mlnk-20241031

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

________________________

(Mark One)


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

For the quarterly period ended October 31, 2024


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

For the transition period from to

Commission File Number 001-35319

_______________________

Steel Connect, Inc.

(Exact name of registrant as specified in its charter)

_______________________


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


590 Madison Avenue 32nd Floor New York, New York (Address of principal executive offices)						10022 (Zip Code)

(914) 461-1276

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

_______________________

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	STCN	Nasdaq Capital Market

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

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

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

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

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

As of December 1, 2024, there were 6,335,641 shares issued and outstanding of the registrant's Common Stock, $0.01 par value per share.

Table of Contents

STEEL CONNECT, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page Number
Part I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

Table of Contents

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	October 31, 2024		July 31, 2024
	(unaudited)
ASSETS
Cash and cash equivalents	$	233,927	$	248,614
Accounts receivable, trade, net of allowance for credit losses of $150 and $169 at October 31, 2024 and July 31, 2024, respectively	34,543		33,443
Inventories, net	8,667		6,733
Funds held for clients	2,465		2,576
Prepaid expenses and other current assets	3,797		4,462
Total current assets	283,399		295,828
Property and equipment, net	5,642		5,536
Operating lease right-of-use assets	18,555		20,748
Investments	48,693		41,376
Other intangible assets, net	30,143		31,036
Goodwill	19,703		19,703
Deferred tax assets	67,860		68,315
Other assets	2,763		3,086
Total assets	$	476,758	$	485,628
LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Accounts payable	$	29,031	$	25,219
Accrued expenses	22,200		21,659
Funds held for clients	2,408		2,532
Current lease obligations	7,881		8,319
Convertible note payable	—		12,903
Other current liabilities	4,858		4,423
Total current liabilities	66,378		75,055

Long-term lease obligations	11,020		12,740
Other long-term liabilities	5,048		5,913
Total long-term liabilities	16,068		18,653
Total liabilities	82,446		93,708
Series C contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at October 31, 2024 and July 31, 2024	35,006		35,006
Series E contingently redeemable preferred stock, $0.01 par value per share. 3,500,000 shares authorized, issued and outstanding at October 31, 2024 and July 31, 2024	202,733		202,733
Total contingently redeemable preferred stock	237,739		237,739
Stockholders' equity:
Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at October 31, 2024 and July 31, 2024; zero shares issued and outstanding at October 31, 2024 and July 31, 2024	—		—
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 6,335,641 issued and outstanding shares at October 31, 2024; 6,319,513 issued and outstanding shares at July 31, 2024	65		65
Additional paid-in capital	62,347		62,166
Accumulated earnings	95,285		93,457
Accumulated other comprehensive loss	(1,124)		(1,507)
Total stockholders' equity	156,573		154,181
Total liabilities, contingently redeemable preferred stock and stockholders' equity	$	476,758	$	485,628

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



	Three Months Ended October 31,
	2024		2023
Net revenue	$	50,487	$	41,341
Cost of revenue	33,251		29,866
Gross profit	17,236		11,475
Operating expenses:
Selling, general and administrative	9,842		8,795
Amortization	893		875
Total operating expenses	10,735		9,670
Operating income	6,501		1,805
Other (expense) income:
Interest income	2,814		3,219
Interest expense	(111)		(247)
Other (losses) gains, net	(6,022)		330
Total other (expense) income, net	(3,319)		3,302
Income before income taxes	3,182		5,107
Income tax expense	817		671
Net income	2,365		4,436
Less: Preferred dividends on Series C redeemable preferred stock	(537)		(536)
Net income attributable to common stockholders	$	1,828	$	3,900

Net income per common shares - basic	$	0.07	$	0.15

Net income per common shares - diluted	$	0.07	$	0.15

Weighted-average number of common shares outstanding - basic	6,256		6,199
Weighted-average number of common shares outstanding - diluted	26,104		26,066

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three Months Ended October 31,
	2024		2023
Net income	$	2,365	$	4,436
Other comprehensive income (loss):
Foreign currency translation adjustment	383		(996)


Other comprehensive income (loss)	383		(996)
Comprehensive income	$	2,748	$	3,440

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

(unaudited)


	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
Balance at July 31, 2024	6,319,513	$	65	$	62,166	$	93,457	$	(1,507)	$	154,181
Net income	—	—		—		2,365		—		2,365
Preferred dividends	—	—		—		(537)		—		(537)

Restricted stock grants	16,128	—		—		—		—		—

Share-based compensation	—	—		181		—		—		181
Other comprehensive items	—	—		—		—		383		383
Balance at October 31, 2024	6,335,641	$	65	$	62,347	$	95,285	$	(1,124)	$	156,573



	Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
Balance at July 31, 2023	6,250,493	$	65	$	61,534	$	7,612	$	(587)	$	68,624
Net income	—	—		—		4,436		—		4,436
Preferred dividends	—	—		—		(536)		—		(536)

Restricted stock grants	16,737	—		—		—		—		—
Share-based compensation	—	—		137		—		—		137
Other comprehensive items	—	—		—		—		(996)		(996)
Balance at October 31, 2023	6,267,230	$	65	$	61,671	$	11,512	$	(1,583)	$	71,665

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three Months Ended October 31,
	2024		2023
Cash flows from operating activities:
Net income	$	2,365	$	4,436
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation	606		435
Amortization of finite-lived intangible assets	893		875


Share-based compensation	181		137
Non-cash lease expense	2,417		2,197
Bad debt recovery	(22)		(8)
Other losses (gains), net	6,032		(330)
Changes in operating assets and liabilities:
Accounts receivable, net	(943)		238
Inventories, net	(1,889)		1,525
Prepaid expenses and other current assets	632		(367)
Accounts payable, accrued restructuring and accrued expenses	4,100		(1,351)
Refundable and accrued income taxes, net	(58)		312
Other assets and liabilities	(2,324)		(1,516)
Net cash provided by operating activities	11,990		6,583
Cash flows from investing activities:
Purchases of investments	(12,797)		(3,890)
Proceeds from disposition of securities	—		154,526
Additions of property and equipment	(581)		(552)
Proceeds from the disposition of property and equipment	1		—
Net cash (used in) provided by investing activities	(13,377)		150,084
Cash flows from financing activities:
Preferred dividend payments	(537)		(536)
Repayment of remaining principal balance on SPHG Note	(12,940)		—

Net cash used in financing activities	(13,477)		(536)
Net effect of exchange rate changes on cash, cash equivalents and restricted cash	66		(884)
Net increase in cash, cash equivalents and restricted cash	(14,798)		155,247
Cash, cash equivalents and restricted cash, beginning of period	251,190		123,404
Cash, cash equivalents and restricted cash, end of period	$	236,392	$	278,651

Cash and cash equivalents, end of period	$	233,927	$	276,705
Restricted cash for funds held for clients, end of period	2,465		1,946
Cash, cash equivalents and restricted cash, end of period	$	236,392	$	278,651

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

STEEL CONNECT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1)NATURE OF OPERATIONS

Steel Connect, Inc. (the "Company" or "Steel Company"), 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”). The Exchange Transaction closed on May 1, 2023, which is the date that the consideration was exchanged between Steel Holdings and the Company.

As of October 31, 2024, the Steel Partners Group beneficially owned approximately 91.0% of our outstanding capital stock, including the if-converted 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.

(2)BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the year ended July 31, 2024 (Fiscal Year 2024), which are contained in the Company's Form 10-K for the fiscal year ended July 31, 2024 filed on November 6, 2024, as amended on November 25, 2024. The results for the three months ended October 31, 2024 are not necessarily indicative of the results to be expected for the full fiscal year. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.

Pushdown Accounting

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.

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

The Company considers events or transactions that occur after the balance sheet date but before the issuance of financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. For the three months ended October 31, 2024, the Company evaluated subsequent events for potential recognition and disclosure through the date these financial statements were filed.

(3)RECENT ACCOUNTING PRONOUNCEMENTS

Table of Contents

Adoption of New Accounting Standards

In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40). The amendment in this update simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This update also amends the guidance for the derivatives scope exception for contracts in an entity's own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share. The update also requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity's financial statements and information about events, conditions and circumstances that can affect how to assess the amount or timing of an entity's future cash flows related to those instruments. The guidance is effective for interim and annual periods beginning in our fiscal year ending July 31, 2025, with early adoption permitted. The Company adopted ASU 2020-06 on August 1, 2024. The adoption did not have any impact on the Company's consolidated financial statements and disclosures.

Accounting Standards Issued and Not Yet Implemented

In November 2024, the FASB issued ASU 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40), which requires a public business entity to disclose specific information about certain costs and expenses in the notes to its financial statements for interim and annual reporting periods. The objective of the disclosure requirements is to provide disaggregated information about a public business entity's expenses to help investors: (a) better understand the entity's performance, (b) better assess the entity's prospects for future cash flows, and (c) compare an entity's performance over time and with that of other entities. Early adoption is permitted. The new guidance may be applied either on a prospective or retrospective basis. The amendments in this update are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statement disclosures; however, adoption is not expected to impact its consolidated balance sheets, or statement of operations.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to enhance the transparency, decision usefulness and effectiveness of income tax disclosures. The new guidance requires disaggregated information about the effective tax rate reconciliation and additional information on taxes paid that meet a quantitative threshold. The new guidance is effective for annual reporting periods beginning after December 15, 2024, with early adoption and retrospective application permitted. This guidance will be effective for the Company beginning in the fourth quarter in the fiscal year ending July 31, 2026. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statement disclosures; however, adoption is not expected to impact its consolidated balance sheets or statement of operations.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, allowing financial statement users to better understand the components of a segment's profit or loss to assess potential future cash flows for each reportable segment and the entity as a whole. The new guidance requires a public entity to disclose significant expenses and other segment items that are regularly reported to the chief operating decision maker ("CODM") and the nature of segment expense information used to manage operations. Additionally, it requires a public entity to disclose the title and position of the CODM. The ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative thresholds to determine its reportable segments. The new guidance is effective for annual reporting periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. This guidance will be effective for the Company beginning in the fourth quarter in the fiscal year ending July 31, 2025. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statement disclosures; however, adoption is not expected to impact its consolidated balance sheets or statements of operations.

In August 2023, the FASB issued ASU 2023-05, Business Combinations-Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement ("ASU 2023-05"). ASU 2023-05 applies to the formation of a "joint venture" or a "corporate joint venture" and requires a joint venture to initially measure all contributions received upon its formation at fair value. The new guidance is applicable to joint venture entities with a formation date on or after January 1, 2025, on a prospective basis. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statement disclosures; however, adoption is not expected to impact its consolidated balance sheets or statement of operations.

Other new pronouncements issued but not effective until after October 31, 2024 are not expected to have a material impact on our financial condition, results of operations or liquidity.

Table of Contents

(4)GOODWILL AND OTHER INTANGIBLE ASSETS, NET

In connection with the application of pushdown accounting, the Company recorded intangible assets for goodwill, customer relationships and tradenames. A reconciliation of the change in the carrying amount of goodwill by reportable segment is as follows:


	Supply Chain
(In thousands)
Balance at July 31, 2024
Gross goodwill	$	22,785
Accumulated impairments	—
Pushdown accounting adjustment(a)	(3,082)
Net goodwill	$	19,703
Balance at October 31, 2024
Gross goodwill	$	19,703
Accumulated impairments	—
Net goodwill	$	19,703

(a) In the fourth quarter of Fiscal Year 2024, the Company determined that the fair value of a liability that existed as of the date of the Exchange Transaction was zero. As such, the Company recorded the $3.1 million reduction of the liability as an offset to the amount of goodwill recognized in pushdown accounting.

A summary of Other intangible assets, net is as follows:



	October 31, 2024						July 31, 2024
	(In thousands)
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Customer relationships	$	25,000	$	5,357	$	19,643	$	25,000	$	4,464	$	20,536
Trade name	10,500		—		10,500		10,500		—		10,500
Total	$	35,500	$	5,357	$	30,143	$	35,500	$	4,464	$	31,036

The trade name intangible asset has an indefinite useful life. Customer relationships are amortized on a straight-line basis over an estimated useful life of seven years. Amortization expense related to intangible assets was $0.9 million for both the three months ended October 31, 2024 and 2023, respectively.

Based on gross carrying amounts at October 31, 2024, the Company's estimate of amortization expense for identifiable intangible assets for the remainder of the fiscal year ending July 31, 2025, and fiscal years 2026 through 2029 and thereafter is presented in the table below:


	Fiscal Year Ending July 31,
	2025		2026		2027		2028		2029		Thereafter
	(In thousands)
Estimated amortization expense	$	2,679	$	3,571	$	3,571	$	3,571	$	3,571	$	2,680

Table of Contents

(5)INVENTORIES, NET

The table below presents the components of Inventories, net:



	October 31, 2024		July 31, 2024
	(In thousands)
Raw materials	$	7,326	$	5,534
Work-in-process	263		125
Finished goods	1,078		1,074
	$	8,667	$	6,733

Table of Contents

(6)INVESTMENTS

The following table summarizes the Company's investments as of October 31, 2024 and July 31, 2024.


	October 31, 2024		July 31, 2024
	(In thousands)
Convertible loan note investment(a)	$	—	$	—
Investments in equity securities(b)	48,693		41,376
Total	$	48,693	$	41,376

(a) The balance consists of the Company's investment in a convertible loan note, which matures on March 31, 2025. The Company paid 1.0 million GBP (approximately $1.2 million) to subscribe for an amount of £1.0 million (the "loan principal") of 11.0% 2025 unsecured convertible loan notes issued by the investee (the "CLN Instrument Agreement"). Contemporaneous with the execution of the CLN Instrument Agreement, the Company executed the Equity Warrant Instrument Agreement (“Warrant Agreement”), which provides the Company with the option to convert the outstanding balance into equity shares of the investee at any time before repayment of the outstanding loan principal balance. The Company elected the fair value option to account for this investment. In April 2024, the Company became aware that the investee had halted its operations while it undergoes a restructuring process. As a result, the Company determined that the fair value of the investment was zero. The Company recorded a loss of $1.2 million to Other (losses) gains, net on the condensed consolidated statements of operations during the third quarter of fiscal year 2024, which was the fair value of the investment as of January 31, 2024. As of October 31, 2024, there was no new information available that would indicate that the fair value of the convertible loan note investment had changed.

(b) The balance consists of multiple common stock investments in public companies which are measured at fair value.

The amounts of net unrealized losses for the three months ended October 31, 2024 and 2023 that relate to equity securities still held as of October 31, 2024 and 2023, respectively, are as follows:


	Three months ended October 31,
	2024		2023


	(In thousands)
Unrealized losses recognized during the period on equity securities still held at the end of the period	$	(5,480)	$	(447)

Unrealized losses are recorded in Other (losses) gains, net on the condensed consolidated statements of operations.

Table of Contents

(7)ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The following tables reflect the components of "Accrued expenses" and "Other current liabilities".



	October 31, 2024		July 31, 2024
Accrued Expenses	(In thousands)
Accrued compensation	$	6,926	$	6,504
Accrued audit, tax and legal	4,073		3,909
Accrued price concessions	3,531		2,312
Accrued taxes	1,970		1,863
Accrued occupancy costs	1,830		1,803



Accrued other	3,870		5,268
Total accrued expenses	$	22,200	$	21,659



	October 31, 2024		July 31, 2024
Other Current Liabilities	(In thousands)
Deferred revenue - current	2,027		2,271

Other	2,831		2,152
Total other current liabilities	$	4,858	$	4,423

(8)LEASES

The table below presents the components of the Company's lease expense:



	Three Months Ended October 31,
	2024		2023
	(In thousands)
Operating lease cost	$	2,688	$	2,546
Short-term lease expense	380		451



Sublease income	(10)		(167)
Total lease expense	$	3,058	$	2,830

Supplemental Cash Flow Information

Supplemental cash flow information related to the Company's leases was as follows:



	Three Months Ended October 31,
	2024		2023
	(In thousands)
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	2,690	$	2,292

(9)DEBT

The components of debt are presented in the table below:

Table of Contents



	October 31, 2024		July 31, 2024
	(In thousands)
Unsecured
7.50% Convertible Senior Note due September 1, 2024	$	—	$	12,903
Credit Facilities
Umpqua Revolver	—		—
Total debt, net	$	—	$	12,903

7.50% Convertible Senior Note

On February 28, 2019, the Company entered into a 7.50% Convertible Senior Note Due 2024 Purchase Agreement (the "SPHG Note Purchase Agreement") with SPH Group Holdings LLC ("SPHG Holdings"), whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for a 7.50% Convertible Senior Note due 2024 (the "SPHG Note"). The SPHG Note was amended on March 9, 2023 (the "Amendment Date"), to extend the maturity date to September 1, 2024. In addition, the Company repaid $2.0 million in principal amount of the SPHG Note during fiscal year 2023.

The SPHG Note matured on September 1, 2024 and the Company paid off the outstanding principal balance of $12.9 million plus accrued interest of $0.5 million for the SPHG Note upon its maturity. As such, the balance of the SPHG Note was zero as of October 31, 2024. As of July 31, 2024, the principal amount of the note was $12.9 million, and the fair value of the note was $12.9 million. As of May 1, 2023, or the date of the Exchange Transaction, the Company accounted for the SPHG Note under the fair value option in order to conform with Steel Holdings' basis of accounting, with changes in fair value recognized in earnings until the note matured. Refer to Note 17 - "Fair Value Measurements" for further information.

Below is a reconciliation of interest expense related to the SPHG Note to total interest expense:



	Three Months Ended October 31,
	2024		2023
	(In thousands)
Interest expense related to contractual interest coupon on the SPHG Note	$	111	$	247



Total interest expense	$	111	$	247

Umpqua Revolver

ModusLink, as borrower, is party to a revolving credit agreement with Umpqua Bank as lender and as agent, which provides for a maximum credit commitment of $12.5 million and a sublimit of $5.0 million for letters of credit (collectively, the "Umpqua Revolver"). On May 1, 2024, ModusLink, entered into a Second Amendment to the Umpqua Revolver (the “Second Amendment”). Among other things, the Second Amendment (i) extended the maturity date with respect to revolving loans from March 31, 2025 to March 31, 2026, (ii) removed certain adjustments in the definition of “Adjusted EBITDA” as set forth in the Umpqua Revolver, (iii) increased the minimum Adjusted Tangible Net Worth (as defined in the credit agreement) and (iv) removed certain caps and conditions on ModusLink’s ability to pay dividends.

As of October 31, 2024, ModusLink was in compliance with the Umpqua Revolver's covenants, and believes it will remain in compliance with the Umpqua Revolver’s covenants for the next twelve months from the filing of this Form 10-Q. As of October 31, 2024, ModusLink had available borrowing capacity of $11.9 million and there was $0.6 million outstanding letters of credit.

(10)CONTINGENCIES

Donald Reith v. Warren G. Lichtenstein, et al.

On April 13, 2018, a purported shareholder, Donald Reith, filed a verified complaint, Reith v. Lichtenstein, et al., 2018-277 (Del. Ch.) in the Delaware Court of Chancery (the “Reith litigation”). The complaint alleges class and derivative claims for breach of fiduciary duty and/or aiding and abetting breach of fiduciary duty and unjust enrichment against certain current and former directors of the Company, Warren G. Lichtenstein, Glen M. Kassan, William T. Fejes, Jack L. Howard, Jeffrey J. Fenton,

Table of Contents

Philip E. Lengyel and Jeffrey S. Wald; and stockholders Steel Holdings and several of its affiliated companies (collectively, the "Steel Parties") in connection with the acquisition of $35.0 million of the Series C Convertible Preferred Stock by SPHG Holdings and equity grants made to Messrs. Lichtenstein, Howard and Fejes on December 15, 2017 (collectively, the "Challenged Transactions"). The Company is named as a nominal defendant. The complaint alleges that although the Challenged Transactions were approved by a Special Committee consisting of the independent members of the Board of Directors (Messrs. Fenton, Lengyel and Wald), the Steel Parties dominated and controlled the Special Committee, who approved the Challenged Transactions in breach of their fiduciary duty. Plaintiff alleges that the Challenged Transactions unfairly diluted stockholders and therefore unjustly enriched Steel Holdings, SPHG Holdings and Messrs. Lichtenstein, Howard and Fejes. The complaint also alleges that the Board of Directors made misleading disclosures in the Company's proxy statement for the 2017 Annual Meeting of Stockholders in connection with seeking approval to amend the 2010 Incentive Award Plan to authorize the issuance of additional shares to accommodate certain shares underlying the equity grants. Remedies requested include rescission of the Series C Convertible Preferred Stock and equity grants, disgorgement of any unjustly obtained property or compensation and monetary damages.

On August 13, 2021, the Company, together with certain of its current and former directors of the Board, Warren Lichtenstein, Glen Kassan, William Fejes, Jr., Jack Howard, Jeffrey Fenton and Jeffrey Wald, as well as other named defendants (collectively, the “Defendants”), entered into a memorandum of understanding (the “MOU”) with Donald Reith (the “Plaintiff”) in connection with the settlement of the Reith.

Additionally, under the MOU and separate letter agreements between the Company and such individuals (the “Surrender Agreements”), Messrs. Lichtenstein, Howard and Fejes agreed to surrender to the Company an aggregate 353,571 shares that they had initially received in December 2017 in consideration for services to the Company. The surrenders and cancellations are in the following amounts: for Mr. Lichtenstein, 196,429 vested shares and 32,143 unvested shares; for Mr. Howard, 98,214 vested shares and 16,071 unvested shares; and for Mr. Fejes, 10,714 vested shares. All such shares were surrendered and subsequently cancelled. On September 23, 2022, the court ruled that it was denying approval of the terms of the MOU.

On April 8, 2024, the Company, the Defendants and Mr. Reith entered into a new memorandum of understanding contemplating the settlement of the Reith litigation.

On October 18, 2024, the Company, Plaintiff, and Defendants entered into a Stipulation and Agreement of Compromise, Settlement and Release (the “Stipulation”) to resolve the Reith litigation (the “Settlement”).

A court hearing is scheduled to consider the approval of the Settlement on December 13, 2024.

If the Settlement is approved by the Court, (i) the Defendants shall cause their insurers to make a cash payment of $6.0 million to the Company and, after deducting any Court-approved award of attorneys’ fees to Plaintiff's counsel and certain litigation expenses, the Company shall distribute the balance of the cash payment, by way of a special divided or other distribution, to the holders of the Company’s common stock pursuant to the allocation provisions set forth in the previously disclosed Stockholders Agreement dated April 30, 2023 by and among the Company, Steel Partners Holdings L.P., and other stockholders signatory thereto (the “Stockholders’ Agreement”) as amended by the Settlement; (ii) the Company will adopt certain amendments to the Stockholders’ Agreement; and (iii) the Company will adopt certain corporate governance policies and practices, including a formal review process for compensation clawbacks, enhancing the process for granting equity awards and keeping records of equity awards granted under the Company’s stock plans, further enhancing board committee independence, and reducing the materiality threshold for review of related party transactions under the Stockholders' Agreement.

The Settlement requires Court approval, and there can be no assurances that such approval will be granted. The Settlement, if approved by the Court, will cause the dismissal, with prejudice, of the Reith litigation and the release of claims against the parties to the Settlement as described in the Stipulation.

On December 12, 2023, the Company received books and records demand, similar to the demand from Reith, from another purported shareholder. The possible liability, if any, with respect to this matter cannot be determined.

(11)REVENUE RECOGNITION

Disaggregation of Revenue

The following table presents the Company's revenues from contracts with customers disaggregated by major good or service line and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.

Table of Contents



	Three Months Ended October 31,
	2024		2023
	(In thousands)
Major Goods/Service Lines
Supply chain management services	$	50,061	$	41,005
Other	426		336
	$	50,487	$	41,341
Timing of Revenue Recognition
Services transferred over time	$	50,487	$	41,341
	$	50,487	$	41,341

Supply Chain Management Services

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

For certain customer contracts, the Company recognizes the sale of certain inventoriable goods at a point in time when control of those goods is transferred to clients. However, for sales recognized at a point in time, the timing of recognition is not significantly different than over time.

Other

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

Contract Balances

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

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

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

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

Table of Contents

The table below presents information for the Company's contract balances:



	October 31, 2024		July 31, 2024
	(In thousands)
Accounts receivable, trade, net	$	34,543	$	33,443
Contract assets	360		275

Deferred revenue - current	$	2,027	$	2,271
Deferred revenue - long-term	48		54
Total deferred revenue	$	2,075	$	2,325

Remaining Performance Obligations

Remaining performance obligations are comprised of deferred revenue. Changes in deferred revenue during the three months ended October 31, 2024 and October 31, 2023, were as follows:



	Three Months Ended October 31,
	2024		2023
	(In thousands)
Balance at beginning of period	$	2,325	$	2,718
Deferral of revenue	208		301
Recognition of deferred amounts upon satisfaction of performance obligation	(458)		(371)
Balance at end of period	$	2,075	$	2,648

The Company expects to recognize approximately $2.0 million of the deferred revenue over the next twelve months and the remaining balance beyond that time period.

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

(12)INCOME TAXES

The Company's tax provision represents the income tax expense or benefit of its consolidated subsidiaries that are taxable entities. The income tax provision fluctuates based on, among other factors, where income is earned and the level of income relative to tax attributes. The Company recorded income tax provisions of $0.8 million and $0.7 million for the three months ended October 31, 2024 and 2023, respectively. Provisions have been made for federal, state, local, and foreign income taxes on the results of operations generated by our consolidated subsidiaries that are taxable entities. Significant differences between the statutory rate and the effective tax rate include changes in deferred tax valuation allowances, the impact of international tax provisions and withholding taxes, and other permanent differences. The Company’s consolidated subsidiaries have recorded deferred tax valuation allowances to the extent that they believe it is more likely than not that the benefits of certain deferred tax assets will not be realized in future periods.

The Company operates in multiple taxing jurisdictions, both within and outside of the United States. For the three months ended October 31, 2024, the Company was profitable in certain jurisdictions, resulting in an income tax expense using enacted rates in those jurisdictions. As of both October 31, 2024 and July 31, 2024, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately $0.1 million.

Uncertain Tax Positions

In accordance with the Company's accounting policy, interest related to unrecognized tax benefits is included in the income tax expense line of the condensed consolidated statements of operations. As of both October 31, 2024 and July 31, 2024, the total amount of the liability for uncertain tax positions, including interest, related to federal, state and foreign taxes was approximately $0.1 million. The Company expects $0.1 million of unrecognized tax benefits and related interest to reverse in the next twelve months. The Company is subject to U.S. federal income tax and various state, local and international income taxes in numerous jurisdictions. The federal and state tax returns are generally subject to tax examinations for the tax years ended July 31, 2021

Table of Contents

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 2019 through 2024 tax years remain subject to examination in most locations, while the Company's 2018 through 2024 tax years remain subject to examination in most Asia locations.

(13)EARNINGS PER SHARE

The following table reconciles net earnings per share for the three months ended October 31, 2024 and 2023:



	Three Months Ended October 31,
	2024		2023
	(In thousands, except per share data)
Reconciliation of net income to net income attributable to common stockholders after assumed conversions:
Net income	$	2,365	$	4,436
Less: Preferred dividends on Series C redeemable preferred stock	(537)		(536)
Net income available to common stockholders	1,828		3,900
Less: Undistributed earnings allocated to participating securities	(1,389)		(2,970)
Net income attributable to common stockholders	$	439	$	930

Effect of dilutive securities:


Undistributed earnings allocated to Series E preferred stock	1,389		2,970
Net income attributable to common stockholders - assuming dilution	$	1,828	$	3,900

Net income per common share - basic	$	0.07	$	0.15

Net income per common share - diluted	$	0.07	$	0.15

Weighted average common shares outstanding - basic	6,256		6,199
Effect of dilutive securities:
Common stock equivalents - Restricted stock and restricted stock shares	38		57


Common stock equivalents - Series E Preferred stock	19,810		19,810
Weighted average common shares outstanding - diluted	26,104		26,066

The Company calculated basic and diluted net income per common share using the two-class method, as the Series E Convertible Preferred Stock 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, if any, 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.

Table of Contents

The below details certain exclusions from the calculation of diluted net income per share for the three months ended October 31, 2024 and 2023, respectively, as their inclusion would have been antidilutive:

For the three months ended October 31, 2024, $0.5 million of Series C preferred dividends were excluded from the numerator in the calculation of diluted net income per share as their inclusion would have been antidilutive. For the three months ended October 31, 2023, $0.2 million of interest expense, net of tax impact related to the SPHG Note, and $0.5 million of Series C preferred dividends were excluded from the numerator in the calculation of diluted net income per share as their inclusion would have been antidilutive.

For the three months ended October 31, 2024, 1.9 million common stock equivalent shares related to the Series C Preferred stock were excluded from the denominator in the calculation of diluted net income per share as their inclusion would have been antidilutive. For the three months ended October 31, 2023, 2.5 million common stock equivalent shares (including those related to the SPHG Note and the Series C Preferred stock) were excluded from the denominator in the calculation of diluted net income per share as their inclusion would have been antidilutive.

(14)COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income combines net income and other comprehensive items. Other comprehensive items represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheets. Accumulated other comprehensive items consist of the following:

SEC Form 10-Q filed by Steel Connect Inc.