Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): September 30, 2020
Steel Connect, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Delaware
001-35319
04-2921333
(State or Other Jurisdiction
of Incorporation)
(Commission
File Number)
(IRS Employer
Identification No.)
 
 
 
1601 Trapelo Road, Suite 170
Waltham, Massachusetts
02451
(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code: (781) 663-5000
 
(Former Name or Former Address, If Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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 Market
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐








Item 2.02    Results of Operations and Financial Condition.

On September 30, 2020, Steel Connect, Inc. (the "Registrant") issued a press release reporting its results of operations for its fiscal quarter and the fiscal year ended July 31, 2020. A copy of the press release issued by the Registrant concerning the foregoing results is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.

The information in this Item 2.02, including Exhibit 99.1 attached hereto, is furnished and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of such section. The information in this report, including the exhibit, shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, regardless of any incorporation by reference language in any such filing, except as shall be expressly set forth by specific reference in such a filing.

Item 9.01.
Financial Statements and Exhibits.

(d) Exhibits.
Exhibit No.
Description
 
 
99.1





SIGNATURES
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 hereunto duly authorized.
 
STEEL CONNECT, INC.
 
 
 
Date: September 30, 2020
By:
/S/ DOUGLAS B. WOODWORTH
 
 
Douglas B. Woodworth
 
 
Chief Financial Officer



Exhibit


Exhibit 99.1

Steel Connect Reports Fourth Quarter Financial Results


Fourth Quarter 2020 Highlights

Net revenue totaled $164.9 million, as compared to $204.5 million in the prior year
Net loss for the quarter was $0.4 million, an improvement of $37.6 million
Net loss attributable to common stockholders was $0.9 million, an improvement of $37.6 million
Adjusted EBITDA* was $24.9 million, an improvement of $10.1 million
Net cash provided by operating activities was $11.6 million
Free cash flow* totaled $11.0 million
Total debt was $386.9 million; net debt* totaled $311.0 million

Fiscal Year 2020 Highlights

Net revenue totaled $782.8 million, as compared to $819.8 million in the prior year
Net loss for the fiscal year was $5.3 million, an improvement of $61.4 million
Net loss attributable to common stockholders was $7.4 million, an improvement of $61.4 million
Adjusted EBITDA* was $86.9 million, an improvement of $21.5 million
Net cash provided by operating activities was $71.6 million
Free cash flow* totaled $59.6 million

WALTHAM, Mass. (September 30, 2020) – Steel Connect, Inc. (the "Company") (NASDAQ: STCN) today announced financial results for its fourth quarter and fiscal year ended July 31, 2020.
Three Months Ended
July 31,
 
 
 
Fiscal year ended
July 31,
2020
 
2019
 
($ in thousands)
 
2020
 
2019
$
164,857

 
$
204,471

 
Net revenue
 
$
782,813

 
$
819,830

(360
)
 
(37,981
)
 
Net loss
 
(5,284
)
 
(66,727
)
(897
)
 
(38,513
)
 
Net loss attributable to common stockholders
 
(7,413
)
 
(68,856
)
24,872

 
14,760

 
Adjusted EBITDA*
 
86,931

 
65,451

15.1
%
 
7.2
%
 
Adjusted EBITDA margin*
 
11.1
%
 
8.0
%
11,573

 
24,465

 
Net cash provided by operating activities
 
71,624

 
20,849

593

 
2,699

 
Additions to property and equipment
 
12,070

 
14,539

10,980

 
21,766

 
Free cash flow*
 
59,554

 
6,310


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

The Company continues to evaluate the global risks and the slowdown in business activity related to COVID-19, including the potential impacts on its employees, customers, suppliers and financial results. The severity of the impact on the Company's business beyond fiscal year 2020 will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, the continued disruption to the demand for our businesses' products and services, and the impact of the global business and economic environment on liquidity and the availability of capital, all of which are uncertain and cannot be predicted. For the fiscal year ended July 31, 2020, COVID-19 required temporary closures of certain of ModusLink's facilities. Additionally, although IWCO Direct operated as an essential business, it had reduced operating levels and labor shifts due to lower sales volume. As of the date of this earnings release, all of the Company's facilities were open and able to operate at normal capacities. Additionally, to help mitigate the financial impact of the COVID-19 pandemic, the Company initiated cost reduction actions, including the waiver of board fees, hiring freezes, staffing and force reductions, Company-wide salary reductions, bonus payment deferrals and temporary 401(k) match suspension. The Company has fully restored the prior salary reductions; however, management continues its focus on cash management and liquidity, which includes elimination of discretionary spending, aggressive working capital management, strict approvals for capital expenditures and borrowing from its revolving credit facilities, if needed, as a precautionary measure to preserve financial flexibility. The Company will evaluate further actions if circumstances warrant.






"I am extremely proud of the dedication of our employees during the COVID-19 pandemic as we delivered on our promises to our customers while meeting all health and safety protocols," said Warren Lichtenstein, Executive Chairman and Interim Chief Executive Officer of the Company. "Our continued focus on cost reduction measures and cash management have allowed us to improve our EBITDA and drastically reduce the losses for the year, despite the reduced revenue. As we start the new fiscal year, IWCO Direct's demand continues to strengthen, and ModusLink continues to see strong demand due to shifting consumer behavior as a result of the pandemic; however, we anticipate ModusLink's volumes will decline in fiscal year 2021 as we continue to rationalize our customer base. We remain vigilant and will continue to thoughtfully manage our operations to strengthen our company for near-term success and long-term growth."

Results of Operations

Comparison of the Fourth Quarter and Fiscal Year Ended July 31, 2020 and 2019
 
Three Months Ended July 31,
 
Fiscal Year Ended July 31,
 
2020
 
2019
 
2020
 
2019
 
(unaudited)
Net revenue:
 
 
 
 
 
 
 
Products
$
89,956

 
$
124,355

 
$
444,360

 
$
486,902

Services
74,901

 
80,116

 
338,453

 
332,928

Total net revenue
164,857

 
204,471

 
782,813

 
819,830

Cost of revenue
124,863

 
167,345

 
619,854

 
670,100

Gross profit margin
24.3
%
 
18.2
%
 
20.8
%
 
18.3
%
Selling, general and administrative
23,997

 
62,376

 
103,261

 
144,078

Amortization of intangible assets
6,536

 
7,277

 
27,255

 
30,446

Interest expense
7,544

 
9,616

 
33,969

 
41,951

All other (income) expenses, net
388

 
(4,875
)
 
(2,159
)
 
(4,646
)
Total costs and expenses
163,328

 
241,739

 
782,180

 
881,929

Income (loss) before income taxes
1,529

 
(37,268
)
 
633

 
(62,099
)
Income tax expense
1,889

 
713

 
5,917

 
4,670

Gains on investments in affiliates, net of tax

 

 

 
42

Net loss
$
(360
)
 
$
(37,981
)
 
$
(5,284
)
 
$
(66,727
)

Net Revenue

Total net revenue for the fourth quarter ended July 31, 2020 decreased $39.6 million, or 19.4%, as compared to the fourth quarter of 2019, primarily due to lower volumes in our Direct Marketing and Supply Chain segments due to the COVID-19 pandemic.

Total net revenue for the fiscal year ended July 31, 2020 decreased $37.0 million, or 4.5%, as compared to fiscal 2019. The decline in revenue in the Direct Marketing segment was primarily due to lower volumes due to the COVID-19 pandemic. Revenue for the Supply Chain segment increased primarily due to increased volume from a client in the computing market.

Cost of Revenue

Cost of revenue for the fourth quarter decreased $42.5 million, or 25.4%, as compared to the fourth quarter of 2019, primarily due to declines in labor and material costs in both the Direct Marketing and Supply Chain segments.

Cost of revenue for the 2020 fiscal year decreased $50.2 million, or 7.5%, as compared to fiscal 2019, also due to declines in labor and material costs in both the Direct Marketing and Supply Chain segments.

The increase in gross profit margin during both the fourth quarter and 2020 fiscal year is attributable to our focus on customer rationalization to improve profitability, as well as cost reduction initiatives in both segments to offset the impact of COVID-19.






Selling, General and Administrative

Selling, general and administrative expenses for the fourth quarter decreased $38.4 million, or 61.5%, as compared to the fourth quarter of 2019, primarily due to a $32.1 million charge for accrued taxes in the Direct Marketing segment in the prior year period that did not recur, as well as cost reduction initiatives in both segments to offset the impact of COVID-19.

Selling, general and administrative expenses for the 2020 fiscal year decreased $40.8 million, or 28.3%, as compared to fiscal 2019, primarily due to the $32.1 million charge in the prior fiscal year for accrued taxes that did not recur, as well as cost reduction initiatives in both segments to offset the impact of COVID-19.

Amortization of Intangible Assets

Amortization of intangibles assets for the fourth quarter and 2020 fiscal year decreased $0.7 million, or 10.2%, and $3.2 million, or 10.5%, respectively, as compared to the same periods in the prior year, due to lower amortization expense with respect to our customer relationship intangible asset.

Interest Expense

Interest expense for the fourth quarter and 2020 fiscal year decreased $2.1 million, or 21.5%, and $8.0 million, or 19.0%, respectively, as compared to the same periods in the prior year, due to the maturity and settlement of the Company's 5.25% Convertible Senior Notes on March 1, 2019.

All Other (Income) Expenses, Net

All other income, net for the fourth quarter decreased $5.3 million, or 108.0%, as compared to the fourth quarter of 2019, primarily due to the derecognition of accrued pricing liabilities in the Supply Chain segment in the fourth quarter of 2019.

All other income, net for the 2020 fiscal year decreased $2.5 million, or 53.5%, as compared to fiscal 2019, primarily due to the derecognition of accrued pricing liabilities in the Supply Chain segment, partially offset by $0.6 million in additional realized foreign exchange gains in the Supply Chain segment.

Income Tax Expense

Income tax expense for the fourth quarter increased $1.2 million, 164.9%, as compared to the fourth quarter of 2019, due to a $0.7 million increase for uncertain tax positions and a $0.5 million tax provision adjustment recorded in 2020 to reflect our final 2019 tax returns.

Income tax expense for the 2020 fiscal year increased $1.2 million, 26.7%, as compared to fiscal 2019, due to increased income in foreign jurisdictions and other discreet tax adjustments.

Additions to Property and Equipment (Capital Expenditures)

Capital expenditures for the fourth quarter totaled $0.6 million, or 0.4% of net revenue, as compared to $2.7 million, or 1.3% of net revenue, for the fourth quarter of 2019. For the 2020 fiscal year, capital expenditures were $12.1 million, or 1.5% of net revenue, as compared to $14.5 million, or 1.8% of net revenue, for fiscal 2019.

Additional Non-GAAP Financial Measures

Adjusted EBITDA for the fourth quarter and 2020 fiscal year increased $10.1 million, or 68.5%, and $21.5 million, or 32.8%, respectively, as compared to the same periods in the prior year, primarily due to improved gross profit and related gross profit margin improvement, as well as lower selling, general and administrative expenses resulting from our continued focus on cost reduction initiatives.

Liquidity and Capital Resources

As of July 31, 2020, the Company had cash and cash equivalents of $75.9 million. As of July 31, 2020, ModusLink and IWCO Direct had a readily available borrowing capacity of $4.4 million and $25.0 million, respectively, under their credit facilities.






As of July 31, 2020, total debt outstanding was $386.9 million, which was comprised of a $372.0 million term loan due December 15, 2022 and a $14.9 million 7.50% Convertible Senior Note due March 1, 2024.

About Steel Connect, Inc.

Steel Connect, Inc. is a diversified holding company with two wholly-owned subsidiaries, IWCO Direct Holdings, Inc. and ModusLink Corporation, that serve the direct marketing and supply chain management markets, respectively.

IWCO Direct delivers highly-effective data-driven marketing solutions for its customers, which represent some of the largest and most respected brands in the world in markets such as insurance, financial services and multiple system operators (cable or direct broadcasting satellite TV systems). Its full range of services includes strategy, creative and execution for omnichannel marketing campaigns, along with one of the industry's most sophisticated 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 Direct was named one of the largest direct mail production providers in North America, with the largest platform of continuous digital print technology and a growing direct marketing agency service. IWCO Direct's solutions enable customers to improve customer lifetime value, which in turn, has led to longer customer relationships. The company is ISO/IEC 27001 Information Security Management System (ISMS) certified through BSI, reflecting its commitment to data security.

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


– Financial Tables Follow –





Steel Connect, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)

 
July 31,
2020
 
July 31,
2019
Assets:
 
 
 
Cash and cash equivalents
$
75,887

 
$
32,548

Accounts receivable, trade, net
93,072

 
112,141

Inventories, net
15,354

 
23,674

Funds held for clients
18,755

 
13,516

Prepaid expenses and other current assets
20,475

 
31,445

Total current assets
223,543

 
213,324

Property and equipment, net
79,678

 
91,268

Goodwill
257,128

 
257,128

Other intangible assets, net
135,263

 
162,518

Operating right-of-use assets
56,140

 

Other assets
7,420

 
7,325

Total assets
$
759,172

 
$
731,563

 
 
 
 
Liabilities:
Accounts payable
$
70,002

 
$
85,898

Accrued expenses
111,380

 
112,658

Funds held for clients
18,755

 
13,516

Current portion of long-term debt
5,527

 
5,732

Current lease obligations
14,318

 
127

Other current liabilities
29,950

 
38,919

Total current liabilities
249,932

 
256,850

Convertible note payable
8,054

 
7,432

Long-term debt, excluding current portion
365,468

 
368,505

Long-term lease obligations
43,211

 

Other long-term liabilities
8,509

 
10,898

Total liabilities
675,174

 
643,685

 
 
 
 
Contingently redeemable preferred stock
35,180

 
35,186

 
 
 
 
Total stockholders' equity
48,818

 
52,692

 
 
 
 
Total liabilities, contingently redeemable preferred stock and stockholders' equity
$
759,172

 
$
731,563







Steel Connect, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)

 
Three Months Ended July 31,
 
Fiscal Year Ended July 31,
 
2020
 
2019
 
Fav (Unfav)
 
2020
 
2019
 
Fav (Unfav)
Net revenue:
 
 
 
 
 
 
 
 
 
 
 
Products
$
89,956

 
$
124,355

 
(27.7
)%
 
$
444,360

 
$
486,902

 
(8.7
)%
Services
74,901

 
80,116

 
(6.5
)%
 
338,453

 
332,928

 
1.7
 %
Total net revenue
164,857

 
204,471

 
(19.4
)%
 
782,813

 
819,830

 
(4.5
)%
Cost of revenue
124,863

 
167,345

 
25.4
 %
 
619,854

 
670,100

 
7.5
 %
Gross profit
39,994

 
37,126

 
7.7
 %
 
162,959

 
149,730

 
8.8
 %
Gross profit margin
24.3
%
 
18.2
%
 
 
 
20.8
%
 
18.3
%
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
23,997

 
62,376

 
61.5
 %
 
103,261

 
144,078

 
28.3
 %
Amortization of intangible assets
6,536

 
7,277

 
10.2
 %
 
27,255

 
30,446

 
10.5
 %
Loss on sale of property

 
571

 
100.0
 %
 

 
485

 
100.0
 %
Total operating expenses
30,533

 
70,224

 
56.5
 %
 
130,516

 
175,009

 
25.4
 %
Operating income (loss)
9,461

 
(33,098
)
 
128.6
 %
 
32,443

 
(25,279
)
 
228.3
 %
Other expenses, net
(7,932
)
 
(4,170
)
 
(90.2
)%
 
(31,810
)
 
(36,820
)
 
13.6
 %
Income (loss) before income taxes
1,529

 
(37,268
)
 
104.1
 %
 
633

 
(62,099
)
 
101.0
 %
Income tax expense
1,889

 
713

 
(164.9
)%
 
5,917

 
4,670

 
(26.7
)%
Gains on investments in affiliates, net of tax

 

 
 %
 

 
(42
)
 
(100.0
)%
Net loss
(360
)
 
(37,981
)
 
99.1
 %
 
(5,284
)
 
(66,727
)
 
92.1
 %
Less: Preferred dividends on redeemable preferred stock
(537
)
 
(532
)
 
(0.9
)%
 
(2,129
)
 
(2,129
)
 
 %
Net loss attributable to common stockholders
$
(897
)
 
$
(38,513
)
 
97.7
 %
 
$
(7,413
)
 
$
(68,856
)
 
89.2
 %
Basic and diluted net loss per share attributable to common stockholders
$
(0.01
)
 
$
(0.63
)
 
98.4
 %
 
$
(0.12
)
 
$
(1.13
)
 
89.4
 %
Weighted average common shares used in basic and diluted loss per share
61,826

 
61,180

 
 
 
61,644

 
61,180

 
 






Steel Connect, Inc. and Subsidiaries
Segment Data
(in thousands)
(unaudited)

 
Three Months Ended
July 31,
 
Fiscal year ended
July 31,
 
2020
 
2019
 
2020
 
2019
Net revenue:
 
 
 
 
 
 
 
Direct Marketing
$
89,956

 
$
124,355

 
$
444,360

 
$
486,902

Supply Chain
74,901

 
80,116

 
338,453

 
332,928

 
$
164,857

 
$
204,471

 
$
782,813

 
$
819,830

Operating income (loss):
 
 
 
 
 
 
 
Direct Marketing
$
561

 
$
(25,924
)
 
$
12,940

 
$
(9,154
)
Supply Chain
9,144

 
(4,647
)
 
27,952

 
(3,822
)
Total segment operating income (loss)
9,705

 
(30,571
)
 
40,892

 
(12,976
)
Corporate-level activity
(244
)
 
(2,527
)
 
(8,449
)
 
(12,303
)
Total operating income (loss)
9,461

 
(33,098
)
 
32,443

 
(25,279
)
Total other expense
(7,932
)
 
(4,170
)
 
(31,810
)
 
(36,820
)
Income (loss) before income taxes
$
1,529

 
$
(37,268
)
 
$
633

 
$
(62,099
)






Steel Connect, Inc. and Subsidiaries
Reconciliation of Non-GAAP Measures to GAAP Measures
(in thousands)
(unaudited)

EBITDA and Adjusted EBITDA Reconciliations:
 
Three Months Ended
July 31,
 
Fiscal year ended
July 31,
 
2020
 
2019
 
2020
 
2019
Net loss
$
(360
)
 
$
(37,981
)
 
$
(5,284
)
 
$
(66,727
)
 
 
 
 
 
 
 
 
Interest income
(23
)
 
(11
)
 
(61
)
 
(528
)
Interest expense
7,544

 
9,616

 
33,969

 
41,951

Income tax expense
1,889

 
713

 
5,917

 
4,670

Depreciation
5,835

 
5,726

 
23,075

 
22,058

Amortization of intangible assets
6,536

 
7,277

 
27,255

 
30,446

EBITDA
21,421

 
(14,660
)
 
84,871

 
31,870

 
 
 
 
 
 
 
 
Strategic consulting and other related professional fees
(50
)
 
100

 
(50
)
 
722

Executive severance and employee retention

 
312

 
534

 
387

Restructuring and restructuring-related expense
(951
)
 
57

 
(27
)
 
57

Share-based compensation
139

 
93

 
720

 
1,267

Loss on sale of long-lived assets
369

 
571

 
414

 
485

Impairment of long-lived assets

 
2,546

 

 
3,015

Unrealized foreign exchange (gains) losses, net
1,224

 
(1,835
)
 
(48
)
 
(115
)
Other non-cash gains, net
(1,248
)
 
(4,494
)
 
(1,419
)
 
(4,265
)
Adjustments related to certain tax liabilities
3,968

 
32,070

 
1,936

 
32,070

Gains on investments in affiliates

 

 

 
(42
)
Adjusted EBITDA
$
24,872

 
$
14,760

 
$
86,931

 
$
65,451

 
 
 
 
 
 
 
 
Net revenue
$
164,857

 
$
204,471

 
$
782,813

 
$
819,830

Adjusted EBITDA margin
15.1
%
 
7.2
%
 
11.1
%
 
8.0
%

Free Cash Flow Reconciliation:
 
Three Months Ended
July 31,
 
Fiscal year ended
July 31,
 
2020
 
2019
 
2020
 
2019
Net cash provided by operating activities
$
11,573

 
$
24,465

 
$
71,624

 
$
20,849

Additions to property and equipment
(593
)
 
(2,699
)
 
(12,070
)
 
(14,539
)
Free cash flow
$
10,980

 
$
21,766

 
$
59,554

 
$
6,310


Net Debt Reconciliation:
 
July 31,
2020
 
July 31,
2019
Total debt, net
379,049

 
387,669

Unamortized discounts and issuance costs
7,863

 
8,396

Cash and cash equivalents
(75,887
)
 
(32,548
)
Net debt
311,025

 
363,517






Note Regarding Use of Non-GAAP Financial Measurements

In addition to the financial measures prepared in accordance with generally accepted accounting principles, the Company uses EBITDA, Adjusted EBITDA, free cash flow and net debt, non-GAAP financial measures, to assess its performance. EBITDA represents earnings (loss) before interest income, interest expense, income tax expense, depreciation and amortization of intangible assets. We define Adjusted EBITDA 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 and restructuring-related expense, share-based compensation, (gain) loss on sale of long-lived assets, impairment of long-lived assets, unrealized foreign exchange (gains) losses, net, other non-cash (gains) losses, net, adjustments related to certain tax liabilities and (gains) losses on investments in affiliates. The Company defines free cash flow as net cash provided by (used in) operating activities less additions to property and equipment, and defines net debt as the sum of total debt, net, prior to reductions for unamortized discounts and issuance costs, less cash and cash equivalents.

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

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

Some of the limitations of EBITDA and Adjusted EBITDA include:

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

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

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






Net Operating Loss Carryforwards

The Company's Restated Certificate of Incorporation includes provisions designed to protect the tax benefits of the Company's net operating loss carryforwards by preventing certain transfers of our securities that could result in an "ownership change" (as defined under Section 382 of the Internal Revenue Code). Pursuant to the tax plan and subject to certain exceptions, if a stockholder (or group) becomes a 4.99-percent stockholder after adoption of the tax plan, certain rights attached to each outstanding share of our common stock would generally become exercisable and entitle stockholders (other than the new 4.99-percent stockholder or group) to purchase additional shares of the Company at a significant discount, resulting in substantial dilution in the economic interest and voting power of the new 4.99-percent stockholder (or group). In addition, under certain circumstances in which the Company is acquired in a merger or other business combination after an non-exempt stockholder (or group) becomes a new 4.99-percent stockholder, each holder of a right (other than the new 4.99-percent stockholder or group) would then be entitled to purchase shares of the acquiring company's common stock at a discount. For further discussion of the Company's tax benefits preservation plan, please see the Company's filings with the Securities and Exchange Commission ("SEC").

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements in this release that are not historical facts are hereby identified as "forward-looking statements" for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact, including without limitation, those with respect to the Company's goals, plans, expectations and strategies set forth herein are forward-looking statements. The following important factors and uncertainties, among others, could cause actual results to differ materially from those described in these forward-looking statements: client or program losses; fluctuations in demand for our products and services; general economic conditions and public health crises (such as the ongoing coronavirus outbreak); demand variability with clients to which the Company sells on a purchase order basis rather than pursuant to contracts with minimum purchase requirements; risks inherent with conducting international operations; the Company's ability to execute on its business strategy and to achieve anticipated synergies and benefits from business acquisitions, including any cost reduction plans and the continued and increased demand for and market acceptance of its services, which could negatively affect the Company's ability to meet its revenue, operating income and cost savings targets, maintain and improve its cash position, expand its operations and revenue, lower its costs, improve its gross margins, reach and sustain profitability, reach its long-term objectives and operate optimally; increased competition and technological changes in the markets in which the Company competes; failure to realize expected benefits of restructuring and cost-cutting actions; difficulties integrating technologies, operations and personnel in accordance with the Company's business strategy; the Company's ability to preserve and monetize its net operating losses; failure to settle disputes and litigation on terms favorable to the Company; failure to maintain compliance with NASDAQ's continued listing requirements; and the Company's ability to repay indebtedness and potential adverse effects from the phase-out of LIBOR. For a detailed discussion of cautionary statements and risks that may affect the Company's future results of operations and financial results, please refer to the Company's filings with the SEC, including, but not limited to, the risk factors in the Company's Annual Report on Form 10-K filed with the SEC on September 30, 2020. These filings are available on the Company's Investor Relations website under the "SEC Filings" tab.

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

Investor Relations Contact

Jennifer Golembeske
212-520-2300
jgolembeske@steelpartners.com