for For the three and six months ended January 31, 2018 and 2017, which was allocated as follows:
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| (In thousands) | ||||||||||||||||
Cost of revenue | $ | 1 | $ | 15 | $ | 12 | $ | 31 | ||||||||
Selling, general and administrative | 7,104 | 174 | 7,385 | 350 | ||||||||||||
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| $ | 7,105 | $ | 189 | $ | 7,397 | $ | 381 | |||||||||
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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, 20182022, 24.7 million common stock equivalent shares (including those related to these non-employee awards was $6.6 million.
At January 31, 2018, there was an immaterial balanceconvertible debt and preferred stock) were excluded from the denominator in the calculation of total unrecognized compensation cost related to Stock Options issued under the Company’s plans. At January 31, 2018, there was approximately $1.1 million of total unrecognized compensation cost related tonon-vested share-based compensation awards under the Company’s plans.
(16) diluted net loss per share as their inclusion would have been antidilutive.
Accumulated other comprehensive items consist of the following:
| Foreign currency items | Pension items | Unrealized gains (losses) on securities | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
Accumulated other comprehensive income (loss) at July 31, 2017 | $ | 7,522 | $ | (3,376 | ) | $ | 167 | $ | 4,313 | |||||||
Foreign currency translation adjustment | 3,926 | — | — | 3,926 | ||||||||||||
Net unrealized holding gain on securities | — | — | 16 | 16 | ||||||||||||
Pension liability adjustments | — | 26 | — | 26 | ||||||||||||
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Net current-period other comprehensive income | 3,926 | 26 | 16 | 3,968 | ||||||||||||
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Accumulated other comprehensive income (loss) at January 31, 2018 | $ | 11,448 | $ | (3,350 | ) | $ | 183 | $ | 8,281 | |||||||
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(17) SEGMENT INFORMATION
The Company has five operating segments: Americas; Asia; Europe; Direct Marketing; ande-Business. Direct Marketing is
| Foreign Currency Items | Pension Items | Total | |||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Accumulated other comprehensive income (loss) as of July 31, 2022 | $ | 6,063 | $ | (1,923) | $ | 4,140 | |||||||||||||||||
| Foreign currency translation adjustment | 1,818 | — | 1,818 | ||||||||||||||||||||
| Pension liability adjustments | — | (1,078) | (1,078) | ||||||||||||||||||||
| Net current-period other comprehensive income | 1,818 | (1,078) | 740 | ||||||||||||||||||||
| Accumulated other comprehensive income (loss) as of January 31, 2023 | $ | 7,881 | $ | (3,001) | $ | 4,880 | |||||||||||||||||
| Foreign Currency Items | Pension Items | Total | |||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Accumulated other comprehensive income (loss) as of July 31, 2021 | $ | 9,762 | $ | (2,600) | $ | 7,162 | |||||||||||||||||
| Foreign currency translation adjustment | 185 | — | 185 | ||||||||||||||||||||
| Net current-period other comprehensive income | 185 | — | 185 | ||||||||||||||||||||
| Accumulated other comprehensive income (loss) as of January 31, 2022 | $ | 9,947 | $ | (2,600) | $ | 7,347 | |||||||||||||||||
Management evaluates segment performance based on segment net revenue and operating income (loss).
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| (In thousands) | ||||||||||||||||
Net revenue: | ||||||||||||||||
Americas | $ | 13,764 | $ | 27,183 | $ | 28,603 | $ | 53,061 | ||||||||
Asia | 36,290 | 38,861 | 79,802 | 81,734 | ||||||||||||
Europe | 37,893 | 44,910 | 76,283 | 90,091 | ||||||||||||
Direct Marketing | 56,913 | — | 56,913 | — | ||||||||||||
All Other | 6,259 | 6,614 | 12,040 | 14,009 | ||||||||||||
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| $ | 151,119 | $ | 117,568 | $ | 253,641 | $ | 238,895 | |||||||||
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Operating income (loss): | ||||||||||||||||
Americas | $ | (2,285 | ) | $ | (1,720 | ) | $ | (4,484 | ) | $ | (5,576 | ) | ||||
Asia | 15,730 | 2,312 | 19,899 | 4,089 | ||||||||||||
Europe | (3,464 | ) | 40 | (6,324 | ) | (2,551 | ) | |||||||||
Direct Marketing | (2,825 | ) | — | (2,825 | ) | — | ||||||||||
All Other | (1,350 | ) | (889 | ) | (2,795 | ) | (545 | ) | ||||||||
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Total Segment operating income (loss) | 5,806 | (257 | ) | 3,471 | (4,583 | ) | ||||||||||
Corporate-level activity | (10,382 | ) | (1,247 | ) | (11,877 | ) | (2,563 | ) | ||||||||
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Total operating loss | (4,576 | ) | (1,504 | ) | (8,406 | ) | (7,146 | ) | ||||||||
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Total other expense | 8,199 | 1,075 | 8,720 | 3,427 | ||||||||||||
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Loss before income taxes | $ | (12,775 | ) | $ | (2,579 | ) | $ | (17,126 | ) | $ | (10,573 | ) | ||||
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Net revenue and operating loss associated with Direct Marketing is for the period from December 15, 2017 to January 31, 2018. The Direct Marketing operating loss includes certain purchase accounting adjustments associated with the IWCO acquisition.
| January 31, 2018 | July 31, 2017 | |||||||
| (In thousands) | ||||||||
Total assets: | ||||||||
Americas | $ | 21,944 | $ | 21,876 | ||||
Asia | 51,805 | 63,819 | ||||||
Europe | 57,039 | 64,639 | ||||||
Direct Marketing | 646,840 | — | ||||||
All Other | 20,020 | 20,703 | ||||||
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Sub-total - segment assets | 797,648 | 171,037 | ||||||
Corporate | 72,462 | 110,261 | ||||||
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| $ | 870,110 | $ | 281,298 | |||||
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| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Supply Chain | $ | 50,781 | $ | 54,322 | 102,140 | 98,676 | |||||||||||||||||
| Total segment net revenue | 50,781 | 54,322 | $ | 102,140 | $ | 98,676 | |||||||||||||||||
| Operating income: | |||||||||||||||||||||||
| Supply Chain | 5,388 | 2,374 | 11,238 | 4,347 | |||||||||||||||||||
| Total segment operating income | 5,388 | 2,374 | 11,238 | 4,347 | |||||||||||||||||||
| Corporate-level activity | (2,785) | (2,323) | (4,756) | (3,725) | |||||||||||||||||||
| Total operating income | 2,603 | 51 | 6,482 | 622 | |||||||||||||||||||
| Total other expense, net | (3,475) | (814) | (1,272) | (2,053) | |||||||||||||||||||
| (Loss) income before income taxes | $ | (872) | $ | (763) | $ | 5,210 | $ | (1,431) | |||||||||||||||
| January 31, 2023 | July 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Total assets: | |||||||||||
| Supply Chain | $ | 126,913 | $ | 101,637 | |||||||
| Corporate | 29,199 | 36,112 | |||||||||
| Total assets | $ | 156,112 | $ | 137,749 | |||||||
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Capital expenditures | $ | 318 | $ | 463 | $ | 866 | $ | 826 | ||||||||||||||||||
| Depreciation expense | 465 | 545 | 924 | 1,175 | ||||||||||||||||||||||
| Three Months Ended January 31, | Six Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| (In thousands) | ||||||||||||||||
Supply chain services | $ | 87,947 | $ | 110,954 | $ | 184,688 | $ | 224,886 | ||||||||
Direct Marketing | 56,913 | — | 56,913 | — | ||||||||||||
e-Business services | 6,259 | 6,614 | 12,040 | 14,009 | ||||||||||||
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| $ | 151,119 | $ | 117,568 | $ | 253,641 | $ | 238,895 | |||||||||
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| Three Months Ended January 31, | Six Months Ended January 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Mainland China | $ | 16,231 | $ | 19,424 | $ | 34,196 | $ | 35,390 | |||||||||||||||
| United States | 13,173 | 13,707 | 25,345 | $ | 24,153 | ||||||||||||||||||
| Czech | 7,535 | 3,990 | 13,295 | 6,757 | |||||||||||||||||||
| Singapore | 5,102 | 4,752 | 10,234 | 9,916 | |||||||||||||||||||
| Netherlands | 4,926 | 6,227 | 10,277 | 11,876 | |||||||||||||||||||
| Other | 3,814 | 6,222 | 8,793 | 10,584 | |||||||||||||||||||
| $ | 50,781 | $ | 54,322 | $ | 102,140 | $ | 98,676 | ||||||||||||||||
Fornet carrying value of the SPHG Note was $12.1 million and $11.0 million, respectively. During the three months ended January 31, 2018,2023 and 2022, the Company’s net revenues within U.S.A., China, Netherlands and Czech Republic were $72.0 million, $28.2 million, $16.5Company recognized interest expense of $0.8 million and $18.3$0.7 million, respectively. Forrespectively, associated with the three months ended January 31, 2017, the Company’s net revenues within U.S.A., China, Netherlands and Czech Republic were $27.5 million, $31.9 million, $20.0 million and $21.7 million, respectively.
ForSPHG Note. During the six months ended January 31, 2018,2023 and 2022, the Company’s net revenues within U.S.A., China, Netherlands and Czech Republic were $87.1 million, $63.0 million, $31.8Company recognized interest expense of $1.6 million and $40.8$1.4 million, respectively. Forrespectively, associated with 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 million, respectively.
(18) RELATED PARTY TRANSACTIONS
SPHG Note.
Under During each of the three months ended January 31, 2023 and 2022, the Company paid dividends of $0.5 million associated with the Series C Certificate of Designations,Convertible Preferred Stock. During 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),six months ended January 31, 2023 and 2022, the Company haspaid dividends of $1.1 million associated with the right to requireSeries C Convertible Preferred 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.
Management Services Agreement
December 24, 2014, the Company entered into a Management Services Agreement with SP Corporate Services LLC (“SP Corporate”),was effective as of JanuaryJune 1, 2015 (as amended, the “Management Services Agreement”). SP Corporate is an indirect wholly owned subsidiary of Steel Holdings and is a related party.2019. Pursuant to the STCN Management Services Agreement, SP Corporate providedSteel Services provides the Company and its subsidiaries with the non-exclusive services of certain employees, including certain executive officers and other corporate services.
The In connection with the IWCO Direct Disposal, the monthly fee under the STCN Management Services Agreement had an initial term of six months. On June 30, 2015,was reduced effective on the Company entered into an amendment that extendedDisposal Date primarily for the termportion of the Management Services Agreementfee attributable 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, 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.IWCO Direct. Total expenses incurred related to this agreementthe STCN Management Services Agreement for the three and six months ended January 31, 20182023 and 2022 were $0.4$0.6 million and $0.9 million, respectively. Total expenses incurred related to this agreementthe STCN Management Services Agreement for the three and six months ended January 31, 20172023 and 2022 were $0.5$1.2 million and $1.1$1.8 million, respectively. As of January 31, 20182023 and July 31, 2017,2022, amounts due to SP Corporate and Steel Services werewas $0.5 million and $0.3$1.0 million, respectively.
The Related Party Transactions 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 to non-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 affiliatedProposed Merger with Steel Holdings GP, which is a wholly-owned subsidiary of
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 of the General Partner of Steel Holdings 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 and 2017, Mutual Securities received an immaterial amount in commissions associated with these transactions.
(19) further discussion.
MEASUREMENTS
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 and July 31, 2017, classified by fair value hierarchy:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| (In thousands) | January 31, 2018 | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 41,034 | $ | 41,034 | $ | — | $ | — | ||||||||
| 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 | — | — | ||||||||||||
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.
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, accounts payable, funds held for clients 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 carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the accompanying balance sheetCompany's current incremental borrowing rates for similar types of borrowing arrangements.
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| (In thousands) | January 31, 2023 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | 25,435 | $ | 25,435 | $ | — | $ | — | |||||||||||||||
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| (In thousands) | July 31, 2022 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | 31,756 | $ | 31,756 | $ | — | $ | — | |||||||||||||||
The following table presents
| 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 | |||||||||||
The fair value of our Notes payable representsCompany and SPHG Holdings entered into an amendment to the value at which our lenders could trade our debt withinSPHG Note (the “SPHG Note Amendment”). Pursuant to the financial markets, and does not representSPHG Note Amendment, the settlement value of these long-term debt liabilities to us. The fair valuematurity date of the Notes payable could vary each period based on fluctuationsSPHG Note was extended six months to September 1, 2024. In addition, the Company repaid $1.0 million 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 asprincipal amount of the reporting dates.
SPHG Note and will be required to repay an additional $1.0 million principal amount of the note on the three month anniversary of the SPHG Note Amendment. In connection with the SPHG Note Amendment, the Company paid SPHG Holdings a cash amendment fee of $0.1 million.
law.
region, the Company's solutions and services are designed to improve end-to-end supply chains in order to drive growth, lower costs, and improve profitability.
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 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 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 additionU.S. economy due to the computerCOVID-19 pandemic, IWCO Direct’s business was significantly 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 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 declinesa material reduction in customer mailing activities. Against this backdrop, the overall performance within these sectorsCompany held, on behalf of IWCO Direct, extensive discussions with Cerberus about amending and uncertainty affecting the world economy.extending IWCO Direct’s credit facility with Cerberus under which there was approximately $361 million outstanding as of January 31, 2022 that was to mature in December 2022. In addition, the dropCompany’s Board of Directors considered a range of strategic options to address the impending maturity. In mid-January 2022, it became apparent that it would not be possible to extend or refinance the credit facility prior to its maturity. In addition, short-term funding under the revolving credit facility became unavailable. IWCO Direct was in consumer demand for productsthe process of certain clients has hadimplementing the competitive improvement plan (“CIP”) intended to address the changing requirements of its customers and may continuemarkets. Despite initial favorable outcomes and improving prospects from the CIP, the Company was unable to haveamend IWCO Direct's credit facility or identify alternatives to refinance IWCO Direct’s indebtedness given the effectmagnitude of reducing our volumes and adversely affecting our revenue, gross margin and overall operating performance. Additionally, the markets for our services are generally very competitive, though we believe we have a compelling and differentiated offering duethat indebtedness relative to the value-added services we provide, our commitmentperformance of IWCO Direct’s business.
For
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 millionglobal economies. Measures taken by national 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, we had cash and cash equivalents of $106.4 million, and working capital of $70.6 million.
Basis of Presentation
The Company presents its financial information in accordance with accounting principles generally acceptedlocal governments in the United States and around the world restricted, and in certain jurisdictions continue to restrict, individuals’ daily activities and curtail or cease many businesses’ normal operations. The COVID-19 pandemic has adversely impacted, and may further adversely impact, nearly all aspects of our business and markets, including our workforce and the operations of our clients, suppliers, and business partners.
segment. All significant intercompany transactions and balancesintra-segment amounts have been eliminated in consolidation.
eliminated.
| Three Months Ended January 31, | |||||||||||||||||||||||
| (unaudited in thousands) | |||||||||||||||||||||||
| 2023 | 2022 | $ Change1 | % Change1 | ||||||||||||||||||||
| Net revenue | $50,781 | $54,322 | $(3,541) | (6.5)% | |||||||||||||||||||
| Cost of revenue | (37,719) | (43,421) | 5,702 | 13.1% | |||||||||||||||||||
| Gross profit | 13,062 | 10,901 | 2,161 | 19.8% | |||||||||||||||||||
| Gross profit percentage | 25.7% | 20.1% | — | 5.6% | |||||||||||||||||||
| Selling, general and administrative | (10,459) | (9,994) | (465) | (4.7)% | |||||||||||||||||||
| Restructuring | — | (856) | 856 | 100.0% | |||||||||||||||||||
| Interest expense, net | (848) | (750) | (98) | (13.1)% | |||||||||||||||||||
| Other losses, net | (2,627) | (64) | (2,563) | (4004.7)% | |||||||||||||||||||
| Loss from continuing operations before income taxes | (872) | (763) | (109) | (14.3)% | |||||||||||||||||||
| Income tax benefit (expense) | 346 | (723) | 1,069 | 147.9% | |||||||||||||||||||
| Net loss from continuing operations | $(526) | $(1,486) | $960 | 64.6% | |||||||||||||||||||
2022
| 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 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Americas | $ | 13,764 | 9.1 | % | $ | 27,183 | 23.1 | % | $ | (13,419 | ) | (49.4 | %) | |||||||||||
Asia | 36,290 | 24.0 | % | 38,861 | 33.1 | % | (2,571 | ) | (6.6 | %) | ||||||||||||||
Europe | 37,893 | 25.1 | % | 44,910 | 38.2 | % | (7,017 | ) | (15.6 | %) | ||||||||||||||
Direct Marketing | 56,913 | 37.7 | % | — | 0.0 | % | 56,913 | — | ||||||||||||||||
All Other | 6,259 | 4.1 | % | 6,614 | 5.6 | % | (355 | ) | (5.4 | %) | ||||||||||||||
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Total | $ | 151,119 | 100.0 | % | $ | 117,568 | 100.0 | % | $ | 33,551 | 28.5 | % | ||||||||||||
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Net
During the three months ended January 31, 2018, net revenue in the Americas region decreased by approximately $13.4 million. This decrease in net revenue was primarily driven by decreased revenues from clients in the consumer electronics and consumer products industries. Within the Asia region, the net revenue decrease of approximately $2.6 million primarily resulted from lower revenues from programs in the consumer electronics market, partially offset by increase in revenues from a program in the computing industry. Within the Europe region, net revenue decreased by approximately $7.0 million primarily due to lower revenues from clients in the consumer electronics and computing industries. Net revenue for All Other decreased by approximately $0.4 million primarily due to lower revenues from clients in the consumer electronics and consumer products industries.
| 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 | $ | 14,330 | 104.1 | % | $ | 26,177 | 96.3 | % | $ | (11,847 | ) | (45.3 | %) | |||||||||||
Asia | 28,935 | 79.7 | % | 32,085 | 82.6 | % | (3,150 | ) | (9.8 | %) | ||||||||||||||
Europe | 37,792 | 99.7 | % | 41,135 | 91.6 | % | (3,343 | ) | (8.1 | %) | ||||||||||||||
Direct Marketing | 47,505 | 83.5 | % | — | 0.0 | % | 47,505 | — | ||||||||||||||||
All Other | 5,607 | 89.6 | % | 6,973 | 105.4 | % | (1,366 | ) | (19.6 | %) | ||||||||||||||
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| |||||||||||||||||||
Total | $ | 134,169 | 88.8 | % | $ | 106,370 | 90.5 | % | $ | 27,799 | 26.1 | % | ||||||||||||
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In the Americas, the 7.8 percentage point decrease in gross margin, from 3.7% to-4.1%, was primarily due to declines in material costs and a reduction in force, offset by a corresponding unfavorable shift in volumes from clients in the consumer electronics and consumer products industries. In Asia, the 2.9 percentage point increase in gross margin, from 17.4% to 20.3%, was primarily due to product mix despite the decline in revenues. In Europe, the 8.1 percentage point decrease in gross margin, from 8.4% to 0.3%, was attributable to an unfavorable revenue mix associated with clients in the consumer electronics market. The gross margin for All Other was 10.4% for the three months ended January 31, 20182023 as compared to-5.4% for the same period ofin the prior year. This increase of 15.8 percentage points was due to a favorable revenue mix primarily associated with clients in the consumer products and computing industries.
| 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 | $ | 1,719 | 12.5 | % | $ | 2,537 | 9.3 | % | $ | (818 | ) | (32.2 | %) | |||||||||||
Asia | 4,317 | 11.9 | % | 4,119 | 10.6 | % | 198 | 4.8 | % | |||||||||||||||
Europe | 3,565 | 9.4 | % | 3,583 | 8.0 | % | (18 | ) | (0.5 | %) | ||||||||||||||
Direct Marketing | 8,126 | 14.3 | % | — | — | 8,126 | — | |||||||||||||||||
All Other | 1,998 | 31.9 | % | 440 | 6.7 | % | 1,558 | 354.1 | % | |||||||||||||||
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Sub-total | 19,725 | 13.1 | % | 10,679 | 9.1 | % | 9,046 | 84.7 | % | |||||||||||||||
Corporate-level activity | 10,382 | 1,247 | 9,135 | 732.6 | % | |||||||||||||||||||
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Total | $ | 30,107 | 19.9 | % | $ | 11,926 | 10.1 | % | $ | 18,181 | 152.4 | % | ||||||||||||
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Amortization2023 as compared to the same period in the prior year.
The intangible asset amortizationemployee termination costs. In November 2021, ModusLink amended its strategic plan to include reorganizing its supply chain operations and recorded a restructuring charge of $4.1approximately $0.9 million during the three months ended January 31, 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 | %) | ||||||||||||||
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Total | $ | 4 | 0.0 | % | $ | 776 | 0.7 | % | $ | (772 | ) | (99.5 | %) | |||||||||||
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The $0.8 million2022. There were no restructuring chargecosts recorded during the three months ended January 31, 20172023 which is driving the decrease in costs period over period.
Interest Income/Expense:
Singapore Dollar.
Other Gains (Losses), net:
The Company recorded foreign exchange gains (losses) of approximately $(1.4) million and $29 thousand during the three months ended January 31, 2018 and 2017, respectively. For the three months ended January 31, 2018, the net gains 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, the Company recordedan income tax benefit of approximately $77.7$0.3 million as compared to $0.7 million in income tax expense of $0.7 million for the same period in the prior fiscal year. The income tax benefitdecrease in the current 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 is primarily due to lower taxable income in certainforeign jurisdictions, whereas compared to the Company operates, using the enacted tax rates in those jurisdictions.
prior year period.
Results
this Quarterly Report on Form 10-Q.
| Six Months Ended January 31, | |||||||||||||||||||||||
| (unaudited in thousands) | |||||||||||||||||||||||
| 2023 | 2022 | $ Change1 | % Change1 | ||||||||||||||||||||
| Net revenue | $102,140 | $98,676 | $3,464 | 3.5% | |||||||||||||||||||
| Cost of revenue | (74,813) | (78,369) | 3,556 | 4.5% | |||||||||||||||||||
| Gross profit | 27,327 | 20,307 | 7,020 | 34.6% | |||||||||||||||||||
| Gross profit percentage | 26.8% | 20.6% | — | 6.2% | |||||||||||||||||||
| Selling, general and administrative | (20,845) | (18,829) | (2,016) | (10.7)% | |||||||||||||||||||
| Restructuring | — | (856) | 856 | 100.0% | |||||||||||||||||||
| Interest expense, net | (1,674) | (1,512) | (162) | (10.7)% | |||||||||||||||||||
| Other gains (losses), net | 402 | (541) | 943 | 174.3% | |||||||||||||||||||
| Income (loss) from continuing operations before income taxes | 5,210 | (1,431) | 6,641 | 464.1% | |||||||||||||||||||
| Income tax expense | (779) | (1,038) | 259 | 25.0% | |||||||||||||||||||
| Net income (loss) from continuing operations | $4,431 | $(2,469) | $6,900 | 279.5% | |||||||||||||||||||
2022
| 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 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Americas | $ | 28,603 | 11.3 | % | $ | 53,061 | 22.2 | % | $ | (24,458 | ) | (46.1 | %) | |||||||||||
Asia | 79,802 | 31.5 | % | 81,734 | 34.2 | % | (1,932 | ) | (2.4 | %) | ||||||||||||||
Europe | 76,283 | 30.1 | % | 90,091 | 37.7 | % | (13,808 | ) | (15.3 | %) | ||||||||||||||
Direct Marketing | 56,913 | 22.4 | % | — | 0.0 | % | 56,913 | — | ||||||||||||||||
All Other | 12,040 | 4.7 | % | 14,009 | 5.9 | % | (1,969 | ) | (14.1 | %) | ||||||||||||||
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Total | $ | 253,641 | 100.0 | % | $ | 238,895 | 100.0 | % | $ | 14,746 | 6.2 | % | ||||||||||||
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Net revenue increased by approximately $14.8 million during
During the six months ended January 31, 2018, net revenue in the Americas region decreased by approximately $24.5 million. This decrease in net revenue was primarily driven by decreased revenues from clients in the consumer electronics and consumer products industries. Within the Asia region, the net revenue decrease of approximately $1.9 million primarily resulted from lower revenues from programs in the consumer electronics market, partially offset by increase in revenues from a program in the computing industry. Within the Europe region, net revenue decreased by approximately $13.8 million primarily due to lower revenues from clients in the consumer electronics industry. Net revenue for All Other decreased by approximately $2.0 million primarily due to lower revenues from clients in the consumer electronics industry.
| 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 | $ | 29,632 | 103.6 | % | $ | 52,965 | 99.8 | % | $ | (23,333 | ) | (44.1 | %) | |||||||||||
Asia | 63,960 | 80.1 | % | 67,714 | 82.8 | % | (3,754 | ) | (5.5 | %) | ||||||||||||||
Europe | 75,520 | 99.0 | % | 84,392 | 93.7 | % | (8,872 | ) | (10.5 | %) | ||||||||||||||
Direct Marketing | 47,505 | 83.5 | % | — | — | 47,505 | — | |||||||||||||||||
All Other | 11,000 | 91.4 | % | 13,293 | 94.9 | % | (2,293 | ) | (17.2 | %) | ||||||||||||||
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Total | $ | 227,617 | 89.7 | % | $ | 218,364 | 91.4 | % | $ | 9,253 | 4.2 | % | ||||||||||||
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In the Americas, the-3.8 percentage point decline in gross margin, from 0.2% to-3.6%, was primarily due to declines in material costs and a reduction in force, offset by a corresponding unfavorable shift in volumes from clients in the consumer electronics and consumer products industries. In Asia, the 2.7 percentage point increase in gross margin, from 17.2% to 19.9%, was primarily due to product mix despite a decline in revenues. In Europe, the 5.3 percentage point decrease in gross margin, from 6.3% to 1.0%, was attributable to an unfavorable revenue mix associated with clients in the consumer electronics market. The gross margin for All Other was 8.6% for the six months ended January 31, 2018 as compared to 5.1% for the same period of the prior year. This increase of 3.5 percentage points was due to a favorable revenue mix primarily associated with clients in the consumer products and computing industries.
2023.
| 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 | $ | 3,428 | 12.0 | % | $ | 5,186 | 9.8 | % | $ | (1,758 | ) | (33.9 | %) | |||||||||||
Asia | 8,634 | 10.8 | % | 9,077 | 11.1 | % | (443 | ) | (4.9 | %) | ||||||||||||||
Europe | 7,085 | 9.3 | % | 7,557 | 8.4 | % | (472 | ) | (6.2 | %) | ||||||||||||||
Direct Marketing | 8,126 | 14.3 | % | — | — | 8,126 | — | |||||||||||||||||
All Other | 3,824 | 31.8 | % | 1,144 | 8.2 | % | 2,680 | 234.3 | % | |||||||||||||||
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Sub-total | 31,097 | 12.3 | % | 22,964 | 9.6 | % | 8,133 | 35.4 | % | |||||||||||||||
Corporate-level activity | 11,877 | 2,563 | 9,314 | 363.4 | % | |||||||||||||||||||
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Total | $ | 42,974 | 16.9 | % | $ | 25,527 | 10.7 | % | $ | 17,447 | 68.3 | % | ||||||||||||
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Amortization2023, as compared to the same period in the prior year.
The intangible asset amortizationemployee termination costs. In November 2021, ModusLink amended its strategic plan to include reorganizing its supply chain operations and recorded a restructuring charge of $4.1approximately $0.9 million during the six months ended January 31, 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:
| 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 | %) | ||||||||||||||
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Total | $ | 41 | 0.0 | % | $ | 2,150 | 0.9 | % | $ | (2,109 | ) | (98.1 | %) | |||||||||||
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The $2.2 million2022. There were no restructuring chargecosts recorded during the six months ended January 31, 20172023, which is driving the decrease in costs period over period.
Interest Income/the same period in the prior year.
During the six months ended January 31, 2018 and 2017, interest expense totaled approximately $8.7 million and $4.1 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) 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 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.
Income Tax Expense:
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, 2017,2023, the Company recorded income tax expense of approximately $1.8 million.$0.8 million as compared to $1.0 million for the same period in the prior fiscal year. 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 bydecrease in income tax expense is primarily due to lower taxable income in certainforeign jurisdictions, whereas compared to the Company operates, using the enacted tax rates in those jurisdictions.
prior year period.
| January 31, 2023 | |||||
| (In thousands) | |||||
| Cash and cash equivalents | $ | 62,427 | |||
| Readily available borrowing capacity under Umpqua Revolver | 11,890 | ||||
| $ | 74,317 | ||||
loss carryforwardTax Cuts and Jobs Act in December 2017 ("U.S. Tax Reform"), 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’sCompany's foreign subsidiaries are in an overall net deficit for earnings and profits purposes. As such, no adjustment has beenwas made to U.S. taxable income in 2017the six months ended January 31, 2023 relating to this aspect of the new tax law.U.S. Tax Reform. 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 not be minor.
On June 30, 2014, two directmaterial.
| Six months ended January 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (In thousands) | |||||||||||
| Net cash provided by (used in) operating activities | $ | 9,588 | $ | (2,722) | |||||||
| Net cash used in investing activities | $ | (850) | $ | (826) | |||||||
| Net cash used in financing activities | $ | (1,112) | $ | (1,110) | |||||||
Form 10-Q for further information.
The Financing Agreement provides for $393.0 million term loan facility (the Term Loan) and a $25.0 million revolving credit facility (collectively, the Cerberus Credit Facility). Proceedsliquidation, dissolution or winding up of the Cerberus Credit Facility were used (i) to finance a portionCompany, either voluntary or involuntary, or the merger or consolidation of the IWCO Acquisition, (ii) to repay certain existing indebtednessCompany or significant subsidiary, or the sale of substantially all of the Borrowerassets or capital stock of the Company or a significant subsidiary, the holders of the Preferred Stock are entitled to receive, prior and its subsidiaries, (iii) for working capital and general corporate purposes and (iv)in preference to pay fees and expenses relatedany distribution of any of the assets or funds of the Company to the Financing Agreement andholders of other equity or equity equivalent securities of the IWCO Acquisition. The Cerberus Credit Facility has a maturityCompany other than the Preferred Stock by reason 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 at the LIBOR Rate option. The Term Loan under the Cerberus Credit Facility is repayable in consecutive quarterly installments, each of which will be intheir ownership thereof, an amount per share in cash equal to the sum of (i) 100% of the stated value per quartershare of $1,500,000Preferred Stock (initially $1,000 per share) then held by them (as adjusted for any stock dividend, stock split, stock combination, reclassification 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 installment to be due and payable,share of Preferred Stock, in arrears, oneach case as the last daydate of each calendar quarter commencing on March 31, 2018 and ending on the earlier of (a)triggering event.
Consolidated working capital was $70.6 million at January 31, 2018, compared with $108.7 million at July 31, 2017. Included in working capital were cash and cash equivalentsPreferred Stock.
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.
Investing activities provided (used) cash of $(443.8) million and $3.4 million during the six months ended January 31, 2018 and 2017, respectively. 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 cash of $432.6 million during the six months ended January 31, 2017, which primarily related to the $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 CompanyParent believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, mandatory debt redemptionsobligations and working capital for its existing business for at least the next twelve months. These resources include cash and cash equivalents,Upon a redemption request of the PNC Credit Agreement,holder of the revolving credit facility noted above and cash, if any, provided by operating activities. At January 31, 2018 and July 31, 2017,Preferred Stock (as discussed above), the Company had cash and cash equivalents and Trading Securities of $106.6 million and $122.6 million, respectively. At January 31, 2018 and July 31, 2017, the Company had a readily available borrowing capacity under its PNC Bank Credit Facility of $6.8 million and $16.0 million, respectively. At January 31, 2018, the Company had a readily available borrowing capacity under its Cerberus revolving Credit Facility of $19.0.
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 believeParent believes it is probable that it ishas access to adequate resources, including cash on hand and potential dividends from ModusLink, to pay the redemption price and continue its operations.
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 respecthave access to its businesses and/or assets and capital raising opportunities. The Company continues to examine allline of credit under the Umpqua Revolver if its financial performance does not satisfy the financial covenants set forth in its financing agreement, which could also result in the acceleration of its options and strategies, including acquisitions, divestitures and other corporate transactions, to increase cash flow and stockholder value.
debt obligations by its lender, adversely affecting liquidity.
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. The Company’s contractual obligations and other commercial commitments did not change materially between July 31, 2017 and January 31, 2018. The Company’s gross liability for unrecognized tax benefits and related accrued interest was approximately $1.8 million as of January 31, 2018. 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, the Company had no recorded liabilities with respect to thesefinancing arrangements.
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.
Estimates Update
The Company is exposed
Interest Rate Risk
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. 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 and July 31, 2017, there were no foreign currency forward contracts outstanding.
Revenues from our foreign operating segments accounted for approximately 49.1% and 71.3% of total revenues during the three months ended January 31, 2018 and 2017, 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 and 2017, we recorded a foreign currency translation gain (loss) of approximately $3.6 million and $(0.7) 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 and 2017, we recorded net realized and unrealized foreign currency transaction and remeasurement gains (losses) of approximately $(1.4) million and $29 thousand, 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.Evaluation of Disclosure Controls and ProceduresAn evaluation was performed under the supervision and with the participation of our management, including the Interim 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 Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Disclosure"Disclosure controls and procedures”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’sSEC'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’scompany'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.objectives. Based upon that evaluation, management, including the Interim Chief Executive Officer and Chief Financial Officer, concluded that due to the material weakness described below as well as a material weakness in internal controls over financial reporting as reported in the Company’s 10-K for the period ended July 31, 2017, as filed with the SEC on October 16, 2017, ourCompany's disclosure controls and procedures were not effective as of January 31, 2018.In connection with the preparation of the Form 10-Q for the three and six months ended January 31, 2018, 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 effective controls related 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.Notwithstanding the material weakness, management has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented.Remediation of the Material Weakness2023.Changes in Internal Control Overover Financial ReportingManagement hasThere have been actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness in the e-Business segment throughout the fiscal year 2017 and 2018. These remediation efforts, outlined below, are intended both to address the identified material weakness and to enhance the Company’s overall financial control environment.Management has enhanced 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 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 necessaryno 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. We are working to have the material weakness remediated as soon as possible and significant progress has been made to date. We are 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 ReportingOn December 15, 2017, the Company acquired IWCO Direct as more fully described in Note 8. During the initial transition period following the acquisition, we enhanced our internal controls to ensure all financial information related to the acquisition was properly reflected in our consolidated financial statements.Except as described in the preceding paragraph, there have been no changes in our internal controls over financial reporting (as defined in Rule 13(a)-15(f) or Rule 15d-15(f) of the Exchange Act) during the three monthsquarter ended January 31, 20182023 that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol 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 INFORMATIONItem 1.Legal Proceedings.
None.
Except as provided below, there
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:
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.
Note
None.
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| Date: March 15, | By: | /S/ JASON WONG | |||||||||||
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