ALPINE 4 HOLDINGS, INC. - Quarter Report: 2016 September (Form 10-Q)

---

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

Commission file number:  000-55205

 

Alpine 4 Technologies Ltd.

(Exact name of registrant as specified in its charter)

 

Registrant's telephone number, including area code: 855-777-0077 ext 801

 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒       No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒       No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐       No ☒

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:  As of November 14, 2016, the issuer had 21,281,117 shares of its Class A common stock issued and outstanding and 1,600,000 shares of its Class B common stock issued and outstanding.

TABLE OF CONTENTS

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

Alpine 4 Technologies Ltd.

Financial Statements

(Unaudited)

 

 

Contents

 

 

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

Alpine 4 Technologies Ltd.

Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2016

(Unaudited)

Note 1 – Organization and Basis of Presentation

The unaudited financial statements were prepared by Alpine 4 Technologies Ltd. (the "Company"), pursuant to the rules and regulations of the Securities Exchange Commission ("SEC"). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company's Annual Report on Form 10-K filed with the SEC on March 28, 2016. The results for the nine months ended September 30, 2016, are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

Alpine 4 Technologies Ltd. (the "Company") was incorporated under the laws of the State of Delaware on April 22, 2014.  The Company was formed to serve as a vehicle to affect an asset acquisition, merger, exchange of capital stock, or other business combination with a domestic or foreign business.  As of the date of this Report, the Company was a technology holding company with a heavy concentration in the automotive industry. The Company provides a distinctive and powerful advantage to management, sales, finance, and service departments at automotive dealerships in order to increase productivity, profitability and customer retention through the Company's flagship program, 6th Sense Auto. The 6th Sense Auto program uses disruptive technology to improve inventory management, reduce costs, increase sales and enhance service. The 6th Sense Auto program serves a two-fold solution addressing both business to business and business to consumer market needs.

As discussed in note 9, the Company entered into a stock purchase transaction with Quality Circuit Assembly, Inc. ("QCA") in which the Company purchased 100% of QCA's stock.

The consolidated financial statements herein are presented under predecessor entity reporting and because the acquiring entity had nominal operations as compared with the acquired company, QCA, prior historical information of the acquirer is not presented.

This new basis of accounting was created on April 1, 2016, the effective date for financial reporting purposes of the stock purchase agreement.  In the following discussion, the results of the operations and cash flows for the periods ended on or prior to March 31, 2016, and the financial position of QCA as of balance sheet date on or prior to March 31, 2016 are referred to as "Predecessor" financial information, and the results of operations and cash flows of the Company for periods beginning April 1, 2016 and the financial position of the Company as of April 1, 2016 and subsequent balance sheet dates are referred to herein as "Successor" consolidated financial information.

Note 2 - Summary of Significant Accounting Policies

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as of September 30, 2016 (Successor) and December 31, 2015 (Predecessor).  Significant intercompany balances and transactions have been eliminated.

The accompanying financial statements present the balance sheets, statements of operations, stockholders' deficit and cash flows of the Company. The financial statements have been prepared in accordance with U.S. GAAP.

The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  These estimates and judgments are based on historical information, information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances.  Actual results could differ from those estimates.

Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days.  Cash equivalents are placed with high credit quality financial institutions and are primarily in money market funds.  The carrying value of those investments approximates fair value.

For all periods presented the Company had two customers that made up approximately 50% of total revenues.  All other customers were less than 10% each of total revenues in each period.

For all periods presented the Company had two customers that made up approximately 50% of outstanding accounts receivable.  All other customers were less than 10% each of total accounts receivable for each period presented.

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

Inventory is valued at the lower of the inventory's cost (weighted average basis) or market. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to market value, if lower.  Inventory is segregated into four areas, raw materials, WIP, finished goods, and In-Transit.  Below is a breakdown of how much inventory is in each area as of September 30, 2016 (Successor) and December 31, 2015 (Predecessor).

Property and equipment are carried at cost less depreciation. Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets, which range from five years to 39 years as follows:

Maintenance and repair costs are charged against income as incurred.  Significant improvements or betterments are capitalized and depreciated over the estimated life of the asset.

Below is a table of Property and Equipment

The Company amortizes intangible assets with finite lives over their estimated useful lives, which range between five and fifteen years as follows:

Below are tables for Intangibles and Other Long-Lived Assets

 

Other Intangibles consist of QCA's trade name, long lived customer relationships and customer lists.

 

The Company accounts for long-lived assets in accordance with the provisions of FASB Topic 360, "Accounting for the Impairment of Long-Lived Assets".  This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset.  During the three and six months ended September 30, 2016 (Successor), the period from January 1, 2016 through March 31, 2016 (Predecessor) and the nine months ended September 30, 2015 (Predecessor), there have been no impairment losses.

In financial reporting goodwill is not amortized, but is tested for impairment annually in the fourth quarter of the fiscal year or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  Events that result in an impairment review include significant changes in the business climate, declines in our operating results, or an expectation that the carrying amount may not be recoverable.  We assess potential impairment by considering present economic conditions as well as future expectations.

We review goodwill for impairment by performing a two-step goodwill impairment test.  The first step of the two-step goodwill impairment test is to compare the fair value of the reporting unit to its carrying amount, including goodwill.  If the carrying amount of the reporting unit exceeds its fair value, the second step of the two-step goodwill impairment test is required to measure the goodwill impairment loss.

The second step includes valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination.  Then, the implied fair value of the reporting unit's goodwill is compared to the carrying amount of that goodwill.  If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount.

The Company has recorded no impairment of goodwill in any period presented.

The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, convertible notes, notes and line of credit.  The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

The Company has a portfolio of consumer and professional software applications called 6thSenseAuto, which consists primarily of the Company's two products previously branded as LotWatch™ and ServiceWatch™.

LotWatch™ is a product for dealerships to give them vehicle inventory information. Our telematics devices use information gathered from the OBD (On Board Diagnostics) port, and by utilizing both GPS technology and cellular based service, the LotWatch™ module provides specific, real-time, accurate information about a dealership's fleet of new vehicles. This information can be easily accessed and viewed on Alpine 4's interface anywhere the dealership have internet access.

ServiceWatch™ is a product for the driving consumer that also uses information gathered from the OBD port.  By utilizing both GPS technology and cellular based service, the ServiceWatch™ module provides vehicle specific real-time, accurate information to a dealership's service department to increase sales all while improving their level of service.

When the Company enters into an agreement with a car dealership that wants to utilize its LotWatch™ service, a telematics device must be installed in each vehicle.  The Company will generally charge the car dealership a flat fee to install its telematics device in each vehicle.  The Company recognizes revenue when all the devices have been installed.  At the end of each month, the Company will charge the dealership a fee based on the average number of cars on the dealer's lot during the month and revenue is recognized at that time (end of the month).

The Company will account for its revenue per the guidance in ASC 605-25-25 by allocating the total contract amount between the product and service elements.  When a vehicle is sold to the driving consumer who purchases the ServiceWatch™ service, the cost of the service is added to the price of the car and the amount collected by the dealership for this service is remitted to the Company.  At the time of the vehicle is purchased, the Company recognizes revenue for the retail value of the telematics device that has been installed in the vehicle and the remaining amount is recognized over the service period of generally 24 to 36 months.

The Company also derives revenue from the sale of circuit boards and wire harnesses and recognizes revenue either FOB Origin or FOB Destination dependent upon the contract with the customer.

We consider revenue recognizable when persuasive evidence of an arrangement exists, the price is fixed or determinable, goods or services have been shipped or delivered, and collectability is reasonably assured. These criteria are assumed to have been met if a customer orders an item, the goods or services have been shipped or delivered to the customer, and we have sufficient evidence of collectability, such a payment history with the customer.  Our records for all periods presented have been sufficient to satisfy all of the four requirements.

Leases are reviewed by management and examined to see if they are required to be categorized as an operating lease, a capital lease or a financing transaction.

Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if potentially dilutive securities had been issued. The only potentially dilutive securities outstanding during the periods presented were the convertible notes payable , but they are anti-dilutive due to the net loss incurred.

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 718-10, Compensation – Stock Compensation, and the conclusions reached by FASB ASC 505-50, Equity – Equity-Based Payments to Non-Employees. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment is reached or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.

The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carry forwards. Accounting standards regarding income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, the Company's experience with operating loss and tax credit carry forwards not expiring unused, and tax planning alternatives.

 

The Company recorded valuation allowances on the net deferred tax assets.  Management will reassess the realization of deferred tax assets based on the accounting standards for income taxes each reporting period. To the extent that the financial results of operations improve and it becomes more likely than not that the deferred tax assets are realizable, the Company will be able to reduce the valuation allowance.

Significant judgment is required in evaluating the Company's tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting standards regarding uncertainty in income taxes provides a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely, based solely on the technical merits, of being sustained on examinations. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

The Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings.  If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of any beneficial conversion features.

FASB ASC 850, "Related Party Disclosures" requires companies to include in their financial statements disclosures of material related party transactions. The Company discloses all material related party transactions. Related parties are defined to include any principal owner, director or executive officer of the Company and any immediate family members of a principal owner, director or executive officer.

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current US GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods with that reporting period.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the Company's financial statements. Early adoption is permitted.

In September, 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805).  Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  The adoption of ASU 2015-016 is not expected to have a material effect on the Company's financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not anticipate the adoption of this ASU will have a significant impact on its financial position, results of operations, or cash flows.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its financial statements.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.

 

Note 3 – Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception.  The Company requires capital for its contemplated operational and marketing activities.  The Company's ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company's contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise some doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

In order to mitigate the risk related with this uncertainty, the Company has a three-fold plan to resolve these risks.  First the acquisition of QCA has allowed for an increased level of cash flow to the Company as demonstrated in the sales for Q2 and Q3.  Second, the Company is close to acquiring another company that, like QCA, will increase income and cash flow to the Company.  Third, the Company plans to issue additional shares of common stock for cash and services during the next 12 months and has engaged MCAP, LLC to provide advisory services to that capital raise.

 

Note 4 – Leases

During the nine months ending September 30, 2016 (Successor) the Company entered into a financing transaction for a building.  The Company bought ($3,895,000) and sold ($7,000,000) the property to an unrelated third-party real estate company and simultaneously entered into an arrangement with the third-party real estate company to lease back the property.  Since the leaseback was not a normal leaseback this transaction is recorded as a financing transaction with the asset and related financing obligation recorded on the balance sheet.  The lease has a 15-year term expiring in 2031 and certain default provisions requiring the Company to perform repairs and maintenance, make timely rent payments and insure the building.  The Company also issued a letter of credit for $525,270 in favor of the landlord; the letter of credit is collateralized by a savings account which is classified as restricted cash under non-current assets.  The liability under the financing transaction as of September 30, 2016 (Successor) totals $9,855,790.  Imputed interest of $3,302,003 is being amortized over the lease term.  The Company paid costs of $54,898 and a commission of $350,000 in conjunction with the transaction, which is characterized as debt issuance costs and will be amortized over the lease term.  The current unamortized balance of the debt issuance costs is $349,028 and in accordance with ASU 2015-03 debt issuance costs are reflected as a contra-liability reducing the related financing lease obligation.

As of September 30, 2016 (Successor) the future minimum capital lease and financing transaction payments, net of amortization of debt issuance costs, are as follows:

The Company also has a commitment to pay $276,000 towards Leasehold Improvements of which $138,000 has been satisfied and reflected on the balance sheet as of September 30, 2016 (Successor).

The money received from the sale of the building was used to purchase Quality Circuit Assembly.  Since this is a financing transaction the sale is recorded under financing obligation lease on the Balance Sheet and amortized over the 15-year term of the lease.

Note 5 – Notes Payable

During the nine months ended September 30, 2016 (Successor) the Company secured a line of credit with a third-party lender, of which $327,500 was received in Q1.  The line of credit is collateralized by QCA's outstanding accounts receivable, up to 80%, and inventory with maximum draws of $2,000,000 and $125,000, respectively, and a variable interest rate.  The Company also secured a five-year variable interest rate term loan with Celtic which is collateralized by QCA's equipment.  As of September 30, 2016 (Successor) the outstanding balances for the loans are as follows:

Note 6 – Notes Payable, Related Parties

At September 30, 2016 (Successor), and December 31, 2015 (Predecessor), notes payable consisted of the following:

During the three months ended September 30, 2016 (Successor) a note with a related party was amended with a conversion option (see Note 7 for convertible notes description).  The amendment resulted in extinguishment of the original note because a conversion feature was added.  Management has evaluated the conversion option for derivative accounting consideration under ASC Topic 815-40, Derivatives and Hedging – Contracts in Entity's Own Stock and concluded that the conversion option meets the criteria for classification in stockholders' equity. Therefore, derivative accounting is not applicable for the conversion option.  Management also evaluated the conversion feature for whether it was beneficial as described in ASC Topic 470-30 and concluded it was beneficial because the conversion price at commitment date was less than the fair value of the Company's common stock.  The note converted during the three months ended September 30, 2016 (Successor) and thus the BCF discount was expensed to interest expense in its entirety.

Note 7 – Convertible Notes Payable

During the nine months ended September 30, 2016 (Successor) and year ended December 31, 2015 (Predecessor), the Company entered into convertible note agreements with investors.  The convertible notes are unsecured; bear interest at 5-20% annually, and are due from April 27, 2016, to July 1, 2019.  All of the convertible notes payable contain a provision that allows the note holder to convert the outstanding balance into shares of the Company's common stock.  Notes are convertible at $1.00 per share, except for those issued for a business acquisition, which are convertible at $10.00 per share.  The debt discount, which arises from a beneficial conversion feature ("BCF") on the $1 per share investor notes, is being amortized over the terms of the convertible notes payable.  Total BCF discount is $113,810 for the six months ended September 30, 2016 (Successor).  For the three months ended September 30, 2016 (Successor), the Company recognized interest expense of $139,748 related to the amortization of the debt discount.  Company has evaluated Embedded Conversion Feature for convertible notes and BCF discount has a balance of $49,319 at September 30, 2016.

Convertible notes payable at September 30, 2016 (Successor) and December 31, 2015 (Predecessor), consisted of the following:

See Note 9 "Business Combination" for details on $2,000,000 convertible note.

A roll forward of the convertible notes payable is provided below:

Note 8 – Stockholders' Equity

The Company is authorized to issue 5,000,000 shares of $.0001 par value preferred stock. As of November 11, 2016, no shares of preferred stock were outstanding.

Pursuant to the Second Amended and Restated Certificate of Incorporation, the Company is authorized to issue two classes of common stock: Class A common stock, which will have one vote per share, and Class B common stock, which will have ten votes per share. Any holder of Class B common stock may convert his or her shares at any time into shares of Class A common stock on a share-for-share basis. Otherwise the rights of the two classes of common stock will be identical.

The Company had the following transactions in its common stock during the six months ended September 30, 2016:

·

issued 200,548 (157,000 to related parties) shares of its Class A common stock for services, of the related party shares 107,000 are fully vested with 50,000 vesting from April 18, 2016 to April 18, 2017.  Unrecognized compensation for the unvested share is $212,500 which will be recognized over the vesting period;

·

issued 159,830 (101,310 to a related party on conversion of principal of $92,100 and accrued interest of $9,210) shares of its Class A common stock in connection with the conversion of convertible notes payable and accrued interest;

·

issued 670 shares of the Company's restricted Class A common stock in private placement transactions to investors, in exchange for capital raised of $6,000.

There were no equity transactions related to the Predecessor Company during any Predecessor period presented.

On July 29, 2016 the Company adopted a resolution approved by the shareholders to issue a reverse stock split at a ratio of one (1) new share for each ten (10) old shares of the Company's commons stock (the "Reverse Split").  By its terms, the Reverse Split would only reduce the number of outstanding shares of Class A and Class B common stock, and would not correspondingly reduce the number of Class A and Class B common shares authorized for issuance, which remained at 500,000,000 and 100,000,000, respectively.

The financial statements have been retrospectively restated to reflect the reverse split.

Note 9 – Business Combination

A summary of the preliminary purchase price allocation at fair value is below.

 

Preliminary purchase price allocation is pending finalization of tax effect on intangibles.  During three months ended September 30, 2016 (Predecessor) an adjustment was made to the purchase price allocation based on additional information.  Accounts receivable decreased by $51,044, Inventory increased by $19,641, Accounts Payable increased by $19,782 and Goodwill increased by $51,185.

Unaudited pro forma result of operations for the three months ended March 31, 2016 and the three and nine months ended September 30, 2015 as if the Companies had been combined as of January 1, 2015, follow.  The pro forma results include estimates and assumptions which management believes are reasonable.  However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated or which may result in the future.  For periods ending June 30, 2016 and September 30, 2016 pro forma information is not provided because the results after March 31, 2016 are post-acquisition.

 

For the three months and six months ending September 30, 2016 QCA has contributed $2,244,498 and $4,213,114 of revenue, respectively and $106,555 and $147,337 of net income, respectively.

Note 10 – Subsequent Events

None

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

There are statements in this Report that are not historical facts. These "forward-looking statements" can be identified by use of terminology such as "believe," "hope," "may," "anticipate," "should," "intend," "plan," "will," "expect," "estimate," "project," "positioned," "strategy" and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read this entire Report carefully, especially the risks discussed under "Risk Factors." Although management believes that the assumptions underlying the forward looking statements included in this Report are reasonable, they do not guarantee our future performance, and actual results could differ from those contemplated by these forward looking statements. The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. In the light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in this Report will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We expressly disclaim any obligation to update or revise any forward-looking statements.

Overview and Highlights

Company Background

Alpine 4 Technologies Ltd. (formerly ALPINE 4 Inc. and Alpine 4 Automotive Technologies Ltd.) (the "Company") was incorporated in the State of Delaware on April 22, 2014.  Between inception and August 2014, the Company was in the developmental stage and conducted virtually no business operations.  On August 5, 2014, the Company entered into a Licensing Agreement (the "License Agreement") with AutoTek Incorporated ("AutoTek").  Pursuant to the License Agreement, AutoTek granted to Alpine 4 an exclusive, transferable (including sub licensable) worldwide perpetual license of the source code that could be developed into the LotWatch and ServiceWatch Products, to make, use, and sell products incorporating the LotWatch and ServiceWatch products (the "Licensed Products").  The Company was required to pay to AutoTek royalty payments equal to $10 per ServiceWatch device activated using the Licensed Technology.

 

The Company and AutoTek worked together to complete the asset purchase transaction, which closed on February 4, 2016. Also on February 4, 2016, the Company closed a share exchange transaction with the AutoTek shareholders, pursuant to which AutoTek shareholders exchanged an aggregate of 25,000,000 shares of AutoTek common stock for 15,000,000 shares of the Company's Class A common stock.

Following the closing of the asset purchase transaction, the Company has continued to use the source code acquired from AutoTek, as well as targeting and acquiring other potential businesses and assets, and deploying those assets to the Company's customer base which consists of automotive dealerships in the United States.  The Company 4 has used AutoTek's source code to design, develop and market telematics devices and software for the Automotive Industry, as discussed in more detail below.  

Business Strategy

Who We Are

Alpine 4 is a publicly held enterprise with four principles at the core of its business: Synergy, Innovation, Drive, and Excellence (S.I.D.E).  At Alpine 4, we believe synergistic innovation drives excellence. By anchoring these words to our combined experience and capabilities, we are able to aggressively pursue opportunities within and across vertical markets. We deliver solutions that not only drive industry standards, but also increase value for our shareholders.

At Alpine 4, we understand the nature of how technology and innovation can accentuate a business. We strive to develop strategic synergies between our holdings to create value and operational excellence within a unique long-term perspective.

Our Core Business

We are a technology holding company with a heavy concentration in the automotive industry. We provide a distinctive and powerful advantage to management, sales, finance and service departments at automotive dealerships in order to increase productivity, profitability and customer retention through our flagship program, 6thSenseAuto ("6SA") (formerly LotWatch and ServiceWatch, discussed in more detail below), which uses disruptive technology to improve inventory management, reduce costs, increase sales and enhance service. The 6SA program serves a two-fold solution addressing both business to business and business to consumer market needs. The 6SA product is discussed in more detail below.

Market Size and Growth

There are approximately 60,000 auto dealerships in the United States. This includes new car dealerships affiliated with an auto manufacturer and independent used car dealerships ranging from small lots to megadealers such as AutoNation. In 2014, 40.5 million used vehicles were sold, representing approximately two and half times the number of new vehicles sold. Moreover, total used vehicle sales by new car dealers increased 8 percent in 2014 to 15 million units in 2015, the highest level since 2005.  As such, with almost 55.5 million vehicles sold domestically each year, the Company's management believes that our 6SA program has a $12-billion-dollar market opportunity.

Diversification

In addition to our push for marketplace adoption of our 6SA product, we have also been actively pursuing diversification through planned acquisitions of other businesses, including the recent acquisition of Quality Circuit Assembly, Inc., a California corporation ("QCA") (discussed more below).   It is our goal to help drive Alpine 4 into a leading multi-faceted holding company with diverse products and services that not only benefit from one another as whole but also have the benefit of independence.  This type of corporate structure is about having our subsidiaries prosper through strong onsite leadership, while working synergistically with other Alpine 4 holdings.   Alpine 4 has been set up with a holding company model, with Presidents who will run each business, and Managers with specific industry related experience who, along with Kent Wilson, the CEO of Alpine 4, will help guide our portfolio of companies as needed.  Alpine 4 will work with our Presidents and Managers to ensure that our motto of S.I.D.E (Synergistic, Innovation, Drives, Excellence) is utilized.  Further, we plan to work with our subsidiaries and capital partners to provide the proper capital allocation and to work to make sure each business is executing at high levels.  

For the greater part of 2016, Alpine 4's primary interests will lie in the following: software, automotive technologies, electronics manufacturing, energy services and fabrication technologies; or those companies that support these industries.  At the core of our acquisition strategy is our focus on existing smaller middle market operating companies with revenues of $5 to $50 million.  In this target-rich environment, we believe that businesses generally sell at more reasonable multiples, present greater opportunities for operational and strategic improvements and have greater potential for growth.

 

Developed Products

Alpine 4 has a portfolio of consumer and professional software applications called 6thSenseAuto ("6SA"), which consists primarily of the Company's two products previously branded as LotWatch™ and ServiceWatch™, which together are now presented as 6SA.

6th Sense Auto ("6SA") can provide automobile dealerships with industry-leading sales team management information.  Utilizing our proprietary business intelligence platform, 6SA can help dealership sales departments; track customers from the time they enter a dealer's lot; let sales managers know in real-time when a salesperson is with a customer, on a test drive; or permit dealers and managers to review vehicles in inventory.  The 6SA system delivers a wide range of operational efficiencies, which the Company believes will maximize everything dealership sales managers need to know into one unique dashboard.

Inventory Management and Vehicle Location:  The 6SA Inventory Management System easily allows dealership personnel to locate vehicles in inventory so their sales team can easily guide a customer to the exact car they are looking for, which allows them to:

 

Customer Retention & Fix Ops Management:  The 6SA Customer Retention Platform ("CRP") provides vehicle-specific, real-time, accurate information to a dealership's service department.   According to data provided by the National Automobile Dealers Association, it is estimated that at least 30% percent of a new car dealership's profit comes from its service department, and as such, new car dealerships spend roughly $34 per month retaining a new customer!

6th Sense Auto Customer Retention Platform reduces that monthly expense by passing that expense to the consumer.

The CRP lets the service department know in real-time the status of a customer's vehicle.  The system can track information with respect to any Diagnostic Trouble codes ("DTC") or check engine lights, actual mileage of the vehicle, and if there are any recommended services that are needed at the time, and also communicates that information to the consumer via email, text, or phone.

Management believes that this will increases a dealership's profitability by:

Customer Vehicle Knowledge & Location System:  The 6SA Vehicle Knowledge & Location System is a consumer product that gives automobile owners real-time information about their car such as:

 

As of the date of this Report, Alpine 4 had concluded installations at four automobile dealerships in Arizona, California, and Indiana for the 6SA system.

Alpine 4 personnel provide training in the installation of the devices, creation of the customized user interface, and use of the inventory management system.  Additionally, personnel introduce and explain the details of the products to a dealership's sales staff, train the finance managers on the benefits of ServiceWatch and the registration process, and provide other training and support as agreed upon with the dealership.

Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception.  The Company requires capital for its contemplated operational and marketing activities.  The Company's ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company's contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raises some doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

In order to mitigate the risk related with this uncertainty, the Company has a three-fold plan to resolve these risks.  First the acquisition of QCA has allowed for an increased level of cash flow to the Company as demonstrated in the sales for Q2 and Q3.  Second, the Company is close to acquiring another company that, like QCA, will increase income and cash flow to the Company.  Third, the Company plans to issue additional shares of common stock for cash and services during the next 12 months and has engaged MCAP, LLC to provide advisory services to that capital raise.

Results of Operations 

Our revenues were $4,294,535 for the six months ended September 30, 2016 (Successor) with the majority being from QCA and $1,788,654 for the three months ended March 31, 2016 (Predecessor).  This compares with $5,971,309 generated during the nine months ended September 30, 2015 (Predecessor).  Predecessor revenue is from circuit board and wire harness sales.  Successor revenues include these as well as the 6SA products and services.  The Company began selling the 6SA products and services during the second half of 2015, and expect our revenue to grow significantly over the next 12 months. Management's expectations of growth in revenues is based on management's contacts within the automobile dealership industry, and the anticipated increase in interest in Alpine 4's products and services as Alpine 4 increases its advertising and brand and product/service awareness campaigns beginning in the second quarter of 2015 and which will continue through 2016.   Management also expects revenue from circuit board and wire harness sales to increase over the next 12 months.  These expectations are a result of increased focus on acquiring new customers and growing current customer's orders.

Our cost of revenues was $2,730,395 for the six months ended September 30, 2016 (Successor) and $1,337,083 for the three months ended March 31, 2016 (Predecessor).  This compares with $4,615,800 for the nine months ended September 30, 2015 (Predecessor). We expect our cost of revenue to increase over the next 12 months as our revenue increases.  

Our general and administrative expenses were $2,858,163 for the six months ended September 30, 2016 (Successor) and $490,091 for the three months ended March 31, 2016 (Predecessor).  This compares with $1,189,649 for the nine months ended September 30, 2015 (Predecessor).  For the nine months ended September 30, 2016 (Successor) and 2015 (Predecessor), $1,469,240 and $0 of our general and administrative expenses was a non-cash expense related to the issuance of our common stock for services, of which $1,062,500 was for employee stock compensation.  We expect that our overall general and administrative expenses will decrease over the next 12 months as we have completed awarding most of our anticipated employee stock plan.  As Alpine 4 increases its advertising and brand and product/service awareness campaigns beginning in the second half of 2016, and as Alpine 4 hires additional personnel as needed and as operations permit, management anticipates that such actions will result in increased expenses in these areas to the Company.  

Our interest expense was $627,515 for the six months ended September 30, 2016 (Successor) and $456 for the three months ended March 31, 2016 (Predecessor).  This compares with $1,822 for the nine months ended September 30, 2015 (Predecessor).   The increase in interest expense is due to the increase in debt, including convertible notes, along with interest costs associated with the purchase of QCA.  Interest expense includes the interest on the convertible debentures and the amortization of the debt discounts associated with the conversion features embedded in the convertible debentures.

Liquidity and Capital Resources

We have financed our operations since inception from the sale of common stock, capital contributions from stockholders, issuance of notes payable and convertible notes payable.  We expect to continue to finance our operations by selling shares of our common stock and by generating income from the sale of our products.  As noted above, management's expectations of growth in revenues is based on management's contacts within the automobile dealership industry, and the anticipated increase in interest in Alpine 4's products and services as Alpine 4 increases its advertising and brand and product/service awareness campaigns beginning in the third and fourth quarters of 2016.  Additionally, management anticipates that the new campaigns will result in the Company's adding new dealerships each month, which began in the second quarter and which should continue through the end of 2016.

Management expects to have sufficient working capital for continuing operations from either the sale of its products, its subsidiaries product and services' revenue, or through the raising of additional capital through private offerings of our securities. Additionally, as of the date of this Report, the Company was in negotiations to acquire two businesses, which management believes will provide additional operating revenues to the Company.  There can be no guarantee that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule anticipated by management, or at all.

      

The Company generated cash from operating activities of $30,831 for the six months ended September 30, 2016 (Successor) and used cash of $72,935 for the three months ended March 31, 2016 (Predecessor).  This compares with cash generated of $138,649 for the nine months ended September 30, 2015 (Predecessor).  The increase is due to the increase of accounts receivable.

The Company used cash from investing activities of $2,969,500 for the six months ended September 30, 2016 (Successor) and $0 for the three months ended March 31, 2016 (Predecessor).  This compares with $14,024 for the nine months ended September 30, 2015 (Predecessor).  The increase is due to the purchase of QCA.

The Company generated cash from financing activities of $2,713,665 for the six months ended September 30, 2016 (Successor) and used $69,461 for the three months ended March 31, 2016 (Predecessor).  This compares with generation of $30,563 for the nine months ended September 30, 2015 (Predecessor).  The increase is due to the financing transaction of the building and notes payable in the acquisition of QCA.

Off-Balance Sheet Arrangements

The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles ("GAAP") and the Company's discussion and analysis of its financial condition and operating results require the Company's management to make judgments, assumptions, and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes.  Note 2, "Summary of Significant Accounting Policies" of this Form 10-Q describes the significant accounting policies and methods used in the preparation of the Company's condensed consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.

Management believes the Company's critical accounting policies and estimates are those related to revenue recognition, inventory valuation and lease accounting. Management considers these policies critical because they are both important to the portrayal of the Company's financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.

Revenue Recognition

The Company has a portfolio of consumer and professional software applications called 6thSenseAuto, which consists primarily of the Company's two products previously branded as LotWatch™ and ServiceWatch™.

LotWatch™ is a product for dealerships to give them vehicle inventory information. Our telematics devices use information gathered from the OBD (On Board Diagnostics) port, and by utilizing both GPS technology and cellular based service, the LotWatch™ module provides specific, real-time, accurate information about a dealership's fleet of new vehicles. This information can be easily accessed and viewed on Alpine 4's interface anywhere the dealership have internet access.

ServiceWatch™ is a product for the driving consumer that also uses information gathered from the OBD port.  By utilizing both GPS technology and cellular based service, the ServiceWatch™ module provides vehicle specific real-time, accurate information to a dealership's service department to increase sales all while improving their level of service.

When the Company enters into an agreement with a car dealership that wants to utilize its LotWatch™ service, a telematics device must be installed in each vehicle.  The Company will generally charge the car dealership a flat fee to install its telematics device in each vehicle.  The Company recognizes revenue when all the devices have been installed.  At the end of each month, the Company will charge the dealership a fee based on the average number of cars on the dealer's lot during the month and revenue is recognized at that time (end of the month).

The Company will account for its revenue per the guidance in ASC 605-25-25 by allocating the total contract amount between the product and service elements.  When a vehicle is sold to the driving consumer who purchases the ServiceWatch™ service, the cost of the service is added to the price of the car and the amount collected by the dealership for this service is remitted to the Company.  At the time of the vehicle is purchased, the Company recognizes revenue for the retail value of the telematics device that has been installed in the vehicle and the remaining amount is recognized over the service period of generally 24 to 36 months.

The Company also derives revenue from the sale of circuit boards and wire harnesses and recognizes revenue either FOB Origin or FOB Destination dependent upon the contract with the customer.

We consider revenue recognizable when persuasive evidence of an arrangement exists, the price is fixed or determinable, goods or services have been shipped or delivered, and collectability is reasonably assured. These criteria are assumed to have been met if a customer orders an item, the goods or services have been shipped or delivered to the customer, and we have sufficient evidence of collectability, such a payment history with the customer.  Our records for all periods presented have been sufficient to satisfy all of the four requirements.

Inventory

Inventory is valued at the lower of the inventory's cost (weighted average basis) or the current market price of the inventory. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to market value, if lower.  

Recent Developments

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

None.

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, September 30, 2016. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Based upon that evaluation, including our Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report due to the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; (ii) inadequate control activities and monitoring processes; and (iii) failure in the process for identification and disclosure of related party transactions; and (iv) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC guidelines.

 

We plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we hope to implement the following changes during our fiscal year ending December 31, 2016: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out in (i) and (ii) are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2016, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.                      Legal Proceedings.

 

There are not presently any material pending legal proceedings to which the Company is a party or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.

Item 1A. Risk Factors

Not required for Smaller Reporting Companies.  Investors may review the Company's Annual Report on Form 10-K for the year ended December 31, 2015, as amended, filed with the U.S. Securities and Exchange Commission, which includes risk factors relating to the Company, its business and operations, and ownership of the Company's securities.

Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds.

During the quarter ended June 30, 2016, the Company sold an aggregate of 670 shares of its restricted Class A common stock in private offerings.  The Company raised an aggregate of approximately $6,000.  The Company issued 159,830 shares of its restricted class A common stock in connection with the conversion of convertible notes payable.  Additionally, the Company issued 200,548 (157,000 to employees) shares of its Class A common stock for services.

The shares of common stock were issued without registration under the 1933 Act in reliance on Section 4(a)(2) of the 1933 Act and the rules and regulations promulgated thereunder.

Item 3.                      Defaults Upon Senior Securities

 

None.

 

Item 4.                      Mining Safety Disclosures

 

Not applicable.

Item 5.                      Other Information.

None. 

 

Item 6.                      Exhibits.

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

---