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
Steel Connect, Inc. (Steel Connect or the Company) together with its consolidated subsidiaries, operates
through its wholly owned subsidiaries, ModusLink Corporation and ModusLink PTS, Inc. (together ModusLink), and IWCO Direct Holdings, Inc. (IWCO Direct or IWCO). The Company was formerly known as ModusLink Global
Solutions, Inc. until it changed its name to Steel Connect, Inc. effective February 27, 2018.
ModusLink 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.
ModusLink has an integrated
network of strategically located facilities with 20 sites operating in 21 languages in various countries, including numerous sites throughout North America, Europe and Asia. The Company previously operated under the names ModusLink Global Solutions,
Inc., CMGI, Inc. and CMG Information Services, Inc. and was incorporated in Delaware in 1986.
IWCO Direct delivers highly-effective
data-driven marketing solutions for its customers, which represent some of the largest and most respected brands in the world. Its full range of services includes strategy, creative and production for multichannel marketing campaigns, along with one
of the industrys most sophisticated postal logistics programs for direct mail. Through its Mail-Gard
®
product, IWCO Direct also offers business continuity and disaster recovery services
to protect against unexpected business interruptions, along with providing print and mail outsourcing services. IWCO Direct is the largest direct mail production provider in North America, with the largest platform of continuous digital print
technology and a growing direct marketing agency service. Their solutions enable customers to improve Customer Lifetime Value (CLV), which in turn, has led to and longer customer relationships.
IWCO has administrative offices in Chanhassen, MN. and has three facilities in Chanhassen, MN., one facility in Little Falls, MN., one
facility in Warminster, PA. and two facilities in Hamburg PA.
Historically, the Company has financed its operations and met its capital
requirements primarily through funds generated from operations, the sale of our securities and borrowings from lending institutions. As of April 30, 2018, the Company had available cash and cash equivalents of $99.7 million. The Company believes it
will generate sufficient cash to meet its debt covenants of its Credit Facility, repay or restructure the Convertible Senior Notes, and be able to obtain cash through its current PNC Bank. Additionally, the Company expects to preserve cash through a
tax sharing agreement with IWCO. The Company believes that it has adequate cash and available resources to meet its obligations for one year.
(2)
CORRECTION OF PRIOR PERIOD FINANCIAL STATEMENTS
In connection with the preparation of our condensed consolidated financial statements
for the three months ended April 30, 2018, and our remediation efforts related to the material weakness in our internal control over financial reporting related to our controls over
non-routine
transactions, we identified errors as of January 31, 2018 in the determination of deferred tax liabilities in connection with the acquisition of IWCO Direct and in our revenue recognition for our Direct Marketing segment. Based in part upon the
estimates of self-insurance and fixed assets, we overstated a tax benefit in our condensed consolidated statements of operations. The correction of this error requires an adjustment to the income tax benefit of $4.1 million as of
January 31, 2018. Additionally, we identified bill and hold revenue recognition practices for a portion of certain Direct Mail revenues. We evaluated the error and determined that the related impact was not material to our results of operations
or financial position for any prior annual or interim period, but that correcting the $4.1 million cumulative impact of the error would be material to our results of operations for the three months ended April 30, 2018. Although deemed
immaterial, we also corrected the recognition of the Direct Mail revenue recognized before the performance obligation to the customer had been satisfied for a portion of certain Direct Mail revenues. Accordingly, we have corrected the condensed
consolidated balance sheets as of January 31, 2018 and the condensed consolidated statements of operations for the three and six months ended January 31, 2018. Additionally, we have restated the preliminary fair value of acquired assets
and liabilities assumed at the date of acquisition. These errors had no impact on the three and six months ended January 31, 2017. The impact to the condensed consolidated balance sheets, and the consolidated statements of income for the three
and six months ended January 31, 2018 is as follows (in thousands, except per share amounts):
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
January 31, 2018
|
|
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Revised
|
|
Inventories, net
|
|
$
|
45,211
|
|
|
$
|
4,002
|
|
|
$
|
49,213
|
|
Goodwill
|
|
|
259,085
|
|
|
|
(3,724
|
)
|
|
|
255,361
|
|
Total assets
|
|
|
870,110
|
|
|
|
278
|
|
|
|
870,388
|
|
Other current liabilities
|
|
|
43,561
|
|
|
|
23,549
|
|
|
|
67,110
|
|
Other long-term liabilities
|
|
|
30,693
|
|
|
|
(18,000
|
)
|
|
|
12,693
|
|
Total liabilities
|
|
|
700,883
|
|
|
|
5,549
|
|
|
|
706,432
|
|
Accumulated deficit
|
|
|
(7,339,367
|
)
|
|
|
(5,271
|
)
|
|
|
(7,344,638
|
)
|
Total stockholders equity
|
|
$
|
133,968
|
|
|
$
|
(5,271
|
)
|
|
$
|
128,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
Three Months Ended January 31, 2018
|
|
|
Six Months Ended January 31, 2018
|
|
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Revised
|
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Revised
|
|
Net revenue
|
|
$
|
151,119
|
|
|
$
|
459
|
|
|
$
|
151,578
|
|
|
$
|
253,641
|
|
|
$
|
459
|
|
|
$
|
254,100
|
|
Cost of revenue
|
|
|
134,169
|
|
|
|
1,586
|
|
|
|
135,755
|
|
|
|
227,617
|
|
|
|
1,586
|
|
|
|
229,203
|
|
Gross profit
|
|
|
16,950
|
|
|
|
(1,127
|
)
|
|
|
15,823
|
|
|
|
26,024
|
|
|
|
(1,127
|
)
|
|
|
24,897
|
|
Income tax expense (benefit)
|
|
|
(77,664
|
)
|
|
|
4,143
|
|
|
|
(73,521
|
)
|
|
|
(76,577
|
)
|
|
|
4,143
|
|
|
|
(72,434
|
)
|
Net income (loss)
|
|
$
|
65,089
|
|
|
$
|
(5,271
|
)
|
|
$
|
59,818
|
|
|
$
|
59,852
|
|
|
$
|
(5,271
|
)
|
|
$
|
54,581
|
|
Basic net earning (loss) per share attributable to common stockholders:
|
|
$
|
1.11
|
|
|
|
|
|
|
$
|
1.02
|
|
|
$
|
1.05
|
|
|
|
|
|
|
$
|
0.96
|
|
Diluated net earning (loss) per share attributable to common stockholders:
|
|
$
|
0.85
|
|
|
|
|
|
|
$
|
0.78
|
|
|
$
|
0.87
|
|
|
|
|
|
|
$
|
0.80
|
|
The impact to the preliminary fair value of acquired assets and liabilities assumed at the date of acquisition
is noted in Note 9 to these Condensed Consolidated Financial Statements.
(3) 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, 2017, which are contained in the Companys Annual Report on Form
10-K
filed with the Securities and Exchange Commission (SEC) on October 16, 2017.
The results for the three and nine months ended April 30, 2018 are not necessarily indicative of the results to be expected for the full fiscal year. The July 31, 2017 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, 2018, the Company evaluated subsequent events for potential recognition and disclosure through
the date these financial statements were filed.
9
(4) RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 standard allows two methods of adoption: (i) retrospectively to each prior period presented (full retrospective method),
or (ii) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption (modified retrospective method). The Company will adopt the new standard using the modified retrospective method at the
beginning of its first quarter of fiscal 2019.
The Company and its outside consultants have initiated the process of evaluating the
potential effects on the consolidated financial statements and establishing new accounting policies and internal controls necessary to support the requirements of the new standard. This preliminary assessment is based on the types and number of
revenue arrangements currently in place. The exact impact of the new standard will be dependent on facts and circumstances at adoption.
The Company does not expect the new standard to have a material impact on its revenue recognition practices on an ongoing basis. Revenue from
the sale of physical and digital supply chain management services to the Companys clients will continue to be recognized over time as the services are performed. The new standard will primarily impact the Companys revenue recognition
with respect to certain transactions involving the sale of software products by the ModusLinks
e-Business
operations and IWCOs marketing solutions offerings. Currently, revenue from the sale of
perpetual licenses sold in multiple element arrangements is recognized ratably over the initial maintenance term, due to lack of Vendor Specific Objective Evidence (VSOE) for certain undelivered elements. The new standard will accelerate the
recognition of revenue from the sale of perpetual licenses as the Company will allocate consideration between each performance obligation based on each items relative standalone selling price. Revenue recognized related to IWCOs
marketing solutions offerings, which typically consist of a single combined performance obligation, will be recognized over time as the services are performed, rather than the current practice of recognizing revenue at a point in time when the
services are complete. However, given the typical contract terms, the Company does not expect this change to be material.
In addition,
the new standard will require incremental contract acquisition costs (such as certain sales commissions) for customer contracts to be capitalized and amortized over the period of contract performance or expected client program life, if renewals are
expected and the renewal commission is not commensurate with the initial commission. Currently, these costs are expensed as incurred. The Company has identified certain commissions programs where it expects that incremental costs will be capitalized
and recognized over a period of greater than one year.
The Company will be required to record cumulative effect adjustments to retained
earnings (net of tax) upon adopting the new standard as of the fiscal year commencing August 1, 2018. The most significant of these adjustments will be to establish an asset and increase retained earnings related to the requirement to
capitalize incremental contract acquisition costs for customer contracts. An adjustment will also be recorded to reduce deferred revenue and increase retained earnings at the date of adoption to reflect revenue that would have been already
recognized under the new standard related to an existing software arrangements where the pattern and timing of revenue recognition will change, as well as creating a contract asset for unbilled revenue for services that are being performed over
time, but where the customer is not billed until completion of the work. The Company expects to complete its assessment during the final quarter of fiscal year 2019.
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. The Company adopted this guidance as of the first quarter of fiscal year 2018. Its
adoption did not have an effect on the Companys consolidated financial statements.
10
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 Company adopted this guidance beginning the first quarter of fiscal year 2018. The adoption of the guidance did not have a material impact on the
Companys consolidated financial statements and related disclosures.
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 in fiscal year 2017 on a prospective basis and, as a result, prior
consolidated balance sheets were not retrospectively adjusted.
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 and its outside consultants have initiated the process of evaluating the potential effects on the 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. The Company retrospectively adopted this guidance during the first quarter of fiscal year 2018 by utilizing the modified retrospective transition method. The adoption of this
ASU did not materially impact the Companys consolidated financial statements and related disclosures.
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 SEC Registrants. This ASU will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company is currently in the process of assessing what impact this new standard may have on its
consolidated 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.
(5) INVENTORIES
Inventories are stated at the lower of cost or net realizable value. 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.
11
Inventories, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
21,760
|
|
|
$
|
24,129
|
|
Work-in-process
|
|
|
15,259
|
|
|
|
713
|
|
Finished goods
|
|
|
9,165
|
|
|
|
9,527
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,184
|
|
|
$
|
34,369
|
|
|
|
|
|
|
|
|
|
|
The Company continuously monitors inventory balances and records inventory provisions for any excess of the
cost of the inventory over its estimated net realizable 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 its 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.
IWCOs inventory consists primarily of raw materials (paper) used to produce direct mail packages and
work-in-process.
Finished goods are generally not a significant element of the inventory as they are generally mailed after the production and sorting process. With the acquisition of IWCO the Company
recorded a fair value
step-up
to
work-in-process
inventory of $7.0 million, which was recognized as a
non-cash
charge to cost of revenues during the nine months ended April 30, 2018.
(6) INVESTMENTS
Trading securities
During the nine months
ended April 30, 2018, the Company received $13.8 million in proceeds associated with the sale of publicly traded securities (Trading Securities), which included a cash gain of $4.6 million. During the nine months ended
April 30, 2018, the Company recognized $2.7 million in net
non-cash
net losses associated with its 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. These gains and losses were recorded as a component of
Other gains (losses), net on the Statements of Operations.
12
As of April 30, 2018, the Company did not have any investments in Trading Securities. As of
July 31, 2017, the Company had $11.9 million in investments in Trading Securities.
(7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table reflects the components of Accrued expenses and Other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(In thousands)
|
|
Accrued taxes
|
|
$
|
30,268
|
|
|
$
|
2,272
|
|
Accrued compensation
|
|
|
21,254
|
|
|
|
10,678
|
|
Accrued interest
|
|
|
992
|
|
|
|
1,366
|
|
Accrued audit, tax and legal
|
|
|
2,814
|
|
|
|
2,759
|
|
Accrued contract labor
|
|
|
1,612
|
|
|
|
1,632
|
|
Accrued workers compensation
|
|
|
6,690
|
|
|
|
|
|
Accrued other
|
|
|
22,150
|
|
|
|
19,191
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,780
|
|
|
$
|
37,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(In thousands)
|
|
Accrued pricing liabilities
|
|
$
|
18,882
|
|
|
$
|
18,882
|
|
Line of credit liability
|
|
|
6,000
|
|
|
|
|
|
Customer postage deposits
|
|
|
12,357
|
|
|
|
|
|
Other
|
|
|
11,102
|
|
|
|
7,259
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,341
|
|
|
$
|
26,141
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018 and July 31, 2017, 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 April 30, 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, 2018 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.
In connection with the acquisition of IWCO the Company performed an analysis of the
liability associated with IWCOs sales tax. Based on the information currently available, a reserve of $18.0 million was recorded on IWCOs opening balance sheet. This reserve is subject to review during the measurement period and may
be adjusted accordingly. As of April 30, 2018, accrued expenses includes sales tax liabilities of approximately $18.0 million.
13
(8) RESTRUCTURING, NET
Restructuring and other costs for the three and nine months ended April 30, 2018, 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, 2018. 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 2018.
The $0.1 million restructuring charge recorded during the nine months
ended April 30, 2018 primarily consisted of $0.1 million of employee-related costs in the Americas. 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 following tables
summarize the activities related to the restructuring accrual by expense category and by reportable segment for the nine months ended April 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Related
Expenses
|
|
|
Contractual
Obligations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Accrued restructuring balance at July 31, 2017
|
|
$
|
100
|
|
|
$
|
86
|
|
|
$
|
186
|
|
Restructuring charges
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Restructuring adjustments
|
|
|
93
|
|
|
|
22
|
|
|
|
115
|
|
Cash paid
|
|
|
(48
|
)
|
|
|
(108
|
)
|
|
|
(156
|
)
|
Non-cash
adjustments
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at April 30, 2018
|
|
$
|
140
|
|
|
$
|
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
Asia
|
|
|
Europe
|
|
|
Direct
marketing
|
|
|
e-Business
|
|
|
Consolidated
Total
|
|
|
|
(In thousands)
|
|
Accrued restructuring balance at July 31, 2017
|
|
$
|
51
|
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
|
|
|
$
|
112
|
|
|
$
|
186
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
Restructuring adjustments
|
|
|
101
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
11
|
|
|
|
115
|
|
Cash paid
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108
|
)
|
|
|
(156
|
)
|
Non-cash
adjustments
|
|
|
(11
|
)
|
|
|
(1
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
29
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at April 30, 2018
|
|
$
|
93
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
47
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The net restructuring charges for the three and nine months ended April 30, 2018 and 2017
would have been allocated as follows had the Company recorded the expense and adjustments within the functional department of the restructured activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
|
|
|
$
|
(170
|
)
|
|
$
|
8
|
|
|
$
|
565
|
|
Selling, general and administrative
|
|
|
77
|
|
|
|
(79
|
)
|
|
|
110
|
|
|
|
1,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77
|
|
|
$
|
(249
|
)
|
|
$
|
118
|
|
|
$
|
1,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) ACQUISITION OF IWCO DIRECT
On December 15, 2017, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) by and among the
Company, MLGS Merger Company, Inc., a Delaware corporation and newly formed wholly-owned subsidiary of the Company (MLGS), IWCO Direct Holdings, Inc. a Delaware corporation (IWCO), CSC Shareholder Services, LLC, a Delaware
limited liability company (solely in its capacity as representative), and the stockholders of IWCO. Pursuant to the Merger Agreement, MLGS was merged with and into IWCO, with IWCO surviving as a wholly-owned subsidiary of the Company (the IWCO
Acquisition). The Company acquired IWCO as a part of the Companys overall acquisition strategy to acquire profitable companies to utilize the Companys tax net operating losses.
The Company acquired IWCO for total consideration of approximately $469.2 million, net of purchase price adjustments. The Company
financed the IWCO Acquisition through a combination of cash on hand and proceeds from a $393.0 million term loan made under the below described financing agreement with Cerberus Business Finance, LLC, net of $2.5 million received from
escrow for working capital claims. The transaction price included
one-time
transaction incentive awards of $3.5 million paid to executives upon closing that were related to
pre-existing
management arrangements and were included as an element of the purchase price. In connection with the acquisition, the Company paid transaction costs of $1.5 million at acquisition which was
recorded as a component of selling, general and administrative expense. Goodwill related to the acquisition of IWCO is not deductible for tax purposes.
15
The following table summarizes the preliminary fair value of assets acquired and liabilities
assumed at the date of the acquisition, and the adjustments required due to the correction of the error discussed in Note 2 to these Condensed Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Revised
|
|
|
|
(In thousands)
|
|
Accounts receivable
|
|
$
|
47,841
|
|
|
$
|
|
|
|
$
|
47,841
|
|
Inventory
|
|
|
27,165
|
|
|
|
5,590
|
|
|
|
32,755
|
|
Other current assets
|
|
|
7,427
|
|
|
|
|
|
|
|
7,427
|
|
Property and equipment
|
|
|
87,976
|
|
|
|
|
|
|
|
87,976
|
|
Intangible assets
|
|
|
210,920
|
|
|
|
|
|
|
|
210,920
|
|
Goodwill
|
|
|
259,085
|
|
|
|
(3,724
|
)
|
|
|
255,361
|
|
Other assets
|
|
|
3,040
|
|
|
|
|
|
|
|
3,040
|
|
Accounts payable
|
|
|
(31,069
|
)
|
|
|
|
|
|
|
(31,069
|
)
|
Accrued liabilities and other current liabilities
|
|
|
(35,790
|
)
|
|
|
(24,009
|
)
|
|
|
(59,799
|
)
|
Customer deposits
|
|
|
(7,829
|
)
|
|
|
|
|
|
|
(7,829
|
)
|
Deferred income taxes
|
|
|
(79,918
|
)
|
|
|
4,143
|
|
|
|
(75,775
|
)
|
Other liabilities
|
|
|
(19,627
|
)
|
|
|
18,000
|
|
|
|
(1,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
$
|
469,221
|
|
|
$
|
|
|
|
$
|
469,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets include trademarks and tradenames valued at $20.5 million and customer
relationships of $190.4 million. The preliminary fair value estimate of trademarks and tradenames was prepared utilizing a relief from royalties method of valuation, while the preliminary fair value estimate of customer relationships was
prepared using a multi-period excess earnings method of valuation. The trademarks and tradenames intangible asset will be amortized on a straight line basis over a 3 year estimated useful life. The customer relationship intangible asset will be
amortized on a double-declining basis over an estimated useful life of 15 years. The acquired property and equipment consist mainly of machinery and equipment. The fair value of the acquired property and equipment was estimated using the cost
approach to value, and applying industry standard normal useful lives and inflationary indices. In the preliminary allocation of the purchase price, the Company recognized $255.4 million of goodwill which arose primarily from the synergies in
its business and the assembled workforce of IWCO.
The following unaudited pro forma financial results are based on the Companys
historical consolidated financial statements and IWCOs historical consolidated financial statements as adjusted to give effect to the Companys acquisition of IWCO and related transactions. The unaudited pro forma financial information
for the three and nine months ended April 30, 2018 give effect to these transactions as if they had occurred on August 1, 2016. The unaudited pro forma results presented do not necessarily reflect the results of operations that would have
resulted had the acquisition been completed at the beginning of August 1, 2016, nor do they indicate the results of operations in future periods. Additionally, the unaudited pro forma results do not include the impact of possible business model
changes, nor do they consider any potential impacts of current market conditions or revenues, reduction of expenses, asset dispositions, or other factors. The impact of these items could alter the following pro forma results.
The pro forma results were adjusted to reflect incremental depreciation and amortization based on preliminary fair value adjustments for the
acquired property, plant and equipment, and intangible assets. A reduction to interest expense is also reflected in the pro forma results to reflect the more favorable terms obtained with the new Credit Facility as compared to the interest rate
under the former facility carried by IWCO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Net revenue
|
|
$
|
187,369
|
|
|
$
|
204,716
|
|
|
$
|
620,377
|
|
|
$
|
671,695
|
|
Net income (loss)
|
|
$
|
(16,449
|
)
|
|
$
|
(11,660
|
)
|
|
$
|
43,339
|
|
|
$
|
(35,929
|
)
|
16
(10) GOODWILL AND INTANGIBLE ASSETS
The Company conducts its goodwill impairment test on July 31 of each fiscal year. In addition, if and when events or circumstances change
that could reduce the fair value of any of its reporting units below its carrying value, an interim test is performed. In making this assessment, the Company relies on a number of factors including operating results, business plans, economic
projections, anticipated future cash flows, and transactions and marketplace data. The Companys goodwill of $255.4 million as of April 30, 2018 relates to the Companys Direct Marketing reporting unit. There were no indicators
of impairment identified related to the Companys Direct Marketing reporting unit during the three and nine months ended April 30, 2018.
Intangible assets, as of April 30, 2018, include trademarks and tradenames with a carrying balance of $17.9 million and customer
relationships of $180.9 million. The trademarks and tradenames intangible asset are being amortized on a straight line basis over a 3 year estimated useful life. The customer relationship intangible asset are being amortized on a
double-declining basis over an estimated useful life of 15 years. Intangible assets deemed to have finite lives are amortized over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute
directly, or indirectly, to its future cash flows. Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the carrying amount of the
intangible asset exceeds its fair value. At least annually, the remaining useful life is evaluated.
(11) DEBT
5.25% Convertible Senior 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, 2018, 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 nine months ended April 30, 2018.
The Company may not redeem the Notes prior
to the maturity date, and no sinking fund is provided for the Notes. The Company will have the right to elect to cause the mandatory conversion of the Notes in whole, and not in part, at any time on or after March 6, 2017, if the last reported
sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company notifies holders of
its election to mandatorily convert the Notes, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company notifies holders of its election to mandatorily convert the
notes.
17
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 $66.3 million and $63.9 million as of April 30, 2018 and July 31, 2017, respectively. This value does not represent the settlement value of these long-term debt liabilities to the Company. The
fair value of the Notes payable could vary each period based on fluctuations in market interest rates, as well as changes to our credit ratings. The Notes payable are traded and their fair values are based upon traded prices as of the reporting
dates. As of April 30, 2018 and July 31, 2017, the net carrying value of the Notes was $63.3 million and $59.8 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(In thousands)
|
|
Carrying amount of equity component (net of allocated debt issuance costs)
|
|
$
|
26,961
|
|
|
$
|
26,961
|
|
Principal amount of Notes
|
|
$
|
67,625
|
|
|
$
|
67,625
|
|
Unamortized debt discount
|
|
|
(3,997
|
)
|
|
|
(7,227
|
)
|
Unamortized debt issuance costs
|
|
|
(354
|
)
|
|
|
(640
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
63,274
|
|
|
$
|
59,758
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018, the remaining period over which the unamortized discount will be amortized is 10
months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Interest expense related to contractual interest coupon
|
|
$
|
914
|
|
|
$
|
914
|
|
|
$
|
2,741
|
|
|
$
|
2,737
|
|
Interest expense related to accretion of the discount
|
|
|
1,113
|
|
|
|
973
|
|
|
|
3,230
|
|
|
|
2,913
|
|
Interest expense related to debt issuance costs
|
|
|
99
|
|
|
|
86
|
|
|
|
286
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,126
|
|
|
$
|
1,973
|
|
|
$
|
6,257
|
|
|
$
|
5,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended April 30, 2018, the Company recognized interest expense associated
with the Notes of $2.1 million and $6.3 million, respectively. 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. 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 at 5.25%.
PNC Bank Credit Facility
On
June 30, 2014, two direct and wholly owned subsidiaries of the Company (the ModusLink 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.
18
Generally, borrowings under the Credit Agreement bear interest at a rate per annum equal to, at
the ModusLink Borrowers option, either (a) LIBOR (adjusted to reflect any required bank reserves) for an interest period equal to one, two or three months (as selected by the ModusLink Borrowers) plus a margin of 2.25% per annum or
(b) a base rate determined by reference to the highest of (1) the base commercial lending rate publicly announced from time to time by PNC Bank, National Association, (2) the sum of the Federal Funds Open Rate in effect on such day
plus one half of one percent (0.5%) per annum, or (3) the LIBOR rate (adjusted to reflect any required bank reserves) in effect on such day plus 1.00% per annum. In addition to paying interest on outstanding principal under the Credit
Agreement, the ModusLink Borrowers are required to pay a commitment fee, in respect of the unutilized commitments thereunder, of 0.25% per annum, paid quarterly in arrears. The ModusLink Borrowers are also required to pay a customary letter of
credit fee equal to the applicable margin on revolving credit LIBOR loans and fronting fees.
Obligations under the Credit Agreement are
guaranteed by the ModusLink Borrowers existing and future direct and indirect wholly-owned domestic subsidiaries, subject to certain limited exceptions; and the Credit Agreement is secured by security interests in substantially all the
ModusLink Borrowers assets and the assets of each subsidiary guarantor, whether owned as of the closing or thereafter acquired, including a pledge of 100.0% of the equity interests of each subsidiary guarantor that is a domestic entity
(subject to certain limited exceptions) and 65.0% of the voting equity interests of any direct first tier foreign entity owned by either Borrower or by a subsidiary guarantor. The Company is 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
ModusLink 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 ModusLink
Borrowers liquidity. During the three months ended April 30, 2018, the Company did not meet the criteria that would cause its financial covenants to be applicable. As of April 30, 2018 and July 31, 2017, the Company did not have
any balance outstanding on the PNC Bank credit facility.
Cerberus Credit Facility
On December 15, 2017, MLGS, a wholly owned subsidiary of the Company, entered into a Financing Agreement (the Financing
Agreement), by and among the MLGS (as the initial borrower), Instant Web, LLC, a Delaware corporation and wholly owned subsidiary of IWCO (as Borrower), IWCO, and certain of IWCOs subsidiaries (together with IWCO, the
Guarantors), the lenders from time to time party thereto, and Cerberus Business Finance, LLC, as collateral agent and administrative agent for the lenders. MLGS was the initial borrower under the Financing Agreement, but immediately upon
the consummation of the IWCO Acquisition, as described above, Borrower became the borrower under the Financing Agreement.
The Financing
Agreement provides for $393.0 million term loan facility (the Term Loan) and a $25.0 million revolving credit facility (collectively, the Cerberus Credit Facility). Proceeds of the Cerberus Credit Facility were used
(i) to finance a portion of the IWCO Acquisition, (ii) to repay certain existing indebtedness of the Borrower and its subsidiaries, (iii) for working capital and general corporate purposes and (iv) to pay fees and expenses
related to the Financing Agreement and the IWCO Acquisition.
The Cerberus Credit Facility has a maturity of five years. Borrowings under
the Cerberus Credit Facility bear interest, at the Borrowers option, at a Reference Rate plus 3.75% or a LIBOR Rate plus 6.5%, each as defined the Financing Agreement. The initial interest rate under the Cerberus Credit Facility is at the
LIBOR Rate option.
The Term Loan under the Cerberus Credit Facility is repayable in consecutive quarterly installments, each of which
will be in an amount equal per quarter of $1.5 million and each such installment to be due and payable, in arrears, on the last day of each calendar quarter commencing on March 31, 2018 and ending on the earlier of
(a) December 15, 2022 and (b) upon the payment in full of all obligations under the Financing Agreement and the termination of all commitments under the Financing Agreement. Further, the Term Loan would be permanently reduced pursuant
to certain mandatory prepayment events including an annual excess cash flow sweep of 50% of the consolidated excess cash flow, with a step-down to 25% when the Leverage Ratio (as defined in the Financing Agreement) is below 3.50:1.00;
provided that, in any calendar year, any voluntary prepayments of the Term Loan shall be credited against the Borrowers excess cash flow prepayment obligations on a
dollar-for-dollar
basis for such calendar year.
19
Borrowings under the Financing Agreement are fully guaranteed by the Guarantors and are
collateralized by substantially all the assets of the Borrower and the Guarantors and a pledge of all of the issued and outstanding equity interests of each of IWCOs subsidiaries.
The Financing Agreement contains certain representations, warranties, events of default, mandatory prepayment requirements, as well as certain
affirmative and negative covenants customary for financing agreements of this type. These covenants include restrictions on borrowings, investments and dispositions, as well as limitations on the ability of the Borrower and the Guarantors to make
certain capital expenditures and pay dividends. Upon the occurrence and during the continuation of an event of default under the Financing Agreement, the lenders under the Financing Agreement may, among other things, terminate all commitments and
declare all or a portion of the loans under the Financing Agreement immediately due and payable and increase the interest rate at which loans and obligations under the Financing Agreement bear interest.
On May 9, 2018, IWCO entered into a Waiver and Amendment No.1 to Financing Agreement (the Amendment No. 1) in order to,
among other things, amend the definition of Fiscal Year to mean the twelve (12) month period ending on July 31st of each calendar year for IWCO and its subsidiaries and to make other related conforming changes to the Financing
Agreement. Amendment No.1 also waived an event of default existing under the Financing Agreement that resulted from the failure of the Borrower and the Guarantors to deliver certain financial statements and an opinion for the Fiscal Year, which,
prior to the effectiveness of Amendment No.1, was based on a year ending on December 31st of each year. The Company anticipates delivering the required financial statements and opinion for the Fiscal Year ended July 31, 2018, as now
required under the amended Financing Agreement. There were no events of default under the Financing Agreement during the three months ended April 30, 2018 (after giving effect to the above-described waiver).
During the first quarter of fiscal year 2017, the Company adopted ASU
No. 2015-03.
As such, the
debt issuance costs are capitalized as a reduction of the principal amount of Term Loan on the Companys balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of the Term Loan. As of
April 30, 2018, the Company had $6.0 million outstanding on the revolving credit facility. As of April 30, 2018, the principal amount outstanding on the Term Loan was $391.5 million. As of April 30, 2018, the current and
long-term net carrying value of the Term Loan was $390.3 million.
|
|
|
|
|
|
|
April 30,
2018
|
|
|
|
(In thousands)
|
|
Principal amount outstanding on the Term Loan
|
|
$
|
391,500
|
|
Unamortized debt issuance costs
|
|
|
(1,230
|
)
|
|
|
|
|
|
Net carrying value of the Term Loan
|
|
$
|
390,270
|
|
|
|
|
|
|
(12) STOCKHOLDERS EQUITY
Preferred Stock
The
Companys Board of Directors (the Board) has the authority, subject to any limitations prescribed by Delaware law, to issue shares of preferred stock in one or more series and to fix and determine the designation, privileges,
preferences and rights and the qualifications, limitations and restrictions of those shares, including dividend rights, conversion rights, voting rights, redemption rights, terms of sinking funds, liquidation preferences and the number of shares
constituting any series or the designation of the series, without any further vote or action by the stockholders. Any shares of the Companys preferred stock so issued may have priority over its common stock with respect to dividend,
liquidation and other rights. The Companys board of directors may authorize the issuance of preferred stock with voting rights or conversion features that could adversely affect the voting power or other rights of the holders of its common
stock. Although the issuance of preferred stock could provide us with flexibility in connection with possible acquisitions and other corporate purposes, under some circumstances, it could have the effect of delaying, deferring or preventing a change
of control.
On December 15, 2017, the Company entered into a Preferred Stock Purchase Agreement (the Purchase Agreement)
with SPH Group Holdings LLC (SPHG Holdings), pursuant to which the Company issued 35,000 shares of the Companys newly created Series C Convertible Preferred Stock, par value $0.01 per share (the Preferred Stock), to
SPHG Holdings at a price of $1,000 per
20
share, for an aggregate purchase consideration of $35.0 million (the Preferred Stock Transaction). The terms, rights, obligations and preferences of the Preferred Stock are set
forth in a Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of the Company (the Series C Certificate of Designations), which has been filed with the Secretary of State of the State of Delaware.
Under the Series C Certificate of Designations, each share of Preferred Stock can be converted into shares of the Companys common
stock, par value $0.01 per share (the Common Stock), at an initial conversion price equal to $1.96 per share, subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar
transaction. Holders of the Preferred Stock will also receive dividends at 6% per annum payable in cash or Common Stock. If at any time the closing bid price of the Companys Common Stock exceeds 170% of the conversion price for at least five
consecutive trading days (subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), the Company has the right to require each holder of Preferred Stock to convert all, or any
whole number, of shares of the Preferred Stock into Common Stock.
Upon the occurrence of certain triggering events such as a liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, or the merger or consolidation of the Company or significant subsidiary, or the sale of substantially all of the assets or capital stock of the Company or a significant
subsidiary, the holders of the Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets or funds of the Company to the holders of other equity or equity equivalent securities of the Company other than
the Preferred Stock by reason of their ownership thereof, an amount per share in cash equal to the sum of (i) one hundred percent (100%) of the stated value per share of Preferred Stock (initially $1,000 per share) then held by them (as
adjusted for any stock split, stock dividend, stock combination or other similar transactions with respect to the Preferred Stock), plus (ii) 100% of all declared but unpaid dividends, and all accrued but unpaid dividends on each such share of
Preferred Stock, in each case as the date of the triggering event. On or after December 15, 2022, each holder of Preferred Stock can also require the Company to redeem its Preferred Stock in cash at a price equal to the Liquidation Preference
(as defined in Series C Certificate of Designations).
Each holder of Preferred Stock has a vote equal to the number of shares of Common
Stock into which its Preferred Stock would be convertible as of the record date, provided that the number of shares voted is based upon a conversion price which is no less than the greater of the book or market value of the Common Stock on the
closing date of the purchase of the Preferred Stock. In addition, for so long as the Preferred Stock remains outstanding, the Company will not, directly or indirectly, and including in each case with respect to any significant subsidiary, without
the affirmative vote of the holders of a majority of the Preferred Stock (i) liquidate, dissolve or wind up the Company or any significant subsidiary; (ii) consummate any transaction that would constitute or result in a Liquidation Event
(as defined in the Series C Certificate of Designations); (iii) effect or consummate any Prohibited Issuance (as defined in the Series C Certificate of Designations); or (iv) create, incur, assume or suffer to exist any Indebtedness (as defined
in the Series C Certificate of Designations) of any kind, other than certain existing Indebtedness of the Company and any replacement financing thereto, unless any such replacement financing be on substantially similar terms as such existing
Indebtedness.
The Purchase Agreement provides that the Company will use its commercially reasonable efforts to effect the piggyback
registration of the Common Stock issuable on the conversion of the Preferred Stock and any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing, with the
Securities and Exchange Commission in all states reasonably requested by the holder in accordance with certain enumerated conditions. The Purchase Agreement also contains other representations, warranties and covenants, customary for an issuance of
Preferred Stock in a private placement of this nature.
21
The Preferred Stock Transaction was approved and recommended to the Board by a special committee
of the Board (the Special Committee) consisting of independent directors not affiliated with Steel Partners Holdings GP Inc. (Steel Holdings GP), which controls the power to vote and dispose of the securities held by SPHG
Holdings and its affiliates.
Common Stock
Each holder of the Companys common stock is entitled to:
|
|
|
one vote per share on all matters submitted to a vote of the stockholders, subject to the rights of any preferred stock that may be outstanding;
|
|
|
|
dividends as may be declared by the Companys board of directors out of funds legally available for that purpose, subject to the rights of any preferred stock that may be outstanding; and
|
|
|
|
a pro rata share in any distribution of the Companys assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding preferred stock in the event of liquidation.
|
Holders of the Companys common stock have no cumulative voting rights, redemption rights or preemptive rights to
purchase or subscribe for any shares of its common stock or other securities. All of the outstanding shares of common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of its common stock are subject to, and
may be adversely affected by, the rights of the holders of shares of any existing series of preferred stock and any series of preferred stock that the Company may designate and issue in the future. There are no redemption or sinking fund provisions
applicable to the Companys common stock.
On March 12, 2013, stockholders of the Company approved the sale of 7,500,000 shares
of newly issued common stock to Steel Partners Holdings L.P. (Steel Holdings), an affiliate of SPHG Holdings, at a price of $4.00 per share, resulting in aggregate proceeds of $30.0 million before transaction costs. The Company
incurred $2.3 million of transaction costs, which consisted primarily of investment banking and legal fees, resulting in net proceeds from the sale of $27.7 million. In addition, as part of the transaction, the Company issued Steel
Holdings a warrant to acquire an additional 2,000,000 shares at an exercise price of $5.00 per share (the Warrant). These warrants were to expire after a term of five years after issuance. On December 15, 2017, contemporaneously
with the closing of the Preferred Stock Transaction, the Company entered into a Warrant Repurchase Agreement (the Warrant Repurchase Agreement) with Steel Holdings pursuant to which the Company repurchased the Warrant for $100. The
Warrant was terminated by the Company upon repurchase. The Warrant Repurchase Agreement is more fully described in Note 19 to these Condensed Consolidated Financial Statements.
(13) 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Foreign currency exchange gains (losses)
|
|
$
|
720
|
|
|
$
|
206
|
|
|
$
|
(1,351
|
)
|
|
$
|
632
|
|
Gains on Trading Securities
|
|
|
|
|
|
|
2,509
|
|
|
|
1,876
|
|
|
|
2,603
|
|
Other, net
|
|
|
(1,412
|
)
|
|
|
(7
|
)
|
|
|
(1,512
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(692
|
)
|
|
$
|
2,708
|
|
|
$
|
(987
|
)
|
|
$
|
3,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded foreign exchange gains of approximately $0.7 million and $0.2 million during
the three months ended April 30, 2018 and 2017, respectively. For the three months ended April 30, 2018, the net gains primarily related to realized and unrealized gains from foreign currency exposures and settled transactions of
approximately $1.4 million in Corporate, offset by net losses of $0.6 million in Europe. 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.
22
During the three months ended April 30, 2017, the Company recognized $2.5 million in
net gains associated with its Trading Securities.
The Company recorded foreign exchange gains (losses) of approximately $(1.4) million
and $0.6 million during the nine months ended April 30, 2018 and 2017, respectively. For the nine months ended April 30, 2018, the net losses primarily related to realized and unrealized losses from foreign currency exposures and
settled transactions of approximately $1.0 million and $0.8 million in the Asia and Corporate, respectively, offset by net gains of $0.4 million in Europe. 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.
During the nine months ended April 30, 2018 and 2017, the Company recognized $1.9 million and $2.6 million
in net gains (losses) associated with its Trading Securities.
(14) INCOME TAXES
The Company operates in multiple taxing jurisdictions, both within and outside of the United States. For the nine months ended April 30,
2018, the Company was profitable in certain jurisdictions, resulting in an income tax expense using enacted rates in those jurisdictions. As of April 30, 2018, the total amount of the liability for unrecognized tax benefits related to federal,
state and foreign taxes was approximately $1.8 million. As of July 31, 2017, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $0.7 million.
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, 2018 and July 31, 2017, 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, 2013 through July 31, 2017.
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.
23
Tax Benefits Preservation Plan
On January 19, 2018, our Board adopted a Tax Benefits Preservation Plan (the Tax Plan) and with American Stock
Transfer & Trust Company, LLC, as rights agent (the Rights Agent). The Tax Plan is designed to preserve the Companys ability to utilize its Tax Benefits and is similar to plans adopted by other public companies with
significant Tax Benefits.
The Board asked the Companys stockholders to approve, and the stockholders did so approve, the Tax Plan
at its 2017 Annual Meeting of Stockholders held on April 12, 2018 (the 2017 Meeting). If the Tax Plan was not approved by stockholders at the 2017 Meeting, the Tax Plan would have automatically expired immediately following the
final adjournment of the 2017 Meeting if stockholder approval was not received.
The Company had net operating loss carryforwards for
federal and state tax purposes of approximately $2.1 billion and $209.8 million, respectively, as of April 30, 2018. The Companys s ability to use its Tax Benefits would be substantially limited if the Company undergoes an
ownership change (within the meaning of Section 382 of the Internal Revenue Code). The Tax Plan is intended to prevent an ownership change of the Company that would impair the Company ability to utilize its Tax Benefits.
As part of the Tax Plan, the Board declared a dividend of one right (a Right) for each share of Common Stock then
outstanding. The dividend was payable to holders of record as of the close of business on January 29, 2018. Any shares of Common Stock issued after January 29, 2018, will be issued together with the Rights. Each Right initially represents
the right to purchase one
one-thousandth
of a share of newly created Series D Junior Participating Preferred Stock.
Initially, the Rights will be attached to all certificates representing shares of Common Stock then outstanding and no separate rights
certificates will be distributed. In the case of book entry shares, the Rights will be evidenced by notations in the book entry accounts. Subject to certain exceptions specified in the Plan, the Rights will separate from the Common Stock and a
distribution date (the Distribution Date) will occur upon the earlier of (i) ten (10) business days following a public announcement that a stockholder (or group) has become a beneficial owner of
4.99-percent
or more of the shares of Common Stock then outstanding and (ii) ten (10) business days (or such later date as the Board determines) following the commencement of a tender offer or exchange
offer that would result in a person or group becoming a
4.99-percent
stockholder.
Pursuant to the
Tax Plan and subject to certain exceptions, if a stockholder (or group) becomes a
4.99-percent
stockholder after adoption of the Tax Plan, the Rights would generally become exercisable and entitle stockholders
(other than the
4.99-percent
stockholder or group) to purchase additional shares of Steel Connect, Inc. at a significant discount, resulting in substantial dilution in the economic interest and voting power of
the
4.99-percent
stockholder (or group). In addition, under certain circumstances in which Steel Connect, Inc. is acquired in a merger or other business combination after an
non-exempt
stockholder (or group) becomes a
4.99-percent
stockholder, each holder of the Right (other than the
4.99-percent
stockholder or group) would then be entitled to purchase shares of the acquiring companys common stock at a discount.
The Rights
are not exercisable until the Distribution Date and will expire at the earliest of (i) 11:59 p.m. on the date that the votes of the stockholders of the Company with respect to the Companys next annual meeting or special meeting of stockholders
are certified (which date will be no later than January 18, 2019), unless the continuation of the Tax Plan is approved by the affirmative vote of the majority of shares of Common Stock present at such meeting of stockholders (in which case
clause (ii) will govern); (ii) 11:59 p.m., on January 18, 2021; (iii) the time at which the Rights are redeemed or exchanged as provided in the Tax Plan; and (iv) the time at which the Board determines that the Tax Plan is no longer
necessary or desirable for the preservation of Tax Benefits.
Protective Amendment
On March 6, 2018, the Board, subject to approval by the Companys stockholders, approved an amendment to the Companys Restated
Certificate of Incorporation designed to protect the tax benefits of the Companys net operating loss carryforwards by preventing certain transfers of our securities that could result in an ownership change (as defined under
Section 382 of the Code) (the Protective Amendment). The Protective Amendment was approved and adopted by the Companys stockholders at the 2017 Meeting and was filed with the Secretary of State of the State of Delaware on
April 12, 2018.
24
IWCO Acquisition
As more fully described in Note 9 to these unaudited Condensed Consolidated Financial Statements, the Company completed the IWCO Acquisition on
December 15, 2017. Going forward, the Company and IWCO will file a consolidated federal tax return. In purchase accounting, a deferred tax liability of $75.8 million was computed for IWCO. After considering the transaction, the projected
combined results and available temporary differences from the acquired business, the Company has determined in accordance with ASC
805-740-30-3
that its valuation allowance in the same amount of IWCOs full deferred tax liability may be released and the
benefit be recognized in income.
The Tax Cuts and Jobs Act
In December 2017, the Tax Cuts and Jobs Act, or the Tax Act (TCJA), was signed into law. Among other things, the Tax Act
permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate federal income tax rate to
21%, U.S. GAAP requires companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. This revaluation resulted in a
provision of $266.3 million to income tax expense in continuing operations and a corresponding reduction in the valuation allowance. As a result, there was no impact to the Companys income statement as a result of reduction in tax rates.
The total provision of $266.3 million included a provision of $296.1 million to income tax expense for the Company and a benefit of $29.8 million to income tax expense for IWCO.
Beginning on January 1, 2018, the TCJA also requires a minimum tax on certain future earnings generated by foreign subsidiaries while
providing for future
tax-free
repatriation of such earnings through a 100% dividends-received deduction. In accordance with ASC Topic 740, Income Taxes, and SAB 118, the Company has estimated that no
provisional charge will be recorded related to the TCJA based on its initial analysis using available information and estimates. Given the significant complexity of the TCJA, anticipated guidance from the U.S. Treasury Department about implementing
the TCJA and the potential for additional guidance from the SEC or the FASB related to the TCJA or additional information becoming available, the Companys provisional charge may be adjusted during 2018 and is expected to be finalized no later
than December 31, 2018. Other provisions of the TCJA that impact future tax years are still being assessed.
Our preliminary estimate
of the TCJA and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of managements analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to
certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TCJA may require further adjustments and changes in our estimates. The final determination of the TCJA
and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA.
25
(15) 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, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands, except per share data)
|
|
Net income (loss)
|
|
$
|
(10,333
|
)
|
|
$
|
(5,067
|
)
|
|
$
|
44,248
|
|
|
$
|
(16,516
|
)
|
Less: Preferred dividends on redeemable preferred stock
|
|
|
(529
|
)
|
|
|
|
|
|
|
(788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
|
(10,862
|
)
|
|
|
(5,067
|
)
|
|
|
43,460
|
|
|
|
(16,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.25% Convertible Senior Notes
|
|
|
|
|
|
|
|
|
|
|
5,248
|
|
|
|
|
|
Redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders after assumed conversions
|
|
$
|
(10,862
|
)
|
|
$
|
(5,067
|
)
|
|
$
|
49,496
|
|
|
$
|
(16,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
60,076
|
|
|
|
55,257
|
|
|
|
58,281
|
|
|
|
55,099
|
|
Weighted average common equivalent shares arising from dilutive stock options, restricted stock,
convertible notes and convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
20,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and potential common shares
|
|
|
60,076
|
|
|
|
55,257
|
|
|
|
78,934
|
|
|
|
55,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earning (loss) per share attributable to common stockholders:
|
|
$
|
(0.18
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.75
|
|
|
$
|
(0.30
|
)
|
Diluted net earning (loss) per share attributable to common stockholders:
|
|
$
|
(0.18
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.63
|
|
|
$
|
(0.30
|
)
|
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 or preferred stock conversion (calculated using an
as-if
converted method).
For the three and nine months ended April 30, 2018, approximately 29.6 million and 0.5 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, 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.
26
(16) 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, 2018 and 2017, which was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
41
|
|
Selling, general and administrative
|
|
|
2,259
|
|
|
|
135
|
|
|
|
9,644
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,260
|
|
|
$
|
145
|
|
|
$
|
9,657
|
|
|
$
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During December 2017, the Board, upon the recommendation of the Special Committee and the Human Resources and
Compensation Committee of the Board (the Compensation Committee), approved equity grants to certain members of the Board, in each case effective upon the closing of the IWCO Acquisition and in consideration for current and future
services to the Company.
At April 30, 2018, there was an immaterial amount unrecognized compensation cost related to Stock Options
issued under the Companys plans. At April 30, 2018, there was approximately $2.1 million of total unrecognized compensation cost related to
non-vested
share-based compensation awards under the
Companys plans.
(17) 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Foreign
currency
items
|
|
|
Pension
items
|
|
|
gains
(losses) on
securities
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Accumulated other comprehensive income (loss) at July 31, 2017
|
|
$
|
7,522
|
|
|
$
|
(3,376
|
)
|
|
$
|
167
|
|
|
$
|
4,313
|
|
Foreign currency translation adjustment
|
|
|
2,515
|
|
|
|
|
|
|
|
|
|
|
|
2,515
|
|
Net unrealized holding loss on securities
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Pension liability adjustments
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
2,515
|
|
|
|
26
|
|
|
|
(10
|
)
|
|
|
2,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) at April 30, 2018
|
|
$
|
10,037
|
|
|
$
|
(3,350
|
)
|
|
$
|
157
|
|
|
$
|
6,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18) SEGMENT INFORMATION
The Company has five operating segments: Americas; Asia; Europe; Direct Marketing; and
e-Business.
Direct Marketing is a new operating segment which represents IWCO. 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 five reportable segments: Americas, Asia, Europe, Direct Marketing and
e-Business.
In the past the All Other category has
completely been comprised of the e-Business operating segment. 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 Companys reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, 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.
27
Management evaluates segment performance based on segment net revenue, operating income (loss)
and adjusted operating income (loss), which is defined as the operating income (loss) excluding net charges related to depreciation, amortization of intangible assets, long-lived asset impairment, share-based compensation and
restructuring. These items are excluded because they may be considered to be of a
non-operational
or
non-cash
nature. Historically, the Company has recorded significant
impairment and restructuring charges and therefore management uses adjusted operating income to assist in evaluating the performance of the Companys core operations.
Summarized financial information of the Companys continuing operations by operating segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
13,061
|
|
|
$
|
20,179
|
|
|
$
|
41,664
|
|
|
$
|
73,240
|
|
Asia
|
|
|
31,820
|
|
|
|
37,056
|
|
|
|
111,622
|
|
|
|
118,790
|
|
Europe
|
|
|
22,942
|
|
|
|
34,272
|
|
|
|
99,225
|
|
|
|
124,363
|
|
Direct Marketing
|
|
|
115,647
|
|
|
|
|
|
|
|
173,019
|
|
|
|
|
|
e-Business
|
|
|
5,452
|
|
|
|
6,441
|
|
|
|
17,492
|
|
|
|
20,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188,922
|
|
|
$
|
97,948
|
|
|
$
|
443,022
|
|
|
$
|
336,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
(2,032
|
)
|
|
$
|
(2,363
|
)
|
|
$
|
(6,518
|
)
|
|
$
|
(7,939
|
)
|
Asia
|
|
|
1,903
|
|
|
|
832
|
|
|
|
21,795
|
|
|
|
4,921
|
|
Europe
|
|
|
(1,770
|
)
|
|
|
(2,334
|
)
|
|
|
(8,089
|
)
|
|
|
(4,885
|
)
|
Direct Marketing
|
|
|
9,917
|
|
|
|
|
|
|
|
5,965
|
|
|
|
|
|
e-Business
|
|
|
(1,646
|
)
|
|
|
(197
|
)
|
|
|
(4,437
|
)
|
|
|
(742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment operating income (loss)
|
|
|
6,372
|
|
|
|
(4,062
|
)
|
|
|
8,716
|
|
|
|
(8,645
|
)
|
Corporate-level activity
|
|
|
(4,992
|
)
|
|
|
(1,181
|
)
|
|
|
(16,869
|
)
|
|
|
(3,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
1,380
|
|
|
|
(5,243
|
)
|
|
|
(8,153
|
)
|
|
|
(12,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(11,198
|
)
|
|
|
763
|
|
|
|
(19,919
|
)
|
|
|
(2,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(9,818
|
)
|
|
$
|
(4,480
|
)
|
|
$
|
(28,072
|
)
|
|
$
|
(15,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue and operating income associated with Direct Marketing is for the period from December 15,
2017 to April 30, 2018. The Direct Marketing operating income includes certain purchase accounting adjustments associated with the IWCO acquisition.
|
|
|
|
|
|
|
|
|
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(In thousands)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
23,679
|
|
|
$
|
21,876
|
|
Asia
|
|
|
44,731
|
|
|
|
63,819
|
|
Europe
|
|
|
42,367
|
|
|
|
64,639
|
|
Direct Marketing
|
|
|
641,384
|
|
|
|
|
|
e-Business
|
|
|
14,909
|
|
|
|
20,703
|
|
|
|
|
|
|
|
|
|
|
Sub-total
- segment assets
|
|
|
767,070
|
|
|
|
171,037
|
|
Corporate
|
|
|
75,963
|
|
|
|
110,261
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
843,033
|
|
|
$
|
281,298
|
|
|
|
|
|
|
|
|
|
|
Summarized financial information of the Companys net revenue from external customers by group of
services is as follows:
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Supply chain services
|
|
$
|
67,823
|
|
|
$
|
91,507
|
|
|
$
|
252,511
|
|
|
$
|
316,393
|
|
Direct Marketing
|
|
|
115,647
|
|
|
|
|
|
|
|
173,019
|
|
|
|
|
|
e-Business
services
|
|
|
5,452
|
|
|
|
6,441
|
|
|
|
17,492
|
|
|
|
20,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188,922
|
|
|
$
|
97,948
|
|
|
$
|
443,022
|
|
|
$
|
336,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018, approximately $108.8 million of the Companys long-lived assets were
located in the U.S.A. As of July 31, 2017, approximately $9.3 million of the Companys long-lived assets were located in the U.S.A.
For the three months ended April 30, 2018, the Companys net revenues within U.S.A., China, Netherlands and Czech Republic were
$129.3 million, $24.3 million, $13.3 million and $6.2 million, respectively. 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 nine months ended April 30,
2018, the Companys net revenues within U.S.A., China, Netherlands and Czech Republic were $216.8 million, $87.3 million, $45.1 million and $46.3 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.
(19) RELATED PARTY TRANSACTIONS
Preferred Stock Transaction and Warrant Repurchase
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 Companys newly created Series C Convertible Preferred Stock, par value $0.01 per share (the Preferred Stock), to SPHG Holdings at a price of $1,000 per share, for an aggregate purchase consideration of
$35.0 million. The terms, rights, obligations and preferences of the Preferred Stock are set forth in a Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of the Company, which has been filed with the
Secretary of State of the State of Delaware.
Under the Series C Certificate of Designations, each share of Preferred Stock can be
converted into shares of the our Common Stock, at an initial conversion price equal to $1.96 per share, subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction. Holders of
the Preferred Stock will also receive dividends at 6% per annum payable in cash or Common Stock. If at any time the closing bid price of the Companys Common Stock exceeds 170% of the conversion price for at least five consecutive trading days
(subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), the Company has the right to require each holder of Preferred Stock to convert all, or any whole number, of shares
of the Preferred Stock into Common Stock.
The Preferred Stock Transaction was approved and recommended to the Board by a special
committee of the Board (the Special Committee). Each member of the Special Committee was independent and not affiliated with Steel Holdings GP, which controls the power to vote and dispose of the securities held by SPHG Holdings and its
affiliates.
On December 15, 2017, contemporaneously with the closing of the Preferred Stock Transaction, the Company entered into a
Warrant Repurchase Agreement with Steel Holdings, an affiliate of SPHG Holdings, pursuant to which the Company repurchased for $100 the warrant to acquire 2,000,000 shares of the Common Stock that the Company had previously issued to Steel Holdings.
The Warrant, which was to expire in 2018, was terminated by the Company upon repurchase.
Management Services Agreement
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 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.
29
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), the parent of SP Corporate and an affiliate of SPHG Holdings, 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. On March 10, 2016, the Company entered into a Transfer Agreement with SPH Services pursuant to which the parties agreed to transfer to the Company certain individuals who provide corporate
services to the Company (the Transfer Agreement). SP Corporate and Steel Partners LLC merged with and into SPH Services, with SPH Services surviving. SPH Services has since changed its name to Steel Services Ltd. (Steel
Services). On September 1, 2017, the Company entered into a Third Amendment to the Management Services Agreement, which reduced the fixed monthly fee paid by the Company to Steel Services under the Management Services Agreement from
$175,000 per month to $95,641 per month. The monthly fee is subject to review and adjustment by agreement between the Company and Steel Services for periods commencing in fiscal 2016 and beyond. Additionally, the Company may be required to reimburse
Steel Services and its affiliates for all reasonable and necessary business expenses incurred on our behalf in connection with the performance of the services under the Management Services Agreement, including travel expenses. The Management
Services Agreement provides that, under certain circumstances, the Company may be required to indemnify and hold harmless Steel Services and its affiliates and employees from any claims or liabilities by a third party in connection with activities
or the rendering of services under the Management Services Agreement. Total expenses incurred related to this agreement for the three and nine months ended April 30, 2018 were $0.3 million and $1.5 million, respectively. Total
expenses incurred related to this agreement for the three and nine months ended April 30, 2017 were $0.6 million and $1.7 million, respectively. As of April 30, 2018 and July 31, 2017, amounts due to SP Corporate and Steel
Services were $0.1 million and $0.3 million, respectively.
The Related Party Transactions Committee of the Board (the
Related Party Transactions Committee) approved the entry into the Management Services Agreement (and the first two amendments thereto) and the Transfer Agreement. The Audit Committee of the Board of Directors (the Audit
Committee) approved the third amendment to the Management Services 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
reviews all related party transactions on an ongoing basis and all such transactions must be approved or ratified by the Audit Committee.
On December 15, 2017, the Board, upon the recommendation of the Special Committee and the Compensation Committee, approved restricted
stock grants and market performance based restricted stock grants to
non-employee
directors Messrs. Howard, Fejes and Lichtenstein, the Executive Chairman of the Board, in each case effective upon the closing
of the IWCO Acquisition (the Grant Date) and in consideration for current and future services to the Company. Messrs. Howard and Lichtenstein are affiliated with Steel Holdings GP, which is a wholly-owned subsidiary of Steel Holdings.
Mr. Fejes is currently affiliated with Steel Services, an indirect wholly owned subsidiary of Steel Holdings. These awards were measured based on the fair market value on the Grant Date.
Mutual Securities, Inc. (Mutual Securities) serves as the broker and record-keeper for all the transactions associated with the
Trading Securities. An officer of SP Corporate and of the General Partner of Steel Holdings is a registered principal of Mutual Securities. Commissions charged by Mutual Securities are generally commensurate with commissions charged by other
institutional brokers, and the Company believes its use of Mutual Securities is consistent with its desire to obtain best price and execution. During the three and nine months ended April 30, 2018 and 2017, Mutual Securities received an
immaterial amount in commissions associated with these transactions.
(20) 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
30
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
|
|
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, funds held for clients, 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, 2018 and
July 31, 2017, classified by fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(In thousands)
|
|
April 30, 2018
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
47,002
|
|
|
$
|
47,002
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
(In thousands)
|
|
July 31, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
11,898
|
|
|
$
|
11,898
|
|
|
$
|
|
|
|
$
|
|
|
Money market funds
|
|
|
85,683
|
|
|
|
85,683
|
|
|
|
|
|
|
|
|
|
There were no transfers between Levels 1, 2 or 3 during any of the periods presented.
When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were
classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The
inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.
31
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 the Companys @Ventures investments and certain assets subject to long-lived asset impairment. The Company reviews the carrying amounts of these assets whenever certain events or changes in circumstances indicate that the
carrying amounts may not be recoverable.
Fair Value of Financial Instruments
The Companys financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts
receivable, accounts payable, funds held for clients and debt, and are reflected in the financial statements at cost. With the exception of the Notes payable and long-term debt, cost approximates fair value for these items due to their short-term
nature. We believe that the carrying value of our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates.
Included in Trading Securities in the accompanying balance sheet are marketable equity securities. 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 Notes payable not carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2018
|
|
|
July 31, 2017
|
|
|
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Fair Value
Hierarchy
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
63,274
|
|
|
$
|
66,273
|
|
|
$
|
59,758
|
|
|
$
|
63,852
|
|
|
|
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.
32