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March 15, 2024 at 7:38 AM EDT

Steel Connect Reports Second Quarter Fiscal 2024 Financial Results

Second Quarter 2024 Results

  • Net revenue totaled $43.0 million, as compared to $50.8 million in the same period of the prior fiscal year.
  • Net income was $5.3 million, as compared to a net loss of $0.5 million in the same period of the prior fiscal year.
  • Net income available to common stockholders was $4.8 million, as compared to a net loss available to common stockholders of $1.1 million in the same period of the prior fiscal year.
  • Adjusted EBITDA* was $3.7 million, as compared to $4.6 million in the same period of the prior fiscal year.
  • Net cash provided by operating activities was $0.1 million.
  • Free Cash Flow* totaled $(1.1) million.
  • Total debt was $12.9 million; Net Cash* totaled $263.5 million.

Six-Month Fiscal Year-to-Date Financial Results

  • Net revenue totaled $84.4 million, as compared to $102.1 million in the same period of the prior fiscal year.
  • Net income was $9.8 million, as compared to $4.4 million in the same period of the prior fiscal year.
  • Net income available to common stockholders was $8.7 million, as compared to $3.4 million in the same period of the prior fiscal year.
  • Adjusted EBITDA* was $7.5 million, as compared to $11.9 million in the same period of the prior fiscal year.
  • Net cash provided by operating activities was $6.7 million.
  • Free Cash Flow* totaled $5.0 million.

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

NEW YORK--(BUSINESS WIRE)--Mar. 15, 2024-- Steel Connect, Inc. (the "Company") (NASDAQ: STCN) today announced financial results for its second quarter ended January 31, 2024.

Results of Operations

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

Due to the application of pushdown accounting in connection with the exchange transaction ("Exchange Transaction") on May 1, 2023 with Steel Partners Holdings L.P. (“Steel Partners”), the Company’s consolidated financial statements include a black line division between the two distinct periods to indicate the application of two different bases of accounting, which may not be comparable, between the periods presented. The pre-exchange period through April 30, 2023, is referred to as the "Predecessor" period. The post-exchange period, May 1, 2023, and onward, includes the impact of pushdown accounting and is referred to as the "Successor" period.

As it relates to the results of operations, while the Successor period and the Predecessor period are distinct reporting periods, the effects of the change of control for financial statement purposes did not have a material impact on the comparability of our results of operations between the periods, unless otherwise noted related to the impact from pushdown accounting.

 

Successor

   

Predecessor

   

Successor

   

Predecessor

 

Three Months Ended January 31,

   

Three Months Ended January 31,

   

Six Months Ended January 31,

   

Six Months Ended January 31,

 

 

2024

 

   

 

2023

 

   

 

2024

 

   

 

2023

 

 

(in thousands)

Net revenue

$

43,045

 

   

$

50,781

 

   

$

84,386

 

   

$

102,140

 

Net income (loss)

 

5,346

 

   

 

(526

)

   

 

9,782

 

   

 

4,431

 

Net income (loss) available to common stockholders

$

4,809

 

   

$

(1,063

)

   

$

8,709

 

   

$

3,357

 

Adjusted EBITDA*

$

3,701

 

   

$

4,631

 

   

$

7,458

 

   

$

11,912

 

Adjusted EBITDA margin*

 

8.6

%

   

 

9.1

%

   

 

8.8

%

   

 

11.7

%

Net cash provided by operating activities

 

78

 

   

 

1,336

 

   

 

6,661

 

   

 

9,588

 

Additions to property and equipment

 

(1,148

)

   

 

(318

)

   

 

(1,700

)

   

 

(866

)

Free cash flow*

$

(1,070

)

   

$

1,018

 

   

$

4,961

 

   

$

8,722

 

*

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

Comparison of the Second Quarter and Six Months Ended January 31, 2024 and 2023

 

Successor

 

 

Predecessor

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended January 31,

 

 

Three Months Ended January 31,

 

 

 

Six Months Ended January 31,

 

 

Six Months Ended January 31,

 

 

 

(unaudited in thousands)

 

 

2024

 

 

 

 

2023

 

 

Fav (Unfav) ($)

 

 

2024

 

 

 

 

2023

 

 

Fav (Unfav) ($)

Net revenue

$

43,045

 

 

 

$

50,781

 

 

$

(7,736

)

 

$

84,386

 

 

 

$

102,140

 

 

$

(17,754

)

Cost of revenue

 

(31,698

)

 

 

 

(37,719

)

 

 

6,021

 

 

 

(61,564

)

 

 

 

(74,813

)

 

 

13,249

 

Gross profit

 

11,347

 

 

 

 

13,062

 

 

 

(1,715

)

 

 

22,822

 

 

 

 

27,327

 

 

 

(4,505

)

Gross profit percentage

 

26.4

%

 

 

 

25.7

%

 

 

 

 

 

27.0

%

 

 

 

26.8

%

 

 

 

Selling, general and administrative

 

(8,732

)

 

 

 

(10,459

)

 

 

1,727

 

 

 

(17,527

)

 

 

 

(20,845

)

 

 

3,318

 

Amortization

 

(893

)

 

 

 

 

 

 

(893

)

 

 

(1,768

)

 

 

 

 

 

 

(1,768

)

Interest expense

 

(249

)

 

 

 

(848

)

 

 

599

 

 

 

(496

)

 

 

 

(1,674

)

 

 

1,178

 

Other gains (losses), net

 

4,067

 

 

 

 

(2,627

)

 

 

6,694

 

 

 

7,616

 

 

 

 

402

 

 

 

7,214

 

Total costs and expenses

 

(37,505

)

 

 

 

(51,653

)

 

 

14,148

 

 

 

(73,739

)

 

 

 

(96,930

)

 

 

23,191

 

Income (loss) before income taxes

 

5,540

 

 

 

 

(872

)

 

 

6,412

 

 

 

10,647

 

 

 

 

5,210

 

 

 

5,437

 

Income tax (expense) benefit

 

(194

)

 

 

 

346

 

 

 

(540

)

 

 

(865

)

 

 

 

(779

)

 

 

(86

)

Net income (loss)

$

5,346

 

 

 

$

(526

)

 

$

5,872

 

 

$

9,782

 

 

 

$

4,431

 

 

$

5,351

 

Net Revenue

Net revenue for the second quarter decreased $7.7 million, or 15.2%, as compared to the same period in the prior fiscal year. This decrease in net revenue was primarily driven by lower volumes associated with existing clients in the computing and consumer electronics markets, offset partially by new business revenue and new program starts with clients in the consumer electronics market.

Net revenue for the six months ended January 31, 2024 decreased $17.8 million, or 17.4%, as compared to the six months ended January 31, 2023. This decrease in net revenue was primarily driven by lower volumes associated with existing clients in the computing and consumer electronics markets, partially offset by new business revenue and new program starts with clients in the consumer electronics market. Fluctuations in foreign currency exchange rates had an insignificant impact on net revenues for the three and six month periods ended January 31, 2024 and 2023, respectively.

Cost of Revenue

Total cost of revenue decreased by $6.0 million or 16.0% for the second quarter, as compared to the same period in the prior fiscal year. This was primarily driven by a decrease in materials procured on behalf of our clients of $6.9 million as a result of lower sales volumes associated with existing clients in the computing and consumer electronics markets. The decrease in cost of materials was partially offset by increases in labor costs for new business revenue in the consumer electronics market.

Total cost of revenue decreased by $13.2 million or 17.7% for the six months ended January 31, 2024, as compared to the six months ended January 31, 2023. This was primarily driven by a decrease in materials procured on behalf of our clients of $12.8 million as a result of lower sales volumes associated with clients in the computing and consumer electronics markets. Fluctuations in foreign currency exchange rates had an insignificant impact on cost of revenues for the three and six month periods ended January 31, 2024 and 2023, respectively.

Gross Profit Margin

Gross profit decreased $1.7 million or 13.1% in the second quarter as compared to the same period in the prior fiscal year primarily due to the lower sales volume discussed above. Gross profit percentage increased 70 basis points to 26.4% from 25.7% in the second quarter as compared to the same period in the prior fiscal year, primarily due to changes in customer sales mix.

Gross profit decreased $4.5 million or 16.5% in the six months ended January 31, 2024 as compared to the six months ended January 31, 2023, primarily driven by lower sales volume discussed above. The gross profit percentage remained relatively unchanged from the prior period. Fluctuations in foreign currency exchange rates had an insignificant impact on the Company's gross margin for the three and six month periods ended January 31, 2024 and 2023, respectively.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses during the second quarter decreased by approximately $1.7 million or 16.5% as compared to the same period in the prior fiscal year due to Corporate-level activity, which decreased by $1.4 million primarily due to a decrease in legal and other professional fees.

SG&A expenses decreased by approximately $3.3 million or 15.9% during the six months ended January 31, 2024 as compared to the six months ended January 31, 2023. SG&A expenses for ModusLink Corporation ("Supply Chain") decreased by $0.8 million primarily due to bad debt expense recorded for a client in the consumer products industry during the six months ended January 31, 2023 that did not reoccur during the six months ended January 31, 2024. Corporate-level activity decreased by $2.5 million, primarily due to a decrease in legal and other professional fees. Fluctuations in foreign currency exchange rates did not have a significant impact on SG&A expenses for the three and six month periods ended January 31, 2024 and 2023, respectively.

Amortization Expense

Amortization expense of $0.9 million and $1.8 million for the three and six months ended January 31, 2024, respectively, was driven by the recognition of intangible assets in connection with the application of pushdown accounting as a result of the Exchange Transaction. As the Exchange Transaction closed on May 1, 2023, there was no activity for the three and six month periods ended January 31, 2023.

Interest Expense

Interest expense during the three and six months ended January 31, 2024 decreased $0.6 million and $1.2 million, respectively, as compared to the three and six months ended January 31, 2023, primarily due to the cessation of the amortization of the discount on the 7.50% Convertible Senior Note due September 1, 2024 (the “SPHG Note”) as of May 1, 2023, the date of the Exchange Transaction.

Other Gains (Losses), Net

Other gains, net are primarily composed of investment gains (losses), fair value remeasurement gains (losses), foreign exchange gains (losses), interest income, and sublease income.

The Company recorded $4.1 million to Other gains, net for the three months ended January 31, 2024, primarily due to: (1) $3.5 million interest income earned on money market funds and (2) $1.0 million of net realized and unrealized gains recognized on investments in equity securities. This activity was partially offset by $0.6 million in unrealized losses recognized as a result of the fair value remeasurement of the SPHG Note at January 31, 2024. The Company recorded $2.6 million to Other losses, net, for the three months ended January 31, 2023 primarily due to $3.3 million in foreign exchange net losses.

The Company recorded $7.6 million to Other gains, net for the six months ended January 31, 2024, primarily due to: (1) $6.7 million interest income earned on money market funds and (2) $0.6 million of net realized and unrealized gains recognized on investments in equity securities. This activity was offset partially by $0.4 million unrealized losses recognized as a result of the fair value remeasurement of the SPHG Note. The Company recorded $0.4 million to Other gains, net, for the six months ended January 31, 2023, primarily due to (1) $0.6 million sublease income and (2) $0.5 million interest income earned on money market funds. This activity was offset partially by $0.8 million foreign exchange net losses.

Income Tax (Expense) Benefit

During the second quarter, the Company recorded income tax expense of approximately $0.2 million as compared to a $0.3 million income tax benefit for the same period in the prior fiscal year. The change in income tax expense is primarily due to higher taxable income in foreign jurisdictions, as compared to the prior fiscal year.

During the six months ended January 31, 2024, the Company recorded income tax expense of approximately $0.9 million as compared to $0.8 million for the six months ended January 31, 2023. The increase in income tax expense is primarily due to higher taxable income in foreign jurisdictions for the six months ended January 31, 2024 as compared to the six months ended January 31, 2023.

Net Income

Net income for the second quarter increased $5.9 million, as compared to the same period in the prior fiscal year. The increase in net income is largely driven by the $6.7 million favorable change in activity recorded to Other gains (losses), net. Refer to above explanations for further details.

Net income for the six months ended January 31, 2024 increased $5.4 million, as compared to the six months ended January 31, 2023. The increase in net income is primarily due to the $7.2 million favorable change in activity recorded in Other gains, net. Lower SG&A expenses also contributed to the increase in net income, offset partially by lower gross profits. Refer to above explanations for further details.

Additions to Property and Equipment (Capital Expenditures)

Capital expenditures for the second quarter totaled $1.1 million, or 2.7% of net revenue, as compared to $0.3 million, or 0.6% of net revenue, for the same period in the prior fiscal year.

Capital expenditures for the six months ended January 31, 2024 totaled $1.7 million, or 2.0% of net revenue, as compared to $0.9 million, or 0.8% of net revenue, for the six months ended January 31, 2023.

Adjusted EBITDA

Adjusted EBITDA decreased $0.9 million, or 20.1%, for the second quarter as compared to the same period in the prior fiscal year, primarily due to lower operational net income.

Adjusted EBITDA decreased $4.5 million, or 37.4%, for the six months ended January 31, 2024 as compared to the six months ended January 31, 2023, primarily due to due to lower operational net income.

Liquidity and Capital Resources

As of January 31, 2024, the Company had cash and cash equivalents of $276.4 million and ModusLink had readily available borrowing capacity of $11.9 million under its revolving credit facility with Umpqua Bank.

As of January 31, 2024, the fair value of outstanding debt was $12.9 million, which was comprised of $12.9 million principal outstanding on the SPHG Note.

About Steel Connect, Inc.

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

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

– Financial Tables Follow –

Steel Connect, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands)

 

 

Successor

 

January 31, 2024

 

July 31, 2023

 

(unaudited)

 

 

ASSETS

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

276,422

 

$

121,372

Accounts receivable, trade, net

 

29,179

 

 

28,616

Inventories, net

 

7,742

 

 

8,569

Funds held for clients

 

2,479

 

 

2,031

Prepaid expenses and other current assets

 

5,550

 

 

158,686

Total current assets

 

321,372

 

 

319,274

Property and equipment, net

 

4,433

 

 

3,698

Operating lease right-of-use assets

 

24,813

 

 

27,098

Investments

 

3,174

 

 

Other intangible assets, net

 

32,821

 

 

34,589

Goodwill

 

22,785

 

 

22,785

Other assets

 

3,317

 

 

3,737

Total assets

$

412,715

 

$

411,181

 

 

 

 

LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

25,463

 

$

26,514

Accrued expenses

 

21,936

 

 

26,774

Funds held for clients

 

2,445

 

 

1,949

Current lease obligations

 

9,027

 

 

7,973

Convertible note payable

 

12,903

 

 

Other current liabilities

 

3,843

 

 

4,544

Total current liabilities

 

75,617

 

 

67,754

Convertible note payable

 

 

 

12,461

Long-term lease obligations

 

16,135

 

 

19,161

Other long-term liabilities

 

5,867

 

 

5,442

Total long-term liabilities

 

22,002

 

 

37,064

Total liabilities

 

97,619

 

 

104,818

 

 

 

 

Contingently redeemable preferred stock

 

237,739

 

 

237,739

 

 

 

 

Total stockholders' equity

 

77,357

 

 

68,624

Total liabilities, contingently redeemable preferred stock and stockholders' equity

$

412,715

 

$

411,181

 

Steel Connect, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

 

 

Successor

 

 

Predecessor

 

Successor

 

 

Predecessor

 

Three Months Ended

January 31,

 

 

Three Months Ended

January 31,

 

Six Months Ended

January 31,

 

 

Six Months Ended

January 31,

 

 

2024

 

 

 

 

2023

 

 

 

2024

 

 

 

 

2023

 

Net revenue

$

43,045

 

 

 

$

50,781

 

 

$

84,386

 

 

 

$

102,140

 

Cost of revenue

 

31,698

 

 

 

 

37,719

 

 

 

61,564

 

 

 

 

74,813

 

Gross profit

 

11,347

 

 

 

 

13,062

 

 

 

22,822

 

 

 

 

27,327

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

8,732

 

 

 

 

10,459

 

 

 

17,527

 

 

 

 

20,845

 

Amortization

 

893

 

 

 

 

 

 

 

1,768

 

 

 

 

 

Total operating expenses

 

9,625

 

 

 

 

10,459

 

 

 

19,295

 

 

 

 

20,845

 

Operating income

 

1,722

 

 

 

 

2,603

 

 

 

3,527

 

 

 

 

6,482

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

3,499

 

 

 

 

332

 

 

 

6,718

 

 

 

 

476

 

Interest expense

 

(249

)

 

 

 

(848

)

 

 

(496

)

 

 

 

(1,674

)

Other gains (losses), net

 

568

 

 

 

 

(2,959

)

 

 

898

 

 

 

 

(74

)

Total other income (loss)

 

3,818

 

 

 

 

(3,475

)

 

 

7,120

 

 

 

 

(1,272

)

Income (loss) before income taxes

 

5,540

 

 

 

 

(872

)

 

 

10,647

 

 

 

 

5,210

 

Income tax expense (benefit)

 

194

 

 

 

 

(346

)

 

 

865

 

 

 

 

779

 

Net income (loss)

 

5,346

 

 

 

 

(526

)

 

 

9,782

 

 

 

 

4,431

 

Less: Preferred dividends on Series C redeemable preferred stock

 

(537

)

 

 

 

(537

)

 

 

(1,073

)

 

 

 

(1,074

)

Net income (loss) available to common stockholders

$

4,809

 

 

 

$

(1,063

)

 

$

8,709

 

 

 

$

3,357

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common shares - basic

$

0.18

 

 

 

$

(0.16

)

 

$

0.33

 

 

 

$

0.52

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common shares - diluted

$

0.18

 

 

 

$

(0.16

)

 

$

0.33

 

 

 

$

0.52

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding - basic

 

6,211

 

 

 

 

6,448

 

 

 

6,205

 

 

 

 

6,442

 

Weighted-average number of common shares outstanding - diluted

 

26,083

 

 

 

 

6,448

 

 

 

26,075

 

 

 

 

6,496

 

 

Steel Connect, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Successor

 

 

Predecessor

 

Six Months Ended

January 31,

 

 

Six Months Ended

January 31,

 

 

2024

 

 

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

Net income

$

9,782

 

 

 

$

4,431

 

Adjustments to reconcile net income to cash flows from operating activities:

 

 

 

 

Depreciation

 

885

 

 

 

 

924

 

Amortization of finite-lived intangible assets

 

1,768

 

 

 

 

 

Amortization of deferred financing costs

 

 

 

 

 

24

 

Accretion of debt discount

 

 

 

 

 

1,056

 

Share-based compensation

 

297

 

 

 

 

355

 

Non-cash lease expense

 

4,479

 

 

 

 

4,488

 

Bad debt expense

 

 

 

 

 

964

 

Other (gains) losses, net

 

(898

)

 

 

 

74

 

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable, net

 

(802

)

 

 

 

2,734

 

Inventories, net

 

640

 

 

 

 

(493

)

Prepaid expenses and other current assets

 

(1,449

)

 

 

 

(1,536

)

Accounts payable and accrued expenses

 

(4,868

)

 

 

 

(1,016

)

Refundable and accrued income taxes, net

 

(510

)

 

 

 

(845

)

Other assets and liabilities

 

(2,663

)

 

 

 

(1,572

)

Net cash provided by operating activities

 

6,661

 

 

 

 

9,588

 

Cash flows from investing activities:

 

 

 

 

Purchases of investments

 

(5,519

)

 

 

 

 

Proceeds from sales of investments

 

157,468

 

 

 

 

 

Additions of property and equipment

 

(1,700

)

 

 

 

(866

)

Proceeds from the disposition of property and equipment

 

 

 

 

 

16

 

Net cash provided by (used in) investing activities

 

150,249

 

 

 

 

(850

)

Cash flows from financing activities:

 

 

 

 

Preferred dividend payments

 

(1,073

)

 

 

 

(1,074

)

Repayments on capital lease obligations

 

 

 

 

 

(38

)

Net cash used in financing activities

 

(1,073

)

 

 

 

(1,112

)

Net effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(339

)

 

 

 

1,110

 

Net increase in cash, cash equivalents and restricted cash

 

155,498

 

 

 

 

8,736

 

Cash, cash equivalents and restricted cash, beginning of period

 

123,403

 

 

 

 

58,045

 

Cash, cash equivalents and restricted cash, end of period

$

278,901

 

 

 

$

66,781

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

276,422

 

 

 

$

62,427

 

Restricted cash for funds held for clients, end of period

 

2,479

 

 

 

 

4,354

 

Cash, cash equivalents and restricted cash, end of period

$

278,901

 

 

 

$

66,781

 

 

Steel Connect, Inc. and Subsidiaries

Segment Data

(in thousands)

(unaudited)

 

 

Successor

 

 

Predecessor

 

Successor

 

 

Predecessor

 

Three Months Ended

January 31,

 

 

Three Months Ended

January 31,

 

Six Months Ended January 31,

 

 

Six Months Ended January 31,

 

 

2024

 

 

 

 

2023

 

 

 

2024

 

 

 

 

2023

 

 

(Unaudited)

Net revenue:

 

 

 

 

 

 

 

 

 

Supply Chain

$

43,045

 

 

 

$

50,781

 

 

$

84,386

 

 

 

$

102,140

 

Total segment net revenue

 

43,045

 

 

 

 

50,781

 

 

 

84,386

 

 

 

 

102,140

 

Operating income:

 

 

 

 

 

 

 

 

 

Supply Chain

 

3,065

 

 

 

 

5,388

 

 

 

5,740

 

 

 

 

11,238

 

Total segment operating income

 

3,065

 

 

 

 

5,388

 

 

 

5,740

 

 

 

 

11,238

 

Corporate-level activity

 

(1,343

)

 

 

 

(2,785

)

 

 

(2,213

)

 

 

 

(4,756

)

Total operating income

 

1,722

 

 

 

 

2,603

 

 

 

3,527

 

 

 

 

6,482

 

Total other income (expense), net

 

3,818

 

 

 

 

(3,475

)

 

 

7,120

 

 

 

 

(1,272

)

Income (loss) before income taxes

$

5,540

 

 

 

$

(872

)

 

$

10,647

 

 

 

$

5,210

 

 

Steel Connect, Inc. and Subsidiaries

Reconciliation of Non-GAAP Measures to GAAP Measures

(in thousands)

(unaudited) 

 

EBITDA and Adjusted EBITDA Reconciliations:

 

 

Successor

 

 

Predecessor

 

Successor

 

 

Predecessor

 

Three Months Ended

January 31,

 

 

Three Months Ended

January 31,

 

Six Months Ended January 31,

 

 

Six Months Ended January 31,

 

 

2024

 

 

 

 

2023

 

 

 

2024

 

 

 

 

2023

 

Net income (loss)

$

5,346

 

 

 

$

(526

)

 

$

9,782

 

 

 

$

4,431

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

(3,499

)

 

 

 

(332

)

 

 

(6,718

)

 

 

 

(476

)

Interest expense

 

249

 

 

 

 

848

 

 

 

496

 

 

 

 

1,674

 

Income tax expense (benefit)

 

194

 

 

 

 

(346

)

 

 

865

 

 

 

 

779

 

Depreciation

 

450

 

 

 

 

465

 

 

 

885

 

 

 

 

924

 

Amortization

 

893

 

 

 

 

 

 

 

1,768

 

 

 

 

 

EBITDA

 

3,633

 

 

 

 

109

 

 

 

7,078

 

 

 

 

7,332

 

 

 

 

 

 

 

 

 

 

 

Strategic consulting and other related professional fees

 

 

 

 

 

181

 

 

 

 

 

 

 

832

 

Executive severance and employee retention

 

 

 

 

 

(34

)

 

 

 

 

 

 

(150

)

Restructuring and restructuring-related expense

 

125

 

 

 

 

 

 

 

125

 

 

 

 

 

Share-based compensation

 

160

 

 

 

 

178

 

 

 

297

 

 

 

 

355

 

Loss on sale of long-lived assets

 

1

 

 

 

 

 

 

 

1

 

 

 

 

16

 

Unrealized foreign exchange losses, net

 

366

 

 

 

 

4,240

 

 

 

317

 

 

 

 

3,728

 

Other non-cash gains, net

 

(584

)

 

 

 

(43

)

 

 

(360

)

 

 

 

(201

)

Adjusted EBITDA

$

3,701

 

 

 

$

4,631

 

$

7,458

 

 

$

11,912

 

 

 

 

 

 

 

 

 

 

 

Net revenue

$

43,045

 

 

 

$

50,781

 

$

84,386

 

 

$

102,140

 

Adjusted EBITDA margin

 

8.6

%

 

 

 

9.1

%

 

 

8.8

%

 

 

 

11.7

%

Free Cash Flow Reconciliation:

 

 

Successor

 

 

Predecessor

 

Successor

 

 

Predecessor

 

Three Months Ended

January 31,

 

 

Three Months Ended

January 31,

 

Six Months Ended January 31,

 

 

Six Months Ended January 31,

 

2024

 

 

2023

 

2024

 

 

2023

Net cash provided by operating activities

$

78

 

 

 

$

1,336

 

 

$

6,661

 

 

 

$

9,588

 

Additions to property and equipment

 

(1,148

)

 

 

 

(318

)

 

 

(1,700

)

 

 

 

(866

)

Free cash flow

$

(1,070

)

 

 

$

1,018

 

 

$

4,961

 

 

 

$

8,722

 

 

Net Cash (Debt) Reconciliation:

 

 

Successor

 

January 31, 2024

 

July 31, 2023

Total debt, net

 

(12,903

)

 

 

(12,461

)

Cash and cash equivalents

 

276,422

 

 

 

121,372

 

Net cash

$

263,519

 

 

$

108,911

 

Note Regarding Use of Non-GAAP Financial Measurements

In addition to the financial measures prepared in accordance with generally accepted accounting principles, the Company uses EBITDA, Adjusted EBITDA, Free Cash Flow and Net Cash (Debt), all of which are non-GAAP financial measures, to assess its performance. EBITDA represents earnings (losses) before interest income, interest expense, income tax expense (benefit), depreciation, and amortization. We define Adjusted EBITDA as net income (loss) excluding net charges related to interest income, interest expense, income tax expense (benefit), depreciation, amortization, strategic consulting and other related professional fees, executive severance and employee retention, restructuring and restructuring-related expense, share-based compensation, (gain) loss on sale of long-lived assets, impairment of long-lived assets, unrealized foreign exchange (gains) losses, net, and other non-cash (gains) losses, net. The Company defines Free Cash Flow as net cash provided by (used in) operating activities less additions to property and equipment, and defines Net Cash (Debt) as the sum of total debt, excluding reductions for unamortized discounts and issuance costs, less cash and cash equivalents.

We believe that providing these non-GAAP measurements to investors is useful, as these measures provide important supplemental information of our performance to investors and permit investors and management to evaluate the operating performance of our business. These measures provide useful supplemental information to management and investors regarding our operating results as they exclude certain items whose fluctuation from period-to-period do not necessarily correspond to changes in the operating results of our business. We use EBITDA and Adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our Board of Directors, determining a component of certain incentive compensation for executive officers and other key employees based on operating performance, determining compliance with certain covenants in the Company's credit facilities, and evaluating short-term and long-term operating trends in our core business. We use Free Cash Flow to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a useful measure of cash flows since purchases of property and equipment are a necessary component of ongoing operations, and similar to the use of Net Cash (Debt), assists management with its capital planning and financing considerations.

We believe that these non-GAAP financial measures assist in providing an enhanced understanding of our underlying operational measures to manage our core businesses, to evaluate performance compared to prior periods and the marketplace, and to establish operational goals. Further, we believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making. These non-GAAP financial measures should not be considered in isolation or as a substitute for financial information provided in accordance with U.S. GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies.

Some of the limitations of EBITDA and Adjusted EBITDA include:

  • EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
  • EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
  • EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;
  • EBITDA and Adjusted EBITDA do not reflect historical capital expenditures or future requirements for capital expenditures or contractual commitments;
  • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
  • other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

In addition, Net Cash (Debt) assumes the Company's cash and cash equivalents can be used to reduce outstanding debt without restriction, while Free Cash Flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures and excludes the Company's remaining investing activities and financing activities, including the requirement for principal payments on the Company's outstanding indebtedness.

See reconciliations of these non-GAAP measures to the most directly comparable GAAP measures included in the financial tables of this release.

Net Operating Loss Carryforwards

The Company's Restated Certificate of Incorporation (the “Protective Amendment”) and Amended Tax Benefits Preservation Plan (the “Tax Plan”) includes provisions designed to protect the tax benefits of the Company's 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 Internal Revenue Code). The Protective Amendment generally restricts any direct or indirect transfer if the effect would be to (i) increase the direct, indirect or constructive ownership of any stockholder from less than 4.99 percent to 4.99 percent or more of the shares of common stock then outstanding or (ii) increase the direct, indirect or constructive ownership of any stockholder owning or deemed to own 4.99 percent or more of the shares of common stock then outstanding. Pursuant to the Protective Amendment, any direct or indirect transfer attempted in violation of the Protective Amendment would be void as of the date of the prohibited transfer as to the purported transferee (or, in the case of an indirect transfer, the ownership of the direct owner of the shares would terminate simultaneously with the transfer), and the purported transferee (or in the case of any indirect transfer, the direct owner) would not be recognized as the owner of the shares owned in violation of the Protective Amendment (the "excess stock") for any purpose, including for purposes of voting and receiving dividends or other distributions in respect of such shares, or in the case of options, receiving shares in respect of their exercise. 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, certain rights attached to each outstanding share of our common stock would generally become exercisable and entitle stockholders (other than the new 4.99-percent stockholder or group) to purchase additional shares of the Company at a significant discount, resulting in substantial dilution in the economic interest and voting power of the new 4.99-percent stockholder (or group). In addition, under certain circumstances in which the Company is acquired in a merger or other business combination after an non-exempt stockholder (or group) becomes a new 4.99-percent stockholder, each holder of a right (other than the new 4.99-percent stockholder or group) would then be entitled to purchase shares of the acquiring company's common stock at a discount. For further discussion of the Company's tax benefits preservation plan, please see the Company's filings with the SEC.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this release that are not historical facts are hereby identified as "forward-looking statements" for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact, including without limitation, those with respect to the Company's goals, plans, expectations and strategies set forth herein are forward-looking statements. The following important factors and uncertainties, among others, could cause actual results to differ materially from those described in these forward-looking statements: changes in the Company’s relationships with significant clients; fluctuations in demand for our products and services; the Company’s ability to achieve and sustain operating profitability; demand variability from clients without minimum purchase requirements; general economic conditions and public health crises; intense competition in the Company’s business; risks relating to impairment, misappropriation, theft and credit-related issues with respect to funds held for the Company’s clients; a decrease in our key business sectors or a reduction in consumer demand; our ability to maintain adequate inventory levels; our ability to raise or access capital in the future; difficulties increasing operating efficiencies and effecting cost savings; loss of essential employees or an inability to recruit and retain personnel; the Company's ability to execute on its business strategy and to achieve anticipated synergies and benefits from business acquisitions; risks inherent with conducting international operations, including the Company’s operations in Mainland China; the risk of damage, misappropriation or loss of the physical or intellectual property of the Company’s clients; disruptions in or breaches of the Company’s technology systems; failure to settle disputes and litigation on terms favorable to the Company; the Company's ability to preserve and monetize its net operating losses; changes in tax rates, laws or regulations; the vast majority of the voting power of our capital stock is owned and controlled by Steel Partners Holdings, L.P.; potential conflicts of interest arising from the interests of the members of the Company’s board of directors in Steel Holdings and its affiliates; risks related to the reverse/forward stock split; potential restrictions imposed by its indebtedness; and potential adverse effects from changes in interest rates. For a detailed discussion of cautionary statements and risks that may affect the Company's future results of operations and financial results, please refer to the Company's filings with the SEC, including, but not limited to, the risk factors in the Company's Annual Report on Form 10-K filed with the SEC on November 8, 2023. These filings are available on the Company's Investor Relations website under the "SEC Filings" tab.

All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations, and, therefore, you are cautioned not to place undue reliance on such statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Investor Relations Contact

Jennifer Golembeske
914-461-1276
investorrelations@steelconnectinc.com

Source: Steel Connect, Inc.

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