STEEL CONNECT, INC. The matters discussed in this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those risks discussed elsewhere in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") onNovember 9, 2022 , and other subsequent reports filed with or furnished to theSEC . Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof, except as required by law. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. OverviewSteel Connect, Inc. (the "Company") is a holding company operating through its wholly-owned subsidiary,ModusLink Corporation ("ModusLink" or "Supply Chain"), which serves the supply chain management market.ModusLink provides digital and physical supply chain solutions to many of the world's leading brands across a diverse range of industries, including consumer electronics, telecommunications, computing and storage, software and content, consumer packaged goods, medical devices, retail and luxury and connected devices. These solutions 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. With a global footprint spanningNorth America ,Europe and theAsia Pacific 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.
Disposition of
Beginning in the second quarter of 2020, with the shutdown of theU.S. economy due to the COVID-19 pandemic,IWCO Direct's business was significantly and adversely affected by a material reduction in customer mailing activities. Against this backdrop, the Company held, on behalf ofIWCO Direct , extensive discussions with Cerberus about amending and extendingIWCO Direct's credit facility with Cerberus under which there was approximately$361 million outstanding as ofJanuary 31, 2022 that was to mature inDecember 2022 . In addition, the Company's Board of Directors considered a range of strategic options to address the impending maturity. Inmid-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 the process of implementing the competitive improvement plan ("CIP") intended to address the changing requirements of its customers and markets. Despite initial favorable outcomes and improving prospects from the CIP, the Company was unable to amendIWCO Direct's credit facility or identify alternatives to refinanceIWCO Direct's indebtedness given the magnitude of that indebtedness relative to the performance ofIWCO Direct's business. In light of these developments, the Board of Directors determined that it was in the best interests of the Company's stockholders to pursue an orderly and consensual disposition ofIWCO Direct to the Cerberus-led investor group. Although the Board of Directors considered other alternatives forIWCO Direct , the Board of Directors concluded that such alternatives would not be viable and onFebruary 25, 2022 , the Company completed the disposition ofIWCO Direct to the Cerberus-led investor group (the entire transaction being referred to as the "IWCO Direct Disposal"). The Company did not receive any cash consideration from the Cerberus-led investor group in exchange for the disposition ofIWCO Direct . The Company deconsolidatedIWCO Direct as ofFebruary 25, 2022 as it no longer held a controlling financial interest as of that date. The results ofIWCO Direct are presented as a discontinued operation in all periods reported. Refer to Note 1 - "Nature of Operations" and Note 4 - "Discontinued Operations" to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the IWCO Direct Disposal.
Customers
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Historically, a limited number of key clients have accounted for a significant percentage of the Company's revenue. For the three months endedJanuary 31, 2023 and 2022, the Company's ten largest clients accounted for approximately 85.9% and 81.5% of consolidated net revenue, respectively. Two clients accounted for 47.9% and 10.4% of the Company's consolidated net revenue for the three months endedJanuary 31, 2023 , and two clients accounted for 26.3% and 16.2% of the Company's consolidated net revenue for the three months endedJanuary 31, 2022 . No other clients accounted for more than 10.0% of the Company's consolidated net revenue for the three months endedJanuary 31, 2023 or 2022. For the six months endedJanuary 31, 2023 and 2022, the Company's ten largest clients accounted for approximately 83.8% and 80.0% of consolidated net revenue, respectively. Two clients accounted for 42.1% and 12.7% of the Company's consolidated net revenue for six months endedJanuary 31, 2023 , and two clients accounted for 26.0% and 13.0% of the Company's consolidated net revenue for six months endedJanuary 31, 2022 . No other clients accounted for more than 10.0% of the Company's consolidated net revenue for the six months endedJanuary 31, 2023 or 2022. In general, the Company does not have any agreements which obligate any client to buy a minimum amount of services from it or designate it as an exclusive service provider. Consequently, the Company's net revenue is subject to demand variability by our clients. The level and timing of orders placed by the Company's clients vary for a variety of reasons, including seasonal buying by end-users, the introduction of new technologies and general economic conditions. By diversifying into new markets and improving the operational support structure for its clients, the Company expects to offset the adverse financial impact such factors may bring about. COVID-19 Update The COVID-19 pandemic (in particular, the emergence of new variants of the virus across the globe) has caused, and may continue to cause, significant disruptions in theU.S. and global economies. Measures taken by national and local governments inthe 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. We experienced disruptions to our business continuity as a result of temporary closures of certain ofModusLink's facilities in 2020 and 2021; however, these temporary closures did not have a significant impact onModusLink's operations. Outbreaks in Mainland China throughout 2022 (March to May, July and September to October) led to temporary lockdown orders impacting severalModusLink facilities inChina ; however,ModusLink was able to resume operations at all facilities and the lockdowns have not had a significant impact toModusLink's operations through the filing of this Quarterly Report on Form 10-Q. If the situation continues at this level or worsens, however, it could result in a potential adverse impact on our business, results of operations and financial condition. We continue to closely monitor the impact of COVID-19 and other disease outbreaks on all aspects of our business and geographies, including its impact on our clients, employees, suppliers, vendors, business partners and distribution channels. We believe that such impacts could include the continued disruption to the demand for our businesses' products and services; disruptions in or closures of our business operations or those of our customers or suppliers; the impact of the global business and economic environment on liquidity and the availability of capital; increased costs and delays in payments of outstanding receivables beyond normal payment terms; supply chain disruptions; uncertain demand; and the effect of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers. Despite indications of economic recovery, the severity of the impact of the COVID-19 pandemic on the Company's business in the future is difficult to predict and will depend on a number of uncertain factors and trends. Such factors and trends include, but are not limited to: the emergence of new variant strains; the widespread use of vaccines; the impact of the global business and economic environment on liquidity and the availability of capital; the extent and severity of the impact on our customers and suppliers; andU.S. and foreign government actions that have been taken, or may be taken in the future, to mitigate adverse economic or other impacts or to mitigate the spread of the virus and its variants. The Company continues to monitor for any developments or updates to COVID-19 guidelines from public health and governmental authorities, as well as the protection of the health and safety of its personnel, and is continuously working to ensure that its health and safety protocols, business continuity plans and crisis management protocols are in place to help mitigate any negative impacts of COVID-19 and other disease outbreaks on the Company's employees, business or operations.
Terminated Merger with
OnJune 12, 2022 , the Company, Steel Partners Holdings L.P. ("Steel Holdings ") andSP Merger Sub, Inc. , a wholly owned subsidiary ofSteel 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 30 -------------------------------------------------------------------------------- Table of Contents owned subsidiary ofSteel Holdings . The Merger Agreement provided 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) would, 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 byModusLink 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 also entered into a Voting and Support Agreement, dated as ofJune 12, 2022 (the "Voting and Support Agreement"), pursuant to which, among other things, they agreed to vote all shares of common stock and Series C Convertible 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 "Special Committee") of independent and disinterested directors formed to consider and negotiate the terms and conditions of the Merger and to make a recommendation to our Board of Directors). Our Board of Directors, acting on the unanimous recommendation of the Special Committee, and the Board of Directors ofSteel Partner Holdings GP Inc. , the general partner ofSteel 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 withSteel Holdings , exclusively negotiated the terms of the Merger Agreement withSteel Holdings , with the assistance of its independent financial and legal advisors. OnNovember 15, 2022 ,Steel Holdings terminated the Merger Agreement. The Merger Agreement was terminated following the 2021 Annual Meeting of Stockholders of the Company at which the proposal to adopt the Merger Agreement was not approved by a majority of the outstanding shares of common stock not owned, directly or indirectly, bySteel Holdings , and Merger Sub, any other officer or director of the Company or any other person having any equity interest in, or any right to acquire any equity interest in, Merger Sub or any person of which Merger Sub is a direct or indirect subsidiary as required under the Merger Agreement. As a result of the termination of the Merger Agreement, the Voting and Support Agreement, dated as ofJune 12, 2022 , by and among the Company,Steel Holdings and certain of its affiliates, automatically terminated pursuant to its terms.
Basis of Presentation
The Company has one operating segment which is the same as its reportable segment: Supply Chain. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance and share-based compensation, which are not allocated to the Company's reportable segment. The Corporate-level balance sheet information includes cash and cash equivalents, debt and other assets and liabilities which are not allocated to the operations of the Company's operating segment. All significant intra-segment amounts have been eliminated.
Results of Operations
Three Months Ended
(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%
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1 Favorable (unfavorable) change
Three months ended
Net Revenue:
During the three months endedJanuary 31, 2023 , net revenue for the Supply Chain segment decreased by approximately$3.5 million . The decrease in net revenue was driven by lower volumes associated with clients in the computing and consumer electronics markets during the three months endedJanuary 31, 2023 as compared to the same period in the prior year. Fluctuations in foreign currency exchange rates had an insignificant impact on the Supply Chain segment's net revenues for the three months endedJanuary 31, 2023 , as compared to the same period in the prior year. Cost of Revenue: Cost of revenue consists primarily of expenses related to the cost of materials purchased in connection with the provision of supply chain management services, as well as costs for salaries and benefits, depreciation expense, severance, contract labor, consulting, fulfillment and shipping, and applicable facilities costs. Total cost of revenue decreased by$5.7 million for the three months endedJanuary 31, 2023 , as compared to the same period in the prior year, primarily driven by a decrease in cost of materials as a result of the decrease in net revenue discussed above. Cost of revenue for the three months endedJanuary 31, 2023 included materials procured on behalf of our Supply Chain clients of$21.1 million , as compared to$25.7 million for the same period in the prior year, a decrease of$4.6 million , driven by lower volumes for clients in the computing and consumer electronics market. The remaining$1.1 million decrease is driven by lower labor costs, such as a decrease in salaries and wages and production costs, and due to severance charges in the three months endedJanuary 31, 2022 that did not recur.
Gross Profit:
Gross profit percentage for the current quarter increased 560 basis points, to 25.7% as compared to 20.1% in the prior year quarter, driven by higher value added revenue for a major client in the computing and consumer electronics market and to a lesser extent the impact of severance charges in the three months endedJanuary 31, 2022 that did not recur. Fluctuations in foreign currency exchange rates had an insignificant impact on Supply Chain's gross margin for the three months endedJanuary 31, 2023 as compared to the same period in the prior year.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, information technology expenses, travel expenses, facilities costs, consulting fees, fees for professional services, depreciation expense, marketing expenses, share-based compensation expense, transaction costs, restructuring and public reporting costs. Selling, general and administrative expenses during the three months endedJanuary 31, 2023 increased by approximately$0.5 million as compared to the same period in the prior year due to an increase in legal fees for Corporate-level activity. Selling, general and administrative expenses during the three months endedJanuary 31, 2023 for the Supply Chain segment did not change significantly as compared to the same period in the prior year. Fluctuations in foreign currency exchange rates did not have a significant impact on selling, general and administrative expenses for the three months endedJanuary 31, 2023 as compared to the same period in the prior year.
Restructuring:
During the fiscal year endedJuly 31, 2021 ,ModusLink implemented a strategic plan to reorganize its sales function and the e-Business operations. The restructuring charges associated with this plan were primarily composed of employee termination costs. InNovember 2021 ,ModusLink amended its strategic plan to include reorganizing its supply chain operations and recorded a restructuring charge of approximately$0.9 million during the three months endedJanuary 31, 2022 . There were no restructuring costs recorded during the three months endedJanuary 31, 2023 which is driving the decrease in costs period over period. Interest Expense: Total interest expense increased by$0.1 million during the three months endedJanuary 31, 2023 as compared to the same period in the prior year, primarily due to higher interest expense related to accretion of the discount on the 7.50% Convertible Senior Note due 2024 (the "SPHG Note").
Other Losses, Net:
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Other losses, net are primarily composed of foreign exchange losses, interest income, and sublease income.
The$2.6 million increase in other losses, net is primarily driven by a$3.0 million increase in foreign exchange losses between the current year quarter and the prior year quarter. The Company recorded$3.3 million of foreign exchange losses compared to$0.3 million of foreign exchange losses during the three months endedJanuary 31, 2023 and 2022, respectively. The increase in foreign exchange losses is primarily driven by unrealized losses incurred, particularly for changes in the China Renminbi and the Singapore Dollar.
Income Tax Benefit (Expense):
During the three months endedJanuary 31, 2023 , the Company recorded an income tax benefit of approximately$0.3 million as compared to$0.7 million in income tax expense for the same period in the prior fiscal year. The decrease in income tax expense is primarily due to lower taxable income in foreign jurisdictions, as compared to the prior year period.
The Company provides for income tax expense related to federal, state and
foreign income taxes. The Company continues to maintain a full valuation
allowance against its deferred tax assets in the
Loss from Continuing Operations:
Net loss from continuing operations for the three months endedJanuary 31, 2023 decreased$1.0 million as compared to the same period in the prior fiscal year, driven by the$1.1 million favorable change in income taxes. Refer to discussion above for further details.
Loss from Discontinued Operations:
Net loss from discontinued operations for the three months endedJanuary 31, 2022 was$21.5 million , and reflects the net loss forIWCO Direct .IWCO Direct was deconsolidated inFebruary 2022 , and as such, there was no activity from discontinued operations for the three months endedJanuary 31, 2023 . See Note 4 - "Discontinued Operations" to the consolidated financial statements in Part I, Item 1 included of 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%
1 Favorable (unfavorable) change
Six months ended
Net Revenue: During the six months endedJanuary 31, 2023 , net revenue for the Supply Chain segment increased by approximately$3.5 million as compared to the same period in the prior year. This increase in net revenue was driven by overall higher volume associated with clients in the computing and consumer electronics markets as compared to the same period in the prior year, along 33
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with new business revenue. Fluctuations in foreign currency exchange rates had an insignificant impact on the Supply Chain segment's net revenues for the six months endedJanuary 31, 2023 , as compared to the same period in the prior year.
Cost of Revenue:
Cost of revenue consists primarily of expenses related to the cost of materials purchased in connection with the provision of supply chain management services, as well as costs for salaries and benefits, depreciation expense, severance, contract labor, consulting, fulfillment and shipping, and applicable facilities costs. Cost of revenue for the six months endedJanuary 31, 2023 included materials procured on behalf of our Supply Chain clients of$40.4 million , as compared to$44.7 million for the same period in the prior year, a decrease of$4.3 million , driven by lower costs on programs launched in the prior year period along with lower material costs related to programs that ended during the current year period. Total cost of revenue decreased by$3.6 million for the six months endedJanuary 31, 2023 , as compared to the same period in the prior year, primarily due to the decrease in material costs discussed above, offset partially by higher labor costs as a result of overall higher revenue volume.
Gross Profit:
Gross profit percentage for the six months endedJanuary 31, 2023 increased 620 basis points, to 26.8% as compared to 20.6% for the six months endedJanuary 31, 2022 , driven by an increase in value added revenue for a major client in the computing and consumer electronics market. Fluctuations in foreign currency exchange rates had an insignificant impact on Supply Chain's gross margin for the six months endedJanuary 31, 2023 .
Selling, General and Administrative Expenses:
Selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, information technology expenses, travel expenses, facilities costs, consulting fees, fees for professional services, depreciation expense, marketing expenses, share-based compensation expense, transaction costs, restructuring and public reporting costs. Selling, general and administrative expenses during the six months endedJanuary 31, 2023 increased by approximately$2.0 million as compared to the same period in the prior year. Selling, general and administrative expenses for the Supply Chain segment increased$1.0 million primarily due to bad debt expense recorded for a client in the consumer products industry in first quarter of fiscal year 2023. Corporate-level activity increased$1.0 million primarily due to an increase in legal and other professional fees. Fluctuations in foreign currency exchange rates did not have a significant impact on selling, general and administrative expenses for the six months endedJanuary 31, 2023 , as compared to the same period in the prior year.
Restructuring:
During the fiscal year endedJuly 31, 2021 ,ModusLink implemented a strategic plan to reorganize its sales function and the e-Business operations. The restructuring charges associated with this plan were primarily composed of employee termination costs. InNovember 2021 ,ModusLink amended its strategic plan to include reorganizing its supply chain operations and recorded a restructuring charge of approximately$0.9 million during the six months endedJanuary 31, 2022 . There were no restructuring costs recorded during the six months endedJanuary 31, 2023 , which is driving the decrease in costs period over period. Interest Expense: Total interest expense during the six months endedJanuary 31, 2023 increased$0.2 million as compared to the same period in the prior year, primarily due to higher interest expense related to accretion of the discount on the SPHG Note.
Other Gains (Losses), Net:
Other gains (losses), net are primarily composed of foreign exchange gains (losses), interest income and sublease income. The$0.9 million increase in other gains (losses), net is primarily driven by$0.5 million increase in interest income, and$0.4 million increase in sublease income in the six months endedJanuary 31, 2023 as compared to the same period in the prior year. Foreign exchange gains (losses) did not change significantly as compared to the same period in the prior year. Income Tax Expense: During the six months endedJanuary 31, 2023 , the Company recorded income tax expense of approximately$0.8 million as compared to$1.0 million for the same period in the prior fiscal year. The decrease in income tax expense is primarily due to lower taxable income in foreign jurisdictions, as compared to the prior year period. 34
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The Company provides for income tax expense related to federal, state and
foreign income taxes. The Company continues to maintain a full valuation
allowance against its deferred tax assets in the
Income (Loss) from Continuing Operations:
Net income from continuing operations for the six months endedJanuary 31, 2023 increased$6.9 million , as compared to the same period in the prior year. The increase in net income from continuing operations is primarily due to the increase in gross profit, a decrease in restructuring and income tax expense, and an increase in other gains, net, partially offset by an increase in SG&A expenses. Refer to explanations above for further details regarding specific increases or decreases.
Loss from Discontinued Operations:
Net loss from discontinued operations for the six months endedJanuary 31, 2022 was$40.0 million , and reflects the net loss forIWCO Direct .IWCO Direct was deconsolidated inFebruary 2022 , and as such, there was no activity from discontinued operations for the six months endedJanuary 31, 2023 . See Note 4 - "Discontinued Operations" to the consolidated financial statements in Part I, Item 1 included of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
Anticipated Sources and Uses of Cash Flow
Historically, the Company has financed its operations and met its capital
requirements primarily through funds generated from operations, the sale of it
securities, borrowings from lending institutions and sale of facilities that
were not fully utilized. The following table summarizes our liquidity:
January 31,
2023
(In thousands)
Cash and cash equivalents $ 62,427
Readily available borrowing capacity under Umpqua Revolver 11,890
$ 74,317
Due to the changes reflected in the U.S. Tax 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's foreign subsidiaries are in an
overall net deficit for earnings and profits purposes. As such, no adjustment
was made to U.S. taxable income in the six months ended January 31, 2023
relating to this aspect of the U.S. Tax Reform. In future years, 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 material.
Consolidated excess working capital was $32.6 million as of January 31, 2023 , as
compared to $26.0 million at July 31, 2022 . Included in excess working capital
were cash and cash equivalents of $62.4 million as of January 31, 2023 and $53.1
million at July 31, 2022 . The increase in excess working capital was primarily
driven by higher cash and cash equivalents as a result of increased collections
on accounts receivable. Sources and uses of cash for the six months ended
January 31, 2023 , as compared to the same period in the prior year, are as
follows:
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)
Operating Activities: We generated cash of$9.6 million from operating activities during the six months endedJanuary 31, 2023 , an improvement of$12.3 million compared with$2.7 million used in operating activities during the six months endedJanuary 31, 2022 . The Company's future cash flows related to operating activities are dependent on several factors, including 35
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profitability, accounts receivable collections, effective inventory management practices and optimization of the credit terms of certain vendors of the Company, and overall performance of the technology sector impacting the Supply Chain segment. The change in cash provided by operating activities as compared to cash used in operating activities the prior fiscal year was primarily due to an increase in net income of$6.9 million and an increase in accounts receivable collections of$9.4 million , offset by an increase in payments on outstanding accounts payable of$6.6 million . Investing Activities: Net cash used in investing activities was$0.9 million and$0.8 million during the six months endedJanuary 31, 2023 and 2022, respectively, and was primarily related to capital expenditures. The slight increase was primarily due to lower capital spending in the prior year as the result of the COVID-19 pandemic.
Financing Activities: Net cash used in financing activities was
Debt and Financing Arrangements
Following is a summary of Company's outstanding debt and financing agreements and preferred stock. Refer to Note 9 - "Debt" and Note 16 - "Related Party Transactions" to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
7.50% Convertible Senior Note
OnFebruary 28, 2019 , the Company entered into that certain 7.50% Convertible Senior Note Due 2024 Purchase Agreement withSPHG Holdings wherebySPHG Holdings loaned the Company$14.9 million in exchange for a 7.50% Convertible Senior Note due 2024 (the "SPHG Note"). The SPHG Note bears interest at the fixed rate of 7.50% per year, payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, beginning onSeptember 1, 2019 . OnMarch 9, 2023 , the Company andSPHG Holdings entered into an amendment to the SPHG Note (the "SPHG Note Amendment"). Pursuant to the SPHG Note Amendment, the maturity date of the SPHG Note was extended six months toSeptember 1, 2024 . In addition, the Company repaid$1.0 million in principal amount of the 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 paidSPHG Holdings a cash amendment fee of$0.1 million . The SPHG Note will mature onSeptember 1, 2024 (the "SPHG Note Maturity Date"), unless earlier repurchased by the Company or converted by the holder in accordance with its terms prior to such maturity date. At its election, the Company may pay some or all of the interest due on each interest payment date by increasing the principal amount of the SPHG Note in the amount of such interest due or any portion thereof (such payment of interest by increasing the principal amount of the SPHG Note referred to as "PIK Interest"), with the remaining portion of the interest due on such interest payment date (or, at the Company's election, the entire amount of interest then due) to be paid in cash by the Company. Following an increase in the principal amount of the SPHG Note as a result of a payment of PIK Interest, the SPHG Note will bear interest on such increased principal amount from and after the date of such payment of PIK Interest.SPHG Holdings has the right to require the Company to repurchase the SPHG Note upon the occurrence of certain fundamental changes, subject to certain conditions, at a repurchase price equal to 100% of the principal amount of the SPHG Note plus accrued and unpaid interest. The Company will have the right to elect to cause the mandatory conversion of the SPHG Note in whole, and not in part, at any time on or afterMarch 6, 2022 , subject to certain conditions including that the stock price of the Company exceeds a certain threshold.SPHG Holdings has the right, at its option, prior to the close of business on the business day immediately preceding the SPHG Note Maturity Date, to convert the SPHG Note or a portion thereof that is$1,000 or an integral multiple thereof, into shares of common stock (if the Company has not received a required stockholder approval) or cash, shares of common stock or a combination of cash and shares of common stock, as applicable (if the Company has received a required stockholder approval), at an initial conversion rate of 421.2655 shares of common stock, which is equivalent to an initial conversion price of approximately$2.37 per share (subject to adjustment as provided in the SPHG Note) per$1,000 principal amount of the SPHG Note (the "Conversion Rate"), subject to, and in accordance with, the settlement provisions of the SPHG Note. For any conversion of the SPHG Note, if the Company is required to obtain and has not received approval from its stockholders in accordance with Nasdaq Stock Market Rule 5635 to issue 20% or more of the total shares of common stock outstanding upon conversion (including upon any mandatory conversion) of the SPHG Note prior to the relevant conversion date (or, if earlier, the 45th scheduled trading day immediately preceding the SPHG Note Maturity Date), the Company shall deliver to the converting holder, in respect of each$1,000 principal amount of the SPHG Note being converted, a number of shares of common stock determined by reference to the Conversion Rate, together with a cash payment, if applicable, in lieu of delivering any fractional share of common stock based on the volume weighted average price (VWAP) of its common stock on the relevant conversion date, on the third business day immediately following the relevant conversion date. As ofJanuary 31, 2023 andJuly 31, 2022 , outstanding debt in both periods consisted of the$14.9 million 7.50% Convertible Senior Note dueMarch 1, 2024 . As 36 -------------------------------------------------------------------------------- Table of Contents ofJanuary 31, 2023 andJuly 31, 2022 , the net carrying value of the SPHG Note was$12.1 million , and$11.0 million , respectively.
Umpqua Revolver
OnMarch 16, 2022 ,ModusLink , as borrower, submitted a notice of termination toMidCap Financial Trust for its$12.5 million revolving credit facility and entered into a new credit agreement withUmpqua Bank as lender and as agent. There was no balance outstanding on the Midcap Credit Facility of at the time of its termination. The Umpqua Revolver provides for a maximum credit commitment of$12.5 million and a sublimit of$5.0 million for letters of credit and expires onMarch 16, 2024 .Steel Connect, Inc. ("Parent") is not a borrower or a guarantor under the Umpqua Revolver. Under the Umpqua Revolver,ModusLink is permitted to make distributions to the Parent, in an aggregate amount not to exceed$10.0 million in any fiscal year. OnMarch 13, 2023 ,ModusLink andUmpqua Bank entered into an amendment to the Umpqua Revolver to extend its expiration date toMarch 30, 2025 . Cerberus Credit Facility The Cerberus Credit Facility consisted of a term loan facility (the "Cerberus Term Loan") and a$25 million revolving credit facility (the "Revolving Facility") (together the "Cerberus Credit Facility") which was to mature onDecember 15, 2022 . OnFebruary 25, 2022 , the Company transferred all of its interests inIWCO Direct and the financial obligations of the Cerberus Credit Facility as part of the IWCO Direct Disposal. As a result, the Company has no debt or access to future borrowings under the Cerberus Credit Facility.
Preferred Stock
OnDecember 15, 2017 , the Company entered into a Preferred Stock Purchase Agreement (the "Purchase Agreement") withSPHG 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 shares, or the Preferred Stock, toSPHG 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 theState 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 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 dividends at 6% per annum payable, at the Company's option, in cash or common stock. If at any time the closing bid price of the Company's common stock exceeds 170% of the conversion price for at least five consecutive trading days (subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), the Company has the right to require each holder of Preferred Stock to convert all, or any whole number, of shares of the Preferred Stock into common stock. Upon the occurrence of certain triggering events such as a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or the merger or consolidation of the Company or significant subsidiary, or the sale of substantially all of the assets or capital stock of the Company or a significant subsidiary, the holders of the Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets or funds of the Company to the holders of other equity or equity equivalent securities of the Company other than the Preferred Stock by reason of their ownership thereof, an amount per share in cash equal to the sum of (i) 100% of the stated value per share of Preferred 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 share of Preferred Stock, in each case as the date of the triggering event. On or afterDecember 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 the Series C Certificate of Designations), or approximately$35.2 million . If holders of the Preferred Stock exercise this right to require the Company to redeem all the Preferred Stock, the Company's payment of the redemption price would likely adversely impact the Company's liquidity and ability to finance its operations. As ofJanuary 31, 2023 , this right had not been exercised by holders of the Preferred Stock.
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The Parent believes it has access to adequate resources to meet its needs for
normal operating costs, debt obligations and working capital for at least the
next twelve months. Upon a redemption request of the holder of the Preferred
Stock (as discussed above), the Parent believes it is probable that it has
access to adequate resources, including cash on hand and potential dividends
from ModusLink , to pay the redemption price and continue its operations.
ModusLink believes that if dividends to the Parent are required, it would have
access to adequate resources to meet its operating needs while remaining in
compliance with the Umpqua Revolver's covenants over the next twelve months.
However, there can be no assurances that ModusLink will continue to have access
to its line 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 debt obligations by its
lender, adversely affecting liquidity.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet financing arrangements.
Critical Accounting Estimates Update
During the three months endedJanuary 31, 2023 , there were no significant changes to the items that we disclosed as our critical accounting policies and estimates in the "Critical Accounting Estimates" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2022 . The Company's Condensed Consolidated Financial Statements are prepared in conformity withU.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. The critical accounting policies and estimates that we believe are most critical to the portrayal of our financial condition and results of operations are reported in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2022 .
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