First Quarter 2023 Results
- Net revenue from continuing operations totaled $51.4 million,
as compared to $44.4 million in the prior year.
- Net income from continuing operations was $5.0 million, as
compared to net loss from continuing operations of $1.0 million in
the prior year.
- Net income attributable to common stockholders was $4.4
million, as compared to net loss attributable to common
stockholders of $20.0 million in the prior year.
- Adjusted EBITDA* was $7.3 million, as compared to $0.6 million
in the prior year.
- Net cash provided by operating activities was $8.3
million.
- Free Cash Flow* totaled $7.7 million.
- Total debt, net of unamortized discounts and issuance costs,
was $11.5 million; Net Debt* totaled $(45.0) million.
Steel Connect, Inc. (the "Company") (NASDAQ: STCN) today
announced financial results for its first quarter ended October 31,
2022.
Results of Operations
The financial information and discussion that
follows below are for the Company's operations.
Three Months Ended
October 31,
2022
2021
(in thousands)
Net revenue
$
51,359
$
44,354
Net income (loss) from continuing
operations
4,957
(983)
Net income (loss) attributable to common
stockholders
$
4,420
$
(20,031)
Adjusted EBITDA*
$
7,281
$
627
Adjusted EBITDA margin*
14.2 %
1.4 %
Net cash provided by (used in) operating
activities
8,252
(3,820)
Additions to property and equipment
(548)
(363)
Free cash flow*
$
7,704
$
(4,183)
*
See reconciliations of these non-GAAP
measurements to the most directly comparable GAAP measures included
in the financial tables. See also "Note Regarding Use of Non-GAAP
Financial Measurements" below for the definitions of these non-GAAP
measures.
Results of Operations
Comparison of the First Quarter Ended October 31, 2022 and
2021
Three Months Ended
October 31,
2022
2021
Fav (Unfav) ($)
% Change
(unaudited, $ in
thousands)
Net revenue
$51,359
$44,354
$7,005
15.8%
Cost of revenue
(37,094)
(34,948)
(2,146)
(6.1)%
Gross profit
14,265
9,406
4,859
51.7%
Gross profit margin
27.8%
21.2%
—
6.6%
Selling, general and administrative
(10,386)
(8,835)
(1,551)
(17.6)%
Interest expense
(826)
(761)
(65)
(8.5)%
Other gains (losses), net
3,030
(478)
3,508
733.9%
Total costs and expenses
(8,182)
(10,074)
1,892
18.8%
Income from continuing operations before
income taxes
6,083
(668)
6,751
1010.6%
Income tax expense
(1,126)
(315)
(811)
(257.5)%
Net income (loss) from continuing
operations
$4,957
$(983)
$5,940
604.3%
Net Revenue
Net revenue from continuing operations for the first quarter
increased $7.0 million, or 15.8%, as compared to the same period in
the prior year. This increase in net revenue was primarily driven
by higher volume associated with clients in the computing and
consumer electronics markets. Fluctuations in foreign currency
exchange rates did not have a significant impact on the Supply
Chain segment's net revenues for the first quarter, as compared to
the same period in the prior year.
Cost of Revenue
Cost of revenue from continuing operations for the first quarter
increased $2.1 million, or 6.1%, as compared to the same period in
the prior year, primarily due to increased material and labor costs
from higher sales volume.
Gross Profit Margin
Gross profit percentage for the current quarter increased by
6.6%, or 657 basis points, to 27.8% as compared to 21.2% in the
prior year quarter, driven by higher net revenues and favorable
sales mix. Fluctuations in foreign currency exchange rates did not
have a significant impact on Supply Chain's gross margin for the
three months ended October 31, 2022.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses for
the first quarter increased $1.6 million or 17.6% as compared to
the same period in the prior year. Selling, general and
administrative expenses for the Supply Chain segment increased $1.0
due to bad debt expense recorded for a client in the consumer
products industry. Corporate-level activity increased $0.6 million,
primarily due to an increase in professional fees. Fluctuations in
foreign currency exchange rates had an insignificant impact on
selling, general and administrative expenses for the three months
ended October 31, 2022.
Interest Expense
Total interest expense for the first quarter did not change
significantly as compared to the same period in the prior year.
Other Gains (Losses), Net
Other gains (losses), net are primarily composed of foreign
exchange gains (losses). The Company recorded $2.5 million of
foreign exchange gains, compared to $0.5 million of foreign
exchange losses during the three months ended October 31, 2022 and
2021, respectively. The remaining favorable change of $0.5 million
is driven by changes in activity recorded to "Other - other gains
and losses" between the current quarter and the prior year
quarter.
Income Tax Expense
During the three months ended October 31, 2022, the Company
recorded income tax expense of approximately $1.1 million as
compared to income tax expense of $0.3 million for the same period
in the prior fiscal year. The increase in income tax expense is
primarily due to higher taxable income in foreign jurisdictions, as
compared to the prior year.
Net Income (Loss) From Continuing Operations
Net income from continuing operations for the first quarter
increased $5.9 million, as compared to net loss from continuing
operations for the same period in the prior year. The increase in
net income from continuing operations is primarily due an increase
in sales and an increase in foreign exchange gains.
Additions to Property and Equipment (Capital
Expenditures)
Capital expenditures for the first quarter totaled $0.5 million,
or 1.1% of net revenue, as compared to $0.4 million, or 0.8% of net
revenue, for the same period in the prior year.
Adjusted EBITDA
Adjusted EBITDA increased $6.7 million, or 1061.2%, for the
first quarter as compared to the same period in the prior year,
primarily due to an increase in net income from continuing
operations of $5.9 million.
Liquidity and Capital Resources
As of October 31, 2022, the Company had cash and cash
equivalents of $59.9 million and ModusLink had readily available
borrowing capacity of $11.9 million under its revolving credit
facility with Umpqua Bank.
As of October 31, 2022, total debt outstanding, net of
unamortized discounts and issuance costs, was $11.5 million, which
was comprised of $14.9 million outstanding on the 7.50% Convertible
Senior Note due March 1, 2024, less associated unamortized
discounts and issuance costs, as well as unamortized deferred
financing costs on the Umpqua Revolver.
About Steel Connect, Inc.
Steel Connect, Inc. is a holding company whose wholly-owned
subsidiary, ModusLink Corporation, serves the supply chain
management market.
ModusLink is an end-to-end global supply chain solutions and
e-commerce provider serving clients in markets such as consumer
electronics, communications, computing, medical devices, software
and retail. ModusLink designs and executes critical elements in its
clients' global supply chains to improve speed to market, product
customization, flexibility, cost, quality and service. These
benefits are delivered through a combination of industry expertise,
innovative service solutions, and integrated operations, proven
business processes, an expansive global footprint and world-class
technology. ModusLink also produces and licenses an entitlement
management solution powered by its enterprise-class Poetic
software, which offers a complete solution for activation,
provisioning, entitlement subscription, and data collection from
physical goods (connected products) and digital products. ModusLink
has an integrated network of strategically located facilities in
various countries, including numerous sites throughout North
America, Europe and Asia.
– Financial Tables Follow –
Steel Connect, Inc. and
Subsidiaries Condensed Consolidated Balance Sheets (in
thousands)
October 31, 2022
July 31, 2022
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
59,948
$
53,142
Accounts receivable, trade, net
35,680
40,083
Inventories, net
8,991
8,151
Funds held for clients
4,856
4,903
Prepaid expenses and other current
assets
3,692
3,551
Total current assets
113,167
109,830
Property and equipment, net
3,504
3,534
Operating lease right-of-use assets
17,491
19,655
Other assets
3,772
4,730
Total assets
$
137,934
$
137,749
LIABILITIES, CONTINGENTLY
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable
$
31,633
$
30,553
Accrued expenses
27,285
28,396
Funds held for clients
4,856
4,903
Current lease obligations
5,581
6,466
Other current liabilities
13,643
13,482
Total current liabilities
82,998
83,800
Convertible note payable
11,557
11,047
Long-term lease obligations
11,754
12,945
Other long-term liabilities
4,969
3,983
Total long-term liabilities
28,280
27,975
Total liabilities
111,278
111,775
Contingently redeemable preferred
stock
35,180
35,180
Preferred stock, $0.01 par value per
share. 4,965,000 shares authorized at October 31, 2022 and July 31,
2022; zero shares issued and outstanding at October 31, 2022 and
July 31, 2022
—
—
Common stock, $0.01 par value per share.
Authorized 1,400,000,000 shares; 60,657,539 issued and outstanding
shares at October 31, 2022; 60,529,558 issued and outstanding
shares at July 31, 2022
606
605
Additional paid-in capital
7,479,542
7,479,366
Accumulated deficit
(7,488,897)
(7,493,317)
Accumulated other comprehensive income
225
4,140
Total stockholders' (deficit) equity
(8,524)
(9,206)
Total liabilities, contingently redeemable
preferred stock and stockholders' deficit
$
137,934
$
137,749
Steel Connect, Inc. and
Subsidiaries Condensed Consolidated Statements of
Operations (in thousands, except per share amounts)
(unaudited)
Three Months Ended
October 31,
2022
2021
Net revenue
$
51,359
$
44,354
Cost of revenue
37,094
34,948
Gross profit
14,265
9,406
Operating expenses:
Selling, general and administrative
10,386
8,835
Total operating expenses
10,386
8,835
Operating income (loss)
3,879
571
Other income (expense):
Interest income
144
3
Interest expense
(826)
(761)
Other gains, net
2,886
(481)
Total other income (expense)
2,204
(1,239)
Income (loss) from continuing
operations before income taxes
6,083
(668)
Income tax expense
1,126
315
Net income (loss) from continuing
operations
4,957
(983)
Net loss from discontinued operations
—
(18,511)
Net income (loss)
4,957
(19,494)
Less: Preferred dividends on redeemable
preferred stock
(537)
(537)
Net income (loss) attributable to
common stockholders
$
4,420
$
(20,031)
Net income (loss) per common shares -
basic
Continuing operations
$
0.07
$
(0.02)
Discontinued operations
—
(0.31)
Net income (loss) attributable to common
stockholders
$
0.07
$
(0.33)
Net income (loss) per common shares -
diluted
Continuing operations
$
0.06
$
(0.02)
Discontinued operations
—
(0.31)
Net income (loss) attributable to common
stockholders
$
0.06
$
(0.33)
Weighted-average number of common shares
outstanding - basic
60,050
60,307
Weighted-average number of common shares
outstanding - diluted
78,430
60,307
Steel Connect, Inc. and
Subsidiaries Condensed Consolidated Statements of Cash
Flows (in thousands) (unaudited)
Three months ended October
31,
2022
2021
Cash flows from operating activities:
Net income (loss)
$
4,957
$
(19,494)
Less: Loss from discontinued operations,
net of tax
—
(18,511)
Loss from continuing operations
4,957
(983)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation
459
630
Amortization of deferred financing
costs
12
34
Accretion of debt discount
510
386
Share-based compensation
177
191
Non-cash lease expense
2,230
2,391
Bad debt expense (recovery)
960
(5)
Other (gains) losses, net
(2,885)
481
Changes in operating assets and
liabilities:
Accounts receivable, net
3,026
(875)
Inventories, net
(1,077)
(624)
Prepaid expenses and other current
assets
(168)
737
Accounts payable and accrued expenses
1,553
(2,039)
Refundable and accrued income taxes,
net
118
(268)
Other assets and liabilities
(1,620)
(3,876)
Net cash provided by (used in) operating
activities
8,252
(3,820)
Cash flows from investing activities:
Additions to property and equipment
(548)
(363)
Proceeds from the disposition of property
and equipment
16
—
Net cash used in investing activities
(532)
(363)
Cash flows from financing activities:
Payments of preferred dividends
(537)
(537)
Repayments on capital lease
obligations
(19)
(18)
Proceeds from issuance of common stock
—
1
Net cash used in financing activities
(556)
(554)
Net effect of exchange rate changes on
cash and cash equivalents
(405)
(121)
Net increase in cash, cash equivalents and
restricted cash
6,759
(4,858)
Cash, cash equivalents and restricted
cash, beginning of period
58,045
66,329
Cash, cash equivalents and restricted
cash, end of period
$
64,804
$
61,471
Cash and cash equivalents, end of
period
$
59,948
$
54,940
Restricted cash for funds held for
clients, end of period
4,856
6,531
Cash, cash equivalents and restricted
cash, end of period
$
64,804
$
61,471
Cash flows from discontinued
operations:
Operating activities
$
—
$
(6,606)
Investing activities
—
(4,318)
Financing activities
—
(1,500)
Net cash (used in) provided by
discontinued operations
$
—
$
(12,424)
Steel Connect, Inc. and
Subsidiaries Segment Data (in thousands)
(unaudited)
Three Months Ended
October 31,
2022
2021
(Unaudited)
Net revenue:
Supply Chain
$
51,359
$
44,354
51,359
44,354
Operating income:
Supply Chain
5,851
1,973
Total segment operating income
5,851
1,973
Corporate-level activity
(1,972)
(1,402)
Total operating income
3,879
571
Total other income (expense)
2,204
(1,239)
Income (loss) before income taxes
$
6,083
$
(668)
Steel Connect, Inc. and
Subsidiaries Reconciliation of Non-GAAP Measures to GAAP
Measures (in thousands) (unaudited)
EBITDA and Adjusted EBITDA
Reconciliations:
Three Months Ended
October 31,
2022
2021
Net income (loss) from continuing
operations
$
4,957
$
(983)
Interest income
(144)
(3)
Interest expense
826
761
Income tax expense
1,126
315
Depreciation
459
630
EBITDA
7,224
720
Strategic consulting and other related
professional fees
648
134
Executive severance and employee
retention
(116)
—
Share-based compensation
177
191
Loss on sale of long-lived assets
16
—
Unrealized foreign exchange (gains),
net
(511)
(441)
Other non-cash (gains) losses, net
(157)
23
Adjusted EBITDA
$
7,281
$
627
Net revenue
$
51,359
$
44,354
Adjusted EBITDA margin
14.2 %
1.4 %
Free Cash Flow Reconciliation:
Three Months Ended
October 31,
2022
2021
Net cash provided by (used in) operating
activities
$
8,252
$
(3,820)
Additions to property and equipment
(548)
(363)
Free cash flow
$
7,704
$
(4,183)
Net Debt Reconciliation:
October 31,
2022
July 31,
2022
Total debt, net
$
11,490
$
10,968
Unamortized discounts and issuance
costs
3,450
3,972
Cash and cash equivalents
(59,948)
(53,142)
Net debt
$
(45,008)
$
(38,202)
Note Regarding Use of Non-GAAP Financial Measurements
In addition to the financial measures prepared in accordance
with generally accepted accounting principles, the Company uses
EBITDA, Adjusted EBITDA, Free Cash Flow and Net Debt, all of which
are non-GAAP financial measures, to assess its performance. EBITDA
represents earnings (loss) from continuing operations before
interest income, interest expense, income tax expense, and
depreciation. We define Adjusted EBITDA as net income (loss) from
continuing operations excluding net charges related to interest
income, interest expense, income tax expense (benefit),
depreciation, strategic consulting and other related professional
fees, executive severance and employee retention, restructuring and
restructuring-related expense, share-based compensation, (gain)
loss on sale of long-lived assets, impairment of long-lived assets,
unrealized foreign exchange (gains) losses, net, and other non-cash
(gains) losses, net. The Company defines Free Cash Flow as net cash
provided by (used in) operating activities less additions to
property and equipment, and defines Net Debt as the sum of total
debt, excluding reductions for unamortized discounts and issuance
costs, less cash and cash equivalents.
We believe that providing these non-GAAP measurements to
investors is useful, as these measures provide important
supplemental information of our performance to investors and permit
investors and management to evaluate the operating performance of
our business. These measures provide useful supplemental
information to management and investors regarding our operating
results as they exclude certain items whose fluctuation from
period-to-period do not necessarily correspond to changes in the
operating results of our business. We use EBITDA and Adjusted
EBITDA in internal forecasts and models when establishing internal
operating budgets, supplementing the financial results and
forecasts reported to our Board of Directors, determining a
component of certain incentive compensation for executive officers
and other key employees based on operating performance, determining
compliance with certain covenants in the Company's credit
facilities, and evaluating short-term and long-term operating
trends in our core business. We use Free Cash Flow to conduct and
evaluate our business because, although it is similar to cash flow
from operations, we believe it is a useful measure of cash flows
since purchases of property and equipment are a necessary component
of ongoing operations, and similar to the use of Net Debt, assists
management with its capital planning and financing
considerations.
We believe that these non-GAAP financial measures assist in
providing an enhanced understanding of our underlying operational
measures to manage our core businesses, to evaluate performance
compared to prior periods and the marketplace, and to establish
operational goals. Further, we believe that these non-GAAP
financial adjustments are useful to investors because they allow
investors to evaluate the effectiveness of the methodology and
information used by management in our financial and operational
decision-making. These non-GAAP financial measures should not be
considered in isolation or as a substitute for financial
information provided in accordance with U.S. GAAP. These non-GAAP
financial measures may not be computed in the same manner as
similarly titled measures used by other companies
Some of the limitations of EBITDA and Adjusted EBITDA
include:
- EBITDA and Adjusted EBITDA do not reflect changes in, or cash
requirements for, our working capital needs;
- EBITDA and Adjusted EBITDA do not reflect our interest expense,
or the cash requirements necessary to service interest or principal
payments, on our debt;
- EBITDA and Adjusted EBITDA do not reflect our tax expense or
the cash requirements to pay our taxes;
- EBITDA and Adjusted EBITDA do not reflect historical capital
expenditures or future requirements for capital expenditures or
contractual commitments;
- although depreciation and amortization are non-cash charges,
the assets being depreciated and amortized will often have to be
replaced in the future, and EBITDA and Adjusted EBITDA do not
reflect any cash requirements for such replacements; and
- other companies in our industry may calculate EBITDA and
Adjusted EBITDA differently, limiting their usefulness as
comparative measures.
In addition, Net Debt assumes the Company's cash and cash
equivalents can be used to reduce outstanding debt without
restriction, while Free Cash Flow has limitations due to the fact
that it does not represent the residual cash flow available for
discretionary expenditures and excludes the Company's remaining
investing activities and financing activities, including the
requirement for principal payments on the Company's outstanding
indebtedness.
See reconciliations of these non-GAAP measures to the most
directly comparable GAAP measures included in the financial tables
of this release.
Net Operating Loss Carryforwards
The Company's Restated Certificate of Incorporation (the
“Protective Amendment”) and Amended Tax Benefits Preservation Plan
(the “Tax Plan”) includes provisions designed to protect the tax
benefits of the Company's net operating loss carryforwards by
preventing certain transfers of our securities that could result in
an "ownership change" (as defined under Section 382 of the Internal
Revenue Code). The Protective Amendment generally restricts any
direct or indirect transfer if the effect would be to (i) increase
the direct, indirect or constructive ownership of any stockholder
from less than 4.99 percent to 4.99 percent or more of the shares
of common stock then outstanding or (ii) increase the direct,
indirect or constructive ownership of any stockholder owning or
deemed to own 4.99 percent or more of the shares of common stock
then outstanding. Pursuant to the Protective Amendment, any direct
or indirect transfer attempted in violation of the Protective
Amendment would be void as of the date of the prohibited transfer
as to the purported transferee (or, in the case of an indirect
transfer, the ownership of the direct owner of the shares would
terminate simultaneously with the transfer), and the purported
transferee (or in the case of any indirect transfer, the direct
owner) would not be recognized as the owner of the shares owned in
violation of the Protective Amendment (the "excess stock") for any
purpose, including for purposes of voting and receiving dividends
or other distributions in respect of such shares, or in the case of
options, receiving shares in respect of their exercise. Pursuant to
the Tax Plan and subject to certain exceptions, if a stockholder
(or group) becomes a 4.99-percent stockholder after adoption of the
Tax Plan, certain rights attached to each outstanding share of our
common stock would generally become exercisable and entitle
stockholders (other than the new 4.99-percent stockholder or group)
to purchase additional shares of the Company at a significant
discount, resulting in substantial dilution in the economic
interest and voting power of the new 4.99-percent stockholder (or
group). In addition, under certain circumstances in which the
Company is acquired in a merger or other business combination after
an non-exempt stockholder (or group) becomes a new 4.99-percent
stockholder, each holder of a right (other than the new
4.99-percent stockholder or group) would then be entitled to
purchase shares of the acquiring company's common stock at a
discount. For further discussion of the Company's tax benefits
preservation plan, please see the Company's filings with the
SEC.
Forward-Looking Statements
This release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Statements in this release that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the
safe harbor provided by Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements other than statements of historical
fact, including without limitation, those with respect to the
Company's goals, plans, expectations and strategies set forth
herein are forward-looking statements. The following important
factors and uncertainties, among others, could cause actual results
to differ materially from those described in these forward-looking
statements: changes in the Company’s relationships with significant
clients; fluctuations in demand for our products and services; the
Company’s ability to achieve and sustain operating profitability;
demand variability from clients without minimum purchase
requirements; general economic conditions and public health crises
(such as the ongoing COVID-19 pandemic); intense competition in the
Company’s business; risks relating to impairment, misappropriation,
theft and credit-related issues with respect to funds held for the
Company’s clients; our ability to maintain adequate inventory
levels; our ability to raise or access capital in the future;
difficulties increasing operating efficiencies and effecting cost
savings; loss of essential employees or an inability to recruit and
retain personnel; the Company's ability to execute on its business
strategy and to achieve anticipated synergies and benefits from
business acquisitions; risks inherent with conducting international
operations, including the Company’s operations in Mainland China;
the risk of damage, misappropriation or loss of the physical or
intellectual property of the Company’s clients; increased
competition and technological changes in the markets in which the
Company competes; disruptions in or breaches of the Company’s
technology systems; failure to settle disputes and litigation on
terms favorable to the Company; challenges and risks arising from
the disposition of IWCO Direct, including the Company’s reliance on
the Supply Chain segment as its sole business; the Company's
ability to preserve and monetize its net operating losses; changes
in tax rates, laws or regulations; failure to maintain compliance
with Nasdaq’s continued listing requirements; potential conflicts
of interest arising from the interests of the members of the
Company’s board of directors in Steel Holdings and its affiliates;
potential restrictions imposed by its indebtedness; and potential
adverse effects from changes in interest rates and the phase-out of
LIBOR. For a detailed discussion of cautionary statements and risks
that may affect the Company's future results of operations and
financial results, please refer to the Company's filings with the
SEC, including, but not limited to, the risk factors in the
Company's Annual Report on Form 10-K filed with the SEC on October
31, 2022. These filings are available on the Company's Investor
Relations website under the "SEC Filings" tab.
All forward-looking statements are necessarily only estimates of
future results, and there can be no assurance that actual results
will not differ materially from expectations, and, therefore, you
are cautioned not to place undue reliance on such statements.
Further, any forward-looking statement speaks only as of the date
on which it is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the
occurrence of unanticipated events.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20221213006120/en/
Investor Relations Jennifer Golembeske 914-461-1276
investorrelations@steelconnectinc.com
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