EXCHANGE TRANSACTION

12 Months Ended

Jul. 31, 2024

Steel Partners and Steel Connect Exchange Transaction

On April 30, 2023, the Company and Steel Holdings executed a series of agreements, in which the Steel Partners Group transferred an aggregate of 3,597,744 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 the Company's newly created Series E Convertible Preferred Stock (the “Series E Convertible Preferred Stock” and such transfer and related transactions, the "Exchange Transaction"). Following the approval by the Company's stockholders on June 6, 2023, pursuant to the rules of the Nasdaq Capital Market, 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, when combined with the common stock, the SPHG Note, if converted, and the Steel Connect Series C Convertible Preferred Stock, also if converted, owned by the Steel Partners Group, would have resulted in the Steel Partners Group holding approximately 84.0% of the outstanding equity interests of the Company as of May 1, 2023. The exclusion of the if-converted shares of the SPHG Note would have resulted in the Steel Partners Group holding approximately 83.8% of the outstanding equity interests of the Company as of May 1, 2023.

The Exchange Transaction closed on May 1, 2023, the date that the consideration was exchanged between the Company and Steel Holdings, and as of that date 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 Company's assets and liabilities have been included in Steel Holdings' consolidated balance sheet, with a related noncontrolling interest of 16.0% of the Company's common stock. Prior to May 1, 2023, when including the if-converted value of the SPHG Note and the Steel Connect Series C Convertible Preferred Stock, 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. When excluding the if-converted value of the SPHG Note, Steel Holdings held a 45.8% ownership interest in the Company. As of the date of the Exchange Transaction, Steel Holdings remeasured the previously held equity method investment to its fair value based upon a valuation of the Company.

The Exchange Transaction was accounted for in accordance with 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. 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.

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

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 previously held interest in Steel Connect and noncontrolling interest	111,816
Less: cash acquired from Steel Connect	(65,896)
Total estimated consideration, less cash acquired	$	248,653

The following represents the calculation of goodwill and fair value amounts recognized in the Exchange Transaction, as well as final fair value allocations reflecting adjustments made during the measurement period:


(in thousands)	Initial Estimate		Measurement Period Adjustments		Final Allocation
Assets
Accounts receivable, trade	$	36,900	$	—	$	36,900
Inventories, net	6,900		—		6,900
Prepaid expenses and other current assets	4,957		—		4,957
Other intangible assets	35,500		—		35,500
Other assets	3,900		—		3,900
Property and equipment, net	3,400		—		3,400
Operating lease right-of-use assets	29,250		—		29,250
Investments	202,733		—		202,733
Estimated fair value of total assets acquired by Steel Holdings	323,540		—		323,540
Liabilities
Accounts payable	26,300		—		$	26,300
Accrued expenses	29,100		(3,082)		26,018
Current lease obligations	7,994		—		7,994
Other current liabilities	7,236		—		7,236
Long-term lease obligations	21,300		—		21,300
Other long-term liabilities	5,742		—		5,742
Estimated fair value of total liabilities assumed by Steel Holdings	97,672		(3,082)		94,590
Fair value of identifiable net assets	225,868		3,082		228,950
Goodwill attributable to Steel Connect	$	22,785	$	(3,082)	$	19,703

In connection with the application 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.

Identifiable intangible assets were recognized 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