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OFFON

STEEL CONNECT, INC.

(STCN)
Real-time Estimate Quote. Real-time Estimate Cboe BZX - 01/20 03:46:21 pm
1.325 USD   -3.99%
01/10STEEL CONNECT, INC. : Change in Directors or Principal Officers (form 8-K)
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01/10Steel Connect, Inc. Announces Management Changes
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2021STEEL CONNECT : Fiscal Q1 Earnings Snapshot
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STEEL CONNECT, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

10/29/2021 | 05:17pm EST
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Exchange Act and Section 27A of the Securities
Act. For this purpose, any statements contained herein that are not statements
of historical fact 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 discussed in Item 1A. Risk Factors and elsewhere in this Report. For more
information, see "Forward Looking Statements." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
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management's analysis, judgment, belief or expectation only as of the date
hereof. We do not undertake any obligation to update forward-looking statements
whether as a result of new information, future events or otherwise.

Overview


Steel Connect, Inc. is a diversified holding company with two, wholly-owned
subsidiaries, IWCO Direct and ModusLink, which serve the direct marketing and
supply chain management markets, respectively. For a more complete description
of the Company's segments, see "Item 1. Business" found elsewhere in this Form
10-K.

Impact of COVID-19

The 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 COVID-19
as a pandemic and the President of the United States declared the COVID-19
outbreak a national emergency, we experienced impacts to our customers' demand,
facility operations, supply chain, availability and productivity of 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 to our business continuity as a result of
temporary closures of certain of ModusLink's facilities in the third and fourth
quarters of fiscal year 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 as an
essential business, it had reduced operating levels and labor shifts due to
lower sales volume during the third quarter of fiscal year 2020.

To help combat these impacts and mitigate the financial impact of the COVID-19
pandemic 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 salary reductions, bonus
payment deferrals and temporary 401(k) match suspension. The temporary waiver of
board fees and company-wide salary reduction actions taken in the prior fiscal
year were fully restored prior to the beginning of fiscal year 2021, and the
majority of salary reductions were repaid prior to the fiscal quarter ended
January 31, 2021.We continue our focus on cash management and liquidity, which
includes aggressive working capital management.

In addition, we aim to closely monitor the impact of COVID-19 on all aspects of
our business and geographies, including its impact on our clients, employees,
suppliers, vendors, business partners and distribution channels. We believe that
such impacts could include, but are not limited to, the extent and severity of
the impact on our customers and suppliers; the continued disruption to the
demand for our businesses' products and services; the impact of the global
business and economic environment on liquidity and the availability of capital;
delays in payments of outstanding receivables beyond normal payment terms;
supply chain disruptions; uncertain demand; and the effect of any initiatives or
programs that we may undertake to address financial and operational challenges
faced by our customers. The full extent to which the pandemic will directly or
indirectly impact our business, results of operations and financial condition,
is difficult to 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-K, 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.

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 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 year-end), 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 costs will depend on a
number of factors.
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Reverse Stock Split


At our 2020 Annual Meeting of Stockholders, our stockholders approved a reverse
stock split of the issued and outstanding shares of our common stock at the
ratio of one-for-ten (the "Reverse Stock Split"). Our board is authorized to
determine when to file the necessary amendment to our Restated Certificate of
Incorporation for the Reverse Stock Split with the Delaware Secretary of State
at any time on or before the 12-month anniversary of stockholder approval
thereof. The board may, at its discretion, cause the filing of the amendment to
effect the Reverse Stock Split or abandon the amendment and not effect the
Reverse Stock Split if it determines that any such action is or is not in the
best interests of the Company and its stockholders. The board's decision as to
whether and when to effect the Reverse Stock Split will be based on a number of
factors, including market conditions, existing and expected trading prices for
our common stock and the Nasdaq Rules. Upon consummation of the Reverse Stock
Split, every ten shares of common stock held by a stockholder at that time will
be combined into one share of common stock. The Reverse Stock Split will affect
all of our stockholders uniformly and will not affect any stockholder's
percentage ownership interests in the Company or proportionate voting power,
except for minor adjustments due to the treatment of fractional shares. No
fractional shares will be issued in connection with the Reverse Stock Split.

Additionally, at our 2020 Annual Meeting of Stockholders, our stockholders also
approved the amendment to our Restated Certificate of Incorporation to reduce
the number of shares of authorized common stock (the "Authorized Shares
Reduction"), from 1,400,000,000 to 140,000,000. While our board currently
intends to implement the Authorized Shares Reduction to the extent that it
implements the Reverse Stock Split, our board reserves its right to elect not to
proceed with the Authorized Shares Reduction if it determines, in its sole
discretion, following stockholder approval, that this proposal is no longer in
the best interests of the Company or its stockholders.

For the risks associated with the Reverse Stock Split and the Authorized Shares
Reduction, including risks arising from their implementation or
non-implementation, see "Item 1A. Risk Factors-Risks Related to Ownership of Our
Common Stock - Our board may effect a reverse split of the issued and
outstanding shares of our common stock at the ratio of one-for-ten, the effects
of which we cannot predict with certainty and which may be materially adverse to
the value of your investment in our common stock."

Results of Operations

Fiscal Year 2021 compared to Fiscal Year 2020

Net Revenue:
                                                        As a %                                     As a %
                                                          of                                         of
                                Fiscal Year             Total              Fiscal Year             Total
                                   Ended                 Net                  Ended                 Net
                               July 31, 2021           Revenue            July 31, 2020           Revenue              $ Change              % Change
                                                                                     (In thousands)
Direct Marketing               $  387,510                   63.1  %       $  444,360                   56.8  %       $  (56,850)                  (12.8) %
Supply Chain                      226,256                   36.9  %          338,453                   43.2  %         (112,197)                  (33.1) %
Total                          $  613,766                  100.0  %       $  782,813                  100.0  %       $ (169,047)                  (21.6) %


Consolidated net revenue, for the fiscal year ended July 31, 2021, decreased by approximately $169.0 million, as compared to the fiscal year ended July 31, 2020.


Direct Marketing segment net revenue for the fiscal year ended July 31, 2021
decreased by approximately $56.9 million as compared with the prior fiscal year.
Direct Marketing segment net revenue decreased by: (1) approximately $36.2
million due to lower volume from client exits and (2) approximately $20.7
million due to overall lower customer demand. The client exits in the year ended
July 31, 2021 are expected to result in further decreases of Direct Marketing's
net revenue for the fiscal year ending July 31, 2022.

Supply Chain net revenue for the fiscal year ended July 31, 2021 decreased by
approximately $112.2 million as compared with the prior fiscal year. Supply
Chain net revenue decreased by: (1) approximately $60.0 million due to lower
volume from client exits and (2) approximately $52.2 million due to lower client
volume, the majority of which is associated with a client in the computing
market. Fluctuations in foreign currency exchange rates had an insignificant
impact on the Supply Chain segment's net revenues for the fiscal year ended
July 31, 2021, as compared to the same period in the prior year.
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Cost of Revenue:
                                                        As a %                                     As a %
                                                          of                                         of
                                Fiscal Year            Segment             Fiscal Year            Segment
                                   Ended                 Net                  Ended                 Net
                               July 31, 2021           Revenue            July 31, 2020           Revenue              $ Change              % Change
                                                                                     (In thousands)
Direct Marketing               $  305,601                   78.9  %       $  345,173                   77.7  %       $  (39,572)                  (11.5) %
Supply Chain                      178,552                   78.9  %          274,681                   81.2  %          (96,129)                  (35.0) %
Total                          $  484,153                   78.9  %       $  619,854                   79.2  %       $ (135,701)                  (21.9) %



Consolidated 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,
contract labor, consulting, paper for direct mailing, fulfillment and shipping,
and applicable facilities costs. Cost of revenue for the fiscal year ended
July 31, 2021 included materials procured on behalf of our Supply Chain clients
of $109.0 million, as compared to $190.3 million for the prior year, a decrease
of $81.2 million. Consolidated cost of revenue decreased by $135.7 million for
the fiscal year ended July 31, 2021, as compared to the prior year, primarily
due to lower labor and material costs as a result of the decrease in revenue.
Consolidated gross margin percentage for the fiscal year ended July 31, 2021
increased 30 basis points to 21.1% from 20.8% in the fiscal year ended July 31,
2020, primarily due to favorable changes in sales mix, our focus on customer
rationalization to improve profitability, as well as cost reduction initiatives
in both segments to offset the impact of COVID-19.

Direct Marketing's cost of revenue decreased by $39.6 million for the fiscal
year ended July 31, 2021, as compared to the prior fiscal year. The decrease was
primarily due to lower material and labor costs as a result of lower sales
volume. The Direct Marketing segment's gross margin percentage decreased by 120
basis points to 21.1% for the fiscal year ended July 31, 2021, as compared to
22.3% for the fiscal year ended July 31, 2020 primarily due to changes in
customer mix and the competitive pricing pressures within the marketplace.
Supply Chain's cost of revenue decreased by $96.1 million during the fiscal year
ended July 31, 2021, as compared to the prior fiscal year. The decrease was
primarily due to lower material and labor costs due to lower sales volume. The
Supply Chain segment's gross margin percentage increased by 230 basis points to
21.1% for the fiscal year ended July 31, 2021, as compared to 18.8% for the
fiscal year ended July 31, 2020, primarily due to improved sales mix towards
higher margin services. Fluctuations in foreign currency exchange rates had an
insignificant impact on the Supply Chain segment's gross margin for the fiscal
year ended July 31, 2021, as compared to the same period in the prior year.

Selling, General and Administrative:

                                                            As a %                                     As a %
                                                              of                                         of
                                    Fiscal Year            Segment             Fiscal Year            Segment
                                       Ended                 Net                  Ended                 Net
                                   July 31, 2021           Revenue            July 31, 2020           Revenue              $ Change             % Change
                                                                                         (In thousands)
Direct Marketing                   $   47,254                   12.2  %       $   58,992                   13.3  %       $ (11,738)                  (19.9) %
Supply Chain                           40,877                   18.1  %           35,820                   10.6  %           5,057                    14.1  %
Sub-total                              88,131                   14.4  %           94,812                   12.1  %          (6,681)                   (7.0) %
Corporate-level activity                8,397                                      8,449                                       (52)                   (0.6) %
Total                              $   96,528                   15.7  %       $  103,261                   13.2  %       $  (6,733)                   (6.5) %



Consolidated selling, general and administrative expenses for the fiscal year
ended July 31, 2021 decreased by approximately $6.7 million, as compared to the
same period in the prior year. Direct Marketing's selling, general and
administrative expenses for the fiscal year ended July 31, 2021 decreased by
approximately $11.7 million, primarily due to a lower employee-related costs,
sales and marketing, and other expenses. Supply Chain's selling, general and
administrative expenses for the fiscal year ended July 31, 2021 increased
approximately $5.1 million, primarily due to an increase in costs associated
with the information technology function, offset partially by a decrease
compensation costs. Corporate-level activity decreased slightly compared to the
prior year. Fluctuations in foreign currency exchange rates had an insignificant
impact on the Supply Chain segment's selling, general and administrative
expenses for the fiscal year ended July 31, 2021.

Goodwill Impairment Charge:

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During the fiscal year ended July 31, 2021, the Company recorded a non-cash
pre-tax goodwill impairment charge of $25.7 million for the Direct Marketing
segment. The Company did not record any goodwill impairment charge during the
prior fiscal year. For a discussion of the drivers of the goodwill impairment
charge, see Note 5 to the consolidated financial statements found elsewhere in
this Form 10-K.

Amortization of Intangible Assets:


Intangible asset amortization expense of $20.3 million and $27.3 million during
the fiscal years ended July 31, 2021 and 2020, respectively, relates to
intangible assets acquired by the Company in connection with its acquisition of
IWCO Direct. Amortization expense decreased by approximately $7.0 million for
the year ended July 31, 2021 as compared to the prior fiscal year due to
trademarks and tradenames that became fully amortized in December 2020 and 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:

Interest expense of $31.1 million for the year ended July 31, 2021 decreased by
approximately $2.8 million as compared to the prior fiscal year primarily due to
lower average outstanding debt balances.

Other Gains, Net:


Other gains, net for the fiscal year ended July 31, 2021 were approximately $1.2
million. Other gains, net included gains of $3.2 million from the derecognition
of accrued pricing liabilities in the Supply Chain segment, partially offset by
$1.9 million in net realized and unrealized foreign exchange losses in the
Supply Chain segment.

Other gains, net for the fiscal year ended July 31, 2020 were approximately $2.1
million. Other gains, net included gains of $0.8 million from the derecognition
of accrued pricing liabilities in the Supply Chain segment and $0.9 million in
net realized and unrealized foreign exchange gains in the Supply Chain segment.

Income Tax Expense:

Company recorded income tax expense of approximately $1.6 million and $5.9 million for the fiscal years ended July 31, 2021 and 2020, respectively. The decrease in income tax expense is primarily due to lower taxable income in foreign jurisdictions, as compared to the prior year.

Liquidity and Capital Resources

Anticipated Sources and Uses of Cash Flow


Historically, the Company has financed its operations and met its capital
requirements primarily through funds generated from operations, the sale of it
securities, borrowings from lending institutions and sale of facilities that
were not fully utilized. The following table summarizes our liquidity:
                                                                                    July 31,
                                                                                      2021
                                                                                 (In thousands)
Cash and cash equivalents                                                      $        96,931
Readily available borrowing capacity under Cerberus Credit Facility                     25,000

Readily available borrowing capacity under Midcap Credit Facility

             8,687
                                                                               $       130,618



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 fiscal year ended July 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
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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.

Consolidated net working capital deficit was $4.6 million at July 31, 2021,
compared with $26.4 million at July 31, 2020. Included in net working capital
were cash and cash equivalents of $96.9 million at July 31, 2021 and $75.9
million at July 31, 2020. The improvement in the net working capital deficit was
primarily driven by higher cash and cash equivalents and lower accounts payable,
partially offset by lower accounts receivable due to earlier customer cash
receipts, reflecting our focus on cash collection, and reduced sales levels at
IWCO Direct, as well as increased lease liabilities recognized due to the
adoption of new accounting standards.

Sources and uses of cash for the year ended July 31, 2021, as compared to the year ended July 31, 2020, are as follows:


                                                 Fiscal Year Ended
                                                     July 31,
                                                2021          2020
                                                  (In thousands)

Net cash provided by operating activities $ 23,067 $ 71,624 Net cash used in investing activities $ (3,326) $ (11,886) Net cash used in financing activities $ (9,837) $ (12,284)




Operating Activities: Net cash provided by operating activities was $23.1
million for the fiscal year ended July 31, 2021. The $48.6 million decrease as
compared to the prior fiscal year was primarily due lower gross profits, as a
result of lower sales volumes, and a reduction in funds held for clients. 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 was $3.3 million and
$11.9 million for the fiscal year ended July 31, 2021 and 2020, respectively,
and was primarily comprised of capital expenditures. The decrease in capital
expenditures in the fiscal year ended July 31, 2021 is primarily due to capital
expenditure management as a result of the COVID-19 pandemic.

Financing Activities: The $9.8 million of cash used in financing activities
during the fiscal year ended July 31, 2021 was primarily due to $7.6 million in
payments of long-term debt and $2.1 million in payment of preferred dividends.
The $12.3 million of cash used in financing activities during the fiscal year
ended July 31, 2020 was primarily due to $6.0 million of net payments under
revolving credit facilities, $3.2 million in payments of long-term debt, $2.1
million in payment of preferred dividends and $0.9 million in payments for
financing the MidCap Credit Agreement and amending the Cerberus Credit Facility.

IWCO Direct's Competitive Improvement Plan


IWCO Direct's CIP contemplates a total investment of approximately $54.0 million
primarily over a 24-month period. The Company estimates the CIP cost will
consist of approximately: (1) $38.0 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 year-end), and (2)
$16.0 million for severance, employee retention, facilities optimization, and
other implementation costs. The Company currently expects approximately half of
cash CIP costs will be expended within the next 12 months, however, the timing
and amount of costs will depend on a number of factors.

Debt and Financing Arrangements

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

                                                 July 31,
                                                   2021
                                              (In thousands)

Cerberus Term Loan due December 15, 2022 $ 364,330 7.50% Convertible Note due March 1, 2024

              14,940
                                             $       379,270


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Following is a summary of Company's outstanding debt and financing agreements. Refer to Note 7 to our consolidated financial statements for further information.

Cerberus Credit Facility


On December 15, 2017, the Company entered into a Financing Agreement (the
"Financing Agreement"), by and among the Company, Instant Web, LLC, a Delaware
corporation and wholly-owned subsidiary of IWCO Direct (as "Borrower"), IWCO
Direct, and certain of IWCO Direct's subsidiaries (together with IWCO Direct,
the "Guarantors"), the lenders from time to time party thereto and Cerberus
Business Finance, LLC, as collateral agent and administrative agent for the
lenders. Steel Connect, Inc. is not a borrower or a guarantor under the
Financing Agreement.

The Financing Agreement which matures on December 15, 2022, provides for a
$393.0 million term loan facility (the "Term Loan") and a $25.0 million
revolving credit facility (the "Revolving Facility") (together, the "Cerberus
Credit Facility"). Proceeds of the Cerberus Credit Facility were used (i) to
finance a portion of the Company's acquisition of IWCO Direct (the "IWCO Direct
Acquisition"), (ii) to repay certain existing indebtedness of the Borrower and
its subsidiaries, (iii) for working capital and general corporate purposes and
(iv) to pay fees and expenses related to the Financing Agreement and the IWCO
Direct Acquisition.

Borrowings under the Cerberus Credit Facility bear interest, at the Borrower's
option, at a Reference Rate plus 3.75% or a LIBOR Rate plus 6.5%, each as
defined the Financing Agreement. The initial interest rate under the Cerberus
Credit Facility is at the LIBOR Rate option.

The Term Loan under the Cerberus Credit Facility is repayable in consecutive
quarterly installments, each of which will be in an amount equal per quarter of
$1.5 million and each such installment to be due and payable, in arrears, on the
last day of each calendar quarter commencing on March 31, 2018 and ending on the
earlier of (a) December 15, 2022 and (b) upon the payment in full of all
obligations under the Financing Agreement and the termination of all commitments
under the Financing Agreement. Further, the Term Loan would be permanently
reduced pursuant to certain mandatory prepayment events including an annual
"excess cash flow sweep" of 50% of the consolidated excess cash flow, with a
step-down to 25% when the Leverage Ratio (as defined in the Financing Agreement)
is below 3.50:1.00; provided that, in any calendar year, any voluntary
prepayments of the Term Loan shall be credited against the Borrower's "excess
cash flow" prepayment obligations on a dollar-for-dollar basis for such calendar
year.

On March 30, 2020, IWCO Direct entered into Amendment No. 2 to the Financing
Agreement ("Amendment No. 2"). Amendment No. 2 amended the Financing Agreement
to permit Borrower to defer approximately $3.0 million in principal payments,
due between March 31, 2020 and June 30, 2020, until loan maturity and to forgo
the payment of approximately $4.3 million in principal payments pursuant to the
excess cash flow sweep in the Financing Agreement. In addition, while Amendment
No. 2 limited the total amount Borrower may distribute to the Company for
management fees and tax sharing to $5.0 million during the calendar year ended
December 31, 2020, Amendment No. 2 also amended the calculation of the excess
cash flow defined in the Financing Agreement, for the same period, to eliminate
any adverse impact to Borrower from the distribution limit or from the deferral
of principal payments. Borrower is required to continue to make all interest
payments. In addition, Amendment No. 2 amended the liquidity requirement from
$15.0 million to $14.5 million. Amendment No. 2 was part of a comprehensive
precautionary approach to increase the IWCO Direct's cash position and maximize
its financial flexibility in light of the volatility in the global markets
resulting from the COVID-19 outbreak.

Borrowings under the Financing Agreement are fully guaranteed by the Guarantors
and are collateralized by substantially all the assets of the Borrower and the
Guarantors and a pledge of all of the issued and outstanding equity interests of
each of IWCO Direct's subsidiaries.

The Financing Agreement contains certain representations, warranties, events of
default, mandatory prepayment requirements, as well as certain affirmative and
negative covenants customary for financing agreements of this type. These
covenants include restrictions on borrowings, investments and dispositions, as
well as limitations on the ability of the Borrower and the Guarantors to make
certain capital expenditures and pay dividends. IWCO Direct's failure to
maintain compliance with the covenants could prevent the Borrower from borrowing
additional amounts and could result in a default under any of the debt
agreements. Such default could cause the outstanding indebtedness to become
immediately due and payable, by virtue of cross-acceleration or cross-default
provisions. Upon the occurrence and during the continuation of an event of
default under the Financing Agreement, the lenders under the Financing Agreement
may, among other things, terminate all commitments and declare all or a portion
of the loans under the Financing Agreement immediately due and payable and
increase the interest rate at which loans and obligations under the Financing
Agreement bear interest. If IWCO Direct's indebtedness is accelerated, it
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cannot be certain that it will have sufficient funds available to pay the
accelerated indebtedness (together with accrued interest and fees), or that it
will have the ability to refinance the accelerated indebtedness on terms
favorable to IWCO Direct or at all. This could have serious consequences to its
financial condition, operating results and business, and could cause the
Borrower to become insolvent or enter bankruptcy proceedings, and shareholders
may lose all or a portion of their investment because of the priority of the
claims of its creditors on its assets. During the fiscal year ended July 31,
2021, the IWCO Direct did not trigger any of these covenants. IWCO Direct
believes it will remain in compliance with the Financing Agreement's covenants
for the next twelve months. While IWCO Direct currently expects to be in
compliance in future periods 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.

As of July 31, 2021, and the date of the filing of this Form 10-K, IWCO Direct
had the full $25.0 million readily available borrowing capacity under its
Revolving Facility. As of July 31, 2021, the principal amount outstanding on the
Term Loan was $364.3 million, and the current and long-term net carrying value
of the Term Loan was $363.8 million. IWCO Direct intends to refinance this debt,
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. It may not be able to engage in any of
these activities or engage in these activities on desirable terms, which could
result in a default on its debt obligations and have a material adverse effect
on the Company's financial condition and liquidity.

7.50% Convertible Senior Note


On February 28, 2019, the Company entered into that certain 7.50% Convertible
Senior Note Due 2024 Purchase Agreement with SPHG Holdings whereby SPHG Holdings
loaned the Company $14.9 million in exchange for a 7.50% Convertible Senior Note
due 2024 (the "SPHG Note"). The SPHG Note bears interest at the fixed rate of
7.50% per year, payable semi-annually in arrears on March 1 and September 1 of
each year, beginning on September 1, 2019. The SPHG Note will mature on March 1,
2024 (the "SPHG Note Maturity Date"), unless earlier repurchased by the Company
or converted by the holder in accordance with its terms prior to such maturity
date.

At its election, the Company may pay some or all of the interest due on each
interest payment date by increasing the principal amount of the SPHG Note in the
amount of such interest due or any portion thereof (such payment of interest by
increasing the principal amount of the SPHG Note referred to as "PIK Interest"),
with the remaining portion of the interest due on such interest payment date
(or, at the Company's election, the entire amount of interest then due) to be
paid in cash by the Company. Following an increase in the principal amount of
the SPHG Note as a result of a payment of PIK Interest, the SPHG Note will bear
interest on such increased principal amount from and after the date of such
payment of PIK Interest. SPHG Holdings has the right to require the Company to
repurchase the SPHG Note upon the occurrence of certain fundamental changes,
subject to certain conditions, at a repurchase price equal to 100% of the
principal amount of the SPHG Note plus accrued and unpaid interest. The Company
will have the right to elect to cause the mandatory conversion of the SPHG Note
in whole, and not in part, at any time on or after March 6, 2022, subject to
certain conditions including that the stock price of the Company exceeds a
certain threshold. 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 (the "Conversion Rate"),
subject to, and in accordance with, the settlement provisions of the SPHG Note.
For any conversion of the SPHG Note, if the Company is required to obtain and
has not received approval from its stockholders in accordance with Nasdaq Stock
Market Rule 5635 to issue 20% or more of the total shares of common stock
outstanding upon conversion (including upon any mandatory conversion) of the
SPHG Note prior to the relevant conversion date (or, if earlier, the 45th
scheduled trading day immediately preceding the SPHG Note Maturity Date), the
Company shall deliver to the converting holder, in respect of each $1,000
principal amount of the SPHG Note being converted, a number of shares of common
stock determined by reference to the Conversion Rate, together with a cash
payment, if applicable, in lieu of delivering any fractional share of common
stock based on the volume weighted average price (VWAP) of its common stock on
the relevant conversion date, on the third business day immediately following
the relevant conversion date. As of July 31, 2021, the net carrying value of the
SPHG Note was $9.3 million.

MidCap Credit Facility

On December 31, 2019, ModusLink, as borrower, and certain of its subsidiaries as
guarantors (the "MidCap Guarantors"), entered into a revolving credit and
security agreement (the "MidCap Credit Agreement"), with MidCap Financial Trust,
as lender and as agent ("MidCap"). The MidCap Credit Agreement, which expires on
December 31, 2022, provides for a maximum credit commitment of $12.5 million and
a sublimit of $5.0 million for letters of credit. The actual maximum credit
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available under the MidCap Credit Agreement varies from time to time and is
determined by calculating the applicable borrowing base, which is based upon
applicable percentages of the values of (a) eligible accounts receivable; plus
(b) the least of (i) the orderly liquidation value of eligible inventory, (ii)
the value of eligible inventory based on first-in-first-out cost or market cost
and other adjustments, and (iii) $4.5 million; minus (c) reserves; all as
specified in the MidCap Credit Agreement. Amounts borrowed under the MidCap
Credit Agreement are due and payable, together with all unpaid interest, fees
and other obligations, on December 31, 2022.

Generally, borrowings under the MidCap Credit Agreement bear interest at a rate
per annum equal to the LIBOR Rate (as defined in the MidCap Credit Agreement),
which is subject to adjustment by MidCap, plus a margin of 4% per annum. In
addition to paying interest on outstanding principal under the MidCap Credit
Agreement, ModusLink is required to pay an unused line fee of 0.50% per annum.
ModusLink is also required to pay a customary letter of credit fee equal to the
applicable margin on loans bearing interest at the LIBOR Rate.

Obligations under the MidCap Credit Agreement are guaranteed by the MidCap
Guarantors, and the MidCap Credit Agreement is secured by security interests in
substantially all of the assets of ModusLink and the MidCap Guarantors,
including a pledge of all of the equity interests of each subsidiary of
ModusLink that is a domestic entity (subject to certain limited exceptions).
Steel Connect, Inc. is not a borrower or a guarantor under the MidCap Credit
Agreement.

The MidCap Credit Agreement includes certain representations and warranties of
ModusLink, as well as events of default and certain affirmative and negative
covenants that are customary for credit agreements of this type. These covenants
include restrictions on borrowings, investments and dispositions by ModusLink,
as well as limitations on ModusLink's ability to make certain distributions and
to enter into transactions with affiliates. The MidCap Credit Agreement requires
compliance with certain financial covenants providing for the maintenance of a
minimum fixed charge coverage ratio, all as more fully described in the MidCap
Credit Agreement.

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 and MidCap as lender and agent. Amendment No. 1 amended
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") to the Company. Payment of the Special Distributions
will eliminate the availability of the general dividend basket for the fiscal
year ending July 31, 2021. Special Distributions totaling $40.0 million were
made by ModusLink to the Company during the fiscal year ended July 31, 2021. In
addition, Amendment No. 1 incorporated a new minimum liquidity financial
covenant, which required that the sum of excess availability under the MidCap
credit agreement and the amount of qualified cash and cash equivalents of the
borrower was 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 increased the percentage
of eligible accounts included in the borrowing base from 50% to 75% and amended
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.

On June 2, 2021, ModusLink entered into a Second Amendment to the MidCap credit
agreement ("Amendment No. 2") by and among ModusLink, certain of ModusLink's
subsidiaries, and MidCap as lender and agent. Amendment No. 2 amended the MidCap
Credit Agreement to extend the time period for payment from ModusLink to the
Company of special distributions to July 31, 2022. In addition, the unused line
fee was increased to 0.65% in Amendment No. 2 and certain other technical
amendments were incorporated.

On July 1, 2021, ModusLink entered into a Third Amendment to the Credit
Agreement ("Amendment No. 3") which increases the effective cap on eligibility
of unpaid Eligible Accounts, as defined in the Credit Agreement, from a certain
obligor to $8.0 million. In addition, Amendment No. 3 amended the Credit
Agreement to require disclosure by ModusLink of certain discount payments owing
to certain of its customers which are not expected to be deducted from the
Borrowing Base in the future.

Upon the occurrence and during the continuation of an event of default under the
MidCap Credit Agreement, MidCap may, among other things, declare all obligations
under the MidCap Credit Agreement immediately due and payable and increase the
interest rate at which loans and other obligations under the MidCap Credit
Agreement bear interest. The MidCap Credit Agreement expires on December 31,
2022. 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 fiscal year ended July 31, 2021, ModusLink was in compliance with
all financial covenants in the MidCap Credit Agreement. ModusLink believes it
will remain in compliance with the MidCap Credit
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Agreement's covenants for the next twelve months. At July 31, 2021, the Company
did not have any balance outstanding under the MidCap Credit Facility and had a
readily available borrowing capacity of $8.7 million.

Steel Connect, Inc., as Parent


As indicated above, Steel Connect, Inc. (excluding its operating subsidiaries,
the "Parent") is not a borrower or a guarantor under its subsidiaries' credit
facilities, and these credit facilities place limits on distributions to the
Parent. Under the Financing Agreement, IWCO Direct is permitted to make
distributions to the Parent, in an aggregate amount not to exceed $5.0 million
in any fiscal year for management service fees. The Parent is entitled to
receive additional cash remittances under a tax sharing agreement from IWCO
Direct; however, the total amount that IWCO Direct may distribute to the Parent
for management fees and tax sharing during the calendar year ended December 31,
2020, was limited to $5.0 million. Distributions by ModusLink to the Parent are
limited to $2.0 million in any fiscal year under the terms of the MidCap Credit
Agreement; provided, however, pursuant to the MidCap Credit Agreement amendments
described above the ModusLink is permitted to make a special cash dividends to
be made on or prior to July 31, 2022 in an aggregate amount not to exceed $50.0
million to the Company. Payment of this Special Distributions will eliminate the
availability of the general dividend basket for the fiscal year ending July 31,
2021 and July 31, 2022. Special Distributions totaling $40.0 million were made
by ModusLink to the Company during the fiscal year ended July 31, 2021.
Distributions by ModusLink to the Parent, other than periods in which Special
Distributions are permitted, are limited to $2.0 million in any fiscal year
under the terms of the MidCap Credit Agreement.

The Parent believes it 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 Parent and its
operating businesses will continue to have access to their lines of credit if
their financial performance does not satisfy the financial covenants set forth
in their respective financing agreements, which could also result in the
acceleration of their debt obligations by their respective lenders, adversely
affecting liquidity.

Off-Balance Sheet Financing Arrangements

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

Contractual Obligations


Our principal uses of cash will be to provide working capital, meet debt service
requirements, fund capital expenditures and execute management's strategic plans
including the IWCO Direct CIP. As of July 31, 2021, we had contractual cash
obligations to repay debt, to purchase goods and services and to make payments
under operating and capital lease leases. As of July 31, 2021, payments due
under these long-term obligations are as follows:

                                             Less than 1                                               More than 5
                                                 year            2-3 years          4-5 years             years              Total
                                                                                  (In thousands)
Debt(1)                                      $   6,000          $ 373,270          $       -          $        -          $ 379,270
Interest payments(2)                            30,045             12,581                  -                   -             42,626
Operating lease liabilities                     15,362             17,242             13,528              14,255             60,387
Financing lease liabilities                          6                114                  -                   -                120
Preferred dividend payments                      2,100              4,200              4,200                      †          10,500
                                             $  53,513          $ 407,407          $  17,728          $   14,255          $ 492,903



(1) Represents principal amount of debt and only includes scheduled principal
payments.
(2) Represents expected interest payments on debt. Interest payments based on
variable interest rates were determined using the interest rate in effect as of
July 31, 2021.
† Holders of the Preferred Stock receive dividends at 6% per annum.

Critical Accounting Policies


Our significant accounting policies are discussed in Note 2 to our audited
consolidated financial statements. The discussion and analysis of our financial
condition and results of operations are based on our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
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statements and the reported amounts of revenue and expenses during the reporting
period. The most significant of these estimates and assumptions relate to: (1)
revenue recognition; (2) valuation allowances for trade and other receivables
and inventories; (3) the valuation of goodwill, other intangible assets and
long-lived assets; (4) contingencies, including litigation reserves; (5)
restructuring charges and related severance expenses; (6) litigation reserves;
(7) pension obligations, (8) going concern assumptions, and (9) accrued pricing
and tax related liabilities. Of the accounting estimates we routinely make
relating to our critical accounting policies, those estimates made in the
process of: recognition of revenue; determining the valuation of inventory and
related reserves; accounting for impairment of goodwill, other intangible assets
and long-lived assets; and establishing income tax valuation allowances and
liabilities are the estimates most likely to have a material impact on our
financial position and results of operations. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Changes in estimates are reflected in the
periods in which they become known. However, because these estimates inherently
involve judgments and uncertainties, there can be no assurance that actual
results will not differ materially from those estimates.

We believe that our critical accounting estimates have the following attributes:
(1) we are required to make assumptions about matters that are uncertain and
require judgment at the time of the estimate; (2) use of reasonably different
assumptions could have changed our estimates, particularly with respect to
recoverability of assets; and (3) changes in the estimate could have a material
effect on our financial condition or results of operations. We believe the
critical accounting policies below contain the more significant judgments and
estimates used in the preparation of our financial statements:

•Revenue recognition •Accounting for goodwill, other intangible assets and long-lived assets •Income taxes

Revenue Recognition


The Company recognizes revenue from its contracts with customers primarily from
the sale of marketing solutions offerings and supply chain management services.
Revenue is recognized when control of the promised goods or services is
transferred to a customer, in an amount that reflects the consideration the
Company expects to be entitled to in exchange for those goods or services. For
IWCO Direct's marketing solutions offerings and ModusLink's supply chain
management services arrangements, the goods and services are considered to be
transferred over time as they are performed. Taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by the Company from a
customer, are excluded from revenue.

Marketing solutions offerings.


IWCO Direct'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 Direct'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, fees for professional services and
fees for the sale of perpetual software licenses in ModusLink's e-Business
operations. Except for perpetual software licenses, 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. Revenue from the sale of
perpetual licenses is recognized at a point in time upon execution of the
relevant license agreement and when delivery has taken place.

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Significant Judgments

The Company's contracts with customers may include promises to transfer multiple
products and services to a customer. Determining whether products and services
are considered distinct performance obligations that should be accounted for
separately versus together may require significant judgment. For arrangements
with multiple performance obligations, the Company allocates revenue to each
performance obligation based on its relative standalone selling price. Judgment
is required to determine the standalone selling price for each distinct
performance obligation. The Company generally determines standalone selling
prices based on the prices charged to customers and uses a range of amounts to
estimate standalone selling prices when we sell each of the products and
services separately and need to determine whether there is a discount that needs
to be allocated based on the relative standalone selling prices of the various
products and services. The Company typically has more than one range of
standalone selling prices for individual products and services due to the
stratification of those products and services by customers and circumstances. In
these instances, the Company may use information such as the type of customer
and geographic region in determining the range of standalone selling prices.

The Company may provide credits or incentives to customers, which are accounted
for as variable consideration when estimating the transaction price of the
contract and amounts of revenue to recognize. The amount of variable
consideration to include in the transaction price is estimated at contract
inception using either the estimated value method or the most likely amount
method based on the nature of the variable consideration. These estimates are
updated at the end of each reporting period as additional information becomes
available and revenue is recognized only to the extent that it is probable that
a significant reversal of any amounts of variable consideration included in the
transaction price will not occur.

Principal Versus Agent Revenue Recognition


For revenue generated from contracts with customers involving another party, the
Company considers whether it maintains control of the specified goods or
services before they are transferred to the customer, as well as other
indicators such as the party primarily responsible for fulfillment and
discretion in establishing price. Revenues are recognized on a gross basis if
the Company is acting in the capacity of a principal and on a net basis if its
acting in the capacity of an agent. Certain of IWCO Direct's marketing services
revenues are presented on a net basis as it does not maintain control of the
specified goods or services before they are transferred to the client nor is
IWCO Direct primarily responsible for fulfillment.

Accounting for Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets


Goodwill, which is not amortized, represents the difference between the purchase
price and the fair value of identifiable net assets acquired in a business
combination. The Company's goodwill of $231.5 million as of July 31, 2021
relates to the Company's Direct Marketing reporting unit, which is the only
reporting unit in the Direct Marketing reportable segment. We review goodwill
for impairment annually in the fourth quarter and test for impairment during the
year if an event occurs or circumstances change that would indicate the carrying
amount may be impaired. An entity can choose between using the qualitative or
Step 0 approach, or perform a quantitative test for impairment.

For the Step 0 approach, an entity may assess qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. An entity has an unconditional option to bypass
the Step 0 assessment for any reporting unit in any period and proceed directly
to performing the quantitative goodwill impairment test. An entity may resume
performing the Step 0 assessment in any subsequent period.

For the quantitative test, the Company will calculate the fair value of a
reporting unit and compare it to its carrying amount. There are several methods
that may be used to estimate a reporting unit's fair value, including the income
approach, the market approach and/or the cost approach. The Company generally
determines the fair value of its reporting unit using a discounted cash flow
valuation approach. If a potential impairment is identified, the Company will
determine the amount of goodwill impairment by comparing the fair value of a
reporting unit with its carrying amount. To the extent the carrying value of a
reporting unit exceeds its fair value, a goodwill impairment charge is
recognized.

During the three months ended April 30, 2021, IWCO Direct 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 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
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from these 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 goodwill and
other long-lived assets may be impaired. The customers who are transitioning
their direct marketing spending to other companies accounted for approximately
$10.9 million or 7.0% and $13.1 million or 7.0% of the Company's revenues for
the three months ended April 30, 2021 and 2020, respectively. As a result, the
Company performed an interim impairment test of Direct Marketing's goodwill and
other long-lived assets as of April 30, 2021. The Company determined that the
goodwill was impaired, and recorded a non-cash impairment charge of $25.7
million for the three months ended April 30, 2021.

As of the Company's annual impairment test date on June 30, 2021, the Company
performed a quantitative impairment test of goodwill. The Company calculated the
fair value of the Direct Marketing reporting unit which indicated the fair value
of the reporting unit exceeded its carrying value by greater than 10%, and
therefore, as of June 30, 2021, there was no goodwill impairment.

For each of the goodwill impairment tests performed during the year ended
July 31, 2021, the fair value of the Direct Marketing reporting unit was
calculated using a discounted cash flow ("DCF") model (a form of the income
approach) using the Company's current projections, which are subject to various
risks and uncertainties associated with its forecasted revenue, expenses and
cash flows, as well as the duration and expected impact on its business from the
COVID-19 pandemic. The DCF calculation was dependent on estimates for future
sales, operating income, depreciation and amortization, income tax payments,
working capital changes and capital expenditures, as well as expected long-term
growth rates for cash flows. All of these factors are affected by economic
conditions related to the industries in which the Company and its customers
operate, as well as in conditions in the global capital markets. The discount
rates utilized in the DCF valuation are based upon our weighted average cost of
capital, which takes into account the relative weights of each component of
capital structure (equity and debt) and represents the expected cost of new
capital adjusted as appropriate to consider the risk inherent in future cash
flows of the reporting unit. Future cash flow estimates are, by their nature,
subjective, and actual results may differ materially from the Company's
estimates. 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. If the
Company's ongoing cash flow projections are not met, the Company may have to
record further impairment charges in future periods.

Other intangible assets, net, as of July 31, 2021, include customer
relationships with a gross balance of $192.7 million and carrying balance of
$115.0 million. The customer relationship intangible assets are being amortized
on an accelerated basis over an estimated useful life of 15 years. Intangible
assets are reviewed for impairment on an interim basis when certain events or
circumstances exist. If the carrying amount of other intangible assets, net is
not recoverable, the carrying amount of such assets is reduced to fair value.
The Company performed a qualitative assessment of whether it was more likely
than not that its other intangibles assets were impaired as of July 31, 2021.
The Company reviewed its previous forecasts and assumptions based on the
Company's current projections, that are subject to various risks and
uncertainties, including forecasted revenues, expenses and cash flows, including
the duration and extent of impact to our businesses from the COVID-19 pandemic.
Based upon that assessment, the Company concluded it was not more likely than
not that the other intangible assets were impaired as of July 31, 2021.

In addition to goodwill and identifiable intangible assets recognized in
connection with our business acquisitions, our long-lived assets also include
property, plant and equipment, capitalized software development costs for
software to be sold, leased or otherwise marketed, and certain long-term
investments. As July 31, 2021, the consolidated carrying values of our property,
plant and equipment were $58.9 million, which represented 8.7% of total assets.
We review the valuation of our long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset exceeds its fair value or net realizable value expected to
result from the asset's use and eventual disposition. We use a variety of
factors to assess valuation, depending upon the asset. Long-lived assets are
evaluated based upon the expected period the asset will be utilized and other
factors depending on the asset, including estimated future sales, profits and
related cash flows. Changes in estimates and judgments on any of these factors
could have a material impact on our results of operations and financial
position.

Income Taxes


The Company has net operating loss carryforwards for federal and state tax
purposes of approximately $2.1 billion and $111.1 million, respectively, as of
July 31, 2021. A 5% reduction in the Company's current valuation allowance on
these federal and state net operating loss carryforwards would result in an
income tax benefit of approximately $23.4 million. Income taxes are accounted
for under the provisions of ASC 740, Income Taxes, using the asset and liability
method whereby deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or
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settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance, if based on the weight
of available evidence, it is more likely than not that some portion or all of
the recorded deferred tax assets will not be realized in future periods. This
methodology is subjective and requires significant estimates and judgments in
the determination of the recoverability of deferred tax assets and in the
calculation of certain tax liabilities. As of July 31, 2021 and 2020, a
valuation allowance has been recorded against the deferred tax asset in the U.S.
and certain of its foreign subsidiaries since management believes that after
considering all the available objective evidence, both positive and negative,
historical and prospective, with greater weight given to historical evidence, it
is more likely than not that these assets will not be realized. In each
reporting period, we evaluate the adequacy of our valuation allowance on our
deferred tax assets. In the future, if the Company is able to demonstrate a
consistent trend of pre-tax income, then at that time management may reduce its
valuation allowance accordingly. The Company also performs a valuation allowance
scheduling exercise based on the deferred tax assets and liabilities as of
July 31, 2021. From a state perspective, the Company does not have enough
deferred tax assets in certain state jurisdictions to offset future income from
the reversal of its deferred tax liabilities, and therefore a state deferred tax
liability was recorded in the period ending July 31, 2021.

In addition, the calculation of the Company's tax liabilities involves dealing
with uncertainties in the application of complex tax regulations in several tax
jurisdictions. The Company is periodically reviewed by domestic and foreign tax
authorities regarding the amount of taxes due. These reviews include questions
regarding the timing and amount of deductions and the allocation of income among
various tax jurisdictions. In evaluating the exposure associated with various
filing positions, we record estimated reserves for exposures. Based on our
evaluation of current tax positions, the Company believes it has appropriately
accrued for exposures as of July 31, 2021.

Recent Accounting Pronouncements

For a discussion of the Company's new or recently adopted accounting pronouncements, see Note 2 to the consolidated financial statements found elsewhere in this Form 10-K.

Tax Benefits Preservation Plan


Our past operations generated significant net operating losses, or NOLs. On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was
enacted in response to the COVID-19 pandemic which among, other things, amends
the treatment of NOLs. Under federal tax laws, for NOLs arising in tax years
beginning before January 1, 2018, we generally can use any such NOLs and certain
related tax credits to reduce ordinary income tax paid in our prior two tax
years or on our future taxable income for up to 20 years, at which point they
"expire" for such purposes. Until they expire, we can "carry forward" NOLs and
certain related tax credits that we do not use in any particular year to offset
taxable income in future years. For NOLs arising in tax years beginning after
December 31, 2017 and before January 1, 2021, we are allowed to carryback such
NOLs to each of the five taxable years preceding the taxable year of such losses
and generally can use any such NOLs and certain related tax credits to reduce
ordinary income tax paid on our future taxable income indefinitely; however,
except for NOLs generated in tax years beginning after December 31, 2017 and
prior to January 1, 2021 (which can be carried back to reduce taxable income for
the prior five tax years), any such NOLs cannot be used to reduce ordinary
income tax paid in prior tax years. In addition, the deduction for NOLs arising
in tax years beginning after December 31, 2020 is limited to 80 percent of our
taxable income for any tax year (computed without regard to the NOL deduction).
NOLs arising in tax years beginning before January 1, 2018, are referred to
herein as "Current NOLs." The Company had net NOL carryforwards for federal and
state tax purposes of approximately $2.1 billion and $111.0 million,
respectively, at July 31, 2021, substantially all of which arose in tax years
ending before January 1, 2018. While we cannot estimate the exact amount of NOLs
that we will be able use to reduce future income tax liability because we cannot
predict the amount and timing of our future taxable income, we believe our NOLs
are a very valuable asset. For more information, see "Item 1A. Risk
Factors-Risks Related to Taxation-We may be unable to realize the benefits of
our net operating loss carry-forwards and other tax benefits (collectively, the
'NOLs' or 'Tax Benefits')."

In early 2018, Company's board of directors adopted the Protective Amendment and
Tax Plan, each designed to preserve the Company's ability to utilize its NOLs,
by preventing an "ownership change" within the meaning of Section 382 of the
Internal Revenue Code that would impair the Company's ability to utilize its
NOLs. Later that year, the stockholders of Steel Connect approved the Protective
Amendment and Tax Plan.

The federal net operating losses will expire from fiscal year 2022 through 2038,
and the state net operating losses will expire from fiscal year 2019 through
2039. The Company's ability to use its Tax Benefits would be substantially
limited if the Company undergoes an Ownership Change. The Protective Amendment
and Tax Plan are intended to prevent an Ownership Change of the Company that
would impair the Company's ability to utilize its Tax Benefits.

                                       36

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  Table of Contents
The Protective Amendment generally restricts any direct or indirect transfer if
the effect would be to (i) increase the direct, indirect or constructive
ownership of any stockholder from less than 4.99 percent to 4.99 percent or more
of the shares of common stock then outstanding or (ii) increase the direct,
indirect or constructive ownership of any stockholder owning or deemed to own
4.99 percent or more of the shares of common stock then outstanding. Pursuant to
the Protective Amendment, any direct or indirect transfer attempted in violation
of the Protective Amendment would be void as of the date of the prohibited
transfer as to the purported transferee (or, in the case of an indirect
transfer, the ownership of the direct owner of the shares would terminate
simultaneously with the transfer), and the purported transferee (or in the case
of any indirect transfer, the direct owner) would not be recognized as the owner
of the shares owned in violation of the Protective Amendment (the "excess
stock") for any purpose, including for purposes of voting and receiving
dividends or other distributions in respect of such shares, or in the case of
options, receiving shares in respect of their exercise. In addition to a
prohibited transfer being void as of the date it is attempted, upon demand, the
purported transferee must transfer the excess stock to an agent of the Company
along with any dividends or other distributions paid with respect to such excess
stock. The agent is required to sell such excess stock in an arm's-length
transaction (or series of transactions) that would not constitute a violation
under the Protective Amendment.

As part of the Tax Plan, the Board declared a dividend of one right (a "Right")
for each share of common stock then outstanding. The dividend was payable to
holders of record as of the close of business on January 29, 2018. Any shares of
common stock issued after January 29, 2018, will be issued together with the
Rights. Each Right initially represents the right to purchase one one-thousandth
of a share of newly created Series D Junior Participating Preferred Stock.

Initially, the Rights will be attached to all certificates representing shares
of common stock then outstanding, and no separate rights certificates will be
distributed. In the case of book entry shares, the Rights will be evidenced by
notations in the book entry accounts. Subject to certain exceptions specified in
the Tax Plan, the Rights will separate from the common stock and a distribution
date (the "Distribution Date") will occur upon the earlier of (i) ten (10)
business days following a public announcement that a stockholder (or group) has
become a beneficial owner of 4.99-percent or more of the shares of common stock
then outstanding or (ii) ten (10) business days (or such later date as the Board
determines) following the commencement of a tender offer or exchange offer that
would result in a person or group becoming a 4.99 percent stockholder.

Pursuant to the Tax Plan and subject to certain exceptions, if a stockholder (or
group) becomes a new 4.99-percent stockholder after adoption of the Tax Plan,
the Rights would generally become exercisable and entitle stockholders (other
than the new 4.99-percent stockholder or group) to purchase additional shares of
the Company at a significant discount, resulting in substantial dilution in the
economic interest and voting power of the 4.99-percent stockholder (or group).
In addition, under certain circumstances in which the Company is acquired in a
merger or other business combination after a non-exempt stockholder (or group)
becomes a 4.99-percent stockholder, each holder of the Right (other than the
4.99-percent stockholder or group) would then be entitled to purchase shares of
the acquiring company's common stock at a discount.

The Protective Amendment does not expire. The Rights are not exercisable until
the Distribution Date and will expire at 11:59 p.m., on January 18, 2024, unless
the Rights are earlier redeemed or exchanged as provided in the Tax Plan or the
board earlier determines that the Tax Plan is no longer necessary or desirable
for the preservation of the Tax Benefits. For more information, see "Item 1A.
Risk Factors-Risks Related to Taxation-We may be unable to realize the benefits
of our net operating loss carry-forwards and other tax benefits (collectively,
the 'NOLs' or 'Tax Benefits')."

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