16-Mar-2023

Steel Connect Reports Second Quarter Fiscal 2023 Financial Results

Second Quarter 2023 Results

Net revenue from continuing operations totaled $50.8 million, as compared to $54.3 million in the prior year.
Net loss from continuing operations was $0.5 million, as compared to net loss from continuing operations of $1.5 million in the prior year.
Net loss attributable to common stockholders was $1.1 million, as compared to net loss attributable to common stockholders of $23.5 million in the prior year.
Adjusted EBITDA^* was $4.6 million, as compared to $1.8 million in the prior year.
Net cash provided by operating activities was $1.3 million.
Free Cash Flow^* totaled $1.0 million.
Total debt, net of unamortized discounts and issuance costs, was $12.0 million; Net Debt^* totaled $(47.5) million.

Six-Month Fiscal Year-to-Date Financial Results

Net revenue from continuing operations totaled $102.1 million, as compared to $98.7 million in the prior year.
Net income from continuing operations was $4.4 million, as compared to net loss from continuing operations of $2.5 million in the prior year.
Net income attributable to common stockholders was $3.4 million, as compared to net loss attributable to common stockholders of $43.5 million in the prior year.
Adjusted EBITDA^* was $11.9 million, as compared to $2.4 million in the prior year.
Net cash provided by operating activities was $9.6 million.
Free Cash Flow^* totaled $8.7 million.

SMYRNA, Tenn.--(BUSINESS WIRE)--Steel Connect, Inc. (the "Company") (NASDAQ: STCN) today announced financial results for its second quarter ended January 31, 2023.

Results of Operations

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

	Three Months Ended January 31,				Six Months Ended January 31,
	2023		2022		2023		2022
	(in thousands)
Net revenue	$	50,781	$	54,322	$	102,140	$	98,676
Net (loss) income from continuing operations		(526)		(1,486)		4,431		(2,469)
Net (loss) income attributable to common stockholders	$	(1,063)	$	(23,514)	$	3,357	$	(43,545)
Adjusted EBITDA^*	$	4,631	$	1,754	$	11,912	$	2,381
Adjusted EBITDA margin^*		9.1 %		3.2 %		11.7 %		2.4 %
Net cash provided by (used in) operating activities		1,336		1,098		9,588		(2,722)
Additions to property and equipment		(318)		(463)		(866)		(826)
Free cash flow^*	$	1,018	$	635	$	8,722	$	(3,548)
* 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.

Results of Operations

Comparison of the Second Quarter and Six Months Ended January 31, 2023 and 2022

	Three Months Ended January 31,			Six Months Ended January 31,
	2023	2022	Fav (Unfav) ($)	2023	2022	Fav (Unfav) ($)
	(unaudited, $ in thousands)			(unaudited, $ in thousands)
Net revenue	$50,781	$54,322	(3,541)	$102,140	$98,676	3,464
Cost of revenue	(37,719)	(43,421)	5,702	(74,813)	(78,369)	3,556
Gross profit	13,062	10,901	2,161	27,327	20,307	7,020
Gross profit margin	25.7%	20.1%	—	26.8%	20.6%	—
Selling, general and administrative	(10,459)	(9,994)	(465)	(20,845)	(18,829)	(2,016)
Restructuring	—	(856)	856	—	(856)	856
Interest expense	(848)	(750)	(98)	(1,674)	(1,512)	(162)
Other (losses) gains, net	(2,627)	(64)	(2,563)	402	(541)	943
Total costs and expenses	(13,934)	(11,664)	(2,270)	(22,117)	(21,738)	(379)
(Loss) income from continuing operations before income taxes	(872)	(763)	(109)	5,210	(1,431)	6,641
Income tax benefit (expense)	346	(723)	1,069	(779)	(1,038)	259
Net (loss) income from continuing operations	$(526)	$(1,486)	$960	$4,431	$(2,469)	$6,900

Net Revenue

Net revenue from continuing operations for the second quarter decreased $3.5 million, or 6.5%, as compared to the same period in the prior year. The decrease in net revenue was driven by lower volumes associated with clients in the computing and consumer electronics markets during the three months ended January 31, 2023 as compared to the same period in the prior year. Fluctuations in foreign currency exchange rates had an insignificant impact on the Supply Chain segment's net revenues for the three months ended January 31, 2023, as compared to the same period in the prior year.

Net revenue from continuing operations for the six months ended January 31, 2023 increased $3.5 million, or 3.5%, as compared to the same period in the prior year. This increase in net revenue was driven by overall higher volume associated with clients in the computing and consumer electronics markets as compared to the same period in the prior year, as well as new business revenue. Fluctuations in foreign currency exchange rates had an insignificant impact on the Supply Chain segment's net revenues for the six months ended January 31, 2023, as compared to the same period in the prior year.

Cost of Revenue

Cost of revenue from continuing operations for the second quarter decreased $5.7 million, or 13.1%, as compared to the same period in the prior year, primarily due to a decrease in cost of materials as a result of the decrease in net revenue discussed above. Cost of revenue for the three months ended January 31, 2023 included materials procured on behalf of our Supply Chain clients of $21.1 million, as compared to $25.7 million for the same period in the prior year, a decrease of $4.6 million, driven by lower volumes for clients in the computing and consumer electronics market. The remaining $1.1 million decrease is driven by lower labor costs, such as a decrease in salaries and wages and production costs and due to severance charges in the three months ended January 31, 2022 that did not recur.

Cost of revenue from continuing operations for the six months ended January 31, 2023 decreased $3.6 million, or 4.5%, as compared to the same period in the prior year, primarily driven by a decrease in cost of materials. Cost of revenue for the six months ended January 31, 2023 included materials procured on behalf of our Supply Chain clients of $40.4 million, as compared to $44.7 million for the same period in the prior year, a decrease of $4.3 million driven by lower material costs related to services launched in the prior year period along with lower material costs related to programs that ended during the current year period. This decrease is partially offset by a $0.7 million increase in higher labor costs as a result of overall higher revenue volume.

Gross Profit Margin

Gross profit percentage for the current quarter increased 560 basis points, to 25.7% as compared to 20.1% in the prior year quarter, driven by higher value added revenue for a major client in the computing and consumer electronics market and to a lesser extent the impact of severance charges in the three months ended January 31, 2022 that did not recur. Fluctuations in foreign currency exchange rates had an insignificant impact on Supply Chain's gross margin for the three months ended January 31, 2023 as compared to the same period in the prior year.

Gross profit percentage for the six months ended January 31, 2023 increased 620 basis points, to 26.8% as compared to 20.6% for the six months ended January 31, 2022, driven by higher value added revenue from a major client in the computing and consumer electronics market. Fluctuations in foreign currency exchange rates had an insignificant impact on Supply Chain's gross margin for the six months ended January 31, 2023.

Selling, General and Administrative

Selling, general and administrative expenses during the three months ended January 31, 2023 increased by approximately $0.5 million as compared to the same period in the prior year due to an increase in legal fees for Corporate-level activity. Selling, general and administrative expenses during the three months ended January 31, 2023 for the Supply Chain segment did not change significantly as compared to the same period in the prior year. Fluctuations in foreign currency exchange rates did not have a significant impact on selling, general and administrative expenses for the three months ended January 31, 2023 as compared to the same period in the prior year.

Selling, general and administrative expenses during the six months ended January 31, 2023 increased by approximately $2.0 million as compared to the same period in the prior year. Selling, general and administrative expenses for the Supply Chain segment increased $1.0 million primarily due to bad debt expense recorded for a client in the consumer products industry in first quarter of fiscal year 2023. Corporate-level activity increased $1.0 million primarily due to an increase in legal and other professional fees. Fluctuations in foreign currency exchange rates did not have a significant impact on selling, general and administrative expenses for the six months ended January 31, 2023, as compared to the same period in the prior year.

Restructuring

During the fiscal year ended July 31, 2021, ModusLink implemented a strategic plan to reorganize its sales function and the e-Business operations. The restructuring charges associated with this plan were primarily composed of employee termination costs. In November 2021, ModusLink amended its strategic plan to include reorganizing its supply chain operations and recorded a restructuring charge of approximately $0.9 million during the three and six months ended January 31, 2022. There were no restructuring costs recorded during the three or six months ended January 31, 2023, which is driving the decrease in costs for both periods.

Interest Expense

Total interest expense increased by $0.1 million and $0.2 million during the three and six months ended January 31, 2023, respectively, as compared to the same periods in the prior year, primarily due to higher interest expense related to accretion of the discount on the SPHG Note.

Other (Losses) Gains, Net

The $2.6 million increase in other losses, net during the three months ended January 31, 2023 compared to the same period in the prior year primarily relates to $3.3 million of foreign exchange losses recorded for the three months ended January 31, 2023 compared to $0.3 million of foreign exchange losses recorded for the same period in the prior year. The increase in foreign exchange losses is primarily driven by unrealized losses incurred, particularly for changes in the China Renminbi and the Singapore Dollar.

The $0.9 million increase in other gains (losses), net is primarily driven by $0.5 million increase in interest income, and $0.4 million increase in sublease income in the six months ended January 31, 2023 as compared to the same period in the prior year. Foreign exchange gains (losses) did not change significantly as compared to the same period in the prior year.

Income Tax Benefit (Expense)

During the three months ended January 31, 2023, the Company recorded an income tax benefit of approximately $0.3 million as compared to $0.7 million in income tax expense for the same period in the prior fiscal year. The decrease in income tax expense is primarily due to lower taxable income in foreign jurisdictions, as compared to the prior year period.

During the six months ended January 31, 2023, the Company recorded income tax expense of approximately $0.8 million as compared to $1.0 million for the same period in the prior fiscal year. The decrease in income tax expense is primarily due to lower taxable income in foreign jurisdictions, as compared to the prior year period.

Net (Loss) Income From Continuing Operations

Net loss from continuing operations for the three months ended January 31, 2023 decreased $1.0 million as compared to the same period in the prior fiscal year, driven by the $1.1 million favorable change in income taxes. Refer to discussion above for further details.

Net income from continuing operations for the six months ended January 31, 2023 increased $6.9 million, as compared to the same period in the prior year. The increase in net income from continuing operations is primarily due to the increase in gross profit, a decrease in restructuring and income tax expense, and an increase in other gains, net, partially offset by an increase in SG&A expenses. Refer to explanations above for further details regarding specific increases or decreases.

Additions to Property and Equipment (Capital Expenditures)

Capital expenditures for the second quarter totaled $0.3 million, or 0.6% of net revenue, as compared to $0.5 million, or 0.9% of net revenue, for the same period in the prior year.

Capital expenditures for the six months ended January 31, 2023 totaled $0.9 million, or 0.8% of net revenue, as compared to $0.8 million, or 0.8% of net revenue, for the same period in the prior year.

Adjusted EBITDA

Adjusted EBITDA increased $2.9 million, or 164.0%, for the second quarter as compared to the same period in the prior year, primarily due to an increase in net income from continuing operations.

Adjusted EBITDA increased $9.5 million, or 400.3%, for the six months ended January 31, 2023 as compared to the same period in the prior year. The increase is primarily due to increase in net income from continuing operations of $6.9 million.

Liquidity and Capital Resources

As of January 31, 2023, the Company had cash and cash equivalents of $62.4 million and ModusLink had readily available borrowing capacity of $11.9 million under its revolving credit facility with Umpqua Bank.

As of January 31, 2023, total debt outstanding, net of unamortized discounts and issuance costs, was $12.0 million, which was comprised of $14.9 million outstanding on the 7.50% Convertible Senior Note due March 1, 2024, less associated unamortized discounts and issuance costs, as well as unamortized deferred financing costs on the Umpqua Revolver.

About Steel Connect, Inc.

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

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

– Financial Tables Follow –

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

	January 31, 2023		July 31, 2022
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	62,427	$	53,142
Accounts receivable, trade, net		37,180		40,083
Inventories, net		8,916		8,151
Funds held for clients		4,354		4,903
Prepaid expenses and other current assets		5,223		3,551
Total current assets		118,100		109,830
Property and equipment, net		3,493		3,534
Operating lease right-of-use assets		30,538		19,655
Other assets		3,981		4,730
Total assets	$	156,112	$	137,749

LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	32,805	$	30,553
Accrued expenses		25,632		28,396
Funds held for clients		4,323		4,903
Current lease obligations		7,665		6,466
Other current liabilities		15,031		13,482
Total current liabilities		85,456		83,800
Convertible note payable		12,104		11,047
Long-term lease obligations		22,904		12,945
Other long-term liabilities		5,222		3,983
Total long-term liabilities		40,230		27,975
Total liabilities		125,686		111,775

Contingently redeemable preferred stock		35,180		35,180

Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at January 31, 2023 and July 31, 2022; zero shares issued and outstanding at January 31, 2023 and July 31, 2022		—		—
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 60,784,589 issued and outstanding shares at January 31, 2023; 60,529,558 issued and outstanding shares at July 31, 2022		607		605
Additional paid-in capital		7,479,719		7,479,366
Accumulated deficit		(7,489,960)		(7,493,317)
Accumulated other comprehensive income		4,880		4,140
Total stockholders' deficit		(4,754)		(9,206)

Total liabilities, contingently redeemable preferred stock and stockholders' deficit	$	156,112	$	137,749

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,
	2023		2022		2023		2022
Net revenue	$	50,781	$	54,322	$	102,140	$	98,676
Cost of revenue		37,719		43,421		74,813		78,369
Gross profit		13,062		10,901		27,327		20,307
Operating expenses:
Selling, general and administrative		10,459		9,994		20,845		18,829
Restructuring		—		856		—		856
Total operating expenses		10,459		10,850		20,845		19,685
Operating income		2,603		51		6,482		622
Other income (expense):
Interest income		332		1		476		5
Interest expense		(848)		(750)		(1,674)		(1,512)
Other losses, net		(2,959)		(65)		(74)		(546)
Total other expense		(3,475)		(814)		(1,272)		(2,053)
(Loss) income from continuing operations before income taxes		(872)		(763)		5,210		(1,431)
Income tax (benefit) expense		(346)		723		779		1,038
Net (loss) income from continuing operations		(526)		(1,486)		4,431		(2,469)
Net loss from discontinued operations		—		(21,491)		—		(40,002)
Net (loss) income		(526)		(22,977)		4,431		(42,471)
Less: Preferred dividends on redeemable preferred stock		(537)		(537)		(1,074)		(1,074)
Net (loss) income attributable to common stockholders	$	(1,063)	$	(23,514)	$	3,357	$	(43,545)

Net (loss) income per common shares - basic
Continuing operations	$	(0.02)	$	(0.03)	$	0.06	$	(0.06)
Discontinued operations		—		(0.36)		—		(0.67)
Net (loss) income attributable to common stockholders	$	(0.02)	$	(0.39)	$	0.06	$	(0.73)

Net (loss) income per common shares - diluted
Continuing operations	$	(0.02)	$	(0.03)	$	0.06	$	(0.06)
Discontinued operations		—		(0.36)		—		(0.67)
Net (loss) income attributable to common stockholders	$	(0.02)	$	(0.39)	$	0.06	$	(0.73)

Weighted-average number of common shares outstanding - basic		60,178		59,748		60,129		60,027
Weighted-average number of common shares outstanding - diluted		60,178		59,748		60,637		60,027

Steel Connect, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)

	Six months ended January 31,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	4,431	$	(42,471)
Less: Loss from discontinued operations, net of tax		—		(40,002)
Income (loss) from continuing operations		4,431		(2,469)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		924		1,175
Amortization of deferred financing costs		24		68
Accretion of debt discount		1,056		800
Share-based compensation		355		408
Non-cash lease expense		4,488		4,720
Bad debt expense (recovery)		964		(3)
Other losses, net		74		759
Changes in operating assets and liabilities:
Accounts receivable, net		2,734		(6,665)
Inventories, net		(493)		(1,661)
Prepaid expenses and other current assets		(1,536)		(476)
Accounts payable and accrued expenses		(1,016)		5,633
Refundable and accrued income taxes, net		(845)		(319)
Other assets and liabilities		(1,572)		(4,692)
Net cash provided by (used in) operating activities		9,588		(2,722)
Cash flows from investing activities:
Additions to property and equipment		(866)		(826)
Proceeds from the disposition of property and equipment		16		—
Net cash used in investing activities		(850)		(826)
Cash flows from financing activities:
Payments of preferred dividends		(1,074)		(1,074)
Repayments on capital lease obligations		(38)		(36)
Net cash used in financing activities		(1,112)		(1,110)
Net effect of exchange rate changes on cash and cash equivalents		1,110		(395)
Net increase in cash, cash equivalents and restricted cash		8,736		(5,053)
Cash, cash equivalents and restricted cash, beginning of period		58,045		66,329
Cash, cash equivalents and restricted cash, end of period	$	66,781	$	61,276

Cash and cash equivalents, end of period	$	62,427	$	55,641
Restricted cash for funds held for clients, end of period		4,354		5,635
Cash, cash equivalents and restricted cash, end of period	$	66,781	$	61,276

Cash flows from discontinued operations:
Operating activities	$	—	$	(20,446)
Investing activities		—		(6,363)
Financing activities		—		(3,000)
Net cash used in discontinued operations	$	—	$	(29,809)

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

	Three Months Ended January 31,				Six Months Ended January 31,
	2023		2022		2023		2022
	(Unaudited)
Net revenue:
Supply Chain	$	50,781	$	54,322	$	102,140	$	98,676
		50,781		54,322		102,140		98,676
Operating income:
Supply Chain		5,388		2,374		11,238		4,347
Total segment operating income		5,388		2,374		11,238		4,347
Corporate-level activity		(2,785)		(2,323)		(4,756)		(3,725)
Total operating income		2,603		51		6,482		622
Total other expense, net		(3,475)		(814)		(1,272)		(2,053)
(Loss) income before income taxes	$	(872)	$	(763)	$	5,210	$	(1,431)

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

	Three Months Ended January 31,				Six Months Ended January 31,
	2023		2022		2023		2022
Net (loss) income from continuing operations	$	(526)	$	(1,486)	$	4,431	$	(2,469)

Interest income		(332)		(1)		(476)		(5)
Interest expense		848		750		1,674		1,512
Income tax (benefit) expense		(346)		723		779		1,038
Depreciation		465		545		924		1,175
EBITDA		109		531		7,332		1,251

Strategic consulting and other related professional fees		181		212		832		346
Executive severance and employee retention		(34)		356		(150)		356
Restructuring and restructuring-related expense		—		856		—		856
Share-based compensation		178		217		355		408
Loss on sale of long-lived assets		—		1		16		1
Unrealized foreign exchange losses (gains), net		4,240		(363)		3,728		(804)
Other non-cash gains, net		(43)		(56)		(201)		(33)
Adjusted EBITDA	$	4,631	$	1,754	$	11,912	$	2,381

Net revenue	$	50,781	$	54,322	$	102,140	$	98,676
Adjusted EBITDA margin		9.1 %		3.2 %		11.7 %		2.4 %

Free Cash Flow Reconciliation:

	Three Months Ended January 31,				Six Months Ended January 31,
	2023		2022		2023		2022
Net cash provided by (used in) operating activities	$	1,336	$	1,098	$	9,588	$	(2,722)
Additions to property and equipment		(318)		(463)		(866)		(826)
Free cash flow	$	1,018	$	635	$	8,722	$	(3,548)

Net Debt Reconciliation:

	January 31, 2022		July 31, 2022
Total debt, net	$	12,048	$	10,968
Unamortized discounts and issuance costs		2,892		3,972
Cash and cash equivalents		(62,427)		(53,142)
Net debt	$	(47,487)	$	(38,202)

Contacts

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

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Last Updated: 16-Mar-2023