ALPINE 4 HOLDINGS, INC. - Quarter Report: 2017 September (Form 10-Q)

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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

 

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, a smaller reporting company, or an emerging growth company.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(1) of the Exchange Act. ☒

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, 2017, the issuer had 23,105,194 shares of its Class A common stock issued and outstanding* and 1,600,000 shares of its Class B common stock issued and outstanding. *(includes 350,000 shares of our common stock issued to a 3^rd party for a loan but which are not considered outstanding for accounting purposes)

 

TABLE OF CONTENTS

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

Alpine 4 Technologies Ltd.

Financial Statements

(Unaudited)

 

 

Contents

 

 

Alpine 4 Technologies Ltd.

Consolidated Balance Sheets

(Unaudited)

Alpine 4 Technologies Ltd.

Consolidated Statements of Operations

(Unaudited)

 

Alpine 4 Technologies Ltd.

Consolidated Statements of Operations

(Unaudited)

 

Alpine 4 Technologies Ltd.

Consolidated Statements of Cash Flows

(Unaudited)

 

Alpine 4 Technologies Ltd.

Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended September 30, 2017

(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 April 14, 2017. The results for the three and nine months ended September 30, 2017, are not necessarily indicative of the results to be expected for the year ending December 31, 2017.

Alpine 4 Technologies Ltd. ("we" or 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 is a technology holding company owning three companies (ALTIA, LLC, Quality Circuit Assembly, Inc. ("QCA"); and Horizon Well Testing, LLC ("HWT")).  For 2016, QCA made up most of the revenue disclosed in the consolidated financial statements.  HWT was not acquired until January 1, 2017, so it is not combined in our 2016 financial statements.

As discussed in Note 9, the Company entered into a stock purchase transaction with QCA in which the Company purchased 100% of QCA's outstanding 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 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, 2017, and December 31, 2016, 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.

Certain prior year amounts have been reclassified to conform to the current period presentation.  These reclassifications had no impact on net earnings and financial position.

Advertising costs are expensed when incurred.  All advertising takes place at the time of expense.  We have no long-term contracts for advertising.  Advertising expense for all periods presented were under $10,000.

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. As of September 30, 2017, and December 31, 2016, the Company had no cash equivalents.

For three months ended March 31, 2016 (Predecessor) and the six months ended September 30, 2016 (Successor), the Company had two customers that made up approximately 50% of total revenues.  For the three months ended September 30, 2017 (Successor), and nine months ended September 30, 2017 (Successor), the Company had one customer that made up approximately 43% and 37% of total revenues, respectively.  All other customers were less than 10% each of total revenues in each period.

For three months ended March 31, 2016 (Predecessor) and the six months ended September 30, 2016 (Successor), the Company had two customers that made up approximately 50% of outstanding accounts receivable.  For the three months ended September 30, 2017 (Successor), and nine months ended September 30, 2017 (Successor), the Company had two customers that made up approximately 54% 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.  As of September 30, 2017, and December 31, 2016, allowance for bad debt was $177,470 and $0, respectively.

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 was in each area as of September 30, 2017, and December 31, 2016.

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 ten 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:

During the three months ended September 30, 2017 we had an impairment on Automobiles & Trucks of $86,807 which was offset by proceeds from the insurance claim on the damaged Automobiles & Trucks.  We also had a loss on Machinery & Equipment of $62,787 due to fire which was offset by an insurance claim of $54,838 for a net loss of $7,949.

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:

Restricted cash consists of deposit account collateralizing letters of credit in favor of the counterparty in our lease financing obligation.  Changes in restricted cash are reflected as financing activities because the cash is being used in conjunction with financing activities.

The Company accounts for long-lived assets in accordance with the provisions of Financial Accounting Standards Board ("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 all periods presented, 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.  All assessments of goodwill impairment are conducted at the individual reporting unit level.  As of September 30, 2017, the only reporting units with goodwill were QCA and HWT.

The Company used qualitative factors according to Accounting Standards Codification ("ASC") 350-20-35-3 to determine whether it is more likely than not that the fair value of goodwill is less than its carrying amount.  Based on the qualitative criteria the company believes there not to be any triggers for potential impairment of goodwill and therefore 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.  For additional information, please see Note 11 – Derivative Liabilities and Fair Value Measurements.

As discussed in Note 9 below 379,403 shares of Class A common stock that were issued as consideration for the HWT acquisition contain a redemption feature which allows for the redemption of common stock at the option of the holder. In accordance with ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity.   Accordingly, at September 30, 2017, 379,403 shares of Class A common stock were classified outside of permanent equity at its redemption value.

 

ALTIA

The Company accounts 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 6^th Sense Auto 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 the vehicle is purchased, the Company recognizes the service portion of the contract over the service period of generally 12 to 36 months.

Quality Circuit Assembly

The Company accounts for its revenue per the guidance in ASC 605-25-25 by allocating the total contract amount between the product and service elements.  Revenue is recognized when either the product has completely been built and shipped or the service has been completed.  If a deposit for product or service is received prior to completion the payment is recorded to deferred revenue until such point the product or services meets our revenue recognition policy.  Management assesses the materiality and likelihood of warranty work and returns, and records reserves as needed.  For all periods presented, management determined that the warranty and returns would be immaterial.

Horizon Well Testing

Revenue is recognized when the contract has been performed in completion.  Contracts range from one day to 30 days in length.

Due to how the Company recognizes revenue deferred revenue can be present.  Deferred revenue greater than 12 months is classified as long-term, anything less is classified as short-term.

ALTIA

For the period ending September 30, 2017 deferred revenue is $89,078 for short-term and $53 for long-term.  There was no deferred revenue for the period ending December 31, 2016.  The increase is due to the sale of the 6^th Sense product into two new dealerships.  The install at these dealerships took place in October 2017.

Quality Circuit Assembly

For the period ending September 30, 2017 deferred revenue is $41,149 for short-term and $0 for long-term.  For the period ending December 31, 2016 deferred revenue was $12,536 for short-term and $0 for long-term.  The increase is due to the timing of sales with prepay customers.

Horizon Well Testing

There is no deferred revenue for any periods presented.

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 debentures, but they are anti-dilutive due to the net loss incurred.  All earnings (loss) per common share have been adjusted retroactively for all periods presented to reflect changes in number of shares as a result of the reverse stock split amount.

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB 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.

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.

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 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.

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 adopted this ASU, and all financial periods presented herein reflect this.  There were no significant impacts on our 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. The working capital of the Company is currently negative and causes doubt of the ability for the Company to continue. The Company requires capital for its 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 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 substantial 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 the second and third quarters of 2016.  Second, the Company has acquired HWT and is considering other potential acquisition targets that, like QCA, should 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 in connection with that capital raise.

 

Note 4 – Leases

As of September 30, 2017, 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 $276,000 has been satisfied and reflected on the balance sheet as of September 30, 2017.

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

The term of the lease has been extended through September 30, 2032 at a monthly rate of approximately $69,000.  These payments are reflected in the table above.

A letter of credit of $1,000,000 is to be provided to landlord, of which $255,709 had been satisfied as of September 30, 2017.

Operating Leases

The company also had three operating leases as of September 30, 2017 (Successor), for its location in San Jose, CA (QCA), Phoenix, AZ (Alpine) and Oklahoma City, OK (HWT).  Approximate monthly rent obligations are $21,500, $2,800, and $5,000 respectively.

The five-year minimum rent payments for each location are as follows

The San Jose, CA, rent agreement expires at the end of 2021, the Phoenix, AZ, rent agreement expired at the end of May 2017 and went to a monthly rent agreement and the Oklahoma City, OK rent agreement expires end of August 2019.

Note 5 – Notes Payable

During the three months ended March 31, 2016 (Predecessor), QCA paid off $10,000 of related party notes and $59,461 of unrelated party notes that were collateralized by vehicles prior to the purchase of QCA by Alpine 4.  There was no monthly payment on the related party notes.  The aggregate monthly payments on the unrelated party notes were $1,808.

During the nine months ended September 30, 2017, the Company secured a line of credit with a third-party lender, Crestmark.  The line of credit is collateralized by HWT's outstanding accounts receivable, up to 85% with maximum draws of $2,000,000 and a variable interest rate.  The Company also secured a five-year fixed rate (10.14%) term loan with Crestmark Equipment Finance which is collateralized by HWT's equipment.  Both are guaranteed by the Company.

During the nine months ended September 30, 2017 the company also entered into four fixed rate (30.00%) term notes with maturity dates of two, three and six months for a total of $80,000, of which $70,000 has been repaid as of September 30, 2017.

As of September 30, 2017, the outstanding balances for all notes payable are as follows:

The QCA and HWT equipment notes are classified as current due to the notes being in default and fully callable by the lender.

Note 6 – Notes Payable, Related Parties

During the nine months ended September 30, 2017, the Company made payments to related parties for notes payable of $123,500, and borrowed $405,500 of which $300,000 was associated with the HWT acquisition described in Note 9.

At September 30, 2017, and December 31, 2016, notes payable consisted of the following:

During the nine months ended September 30, 2017, a note with a related party was amended with a due date of January 30, 2017, to May 31, 2017.  Also, a note with due date of April 30, 2017, was amended to July 31, 2017.  These notes are now due upon demand.

The secured note for $100,000 is secured by real estate in the HWT purchase agreement.  The secured note for $300,000 is subordinated debt secured by all assets of HWT.

Note 7 – Convertible Notes Payable

During the nine months ended September 30, 2017 (Successor), the Company entered into fixed convertible note agreements with investors and as consideration for an acquisition.  The fixed convertible notes are unsecured; bear interest at 5-20% annually, and are due from April 27, 2016, to July 1, 2019.  All the fixed convertible notes payable contain a provision that allows the note holder to convert the outstanding balance into shares of the Company's Class A common stock.  Notes are convertible at $1.00 per share, except for those issued for the HWT and QCA business acquisitions, which are convertible at $8.50 and $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 recognized is $30,000 for the nine months ended September 30, 2017.  For the nine months ended September 30, 2017 (Successor), the Company recognized interest expense of $28,406 related to the amortization of the debt discount.  The unamortized balance for these notes was $9,015 as of September 30, 2017.

During the nine months ended September 30, 2017 (Successor), the Company entered into two convertible note agreements with investors for $20,000 and $10,000.  The convertible notes are unsecured; bear interest at 10% annually, and are due on January 19 and January 23, 2018, respectively.  They are convertible to the Company's Class A common stock at $1 per share.

During the nine months ended September 30, 2017 (Successor), the Company entered into five variable convertible note agreements with investors.  The variable convertible notes are unsecured; bear interest at 10-12% annually, and are due from January 21to September 5, 2018.

On April 17, 2017, the Company entered into a variable convertible note with unrelated 3^rd party for $58,500 with net proceeds of $55,000.  The note is due January 30, 2018, and bears interest at 12% per annum.  After 180 days, the note is convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from April 17, 2017.  The prepayment penalty is equal to 10% to 27% of the outstanding note amount, depending on when prepaid.

On June 15, 2017, the Company entered into a variable convertible note with unrelated 3^rd party for $60,000 with net proceeds of $57,000.  The note is due June 15, 2018 and bears interest at 10% per annum.  After 180 days, the note is convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from June 15, 2017.  The prepayment penalty is equal to 10% to 25% of the outstanding note amount depending on when prepaid.

On July 13, 2017, the Company entered into a variable convertible note with unrelated 3^rd party for $43,000 with net proceeds of $40,000.  The note is due April 30, 2018, and bears interest at 12% per annum.  After 180 days, the note is convertible to the Company's Class A common stock at a discount of 38% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from July 13, 2017.  The prepayment penalty is equal to 10% to 27% of the outstanding note amount, depending on when prepaid.

On July 19, 2017, the Company entered into a variable convertible note with unrelated 3^rd party for $115,000 with net proceeds of $107,000.  The note is due January 21, 2018 and bears interest at 10% per annum.  , The note is immediately convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from July 19, 2017.  The Company issued 500,000 shares of Class A common stock to the note holder which are returnable if no event of default has occurred and the note is paid in full within 180 days of the note date.  Management has determined that it is probable that the Company will meet the conditions under the note and therefore it more likely than not that the Company will not be in default as defined in the note and the note will be paid in full within 180 days of the note date.  As a result, management has concluded that it is probable that the shares would be returned and therefore the cost of issuance has not been recorded as of September 30, 2017.  The Company will reassess the likelihood of such at each period end.  This is accounted for as a derivative liability, so a debt discount from derivative liabilities of $115,000 was recognized.  The Company recognized interest expense of $47,917 related to the amortization of debt discounts.  The unamortized balance for this note was $67,083 as of September 30, 2017.  Please see Note 11 – Derivative Liabilities and Fair Value Measurements for more details.

On September 5, 2017, the Company entered into a variable convertible note with unrelated 3^rd party for $105,000 with net proceeds of $100,000.  The note is due September 5, 2018 and bears interest at 10% per annum.  After 180 days, the note is convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from September 5, 2017.  The prepayment penalty is equal to 10% to 25% of the outstanding note amount depending on when prepaid.

Convertible notes payable at September 30, 2017, and December 31, 2016, consisted of the following:

 

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

 

Principal maturities associated with debt obligations with due dates as of September 30, 2017, are as follows:

Minimum payments on Notes payable, non-related parties is $43,717 per month.  Other loans have no monthly payments.

Note 8 – Stockholders' Equity

The Company is authorized to issue 5,000,000 shares of $.0001 par value preferred stock. As of September 30, 2017, and November 14, 2017, 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 nine months ended September 30, 2017:

 

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

 

·

The Company issued 379,403 shares of its Class A common stock in connection with the purchase of HWT.  260,000 shares are redeemable at $4.25 per share at three different redemption periods:  130,000 shares at 12 months, 65,000 shares at 18 months and 65,000 shares at 24 months from the closing date of the purchase of HWT.  119,403 shares are redeemable at $3.35 per share at 12 months from the closing date of the purchase of HWT.  Shares are valued at the redemption value of $1,439,725.

Due to the nature of the issuance of stock for the HWT acquisition, it is recorded outside of permanent equity in the balance sheet.

During the nine months ended September 30, 2017, the following stock options were issued to purchase one share each of the Company's Class A common stock.  The options were issued pursuant to the Company's 2016 Stock Option and Stock Award Plan (the "Plan").  The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant and on each modification date using the following assumptions.

On April 7, 2017, the Company issued 741,500 options to employees and consultants of the Company. The options granted vest over the next four years, and the exercise price of the options granted is $0.90, which was the last closing bid price of the Company's common stock as traded on the OTC QB Market.  The stock options are valued at $586,972 which will be expensed quarterly over the vesting period.

On May 3, 2017, the Company issued 114,000 options to an employee.  The options granted vest over the next four years and the exercise price of the options granted is $0.26, which was the last closing bid price of the Company's common stock as traded on the OTC QB Market.  The stock options are valued at $29,298 which will be expensed quarterly over the vesting period.

On July 31, 2017, the Company issued 488,500 options to employees and consultants of the Company. The options granted vest over the next four years, and the exercise price of the options granted is $0.13, which was the last closing bid price of the Company's common stock as traded on the OTC QB Market.  The stock options are valued at $62,773 which will be expensed quarterly over the vesting period.

During the three months ended September 30, 2017, approximately $37,000 of expense was recorded for stock options expense.  During the nine months ended September 30, 2017, approximately $69,000 of expense was recorded for stock options expense.

On July 29, 2016, the Company adopted a resolution approved by the shareholders to effectuate 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.

On July 19, 2017, the Company entered into a variable convertible note with unrelated 3^rd party for $115,000 with net proceeds of $107,000.  The note is due January 21, 2018 and bears interest at 10% per annum.  The note is immediately convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from July 19, 2017.  The Company issued 500,000 shares of Class A common stock to the note holder which are returnable if no event of default has occurred and the note is paid in full within 180 days of the note date.  Management has determined that it is probable that the Company will meet the conditions under the note and therefore it more likely than not that the Company will not be in default as defined in the note and the note will be paid in full within 180 days of the note date.  As a result, management has concluded that it is probable that the shares would be returned and therefore the cost of issuance has not been recorded as of September 30, 2017.  The Company will reassess the likelihood of such at each period end.

Note 9 – Business Combinations

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

Horizon Well Testing

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

During the three months ended September 30, 2017 an adjustment was made to the purchase price allocation based on additional information.  Intangibles decreased by $123,240, Property, Plant & Equipment increased by $273,459 and Goodwill decreased by $150,219.

Unaudited pro forma results of operations for the nine months ended September 30, 2016 (Predecessor), as if the Companies (Alpine, QCA & HWT) had been combined as of January 1, 2016, 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 period ending September 30, 2017 (Successor), pro forma information is not provided because the results after December 31, 2016, are post-acquisition.

Note 10 – Industry Segments

This summary presents the Company's current segments, QCA and HWT, for the three and nine months ended September 30, 2017 (Successor).  Prior periods are not presented as QCA made up the majority of the financials.

Note 11 – Derivative Liabilities and Fair Value Measurements

During the nine months ended September 30, 2017, the Company issued a convertible note dated July 19, 2017 (see "Note 7 – Convertible Notes Payable").

This note was evaluated under FASB ASC 815-40, Derivatives and Hedging and was determined to have characteristics of derivative liability under the above guidance.  Each reporting period, this derivative liability is marked-to-market with the non-cash gain or loss recorded in the period as a gain or loss on derivatives.  On September 30, 2017 and December 31, 2016, the aggregate fair value of the derivative liabilities was $175,332 and $0, respectively.

During the nine months ended September 30, 2017, certain notes issued, conversion options relating to convertible debt with a fixed conversion price that had been previously issued, and the outstanding Class A common stock warrants became tainted and were required to be accounted for as derivative liabilities under ASC 815.

For the nine months ended September 30, 2017 and twelve months ended December 31, 2016, the aggregate change in the fair value of derivative liabilities was a gain of $72,361 and $0, respectively.

The valuation of our embedded derivatives is determined by using the Black-Scholes Option Pricing Model.  As such, our derivative liabilities have been classified as Level 3.

The Company estimated the fair value of the derivative liabilities using the Black-Scholes Option Pricing Model and the following key assumptions during the nine months ended September 30, 2017.

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  FASB ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level of input that is significant to the fair value measurement of the instrument.

The following table provides a summary of the fair value of our derivative liabilities as of September 30, 2017 and December 31, 2016.

The below table presents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2017:

Note 12 – Subsequent Events

Convertible Notes

On October 5, 2017, the Company entered into a convertible note with an unrelated lender for $60,000 with net proceeds of $55,000.  The note is due July 4, 2018 and bears interest at 12% per annum.  After 180 days, the note is convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from October 5, 2017.  The prepayment penalty is equal to 20% to 25% of the outstanding note amount depending on when prepaid.

On October 11, 2017, the Company entered into a convertible note with an unrelated lender for $58,500 with net proceeds of $55,500.  The note is due July 20, 2018 and bears interest at 12% per annum.  The note is immediately  convertible to the Company's Class A common stock at a discount of 38% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from October 11, 2017.  The prepayment penalty is equal to 10% to 27% of the outstanding note amount depending on when prepaid.

 

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. (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 is a technology holding company owning three companies (ALTIA, LLC; Quality Circuit Assembly, Inc.; and Horizon Well Testing, LLC).

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 Strategy

Alpine 4's strategy is to provide Fortune 500-level execution strategies in its subsidiary companies and market segments to businesses and companies that have the most to benefit from this access.

Alpine 4 feels this opportunity exists in smaller middle market operating companies with revenues between $5 to $150 million.  In this target rich environment, businesses generally sell at more reasonable multiples, presenting greater opportunities for operational and strategic improvements and have greater potential for growth.   Implementation of our strategy within our holdings is accomplished by the offering of strategic and tactical MBA-level training and development, delivered via the following modules:

All great strategies must have trade-offs. Therefore, Alpine 4 avoids companies that have unionized employees, businesses that have more than $150 million in revenue, and companies that operate in highly regulated business industries.

Diversification

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. 

In 2016, we saw the beginning of our plan for diversification take hold with the acquisition of Quality Circuit Assembly, Inc. ("QCA") when Alpine 4 acquired 100% of QCA's stock effective April 1, 2016.  Additional information relating to our acquisition of QCA can be found in our Current Report on Form 8-K, filed with the SEC on March 15, 2016.

In October of 2016, Alpine 4 formed a new Limited Liability Company called ALTIA (Automotive Logic & Technology In Action) to create an independent subsidiary for Alpine 4's 6^th Sense Auto product ("6SA") and its BrakeActive product.

Effective, January 1, 2017, Alpine 4 acquired 100% of Horizon Well Testing, LLC ("HWT"). Additional information about the acquisition of HWT can be found in our Current Reports on Form 8-K filed with the SEC on December 8, 2016, and January 13, 2017.

Finally, we have entered into two additional LOI's to acquire two different companies, and will provide additional disclosures relating to those transactions as they progress.

Segments

Segment revenue and net income are key metrics we use to evaluate segment operating performance and to determine resource allocation between segments.

Common Stock

Holders of our Class A and Class B common stock have identical rights, except that holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Holders of shares of Class A common stock and Class B common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law. We have not provided for cumulative voting for the election of directors in our certificate of incorporation.

Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of Class A common stock and Class B common stock shall be entitled to share equally in any dividends that our board of directors may determine to issue from time to time. In the event a dividend is paid in the form of shares of common stock or rights to acquire shares of common stock, the holders of Class A common stock shall receive Class A common stock, or rights to acquire Class A common stock, as the case may be, and the holders of Class B common stock shall receive Class B common stock, or rights to acquire Class B common stock, as the case may be.

Upon our liquidation, dissolution or winding-up, the holders of Class A common stock and Class B common stock shall be entitled to share equally all assets remaining after the payment of any liabilities and the liquidation preferences on any outstanding preferred stock.

Our Class A common stock is not convertible into any other shares of our capital stock.

Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock. In addition, each share of Class B common stock shall convert automatically into one share of Class A common stock upon any transfer, whether or not for value, except for certain transfers described in our certificate of incorporation.

Once transferred and converted into Class A common stock, the Class B common stock shall not be reissued. No class of common stock may be subdivided or combined unless the other class of common stock concurrently is subdivided or combined in the same proportion and in the same manner.

The foregoing description of the Second Amended and Restated Certificate of Incorporation is qualified in its entirety by reference to the text of the Amendment attached as Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on August 27, 2015, and incorporated therein by reference. 

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 substantial 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 and HWT has allowed for an increased level of cash flow to the Company.  Second, the Company is in negotiations to acquire another company that management believes will increase income and cash flow to the Company as QCA has done.  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 in connection with that capital raise.

Results of Operations 

Our revenues were $7,044,806 for the nine months ended September 30, 2017 (Successor), with the majority being from QCA.  This compares with $1,788,654 for the three months ended March 31, 2016 (Predecessor), and $4,294,535 for the six months ended September 30, 2016 (Successor).  Predecessor revenue is from circuit board and wire harness sales.  Successor revenues include these and the 6SA product for the period ending June 30, 2016, as well as oil industry services for the period ending September 30, 2017.  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 are based on management's contacts within the automobile dealership industry and the anticipated increase in interest in Alpine 4's products and services.   Management also expects revenue from circuit board and wire harness sales to increase over the next 12 months as well as services in the oil field industry.  These expectations are a result of increased focus on acquiring new customers and growing current customer's orders.

Our cost of revenues was $4,661,163 for the nine months ended September 30, 2017 (Successor).  This compares to $1,383,031 for the three months ended March 31, 2016 (Predecessor) and $2,730,395 for the six months ended September 30, 2016 (Successor).  We expect our cost of revenue to increase over the next 12 months as our revenue increases.  

Our general and administrative expenses were $3,238,927 for the nine months ended September 30, 2017 (Successor).  This compares to $533,894 for the three months ended March 31, 2016 (Predecessor) and $2,858,163 for the six months ended September 30, 2016 (Successor).  As Alpine 4 increases its advertising and brand and product/service awareness campaigns beginning in the second half of 2017, 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 $1,080,476 for the nine months ended September 30, 2017 (Successor).  This compares to $456 for the three months ended March 31, 2016 (Predecessor) and $627,515 for the six months ended September 30, 2016 (Successor).  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 and HWT.  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, and 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 which began in the third quarter of 2017.  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 2017.

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 used cash from operating activities of $872,969 for the nine months ended September 30, 2017 (Successor).  This compares with cash used of $72,935 for the three months ended March 31, 2016 (Predecessor) and cash generated of $30,831 for the six months ended September 30, 2016 (Successor).  The increase is due to a larger loss and the increase of inventory.

The Company used cash from investing activities of $2,033,934 for the nine months ended September 30, 2017 (Successor).  This compares with $0 cash used for the three months ended March 31, 2016 (Predecessor) and $2,969,500 cash used for the six months ended September 30, 2016 (Successor).  The decrease is due to the purchase of QCA in 2016 cost more than the purchase of HWT in 2017.

The Company generated cash from financing activities of $2,760,781 for the nine months ended September 30, 2017 (Successor).  This compares to cash used of $69,461 for the three months ended March 31, 2016 (Predecessor), and generated cash of $2,713,665 for the six months ended September 30, 2016.

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 ("U.S. 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.

ALTIA

The Company accounts for ALTIA's 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 6^th Sense Auto 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 the vehicle is purchased, the Company recognizes the service portion of the contract over the service period of generally 12 to 36 months.

Quality Circuit Assembly

The Company accounts for QCA's revenue per the guidance in ASC 605-25-25 by allocating the total contract amount between the product and service elements.  Revenue is recognized when either the product has completely been built and shipped or the service has been completed.  If a deposit for product or service is received prior to completion the payment is recorded to deferred revenue until such point the product or services meets our revenue recognition policy.  Management assesses the materiality and likelihood of warranty work and returns, and records reserves as needed.  For all periods presented, management determined that the warranty and returns would be immaterial.

Horizon Well Testing

Revenue is recognized when the contract has been performed in completion.  Contracts range from one day to 30 days in length.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as of September 30, 2017 (Successor), and December 31, 2016.  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.

Advertising costs are expensed when incurred.  All advertising takes place at the time of expense.  We have no long-term contracts for advertising.  Advertising expense for all periods presented were under $10,000.

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. As of September 30, 2017, and December 31, 2016, the Company had no cash equivalents.

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.  As of September 30, 2017 (Successor), and March 31, 2016 (Predecessor), allowance for bad debt was $177,470 and $0, respectively.

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.

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 ten 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.

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

The Company evaluates intangible assets for impairment on a yearly basis or as needed.  During the nine months ended September 30, 2017 (Successor), there have been no impairment losses.

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 nine months ended September 30, 2017 (Successor), 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.  All assessments of goodwill impairment are conducted at the individual reporting unit level.  As of September 30, 2017, the only reporting units with goodwill were QCA and HWT.

The Company used qualitative factors according to ASC 350-20-35-3 to determine whether it is more likely than not that the fair value of goodwill is less than its carrying amount.  Based on the qualitative criteria the company believes there not to be any triggers for potential impairment of goodwill and therefore 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.

As discussed in Note 9 above 379,403 shares of Class A common stock that were issued as consideration for the HWT acquisition contain a redemption feature which allows for the redemption of Class A common stock at the option of the holder. In accordance with ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity.   Accordingly, at September 30, 2017, 379,403 shares of the Class A common stock were classified outside of permanent equity at its redemption value.

Recent Developments

Convertible Notes

On October 4, 2017, the Company entered into a convertible note with an unrelated lender for $60,000 with net proceeds of $55,000.  The note is due July 4, 2018 and bears interest at 12% per annum.  After 180 days, the note is convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from October 5, 2017.  The prepayment penalty is equal to 20% to 25% of the outstanding note amount depending on when prepaid.

On October 11, 2017, the Company entered into a convertible note with an unrelated lender for $58,500 with net proceeds of $55,500.  The note is due July 20, 2018 and bears interest at 12% per annum.  After 180 days, the note is convertible to the Company's Class A common stock at a discount of 38% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from October 11, 2017.  The prepayment penalty is equal to 10% to 27% of the outstanding note amount depending on when prepaid.

With approximately 40 million new and used cars sold in the United States annually, management believes that ALTIA's market opportunity is very large, and believes that the Company's 6^th Sense Auto product is positioned to be a dominant player in this industry.

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, June 30, 2017. 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, 2017: (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, 2017, 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 2.                      Unregistered Sales of Equity Securities and Use of Proceeds.

During the quarter ended September 30, 2017, the Company issued 106,000 shares of its restricted Class A common stock in connection with services, 177,342 shares for note conversions and 500,000 shares which are fully returnable upon the payment of a convertible note.   Of the 500,000 shares 150 000 have been released for return in exchange for another note with no issuance of shares on the second note.

The shares of Class A 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 4.                      Mine safety disclosures.

None

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.

 

 

 

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