BUSINESS COMBINATIONS

12 Months Ended

Dec. 31, 2022

Business Combination and Asset Acquisition [Abstract]

BUSINESS COMBINATIONS

17. BUSINESS COMBINATIONS

Avalanche International Corp. (“AVLP”) Acquisition

On June 1, 2022, the Company converted the principal amount under the convertible promissory notes issued to it by AVLP and accrued unpaid interest into common stock of AVLP. The Company converted $20.0 million in principal and $5.9 million of accrued interest receivable at a conversion price of $0.50 per share and received 51,889,168 shares of common stock increasing its common stock ownership of AVLP from less than 20% to approximately 92%.

Prior to the conversion of the convertible promissory notes, the Company accounted for its investment in AVLP as an investment in an unconsolidated entity under the equity method of accounting. In connection with the conversion of the convertible promissory notes, the Company’s consolidated financial statements now include all of the accounts of AVLP, and any significant intercompany balances and transactions have been eliminated in consolidation.

The consideration transferred for the Company’s approximate 92% ownership interest in connection with this acquisition aggregated $20.7 million, which represented the fair value of the Company’s holdings in AVLP immediately prior to conversion. The carrying amount of the Company’s holdings in AVLP immediately prior to conversion was $23.4 million, resulting in a $2.7 million loss for the related remeasurement, which was recognized in interest and other income.

The Company estimated the fair values of assets acquired and liabilities assumed using valuation techniques, such as the income, cost and market approaches. The fair values are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. The income method to measure the fair value of intangible assets, is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflected a consideration of other marketplace participants and included the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product or technology life cycles, economic barriers to entry and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances could affect the accuracy or validity of the estimates and assumptions.

The tradenames and patents/developed technology intangible assets were valued using the relief-from-royalty method. The relief-from-royalty method is one of the methods under the income approach wherein estimates of a company’s earnings attributable to the intangible asset are based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying royalty rates of 20% for patents and developed technology and 0.25% for trademarks. The resulting net annual royalty payments are then discounted to present value using a discount factor of 24.6%.

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed at the acquisition date and is primarily attributable to the assembled workforce and expected synergies at the time of the acquisition. The goodwill resulting from this acquisition is not tax deductible.

The Company invested in AVLP based on the potential global impact of the novel technology of AVLP. AVLP has developed a novel cost effective and environmentally friendly material synthesis technology for textile applications. AVLP’s Multiplex Laser Surface Enhancement is a unique technology that has the ability to treat both natural and synthetic textiles for a wide variety of functionalities, including dyeability and printing enhancements, hydrophilicity, hydrophobicity, fire retardancy and anti-microbial properties. The use of water, harmful chemicals and energy is significantly reduced in comparison to conventional textile treatment methods.

The following table presents the allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values.

	Allocation
Total purchase consideration	$	22,143,000
Fair value of non-controlling interest		7,790,000
Total consideration	$	29,933,000
Identifiable net liabilities assumed:
Cash	$	1,245,000
Prepaid expenses and other current assets		55,000
Property and equipment		5,057,000
Intangible asset - patents/developed technology (not yet placed in service; upon being placed in service, 7 year estimated useful life)		23,984,000
Intangible asset - trademarks (9 year estimated useful life)		816,000
Accounts payable and accrued expenses		(4,689,000	)
Deferred tax liability		(5,000,000	)
Convertible notes payable, principal		(10,104,000	)
Net assets assumed		11,364,000
Goodwill	$	18,569,000

The Company consolidates the results of AVLP on a one-month lag, therefore the statements of operations include results for AVLP for the six months ended November 30, 2022.

AVLP Related Party Transaction

During the period from June 2022 to November 2022, MTIX Ltd., a subsidiary of AVLP, incurred fees of $0.3 million from 313M Technology Ltd, a UK Company, (“313M”) for the use of facilities and personnel. The Managing Director of 313M is Kristina Mistry, the daughter of Pravin Mistry, a director of AVLP and the Chief Executive Officer of MTIX Ltd.

Overview of SMC Acquisition

Beginning in June 2022, the Company, through its subsidiary Ault Lending, began making open market purchases of SMC common stock. These purchases granted the Company a greater than 20% effective ownership on June 9, 2022, and subsequently, on June 15, 2022, the Company owned more than 50% of the issued and outstanding common stock of SMC. The Company’s ownership of SMC stood at approximately 57% as of December 31, 2022.

SMC is a NASDAQ-listed global leader in consumer karaoke products. This strategic acquisition aligns with the Company’s initiatives to expand its presence in the hospitality and entertainment industry. SMC leverages a top-tier global distribution network through major mass merchandisers and online retailers. The Company intends to capitalize on its existing relationships and sourcing capabilities to extend SMC’s reach and product offerings, with the goal of increasing market share and revenues.

As of June 15, 2022 (“Acquisition Date”), the purchase price of the common stock acquired totaled $7.4 million and on June 15, 2022 a $3.1 million gain was recognized in interest and other income for the remeasurement of the Company’s previously held ownership interest to $10.5 million, based on the trading price of SMC common stock. The Company also recognized non-controlling interest at fair value as of the Acquisition Date in the amount of $10.3 million. 

The trade names and developed technology intangible assets were valued using the relief-from-royalty method. The relief-from-royalty method is one of the methods under the income approach wherein estimates of a company’s earnings attributable to the intangible asset are based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated by applying royalty rates between of 0.5% and 1.0% to the prospective revenue attributable to the intangible asset. The resulting net annual royalty payments are then discounted to present value using a discount factor of 12.0%.

The Company determined an estimated fair value of customer relationships using an income approach utilizing a discounted cash flow methodology. The analysis included assumptions regarding the development of new businesses and 3% organic growth rates, a discount rate of 12% using a weighted average cost of capital analysis, and capital expenditure requirements associated with any new initiatives developed by SMC. Significant assumptions utilized in the income approach were based on company specific information and projections which are not observable in the market and are therefore considered Level 3 fair value measurements.

The goodwill resulting from this acquisition is not tax deductible.

The following table presents the allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values.

	Allocation
Total purchase consideration	$	10,517,000
Fair value of non-controlling interest		10,336,000
Total consideration	$	20,853,000
Identifiable net assets acquired:
Cash	$	2,278,000
Accounts receivable		9,891,000
Prepaid expenses and other current assets		673,000
Inventories		12,840,000
Property and equipment, net		529,000
Right-of-use assets		1,073,000
Other assets		83,000
Intangible assets:
Trade names (10 year estimated useful life)		2,470,000
Customer relationships (10 year estimated useful life)		1,380,000
Proprietary technology (3 year estimated useful life)		600,000
Accounts payable and accrued expenses		(10,052,000	)
Notes payable		(2,972,000	)
Lease liabilities		(1,124,000	)
Net assets acquired		17,669,000
Goodwill	$	3,184,000

Overview of GIGA Acquisition

On September 8, 2022, GIGA acquired 100% of the capital stock of Gresham Worldwide, Inc. (“GWW”) from the Company in exchange for 2.92 million shares of GIGA’s common stock and 514.8 shares of GIGA’s Series F Convertible Preferred Stock (“Series F”) that are convertible into an aggregate of 3.96 million shares of GIGA’s common stock. GIGA also assumed GWW’s outstanding equity awards representing the right to receive up to 749,626 shares of GIGA’s common stock, on an as-converted basis. The transaction described above resulted in a change of control of GIGA. Assuming the Company was to convert all of the Series F, the common stock owned by the Company after such conversion would result in the Company owning approximately 71.2% of GIGA’s outstanding shares. 

On September 8, 2022, the Company loaned GIGA $4.25 million by purchasing a convertible note that carries an interest rate of 10% per annum and matures on February 14, 2023. The convertible note between the Company and GIGA is eliminated in consolidation beginning on September 8, 2022. The Company received the right to appoint four members of a seven member GIGA board of directors. These factors contributed to the Company’s determination that GWW be treated as the accounting acquirer.

The Company believes there are synergies between GIGA and GWW. GIGA manufactures specialized electronics equipment for use in both military test and airborne operational applications. GIGA focuses on the design and manufacture of custom microwave products for military airborne, sea, and ground applications as well as the design and manufacture of high-fidelity signal simulation and recording solutions for RADAR and electronic warfare test applications. GIGA’s results of operations subsequent to the acquisition are included in the Company’s GIGA defense business segment.

In respect of the above transactions, the acquired assets and assumed liabilities, together with acquired processes and employees, represent a business as defined in ASC 805, Business Combinations. The transactions were accounted for as a reverse acquisition using the acquisition method of accounting with GIGA treated as the legal acquirer and GWW treated as the accounting acquirer. In identifying GWW as the acquiring entity for accounting purposes, GIGA and GWW took into account a number of factors, including the relative voting rights, executive management and the corporate governance structure of the Company. GWW is considered the accounting acquirer since the Company controls the board of directors of GIGA following the transactions and received a 71.2% beneficial ownership interest in GIGA. However, no single factor was the sole determinant in the overall conclusion that GWW is the acquirer for accounting purposes; rather all factors were considered in arriving at such conclusion.

The fair value of the purchase consideration was $9.5 million, consisting of $4.0 million for GIGA’s common stock and prefunded warrants, $0.4 million fair value of vested stock incentives, $3.7 million cash and $1.3 million related to an existing loan agreement between Ault Lending and GIGA, which was deemed settled.

The total purchase price to acquire GIGA has been allocated to the assets acquired and assumed liabilities based upon estimated fair values, with any excess purchase price allocated to goodwill. The goodwill resulting from this acquisition is not tax deductible. The fair value of the acquired assets and assumed liabilities as of the date of acquisition are based on reports from a third-party valuation expert.

The purchase price allocation is as follows:

	Allocation
Total purchase consideration	$	6,763,000
Fair value of non-controlling interest		2,735,000
Total consideration	$	9,498,000
Identifiable net assets acquired (liabilities assumed):
Cash	$	107,000
Trade accounts receivable		536,000
Inventories		2,930,000
Prepaid expenses		116,000
Accrued revenue		363,000
Property and equipment		331,000
Right-of-use asset		370,000
Other long-term assets		446,000
Accounts payable		(2,831,000	)
Loans payable, net of discounts and issuance costs		(387,000	)
Accrued payroll and benefits		(1,488,000	)
Lease obligations		(491,000	)
Other current liabilities		(368,000	)
Other non-current liabilities		(17,000	)
Net liabilities assumed		(383,000	)
Goodwill	$	9,881,000

Overview of Circle 8 Acquisition

On November 17, 2022, Circle 8 (“Buyer”), a wholly owned subsidiary of Circle 8 Holdco LLC entered into an asset purchase agreement (“Circle 8 Purchase Agreement”) with Circle 8 Crane Services, LLC (“Seller”), to acquire substantially all of Circle 8’s operating assets and the recapitalization of the business into Circle 8. The Company has a 65% direct ownership in Circle 8 Holdco LLC and a 5.8% indirect ownership via Circle 8 Crane GP.

In accordance with the Circle 8 Purchase Agreement, on December 16, 2022 (“Closing Date”), the Buyer completed the acquisition and obtained control of Circle 8. The aggregate purchase price consideration transferred from the Buyer to the Seller totaled $31.5 million which included (i) extinguishment of debt amounting to $29.2 million (ii) rollover equity issued to the seller with an estimated fair value of $0.6 million (iii) contingent consideration of $0.9 million and (iv) Seller’s transaction expenses of $0.7 million. The following summarizes the fair value of consideration transferred at the acquisition closing:

Extinguishment of debt	$	29,234,000
Rollover equity		565,000
Contingent consideration – earn-out		922,000
Sellers transaction expenses reimbursement		742,000
Total consideration	$	31,463,000

In conjunction with the acquisition, certain individuals of the Seller’s ownership group received rollover equity interest as purchase consideration. The rollover equity includes the Buyer issuing to the Seller 6,000 Class D interests in Circle 8 Holdco LLC, which is the sole owner of the equity interests of Circle 8. Management engaged a valuation specialist to estimate the fair value of the grants as of the Closing Date.

Pursuant to the terms of the Circle 8 Purchase Agreement, additional purchase consideration would be paid by the Buyers to the Sellers, contingent upon achievement of a minimum EBITDA threshold for a three-year earn-out measurement period beginning on the day following the Closing Date and ending on the date that is the 36-month anniversary of the Closing Date, which would then increase for additional EBITDA performance up to a maximum ceiling. Pursuant to the terms of the Circle 8 Purchase Agreement, the earn-out would be paid to the Sellers in an amount ranging from $0 up to $0.7 million based on a pro rata basis for incremental EBITDA results starting at a minimum of $5.7 million. The fair value of the earn-out was valued using the Monte Carlo Simulation which estimates the fair value based on an analysis of various future outcomes. As such the fair value measurement includes significant unobservable inputs such as risk-adjusted discount rate and projected results of operations over the earn-out period, and thus, represented a Level 3 measurement. The fair value of the earn-out as of the acquisition date was $0.9 million. To date, the year one earn-out measurement period has not been surpassed and thus, no cash payments have been made from the Buyers to the Sellers for contingent purchase consideration.

The acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations. In accordance with ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, the Company elected not to separately recognize intangible assets that would otherwise arise from customer-related intangible assets. The value of these intangible assets is effectively subsumed into goodwill.

The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date, with the exception of the deferred income tax assets acquired and liabilities assumed which are recognized and measured in accordance with ASC 740, Income Taxes. The excess of the fair value of purchase consideration over the values of the identifiable assets and liabilities is recorded as goodwill.

The acquisition resulted in the fair value of the net assets acquired exceeding the amount of consideration transferred, which occurred as a result of negotiations with the Seller at a time of depressed EBITA as well as imposing a requirement on the Seller to provide preliminary net working capital equal to or greater than $3.0 million without the ability for adjustments up or down. ASC 805 refers to this as a “bargain purchase” and requires the Buyer to recognize a gain for the amount that the values assigned to the net assets acquired exceed the consideration transferred and cannot recognize goodwill from the acquisition.

Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired, and liabilities assumed and concluded that all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain of $0.8 million. The gain is included in the line item “gain from bargain purchase of business” in the consolidated statement of operations.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

Assets
Cash and cash equivalents	$	290,000
Trade receivable, net		4,334,000
Prepaids and other current assets		1,185,000
Inventory		24,000
Property and equipment, net		36,395,000
Right-of-use assets		1,558,000
Intangible assets – trade name (10 year estimated useful life)		1,030,000
Intangible assets – customer relationships (8 year estimated useful life)		1,290,000
Other non-current assets		17,000
Total Assets	$	46,123,000
Liabilities
Accounts payable	$	(548,000	)
Accrued payroll and benefits		(186,000	)
Operating lease liabilities - current		(436,000	)
Other current liabilities		(855,000	)
Notes payable - Equipment notes		(10,685,000	)
Operating lease liabilities - non current		(1,144,000	)
Total Liabilities	$	(13,854,000	)
Net assets acquired	$	32,269,000

The fair value of the acquired trade accounts receivables approximates the carrying value due to the short-term nature of the expected timeframe to collect the amounts due and the contractual cash flows, which are expected to be collected related to these receivables.

As part of the purchase price allocation, the Company determined the identifiable intangible assets were: (i) trade name and (ii) customer relationships. The fair value of the intangible assets was estimated using variations of the income approach. Specifically, the relief from royalty method was utilized to estimate the fair value of the trade name and the multi-period excess earnings method was utilized to estimate the fair value of the customer relationships. The trade name relates to the overall consolidated group name and related industry recognition. The customer relationships represent a source of repeat business that is critical to the operations providing crane operators, engineering, custom rigging and transportation services for oilfield, construction, commercial and infrastructure markets. The discounted cash flows were based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model and the weighted average cost of capital. These nonrecurring fair value measurements are primarily determined using unobservable inputs. Accordingly, these fair value measurements are classified within Level 3 of the fair value hierarchy.

The consolidated financial statements include results of operations following the consummation of the acquisition for the period December 16, 2022, through December 31, 2022.

Unaudited Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations for the year ended December 31, 2022 have been prepared as if the AVLP, SMC, GIGA and Circle 8 acquisitions had occurred on January 1, 2021. 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,
	2022			2021
Total revenues	$	214,636,000		$	135,582,000
Net loss attributable to Ault Alliance, Inc.	$	(185,957,000	)	$	(17,966,000	)

Asset Acquisitions During 2021

Acquisition of Michigan Cloud Data Center

On January 29, 2021, Alliance Cloud Services, LLC, a majority-owned subsidiary of its wholly owned subsidiary, Ault Alliance, closed on the acquisition of a 617,000 square foot energy-efficient facility located on a 34.5 acre site in southern Michigan for a purchase price of $4.0 million. The purchase price was paid by the Company using its own working capital. The facility is subject to a final corrective measures plan with the Environment Protection Agency. The seller performed remedial activities at the Michigan facility relating to historical soil and groundwater contamination and the Company is responsible for ongoing monitoring and final remediation plans. The Company’s estimated cost of the environmental remediation obligation is approximately $0.4 million and reflects its best estimate of probable future costs for remediation based on the current assessment data and regulatory obligations. Future costs will depend on many factors, including the extent of work necessary to implement monitoring and final remediation plans and the Company’s time frame for remediation. The Company may incur actual costs in the future that are materially different than this estimate and such costs could have a material impact on results of operations, financial condition, and cash flows during the period in which they are recorded.

Acquisition of Hotels

On December 22, 2021, the Company, through AGREE, acquired four hotel properties for $71.3 million consisting of a 136-room Courtyard by Marriott, a 133-room Hilton Garden Inn and a 122-room Residence Inn by Marriott in Middleton, WI, as well as a 135-room Hilton Garden Inn in Rockford, IL.

The allocation of the purchase price of the hotel acquisitions is based on the estimated fair value of the assets acquired. The Company accounted for these transactions as acquisitions of assets.

The Company has performed a valuation analysis of the fair market value of the assets acquired. The accounted for these transactions as acquisitions of assets. The following table summarizes the allocation of the purchase price as of the date of the Acquisition. The purchase price consisted of $69.2 million paid to the seller and $2.1 million of direct transaction costs.

Land and improvements	$	9,021,000
Building improvements		60,265,000
Furniture, fixtures and equipment		2,048,000
Assets acquired	$	71,334,000

Acquisition of St. Peterburg Land

On December 30, 2021, the Company, through Third Avenue Apartments, LLC, a wholly owned subsidiary of AGREE Madison, LLC (“AGREE Madison”), a wholly owned subsidiary of AGREE, acquired certain real property located at the southeast corner of 5th Street North and 3rd Avenue North in St. Petersburg, Florida. The purchase price for the property was $15.5 million. The Company has obtained permits to develop the property for a high-rise multi-family project.