EXCHANGE TRANSACTION

12 Months Ended

Jul. 31, 2023

Steel Partners and Steel Connect Exchange Transaction

On April 30, 2023, the Company and Steel Holdings executed a series of agreements, in which Steel Holdings and the Steel Partners Group transferred an aggregate of 3.6 million shares of common stock, par value $0.10 per share, of Aerojet Rocketdyne Holdings, Inc. ("Aerojet") held by the Steel Partners Group to the Company in exchange for 3.5 million shares of newly created Series E Convertible Preferred Stock of Steel Connect (the “Series E Convertible Preferred Stock” and such transfer and related transactions, the "Exchange Transaction"). Following approval by the Company's stockholders pursuant to the rules of The Nasdaq Stock Market LLC at a special meeting of stockholders held on June 6, 2023, the Series E Convertible Preferred Stock is convertible into an aggregate of 19.8 million shares of the Company's common stock, par value $0.01 per share (the “common stock” or “Common Stock”), and votes together with the Company's common stock and participates in any dividends paid on the Company's common stock, in each case on an as-converted basis. Upon conversion of the Series E Convertible Preferred Stock, the Steel Partners Group would hold approximately 84.0% of the outstanding equity interests of the Company, and the Company became a consolidated subsidiary of Steel Holdings for financial statement purposes. The Company is not consolidated by Steel Holdings for Federal income tax purposes because Steel Holdings' ownership in the Company is dispersed between different federal tax consolidation groups. The Exchange Transaction closed on May 1, 2023, the date that the consideration was exchanged between the Company and Steel Holdings. The Company's assets and liabilities have been included in Steel Holdings' consolidated balance sheet as of May 1, 2023, with a related noncontrolling interest of 16.0% of the Company's common stock. Prior to May 1, 2023, Steel Holdings held a 49.6% ownership interest in the Company and accounted for its investment in the Company in accordance with the equity method of accounting. Steel Holdings remeasured the previously held equity method investment to its fair value based upon a valuation of the Company, as of the date of the Exchange Transaction. The Exchange Transaction accomplishes Steel Holdings' objective, which is to increase ownership in the Company in order to benefit from future earnings and growth and strengthens the Company's balance sheet to permit it to do acquisitions.

The Exchange Transaction was accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and, accordingly, the Company's results of operations were consolidated in Steel Holdings' financial statements on the date of the Exchange Transaction. Steel Holdings recorded a preliminary allocation of the Exchange Transaction to assets acquired and liabilities assumed based on their estimated fair values as of May 1, 2023. The final Exchange

Transaction allocation, which is expected to be completed by December 31, 2023, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. Steel Holdings does not expect that differences between the preliminary and final Exchange Transaction allocation will have a material impact on its results of operations or financial position. As discussed in Note 1 - "Nature of Operations, the Company elected pushdown accounting in which it uses Steel Holdings' basis of accounting, which reflects the fair market value of the Company’s assets and liabilities at the date of the Exchange Transaction.

The following table summarizes the total Exchange Transaction consideration:


(in thousands)	May 1, 2023
Fair value of Aerojet common stock	$	202,733
Fair value of Steel Holdings' previously held interests in Steel Connect and Steel Holdings' noncontrolling interest	111,816
Less: cash acquired from Steel Connect	(65,896)
Total estimated consideration, less cash acquired	$	248,653

The following represents the preliminary calculation of goodwill and fair value amounts recognized:


(in thousands)	May 1, 2023
Assets
Accounts receivable, trade	$	36,900
Inventories, net	6,900
Prepaid expenses and other current assets	4,957
Other intangible assets	35,500
Other assets	3,900
Property and equipment, net	3,400
Operating lease right-of-use assets	29,250
Investments	202,733
Estimated fair value of total assets acquired by Steel Holdings	323,540
Liabilities
Accounts payable	26,300
Accrued expenses	29,100
Current lease obligations	7,994
Other current liabilities	7,236
Long-term lease obligations	21,300
Other long-term liabilities	5,742
Estimated fair value of total liabilities assumed by Steel Holdings	97,672
Fair value of identifiable net assets	225,868
Goodwill attributable to Steel Connect	$	22,785

The following table summarizes the significant adjustments recognized by the Company as of the Exchange date for each major class of assets and liabilities as a result of pushdown accounting:


	Exchange Date Carrying Value		Adjustments	Exchange Date Fair Value
(in thousands)
Goodwill	$	—	22,785	$	22,785
Other intangible assets	$	—	35,500	$	35,500

Operating lease right-of-use assets	$	28,900	350	$	29,250
Prepaid and other current assets	$	5,000	(43)	$	4,957
Convertible note payable	$	(11,586)	(1,420)	$	(13,006)
Other current liabilities	$	(16,671)	9,435	$	(7,236)
Other long-term liabilities	$	(5,500)	(242)	$	(5,742)

As part of pushdown accounting, the Company calculated the amount of goodwill recognized based on the excess of the Exchange Transaction consideration over the fair value of net identifiable assets acquired and liabilities assumed. Goodwill is primarily attributable to expected synergies and the assembled workforce of the Company. The goodwill recognized will not be deductible for income tax purposes.

The recorded identifiable intangible assets at their estimated fair value as of the date of the Exchange Transaction. The fair value of the trade name asset was determined using the relief-from-royalty method and the fair value of the customer relationships asset was determined using the excess earnings method. These income-based approaches included assumptions such as the amount and timing of projected cash flows, growth rates, customer attrition rates, discount rates, and the assessment of the asset’s life cycle. The estimated fair value and estimated remaining useful lives of identifiable intangible assets as of the Exchange Transaction date were as follows:


(in thousands)	Useful Life (Years)	Amount
Customer relationships	7	$	25,000
Trade name	Indefinite	10,500
Estimated fair value of identifiable intangible assets		$	35,500

The Company recorded a $0.4 million favorable adjustment to operating lease right-of-use assets for the favorable leasehold interest asset identified as part of purchase accounting. The fair value of the favorable leasehold interest asset was determined by analyzing any favorable or unfavorable leasehold interest inherent in the lease contracts, and comparing the annual lease contract rent over the remaining contractual term to a market rental rate cash flow stream in applying the income approach to estimate any favorable or unfavorable leasehold interest. The difference between the contractual and market-based cash flows was then discounted to present value to estimate the fair value of the favorable leasehold interest asset.

The Company wrote off the remaining $43.4 thousand related to deferred financing costs for the Umpqua Revolver in other current assets as part of pushdown accounting.

The carrying value of the SPHG Note was increased by $1.4 million to reflect its fair value at the Exchange Date. The value of the SPHG Note was calculated using the Goldman Sachs Binomial Lattice Model.

Other current liabilities was decreased by $9.4 million related to the accrued pricing liability. The accrued pricing liability was reduced to zero to reflect its fair value at the Exchange Date. Refer to Note 9 - "Accrued Expenses and Other Current Liabilities" for further information.

Other non-current liabilities was increased by net $0.2 million. The Company booked $0.8 million deferred tax liability related to the ModusLink trade name intangible. This was partially offset by $0.5 million decrease to the non-current pension liability as a result of the fair value measurement of the Company's defined benefit plans as of the Exchange Date.

The Company recorded $202.7 million to investments, which represents the fair value of the Aerojet common stock transferred to Steel Connect as part of the Exchange Transaction. As of July 31, 2023, the Company had disposed of all its interest in Aerojet common stock. The majority of Aerojet common stock was purchased when L3 Harris closed its merger with Aerojet. The Company received total net proceeds of $207.8 million in exchange for all of its Aerojet shares, and recorded a gain of $5.1 million to Other gains, net in the Consolidated Statements of Operations in the Successor Period. See Note 16 - "Other gains, net"

for more information. As of July 31, 2023, the Company had a receivable of $154.5 million for proceeds receivable, which is recorded as a component of prepaid expenses and other current assets within the consolidated balance sheets and was received in August 2023.