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DECONSOLIDATION AND RECONSOLIDATION OF SUBSIDIARIES
 12 Months Ended
Dec. 31, 2025
Deconsolidation And Reconsolidation Of Subsidiaries  
DECONSOLIDATION AND RECONSOLIDATION OF SUBSIDIARIES

3. DECONSOLIDATION AND RECONSOLIDATION OF SUBSIDIARIES

 

The Company experienced several changes in its consolidation conclusions during the years ended December 31, 2025 and 2024, including deconsolidations resulting from bankruptcy or liquidation proceedings, where control of the affected entities shifted to courts or creditors, and the reconsolidation of Gresham following its emergence from Chapter 11, when control reverted to the Company.

 

Deconsolidation of Avalanche International Corp. (“AVLP”)

 

On March 28, 2025, AVLP, formerly a majority-owned subsidiary of the Company, filed a voluntary petition for liquidation under Chapter 7 of the U.S. Bankruptcy Code. As a result of the filing, AVLP became subject to the control of the bankruptcy court, and the Company no longer maintained a controlling financial interest. Accordingly, the Company deconsolidated AVLP effective as of the petition date. In connection with the deconsolidation, the Company recognized a gain of $10.0 million, which is included in the consolidated statement of operations for the year ended December 31, 2025. The Company evaluated the criteria for discontinued operations and determined that the operations of AVLP did not meet the requirements for such classification.

 

Deconsolidation of Eco Pack Technologies Limited (“Eco Pack”)

 

On April 16, 2025, Eco Pack, formerly a majority-owned subsidiary of the Company, filed a voluntary liquidation under the insolvency regulations in the UK. As a result of the filing, the Company no longer maintained a controlling financial interest. Accordingly, the Company deconsolidated Eco Pack effective as of the filing date. In connection with the deconsolidation, the Company recognized a loss of $0.4 million, which is included in the consolidated statement of operations for the year ended December 31, 2025. The operations did not meet the criteria for discontinued operations.

 

Deconsolidation of a Subsidiary of ROI

 

During the year ended December 31, 2025, the Company recognized a gain of $2.7 million in connection with the bankruptcy proceedings for a subsidiary of ROI. The Company deconsolidated the entity upon determining that it no longer maintained a controlling financial interest. The gain recognized reflects the derecognition of the subsidiary’s remaining assets, liabilities, and equity balances. The operations did not meet the criteria for discontinued operations.

 

Gresham Chapter 11 Filing and Deconsolidation

 

On August 14, 2024, Gresham filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. As a result of the Chapter 11 filing, Gresham and its subsidiaries became subject to the jurisdiction of the bankruptcy court and operated as debtors-in-possession.

 

Upon the filing of the Chapter 11 petition, the Company evaluated whether it continued to have a controlling financial interest in Gresham under ASC 810, Consolidation (“ASC 810”). Because the bankruptcy court and creditors obtained significant control over Gresham’s operations and financial decisions, the Company concluded that it no longer had a controlling financial interest in Gresham. Accordingly, the Company deconsolidated Gresham and its subsidiaries effective August 14, 2024, the petition date.

 

Upon deconsolidation, the Company recognized a gain on deconsolidation of approximately $2.0 million, which is included in net gain (loss) from discontinued operations in the consolidated statement of operations for the year ended December 31, 2024.

 

Discontinued Operations

 

The Company determined that the deconsolidation of Gresham represented a strategic shift that had a significant effect on the Company’s operations and financial results. Accordingly, in accordance with ASC 205-20, the historical results of Gresham have been presented as discontinued operations in the consolidated statements of operations and cash flows for periods prior to the reconsolidation date.

 

Net Loss from Discontinued Operations

 

The net loss from discontinued operations for the year ended December 31, 2024 includes the gain on deconsolidation as follows:

     
   For the Year
Ended
December 31,
2024		 
Gresham net loss  $(2,792,000)
Gain on deconsolidation   2,013,000 
Net loss from discontinued operations  $(779,000)

 

The following table presents the results of Gresham operations for the year ended December 31, 2024:

     
   For the Year 
   Ended 
   December 31, 
   2024 
Revenue, products  $30,862,000 
Cost of revenue, products   23,339,000 
Gross profit   7,523,000 
Operating expenses     
Research and development   2,617,000 
Selling and marketing   1,166,000 
General and administrative   8,033,000 
Impairment of goodwill and intangible assets   - 
Total operating expenses   11,816,000 
Loss from operations   (4,293,000)
Other income (expense):     
Interest and other income   1,594,000 
Interest expense   (1,662,000)
Loss on extinguishment of debt   - 
Change in fair value of warrant liability   - 
Total other expense, net   (68,000)
Loss before income taxes   (4,361,000)
Income tax benefit   (15,000)
Net loss   (4,346,000)
Net loss attributable to non-controlling interest   1,554,000 
Net loss attributable to common stockholders  $(2,792,000)

 

Cash Flows from Discontinued Operations

 

Cash flow activity related to discontinued operations is presented separately in the consolidated statement of cash flows and is summarized below:

     
   For the Year 
   Ended 
   December 31, 
   2024 
Cash flows from operating activities:     
Net loss  $(4,346,000)
Adjustments to reconcile net loss to net cash provided by operating activities:     
Depreciation and amortization   618,000 
Amortization of right-of-use assets   684,000 
Amortization of intangibles   157,000 
Impairment of goodwill and intangible assets   - 
Stock-based compensation   (858,000)
Changes in operating assets and liabilities:     
Accounts receivable   (1,638,000)
Inventories   1,514,000 
Prepaid expenses and other current assets   (1,516,000)
Lease liabilities   (667,000)
Accounts payable and accrued expenses   (314,000)
Net cash used in operating activities   (6,366,000)
Cash flows from investing activities:     
Purchase of property and equipment   (249,000)
Cash decrease upon deconsolidation   (3,550,000)
Net cash used in investing activities   (3,799,000)
Cash flows from financing activities:     
Proceeds from notes payable   2,552,000 
Cash contributions from parent   3,383,000 
Net cash provided by financing activities   5,935,000 
      
Effect of exchange rate changes on cash and cash equivalents   (71,000)
      
Net (decrease) increase in cash and cash equivalents and restricted cash   (4,301,000)
      
Cash and cash equivalents and restricted cash at beginning of period   4,301,000 
      
Cash and cash equivalents and restricted cash at end of period  $- 
      
Supplemental disclosures of cash flow information:     
Cash paid during the period for interest  $946,000 

 

Gresham Emergence from Chapter 11 and Reconsolidation

 

On August 29, 2025, the Bankruptcy Court confirmed Gresham’s First Amended Plan of Reorganization (the “Plan”). The Plan became effective on November 28, 2025 (the “Effective Date”), upon satisfaction of all conditions precedent.

 

Upon the Effective Date:

 

·All pre-emergence equity interests in Gresham were cancelled;

 

·Gresham’s prepetition indebtedness owed to the Company was extinguished and exchanged for newly issued equity;

 

·Exit financing of $10.0 million was funded; and

 

·The Company obtained 100% of the voting equity of reorganized Gresham.

 

As a result of these transactions, the Company regained a controlling financial interest in Gresham and reconsolidated Gresham as of the Effective Date in accordance with ASC 810.

 

Because the Company had previously deconsolidated Gresham during the bankruptcy proceedings and regained control upon emergence, the transaction is accounted for as a business combination under ASC 805, Business Combinations.

 

Description of Acquired Businesses

 

Gresham operates through several subsidiaries, including Enertec Systems 2001 Ltd., Relec Electronics Ltd., and Microphase Corporation. These businesses are engaged in the design, manufacture, and distribution of electronic components and systems, primarily serving defense, aerospace, and industrial markets.

 

·Enertec Systems 2001 Ltd. specializes in the design, engineering, and manufacture of ruggedized electronic systems and components used in defense and aerospace applications. Its product offerings include embedded computing systems, power supply solutions, and electronic assemblies designed to operate in harsh environments and meet stringent military and aerospace standards. Enertec primarily serves government and defense contractors and generates revenue through long-term and project-based contracts, often involving customized solutions with high reliability and qualification requirements.

 

·Relec Electronics Ltd. is a distributor of electronic components and power supplies, providing value-added services and solutions to industrial and commercial customers.

 

·Microphase Corporation develops and manufactures high-performance radio frequency and microwave components used in defense, communications, and aerospace applications.

 

These businesses complement the Company’s broader strategic focus on advanced technologies and infrastructure.

 

Consideration Transferred

 

The total consideration transferred in the business combination was as follows:

     
   Amount 
Exit financing funded  $10,000,000 
Fair value of prepetition debt exchanged for equity   18,753,000 
Fair value of non-controlling interest   1,294,000 
Total consideration  $30,047,000 

 

The extinguishment of prepetition indebtedness was integral to the Plan and directly resulted in the Company obtaining ownership of the reorganized entity. Accordingly, it was included in consideration transferred. The fair value of the non-controlling interest was estimated using an income approach based on projected cash flows of the acquired business and a market participant discount rate. This measurement is classified as a Level 3 fair value measurement under ASC 820.

 

Preliminary Allocation of Purchase Price

 

The Company allocated the consideration transferred to the identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The allocation is preliminary and subject to refinement during the measurement period.

               
   Enertec   Other Gresham
Entities		   Total 
Identifiable net assets acquired:               
Cash  $-   $4,382,000   $4,382,000 
Restricted cash   850,000    -    850,000 
Trade accounts receivable   2,642,000    1,566,000    4,208,000 
Accrued revenue   8,170,000    -    8,170,000 
Inventories, net   975,000    2,452,000    3,427,000 
Prepaid expenses and other current assets   1,182,000    560,000    1,742,000 
Property and equipment   503,000    357,000    860,000 
Right-of-use asset   1,665,000    521,000    2,186,000 
Intangible asset - trade name (12-15 year estimated useful life)   1,350,000    120,000    1,470,000 
Intangible asset - developed technology (5-10 year estimated useful life)   4,780,000    810,000    5,590,000 
Intangible asset - customer relationships (10-12 year estimated useful life)   3,810,000    1,150,000    4,960,000 
Other assets   291,000    52,000    343,000 
Accounts payable and accrued expenses   (5,484,000)   (1,516,000)   (7,000,000)
Notes payable   (4,027,000)   -    (4,027,000)
Notes payable, related party   -    (315,000)   (315,000)
Pre-petition unsecured creditor obligations   -    (3,280,000)   (3,280,000)
Operating lease liabilities   (1,718,000)   (1,344,000)   (3,062,000)
Other non-current liabilities   (20,000)   (329,000)   (349,000)
Net assets acquired   14,969,000    5,186,000    20,155,000 
Goodwill  $5,031,000   $4,861,000   $9,892,000 

 

Goodwill primarily represents expected synergies from combining operations, expanded market opportunities, operational efficiencies, and the value of the assembled workforce, which does not qualify for separate recognition as an intangible asset. The goodwill recognized in connection with this acquisition is not expected to be deductible for income tax purposes.

 

Identifiable Intangible Assets

 

In connection with the acquisition, the Company identified the following intangible assets based on a preliminary third-party valuation:

        
Intangible Asset  Fair Value   Estimated Useful Life
Trade names  $1,470,000   12 years
Developed technology   5,590,000   5 years
Customer relationships   4,960,000   10 years
Total identifiable intangible assets  $12,020,000    

 

Valuation of Identifiable Intangible Assets

 

The fair values of identifiable intangible assets were determined using income-based valuation techniques consistent with ASC 820. These techniques require significant estimates and assumptions, including projected revenues, customer attrition rates, royalty rates, operating margins, contributory asset charges, and discount rates. These measurements are classified as Level 3 fair value measurements.

 

Specifically:

 

·Customer relationships were valued using a multi-period excess earnings method, which estimates the present value of the incremental after-tax cash flows attributable to existing customers. Key assumptions included customer attrition rates of approximately 5%, estimated useful lives ranging from 10 to 12 years, forecasted EBITA margins of approximately 7% to 12%, and discount rates of approximately 20%.

 

·Developed technology was valued using an income approach based on a multi-period excess earnings method. Key assumptions included estimated useful lives of approximately 5 to 10 years, forecasted revenue growth based on management projections, EBITA margins of approximately 11% to 12%, and discount rates of approximately 20%.

 

·Trade names were valued using the relief-from-royalty method. Key assumptions included royalty rates ranging from approximately 0.25% to 0.75%, a long-term revenue growth rate of approximately 3%, and discount rates of approximately 20%.

 

The discount rates applied in these models were derived from weighted average cost of capital analyses for each reporting unit, which ranged from approximately 18% to 29%, and were adjusted, as appropriate, for asset-specific risk characteristics.

 

Measurement Period

 

The purchase price allocation is preliminary and subject to adjustment during the measurement period, which may extend up to one year from the acquisition date. The Company is continuing to evaluate certain estimates and assumptions, including the fair value of identifiable intangible assets and related useful lives, income tax balances, and working capital adjustments. Any measurement period adjustments will be recorded as an adjustment to goodwill.

 

Unaudited Pro Forma Financial Information

 

The following unaudited pro forma consolidated results of operations for the years ended December 31, 2025 and 2024 have been prepared as if the Gresham acquisition had occurred on January 1, 2024. This table has been prepared for comparative purposes only and is not indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results.

          
   For the Year Ended December 31, 
   2025   2024 
 Total revenue  $138,764,000   $148,283,000 
 Net loss attributable to Hyperscale Data  $(70,541,000)  $(65,273,000)