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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-35319
_______________________
https://cdn.kscope.io/07df4eb91d78f8bff04cf4c6c7b9bbc6-mlnk-20201031_g1.jpg
Steel Connect, Inc.
(Exact name of registrant as specified in its charter)
_______________________
Delaware
(State or other jurisdiction of
incorporation or organization)
04-2921333
(I.R.S. Employer
Identification No.)
2000 Midway Ln
Smyrna, Tennessee
(Address of principal executive offices)
37167
(Zip Code)
(914461-1276
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
_______________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueSTCNNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of December 1, 2020, there were 62,793,969 shares issued and outstanding of the registrant's Common Stock, $0.01 par value per share.


Table of Contents
STEEL CONNECT, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
Number

2


Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
3


Table of Contents
STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
October 31,
2020
July 31,
2020
(unaudited)
ASSETS
Cash and cash equivalents$104,522 $75,887 
Accounts receivable, trade, net of allowance for doubtful accounts of $54 and $134 at October 31, 2020 and July 31, 2020, respectively
79,898 93,072 
Inventories, net14,829 15,354 
Funds held for clients12,468 18,755 
Prepaid expenses and other current assets24,683 20,475 
Total current assets236,400 223,543 
Property and equipment, net74,871 79,678 
Goodwill257,128 257,128 
Other intangible assets, net128,728 135,263 
Operating lease right-of-use assets52,165 56,140 
Other assets7,065 7,420 
Total assets$756,357 $759,172 
LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Accounts payable$70,539 $70,002 
Accrued expenses116,994 111,380 
Funds held for clients12,468 18,755 
Current portion of long-term debt5,572 5,527 
Current lease obligations13,960 14,318 
Other current liabilities29,188 29,950 
Total current liabilities248,721 249,932 
Convertible note payable8,346 8,054 
Long-term debt, excluding current portion364,037 365,468 
Long-term lease obligations39,976 43,211 
Other long-term liabilities12,203 8,509 
Total long-term liabilities424,562 425,242 
Total liabilities673,283 675,174 
Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at October 31, 2020 and July 31, 2020
35,180 35,180 
Stockholders' equity:
Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at October 31, 2020 and July 31, 2020; zero shares issued and outstanding at October 31, 2020 and July 31, 2020
  
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 62,793,969 issued and outstanding shares at October 31, 2020; 62,787,919 issued and outstanding shares at July 31, 2020
628 628 
Additional paid-in capital7,478,238 7,478,047 
Accumulated deficit(7,437,788)(7,433,700)
Accumulated other comprehensive income 6,816 3,843 
Total stockholders' equity47,894 48,818 
Total liabilities, contingently redeemable preferred stock and stockholders' equity$756,357 $759,172 
See accompanying notes to unaudited condensed consolidated financial statements
4


Table of Contents
STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
October 31,
20202019
Net revenue:
Products$105,708 $133,003 
Services64,226 92,150 
Total net revenue169,934 225,153 
Cost of revenue129,466 180,907 
Gross profit40,468 44,246 
Operating expenses:
Selling, general and administrative26,858 22,227 
Amortization of intangible assets6,535 7,277 
Total operating expenses33,393 29,504 
Operating income7,075 14,742 
Other income (expense):
Interest income20 16 
Interest expense(7,823)(9,169)
Other (losses) gains, net(2,019)558 
Total other expense(9,822)(8,595)
(Loss) income before income taxes(2,747)6,147 
Income tax expense804 1,355 
Net (loss) income(3,551)4,792 
Less: Preferred dividends on redeemable preferred stock(537)(536)
Net (loss) income attributable to common stockholders$(4,088)$4,256 
Basic net (loss) earnings per share attributable to common stockholders$(0.07)$0.07 
Diluted net (loss) earnings per share attributable to common stockholders$(0.07)$0.06 
Weighted average common shares used in:
Basic (loss) earnings per share61,893 61,401 
Diluted (loss) earnings per share61,893 86,006 
See accompanying notes to unaudited condensed consolidated financial statements
5


Table of Contents
STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended
October 31,
20202019
Net (loss) income $(3,551)$4,792 
Other comprehensive income (loss):
Foreign currency translation adjustment2,973 13 
Pension liability adjustments, net of tax (2)
Other comprehensive income2,973 11 
Comprehensive (loss) income $(578)$4,803 
See accompanying notes to unaudited condensed consolidated financial statements
6


Table of Contents
STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
Number of
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders'
Equity
Balance at July 31, 202062,787,919 $628 $7,478,047 $(7,433,700)$3,843 $48,818 
Net loss— — — (3,551)— (3,551)
Preferred dividends— — — (537)— (537)
Issuance of common stock pursuant to employee stock purchase plan6,982 — 3 — — 3 
Restricted stock forfeitures, net of issuance(932)— — — — — 
Share-based compensation— — 188 — — 188 
Other comprehensive items— — — — 2,973 2,973 
Balance at October 31, 202062,793,969 $628 $7,478,238 $(7,437,788)$6,816 $47,894 
Number of
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
Total
Stockholders'
Equity
Balance at July 31, 201961,805,856 $618 $7,477,327 $(7,426,287)$1,034 $52,692 
Net income— — — 4,792 — 4,792 
Preferred dividends— — — (536)— (536)
Issuance of common stock pursuant to employee stock purchase plan4,397 — 2 — — 2 
Share-based compensation— — 176 — — 176 
Other comprehensive items— — — — 11 11 
Balance at October 31, 201961,810,253 $618 $7,477,505 $(7,422,031)$1,045 $57,137 
See accompanying notes to unaudited condensed consolidated financial statements
7


Table of Contents
STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
October 31,
20202019
Cash flows from operating activities:
Net (loss) income$(3,551)$4,792 
Adjustments to reconcile net (loss) income to cash flows from operating activities:
Depreciation5,780 5,589 
Amortization of intangible assets6,535 7,277 
Amortization of deferred financing costs148 68 
Accretion of debt discount292 409 
Share-based compensation188 176 
Other losses (gains), net3,622 (558)
Changes in operating assets and liabilities:
Accounts receivable, net12,839 (1,564)
Inventories, net514 (2,165)
Prepaid expenses and other current assets(4,473)(3,342)
Accounts payable and accrued expenses6,416 4,625 
Refundable and accrued income taxes, net503 639 
Other assets and liabilities(3,086)6,464 
Net cash provided by operating activities25,727 22,410 
Cash flows from investing activities:
Additions of property and equipment(1,059)(4,072)
Net cash used in investing activities(1,059)(4,072)
Cash flows from financing activities:
Payments towards revolving lines of credit, net (4,000)
Payment of long-term debt(1,500)(1,500)
Payment of preferred dividends(537)(536)
Repayments on capital lease obligations(17)(33)
Proceeds from issuance of common stock3 6 
Net cash used in financing activities(2,051)(6,063)
Net effect of exchange rate changes on cash, cash equivalents and restricted cash(269)41 
Net increase in cash, cash equivalents and restricted cash22,348 12,316 
Cash, cash equivalents and restricted cash, beginning of period94,642 46,064 
Cash, cash equivalents and restricted cash, end of period$116,990 $58,380 
Cash and cash equivalents, end of period$104,522 $41,214 
Funds held for clients, end of period12,468 17,166 
Cash, cash equivalents and restricted cash, end of period$116,990 $58,380 
See accompanying notes to unaudited condensed consolidated financial statements
8


Table of Contents
STEEL CONNECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1)NATURE OF OPERATIONS
Steel Connect, Inc. (the "Company") together with its consolidated subsidiaries, operates through its wholly-owned subsidiaries, IWCO Direct Holdings, Inc. ("IWCO Direct," "IWCO" or "Direct Marketing") and ModusLink Corporation ("ModusLink" or "Supply Chain").
IWCO Direct delivers data-driven marketing solutions for its customers. Its full range of services includes strategy, creative and execution for omnichannel marketing campaigns, along with postal logistics programs for direct mail. Through its Mail-Gard® division, IWCO Direct also offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services.
ModusLink is a supply chain business process management company serving clients in markets such as consumer electronics, communications, computing, medical devices, software and retail. ModusLink designs and executes elements in its clients' global supply chains to improve speed to market, product customization, flexibility, cost, quality and service. The Company also produces and licenses an entitlement management solution for activation, provisioning, entitlement subscription and data collection from physical goods (connected products) and digital products.
Historically, the Company has financed its operations and met its capital requirements primarily through funds generated from operations, the sale of its securities, borrowings from lending institutions and sale of facilities that were not fully utilized. The Company believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, mandatory debt redemptions and working capital for its existing business for at least twelve months from the date of this filing. These resources include current cash and cash equivalents, ModusLink's credit agreement with MidCap Financial Trust ("MidCap"), IWCO's revolving credit facility with Cerberus Business Finance, LLC ("Cerberus"), and cash, if any, provided by operating activities. The Company's expectations regarding its ability to use its existing cash to continue funding its operations are based on assumptions that may prove to be inaccurate, and the Company may require capital resources sooner than currently expected. While the Company believes it will be able to access this additional liquidity based on existing information, the assumptions underlying this belief may also later prove to be inaccurate.
As of October 31, 2020 and July 31, 2020, the Company had cash and cash equivalents of $104.5 million and $75.9 million, respectively. As of October 31, 2020, the Company had a working capital deficit of $12.3 million, which includes accrued pricing liabilities and certain tax related liabilities which the Company believes will not require a cash outlay in the next twelve months. As of October 31, 2020, ModusLink had a readily available borrowing capacity under its revolving credit facility of $1.2 million. As of October 31, 2020, IWCO Direct had $25.0 million available borrowing capacity under its revolving facility. The Company believes it will generate sufficient cash to meet its debt covenants under its credit facilities to which certain of its subsidiaries are a party and that it will be able to obtain cash through its current and future credit facilities, if needed.
Impact of COVID-19
In March 2020, the World Health Organization categorized the novel Coronavirus ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The spread of the outbreak has caused significant disruptions in the U.S. and global economies, and economists expect the impact will be significant during the remainder of 2020 and beyond. The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The Company continues to evaluate the global risks and the slowdown in business activity related to COVID-19, including the potential impacts on its employees, customers, suppliers and financial results. The effects of COVID-19 required temporary closures of certain of ModusLink's facilities for short periods of time during the fiscal year ended July 31, 2020. Additionally, although IWCO operated and continues to operate as an essential business, it had reduced operating levels and labor shifts due to lower sales volume during the prior fiscal year. As of the filing of this quarterly report on Form 10-Q, all of the Company's facilities were open and able to operate at normal capacities.

To help mitigate the financial impact of the COVID-19 pandemic, the Company initiated cost reduction actions, including waiver of board fees, hiring freezes, staffing and force reductions, Company-wide salary reductions, bonus payment deferrals and temporary 401(k) match suspension. The temporary waiver of board fees and Company-wide salary reduction actions taken in the prior fiscal year were fully restored prior to the beginning of the current fiscal year. The Company continues its focus on cash management and liquidity, which includes reduction of discretionary spending, aggressive working capital management, strict approvals for capital expenditures and other actions. The Company will evaluate further actions if circumstances warrant.
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Currently, the Company anticipates that the impact of the deterioration of the U.S and global economies will most likely continue and may have an adverse impact on the Company's business. However, as the situation surrounding COVID-19 remains fluid, it is difficult to predict the duration of the pandemic and the impact on the Company's business, operations, financial condition and cash flows. The severity of the impact on the Company's business for the remainder of calendar 2020 and beyond will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, the extent and severity of the impact on the Company's customers and suppliers, the continued disruption to the demand for our businesses' products and services, and the impact of the global business and economic environment on liquidity and the availability of capital, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could also be adversely impacted by delays in payments of outstanding receivables beyond normal payment terms, supply chain disruptions and uncertain demand, and the effect of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers. There is also no certainty that federal, state or local regulations regarding safety measures to address the spread of COVID-19 will not adversely impact the Company's operations.
(2)BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the year ended July 31, 2020 (Fiscal Year 2020), which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 30, 2020. The results for the three months ended October 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
All significant intercompany transactions and balances have been eliminated in consolidation.
The Company considers events or transactions that occur after the balance sheet date but before the issuance of financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. For the three months ended October 31, 2020, the Company evaluated subsequent events for potential recognition and disclosure through the date these financial statements were filed.
During the three months ended October 31, 2019, the Company recorded a $6.4 million adjustment to correct an out-of-period misstatement related to the Company's estimate for certain tax related liabilities. Had this correction been recorded for the fiscal year ended July 31, 2019 (Fiscal Year 2019), the Company's selling, general and administrative expenses and net loss for that period would have been reduced to $137.7 million and $60.3 million, respectively.
(3)RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The amendments in ASU 2018-13 are effective in the first quarter of the Company's fiscal year ending July 31, 2021 (Fiscal Year 2021). The adoption of the accounting standard did not have a material impact on the Company's financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension and other post-retirement plans. The amendments in ASU 2018-14 became effective in the first quarter of the Company's Fiscal Year 2021. The adoption of the accounting standard did not have a material impact on the Company's financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, (a consensus of the FASB Emerging Issues Task Force) to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The amendments
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in ASU 2018-15 became effective for the Company's first quarter of Fiscal Year 2021. The adoption of the accounting standard did not have a material impact on the Company's consolidated financial statements.
Accounting Standards Issued and Not Yet Implemented

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Loses on Financial Instruments, an ASU that requires measurement and recognition of expected credit losses for financial instruments, including trade receivables, based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The ASU will be effective for the Company beginning in the first quarter of the fiscal year 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 this guidance to determine the impact it may have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends the existing guidance relating to the accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of U.S. GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The new guidance is effective for the Company's first quarter of the fiscal year ending July 31, 2022. The Company does not expect that the adoption of this new guidance will have a material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is intended to provide temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate, known as LIBOR, or by another reference rate expected to be discontinued. This optional guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40). The amendment in this update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity's financial statements, and information about events, conditions and circumstances that can affect how to assess the amount or timing of an entity's future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning in our fiscal year ending July 31, 2025, with early adoption permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
(4)INVENTORIES

The table below presents the components of Inventories, net:
October 31,
2020
July 31,
2020
(In thousands)
Raw materials$13,554 $14,216 
Work-in-process337 253 
Finished goods938 885 
$14,829 $15,354 
(5)GOODWILL AND INTANGIBLE ASSETS
The Company's goodwill of $257.1 million as of October 31, 2020 relates to the Company's Direct Marketing reporting unit, which is the only reporting unit in the Direct Marketing reportable segment. The Company has not previously recognized any impairment losses for this reporting unit.
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Other intangible assets, net, as of October 31, 2020, include trademarks and tradenames, and customer relationships. The trademarks and tradenames intangible assets are being amortized on a straight-line basis and the customer relationship intangible assets are being amortized on a double-declining basis over their estimated useful lives.

The table below presents information for the Company's intangible assets:
October 31, 2020July 31, 2020
Weighted Average Amortization PeriodGross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
(in years)(In thousands)
Customer relationships15$192,730 $64,857 $127,873 $192,730 $60,032 $132,698 
Trademarks and trade names320,520 19,665 855 20,520 17,955 2,565 
Total$213,250 $84,522 $128,728 $213,250 $77,987 $135,263 

The table below presents amortization expense recorded by the Company for other intangible assets:
Three Months Ended
October 31,
20202019
(In thousands)
Customer relationships$4,825 $5,567 
Trademarks and trade names1,710 1,710 
Total$6,535 $7,277 

As of October 31, 2020, the Company reviewed its goodwill and other intangible assets for indicators of impairment as a result of the continued impact of the COVID-19 pandemic. Although the Company's performance has improved since the beginning of the pandemic, the Company believes that indicators of impairment were present for all these asset classes due to a general deterioration in macroeconomic conditions and a significant decline in the Company's market capitalization.
The Company performed a qualitative assessment of whether it was more likely than not that its goodwill and other intangibles assets were impaired as of October 31, 2020. The Company reviewed its previous forecasts and assumptions based on the Company's current projections, which are subject to various risks and uncertainties associated with forecasted revenues, expenses and cash flows, as well as the duration and extent of impact to our businesses from the COVID-19 pandemic. Based upon that assessment, the Company concluded it was more likely than not that goodwill and other intangible assets were not impaired as of October 31, 2020. It is possible that in future periods decreases in customer demand or volumes or other potential changes in operations may increase the risk that goodwill and other intangible assets, which are only associated with the Direct Marketing segment, may become impaired.
(6)ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following tables reflect the components of "Accrued expenses" and "Other current liabilities":
October 31,
2020
July 31,
2020
Accrued Expenses(In thousands)
Accrued taxes$62,207 $60,744 
Accrued compensation25,791 25,439 
Accrued worker's compensation3,949 3,949 
Accrued audit, tax and legal2,917 3,399 
Accrued contract labor1,105 981 
Accrued interest2,516 476 
Accrued other18,509 16,392 
$116,994 $111,380 
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October 31,
2020
July 31,
2020
Other Current Liabilities(In thousands)
Accrued pricing liabilities$13,499 $13,499 
Customer postage deposits9,160 8,551 
Other6,529 7,900 
$29,188 $29,950 
As of October 31, 2020 and July 31, 2020, the Company had accrued taxes of $62.2 million and $60.7 million, respectively, which reflected the Company's estimate for certain tax related liabilities. As of both October 31, 2020 and July 31, 2020, the Company had accrued pricing liabilities of approximately $13.5 million. As previously reported by the Company, several principal adjustments were made to its historic financial statements for periods ending on or before January 31, 2012, the most significant of which related to the treatment of vendor rebates in its pricing policies. Where the retention of a rebate or a mark-up was determined to have been inconsistent with a client contract, the Company concluded that these amounts were not properly recorded as revenue. Accordingly, revenue was reduced by an equivalent amount for the period that the rebate was estimated to have been affected. A corresponding liability for the same amount was recorded in that period (referred to as accrued pricing liabilities). The Company believes that it may not ultimately be required to pay all or any of the accrued pricing liabilities based upon the expiration of statutes of limitations, and due in part to the nature of the interactions with its clients. The remaining accrued pricing liabilities as of October 31, 2020 will be derecognized when there is sufficient information for the Company to conclude that such liabilities are not subject to escheatment and have been extinguished, which may occur through payment, legal release, or other legal or factual determination. The Company has not provided for any provision for interest and or penalties related to escheatment as it has concluded that such is not probable to occur, and any potential interest and penalties cannot be reasonably estimated.
(7)LEASES
The table below presents the components of the Company's lease expense:
Three Months Ended October 31, 2020Three Months Ended October 31, 2019
(In thousands)
Operating lease cost$4,228 $4,816 
Short-term lease expense407 226 
Variable lease cost8 40 
Amortization of finance lease assets 18 
Interest on finance lease liabilities2 4 
$4,645 $5,104 
Supplemental Cash Flow Information
Supplemental cash flow information related to the Company's leases was as follows:
Three Months Ended October 31, 2020Three Months Ended October 31, 2019
(In thousands)
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases$4,239 $4,372 
Operating cash flows from finance leases$2 $4 
Financing cash flows from finance leases$17 $33 
(8)DEBT
The components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below:
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October 31,
2020
July 31,
2020
(In thousands)
Secured
Cerberus Term Loan due December 15, 2022$370,472 $371,972 
Unsecured
7.50% Convertible Senior Note due March 1, 202414,940 14,940 
Credit Facilities
Cerberus Bank Credit Facility  
MidCap Credit Facility  
Less: unamortized discounts and issuance costs(7,457)(7,863)
Total debt, net377,955 379,049 
Less: current portion of debt, net(5,572)(5,527)
Total long-term debt, net$372,383 $373,522 
7.50% Convertible Senior Note
On February 28, 2019, the Company entered into that certain 7.50% Convertible Senior Note Due 2024 Purchase Agreement (the "SPHG Note Purchase Agreement") with SPH Group Holdings LLC ("SPHG Holdings"), whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for a 7.50% Convertible Senior Note due 2024 (the "SPHG Note"). As of October 31, 2020, the if-converted value of the SPHG Note did not exceed the principal value of the SPHG Note. As of October 31, 2020, the remaining period over which the unamortized discount will be amortized is 40 months. As of October 31, 2020 and July 31, 2020, the net carrying value of the SPHG Note was $8.3 million and $8.1 million, respectively. The effective interest rate on the SPHG Note, including accretion of the discount, is 27.8%. The following tables reflect the components of the SPHG Note:
October 31,
2020
July 31,
2020
(In thousands)
Carrying amount of equity component $8,200 $8,200 
Principal amount of note$14,940 $14,940 
Unamortized debt discount(6,594)(6,886)
Net carrying amount$8,346 $8,054 
Three Months Ended October 31, 2020Three Months Ended October 31, 2019
(In thousands)
Interest expense related to contractual interest coupon$286 $280 
Interest expense related to accretion of the discount292 409 
$578 $689 
(9)CONTINGENCIES
On April 13, 2018, a purported shareholder, Donald Reith, filed a verified complaint, Reith v. Lichtenstein, et al., 2018-277 (Del. Ch.) in the Delaware Court of Chancery. The complaint alleges class and derivative claims for breach of fiduciary duty and/or aiding and abetting breach of fiduciary duty and unjust enrichment against the Company's Board of Directors (the "Board"), Warren Lichtenstein, Glen Kassan, William T. Fejes, Jack L. Howard, Jeffrey J. Fenton, Philip E. Lengyel and Jeffrey S. Wald; and stockholders Steel Partners Holdings L.P. ("Steel Holdings"), Steel Partners, Ltd., SPHG Holdings, Handy & Harman Ltd. and WHX CS Corp. (collectively, the "Steel Parties") in connection with the acquisition of $35.0 million of the Series C Convertible Preferred Stock by SPHG Holdings and equity grants made to Lichtenstein, Howard and Fejes on December 15, 2017 (collectively, the "Challenged Transactions"). The Company is named as a nominal defendant. The complaint alleges that
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although the Challenged Transactions were approved by a Special Committee consisting of the independent members of the Board (Messrs. Fenton, Lengyel and Wald), the Steel Parties dominated and controlled the Special Committee, who approved the Challenged Transactions in breach of their fiduciary duty. Plaintiff alleges that the Challenged Transactions unfairly diluted shareholders and therefore unjustly enriched Steel Holdings, SPHG Holdings and Messrs. Lichtenstein, Howard and Fejes. The complaint also alleges that the Board made misleading disclosures in the Company's proxy statement for the 2017 Annual Meeting of Stockholders in connection with seeking approval to amend the 2010 Incentive Award Plan to authorize the issuance of additional shares to accommodate certain shares underlying the equity grants. Remedies requested include rescission of the Series C Convertible Preferred Stock and equity grants, disgorgement of any unjustly obtained property or compensation and monetary damages. On June 8, 2018, defendants moved to dismiss 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. Discovery is proceeding. Based on information currently available, the Company is unable to reasonably estimate a possible loss or range of possible losses, if any, with regard to the lawsuit; therefore, no litigation reserve has been recorded in the Company's condensed consolidated balance sheets. Although there can be no assurance as to the ultimate outcome, the Company believes it has meritorious defenses, continues to deny liability and intends to defend this litigation vigorously.
(10)REVENUE RECOGNITION
Disaggregation of Revenue
The following table presents the Company's revenues from contracts with customers disaggregated by major good or service line and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.
Three Months Ended October 31, 2020Three Months Ended October 31, 2019
Direct
Marketing
Supply ChainConsolidated
Total
Direct
Marketing
Supply ChainConsolidated
Total
(In thousands)
Major Goods/Service Lines
Marketing solutions offerings$105,708 $ $105,708 $133,003 $ $133,003 
Supply chain management services 63,787 63,787  91,705 91,705 
Other 439 439  445 445 
$105,708 $64,226 $169,934 $133,003 $92,150 $225,153 
Timing of Revenue Recognition
Goods transferred over time$105,708 $ $105,708 $133,003 $ $133,003 
Services transferred over time 64,226 64,226  92,150 92,150 
$105,708 $64,226 $169,934 $133,003 $92,150 $225,153 
Marketing Solutions Offerings
IWCO's revenue is generated through the provision of data-driven marketing solutions, primarily through providing direct mail products to customers. Revenue related to the majority of IWCO's marketing solutions contracts, which typically consist of a single integrated performance obligation, is recognized over time as the Company performs because the products have no alternative use to the Company.
Supply Chain Management Services
ModusLink's revenue primarily comes from the sale of supply chain management services to its clients. Amounts billed to customers under these arrangements include revenue attributable to the services performed as well as for materials procured on the customer's behalf as part of its service to them. The majority of these arrangements consist of two distinct performance obligations (i.e., warehousing/inventory management service and a separate kitting/packaging/assembly service), revenue related to each of which is recognized over time as services are performed using an input method based on the level of efforts expended.
Other
Other revenue consists of cloud-based software subscriptions, software maintenance and support service contracts, and fees for professional services. Revenue related to these arrangements is recognized on a straight-line basis over the term of the agreement or over the term of the agreement in proportion to the costs incurred in satisfying the obligations under the contract.
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Contract Balances
Timing of revenue recognition may differ from timing of invoicing to customers. The Company records contract assets and liabilities related to its contracts with customers as follows:
Accounts receivable when revenue is recognized prior to receipt of cash payments and if the right to such amounts is unconditional and solely based on the passage of time.
Contract asset when the Company recognizes revenue based on efforts expended but the right to such amount is conditional upon satisfaction of another performance obligation. Contract assets are primarily comprised of fees related to marketing solutions offerings and supply chain management services. The Company notes that its contract assets are all short-term in nature and are included in prepaid expenses and other current assets in the Company's condensed consolidated balance sheets.
Deferred revenue when cash payments are received or due in advance of performance. Deferred revenue is primarily comprised of fees related to supply chain management services, cloud-based software subscriptions and software maintenance and support service contracts, which are generally billed in advance. Deferred revenue also includes other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. The deferred revenue balance is classified as a component of other current liabilities and other long-term liabilities on the Company's condensed consolidated balance sheets.

The table below presents information for the Company's contract balances:
October 31,
2020
July 31,
2020
(In thousands)
Accounts receivable, trade, net$79,898 $93,072 
Contract assets$18,128 $13,016 
Deferred revenue - current$2,933 $2,860 
Deferred revenue - long-term255 85 
Total deferred revenue$3,188 $2,945 
Remaining Performance Obligations

Remaining performance obligations are comprised of deferred revenue. Changes in deferred revenue during the three months ended October 31, 2020 and October 31, 2019, were as follows:
Three Months Ended October 31, 2020Three Months Ended October 31, 2019
(In thousands)
Balance at beginning of period$2,945 $3,029 
Deferral of revenue1,096 1,216 
Recognition of deferred amounts upon satisfaction of performance obligation(853)(855)
Balance at end of period$3,188 $3,390 
We expect to recognize approximately $2.9 million of the deferred revenue over the next twelve months and the remaining $0.3 million beyond that time period.
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
(11)INCOME TAXES
The Company operates in multiple taxing jurisdictions, both within and outside of the United States. For the three months ended October 31, 2020, the Company was profitable in certain jurisdictions, resulting in an income tax expense using enacted
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rates in those jurisdictions. As of October 31, 2020 and July 31, 2020, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $2.8 million and $2.8 million, respectively.
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act into law, which is intended to respond to the COVID-19 pandemic and its impact on the economy, public health, state and local governments, individuals and businesses. The CARES Act contains numerous tax provisions, including temporary changes to the future limitations on interest deductions related to section 163j and deferral of payment of the employer portion of social security taxes through the end of calendar year 2020.
The Company has elected to defer the employer-paid portion of social security taxes, which is expected to provide the Company with approximately $5.2 million of additional liquidity during the current calendar year, with 50% of the deferral due December 31, 2021 and the remaining 50% due December 31, 2022. The Company does not expect the provisions of the CARES Act to have a significant impact on the income tax provision, income tax payable or deferred income tax positions of the Company.
Uncertain Tax Positions
In accordance with the Company's accounting policy, interest related to unrecognized tax benefits is included in the income tax expense line of the condensed consolidated statements of operations. As of October 31, 2020 and July 31, 2020, the liabilities for interest expense related to uncertain tax positions were $0.4 million and $0.3 million, respectively. The Company has accrued $0.4 million for penalties related to income tax positions. The Company expects $0.3 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, 2016 through July 31, 2020. 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 2012 through 2019 tax years remain subject to examination in most locations, while the Company's 2008 through 2019 tax years remain subject to examination in most Asia locations.
(12)(LOSS) EARNINGS PER SHARE
The following table reconciles (loss) earnings per share for the three months ended October 31, 2020 and 2019:
Three Months Ended
October 31,
20202019
(In thousands, except per share data)
Net (loss) income $(3,551)$4,792 
Less: Preferred dividends on redeemable preferred stock(537)(536)
Net (loss) income attributable to common stockholders(4,088)4,256 
7.50% Convertible Senior Note 592 
Redeemable preferred stock 536 
Net (loss) income attributable to common stockholders after assumed conversions$(4,088)$5,384 
Weighted average common shares outstanding61,893 61,401 
Weighted average common equivalent shares arising from dilutive stock options, restricted stock, convertible note and convertible preferred stock 24,605 
Weighted average number of common and potential common shares61,893 86,006 
Basic net (loss) income per share attributable to common stockholders$(0.07)$0.07 
Diluted net (loss) income per share attributable to common stockholders$(0.07)$0.06 
Basic net (loss) earnings per common share is calculated using the weighted average number of common shares outstanding during the period. Diluted net earnings per common share, if any, gives effect to diluted stock options (calculated based on the treasury stock method), non-vested restricted stock shares purchased under the employee stock purchase plan and shares issuable upon debt or preferred stock conversion (calculated using an as-if converted method).
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For the three months ended October 31, 2020, approximately 24.3 million common stock equivalent shares (including those related to convertible debt and preferred stock) were excluded from the denominator in the calculation of diluted net loss per share as their inclusion would have been antidilutive. For the three months ended October 31, 2019 approximately 0.3 million were excluded from the denominator in the calculation of diluted net earnings per share as their inclusion would have been antidilutive.
(13)COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) combines net income (loss) and other comprehensive items. Other comprehensive items represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheets. Accumulated other comprehensive items consist of the following:
Foreign
Currency
Items
Pension
Items
Total
(In thousands)
Accumulated other comprehensive income (loss) as of July 31, 2020$5,025 $(1,182)$3,843 
Foreign currency translation adjustment2,973  2,973 
Net current-period other comprehensive income (loss)2,973  2,973 
Accumulated other comprehensive income (loss) as of October 31, 2020$7,998 $(1,182)$6,816 
Foreign
Currency
Items
Pension
Items
Unrealized
Gains on
Securities
Total
(In thousands)
Accumulated other comprehensive income (loss) as of July 31, 2019$5,017 $(4,079)$96 $1,034 
Foreign currency translation adjustment13   13 
Pension liability adjustments (2) (2)
Net current-period other comprehensive income (loss)13 (2) 11 
Accumulated other comprehensive income (loss) as of October 31, 2019$5,030 $(4,081)$96 $1,045 
(14)SEGMENT INFORMATION

The Company has two operating segments which are the same as its reportable segments: Direct Marketing and Supply Chain. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance, share-based compensation and acquisition costs, which are not allocated to the Company's reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, debt and other assets and liabilities which are not identifiable to the operations of the Company's operating segments. All significant intra-segment amounts have been eliminated. Management evaluates segment performance based on segment net revenue and operating income (loss).

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Summarized financial information by operating segment is as follows:
Three Months Ended
October 31,
20202019
(In thousands)
Net revenue:
Direct Marketing$105,708 $133,003 
Supply Chain64,226 92,150 
$169,934 $225,153 
Operating income:
Direct Marketing$4,937 $11,203 
Supply Chain5,151 6,510 
Total segment operating income10,088 17,713 
Corporate-level activity(3,013)(2,971)
Total operating income7,075 14,742 
Total other expense(9,822)(8,595)
(Loss) income before income taxes$(2,747)$6,147 
October 31,
2020
July 31,
2020
(In thousands)
Total assets:
Direct Marketing$590,449 $584,477 
Supply Chain114,386 138,773 
Sub-total—segment assets704,835 723,250 
Corporate51,522 35,922 
$756,357 $759,172 
Summarized financial information of the Company's net revenue from external customers by group of services is as follows:
Three Months Ended
October 31,
20202019
(In thousands)
Products:
Direct Marketing$105,708 $133,003 
Services:
Supply Chain64,226 92,150 
$169,934 $225,153 
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Summarized financial information of the Company's net revenue by geographic location is as follows:
Three Months Ended
October 31,
20202019
(In thousands)
United States$121,483 $153,046 
China19,640 39,389 
Netherlands7,795 10,648 
Other21,016 22,070 
$169,934 $225,153 
(15)RELATED PARTY TRANSACTIONS
As of October 31, 2020, SPHG Holdings and its affiliates, including Steel Holdings, Handy & Harman Ltd. and Steel Partners, Ltd., beneficially owned approximately 54.8% of our outstanding capital stock, including the if-converted value of the SPHG Note and shares of Series C Convertible Preferred Stock that vote on an as-converted basis together with our common stock. Warren G. Lichtenstein, our Interim Chief Executive Officer and the Executive Chairman of our Board, is also the Executive Chairman of Steel Holdings GP Inc. ("Steel Holdings GP"), the manager of Steel Holdings. Jack L. Howard, the President and a director of Steel Holdings GP, was appointed to the Board upon the closing of the Preferred Stock Transaction described below.
SPHG Note Transaction
On February 28, 2019, the Company entered into that certain SPHG Note Purchase Agreement with SPHG Holdings, whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for the SPHG Note. As of both October 31, 2020 and July 31, 2020, SPHG Holdings held $14.9 million principal amount of the SPHG Note. As of October 31, 2020 and July 31, 2020, the net carrying value of the SPHG Note was $8.3 million and $8.1 million, respectively.
Preferred Stock Transaction
On December 15, 2017, the Company entered into a Preferred Stock Purchase Agreement with SPHG Holdings, pursuant to which the Company issued 35,000 shares of the Company's newly created Series C Convertible Preferred Stock to SPHG Holdings at a price of $1,000 per share, for an aggregate purchase consideration of $35.0 million. The terms, rights, obligations and preferences of the Series C Convertible Preferred Stock are set forth in the Series C Certificate of Designations, which has been filed with the Secretary of State of the State of Delaware.
Management Services Agreement
On June 14, 2019, the Company entered into an agreement (the "2019 Management Services Agreement") with Steel Services Ltd., an indirect wholly-owned subsidiary of Steel Holdings. The 2019 Management Services Agreement was effective as of June 1, 2019. Total expenses incurred related to the 2019 Management Services Agreement for the three months ended October 31, 2020 and 2019 were $0.8 million and $0.9 million, respectively. As of October 31, 2020 and July 31, 2020, amounts due to Steel Services Ltd. were $2.3 million and $0.8 million, respectively.
(16)FAIR VALUE MEASUREMENTS
ASC 820 provides that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
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Level 3: Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price the assets or liabilities
The carrying value of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the short maturity of these instruments. We believe that the carrying value of our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
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 October 31, 2020 and July 31, 2020, classified by fair value hierarchy:
Fair Value Measurements at Reporting Date Using
(In thousands)October 31, 2020Level 1Level 2Level 3
Assets:
Money market funds$45,119 $45,119 $ $ 
Fair Value Measurements at Reporting Date Using
(In thousands)July 31, 2020Level 1Level 2Level 3
Assets:
Money market funds$5,117 $5,117 $ $ 
There were no transfers between Levels 1, 2 or 3 during any of the periods presented.
When available, quoted prices are used to determine fair value. When quoted prices in active markets are available, investments are classified within Level 1 of the fair value hierarchy. When quoted prices in active markets are not available, fair values are determined using pricing models, and the inputs to those pricing models are based on observable market inputs. The inputs to the pricing models are 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 reviews the carrying amounts of these assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount of the asset group or reporting unit is not recoverable and exceeds its fair value. The Company estimates the fair values of assets subject to impairment based on the Company's own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available.
Fair Value of Financial Instruments
The Company's financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, customer deposits, accounts payable, restricted cash and debt, and are reflected in the consolidated financial statements at carrying value. With the exception of the SPHG Note and long-term debt, carrying value approximates fair value for these items due to their short-term nature. The Company believes that the carrying value of the liability component of the SPHG Note and our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates. Included in cash and cash equivalents in the accompanying condensed consolidated balance sheets are money market funds. These are valued at quoted market prices in active markets.
(17)SUBSEQUENT EVENT
Steel Holdings Expression of Interest
On November 19, 2020, the Board received a preliminary, non-binding expression of interest (the "Expression of Interest") from Steel Holdings to acquire all of the outstanding shares of common stock not already owned by Steel Holdings or its affiliates for a combination of cash and Steel Holdings 6% Series A Preferred Units, which would imply a value per share of common stock in the range of $0.65 to $0.72 per share. The Board has established a special committee comprised solely of independent directors (the "Acquisition Proposal Special Committee") authorized to retain independent legal and financial advisors and to review,
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evaluate, negotiate and approve or disapprove the Expression of Interest, and to explore alternative strategies or transactions. As set forth in the Expression of Interest, the proposed transaction will be subject to the approval of the Acquisition Proposal Special Committee, as well as a non-waivable condition requiring approval of a majority of the shares outstanding of the Company not owned by Steel Holdings and its affiliates and related parties. The Board resolutions establishing the Acquisition Proposal Special Committee expressly provide that the Board will not approve the proposed transaction contemplated by the Expression of Interest or any alternative thereto without a prior favorable recommendation by the Acquisition Proposal Special Committee.
No decision has yet been made with respect to the Company's response to the Expression of Interest or any alternatives thereto. The Board has only received a proposal, which does not constitute an offer or proposal capable of acceptance and may be withdrawn at any time and in any manner. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that the transaction proposed in the Expression of Interest or any other transaction will be approved or completed. The Company is not obligated to disclose any further developments or updates on the progress of the proposed transaction until either the Company enters into a definitive agreement or the Acquisition Proposal Special Committee determines no such transaction will be approved.
Amendment to MidCap Credit Facility
On December 9, 2020, ModusLink entered into a First Amendment to the MidCap credit agreement (“Amendment No. 1”) by and among ModusLink, certain of ModusLink's subsidiaries identified on the signature pages thereto, and MidCap as lender and agent.
Amendment No. 1 amends the MidCap credit agreement to permit special cash dividends to be made on or prior to July 31, 2021 in an aggregate amount not to exceed $50.0 million (the “Special Distributions”). Payment of the Special Distributions will eliminate the availability of the general dividend basket for the fiscal year ending July 31, 2021. In addition, Amendment No. 1 incorporates a new minimum liquidity financial covenant, which requires that the sum of excess availability under the MidCap credit agreement and the amount of qualified cash and cash equivalents of the borrower is not less than $3.0 million until the earlier of July 31, 2021 or the date on which the borrower has either distributed the maximum amount of the Special Distributions or waived the ability to make further Special Distributions. Among other things, Amendment No. 1 also increases the percentage of eligible accounts included in the borrowing base from 50% to 75% and amends the condition for borrowing of revolving loans after the effective date of Amendment No. 1 to require evidence that specified availability (the sum of excess availability and the difference between the borrowing base and the aggregate revolving loan commitments) is not less than $3.0 million prior to giving effect to any such borrowing.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The matters discussed in this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those risks discussed elsewhere in this report and the risks discussed in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on September 30, 2020, and other subsequent reports filed with or furnished to the SEC. 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.
Overview
Steel Connect, Inc. (the "Company") is a diversified holding company with two wholly-owned subsidiaries, IWCO Direct Holdings, Inc. ("IWCO Direct," "IWCO" or "Direct Marketing") and ModusLink Corporation ("ModusLink" or "Supply Chain"), that have market-leading positions in direct marketing and supply chain management, respectively.
IWCO Direct
As a leading provider of data-driven direct marketing solutions, IWCO Direct's products and services help clients create more effective marketing offers and communications across all marketing channels to create new and more loyal customers. With a nearly 50-year legacy of printing and mailing services, IWCO Direct's full range of expanded marketing services includes strategy, creative and execution for omnichannel marketing campaigns, along with one of the industry's most sophisticated postal logistics strategies for direct mail. Through Mail-Gard®, IWCO Direct offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services.
IWCO Direct's services include (a) development of direct mail and omnichannel marketing strategies, (b) creative services to design direct mail, email and online marketing, (c) printing and compiling of direct mail pieces into envelopes ready for mailing, (d) commingling services to sort mail produced for various customers by destination to achieve optimized postal savings and (e) business continuity and disaster recovery services for critical communications to protect against unexpected business interruptions. The major markets served by IWCO Direct include financial services, multiple-system operators ("MSO") (cable or direct-broadcast satellite TV systems), insurance and to a lesser extent subscription/services, healthcare, travel/hospitality and other. Direct mail is a critical piece of marketing for most of its current customers who use direct mail to acquire new customers. Management believes that direct mail will remain an important part of its customers' strategy for the foreseeable future, based on its proven ability to enhance results when used as part of an omnichannel marketing strategy.
It is possible that in future periods decreases in customer demand or volumes or other potential changes in operations may increase the risk that goodwill and other intangible assets, which are only associated with the Direct Marketing segment, may become impaired.
Supply Chain
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 ModusLink operates in. To address this, in addition to the computer and software markets, ModusLink has expanded its 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. ModusLink believes these markets, and other verticals it operates in, may experience faster growth than its historical markets and represent opportunities to realize higher gross margins on the services it offers. Companies in these markets often have significant need for a supply chain partner who will be an extension to their business models. ModusLink believes the scope of its 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, and e-Business will increase the overall value of the supply chain solutions it delivers to its existing clients and to new clients.
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As a large portion of the Supply Chain revenue comes from outsourcing services provided to clients such as retail products and consumer electronics companies, our operating performance has been and may continue to be adversely affected by declines in the overall performance within these sectors and uncertainty affecting the world economy. In addition, the drop in consumer demand for products of certain clients has had and may continue to have the effect of reducing our volumes and adversely affecting revenue, gross margin and overall operating performance. Additionally, the markets for the Supply Chain services are generally very competitive, though we believe we have a compelling and differentiated offering due to the value-added services we provide, our commitment to client management and our global reach. We also face pressure from our clients to continually realize efficiency gains in order to help our clients maintain their profitability objectives. Increased competition and client demands for efficiency improvements may result in price reductions, reduced gross margins and, in some cases, loss of market share. In addition, our profitability varies based on the types of services we provide and the regions in which we perform them. Therefore, the mix of revenue derived from our various services and locations can impact our gross margin results. Also, form factor changes, which we describe as the reduction in the amount of materials and product components used in our clients' completed packaged product, can also have the effect of reducing our revenue and gross margin opportunities. As a result of these competitive and client pressures, the gross margins in our Supply Chain business are low.
Many of the Supply Chain business' clients products are subject to seasonal consumer buying patterns. As a result, the services ModusLink provides to its clients are also subject to seasonality, with higher revenue and operating income typically being realized from handling its clients' products during the first half of our fiscal year, which includes the holiday selling season.
We have developed plans and will continue to monitor plans to address process improvements and realize other efficiencies throughout our global footprint with a goal to reduce cost, remove waste and improve our overall gross margins. There can be no assurance that these actions will improve gross margins. Increased competition as well as industry consolidation and/or low demand for our clients' products and services may hinder our ability to maintain or improve our gross margins, profitability and cash flows. We must continue to focus on margin improvement, through implementation of our strategic initiatives, cost reductions and asset and employee productivity gains in order to improve the profitability of our businesses and maintain our competitive position. We generally manage margin and pricing pressures in several ways, including efforts to target new markets, expand and enhance our service offerings, improve the efficiency of our processes and to lower our infrastructure costs. We seek to lower our cost to service clients by moving work to lower-cost venues, consolidating and leveraging our global facility footprint, drive process and efficiency reforms and other actions designed to improve the productivity of our operations.
Historically, a limited number of key clients had accounted for a significant percentage of the Company's revenue. For the three months ended October 31, 2020 and 2019, the Company's ten largest clients accounted for approximately 55% and 52% of consolidated net revenue, respectively. One client from the computing market accounted for 15% of the Company's consolidated net revenue for three months ended October 31, 2020. One client from the computing market accounted for 15% of the Company's consolidated net revenue for the three months ended October 31, 2019. 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 the Company's clients, it expects to offset the adverse financial impact such factors may bring about.
Impact of COVID-19
In March 2020, the World Health Organization categorized the novel Coronavirus ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The spread of the outbreak has caused significant disruptions in the U.S. and global economies, and economists expect the impact will be significant during the remainder of 2020 and beyond. The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The Company continues to evaluate the global risks and the slowdown in business activity related to COVID-19, including the potential impacts on its employees, customers, suppliers and financial results. The effects of COVID-19 required temporary closures of certain of ModusLink's facilities for short periods of time during the fiscal year ended July 31, 2020. Additionally, although IWCO operated and continues to operate as an essential business, it had reduced operating levels and labor shifts due to lower sales volume during the prior fiscal year. As of the filing of this quarterly report on Form 10-Q, all of the Company's facilities were open and able to operate at normal capacities.

To help mitigate the financial impact of the COVID-19 pandemic, the Company initiated cost reduction actions, including waiver of board fees, hiring freezes, staffing and force reductions, Company-wide salary reductions, bonus payment deferrals and temporary 401(k) match suspension. The temporary waiver of board fees and Company-wide salary reduction actions taken in the prior fiscal year were fully restored prior to the beginning of the current fiscal year. The Company continues its focus on cash management and liquidity, which includes reduction of discretionary spending, aggressive working capital management, strict approvals for capital expenditures and other actions. The Company will evaluate further actions if circumstances warrant.
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Currently, the Company anticipates that the impact of the deterioration of the U.S and global economies will most likely continue and may have an adverse impact on the Company's business. However, as the situation surrounding COVID-19 remains fluid, it is difficult to predict the duration of the pandemic and the impact on the Company's business, operations, financial condition and cash flows. The severity of the impact on the Company's business for the remainder of calendar 2020 and beyond will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, the extent and severity of the impact on the Company's customers and suppliers, the continued disruption to the demand for our businesses' products and services, and the impact of the global business and economic environment on liquidity and the availability of capital, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could also be adversely impacted by delays in payments of outstanding receivables beyond normal payment terms, supply chain disruptions and uncertain demand, and the effect of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers. There is also no certainty that federal, state or local regulations regarding safety measures to address the spread of COVID-19 will not adversely impact the Company's operations.

Recent Developments

Non-binding Expression of Interest

On November 19, 2020, the Company's Board of Directors (the "Board") received a preliminary, non-binding expression of interest (the "Expression of Interest") from Steel Partners Holdings L.P. ("Steel Holdings") to acquire all of the outstanding shares of common stock not already owned by Steel Holdings or its affiliates for a combination of cash and Steel Holdings 6% Series A Preferred Units, which would imply a value per share of common stock in the range of $0.65 to $0.72 per share. The Expression of Interest was filed as an exhibit to a Schedule 13D/A filed with the SEC by Steel Holdings and certain of its affiliates on November 19, 2020. The Board has established a special committee comprised solely of independent directors (the "Acquisition Proposal Special Committee") authorized to retain independent legal and financial advisors and to review, evaluate, negotiate and approve or disapprove the Expression of Interest, and to explore alternative strategies or transactions. As set forth in the Expression of Interest, the proposed transaction will be subject to the approval of the Acquisition Proposal Special Committee, as well as a non-waivable condition requiring approval of a majority of the shares outstanding of the Company not owned by Steel Holdings and its affiliates and related parties. The Board resolutions establishing the Acquisition Proposal Special Committee expressly provide that the Board will not approve the proposed transaction contemplated by the Expression of Interest or any alternative thereto without a prior favorable recommendation by the Acquisition Proposal Special Committee.

No decision has yet been made with respect to the Company's response to the Expression of Interest or any alternatives thereto. The Board cautions that it has only received a proposal, which does not constitute an offer or proposal capable of acceptance and may be withdrawn at any time and in any manner. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that the transaction proposed in the Expression of Interest or any other transaction will be approved or completed. The Company is not obligated to disclose any further developments or updates on the progress of the proposed transaction until either the Company enters into a definitive agreement or the Acquisition Proposal Special Committee determines no such transaction will be approved.
MidCap Credit Facility
On December 9, 2020, ModusLink entered into a First Amendment (“Amendment No. 1”) to its credit agreement with MidCap Financial Trust ("MidCap") by and among ModusLink, certain of ModusLink's subsidiaries identified on the signature pages thereto, and MidCap as lender and agent.
Amendment No. 1 amends the MidCap credit agreement to permit special cash dividends to be made on or prior to July 31, 2021 in an aggregate amount not to exceed $50.0 million (the “Special Distributions”). Payment of the Special Distributions will eliminate the availability of the general dividend basket for the fiscal year ending July 31, 2021. In addition, Amendment No. 1 incorporates a new minimum liquidity financial covenant, which requires that the sum of excess availability under the MidCap credit agreement and the amount of qualified cash and cash equivalents of the borrower is not less than $3.0 million until the earlier of July 31, 2021 or the date on which the borrower has either distributed the maximum amount of the Special Distributions or waived the ability to make further Special Distributions. Among other things, Amendment No. 1 also increases the percentage of eligible accounts included in the borrowing base from 50% to 75% and amends the condition for borrowing of revolving loans after the effective date of Amendment No. 1 to require evidence that specified availability (the sum of excess availability and the difference between the borrowing base and the aggregate revolving loan commitments) is not less than $3.0 million prior to giving effect to any such borrowing.
Basis of Presentation
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The Company has two operating segments which are the same as its reportable segments: Direct Marketing and Supply Chain. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance, share-based compensation and acquisition costs, which are not allocated to the Company's reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, debt and other assets and liabilities which are not identifiable to the operations of the Company's operating segments. All significant intra-segment amounts have been eliminated.
During the three months ended October 31, 2019, the Company recorded a $6.4 million adjustment to correct an out-of-period misstatement related to the Company's estimate for certain tax related liabilities. Had this correction been recorded for the fiscal year ended July 31, 2019, the Company's selling, general and administrative expenses and net loss for that period would have been reduced to $137.7 million and $60.3 million, respectively.
Results of Operations
Three months ended October 31, 2020 compared to the three months ended October 31, 2019

Net Revenue:
Three Months Ended October 31, 2020As a %
of Total
Net
Revenue
Three Months Ended October 31, 2019As a %
of Total
Net
Revenue
$ Change% Change
(In thousands)
Direct Marketing$105,708 62.2 %$133,003 59.1 %$(27,295)(20.5)%
Supply Chain64,226 37.8 %92,150 40.9 %(27,924)(30.3)%
Total$169,934 100.0 %$225,153 100.0 %$(55,219)