截至2024年7月31日，鋼鐵控股公司直接和間接持有我們全部流通普通股的大約88.4%（按轉換基礎計算），與其關聯實體及個人（與鋼鐵控股公司及其關聯實體一起構成第13（d）條款小組的成員）合計持有我們全部流通普通股的89.5%（按轉換基礎計算）。這包括除了直接持有的普通股外，還包括所有普通股衍生的C系列可轉換優先股和E系列優先股（與持有普通股的持有人一起按轉換基礎投票），每股面值爲$0.01每股。這不包括584,055股普通股，這些股票是SPHG Note的基礎資產（根據其持有人的選擇在到期後支付），由SPH Group Holdings LLC擁有受益所有權，該公司由鋼鐵控股公司控制。另外，我們的四名董事會成員包括鋼鐵控股公司的普通合夥人執行主席，鋼鐵控股公司總裁，鋼鐵控股公司的關聯公司以及鋼鐵控股公司的首席行政官和首席法務官。
與反向/前向股票拆分無關的碎股未發行。 在反向股票拆分前立即擁有公司普通股不到3,500股的股東持有的股份將轉換爲收取現金支付的權利（不附利息），該支付的公允價值將等同於在確定應收到此類支付的人員時，時間當下的這些股份的公司普通股的收盤價的平均值 x 5個連續交易日，即反向股票拆分生效日之前的5個連續交易日，公司普通股在納斯達克上的平均收盤價，以及反向股票拆分生效時間前立即擁有3,500股或更多的記錄持股人持有的公司普通股，將根據比率：每股公司普通股換375股公司普通股，轉換爲反向股票拆分後立即擁有的公司普通股的新數量，包括反向股票拆分後持有的任何碎股; 但是，關於由於前向股票拆分而可能持有的公司普通股的任何零頭，持股人將根據該零頭的公允價值收到現金支付（不附利息），該支付金額將等於這些零頭 x 5個連續交易日的公司普通股在納斯達克上的平均收盤價，即反向/前向股票拆分生效日的前5個連續交易日的公司普通股的平均收盤價（此平均收盤價將進行調整以反映反向/前向股票拆分的效應)。
保護性修正案通常限制任何直接或間接的轉讓，如果其效果將導致 (i) 任何股東的直接、間接或推定持股從少於4.99%增加到4.99%或更多，或 (ii) 任何持有或視爲持有4.99%或更多普通股的股東的直接、間接或推定持股增加。根據保護性修正案，任何違反保護性修正案而試圖進行的直接或間接轉讓，自禁止轉讓之日起對假定的受讓人無效（或在間接轉讓的情況下，直接持有股份的所有權將與轉讓同時終止），並且假定的受讓人（或在任何間接轉讓情況下，直接所有者）將不被視爲在違反保護性修正案的情況下擁有的股份（"超額股份"），無論出於什麼目的，包括投票和收取與該等股份相關的分紅或其他分配，或在期權情況下，收取與其行使相關的股份。除禁止轉讓自嘗試之日起無效外，假定受讓人必須根據要求將超額股份及與超額股份相關的任何分紅或其他分配轉讓給公司的代理人。代理人需在不違反保護性修正案的前提下，以公平交易（或一系列交易）出售該超額股份。
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This methodology is subjective and requires significant estimates and judgments in the determination of the recoverability of deferred tax assets and in the calculation of certain tax liabilities.
During fiscal year ended July 31, 2024, the Company reassessed the need for a valuation allowance against deferred tax assets by evaluating pre-tax income over the prior three years, concluding this resulted in cumulative pre-tax income. In assessing pre-
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the discount rates, royalty rate, and projected revenues, earnings, and cash flows used by management to estimate the fair value of the Supply Chain reporting unit and trade name included the following, among others:
•We evaluated management’s ability to accurately forecast expected future earnings and cash flows as well as projected revenues by comparing actual results to management’s historical forecasts.
•We evaluated whether the estimates made by management were consistent with evidence obtained in other areas of the audit.
•We evaluated the reasonableness of management’s expected future earnings and cash flows as well as projected revenue, by comparing the forecasts to:
–Historical revenues and expected future earnings.
–Internal communications to management and the Board of Directors.
–Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.
•We considered the impact of industry, market conditions and macroeconomic factors that could impact management’s expected future earnings and projected revenue.
•We evaluated the impact of changes in management’s projected revenues and expected future earnings from the June 1, 2024, annual measurement date to July 31, 2024.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology (2) discount rate and (3) royalty rate, by:
–Testing the underlying source information of the discount rate and royalty rate and mathematical accuracy of the calculation.
Steel Connect, Inc., (the "Company" or "Steel Connect"), is a holding company which operates through its wholly-owned subsidiary ModusLink Corporation ("ModusLink" or "Supply Chain").
ModusLink is a supply chain business process management company serving clients in markets such as consumer electronics, telecommunications, computing and storage, software and content, consumer packaged goods, health and personal care products, retail and luxury, and connected devices. 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.
Steel Partners and Steel Connect Exchange Transaction
On April 30, 2023, Steel Partners Holdings L.P. (“Steel Holdings”) and the Company executed a series of agreements in which Steel Holdings and certain of its affiliates (the “Steel Partners Group”) agreed to transfer certain marketable securities held by the Steel Partners Group to the Company in exchange for 3.5 million shares of Series E Convertible Preferred Stock of the Company (the “Series E Convertible Preferred Stock”, and, such transfer and related transactions, the “Exchange Transaction”). Following the approval by the Company's stockholders on June 6, 2023, pursuant to the rules of the Nasdaq Capital Market, the Series E Convertible Preferred Stock is convertible into an aggregate of 19.8 million shares of the Company's common stock, par value $0.01 per share (the “common stock” or “Common Stock”), and votes together with the Company's common stock and participate in any dividends paid on the Company's common stock, in each case on an as-converted basis. Conversion of the Series E Convertible Preferred Stock, when combined with the Steel Connect common stock, the 7.50% Convertible Senior Note (the "SPHG Note"), if converted, and the Steel Connect Series C Convertible Preferred Stock, also if converted, owned by the Steel Partners Group, would have resulted in the Steel Partners Group holding approximately 84.0% of the outstanding equity interests of the Company as of May 1, 2023. The exclusion of the if-converted shares of the SPHG Note would have resulted in the Steel Partners Group holding approximately 83.8% of the outstanding equity interests of the Company as of May 1, 2023. The Exchange Transaction closed on May 1, 2023, the date that the consideration was exchanged between the Company and Steel Holdings, and as of that date the Company became a consolidated subsidiary of Steel Holdings for financial statement purposes. In connection with the Exchange Transaction, the parties entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”) governing, among other things, certain transactions between the Company and the Steel Partners Group following the closing of the Exchange Transaction. See Note 3 - "Exchange Transaction" for further information.
Predecessor/Successor Reporting
On May 1, 2023, the Exchange Transaction resulted in Steel Holdings obtaining control of the Company for financial statement consolidation purposes. Steel Holdings does not consolidate the Company for Federal income tax purposes because the ownership in the Company is dispersed between different federal tax consolidation groups within Steel Holdings. As of May 1, 2023, the Company elected pushdown accounting in which it used Steel Holdings' basis of accounting, which reflected the fair market value of the Company’s assets and liabilities at the date of the Exchange Transaction. As a result, the Company has reflected the required pushdown accounting adjustments in its consolidated financial statements. Due to the application of pushdown accounting, the Company’s consolidated financial statements and certain footnote disclosures include a black line division between the two distinct periods to indicate the application of two different bases of accounting, which may not be comparable, between the periods presented. The pre-exchange period through April 30, 2023 is referred to as the "Predecessor" period. The post-exchange period, May 1, 2023 and onward, includes the impact of pushdown accounting and is referred to as the "Successor" period. See Note 3 - "Exchange Transaction" for further information.
As of July 31, 2024, the Steel Partners Group beneficially owned approximately 89.7% of our outstanding capital stock, including the if-converted value of the SPHG Note and shares of Series C Convertible Preferred Stock and Series E Convertible Preferred Stock that vote on an as-converted basis together with our Common Stock. The exclusion of the if-converted value of the SPHG Note would have resulted in the Steel Partners Group holding approximately 89.5% of our outstanding capital stock.
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of certain significant accounting policies described below.
2018年4月13日，一位自稱股東的Donald Reith在特拉華州競賽法庭（Del. Ch.）提起了一項名爲Reith v. Lichtenstein, et al., 2018-277 (Del. Ch.)的被確認的投訴（以下簡稱「Reith訴訟」）。該投訴聲稱對公司的某些現任和前任董事Warren G. Lichtenstein, Glen m. Kassan, William t. Fejes, Jack L. Howard, Jeffrey J. Fenton, Philip E. Lengyel和Jeffrey S. Wald;以及鋼鐵控股（Steel Holdings）及其附屬公司（統稱「鋼鐵方」）提起了類別和衍生權責任違反和/或散佈責任違反和非法牟利的訴訟，訴訟是因爲鋼鐵方收購了公司3百萬美元的C系列優先股以及與此相關的股權授予Messrs. Lichtenstein, Howard和Fejes（以下簡稱「有爭議交易」）。以公司作爲名義被告方。投訴聲稱，儘管有爭議交易獲得了由董事會獨立成員（Messrs. Fenton, Lengyel和Wald）組成的特別委員會的批准，但鋼鐵方掌控和控制了特別委員會，他們在違揹他們的權責任的情況下批准了有爭議交易。原告聲稱，有爭議交易不公平地稀釋了股東權益，因此非法使鋼鐵控股，SPHG控股及Messrs. Lichtenstein, Howard和Fejes受益。而投訴還聲稱，董事會在公司的2017年股東大會代理聲明中提供了誤導性披露，該聲明是爲了尋求批准修改2010年激勵獎計劃以授權發行額外股份以應對某些股權授予的股份。請求的補救措施包括撤銷C系列可轉換優先股和股權授予，返還通過非法獲取的任何財產或補償和賠償金。35.0該公司名訴爲名義被告方。投訴聲稱，儘管有爭議交易獲得了由獨立董事成員（Fenton先生、Lengyel先生和Wald先生）組成的特別委員會的批准，但鋼鐵方掌控和控制了特別委員會，他們在違揹他們的權責任的情況下批准了有爭議交易。原告聲稱，有爭議交易不公平地稀釋了股東權益，因此非法使鋼鐵控股，SPHG控股及Messrs. Lichtenstein, Howard和Fejes受益。而投訴還聲稱，董事會在公司的2017年股東大會代理聲明中提供了誤導性披露，該聲明是爲了尋求批准修改2010年激勵獎計劃以授權發行額外股份以應對某些股權授予的股份。請求的補救措施包括撤銷C系列可轉換優先股和股權授予，返還通過非法獲取的任何財產或補償和賠償金。
The Company has estimated its fiscal year 2024 global intangible low-taxed income ("GILTI") inclusion based on its current year foreign activity. The foreign entities have minor earnings and profit adjustments that will be factored in as part of the tax return filing. These amounts are not material and will not have a significant impact on the overall tax provision or disclosure. Due to the net operating losses available in the U.S., the Company is not entitled to a Section 250 deduction, which is why the total income amount has been recorded as the GILTI inclusion. The Company has made an accounting policy
election, as allowed by the SEC and FASB, to recognize the impact of GILTI within the period incurred. Therefore, no U.S. deferred taxes are provided in GILTI inclusions of future foreign subsidiary earnings.
The Company has net operating loss carryforwards for federal and state tax purposes of approximately $321.6 million and $116.1 million, respectively, at July 31, 2024. As of July 31, 2024, approximately $30.8 million of net operating loss carryforwards for federal and state tax purposes expired. $225.0 million of the company's federal net operating losses will expire from the fiscal year ending July 31, 2027 through the fiscal year ended July 31, 2038 and the remainder federal net operating losses of $96.6 million has an indefinite carryforward period. The state net operating losses will expire from the fiscal year ended July 31, 2026 through the fiscal year ended July 31, 2042. The Company has a foreign net operating loss carryforward of approximately $71.3 million, of which $68.8 million has an indefinite carryforward period.
Income tax (benefit) expense attributable to income differs from the expense computed by applying the U.S. federal income tax rate of 21.0% to income before income taxes as a result of the following:
Successor
Predecessor
Fiscal Year Ended July 31,
May 1 to July 31,
August 1, 2022 to April 30,
2024
2023
2023
(In thousands)
Computed "expected" income tax expense (benefit)
$
4,401
$
1,627
$
1,909
Increase (decrease) in income tax expense resulting from:
Change in valuation allowance
(77,845)
(350,469)
(424)
Foreign tax rate differential
(166)
(255)
(50)
Nondeductible expenses
29
459
—
Foreign withholding taxes
(157)
245
147
Foreign other adjustments
167
(246)
—
GILTI
944
1,141
—
Change in uncertain tax position reserves
(259)
(430)
11
Section 78 gross-up
270
—
—
State income taxes, net of federal benefit
869
(1,916)
37
Expiration of net operating loss
5,027
347,462
—
Deferred true-up
(361)
1,786
—
Other
58
198
—
Actual income tax (benefit) expense
$
(67,023)
$
(398)
$
1,630
The calculation of the Company's income tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several tax jurisdictions. The Company is periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves when necessary. Based on the evaluation of current tax positions, the Company believes it has appropriately accrued for exposures.
The Company operates in multiple taxing jurisdictions, both within and outside of the United States. As of July 31, 2024 and 2023, the total amount of the liability for unrecognized tax benefits, including interest, related to federal, state and foreign taxes was approximately $0.1 million and $0.4 million, respectively. To the extent the unrecognized tax benefits are recognized, the entire amount would impact income tax expense. The Company expects that there will be a $0.1 million reduction of the unrecognized tax benefits in the next twelve months related to the U.S. state income tax exposure as a result of a lapse in the applicable statute of limitations.
The Company files income tax returns in the U.S., various states and in foreign jurisdictions. The federal and state income tax returns are generally subject to tax examinations for the tax years ended July 31, 2021 through July 31, 2024. 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 2016 through 2023 tax years remain subject to examination in most locations while the Company's 2012 through 2023 tax years remain subject to examination in most Asia locations.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
Successor
July 31, 2024
July 31, 2023
(In thousands)
Balance as of beginning of year
$
274
$
571
Reductions for lapses in statute of limitations
(189)
(297)
Balance as of end of year
$
85
$
274
In accordance with the Company's accounting policy, interest related to income taxes is included in the provision for income taxes line of the consolidated statements of operations. For the fiscal years ended July 31, 2024 and 2023, the Company has not recognized any material interest expense related to uncertain tax positions. As of July 31, 2024 and 2023, the Company had recorded liabilities for increases in interest expense related to uncertain tax positions for an immaterial amount. The Company expects $0.1 million of unrecognized tax benefits and related interest will reverse in the next twelve months.
(18)EARNINGS PER SHARE
Earnings Per Share
As discussed in Note 2 - "Summary of Significant Accounting Policies", the Reverse/Forward Stock Split was effective on June 21, 2023. The Company’s shares of outstanding common stock and earnings per share amounts have been retroactively restated for all periods presented for the Reverse/Forward Stock Split. The following table reconciles net income per share for the periods below:
Reconciliation of net income to net income attributable to common stockholders after assumed conversions:
Net income
$
87,980
$
8,149
$
7,460
Less: Preferred dividends on Series C preferred stock
(2,135)
(537)
(1,593)
Net income available to common stockholders
85,845
7,612
5,867
Less: Undistributed earnings allocated to participating securities
(65,336)
(5,803)
—
Net income attributable to common stockholders
$
20,509
$
1,809
$
5,867
Effect of dilutive securities:
Interest costs on SPHG Note
$
971
$
—
$
—
Dividends on Series C preferred stock
2,135
537
1,593
Undistributed earnings allocated to Series E preferred stock
65,336
5,803
—
Net income attributable to common stockholders - assuming dilution
$
88,951
$
8,149
$
7,460
Net income per common share - basic
$
3.30
$
0.29
$
0.91
Net income per common share - diluted
$
3.11
$
0.29
$
0.89
Weighted average common shares outstanding - basic
6,218
6,177
6,449
Effect of dilutive securities:
Common stock equivalents - Restricted stock and restricted stock shares
64
60
55
Common stock equivalents - SPHG Note
584
—
—
Common stock equivalents - Series C Preferred Stock
1,913
1,913
1,913
Common stock equivalents - Series E Preferred Stock
19,810
19,810
—
Weighted average common shares outstanding - diluted
28,589
27,960
8,417
The Company calculates basic and diluted net income per common share using the two-class method, as the Series E Convertible Preferred Stock issued in the Exchange Transaction meets the definition of a participating security. The two-class method is an allocation formula that determines net income per common share for each share of common stock and Series E Convertible Preferred Stock, a participating security, according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and Series E Convertible Preferred Stock based on their respective rights to receive dividends. The holders of Series E Convertible Preferred Stock are entitled to participate equally and ratably with the holders of shares of Common Stock in all dividends or other distributions on the shares of Common Stock as if, immediately prior to each record date for payment of dividends or other distributions on the Common Stock, shares of Series E Preferred Stock then outstanding were converted into shares of Common Stock. Basic net income per common share is computed by dividing net income attributable to common stockholders for the period by the weighted average number of common shares outstanding for the period. Net income attributable to common stockholders for the period includes dividends paid to common stockholders during the period plus a proportionate share of undistributed net income allocable to common stockholders for the period; the proportionate share of undistributed net income allocable to common stockholders for the period is based on the proportionate share of total weighted-average common shares and participating securities outstanding during the period. Diluted net income per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not antidilutive. Potential common shares consist of restricted common stock (calculated based on the treasury stock method) and shares issuable upon debt or preferred stock conversion (calculated using an as-if converted method), using the more dilutive of either the two-class method or as-converted stock method.
The Company was not required to apply the two-class method during the August 1, 2022 to April 30, 2023 Predecessor Period as there were no participating securities, and as such, there were no changes to the Predecessor Period other than the retroactive restatement for the Reverse/Forward Stock Split discussed previously.
The below details certain exclusions from the calculation of diluted net income per share for the fiscal year ended July 31, 2024, the May 1 to July 31, 2023 Successor Period and the August 1, 2022 to April 30, 2023 Predecessor Period as their inclusion would have been antidilutive:
No exclusions were required from the calculation of diluted net income per share for the fiscal year ended July 31, 2024, as all securities were considered dilutive.
For the May 1 to July 31, 2023 Successor Period, $0.2 million of interest expense, net of tax impact related to the SPHG Note was excluded from the numerator in the calculation of diluted net income per share as their inclusion would have been antidilutive. For the May 1 to July 31, 2023 Successor Period, 0.6 million common stock equivalent shares (including those related to the SPHG Note) were excluded from the denominator in the calculation of diluted net income per share as their inclusion would have been antidilutive.
For the August 1, 2022 to April 30, 2023 Predecessor Period, $2.3 million of interest expense, net of tax impact related to the SPHG Note were excluded from the numerator in the calculation of diluted net income per share as their inclusion would have been antidilutive. For the August 1, 2022 to April 30, 2023 Predecessor Period, 0.6 million common stock equivalent shares (including those related to the SPHG Note) were excluded from the denominator in the calculation of diluted net income per share as their inclusion would have been antidilutive.
(19)ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) represents the cumulative other comprehensive income (loss) items that are reported separate from net income and detailed on the Consolidated Statements of Comprehensive Income (Loss).
As discussed in Note 1 - "Nature of Operations", we have elected to apply push-down accounting as of the Exchange Transaction date, May 1, 2023. As part of this election, the Company's accumulated other comprehensive income (loss) was reset to zero at the Exchange Transaction date.
The components of accumulated other comprehensive income, net of income taxes, are as follows:
Foreign currency items
Pension items
Total
(In thousands)
Accumulated other comprehensive income (loss) at July 31, 2022 (Predecessor)
$
6,063
$
(1,923)
$
4,140
Foreign currency translation adjustment
999
—
999
Pension liability adjustments
—
(1,078)
(1,078)
Net current-period other comprehensive income (loss)
999
(1,078)
(79)
Accumulated other comprehensive income (loss) at April 30, 2023 (Predecessor)
7,062
(3,001)
4,061
Application of pushdown accounting
(7,062)
3,001
(4,061)
Accumulated other comprehensive income (loss) at May 1, 2023 (Successor)
—
—
—
Foreign currency translation adjustment
(623)
—
(623)
Pension liability adjustments
—
36
36
Net current-period other comprehensive (loss) income
(623)
36
(587)
Accumulated other comprehensive (loss) income at July 31, 2023 (Successor)
(623)
36
(587)
Foreign currency translation adjustment
(476)
—
(476)
Pension liability adjustments
—
(444)
(444)
Net current-period other comprehensive loss
(476)
(444)
(920)
Accumulated other comprehensive loss at July 31, 2024 (Successor)
In both the fiscal years ended July 31, 2024 and 2023, the Company recorded an immaterial amount in taxes related to other comprehensive loss.
(20)STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION
The amount of cash, cash equivalents and restricted cash as of July 31, 2024 and 2023 in the consolidated statements of cash flows is reconciled to the Company's consolidated balance sheets as follows:
Successor
July 31, 2024
July 31, 2023
(In thousands)
Cash and cash equivalents
$
248,614
$
121,372
Funds held for clients
2,576
2,031
Cash, cash equivalents and restricted cash
$
251,190
$
123,403
Cash used for operating activities reflect cash payments for interest and income taxes as follows:
Successor
Predecessor
Fiscal Year Ended July 31,
May 1 to July 31,
August 1, 2022 to April 30,
2024
2023
2023
(In thousands)
Cash paid for interest
$
1,009
$
9
$
1,145
Cash paid for income taxes
$
2,204
$
3,008
$
—
Cash paid for taxes can be lower than income tax expense as shown on the Company's consolidated statements of operations due to the timing of required payments in relation to recorded expense, which can cross fiscal years.
Non-Cash Activities
There were no non-cash investing activities for the fiscal year ended July 31, 2024. Non-cash investing activities during the May 1 to July 31, 2023 Successor Period included $154.5 million for unsettled proceeds from the disposition of the Aerojet shares. The proceeds were received in August 2023.
Non-cash financing activities during the fiscal years ended July 31, 2024 and 2023 included the issuance of approximately 0.1 million and 0.1 million shares, respectively, of non-vested common stock, valued at approximately $0.7 million and $0.7 million, respectively, to certain employees and non-employees of the Company. The Company also approved $57.4 thousand of accelerated compensation cost related to unvested shares that were approved to vest during the fiscal year ended July 31, 2023. Additionally, non-cash financing activities during the May 1 to July 31, 2023 Successor Period included the issuance of $202.7 million of Series E Preferred Stock in exchange for 3.6 million shares of common stock, par value $0.10 per share, of Aerojet held by Steel Holdings in the Exchange Transaction.
(21)STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Board of Directors 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 of Directors may authorize the issuance of preferred stock with voting rights or conversion features that could adversely affect the voting power or other rights of the holders of its common stock. Although the issuance of preferred stock could provide us with flexibility in connection with possible acquisitions and other corporate purposes, under some circumstances, it could have the effect of delaying, deferring or preventing a change of control.
On December 15, 2017, the Company entered into a Preferred Stock Purchase Agreement (the "Purchase Agreement") with SPHG Holdings, pursuant to which the Company issued 35,000 shares of the Company's newly created Series C Convertible Preferred Stock, par value $0.01 per share (the "Series C Convertible Preferred Stock"), to SPHG Holdings at a price of $1,000 per share, for an aggregate purchase consideration of $35.0 million (the "Series C Convertible 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 Series C Convertible Preferred Stock can be converted into shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), at an initial conversion price equal to $18.29 per share, subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction. Holders of the Series C Convertible 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 Series C Convertible Preferred Stock to convert all, or any whole number, of shares of the Series C Convertible 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 Series C Convertible Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets or funds of the Company to the holders of other equity or equity equivalent securities of the Company other than the Series C Convertible Preferred Stock by reason of their ownership thereof, an amount per share in cash equal to the sum of (i) 100% of the stated value per share of Series C Convertible Preferred Stock (initially $1,000 per share) then held by them (as adjusted for any stock dividend, stock split, stock combination, reclassification or other similar transactions with respect to the Series C Convertible Preferred Stock), plus (ii) 100% of all declared but unpaid dividends, and all accrued but unpaid dividends on each such share of Series C Convertible Preferred Stock, in each case as the date of the triggering event.
On or after December 15, 2022, each holder of Series C Convertible Preferred Stock can also require the Company to redeem its Series C Convertible Preferred Stock in cash at a price equal to the Liquidation Preference (as defined in Series C Certificate of Designations).
Each holder of Series C Convertible Preferred Stock has a vote equal to the number of shares of Common Stock into which its Series C Convertible 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 Series C Convertible Preferred Stock. In addition, for so long as the Series C Convertible 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 Series C Convertible 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 is 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 Series C Convertible 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 SEC in the manner reasonably requested by the holder and the qualification of the securities in all states reasonably requested by the holder, in each case, in accordance with certain enumerated conditions. The Purchase Agreement also contains other representations, warranties and covenants, customary for an issuance of Series C Convertible Preferred Stock in a private placement of this nature.
The Series C Convertible Preferred Stock Transaction was approved and recommended to the Board of Directors by the Special Committee of the Board of Directors 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.
Series E Preferred Stock
On May 1, 2023, the Company and Steel Holdings executed a series of agreements in which the Steel Partners Group agreed to transfer certain marketable securities held by the Steel Partners Group to Steel Connect in exchange for 3.5 million shares of Series E Convertible Preferred Stock of Steel Connect (the “Series E Convertible Preferred Stock”, and, such transfer the “Transfer and Exchange Agreement”). Pursuant to the Transfer and Exchange Agreement, the Company held a special stockholders’ meeting on June 6, 2023 (the “Special Meeting”) to consider and vote upon the rights of the Series E Preferred Stock to vote and receive dividends together with the Common Stock on an as-converted basis and the issuance of the Company's common stock (the "Common Stock") upon conversion of the Series E Preferred Stock by the holders at their option, pursuant to the rules and regulations of Nasdaq (the “Nasdaq Proposal”). Following approval of the Nasdaq Proposal by the Steel Connect stockholders (the “Stockholder Approval”), the Series E Convertible Preferred Stock became convertible into an aggregate of 19.8 million shares of the Common Stock, and votes together with the Common Stock and participates in any dividends paid on the Common Stock, in each case on an as-converted basis. Refer to Note 24 - "Related Party Transactions" for more information on the Voting Agreement.
The terms, rights, obligations and preferences of the Series E Convertible Preferred Stock are set forth in a Certificate of Designations, Preferences and Rights of Series E Convertible Preferred Stock of the Company (the “Series E Certificate of Designations”), which are summarized below:
Any holder of the Series E Convertible Preferred Stock (“Holder”), may, at its option, convert all or any shares of Series E Convertible Preferred Stock held by such Holder into Common Stock based on a conversion price of $10.27 (the “Conversion Price”) per share, subject to appropriate adjustments for any stock dividend, stock split, stock combination, or similar transaction by delivering to the Company a conversion notice.
Holders are entitled to participate equally and ratably with the holders of shares of Common Stock in all dividends or other distributions on the shares of Common Stock as if, immediately prior to each record date for payment of dividends or other distributions on the Common Stock, shares of the Series E Convertible Preferred Stock then outstanding were converted into shares of Common Stock. Dividends or other distributions payable will be payable on the same date that such dividends or other distributions are payable to holders of shares of Common Stock, and no dividends or other distributions will be payable to holders of shares of Common Stock unless dividends or such other distributions are also paid at the same time in respect of the Series E Convertible Preferred Stock.
Upon the occurrence of certain triggering events such as a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, any merger or consolidation in which the Company is a constituent party or a Significant Subsidiary is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation such that the stockholders of the Company prior to such merger or consolidation hold less than 50.0% of the aggregate voting securities of the Corporation following such merger or consolidation, or the sale of substantially all of the assets or capital stock of the Company or a significant subsidiary (collectively, or any of these, a “Liquidation Event(s)”), the holders of the Series E Convertible Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets or funds of the Company to the holders of Common Stock by reason of their ownership thereof, an amount per share in cash equal to $58.1087 (as adjusted for any stock split, stock dividend, stock combination or other similar transactions with respect to the Series E Convertible Preferred Stock (“the Series E Convertible Preferred Stock Liquidation Preference”). In the event that the Series E Convertible Preferred Stock Liquidation Preference is not paid with respect to any shares of Series E Convertible Preferred Stock as required to be paid, such shares shall continue to be entitled to dividends and all such shares shall remain outstanding and entitled to all the rights and preferences provided within the Series E Certificate of Designations.
The Company nor the Holder have any rights to redeem the Series E Convertible Preferred Stock.
Prior to obtaining the Stockholder Approval, the Series E Convertible Preferred Stock was non-voting and did not have the right to vote on any matters presented to the stockholders of the Company. Following the date on which Stockholder Approval was obtained, which was approved by the Company's stockholders at the special stockholders' meeting held on June 6, 2023, each Holder is now entitled to vote with holders of outstanding shares of Common Stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration (whether at a meeting of stockholders of the Company, by written action of stockholders in lieu of a meeting or otherwise), except as provided by law. In any such vote, each Holder is entitled to a number of votes equal to the largest number of whole
shares of Common Stock into which all shares of Series E Convertible Preferred Stock held of record by such Holder is convertible as of the record date for such vote or written consent or, if there is no specified record date, as of the date of such vote or written consent.
Common Stock
Each holder of the Company's common stock is entitled to:
•one vote per share on all matters submitted to a vote of the stockholders, subject to the rights of any preferred stock that may be outstanding;
•dividends as may be declared by the Company's Board of Directors out of funds legally available for that purpose, subject to the rights of any preferred stock that may be outstanding; and
•a pro rata share in any distribution of the Company's assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding preferred stock in the event of liquidation.
Holders of the Company's common stock have no cumulative voting rights, redemption rights or preemptive rights to purchase or subscribe for any shares of its common stock or other securities. All of the outstanding shares of common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of its common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any existing series of preferred stock and any series of preferred stock that the Company may designate and issue in the future. There are no redemption or sinking fund provisions applicable to the Company's common stock.
(22)FAIR VALUE MEASUREMENTS
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following tables present the Company's financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2024 and 2023, classified by fair value hierarchy:
Successor
Fair Value Measurements at Reporting Date Using
(In thousands)
July 31, 2024
Level 1
Level 2
Level 3
Assets:
Money market funds
$
235,221
$
235,221
$
—
$
—
Convertible loan note investment
—
—
—
—
Other investments
41,376
41,376
—
—
Liabilities:
SPHG Note
$
12,903
$
—
$
—
$
12,903
Successor
Fair Value Measurements at Reporting Date Using
(In thousands)
July 31, 2023
Level 1
Level 2
Level 3
Assets:
Money market funds
$
85,269
$
85,269
$
—
$
—
Liabilities:
SPHG Note
$
12,461
$
—
$
—
$
12,461
There were no transfers between Levels 1, 2 or 3 during any of the periods presented.
ASC 820, Fair Value Measurement, provides that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
Level 3: Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price the assets or liabilities
When available, quoted prices are used to determine fair value. When quoted prices in active markets are available, investments are classified within Level 1 of the fair value hierarchy. When quoted prices in active markets are not available, fair values are determined using pricing models, and the inputs to those pricing models are based on observable market inputs. The inputs to the pricing models are typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The Company's assets and liabilities that are measured at fair value on a nonrecurring basis include long-lived assets and goodwill and other intangible assets. The Company reviews the carrying amounts of these assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recognized when the carrying amount of the asset group or reporting unit is not recoverable and exceeds its fair value. The Company estimates the fair values of assets subject to impairment based on the Company's own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available.
Fair Value of Financial Instruments
The Company's financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, customer deposits, accounts payable, and restricted cash, and are reflected in the consolidated financial statements at carrying value. Carrying value approximates fair value for these items due to their short-term maturities or expected settlement dates of these instruments.
Subsequent to the issuance of fiscal year 2023 financial statements, the Company determined that the money market funds balance as of July 31, 2023 in the above table, was understated by $54.2 million. The Company corrected this immaterial error in the table above as of July 31, 2023. This disclosure change did not have any impact to amounts recognized in the consolidated balance sheets.
Following is a summary of changes in financial assets and liabilities measured using Level 3 inputs:
(in thousands)
SPHG Note (a)
Convertible Loan Note Investment (a)
Balance as of July 31, 2023 (Successor)
$
12,461
$
—
Purchases
—
1,227
Change in fair value
442
(1,227)
Balance as of July 31, 2024 (Successor)
$
12,903
$
—
(a) Unrealized losses are recorded in Other gains, net within the condensed consolidated statements of operations.
Valuation Techniques
Included in cash and cash equivalents in the accompanying consolidated balance sheets are money market funds. These are valued at quoted market prices in active markets.
The Company uses quoted market prices to determine the fair value of investments in equity securities with readily determinable fair value.
Prior to the date of the Exchange Transaction, the Company did not measure the fair value of the SPHG Note on a recurring basis, as the assumption was that the carrying value of the liability component of the SPHG Note approximated fair value because the stated interest rate of this debt was consistent with current market rates. In conjunction with the application of pushdown accounting, the Company now measures the fair value of the SPHG Note on a recurring basis. Refer to Note 10 - "Debt" for further details. The Company estimates the value of the SPHG Note using a Binomial Lattice Model. Key inputs in
the valuation include the trading price and volatility of Steel Connect's common stock, the risk-free rate of return, as well as the dividend rate, conversion price, and maturity date. The Company recognized $0.4 million and $0.5 million in unrealized losses in Other gains, net within the condensed consolidated statements of operations for the fiscal year ended July 31, 2024 and during the May 1 to July 31, 2023 Successor Period, respectively, as a result of the fair value measurements performed. There were no unrealized gains or losses recognized during the August 1 to April 30, 2023 Predecessor Period. The Company determined that there have been no changes to the fair value of the SPHG Note from the second quarter of fiscal year 2024, given that the fair value remeasurement performed as of January 31, 2024 yielded $12.9 million, which equates to the principal balance remaining on the SPHG Note. The SPHG Note matured on September 1, 2024 and the Company paid off the outstanding principal and accrued interest for the SPHG Note upon its maturity.
As discussed in Note 6 - "Investments", the Company elected the fair value option to account for their convertible loan note investment. In April 2024, the Company determined that the fair value of the investment is zero. As such, the Company recorded a loss of $1.2 million to the condensed consolidated statement of operations during the third quarter of fiscal year 2024. As of July 31, 2024, there was no new information available that would indicate that the fair value of the convertible loan note investment had changed. There were no unrealized gains or losses recorded to the condensed consolidated statement of operations during the fiscal year ended July 31, 2023, as the convertible loan note investment was a new investment in October 2023.
(23)SEGMENT INFORMATION
Subsequent to the Company’s disposition of the Direct Marketing reportable segment in the IWCO Direct Disposal in February 2022, the Company has one reportable segment: Supply Chain. The Company also has Corporate-level activity, which consists primarily of activity related to business development to manage investments and cash, as well as costs associated with certain corporate administrative functions such as legal, finance and share-based compensation, which are not allocated to the Company's reportable segment. 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 segment. All significant intra-segment amounts have been eliminated. Management evaluates segment performance based on segment net revenue and operating income (loss).
Management evaluates segment performance based on segment net revenue, operating income (loss) and "adjusted operating income (loss)," which is defined as the operating income (loss) excluding net charges related to depreciation, amortization of long-lived asset impairment, share-based compensation and restructuring. These items are excluded because they may be considered to be of a non-operational or non-cash nature. Historically, the Company has recorded significant impairment and restructuring charges, and therefore management uses adjusted operating income (loss) to assist in evaluating the performance of the Company's core operations.
Summarized financial information of the Company's operations by operating segment is as follows:
Summarized financial information of the Company's capital expenditures and depreciation expense for the Supply Chain reportable segment is as follows:
Successor
Predecessor
Fiscal Year Ended July 31,
May 1 to July 31,
August 1, 2022 to April 30,
2024
2023
2023
(In thousands)
Capital expenditures
$
3,965
$
807
$
1,311
Depreciation expense
1,826
456
1,427
Summarized financial information of the Company's net revenue by geographic location is as follows:
Successor
Predecessor
Fiscal Year Ended July 31,
May 1 to July 31,
August 1, 2022 to April 30,
2024
2023
2023
(In thousands)
Mainland China
$
61,339
$
14,649
$
48,049
United States
40,860
8,800
38,262
Netherlands
21,720
5,774
15,149
Singapore
17,144
4,448
14,940
Czech
14,320
3,336
19,497
Other
18,726
3,797
12,386
Total consolidated net revenue
$
174,109
$
40,804
$
148,283
(24)RELATED PARTY TRANSACTIONS
As of July 31, 2024, the Steel Partners Group beneficially owned approximately 89.7% of our outstanding capital stock, including the if-converted value of the SPHG Note and shares of Series C Convertible Preferred Stock and Series E Convertible Preferred Stock that vote on an as-converted basis together with our Common Stock. The exclusion of the if-converted value of the SPHG Note would have resulted in the Steel Partners Group holding approximately 89.5% of our outstanding capital 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 of Directors and former Chief Administrative Officer, is an employee of Steel Services. Jack L. Howard, the President and a director of Steel Holdings GP, is also a director. Joseph Martin, one of our directors, is the Chief Administrative Officer and Chief Legal Officer of Steel Holdings. Ryan O'Herrin, our Chief Financial Officer, is the Chief Financial Officer of Steel Holdings.
SPHG Note Transaction
On February 28, 2019, the Company entered into the SPHG Note Purchase Agreement with SPHG Holdings, whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for the SPHG Note.
On March 9, 2023 (the "Amendment Date"), the Company and SPHG Holdings entered into an amendment to the SPHG Note. Pursuant to the SPHG Note Amendment, the maturity date of the SPHG Note was extended six months from March 1, 2024 to September 1, 2024. The Company repaid $1.0 million in principal amount of the SPHG Note on the Amendment Date, and repaid an additional $1.0 million principal amount of the note on June 9, 2023. In connection with the SPHG Note
Amendment, the Company also paid SPHG Holdings a cash amendment fee of $0.1 million, and derecognized $0.2 million of the debt discount in proportion to the reduction of the principal balance on the Amendment Date in the third quarter of fiscal year 2023. No other changes were made to the terms of the SPHG Note besides the items discussed.
During the fiscal year ended July 31, 2024, and the May 1 to July 31, 2023 Successor Period, the Company recognized interest expense of $1.0 million and $0.3 million, respectively, associated with the SPHG Note. During the August 1, 2022 to April 30, 2023 Predecessor Period, the Company recognized interest expense of $2.5 million associated with the SPHG Note.
The SPHG Note matured on September 1, 2024, and the Company paid off the outstanding principal and accrued interest for the SPHG Note upon its maturity.
Preferred Stock Transactions
Refer to Note 21 – “Stockholders’ Equity” for information on the Series C Preferred Stock Purchase Agreement with SPHG Holdings. During each of the fiscal years ended July 31, 2024 and 2023, the Company paid dividends of $2.1 million and $2.1 million, respectively, associated with the Series C Convertible Preferred Stock.
Refer to Note 21 – “Stockholders’ Equity” for information on the Transfer and Exchange Agreement with the Steel Partners Group, where the Company exchanged 3.5 million shares of Series E Convertible Preferred Stock of Steel Connect for certain marketable securities held by the Steel Partners Group.
Stockholders' Agreement
Concurrently with the execution of the Transfer and Exchange Agreement, the Company, Steel Holdings, Steel Excel, WebFinancial, WHX CS, LLC, WF Asset Corp., Steel Partners Ltd., Warren G. Lichtenstein and Jack L. Howard (together, the "SP Investors") entered into a Stockholders' Agreement dated as of April 30, 2023 (the "Stockholders' Agreement"). Pursuant to the Stockholders' Agreement, the parties agreed to certain aspects of the Company's governance, including the maintenance of the Board size at seven directors and the creation of an audit committee consisting of at least three independent directors under SEC and applicable stock exchange rules (an "Independent Audit Committee") or one consisting of at least three directors, at least one of whom qualifies as independent under SEC and applicable stock exchange rules and the remainder of whom are not affiliated, as described in the Stockholders’ Agreement, with the Company or the SP Investors or their subsidiaries or affiliates (the “Disinterested Audit Committee”).
The Stockholders' Agreement further provides that (a) prior to September 1, 2025 the prior approval of the Independent Audit Committee or the Disinterested Audit Committee, as applicable, is required for the following: (i) a voluntary delisting of the common stock from the applicable stock exchange or a transaction (including a merger, recapitalization, stock split or otherwise) which results in the delisting of the common stock, Steel Connect ceasing to be an SEC reporting company, or Steel Connect filing a Form 25 or Form 15 or any similar form with the SEC; (ii) an amendment to the terms of the STCN Management Services Agreement (the "Services Agreement") dated June 14, 2019, by and between Steel Connect and Steel Services Ltd.; and (iii) any related party transaction between Steel Connect and the SP Investors and their subsidiaries and affiliates; (b) prior to September 1, 2028, the prior approval of the Independent Audit Committee or the Disinterested Audit Committee, as applicable, is required for the Board to approve a going private transaction pursuant to which Steel Holdings or its subsidiaries or affiliates acquires the outstanding shares of common stock they do not own (or any alternative transaction that would have the same impact); and (c) until the Final Sunset Date (as defined in the Stockholders' Agreement), the prior approval of the Independent Audit Committee or the Disinterested Audit Committee, as applicable, is required (i) for the Board to approve a short-form or squeeze-out merger between Steel Connect and the SP Investors; or (ii) prior to any transfer of equity interests in Steel Connect by the members of the SP Group (as defined in the Stockholders' Agreement) if such transfers would result in 80% of the voting power and value of the equity interests in Steel Connect that are held by the members of the SP Group being held by one corporate entity.
Currently, the Stockholders' Agreement also provides that 70% of the net proceeds received by the Company upon resolution of the Reith litigation will be distributed to the Company’s stockholders with the SP Investors agreeing to waive their portion of any such distribution to the extent of any shares of common stock held as of the date of the Stockholders’ Agreement or issuable upon conversion of the Series E Convertible Preferred Stock held by the SP Investors and the Series C Convertible Preferred Stock of Steel Connect, and the SPHG Note. Any amendment to the Stockholders’ Agreement by the Company prior to the date that any person or group of related persons owns 100% of the equity securities of the Company requires the prior approval of the Independent Audit Committee or the Disinterested Audit Committee, as applicable. As described in the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, if the Proposed Settlement is approved, the Company will make certain changes to the Stockholders’ Agreement as described above, including that 100% of the net proceeds received by the Company upon resolution of the Reith litigation will be distributed to the Company's stockholders.
On June 14, 2019, the Company entered into an agreement (the "STCN Management Services Agreement") with Steel Services Ltd. ("Steel Services"), an indirect wholly-owned subsidiary of Steel Holdings. The STCN Management Services Agreement was effective as of June 1, 2019. Pursuant to the STCN Management Services Agreement, Steel Services provides the Company and its subsidiaries with the non-exclusive services of certain employees, including certain executive officers (including chief financial officer and general counsel services) and other corporate services. The STCN Management Services Agreement also provides for reimbursements to Steel Services and its representatives for all reasonable expenses incurred in providing the non-exclusive services and automatically renews for successive one year periods unless and until terminated by the Company or Steel Services. On February 25, 2022, in connection with the Company's disposal of its ownership in IWCO Direct Holdings, Inc., the management fee was reduced from $282.8 thousand per month to $101.9 thousand per month.
On October 25, 2023, the Company and Steel Services entered into Amendment No. 2 to the STCN Management Services Agreement, pursuant to which the parties agreed to increase the monthly fee to $131.0 thousand effective as of January 1, 2024, primarily to increase the business development and mergers and acquisition staffing needed to originate, analyze and pursue strategic acquisitions and investments.
Prior to the effective date of Amendment No. 2 to the STCN Management Services Agreement, expenses incurred by ModusLink were paid to Steel Services under the STCN Management Services Agreement.
ModusLink Management Services Agreement
On October 25, 2023, ModusLink entered into a management services agreement (the “ModusLink Management Services Agreement”) with Steel Services, effective as of January 1, 2024. Pursuant to the ModusLink Management Services Agreement, Steel Services will provide ModusLink with certain non-exclusive services of certain employees and executive officers to serve in various positions or functions and to perform duties normally associated with those specific to, or substantially equivalent, positions or functions for ModusLink based on its particular needs. Such services include, but are not limited to, services related to legal and environmental, health and safety, finance, tax and treasury, human resources, “lean,” internal audit, mergers and acquisitions, and information technology. Previously, the terms regarding such non-exclusive services were governed by the STCN Management Services Agreement.
The ModusLink Management Services Agreement provides that ModusLink will pay Steel Services a fixed monthly fee of $80.0 thousand in consideration of the non-exclusive services and will reimburse Steel Services and its representatives for all reasonable expenses incurred in providing the services. The ModusLink Management Services Agreement will automatically renew for successive one-year periods unless and until terminated by ModusLink or Steel Services.
Total expenses incurred related to the management services agreements for the Successor and Predecessor periods are below and are recorded within the consolidated statements of operations to Selling, general and administrative expense:
Successor
Predecessor
Fiscal Year Ended July 31,
May 1 to July 31,
August 1, 2022 to April 30,
2024
2023
2023
(In thousands)
Management services agreement expenses
$
2,936
$
617
$
1,736
As of July 31, 2024 and 2023, amounts due to Steel Services were $0.1 million and $0.7 million, respectively and are recorded within the consolidated balance sheets as a component of Accounts payable.
ModusLink Employee Stock Awards
On May 14, 2024, the Company agreed to reimburse Steel Holdings for the issuance by Steel Holdings of restricted limited partnership units to certain ModusLink employees.
Total expenses incurred related to the ModusLink Stock Awards were $0.2 million for the fiscal year ended July 31, 2024. As of July 31, 2024, amounts due to Steel Services were $0.2 million and are recorded within the consolidated balance sheets as a component of Accounts payable.
The Company reimburses SP General Services, LLC (an affiliate of Steel Holdings), rather than Steel Services, for expenses for business-related air travel, which relates to services provided to the Company by Warren G. Lichtenstein as Interim Chief Executive Officer as well as certain of the Company’s executive officers whose services are provided to the Company under the STCN Management Services Agreement or the ModusLink Management Services Agreement. During the fiscal year ended July 31, 2024, SP General Services, LLC incurred $1.8 million in expenses for business-related air travel. During the fiscal year ended July 31, 2023, SP General Services, LLC did not incur any reportable expenses for such business-related air travel. As of July 31, 2024, amounts due to SP General Services, LLC were $1.6 million. There was no balance due to SP General Services, LLC as of July 31, 2023.
ITEM 9.— CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.— CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the Interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Report. "Disclosure controls and procedures" means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based upon that evaluation, management, including the Interim Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls were effective as of July 31, 2024.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as such terms are defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of its financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of management, including the Interim Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of July 31, 2024.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended July 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.— OTHER INFORMATION
During the three months ended July 31, 2024, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
ITEM 9C.— DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10.— DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Unless earlier included in an amendment to this Form 10-K, the information with respect to directors and executive officers required by this item will be contained in our definitive proxy statement to be filed with the SEC not later than 120 days after the close of business of the fiscal year and is incorporated in this Report by reference.
During the fiscal year ended July 31, 2024, we made no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors, as described in our definitive proxy statement on Schedule 14A filed with the SEC on July 31, 2024.
The Company has adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees of the Company, including the Company's principal executive officer, and its senior financial officers (principal financial officer and controller or principal accounting officer, or persons performing similar functions). The Company's Code of Business Conduct and Ethics is posted on its website, www.steelconnectinc.com (under the Corporate Governance section). We intend to satisfy the disclosure requirement regarding any amendment to, or waiver of, a provision of the Code of Business Conduct and Ethics applicable to the Company's principal executive officer or its senior financial officers (principal financial officer and controller or principal accounting officer, or persons performing similar functions) by posting such information on our website as required by the rules of the SEC or Nasdaq.
ITEM 11.— EXECUTIVE COMPENSATION
Unless earlier included in an amendment to this Form 10-K, the information required by this item will be contained in our definitive proxy statement and is incorporated in this Report by reference.
ITEM 12.— SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Unless earlier included in an amendment to this Form 10-K, information regarding the security ownership of certain beneficial owners and management will be contained in our definitive proxy statement and is incorporated in this Report by reference.
Equity Compensation Plan Information as of July 31, 2024
The following table sets forth certain information regarding the Company's equity compensation plans as of July 31, 2024:
(a)
(b)
(c)
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders
—
$
—
747,549
(1)(2)
Equity compensation plans not approved by security holders
—
$
—
—
Total
—
$
—
747,549
_____________
(1)Includes:
▪Approximately 8,284 shares available for issuance under the Company's Amended and Restated 1995 Employee Stock Purchase Plan, as amended.
▪739,265 shares available for future issuance under the 2020 Stock Incentive Compensation Plan.
(2)On June 12, 2020, the Company's Board of Directors adopted, subject to stockholder approval, the Steel Connect Inc. 2020 Stock Incentive Compensation Plan ("2020 Incentive Plan"), and on July 23, 2020, the 2020 Incentive Plan was approved. The 2020 Incentive Plan replaces the 2010 Incentive Award Plan, as amended (the "2010 Incentive Plan"). The Company also has a 2005 Non-Employee Director Plan (the "2005 Director Plan"). As of December 2010, no grants were allowed under the 2005 Director Plan. As of July 23, 2020, no additional grants may be issued under the 2010 Incentive Plan. Any awards that are outstanding under the 2010 Incentive Plan continue to be subject to the terms and conditions of such plan.
ITEM 13.— CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Unless earlier included in an amendment to this Form 10-K, the information required by this item will be contained in our definitive proxy statement and is incorporated in this Report by reference.
ITEM 14.— PRINCIPAL ACCOUNTING FEES AND SERVICES
Unless earlier included in an amendment to this Form 10-K, the information required by this item will be contained in our definitive proxy statement and is incorporated in this Report by reference.
PART IV
ITEM 15.— EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements.
The financial statements listed in the Index to Consolidated Financial Statements are filed as part of this Report.
(a) 2. Financial Statement Schedules.
All financial statement schedules have been omitted as they are either not required, not applicable, or the information is otherwise included.
(a) 3. Exhibits.
The exhibits listed in the Exhibit Index are filed, furnished or incorporated by reference in this Annual Report.
Interactive Data Files Pursuant to Rule 405 of Regulation S-T formatted in Inline XBRL: (i) Audited Consolidated Balance Sheet as of July 31, 2024, (ii) Audited Consolidated Statement of Operations for the fiscal year ended July 31, 2024, (iii) Audited Consolidated Statement of Comprehensive Income for the fiscal year ended July 31, 2024, (iv) Audited Consolidated Statement of Stockholders' Equity for the fiscal year ended July 31, 2024, (v) Audited Consolidated Statement of Cash Flows for the fiscal year ended July 31, 2024 and (vi) Notes to Audited Consolidated Financial Statements.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document).
___________________
* Management contract or compensatory plan or arrangement.
** Filed herewith.
‡ Furnished herewith.
++ Portions of this exhibit (indicated by asterisks) have been omitted pursuant to Regulation S-K. Item 601(b)(10). Such
omitted information is not material and would likely cause competitive harm to the registrant if publicly disclosed.
† The schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STEEL CONNECT, INC.
Date: November 6, 2024
By:
/S/ WARREN G. LICHTENSTEIN
Warren G. Lichtenstein
Interim Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Warren G. Lichtenstein and Ryan O'Herrin, or either of them as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated.
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ WARREN G. LICHTENSTEIN
Interim Chief Executive Officer, Executive Chairman of the Board and Director
