See accompanying notes to unaudited condensed consolidated financial statements
See accompanying notes to unaudited condensed consolidated financial statements
See accompanying notes to unaudited condensed consolidated financial statements
See accompanying notes to unaudited condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) NATURE OF OPERATIONS
ModusLink Global Solutions, Inc. (together with its consolidated subsidiaries, ModusLink Global Solutions or the
Company), through its wholly owned subsidiaries, ModusLink Corporation (ModusLink) and ModusLink PTS, Inc. (ModusLink PTS), is a leader in global supply chain business process management serving clients in markets
such as consumer electronics, communications, computing, medical devices, software, and retail. The Company designs and executes critical elements in its clients global supply chains to improve speed to market, product customization,
flexibility, cost, quality and service. These benefits are delivered through a combination of industry expertise, innovative service solutions, and integrated operations, proven business processes, expansive global footprint and world-class
technology. The Company also produces and licenses an entitlement management solution powered by its enterprise-class Poetic software, which offers a complete solution for activation, provisioning, entitlement subscription and data collection from
physical goods (connected products) and digital products.
The Company has an integrated network of strategically located facilities with
21 sites operating in 21 languages in various countries, including numerous sites throughout North America, Europe and Asia. The Company previously operated under the names CMGI, Inc. and CMG Information Services, Inc. and was incorporated in
Delaware in 1986.
(2) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to 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 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, 2016, which are contained in the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission (SEC) on October 14, 2016. The results for the three and nine months ended April 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
All significant intercompany transactions and balances have been eliminated in consolidation.
The Company considers events or transactions that occur after the balance sheet date but before the issuance of financial statements to
provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. For the period ended April 30, 2017, the Company evaluated subsequent events for potential recognition and disclosure through
the date these financial statements were filed.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition
requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in
judgments and assets recognized from costs incurred to obtain or fulfill a contract. The effective date will be the first quarter of fiscal year 2019 using one of two retrospective application methods or a cumulative effect approach. The Company is
evaluating the potential effects on the consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15
Presentation of Financial StatementsGoing Concern (Subtopic 205-40), which amends the accounting guidance related to the evaluation of an entitys ability to continue as a going concern. The amendment establishes managements
responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern in connection with preparing financial statements for each annual and interim reporting period. The update also gives
guidance to determine whether to disclose information about relevant conditions and events when there is substantial doubt about an entitys ability to continue as a going concern. This guidance will be effective for the Company as of the first
quarter of fiscal year 2018. The new guidance is not anticipated to have an effect on the Companys consolidated financial statements.
8
In April 2015, the FASB issued ASU No. 2015-03, InterestImputation of Interest
(Subtopic 835-30)Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as
an asset. The Company adopted this guidance beginning in the first quarter of fiscal year 2017. Upon adoption, an entity must apply the guidance retrospectively to all prior periods presented in the financial statements. As such, the prior year
consolidated balance sheets were also adjusted.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of
Inventory (Topic 330), which provides guidance related to inventory measurement. The new standard requires entities to measure inventory at the lower of cost and net realizable value thereby simplifying the current guidance under which an entity
must measure inventory at the lower of cost or market. The new standard is effective for the Company beginning in the first quarter of fiscal year 2018. The Company is currently evaluating the effect the guidance will have on the Companys
financial statement disclosures, results of operations and financial position.
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes, which requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. This guidance
allowed for adoption on either a prospective or retrospective basis. The Company had elected to early adopt this guidance on a prospective basis and, as a result, prior consolidated balance sheets were not retrospectively adjusted. The adoption of
this guidance did not have a material impact on the Companys consolidated financial statements and related disclosures.
In February
2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to todays accounting. This ASU will be effective for
the Company beginning in the first quarter of fiscal year 2020. The Company is currently evaluating the effect the guidance will have on the Companys financial statement disclosures, results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net). The amendments in this update relate to when another party, along with the Company, are involved in providing a good or service to a customer and are intended to improve the operability and understandability of
the implementation guidance on principal versus agent. Revenue recognition guidance requires companies to determine whether the nature of its promise is to provide that good or service to the customer (i.e., the Company is a principal) or to arrange
for the good or service to be provided to the customer by the other party (i.e., the Company is an agent). This ASU will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company is currently in the process of
assessing what impact this new update may have on its consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax
consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2018. The Company
is currently in the process of assessing what impact this new standard may have on its consolidated financial statements.
In November
2016, the FASB issued ASU No. 2016-18, Restricted Cash. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of
the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent balances, which is similar to what is required today for
Securities and Exchange Commission Registrants. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company is currently in the process of assessing what impact this new standard may have on its
combined financial statements but does not believe that implementing this standard will have a significant impact on the Companys current presentation and disclosures.
In March 2017, the FASB issued ASU No. 2017-07, CompensationRetirement Benefits (Topic 715), which requires that the service cost
component of net periodic pension and postretirement benefit cost be presented in the same line item as other employee compensation costs, while the other components be presented separately as non-operating income (expense). This ASU will be
effective for the Company beginning in the first quarter of fiscal year 2019. The Company is currently in the process of assessing what impact this new standard may have on its consolidated financial statements.
(4) INVENTORIES
Inventories are stated
at the lower of cost or market. Cost is determined by both the moving average and the first-in, first-out methods. Materials that the Company typically procures on behalf of its clients that are included in inventory include materials such as
compact discs, printed materials, manuals, labels, hardware accessories, hard disk drives, phone chassis, consumer packaging, shipping boxes and labels, power cords and cables for client-owned electronic devices.
9
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
23,640
|
|
|
$
|
28,506
|
|
Work-in-process
|
|
|
639
|
|
|
|
590
|
|
Finished goods
|
|
|
10,423
|
|
|
|
11,174
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,702
|
|
|
$
|
40,270
|
|
|
|
|
|
|
|
|
|
|
The Company continuously monitors inventory balances and records inventory provisions for any excess of the
cost of the inventory over its estimated market value. The Company also monitors inventory balances for obsolescence and excess quantities as compared to projected demands. The Companys inventory methodology is based on assumptions about
average shelf life of inventory, forecasted volumes, forecasted selling prices, contractual provisions with our clients, write-down history of inventory and market conditions. While such assumptions may change from period to period, in determining
the net realizable value of its inventories, the Company uses the best information available as of the balance sheet date. If actual market conditions are less favorable than those projected, or the Company experiences a higher incidence of
inventory obsolescence because of rapidly changing technology and client requirements, additional inventory provisions may be required. Once established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory
and cannot be reversed due to subsequent increases in demand forecasts. Accordingly, if inventory previously written down to its net realizable value is subsequently sold, gross profit margins may be favorably impacted.
10
(5) INVESTMENTS
Trading securities
During the three
months ended April 30, 2017, the Company received $2.2 million in proceeds associated with the sale of publicly traded securities (Trading Securities), which included a $0.4 million cash gain. During the three months ended
April 30, 2017, the Company recognized $2.2 million in net non-cash net gains associated with its Trading Securities. During the nine months ended April 30, 2017, the Company received $8.0 million in proceeds associated with the sale of
Trading Securities, which included a $0.9 million cash gain. During the nine months ended April 30, 2017, the Company recognized $1.7 million in net non-cash net gains associated with its Trading Securities.
During the three months ended April 30, 2016, the Company sold $12.9 million in Trading Securities, with a realized gain of $0.7 million.
However, the cash associated with $0.3 million of these trades was received subsequent to April 30, 2016. The receivable associated with this receipt is classified under other current assets on our balance sheet as of April 30, 2016.
During the nine months ended April 30, 2016, the Company received $57.1 million in proceeds associated with the sale of Trading Securities, which included a realized gain of $6.2 million. These gains and losses associated with the Trading
Securities are recorded as a component of Other gains (losses), net on the Statement of Operations.
As of April 30, 2017, the
Company had $11.4 million in investments in Trading Securities. As of July 31, 2016, the Company had $16.8 million in investments in Trading Securities, $12.6 million of which were the publicly traded convertible debentures. The Companys
purchases of the publicly traded convertible debentures were on the open market. The chairman of the board of the company issuing the publicly traded convertible debentures is also the chairman of the board of ModusLink Global Solutions, Inc. The
Trading Securities were classified within Level 1 of the fair value hierarchy.
(6) OTHER CURRENT LIABILITIES
The following table reflects the components of Accrued expenses and Other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
April 30,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Accrued taxes
|
|
$
|
3,371
|
|
|
$
|
3,068
|
|
Accrued compensation
|
|
|
8,469
|
|
|
|
9,590
|
|
Accrued interest
|
|
|
460
|
|
|
|
1,346
|
|
Accrued audit, tax and legal
|
|
|
2,961
|
|
|
|
2,544
|
|
Accrued contract labor
|
|
|
3,318
|
|
|
|
2,966
|
|
Accrued other
|
|
|
21,438
|
|
|
|
18,226
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,017
|
|
|
$
|
37,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Accrued pricing liabilities
|
|
$
|
18,882
|
|
|
$
|
18,882
|
|
Other
|
|
|
7,205
|
|
|
|
8,227
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,087
|
|
|
$
|
27,109
|
|
|
|
|
|
|
|
|
|
|
11
As of April 30, 2017 and July 31, 2016, the Company had accrued pricing liabilities of
approximately $18.9 million for both periods. As previously reported by the Company, several 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 (collectively referred to as pricing adjustments), the Company
concluded that these amounts were not properly recorded as revenue. Accordingly, revenue was reduced by an equivalent amount for the period that the rebate was estimated to have 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 of the accrued pricing liabilities, due in part to the nature of the interactions with its clients. The remaining
accrued pricing liabilities at April 30, 2017 will be derecognized when there is sufficient information for the Company to conclude that such liabilities have been extinguished, which may occur through payment, legal release, or other legal or
factual determination.
(7) RESTRUCTURING, NET
Restructuring and other costs for the three and nine months ended April 30, 2017 primarily included continuing charges for personnel
reductions and facility consolidations in an effort to streamline operations across our global supply chain operations. It is expected that the payments of employee-related charges will be substantially completed during the fiscal year ended
July 31, 2017. The remaining contractual obligations primarily relate to facility lease obligations for vacant space resulting from the previous restructuring activities of the Company. The Company anticipates that these contractual obligations
will be substantially fulfilled by the end of December 2017.
The $1.9 million restructuring charge recorded during the nine months ended
April 30, 2017 primarily consisted of $0.2 million, $0.7 million, $0.5 million and $0.1 million of employee-related costs in the Americas, Asia, Europe and e-Business, respectively, related to the workforce reduction of 78 employees in our
global supply chain. Of this amount, $0.5 million related to contractual obligations.
The $1.4 million restructuring charge recorded
during the nine months ended April 30, 2016 primarily consisted of $0.9 million and $0.5 million of employee-related costs in the Americas and Asia, respectively, related to the workforce reduction of 75 employees in our global supply chain
operations.
The following tables summarize the activities related to the restructuring accrual by expense category and by reportable
segment for the nine months ended April 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Related
Expenses
|
|
|
Contractual
Obligations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Accrued restructuring balance at July 31, 2016
|
|
$
|
2,074
|
|
|
$
|
955
|
|
|
$
|
3,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
1,853
|
|
|
|
441
|
|
|
|
2,294
|
|
Restructuring adjustments
|
|
|
(437
|
)
|
|
|
44
|
|
|
|
(393
|
)
|
Cash paid
|
|
|
(3,274
|
)
|
|
|
(1,298
|
)
|
|
|
(4,572
|
)
|
Non-cash adjustments
|
|
|
(54
|
)
|
|
|
9
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at April 30, 2017
|
|
$
|
162
|
|
|
$
|
151
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
Asia
|
|
|
Europe
|
|
|
e-Business
|
|
|
Consolidated
Total
|
|
|
|
(In thousands)
|
|
Accrued restructuring balance at July 31, 2016
|
|
$
|
862
|
|
|
$
|
894
|
|
|
$
|
398
|
|
|
$
|
875
|
|
|
$
|
3,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
500
|
|
|
|
972
|
|
|
|
698
|
|
|
|
124
|
|
|
|
2,294
|
|
Restructuring adjustments
|
|
|
(217
|
)
|
|
|
(107
|
)
|
|
|
(60
|
)
|
|
|
(9
|
)
|
|
|
(393
|
)
|
Cash paid
|
|
|
(1,034
|
)
|
|
|
(1,672
|
)
|
|
|
(984
|
)
|
|
|
(882
|
)
|
|
|
(4,572
|
)
|
Non-cash adjustments
|
|
|
|
|
|
|
(40
|
)
|
|
|
(8
|
)
|
|
|
3
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at April 30, 2017
|
|
$
|
111
|
|
|
$
|
47
|
|
|
$
|
44
|
|
|
$
|
111
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net restructuring charges for the three and nine months ended April 30, 2017 and 2016 would have been
allocated as follows had the Company recorded the expense and adjustments within the functional department of the restructured activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
(170
|
)
|
|
$
|
182
|
|
|
$
|
565
|
|
|
$
|
1,080
|
|
Selling, general and administrative
|
|
|
(79
|
)
|
|
|
|
|
|
|
1,336
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(249
|
)
|
|
$
|
182
|
|
|
$
|
1,901
|
|
|
$
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) DEBT
Notes
Payable
On March 18, 2014, the Company entered into an indenture (the Indenture) with Wells Fargo Bank, National
Association, as trustee, relating to the Companys issuance of $100 million of 5.25% Convertible Senior Notes (the Notes). The Notes bear interest at the rate of 5.25% per year, payable semi-annually in arrears on March 1
and September 1 of each year, beginning on September 1, 2014. The Notes will mature on March 1, 2019, unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such maturity date.
Holders of the Notes may convert all or any portion of their notes, in multiples of $1,000 principal amount, at their option at any time
prior to the close of business or the business day immediately preceding the maturity date. Each $1,000 of principal of the Notes will initially be convertible into 166.2593 shares of our common stock, which is equivalent to an initial conversion
price of approximately $6.01 per share, subject to adjustment upon the occurrence of certain events, or, if the Company obtains the required consent from its stockholders, into shares of the Companys common stock, cash or a combination of cash
and shares of its common stock, at the Companys election. If the Company has received stockholder approval, and it elects to settle conversions through the payment of cash or payment or delivery of a combination of cash and shares, the
Companys conversion obligation will be based on the volume weighted average prices (VWAP) of its common stock for each VWAP trading day in a 40 VWAP trading day observation period. The Notes and any of the shares of common stock
issuable upon conversion have not been registered. As of April 30, 2017, the if-converted value of the Notes did not exceed the principal value of the Notes.
Holders will have the right to require the Company to repurchase their Notes, at a repurchase price equal to 100% of the principal amount of
the Notes plus accrued and unpaid interest, upon the occurrence of certain fundamental changes, subject to certain conditions. No fundamental changes occurred during the quarter ended April 30, 2017.
The Company may not redeem the Notes prior to the mandatory date, and no sinking fund is provided for the Notes. The Company will have the
right to elect to cause the mandatory conversion of the Notes in whole, and not in part, at any time on or after March 6, 2017, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect
for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company notifies holders of its election to mandatorily convert the Notes, during any 30 consecutive trading day period
ending on, and including, the trading day immediately preceding the date on which the Company notifies holders of its election to mandatorily convert the notes.
13
Per the Indenture, if the Notes are assigned a restricted CUSIP or the Notes are not otherwise
freely tradable by holders at any time during the three months immediately preceding as of the 365th day after the last date of original issuance of the Notes, the Company shall pay additional interest on the Notes at a rate equal to 0.50% per
annum of the principal amount of Notes outstanding until the restrictive legend on the Notes has been removed. The restrictive legend was removed on August 26, 2015 and, as such, the Company paid $0.2 million in additional interest associated
with this restriction.
The Company has valued the debt using similar nonconvertible debt as of the original issuance date of the Notes
and bifurcated the conversion option associated with the Notes from the host debt instrument and recorded the conversion option of $28.1 million in stockholders equity prior to the allocation of debt issuance costs. The initial value of the
equity component, which reflects the equity conversion feature, is equal to the initial debt discount. The resulting debt discount on the Notes is being accreted to interest expense at the effective interest rate over the estimated life of the
Notes. The equity component is included in the additional paid-in-capital portion of stockholders equity on the Companys consolidated balance sheet. In addition, the debt issuance costs of $3.4 million are allocated between the liability
and equity components in proportion to the allocation of the proceeds. During the first quarter of fiscal year 2017, the Company adopted ASU No. 2015-03. As such, the issuance costs allocated to the liability component ($2.5 million) are
capitalized as a reduction of the principal amount of the Notes payable on the Companys balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of the Notes. The issuance costs allocated
to the equity component is recorded as a reduction to additional paid-in capital.
The fair value of the Companys Notes payable,
calculated as of the closing price of the traded securities, was $63.6 million and $51.0 million as of April 30, 2017 and July 31, 2016, respectively. This value does not represent the settlement value of these long-term debt liabilities
to the Company. The fair value of the Notes payable could vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The Notes payable are traded and their fair values are based upon traded prices as
of the reporting dates. As of April 30, 2017 and July 31, 2016, the net carrying value of the Notes was $58.7 million and $57.2 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
April 30,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Carrying amount of equity component (net of allocated debt issuance costs)
|
|
$
|
26,961
|
|
|
$
|
27,099
|
|
Principal amount of Notes
|
|
$
|
67,625
|
|
|
$
|
69,625
|
|
Unamortized debt discount
|
|
|
(8,234
|
)
|
|
|
(11,443
|
)
|
Unamortized debt issuance costs
|
|
|
(728
|
)
|
|
|
(1,013
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
58,663
|
|
|
$
|
57,169
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2017, the remaining period over which the unamortized discount will be amortized is 22
months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Interest expense related to contractual interest coupon
|
|
$
|
914
|
|
|
$
|
1,322
|
|
|
$
|
2,737
|
|
|
$
|
3,968
|
|
Interest expense related to accretion of the discount
|
|
|
973
|
|
|
|
1,391
|
|
|
|
2,913
|
|
|
|
3,864
|
|
Interest expense related to debt issuance costs
|
|
|
86
|
|
|
|
123
|
|
|
|
258
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,973
|
|
|
$
|
2,836
|
|
|
$
|
5,908
|
|
|
$
|
8,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended April 30, 2017, the Company recognized interest expense associated
with the Notes of $2.0 million and $5.9 million, respectively. During the three and nine months ended April 30, 2016, the Company recognized interest expense associated with the Notes of $2.8 million and $8.2 million, respectively. The
effective interest rate on the Notes, including amortization of debt issuance costs and accretion of the discount, is 13.9%. The notes bear interest of 5.25%.
14
PNC Bank Credit Facility
On June 30, 2014, two direct and wholly owned subsidiaries of the Company (the Borrowers) entered into a revolving credit and
security agreement (as amended, the Credit Agreement), as borrowers and guarantors, with PNC Bank and National Association, as lender and as agent, respectively.
The Credit Agreement has a five (5) year term which expires on June 30, 2019. It includes a maximum credit commitment of $50.0
million, is available for letters of credit (with a sublimit of $5.0 million) and has a $20.0 million uncommitted accordion feature. The actual maximum credit available under the Credit Agreement varies from time to time and is determined by
calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable and eligible inventory minus reserves determined by the Agent (including other reserves that the Agent may establish
from time to time in its permitted discretion), all as specified in the Credit Agreement.
Generally, borrowings under the Credit
Agreement bear interest at a rate per annum equal to, at the Borrowers option, either (a) LIBOR (adjusted to reflect any required bank reserves) for an interest period equal to one, two or three months (as selected by the Borrowers) plus
a margin of 2.25% per annum or (b) a base rate determined by reference to the highest of (1) the base commercial lending rate publicly announced from time to time by PNC Bank, National Association, (2) the sum of the Federal
Funds Open Rate in effect on such day plus one half of one percent (0.5%) per annum, or (3) the LIBOR rate (adjusted to reflect any required bank reserves) in effect on such day plus 1.00% per annum. In addition to paying interest on
outstanding principal under the Credit Agreement, the Borrowers are required to pay a commitment fee, in respect of the unutilized commitments thereunder, of 0.25% per annum, paid quarterly in arrears. The Borrowers are also required to pay a
customary letter of credit fee equal to the applicable margin on revolving credit LIBOR loans and fronting fees.
Obligations under the
Credit Agreement are guaranteed by the Borrowers existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain limited exceptions; and the Credit Agreement is secured by security interests in substantially all
the Borrowers assets and the assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0% of the equity interests of each subsidiary guarantor that is a domestic entity (subject to
certain limited exceptions) and 65.0% of the voting equity interests of any direct first tier foreign entity owned by either Borrower or by a subsidiary guarantor. The Company is not a borrower or a guarantor under the Credit Agreement.
The Credit Agreement contains certain customary negative covenants, which include limitations on mergers and acquisitions, the sale of assets,
liens, guarantees, investments, loans, capital expenditures, dividends, indebtedness, changes in the nature of business, transactions with affiliates, the creation of subsidiaries, changes in fiscal year and accounting practices, changes to
governing documents, compliance with certain statutes, and prepayments of certain indebtedness. The Credit Agreement also contains certain customary affirmative covenants (including periodic reporting obligations) and events of default, including
upon a change of control. The Credit Agreement requires compliance with certain financial covenants providing for maintenance of specified liquidity, maintenance of a minimum fixed charge coverage ratio and/or maintenance of a maximum leverage ratio
following the occurrence of certain events and/or prior to taking certain actions, all as more fully described in the Credit Agreement. The Company believes that the Credit Agreement provides greater financial flexibility to the Company and the
Borrowers and may enhance their ability to consummate one or several larger and/or more attractive acquisitions and should provide our clients and/or potential clients with greater confidence in the Companys and the Borrowers liquidity.
During the three months ended April 30, 2017, the Company did not meet the criteria that would cause its financial covenants to be applicable. As of April 30, 2017 and July 31, 2016, the Company did not have a balance outstanding on
the PNC Bank credit facility.
15
(9) CONTINGENCIES
On June 8, 2015, Sean Peters, a former employee filed a complaint (the Complaint) against ModusLink Corporation in Superior
Court of California asserting claims, among other things, for failure to pay wages, breach of contract, wrongful retaliation and termination, fraud, violations of California Business and Professions Code Section 17200, et seq., and civil
penalties pursuant to California Labor Code Sections and pursuant to the California Private Attorney General Act, seeking over $1.0 million in damages, attorneys fees and costs and penalties. ModusLink filed an Answer to the Complaint making a
general denial and asserting various affirmative defenses. The parties have agreed to mediate the matter. A Mediation is tentatively scheduled for June 29, 2017. The parties have engaged in formal and informal discovery, but no depositions have been
taken. Although there can be no assurance as to the ultimate outcome, ModusLink believes it has meritorious defenses and intends to defend the allegations vigorously.
On May 12, 2017, the Excise Tax Branch of the Internal Revenue Service issued a $1.6 million claim associated with the Companys
compliance with the self-assessment of excise tax on Ozone Depleting Chemicals. The Company is objecting to the assessment on a number of technical and substantive grounds. Currently the Company is unable to determine the probability of an
unfavorable outcome or a range of outcomes. Accordingly the Company has not recorded a reserve associated with this matter.
(10) OTHER GAINS (LOSSES),
NET
The following table reflects the components of Other gains (losses), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Foreign currency exchange gain (losses)
|
|
$
|
206
|
|
|
$
|
137
|
|
|
$
|
632
|
|
|
$
|
(616
|
)
|
Gains (losses) on Trading Securities
|
|
|
2,509
|
|
|
|
1,860
|
|
|
|
2,603
|
|
|
|
(6,488
|
)
|
Other, net
|
|
|
(7
|
)
|
|
|
242
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,708
|
|
|
$
|
2,239
|
|
|
$
|
3,239
|
|
|
$
|
(7,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded foreign exchange gains of approximately $0.2 million and $0.1 million during the three
months ended April 30, 2017 and 2016, respectively. For the three months ended April 30, 2017, the net gains primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of
approximately $(0.5) million, $0.5 million and $0.3 million in Corporate, Asia and e-Business, respectively. For the three months ended April 30, 2016, the net gains primarily related to realized and unrealized gains from foreign currency
exposures and settled transactions of approximately $0.5 million, $0.5 million $0.1 million in the Asia, Europe and e-Business, respectively, offset by net losses of $1.1 million in Corporate.
During the three months ended April 30, 2017 and 2016, the Company recognized $2.5 million and $1.9 million in net gains associated with
its Trading Securities. During the three months ended April 30, 2016, the Company recognized $0.2 million in net gains associated with short-term foreign currency contracts.
The Company recorded foreign exchange gains (losses) of approximately $0.6 million and $(0.6) million during the nine months ended
April 30, 2017 and 2016, respectively. For the nine months ended April 30, 2017, the net gains primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $0.7
million, $0.2 million and $(0.4) million in Corporate, e-Business and Europe, respectively. For the nine months ended April 30, 2016, the net losses primarily related to realized and unrealized losses from foreign currency exposures and settled
transactions of approximately $(0.5) million and $(0.2) million in the Asia and Corporate, respectively, offset by net gains of $0.1 million in e-Business.
During the nine months ended April 30, 2017 and 2016, the Company recognized $2.6 million and $(6.5) million in net gains (losses)
associated with its Trading Securities. During the nine months ended April 30, 2016, the Company recognized $0.1 million in net gains associated with short-term foreign currency contracts.
16
(11) INCOME TAXES
The Company operates in multiple taxing jurisdictions, both within and outside of the United States. For the three months ended April 30,
2017, the Company was profitable in certain jurisdictions, resulting in an income tax expense using enacted rates in those jurisdictions. As of April 30, 2017 and July 31, 2016, the total amount of the liability for unrecognized tax
benefits related to federal, state and foreign taxes was approximately $0.7 million and $1.2 million, respectively.
Uncertain Tax Positions
In accordance with the Companys accounting policy, interest related to unrecognized tax benefits is included in the provision of income
taxes line of the Condensed Consolidated Statements of Operations. As of April 30, 2017 and July 31, 2016, the liabilities for interest expense related to uncertain tax positions were immaterial. The Company did not accrue for penalties
related to income tax positions as there were no income tax positions that required the Company to accrue penalties. The Company does not expect any unrecognized tax benefits to reverse in the next twelve months. The Company is subject to U.S.
federal income tax and various state, local and international income taxes in numerous jurisdictions. The federal and state tax returns are generally subject to tax examinations for the tax years ended July 31, 2012 through July 31, 2016.
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 Companys 2009 through 2016 tax years remain subject to examination in
most locations, while the Companys 2005 through 2016 tax years remain subject to examination in most Asia locations.
Net Operating Loss
The Company has certain deferred tax benefits, including those generated by net operating losses and certain other tax attributes
(collectively, the Tax Benefits). The Companys ability to use these Tax Benefits could be substantially limited if it were to experience an ownership change, as defined under Section 382 of the Internal Revenue
Code of 1986, as amended (the Code). In general, an ownership change would occur if there is a greater than 50-percentage point change in ownership of securities by stockholders owning (or deemed to own under Section 382 of the
Code) five percent or more of a corporations securities over a rolling three-year period.
Tax Benefit Preservation Plan
On October 17, 2011, the Companys Board of Directors adopted a Tax Benefit Preservation Plan between the Company and American Stock
Transfer & Trust Company, LLC, as rights agent (as amended from time to time, the Tax Plan). The Tax Plan reduces the likelihood that changes in the Companys investor base would have the unintended effect of limiting the
Companys use of its Tax Benefits. The Tax Plan is intended to require any person acquiring shares of the Companys securities equal to or exceeding 4.99% of the Companys outstanding shares to obtain the approval of the Board of
Directors. This would protect the Tax Benefits because changes in ownership by a person owning less than 4.99% of the Companys stock are considered and included in one or more public groups in the calculation of ownership change
for purposes of Section 382 of the Code. On October 9, 2014, the Tax Plan was amended by our Board of Directors to extend the expiration of the Tax Plan until October 17, 2017. Following the stockholders approval of the
Protective Amendment (as described below) at the Companys 2014 Annual Meeting, the Tax Plan was further amended so that it expired at the close of business on December 31, 2014.
Protective Amendment
On
December 29, 2014, the Company filed an Amendment to its Restated Certificate of Incorporation (the Protective Amendment) with the Delaware Secretary of State to protect the significant potential long-term tax benefits presented by
its net operating losses and other tax benefits (collectively, the NOLs). The Protective Amendment was approved by the Companys stockholders at the Companys 2014 Annual Meeting of Stockholders held on December 9, 2014.
As a result of the filing of the Protective Amendment with the Delaware Secretary of State, the Company amended its Tax Benefit Preservation Plan so that it expired at the close of business on December 31, 2014.
The Protective Amendment limits certain transfers of the Companys common stock, to assist the Company in protecting the long-term value
of its accumulated NOLs. The Protective Amendments transfer restrictions generally restrict any direct or indirect transfers of the common stock if the effect would be to increase the direct or indirect ownership of the common stock by any
person
17
(as defined in the Protective Amendment) from less than 4.99% to 4.99% or more of the common stock, or increase the percentage of the common stock owned directly or indirectly by a Person owning
or deemed to own 4.99% or more of the common stock. Any direct or indirect transfer attempted in violation of the Protective Amendment will be void as of the date of the prohibited transfer as to the purported transferee. The Board of Directors of
the Company has discretion to grant waivers to permit transfers otherwise restricted by the Protective Amendment. In accordance with the Protective Amendment, Handy & Harman (HNH), a related party, requested, and the Company
granted HNH and its affiliates, a waiver under the Protective Amendment to permit their acquisition of up to 45% of the Companys outstanding shares of common stock in the aggregate (subject to proportionate adjustment, the 45%
Cap), in addition to acquisitions of common stock in connection with the exercise of certain warrants of the Company (the Warrants) held by Steel Partners Holdings L.P. (SPH), an affiliate of HNH, as well as a limited
waiver under Section 203 of the Delaware General Corporation Law for this purpose. Notwithstanding the foregoing, HNH and its affiliates (and any group of which HNH or any of its affiliates is a member) are not permitted to acquire securities
that would result in an ownership change of the Company for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, that would have the effect of impairing any of the Companys NOLs. The foregoing waiver was
approved by the independent directors of the Company.
(12) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with ASC Topic 260, Earnings per Share. The following table reconciles
earnings per share for the three and nine months ended April 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands, except per share data)
|
|
Net loss
|
|
$
|
(5,067
|
)
|
|
$
|
(12,849
|
)
|
|
$
|
(16,516
|
)
|
|
$
|
(41,570
|
)
|
Weighted average common shares outstanding
|
|
|
55,257
|
|
|
|
52,200
|
|
|
|
55,099
|
|
|
|
51,867
|
|
Weighted average common equivalent shares arising from dilutive stock options and restricted
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and potential common shares
|
|
|
55,257
|
|
|
|
52,200
|
|
|
|
55,099
|
|
|
|
51,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.80
|
)
|
Basic earnings per common share is calculated using the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share, if any, gives effect to diluted stock options (calculated based on the treasury stock method), non-vested restricted stock shares purchased under the employee stock purchase plan and shares
issuable upon debt conversion (calculated using an as-if converted method).
For the three and nine months ended April 30, 2017,
approximately 13.9 million and 14.3 million, respectively, common stock equivalent shares were excluded from the denominator in the calculation of diluted earnings per share as their inclusion would have been antidilutive.
For the three and nine months ended April 30, 2016, approximately 21.8 million and 21.7 million, respectively, common stock
equivalent shares were excluded from the denominator in the calculation of diluted earnings per share as their inclusion would have been antidilutive.
18
(13) SHARE-BASED PAYMENTS
The following table summarizes share-based compensation expense related to employee stock options, employee stock purchases and non-vested
shares for the three and nine months ended April 30, 2017 and 2016, which was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
41
|
|
|
$
|
77
|
|
Selling, general and administrative
|
|
|
135
|
|
|
|
(53
|
)
|
|
|
485
|
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145
|
|
|
$
|
(32
|
)
|
|
$
|
526
|
|
|
$
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 30, 2017, there was approximately $0.1 million of total unrecognized compensation cost related
to Stock Options issued under the Companys plans. At April 30, 2017, there was approximately $0.3 million of total unrecognized compensation cost related to non-vested share-based compensation awards under the Companys plans.
(14) 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
|
|
|
Unrealized
gains
(losses) on
securities
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Accumulated other comprehensive income (loss) at July 31, 2016
|
|
$
|
6,131
|
|
|
$
|
(4,206
|
)
|
|
$
|
94
|
|
|
$
|
2,019
|
|
Foreign currency translation adjustment
|
|
|
(1,771
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,771
|
)
|
Pension liability adjustments
|
|
|
|
|
|
|
830
|
|
|
|
|
|
|
|
830
|
|
Net unrealized holding gain on securities
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
(1,771
|
)
|
|
|
830
|
|
|
|
40
|
|
|
|
(901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at April 30, 2017
|
|
$
|
4,360
|
|
|
$
|
(3,376
|
)
|
|
$
|
134
|
|
|
$
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15) SEGMENT INFORMATION
The Company has four operating segments: Americas; Asia; Europe; and e-Business. Based on the information provided to the Companys chief
operating decision-maker (CODM) for purposes of making decisions about allocating resources and assessing performance and quantitative thresholds, the Company has determined that it has four reportable segments: Americas, Asia, Europe
and e-Business. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance and public reporting costs, which are not allocated to the
Companys reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, Trading Securities, investments in affiliates, notes payables and other assets and liabilities which are not identifiable to the
operations of the Companys operating segments. All significant intra-segment amounts have been eliminated. The Company has recently had personnel reductions and facility consolidations, and is undergoing operational changes. Therefore, in the
future, as the Company evolves, adjustments may be made as to how the Company allocates resources and analyzes performance, which can result in a change to these segments.
19
Summarized financial information of the Companys continuing operations by operating segment
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
20,179
|
|
|
$
|
22,707
|
|
|
$
|
73,240
|
|
|
$
|
84,126
|
|
Asia
|
|
|
37,056
|
|
|
|
33,217
|
|
|
|
118,790
|
|
|
|
131,624
|
|
Europe
|
|
|
34,272
|
|
|
|
33,186
|
|
|
|
124,363
|
|
|
|
116,585
|
|
e-Business
|
|
|
6,441
|
|
|
|
7,350
|
|
|
|
20,450
|
|
|
|
25,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,948
|
|
|
$
|
96,460
|
|
|
$
|
336,843
|
|
|
$
|
357,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
(2,363
|
)
|
|
$
|
(3,601
|
)
|
|
$
|
(7,939
|
)
|
|
$
|
(11,598
|
)
|
Asia
|
|
|
832
|
|
|
|
(2,015
|
)
|
|
|
4,921
|
|
|
|
1,031
|
|
Europe
|
|
|
(2,334
|
)
|
|
|
(3,826
|
)
|
|
|
(4,885
|
)
|
|
|
(7,858
|
)
|
e-Business
|
|
|
(197
|
)
|
|
|
(1,248
|
)
|
|
|
(742
|
)
|
|
|
(2,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment operating income (loss)
|
|
|
(4,062
|
)
|
|
|
(10,690
|
)
|
|
|
(8,645
|
)
|
|
|
(20,574
|
)
|
Corporate-level activity
|
|
|
(1,181
|
)
|
|
|
(1,807
|
)
|
|
|
(3,744
|
)
|
|
|
(5,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
|
(5,243
|
)
|
|
|
(12,497
|
)
|
|
|
(12,389
|
)
|
|
|
(25,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(763
|
)
|
|
|
260
|
|
|
|
2,664
|
|
|
|
14,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(4,480
|
)
|
|
$
|
(12,757
|
)
|
|
$
|
(15,053
|
)
|
|
$
|
(40,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2017
|
|
|
July 31,
2016
|
|
|
|
(In thousands)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
23,524
|
|
|
$
|
28,280
|
|
Asia
|
|
|
76,147
|
|
|
|
89,242
|
|
Europe
|
|
|
64,212
|
|
|
|
75,952
|
|
e-Business
|
|
|
18,634
|
|
|
|
22,884
|
|
|
|
|
|
|
|
|
|
|
Sub-totalsegment assets
|
|
|
182,517
|
|
|
|
216,358
|
|
Corporate
|
|
|
113,954
|
|
|
|
131,574
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
296,471
|
|
|
$
|
347,932
|
|
|
|
|
|
|
|
|
|
|
Summarized financial information of the Companys net revenue from external customers by group of
services is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Supply chain services
|
|
$
|
91,507
|
|
|
$
|
89,110
|
|
|
$
|
316,393
|
|
|
$
|
332,335
|
|
e-Business services
|
|
|
6,441
|
|
|
|
7,350
|
|
|
|
20,450
|
|
|
|
25,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,948
|
|
|
$
|
96,460
|
|
|
$
|
336,843
|
|
|
$
|
357,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2017, approximately $3.0 million, $3.4 million, $3.3 million, $2.3 million and $2.8
million of the Companys long-lived assets were located in the U.S.A., Netherlands, Ireland, China and Singapore, respectively. As of July 31, 2016, approximately $12.3 million, $3.0 million, $3.5 million, $3.0 million and $2.9 million of
the Companys long-lived assets were located in the U.S.A., Netherlands, Ireland, China and Singapore, respectively.
20
For the three months ended April 30, 2017, the Companys net revenues within U.S.A.,
China, Netherlands and Czech Republic were $21.0 million, $29.1 million, $16.5 million and $16.4 million, respectively. For the three months ended April 30, 2016, the Companys net revenues within U.S.A., China, Netherlands and Czech
Republic were $23.7 million, $26.0 million, $13.5 million and $17.8 million, respectively.
For the nine months ended April 30, 2017,
the Companys net revenues within U.S.A., China, Netherlands and Czech Republic were $75.3 million, $97.2 million, $53.3 million and $64.4 million, respectively. For the nine months ended April 30, 2016, the Companys net revenues
within U.S.A., China, Netherlands and Czech Republic were $88.8 million, $109.8 million, $51.2 million and $58.7 million, respectively.
(16) RELATED
PARTY TRANSACTIONS
On December 24, 2014, the Company entered into a Management Services Agreement with SP Corporate Services LLC
(SP Corporate), effective as of January 1, 2015 (as amended, the Management Services Agreement). SP Corporate is an indirect wholly owned subsidiary of Steel Partners Holdings L.P. (Steel Holdings) and is a
related party. Pursuant to the Management Services Agreement, SP Corporate provided the Company and its subsidiaries with the services of certain employees, including certain executive officers, and other corporate services.
The Management Services Agreement had an initial term of six months. On June 30, 2015, the Company entered into an amendment that
extended the term of the Management Services Agreement to December 31, 2015 and provided for automatic renewal for successive one year periods, unless and until terminated.in accordance with the terms set forth therein, which include, under
certain circumstances, the payment by the Company of certain termination fees to SP Corporate. On March 10, 2016, the Company entered into a Second Amendment to the Management Services Agreement with SPH Services, Inc. (SPH
Services) pursuant to which SPH Services assumed rights and responsibilities of SP Corporate and the services provided by SPH Services to the Company were modified pursuant to the terms of the amendment. SPH Services is the parent of SP
Corporate and an affiliate of SPH Group Holdings LLC. On March 10, 2016, the Company entered into a Transfer Agreement with SPH Services pursuant to which the parties agreed to transfer to the Company certain individuals who provide corporate
services to the Company.
Pursuant to the Management Services Agreement, the Company pays a fixed monthly fee of $175,000 in consideration
for the services and incremental costs as incurred. The fees payable under the Management Services Agreement are subject to review and such adjustments as may be agreed upon by the parties. Total expenses incurred related to the Management Services
Agreement for the three months ended April 30, 2017 and 2016 were both $0.6 million. Total expenses incurred related to the Management Services Agreement for the nine months ended April 30, 2017 and 2016 were both $1.7 million. As of
April 30, 2017, $0.4 million was due to SPH Services. As of July 31, 2016, amounts due to SP Corporate SPH Services were $0.5 million.
The Related Party Transactions Committee of the Board (the Related Party Transactions Committee) approved the entry into the
Management Services Agreement (and the amendment thereto) and the Transfer Agreement. The Related Party Transactions Committee held the responsibility to review, approve and ratify related party transactions from November 20, 2014, until
October 11, 2016. On October 11, 2016, the Board adopted a Related Person Transaction Policy that is administered by the Audit Committee and applies to all related party transactions. As of October 11, 2016, the Audit Committee of the
Board reviews all related party transactions on an ongoing basis and all such transactions must be approved or ratified by the Audit Committee.
Mutual Securities, Inc. (Mutual Securities) serves as the broker and record-keeper for all the transactions associated with the
Trading Securities. An officer of SP Corporate and of the General Partner of Steel Partners Holdings L.P., is a registered principal of Mutual Securities. Commissions charged by Mutual Securities are generally commensurate with commissions charged
by other institutional brokers, and the Company believes its use of Mutual Securities is consistent with its desire to obtain best price and execution. During the three months ended April 30, 2017, Mutual Securities received an immaterial
amount in commissions associated with these transactions.
(17) FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES
ASC Topic 820 provides that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or liability. ASC Topic 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as
follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets
21
Level 2: Other inputs that are observable directly or indirectly, such as quoted
prices for similar assets or liabilities or market-corroborated inputs
Level 3: Unobservable inputs for which there is
little or no market data and which require the Company to develop its own assumptions about how market participants would price the assets or liabilities
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, current liabilities and the revolving line of credit
approximate fair value because of the short maturity of these instruments. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Companys current incremental
borrowing rates for similar types of borrowing arrangements. The fair values of the Companys Trading Securities are estimated using quoted market prices. The Company values foreign exchange forward contracts using observable inputs which
primarily consist of an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount. The defined benefit plans have 100% of their assets invested in bank-managed portfolios of debt
securities and other assets. Conservation of capital with some conservative growth potential is the strategy for the plans. The Companys pension plans are outside the United States, where asset allocation decisions are typically made by an
independent board of trustees. Investment objectives are aligned to generate returns that will enable the plans to meet their future obligations. The Company acts in a consulting and governance role in reviewing investment strategy and providing a
recommended list of investment managers for each plan, with final decisions on asset allocation and investment manager made by local trustees.
Assets
and Liabilities that are Measured at Fair Value on a Recurring Basis
The following tables present the Companys financial assets
measured at fair value on a recurring basis as of April 30, 2017 and July 31, 2016, classified by fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(In thousands)
|
|
April 30, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
11,373
|
|
|
$
|
11,373
|
|
|
$
|
|
|
|
$
|
|
|
Money market funds
|
|
|
86,318
|
|
|
|
86,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(In thousands)
|
|
July 31, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
4,209
|
|
|
$
|
4,209
|
|
|
$
|
|
|
|
$
|
|
|
Marketable corporate bonds
|
|
|
12,559
|
|
|
|
12,559
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
101,224
|
|
|
|
101,224
|
|
|
|
|
|
|
|
|
|
There were no transfers between Levels 1, 2 or 3 during any of the periods presented.
When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were
classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The
inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The Companys only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial
recognition were certain assets subject to long-lived asset impairment.
22
The Company reviews the carrying amounts of these assets whenever certain events or changes in
circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount of the asset group or reporting unit is not recoverable and exceeds its fair value. The Company estimated the fair
values of assets subject to impairment based on the Companys own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available. The Company uses the income approach when
determining the fair value of its reporting units.
Fair Value of Financial Instruments
The Companys financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts
receivable, accounts payable and long-term debt and are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature.
Included in Trading Securities in the accompanying balance sheet are marketable equity securities and marketable corporate bonds. These
instruments are valued at quoted market prices in active markets. Included in cash and cash equivalents in the accompanying balance sheet are money market funds. These are valued at quoted market prices in active markets.
The following table presents the Companys debt not carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2017
|
|
|
July 31, 2016
|
|
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Fair Value
Hierarchy
|
|
|
(In thousands)
|
|
|
|
Notes payable
|
|
$
|
58,663
|
|
|
$
|
63,610
|
|
|
$
|
57,169
|
|
|
$
|
50,957
|
|
|
Level 1
|
The fair value of our Notes payable represents the value at which our lenders could trade our debt within the
financial markets, and does not represent the settlement value of these long-term debt liabilities to us. The fair value of the Notes payable could vary each period based on fluctuations in market interest rates, as well as changes to our credit
ratings. The Notes payable are traded and their fair values are based upon traded prices as of the reporting dates.
23