ALPINE 4 HOLDINGS, INC. - Quarter Report: 2021 March (Form 10-Q)

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, 2021

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

Commission file number: 000-55205

Alpine 4 Holdings, Inc.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: 480-702-2431

(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 May 15, 2021, the issuer had 139,183,509 shares of its Class A common stock issued and outstanding, 9,023,088 shares of its Class B common stock issued and outstanding and 12,500,200 shares of its Class C common stock issued and outstanding.

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TABLE OF CONTENTS

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, commencement of business operations, business strategy, statements related to the expected effects on our business from the novel coronavirus (“COVID-19”) pandemic, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “hope,” “intend,” “project,” “positioned,” or “strategy” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements including, but not limited to, the duration and scope of the COVID-19 pandemic and impact on the demand for the products we distribute; our ability to obtain the products from the manufacturer; actions governments, businesses, and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the COVID-19 pandemic and action taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; our inability to sustain profitable sales growth; and circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs, of our current and planned business initiatives. For a more thorough discussion of these risks, you should read this entire Report carefully, as well as the risks discussed under “Risk Factors” in our Annual Report for the year ended December 31, 2020.

Although management believes that the assumptions underlying the forward-looking statements included in this Report are reasonable, such statements 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, all of the forward-looking statements made herein are qualified by these cautionary statements, and 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.

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PART I - FINANCIAL INFORMATION

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Alpine 4 Holdings, Inc., and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended March 31, 2021

Note 1 – Organization and Basis of Presentation

The unaudited consolidated financial statements were prepared by Alpine 4 Holdings, Inc. (‘we,” “our,” or 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 consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2021. The results for the three months ended March 31, 2021, are not necessarily indicative of the results to be expected for the year ending December 31, 2021.

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.  On March 2, 2021, the Company changed its name from Alpine 4 Technologies Ltd. to Alpine 4 Holdings, Inc.

Effective January 1, 2019, the Company purchased all of the outstanding capital stock of Morris Sheet Metal Corp., an Indiana corporation (“MSM”), JTD Spiral, Inc. a wholly owned subsidiary of MSM, an Indiana corporation, Morris Enterprises LLC, an Indiana limited liability company, and Morris Transportation LLC, an Indiana limited liability company (collectively “Morris”).  

Effective November 6, 2019, the Company purchased all of the outstanding capital stock and units of Deluxe Sheet Metal, Inc., an Indiana corporation, and DSM Holding, LLC, an Indiana limited liability company, and purchased certain real estate from Lonewolf Enterprises, LLC, an Indiana limited liability company (collectively “Deluxe”) (see Note 8).  

Effective February 21, 2020, the Company purchased all of the outstanding units of Excel Fabrication, LLC., an Idaho limited liability company (“Excel”).  

Effective December 15, 2020, the Company purchased the assets of Impossible Aerospace Corporation, a Delaware corporation (“IA”).

Effective February 8, 2021, the Company purchased the assets of Vayu (US), Inc., a Delaware corporation (“Vayu”).

Effective May 1, 2021, the Company acquired all of the outstanding shares of stock of Thermal Dynamics, Inc., a Delaware corporation (“TDI”).

Effective May 4, 2021, the Company acquired all of the outstanding membership interests of KAI Enterprises, LLC, a Florida limited liability company, the sole asset of which was all of the outstanding membership interests of Alternative Laboratories, LLC, a Delaware limited liability company (“Alt Labs”).

As of the date of this Report, the Company is a holding company owning, directly or indirectly, eleven companies:

·A4 Corporate Services, LLC;  

·ALTIA, LLC;  

·Quality Circuit Assembly, Inc.;  

·Morris Sheet Metal, Corp;  

·JTD Spiral, Inc.;  

·Excel Construction Services, LLC;  

·SPECTRUMebos, Inc.;  

·Impossible Aerospace, Inc.;   

·Vayu (US); 

·Thermal Dynamics, Inc.; and 

·Alternative Laboratories, LLC. 

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Basis of presentation

The accompanying consolidated 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 generally accepted accounting principles in the United States (“GAAP”).

Liquidity

The Company’s financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.

In accordance with Financial Accounting Standards Board (the “FASB”), Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

While the Company experienced a loss for the quarter ended March 31, 2021, of $6.1 million, and had a negative cash flow used in operations, there were significant non-recurring items related to the RSU purchases totaling approximately $1.8 million contributing to the loss.

The Company received a total of approximately $54.0 million in February 2021 in the following two transactions:

·The Company raised approximately $45.0 million in net proceeds in connection with a registered direct offering of its stock and;  

·The Company raised approximately $9.0 million in net proceeds in connection with an equity line of credit financing arrangement.  

The Company plans to continue to generate additional revenue (and improve cash flows from operations) partly from the acquisitions of two operating companies which closed in May 2021 combined with improved performance from the existing operating companies. 

Based on the capital raise as indicated above and management plans to improve cash flows from operations, management believes the Company has sufficient working capital to satisfy the Company’s estimated liquidity needs for the next 12 months. The Company ended the March 31, 2021 quarter with $36.0 million in cash, and as of the date of this Report had $14.3 million in cash after the purchase of the two operating companies in May 2021. During the quarter, the Company paid down liabilities of approximately $13.0 million. In addition, approximately $1.0 million was used to build inventory and for capital expenditures. The current ratio was at 3.2 times at March 31, 2021.

However, there is no assurance that management’s plans will be successful due to the current economic climate in the United States and globally.

Note 2 - Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as of March 31, 2021, and December 31, 2020.  Significant intercompany balances and transactions have been eliminated.

Use of estimates

The consolidated financial statements are prepared in accordance with U.S. GAAP.  Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable. In many instances, the Company could have reasonably used different accounting estimates and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. This applies in particular to useful lives of non-current assets, valuation allowance for deferred tax assets and impairment of non-current assets. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, the Company’s future financial statement presentation, financial condition, results of operations

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and cash flows will be affected.  The ultimate impact from COVID-19 on the Company’s operations and financial results during 2021 will depend on, among other things, the ultimate severity and scope of the pandemic, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, and the speed with which the economy recovers. The Company is not able to fully quantify the impact that these factors will have on the Company’s financial results during 2021 and beyond.  COVID-19 did have a negative impact on the Company’s financial performance in 2020.  During the three months ended March 31, 2021, there was no impairment charge related to intangible assets and goodwill.

Major Customers

The Company had two customers that made up 14% and 9%, respectively, of accounts receivable as of March 31, 2021. The Company had two customers that made up 10% and 8%, respectively, of accounts receivable as of December 31, 2020.

For the three months ended March 31, 2021, the Company had two customers that made up 15% and 10% of total revenues. For the three months ended March 31, 2020, the Company had two customers that made up 14% and 11%, respectively, of total revenues. 

Fair value measurements

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. 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. 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.

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

The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates.  As of March 31, 2021 and December 31, 2020, the Company has no financial assets or liabilities that required to be fair valued on a recurring basis.

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Earnings (loss) per shares

The Company presents both basic and diluted net loss per share on the face of the consolidated statements of operations. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants, and using the treasury-stock method. If antidilutive, the effect of potentially dilutive shares of common stock is ignored. The only potentially dilutive securities outstanding during the periods presented were the convertible debt, options and warrants.  The following table illustrates the computation of basic and diluted earnings per share (“EPS”) for the three months ended March 31, 2021 and 2020:

Note 3 – Leases

The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.

As of March 31, 2021, the future minimum finance and operating lease payments were as follows:

As of October 1, 2020, the American Precision Fabricators, Inc. (“APF”) building lease with Harbor Island Properties, LLC was modified, assignment was transferred to Excel Fabrication, LLC (“Excel”), and Quality Circuit Assembly, Inc. (“QCA”). As part of the modification, the lease was extended through 2037 and the payment terms were amended effective January 15, 2021.  

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Operating Leases

The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheet as of March 31, 2021, and December 31, 2020:

Note 4 – Notes Payable

The outstanding balances for the loans as of March 31, 2021, and December 31, 2020, were as follows:

The negative line of credit balance represents funds owed to the Company from the prior lender as a direct result of transitioning out of the credit facility. The funds are being remitted from the lender on a weekly basis.

Future scheduled maturities of outstanding notes payable are as follows:

Note 5 – Notes Payable, Related Parties

At March 31, 2021, and December 31, 2020, notes payable due to related parties consisted of the following:

The above notes which were in default as of March 31, 2021, were due on demand by the lenders as of the date of this Report.

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Note 6 – Convertible Notes Payable

At March 31, 2021, and December 31, 2020, convertible notes payable consisted of the following:

(A) In May and June 2020 the Company amended the following seller notes:   The convertible note with Jeff Moss with a $720,185 balance as of May 4, 2020, was amended to extend the maturity date to May 4, 2027, at 5% interest with weekly payments of $2,605.   The principal balance was increased to $798,800 and the balance outstanding at December 31, 2020, was $735,329.  The convertible note with Dwight Hargreaves with a $551,001 balance as of June 5, 2020, was amended to extend the maturity date to June 5, 2026, at 6% interest with weekly payments of $2,316.  The principal balance was increased to $605,464 and the balance outstanding at December 31, 2020, was $556,135.  A loss on extinguishment of debt of $192,272 was recognized on these transactions.   

The discounts on convertible notes payable arise from beneficial conversion features.  During the three months ended March 31, 2021, and the year ended December 31, 2020, the Company issued convertible notes with a fixed conversion price.  The beneficial conversion feature related to these convertible notes that have been recorded as a discount on the convertible notes and as a component of equity was $92,428 and $1,482,500 for the three months ended March 31, 2021, and the year ended December 31, 2020, respectively.  The discounts are being amortized over the terms of the convertible notes payable.  Amortization of debt discounts during the three months ended March 31, 2021 and 2020, amounted to $801,340 and $245,774, respectively, and is recorded as interest expense in the accompanying consolidated statements of operations.  The unamortized discount balance for these notes was $634,712 as of March 31, 2021, which is expected to be amortized over the next 12 months.

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A summary of the activity in the Company's convertible notes payable is provided below:

Note 7 – Stockholders' Equity

Common Stock

·On February 11, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors to purchase 8,333,333 shares of the Company’s Class A common stock for aggregate gross proceeds of approximately $50 million.  A.G.P./Alliance Global Partners served as the placement agent and received a cash fee of 7% of the aggregate gross proceeds and warrants to purchase shares of the Company’s Class A Common Stock in an amount equal to 5% of the Shares from the offering with an exercise price of $6.60 per share and are not exercisable until August 16, 2021. Net proceeds from the sale of shares amounted to approximately $45 million.  

·issued 1,524,064 shares of Class A common stock to an investor for cash for total proceeds of $9.3 million.   

·issued 702,877 shares of Class A common stock for the conversion of total debt and accrued liabilities totaling $109,830.   

·repurchased 45,000 shares of Class C common stock for $185,850.  

Preferred Stock

·On February 8, 2021, the Company issued 1,428,572 shares of Series D Preferred Stock in connection with the acquisition of assets of Vayu that were valued at $6,653,309.  

·In March 2021, the Company repurchased 514,286 outstanding restricted stock units (RSUs) which had not yet settled, from two individuals in privately negotiated transactions. The Company repurchased 314,286 shares of Series C Preferred Stock and 200,000 shares of Series D Preferred Stock at $3.50 per share. The RSUs had been issued to the individuals in connection with the IA and Vayu acquisitions. 

Stock Options

The following summarizes the stock option activity:

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The following table summarizes information about options outstanding and exercisable as of March 31, 2021:

During the three months ended March 31, 2021 and 2020, stock option expense amounted to $19,341 and $19,556, respectively.  Unrecognized stock option expense as of March 31, 2021, amounted to $24,407, which will be recognized over a period extending through December 2022.    

Warrants

The following summarizes the warrants activity:

The following table summarizes information about warrants outstanding and exercisable as of March 31, 2021:

During the three months ended March 31, 2021, the Company issued 416,667 warrants to a placement agent in connection with sale of its common stock (Note 7). The warrants have an exercise price of $6.60, become exercisable on August 16, 2021 and expire on February 16, 2025.

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The fair value of the warrants of $2,498,637 was determined using the Black-Scholes option pricing model with the following assumptions:

The fair value of the warrants was recorded as offering costs with a corresponding credit to additional paid in capital.

Note 8 – Business Combinations

Vayu (US)

Effective February 8, 2021, the Company purchased the assets of Vayu (US), Inc., a Delaware corporation (“Vayu”).

Under the provision of Accounting Standards Codification (“ASC”) 805, the Company had to determine whether this acquisition was a business combination or an asset (or a group of assets) acquisition. In doing so, the Company determined that the acquisition of Vayu was in fact an asset purchase.  Of the consideration given for the Vayu acquisition more than 95% was concentrated in a single asset or a group of assets in Intellectual Property. As such, the Company accounted for this acquisition as an asset acquisition in accordance with ASC 805-10-20.  Accordingly, the assets acquired are initially recognized at the consideration paid, which was the fair value of the series D preferred stock issued, including direct acquisition costs, of which there were none. The cost is allocated to the group of assets acquired based on their relative fair values. The assets acquired and liabilities assumed of were as follows at the purchase date:

The purchase price was paid as follows:

The following are the unaudited pro forma results of operations for the three months ended March 31, 2021 and 2020, as if Excel, Impossible Aerospace, Inc. (“IA”), and Vayu had been acquired on January 1, 2020.  The pro forma results include estimates and assumptions which management believes are reasonable.  However, pro forma results do 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.

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Note 9 – Industry Segments

This summary presents the Company's segments, QCA; APF; Morris Sheet Metal Corp, Morris Enterprises LLC, and Morris Transportation LLC (collectively, “Morris”); Deluxe Sheet Metal, Inc., DSM Holding, LLC (collectively, “DSM”), Excel, IA, and Vayu for the three months ended March 31, 2021, March 31, 2020, and December 31, 2020: