Steel Connect Reports Third Quarter Fiscal 2022 Financial Results

Third Quarter Fiscal 2022 Results

• Net revenue totaled $51.5 million, as compared to $49.4 million in the same period in the prior year
• Net loss from continuing operations, net of income taxes was $9.7 million, as compared to a net loss from continuing operations of $9.3 million in the same period in the prior year
• Net income attributable to common stockholders was $29.7 million, as compared to a net loss of $28.1 million in the same period in the prior year
• Adjusted EBITDA^* was $0.9 million, as compared to $(0.4) million in the same period in the prior year
• Net cash used in operating activities was $2.5 million
• Free Cash Flow^* totaled $(2.9) million
• Total debt, net of unamortized discounts and issuance costs, was $10.5 million; Net Debt^* totaled $(35.0) million

Nine-Month Fiscal Year-to-Date Financial Results

• Net revenue totaled $150.2 million, as compared to $178.6 million in the same period in the prior year
• Net loss from continuing operations, net of income taxes was $12.2 million, as compared to a net loss from continuing operations of $11.5 million in the same period in the prior year
• Net loss attributable to common stockholders was $13.9 million, as compared to a net loss of $35.0 million in the same period in the prior year
• Adjusted EBITDA^* was $3.3 million, as compared to $8.8 million in the same period in the prior year
• Net cash used in operating activities was $5.3 million
• Free Cash Flow^* totaled $(6.4) million

SMYRNA, Tenn.–(BUSINESS WIRE)–Steel Connect, Inc. (the “Company”) (NASDAQ: STCN) today announced financial results for its third quarter ended April 30, 2022.

“For the third quarter, ModusLink remained focused on driving growth with our current and new customers.” said Interim Chief Executive Officer and Executive Chairman Warren Lichtenstein. “We continue to rightsize the business based on current and expected demand while closely managing costs. In addition, we have significantly deleveraged the balance sheet due to the disposition of IWCO Direct, and we have positive working capital.”

Disposition of IWCO Direct

As previously announced, on February 25, 2022, the Company completed the full disposition of IWCO Direct Holdings, Inc. (“IWCO Direct”), a wholly-owned subsidiary, to an investor group led by affiliates of Cerberus Capital Management, L.P., IWCO Direct’s senior secured lender. The Company received no cash consideration for the disposition and, following the disposition, has no net debt associated with IWCO Direct. The Company recognized a gain of $38.0 million upon deconsolidation. The historical results of IWCO Direct are included in the financial statements for the three and nine months ended April 30, 2022 and 2021, and are presented as a discontinued operation. ModusLink Corporation (“ModusLink”) is unaffected by the disposition of IWCO Direct.

Proposed Merger with Steel Holdings

On June 12, 2022, the Company, Steel Partners Holdings L.P. (“Steel Holdings”) and SP Merger Sub, Inc., a wholly-owned subsidiary of Steel Holdings (“Merger Sub”), entered into an agreement and plan of merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Steel Holdings. The Merger Agreement provides that each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger (other than dissenting shares and shares owned by the Company, Steel Holdings or any of their respective subsidiaries) shall, subject to the terms and conditions set forth in the Merger Agreement, be converted into the right to receive (i) $1.35 in cash, without interest and (ii) one contingent value right to receive a pro rata share of the proceeds received by the Company, Steel Holdings or any of their affiliates with respect to the sale, transfer or other disposition of all or any portion of the assets currently owned by ModusLink within two years of the Merger’s closing date, to the extent such proceeds exceed $80 million plus certain related costs and expenses. Steel Holdings and certain of its affiliates have also entered into a Voting and Support Agreement pursuant to which, among other things, they have agreed to vote all shares of common stock and Series C Preferred Stock beneficially owned by them in favor of the adoption of the Merger Agreement and the Merger and any alternative acquisition agreement approved by the Company’s board of directors (acting on the recommendation of the Special Committee).

The Merger Agreement includes a “go-shop” period that expires at 11:59 p.m. Eastern time on July 12, 2022, during which the Company may actively solicit and consider alternative acquisition proposals. There can be no assurances that the “go-shop” process will result in a superior proposal, and Steel Connect does not intend to communicate developments regarding the process unless and until Steel Connect determines that additional disclosure is required or desirable.

The closing of the Merger is conditioned upon receipt of approval of the Merger from (i) the holders of a majority in voting power of the outstanding shares of common stock and Series C Preferred Stock of the Company (voting on an as converted to shares of common stock basis), voting together as a single class, (ii) a majority of the outstanding shares of common stock of the Company not owned, directly or indirectly, by Steel Holdings, its affiliates and related parties, and any other officers or directors of the Company and (iii) the holders of a majority of the outstanding shares of Series C Preferred Stock of the Company, voting as a separate class, as well as other customary closing conditions. Accordingly, there can be no assurance that the Company will be able to complete the Merger on the expected timeline or at all. Subject to the satisfaction of all of the conditions to closing, including the receipt of the separate stockholder approvals, the Merger is expected to close in the second half of 2022.

The board of directors of the Company (the “Company Board”), acting on the unanimous recommendation of the special committee of the Company Board (the “Special Committee”), and the Board of Directors of Steel Partner Holdings GP Inc., the general partner of Steel Holdings, approved the Merger Agreement and the transactions contemplated by the Merger Agreement (such transactions, collectively, the “Transactions”) and resolved to recommend the stockholders adopt the Merger Agreement and approve the Transactions. The Special Committee, which is comprised solely of independent and disinterested directors of the Company who are unaffiliated with Steel Holdings, exclusively negotiated the terms of the Merger Agreement with Steel Holdings, with the assistance of its independent financial and legal advisors.

Results of Operations

The financial information and discussion that follows below are for the Company’s operations.

		Three Months Ended April 30,								Nine Months Ended April 30,
			2022				2021				2022				2021
		(in thousands)
Net revenue		$	51,548			$	49,434			$	150,223			$	178,552
Net loss from continuing operations			(9,695	)			(9,294	)			(12,163	)			(11,481	)
Net income (loss) attributable to common stockholders			29,663				(28,148	)			(13,882	)			(34,962	)
Adjusted EBITDA*			938				(378	)			3,318				8,799
Adjusted EBITDA margin*			1.8	%			(0.8	)%			2.2	%			4.9	%
Net cash (used in) provided by operating activities			(2,544	)			5,285				(5,267	)			(4,963	)
Additions to property and equipment			316				220				1,142				902
Free cash flow*			(2,860	)			5,065				(6,409	)			(5,865

*	See reconciliations of these non-GAAP measurements to the most directly comparable GAAP measures included in the financial tables. See also “Note Regarding Use of Non-GAAP Financial Measurements” below for the definitions of these non-GAAP measures.

Comparison of the Third Quarter and Nine Months Ended April 30, 2022 and 2021

	Three Months Ended April 30,											Nine Months Ended April 30,
		2022				2021			Fav (Unfav)				2022				2021			Fav (Unfav)
	(unaudited, $ in thousands)
Net revenue	$	51,548			$	49,434			4.3	%		$	150,223			$	178,552			(15.9	)%
Cost of revenue		(42,303	)			(39,531	)		(7.0	)%			(120,672	)			(139,262	)		13.3	%
Gross profit		9,245				9,903							29,551				39,290
Gross margin percentage		17.9	%			20.0	%						19.7	%			22.0	%
Selling, general and administrative		(9,214	)			(12,417	)		25.8	%			(28,899	)			(36,754	)		21.4	%
Interest income (expense), net		(845	)			(618	)		(36.7	)%			(2,350	)			(1,903	)		(23.5	)%
Other gains (losses), net		2,151				153			1,305.9	%			1,605				(3,990	)		140.2	%
Income (loss) from continuing operations before income taxes		1,337				(2,979	)						(93	)			(3,357	)
Income tax expense		(11,032	)			(6,315	)		(74.7	)%			(12,070	)			(8,124	)		(48.6	)%
Net loss from continuing operations	$	(9,695	)		$	(9,294	)					$	(12,163	)		$	(11,481	)

Net Revenue

Net revenue from continuing operations for the third quarter increased $2.1 million, or 4.3%, as compared to the same period in the prior year. This increase in net revenue was primarily driven by higher volume associated with clients in the computing and consumer electronics markets.

Net revenue from continuing operations for the nine months ended April 30, 2022 decreased $28.3 million, or 15.9%, as compared to the same period in the prior year, primarily due to lower volume associated with clients in the computing and consumer electronics markets, which have been negatively impacted by global market shortage of semiconductor and other electrical component supplies.

Cost of Revenue

Cost of revenue from continuing operations for the third quarter increased $2.8 million, or 7.0%, as compared to the same period in the prior year, primarily due to increased material and labor costs from higher sales volume. The Company’s gross margin percentage decreased by 210 basis points to 17.9%, as compared to 20.0% for the same period in the prior year, primarily due to higher labor and material costs, not completely offset by the higher revenues.

Cost of revenue from continuing operations for the nine months ended April 30, 2022 decreased $18.6 million, or 13.3%, as compared to the same period in the prior year, primarily due to decreased material and labor costs from lower sales volume associated with clients in the computing and consumer electronics markets. The Company’s gross margin percentage decreased by 230 basis points to 19.7%, as compared to 22.0% for the same period in the prior year, primarily due to lower revenues and higher labor costs.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the third quarter decreased $3.2 million, or 25.8%, as compared to the same period in the prior year. The decrease in SG&A expenses is primarily due to lower costs associated with the information technology function for the Supply Chain segment.

SG&A expenses for the nine months ended April 30, 2022 decreased $7.9 million, or 21.4%, as compared to the same period in the prior year. SG&A expenses for the Supply Chain segment decreased primarily due to lower costs associated with the information technology function. Corporate-level activity decreased primarily due to a decrease in professional fees and employee related costs.

Interest Expense

Total interest expense during the three and nine months ended April 30, 2022 did not change significantly as compared to the same period in the prior year.

All Other Expenses, Net

All other expenses, net are primarily composed of foreign exchange gains and losses. The Company recorded $2.2 million and $0.2 million of foreign exchange gains during the three months ended April 30, 2022 and 2021, respectively. The Company recorded $1.6 million of foreign exchange gains and $4.0 million of foreign exchange losses during the nine months ended April 30, 2022 and 2021, respectively.

Income Tax Expense

Income tax expense for the third quarter increased $4.7 million as compared to the same period in the prior year and for the nine months increased $3.9 million as compared to the same period in the prior year. These increases are primarily due to the income tax expense associated with an increase in the valuation allowance recorded on deferred tax assets as a result of the IWCO Direct disposal during the three months ended April 30, 2022.

Loss From Continuing Operations, Net of Income Tax

Loss from continuing operations, net of income tax for the third quarter increased $0.4 million, as compared to the same period in the prior year. The increase in loss from continuing operations, net of income tax is primarily due to the increase in income taxes, partially offset by an increase in operating income.

Loss from continuing operations, net of income taxes for the nine months increased $0.7 million, as compared to the same period in the prior year. The increase in loss from continuing operations, net of income tax is primarily due to the increase in income taxes, partially offset by an increase in foreign exchange gains and an increase in operating income.

Additions to Property and Equipment (Capital Expenditures)

Capital expenditures for the third quarter totaled $0.3 million, or 0.6% of net revenue, as compared to $0.2 million, or 0.5% of net revenue, for the same period in the prior year. Capital expenditures for the nine months totaled $1.1 million, or 0.8% of net revenue, as compared to $0.9 million, or 0.5% of net revenue, for the same period in the prior year. The increase was primarily due to reduced capital spending in the prior year as the result of the COVID-19 pandemic.

Adjusted EBITDA

Adjusted EBITDA increased $1.3 million for the third quarter as compared to the same period in the prior year, primarily due to reduced operating expenses. Adjusted EBITDA decreased $5.5 million, or 62.3%, for the nine months as compared to the same period in the prior year, primarily due to reduced gross profit.

Liquidity and Capital Resources

As of April 30, 2022, the Company had cash and cash equivalents of $49.9 million and ModusLink had readily available borrowing capacity of $12.2 million under its revolving credit facility with Umpqua Bank.

As of April 30, 2022, total debt outstanding, net of unamortized discounts and issuance costs, was $10.5 million, which was comprised of $14.9 million outstanding on the 7.50% Convertible Senior Note due March 1, 2024, less unamortized discounts and issuance costs.

About Steel Connect, Inc.

Steel Connect, Inc. is a holding company whose wholly-owned subsidiary, ModusLink Corporation, serves the supply chain management market.

ModusLink is an end-to-end global supply chain solutions and e-commerce provider serving clients in markets such as consumer electronics, communications, computing, medical devices, software and retail. ModusLink designs and executes critical elements in its clients’ global supply chains to improve speed to market, product customization, flexibility, cost, quality and service. These benefits are delivered through a combination of industry expertise, innovative service solutions, and integrated operations, proven business processes, an expansive global footprint and world-class technology. ModusLink also produces and licenses an entitlement management solution powered by its enterprise-class Poetic software, which offers a complete solution for activation, provisioning, entitlement subscription, and data collection from physical goods (connected products) and digital products. ModusLink has an integrated network of strategically located facilities in various countries, including numerous sites throughout North America, Europe and Asia.

– Financial Tables Follow –

Steel Connect, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands)
		April 30, 2022				July 31, 2021
		(unaudited)
Assets:
Cash and cash equivalents		$	49,914			$	58,117
Accounts receivable, trade, net			43,932				36,547
Inventories, net			9,837				9,043
Funds held for clients			7,580				8,212
Prepaid expenses and other current assets			4,331				4,958
Current assets of discontinued operations			—				96,522
Total current assets			115,594				213,399
Property and equipment, net			3,768				4,616
Operating lease right-of-use assets			21,814				18,253
Other assets			6,123				5,692
Long-term assets of discontinued operations			—				434,421
Total assets		$	147,299			$	676,381
Liabilities:
Accounts payable		$	32,355			$	29,829
Accrued expenses			29,406				32,653
Funds held for clients			7,580				8,212
Current lease obligations			7,613				9,643
Other current liabilities			15,208				14,264
Current liabilities of discontinued operations			—				123,392
Total current liabilities			92,162				217,993
Convertible note payable			10,572				9,343
Long-term lease obligations			14,119				8,719
Other long-term liabilities			4,693				3,863
Long-term liabilities of discontinued operations			—				395,071
Total long-term liabilities			29,384				416,996
Total liabilities			121,546				634,989
Contingently redeemable preferred stock			35,180				35,180
Total stockholders’ (deficit) equity			(9,427	)			6,212
Total liabilities, contingently redeemable preferred stock and stockholders’ (deficit) equity		$	147,299			$	676,381

Steel Connect, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except per share amounts) (unaudited)
		Three Months Ended April 30,								Nine Months Ended April 30,
		2022				2021				2022				2021
Net revenue		$	51,548			$	49,434			$	150,223			$	178,552
Cost of revenue			42,303				39,531				120,672				139,262
Gross profit			9,245				9,903				29,551				39,290
Operating expenses:
Selling, general and administrative			9,214				12,417				28,899				36,754
Total operating expenses			9,214				12,417				28,899				36,754
Operating income (loss)			31				(2,514	)			652				2,536
Other income (expense):
Interest income			3				1				9				10
Interest expense			(848	)			(619	)			(2,359	)			(1,913	)
Other gains (losses), net			2,151				153				1,605				(3,990	)
Total other income (expense), net			1,306				(465	)			(745	)			(5,893	)
Income (loss) from continuing operations before income taxes			1,337				(2,979	)			(93	)			(3,357	)
Income tax expense			11,032				6,315				12,070				8,124
Loss from continuing operations, after income taxes			(9,695	)			(9,294	)			(12,163	)			(11,481	)
Income (loss) from discontinued operations, net of tax			39,895				(18,335	)			(108	)			(21,895	)
Net income (loss)			30,200				(27,629	)			(12,271	)			(33,376	)
Less: Preferred dividends on redeemable preferred stock			(537	)			(519	)			(1,611	)			(1,586	)
Net income (loss) attributable to common stockholders		$	29,663			$	(28,148	)		$	(13,882	)		$	(34,962	)
Basic and diluted net income (loss) per share attributable to common stockholders:
Continuing operations		$	(0.17	)		$	(0.16	)		$	(0.23	)		$	(0.21	)
Discontinued operations		$	0.67			$	(0.29	)		$	0.00			$	(0.35	)
Net income (loss) attributable to common stockholders		$	0.50			$	(0.45	)		$	(0.23	)		$	(0.56	)
Weighted average common shares used in:
Basic and diluted earnings (loss) per share			59,853				62,263				59,961				61,898

Steel Connect, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
		Nine Months Ended April 30,
		2022				2021
Cash flows from operating activities:
Net loss		$	(12,271	)		$	(33,376	)
Loss from discontinued operations, net of tax			108				21,895
Loss from continuing operations			(12,163	)			(11,481	)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation			1,698				2,620
Amortization of deferred financing costs			102				103
Accretion of debt discount			1,229				930
Share-based compensation			519				443
Non-cash lease expense			7,083				7,505
Other (gains) losses, net			(1,605	)			5,605
Changes in operating assets and liabilities:
Accounts receivable, net			(8,786	)			14,247
Inventories, net			(1,291	)			1,671
Prepaid expenses and other current assets			240				37
Accounts payable and accrued expenses			2,076				(20,556	)
Refundable and accrued income taxes, net			142				11,458
Other assets and liabilities			5,489				(17,545	)
Net cash used in operating activities of continuing operations			(5,267	)			(4,963	)
Cash flows from investing activities:
Additions of property and equipment			(1,142	)			(902	)
Proceeds from the disposition of property and equipment			—				69
Net cash used in investing activities of continuing operations			(1,142	)			(833	)
Cash flows from financing activities:
Preferred dividend payments			(1,598	)			(1,586	)
Repayments on capital lease obligations			(54	)			(52	)
Proceeds from issuance of common stock			—				4
Net cash used in financing activities of continuing operations			(1,652	)			(1,634	)
Net effect of exchange rate changes on cash, cash equivalents and restricted cash			(774	)			746
Net decrease in cash, cash equivalents and restricted cash			(8,835	)			(6,684	)
Cash, cash equivalents and restricted cash, beginning of period			66,329				77,071
Cash, cash equivalents and restricted cash, end of period		$	57,494			$	70,387
Cash and cash equivalents of continuing operations, end of period		$	49,914			$	61,990
Funds held for clients, end of period			7,580				8,397
Cash, cash equivalents and restricted cash, end of period		$	57,494			$	70,387
Cash flows from discontinued operations:
Operating activities		$	(6,738	)		$	25,975
Investing activities			625				(1,812	)
Financing activities			4,230				(6,142	)
Net cash (used in) provided by discontinued operations		$	(1,883	)		$	18,021

Steel Connect, Inc. and Subsidiaries Segment Data (in thousands) (unaudited)
		Three Months Ended April 30,								Nine Months Ended April 30,
		2022				2021				2022				2021
Net revenue:
Supply Chain			51,548				49,434				150,223				178,552
		$	51,548			$	49,434			$	150,223			$	178,552
Operating income (loss):
Supply Chain			1,548				(534	)			5,894				9,574
Total segment operating (loss) income			1,548				(534	)			5,894				9,574
Corporate-level activity			(1,517	)			(1,980	)			(5,242	)			(7,038	)
Total operating (loss) income			31				(2,514	)			652				2,536
Total other income (expense)			1,306				(465	)			(745	)			(5,893	)
Income (loss) before income taxes		$	1,337			$	(2,979	)		$	(93	)		$	(3,357	)

Steel Connect, Inc. and Subsidiaries Reconciliation of Non-GAAP Measures to GAAP Measures (in thousands) (unaudited)
EBITDA and Adjusted EBITDA Reconciliations:
		Three Months Ended April 30,								Nine Months Ended April 30,
		2022				2021				2022				2021
Net income (loss) from continuing operations		$	(9,695	)		$	(9,294	)		$	(12,163	)		$	(11,481	)
Interest income			(3	)			(1	)			(9	)			(10	)
Interest expense			848				619				2,359				1,913
Income tax expense			11,032				6,315				12,070				8,124
Depreciation			523				803				1,698				2,620
EBITDA			2,705				(1,558	)			3,955				1,166
Strategic consulting and other related professional fees			163				965				509				1,130
Executive severance and employee retention			58				—				414				—
Restructuring and restructuring-related expense			118				(300	)			974				918
Share-based compensation			111				97				519				443
Loss on sale of long-lived assets			2				36				3				(3	)
Unrealized foreign exchange losses, net			(2,127	)			410				(2,931	)			5,183
Other non-cash (gains) losses, net			(92	)			(28	)			(125	)			(38	)
Adjustments related to certain tax liabilities			—				—				—				—
Adjusted EBITDA		$	938			$	(378	)		$	3,318			$	8,799
Net revenue		$	51,548			$	49,434			$	150,223			$	178,552
Adjusted EBITDA margin			1.8	%			(0.8	)%			2.2	%			4.9	%
Free Cash Flow Reconciliation:
		Three Months Ended April 30,								Nine Months Ended April 30,
		2022				2021				2022				2021
Net cash used in operating activities		$	(2,544	)		$	5,285			$	(5,267	)		$	(4,963	)
Additions to property and equipment			(316	)			(220	)			(1,142	)			(902	)
Free cash flow		$	(2,860	)		$	5,065			$	(6,409	)		$	(5,865	)
Net Debt Reconciliation:
										April 30, 2022				July 31, 2021
Total debt, net										$	10,481			$	9,147
Unamortized discounts and issuance costs											4,459				5,793
Cash and cash equivalents											(49,914	)			(58,117	)
Net debt										$	(34,974	)		$	(43,177	)

Contacts

Investor Relations

Jennifer Golembeske

914-461-1276

[email protected]

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