ALPINE 4 HOLDINGS, INC. - Quarter Report: 2018 March (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

For the quarterly period ended March 31, 2018

[   ]           TRANSITION 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. ☒

TABLE OF CONTENTS

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

 

ALPINE 4 TECHNOLOGIES, LTD. and SUBSIDIARIES

(Unaudited) 

 

Alpine 4 Technologies Ltd.

Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended March 31, 2018

(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 17, 2018. The results for the three months ended March 31, 2018, are not necessarily indicative of the results to be expected for the year ending December 31, 2018.

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.  The Company is a technology holding company owning four companies (ALTIA, LLC; Quality Circuit Assembly, Inc. ("QCA"); Venture West Energy Services ("VWES") (formerly Horizon Well Testing, LLC); and American Precision Fabricators, Inc., an Arkansas corporation ("APF").   On April 5, 2018, the Company acquired 100% of the outstanding shares of APF (see Note 12).

Note 2 - Summary of Significant Accounting Policies

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as of March 31, 2018, and December 31, 2017.  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 not significant.

Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days.   As of March 31, 2018, and December 31, 2017, the Company had no cash equivalents.

The following table provides a reconciliation of cash and restricted cash reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows.

The Company had two customers that made up 21% and 20%, respectively, of accounts receivable as of March 31, 2018.  The Company had two customers that made up 41% and 13%, respectively, of accounts receivable as of December 31, 2017.

For the three months ended March 31, 2018, the Company had two customers that made up 22% and 15%, respectively, of total revenues.  For the three months ended March 31, 2017, the Company had four customers that collectively made up approximately 60% of total revenues.

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 March 31, 2018 (unaudited), and December 31, 2017, allowance for bad debt was $18,710.

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 March 31, 2018 (unaudited), and December 31, 2017:

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.

Property and equipment consisted of the following as of March 31, 2018 (unaudited), and December 31, 2017:

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

Intangible assets consisted of the following as of March 31, 2018 (unaudited), and December 31, 2017:

Other long-term assets consisted of the following as of March 31, 2018 (unaudited), and December 31, 2017:

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") Accounting Standards Codification ("ASC") 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 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 March 31, 2018, and December 31, 2017, the reporting units with goodwill were QCA and VWES.

 

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.

On January 1, 2018, the Company adopted ASC Topic 606, "Revenue from Contracts with Customers" using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under ASC Topic 605.

The Company recorded a net increase to its opening accumulated deficit of $178,202 as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with the impact related to recognition of revenue and costs relating to the sales of the 6^th Sense Auto service.  Under the new revenue standard, sales of the Company's 6^th Sense Auto service, which includes a hardware and a monthly subscription component, are required to be treated as a single performance obligation and recognized over time.  As a result, the deferred revenue increased by $279,736 and capitalized contract costs increased by $101,534.  The impact to the consolidated statement of operations for the quarter ended March 31, 2018 was a net increase of $15,888 to revenue and a net increase of $5,670 to cost of revenue an increase of as a result of applying ASC Topic 606.  The impact to the consolidated statement of operations for the quarter ended March 31, 2017 was not significant.

Revenues under ASC Topic 606 are recognized when the promised goods or services are transferred to customers, in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services.  The following is a summary of the revenue recognition policy for each of the Company's subsidiaries.

ALTIA

Revenues recorded by ALTIA relate primarily to the Company's 6^th Sense Auto service.  The Company accounts for its revenue by deferring the total contract amount and recognizing the amounts over the monthly subscription period, ranging from 12 to 36 months.  

QCA

QCA is a contract manufacturer and recognizes revenue when the products have been built and control has been transferred to the customer.  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.

VWES

VWES performs water transfer services and well testing for the oil and gas industry.  Revenue is recognized over time as services under the contracts are completed. 

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. 

 

 

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 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 ultimate transition 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.  Second, the Company has acquired VWES 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 professional service firms to provide advisory services in connection with that capital raise.

 

Note 4 – Leases

As of March 31, 2018, the future minimum capital lease and financing transaction payments, net of amortization of debt issuance costs, were as follows:

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 $207,311 had been satisfied as of March 31, 2018.

Operating Leases

The Company has two non-cancellable operating leases as of March 31, 2018 for its locations in San Jose, California and Oklahoma City, Oklahoma.  Approximate monthly rent obligations for these locations amount to $21,500 and $5,000 respectively.  The Company also has an office it leases in Phoenix, Arizona on a month-to-month basis.  VWES also rents certain equipment on a temporary basis to perform its services.

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

Rent expense for the three months ended March 31, 2018 and 2017 amounted to $458,575 and $93,300, respectively.

Note 5 – Notes Payable

During the year ended December 31, 2017, VWES secured a line of credit with a third-party lender, Crestmark.  The line of credit is collateralized by VWES'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 for $1,872,392 which is collateralized by VWES's equipment.  Both are guaranteed by the Company.

As of December 31, 2017, the Company had an outstanding term loan with a 30% interest rate of $10,000 which was repaid during the three months ended March 31, 2018.  During the three months ended March 31, 2018, the Company borrowed an aggregate total of $149,000 in additional short-term notes payable bearing interest at 15% per annum with maturity dates of three months from the date of issuance.

On February 22, 2018, the Company issued a $3,000,000 note payable under the Amended and Restated Secured Promissory Note with the seller of VWES (see Note 9).  The note is secured by the assets of VWES and bears interest at 7% per annum and is due in semi-annual payments of $150,000 commencing on June 1, 2018, through June 1, 2020.
 

Future scheduled maturities of outstanding notes payable to third parties are as follows:

 

 

Note 6 – Notes Payable, Related Parties

 

At March 31, 2018 (unaudited), and December 31, 2017, notes payable due to related parties consisted of the following:

 

 

The above notes which are in default as of March 31, 2018, were due on demand by the lender as of the date of this Report.

 

Note 7 – Convertible Notes Payable

At March 31, 2018 (unaudited) and December 31, 2017, convertible notes payable consisted of the following:

 

 

The discounts on convertible notes payable arise from stock issued with notes payable, beneficial conversion features, as well as conversion features of certain convertible notes being treated as derivative liabilities (see Note 11).  The discounts are being amortized over the terms of the convertible notes payable.  Amortization of debt discounts during the three months ended March 31, 2018 and 2017 amounted to $122,590 and $11,349, respectively, and is recorded as interest expense in the accompanying consolidated statements of operations.  The unamortized discount balance for these notes was $107,417 as of March 31, 2018, which is expected to be amortized in 2018.

Future scheduled maturities of outstanding convertible notes payable are as follows:

Note 8 – Stockholders' Equity

The Company is authorized to issue 10,000,000 shares of $.0001 par value preferred stock. As of March 31, 2018 and December 31, 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 has one vote per share, and Class B common stock, which has 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 three months ended March 31, 2018:

 

 

During the quarter ended March 31, 2017, the Company issued 379,403 shares of its Class A common stock in connection with the purchase of VWES.  Of these shares, 260,000 shares were 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 VWES.  Additionally, 119,403 shares were redeemable at $3.35 per share at 12 months from the closing date of the purchase of VWES.  These shares were valued at the redemption value of $1,439,725.  The redemption right on these shares was cancelled in connection with the Amended Agreement entered on February 22, 2018 (see Note 9).

Due to the nature of the issuance of stock for the VWES acquisition, it was historically recorded outside of permanent equity.  Subsequent to February 22, 2018 after the cancellation of the redemption rights, the stock was reclassified to equity in the accompanying consolidated balance sheet.

The Company has issued stock options to purchase shares of the Company's Class A common stock 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.

The following summarizes the stock option activity for the three months ended March 31, 2018:

 

The following table summarizes information about options outstanding and exercisable as of March 31, 2018:

During the three months ended March 31, 2018 and 2017, stock option expense amounted to $15,840 and $0, respectively.  Unrecognized stock option expense as of March 31, 2018 amounted to $198,407, which will be recognized over a period extending through September 2021. 

On January 1, 2017, the Company granted 75,000 warrants to the seller of VWES.  The warrants have a 3 year contractual life, an exercise price of $4.25 per share and are vested immediately.  The warrants were accounted for as part of the purchase price of the acquisition of VWES.  On February 22, 2018, in connection with the Amended Agreement (see Note 9), the warrants were cancelled and replaced with 75,000 new warrants with an exercise price of $1 per share that were vested immediately and have a contractual life of 3 years.

During the three months ended March 31, 2017, the Company granted an aggregate total of 2,001 warrants to individuals.  These warrants all have a 3 year contractual life, an exercise price of $2.00 per share and are vested immediately.

Note 9 – Business Combinations

Venture West Energy Services

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

Pro forma information is not provided because the results after December 31, 2016 are post-acquisition.

On February 22, 2018, the Company entered into an Amended Agreement with the seller of VWES.  Per the terms of the Amended Agreement, the two notes payable initially issued to the seller of VWES on January 1, 2017 for $1,500,000 and $300,000 are cancelled, along with the redemption rights associated with 379,403 shares the Company's Class A common stock and 75,000 warrants, and replaced with a new Amended and Restated Secured Promissory Note for $3,000,000 (see Note 5).  The new note is due in semi-annual payments of $150,000 commencing on June 1, 2018 through June 1, 2020 and bears interest at 7% per annum.  If the note is paid in full on or before June 1, 2018, the balance due will be discounted by $500,000.  If the note is paid in full after June 1, 2018 and on or before December 1, 2018, the balance due will be discounted by $450,000.  If the note is paid in full after December 1, 2018, and on or before June 1, 2019, the balance due will be discounted by $350,000.  If the note is paid in full after June 1, 2019 and on or before December 1, 2019, the balance due will be discounted by $250,000.  If the note is paid in full after December 1, 2019 and on or before June 1, 2020, the balance due till be discounted by $200,000.

In connection with the Amended Agreement, the Company also issued an additional 100,000 shares of Class A common stock to the seller of VWES valued at $15,000, and granted new warrants effective February 22, 2018 to purchase 75,000 shares of common stock with an exercise price of $1.00 per share valued at $9,142 using the Black-Sholes model.  The warrants are immediately vested and have a contractual life of 3 years.  The Company also agreed to return the land and building acquired in the acquisition of VWES to the seller.  The land and building had an aggregate book value as of February 22, 2018 of $173,396, which approximated its fair value.

The Company compared the value of the extinguished debt, returned land and building and cancelled stock and warrants to the value of the new Amended and Restated Secured Promissory Note and new instruments issued as of February 22, 2018.  The difference of $136,300 was reflected as a gain on extinguishment of debt during the accompanying consolidated statements of operations for the three months ended March 31, 2018.

Note 10 – Industry Segments

This summary presents the Company's segments, QCA and VWES, for the three months ended March 31, 2018 and 2017: 

 

Note 11 – Derivative Liabilities and Fair Value Measurements

The Company has issued convertible notes payable that were evaluated under the guidance in FASB ASC 815-40, Derivatives and Hedging, and were determined to have characteristics of derivative liabilities.  As a result of the characteristics of these notes, the conversion options relating to previously issued convertible debt and outstanding Class A common stock warrants were also required to be accounted for as derivative liabilities under ASC 815.   Under this guidance, this derivative liability is marked-to-market at each reporting period with the non-cash gain or loss recorded in the period as a gain or loss on derivatives. 

During the three months ended March 31, 2018, the Company had new convertible notes which became convertible that resulted in an additional $205,341 initial derivative fair value, which was recorded as a derivative liability and a discount to the note payable, of which $111,630 was immediately recorded as a derivative expense due to the value of the derivative liability exceeding the book value of the note payable.  In addition, the Company paid off or settled existing convertible notes which resulted in a reduction of the derivative liability and an increase to additional paid-in capital of $125,759.

As of December 31, 2017, the fair value of the derivative liability amounted to $271,588.  As of March 31, 2018, the fair value of the derivative liability amounted to $233,125.  The change in value of the derivative liabilities for the three months ended March 31, 2018 in the accompanying statements of operations amounted to a gain of $6,415.

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 three months ended March 31, 2018.

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 March 31, 2018 (unaudited), and December 31, 2017:

The below table presents the change in the fair value of the derivative liabilities during the three months ended March 31, 2018:

Note 12 – Subsequent Events

Issuance of Additional Convertible Notes Payable

Execution of Securities Purchase Agreement; Acquisition of APF Well Testing

On April 5, 2018, the Company announced that it had entered into a Securities Purchase Agreement (the "SPA") with American Precision Fabricators, Inc., an Arkansas corporation ("APF"), and Andy Galbach ("Galbach") and Clarence Carl Davis, Jr. ("Davis"), the owners of APF (the "Sellers").  Pursuant to the SPA, the Company acquired 100% of the outstanding shares in APF (the "Transaction").

The total purchase price of $4,500,000, consisted of three components, the Cash Consideration, the Note Consideration, and the Convertible Note Consideration, as follows:

In connection with the SPA, and as consideration for the Company to enter into the SPA, APF and Galbach entered into a Consulting Services Agreement (the "Consulting Agreement"), pursuant to which Galbach agreed for a period of 90 days following the closing of the Transaction to provide strategic management services to APF, meet with APF's new management, and provide his knowledge in customer relations, trade and service implementation, and other business disciplines. Additionally, APF agreed to reimburse Galbach for his expenses incurred by Galbach in connection with providing the services under the Consulting Agreement.

 

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.

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.  The Company is a technology holding company owning four companies (ALTIA, LLC; Quality Circuit Assembly, Inc. ("QCA"); Venture West Energy Services ("VWES") (formerly Horizon Well Testing, LLC); and American Precision Fabricators, Inc., an Arkansas corporation ("APF").  On April 5, 2018, the Company acquired 100% of the outstanding shares of APF.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require that we make certain assumptions and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period.  On an ongoing basis, management evaluates its estimates, including those related to collection of receivables, impairment of goodwill, contingencies, calculation of derivative liabilities and income taxes. Management bases its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances. Actual results under circumstances and conditions different than those assumed could result in material differences from the estimated amounts in the financial statements. 

 

For a summary of our critical accounting policies, refer to Note 2 of our unaudited consolidated financial statements included under Item 1 – Financial Statements in this Form 10-Q.

Recent Developments

Acquisition of American Precision Fabricators, Inc.

On April 5, 2018, the Company announced that it had entered into a Securities Purchase Agreement (the "SPA") with American Precision Fabricators, Inc., an Arkansas corporation ("APF"), and Andy Galbach ("Galbach") and Clarence Carl Davis, Jr. ("Davis"), the owners of APF (the "Sellers").  Pursuant to the SPA, the Company acquired 100% of the outstanding shares in APF (the "Transaction").

The total purchase price of $4,500,000, consisted of three components, the Cash Consideration, the Note Consideration, and the Convertible Note Consideration, as follows:

In connection with the SPA, and as consideration for the Company to enter into the SPA, APF and Galbach entered into a Consulting Services Agreement (the "Consulting Agreement"), pursuant to which Galbach agreed for a period of 90 days following the closing of the Transaction to provide strategic management services to APF, meet with APF's new management, and provide his knowledge in customer relations, trade and service implementation, and other business disciplines. Additionally, APF agreed to reimburse Galbach for his expenses incurred by Galbach in connection with providing the services under the Consulting Agreement.

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, March 31, 2018. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive 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, to allow timely decisions regarding required disclosure.

 

Based upon that evaluation, 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, many of which are indicative of many small companies with small staff: (i) as of December 31, 2017, our CFO David Schmitt resigned from his position for personal reasons, (ii) inadequate segregation of duties and effective risk assessment; (iii) inadequate control activities and monitoring processes; and (iv) failure in the process for identification and disclosure of related party transactions; and (v) 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, 2018: (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

Other than the December 31, 2017, resignation of David Schmitt as our CFO as noted above, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2018, 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.

 

Kevin Cannon et al. v. Alpine 4 Technologies Ltd., Jeff Hail, et al, Arizona Superior Court, Maricopa County, Cas No. CV2017-055699.  On October 4, 2017, Kevin Cannon and Michelle Hanby, individually and on behalf of It's a Date LLC and Brake Plus NWA, Inc., filed a lawsuit in the Arizona Superior Court, Maricopa County, against the Company and several other defendants, including Jeff Hail, the Company's Sr. Vice President. The claim against the Company alleges tortious interference of contract by the Company. The Company brought a motion to dismiss the Complaint for failure to state a claim on which relief could be granted. The Court permitted the plaintiffs to amend their complaint, which they did. The Company has filed another motion dismiss the Complaint for failure to state a claim on which relief could be granted. The Court denied the motion to dismiss. As of the date of this Report, discovery had not commenced. The Company disputes the claim against it and intends to defend vigorously against the lawsuit.

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

During the quarter ended March 31, 2018, the Company issued 333,333 shares of its restricted Class A common stock in connection with the issuance of convertible notes payable, 100,000 shares with the modification of outstanding debt, and 120,000 shares for note conversions.  

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 3.   Defaults Upon Senior Securities.

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.