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, ~~2020~~2021


☐			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.)


2000 Midway Ln Smyrna, Tennessee (Address of principal executive offices)						37167 (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 ~~Global Select~~Capital Market
Rights to Purchase Series D Junior Participating Preferred Stock	--	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, ~~2020,~~2021, there were ~~62,793,969~~60,437,654 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

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, 2020		July 31, 2020			October 31, 2021		July 31, 2021
		(unaudited)					(unaudited)
ASSETS	ASSETS					ASSETS
Cash and cash equivalents	Cash and cash equivalents	$	104,522	$	75,887	Cash and cash equivalents	$	81,330	$	96,931
Accounts receivable, trade, net of allowance for doubtful accounts of $54 and $134 at October 31, 2020 and July 31, 2020, respectively		79,898		93,072
Accounts receivable, trade, net of allowance for doubtful accounts of $44 and $49 at October 31, 2021 and July 31, 2021, respectively						Accounts receivable, trade, net of allowance for doubtful accounts of $44 and $49 at October 31, 2021 and July 31, 2021, respectively	74,841		69,805
Inventories, net	Inventories, net	14,829		15,354		Inventories, net	18,166		16,228
Funds held for clients	Funds held for clients	12,468		18,755		Funds held for clients	6,531		8,212
Prepaid expenses and other current assets	Prepaid expenses and other current assets	24,683		20,475		Prepaid expenses and other current assets	18,491		22,222
Total current assets	Total current assets	236,400		223,543		Total current assets	199,359		213,398
Property and equipment, net	Property and equipment, net	74,871		79,678		Property and equipment, net	54,710		58,862
Goodwill	Goodwill	257,128		257,128		Goodwill	231,470		231,470
Other intangible assets, net	Other intangible assets, net	128,728		135,263		Other intangible assets, net	110,823		115,005
Operating lease right-of-use assets	Operating lease right-of-use assets	52,165		56,140		Operating lease right-of-use assets	49,941		50,836
Other assets	Other assets	7,065		7,420		Other assets	6,851		6,810
Total assets	Total assets	$	756,357	$	759,172	Total assets	$	653,154	$	676,381
LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY						LIABILITIES, CONTINGENTLY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable	Accounts payable	$	70,539	$	70,002	Accounts payable	$	51,920	$	55,517
Accrued expenses	Accrued expenses	116,994		111,380		Accrued expenses	109,382		106,871
Funds held for clients	Funds held for clients	12,468		18,755		Funds held for clients	6,531		8,212
Current portion of long-term debt	Current portion of long-term debt	5,572		5,527		Current portion of long-term debt	5,611		5,602
Current lease obligations	Current lease obligations	13,960		14,318		Current lease obligations	13,259		13,690
Other current liabilities	Other current liabilities	29,188		29,950		Other current liabilities	29,366		28,101
Total current liabilities	Total current liabilities	248,721		249,932		Total current liabilities	216,069		217,993
Convertible note payable	Convertible note payable	8,346		8,054		Convertible note payable	9,729		9,343
Long-term debt, excluding current portion	Long-term debt, excluding current portion	364,037		365,468		Long-term debt, excluding current portion	356,783		358,189
Long-term lease obligations	Long-term lease obligations	39,976		43,211		Long-term lease obligations	38,338		38,927
Other long-term liabilities	Other long-term liabilities	12,203		8,509		Other long-term liabilities	10,486		10,537
Total long-term liabilities	Total long-term liabilities	424,562		425,242		Total long-term liabilities	415,336		416,996
Total liabilities	Total liabilities	673,283		675,174		Total liabilities	631,405		634,989
Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at October 31, 2020 and July 31, 2020		35,180		35,180
Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at October 31, 2021 and July 31, 2021						Contingently redeemable preferred stock, $0.01 par value per share. 35,000 shares authorized, issued and outstanding at October 31, 2021 and July 31, 2021	35,180		35,180
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at October 31, 2020 and July 31, 2020; 0 shares issued and outstanding at October 31, 2020 and July 31, 2020		0		0
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 62,793,969 issued and outstanding shares at October 31, 2020; 62,787,919 issued and outstanding shares at July 31, 2020		628		628
Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at October 31, 2021 and July 31, 2021; zero shares issued and outstanding at October 31, 2021 and July 31, 2021						Preferred stock, $0.01 par value per share. 4,965,000 shares authorized at October 31, 2021 and July 31, 2021; zero shares issued and outstanding at October 31, 2021 and July 31, 2021	—		—
Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 60,437,654 issued and outstanding shares at October 31, 2021; 63,099,496 issued and outstanding shares at July 31, 2021						Common stock, $0.01 par value per share. Authorized 1,400,000,000 shares; 60,437,654 issued and outstanding shares at October 31, 2021; 63,099,496 issued and outstanding shares at July 31, 2021	605		632
Additional paid-in capital	Additional paid-in capital	7,478,238		7,478,047		Additional paid-in capital	7,478,855		7,478,638
Accumulated deficit	Accumulated deficit	(7,437,788)		(7,433,700)		Accumulated deficit	(7,500,251)		(7,480,220)
Accumulated other comprehensive income	Accumulated other comprehensive income	6,816		3,843		Accumulated other comprehensive income	7,360		7,162
Total stockholders' equity		47,894		48,818
Total liabilities, contingently redeemable preferred stock and stockholders' equity		$	756,357	$	759,172
Total stockholders' (deficit) equity						Total stockholders' (deficit) equity	(13,431)		6,212
Total liabilities, contingently redeemable preferred stock and stockholders' (deficit) equity						Total liabilities, contingently redeemable preferred stock and stockholders' (deficit) equity	$	653,154	$	676,381

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,				Three Months Ended October 31,
		2020		2019				2021		2020
Net revenue:	Net revenue:						Net revenue:
Products	Products	$	105,708	$	133,003		Products	$	81,059	$	105,708
Services	Services	64,226		92,150			Services	44,354		64,226
Total net revenue	Total net revenue	169,934		225,153			Total net revenue	125,413		169,934
Cost of revenue		129,466		180,907
Cost of revenue:							Cost of revenue:
Products							Products	75,185		81,192
Services							Services	34,948		48,274
Total cost of revenue							Total cost of revenue	110,133		129,466
Gross profit	Gross profit	40,468		44,246			Gross profit	15,280		40,468
Operating expenses:	Operating expenses:						Operating expenses:
Selling, general and administrative	Selling, general and administrative	26,858		22,227			Selling, general and administrative	22,005		26,858

Amortization of intangible assets	Amortization of intangible assets	6,535		7,277			Amortization of intangible assets	4,182		6,535
Total operating expenses	Total operating expenses	33,393		29,504			Total operating expenses	26,187		33,393
Operating income		7,075		14,742
Operating (loss) income							Operating (loss) income	(10,907)		7,075
Other income (expense):	Other income (expense):						Other income (expense):
Interest income	Interest income	20		16			Interest income	4		20
Interest expense	Interest expense	(7,823)		(9,169)			Interest expense	(7,795)		(7,823)
Other (losses) gains, net		(2,019)		558
Total other expense		(9,822)		(8,595)
(Loss) income before income taxes		(2,747)		6,147
Other losses, net							Other losses, net	(481)		(2,019)
Total other expense, net							Total other expense, net	(8,272)		(9,822)
Loss before income taxes							Loss before income taxes	(19,179)		(2,747)
Income tax expense	Income tax expense	804		1,355			Income tax expense	315		804

Net (loss) income		(3,551)		4,792
Net loss							Net loss	(19,494)		(3,551)
Less: Preferred dividends on redeemable preferred stock	Less: Preferred dividends on redeemable preferred stock	(537)		(536)			Less: Preferred dividends on redeemable preferred stock	(537)		(537)
Net (loss) income attributable to common stockholders		$	(4,088)	$	4,256
Net loss attributable to common stockholders							Net loss attributable to common stockholders	$	(20,031)	$	(4,088)

Basic net (loss) earnings per share attributable to common stockholders		$	(0.07)	$	0.07
Diluted net (loss) earnings per share attributable to common stockholders		$	(0.07)	$	0.06
Weighted average common shares used in:
Basic (loss) earnings per share		61,893		61,401
Diluted (loss) earnings per share		61,893		86,006
Basic and diluted net loss per share attributable to common stockholders							Basic and diluted net loss per share attributable to common stockholders	$	(0.33)	$	(0.07)

Weighted average common shares used in basic and diluted loss per share							Weighted average common shares used in basic and diluted loss per share	60,307		61,893

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

(in thousands)

(unaudited)

Three Months Ended
October 31,
2020 2019
Net (loss) income $ (3,551) $ 4,792
Other comprehensive income (loss):
Foreign currency translation adjustment 2,973 13
Pension liability adjustments, net of tax 0 (2)
Other comprehensive income 2,973 11
Comprehensive (loss) income $ (578) $ 4,803


	Three Months Ended October 31,
	2021		2020
Net loss	$	(19,494)	$	(3,551)
Other comprehensive (loss) income:
Foreign currency translation adjustment	198		2,973


Other comprehensive income	198		2,973
Comprehensive loss	$	(19,296)	$	(578)

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

STEEL CONNECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

(in thousands, except share amounts)

(unaudited)


														Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity (Deficit)
Balance at July 31, 2021													Balance at July 31, 2021	63,099,496	$	632	$	7,478,638	$	(7,480,220)	$	7,162	$	6,212
Net loss													Net loss	—	—		—		(19,494)		—		(19,494)
Preferred dividends													Preferred dividends	—	—		—		(537)		—		(537)
Issuance of common stock pursuant to employee stock purchase plan													Issuance of common stock pursuant to employee stock purchase plan	168	—		—		—		—		—
Restricted stock grants													Restricted stock grants	87,990	1		(1)		—		—		—
Restricted stock forfeitures													Restricted stock forfeitures	(2,750,000)	(28)		28		—		—		—
Share-based compensation													Share-based compensation	—	—		190		—		—		190
Other comprehensive items													Other comprehensive items	—	—		—		—		198		198
Balance at October 31, 2021													Balance at October 31, 2021	60,437,654	$	605	$	7,478,855	$	(7,500,251)	$	7,360	$	(13,431)

		Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity			Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at July 31, 2020	Balance at July 31, 2020	62,787,919	$	628	$	7,478,047	$	(7,433,700)	$	3,843	$	48,818	Balance at July 31, 2020	62,787,919	$	628	$	7,478,047	$	(7,433,700)	$	3,843	$	48,818
Net loss	Net loss	—	—		—		(3,551)		—		(3,551)		Net loss	—	—		—		(3,551)		—		(3,551)
Preferred dividends	Preferred dividends	—	—		—		(537)		—		(537)		Preferred dividends	—	—		—		(537)		—		(537)
Issuance of common stock pursuant to employee stock purchase plan	Issuance of common stock pursuant to employee stock purchase plan	6,982	—		3		—		—		3		Issuance of common stock pursuant to employee stock purchase plan	6,982	—		3		—		—		3
Restricted stock forfeitures, net of issuance		(932)	—		—		—		—		—

Restricted stock forfeitures													Restricted stock forfeitures	(932)	—		—		—		—		—
Share-based compensation	Share-based compensation	—	—		188		—		—		188		Share-based compensation	—	—		188		—		—		188
Other comprehensive items	Other comprehensive items	—	—		—		—		2,973		2,973		Other comprehensive items	—	—		—		—		2,973		2,973
Balance at October 31, 2020	Balance at October 31, 2020	62,793,969	$	628	$	7,478,238	$	(7,437,788)	$	6,816	$	47,894	Balance at October 31, 2020	62,793,969	$	628	$	7,478,238	$	(7,437,788)	$	6,816	$	47,894

		Number of Shares	Common Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at July 31, 2019		61,805,856	$	618	$	7,477,327	$	(7,426,287)	$	1,034	$	52,692
Net income		—	—		—		4,792		—		4,792
Preferred dividends		—	—		—		(536)		—		(536)
Issuance of common stock pursuant to employee stock purchase plan		4,397	—		2		—		—		2

Share-based compensation		—	—		176		—		—		176
Other comprehensive items		—	—		—		—		11		11
Balance at October 31, 2019		61,810,253	$	618	$	7,477,505	$	(7,422,031)	$	1,045	$	57,137

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,					Three Months Ended October 31,
		2020		2019			2021		2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net (loss) income		$	(3,551)	$	4,792
Adjustments to reconcile net (loss) income to cash flows from operating activities:
Net loss						Net loss	$	(19,494)	$	(3,551)
Adjustments to reconcile net loss to cash flows from operating activities:						Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation	Depreciation	5,780		5,589		Depreciation	8,607		5,780
Amortization of intangible assets	Amortization of intangible assets	6,535		7,277		Amortization of intangible assets	4,182		6,535
Amortization of deferred financing costs	Amortization of deferred financing costs	148		68		Amortization of deferred financing costs	137		148
Accretion of debt discount	Accretion of debt discount	292		409		Accretion of debt discount	386		292

Share-based compensation	Share-based compensation	188		176		Share-based compensation	190		188
Other losses (gains), net		3,622		(558)
Non-cash lease expense						Non-cash lease expense	3,439		3,613
Other losses, net						Other losses, net	392		3,622
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable, net	Accounts receivable, net	12,839		(1,564)		Accounts receivable, net	(5,059)		12,839
Inventories, net	Inventories, net	514		(2,165)		Inventories, net	(1,978)		514
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(4,473)		(3,342)		Prepaid expenses and other current assets	3,660		(4,473)
Accounts payable and accrued expenses	Accounts payable and accrued expenses	6,416		4,625		Accounts payable and accrued expenses	(482)		6,416
Refundable and accrued income taxes, net	Refundable and accrued income taxes, net	503		639		Refundable and accrued income taxes, net	(268)		503
Other assets and liabilities	Other assets and liabilities	(3,086)		6,464		Other assets and liabilities	(4,137)		(6,699)
Net cash provided by operating activities		25,727		22,410
Net cash (used in) provided by operating activities						Net cash (used in) provided by operating activities	(10,425)		25,727
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Additions of property and equipment	Additions of property and equipment	(1,059)		(4,072)		Additions of property and equipment	(4,742)		(1,059)

Proceeds from the disposition of property and equipment						Proceeds from the disposition of property and equipment	61		—

Net cash used in investing activities	Net cash used in investing activities	(1,059)		(4,072)		Net cash used in investing activities	(4,681)		(1,059)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Payments towards revolving lines of credit, net		0		(4,000)

Payment of long-term debt		(1,500)		(1,500)
Payment of preferred dividends		(537)		(536)

Long-term debt repayments						Long-term debt repayments	(1,500)		(1,500)
Preferred dividend payments						Preferred dividend payments	(537)		(537)

Repayments on capital lease obligations	Repayments on capital lease obligations	(17)		(33)		Repayments on capital lease obligations	(18)		(17)
Proceeds from issuance of common stock	Proceeds from issuance of common stock	3		6		Proceeds from issuance of common stock	—		3
Net cash used in financing activities	Net cash used in financing activities	(2,051)		(6,063)		Net cash used in financing activities	(2,055)		(2,051)
Net effect of exchange rate changes on cash, cash equivalents and restricted cash	Net effect of exchange rate changes on cash, cash equivalents and restricted cash	(269)		41		Net effect of exchange rate changes on cash, cash equivalents and restricted cash	(121)		(269)
Net increase in cash, cash equivalents and restricted cash		22,348		12,316
Net (decrease) increase in cash, cash equivalents and restricted cash						Net (decrease) increase in cash, cash equivalents and restricted cash	(17,282)		22,348
Cash, cash equivalents and restricted cash, beginning of period	Cash, cash equivalents and restricted cash, beginning of period	94,642		46,064		Cash, cash equivalents and restricted cash, beginning of period	105,143		94,642
Cash, cash equivalents and restricted cash, end of period	Cash, cash equivalents and restricted cash, end of period	$	116,990	$	58,380	Cash, cash equivalents and restricted cash, end of period	$	87,861	$	116,990

Cash and cash equivalents, end of period	Cash and cash equivalents, end of period	$	104,522	$	41,214	Cash and cash equivalents, end of period	$	81,330	$	104,522
Funds held for clients, end of period	Funds held for clients, end of period	12,468		17,166		Funds held for clients, end of period	6,531		12,468
Cash, cash equivalents and restricted cash, end of period	Cash, cash equivalents and restricted cash, end of period	$	116,990	$	58,380	Cash, cash equivalents and restricted cash, end of period	$	87,861	$	116,990

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")~~, together with its consolidated subsidiaries (the "Company"), operates through its wholly-owned subsidiaries, IWCO Direct Holdings, Inc. ("IWCO ~~Direct," "IWCO"~~Direct" or "Direct Marketing") and ModusLink Corporation ("ModusLink" or "Supply Chain").

IWCO Direct delivers data-driven marketing solutions for its customers. Its full range of services includes strategy, creative and execution for omnichannel marketing campaigns, along with postal logistics programs for direct mail. Through its Mail-Gard® division, IWCO Direct also offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services.

ModusLink is a supply chain business process management company serving clients in markets such as consumer electronics, communications, computing, medical devices, software and retail. ModusLink designs and executes elements in its clients' global supply chains to improve speed to market, product customization, flexibility, cost, quality and service. The Company also produces and licenses an entitlement management solution for activation, provisioning, entitlement subscription and data collection from physical goods (connected products) and digital products.

Historically, the Company has financed its operations and met its capital requirements primarily through funds generated from operations, the sale of its securities, borrowings from lending institutions and sale of facilities that were not fully utilized. The Company believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, mandatory debt redemptions and working capital for its existing business for at least twelve months from the date of this filing. These resources include current cash and cash equivalents, ModusLink's credit agreement with MidCap Financial Trust ("MidCap"), IWCO's revolving credit facility with Cerberus Business Finance, LLC ("Cerberus"), and cash, if any, provided by operating activities. The Company's expectations regarding its ability to use its existing cash and available credit facilities to continue funding its operations are based on assumptions that may prove to be inaccurate, and the Company may require capital resources sooner than currently expected. While the Company believes it will be able to access this additional liquidity based on existing information, the assumptions underlying this belief may also later prove to be inaccurate.

As of October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, the Company had cash and cash equivalents of ~~$104.5~~$81.3 million and ~~$75.9~~$96.9 million, respectively. As of October 31, ~~2020,~~2021, the Company had a working capital deficit of ~~$12.3~~$16.7 million, which includes accrued pricing liabilities and certain tax related liabilities, which the Company believes will not require a significant cash outlay in the next twelve months. As of October 31, ~~2020,~~2021, IWCO Direct had $25.0 million available borrowing capacity under its Cerberus Credit Facility. During the three months ended October 31, 2021, IWCO Direct did not trigger any of the financial covenants in the Cerberus Credit Facility. In order to maintain compliance with the Cerberus Credit Facility’s required liquidity covenant for the next twelve months, the Company has the ability and wherewithal to execute certain actions that may include, but are not limited to, reducing or delaying capital and strategic investments, and deferral of certain operating expenditures. While IWCO Direct currently expects to be in compliance in the next twelve months with all of the financial covenants, there can be no assurance that these covenants will continue to be met if the Company does not achieve its earnings and operating cash flow projections. Certain of IWCO Direct’s lease agreements contain financial covenants that would require IWCO Direct to issue a letter of credit (“LOC”) to the landlord in the event that IWCO Direct incurs debt that on a pro forma basis would result in IWCO Direct's net leverage exceeding 6.00x of IWCO Direct's Adjusted EBITDA. As of October 31, 2021, and through the date of this filing, IWCO Direct was in compliance with the net leverage ratio such that no LOC issuance is currently required. However, based upon IWCO Direct's covenant compliance as of the most recent balance sheet date, if IWCO Direct incurs additional debt, it would be required to issue an LOC of approximately $3.2 million. As of October 31, 2021, ModusLink had a readily available borrowing capacity under its revolving credit facility of ~~$1.2~~$8.5 million. ~~As of October 31, 2020, IWCO Direct had $25.0 million available borrowing capacity under its revolving facility.~~ The Company believes it will generate sufficient cash to meet its debt covenants under its credit facilities to which certain of its subsidiaries are a party and that it will be able to obtain cash through its current and future credit facilities, if needed.

Impact of COVID-19

Table of ~~2020 and beyond. The Company is subject~~ Contents

to ~~risks and uncertainties~~our business continuity as a result of the COVID-19 pandemic. The Company continues to evaluate the global risks and the slowdown in business activity related to COVID-19, including the potential impacts on its employees, customers, suppliers and financial results. The effects of COVID-19 required temporary closures of certain of ~~ModusLink's~~ModusLink’s facilities ~~for short periods~~in the third and fourth quarters of ~~time during the~~ fiscal year ~~ended July 31, 2020.~~2020, as well as the fourth quarter of fiscal year 2021. However, these temporary closures did not have a significant impact on ModusLink’s operations. Additionally, although IWCO Direct operated ~~and continues to operate~~ as an essential business, it had reduced operating levels and labor shifts due to lower sales volume during the ~~prior~~third quarter of fiscal ~~year. As of the filing of this quarterly report on Form 10-Q, all of the Company's facilities were open and able to operate at normal capacities.~~

year 2020.

To help combat these impacts and mitigate the financial impact of the COVID-19 pandemic ~~the Company initiated~~on our business, during fiscal year 2020 we took proactive measures by initiating cost reduction actions, including the waiver of board fees, hiring freezes, staffing and force reductions, ~~Company-wide~~company-wide salary reductions, bonus payment deferrals and temporary 401(k) match suspension. The temporary waiver of board fees and ~~Company-wide~~company-wide salary reduction actions taken in the prior fiscal year were fully restored prior to the beginning of fiscal year 2021, and the ~~current~~majority of salary reductions were repaid prior to the fiscal ~~year. The Company continues its~~quarter ended January 31, 2021.We continue our focus on cash management and liquidity, which includes ~~reduction of discretionary spending,~~ aggressive working capital ~~management, strict approvals for capital expenditures and other actions. The Company will evaluate further actions if circumstances warrant.~~management.

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~~Currently, the Company anticipates that~~In addition, we aim to closely monitor the impact of ~~the deterioration~~COVID-19 on all aspects of ~~the U.S~~our business and ~~global economies will most likely continue and may have an adverse~~geographies, including its impact on ~~the Company's business. However, as the situation surrounding COVID-19 remains fluid, it is difficult to predict the duration of the pandemic~~our clients, employees, suppliers, vendors, business partners and the impact on the Company's business, operations, financial condition and cash flows. The severity of the impact on the Company's business for the remainder of calendar 2020 and beyond will depend on a number of factors, including,distribution channels. We believe that such impacts could include, but are not limited to, ~~the duration and severity of the pandemic,~~ the extent and severity of the impact on ~~the Company's~~our customers and ~~suppliers,~~suppliers; the continued disruption to the demand for our businesses' products and ~~services, and~~services; the impact of the global business and economic environment on liquidity and the availability of ~~capital, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could also be adversely impacted by~~capital; delays in payments of outstanding receivables beyond normal payment ~~terms,~~terms; supply chain ~~disruptions and~~disruptions; uncertain ~~demand,~~demand; and the effect of any initiatives or programs that ~~the Company~~we may undertake to address financial and operational challenges faced by ~~its~~our customers. ~~There~~The full extent to which the pandemic will directly or indirectly impact our business, results of operations and financial condition, is ~~also no certainty that federal, state or local regulations regarding safety measures~~difficult to ~~address~~predict and will depend on the duration and spread of the ongoing COVID-19 pandemic (including new variants of COVID-19), its severity, the actions to contain the virus or address its impact, the timing, distribution, and efficacy of vaccines and other treatments, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. As of the filing of this Form 10-Q, all of our facilities were open and able to operate at normal capacities. We will evaluate further actions if circumstances warrant while continuing to strategically support the Company’s future growth initiatives (including its Competitive Improvement Plan for IWCO Direct), sales and marketing activities and supply chain solutions and services.

Steel Holdings Expression of Interest

On November 19, 2020, the Company's Board of Directors (the "Board") received a preliminary, non-binding expression of interest (the "Expression of Interest") from Steel Partners Holdings L.P. ("Steel Holdings") to acquire all of the outstanding shares of common stock not already owned by Steel Holdings or its affiliates for a combination of cash and Steel Holdings 6% Series A Preferred Units, which would imply a value per share of common stock in the range of $0.65 to $0.72 per share. The Board has established a special committee comprised solely of independent directors (the "Acquisition Proposal Special Committee") authorized to retain independent legal and financial advisors and to review, evaluate, negotiate and approve or disapprove the Expression of Interest, and to explore alternative strategies or transactions. The Acquisition Proposal Special Committee announced on January 11, 2021 that it had retained financial advisors and legal counsel. As set forth in the Expression of Interest, the proposed transaction will be subject to the approval of the Acquisition Proposal Special Committee, as well as a non-waivable condition requiring approval of a majority of the shares outstanding of the Company not owned by Steel Holdings and its affiliates and related parties. The Board resolutions establishing the Acquisition Proposal Special Committee expressly provide that the Board will not ~~adversely impact~~approve the ~~Company's operations.~~proposed transaction contemplated by the Expression of Interest or any alternative thereto without a prior favorable recommendation by the Acquisition Proposal Special Committee.

The Board has only received a proposal, which it continues to negotiate with Steel Holdings. The proposal under negotiation does not constitute a definitive offer capable of acceptance, and may be withdrawn at any time and in any manner. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that the transaction proposed in the Expression of Interest or any other transaction will be approved or completed. The Company is not obligated to disclose any further developments or updates on the progress of the proposed transaction until either the Company enters into a definitive agreement or the Acquisition Proposal Special Committee determines no such transaction will be approved.

(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 ~~("U.S. GAAP")~~ 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

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related notes for the year ended July 31, ~~2020~~2021 (Fiscal Year ~~2020)~~2021), which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on ~~September 30, 2020.~~October 29, 2021. The results for the three months ended October 31, ~~2020~~2021 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 ~~accounting principles generally accepted in the United States of America.~~U.S. GAAP.

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, ~~2020,~~2021, the Company evaluated subsequent events for potential recognition and disclosure through the date these financial statements were filed.

~~During~~Reclassification

Certain reclassifications have been made to the prior year balances to conform with current reporting. On the statement of cash flows for the three months ended October 31, ~~2019,~~2021, the Company ~~recorded a $6.4~~reclassified the non-cash portion of lease expense which totaled $3.6 million ~~adjustment~~from Other Assets and Liabilities to correct an out-of-period misstatement related to the Company's estimate for certain tax related liabilities. Had this correction been recorded for the fiscal year ended July 31, 2019 (Fiscal Year 2019), the Company's selling, general and administrative expenses andNon-cash Lease Expense. These reclassifications had no impact on net loss ~~for that period would have been reduced to $137.7 million and $60.3 million, respectively.~~or stockholder’s equity.

(3)RECENT ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In ~~August 2018,~~December 2019, the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) issued Accounting Standards Update ~~("ASU"~~(“ASU”) ~~2018-13,~~ ~~Fair Value Measurement~~2019-12, Income Taxes (Topic ~~820)~~740): ~~Disclosure Framework-Changes~~Simplifying the Accounting for Income Taxes, which amends the existing guidance relating to the ~~Disclosure Requirements~~accounting for ~~Fair Value Measurement~~.income taxes. This ASU 2018-13 modifies the disclosure requirements on fair value measurements. The amendments in ASU 2018-13 are effective in the first quarter of the Company's fiscal year ending July 31, 2021 (Fiscal Year 2021). The adoption ofis intended to simplify the accounting ~~standard did not have a material impact on the Company's financial statements.~~

~~In August 2018, the FASB issued ASU 2018-14,~~ ~~Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes~~for income taxes by removing certain exceptions to the ~~Disclosure Requirements~~general principles of accounting for ~~Defined Benefit Plans. ASU 2018-14 modifies~~income taxes and to improve the ~~disclosure requirements~~consistent application of U.S. GAAP for ~~employers that sponsor defined benefit pension~~other areas of accounting for income taxes by clarifying and ~~other post-retirement plans.~~amending existing guidance. The amendments in ASU 2018-14 became effective in the first quarter of the Company's Fiscal Year 2021. The adoption of the accounting standard did not have a material impact on the Company's financial statements.

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,~~ (a consensus of the FASB Emerging Issues Task Force) to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The amendments

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~~in ASU 2018-15 became~~new guidance was effective for the Company's first quarter of ~~Fiscal~~the fiscal year ending July 31, 2022 (Fiscal Year ~~2021.~~2022). The adoption of ~~the accounting standard~~this new guidance did not have a material impact on the Company's consolidated financial statements.

Accounting Standards Issued and Not Yet Implemented

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Loses on Financial Instruments, an ASU that requires measurement and recognition of expected credit losses for financial instruments, including trade receivables, based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The ASU will be effective for the Company beginning in the first quarter of the fiscal year ending July 31, 2024 on a modified retrospective basis, which requires a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating this guidance to determine the impact it may have ~~on its consolidated financial statements.~~

~~In December 2019, the FASB issued ASU 2019-12,~~ ~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes~~, which amends the existing guidance relating to the accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of U.S. GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The new guidance is effective for the Company's first quarter of the fiscal year ending July 31, 2022. The Company does not expect that the adoption of this new guidance will have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is intended to provide temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate, known as LIBOR, or by another reference rate expected to be discontinued. This optional guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

In August 2020, the FASB issued 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 assessment of 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 is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

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(4)INVENTORIES, NET

The table below presents the components of Inventories, net:


		October 31, 2020		July 31, 2020			October 31, 2021		July 31, 2021
		(In thousands)					(In thousands)
Raw materials	Raw materials	$	13,554	$	14,216	Raw materials	$	17,206	$	15,484
Work-in-process	Work-in-process	337		253		Work-in-process	175		76
Finished goods	Finished goods	938		885		Finished goods	785		668
		$	14,829	$	15,354		$	18,166	$	16,228

(5)GOODWILL AND INTANGIBLE ASSETS

The Company's goodwill of ~~$257.1~~$231.5 million as of October 31, ~~2020~~2021 and July 31, 2021, respectively, relates to the Company's Direct Marketing reporting unit, which is the only reporting unit in the Direct Marketing reportable segment. The ~~Company has~~carrying value of goodwill is not ~~previously recognized any~~amortized, but is tested for impairment ~~losses for this reporting unit.~~

~~Table~~annually as of ~~Contents~~

June 30, and, additionally on an interim basis, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Other intangible assets, net, as of October 31, ~~2020,~~2021, include ~~trademarks and tradenames, and~~ customer relationships. The trademarks and tradenames intangible assets ~~are being~~were fully amortized ~~on a straight-line basis and the customer relationship~~as of January 31, 2021.

A summary of other intangible assets, net are ~~being amortized on a double-declining basis over their estimated useful lives.~~

~~The~~reflected in the table ~~below presents information for the Company's intangible assets:~~below:


			October 31, 2020						July 31, 2020								October 31, 2021						July 31, 2021
		Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
		(in years)	(In thousands)													(in years)	(In thousands)
Customer relationships	Customer relationships	15	$	192,730	$	64,857	$	127,873	$	192,730	$	60,032	$	132,698	Customer relationships	15	$	192,730	$	81,907	$	110,823	$	192,730	$	77,725	$	115,005
Trademarks and trade names		3	20,520		19,665		855		20,520		17,955		2,565
Trademarks and tradenames															Trademarks and tradenames	3	20,520		20,520		—		20,520		20,520		—
Total	Total		$	213,250	$	84,522	$	128,728	$	213,250	$	77,987	$	135,263	Total		$	213,250	$	102,427	$	110,823	$	213,250	$	98,245	$	115,005

The table below presents amortization expense recorded by the Company for other intangible assets:


		Three Months Ended October 31,					Three Months Ended October 31,
		2020		2019					2021		2020
		(In thousands)				(In thousands)
Customer relationships	Customer relationships	$	4,825	$	5,567			Customer relationships	$	4,182	$	4,825
Trademarks and trade names	Trademarks and trade names	1,710		1,710				Trademarks and trade names	—		1,710
Total	Total	$	6,535	$	7,277			Total	$	4,182	$	6,535

As of October 31, 2020, the Company reviewed its goodwill and other intangible assets for indicators of impairment as a result of the continued impact of the COVID-19 pandemic. Although the Company's performance has improved since the beginning of the pandemic, the Company believes that indicators of impairment were present for all these asset classes due to a general deterioration in macroeconomic conditions and a significant decline in the Company's market capitalization.

The Company performed a qualitative assessment of whether it was more likely than not that its goodwill and other intangibles assets were impaired as of October 31, 2020. The Company reviewed its previous forecasts and assumptions based on the Company's current projections, which are subject to various risks and uncertainties associated with forecasted revenues, expenses and cash flows, as well as the duration and extent of impact to our businesses from the COVID-19 pandemic. Based upon that assessment, the Company concluded it was more likely than not that goodwill and other intangible assets were not impaired as of October 31, 2020. It is possible that in future periods decreases in customer demand or volumes or other potential changes in operations may increase the risk that goodwill and other intangible assets, which are only associated with the Direct Marketing segment, may become impaired.

(6)ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

October 31,
2020 July 31,
2020
Accrued Expenses (In thousands)
Accrued taxes $ 62,207 $ 60,744
Accrued compensation 25,791 25,439
Accrued worker's compensation 3,949 3,949
Accrued audit, tax and legal 2,917 3,399
Accrued contract labor 1,105 981
Accrued interest 2,516 476
Accrued other 18,509 16,392
$ 116,994 $ 111,380

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October 31,
2020 July 31,
2020
Other Current Liabilities (In thousands)
Accrued pricing liabilities $ 13,499 $ 13,499
Customer postage deposits 9,160 8,551
Other 6,529 7,900
$ 29,188 $ 29,950


	October 31, 2021		July 31, 2021
Accrued Expenses	(In thousands)
Accrued taxes	$	56,509	$	57,152
Accrued compensation	27,458		22,987
Accrued worker's compensation	1,805		1,818
Accrued audit, tax and legal	3,840		3,674
Accrued contract labor	1,119		930
Accrued interest	190		476
Accrued other	18,461		19,834
	$	109,382	$	106,871


	October 31, 2021		July 31, 2021
Other Current Liabilities	(In thousands)
Accrued pricing liabilities	$	10,295	$	10,295
Customer postage deposits	15,370		13,452

Other	3,701		4,354
	$	29,366	$	28,101

As of October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, the Company had accrued taxes of ~~$62.2~~$56.5 million and ~~$60.7~~$57.2 million, respectively, which reflected the Company's estimate for certain tax related liabilities. As of both October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, the Company had accrued pricing liabilities of approximately ~~$13.5~~$10.3 million. As previously reported by the Company, several principal adjustments were made to its historic financial statements for periods ending on or before January 31, 2012, the most significant of which related to the treatment of vendor rebates in its pricing policies. Where the retention of a rebate or a mark-up was determined to have been inconsistent with a client contract, the Company concluded that these amounts were not properly recorded as revenue. Accordingly, revenue was reduced by an equivalent amount for the period that the rebate was estimated to have been affected. A corresponding liability for the same amount was recorded in that period (referred to as accrued pricing liabilities). The Company believes that it may not ultimately be required to pay all or any of the accrued pricing liabilities based upon the expiration of statutes of limitations, and due in part to the nature of the interactions with its clients. The remaining accrued pricing liabilities as of October 31, ~~2020~~2021 will be derecognized when there is sufficient information for the Company to conclude that such liabilities are not subject to escheatment and have been extinguished, which may occur through payment, legal release, or other legal or factual determination. The Company has not provided for any provision for interest and or penalties related to escheatment as it has concluded that such is not probable to occur, and any potential interest and penalties cannot be reasonably estimated.

(7)RESTRUCTURING

IWCO Direct Restructuring Activities

On June 2, 2021, the Board approved a Competitive Improvement Plan (“CIP”) for IWCO Direct, which addresses the changing requirements of its customers and markets it serves, as well as the current competitive landscape. The CIP seeks to expand IWCO Direct’s marketing services capabilities, and upgrade its production platform to new digital and inserting technology, while reducing its overall production costs to enhance its competitive pricing capabilities. The CIP contemplates a total investment of approximately $54 million primarily over a 24-month period. The Company estimates the CIP cost will consist of approximately: (1) $38 million for digital press and insertion equipment, and technology build out cost (of which approximately $34 million in lease/purchase agreements were entered into subsequent to the year ended July 31, 2021), and (2) $16 million for severance, employee retention, facilities optimization, and other implementation costs. In addition, the Company expects to incur approximately $12 million for non-cash accelerated depreciation expense. The cost estimates do not include amounts for potential non-cash asset impairment charges relating to facilities and equipment optimization. The timing and amount of the future costs incurred will depend on a number of factors.

Accelerated depreciation costs primarily relate to operating facilities and equipment to be sold or closed as part of the programs. Accelerated depreciation costs represent the difference between the depreciation expense to be recognized over the

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revised useful life of the asset, based upon the anticipated date the site will be closed or divested or the equipment disposed of, and depreciation expense as determined utilizing the useful life prior to the restructuring actions.

As part of the CIP, the Company announced on August 23, 2021 that it will be optimizing its manufacturing footprint by closing IWCO Direct’s Little Falls, Minnesota facility. The facility is expected to close in January of 2022. The Company recognized approximately $6.6 million of cost during the three months ended October 31, 2021 and did not incur any material costs during the fiscal year ended July 31, 2021 associated with these restructuring activities.

ModusLink Restructuring Activities

During the fiscal year ended July 31, 2021, ModusLink implemented a strategic plan to reorganize its sales function and the e-Business operations. The restructuring charges associated with this plan were incurred during the fiscal year ended July 31, 2021 and were primarily composed of employee termination costs. ModusLink did not incur any restructuring charges during the three months ended October 31, 2021. In November 2021, ModusLink amended its strategic plan to include reorganizing its supply chain operations and expects to record a restructuring charge of approximately $1.0 million in the three months ending January 31, 2022.

The tables below present restructuring charges by type of cost for the three months ended October 31, 2021:


(in thousands)	Direct Marketing
Accelerated depreciation	$	4,395
Impairment of long-lived assets	70
Employee termination costs	1,985
Contractual obligations	195
Total restructuring charges	$	6,645


(in thousands)	Direct Marketing
Cost of revenue	$	6,343
Selling, general and administrative	302
	$	6,645

Changes to the restructuring liability during the three months ended October 31, 2021 were as follows:


(in thousands)	Employee Termination Costs		Contractual Obligations		Asset Impairment		Restructuring Liability
Balance as of July 31, 2021	$	1,055	$	—	$	—	$	1,055
Costs incurred	1,985		195		4,465		6,645

Non-cash relief of accrual	—		—		(4,465)		(4,465)
Change in estimates	(14)		—		—		(14)
Balance as of October 31, 2021	$	3,026	$	195	$	—	$	3,221

(8)LEASES

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

Three Months Ended October 31, 2020 Three Months Ended October 31, 2019
(In thousands)
Operating lease cost $ 4,228 $ 4,816
Short-term lease expense 407 226
Variable lease cost 8 40
Amortization of finance lease assets 0 18
Interest on finance lease liabilities 2 4
$ 4,645 $ 5,104

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	Three Months Ended October 31,
	2021		2020
	(In thousands)
Operating lease cost	$	4,001	$	4,228
Short-term lease expense	349		407
Variable lease cost	11		8

Interest on finance lease liabilities	1		2
	$	4,362	$	4,645

Supplemental Cash Flow Information

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


							Three Months Ended October 31,
		Three Months Ended October 31, 2020		Three Months Ended October 31, 2019			2021		2020
		(In thousands)					(In thousands)
Cash paid for amounts included in measurement of lease liabilities:	Cash paid for amounts included in measurement of lease liabilities:					Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	4,239	$	4,372	Operating cash flows from operating leases	$	3,930	$	4,239
Operating cash flows from finance leases	Operating cash flows from finance leases	$	2	$	4	Operating cash flows from finance leases	$	1	$	2
Financing cash flows from finance leases	Financing cash flows from finance leases	$	17	$	33	Financing cash flows from finance leases	$	18	$	17

~~(8)~~(9)DEBT

The components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below:

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		October 31, 2020		July 31, 2020			October 31, 2021		July 31, 2021
		(In thousands)					(In thousands)
Secured	Secured					Secured
Cerberus Term Loan due December 15, 2022	Cerberus Term Loan due December 15, 2022	$	370,472	$	371,972	Cerberus Term Loan due December 15, 2022	$	362,830	$	364,330
Unsecured	Unsecured					Unsecured
7.50% Convertible Senior Note due March 1, 2024	7.50% Convertible Senior Note due March 1, 2024	14,940		14,940		7.50% Convertible Senior Note due March 1, 2024	14,940		14,940
Credit Facilities	Credit Facilities					Credit Facilities
Cerberus Bank Credit Facility		0		0
Cerberus Revolving Facility						Cerberus Revolving Facility	—		—
MidCap Credit Facility	MidCap Credit Facility	0		0		MidCap Credit Facility	—		—
Less: unamortized discounts and issuance costs	Less: unamortized discounts and issuance costs	(7,457)		(7,863)		Less: unamortized discounts and issuance costs	(5,647)		(6,136)
Total debt, net	Total debt, net	377,955		379,049		Total debt, net	372,123		373,134
Less: current portion of debt, net	Less: current portion of debt, net	(5,572)		(5,527)		Less: current portion of debt, net	(5,611)		(5,602)
Total long-term debt, net	Total long-term debt, net	$	372,383	$	373,522	Total long-term debt, net	$	366,512	$	367,532

7.50% Convertible Senior Note

On February 28, 2019, the Company entered into ~~that certain~~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"). SPHG Holdings has the right, at its option, prior to the close of business on the business day immediately preceding the SPHG Note Maturity Date, to convert the SPHG Note or a portion thereof that is $1,000 or an integral multiple thereof, into shares of common stock (if the Company has not received a required stockholder approval) or cash, shares of common stock or a combination of cash and shares of common stock, as applicable (if the Company has received a required stockholder approval), at an initial conversion rate of 421.2655 shares of common stock, which is equivalent to an initial conversion price of approximately $2.37 per share (subject to adjustment as provided in the SPHG Note) per $1,000 principal amount of the SPHG Note, subject to, and in accordance with, the settlement provisions of the SPHG Note. As of October 31, ~~2020,~~2021, the if-converted value of the SPHG Note did not exceed the

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principal value of the SPHG Note. As of October 31, ~~2020,~~2021, the remaining period over which the unamortized discount will be amortized is 4028 months. As of October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, the net carrying value of the SPHG Note was ~~$8.3~~$9.7 million and ~~$8.1~~$9.3 million, respectively. The effective interest rate on the SPHG Note, including accretion of the discount, is 27.8%. The following tables reflect the components of the SPHG Note:


		October 31, 2020		July 31, 2020			October 31, 2021		July 31, 2021
		(In thousands)					(In thousands)
Carrying amount of equity component	Carrying amount of equity component	$	8,200	$	8,200	Carrying amount of equity component	$	8,200	$	8,200

Principal amount of note	Principal amount of note	$	14,940	$	14,940	Principal amount of note	$	14,940	$	14,940
Unamortized debt discount	Unamortized debt discount	(6,594)		(6,886)		Unamortized debt discount	(5,211)		(5,597)
Net carrying amount	Net carrying amount	$	8,346	$	8,054	Net carrying amount	$	9,729	$	9,343

		Three Months Ended October 31, 2020		Three Months Ended October 31, 2019			Three Months Ended October 31,
		(In thousands)					2021		2020
							(In thousands)
Interest expense related to contractual interest coupon	Interest expense related to contractual interest coupon	$	286	$	280	Interest expense related to contractual interest coupon	$	286	$	286
Interest expense related to accretion of the discount	Interest expense related to accretion of the discount	292		409		Interest expense related to accretion of the discount	386		292
		$	578	$	689		$	672	$	578

~~(9)~~(10)CONTINGENCIES

On April 13, 2018, a purported shareholder, Donald Reith, filed a verified complaint, Reith v. Lichtenstein, et al., 2018-277 (Del. Ch.) in the Delaware Court of Chancery. The complaint alleges class and derivative claims for breach of fiduciary duty and/or aiding and abetting breach of fiduciary duty and unjust enrichment against the ~~Company's~~ Board, ~~of Directors (the "Board"),~~ Warren G. Lichtenstein, Glen M. Kassan, William T. Fejes, Jack L. Howard, Jeffrey J. Fenton, Philip E. Lengyel and Jeffrey S. Wald; and stockholders Steel ~~Partners~~ Holdings, ~~L.P. ("Steel Holdings"),~~ Steel Partners, Ltd., SPHG Holdings, Handy & Harman Ltd. ("Handy & Harman") and WHX CS Corp. (collectively, the "Steel Parties") in connection with the acquisition of $35.0 million of the Series C Convertible Preferred Stock by SPHG Holdings and equity grants made to 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

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although the Challenged Transactions were approved by a Special Committee consisting of the independent members of the Board (Messrs. Fenton, Lengyel and Wald), the Steel Parties dominated and controlled the Special Committee, who approved the Challenged Transactions in breach of their fiduciary duty. Plaintiff alleges that the Challenged Transactions unfairly diluted shareholders and therefore unjustly enriched Steel Holdings, SPHG Holdings and Messrs. Lichtenstein, Howard and Fejes. The complaint also alleges that the Board made misleading disclosures in the Company's proxy statement for the 2017 Annual Meeting of Stockholders in connection with seeking approval to amend the 2010 Incentive Award Plan to authorize the issuance of additional shares to accommodate certain shares underlying the equity grants. Remedies requested include rescission of the Series C Convertible Preferred Stock and equity grants, disgorgement of any unjustly obtained property or compensation and monetary damages. On June 8, 2018, defendants moved to dismiss the complaint for failure to plead demand futility and failure to state a claim. On June 28, 2019, the Court denied most of the motion to dismiss allowing the matter to proceed. ~~Discovery is proceeding. Based on information currently available,~~

On August 13, 2021, the Company, ~~is unable to reasonably estimate~~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 ~~possible loss or range~~memorandum of ~~possible losses, if any,~~understanding (the “MOU”) with ~~regard~~Donald Reith (the “Plaintiff”) in connection with the settlement of the Reith v. Lichtenstein, et al., C.A. No. 2018-0277-MTZ (Del. Ch. 2018) class and derivative action. Pursuant to the ~~lawsuit; therefore, no litigation reserve has been recorded~~MOU, the Defendants agreed to cause their directors’ and officers’ liability insurance carriers to pay to the Company $2.75 million in cash. The payment shall be paid into an escrow account within 14 business days of the later of (i) the entry of the scheduling order in connection with the stipulation of the settlement; or (ii) the date on which Plaintiff’s counsel provides to the Defendants’ counsel written payment and wire instructions.

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 3.3 million shares which they had initially received in December 2017 in consideration for services to the Company. The surrenders and cancellations are in the ~~Company's condensed consolidated balance sheets. Although~~following amounts: for Mr. Lichtenstein, 1,833,333 vested shares and 300,000 unvested shares; for Mr. Howard, 916,667

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vested shares and 150,000 unvested shares; and for Mr. Fejes, 100,000 vested shares. Such amounts are to be adjusted to give effect to the one-for-ten reverse stock split voted on by the Company’s shareholders at the annual meeting on July 26, 2021 (if such reverse stock split is effected prior to the surrender of such shares). The surrenders and cancellations shall be completed no later than seven calendar days following final approval of the settlement by the court and the exhaustion of any appeals therefrom or the expiration of time to appeal. On August 17, 2021, Mr. Lichtenstein and Mr. Howard surrendered the shares required under their respective Surrender Agreements and all such shares were subsequently cancelled. Pursuant to the MOU, the Company has also agreed to pay the Plaintiff’s counsel legal fees for this matter. The settlement requires court approval, and there can be no ~~assurance as to the ultimate outcome, the Company believes it has meritorious defenses, continues to deny liability and intends to defend this litigation vigorously.~~assurances that such approval will be granted.

~~(10)~~(11)REVENUE RECOGNITION

Disaggregation of Revenue

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


		Three Months Ended October 31, 2020						Three Months Ended October 31, 2019							Three Months Ended October 31, 2021						Three Months Ended October 31, 2020
		Direct Marketing		Supply Chain		Consolidated Total		Direct Marketing		Supply Chain		Consolidated Total			Direct Marketing		Supply Chain		Consolidated Total		Direct Marketing		Supply Chain		Consolidated Total
		(In thousands)													(In thousands)
Major Goods/Service Lines	Major Goods/Service Lines													Major Goods/Service Lines
Marketing solutions offerings	Marketing solutions offerings	$	105,708	$	0	$	105,708	$	133,003	$	0	$	133,003	Marketing solutions offerings	$	81,059	$	—	$	81,059	$	105,708	$	—	$	105,708
Supply chain management services	Supply chain management services	0		63,787		63,787		0		91,705		91,705		Supply chain management services	—		43,942		43,942		—		63,787		63,787
Other	Other	0		439		439		0		445		445		Other	—		412		412		—		439		439
		$	105,708	$	64,226	$	169,934	$	133,003	$	92,150	$	225,153		$	81,059	$	44,354	$	125,413	$	105,708	$	64,226	$	169,934
Timing of Revenue Recognition	Timing of Revenue Recognition													Timing of Revenue Recognition
Goods transferred over time	Goods transferred over time	$	105,708	$	0	$	105,708	$	133,003	$	0	$	133,003	Goods transferred over time	$	81,059	$	—	$	81,059	$	105,708	$	—	$	105,708
Services transferred over time	Services transferred over time	0		64,226		64,226		0		92,150		92,150		Services transferred over time	—		44,354		44,354		—		64,226		64,226
		$	105,708	$	64,226	$	169,934	$	133,003	$	92,150	$	225,153		$	81,059	$	44,354	$	125,413	$	105,708	$	64,226	$	169,934

Marketing Solutions Offerings

IWCO's revenue is generated through the provision of data-driven marketing solutions, primarily through providing direct mail products to customers. Revenue related to the majority of IWCO's marketing solutions contracts, which typically consist of a single integrated performance obligation, is recognized over time as the Company performs because the products have no alternative use to the Company.

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.

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.

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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:

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

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

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

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


		October 31, 2020		July 31, 2020			October 31, 2021		July 31, 2021
		(In thousands)					(In thousands)
Accounts receivable, trade, net	Accounts receivable, trade, net	$	79,898	$	93,072	Accounts receivable, trade, net	$	74,841	$	69,805
Contract assets	Contract assets	$	18,128	$	13,016	Contract assets	$	11,657	$	14,458

Deferred revenue - current	Deferred revenue - current	$	2,933	$	2,860	Deferred revenue - current	$	2,735	$	2,562
Deferred revenue - long-term	Deferred revenue - long-term	255		85		Deferred revenue - long-term	126		108
Total deferred revenue	Total deferred revenue	$	3,188	$	2,945	Total deferred revenue	$	2,861	$	2,670

Remaining Performance Obligations

Remaining performance obligations are comprised of deferred revenue. Changes in deferred revenue during the three months ended October 31, ~~2020~~2021 and October 31, ~~2019,~~2020, were as follows:


							Three Months Ended October 31,
		Three Months Ended October 31, 2020		Three Months Ended October 31, 2019			2021		2020
		(In thousands)					(In thousands)
Balance at beginning of period	Balance at beginning of period	$	2,945	$	3,029	Balance at beginning of period	$	2,670	$	2,945
Deferral of revenue	Deferral of revenue	1,096		1,216		Deferral of revenue	685		1,096
Recognition of deferred amounts upon satisfaction of performance obligation	Recognition of deferred amounts upon satisfaction of performance obligation	(853)		(855)		Recognition of deferred amounts upon satisfaction of performance obligation	(494)		(853)
Balance at end of period	Balance at end of period	$	3,188	$	3,390	Balance at end of period	$	2,861	$	3,188

We expect to recognize approximately ~~$2.9~~$2.7 million of the deferred revenue over the next twelve months and the remaining ~~$0.3~~$0.1 million beyond that time period.

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

~~(11)~~(12)INCOME TAXES

The Company operates in multiple taxing jurisdictions, both within and outside of the United States. For the three months ended October 31, ~~2020,~~2021, the Company was profitable in certain jurisdictions, resulting in an income tax expense using enacted

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rates in those jurisdictions. As of both October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, the total amount of the liability for unrecognized tax benefits related to federal, state and foreign taxes was approximately ~~$2.8 million and $2.8 million, respectively.~~$2.5 million.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act into law, which is intended to respond to the COVID-19 pandemic and its impact on the economy, public health,

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state and local governments, individuals and businesses. The CARES Act contains numerous tax provisions, including temporary changes to the future limitations on interest deductions related to ~~section 163j and deferral of payment~~Section 163(j) of the ~~employer portion of social security taxes through the end of calendar year 2020.~~U.S. Internal Revenue Code (the “IRC”).

The Company ~~has~~ elected to defer the employer-paid portion of social security taxes, which is expected to provide the Company with approximately ~~$5.2~~$5.3 million of additional liquidity during the current calendar year, with 50% of the deferral due December 31, 2021 and the remaining 50% due December 31, 2022. The Company does not expect the provisions of the CARES Act to have a significant impact on the income tax provision, income tax payable or deferred income tax positions of the Company.

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 October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, the liabilities for interest expense related to uncertain tax positions were $0.4 million and $0.3 million, respectively. The Company has accrued $0.4 million for penalties related to income tax positions. The Company expects ~~$0.3~~$0.7 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, ~~2016~~2018 through July 31, ~~2020.~~2021. 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 ~~2012~~2013 through ~~2019~~2020 tax years remain subject to examination in most locations, while the Company's ~~2008~~2009 through ~~2019~~2020 tax years remain subject to examination in most Asia locations.

~~(12)~~(13)~~(LOSS) EARNINGS~~LOSS PER SHARE

The following table reconciles (loss) earnings per share for the three and three months ended October 31, ~~2020~~2021 and ~~2019:~~2020:

Three Months Ended
October 31,
2020 2019
(In thousands, except per share data)
Net (loss) income $ (3,551) $ 4,792
Less: Preferred dividends on redeemable preferred stock (537) (536)
Net (loss) income attributable to common stockholders (4,088) 4,256
7.50% Convertible Senior Note 0 592
Redeemable preferred stock 0 536
Net (loss) income attributable to common stockholders after assumed conversions $ (4,088) $ 5,384
Weighted average common shares outstanding 61,893 61,401
Weighted average common equivalent shares arising from dilutive stock options, restricted stock, convertible note and convertible preferred stock 0 24,605
Weighted average number of common and potential common shares 61,893 86,006
Basic net (loss) income per share attributable to common stockholders $ (0.07) $ 0.07
Diluted net (loss) income per share attributable to common stockholders $ (0.07) $ 0.06


	Three Months Ended October 31,
	2021		2020
	(In thousands, except per share data)
Net loss	$	(19,494)	$	(3,551)
Less: Preferred dividends on redeemable preferred stock	(537)		(537)
Net loss attributable to common stockholders	$	(20,031)	$	(4,088)




Weighted average common shares outstanding	60,307		61,893


Basic net loss per share attributable to common stockholders	$	(0.33)	$	(0.07)
Diluted net loss per share attributable to common stockholders	$	(0.33)	$	(0.07)

Basic net ~~(loss) earnings~~loss per common share is calculated using the weighted average number of common shares outstanding during the period. Diluted net earnings per common share, if any, gives effect to diluted stock options (calculated based on the treasury stock method), non-vested restricted stock shares purchased under the employee stock purchase plan and shares issuable upon debt or preferred stock conversion (calculated using an as-if converted method).

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For the three months ended October 31, 2021 and 2020, approximately 24.2 million and 24.3 million, respectively, common stock equivalent shares (including those related to convertible debt and preferred stock) were excluded from the denominator in the calculation of diluted net loss per share as their inclusion would have been antidilutive. For the three months ended October 31, 2019 approximately 0.3 million were excluded from the denominator in the calculation of diluted net earnings per share as their inclusion would have been antidilutive.

~~(13)~~(14)COMPREHENSIVE INCOME (LOSS)

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

Foreign
Currency
Items Pension
Items Total
(In thousands)
Accumulated other comprehensive income (loss) as of July 31, 2020 $ 5,025 $ (1,182) $ 3,843
Foreign currency translation adjustment 2,973 0 2,973
Net current-period other comprehensive income (loss) 2,973 0 2,973
Accumulated other comprehensive income (loss) as of October 31, 2020 $ 7,998 $ (1,182) $ 6,816
Foreign
Currency
Items Pension
Items Unrealized
Gains on
Securities Total
(In thousands)
Accumulated other comprehensive income (loss) as of July 31, 2019 $ 5,017 $ (4,079) $ 96 $ 1,034
Foreign currency translation adjustment 13 0 0 13
Pension liability adjustments 0 (2) 0 (2)
Net current-period other comprehensive income (loss) 13 (2) 0 11
Accumulated other comprehensive income (loss) as of October 31, 2019 $ 5,030 $ (4,081) $ 96 $ 1,045

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	Foreign Currency Items		Pension Items		Total
	(In thousands)
Accumulated other comprehensive income (loss) as of July 31, 2021	$	9,762	$	(2,600)	$	7,162
Foreign currency translation adjustment	198		—		198


Net current-period other comprehensive income	198		—		198
Accumulated other comprehensive income (loss) as of October 31, 2021	$	9,960	$	(2,600)	$	7,360


	Foreign Currency Items		Pension Items		Total
	(In thousands)
Accumulated other comprehensive income (loss) as of July 31, 2020	$	5,025	$	(1,182)	$	3,843
Foreign currency translation adjustment	2,973		—		2,973


Net current-period other comprehensive income	2,973		—		2,973
Accumulated other comprehensive income (loss) as of October 31, 2020	$	7,998	$	(1,182)	$	6,816

~~(14)~~(15)SEGMENT INFORMATION

The Company has 2 operating segments which are the same as its reportable segments: Direct Marketing and Supply Chain. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance and share-based compensation, ~~and acquisition costs,~~ which are not allocated to the Company's reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, debt and other assets and liabilities which are not identifiable to the operations of the Company's operating segments. All significant intra-segment amounts have been eliminated. Management evaluates segment performance based on segment net revenue and operating income (loss).

Summarized financial information by operating segment is as follows:


	Three Months Ended October 31,
	2021		2020
	(In thousands)
Net revenue:
Direct Marketing	$	81,059	$	105,708
Supply Chain	44,354		64,226
	$	125,413	$	169,934
Operating (loss) income:
Direct Marketing	$	(11,478)	$	4,937
Supply Chain	1,973		5,151
Total segment operating (loss) income	(9,505)		10,088
Corporate-level activity	(1,402)		(3,013)
Total operating (loss) income	(10,907)		7,075
Total other expense, net	(8,272)		(9,822)
Loss before income taxes	$	(19,179)	$	(2,747)

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~~Summarized financial information by operating segment is as follows:~~
Three Months Ended
October 31,
2020 2019
(In thousands)
Net revenue:
Direct Marketing $ 105,708 $ 133,003
Supply Chain 64,226 92,150
$ 169,934 $ 225,153
Operating income:
Direct Marketing $ 4,937 $ 11,203
Supply Chain 5,151 6,510
Total segment operating income 10,088 17,713
Corporate-level activity (3,013) (2,971)
Total operating income 7,075 14,742
Total other expense (9,822) (8,595)
(Loss) income before income taxes $ (2,747) $ 6,147


		October 31, 2020		July 31, 2020			October 31, 2021		July 31, 2021
		(In thousands)					(In thousands)
Total assets:	Total assets:					Total assets:
Direct Marketing	Direct Marketing	$	590,449	$	584,477	Direct Marketing	$	514,997	$	530,944
Supply Chain	Supply Chain	114,386		138,773		Supply Chain	93,395		101,159
Sub-total—segment assets	Sub-total—segment assets	704,835		723,250		Sub-total—segment assets	608,392		632,103
Corporate	Corporate	51,522		35,922		Corporate	44,762		44,278
		$	756,357	$	759,172		$	653,154	$	676,381

Summarized financial information of the Company's net revenue from external customers by group of services is as follows:

Three Months Ended
October 31,
2020 2019
(In thousands)
Products:
Direct Marketing $ 105,708 $ 133,003
Services:
Supply Chain 64,226 92,150
$ 169,934 $ 225,153

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	Three Months Ended October 31,
	2021		2020
	(In thousands)
Products:
Direct Marketing	$	81,059	$	105,708
Services:
Supply Chain	44,354		64,226
	$	125,413	$	169,934

Summarized financial information of the Company's net revenue by geographic location is as follows:


		Three Months Ended October 31,					Three Months Ended October 31,
		2020		2019					2021		2020
		(In thousands)				(In thousands)
United States	United States	$	121,483	$	153,046			United States	$	91,506	$	121,483
China	China	19,640		39,389				China	15,966		19,640
Netherlands	Netherlands	7,795		10,648				Netherlands	5,649		7,795
Other	Other	21,016		22,070				Other	12,292		21,016
		$	169,934	$	225,153				$	125,413	$	169,934

~~(15)~~(16)RELATED PARTY TRANSACTIONS

As of October 31, ~~2020,~~2021, SPHG Holdings and its affiliates, including Steel Holdings, Handy & Harman Ltd. and Steel Partners Ltd., beneficially owned approximately ~~54.8%~~53.4% of our outstanding capital stock, including the if-converted value of the SPHG Note and shares of Series C Convertible Preferred Stock that vote on an as-converted basis together with our common stock. Warren G. Lichtenstein, our Interim Chief Executive Officer and the Executive Chairman of our Board, is also the Executive Chairman of Steel Holdings GP Inc. ("Steel Holdings GP"), the manager of Steel Holdings. Jack L. Howard, the President and a director of Steel Holdings GP, was appointed to the Board upon the closing of the Preferred Stock Transaction described below.

SPHG Note Transaction

On February 28, 2019, the Company entered into ~~that certain~~a SPHG Note Purchase Agreement with SPHG Holdings, whereby SPHG Holdings agreed to loan the Company $14.9 million in exchange for the SPHG Note. As of both October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, SPHG Holdings held $14.9 million principal amount of the SPHG Note. As of October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, the net carrying value of the SPHG Note was ~~$8.3~~$9.7 million and ~~$8.1~~$9.3 million, respectively.

Preferred Stock Transaction

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On December 15, 2017, the Company entered into a Preferred Stock Purchase Agreement with SPHG Holdings, pursuant to which the Company issued 35,000 shares of the Company's newly created Series C Convertible Preferred Stock to SPHG Holdings at a price of $1,000 per share, for an aggregate purchase consideration of $35.0 million. The terms, rights, obligations and preferences of the Series C Convertible Preferred Stock are set forth in the Series C Certificate of Designations, which has been filed with the Secretary of State of the State of Delaware.

Management Services Agreement

On June 14, 2019, the Company entered into an agreement (the ~~"2019 Management~~"Management Services Agreement") with Steel Services Ltd. ("Steel Services"), an indirect wholly-owned subsidiary of Steel Holdings. The ~~2019~~ Management Services Agreement was effective as of June 1, 2019. Total expenses incurred related to the ~~2019~~ Management Services Agreement for the three months ended October 31, ~~2020~~2021 and ~~2019~~2020 were $0.8 million and ~~$0.9~~$0.8 million, respectively. As of both October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, amounts due to Steel Services ~~Ltd. were $2.3 million and $0.8 million, respectively.~~was $0.9 million.

~~(16)~~(17)FAIR VALUE MEASUREMENTS

ASC 820 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

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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

The carrying value of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, current liabilities and the revolving line of credit approximate fair value because of the short maturity of these instruments. We believe that the carrying value of our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates. The carrying value of capital lease obligations approximates fair value, as estimated by using discounted future cash flows based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following tables present the Company's financial assets measured at fair value on a recurring basis as of October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, classified by fair value hierarchy:
Fair Value Measurements at Reporting Date Using
(In thousands) October 31, 2020 Level 1 Level 2 Level 3
Assets:
Money market funds $ 45,119 $ 45,119 $ 0 $ 0
Fair Value Measurements at Reporting Date Using
(In thousands) July 31, 2020 Level 1 Level 2 Level 3
Assets:
Money market funds $ 5,117 $ 5,117 $ 0 $ 0


			Fair Value Measurements at Reporting Date Using
(In thousands)	October 31, 2021		Level 1		Level 2		Level 3
Assets:
Money market funds	$	42,327	$	42,327	$	—	$	—


			Fair Value Measurements at Reporting Date Using
(In thousands)	July 31, 2021		Level 1		Level 2		Level 3
Assets:
Money market funds	$	42,327	$	42,327	$	—	$	—

There were no transfers between Levels 1, 2 or 3 during any of the periods presented.

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.

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Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

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, restricted cash and debt, and are reflected in the consolidated financial statements at carrying value. With the exception of the SPHG Note and long-term debt, carrying value approximates fair value for these items due to their short-term nature. The Company believes that the carrying value of the liability component of the SPHG Note and our long-term debt approximates fair value because the stated interest rates of this debt is consistent with current market rates. Included in cash and cash equivalents in the accompanying condensed consolidated balance sheets are money market funds. These are valued at quoted market prices in active markets.

~~(17)SUBSEQUENT EVENT~~

~~Steel Holdings Expression of Interest~~

On November 19, 2020, the Board received a preliminary, non-binding expression of interest (the "Expression of Interest") from Steel Holdings to acquire all of the outstanding shares of common stock not already owned by Steel Holdings or its affiliates for a combination of cash and Steel Holdings 6% Series A Preferred Units, which would imply a value per share of common stock in the range of $0.65 to $0.72 per share. The Board has established a special committee comprised solely of independent directors (the "Acquisition Proposal Special Committee") authorized to retain independent legal and financial advisors and to review,

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evaluate, negotiate and approve or disapprove the Expression of Interest, and to explore alternative strategies or transactions. As set forth in the Expression of Interest, the proposed transaction will be subject to the approval of the Acquisition Proposal Special Committee, as well as a non-waivable condition requiring approval of a majority of the shares outstanding of the Company not owned by Steel Holdings and its affiliates and related parties. The Board resolutions establishing the Acquisition Proposal Special Committee expressly provide that the Board will not approve the proposed transaction contemplated by the Expression of Interest or any alternative thereto without a prior favorable recommendation by the Acquisition Proposal Special Committee.

No decision has yet been made with respect to the Company's response to the Expression of Interest or any alternatives thereto. The Board has only received a proposal, which does not constitute an offer or proposal capable of acceptance and may be withdrawn at any time and in any manner. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that the transaction proposed in the Expression of Interest or any other transaction will be approved or completed. The Company is not obligated to disclose any further developments or updates on the progress of the proposed transaction until either the Company enters into a definitive agreement or the Acquisition Proposal Special Committee determines no such transaction will be approved.

~~Amendment to MidCap Credit Facility~~

On December 9, 2020, ModusLink entered into a First Amendment to the MidCap credit agreement (“Amendment No. 1”) by and among ModusLink, certain of ModusLink's subsidiaries identified on the signature pages thereto, and MidCap as lender and agent.

Amendment No. 1 amends the MidCap credit agreement to permit special cash dividends to be made on or prior to July 31, 2021 in an aggregate amount not to exceed $50.0 million (the “Special Distributions”). Payment of the Special Distributions will eliminate the availability of the general dividend basket for the fiscal year ending July 31, 2021. In addition, Amendment No. 1 incorporates a new minimum liquidity financial covenant, which requires that the sum of excess availability under the MidCap credit agreement and the amount of qualified cash and cash equivalents of the borrower is not less than $3.0 million until the earlier of July 31, 2021 or the date on which the borrower has either distributed the maximum amount of the Special Distributions or waived the ability to make further Special Distributions. Among other things, Amendment No. 1 also increases the percentage of eligible accounts included in the borrowing base from 50% to 75% and amends the condition for borrowing of revolving loans after the effective date of Amendment No. 1 to require evidence that specified availability (the sum of excess availability and the difference between the borrowing base and the aggregate revolving loan commitments) is not less than $3.0 million prior to giving effect to any such borrowing.

2223

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The matters discussed in this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those risks discussed elsewhere in this report and the risks discussed in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on ~~September 30, 2020,~~October 29, 2021, and other subsequent reports filed with or furnished to the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof, except as required by law.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this quarterly report.

Overview

Steel Connect, Inc. (the "Company") is a diversified holding company with two wholly-owned subsidiaries, IWCO Direct Holdings, Inc. ("IWCO ~~Direct," "IWCO"~~Direct" or "Direct Marketing") and ModusLink Corporation ("ModusLink" or "Supply Chain"), ~~that have market-leading positions in~~which serve the direct marketing and supply chain management markets, respectively.

IWCO Direct

As is a ~~leading~~ provider of data-driven ~~direct~~ marketing solutions, ~~IWCO Direct's products and services help clients create more effective marketing offers and communications~~driving response across all marketing channels and measurable improvements to ~~create new and more loyal customers.~~its customers’ return on marketing investment. With a ~~nearly~~more than 50-year legacy of printing and mailing services, IWCO Direct's full range of expanded marketing services includes strategy, creative services, and execution for omnichannel marketing campaigns, along with one of the industry's most sophisticated postal logistics strategies for direct mail. Through Mail-Gard®, IWCO Direct offers business continuity and disaster recovery services to protect against unexpected business interruptions, along with providing print and mail outsourcing services.

IWCO Direct's services ~~include~~include: (a) development of direct mail and omnichannel marketing strategies, (b) creative services to design direct mail, email, and online marketing, (c) printing and compiling of direct mail pieces into envelopes ready for mailing, (d) commingling services to sort mail produced for various customers by destination to achieve optimized postal savings, and (e) business continuity and disaster recovery services for critical communications to protect against unexpected business interruptions. The major markets served by IWCO Direct include financial services, multiple-system operators ~~("MSO")~~ (cable or direct-broadcast satellite TV systems), insurance, ~~and to a lesser extent~~as well as subscription/services, healthcare, travel/hospitality, retail, not-for-profit, and ~~other.~~others. Direct mail is a critical piece of marketing for most of ~~its current customers~~IWCO Direct’s clients, who use direct mail to acquire new ~~customers.~~customers, deepen the sales cycle, and maintain customer loyalty. Management believes that direct mail will remain an important part of its customers' strategy for the foreseeable future, based on its proven ability to enhance results when used as part of an omnichannel marketing strategy.

ItModusLink is ~~possible that in future periods decreases in customer demand or volumes or other potential changes in operations may increase the risk that goodwill~~an end-to-end global supply chain solutions and ~~other intangible assets, which are only associated with the Direct Marketing segment, may become impaired.~~

~~Supply Chain~~

~~Historically, a significant portion of our revenue from our Supply Chain business has been generated from~~e-commerce provider serving clients in the computer and software markets. These markets, while large in size, are mature and, as a result, gross margins in these markets tend to be lower than other markets ModusLink operates in. To address this, in addition to the computer and software markets, ModusLink has expanded its sales focus to include additional markets such as ~~communications and~~ consumer electronics, ~~with~~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 ~~long-term focus on expanding in growth industries, such as the connected home~~combination of industry expertise, innovative service solutions, and ~~connected healthcare, among others.~~integrated operations, proven business processes, an expansive global footprint and world-class technology. ModusLink ~~believes these markets,~~also produces and other verticals it operates in, may experience faster growth than its historical markets and represent opportunities to realize higher gross margins on the services it offers. Companies in these markets often have significant need for a supply chain partner who will belicenses an extension to their business models. ModusLink believes the scope of its service offerings, including value-added warehousing and distribution, repair and recovery, aftersales, returns management, financial management, entitlement management ~~contact center support, material planning~~solution powered by its enterprise-class Poetic software, which offers a complete solution for activation, provisioning, entitlement subscription, and ~~factory supply,~~data collection from physical goods (connected products) and ~~e-Business will increase the overall value~~digital products. ModusLink has an integrated network of ~~the supply chain solutions it delivers to its existing clients~~strategically located facilities in various countries, including numerous sites throughout North America, Europe and ~~to new clients.~~Asia.

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As a large portion of the Supply Chain revenue comes from outsourcing services provided to clients such as retail products and consumer electronics companies, our operating performance has been and may continue to be adversely affected by declines in the overall performance within these sectors and uncertainty affecting the world economy. In addition, the drop in consumer demand for products of certain clients has had and may continue to have the effect of reducing our volumes and adversely affecting revenue, gross margin and overall operating performance. Additionally, the markets for the Supply Chain services are generally very competitive, though we believe we have a compelling and differentiated offering due to the value-added services we provide, our commitment to client management and our global reach. We also face pressure from our clients to continually realize efficiency gains in order to help our clients maintain their profitability objectives. Increased competition and client demands for efficiency improvements may result in price reductions, reduced gross margins and, in some cases, loss of market share. In addition, our profitability varies based on the types of services we provide and the regions in which we perform them. Therefore, the mix of revenue derived from our various services and locations can impact our gross margin results. Also, form factor changes, which we describe as the reduction in the amount of materials and product components used in our clients' completed packaged product, can also have the effect of reducing our revenue and gross margin opportunities. As a result of these competitive and client pressures, the gross margins in our Supply Chain business are low.

Many of the Supply Chain business' clients products are subject to seasonal consumer buying patterns. As a result, the services ModusLink provides to its clients are also subject to seasonality, with higher revenue and operating income typically being realized from handling its clients' products during the first half of our fiscal year, which includes the holiday selling season.

We have developed plans and will continue to monitor plans to address process improvements and realize other efficiencies throughout our global footprint with a goal to reduce cost, remove waste and improve our overall gross margins. There can be no assurance that these actions will improve gross margins. Increased competition as well as industry consolidation and/or low demand for our clients' products and services may hinder our ability to maintain or improve our gross margins, profitability and cash flows. We must continue to focus on margin improvement, through implementation of our strategic initiatives, cost reductions and asset and employee productivity gains in order to improve the profitability of our businesses and maintain our competitive position. We generally manage margin and pricing pressures in several ways, including efforts to target new markets, expand and enhance our service offerings, improve the efficiency of our processes and to lower our infrastructure costs. We seek to lower our cost to service clients by moving work to lower-cost venues, consolidating and leveraging our global facility footprint, drive process and efficiency reforms and other actions designed to improve the productivity of our operations.Customers

Historically, a limited number of key clients ~~had~~have accounted for a significant percentage of the Company's revenue. For the three months ended October 31, ~~2020~~2021 and ~~2019,~~2020, the Company's ten largest clients accounted for approximately ~~55%~~47% and ~~52%~~55% of consolidated net revenue, respectively. No client accounted for more than 10% of the Company's consolidated net revenue for three months ended October 31, 2021. One client from the computing market accounted for 15% of the Company's consolidated net revenue for three months ended October 31, 2020. ~~One client from the computing market accounted for 15% of the Company's consolidated net revenue for the three months ended October 31, 2019.~~ In general, the Company does not have any agreements which obligate any client to buy a minimum amount of services from it or designate it as an exclusive service provider. Consequently, the Company's net revenue is subject to demand variability by our clients. The level and timing of orders placed by the Company's clients vary for a variety of reasons, including seasonal buying by end-users, the introduction of new technologies and general economic

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conditions. By diversifying into new markets and improving the operational support structure for its clients, the ~~Company's clients, it~~Company expects to offset the adverse financial impact such factors may bring about.

Impact of COVID-19

InThe ongoing COVID-19 pandemic has adversely impacted, and is likely to further adversely impact, nearly all aspects of our business and markets, including our workforce and the operations of our clients, suppliers, and business partners. Beginning in March 2020, when the World Health Organization categorized ~~the novel Coronavirus ("COVID-19")~~COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national ~~emergency. The spread~~emergency, we experienced impacts to our customers' demand, facility operations, supply chain, availability and productivity of ~~the outbreak has caused significant~~personnel, while also working to comply with rapidly evolving international, federal, state and local restrictions and recommendations on travel and workplace health and safety. We experienced disruptions ~~in the U.S. and global economies, and economists expect the impact will be significant during the remainder of 2020 and beyond. The Company is subject~~ to ~~risks and uncertainties~~our business continuity as a result of the COVID-19 pandemic. The Company continues to evaluate the global risks and the slowdown in business activity related to COVID-19, including the potential impacts on its employees, customers, suppliers and financial results. The effects of COVID-19 required temporary closures of certain of ~~ModusLink's~~ModusLink’s facilities ~~for short periods~~in the third and fourth quarters of ~~time during the~~ fiscal year ~~ended July 31, 2020.~~2020, as well as the fourth quarter of fiscal year 2021. However, these temporary closures did not have a significant impact on ModusLink’s operations. Additionally, although IWCO Direct operated ~~and continues to operate~~ as an essential business, it had reduced operating levels and labor shifts due to lower sales volume during the ~~prior~~third quarter of fiscal ~~year. As of the filing of this quarterly report on Form 10-Q, all of the Company's facilities were open and able to operate at normal capacities.~~

year 2020.

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~~Currently, the Company anticipates that~~In addition, we aim to closely monitor the impact of ~~the deterioration~~COVID-19 on all aspects of ~~the U.S~~our business and ~~global economies will most likely continue and may have an adverse~~geographies, including its impact on ~~the Company's business. However, as the situation surrounding COVID-19 remains fluid, it is difficult to predict the duration of the pandemic~~our clients, employees, suppliers, vendors, business partners and the impact on the Company's business, operations, financial condition and cash flows. The severity of the impact on the Company's business for the remainder of calendar 2020 and beyond will depend on a number of factors, including,distribution channels. We believe that such impacts could include, but are not limited to, ~~the duration and severity of the pandemic,~~ the extent and severity of the impact on ~~the Company's~~our customers and ~~suppliers,~~suppliers; the continued disruption to the demand for our businesses' products and ~~services, and~~services; the impact of the global business and economic environment on liquidity and the availability of ~~capital, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could also be adversely impacted by~~capital; delays in payments of outstanding receivables beyond normal payment ~~terms,~~terms; supply chain ~~disruptions and~~disruptions; uncertain ~~demand,~~demand; and the effect of any initiatives or programs that ~~the Company~~we may undertake to address financial and operational challenges faced by ~~its~~our customers. ~~There~~The full extent to which the pandemic will directly or indirectly impact our business, results of operations and financial condition, is ~~also no certainty that federal, state or local regulations regarding safety measures~~difficult to ~~address~~predict and will depend on the duration and spread of the ongoing COVID-19 ~~will not adversely~~pandemic (including new variants of COVID-19), its severity, the actions to contain the virus or address its impact, the ~~Company's operations.~~timing, distribution, and efficacy of vaccines and other treatments, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. As of the filing of this Form 10-Q, all of our facilities were open and able to operate at normal capacities. We will evaluate further actions if circumstances warrant while continuing to strategically support the Company’s future growth initiatives (including its Competitive Improvement Plan for IWCO Direct), sales and marketing activities and supply chain solutions and services.

Recent Developments

~~Non-binding~~Steel Holdings Expression of Interest

On November 19, 2020, the Company's Board of Directors (the "Board") received a preliminary, non-binding expression of interest (the "Expression of Interest") from Steel Partners Holdings L.P. ("Steel Holdings") to acquire all of the outstanding shares of common stock not already owned by Steel Holdings or its affiliates for a combination of cash and Steel Holdings 6% Series A Preferred Units, which would imply a value per share of common stock in the range of $0.65 to $0.72 per share. The ~~Expression of Interest was filed as an exhibit to a Schedule 13D/A filed with the SEC by Steel Holdings and certain of its affiliates on November 19, 2020. The~~ Board has established a special committee comprised solely of independent directors (the "Acquisition Proposal Special Committee") authorized to retain independent legal and financial advisors and to review, evaluate, negotiate and approve or disapprove the Expression of Interest, and to explore alternative strategies or transactions. The Acquisition Proposal Special Committee announced on January 11, 2021 that it had retained financial advisors and legal counsel. As set forth in the Expression of Interest, the proposed transaction will be subject to the approval of the Acquisition Proposal Special Committee, as well as a non-waivable condition requiring approval of a majority of the shares outstanding of the Company not owned by Steel Holdings and its affiliates and related parties. The Board resolutions establishing the Acquisition Proposal Special Committee expressly provide that the Board will not approve the proposed transaction contemplated by the Expression of Interest or any alternative thereto without a prior favorable recommendation by the Acquisition Proposal Special Committee.

~~No decision has yet been made with respect to the Company's response to the Expression of Interest or any alternatives thereto.~~ The Board ~~cautions that it~~ has only received a proposal, which it continues to negotiate with Steel Holdings. The proposal under negotiation does not constitute ana definitive offer ~~or proposal~~ capable of acceptance, and may be withdrawn at any time and in any manner.

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There can be no assurance that any definitive offer will be made, that any agreement will be executed or that the transaction proposed in the Expression of Interest or any other transaction will be approved or completed. The Company is not obligated to disclose any further developments or updates on the progress of the proposed transaction until either the Company enters into a definitive agreement or the Acquisition Proposal Special Committee determines no such transaction will be approved.

~~MidCap Credit Facility~~

IWCO Direct's Competitive Improvement Plan

On ~~December 9, 2020, ModusLink~~June 2, 2021, the Board approved a Competitive Improvement Plan (“CIP”) for IWCO Direct, which addresses the changing requirements of its customers and markets it serves, as well as the current competitive landscape. The CIP seeks to expand IWCO Direct’s marketing services capabilities, and upgrade its production platform to new digital and inserting technology, while reducing its overall production costs to enhance its competitive pricing capabilities. The CIP contemplates a total investment of approximately $54 million primarily over a 24-month period. The Company estimates the CIP cost will consist of approximately: (1) $38 million for digital press and insertion equipment, and technology build out cost (of which approximately $34 million in lease/purchase agreements were entered into ~~a First Amendment (“Amendment No. 1”)~~subsequent to ~~its credit agreement with MidCap Financial Trust ("MidCap") by and among ModusLink, certain of ModusLink's subsidiaries identified on~~ the ~~signature pages thereto, and MidCap as lender and agent.~~

~~Amendment No. 1 amends the MidCap credit agreement to permit special cash dividends to be made on or prior to~~year ended July 31, ~~2021 in an aggregate amount not to exceed $50.0~~2021), and (2) $16 million ~~(the “Special Distributions”). Payment of the Special Distributions will eliminate the availability of the general dividend basket~~ for ~~the fiscal year ending July 31, 2021.~~severance, employee retention, facilities optimization, and other implementation costs. In addition, ~~Amendment No. 1 incorporates a new minimum liquidity financial covenant, which requires that~~ the ~~sum of excess availability under the MidCap credit agreement~~Company expects to incur approximately $12 million for non-cash accelerated depreciation expense. The cost estimates do not include amounts for potential non-cash asset impairment charges relating to facilities and ~~the amount of qualified cash~~equipment optimization. The timing and ~~cash equivalents of the borrower is not less than $3.0 million until the earlier of July 31, 2021 or the date on which the borrower has either distributed the maximum~~ amount of the ~~Special Distributions or waived the ability~~future costs incurred will depend on a number of factors. Refer to ~~make~~Note 7 for further ~~Special Distributions. Among other things, Amendment No. 1 also increases the percentage~~details of ~~eligible accounts included~~costs recognized in the borrowing base from 50% to 75% and amends the condition for borrowing of revolving loans after the effective date of Amendment No. 1 to require evidence that specified availability (the sum of excess availability and the difference between the borrowing base and the aggregate revolving loan commitments) is not less than $3.0 million prior to giving effect to any such borrowing.three months ended October 31, 2021.

Basis of Presentation

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The Company has two operating segments which are the same as its reportable segments: Direct Marketing and Supply Chain. The Company also has Corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal, finance and share-based compensation, ~~and acquisition costs,~~ which are not allocated to the Company's reportable segments. The Corporate-level balance sheet information includes cash and cash equivalents, debt and other assets and liabilities which are not identifiable to the operations of the Company's operating segments. All significant intra-segment amounts have been eliminated.

During the three months ended October 31, 2019, the Company recorded a $6.4 million adjustment to correct an out-of-period misstatement related to the Company's estimate for certain tax related liabilities. Had this correction been recorded for the fiscal year ended July 31, 2019, the Company's selling, general and administrative expenses and net loss for that period would have been reduced to $137.7 million and $60.3 million, respectively.

Results of Operations

Three months ended October 31, ~~2020~~2021 compared to the three months ended October 31, ~~2019~~2020

Net Revenue:


		Three Months Ended October 31, 2020		As a % of Total Net Revenue		Three Months Ended October 31, 2019		As a % of Total Net Revenue		$ Change		% Change			Three Months Ended October 31, 2021		As a % of Total Net Revenue		Three Months Ended October 31, 2020		As a % of Total Net Revenue		$ Change		% Change
		(In thousands)													(In thousands)
Direct Marketing	Direct Marketing	$	105,708	62.2	%	$	133,003	59.1	%	$	(27,295)	(20.5)	%	Direct Marketing	$	81,059	64.6	%	$	105,708	62.2	%	$	(24,649)	(23.3)	%
Supply Chain	Supply Chain	64,226		37.8	%	92,150		40.9	%	(27,924)		(30.3)	%	Supply Chain	44,354		35.4	%	64,226		37.8	%	(19,872)		(30.9)	%
Total	Total	$	169,934	100.0	%	$	225,153	100.0	%	$	(55,219)	(24.5)	%	Total	$	125,413	100.0	%	$	169,934	100.0	%	$	(44,521)	(26.2)	%

Net revenue decreased by approximately ~~$55.2~~$44.5 million during the three months ended October 31, ~~2020,~~2021, as compared to the same period in the prior year. During the three months ended October 31, ~~2020,~~2021, net revenue for the Direct Marketing segment decreased by approximately ~~$27.3~~$24.6 million primarily ~~driven by~~due: (1) approximately $18.5 million of lower sales volume ~~due to~~from clients who will be exiting and (2) approximately $10.1 million for reduced volume from a client in the ~~COVID-19 pandemic,~~insurance industry. These decreases were partially offset by aapproximately $4.0 million of higher ~~average price per package mailed. Within~~sales volume across all other clients. The client exits in the year ended July 31, 2021 are expected to result in further decreases of Direct ~~Marketing segment, the decrease in~~Marketing’s net revenue ~~was primarily associated with customers in~~for the ~~financial, MSO and insurance industries. Within~~remainder of the fiscal year ending July 31, 2022.

During the three months ended October 31, 2021, net revenue for the Supply Chain segment, net revenues decreased by approximately ~~$27.9~~$19.9 million. This decrease in net revenue was primarily driven ~~by: (1)~~by lower volume associated with clients ~~exiting~~ in the computing and consumer electronics markets which have been negatively impacted by global market shortage of semiconductor and ~~(2) lower volume with the Company's largest client in the computing market, which is expected to shift later in the current fiscal year.~~other electrical component supplies. Fluctuations in foreign currency exchange rates had an insignificant impact on the Supply Chain segment's net revenues for the three months ended October 31, ~~2020,~~2021, as compared to the same period in the prior year.

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Cost of Revenue:


		Three Months Ended October 31, 2020		As a % of Segment Net Revenue		Three Months Ended October 31, 2019		As a % of Segment Net Revenue		$ Change		% Change			Three Months Ended October 31, 2021		As a % of Segment Net Revenue		Three Months Ended October 31, 2020		As a % of Segment Net Revenue		$ Change		% Change
		(In thousands)													(In thousands)
Direct Marketing	Direct Marketing	$	81,192	76.8	%	$	104,590	78.6	%	$	(23,398)	(22.4)	%	Direct Marketing	$	75,185	92.8	%	$	81,192	76.8	%	$	(6,007)	(7.4)	%
Supply Chain	Supply Chain	48,274		75.2	%	76,317		82.8	%	(28,043)		(36.7)	%	Supply Chain	34,948		78.8	%	48,274		75.2	%	(13,326)		(27.6)	%
Total	Total	$	129,466	76.2	%	$	180,907	80.3	%	$	(51,441)	(28.4)	%	Total	$	110,133	87.8	%	$	129,466	76.2	%	$	(19,333)	(14.9)	%

Cost of revenue consists primarily of expenses related to the cost of materials purchased in connection with the provision of direct marketing and supply chain management services, as well as costs for salaries and benefits, depreciation expense, severance, contract labor, consulting, paper for direct mailing, fulfillment and shipping, and applicable facilities costs. Cost of revenue for the three months ended October 31, ~~2020~~2021 included materials procured on behalf of our ~~supply chain~~Supply Chain clients of ~~$30.4~~$19.1 million, as compared to ~~$52.9~~$30.4 million for the same period in the prior year, a decrease of ~~$22.5~~$11.3 million. Total cost of revenue decreased by ~~$51.4~~$19.3 million for the three months ended October 31, ~~2020,~~2021, as compared to the same period in the prior year, primarily due to decreased material and labor ~~costs.~~costs in both segments, partially offset by restructuring costs in Direct Marketing. Gross margin percentage for the current quarter ~~increased~~decreased to ~~23.8%~~12.2%, as compared to ~~19.7%~~23.8% in the prior year ~~quarter,~~quarter.

Direct Marketing’s cost of revenue decreased by $6.0 million during the three months ended October 31, 2021, as compared to the same period in the prior year. The decrease was primarily due to ~~customer mix, our focus on customer rationalization~~decreased material costs due to ~~improve profitability, as well as cost reduction initiatives in both segments to~~lower volume, partially offset by $6.6 million of restructuring charges associated with the ~~impact of COVID-19.~~

CIP. The Direct Marketing segment's gross margin percentage ~~increased~~decreased by ~~180~~1600 basis points to ~~23.2%~~7.2% for the three months ended October 31, ~~2020,~~2021, as compared to ~~21.4%~~23.2% for the same period in the prior year. The decrease in Direct Marketing segment’s gross margin percentage is primarily due to: (1) restructuring charges for the CIP and (2) decreased revenues associated with lower average price-per-package.

Supply Chain’s cost of revenue decreased by $13.3 million during the three months ended October 31, 2021, as compared to the same period in the prior year. The decreased was primarily due to lower materials and labor costs as a result of lower sales volume associated with clients in the computing and consumer electronics markets. The Supply Chain segment's gross margin percentage decreased by 360 basis points to 21.2% for the three months ended October 31, 2021, as compared to 24.8% for the same period in the prior year, primarily due ~~to favorable changes in customer mix,~~ lower ~~employee related costs~~revenues, not completely offset by the decreased materials and ~~the Company's aggressive measures to manage labor and reduce discretionary~~

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spend as a result of the COVID-19 pandemic. The Supply Chain segment's gross margin percentage increased by 760 basis points to 24.8% for the three months ended October 31, 2020, as compared to 17.2% for the same period in the prior year, primarily due to improved customer mix and decreased labor costs. Fluctuations in foreign currency exchange rates had an insignificant impact on Supply Chain's gross margin for the three months ended October 31, ~~2020.~~2021.

Selling, General and Administrative Expenses:


		Three Months Ended October 31, 2020		As a % of Segment Net Revenue		Three Months Ended October 31, 2019		As a % of Segment Net Revenue		$ Change		% Change			Three Months Ended October 31, 2021		As a % of Segment Net Revenue		Three Months Ended October 31, 2020		As a % of Segment Net Revenue		$ Change		% Change
		(In thousands)													(In thousands)
Direct Marketing	Direct Marketing	$	13,044	12.3	%	$	9,933	7.5	%	$	3,111	31.3	%	Direct Marketing	$	13,170	16.2	%	$	13,044	12.3	%	$	126	1.0	%
Supply Chain	Supply Chain	10,801		16.8	%	9,323		10.1	%	1,478		15.9	%	Supply Chain	7,433		16.8	%	10,801		16.8	%	(3,368)		(31.2)	%
Sub-total	Sub-total	23,845		14.0	%	19,256		8.6	%	4,589		23.8	%	Sub-total	20,603		16.4	%	23,845		14.0	%	(3,242)		(13.6)	%
Corporate-level activity	Corporate-level activity	3,013				2,971				42		1.4	%	Corporate-level activity	1,402				3,013				(1,611)		(53.5)	%
Total	Total	$	26,858	15.8	%	$	22,227	9.9	%	$	4,631	20.8	%	Total	$	22,005	17.5	%	$	26,858	15.8	%	$	(4,853)	(18.1)	%

Selling, general and administrative expenses consist primarily of compensation and employee-related costs, sales commissions and incentive plans, information technology expenses, travel expenses, facilities costs, consulting fees, fees for professional services, depreciation expense, marketing expenses, share-based compensation expense, transaction costs, restructuring and public reporting costs. Selling, general and administrative expenses during the three months ended October 31, ~~2020 increased~~2021 decreased by approximately ~~$4.6~~$4.9 million, as compared to the same period in the prior year.

Selling, general and administrative expenses for the Direct Marketing segment ~~increased~~did not change significantly as compared to the same period in the prior ~~year, primarily due to an increase in accrued taxes, partially offset by a decrease in employee related costs, sales and marketing, and other expenses as a result of the COVID-19 pandemic.~~ year.

Selling, general and administrative expenses for the Supply Chain segment ~~increased~~decreased primarily due to a decrease in restructuring ~~costs, primarily associated with the sales~~ and ~~marketing functions. Corporate-level activity remained relatively flat, as compared to the same period~~professional expenses that were incurred in the prior ~~year.~~year period. Corporate-level activity decreased primarily due to a decrease 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, ~~2020.~~2021.

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Amortization of Intangible Assets:

The intangible asset amortization expense of $6.5 million and $7.3 million, during the three months ended October 31, 2020 and 2019, respectively, relates to trademarks, tradenames and customer relationships acquired by the Company in connection with its acquisition of IWCO. The decrease is due to lower amortization expense with respect to the customer relationship intangible assets. The customer relationship intangible assets are amortized using an accelerated method, which reflects the pattern in which we receive the economic benefit of the asset.

~~Interest Expense:~~

During the three months ended October 31, 2021 and 2020, ~~and 2019, interest~~intangible asset amortization expense totaled ~~approximately $7.8~~$4.2 million and ~~$9.2 million. The lower interest~~$6.5 million, respectively. Intangible asset amortization expense isdecreased $2.4 million primarily due to ~~lower variable~~trademarks and tradenames being fully amortized during the prior year.

Interest Expense:

Total interest ~~rates on outstanding debt.~~expense during the three months ended October 31, 2021 did not change significantly as compared to the same period in the prior year.

Other ~~(Losses) Gains,~~Losses, Net:

Other ~~(losses) gains,~~losses, net are primarily composed of foreign exchange ~~gains and~~ losses. The Company recorded $0.5 million and $1.7 million of foreign exchange losses during the three months ended October 31, 2021 and 2020, ~~as compared to $0.5 million of foreign exchange gains in the same period in the prior year.~~respectively.

Income Tax Expense:

During the three months ended October 31, ~~2020,~~2021, the Company recorded income tax expense of approximately ~~$0.8~~$0.3 million, as compared to income tax expense of ~~$1.4~~$0.8 million for the same period in the prior fiscal year. The decrease in income tax expense is primarily due to lower taxable income in foreign jurisdictions, as compared to the prior year.

The Company provides for income tax expense related to federal, state and foreign income taxes. The Company continues to maintain a full valuation allowance against its deferred tax assets in the U.S. and certain of its foreign subsidiaries due to the uncertainty of realizing such benefits.

Liquidity and Capital Resources

~~Table~~Anticipated Sources and Uses of ~~Contents~~

Cash Flow

Historically, the Company has financed its operations and met its capital requirements primarily through funds generated from operations, the sale of ~~its~~it securities, borrowings from lending institutions and sale of facilities that were not fully utilized. The following table summarizes our liquidity:


	October 31, 2021
	(In thousands)
Cash and cash equivalents	$	81,330
Readily available borrowing capacity under Cerberus Credit Facility	25,000
Readily available borrowing capacity under Midcap Credit Facility	8,474
	$	114,804

Certain of IWCO Direct’s lease agreements contain financial covenants that would require IWCO Direct to issue a letter of credit (“LOC”) to the landlord in the event that IWCO Direct incurs debt that on a pro forma basis would result in IWCO Direct's net leverage exceeding 6.00x IWCO Direct's adjusted EBITDA. As of October 31, ~~2020,~~2021, and through the ~~Company's primary source~~date of ~~liquidity consisted~~this filing, IWCO Direct was in compliance with the net leverage ratio such that no LOC issuance is currently required. However, based on IWCO Direct's covenant compliance as of ~~cash and cash equivalents~~the most recent balance sheet date, if IWCO Direct incurs additional debt, it would be required to issue an LOC of ~~$104.5~~approximately $3.2 million ~~which include balances held in certain foreign jurisdictions.~~ .

Due to the changes reflected in the U.S. Tax Cuts and Jobs Act in December 2017 ("U.S. Tax Reform"), there is no U.S. tax payable upon repatriating the undistributed earnings of foreign subsidiaries considered not subject to permanent investment. Foreign withholding taxes would range from 0% to 10% on any repatriated funds. For the Company, earnings and profits have been calculated at each subsidiary. The Company's foreign subsidiaries are in an overall net deficit for earnings and profits purposes. As such, no adjustment was made to U.S. taxable income in the three months ended October 31, 2021 relating to this aspect of the U.S. Tax Reform. In future years, the Company will be able to repatriate its foreign earnings without incurring additional U.S. tax as a result of a 100% dividends received deduction. The Company believes that any future withholding taxes or state taxes associated with such a repatriation would be minor.

As October 31, 2020, we had $25.0 million and $1.2 million of borrowing capacity available under our Direct Marketing and Supply Chain credit facilities, respectively. There were no outstanding borrowings under either credit facility as of October 31, 2020. The Company was in compliance with all financial covenants in its credit facilities and other debt agreements as of October 31, 2020.

~~Cash Flows Information~~

Consolidated working capital deficit was ~~$12.3~~$16.7 million as of October 31, ~~2020,~~2021, as compared to ~~$26.4~~$4.6 million at July 31, ~~2020.~~2021. Included in the working capital deficit were cash and cash equivalents of ~~$104.5~~$81.3 million as of October 31, ~~2020~~2021 and ~~$75.9~~ $96.9

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million at July 31, ~~2020.~~2021. The ~~decrease~~increase in the working capital deficit was primarily driven by ~~higher~~lower cash and cash equivalents, ~~partially offset by lower accounts receivable and higher accrued expenses.~~

~~Net cash provided by~~due to its usage in operating activities ~~was $25.7 million~~and capital expenditures. Sources and uses of cash for the three months ended October 31, ~~2020, as compared to net cash provided by operating activities of $22.4 million for the three months ended October 31, 2019. The $3.3 million increase in net cash provided by operating activities,~~2021, as compared to the same period in the prior year, are as follows:


	Three Months Ended October 31,
	2021		2020
	(In thousands)
Net cash (used in) provided by operating activities	$	(10,425)	$	25,727
Net cash used in investing activities	$	(4,681)	$	(1,059)
Net cash used in financing activities	$	(2,055)	$	(2,051)

Operating Activities: We used cash of $10.4 million from operating activities during the three months ended October 31, 2021, a decrease of $36.2 million compared with $25.7 million generated during the three months ended October 31, 2020. The decrease was primarily due ~~to the timing of accounts receivable collections~~lower gross profits and ~~higher accrued expenses.~~

a reduction in working capital. The Company's cash flows related to operating activities are dependent on several factors, including profitability, accounts receivable collections, effective inventory management practices and optimization of the credit terms of certain vendors of the Company, the market for outsourcing services, overall performance of the technology sector impacting the Supply Chain segment and the strength of the Direct Marketing segment.

Investing Activities: Net cash used in investing activities ~~used cash of $1.1~~was $4.7 million and ~~$4.1~~$1.1 million during the three months ended October 31, 2021 and 2020, respectively, and ~~2019, respectively,~~was primarily related to capital expenditures. The ~~decrease~~increase was primarily due to reduced capital spending in ~~capital expenditures~~the prior year as the result of the COVID-19 pandemic.

Financing Activities: Net cash used in financing activities was $2.1 million during both the three months ended October 31, 2021 and 2020, and primarily consisted of $1.5 million in long-term debt payments and $0.5 million of preferred dividend payments in both periods.

IWCO Direct’s Competitive Improvement Plan

On June 2, 2021, the Board approved a Competitive Improvement Plan (“CIP”) for IWCO Direct, which addresses the changing requirements of its customers and markets it serves, as ~~compared~~well as the current competitive landscape. The CIP seeks to expand IWCO Direct’s marketing services capabilities, and upgrade its production platform to new digital and inserting technology, while reducing its overall production costs to enhance its competitive pricing capabilities. The CIP contemplates a total investment of approximately $54 million primarily over a 24-month period. The Company estimates the CIP cost will consist of approximately: (1) $38 million for digital press and insertion equipment, and technology build out cost (of which approximately $34 million in lease/purchase agreements were entered into subsequent to the ~~same period in~~year ended July 31, 2021), and (2) $16 million for severance, employee retention, facilities optimization, and other implementation costs. In addition, the ~~prior year, is primarily due~~Company expects to ~~reduced spending as the result~~incur approximately $12 million for non-cash accelerated depreciation expense. The cost estimates do not include amounts for potential non-cash asset impairment charges relating to facilities and equipment optimization. The timing and amount of the ~~COVID-19 pandemic.~~future costs incurred will depend on a number of factors.

Debt and Financing Arrangements

As of October 31, 2021 outstanding debt consisted of the following:


	October 31, 2021
	(In thousands)
Cerberus Term Loan due December 15, 2022	$	362,830
7.50% Convertible Note due March 1, 2024	14,940
	$	377,770

Cerberus Credit Facility

The Cerberus Credit Facility consists of a term loan facility (the “Cerberus Term Loan”) and a $25 million revolving credit facility (the “Revolving Facility”) (together the “Cerberus Credit Facility”) which matures on December 15, 2022. IWCO Direct intends to refinance the Cerberus Credit Facility, however its ability to refinance this debt is not guaranteed. IWCO Direct's ability to refinance this debt will depend on the capital and credit markets and our financial condition at such time. IWCO Direct may not

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be able to engage in any of these activities ~~used cash of $2.1 million~~or engage in these activities on desirable terms, which could result in a default on its debt obligations and ~~$6.1 million during~~have a material adverse effect on the Company's financial condition and liquidity.

During the three months ended October 31, ~~2020~~2021, IWCO Direct did not trigger any of the financial covenants in the Cerberus Credit Facility. In order to maintain compliance with the Cerberus Credit Facility’s required liquidity covenant for the next twelve months, the Company has the ability and ~~2019, respectively. The $2.1~~wherewithal to execute certain actions that may include, but are not limited to, reducing or delaying capital and strategic investments, and deferral of certain operating and capital expenditures. While IWCO Direct currently expects to be in compliance in the next twelve months with all of the financial covenants, there can be no assurance that these covenants will continue to be met if the Company does not achieve its earnings and operating cash flow projections.

MidCap Credit Facility

ModusLink’s revolving credit and security agreement with MidCap Financial Trust which expires on December 31, 2022, provides for a maximum credit commitment of $12.5 million and a sublimit of ~~cash used in financing activities~~$5.0 million for letters of credit. ModusLink intends to refinance this revolving credit agreement. ModusLink's ability to refinance this revolving credit agreement will depend on the capital and credit markets and our financial condition at such time. As of and during the ~~three months~~fiscal year ended ~~October~~July 31, ~~2020~~2021, ModusLink was ~~primarily due to $1.5 million~~ in ~~payments of long-term debt and $0.5 million~~compliance with all financial covenants in ~~payment of preferred dividends. The $6.1 million of cash used~~the MidCap Credit Agreement. ModusLink believes it will remain in ~~financing activities during~~compliance with the three months ended October 31, 2019 was primarily comprised of $4.0 million in net payments towards Direct Marketing's revolving credit facility with Cerberus Business Finance, LLC, $1.5 million in payments of long-term debt and $0.5 million in payment of preferred dividends.MidCap CreditAgreement’s covenants for the next twelve months.

Steel Connect, Inc.

The Company believes it ~~will generate sufficient cash~~has access to adequate resources to meet its needs for normal operating costs, debt obligations and working capital for at least the next twelve months; however, there can be no assurances that the Company and its operating businesses will continue to have access to their lines of credit if their financial performance does not satisfy the financial covenants ~~under its credit facilities to~~set forth in their respective financing agreements, which ~~certain~~could also result in the acceleration of ~~its subsidiaries are a party and that it will be able to obtain cash through its current and future credit facilities, if needed.~~their debt obligations by their respective lenders, adversely affecting liquidity.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet financing arrangements.

Contractual Obligations

Consistent with the rules applicable to "Smaller Reporting Companies," we have omitted information required by this disclosure.

Critical Accounting Policies Update

During the three months ended October 31, ~~2020,~~2021, other than the adoption of accounting standards updates discussed in the Condensed Consolidated Financial Statements, ~~we believe that~~ there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended July 31, ~~2020.~~2021.

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The Company's Condensed Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements. The critical accounting policies and estimates that we believe are most critical to the portrayal of our financial condition and results of operations are reported in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended July 31, ~~2020.~~2021.

AsAccounting for Impairment of ~~October 31, 2020, the Company reviewed its goodwill~~Long-Lived Assets, Goodwill and other intangible assets for indicators of impairment as a result of the impact of the COVID-19 pandemic. Although the Company’s performance has improved since the beginning as of the pandemic, the Company believes that indicators of impairment were present for all these asset classes due to a general deterioration in macroeconomic conditions and a significant decline in the Company's market capitalization.Other Intangible Assets

The carrying value of goodwill is not amortized, but is tested for impairment annually as of June 30, and, additionally on an interim basis, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As of October 31, 2021, the Company ~~performed a qualitative assessment~~did not identify any indicators of ~~whether~~impairment of its goodwill, other intangible assets and long-lived assets. During the three months ended April 30, 2021, IWCO was informed by two significant customers that they would be transitioning their direct marketing services to other providers by the end of the fiscal year ending July 31, 2021 and another customer that it ~~was more likely than not~~would have significantly lower volumes of sales in at least the fiscal quarter ending July 31, 2021. In connection with its quarterly close procedures, the Company assessed the anticipated negative impact on revenue and earnings from these

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changes in demand, along with the previously reported notification of another significant customer transitioning its direct marketing services to another company, and determined these factors were indicators that ~~its~~ goodwill and other ~~intangibles~~long-lived assets ~~were impaired~~may be impaired. As a result, the Company performed an interim impairment test of Direct Marketing's goodwill and other long-lived assets as of ~~October 31, 2020.~~April 30, 2021. The Company ~~reviewed its previous forecasts~~determined that the goodwill was impaired, and ~~assumptions based on~~recorded a non-cash impairment charge of $25.7 million for the three months ended April 30, 2021.

The fair value of the Direct Marketing reporting unit was calculated using a discounted cash flow model (a form of the income approach) using the Company's current projections, ~~that~~which are subject to various risks and uncertainties associated with its forecasted ~~revenues,~~revenue, expenses and cash flows, as well as the duration and ~~extent of~~expected impact ~~to our businesses~~on its business from the COVID-19 pandemic. ~~Based upon that assessment,~~The Company's significant assumptions in the analysis include, but are not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate and the tax rate. The Company's estimates of future cash flows are based on current economic climates, recent operating results and planned business strategies. These estimates could be negatively affected by decreased customer demand for IWCO's services, changes in regulations, further economic downturns, increased customer attrition or an inability to execute IWCO's business strategies. Future cash flow estimates are, by their nature, subjective, and actual results may differ materially from the Company's estimates. If the Company's ongoing cash flow projections are not met, the Company ~~concluded it was more likely than not that goodwill and other intangible assets were not impaired as of October 31, 2020.~~may have to record impairment charges in future periods.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Consistent with the rules applicable to "Smaller Reporting Companies," we have omitted information required by this item.

Item 4. 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, 2020 and~~ October 31, ~~2020.~~2021.

Changes in Internal Control over Financial Reporting

Despite the fact that many of our employees are working remotely due to the COVID-19 pandemic, these remote work arrangements have not resulted in changes in our internal controls over financial reporting (as defined in Rule 13(a)-15(f) or Rule 15d-15(f) of the Exchange Act); however, we are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

There have been no changes in our internal control over financial reporting during the quarter ended October 31, ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The information set forth under Note 910 - "Contingencies" to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, also see Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended July 31, ~~2020.~~

2021.

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Item 1A. Risk Factors.

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In addition to the risks and uncertainties discussed in this quarterly report on Form 10-Q, particularly those disclosed in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, see "Risk Factors" in the Company's Annual Report on Form 10-K for fiscal year ended July 31, ~~2020.~~2021. There have been no material changes from the risk factors previously disclosed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended ~~January~~July 31, ~~2020,~~2021, except as set forth below:

Changes in tax rates, laws or regulations, including U.S. government tax reform, could have a negative impact on the results of future operations.

The Company is subject to taxation in the U.S. and foreign jurisdictions. Changes in various tax laws can and do occur. For example, on December 22, 2017, the U.S. Tax Cuts and Jobs Act (the "Act") was enacted. The Act made substantial changes to the IRC, some of which could have an adverse effect on our business. Among other things, the Act (i) reduces the U.S. corporate income tax rate from 35% to 21% beginning in 2018, (ii) limits annual deductions for interest net expense to no more than 30% of our "adjusted taxable income," plus 100% of our business interest income for the year and (iii) permits a taxpayer to offset only 80% (rather than 100%) of its taxable income with any U.S. net operating losses ("NOLs") generated for taxable years beginning after 2017. The U.S. Department of the Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. While the U.S. Department of the Treasury has issued some proposed regulations since the enactment of the Act, additional guidance is likely forthcoming.

The current U.S. presidential administration has various proposals that, if enacted, would cause significant changes to existing tax law, in particular, an increase in U.S. federal income taxes on corporations and the tax rate on foreign earnings. Additionally, longstanding international tax norms that determine each country’s jurisdiction to tax cross-border international trade are subject to potential evolution. In connection with the Base Erosion and Profit Shifting Integrated Framework provided by Organization for Economic Cooperation and Development (“OECD”), the OECD recently reached an agreement to align countries on a minimum corporate tax rate and expand taxing rights of market countries. As a result of this agreement, the determination of multi-jurisdictional taxation rights and the rate of tax applicable to certain types of income may be subject to potential change. There can be no assurance that future changes to federal and state tax laws in the U.S. and foreign income tax laws will not be proposed ~~transaction between us~~or enacted that could materially or adversely impact our business or financial results. If and ~~Steel Holdings will~~when any or all of these changes are put into effect, they could result in tax increases where we do business both in and outside of the United States, and could have a material adverse effect on the results of our operations.

The various United States federal government orders and regulations directing employers to require their employees to be ~~agreed upon, approved~~vaccinated could lead to labor disruptions, which could have a material adverse effect on our business and ~~ultimately consummated, and the terms~~results of ~~any such transaction may differ materially from those originally proposed by Steel Holdings.~~operations.

On September 9, 2021, U.S. President Joseph R. Biden announced plans for the federal Occupational Safety and Health Administration (“OSHA”) to issue an Emergency Temporary Standard (“ETS”) mandating that all employers with more than 100 employees ensure their workers are either fully vaccinated against COVID-19 or produce, on a weekly basis, a negative COVID test (the “vaccine mandate”). On November ~~19, 2020,~~4, 2021, OSHA issued the ~~Company's Board received a preliminary, non-binding expression of interest from Steel Holdings~~ETS, which will require covered employers to ~~acquire all~~comply with the vaccine mandate beginning January 4, 2022 or face substantial penalties for non-compliance. Currently, the implementation of the ~~outstanding shares of common stock not already owned~~vaccine mandate has been blocked by ~~Steel Holdings or its affiliates for~~ a ~~combination of cash and Steel Holdings 6% Series A Preferred Units, which would imply a value per share of common stock in the range of $0.65 to $0.72 per share.~~

~~The transaction, as proposed, is~~federal appeals court, subject to ~~negotiation. Any definitive agreement with respect~~the resolution of ongoing litigation challenging the constitutionality of the rules. In addition to ~~such transaction~~the vaccine mandate, it is ~~subject to approval~~possible that additional mandates may be announced by ~~the board of directors of Steel Holdings, the Board~~foreign or local jurisdictions that could impact our workforce and ~~shareholder approvals. Such definitive agreement would be expected to contain customary closing conditions, including standard regulatory notifications and approvals.~~

operations. As a ~~result,~~company with more than 100 employees, unless these new regulations are overturned, we would thus be required to comply with the vaccine mandate.

Although we cannot predict ~~whether~~with certainty the ~~terms of such transaction will be agreed upon by Steel Holdings~~impact that the potential vaccine mandate and ~~the Board's special committee for recommendation to their respective boards of directors, for approval of the transaction or whether~~ any ~~such transactions would be approved by the requisite votes of our shareholders.~~

~~We also cannot predict the timing, final structure or~~ other ~~terms of any potential transaction, and the terms of any such transaction may differ materially from those originally proposed by Steel Holdings. The pendency of any such proposed transaction~~related measures may have ~~had,~~on our workforce and operations, these mandates may ~~continue~~result in increased operating costs, labor disruptions or employee attrition, which could be material. If we lose employees, it may be difficult in the current competitive labor market to find replacement employees, and this could have an adverse ~~impact~~effect on ~~the market price of our common stock.~~future revenues and costs, which could be material. In addition, ~~we expect to incur~~additional uncertainty could be caused by competing and potentially conflicting laws and regulations, such as the recent executive order issued by the Governor of Texas prohibiting vaccine mandates. Furthermore, these measures may further disrupt the national supply chain, all of which could have a ~~number~~material adverse effect on our business, financial condition and results of ~~non-recurring transaction-related costs associated with negotiating the proposed transaction.~~operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

a.None.

b.None.

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c.For information regarding the disposition of shares of common stock to the Company in connection with the proposed settlement of Reith v. Lichtenstein, et al., 2018-277 (Del. Ch.) in the Delaware Court of Chancery, see Note 9 - "Contingencies" to Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Note applicable.

Item 5. Other Information.

~~We are providing the following disclosure in lieu of filing a Current Report on Form 8-K relating to "Item~~Item 1.01 Entry into a Material Definitive ~~Agreement" and "Item 2.03 Creation of Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant" of Form 8-K.~~ Agreement.

On December ~~9, 2020,~~10, 2021, the ~~ModusLink~~Company entered into ~~a First Amendment~~an indemnification agreement (collectively, the “Indemnification Agreements”) with each of the directors and certain executive officers of the Company (collectively, the “Indemnitees”) to expound upon the indemnification protections provided under the Company’s Fourth Amended and Restated Bylaws (the “Bylaws”) and Delaware law. The Indemnification Agreements require the Company to indemnify the Indemnitees to the ~~MidCap credit agreement~~fullest extent permitted by applicable law against expenses, judgments, fines and ~~among ModusLink,~~other amounts actually and reasonably incurred in connection with any action or proceeding arising out of their service as a director or executive officer, subject to certain exceptions. The Company may enter into substantially similar Indemnification Agreements with new directors, and certain other executive officers in the future. The foregoing summary of ~~ModusLink's subsidiaries identified on~~ the ~~signature pages thereto,~~Indemnification Agreements does not purport to be complete and MidCap as lender and agent. For a description of that amendment, please see “Note 17 - Subsequent Events - Amendment to MidCap Credit Facility" above, which is incorporated herein by reference. The description of such amendment is qualified in its entirety by reference to the ~~amendment,~~actual text of the Indemnification Agreements, a ~~copy~~form of which is ~~attached hereto~~filed herewith as Exhibit ~~10.1 and is incorporated into this "Item 5. Other Information" by reference.~~10.2.

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Item 6. Exhibits.


Exhibit Number						Description

10.1*						~~First Amendment~~Form of Equity Grant Surrender and Cancellation Agreement, between the Registrant and each of Messrs. Lichtenstein and Howard (incorporated by reference to ~~Credit~~Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed August 19, 2021).

10.2*						Form of Indemnification Agreement by and ~~Security Agreement dated as of December 9, 2020.~~between the Company and its directors and officers.

31.1*						Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*						Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1±						Certification of the Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2±						Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*						The following financial information from Steel Connect, Inc.'s Quarterly Report Form 10-Q for the quarter ended October 31, ~~2020~~2021 formatted in Inline XBRL: (i) Unaudited Condensed Consolidated Balance Sheets as of October 31, ~~2020~~2021 and July 31, ~~2020,~~2021, (ii) Unaudited Condensed Consolidated Statements of Operations for the three months ended October 31, ~~2020~~2021 and ~~2019,~~2020 (iii) Unaudited Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss for the three months ended October 31, ~~2020~~2021 and ~~2019,~~2020, (iv) Unaudited Condensed Consolidated Statements of Stockholders' (Deficit) Equity for the three months ended October 31, ~~2020~~2021 and ~~2019,~~2020, (v) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended October 31, ~~2020~~2021 and ~~2019~~2020 and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

104*						Cover Page Interactive Data File (embedded within the Inline XBRL document)

*Filed herewith.

± Furnished herewith.

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SIGNATURES

Pursuant to the requirements 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: December ~~11, 2020~~13, 2021	By:	/S/ ~~DOUGLAS B. WOODWORTH~~JASON WONG
		~~Douglas B. Woodworth~~Jason Wong
		Chief Financial Officer
		(Principal Financial Officer and Authorized Signatory)

3235


		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	2324
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2931
Item 4.	Controls and Procedures	2931
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	2931
Item 1A.	Risk Factors	3031
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3032
Item 3.	Defaults Upon Senior Securities	3033
Item 4.	Mine Safety Disclosures	3033
Item 5.	Other Information	3033
Item 6.	Exhibits	3134


	Foreign Currency Items		Pension Items		Unrealized Gains on Securities		Total
	(In thousands)
Accumulated other comprehensive income (loss) as of July 31, 2019	$	5,017	$	(4,079)	$	96	$	1,034
Foreign currency translation adjustment	13		0		0		13

Pension liability adjustments	0		(2)		0		(2)
Net current-period other comprehensive income (loss)	13		(2)		0		11
Accumulated other comprehensive income (loss) as of October 31, 2019	$	5,030	$	(4,081)	$	96	$	1,045