Company Quick10K Filing
Steel Connect
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 62 $109
10-Q 2020-03-11 Quarter: 2020-01-31
10-Q 2019-12-10 Quarter: 2019-10-31
10-Q 2019-06-06 Quarter: 2019-04-30
10-Q 2019-03-11 Quarter: 2019-01-31
10-Q 2018-12-21 Quarter: 2018-10-31
10-K 2018-12-04 Annual: 2018-07-31
10-Q 2018-06-18 Quarter: 2018-04-30
10-Q 2018-03-15 Quarter: 2018-01-31
10-Q 2017-12-07 Quarter: 2017-10-31
10-K 2017-10-16 Annual: 2017-07-31
10-Q 2017-06-05 Quarter: 2017-04-30
10-Q 2017-03-06 Quarter: 2017-01-31
10-Q 2016-12-07 Quarter: 2016-10-31
10-K 2016-10-14 Annual: 2016-07-31
10-Q 2016-06-09 Quarter: 2016-04-30
10-Q 2016-03-11 Quarter: 2016-01-31
10-Q 2015-12-10 Quarter: 2015-10-31
10-K 2015-10-14 Annual: 2015-07-31
10-Q 2015-06-08 Quarter: 2015-04-30
10-Q 2015-03-12 Quarter: 2015-01-31
10-Q 2014-12-10 Quarter: 2014-10-31
10-K 2014-10-14 Annual: 2014-07-31
10-Q 2014-06-09 Quarter: 2014-04-30
10-Q 2014-03-03 Quarter: 2014-01-31
10-Q 2013-12-10 Quarter: 2013-10-31
10-Q 2013-06-10 Quarter: 2013-04-30
10-Q 2013-03-12 Quarter: 2013-01-31
10-Q 2013-01-11 Quarter: 2012-10-31
10-K 2013-01-11 Annual: 2012-10-31
10-Q 2013-01-11 Quarter: 2012-04-30
10-Q 2012-03-12 Quarter: 2012-01-31
10-Q 2011-12-12 Quarter: 2011-10-31
10-K 2011-10-14 Annual: 2011-07-31
10-Q 2011-06-09 Quarter: 2011-04-30
10-Q 2011-03-14 Quarter: 2011-01-31
10-Q 2010-12-10 Quarter: 2010-10-31
10-K 2010-10-14 Annual: 2010-07-31
10-Q 2010-06-09 Quarter: 2010-04-30
10-Q 2010-03-12 Quarter: 2010-01-31
8-K 2020-03-18 Other Events, Exhibits
8-K 2020-03-12 Earnings, Exhibits
8-K 2019-12-31 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2019-12-30
8-K 2019-12-17 Officers, Exhibits
8-K 2019-12-10 Earnings, Exhibits
8-K 2019-11-22 Officers
8-K 2019-10-28 Officers, Exhibits
8-K 2019-07-24 Shareholder Vote
8-K 2019-06-14 Enter Agreement
8-K 2019-06-06 Earnings, Exhibits
8-K 2019-04-30 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-03-11 Earnings, Exhibits
8-K 2019-03-01 Officers, Exhibits
8-K 2019-02-28 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-12-24 Earnings, Exhibits
8-K 2018-12-18 Exhibits
8-K 2018-12-06
8-K 2018-12-03 Officers
8-K 2018-11-02 Exhibits
8-K 2018-10-31 Earnings, Officers, Exhibits
8-K 2018-06-19 Regulation FD, Exhibits
8-K 2018-06-19 Earnings, Exhibits
8-K 2018-05-09 Enter Agreement, Exhibits
8-K 2018-04-12 Shareholder Rights, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-03-19 Regulation FD, Exhibits
8-K 2018-03-19 Earnings, Exhibits
8-K 2018-02-20 Amend Bylaw, Other Events, Exhibits
8-K 2018-01-19 Enter Agreement, Shareholder Rights, Amend Bylaw, Other Events, Exhibits
8-K 2017-12-29 Enter Agreement
STCN 2020-01-31
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Default Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 stcn-20200131xex311.htm
EX-31.2 stcn-20200131xex312.htm
EX-32.1 stcn-20200131xex321.htm
EX-32.2 stcn-20200131xex322.htm

Steel Connect Earnings 2020-01-31

STCN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CIC 123 412 15 0 0 6 6 123 0% 20.2 1%
GIG 121 78 73 0 0 -1 -0 -23 75.5 -1%
KBLMU 112 50 5 0 0 1 1 113 88.3 2%
STCN 109 735 607 818 150 -36 57 455 18% 8.0 -5%
WRLS 95 64 59 0 0 1 2 95 61.4 2%
HYAC 95 337 17 0 0 1 2 94 41.5 0%
SREV 91 159 66 227 68 -16 -1 63 30% -91.1 -10%
TBRG 83 266 12 0 0 3 3 83 32.0 1%
AGFS 74 867 525 182 134 -33 20 448 74% 22.0 -4%
PFSW 74 190 144 311 79 0 16 94 26% 5.7 0%

10-Q 1 stcn-20200131x10q.htm 10-Q Document

 
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 January 31, 2020
OR
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)
(781663-5000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, 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 Market
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 March 1, 2020, there were 62,375,558 shares issued and outstanding of the registrant's Common Stock, $0.01 par value per share.
 




STEEL CONNECT, INC.
FORM 10-Q
TABLE OF CONTENTS

2



PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.

3



STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
 
January 31,
2020
 
July 31,
2019
ASSETS
Cash and cash equivalents
$
30,197

 
$
32,548

Accounts receivable, trade, net of allowance for doubtful accounts of $334 and $1,804 at January 31, 2020 and July 31, 2019, respectively
118,291

 
112,141

Inventories, net
24,241

 
23,674

Funds held for clients
15,977

 
13,516

Prepaid expenses and other current assets
34,828

 
31,445

Total current assets
223,534

 
213,324

Property and equipment, net
90,088

 
91,268

Goodwill
257,128

 
257,128

Other intangible assets, net
148,334

 
162,518

Operating right-of-use assets
61,650

 

Other assets
8,161

 
7,325

Total assets
$
788,895

 
$
731,563

LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Accounts payable
$
86,148

 
$
85,898

Accrued expenses
109,760

 
112,658

Funds held for clients
15,977

 
13,516

Current portion of long-term debt
5,734

 
5,732

Current lease obligations
14,788

 
127

Other current liabilities
35,706

 
38,919

Total current liabilities
268,113

 
256,850

Convertible Note payable
8,262

 
7,432

Long-term debt, excluding current portion
365,638

 
368,505

Long-term lease obligations
48,133

 

Other long-term liabilities
9,753

 
10,898

Total long-term liabilities
431,786

 
386,835

Total liabilities
699,899

 
643,685

Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at January 31, 2020 and July 31, 2019
35,181

 
35,186

Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at January 31, 2020 and July 31, 2019; zero shares issued and outstanding at January 31, 2020 and July 31, 2019

 

Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 62,375,558 issued and outstanding shares at January 31, 2020; 61,805,856 issued and outstanding shares at July 31, 2019
624

 
618

Additional paid-in capital
7,477,697

 
7,477,327

Accumulated deficit
(7,426,119
)
 
(7,426,287
)
Accumulated other comprehensive income
1,613

 
1,034

Total stockholders' equity
53,815

 
52,692

Total liabilities, contingently redeemable preferred stock and stockholders' equity
$
788,895

 
$
731,563

See accompanying notes to unaudited condensed consolidated financial statements

4



STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2020
 
2019
 
2020
 
2019
Net revenue:
 
 
 
 
 
 
 
Services
$
92,335

 
$
87,776

 
$
184,485

 
$
174,815

Products
123,117

 
118,447

 
256,120

 
246,541

Total net revenue
215,452

 
206,223

 
440,605

 
421,356

Cost of revenue
170,203

 
168,680

 
351,110

 
345,613

Gross profit
45,249

 
37,543

 
89,495

 
75,743

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
31,165

 
27,626

 
53,392

 
54,191

Amortization of intangible assets
6,911

 
7,791

 
14,188

 
15,890

Total operating expenses
38,076

 
35,417

 
67,580

 
70,081

Operating income
7,173

 
2,126

 
21,915

 
5,662

Other income (expense):
 
 
 
 
 
 
 
Interest income
14

 
172

 
30

 
495

Interest expense
(8,733
)
 
(10,984
)
 
(17,902
)
 
(22,041
)
Other losses, net
(823
)
 
(1,662
)
 
(265
)
 
(718
)
Total other expense
(9,542
)
 
(12,474
)
 
(18,137
)
 
(22,264
)
Income (loss) before income taxes
(2,369
)
 
(10,348
)
 
3,778

 
(16,602
)
Income tax expense
1,188

 
1,405

 
2,543

 
2,536

Gains on investments in affiliates, net of tax

 

 

 
(20
)
Net income (loss)
(3,557
)
 
(11,753
)
 
1,235

 
(19,118
)
Less: Preferred dividends on redeemable preferred stock
(531
)
 
(536
)
 
(1,067
)
 
(1,073
)
Net income (loss) attributable to common stockholders
$
(4,088
)
 
$
(12,289
)
 
$
168

 
$
(20,191
)
 
 
 
 
 
 
 
 
Basic net earnings (loss) per share attributable to common stockholders
$
(0.07
)
 
$
(0.20
)
 
$
0.00

 
$
(0.33
)
Diluted net earnings (loss) per share attributable to common stockholders
$
(0.07
)
 
$
(0.20
)
 
$
0.00

 
$
(0.33
)
Weighted average common shares used in:
 
 
 
 
 
 
 
Basic earnings (loss) per share
61,538

 
60,935

 
61,469

 
60,974

Diluted earnings (loss) per share
61,538

 
60,935

 
61,482

 
60,974

See accompanying notes to unaudited condensed consolidated financial statements

5



STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2020
 
2019
 
2020
 
2019
Net income (loss)
$
(3,557
)
 
$
(11,753
)
 
$
1,235

 
$
(19,118
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
664

 
1,952

 
677

 
332

Net unrealized holding loss on securities, net of tax
(96
)
 
(74
)
 
(96
)
 
(89
)
Pension liability adjustments, net of tax

 
(469
)
 
(2
)
 
(64
)
Other comprehensive income (loss)
568

 
1,409

 
579

 
179

Comprehensive income (loss)
$
(2,989
)
 
$
(10,344
)
 
$
1,814

 
$
(18,939
)
See accompanying notes to unaudited condensed consolidated financial statements

6



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 October 31, 2019
61,810,253

 
$
618

 
$
7,477,505

 
$
(7,422,031
)
 
$
1,045

 
$
57,137

Net loss

 

 

 
(3,557
)
 

 
(3,557
)
Preferred dividends

 

 

 
(531
)
 

 
(531
)
Issuance of common stock pursuant to employee stock purchase plan
4,782

 

 
2

 

 

 
2

Restricted stock grants
560,523

 
6

 
(6
)
 

 

 

Share-based compensation

 

 
196

 

 

 
196

Other comprehensive items

 

 

 

 
568

 
568

Balance at January 31, 2020
62,375,558

 
$
624

 
$
7,477,697

 
$
(7,426,119
)
 
$
1,613

 
$
53,815

 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders'
Equity
Balance at October 31, 2018
61,386,888

 
$
614

 
$
7,468,647

 
$
(7,365,332
)
 
$
1,504

 
$
105,433

Net loss

 

 

 
(11,753
)
 

 
(11,753
)
Preferred dividends

 

 

 
(537
)
 

 
(537
)
Issuance of common stock pursuant to employee stock purchase plan
6,298

 

 
7

 

 

 
7

Restricted stock grants
404,621

 
4

 
(4
)
 

 

 

Share-based compensation

 

 
(22
)
 

 

 
(22
)
Other comprehensive items

 

 

 

 
1,409

 
1,409

Balance at January 31, 2019
61,797,807

 
$
618

 
$
7,468,628

 
$
(7,377,622
)
 
$
2,913

 
$
94,537

See accompanying notes to unaudited condensed consolidated financial statements


7



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, 2019
61,805,856

 
$
618

 
$
7,477,327

 
$
(7,426,287
)
 
$
1,034

 
$
52,692

Net income

 

 

 
1,235

 

 
1,235

Preferred dividends

 

 

 
(1,067
)
 

 
(1,067
)
Issuance of common stock pursuant to employee stock purchase plan
9,179

 

 
4

 

 

 
4

Restricted stock grants
560,523

 
6

 
(6
)
 

 

 

Share-based compensation

 

 
372

 

 

 
372

Other comprehensive items

 

 

 

 
579

 
579

Balance at January 31, 2020
62,375,558

 
$
624

 
$
7,477,697

 
$
(7,426,119
)
 
$
1,613

 
$
53,815


 
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

 

 

 
(19,118
)
 

 
(19,118
)
Effect of adoption of ASC 606 on August 1, 2018, net of taxes

 

 

 
6,138

 

 
6,138

Preferred dividends

 

 

 
(1,073
)
 

 
(1,073
)
Issuance of common stock pursuant to employee stock purchase plan
9,405

 

 
13

 

 

 
13

Restricted stock grants
1,045,543

 
10

 
(10
)
 

 

 

Share-based compensation

 

 
770

 

 

 
770

Other comprehensive items

 

 

 

 
179

 
179

Balance at January 31, 2019
61,797,807

 
$
618

 
$
7,468,628

 
$
(7,377,622
)
 
$
2,913

 
$
94,537

See accompanying notes to unaudited condensed consolidated financial statements


8



STEEL CONNECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
January 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income (loss)
$
1,235

 
$
(19,118
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation
11,374

 
10,451

Amortization of intangible assets
14,188

 
15,890

Amortization of deferred financing costs
146

 
511

Accretion of debt discount
830

 
2,311

Impairment of long-lived assets

 
432

Share-based compensation
372

 
770

Other losses, net
265

 
718

Gains on investments in affiliates

 
(20
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
(6,157
)
 
(4,618
)
Inventories, net
(606
)
 
(2,961
)
Prepaid expenses and other current assets
(3,258
)
 
3,593

Accounts payable and accrued expenses
(2,712
)
 
8,129

Refundable and accrued income taxes, net
55

 
(1,833
)
Other assets and liabilities
(859
)
 
1,209

Net cash provided by operating activities
14,873

 
15,464

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(10,370
)
 
(8,953
)
Proceeds from the disposition of property and equipment
23

 
14

Proceeds from the sale of available-for-sale securities
163

 

Proceeds from investments in affiliates

 
20

Net cash used in investing activities
(10,184
)
 
(8,919
)
Cash flows from financing activities:
 
 
 
Payment of long-term debt
(3,000
)
 
(3,000
)
Payment of preferred dividends
(1,077
)
 
(1,072
)
Payment of financing costs
(414
)
 

Purchase of the Company's Convertible Notes

 
(3,700
)
Repayments on capital lease obligations
(79
)
 
(76
)
Proceeds from issuance of common stock
12

 
13

Net cash used in financing activities
(4,558
)
 
(7,835
)
Net effect of exchange rate changes on cash, cash equivalents and restricted cash
(21
)
 
(329
)
Net increase (decrease) in cash, cash equivalents and restricted cash
110

 
(1,619
)
Cash, cash equivalents and restricted cash, beginning of period
46,064

 
103,826

Cash, cash equivalents and restricted cash, end of period
$
46,174

 
$
102,207

 
 
 
 
Cash and cash equivalents, end of period
$
30,197

 
$
92,899

Funds held for clients, end of period
15,977

 
9,308

Cash, cash equivalents and restricted cash, end of period
$
46,174

 
$
102,207

See accompanying notes to unaudited condensed consolidated financial statements

9



STEEL CONNECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1)
NATURE OF OPERATIONS
Steel Connect, Inc. (the "Company") together with its consolidated subsidiaries, operates through its wholly-owned subsidiaries, ModusLink Corporation ("ModusLink" or "Supply Chain") and IWCO Direct Holdings, Inc. ("IWCO Direct" or "IWCO").
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.
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.
Historically, the Company has financed its operations and met its capital requirements primarily through funds generated from operations, the sale of its 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 current cash and cash equivalents, ModusLink's credit agreement with MidCap Financial Trust, IWCO's revolving credit facility, and cash, if any, provided by operating activities. The Company's expectations regarding its ability to use its existing cash to continue funding its operations are based on assumptions that may prove to be inaccurate, and the Company may require capital resources sooner than currently expected. While the Company believes it will be able to access this additional liquidity based on existing information, the assumptions underlying this belief may also later prove to be inaccurate.
As of January 31, 2020 and July 31, 2019, the Company had cash and cash equivalents of $30.2 million and $32.5 million, respectively. As of January 31, 2020, the Company had a working capital deficit of $44.6 million, which includes accrued pricing liabilities and certain tax related liabilities which the Company believes will not require a cash outlay in the next twelve months. As of January 31, 2020, ModusLink had a readily available borrowing capacity under its revolving credit facility of $6.8 million. As of January 31, 2020, IWCO Direct had a readily available borrowing capacity under its revolving facility of $19.0 million. The Company believes it will generate sufficient cash to meet its debt covenants under its credit facilities to which certain of its subsidiaries are a party and that it will be able to obtain cash through its current and future credit facilities, if needed.
(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 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, 2019, which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 15, 2019. The results for the three and six months ended January 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. The year-end condensed consolidated 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 six months ended January 31, 2020, the Company evaluated subsequent events for potential recognition and disclosure through the date these financial statements were filed.

10



During the three months ended October 31, 2019, the Company recorded a $6.4 million adjustment to correct an out-of-period misstatement related to the Company's estimate for certain tax related liabilities. Had this correction been recorded for the fiscal year ended July 31, 2019, the Company's selling, general and administrative expenses and net loss for that period would have been reduced to $137.7 million and $60.3 million, respectively. The Company's accrued expenses as of July 31, 2019 would have been reduced to $106.3 million.
(3)
RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which supersedes the previous guidance for lease accounting, Leases (Topic 840). ASC 842 requires lessees to recognize leases on their balance sheets (through right-of-use ("ROU") assets and lease liabilities). The Company adopted the provisions of ASC 842 on August 1, 2019, using the modified retrospective approach and the option presented under ASU 2018-11, Leases (Topic 842), to transition only active leases as of the August 1, 2019 adoption date, with a cumulative effect adjustment recorded as of that date. All comparative periods prior to August 1, 2019 retain the financial reporting and disclosure requirements of ASC 840.
The Company elected to utilize the transition package of practical expedients permitted under ASC 842, which, among other things, allowed the Company to carry forward the historical lease classification. Additionally, the Company made an accounting policy election to exempt short-term leases (with an initial term of 12 months or less) from the provisions of ASC 842, which resulted in recognition of the related lease payments on a straight-line basis over the lease term, consistent with prior treatment under ASC 840. The Company did not elect the "hindsight" practical expedient when determining the lease terms under ASC 842.
Adoption of ASC 842 resulted in the recording of ROU operating lease assets and corresponding operating lease liabilities of $51.1 million and $53.1 million, respectively, as of August 1, 2019. The difference between the ROU assets and the lease liabilities represents the existing deferred rent balance (under ASC 840), which was reduced to zero, net of prepaids, upon adoption of ASC 842 on August 1, 2019. The adoption of ASC 842 did not materially impact the Company's net earnings and had no impact on its cash flows. The Company's current lease arrangements expire through 2030.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This new standard was created to simplify the accounting for share-based payments to nonemployees. This standard provides guidance on how to account for share-based payment transactions with nonemployees in which a grantor acquires goods or services to be used or consumed in the grantor's own operations by issuing share-based payment awards. The amendments in ASU 2018-07 are effective for the Company's 2020 fiscal year. The adoption of the accounting standard did not have a material impact on the Company's financial statements.
Accounting Standards Issued and Not Yet Implemented
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Loses on Financial Instruments, an accounting standard update that requires measurement and recognition of expected credit losses for financial instruments, including trade receivables, based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal year 2024 on a modified retrospective basis which requires a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The amendments in ASU 2018-13 are effective for the Company's fiscal year 2021, except that the standard permits an entity to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until the effective date. The Company does not expect that the full adoption of this standard will have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension and other post-retirement plans. The amendments in ASU 2018-14 are effective for the Company's fiscal year 2021. The Company does not expect that the adoption of this standard will have a material impact on the Company's consolidated financial statements.

11



In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, (a consensus of the FASB Emerging Issues Task Force) to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The amendments in ASU 2018-15 are effective for the Company's first quarter of fiscal year 2021. The Company is currently evaluating the potential impact of this new guidance.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends the existing guidance relating to the accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of U.S. GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The new guidance is effective for the Company's first quarter of fiscal year 2022. The Company does not expect that the adoption of this new guidance will have a material impact on its consolidated financial statements.
(4)
INVENTORIES
Inventories, net consisted of the following:
 
January 31,
2020
 
July 31,
2019
 
(In thousands)
Raw materials
$
21,631

 
$
21,322

Work-in-process
428

 
587

Finished goods
2,182

 
1,765

 
$
24,241

 
$
23,674

(5)
GOODWILL AND INTANGIBLE ASSETS
The Company's goodwill of $257.1 million as of January 31, 2020 relates to the Company's Direct Marketing reporting unit, which is the only reporting unit in the Direct Marketing reportable segment. The Company has not previously recognized any impairment losses for this reporting unit.
Other intangible assets, net, as of January 31, 2020, include trademarks and tradenames, and customer relationships. The trademarks and tradenames intangible assets are being amortized on a straight-line basis and the customer relationship intangible assets are being amortized on a double-declining basis over their estimated useful lives.
The table below presents information for the Company's intangible assets:
 
 
 
January 31, 2020
 
July 31, 2019
 
Weighted Average Amortization Period
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 
(in years)
 
(In thousands)
Customer relationships
15
 
$
192,730

$
50,381

$
142,349

 
$
192,730

$
39,617

$
153,113

Trademarks and trade names
3
 
20,520

14,535

5,985

 
20,520

11,115

9,405

Total
 
 
$
213,250

$
64,916

$
148,334

 
$
213,250

$
50,732

$
162,518

The table below presents amortization expense recorded by the Company for other intangible assets:
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Customer relationships
$
5,197

 
$
5,996

 
$
10,764

 
$
12,420

Trademarks and trade names
1,714

 
1,795

 
3,424

 
3,470

Total
$
6,911

 
$
7,791

 
$
14,188

 
$
15,890


12



(6)
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following tables reflect the components of "Accrued expenses" and "Other current liabilities":
 
January 31,
2020
 
July 31,
2019
Accrued Expense
(In thousands)
Accrued taxes
$
55,217

 
$
59,057

Accrued compensation
24,810

 
22,584

Accrued interest
467

 
467

Accrued audit, tax and legal
3,711

 
3,148

Accrued contract labor
1,444

 
1,650

Accrued worker's compensation
4,866

 
4,549

Accrued other
19,245

 
21,203

 
$
109,760

 
$
112,658

 
January 31,
2020
 
July 31,
2019
Other Current Liabilities
(In thousands)
Accrued pricing liabilities
$
14,309

 
$
14,309

Customer postage deposits
8,890

 
11,816

Revolving credit facility
6,000

 
6,000

Other
6,507

 
6,794

 
$
35,706

 
$
38,919

As of January 31, 2020 and July 31, 2019, the Company had accrued taxes of $55.2 million and $59.1 million, respectively, which reflected the Company's estimate for certain tax related liabilities. During the three months ended October 31, 2019, the Company recorded a $6.4 million adjustment to correct an out-of-period misstatement related to the Company's estimate for certain tax related liabilities. As of both January 31, 2020 and July 31, 2019, the Company had accrued pricing liabilities of approximately $14.3 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, 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, and due in part to the nature of the interactions with its clients. The remaining accrued pricing liabilities as of January 31, 2020 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.
(7)
LEASES
The Company has operating and finance leases for office space, office equipment, warehouse space and automobiles. The leases have remaining terms of up to 11 years, some of which include options to purchase, extend or terminate the leases, and management has assessed such terms when determining the lease term for accounting purposes. The Company's current lease arrangements expire through 2030.
The Company's leases do not include any residual value guarantees, and therefore none were considered in the calculation of the operating ROU and operating lease liability balances. The Company has leases that contain variable payments, most commonly in the form of common area maintenance charges, which are based on actual costs incurred. These variable payments were excluded from the calculation of the operating ROU asset and operating lease liability balances since they are not fixed or in-substance fixed payments.

13



For leases with terms greater than 12 months, the Company records the related operating ROU assets and operating lease liabilities at the present value of lease payments over the lease terms. For leases with an initial term of 12 months or less (with purchase options or extension options that are not reasonably certain to be exercised), the Company does not record them on the balance sheet, but instead recognizes lease expense on a straight-line basis over the terms of the leases.
Lease expense
The components of the Company's lease expense are presented below:
 
Three Months Ended January 31, 2020
 
Six Months Ended January 31, 2020
 
(In thousands)
Operating lease cost
$
4,816

 
$
9,632

Short-term lease expense
226

 
452

Variable lease cost
6

 
46

Amortization of finance lease assets
18

 
36

Interest on finance lease liabilities
4

 
8

 
$
5,070

 
$
10,174

Lease commitments
The Company's future minimum lease payments required under operating and finance leases that have commenced as of January 31, 2020 were as follows:
 
Operating Leases
 
Finance Leases
 
(In thousands)
2020
$
10,527

 
$
65

2021
15,941

 
76

2022
12,493

 
76

2023
7,597

 
38

2024
5,298

 

Thereafter
23,261

 

Total lease payments
75,117

 
255

Less: imputed interest
12,413

 
38

Present value of lease payments
62,704

 
217

Less: current maturities of lease obligations
14,717

 
71

Long-term lease obligations
$
47,987

 
$
146

As of January 31, 2020, the Company had additional operating leases primarily for office space, which have not yet commenced, with lease liabilities totaling $8.9 million.
In order to calculate the operating ROU asset and operating lease liability for a lease, ASC 842 requires that a lessee apply a discount rate equal to the rate implicit in the lease whenever that rate is readily determinable. The Company's lease agreements do not provide a readily determinable implicit rate, nor is the rate available to the Company from its lessors. Therefore, we use an incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar lease term to obtain an asset of similar value.
Additional lease information

14



Additional information related to the Company's leases as of January 31, 2020 was as follows:
Weighted average remaining lease term:
 
 
Operating leases
6.3
years
Finance leases
2.8
years
 
 
 
Weighted average discount rate:
 
 
Operating leases
 
4.4%
Finance leases
 
3.8%
Supplemental cash flow information
Supplemental cash flow information related to the Company's leases during the six months ended January 31, 2020 was as follows (in thousands):
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases
$
8,769

Operating cash flows from finance leases
$
5

Financing cash flows from finance leases
$
74

(8)
DEBT
The components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below:
 
January 31,
2020
 
July 31,
2019
 
(In thousands)
Cerberus term loan
$
372,125

 
$
375,125

7.50% Convertible senior note
14,940

 
14,940

Principal amount of long-term debt
387,065

 
390,065

Unamortized debt discount
(6,678
)
 
(7,508
)
Unamortized debt issuance costs
(753
)
 
(888
)
Carrying amount of long-term debt
$
379,634

 
$
381,669

PNC Bank Credit Facility
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, 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 amended 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) extend the maturity of the term under the Credit Agreement by six months from June 30, 2019 to December 31, 2019. On December 31, 2019, the Credit Agreement was terminated in accordance with the terms thereof, and all outstanding amounts thereunder were repaid.
Cerberus Credit Facility
On December 15, 2017, MLGS Merger Company, Inc. ("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

15



collateral agent and administrative agent for the lenders. MLGS was the initial borrower under the Financing Agreement, but immediately upon the consummation of the acquisition of IWCO Direct (the "IWCO Acquisition"), Borrower became the borrower under the Financing Agreement.
The Financing Agreement provides for a $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, 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 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. At January 31, 2020, IWCO had a readily available borrowing capacity under its Revolving Facility of $19.0 million. As of January 31, 2020 and July 31, 2019, the balance outstanding on the Revolving Facility was $6.0 million and $6.0 million, respectively. The following table reflects the components of the Term Loan:

 
January 31,
2020
 
July 31,
2019
 
(In thousands)
Principal amount outstanding on the Term Loan
$
372,125

 
$
375,125

Unamortized debt issuance costs
(753
)
 
(888
)
Net carrying value of the Term Loan
$
371,372

 
$
374,237

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 SPH Group Holdings LLC ("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"). 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 its 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

16



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 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.
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 Holdings. 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 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 condensed consolidated balance sheets. The debt issuance costs were not material. As of January 31, 2020, the if-converted value of the SPHG Note did not exceed the principal value of the SPHG Note. As of January 31, 2020, the remaining period over which the unamortized discount will be amortized is 49 months. As of January 31, 2020 and July 31, 2019, the net carrying value of the SPHG Note was $8.3 million and $7.4 million, respectively.


17



 
January 31,
2020
 
July 31,
2019
 
(In thousands)
Carrying amount of equity component
$
8,200

 
$
8,200

 
 
 
 
Principal amount of note
$
14,940

 
$
14,940

Unamortized debt discount
(6,678
)
 
(7,508
)
Net carrying amount
$
8,262

 
$
7,432


 
Three Months Ended January 31, 2020
 
Six Months Ended January 31, 2020
 
(In thousands)
Interest expense related to contractual interest coupon
$
280

 
$
560

Interest expense related to accretion of the discount
421

 
830

 
$
701

 
$
1,390

The effective interest rate on the SPHG Note, including accretion of the discount, is 18.47%.
MidCap Credit Facility
On December 31, 2019, ModusLink, as borrower, and certain of its subsidiaries as guarantors (the "MidCap Guarantors"), entered into a revolving credit and security agreement (the "MidCap Credit Agreement"), with MidCap Financial Trust, as lender and as agent ("MidCap").
The MidCap Credit Agreement, which has a three year term, provides for a maximum credit commitment of $12.5 million and a sublimit of $5.0 million for letters of credit. The actual maximum credit available under the MidCap 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 (a) eligible accounts receivable; plus (b) the least of (i) the orderly liquidation value of eligible inventory, (ii) the value of eligible inventory based on first-in-first-out cost or market cost and other adjustments, and (iii) $4.5 million; minus (c) reserves; all as specified in the MidCap Credit Agreement. Amounts borrowed under the MidCap Credit Agreement are due and payable, together with all unpaid interest, fees and other obligations, on December 31, 2022.
Generally, borrowings under the MidCap Credit Agreement bear interest at a rate per annum equal to the LIBOR Rate (as defined in the MidCap Credit Agreement), which is subject to adjustment by MidCap, plus a margin of 4% per annum. In addition to paying interest on outstanding principal under the MidCap Credit Agreement, ModusLink is required to pay an unused line fee of 0.50% per annum. ModusLink is also required to pay a customary letter of credit fee equal to the applicable margin on loans bearing interest at the LIBOR Rate.
Obligations under the MidCap Credit Agreement are guaranteed by the MidCap Guarantors, and the MidCap Credit Agreement is secured by security interests in substantially all of the assets of ModusLink and the MidCap Guarantors, including a pledge of all of the equity interests of each subsidiary of ModusLink that is a domestic entity (subject to certain limited exceptions). Steel Connect, Inc. is not a borrower or a guarantor under the MidCap Credit Agreement.
The MidCap Credit Agreement includes certain representations and warranties of ModusLink, as well as events of default and certain affirmative and negative covenants that are customary for credit agreements of this type. These covenants include restrictions on borrowings, investments and dispositions by ModusLink, as well as limitations on ModusLink's ability to make certain distributions and to enter into transactions with affiliates. The MidCap Credit Agreement requires compliance with certain financial covenants providing for the maintenance of a minimum fixed charge coverage ratio, all as more fully described in the MidCap Credit Agreement.
Upon the occurrence and during the continuation of an event of default under the MidCap Credit Agreement, MidCap may, among other things, declare all obligations under the MidCap Credit Agreement immediately due and payable and increase the interest rate at which loans and other obligations under the MidCap Credit Agreement bear interest. At January 31, 2020, the Company had a readily available borrowing capacity under its MidCap Credit Facility of $6.8 million. As of January 31, 2020, the Company did not have any balance outstanding on the MidCap Credit Facility.

18



(9)
CONTINGENCIES
On April 13, 2018, a purported shareholder, Donald Reith, filed a verified complaint, Reith v. Lichtenstein, et al., 2018-277 (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 of Directors, 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, Ltd., SPHG Holdings, Handy & Harman Ltd. and WHX CS Corp. (collectively, the "Steel Parties") in connection with the acquisition of $35.0 million of the Series C Convertible Preferred Stock by SPHG Holdings and equity grants made to Lichtenstein, Howard and Fejes on December 15, 2017 (collectively, the "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 Annual Meeting of Stockholders 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 and monetary damages. On June 8, 2018, defendants moved to dismiss the complaint for failure to plead demand futility and failure to state a claim. On June 28, 2019, the Court denied most of the motion to dismiss allowing the matter to proceed. Discovery is proceeding. Based on information currently available, the Company is unable to reasonably estimate a possible loss or range of possible losses, if any, with regard to the remaining lawsuit; therefore, no litigation reserve has been recorded in the Company's condensed consolidated balance sheets. Although there can be no assurance as to the ultimate outcome, the Company believes it has meritorious defenses, continues to deny liability and intends to defend this litigation vigorously.
(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 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 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 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 ("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 ("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, at the Company's option, 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,

19



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 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.
(11)
REVENUE RECOGNITION
Disaggregation of Revenue
The following table presents the Company's revenues from contracts with customers disaggregated by major good or service line and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.
 
Three Months Ended January 31, 2020
 
Three Months Ended January 31, 2019
 
Supply Chain
 
Direct
Marketing
 
Consolidated
Total
 
Supply Chain
 
Direct
Marketing
 
Consolidated
Total
 
(In thousands)
 
(In thousands)
Major Goods/Service Lines
 
 
 
 
 
 
 
 
 
 
 
Supply chain management services
$
91,911

 
$

 
$
91,911

 
$
87,166

 
$

 
$
87,166

Marketing solutions offerings

 
123,117

 
123,117

 

 
118,447

 
118,447

Other
424

 

 
424

 
610

 

 
610

 
$
92,335

 
$
123,117

 
$
215,452

 
$
87,776

 
$
118,447

 
$
206,223

Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Goods transferred over time
$

 
$
123,117

 
$
123,117

 
$

 
$
118,447

 
$
118,447

Services transferred over time
92,335

 

 
92,335

 
87,776

 

 
87,776

 
$
92,335

 
$
123,117

 
$
215,452

 
$
87,776

 
$
118,447

 
$
206,223


20



 
Six Months Ended January 31, 2020
 
Six Months Ended January 31, 2019
 
Supply Chain
 
Direct
Marketing
 
Consolidated
Total
 
Supply Chain
 
Direct
Marketing
 
Consolidated
Total
 
(In thousands)
 
(In thousands)
Major Goods/Service Lines
 
 
 
 
 
 
 
 
 
 
 
Supply chain management services
$
183,616

 
$

 
$
183,616

 
$
173,792

 
$

 
$
173,792

Marketing solutions offerings

 
256,120

 
256,120

 

 
246,541

 
246,541

Other
869

 

 
869

 
1,023

 

 
1,023

 
$
184,485

 
$
256,120

 
$
440,605

 
$
174,815

 
$
246,541

 
$
421,356

Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Goods transferred over time
$

 
$
256,120

 
$
256,120

 
$

 
$
246,541

 
$
246,541

Services transferred over time
184,485

 

 
184,485

 
174,815

 

 
174,815

 
$
184,485

 
$
256,120

 
$
440,605

 
$
174,815

 
$
246,541

 
$
421,356

Supply chain management services.
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.
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.
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.


21



The table below presents information for the Company's contract balances:
 
January 31,
2020
 
July 31,
2019
 
(In thousands)
Accounts receivable, trade, net
$
118,291

 
$
112,141

Contract assets
$
23,546

 
$
21,473

 
 
 
 
Deferred revenue - current
$
3,895

 
$
2,967

Deferred revenue - long-term
98

 
62

Total deferred revenue
$
3,993

 
$
3,029

Remaining Performance Obligations
Remaining performance obligations are comprised of deferred revenue. Changes in deferred revenue during the six months ended January 31, 2020, were as follows:
 
Six Months Ended January 31, 2020
 
(In thousands)
Balance at beginning of period
$
3,029

Deferral of revenue
2,669

Recognition of deferred amounts upon satisfaction of performance obligation
(1,705
)
Balance at end of period
$
3,993

We expect to recognize approximately $3.9 million of the deferred revenue over the next twelve months and the remaining $0.1 million beyond that time period.
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.
(12)
INCOME TAXES
The Company operates in multiple taxing jurisdictions, both within and outside of the United States. For the six months ended January 31, 2020, the Company was profitable in certain jurisdictions, resulting in an income tax expense using enacted rates in those jurisdictions. As of January 31, 2020, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $2.1 million. As of July 31, 2019, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $2.4 million.
Uncertain Tax Positions
In accordance with the Company's accounting policy, interest related to unrecognized tax benefits is included in the income tax expense line of the condensed consolidated statements of operations. As of January 31, 2020 and July 31, 2019, the liabilities for interest expense related to uncertain tax positions were $0.2 million and $0.2 million, respectively. The Company has accrued $0.2 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, 2014 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 2013 through 2018 tax years remain subject to examination in most locations, while the Company's 2006 through 2018 tax years remain subject to examination in most Asia locations.
Net Operating Loss

22



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" or "Tax Plan"). 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 $160.0 million, respectively, as of July 31, 2019. The federal net operating losses will expire from fiscal year 2022 through 2038 and the state net operating losses will expire from fiscal year 2019 through 2039. The Company's ability to use its Tax Benefits would be substantially limited if the Company undergoes an Ownership Change. The Tax Plan is intended to prevent an Ownership Change of the Company that would impair the Company's 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 Tax 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 or (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 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 January 18, 2021; (ii) the time at which the Rights are redeemed or exchanged as provided in the Tax Plan; and (iii) the time at which the Board determines that the Tax Plan is no longer necessary or desirable for the preservation of Tax Benefits.

23



(13)
EARNINGS (LOSS) PER SHARE
The following table reconciles earnings (loss) per share for the three and six months ended months ended January 31, 2020 and 2019:
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2020
 
2019
 
2020
 
2019
 
(In thousands, except per share data)
Net income (loss)
$
(3,557
)
 
$
(11,753
)
 
$
1,235

 
$
(19,118
)
Less: Preferred dividends on redeemable preferred stock
(531
)
 
(536
)
 
(1,067
)
 
(1,073
)
Net income (loss) attributable to common stockholders
$
(4,088
)
 
$
(12,289
)
 
$
168

 
$
(20,191
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
61,538

 
60,935

 
61,469

 
60,974

Weighted average common equivalent shares arising from restricted stock

 

 
13

 

Weighted average number of common and potential common shares
61,538

 
60,935

 
61,482

 
60,974

Basic net earnings (loss) per share attributable to common stockholders
$
(0.07
)
 
$
(0.20
)
 
$
0.00

 
$
(0.33
)
Diluted net earnings (loss) per share attributable to common stockholders
$
(0.07
)
 
$
(0.20
)
 
$
0.00

 
$
(0.33
)
Basic net earnings (loss) per common share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net 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 months ended January 31, 2020 and 2019, approximately 24.5 million and 28.9 million, respectively, common stock equivalent shares were excluded from the denominator in the calculation of diluted net earnings per share as their inclusion would have been antidilutive. For the six months ended January 31, 2020 and 2019, approximately 24.5 million and 28.9 million, respectively, common stock equivalent shares (including those related to convertible debt and preferred stock) were excluded from the denominator in the calculation of diluted net earnings per share as their inclusion would have been antidilutive.
(14)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) combines net income (loss) and other comprehensive items. Other comprehensive items represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheets. Accumulated other comprehensive items consist of the following:
 
Foreign
Currency
Items
 
Pension
Items
 
Unrealized
Gains
(Losses) on
Securities
 
Total
 
(In thousands)
Accumulated other comprehensive income (loss) at July 31, 2019
$
5,017

 
$
(4,079
)
 
$
96

 
$
1,034

Foreign currency translation adjustment
677

 

 

 
677

Net unrealized holding loss on securities

 

 
(96
)
 
(96
)
Pension liability adjustments

 
(2
)
 

 
(2
)
Net current-period other comprehensive income (loss)
677

 
(2
)
 
(96
)
 
579

Accumulated other comprehensive income (loss) at January 31, 2020
$
5,694

 
$
(4,081
)
 
$

 
$
1,613


24



 
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
332

 

 

 
332

Net unrealized holding loss on securities

 

 
(89
)
 
(89
)
Pension liability adjustments

 
(64
)
 

 
(64
)
Net current-period other comprehensive income (loss)
332

 
(64
)
 
(89
)
 
179

Accumulated other comprehensive income (loss) at January 31, 2019
$
6,680

 
$
(3,859
)
 
$
92

 
$
2,913

(15)
SEGMENT INFORMATION
The Company has two operating segments: Supply Chain and Direct Marketing. The Company determined that its two reportable segments are the same as its operating segments. 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, debt 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 and operating income (loss).
Summarized financial information by operating segment is as follows:
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Net revenue:
 
 
 
 
 
 
 
Supply Chain
$
92,335

 
$
87,776

 
$
184,485

 
$
174,815

Direct Marketing
123,117

 
118,447

 
256,120

 
246,541

 
$
215,452

 
$
206,223

 
$
440,605

 
$
421,356

Operating income (loss):
 
 
 
 
 
 
 
Supply Chain
$
5,763

 
$
(141
)
 
$
12,273

 
$
1,541

Direct Marketing
4,217

 
6,695

 
15,420

 
11,462

Total segment operating income
9,980

 
6,554

 
27,693

 
13,003

Corporate-level activity
(2,807
)
 
(4,428
)
 
(5,778
)
 
(7,341
)
Total operating income
7,173

 
2,126

 
21,915

 
5,662

Total other expense
(9,542
)
 
(12,474
)
 
(18,137
)
 
(22,264
)
Income (loss) before income taxes
$
(2,369
)
 
$
(10,348
)
 
$
3,778

 
$
(16,602
)
 
January 31,
2020
 
July 31,
2019
 
(In thousands)
Total assets:
 
 
 
Supply Chain
$
141,053

 
$
112,712

Direct Marketing
619,729

 
600,390

Sub-total—segment assets
760,782

 
713,102

Corporate
28,113

 
18,461

 
$
788,895

 
$
731,563



25



Summarized financial information of the Company's net revenue from external customers by group of services is as follows:
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
Services:
 
 
 
 
 
 
 
Supply Chain
$
92,335

 
$
87,776

 
$
184,485

 
$
174,815

Products:
 
 
 
 
 
 
 
Direct Marketing
123,117

 
118,447

 
256,120

 
246,541

 
$
215,452

 
$
206,223

 
$
440,605

 
$
421,356

Summarized financial information of the Company's net revenue by geographic location is as follows:
 
Three Months Ended
January 31,
 
Six Months Ended
January 31,
 
2020
 
2019
 
2020
 
2019
 
(In thousands)
United States
$
145,293

 
$
136,347

 
$
299,714

 
$
282,411

China
32,569

 
37,910

 
72,026

 
74,521

Netherlands
11,071

 
14,403

 
21,719

 
29,347

Other
26,519

 
17,563

 
47,146

 
35,077

 
$
215,452

 
$
206,223

 
$
440,605

 
$
421,356

(16)
RELATED PARTY TRANSACTIONS
As of January 31, 2020, SPHG Holdings and its affiliates, including Steel Holdings, Handy & Harman Ltd., Steel Partners, Ltd., beneficially owned approximately 56.3% of our outstanding capital stock, including shares of Series C Convertible Preferred Stock, par value $0.01 per share that vote on an as-converted basis together with our Common Stock. Warren G. Lichtenstein, our Interim Chief Executive Officer and the Executive Chairman of our Board, is also the Executive Chairman of Steel Holdings GP. Glen Kassan, our Vice Chairman of the Board and former Chief Administrative Officer, is an employee of Steel Services Ltd. ("Steel Services"). Jack L. Howard, the President and a director of Steel Holdings GP, was appointed to the Board upon the closing of the Preferred Stock Transaction described below. William T. Fejes, Jr., the Chief Operating Officer of Steel Holdings, was also appointed to the Board upon the closing of the Preferred Stock Transaction described below.
SPHG Note Transaction
On February 28, 2019, the Company entered into that certain 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 January 31, 2020 and July 31, 2019, SPHG Holdings held $14.9 million principal amount of the Company's 7.50% Convertible Senior Note. As of January 31, 2020 and July 31, 2019, the net carrying value of the SPHG Note was $8.3 million and $7.4 million, respectively.
Preferred Stock Transaction
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.
Management Services Agreement