SEC Filing - Steel Connect, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

________________________

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-35319

_______________________

Steel Connect, Inc.

(Exact name of registrant as specified in its charter)

_______________________



Delaware (State or other jurisdiction of incorporation or organization)		04-2921333 (I.R.S. Employer Identification No.)



1601 Trapelo Road, Suite 170 Waltham, Massachusetts (Address of principal executive offices)		02451 (Zip Code)

(781) 663-5000

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report.)

_______________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	STCN	NASDAQ Global Select

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of June 1, 2019, there were 61,802,196 shares issued and outstanding of the registrant’s Common Stock, $0.01 par value per share

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STEEL CONNECT, INC.

FORM 10-Q

TABLE OF CONTENTS



		Page Number
Part I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)



	April 30, 2019			July 31, 2018
ASSETS
Cash and cash equivalents	$	20,364		$	92,138
Accounts receivable, trade, net of allowance for doubtful accounts of $468 and $480 at April 30, 2019 and July 31, 2018, respectively	113,204			99,254
Inventories, net	25,404			47,786
Restricted cash	10,070			11,688
Prepaid expenses and other current assets	33,399			13,415
Total current assets	202,441			264,281
Property and equipment, net	97,260			106,632
Goodwill	257,128			254,352
Other intangible assets, net	169,796			192,964
Other assets	8,125			8,821
Total assets	$	734,750		$	827,050
LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK & STOCKHOLDERS’ EQUITY
Accounts payable	$	83,234		$	78,212
Accrued expenses	77,713			88,426
Restricted cash	10,070			11,688
Current portion of long-term debt	5,729			5,727
Other current liabilities	43,753			42,029
Convertible Notes payable	—			50,274
Total current liabilities	220,499			276,356
Convertible Notes payable	7,022			14,256
Long-term debt, excluding current portion	369,938			383,111
Other long-term liabilities	9,707			10,507
Total long-term liabilities	386,667			407,874
Total liabilities	607,166			684,230
Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at April 30, 2019 and July 31, 2018	35,198			35,192
Stockholders’ equity:
Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at April 30, 2019 and July 31, 2018; zero shares issued and outstanding at April 30, 2019 and July 31, 2018	—			—
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 61,802,196 issued and outstanding shares at April 30, 2019; 60,742,859 issued and outstanding shares at July 31, 2018	618			608
Additional paid-in capital	7,477,234			7,467,855
Accumulated deficit	(7,387,774		)	(7,363,569		)
Accumulated other comprehensive income	2,308			2,734
Total stockholders’ equity	92,386			107,628
Total liabilities, contingently redeemable preferred stock and stockholders’ equity	$	734,750		$	827,050

See accompanying notes to unaudited condensed consolidated financial statements

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STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



	Three Months Ended April 30,						Nine Months Ended April 30,
	2019			2018			2019			2018
Net revenue	$	194,003		$	193,921		$	615,359		$	450,181
Cost of revenue	157,142			154,916			502,755			386,279
Gross profit	36,861			39,005			112,604			63,902
Operating expenses
Selling, general and administrative	27,426			29,661			81,702			72,676
Amortization of intangible assets	7,278			7,964			23,168			12,071
Gain on sale of property	—			—			(85		)	(12,692		)
Total operating expenses	34,704			37,625			104,785			72,055
Operating income (loss)	2,157			1,380			7,819			(8,153		)
Other income (expense):
Interest income	22			174			517			430
Interest expense	(10,294		)	(10,680		)	(32,335		)	(19,362		)
Other losses, net	(114		)	(692		)	(832		)	(987		)
Total other expense	(10,386		)	(11,198		)	(32,650		)	(19,919		)
Loss before income taxes	(8,229		)	(9,818		)	(24,831		)	(28,072		)
Income tax expense (benefit)	1,420			715			3,956			(71,719		)
Gains on investments in affiliates, net of tax	(22		)	(200		)	(42		)	(601		)
Net income (loss)	(9,627		)	(10,333		)	(28,745		)	44,248
Less: Preferred dividends on redeemable preferred stock	(525		)	(529		)	(1,598		)	(799		)
Net income (loss) attributable to common stockholders	$	(10,152	)	$	(10,862	)	$	(30,343	)	$	43,449
Basic net earnings (loss) per share attributable to common stockholders:	$	(0.17	)	$	(0.18	)	$	(0.50	)	$	0.75
Diluted net earnings (loss) per share attributable to common stockholders:	$	(0.17	)	$	(0.18	)	$	(0.50	)	$	0.63
Weighted average common shares used in:
Basic earnings per share	61,393			60,076			61,111			58,281
Diluted earnings per share	61,393			60,076			61,111			78,934

See accompanying notes to unaudited condensed consolidated financial statements

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STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)



	Three Months Ended April 30,						Nine Months Ended April 30,
	2019			2018			2019			2018
Net income (loss)	$	(9,627	)	$	(10,333	)	$	(28,745	)	$	44,248
Other comprehensive income (loss):
Foreign currency translation adjustment	(608		)	(1,411		)	(276		)	2,515
Net unrealized holding gain (loss) on securities, net of tax	3			(26		)	(86		)	(10		)
Pension liability adjustments, net of tax	—			—			(64		)	26
Other comprehensive gain (loss)	(605		)	(1,437		)	(426		)	2,531
Comprehensive income (loss)	$	(10,232	)	$	(11,770	)	$	(29,171	)	$	46,779

See accompanying notes to unaudited condensed consolidated financial statements

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STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

(unaudited)



	Number of Shares	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders' Equity
Balance at July 31, 2018	60,742,859	$	608	$	7,467,855		$	(7,363,569	)	$	2,734		$	107,628
Net loss	—	—		—			(28,745		)	—			(28,745		)
Effect of adoption of accounting standards	—	—		—			6,138			—			6,138
Equity portion of convertible note	—	—		8,200			—			—			8,200
Preferred dividends	—	—		—			(1,598		)	—			(1,598		)
Issuance of common stock pursuant to employee stock purchase plan and stock option exercises	13,794	—		15			—			—			15
Restricted stock grants	1,045,543	10		(10		)	—			—			—
Share-based compensation	—	—		1,174			—			—			1,174
Other comprehensive items	—	—		—			—			(426		)	(426		)
Balance at April 30, 2019	61,802,196	$	618	$	7,477,234		$	(7,387,774	)	$	2,308		$	92,386



	Number of Shares		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at July 31, 2017	55,555,973		$	556	$	7,457,051	$	(7,398,949	)	$	4,313	$	62,971
Net loss	—		—		—		44,248			—		44,248
Preferred dividends	—		—		—		(799		)	—		(799		)
Issuance of common stock pursuant to employee stock purchase plan and stock option exercises	6,703		—		3		—			—		3
Restricted stock grants	5,225,806		52				—			—		47
Restricted stock forfeitures	(49,382	)	—		—		—			—		—
Share-based compensation	—		—		9,657		—			—		9,657
Other comprehensive items	—		—		—		—			2,531		2,531
Balance at April 30, 2018	60,739,100		$	608	$	7,466,706	$	(7,355,500	)	$	6,844	$	118,658

See accompanying notes to unaudited condensed consolidated financial statements

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STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Nine Months Ended April 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(28,745	)	$	44,248
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation	16,331			11,388
Amortization of intangible assets	23,168			12,071
Amortization of deferred financing costs	703			748
Accretion of debt discount	2,741			3,230
Impairment of long-lived assets	469			—
Share-based compensation	1,174			9,657
Other (gains) losses, net	832			(13,137		)
Gains on investments in affiliates and impairments	(42		)	(601		)
Changes in operating assets and liabilities
Accounts receivable, net	(15,111		)	30,600
Inventories, net	859			16,350
Prepaid expenses and other current assets	3,548			1,483
Accounts payable and accrued expenses	(2,795		)	(32,508		)
Refundable and accrued income taxes, net	(2,059		)	9,123
Deferred tax assets and liabilities	1,563			(75,775		)
Other assets and liabilities	(6,252		)	(13,882		)
Net cash provided by (used in) operating activities	(3,616		)	2,995
Cash flows from investing activities:
Payments to acquire business	—			(469,221		)
Additions to property and equipment	(11,840		)	(13,610		)
Proceeds from the disposition of property and equipment	19			20,747
Proceeds from the sale of trading securities	—			13,775
Proceeds from investments in affiliates	42			601
Net cash used in investing activities	(11,779		)	(447,708		)
Cash flows from financing activities:
Proceeds from long-term debt	—			393,000
Proceeds from issuance of preferred stock	—			35,000
Proceeds from issuance of Convertible Note	14,940			—
Proceeds from revolving line of credit, net	10,000			6,000
Payments on maturity of Convertible Notes	(63,925		)	—
Payment of long-term debt	(13,376		)	(1,500		)
Payment of deferred financing costs	—			(1,334		)
Payment of preferred dividends	(1,598		)	(612		)
Purchase of the Company's Convertible Notes	(3,700		)	—
Repayments on capital lease obligations	(114		)	(178		)
Proceeds from issuance of common stock	15			3
Net cash provided by (used in) financing activities	(57,758		)	430,379
Net effect of exchange rate changes on cash, cash equivalents, and restricted cash	(239		)	714
Net decrease in cash, cash equivalents, and restricted cash	(73,392		)	(13,620		)
Cash, cash equivalents, and restricted cash, beginning of period	103,826			124,124
Cash, cash equivalents, and restricted cash, end of period	$	30,434		$	110,504

See accompanying notes to unaudited condensed consolidated financial statements

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STEEL CONNECT, INC. AND SUBSIDIARIES

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” or “Supply Chain“), 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 supply chain business process management company serving clients in markets such as consumer electronics, communications, computing, medical devices, software, and retail. ModusLink designs and executes elements in its clients’ global supply chains to improve speed to market, product customization, flexibility, cost, quality and service. The Company also produces and licenses an entitlement management solution for activation, provisioning, entitlement subscription and data collection from physical goods (connected products) and digital products.

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 data-driven marketing solutions for its customers. Its full range of services includes strategy, creative and execution for omnichannel marketing campaigns, along with postal logistics programs for direct mail. Through its Mail-Gard® division, IWCO Direct also offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services.

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, borrowings from lending institutions, and sale of facilities that were not fully utilized. The Company believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, mandatory debt redemptions and working capital for its existing business for at least twelve months from the date of this filing. These resources include cash and cash equivalents, a credit agreement with PNC Bank (the “Credit Agreement”) the possible securitization of European and domestic trade receivables, the revolving credit facility and cash, if any, provided by operating activities.

At April 30, 2019 and July 31, 2018, the Company had cash and cash equivalents of $20.4 million and $92.1 million, respectively. As of April 30, 2019, the Company had a deficiency in working capital which was primarily driven by the Company's $10.0 million outstanding on the revolving credit facility, accrued pricing liabilities which the Company believes will not require a cash outlay in the next twelve months and the additional liabilities assumed because of the acquisition of IWCO Direct during December 2017 (the "IWCO Acquisition"). At April 30, 2019, the Company had a readily available borrowing capacity under its revolving credit and security agreement with PNC Bank, National Association of $12.5 million. At April 30, 2019, IWCO had a readily available borrowing capacity under its revolving credit facility by and among MLGS Merger Company, Inc. (“MLGS”), Instant Web, LLC and Cerberus Business Finance, LLC of $15.0 million. Per that certain financing agreement by and among MLGS, Instant Web, LLC, IWCO and Cerberus Business Finance, LLC (the “Financing Agreement”) and the credit facilities provided thereunder, IWCO is permitted to make distributions to Steel Connect, an aggregate amount not to exceed $5.0 million in any fiscal year and pay reasonable documented expenses incurred by Steel Connect. Steel Connect is entitled to receive additional cash remittances under a “U.S. Federal Income Tax Sharing Agreement.” The Company believes it will generate sufficient cash to meet its debt covenants under the Credit Agreement and the Financing Agreement to which certain of its subsidiaries are a party and that it will be able to obtain cash through its current credit facilities and through securitization of certain trade receivables, if needed. As discussed below, the Company's 5.25% Convertible Senior Notes (the "Notes") matured on March 1, 2019, with a balance due of $65.6 million, including interest to the March 1, 2019 maturity date. The total $65.6 million balance due was paid in full by the Company from available cash on-hand and $14.9 million from the proceeds of the 7.50% Convertible Senior Note (the "SPHG Note") transaction entered into on February 28, 2019 (the "SPHG Note Transaction"). The Company’s historical operating results and working capital deficit indicate substantial doubt exists related to the Company’s ability to continue as a going concern. The Company believes that the resources it has in place and has access to, as discussed above, are probable of occurring and mitigating the substantial doubt raised by the Company’s historical operating results and satisfying the Company’s estimated liquidity needs 12 months from the issuance of the financial statements. However, the

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Company cannot predict, with certainty, the outcome of its actions to generate liquidity, including the availability of additional debt refinancing or factoring of receivables, or whether such actions would generate the expected liquidity as currently planned.


(2)	BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the year ended July 31, 2018, which are contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 4, 2018. The results for the three and nine months ended April 30, 2019 are not necessarily indicative of the results to be expected for the full fiscal year. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

All significant intercompany transactions and balances have been eliminated in consolidation.

The Company considers events or transactions that occur after the balance sheet date but before the issuance of financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. For the period ended April 30, 2019, the Company evaluated subsequent events for potential recognition and disclosure through the date these financial statements were filed.


(3)	RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606 or the new standard), 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. On August 1, 2018, the Company adopted this guidance and all the related amendments using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the Company’s assessment of the cumulative effect adjustment upon adoption. The Company recognized the cumulative effect of initially applying the new standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

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 today’s accounting. The Company expects to adopt the provisions of this guidance on August 1, 2019, using a modified retrospective transition method without restating its prior fiscal year financial statements for comparable amounts. The Company has established an implementation team that has gathered and analyzed a significant portion of our lease contracts. Our implementation efforts include reviewing existing leases and service contracts, which may include embedded leases. Based on preliminary results of the process, which has not been completed, nothing has come to our attention that would indicate that adoption of the new standard will have a material impact on our earnings or shareholders' equity. We expect that the recording of right-of-use assets and associated lease liabilities will have a significant effect on our condensed consolidated balance sheet; however, we are unable to determine an exact amount at this time. We are in the process of evaluating changes to our business processes, systems and controls needed to support recognition and disclosure under the new standard. Further, we are continuing to assess any incremental disclosures that will be required in our consolidated financial statements.

In January 2017 the FASB issued ASU 2017, Intangibles-Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The revised guidance eliminates Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit’s carry amount exceeds its fair value, not to exceed the carrying amount of goodwill. The Company has elected to early adopt this standard as of July 31, 2019, the Company’s fiscal year end. Its adoption is not expected to have an impact on the Company’s consolidated financial statements.

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In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement 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 became effective beginning in the first quarter of fiscal year 2019. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard was effective for interim and annual reporting periods beginning after December 15, 2018. We did not exercise the option to make this reclassification.


(4)	REVENUE RECOGNITION

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On August 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605.

The Company recognizes revenue from its contracts with customers primarily from the sale of supply chain management services and marketing solutions offerings. Revenue is recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For ModusLink’s supply chain management services arrangements and IWCO’s marketing solutions offerings, the goods and services are considered to be transferred over time as they are performed. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

ModusLink’s revenue primarily comes from the sale of supply chain management services to its clients. Under the new standard, the majority of these arrangements consist of two distinct performance obligations (i.e. a warehousing and inventory management service and a separate kitting, packaging and assembly service), each of which is recognized over time as services are performed using an input method based on the level of efforts expended. A significant portion of ModusLink’s revenue from these arrangements continues to be recognized over time as the services are performed based on an input method of efforts expended which corresponds with the transfer of value to the customer. For the limited population of contracts where the Company previously recognized revenues upon completion of all services and historically recognized revenue at a point in time (generally upon product shipment), the new standard accelerates the recognition of revenue as the Company’s performance enhances assets that the customer controls and therefore revenue is recognized over time based on an input method of efforts expended which corresponds with the transfer of value to the customer.

Revenue from the sale of perpetual licenses sold in ModusLink’s e-Business operations is now recognized at a point in time upon execution of the relevant license agreement and when delivery has taken place.

Revenue recognized related to the majority of IWCO’s marketing solutions offerings, which typically consist of a single integrated performance obligation, is now recognized over time as the Company performs because the products have no alternative use to the Company.

Revenue Recognition

In accordance with Topic 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services, and excludes any sales incentives or taxes collected from customers which are subsequently remitted to government authorities. To achieve this core principle, the Company applies the following five steps:

Identify the contract(s) with a customer—A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to those goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is

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probable based on the customer’s intent and ability to pay the promised consideration. The Company’s arrangements with customers are typically documented within a master services agreement (MSA) together with a statement of work (SOW) or business requirements document (BRD). Depending on the nature of the goods and/or services being provided, a contract will be created at the time that the Company and the customer have entered into an MSA and SOW or BRD, and the Company has received some form of authorization or acknowledgment from the customer as to the request for the specified services. For certain goods and/or services, a contract does not exist until the Company receives a firm order to commence the specified activities. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

Identify the performance obligations in the contract—Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.

The Company’s contracts typically do not include options that would result in a material right. If options to purchase additional goods or services are included in customer contracts, the Company evaluates the option in order to determine if the Company’s arrangement include promises that may represent a material right and needs to be accounted for as a performance obligation in the contract with the customer.

Determine the transaction price—The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Determining the transaction price requires significant judgment.

Allocate the transaction price to the performance obligations in the contract—If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price (SSP) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. The Company determines SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, the Company estimates the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.


5.	Recognize revenue when (or as) the Company satisfies a performance obligation—The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

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Disaggregation of Revenue

The following table presents the Company’s revenues disaggregated by major good or service line, timing of revenue recognition, and sales channel. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.



	Three Months Ended April 30, 2019
	Americas		Asia		Europe		Direct Marketing		e- Business		Consolidated Total
	(In thousands)
Major Goods/Service Lines
Supply chain management services	$	17,164	$	39,312	$	16,747	$	—	$	4,285	$	77,508
Perpetual software licenses	—		—		—		—		—		—
Marketing solutions offerings	—		—		—		116,006		—		116,006
Other	—		—		—		—		489		489
	$	17,164	$	39,312	$	16,747	$	116,006	$	4,774	$	194,003
Timing of Revenue Recognition
Goods transferred over time	$	—	$	—	$	—	$	116,006	$	—	$	116,006
Services transferred over time	17,164		39,312		16,747		—		4,774		77,997
	$	17,164	$	39,312	$	16,747	$	116,006	$	4,774	$	194,003
Total Revenue
Revenue from contracts with customers	$	17,164	$	39,312	$	16,747	$	116,006	$	4,774	$	194,003
	$	17,164	$	39,312	$	16,747	$	116,006	$	4,774	$	194,003

Over the three month period ended April 30, 2019, the Company had no revenue recognized at a point in time.



	Nine Months Ended April 30, 2019
	Americas		Asia		Europe		Direct Marketing		e- Business		Consolidated Total
	(In thousands)
Major Goods/Service Lines
Supply chain management services	$	51,313	$	128,123	$	56,718	$	—	$	15,146	$	251,300
Perpetual software licenses	—		—		—		—		—		—
Marketing solutions offerings	—		—		—		362,547		—		362,547
Other	—		—		—		—		1,512		1,512
	$	51,313	$	128,123	$	56,718	$	362,547	$	16,658	$	615,359
Timing of Revenue Recognition
Goods transferred over time	$	—	$	—	$	—	$	362,547	$	—	$	362,547
Services transferred over time	51,313		128,123		56,718		—		16,658		252,812
	$	51,313	$	128,123	$	56,718	$	362,547	$	16,658	$	615,359
Total Revenue
Revenue from contracts with customers	$	51,313	$	128,123	$	56,718	$	362,547	$	16,658	$	615,359
	$	51,313	$	128,123	$	56,718	$	362,547	$	16,658	$	615,359

Over the nine month period ended April 30, 2019, the Company had no revenue recognized at a point in time.

Prior period amounts have not been adjusted under the modified retrospective method.

Supply chain management services.

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ModusLink’s revenue primarily comes from the sale of supply chain management services to its clients. Amounts billed to customers under these arrangements include revenue attributable to the services performed as well as for materials procured on the customer’s behalf as part of its service to them. The majority of these arrangements consist of two distinct performance obligations (i.e. warehousing/inventory management service and a separate kitting/packaging/assembly service), revenue related to each of which is recognized over time as services are performed using an input method based on the level of efforts expended.

Perpetual software licenses.

Revenue from the sale of perpetual software licenses in the Company’s e-Business operations is recognized at a point in time upon execution of the relevant license agreement and when delivery has taken place.

Marketing solutions offerings.

IWCO’s revenue is generated through the provision of data-driven marketing solutions, primarily through providing direct mail products to customers. Revenue related to the majority of IWCO’s marketing solutions contracts, which typically consist of a single integrated performance obligation, is recognized over time as the Company performs because the products have no alternative use to the Company.

Other.

Other revenue consists of cloud-based software subscriptions, software maintenance and support service contracts, and fees for professional services. Revenue related to these arrangements is recognized on a straight-line basis over the term of the agreement or over the term of the agreement in proportion to the costs incurred in satisfying the obligations under the contract.

Significant Judgments

The Company’s contracts with customers may include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For arrangements with multiple performance obligations, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company generally determines standalone selling prices based on the prices charged to customers and uses a range of amounts to estimate standalone selling prices when we sell each of the products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative standalone selling prices of the various products and services. The Company typically has more than one range of standalone selling prices for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the type of customer and geographic region in determining the range of standalone selling prices.

The Company may provide credits or incentives to customers, which are accounted for as variable consideration when estimating the transaction price of the contract and amounts of revenue to recognize. The amount of variable consideration to include in the transaction price is estimated at contract inception using either the estimated value method or the most likely amount method based on the nature of the variable consideration. These estimates are updated at the end of each reporting period as additional information becomes available and revenue is recognized only to the extent that it is probable that a significant reversal of any amounts of variable consideration included in the transaction price will not occur.

Practical Expedients and Exemptions

The Company has elected to make the following accounting policy elections through the adoption of the following practical expedients:

Right to Invoice

Where applicable, the Company will recognize revenue from a contract with a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date and the amount to which the entity has a right to invoice.

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Sales and Other Similar Taxes

The Company will exclude sales taxes and similar taxes from the measurement of transaction price and will ensure that it complies with the disclosure requirements of ASC 235-10-50-1 through 50-6.

Significant Financing Component

The Company will not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Cost to Obtain a Contract

The Company will recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less and there are no renewal periods on which the Company does not pay commissions that are not commensurate with those originally paid.

Promised Goods or Services that are Immaterial in the Context of a Contract

The Company has elected to assess promised goods or services as performance obligations that are deemed to be immaterial in the context of a contract. As such, the Company will not aggregate and assess immaterial items at the entity level. That is, when determining whether a good or service is immaterial in the context of a contract, the assessment will be made based on the application of ASC 606 at the contract level.

Contract Balances

Timing of revenue recognition may differ from timing of invoicing to customers. The Company records contract assets and liabilities related to its contracts with customers as follows:


•	Accounts receivable when revenue is recognized prior to receipt of cash payments and if the right to such amounts is unconditional and solely based on the passage of time.

•

Contract asset when the Company recognizes revenue based on efforts expended but the right to such amount is conditional upon satisfaction of another performance obligation. Contract assets are primarily comprised of fees related to marketing solutions offerings and supply chain management services. The Company notes that its contract assets are all short-term in nature and are included in prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets.

•

Deferred revenue when cash payments are received or due in advance of performance. Deferred revenue is primarily comprised of fees related to supply chain management services, cloud-based software subscriptions and software maintenance and support service contracts, which are generally billed in advance. Deferred revenue also includes other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. The deferred revenue balance is classified as a component of other current liabilities and other long-term liabilities on the Company’s condensed consolidated balance sheets.

The opening balance of contract assets was $24.0 million as of August 1, 2018. As of April 30, 2019, the contract asset balance was $22.4 million, which is recorded as a component of prepaid expenses and other current assets. Contract assets are classified as accounts receivable, trade, upon billing to the customer where such amounts become unconditional.

The opening balance of current deferred revenue and long-term deferred revenue was $3.7 million and $0.2 million, respectively, as of August 1, 2018. As of April 30, 2019, current deferred revenue and long-term deferred revenue was $2.9 million and $0.1 million, respectively.

Changes in deferred revenue during the nine months ended April 30, 2019, were as follows (in thousands):



Nine Months Ended April 30, 2019
Balance at beginning of period	$	3,858
Deferral of revenue	3,583
Recognition of deferred amounts upon satisfaction of performance obligation	(4,415		)
Balance at end of period	$	3,026

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We expect to recognize approximately $2.9 million of the unearned amount over the twelve months ended April 30, 2020 and the remaining $0.1 million beyond April 30, 2020.

Assets Recognized from the Costs to Obtain a Contract with a Customer

Prior to the adoption of Topic 606, the Company expensed incremental costs to obtain a contract, which represented commissions, as the liability was incurred. In accordance with Topic 606, the Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the period over which such costs would be amortized is greater than one year. The Company has determined that certain commissions programs meet the requirements to be capitalized. However, as of August 1, 2018, the total commission expense that had been incurred under the commissions programs identified was not material and therefore, the Company determined that no amounts were required to be capitalized at the date of adoption. For the three and nine months ended April 30, 2019, the total commission expense that had been incurred under the commissions programs identified was not material and the Company determined that no amounts were required to be capitalized at April 30, 2019.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

The cumulative effect of the changes made to the Company’s consolidated August 1, 2018 balance sheet for the adoption of Topic 606 were as follows (in thousands):



Balance Sheet
	July 31, 2018			Adjustments Due to ASU 2014-09			August 1, 2018
Assets
Inventories, net	$	47,786		$	(21,233	)	$	26,553
Prepaid expenses and other current assets	13,415			24,041			37,456
Total current assets	264,281			2,808			267,089
Total assets	$	827,050		$	2,808		$	829,858
Liabilities
Other current liabilities	$	42,029		$	(3,330	)	$	38,699
Total current liabilities	276,356			(3,330		)	273,026
Total liabilities	684,230			(3,330		)	680,900
Stockholders’ equity
Accumulated deficit	(7,363,569		)	6,138			(7,357,431		)
Total stockholders’ equity	107,628			6,138			113,766
Total liabilities, contingently redeemable preferred stock and stockholders’ equity	$	827,050		$	2,808		$	829,858

The Company reduced opening accumulated deficit by $6.1 million as of August 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact attributable to the acceleration of revenue related to ModusLink’s supply chain management services arrangements and IWCO’s marketing solutions offerings where the Company previously recognized revenues upon completion of all services and historically recognized revenue at a point in time (generally upon product shipment or when the products were complete). The adoption of ASC 606 primarily resulted in an acceleration of revenue as of August 1, 2018, which in turn generated additional deferred tax liabilities that ultimately reduced the Company’s net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of Topic 606, this impact was offset by a corresponding reduction to the valuation allowance.

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In accordance with the requirements of the new standard, the disclosure of the impact of the adoption on the Company’s consolidated balance sheet and statement of operations was as follows (in thousands, except per share amounts):



Balance Sheet:	April 30, 2019
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/(Lower)
Assets
Inventories, net	$	25,404		$	47,950		$	(22,546	)
Prepaid expenses and other current assets	33,399			10,975			22,424
Total current assets	202,441			202,563			(122		)
Total assets	$	734,750		$	734,872		$	(122	)
Liabilities
Other current liabilities	$	43,753		$	50,811		$	(7,058	)
Total current liabilities	220,499			227,557			(7,058		)
Total liabilities	607,166			614,224			(7,058		)
Stockholders’ equity
Accumulated deficit	(7,387,774		)	(7,394,710		)	6,936
Total stockholders’ equity	92,386			85,450			6,936
Total liabilities, contingently redeemable preferred stock and stockholders’ equity	$	734,750		$	734,872		$	(122	)



Statement of Operations:	Three Months Ended April 30, 2019
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/(Lower)
Net revenue	$	194,003		$	191,514		$	2,489
Cost of revenue	157,142			155,482			1,660
Gross profit	36,861			36,032			829
Loss before income taxes	(8,229		)	(9,058		)	829
Net loss	(9,627		)	(10,456		)	829
Net loss attributable to common stockholders	$	(10,152	)	$	(10,981	)	$	829
Basic and diluted net loss per share attributable to common stockholders:	$	(0.17	)	$	(0.18	)	$	0.01

The impact to revenues for the three month period ended April 30, 2019 was an increase of $2.5 million as a result of applying Topic 606 primarily related to the acceleration of revenue related to IWCO’s marketing solutions arrangements for certain contracts with customers that under Topic 606 are being recognized over time based on an input method of efforts expended which depicts the transfer of value to the customer.



Statement of Operations:	Nine Months Ended April 30, 2019
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/(Lower)
Net revenue	$	615,359		$	613,248		$	2,111
Cost of revenue	502,755			501,442			1,313
Gross profit	112,604			111,806			798
Loss before income taxes	(24,831		)	(25,629		)	798
Net loss	(28,745		)	(29,543		)	798
Net loss attributable to common stockholders	$	(30,343	)	$	(31,141	)	$	798
Basic and diluted net loss per share attributable to common stockholders:	$	(0.50	)	$	(0.51	)	$	0.01

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The impact to revenues for the nine month period ended April 30, 2019 was an increase of $2.1 million as a result of applying Topic 606 primarily related to the acceleration of revenue related to IWCO’s marketing solutions arrangements for certain contracts with customers that under Topic 606 are being recognized over time based on an input method of efforts expended which depicts the transfer of value to the customer.


(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.

Inventories, net consisted of the following:



	April 30, 2019		July 31, 2018
	(In thousands)
Raw materials	$	22,262	$	23,208
Work-in-process	460		16,147
Finished goods	2,682		8,431
	$	25,404	$	47,786

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 Company’s 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. IWCO’s 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.


(6)	GOODWILL AND INTANGIBLE ASSETS

The Company’s goodwill of $257.1 million as of April 30, 2019 relates to the Company’s Direct Marketing reporting unit. The purchase price allocation, associated with the IWCO Acquisition during December 2017, was completed during the 12 months from the acquisition date. Related adjustments made during the nine months ended April 30, 2019 totaled $2.8 million, which primarily related to the re-evaluation of equipment that was idle as of the purchase date.

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The following table summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition:



	As Originally Reported			Adjustments			As Revised
	(In thousands)
Accounts receivable	$	47,841		$	(433	)	$	47,408
Inventory	27,165			5,829			32,994
Other current assets	7,427			3,197			10,624
Property and equipment	87,976			477			88,453
Intangible assets	210,920			2,330			213,250
Goodwill	259,085			(1,957		)	257,128
Other assets	3,040			—			3,040
Accounts payable	(31,069		)	—			(31,069		)
Accrued liabilities and other current liabilities	(35,790		)	(30,368		)	(66,158		)
Customer deposits	(7,829		)	—			(7,829		)
Deferred income taxes	(79,918		)	2,755			(77,163		)
Other liabilities	(19,627		)	18,170			(1,457		)
Total consideration	$	469,221		$	—		$	469,221

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. There were no indicators of impairment identified related to the Company’s Direct Marketing reporting unit during the three months ended April 30, 2019.

Other intangible assets, net, as of April 30, 2019, include trademarks and tradenames with a carrying balance of $11.1 million and customer relationships of $158.7 million. The trademarks and tradenames intangible asset are being amortized on a straight line basis over a 3 years estimated useful life. The customer relationship intangible asset is 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. An analysis was performed with no indicators of impairment identified for the Company’s intangible assets at April 30, 2019.


(7)	ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The following tables reflect the components of “Accrued expenses” and “Other current liabilities”:



	April 30, 2019		July 31, 2018
	(In thousands)
Accrued sales taxes	$	21,790	$	21,390
Accrued other taxes	6,432		8,414
Accrued compensation	20,113		25,603
Accrued interest	287		1,437
Accrued audit, tax and legal	3,747		3,264
Accrued contract labor	1,613		1,932
Accrued worker's compensation	5,078		6,126
Accrued other	18,653		20,260
	$	77,713	$	88,426

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	April 30, 2019		July 31, 2018
	(In thousands)
Accrued pricing liabilities	$	18,882	$	18,882
Customer postage deposits	8,857		12,638
Revolving credit facility	10,000		—
Other	6,014		10,509
	$	43,753	$	42,029

As of April 30, 2019 and July 31, 2018, the Company had accrued pricing liabilities of approximately $18.9 million. As previously reported by the Company, several principal adjustments were made to its historic financial statements for periods ending on or before January 31, 2012, the most significant of which related to the treatment of vendor rebates in its pricing policies. Where the retention of a rebate or a mark-up was determined to have been inconsistent with a client contract (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 been affected. A corresponding liability for the same amount was recorded in that period (referred to as accrued pricing liabilities). The Company believes that it may not ultimately be required to pay all or any of the accrued pricing liabilities based upon the expiration of statutes of limitations or legal relief, and due in part to the nature of the interactions with its clients. The remaining accrued pricing liabilities at April 30, 2019 will be derecognized when there is sufficient information for the Company to conclude that such liabilities are not subject to escheatment and have been extinguished, which may occur through payment, legal release, or other legal or factual determination. The Company has not provided for any provision for interest and or penalties related to escheatment as it has concluded that such is not probable to occur and any potential interest and penalties cannot be reasonably estimated.


(8)	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 Company’s issuance of $100 million of 5.25% Convertible Senior Notes (the “Notes”). As of July 31, 2018, the net carrying value of the Notes was $64.5 million. The Notes matured on March 1, 2019, with a balance due of $65.6 million, including interest to the March 1, 2019 maturity date. Included in the balance due were notes held by SPH Group Holdings LLC ("SPHG Holdings") in the principal amount of $14.9 million. The total $65.6 million balance due was paid in full by the Company from available cash on-hand, including the $14.9 million from the proceeds of the 7.50% Convertible Senior Note entered into on February 28, 2019, as described below.



	Three Months Ended April 30,				Nine Months Ended April 30,
	2019		2018		2019		2018
	(In thousands)				(In thousands)
Interest expense related to contractual interest coupon	$	286	$	914	$	1,932	$	2,741
Interest expense related to accretion of the discount	430		1,113		2,741		3,230
Interest expense related to debt issuance costs	38		99		243		286
	$	754	$	2,126	$	4,916	$	6,257

During the three months ended April 30, 2019 and 2018, the Company recognized interest expense associated with the Notes of $0.8 million and $2.1 million, respectively. During the nine months ended April 30, 2019 and 2018, the Company recognized interest expense associated with the Notes of $4.9 million and $6.3 million, respectively. The effective interest rate on the Notes, including amortization of debt issuance costs and accretion of the discount, was 13.9%.

PNC Bank Credit Facility

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The Credit Agreement had a five (5) year term which was to expire on June 30, 2019. On April 30, 2019, the Borrowers and Guarantors entered into a Second Amendment to Revolving Credit and Security Agreement (the “Second Amendment”) by and among the Borrowers, the Guarantors, the financial institutions named as parties thereto from time to time as lenders (collectively, the “Lenders”) and PNC Bank as Agent. The Second Amendment amends the Credit Agreement in order to, among other things, (i) reduce the aggregate Revolving Commitment Amounts (as defined in the Credit Agreement) of the Lenders and the related Maximum Revolving Advance Amount (as defined in the Credit Agreement) available to Borrowers under the Credit Agreement, from $50.0 million to $25.0 million, and (ii) to extend the maturity of the term under the Credit Agreement by six (6) months from June 30, 2019 to December 31, 2019. The maximum credit commitment of $25.0 million is available for letters of credit (with a sublimit of $5.0 million). The actual maximum credit available under the Credit Agreement varies from time to time and is determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable and eligible inventory minus reserves determined by the Agent (including other reserves that the Agent may establish from time to time in its permitted discretion), all as specified in the Credit Agreement.

Generally, borrowings under the Credit Agreement bear interest at a rate per annum equal to, at the Borrowers’ option, either (a) LIBOR (adjusted to reflect any required bank reserves) for an interest period equal to one, two or three months (as selected by the Borrowers) plus a margin of 2.25% per annum or (b) a base rate determined by reference to the highest of (1) the base commercial lending rate publicly announced from time to time by PNC Bank, (2) the sum of the Federal Funds Open Rate in effect on such day plus one half of one percent (0.5%) per annum, or (3) the LIBOR rate (adjusted to reflect any required bank reserves) in effect on such day plus 1.00% per annum. In addition to paying interest on outstanding principal under the Credit Agreement, the Borrowers are required to pay a commitment fee, in respect of the unutilized commitments thereunder, of 0.25% per annum, paid quarterly in arrears. The Borrowers are also required to pay a customary letter of credit fee equal to the applicable margin on revolving credit LIBOR loans and fronting fees.

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. At April 30, 2019, the Company had a readily available borrowing capacity under the Credit Agreement of $12.5 million. As of April 30, 2019 and July 31, 2018, the Company did not have any balance outstanding on the Credit Agreement.

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 IWCO’s 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 Cerberus Credit Facility has a maturity of five years. Borrowings under the Cerberus Credit Facility bear interest, at the Borrower’s 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, which commenced 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 Borrower’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for

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such calendar year. During both the three and nine months ended April 30, 2019, the Company made $8.9 million in excess cash flow payments.

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 IWCO’s 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.

At April 30, 2019, IWCO had a readily available borrowing capacity under its Revolving Facility of $15.0 million. As of April 30, 2019, the Company had $10.0 million outstanding on the Revolving Facility. As of July 31, 2018, the Company did not have an outstanding balance on the Revolving Facility. As of April 30, 2019 and July 31, 2018, the principal amount outstanding on the Term Loan was $376.6 million and $390.0 million, respectively. As of April 30, 2019 and July 31, 2018, the current and long-term net carrying value of the Term Loan was $375.7 million and $388.8 million, respectively.



	April 30, 2019			July 31, 2018
	(In thousands)
Principal amount outstanding on the Term Loan	$	376,625		$	390,000
Unamortized debt issuance costs	(958		)	(1,162		)
Net carrying value of the Term Loan	$	375,667		$	388,838

7.50% Convertible Senior Note

On February 28, 2019, the Company entered into that certain 7.50% Convertible Senior Note Due 2024 Purchase Agreement (the "SPHG Note Purchase Agreement") with SPHG Holdings, whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for a 7.50% Convertible Senior Note due 2024 (the SPHG Note)(the SPHG Note Transaction).

On February 28, 2019, the Company issued the SPHG Note in the amount of $14.9 million to SPHG Holdings. The SPHG Note bears interest at the rate of 7.50% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019. The SPHG Note will mature on March 1, 2024 (the “SPHG Note Maturity Date”), unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such maturity date.

The Company has the right to prepay the SPHG Note at any time, upon 10 days’ prior written notice, in whole or in part, without penalty or premium, at a price equal to 100% of the then outstanding principal amount of the SPHG Note plus accrued and unpaid interest. The SPHG Note is an unsecured and unsubordinated obligation of the Company, and will rank equal in right of payment with the Company’s other unsecured and unsubordinated indebtedness, but will be effectively subordinated in right of payment to any existing and future secured indebtedness and liabilities to the extent of the value of the collateral securing those obligations, and structurally subordinated to the indebtedness and other liabilities of the Company’s subsidiaries. The SPHG Note contains other customary terms and conditions, including customary events of default.

At its election, the Company may pay some or all of the interest due on each interest payment date by increasing the principal amount of the SPHG Note in the amount of such interest due or any portion thereof (such payment of interest by increasing the principal amount of the SPHG Note referred to as (“PIK Interest”), with the remaining portion of the interest due on such interest payment date (or, at the Company’s election, the entire amount of interest then due) to be paid in cash by the Company. Following an increase in the principal amount of the SPHG Note as a result of a payment of PIK Interest, the SPHG Note will bear interest on such increased principal amount from and after the date of such payment of PIK Interest.

SPHG has the right to require the Company to repurchase the SPHG Note upon the occurrence of certain fundamental changes, subject to certain conditions, at a repurchase price equal to 100% of the principal amount of the SPHG Note plus accrued and unpaid interest. The Company will have the right to elect to cause the mandatory conversion of the SPHG Note in whole, and

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not in part, at any time on or after March 6, 2022, subject to certain conditions including that the stock price of the Company exceeds a certain threshold.

SPHG has the right, at its option, prior to the close of business on the business day immediately preceding the SPHG Note maturity date, to convert the SPHG Note or a portion thereof that is $1,000 or an integral multiple thereof, into shares of common stock (if the Company has not received a required stockholder approval) or cash, shares of common stock or a combination of cash and shares of common stock, as applicable (if the Company has received a required stockholder approval), at an initial conversion rate of 421.2655 shares of common stock, which is equivalent to an initial conversion price of approximately $2.37 per share (subject to adjustment as provided in the SPHG Note) per $1,000 principal amount of the SPHG Note (the “Conversion Rate”), subject to, and in accordance with, the settlement provisions of SPHG Note.

For any conversion of the SPHG Note, if the Company is required to obtain and has not received approval from its stockholders in accordance with NASDAQ Stock Market Rule 5635 to issue 20% or more of the total shares of common stock outstanding upon conversion (including upon any mandatory conversion) of the SPHG Note prior to the relevant conversion date (or, if earlier, the 45th Scheduled trading day immediately preceding the SPHG Note Maturity Date), the Company shall deliver to the converting holder, in respect of each $1,000 principal amount of the SPHG Note being converted, a number of shares of common stock determined by reference to the Conversion Rate, together with a cash payment, if applicable, in lieu of delivering any fractional share of common stock based on the volume weighted average price (VWAP) of its common stock on the relevant conversion date, on the third Business Day immediately following the relevant conversion date.

The Company’s Board of Directors (the "Board") established a special committee (the “Special Committee”), consisting solely of independent directors not affiliated with SPHG Holdings, to review and consider a financing transaction including a transaction with SPHG. The terms and conditions of the SPHG Note Transaction were determined by the Special Committee to be fair and in the best interests of the Company, and the Special Committee recommended that the Board approve the SPHG Note Transaction and the transactions contemplated thereby. The Board approved such transactions. Warren G. Lichtenstein, our Interim Chief Executive Officer and the Executive Chairman of our Board, is also the Executive Chairman of Steel Partners Holdings GP Inc. ("Steel Holdings GP"), the manager of SPHG Holdings. Jack L. Howard and William T. Fejes, Jr., directors of the Company, are also affiliated with Steel Holdings GP. Glen Kassan, a director and our Vice Chairman of the Board and former Chief Administrative Officer, is also affiliated with Steel Holdings GP.

The Company then assessed the features of the SPHG Note and determined that the conversion features should not be bifurcated as a derivative liability, but should be accounted for under the cash conversion subsections of ASC 470.

The Company has valued the debt using similar nonconvertible debt as of the original issuance date of the SPHG Note and bifurcated the conversion option associated with the SPHG Note from the host debt instrument and recorded the conversion option of $8.2 million in stockholders’ equity. The initial value of the equity component, which reflected the equity conversion feature, was equal to the initial debt discount. The resulting debt discount on the SPHG Note is being accreted to interest expense at the effective interest rate over the estimated life of the SPHG Note. The equity component is included in the additional paid-in-capital portion of stockholders’ equity on the Company’s consolidated balance sheet. In addition, the debt issuance costs were not material. As of April 30, 2019, the if-converted value of the SPHG Note did not exceed the principal value of the SPHG Note. As of April 30, 2019, the remaining period over which the unamortized discount will be amortized is 58 months. As of April 30, 2019, the net carrying value of the SPHG Note was $7.0 million.



	April 30, 2018
	(In thousands)
Carrying amount of equity component	$	8,200

Principal amount of Note	$	14,940
Unamortized debt discount	(7,918		)
Net carrying amount	$	7,022

During both the three and nine months ended April 30, 2019, the Company recognized interest expense associated with the SPHG Note of $0.5 million which includes amortization of debt accretion.

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	Three and Nine Months Ended April 30,
	2019
	(In thousands)
Interest expense related to contractual interest coupon	$	193
Interest expense related to accretion of the discount	282
	$	475

The effective interest rate on the SPHG Note, including accretion of the discount, is 18.47%. The SPHG Note bears interest at 7.50%.


(9)	CONTINGENCIES

On April 13, 2018, a purported shareholder, Donald Reith, filed a verified complaint, Reith v. Lichtenstein, et al., 2018-0277 (Del. Ch.) in the Delaware Court of Chancery. The complaint alleges class and derivative claims for breach of fiduciary duty and/or aiding and abetting breach of fiduciary duty and unjust enrichment against the Company’s Board, Warren Lichtenstein, Glen Kassan, William T. Fejes, Jack L. Howard, Jeffrey J. Fenton, Philip E. Lengyel and Jeffrey S. Wald; and stockholders Steel Partners Holdings L.P. (“Steel Holdings”), Steel Partners, L.P., SPHG Holdings, Handy & Harman Ltd. and WHX CS Corp. (collectively, “Steel Parties”) in connection with the acquisition of $35 million of the Series C Preferred Stock by SPHG Holdings and equity grants made to Lichtenstein, Howard and Fejes on December 15, 2017 (collectively, “Challenged Transactions”). The Company is named as a nominal defendant. The complaint alleges that although the Challenged Transactions were approved by a Special Committee consisting of the independent members of the Board (Messrs. Fenton, Lengyel and Wald), the Steel Parties dominated and controlled the Special Committee, who approved the Challenged Transactions in breach of their fiduciary duty. Plaintiff alleges that the Challenged Transactions unfairly diluted shareholders and therefore unjustly enriched Steel Holdings, SPHG Holdings and Messrs. Lichtenstein, Howard and Fejes. The complaint also alleges that the Board made misleading disclosures in the Company’s proxy statement for the 2017 meeting in connection with seeking approval to amend the 2010 Incentive Award Plan to authorize the issuance of additional shares to accommodate certain shares underlying the equity grants. Remedies requested include rescission of the Series C Convertible Preferred Stock and equity grants, disgorgement of any unjustly obtained property or compensation, attorneys’ fees and costs and monetary damages.

On June 18, 2018, defendants moved to dismiss the complaint for failure to plead demand futility and failure to state a claim. The motions are fully briefed, and argument was held March 5, 2019. On March 5, 2019, the Court of Chancery heard oral argument on (i) the motion to dismiss the Reith complaint and (ii) Ladjevardian’s (see below) motion to intervene and stay. The Court took the motion to dismiss under advisement. Discovery is stayed pending a decision on the motions to dismiss. Because the litigation is at an early stage and motions to dismiss are pending, we are unable at this time to provide a calculation of potential damages or litigation loss that is probable or estimable. Although there can be no assurance as to the ultimate outcome, the defendants believe they have meritorious defenses and intend to defend this litigation vigorously.

On January 18, 2019, Mohammad Ladjevardian, a purported shareholder, filed a verified complaint pursuant to 8 Del. C. § 220. The complaint seeks previously demanded books and records concerning the matters in Ladjevardian’s letters dated January 29, 2018, and August 21, 2018. The complaint does not seek money damages, but does request an award of reasonable attorneys’ fees and costs incurred in pursuing the action. Steel Connect filed an answer on February 7, 2019. On February 20, 2019, the Court entered a scheduling order. Trial in this matter is scheduled for June 26, 2019. Ladjevardian moved to intervene in the Reith matter. On March 5, 2019, the Court took the motion under advisement and denied Ladjevardian’s motion to intervene. On March 13, 2019, the court entered an order staying the case indefinitely pending a decision on the motions to dismiss in the case captioned Donald Reith, v. Lichtenstein, et al.


(10)	STOCKHOLDERS’ EQUITY

Preferred Stock

The Company’s 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

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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 Company’s preferred stock so issued may have priority over its common stock with respect to dividend, liquidation and other rights. The Company’s Board 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 SPHG Holdings, pursuant to which the Company issued 35,000 shares of the Company’s newly created Series C Convertible Preferred Stock, par value $0.01 per 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 “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 Company’s 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 Company’s Common Stock exceeds 170% of the conversion price for at least five consecutive trading days (subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), the Company has the right to require each holder of Preferred Stock to convert all, or any whole number, of shares of the Preferred Stock into Common Stock.

Upon the occurrence of certain triggering events such as a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or the merger or consolidation of the Company or significant subsidiary, or the sale of substantially all of the assets or capital stock of the Company or a significant subsidiary, the holders of the Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets or funds of the Company to the holders of other equity or equity equivalent securities of the Company other than the Preferred Stock by reason of their ownership thereof, an amount per share in cash equal to the sum of (i) 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.

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 Holdings GP, which controls the power to vote and dispose of the securities held by SPHG Holdings and its affiliates.

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Common Stock

Each holder of the Company’s 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 Company’s Board 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 Company’s 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 Company’s 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 Company’s common stock.

The following tables reflect the changes in stockholders' equity for the three months ended April 30, 2019 and 2018 (in thousands):



	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders' Equity
Balance at January 31, 2019	61,797,807	$	618	$	7,468,628	$	(7,377,622	)	$	2,913		$	94,537
Net loss	—	—		—		(9,627		)	—			(9,627		)
Equity portion of convertible note	—	—		8,200		—			—			8,200
Preferred dividends	—	—		—		(525		)	—			(525		)
Issuance of common stock pursuant to employee stock purchase plan and stock option exercises	4,389	—		2		—			—			2
Share-based compensation	—	—		404		—			—			404
Other comprehensive items	—	—		—		—			(605		)	(605		)
Balance at April 30, 2019	61,802,196	$	618	$	7,477,234	$	(7,387,774	)	$	2,308		$	92,386

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	Number of Shares	Common Stock		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders' Equity
Balance at January 31, 2018	60,205,946	$	603	$	7,464,451		$	(7,344,638	)	$	8,281		$	128,697
Net loss	—	—		—			(10,333		)	—			(10,333		)
Preferred dividends	—	—		—			(529		)	—			(529		)
Issuance of common stock pursuant to employee stock purchase plan and stock option exercises	4,258	—		—			—			—			—
Restricted stock grants	528,896	5		(5		)	—			—			—
Share-based compensation	—	—		2,260			—			—			2,260
Other comprehensive items	—	—		—			—			(1,437		)	(1,437		)
Balance at April 30, 2018	60,739,100	$	608	$	7,466,706		$	(7,355,500	)	$	6,844		$	118,658


(11)	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,
	2019			2018			2019			2018
	(In thousands)
Foreign currency exchange losses	$	(33	)	$	720		$	(601	)	$	(1,351	)
Gains, net on trading securities	—			—			—			1,876
Other, net	(81		)	(1,412		)	(231		)	(1,512		)
	$	(114	)	$	(692	)	$	(832	)	$	(987	)

The Company recorded an immaterial amount of foreign exchange losses during the three months ended April 30, 2019 and 2018, respectively. The Company recorded foreign exchange gains of approximately $0.7 million during the three months ended April 30, 2018. For the three months ended April 30, 2019, the net losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $1.0 million, $(0.2) million and $(0.8) million in Corporate, e-Business and Europe, respectively. For the three months ended April 30, 2018, the net losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $1.4 million, and $(0.6) million in Corporate and Europe, respectively.

The Company recorded foreign exchange losses of approximately $(0.6) million and $(1.4) million during the nine months ended April 30, 2019 and 2018, respectively. For the nine months ended April 30, 2019, the net losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $1.6 million, $(0.5) million, $(1.4) million and $(0.4) million in Corporate, Asia, Europe and e-Business, respectively. For the nine months ended April 30, 2018, the net losses primarily related to realized and unrealized gains (losses) from foreign currency exposures and settled transactions of approximately $(0.8) million, $0.4 million and $(1.0) million in Corporate, Europe and Asia, respectively.

During the nine months ended April 30, 2018, the Company recognized $1.9 million in net cash gains associated with its trading securities.


(12)	INCOME TAXES

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The Company operates in multiple taxing jurisdictions, both within and outside of the United States. For the nine months ended April 30, 2019, the Company was profitable in certain jurisdictions, resulting in an income tax expense using enacted rates in those jurisdictions. As of April 30, 2019, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $1.7 million. As of July 31, 2018, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $1.6 million.

Uncertain Tax Positions

In accordance with the Company’s 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 both April 30, 2019 and July 31, 2018, the liabilities for interest expense related to uncertain tax positions were $0.1 million. The Company has accrued $0.1 million for penalties related to income tax positions. 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, 2018. To the extent the Company has tax attribute carryforwards, the tax year in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period. In addition, a number of tax years remain subject to examination by the appropriate government agencies for certain countries in the Europe and Asia regions. In Europe, the Company’s 2009 through 2017 tax years remain subject to examination in most locations, while the Company’s 2005 through 2017 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 Company’s 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 corporation’s securities over a rolling three-year period.

Tax Benefits Preservation Plan

On March 6, 2018, the Board, subject to approval by the Company’s stockholders, approved an amendment to the Company’s Restated Certificate of Incorporation 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 Code) (the “Protective Amendment”). The Protective Amendment was approved and adopted by the Company’s stockholders at the 2017 Meeting and was filed with the Secretary of State of the State of Delaware on April 12, 2018.

The Company had net operating loss carryforwards for federal and state tax purposes of approximately $2.1 billion and $150.6 million, respectively, as of April 30, 2019. The Company’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 the Company 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 the Company is acquired in a merger or other business combination after an non-exempt stockholder (or

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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 company’s 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 Company’s next annual meeting or special meeting of stockholders are certified (which date will be no later than January 18, 2019 - the annual meeting or special meeting of stockholders did not take place prior to this date ), 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.


(13)	EARNINGS (LOSS) 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, 2019 and 2018:



	Three Months Ended April 30,						Nine Months Ended April 30,
	2019			2018			2019			2018
	(In thousands, except per share data)
Net income (loss)	$	(9,627	)	$	(10,333	)	$	(28,745	)	$	44,248
Less: Preferred dividends on redeemable preferred stock	(525		)	(529		)	(1,598		)	(799		)
Net income (loss) attributable to common stockholders	(10,152		)	(10,862		)	(30,343		)	43,449
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	$	(10,152	)	$	(10,862	)	$	(30,343	)	$	49,485
Weighted average common shares outstanding	61,393			60,076			61,111			58,281
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	61,393			60,076			61,111			78,934
Basic net earnings (loss) per share attributable to common stockholders:	$	(0.17	)	$	(0.18	)	$	(0.50	)	$	0.75
Diluted net earnings (loss) per share attributable to common stockholders:	$	(0.17	)	$	(0.18	)	$	(0.50	)	$	0.63

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, 2019, approximately 22.5 million and 19.6 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, 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.


(14)	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, 2019 and 2018, which was allocated as follows:

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	Three Months Ended April 30,				Nine Months Ended April 30,
	2019		2018		2019		2018
	(In thousands)
Cost of revenue	$	—	$	1	$	—	$	13
Selling, general and administrative	404		2,259		1,174		9,644
	$	404	$	2,260	$	1,174	$	9,657

During December 2017, the Board, upon the recommendation of the Special Committee and the Human Resources and Compensation Committee of the Board, 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, 2019, there was an immaterial amount unrecognized compensation cost related to stock options issued under the Company’s plans. At April 30, 2019, there was approximately $0.5 million of total unrecognized compensation cost related to non-vested share-based compensation awards under the Company’s plans.


(15)	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 stockholder’s equity in the accompanying condensed consolidated balance sheets.

Accumulated other comprehensive items consist of the following:



	Foreign currency items			Pension items			Unrealized gains (losses) on securities			Total
	(In thousands)
Accumulated other comprehensive income (loss) at July 31, 2018	$	6,348		$	(3,795	)	$	181		$	2,734
Foreign currency translation adjustment	(276		)	—						(276		)
Net unrealized holding loss on securities	—			—			(86		)	(86		)
Pension liability adjustments	—			(64		)	—			(64		)
Net current-period other comprehensive loss	(276		)	(64		)	(86		)	(426		)
Accumulated other comprehensive income (loss) at April 30, 2019	$	6,072		$	(3,859	)	$	95		$	2,308


(16)	SEGMENT INFORMATION

The Company has five operating segments: Americas; Asia; Europe; Direct Marketing; and e-Business. Based on the information provided to the Company’s 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. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance, share-based compensation and acquisition costs which are not allocated to the Company’s reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, notes payables and other assets and liabilities which are not identifiable to the operations of the Company’s operating segments. All significant intra-segment amounts have been eliminated.

Management evaluates segment performance based on segment net revenue, 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 Company’s core operations.

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Summarized financial information of the Company’s continuing operations by operating segment is as follows:



	Three Months Ended April 30,						Nine Months Ended April 30,
	2019			2018			2019			2018
	(In thousands)
Net revenue:
Americas	$	17,164		$	13,061		$	51,313		$	41,664
Asia	39,312			31,820			128,123			111,622
Europe	16,747			22,942			56,718			99,225
Direct Marketing	116,006			120,646			362,547			180,178
e-Business	4,774			5,452			16,658			17,492
	$	194,003		$	193,921		$	615,359		$	450,181
Operating income (loss):
Americas	$	(1,733	)	$	(2,032	)	$	(5,752	)	$	(6,518	)
Asia	3,366			1,903			13,861			21,795
Europe	(1,154		)	(1,770		)	(3,980		)	(8,089		)
Direct Marketing	5,308			9,917			16,770			5,965
e-Business	(1,195		)	(1,646		)	(3,304		)	(4,437		)
Total Segment operating income (loss)	4,592			6,372			17,595			8,716
Corporate-level activity	(2,435		)	(4,992		)	(9,776		)	(16,869		)
Total operating income (loss)	2,157			1,380			7,819			(8,153		)
Total other expense	(10,386		)	(11,198		)	(32,650		)	(19,919		)
Loss before income taxes	$	(8,229	)	$	(9,818	)	$	(24,831	)	$	(28,072	)

For the nine months ended April 30, 2018, the net revenue and operating loss associated with Direct Marketing is for the period from December 15, 2017 to April 30, 2018. For this period, the Direct Marketing operating loss includes certain purchase accounting adjustments associated with the IWCO acquisition.



	April 30, 2019		July 31, 2018
	(In thousands)
Total assets:
Americas	$	23,236	$	22,820
Asia	46,562		44,322
Europe	37,351		37,223
Direct Marketing	601,602		642,820
e-Business	12,256		15,758
Sub-total—segment assets	721,007		762,943
Corporate	13,743		64,107
	$	734,750	$	827,050

Summarized financial information of the Company’s net revenue from external customers by group of services is as follows:



	Three Months Ended April 30,				Nine Months Ended April 30,
	2019		2018		2019		2018
	(In thousands)
Supply chain services	$	73,223	$	67,823	$	236,154	$	252,511
e-Business services	4,774		5,452		16,658		17,492
Direct Marketing	116,006		120,646		362,547		180,178
	$	194,003	$	193,921	$	615,359	$	450,181

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As of April 30, 2019, approximately $92.3 million of the Company’s long-lived assets were located in the U.S.A. As of July 31, 2018, approximately $101.8 million of the Company’s long-lived assets were located in the U.S.A.

For the three months ended April 30, 2019, the Company’s net revenues within U.S.A., China and Netherlands were $133.8 million, $32.2 million and $11.5 million, respectively. For the three months ended April 30, 2018, the Company’s net revenues within U.S.A., China and Netherlands were $129.3 million, $24.3 million and $13.3 million, respectively.

For the nine months ended April 30, 2019, the Company’s net revenues within U.S.A., China and Netherlands were $416.2 million, $106.8 million and $40.9 million, respectively. For the nine months ended April 30, 2018, the Company’s net revenues within U.S.A., China and Netherlands were $216.8 million, $87.3 million and $45.1 million, respectively.


(17)	RELATED PARTY TRANSACTIONS

As of April 30, 2019, SPHG Holdings and its affiliates beneficially owned approximately 52.6% of our outstanding capital stock which includes restricted stock held by Warren G. Lichtenstein, our Interim Chief Executive Officer and the Executive Chairman of our Board, and also the Executive Chairman of Steel Holdings GP. Glen Kassan, a director and our Vice Chairman of the Board and former Chief Administrative Officer, is also affiliated with Steel Holdings GP. Jack L. Howard and William T. Fejes, Jr., directors of the Company, are also affiliated with Steel Holdings GP.

SPHG Note Transaction

On February 28, 2019, the Company entered into that certain the SPHG Note Purchase Agreement with SPHG Holdings, whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for a 7.50% Convertible Senior Note due 2024.

As of July 31, 2018, SPHG held $14.9 million principal amount of the Company’s 5.25% Convertible Senior Notes. The Notes matured on March 1, 2019, with a balance due of $65.6 million, including interest to the March 1, 2019 maturity date. The total $65.6 million balance due was paid in full by the Company from available cash on-hand and $14.9 million from the proceeds of the SPHG Note Transaction (see note 8).

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 Company’s newly created Series C Convertible Preferred Stock, par value $0.01 per share, to SPHG Holdings at a price of $1,000 per share, for an aggregate purchase consideration of 35.0 million. The terms, rights, obligations and preferences of the Series C Preferred Stock are set forth in a Certificate of Designations, Preferences and Rights of the Series C Convertible Preferred Stock of the Company, which has been filed with the Secretary of State of the State of Delaware.

The Preferred Stock Transaction was approved and recommended to the Board by the Special Committee of the Board. 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

On September 1, 2017, the Company entered into a Third Amendment to the Management Services Agreement, with Steel Services Ltd. (“Steel Services”) a related party, 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 months ended April 30, 2019 and 2018 were $0.3 million and $0.7 million, respectively. Total expenses incurred related to this agreement for the nine months ended April 30, 2019 and 2018 were $1.0

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million and $1.5 million, respectively. As of April 30, 2019 and July 31, 2018, amounts due to Steel Services were $0.1 million and $0.2 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). 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.

Mutual Securities, Inc. (“Mutual Securities”) serves as the broker and record-keeper for all the transactions associated with the trading securities. Mr. Howard, a director of the Company, 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, 2019 and 2018, Mutual Securities received an immaterial amount in commissions associated with these transactions.


(18)	FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES

ASC Topic 820 provides that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets

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, restricted cash, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the short maturity of these instruments. We believe that the carrying value of our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. 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 Company’s 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 Company’s financial assets measured at fair value on a recurring basis as of April 30, 2019 and July 31, 2018, classified by fair value hierarchy:



			Fair Value Measurements at Reporting Date Using
(In thousands)	April 30, 2019		Level 1		Level 2		Level 3
Assets:
Money market funds	$	365	$	365	$	—	$	—

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			Fair Value Measurements at Reporting Date Using
(In thousands)	July 31, 2018		Level 1		Level 2		Level 3
Assets:
Money market funds	$	47,186	$	47,186	$	—	$	—

There were no transfers between Levels 1, 2 or 3 during any of the periods presented.

When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

The Company reviews the carrying amounts of these assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount of the asset group or reporting unit is not recoverable and exceeds its fair value. The Company estimated the fair values of assets subject to impairment based on the Company’s own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available.

Fair Value of Financial Instruments

The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, customer deposits, accounts payable, restricted cash and debt, and are reflected in the financial statements at cost. With the exception of the SPHG Note, 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 the liability component of the SPHG Note and our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates.

Included in cash and cash equivalents in the accompanying balance sheet are money market funds. These are valued at quoted market prices in active markets.

The following table presents the Company’s Notes payable which were not carried at fair value:



	July 31, 2018
	Carrying Amount		Fair Value		Fair Value Hierarchy

Notes payable	$	64,530	$	66,658	Level 1

The fair value of the Company’s Notes payable represented the value at which its lenders could trade its debt within the financial markets, and did not represent the settlement value of these 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 were traded and their fair values were based upon traded prices as of the reporting dates.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The matters discussed in this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended that involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in Part II—Item 1A below and elsewhere in this report and the risks discussed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on December 4, 2018. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof, except as required by applicable securities laws and regulations.

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The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview

Steel Connect, Inc. (“Steel Connect” or the “Company”) is a diversified holding company with two wholly-owned subsidiaries, ModusLink Corporation (“ModusLink”) and IWCO Direct Holdings, Inc. (“IWCO” or “IWCO Direct”), that have market-leading positions in supply chain management and direct marketing.

ModusLink provides comprehensive physical and digital supply chain optimization services (the “Supply Chain business”) that are designed to improve clients’ revenue, cost, sustainability and customer experience objectives. We provide services to leading companies across a wide spectrum of industries, including consumer electronics, communications, computing, medical devices, software, and retail, among others. The Supply Chain business operations are supported by a global footprint that includes more than 20 sites across North America, Europe, and the Asia Pacific region.

We operate an integrated physical and digital supply chain system infrastructure that extends from front-end order management through distribution and returns management. This end-to-end solution enables clients to link supply and demand in real-time, improve visibility and performance throughout the supply chain, and provide real-time access to information for greater collaboration and making informed business decisions. We believe that our clients can benefit from our global integrated business solution, especially given the increased usage of connected devices and digitalized solutions.

Historically, a significant portion of our revenue from our Supply Chain business has been generated from clients in the computer and software markets. These markets, while large in size, are mature and, as a result, gross margins in these markets tend to be lower than other markets the Company operates in. To address this, in addition to the computer and software markets, we have expanded our sales focus to include additional markets such as communications and consumer electronics, with a long-term focus on expanding in growth industries, such as the connected home, and connected healthcare, among others. We believe these markets, and other verticals we operate in, may experience faster growth than our historical markets, and represent opportunities to realize higher gross margins on the services we offer. Companies in these markets often have significant need for a supply chain partner who will be an extension to their business models. We believe the scope of our service offerings, including value-added warehousing and distribution, repair and recovery, aftersales, returns management, financial management, entitlement management, contact center support, material planning and factory supply, and e-Business will increase the overall value of the supply chain solutions we deliver to our existing clients and to new clients.

As a large portion of the Supply Chain business’ revenue comes from outsourcing services provided to clients such as retail products and consumer electronics companies, our operating performance has been and may continue to be adversely affected by declines in the overall performance within these sectors and uncertainty affecting the world economy. In addition, the drop in consumer demand for products of certain clients has had and may continue to have the effect of reducing our volumes and adversely affecting our revenue, gross margin and overall operating performance. Additionally, the markets for our supply chain services are generally very competitive, though we believe we have a compelling and differentiated offering due to the value-added services we provide, our commitment to client management, and our global reach. We also face pressure from our clients to continually realize efficiency gains in order to help our clients maintain their profitability objectives. Increased competition and client demands for efficiency improvements may result in price reductions, reduced gross margins and, in some cases, loss of market share. In addition, our profitability varies based on the types of services we provide and the regions in which we perform them. Therefore, the mix of revenue derived from our various services and locations can impact our gross margin results. Also, form factor changes, which we describe as the reduction in the amount of materials and product components used in our clients’ completed packaged product, can also have the effect of reducing our revenue and gross margin opportunities. As a result of these competitive and client pressures the gross margins in our supply chain business are low.

Many of the Supply Chain’s business’ clients products are subject to seasonal consumer buying patterns. As a result, the services we provide to our clients are also subject to seasonality, with higher revenue and operating income typically being realized from handling our clients’ products during the first half of our fiscal year, which includes the holiday selling season.

As a leading provider of data-driven direct marketing solutions, IWCO Direct’s products and services help clients create more effective marketing offers and communications across all marketing channels to create new and more loyal customers. With a nearly 50-year legacy of printing and mailing services, the Company’s full range of expanded marketing services includes strategy, creative, and execution for omnichannel marketing campaigns, along with one of the industry’s most sophisticated postal logistics strategies for direct mail. Through Mail-Gard®, IWCO Direct offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services.

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IWCO Direct’s services include (a) development of direct mail and omnichannel marketing strategies (b) creative services to design direct mail, email, and online marketing (c) printing and compiling of direct mail pieces into envelopes ready for mailing (d) commingling services to sort mail produced for various customers, by destination to achieve optimized postal savings (e) and business continuity and disaster recovery services for critical communications to protect against unexpected business interruptions. The major markets served by IWCO Direct include financial services, Multiple-System Operations (MSO) (cable or direct-broadcast satellite TV systems), insurance and to a lesser extent subscription/services, healthcare, travel/hospitality and other. Direct mail is a critical piece of marketing for most of its current customers who use direct mail to acquire new customers. Management believes that direct mail will remain an important part of its customer’s budgets for the foreseeable future, based on its proven ability to enhance results when used as part of an omnichannel marketing strategy.

The printing, mailing, and marketing services industries are highly competitive and are expected to remain so. The printing industry has more than 40,000 companies in the U.S. and IWCO Direct is the largest printer in the direct mail category, according to the December 2017 PI 400, an annual ranking of all printers by industry trade publication, Printing Impressions. While the printing industry as a whole is experiencing a shift from paper-based to digital content, direct mail continues to drive the highest response rate for campaigns designed to acquire new customers, according to the Data and Marketing Association’s (DMA) 2018 Response Rate Report. IWCO Direct is expanding its services to provide omnichannel marketing solutions to leverage its leadership role in acquisition marketing for direct mail to include digital marketing campaigns that complement direct mail to drive a higher response across all channels. Significant downward pricing pressure, a significant shift from paper-based to digital marketing for acquisition marketing, availability of paper and price increases for this raw material, the ability to acquire and retain a skilled work force and/or regulatory issues that impact use of consumer data for marketing could adversely affect IWCO Direct’s earnings. IWCO Direct’s business is not typically subject to seasonal buying patterns.

IWCO is ISO/IEC 27001 Information Security Management System (ISMS) certified through BSI, reflecting its commitment to data security. IWCO recently announced three honors were awarded to its team members underscoring their accomplishments in creative design and commitment to safety. 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.

Management evaluates operating performance based on net revenue, operating income (loss) and net income (loss) and a measure that we refer to as Adjusted EBITDA, defined as net income (loss) excluding net charges related to interest income, interest expense, income tax expense, depreciation, amortization of intangible assets, strategic consulting and other related professional fees, executive severance and employee retention, restructuring, non-cash charge related to a fair value step-up to work-in-process inventory, share-based compensation, impairment, unrealized foreign exchange gains and losses, net, other non-operating gains and losses, net, and gains and losses on investments in affiliates and impairments. Among the key factors that will influence our performance are successful execution and implementation of our strategic initiatives, global economic conditions, especially in the technology sector, financial services, MSO and insurance.

We have developed plans and will continue to monitor plans to address process improvements and realize other efficiencies throughout our global footprint with a goal to reduce cost, remove waste and improve our overall gross margins. There can be no assurance that these actions will improve gross margins. For the three months ended April 30, 2019 and 2018, our gross margin percentage was 19.0% and 20.1%, respectively. Increased competition as well as industry consolidation and/or low demand for our clients’ products and services may hinder our ability to maintain or improve our gross margins, profitability and cash flows. We must continue to focus on margin improvement, through implementation of our strategic initiatives, cost reductions and asset and employee productivity gains in order to improve the profitability of our business and maintain our competitive position. We generally manage margin and pricing pressures in several ways, including efforts to target new markets, expand and enhance our service offerings, improve the efficiency of our processes and to lower our infrastructure costs. We seek to lower our cost to service clients by moving work to lower-cost venues, consolidating and leveraging our global facility footprint, drive process and efficiency reforms and other actions designed to improve the productivity of our operations.

Historically, a limited number of key clients had accounted for a significant percentage of our revenue. For the three months ended April 30, 2019, the Company’s ten largest clients accounted for approximately 50.9% of consolidated net revenue. One client from the computing market accounted for more than 10% of the Company’s consolidated net revenue for the three months ended April 30, 2019. In general, we do not have any agreements which obligate any client to buy a minimum amount of services from us or designate us as an exclusive service provider. Consequently, our net revenue is subject to demand variability by our clients. The level and timing of orders placed by our clients vary for a variety of reasons, including seasonal buying by end-users, the introduction of new technologies and general economic conditions. By diversifying into new markets and improving the operational support structure for our clients, we expect to offset the adverse financial impact such factors may bring about.

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For the three months ended April 30, 2019, the Company reported net revenue of $194.0 million, operating income of $2.2 million, loss before income taxes of $(8.2) million, and net loss of $(9.6) million. For the nine months ended April 30, 2019, the Company reported net revenue of $615.4 million, operating income of $7.8 million, loss before income taxes of $(24.8) million and net loss of $(28.7) million. For the three months ended April 30, 2018, the Company reported net revenue of $193.9 million, operating income of $1.4 million, loss before income taxes of $(9.8) million and net loss of $(10.3) million. For the nine months ended April 30, 2018, the Company reported net revenue of $450.2 million, operating loss of $(8.2) million, loss before income taxes of $(28.1) million and net income of $44.2 million. At April 30, 2019, we had cash and cash equivalents of $20.4 million, and working capital of $(18.1) million.

Basis of Presentation

The Company presents its financial information in accordance with accounting principles generally accepted in the United States, U.S. GAAP (or “GAAP”). The Company has five operating segments: Americas; Asia; Europe; Direct Marketing; and e-Business. Based on the information provided to the Company’s chief operating decision-maker 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. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance, share-based compensation and acquisition costs which are not allocated to the Company’s reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, notes payables and other assets and liabilities which are not identifiable to the operations of the Company’s operating segments.

All significant intercompany transactions and balances have been eliminated in consolidation.

Results of Operations

Three months ended April 30, 2019 compared to the three months ended April 30, 2018

Net Revenue:



	Three Months Ended April 30, 2019		As a % of Total Net Revenue		Three Months Ended April 30, 2018		As a % of Total Net Revenue		$ Change			% Change
	(In thousands)
Americas	$	17,164	8.8	%	$	13,061	6.7	%	$	4,103		31.4	%
Asia	39,312		20.3	%	31,820		16.4	%	7,492			23.5	%
Europe	16,747		8.6	%	22,942		11.8	%	(6,195		)	(27.0	)%
Direct Marketing	116,006		59.8	%	120,646		62.2	%	(4,640		)	(3.8	)%
e-Business	4,774		2.5	%	5,452		2.8	%	(678		)	(12.4	)%
Total	$	194,003	100.0	%	$	193,921	100.0	%	$	82		—	%

Net revenue increased by approximately $0.1 million during the three months ended April 30, 2019, as compared to the same period in the prior year, primarily driven by an increase in revenue associated with a client in the computing market, offset by decreased revenues from clients in the consumer electronics industry. Fluctuations in foreign currency exchange rates had an insignificant impact on net revenues for the quarter ended April 30, 2019 as compared to the same period in the prior year.

During the three months ended April 30, 2019, net revenue in the Americas region increased by approximately $4.1 million. This increase in net revenue was primarily driven by clients in the computing market, offset partially by a decrease in revenue from clients in the consumer electronics market. Within the Asia region, the net revenue increase of approximately $7.5 million primarily resulted from higher revenues from programs in the computing and consumer electronics markets, offset partially by lower revenues from other clients in the consumer electronics industries. Within the Europe region, net revenue decreased by approximately $(6.2) million primarily due to a client loss in the consumer electronics industry. The loss of this client did not have a significant negative affect on income from operations. Within the Direct Marketing, net revenue decreased by approximately $(4.6) million primarily due to lower volumes partially offset by an increase in the average price per package mailed. Net revenue for e-Business decreased by $(0.7) million, primarily due to a client loss in the consumer electronics industry.

Cost of Revenue:

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	Three Months Ended April 30, 2019		As a % of Segment Net Revenue		Three Months Ended April 30, 2018		As a % of Segment Net Revenue		$ Change			% Change
	(In thousands)
Americas	$	17,457	101.7	%	$	13,572	103.9	%	$	3,885		28.6	%
Asia	32,033		81.5	%	26,062		81.9	%	5,971			22.9	%
Europe	15,573		93.0	%	21,958		95.7	%	(6,385		)	(29.1	)%
Direct Marketing	87,777		75.7	%	88,045		73.0	%	(268		)	(0.3	)%
e-Business	4,302		90.1	%	5,279		96.8	%	(977		)	(18.5	)%
Total	$	157,142	81.0	%	$	154,916	79.9	%	$	2,226		1.4	%

Cost of revenue consists primarily of expenses related to the cost of materials purchased in connection with the provision of supply chain management and direct marketing services as well as costs for salaries and benefits, contract labor, consulting, paper for direct mailing, fulfillment and shipping, and applicable facilities costs. Cost of revenue for the three months ended April 30, 2019 included materials procured on behalf of our supply-chain clients of $45.3 million, as compared to $40.7 million for the same period in the prior year, a decrease of $4.6 million. Total cost of revenue increased by $2.2 million for the three months ended April 30, 2019, as compared to the same period in the prior year, primarily due to material costs associated with higher volumes for a client in the computing market, offset by lower labor costs. Gross margin percentage for the current quarter decreased to 19.0% from 20.1% in the prior year quarter, primarily due to customer mix and an increase in material and labor costs in the Direct Marketing segment. For the three months ended April 30, 2019, the Company’s gross margin percentages within the Americas, Asia, Europe and Direct Marketing segments were (1.7)%, 18.5%, 7.0% and 24.3%, respectively, as compared to gross margin percentages within the Americas, Asia, Europe and Direct Marketing segments of (3.9)%, 18.1%, 4.3% and 27.0%, respectively, for the same period of the prior year. Fluctuations in foreign currency exchange rates had an insignificant impact on gross margin for the quarter ended April 30, 2019.

In the Americas, the 2.2 percentage point improvement in gross margin, from (3.9)% to (1.7)%, was primarily due to lower fixed costs associated with a site closure and improved product mix. In Asia, the 0.4 percentage point increase in gross margin, from 18.1% to 18.5%, was primarily due to product mix. In Europe, the 2.7 percentage point increase in gross margin, from 4.3% to 7.0%, was primarily attributable to a decline in the cost of materials associated with a client loss in the consumer electronics industry. Direct Marketing’s gross margins decreased by 2.7 percentage points, from 27.0% to 24.3%, primarily due to customer mix and an increase in material and labor costs. The gross margin for e-Business was 9.9% for the three months ended April 30, 2019 as compared to 3.2% for the same period of the prior year. This increase of 6.7 percentage points was due to a favorable revenue mix.

Selling, General and Administrative Expenses:



	Three Months Ended April 30, 2019	As a % of Segment Net Revenue		Three Months Ended April 30, 2018	As a % of Segment Net Revenue		$ Change		% Change
	(In thousands)
Americas	1,440	8.4	%	1,521	11.6	%	(81	)	(5.3	)%
Asia	3,913	10.0	%	3,855	12.1	%	58		1.5	%
Europe	2,328	13.9	%	2,754	12.0	%	(426	)	(15.5	)%
Direct Marketing	15,643	13.5	%	14,720	12.2	%	923		6.3	%
e-Business	1,667	34.9	%	1,819	33.4	%	(152	)	(8.4	)%
Sub-total	24,991	12.9	%	24,669	12.7	%	322		1.3	%
Corporate-level activity	2,435			4,992			(2,557	)	(51.2	)%
Total	27,426	14.1	%	29,661	15.3	%	(2,235	)	(7.5	)%

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Direct Marketing segment ($0.9 million), primarily related to higher professional fees ($0.6 million) and higher employee costs ($0.3 million) for this segment. Fluctuations in foreign currency exchange rates had an insignificant impact on selling, general and administrative expenses for the three months ended April 30, 2019.

Amortization of Intangible Assets:

The intangible asset amortization of $7.3 million and $8.0 million, respectively, during the three months ended April 30, 2019 and 2018, relates to amortizable intangible assets acquired by the Company in connection with its acquisition of IWCO. Acquired intangible assets include trademarks, tradenames and customer relationships. 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.

Interest Income/Expense:

During the three months ended April 30, 2019 and 2018, interest expense totaled approximately $10.3 million and $10.7 million, respectively. The decrease in interest expense is primarily due to the maturity and settlement of the Company's Notes.

Other Gains (Losses), net:

Income Tax Expense:

During the three months ended April 30, 2019, the Company recorded income tax expense of approximately $1.4 million, as compared to income tax expense of $0.7 million for the same period in the prior fiscal year.

The Company provides for income tax expense related to federal, state, and foreign income taxes. The Company continues to maintain a full valuation allowance against its deferred tax assets in the U.S. and certain of its foreign subsidiaries due to the uncertainty of realizing such benefits.

Results of Operations

Nine months ended April 30, 2019 compared to the nine months ended April 30, 2018

Net Revenue:



	Nine Months Ended April 30, 2019		As a % of Total Net Revenue		Nine Months Ended April 30, 2018		As a % of Total Net Revenue		$ Change			% Change
	(In thousands)
Americas	$	51,313	8.3	%	$	41,664	9.3	%	$	9,649		23.2	%
Asia	128,123		20.8	%	111,622		24.8	%	16,501			14.8	%
Europe	56,718		9.2	%	99,225		22.0	%	(42,507		)	(42.8	)%
Direct Marketing	362,547		58.9	%	180,178		40.0	%	182,369			101.2	%
e-Business	16,658		2.7	%	17,492		3.9	%	(834		)	(4.8	)%
Total	$	615,359	100.0	%	$	450,181	100.0	%	$	165,178		36.7	%

Net revenue increased by approximately $165.2 million during the nine months ended April 30, 2019, as compared to the same period in the prior year. The change in net revenue was driven by the increase in revenue associated with the acquisition of IWCO in December 2017 (the "IWCO Acquisition") and increase in revenue associated with a client in the computing market, offset primarily by decreased revenues from a client in the consumer electronics industry, which did not have a significant negative affect on income from operations. Fluctuations in foreign currency exchange rates had an insignificant impact on net revenues for the nine months ended April 30, 2019, as compared to the same period in the prior year.

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During the nine months ended April 30, 2019, net revenue in the Americas region increased by approximately $9.6 million. This increase in net revenue was primarily driven by clients in the computing market, offset partially by a decrease in revenue from clients in the consumer electronics market. Within the Asia region, the net revenue increase of approximately $16.5 million primarily resulted from higher revenues from programs in the computing and consumer electronics markets, offset partially by lower revenues from other clients in the consumer electronics industries. Within the Europe region, net revenue decreased by approximately $42.5 million primarily due to a client loss in the consumer electronics industry. Within Direct Marketing, the net revenue increased by approximately $182.4 million primarily because IWCO was acquired in December 2017. Net revenue for e-Business decrease by $0.8 million primarily due to a client loss in the consumer electronics industry.

Cost of Revenue:



	Nine Months Ended April 30, 2019		As a % of Segment Net Revenue		Nine Months Ended April 30, 2018		As a % of Segment Net Revenue		$ Change			% Change
	(In thousands)
Americas	$	52,828	103.0	%	$	43,206	103.7	%	$	9,622		22.3	%
Asia	102,981		80.4	%	90,029		80.7	%	12,952			14.4	%
Europe	53,751		94.8	%	97,473		98.2	%	(43,722		)	(44.9	)%
Direct Marketing	278,388		76.8	%	139,296		77.3	%	139,092			99.9	%
e-Business	14,807		88.9	%	16,275		93.0	%	(1,468		)	(9.0	)%
Total	$	502,755	81.7	%	$	386,279	85.8	%	$	116,476		30.2	%

Cost of revenue consists primarily of expenses related to the cost of materials purchased in connection with the provision of supply chain management and direct marketing services as well as costs for salaries and benefits, contract labor, consulting, paper for direct mailing, fulfillment and shipping, and applicable facilities costs. Cost of revenue for the nine months ended April 30, 2019 included materials procured on behalf of our supply-chain clients of $144.7 million, as compared to $155.8 million for the same period in the prior year, a decrease of $11.1 million. Total cost of revenue increased by $116.5 million for the nine months ended April 30, 2019, as compared to the same period in the prior year, primarily due to the increase in cost of revenue associated with the IWCO Acquisition, partially offset by lower material and labor costs associated with lower volume from clients in the consumer electronics and consumer products industries. Gross margin percentage for the nine months ended April 30, 2019 increased to 18.3% from 14.2% in the same period in the prior year, primarily due to the IWCO Acquisition. For the nine months ended April 30, 2019, the Company’s gross margin percentages within the Americas, Asia, Europe and Direct Marketing segments were (3.0)%, 19.6%, 5.2% and 23.2%, respectively, as compared to gross margin percentages within the Americas, Asia, Europe and Direct Marketing segments of (3.7)%, 19.3%, 1.8% and 22.7%, respectively, for the same period in the prior year. Fluctuations in foreign currency exchange rates had an insignificant impact on gross margin for the quarter ended April 30, 2019.

In the Americas, the 0.7 percentage point increase in gross margin, from (3.7)% to (3.0)%, was primarily due to lower fixed costs associated with a site closure. In Asia, the 0.3 percentage point increase in gross margin, from 19.3% to 19.6%, was primarily due to product mix. In Europe, the 3.5 percentage point increase in gross margin, from 1.8% to 5.2%, was attributable to a decline in the cost of materials associated with a client loss in the consumer electronics industry. Direct Marketing’s gross margins increased by 0.5 percentage points, from 22.7% to 23.2%, primarily due to a $7.0 million non-cash charge related to a fair value “step-up” to work-in-process inventory which was recorded during the nine months ended April 30, 2018. The gross margin for e-Business was 11.1% for the nine months ended April 30, 2019 as compared to 7.0% for the same period of the prior year. This increase of 4.2 percentage points was due to a favorable reduction in labor costs.

Selling, General and Administrative Expenses:

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	Nine Months Ended April 30, 2019		As a % of Segment Net Revenue		Nine Months Ended April 30, 2018		As a % of Segment Net Revenue		$ Change			% Change
	(In thousands)
Americas	$	4,237	8.3	%	$	4,976	11.9	%	$	(739	)	(14.9	)%
Asia	11,366		8.9	%	12,490		39.3	%	(1,124		)	(9.0	)%
Europe	6,947		12.2	%	9,841		42.9	%	(2,894		)	(29.4	)%
Direct Marketing	44,221		12.2	%	22,846		18.9	%	21,375			93.6	%
e-Business	5,155		30.9	%	5,654		103.7	%	(499		)	(8.8	)%
Sub-total	71,926		11.7	%	55,807		28.8	%	16,119			28.9	%
Corporate-level activity	9,776				16,869				(7,093		)	(42.0	)%
Total	$	81,702	13.3	%	$	72,676	16.1	%	$	9,026		12.4	%

Selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, information technology expenses, travel expenses, facilities costs, consulting fees, fees for professional services, depreciation expense, marketing expenses, share-based compensation expense, transaction costs and public reporting costs. Selling, general and administrative expenses during the nine months ended April 30, 2019 increased by approximately $9.0 million compared to the same period in the prior year, primarily due to additional selling, general and administrative expenses associated with the Direct Marketing segment ($21.4 million), offset by lower share-based compensation expense ($8.5 million) which was recorded as part of Corporate-level-activity, lower professional fees ($2.9 million), lower employee related costs ($1.8 million), as well as other general and administrative costs. Direct Marketing expenses represent of a full nine months of expenses in fiscal year 2019 as opposed to 4.5 months in fiscal year 2018. Fluctuations in foreign currency exchange rates had an insignificant impact on selling, general and administrative expenses for the nine months ended April 30, 2019.

Amortization of Intangible Assets:

The intangible asset amortization of $23.2 million and $12.1 million, respectively, during the nine months ended April 30, 2019 and 2018, relates to amortizable intangible assets acquired by the Company in connection with its acquisition of IWCO on December 15, 2017. Acquired intangible assets include trademarks, tradenames and customer relationships. 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 is being amortized on a double-declining basis over an estimated useful life of 15 years.

Interest Income/Expense:

During the nine months ended April 30, 2019 and 2018, interest income was $0.5 million and $0.4 million, respectively.

During the nine months ended April 30, 2019 and 2018, interest expense totaled approximately $32.3 million and $19.4 million, respectively. The increase in interest expense primarily due to the additional debt associated with the IWCO Acquisition.

Other Gains (Losses), net:

During the nine months ended April 30, 2018, the Company recognized $1.9 million in net cash gains associated with its trading securities.

Income Tax Expense:

During the nine months ended April 30, 2019, the Company recorded income tax expense of approximately $4.0 million. During the nine months ended April 30, 2018, the Company recorded income tax benefit of approximately $71.7 million. The income tax benefit during the nine months ended April 30, 2018 is related to the reduction of the Company’s valuation allowance

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associated with the IWCO acquisition of approximately $79.9 million partially offset by income tax expense in certain jurisdictions where the Company operates, using the enacted tax rates in those jurisdictions.

Liquidity and Capital Resources

Historically, the Company has financed its operations and met its capital requirements primarily through funds generated from operations, the sale of our securities, borrowings from lending institutions and sale of facilities that were not fully utilized. As of April 30, 2019, the Company’s primary sources of liquidity consisted of cash and cash equivalents of $20.4 million. The Company’s ModusLink Corporation subsidiary has undistributed earnings from its foreign subsidiaries of approximately $9.5 million at April 30, 2019, of which approximately $2.4 million is considered to be permanently reinvested due to certain restrictions under local laws as well as the Company’s plans to reinvest such earnings for future expansion in certain foreign jurisdictions. Due to the changes reflected in the new tax law there is no U.S. tax payable upon repatriating the undistributed earnings of foreign subsidiaries considered not subject to permanent investment. Foreign withholding taxes would range from 0% to 10% on any repatriated funds.

For the Company, earnings and profits have been calculated at each subsidiary. The Company’s foreign subsidiaries are in an overall net deficit for earnings and profits purposes. As such, no adjustment has been made to U.S. taxable income in 2018 relating to this aspect of the new tax law. In future years, under the new tax law the Company will be able to repatriate its foreign earnings without incurring additional U.S. tax as a result of a 100% dividends received deduction. The Company believes that any future withholding taxes or state taxes associated with such a repatriation would be minor.

On June 30, 2014, two direct and wholly owned subsidiaries of the Company (the “Borrowers”) and certain subsidiaries of the Borrowers acting as guarantors (the “Guarantors”), entered into a Revolving Credit and Security Agreement (the “Credit Agreement”), as borrowers and guarantors, with PNC Bank, National Association (“PNC Bank”), as a Lender and as agent for the Lenders (“Agent”). The Credit Agreement had a five (5) year term which was to expire on June 30, 2019. On April 30, 2019, the Borrowers and Guarantors entered into a Second Amendment to Revolving Credit and Security Agreement (the “Second Amendment”) by and among the Borrowers, the Guarantors, the financial institutions named as parties thereto from time to time as lenders (collectively, the “Lenders”) and PNC Bank as Agent. The Second Amendment amends the Credit Agreement in order to, among other things, (i) reduce the aggregate Revolving Commitment Amounts (as defined in the Credit Agreement) of the Lenders and the related Maximum Revolving Advance Amount (as defined in the Credit Agreement) available to Borrowers under the Credit Agreement, from $50.0 million to $25.0 million, and (ii) to extend the maturity of the term under the Credit Agreement by six (6) months from June 30, 2019 to December 31, 2019. The maximum credit commitment of $25.0 million, is available for letters of credit (with a sublimit of $5.0 million). 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.

On March 18, 2014, the Company entered into an indenture (the “Indenture”) with Wells Fargo Bank, National Association, as trustee, relating to the Company’s issuance of $100 million of 5.25% Convertible Senior Notes (the “Notes”). As of July 31, 2018, the net carrying value of the Notes was $64.5 million. The Notes matured on March 1, 2019, with a balance due of $65.6 million, including interest to the March 1, 2019 maturity date. Included in the balance due were notes held by SPH Group LLC ("SPHG Holdings") in the principal amount of $14.9 million. The total $65.6 million balance due (which included interest to maturity on March 1, 2019) was paid in full by the Company from available cash on-hand, including the $14.9 million from the proceeds of the 7.50% Convertible Senior Note (the "SPHG Note") transaction entered into on February 28, 2019 (the "SPHG Note Transaction") as described below. During the three months ended April 30, 2018 and 2017, the Company recognized

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interest expense associated with the Notes of $0.8 million and $2.1 million, respectively. During the nine months ended April 30, 2019 and 2018, the Company recognized interest expense associated with the Notes of $4.9 million and $6.3 million, respectively. The effective interest rate on the Notes, including amortization of debt issuance costs and accretion of the discount, was 13.9%.

On December 15, 2017, MLGS Merger Company, Inc., a Delaware corporation and newly formed wholly-owned subsidiary of the Company (“MLGS”), 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 IWCO’s 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 (the “Revolving Facility”) (together, 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 Borrower’s 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 Borrower’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for such calendar year. 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 IWCO’s 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. During the nine month ended April 30, 2019, the Company did not trigger any of these covenants. The debt issuance costs are capitalized as a reduction of the principal amount of Term Loan on the Company’s balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of the Term Loan. At April 30, 2019, IWCO had a readily available borrowing capacity under its Revolving Facility of $15.0 million. As of April 30, 2019, the Company had $10.0 million outstanding on the Revolving Facility. As of July 31, 2018, the Company did not have an outstanding balance on the Revolving Facility. As of April 30, 2019 and July 31, 2018, the principal amount outstanding on the Term Loan was $376.6 million and $390.0 million, respectively. As of April 30, 2019 and July 31, 2018, the current and long-term net carrying value of the Term Loan was $375.7 million and $388.8 million, respectively.

On February 28, 2019, the Company entered into that certain 7.50% Convertible Senior Note Due 2024 Purchase Agreement with SPHG Holdings, whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for a 7.50% Convertible Senior Note due 2024 (the SPHG Note Transaction). On February 28, 2019, the Company issued the SPHG Note in the amount of $14.9 million to SPHG Holdings. The SPHG Note bears interest at the rate of 7.50% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019. The SPHG Note will mature on March 1, 2024 (the “SPHG Note Maturity Date”), unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such maturity date.

At its election, the Company may pay some or all of the interest due on each Interest Payment Date by increasing the principal amount of the SPHG Note in the amount of such interest due or any portion thereof (such payment of interest by increasing the principal amount of the SPHG Note referred to as (“PIK Interest”), with the remaining portion of the interest due on such Interest Payment Date (or, at the Company’s election, the entire amount of interest then due) to be paid in cash by the Company. Following an increase in the principal amount of the SPHG Note as a result of a payment of PIK Interest, the SPHG Note will bear interest on such increased principal amount from and after the date of such payment of PIK Interest. SPHG

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Holdings has the right to require the Company to repurchase the SPHG Note upon the occurrence of certain fundamental changes, subject to certain conditions, at a repurchase price equal to 100% of the principal amount of the SPHG Note plus accrued and unpaid interest. The Company will have the right to elect to cause the mandatory conversion of the SPHG Note in whole, and not in part, at any time on or after March 6, 2022, subject to certain conditions including that the stock price of the Company exceeds a certain threshold. SPHG Holdings has the right, at its option, prior to the close of business on the business day immediately preceding the SPHG Note Maturity Date, to convert the SPHG Note or a portion thereof that is $1,000 or an integral multiple thereof, into shares of common stock (if the Company has not received a required stockholder approval) or cash, shares of common stock or a combination of cash and shares of common stock, as applicable (if the Company has received a required stockholder approval), at an initial conversion rate of 421.2655 shares of common stock, which is equivalent to an initial conversion price of approximately $2.37 per share (subject to adjustment as provided in the SPHG Note) per $1,000 principal amount of the SPHG Note (the “Conversion Rate”), subject to, and in accordance with, the settlement provisions of the SPHG Note. For any conversion of the SPHG Note, if the Company is required to obtain and has not received approval from its stockholders in accordance with NASDAQ Stock Market Rule 5635 to issue 20% or more of the total shares of common stock outstanding upon conversion (including upon any mandatory conversion) of the SPHG Note prior to the relevant conversion date (or, if earlier, the 45th Scheduled trading day immediately preceding the SPHG Note Maturity Date), the Company shall deliver to the converting holder, in respect of each $1,000 principal amount of the SPHG Note being converted, a number of shares of common stock determined by reference to the Conversion Rate, together with a cash payment, if applicable, in lieu of delivering any fractional share of common stock based on the volume weighted average price (VWAP) of its common stock on the relevant conversion date, on the third Business Day immediately following the relevant conversion date. As of April 30, 2019, the net carrying value of the SPHG Note was $7.0 million. During the three and nine months ended April 30, 2019, the Company recognized interest expense associated with the SPHG Note of $0.5 million which includes amortization of debt accretion.

Consolidated working capital (deficit) was $(18.1) million at April 30, 2019, compared with $(12.1) million at July 31, 2018. Included in working capital were cash and cash equivalents of $20.4 million at April 30, 2019 and $92.1 million at July 31, 2018. The working capital deficit was primarily driven by the reduction in cash and cash equivalents of $71.8 million of which $65.6 million (including interest) was used to retire the 5.25% Convertible Senior Notes (the Notes) on March 1, 2019. Also, there were significant decreases in trade accounts receivable and net inventories.

Net cash used in operating activities was $(3.6) million for the nine months ended April 30, 2019, as compared to net cash provided by operating activities of $3.0 million for the nine months ended April 30, 2018. During the nine months ended April 30, 2019, non-cash items within net cash used in operating activities included depreciation expense of $16.3 million, amortization of intangible assets of $23.2 million, amortization of deferred financing costs of $0.7 million, accretion of debt discount of $2.7 million, impairment of long-lived assets of $0.5 million, share-based compensation of $1.2 million and other losses, net, of $0.8 million. During the nine months ended April 30, 2018, non-cash items within net cash provided by operating activities included depreciation expense of $11.4 million, amortization of intangible assets of $12.1 million, amortization of deferred financing costs of $0.7 million, accretion of debt discount of $3.2 million, share-based compensation of $9.7 million, non-cash gains, net, of $(13.1) million and gains on investments in affiliates of $(0.6) million.

The Company believes that its cash flows related to operating activities of continuing operations are dependent on several factors, including profitability, accounts receivable collections, effective inventory management practices, and optimization of the credit terms of certain vendors of the Company. Our cash flows from operations are also dependent on several factors including the overall performance of the technology sector, the market for outsourcing services and the continued positive operations of IWCO.

Investing activities used cash of $(11.8) million and $(447.7) million during the nine months ended April 30, 2019 and 2018, respectively. The $(11.8) million of cash used in investing activities during the nine months ended April 30, 2019 was primarily comprised of $(11.8) million in capital expenditures primarily related to the Direct Marketing segment. The $(447.7) million of cash used in investing activities during the nine months ended April 30, 2018 was primarily comprised of $(469.2) million in payments associated with the IWCO Acquisition, $(13.6) million in capital expenditures, offset by $20.7 million in proceeds associated with the sale of property and equipment, $13.8 million in proceeds from the sale of Trading Securities and $0.6 million in proceeds from investments in affiliates.

Financing activities provided (used) cash of $(57.8) million and $430.4 million during the nine months ended April 30, 2019 and 2018, respectively. The $(57.8) million of cash used in financing activities during the nine months ended April 30, 2019 was primarily comprised of $14.9 million proceeds from the issuance of the convertible note, $10.0 million in proceed from the revolving line of credit, $(63.9) million in payments on maturity of convertible notes, $(13.4) million in payments of long-term debt, $(1.6) million in payment of preferred dividends and $(3.7) million in purchase of the Company’s Convertible Notes. The $430.4 million of cash provided by financing activities during the nine months ended April 30, 2018 was primarily comprised of $393.0 million in net proceeds from the Term Loan associated with the IWCO Acquisition, $35.0 million in proceeds associated

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with the issuance of convertible preferred stock, $6.0 million in proceeds from the revolving line of credit, $(1.5) million in payments of long-term debt, $(1.3) million in payments of financing costs and $(0.6) million in payment of preferred dividends.

At April 30, 2019 and July 31, 2018, the Company had cash and cash equivalents of $20.4 million and $92.1 million, respectively. As of April 30, 2019, the Company had a deficiency in working capital which was primarily driven by the reduction in cash and cash equivalents of $71.8 million, of which $65.6 million (including interest) was used to retire the 5.25% Convertible Senior Notes on March 1, 2019, the Company's $10.0 million outstanding on the Revolving Facility, accrued pricing liabilities which the Company believes will not require a cash outlay in the next twelve months, and the additional liabilities assumed because of the IWCO Acquisition. At April 30, 2019, the Company had a readily available borrowing capacity under its Credit Agreement with PNC Bank and National Association of $12.5 million. At April 30, 2019, IWCO had a readily available borrowing capacity under its Revolving Facility of $15.0 million. Per the Financing Agreement, IWCO is permitted to make distributions to Steel Connect, an aggregate amount not to exceed $5.0 million in any fiscal year and pay reasonable documented expenses incurred by Steel Connect. Steel Connect is entitled to receive additional cash remittances under a “U.S. Federal Income Tax Sharing Agreement.” The Company believes it will generate sufficient cash to meet its debt covenants under the Credit Agreement and the Financing Agreement to which certain of its subsidiaries are a party and that it will be able to obtain cash through its current credit facilities and through securitization of certain trade receivables. As discussed above, the Company's Notes matured on March 1, 2019, with a balance due of $65.6 million, including interest to the March 1, 2019 maturity date. The total $65.6 million balance due was paid in full by the Company from available cash on-hand and $14.9 million from the proceeds of the SPHG Note transaction entered into on February 28, 2019. The Company’s historical operating results and working capital deficit indicate substantial doubt exists related to the Company’s ability to continue as a going concern. The Company believes that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by the Company’s historical operating results and satisfying the Company’s estimated liquidity needs 12 months from the issuance of the financial statements. However, the Company cannot predict, with certainty, the outcome of its actions to generate liquidity,

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Contractual Obligations

A summary of the Company’s contractual obligations is included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018. The Company’s contractual obligations and other commercial commitments did not change materially between July 31, 2018 and April 30, 2019. The Company’s gross liability for unrecognized tax benefits and related accrued interest was approximately $1.7 million as of April 30, 2019. The Company is unable to reasonably estimate the amount or timing of payments for the liability.

From time to time, the Company agrees to indemnify its clients in the ordinary course of business. Typically, the Company agrees to indemnify its clients for losses caused by the Company. As of April 30, 2019, the Company had immaterial recorded liabilities with respect to these arrangements.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventory, restructuring, share-based compensation expense, long-lived assets, investments, and income taxes. Of the accounting estimates we routinely make relating to our critical accounting policies, those estimates made in the process of: determining the valuation of inventory and related reserves; determining future lease assumptions related to restructured facility lease obligations; measuring share-based compensation expense; preparing investment valuations; and establishing income tax valuation allowances and liabilities are the estimates most likely to have a material impact on our financial position and results of operations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. However, because these estimates inherently involve judgments and uncertainties, there can be no assurance that actual results will not differ materially from those estimates.

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During the nine months ended April 30, 2019, other than the adoption of accounting standards updates discussed in the Condensed Consolidated Financial Statements, we believe that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended July 31, 2018.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to the impact of interest rate changes, foreign currency exchange rate fluctuations and changes in the market values of its investments. The carrying value of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the short maturity of these instruments. We believe that the carrying value of our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Interest Rate Risk

At April 30, 2019, the Company did not have an outstanding balance under its PNC Bank Credit Facility and the Company did not have any open derivative positions with respect to its borrowing arrangements. As of April 30, 2019, the Company had $10.0 million outstanding on the Revolving Facility. As of April 30, 2019, the principal amount outstanding on the Term Loan was $376.6 million. As of April 30, 2019, the principal amount outstanding on the SPHG Note was $14.9 million.

The Company maintains a portfolio of highly liquid cash equivalents typically maturing in three months or less as of the date of purchase. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy and include corporate and state municipal obligations such as commercial paper, certificates of deposit and institutional money market funds.

Our exposure to market risk for changes in interest rates relates primarily to our investment in short-term investments. Our short-term investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to our investment guidelines and market conditions.

Foreign Currency Risk

The Company has operations in various countries and currencies throughout the world and its operating results and financial position are subject to exposure from fluctuations in foreign currency exchange rates. From time to time, the Company has used derivative financial instruments on a limited basis, principally foreign currency exchange rate contracts, to minimize the transaction exposure that results from such fluctuations. As of April 30, 2019 and July 31, 2018, there were no foreign currency forward contracts outstanding.

Revenues from our foreign operating segments accounted for approximately 28.9% and 28.2% of total revenues during the three months ended April 30, 2019 and 2018, respectively. A portion of our international sales made by our foreign business units in their respective countries is denominated in the local currency of each country. These business units also incur a portion of their expenses in the local currency.

The primary foreign currencies in which the Company operates include Chinese Renminbi, Euros, Czech Koruna and Singapore Dollars. The income statements of our international operations that are denominated in foreign currencies are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions results in increased revenues and operating expenses for our international operations. Similarly, our revenues and operating expenses will decrease for our international operations when the U.S. dollar strengthens against foreign currencies. While we attempt to balance local currency revenue to local currency expenses to provide in effect a natural hedge, it is not always possible to completely reduce the foreign currency exchange rate risk due to competitive and other reasons.

The conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income (loss). For the three months ended April 30, 2019 and 2018, we recorded a foreign currency translation gain (loss) of approximately $(0.6) million and $(1.4) million, respectively, which is recorded within accumulated other comprehensive income in stockholders’ equity in our condensed consolidated balance sheet. In addition, certain of our subsidiaries have assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the relative exchange rates between the currencies result in remeasurement gains or losses at each

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balance sheet date and transaction gains or losses upon settlement. For the three months ended April 30, 2019 and 2018, we recorded net realized and unrealized foreign currency transaction and remeasurement gains (losses) of approximately $(33.0) thousand and $0.7 million, respectively, which are recorded in “Other gains (losses), net” in our condensed consolidated statements of operations.

Our international business is subject to risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign currency exchange rate volatility when compared to the United States. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. As exchange rates vary, our international financial results may vary from expectations and adversely impact our overall operating results.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. “Disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that, due to the material weakness described below as well as previously disclosed in internal controls over financial reporting as reported in the Company’s 10-K for the period ended July 31, 2018, as filed with the SEC on December 4, 2018, our disclosure controls and procedures were not effective as of July 31, 2018 and April 30, 2019.

A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement to the annual or interim financial statements will not be prevented or detected on a timely basis. In its evaluation of the effectiveness of its internal control over financial reporting as of July 31, 2018, management determined that the Company did not maintain effective internal controls over the assessment, timely review and evaluation of a material complex non-routine transaction, specifically relating to the Company’s accrued pricing liability.

Notwithstanding the material weakness, management has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Remediation of the Material Weakness in Internal Control Over Financial Reporting

The Company has created creating a formal process related to the design and implementation of controls over the accounting policies for complex, non-routine transactions. This process includes the early evaluation of complex, non-routine transactions and documentation by the Company’s accounting staff. Regular meetings with accounting staff and executive level officers involved and familiar with accounting issues related to complex, non-routine transactions will be held. As necessary, outside legal and/or accounting advice will be obtained. The Company will also revise its current risk assessment process to identify potential non-routine transactions that need to be monitored and incorporated under the planned new formal process.

Management believes the measures described above and others that will be implemented will remediate the control deficiencies the Company has identified and strengthen its internal control over financial reporting. Management is committed to continuous improvement of the Company’s internal control processes and will continue to diligently review the Company’s

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financial reporting controls and procedures. The material weakness in our internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company and its outside legal counsel are working to have the material weakness remediated as soon as possible. The Company is committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, the Company may decide to take additional measures to address control deficiencies or decide to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

Changes in Internal Control over Financial Reporting

Beginning August 1, 2018, the Company implemented ASC Topic 606, Revenue from Contracts with Customers. Although the new revenue standard did not have a material impact on consolidated financial statements, the Company did implement changes to our processes related to revenue recognition and the control activities within them. These included the development of new policies based on the five-step model provided in the new revenue standard, new training, ongoing contract review requirements, and the gathering of information necessary provided for expanded disclosures.

Except as described in the preceding paragraph, there have been no changes in our internal controls over financial reporting (as defined in Rule 13(a)-15(f) or Rule 15d-15(f) of the Exchange Act) during the three months ended April 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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Item 1A. Risk Factors.

There have not been any material changes from the risk factors previously disclosed in Part I, “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended July 31, 2018. In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, “Item 1A. Risk Factors” discussed in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Default Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Note applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.



Exhibit Number		Description

4.1		Form of 7.50% Convertible Senior Note due 2024 issued by Steel Connect, Inc. to SPH Group Holdings LLC., is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 28, 2019.

10.1		7.50% Convertible Senior Note Due 2024 Purchase Agreement, dated as of February 28, 2019, by and between Steel Connect, Inc. and SPH Group Holdings LLC., is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 28, 2019.

10.2		Retention Agreement, dated February 25, 2019 (effective March 1, 2019) between Steel Connect, Inc. and Louis J. Belardi, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 5, 2019.

10.3		Second Amendment to Revolving Credit and Security Agreement, dated as of April 30, 2019, by and among ModusLink Corporation, ModusLink PTS, Inc., Modus Media International Documentation Services (Ireland), Limited, Modus Media International (Ireland) Limited, SalesLink Mexico Holding Corp., Sol Holdings, Inc., and PNC Bank, National Association, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 5, 2019.

31.1*		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1±		Certification of the Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2±		Certification of the Principal Financial Officer and Principal Accounting Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*		Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Unaudited Condensed Consolidated Balance Sheets as of April 30, 2019 and July 31, 2018, (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2019 and 2018, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended April 30, 2019 and 2018 (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2019 and 2018 and (v) Notes to Unaudited Condensed Consolidated Financial Statements.


*	Filed herewith.


±	Furnished herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	STEEL CONNECT, INC.

Date: June 6, 2019	By:	/S/ LOUIS J. BELARDI
		Louis J. Belardi
		Chief Financial Officer
		(Duly Authorized Officer, Principal Financial and Accounting Officer)

Exhibit

Exhibit 31.1

CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Warren Lichtenstein, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Steel Connect, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: June 6, 2019

	By:	/S/ WARREN LICHTENSTEIN
		Warren Lichtenstein
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit

Exhibit 31.2

CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Louis J. Belardi, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Steel Connect, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: June 6, 2019

	By:	/S/ LOUIS J. BELARDI
		Louis J. Belardi
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Exhibit

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Steel Connect, Inc. (the “Company”) for the fiscal quarter ended April 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Warren Lichtenstein, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: June 6, 2019
	By:	/S/ WARREN LICHTENSTEIN
		Warren Lichtenstein
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: June 6, 2019
	By:	/S/ LOUIS J. BELARDI
		Louis J. Belardi
		Chief Financial Officer
		(Principal Financial and Accounting Officer)