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 22, 2019. The results for the
nine months ended September 30, 2019, are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
Description of Business
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 five companies (ALTIA, LLC; Quality Circuit Assembly, Inc. ("QCA"); Venture West
Energy Services (“VWES”) (formerly Horizon Well Testing, LLC, currently filed for Chapter 7 bankruptcy); American Precision Fabricators, Inc., an Arkansas corporation (“APF”) and Morris. Effective January 1, 2019, the Company purchased Morris Sheet
Metal Corp., an Indiana corporation, 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”) (see Note 9).
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 September 30, 2019, and December 31,
2018. Significant intercompany balances and transactions have been eliminated.
Basis of presentation
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.
Use of estimates
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
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
Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days. As of September 30, 2019, and
December 31, 2018, 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 statements of cash flows.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash
|
|
$
|
251,019
|
|
|
$
|
207,205
|
|
Restricted cash included in other non-current assets
|
|
|
207,311
|
|
|
|
207,311
|
|
Total cash and restricted cash shown in statement of cash flows
|
|
$
|
458,330
|
|
|
$
|
414,516
|
|
Major Customers
The Company had three customers that made up 21%, 16% and 13%, respectively, of accounts receivable as of September 30, 2019. The Company had two customers that made up 29 % and 27%, respectively,
of accounts receivable as of December 31, 2018.
For the nine months ended September 30, 2019, the Company had two customers that made up 14% and 11%, respectively, of total revenues. For the nine months
ended September 30, 2018, the Company had one customer that made up 23% of total revenues.
Accounts Receivable
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, 2019, and December 31, 2018, allowance for bad debt was $0 and $0, respectively.
Inventory
Inventory is valued at the lower of the inventory's cost (weighted average basis) or net realizable value. Management compares the cost of inventory with
its net realizable value and an allowance is made to write down inventory to net realizable value, if lower. Inventory is segregated into three areas, raw materials, work in progress (WIP) and finished goods. Below is a breakdown of how much
inventory was in each area as of September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
1,460,091
|
|
|
$
|
676,621
|
|
WIP
|
|
|
7,558
|
|
|
|
-
|
|
Finished goods
|
|
|
1,640,236
|
|
|
|
1,499,174
|
|
|
|
$
|
3,107,885
|
|
|
$
|
2,175,795
|
|
Property and Equipment
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:
Automobiles & Trucks
|
10 to 20 years
|
Buildings
|
39 years
|
Leasehold Improvements
|
15 years or time remaining on lease (whichever is shorter)
|
Equipment
|
10 years
|
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 September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Automobiles and trucks
|
|
$
|
155,179
|
|
|
$
|
155,179
|
|
Machinery and equipment
|
|
|
3,654,717
|
|
|
|
2,548,855
|
|
Office furniture and fixtures
|
|
|
114,867
|
|
|
|
109,619
|
|
Building
|
|
|
9,062,000
|
|
|
|
5,795,000
|
|
Leasehold improvements
|
|
|
307,341
|
|
|
|
261,608
|
|
Less: Accumulated depreciation
|
|
|
(1,600,505
|
)
|
|
|
(879,705
|
)
|
|
|
$
|
11,693,599
|
|
|
$
|
7,990,556
|
|
Purchased Intangibles and Other Long-Lived Assets
The Company amortizes intangible assets with finite lives over their estimated useful lives, which range between five and fifteen years as follows:
|
15 years
|
Non-compete agreements
|
15 years
|
Software development
|
5 years
|
Intangible assets consisted of the following as of September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Software
|
|
$
|
278,474
|
|
|
$
|
278,474
|
|
Noncompete
|
|
|
100,000
|
|
|
|
100,000
|
|
Customer lists
|
|
|
1,321,187
|
|
|
|
531,187
|
|
Less: Accumulated amortization
|
|
|
(367,938
|
)
|
|
|
(232,451
|
)
|
|
|
$
|
1,331,723
|
|
|
$
|
677,210
|
|
Expected amortization expense of intangible assets over the next 5 years and thereafter is as follows:
Twelve Months Ending September 30,
|
|
|
|
2020
|
|
$
|
132,627
|
|
2021
|
|
|
132,627
|
|
2022
|
|
|
132,627
|
|
2023
|
|
|
99,028
|
|
2024
|
|
|
99,028
|
|
Thereafter
|
|
|
735,786
|
|
Total
|
|
$
|
1,331,723
|
|
Other long-term assets consisted of the following as of September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Restricted Cash
|
|
$
|
207,311
|
|
|
$
|
207,311
|
|
Deposits
|
|
|
105,927
|
|
|
|
50,927
|
|
Other
|
|
|
33,417
|
|
|
|
32,000
|
|
|
|
$
|
346,655
|
|
|
$
|
290,238
|
|
Restricted cash consists of deposit account collateralizing letters of credit in favor of the counterparty in our lease financing obligation.
Impairment of Long-Lived Assets
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.
Goodwill
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 September 30, 2019, and December 31, 2018, the
reporting units with goodwill were QCA, APF and Morris.
T
he 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.
Fair Value Measurement
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.
Revenue Recognition
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 6th Sense Auto service. Under the new revenue standard, sales of the Company’s 6th 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 year ended December 31, 2018 was a net increase of $279,736 to revenue and a net increase of $101,534 to cost of revenue as a result of applying ASC Topic 606.
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 6th 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.
APF 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.
Morris is a mechanical contractor and recognizes revenue when the services have been performed 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.
Earnings (loss) per share
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 for the
three and nine months ended September 30, 2018 and the nine months ended September 30, 2019 due to the net loss incurred. The following table illustrates the computation of basic and diluted EPS for the three and nine months ended September 30,
2019 and 2018:
|
For the Three Months
ended
September 30, 2019
|
|
For the Three Months
ended
September 30, 2018
|
|
|
Net Income (Loss)
|
|
|
Shares
|
|
Per Share Amount
|
|
Net Income (Loss)
|
|
|
Shares
|
|
Per Share Amount
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to stockholders
|
|
$
|
2,805,182
|
|
|
|
101,810,802
|
|
|
$
|
0.03
|
|
|
$
|
(2,874,626
|
)
|
|
|
30,358,570
|
|
|
$
|
(0.09
|
)
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
(3,468,509
|
)
|
|
|
135,458,885
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Dilute EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to stockholders plus assumed conversions
|
|
$
|
(663,327
|
)
|
|
|
237,269,687
|
|
|
$
|
(0.00
|
)
|
|
$
|
(2,874,626
|
)
|
|
|
30,962,398
|
|
|
$
|
(0.09
|
)
|
|
|
For the Nine Months
ended
September 30, 2019
|
|
|
For the Nine Months
ended
September 30, 2018
|
|
|
|
Net Income (Loss)
|
|
|
Shares
|
|
|
Per Share Amount
|
|
|
Net Income (Loss)
|
|
|
Shares
|
|
|
Per Share Amount
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to stockholders
|
|
$
|
(1,161,983
|
)
|
|
|
62,450,846
|
|
|
$
|
(0.02
|
)
|
|
$
|
(4,112,998
|
)
|
|
|
27,813,506
|
|
|
$
|
(0.15
|
)
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Dilute EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to stockholders plus assumed conversions
|
|
$
|
(1,161,983
|
)
|
|
|
62,450,846
|
|
|
$
|
(0.02
|
)
|
|
$
|
(4,112,998
|
)
|
|
|
27,813,506
|
|
|
$
|
(0.15
|
)
|
Stock-based compensation
The Company accounts for equity instruments issued in exchange for the receipt of goods or services in accordance with ASC 718-10, Compensation – Stock Compensation. 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.
Income taxes
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.
Embedded Conversion Features
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.
Related Party Disclosure
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.
Recent Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments
granted to employees. ASU 2018-07 is effective on January 1, 2019. The adoption of this ASU did not have any impact on the Company’s financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize
lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after
December 15, 2018, with early adoption permitted. ASU 2016-02 and additional ASUs are now codified as ASC 842, Leases. ASC 842 supersedes the lease accounting guidance in ASC 840 Leases, and requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. The Company adopted ASC 842 on
January 1, 2019 and used the modified retrospective transition approach and did not restate its comparative periods. The Company elected to utilize the “package” of three expedients, as defined in ASC 842, which retain the lease classification and
initial direct costs for any leases that existed prior to adoption of the standard. As of the date of implementation on January 1, 2019, the impact of the adoption of ASC 842 resulted in the recognition of a right of use asset and lease payable
obligation on the Company’s consolidated balance sheets of $891,413. As the right of use asset and the lease payable obligation were the same upon adoption of ASC 842, there was no cumulative effect impact on the Company’s accumulated deficit.
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 Company has recurring losses and a working capital deficit. These
factors raise substantial doubt as to the Company’s ability to continue as a going concern. 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 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 the going concern uncertainty, the Company has a three-fold plan to resolve these risks. First, the
acquisitions of QCA, APF and Morris have allowed for an increased level of cash flow to the Company. Second, the Company is considering other potential acquisition targets that, like QCA and Morris, should increase income and cash flow to the
Company. Third, the Company plans to seek new non-convertible debt agreements to fund any deficits in cash requirements.
Note 4 – 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 September 30, 2019, the future minimum financing and operating lease payments, net of amortization of debt issuance costs, were as follows:
|
|
Finance
|
|
|
Operating
|
|
Twelve Months Ended September 30,
|
|
Leases
|
|
|
Leases
|
|
2020
|
|
$
|
1,206,080
|
|
|
$
|
346,998
|
|
2021
|
|
|
1,228,708
|
|
|
|
356,757
|
|
2022
|
|
|
1,248,696
|
|
|
|
142,116
|
|
2023
|
|
|
1,269,248
|
|
|
|
40,950
|
|
2024
|
|
|
1,251,104
|
|
|
|
-
|
|
Thereafter
|
|
|
11,843,097
|
|
|
|
-
|
|
Total
|
|
|
18,046,933
|
|
|
|
886,821
|
|
Less: current lease obligation
|
|
|
(234,682
|
)
|
|
|
(254,535
|
)
|
Less: imputed interest
|
|
|
(6,357,146
|
)
|
|
|
(157,813
|
)
|
Non-current capital leases obligations
|
|
$
|
11,455,105
|
|
|
$
|
474,473
|
|
Finance Leases
In 2016, the Company sold a building and used the money to purchase QCA. Because this is a financing transaction, the sale is recorded under "financing
lease obligation" on the accompanying consolidated 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.
On April 5, 2018, the Company acquired APF. In order to fund a portion of the acquisition price, the Company simultaneously entered into a sale leaseback
transaction with a third-party lender whereby the building acquired from APF was sold for $1,900,000, and leased back to the company for a period of 15 years at a monthly rate of $15,833, subject to an annual increase of 2% throughout the term of the
lease. The Company had no gain or loss resulting from the sale of the property, and the resulting lease qualifies as a capital lease. As a result, the Company has capitalized the cost of the building and the resulting capital lease obligation
liability of $1,900,000. The payments related to this lease are reflected in the table above.
On January 1, 2019, the Company acquired Morris. In order to fund a portion of the acquisition price, the Company simultaneously
entered into a sale leaseback transaction with a third-party lender whereby the building acquired from Morris was sold for $3,267,000, and leased back to the company for a period of 15 years at a monthly rate of $27,500, subject to an annual increase
of 2% throughout the term of the lease. The transaction did not qualify as a sale and leaseback transaction under Topic 842 and as such was accounted for as a financing lease. The payments related to this lease are reflected in the table above.
A letter of credit of $1,000,000 is to be provided to the landlord in the above QCA financing lease obligation, of which $207,311 had
been satisfied as of September 30, 2019.
Operating Leases
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheet as of September 30, 2019:
|
Classification on Balance Sheet
|
|
September 30,
2019
|
|
Assets
|
|
|
|
|
Operating lease assets
|
Operating lease right of use assets
|
|
$
|
721,004
|
|
Total lease assets
|
|
|
$
|
721,004
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Operating lease liability
|
Current operating lease liability
|
|
$
|
254,535
|
|
Noncurrent liabilities
|
|
|
|
|
|
Operating lease liability
|
Long-term operating lease liability
|
|
|
474,473
|
|
Total lease liability
|
|
|
$
|
729,008
|
|
The lease expense for the nine months ended September 30, 2019 was $170,409. The cash paid under operating leases during the nine months
ended September 30, 2019 was $162,405. At September 30, 2019, the weighted average remaining lease terms were 2.62 years and the weighted average discount rate was 15%
Note 5 – Notes Payable
In May 2018, APF also secured a line of credit with Crestmark, providing for borrowings up to $1,000,000 at a variable interest rate, collateralized by
APF’s outstanding accounts receivable.
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. 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. The remaining principal and accrued interest is due on the 3 year anniversary.
On April 5, 2018, the Company issued two secured promissory notes in the aggregate principal amount of $1,950,000 (“Secured APF Notes”) as part of the
consideration for the purchase of APF (see Note 9). The Secured APF Notes are secured by the equipment, customer accounts and intellectual property of the Company, and all of the products and proceeds from any of the assets of APF. The Secured APF
Notes bear interest at 4.25% per annum and have aggregate monthly payments of $19,975 for the first 23 months, with a balloon payment due in April 2020 for the remaining principal and interest outstanding.
O
n May 3, 2018, the Company entered into an equipment note with a lender for total borrowings of $630,750, which is secured by the
equipment of APF. The note bears interest at 11.75% per annum and is payable in weekly payments of $3,795 commencing on the loan date through May 4, 2022.
In connection with the Morris acquisition in January 2019, the Company issued three promissory notes for an aggregate of $3,100,000. The notes bear
interest at 4.25% per annum, require monthly payment for the first 35 months of $31,755 with any remaining principal and accrued interest due on the 3 year-anniversary. The Company also issued three supplemental notes payable for an aggregate of
$350,000. The notes bear interest at 4.25% per annum and are due on the 1-year anniversary.
The outstanding balances for the loans were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Lines of credit, current portion
|
|
$
|
3,086,487
|
|
|
$
|
2,504,440
|
|
Equipment loans, current portion
|
|
|
234,659
|
|
|
|
260,301
|
|
Term notes, current portion
|
|
|
3,308,712
|
|
|
|
820,862
|
|
Total current
|
|
|
6,629,858
|
|
|
|
3,585,603
|
|
Long-term portion
|
|
|
5,521,502
|
|
|
|
4,517,441
|
|
Total notes payable
|
|
$
|
12,151,360
|
|
|
$
|
8,103,044
|
|
Future scheduled maturities of outstanding notes payable from related parties are as follows:
Twelve Months Ending September 30,
|
|
2020
|
|
$
|
6,629,858
|
|
2021
|
|
|
2,752,639
|
|
2022
|
|
|
2,648,863
|
|
2023
|
|
|
80,000
|
|
2024
|
|
|
40,000
|
|
Total
|
|
$
|
12,151,360
|
|
Note 6 – Notes Payable, Related Parties
At September 30, 2019 and December 31, 2018, notes payable due to related parties consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Notes payable; non-interest bearing; due upon demand; unsecured
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
Note payable; bearing interest at 8% per annum; due June 30, 2017; unsecured
|
|
|
7,500
|
|
|
|
7,500
|
|
Series of notes payable, bearing interest at rates from 10% to 20% per annum, with maturity dates from April 2018 to July 2020, unsecured
|
|
|
389,820
|
|
|
|
180,000
|
|
Total notes payable - related parties
|
|
$
|
401,820
|
|
|
$
|
192,000
|
|
The above notes which are in default as of September 30, 2019, were due on demand by the lenders as of the date of this Report.
Note 7 – Convertible Notes Payable
At September 30, 2019 and December 31, 2018, convertible notes payable consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Series of convertible notes payable issued prior to December 31, 2016, bearing interest at rates of 8% - 20% per annum, with due dates ranging from April 2016 through
October 2017. The outstanding principal and interest balances are convertible into shares of Class A common stock at the option of the debt holder at exercise prices ranging from $0.10 to $1 per share.
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Secured convertible notes payable issued to the sellers of QCA on April 1, 2016 for an aggregate of $2,000,000, bearing interest at 5% per annum,
due in monthly payments starting on July 1, 2016 and due in full on July 1, 2019. On August 11, 2019, the Company extended the due date of one of the notes to December 31, 2022. The outstanding principal and interest balances are
convertible after 12 months into Class A common stock at the option of the debt holder at a conversion price of $1 per share.
|
|
|
1,429,587
|
|
|
|
1,654,588
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable issued in January 2017, bearing interest at rates of 10% per annum, and due in January 2018. The outstanding principal and interest balances are
convertible into shares of Class A common stock at the option of the debt holder at an exercise price of $1 per share.
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
On January 10, 2018, the Company entered into a variable convertible note for $150,000 with net proceeds of $135,000. The note is due October 1, 2018 and bears interest
at 12% per annum. The note is immediately convertible into shares of Class A common stock at the lesser of $0.16 per share or 60% of the lowest trading price the previous 25 days prior to conversion. The Company can prepay the note within
the first 90 days following January 10, 2018 with a prepayment penalty equal to 145% of the total outstanding balance. The Company issued 333,333 shares to the lender with this note, which has been recorded as a discount.
|
|
|
-
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
On April 5, 2018, the Company entered into convertible promissory notes for an aggregate principal amount of $450,000 as part of the consideration for the acquisition of
APF (see Note 9). The convertible notes are due in full in 36 months and bear interest at 4.25% per annum, and are convertible into shares of Class A common stock after 6 months from the issuance date at a rate of $1 per share.
|
|
|
450,000
|
|
|
|
450,000
|
|
|
|
|
|
|
|
|
|
|
On April 9, 2018, the Company entered into a variable convertible note for $124,199 with net proceeds of $115,000. The note is due January 9, 2019 and bears interest at
12% per annum. After 180 days, the note is convertible into shares of 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. In
connection with this variable convertible note, the Company issued 76,670 shares of its Class A common stock, along with warrants to purchase 153,340 shares of Class A common stock at an exercise price of $1 per share which are immediately
vested and have a 3 years contractual life. The value of the common stock and warrants have been recorded as a discount.
|
|
|
500
|
|
|
|
61,699
|
|
|
|
|
|
|
|
|
|
|
On April 9, 2018, the Company entered into a variable convertible note for $37,800 with net proceeds of $35,000. The note is due January 9, 2019 and bears interest at
12% per annum. After 180 days, the note is convertible into shares of 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.
|
|
|
68,757
|
|
|
|
37,800
|
|
|
|
|
|
|
|
|
|
|
On June 4, 2018, the Company entered into a variable convertible note for $165,000 with net proceeds of $151,500. The note is due December 4, 2019 and bears interest at
10% per annum. The note is immediately convertible into shares of the Company's Class A common stock at a discount of 42% to the average of the two lowest trading closing prices of the stock for ten days prior to conversion. The Company
issued 850,000 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.
|
|
|
116,480
|
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
On July 18, 2018, the Company entered into a variable convertible note for $88,000 with net proceeds of $88,000. The note is due April 30, 2019 and bears interest at 12%
per annum. The note is immediately convertible into shares of the Company's Class A common stock at a discount of 42% to the average of the two lowest trading closing prices of the stock for ten days prior to conversion.
|
|
|
-
|
|
|
|
88,000
|
|
|
|
|
|
|
|
|
|
|
On August 30, 2018, the Company entered into a variable convertible note for $337,500 with net proceeds of $303,750. The note is due February 28, 2019 and bears interest
at 10% per annum. The note is immediately convertible into shares of the Company's Class A common stock at a discount of 42% to the average of the two lowest trading closing prices of the stock for ten days prior to conversion.
|
|
|
198,348
|
|
|
|
337,500
|
|
|
|
|
|
|
|
|
|
|
On September 27, 2018, the Company entered into a variable convertible note for $93,000 with net proceeds of $93,000. The note is due July 15, 2019 and bears interest at
12% per annum. The note is immediately convertible into shares of the Company's Class A common stock at a discount of 42% to the average of the two lowest trading closing prices of the stock for ten days prior to conversion.
|
|
|
-
|
|
|
|
93,000
|
|
|
|
|
|
|
|
|
|
|
On October 23, 2018, the Company entered into a variable convertible note for $220,000 with net proceeds of $198,000. The note is due December 14,2018 and bears interest
at 10% per annum. The note is immediately convertible into shares of the Company's Class A common stock at a discount of 42% to the average of the two lowest trading closing prices of the stock for ten days prior to conversion.
|
|
|
49,000
|
|
|
|
220,000
|
|
|
|
|
|
|
|
|
|
|
On November 12, 2018, the Company entered into a variable convertible note for $670,000 with net proceeds of $636,000. The note is due November 12, 2019 and bears
interest at 10% per annum. The note is immediately convertible into shares of 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.
|
|
|
511,700
|
|
|
|
670,000
|
|
|
|
|
|
|
|
|
|
|
On December 7, 2018, the Company entered into a variable convertible note for $130,000 with net proceeds of $122,200. The note is due September 7, 2019 and bears
interest at 12% per annum. The note is immediately convertible into shares of the Company's Class A common stock at a discount of 40% to the lowest trading closing prices of the stock for 20 days prior to conversion. This convertible note is
past due.
|
|
|
98,000
|
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
On February 5, 2019, the Company entered into a variable convertible note for $103,000 with net proceeds of $103,000. The note is due November 30, 2019 and bears
interest at 12% per annum. The note is immediately convertible into shares of the Company's Class A common stock at a discount of 42% to the average of the two lowest trading closing prices of the stock for ten days prior to conversion. This
convertible note is past due.
|
|
|
67,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable
|
|
|
3,024,372
|
|
|
|
4,037,587
|
|
|
|
|
|
|
|
|
|
|
Less: discount on convertible notes payable
|
|
|
(113,741
|
)
|
|
|
(942,852
|
)
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable, net of discount
|
|
|
2,910,631
|
|
|
|
3,094,735
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of convertible notes payable
|
|
|
(1,787,943
|
)
|
|
|
(2,644,735
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of convertible notes payable
|
|
$
|
1,122,688
|
|
|
$
|
450,000
|
|
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 nine months ended September 30, 2019 and
2018 amounted to $932,111 and $701,850, respectively, and is recorded as interest expense in the accompanying consolidated statements of operations. The unamortized discount balance for these notes was $113,741 as of September 30, 2019, which is
expected to be amortized over the next 12 months.
A summary of the activity in the Company's convertible notes payable is provided below:
Balance outstanding, December 31, 2018
|
|
$
|
3,094,735
|
|
Issuance of convertible notes payable for cash
|
|
|
103,000
|
|
Issuance of convertible notes payable for penalty interest
|
|
|
128,777
|
|
Repayment of notes
|
|
|
(787,700
|
)
|
Conversion of notes payable to common stock
|
|
|
(457,292
|
)
|
Discount from derivative liability
|
|
|
(103,000
|
)
|
Amortization of debt discounts
|
|
|
932,111
|
|
Balance outstanding, September 30, 2019
|
|
$
|
2,910,631
|
|
Note 8 – Stockholders' Equity
Preferred Stock
The Company is authorized to issue 10,000,000 shares of $.0001 par value preferred stock. As of September 30, 2019 and December 31, 2018, no shares of
preferred stock were outstanding.
Common Stock
Pursuant to the Amended and Restated Certificate of Incorporation, the Company is authorized to issue three classes of common stock: Class A common stock,
which has one vote per share, Class B common stock, which has ten votes per share and Class C common stock, which has five 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 voting rights of the two classes of common stock will be identical. Any holder of Class C common stock may convert 25% of his or her shares at any time after the 3rd to 6th
anniversary into shares of Class A common stock on a share-for-share basis. Otherwise the voting 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, 2019:
•
|
issued 68,602,751 shares of Class A common stock for the conversion of $457,292 of outstanding convertible notes payable and $66,544 of accrued interest;
|
|
|
•
|
issued 7,097,595 shares of Class C common stock as a dividend to the Class A common stockholders.
|
|
|
•
|
issued 200,000 shares of Class B common stock and 2,772,606 shares of Class C common stock to officer, directors and employees for services rendered valued at $38,644.
|
Stock Options
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 nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,790,000
|
|
|
$
|
0.19
|
|
|
|
9.10
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
1,790,000
|
|
|
$
|
0.19
|
|
|
|
8.60
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2019
|
|
|
1,790,000
|
|
|
$
|
0.19
|
|
|
|
8.35
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
727,594
|
|
|
$
|
0.26
|
|
|
|
8.12
|
|
|
$
|
-
|
|
T
he following table summarizes information about options outstanding and exercisable as of September 30, 2019:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.05
|
|
|
|
979,000
|
|
|
|
9.13
|
|
|
$
|
0.05
|
|
|
|
271,563
|
|
|
$
|
0.05
|
|
|
0.10
|
|
|
|
85,000
|
|
|
|
9.04
|
|
|
|
0.10
|
|
|
|
21,250
|
|
|
|
0.10
|
|
|
0.13
|
|
|
|
388,500
|
|
|
|
8.34
|
|
|
|
0.13
|
|
|
|
194,250
|
|
|
|
0.13
|
|
|
0.26
|
|
|
|
114,000
|
|
|
|
8.10
|
|
|
|
0.26
|
|
|
|
64,125
|
|
|
|
0.26
|
|
|
0.90
|
|
|
|
223,500
|
|
|
|
8.02
|
|
|
|
0.90
|
|
|
|
125,719
|
|
|
|
0.90
|
|
|
|
|
|
|
1,790,000
|
|
|
|
|
|
|
|
|
|
|
|
676,907
|
|
|
|
|
|
During the nine months ended September 30, 2019 and 2018, stock option expense amounted to $58,667 and $52,309, respectively. Unrecognized
stock option expense as of September 30, 2019 amounted to $142,170, which will be recognized over a period extending through December 2022.
Warrants
On April 9, 2018, the Company granted 153,340 warrants in connection with the issuance of a convertible note payable. The warrants have a 3 year
contractual life, an exercise price of $1 per share and are vested immediately.
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 year ended December 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.
As of September 30, 2019, the Company had 277,001 warrants outstanding with a weighted average exercise price of $1.01 and a weighted average remaining
life of 1.48 years.
N
ote 9 – Business Combination
Morris
On January 9, 2019, (with an effective date of January 1, 2019) the Company entered into a Securities Purchase Agreement (the "SPA") with Morris Sheet
Metal Corp., an Indiana corporation, 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.
A summary of the purchase price allocation at fair value is below. The business combination accounting is not yet complete and the amounts assigned to
assets acquired and liabilities assumed are provisional. Therefore, this may result in future adjustments to the provisional amounts as new information is obtained about facts and circumstances that existed at the acquisition date.
|
|
Purchase Allocation
|
|
Cash
|
|
$
|
192,300
|
|
Accounts receivable
|
|
|
1,498,591
|
|
Inventory
|
|
|
453,841
|
|
Prepaid expenses and other current assets
|
|
|
858,456
|
|
Property and equipment
|
|
|
4,214,965
|
|
Goodwill
|
|
|
603,592
|
|
Accounts payable
|
|
|
(234,236
|
)
|
Accrued expenses
|
|
|
(443,908
|
)
|
Notes payable
|
|
|
(1,033,695
|
)
|
|
|
$
|
6,109,906
|
|
The purchase price was paid as follows:
Cash
|
|
|
2,159,906
|
|
Seller notes
|
|
|
3,450,000
|
|
Acquisition contingency
|
|
|
500,000
|
|
|
|
$
|
6,109,906
|
|
One year after the closing date, the sellers will calculate monthly the 85/25 requirement to meet the Construction Industry Exemption for the
Withdraw Liability (WDL). If the calculations verify Morris Sheet Metal Corp. and/or JTD Spiral, Inc. met the Exemption requirement for six consecutive months the Company will pay the sellers a $500,000 success fee. The Company anticipates that this
contingency will be met and it will be obligated to pay the additional $500,000.
Simultaneous with the purchase of Morris, a building, owned by Morris prior to the acquisition, was sold in a sale-leaseback transaction agreement, whereby
the building was leased from the buyer for 15 years. The proceeds from the sale-leaseback of $3,267,000 were used to fund the cash consideration to the sellers. The building and the lease is being treated as a financing lease (see Note 4).
American Precision Fabricators (“APF”)
On April 5, 2018, the Company announced that it had entered into a Securities Purchase Agreement (the "SPA") with APF, an Arkansas corporation, 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 total purchase price of APF from the SPA amounted to $4,500,000, which consisted of aggregate cash consideration paid to the Sellers of $2,100,000, an
aggregate of $1,950,000 of secured promissory notes due to the Sellers (see Note 5), and an aggregate of $450,000 of convertible promissory notes due to the Sellers. At the closing date, the Company and the Sellers agreed to a reduction of the
purchase price of $123,250, resulting from a net working capital adjustment which was deducted from the cash consideration due to the Sellers. As a result, the total purchase price of APF was $4,376,750.
A summary of the purchase price allocation at fair value is below. During the period ended June 30, 2019, the Company finalized the purchase price
allocation. As a result the Company took a charge to earnings during the three months ended June 30, 2019 for $65,833 for amortization on the customer list from the purchase date to June 30, 2019.
|
|
Purchase Allocation
|
|
Accounts receivable
|
|
$
|
945,050
|
|
Inventory
|
|
|
675,074
|
|
Prepaid expenses and other current assets
|
|
|
250,040
|
|
Property and equipment
|
|
|
3,300,000
|
|
Customer list
|
|
|
790,000
|
|
Goodwill
|
|
|
440,100
|
|
Accounts payable
|
|
|
(1,234,328
|
)
|
Accrued expenses
|
|
|
(154,186
|
)
|
Line of credit
|
|
|
(165,000
|
)
|
Deferred tax liability
|
|
|
(470,000
|
)
|
|
|
$
|
4,376,750
|
|
The following are the unaudited pro forma results of operations for the nine months ended September 30,
2019 and 2018, as if Morris and APF had been acquired on January 1, 2018. 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.
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Sales
|
|
$
|
20,690,014
|
|
|
$
|
19,812,607
|
|
Cost of goods sold
|
|
|
15,542,194
|
|
|
|
14,202,405
|
|
Gross profit
|
|
|
5,147,820
|
|
|
|
5,610,202
|
|
Operating expenses
|
|
|
5,509,996
|
|
|
|
5,675,248
|
|
Loss from operations
|
|
|
(362,176
|
)
|
|
|
(65,046
|
)
|
Net loss from continuing operations
|
|
|
(3,581,832
|
)
|
|
|
(2,121,185
|
)
|
Loss per share
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
N
ote 10 – Industry Segments
This summary presents the Company's segments, QCA, APF and Morris for the three and nine months ended September 30, 2019 and 2018:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
$
|
2,252,997
|
|
|
$
|
2,910,462
|
|
|
$
|
7,056,674
|
|
|
$
|
7,856,208
|
|
APF
|
|
|
966,735
|
|
|
|
1,200,529
|
|
|
|
3,925,190
|
|
|
|
2,162,126
|
|
Morris
|
|
|
3,820,472
|
|
|
|
-
|
|
|
|
9,561,843
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
47,978
|
|
|
|
231,212
|
|
|
|
146,307
|
|
|
|
551,698
|
|
|
|
$
|
7,088,182
|
|
|
$
|
4,342,203
|
|
|
$
|
20,690,014
|
|
|
$
|
10,570,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
$
|
711,053
|
|
|
$
|
1,233,038
|
|
|
$
|
2,083,729
|
|
|
$
|
2,915,421
|
|
APF
|
|
|
294,722
|
|
|
|
713,047
|
|
|
|
1,180,619
|
|
|
|
816,688
|
|
Morris
|
|
|
702,675
|
|
|
|
-
|
|
|
|
1,747,619
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
68,409
|
|
|
|
276,205
|
|
|
|
135,853
|
|
|
|
359,833
|
|
|
|
$
|
1,776,859
|
|
|
$
|
2,222,290
|
|
|
$
|
5,147,820
|
|
|
$
|
4,091,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
$
|
111,832
|
|
|
$
|
452,793
|
|
|
$
|
179,707
|
|
|
$
|
1,184,664
|
|
APF
|
|
|
110,454
|
|
|
|
(256,068
|
)
|
|
|
561,990
|
|
|
|
(404,148
|
)
|
Morris
|
|
|
423,083
|
|
|
|
-
|
|
|
|
507,162
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
(608,377
|
)
|
|
|
(361,527
|
)
|
|
|
(1,611,035
|
)
|
|
|
(943,609
|
)
|
|
|
$
|
36,992
|
|
|
$
|
(164,802
|
)
|
|
$
|
(362,176
|
)
|
|
$
|
(163,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
$
|
84,398
|
|
|
$
|
75,755
|
|
|
$
|
253,192
|
|
|
$
|
220,976
|
|
APF
|
|
|
82,514
|
|
|
|
95,817
|
|
|
|
286,119
|
|
|
|
191,634
|
|
Morris
|
|
|
95,342
|
|
|
|
-
|
|
|
|
281,310
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
8,333
|
|
|
|
52,965
|
|
|
|
24,999
|
|
|
|
278,133
|
|
|
|
$
|
270,587
|
|
|
$
|
224,537
|
|
|
$
|
845,620
|
|
|
$
|
690,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
$
|
180,014
|
|
|
$
|
170,785
|
|
|
$
|
538,252
|
|
|
$
|
469,368
|
|
APF
|
|
|
94,562
|
|
|
|
39,443
|
|
|
|
263,071
|
|
|
|
68,149
|
|
Morris
|
|
|
150,138
|
|
|
|
-
|
|
|
|
302,724
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
274,130
|
|
|
|
490,886
|
|
|
|
1,632,921
|
|
|
|
1,105,045
|
|
|
|
$
|
698,844
|
|
|
$
|
701,114
|
|
|
$
|
2,736,968
|
|
|
$
|
1,642,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
$
|
9,736
|
|
|
$
|
337,956
|
|
|
$
|
(156,877
|
)
|
|
$
|
888,904
|
|
APF
|
|
|
15,892
|
|
|
|
(295,511
|
)
|
|
|
298,919
|
|
|
|
(472,297
|
)
|
Morris
|
|
|
272,945
|
|
|
|
-
|
|
|
|
209,063
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
2,506,609
|
|
|
|
(1,865,155
|
)
|
|
|
(3,932,937
|
)
|
|
|
(2,809,067
|
)
|
|
|
$
|
2,805,182
|
|
|
$
|
(1,822,710
|
)
|
|
$
|
(3,581,832
|
)
|
|
$
|
(2,392,460
|
)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
|
|
|
|
|
|
|
|
$
|
13,152,517
|
|
|
$
|
10,767,883
|
|
APF
|
|
|
|
|
|
|
|
|
|
|
11,254,397
|
|
|
|
6,159,098
|
|
Morris
|
|
|
|
|
|
|
|
|
|
|
15,929,389
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
|
|
|
|
|
|
|
|
(14,063,370
|
)
|
|
|
1,013,695
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,272,933
|
|
|
$
|
17,940,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
|
|
|
|
|
|
|
|
$
|
1,963,761
|
|
|
$
|
1,963,761
|
|
APF
|
|
|
|
|
|
|
|
|
|
|
440,100
|
|
|
|
1,230,100
|
|
Morris
|
|
|
|
|
|
|
|
|
|
|
603,592
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,007,453
|
|
|
$
|
3,193,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QCA
|
|
|
|
|
|
|
|
|
|
$
|
1,531,514
|
|
|
$
|
1,649,701
|
|
APF
|
|
|
|
|
|
|
|
|
|
|
1,003,589
|
|
|
|
958,153
|
|
Morris
|
|
|
|
|
|
|
|
|
|
|
2,066,789
|
|
|
|
-
|
|
Unallocated and eliminations
|
|
|
|
|
|
|
|
|
|
|
29,750
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,631,642
|
|
|
$
|
2,610,354
|
|
Note 11 – Derivative Liabilities and Fair Value Measurements
Derivative liabilities
The Company has issued convertible notes payable that were evaluated under the guidance in 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.
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 at
September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Risk free rate
|
2.03% to 2.51%
|
|
|
|
1.89
|
%
|
Volatility
|
|
|
231% - 321
|
%
|
|
|
200
|
%
|
Expected terms (years)
|
|
0.5 to 1.51
|
|
|
1.3 to 2.53
|
|
Dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
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.
I
f 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, 2019 and December 31, 2018:
Description
|
|
2019
|
|
|
Fair Value Measurements at
September 30, 2019
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Conversion feature on convertible notes
|
|
$
|
1,850,947
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,850,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
December 31,
2018
|
|
|
Fair Value Measurements at
December 31, 2018
Using Fair Value Hierarchy
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Conversion feature on convertible notes
|
|
$
|
1,892,321
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,892,321
|
|
The below table presents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2019:
Derivative liability balance, December 31, 2018
|
|
$
|
1,892,321
|
|
Issuance of derivative liability during the period
|
|
|
103,000
|
|
Derivative liability resolution
|
|
|
(833,743
|
)
|
Change in derivative liability during the period
|
|
|
689,369
|
|
Derivative liability balance, September 30, 2019
|
|
$
|
1,850,947
|
|
Note 12 – Discontinued Operations
In December 2018, the Company decided to shut down the operations of its VWES subsidiary. In February 2019, VWES filed for Chapter 7 bankruptcy.
VWES has been presented as discontinued operations in the accompanying consolidated financial statements.
The operating results for VWES have been presented in the accompanying consolidated statement of
operations for the nine months ended September 30, 2019 and 2018 as discontinued operations and are summarized below:
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
2,938,441
|
|
Cost of revenue
|
|
|
-
|
|
|
|
2,489,273
|
|
Gross Profit
|
|
|
-
|
|
|
|
449,168
|
|
Operating expenses
|
|
|
95,179
|
|
|
|
2,267,843
|
|
Loss from operations
|
|
|
(95,179
|
)
|
|
|
(1,818,675
|
)
|
Other income (expenses)
|
|
|
-
|
|
|
|
98,137
|
|
Net loss
|
|
$
|
(95,179
|
)
|
|
$
|
(1,720,538
|
)
|
T
he assets and liabilities of the discontinued operations at September 30, 2019 and December 31, 2018 are summarized below:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
-
|
|
|
$
|
121,296
|
|
Property and equipment
|
|
|
-
|
|
|
|
387,727
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
509,023
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
-
|
|
|
$
|
2,493,049
|
|
Notes payable - related party
|
|
|
-
|
|
|
|
43,500
|
|
Notes payable
|
|
|
-
|
|
|
|
215,898
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
2,752,447
|
|
As of March 31, 2019, VWES’ bankruptcy was completed and the Company removed all the assets and liabilities of VWES resulting in a gain on the
disposition of discontinued operations of $2,515,028.
Note 13 – Subsequent Events
Subsequent to September 30, 2019, the Company agreed to settle with convertible note holders and issued 4,400,000 shares of Class A
common stock upon the conversion of convertible debts (see below). In addition, the Company entered into agreement with convertible note holders as follows:
Convertible note with total balance owing, including all interest and penalties of $167,990. The Company and the noteholder agreed that note would be settled over a 13-week period beginning on
August 12, 2019, with 13 weekly payments of $4,000 per week and a final lump-sum payment of $115,990.
Convertible note with total balance owing, including all interest and penalties of, $651,292. The Company and the noteholder entered into a settlement agreement, pursuant to which the parties agreed
that note would be settled with a cash payment by the Company of $300,000, paid on November 8, 2019; a $350,000 fixed-price, one-year convertible note with an interest rate of 15%, convertible at a price per share of $0.15, The holder of the note
had previously submitted a conversion notice on August 5, 2019, for 4,500,000 shares. The noteholder and the Company agreed to amend the conversion notice to 2,000,000 shares, which will be issued to the noteholder as a good faith issuance.
Convertible notes with the first note having an original balance of $337,500 and was settled for 12 monthly payments of $18,000 starting on December 27, 2019. The second note having an original
balance of $220,000 and has been settled for 12 monthly payments of $17,000 starting on December 27, 2019. The note holder also issued a new Senior Secured Promissory Note in the principal amount of $600,000, with the following terms: term of two
years; a fixed conversion price of $0.15 and a 15% interest rate. The note holder had previously submitted a conversion notice seeking the issuance of 4,550,000 shares of the Company’s Class A common stock in connection with the note for $337,500.
The note holder and the Company agreed to amend the conversion notice to 2,400,000 shares which will be issued to the noteholder as a good faith issuance.
Convertible note with total balance owing, including all interest and penalties of $252,870. The Company and the noteholder agreed that note would be settled with a cash payment of $80,000 paid on
November 12, 2019 and the issuance of two new notes in the principal amounts of $35,000 and $137,870 with the following terms: term of one year; a fixed conversion price of $0.15 cents and a 15% interest rate and the future issuance of 300,000
Class A Common Shares and 30,000 Class C Common Stock.
Subsequent to September 30, 2019, the Company issued 10,000 shares of Class C common stock to a
contractor for services rendered.
On November 6, 2019, the Company, completed its acquisition of Deluxe Sheet Metal, Inc., an Indiana corporation (“DSM”), DSM Holding, LLC, an Indiana limited liability company (“DHL”), Lonewolf
Enterprises, LLC, an Indiana limited liability company (“LWE”), and Kevin Smith (the “Seller”). Pursuant to a securities purchase agreement (the “SPA”) among the Company, DSM, DHL, LWE, and the Seller, the Company acquired all of the outstanding
capital stock of DSM, all of the outstanding LLC membership interests of DHL, and certain real estate and improvements thereto from LWE (the “LWE Real Estate”) for the consideration and on the terms and subject to the conditions set forth in the
SPA.
The total purchase price was $8,400,000 (the “Purchase Price”), which is the sum of the cash paid at closing (the “Cash Consideration”), by wire transfer
of immediately available funds to the accounts designated by Seller, and promissory notes (the “Promissory Note Consideration”), also delivered at closing.
The Cash Consideration consisted of $6,003,657, plus the addition of working capital, less any Long-Term Liability (as defined in the SPA) of DSM and DHL satisfied at Closing, as set forth in the
SPA, but not less certain liabilities, as set forth in the SPA. Additionally, the Note Consideration consisted of a secured promissory note issued in favor of Seller only, by the Company, DSM, and DHL and shall consist of (i) a Secured Promissory
Note to Kevin M. Smith in the amount of $1,900,000.00 (“Note 2”), and (ii) a Secured Promissory Note to Kevin M. Smith in the amount of $496,343.00 (“Note 1” and collectively, the “Notes”), in the form set forth in an exhibit to the SPA, secured by
a subordinated security interest in the assets listed in a related security agreement (the “Security Agreement”) (discussed below). The parties to the SPA agreed that the Company has the right to change the senior lender from time to time while
Notes remain unpaid so long as at all times, there is no breach or default or Event of Default under the Notes, the SPA, or the other transaction documents.
The Company, DSM, and DHL collectively issued the Notes to the Seller. The terms of the Notes are as follows: Note 1 is in the amount of $1,900,000 accrues at 4.25% interest, and Note 2 is in the
amount of $496,343 and accrues interest at a rate of 8.75%, and each included a loan fee of $5,000. Note 2 has an amortization rate of 10 years with a balloon payment due 36 months. Note 1 is due January 25, 2020, and the obligations of the
Company, DSM, and DHL under the Notes are secured by a subordinated security interest granted pursuant to the security agreement entered into by the parties.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
There are statements in this Report that are not historical facts. These "forward-looking statements" can be identified by use of
terminology such as "believe," "hope," "may," "anticipate," "should," "intend," "plan," "will," "expect," "estimate," "project," "positioned," "strategy" and similar expressions. You should be aware that these forward-looking statements are subject
to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read this entire Report carefully, especially the risks discussed under "Risk Factors." Although management believes that the assumptions underlying
the forward-looking statements included in this Report are reasonable, they do not guarantee our future performance, and actual results could differ from those contemplated by these forward looking statements. The assumptions used for purposes of
the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the
identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the
outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. In the light of these risks and uncertainties, there can be no assurance that
the results and events contemplated by the forward-looking statements contained in this Report will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We
expressly disclaim any obligation to update or revise any forward-looking statements.
Overview and Highlights
Company Background
Alpine 4 Technologies Ltd. ("we" or the "Company") was incorporated under the laws of the State of Delaware on April 22, 2014. Alpine 4 Technologies,
Ltd (ALPP) is a publicly traded conglomerate that is acquiring businesses that fit into its disruptive DSF business model of Drivers, Stabilizers, and Facilitators. At Alpine 4, we understand the nature of how technology and innovation can
accentuate a business. Our focus is on how the adaptation of new technologies even in brick and mortar businesses can drive innovation. We also believe that our holdings should benefit synergistically from each other and that the ability to have
collaboration across varying industries can spawn new ideas and create fertile ground for competitive advantages. This unique perspective has culminated in the development of our Blockchain enabled Enterprise Business Operating System called
SPECTRUMebos.
The Company was a holding company that owned five operating subsidiaries: ALTIA, LLC; Quality Circuit Assembly, Inc.; American Precision Fabricators,
Inc.; Morris Sheet Metal, Corp; and JTD Spiral, Inc. (As discussed in more detail below, we previously had an additional subsidiary, Venture West Energy Services (formerly Horizon Well Testing, LLC). However, as of December 31, 2018, we
discontinued operations on this company.)
Business Strategy
What We Do:
Alexander Hamilton in his “Federalist paper #11”, said that our adventurous spirit distinguishes the commercial character of
America. Hamilton knew that our freedom to be creative gave American businesses a competitive advantage over the rest of the world. I believe that Alpine 4 also exemplifies this spirit in our subsidiaries and that our greatest competitive
advantage is our highly diverse business structure combined with a culture of collaboration.
It is our mandate to grow Alpine 4 into a leading, multi-faceted holding company with diverse subsidiary holdings with products and
services that not only benefit from one another as a 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. The essence of our business model is based around acquiring B2B companies in a broad spectrum of industries via our acquisition strategy of DSF (Drivers, Stabilizer, Facilitator). Our DSF business model (which I will
discuss more below) offers our shareholders an opportunity to own small-cap businesses that hold defensible positions in their individual market space. Further, Alpine 4’s greatest opportunity for growth exists in the smaller to middle-market
operating companies with revenues between $5 to $150 million annually. In this target-rich environment, businesses generally sell at more reasonable multiples, presenting greater opportunities for operational and strategic improvements that have
greater potential to enhance profit.
Driver, Stabilizer, Facilitator (DSF)
Driver: A Driver is a company that is in an emerging market or technology, that has enormous upside potential for revenue and
profits, with a significant market opportunity to access. These types of acquisitions are typically small, brand new companies that need a structure to support their growth.
Stabilizer: Stabilizers are companies that have sticky customers, consistent revenue and provide solid net profit returns to Alpine
4.
Facilitators: Facilitators are our “secret sauce”. Facilitators are companies that provide a product or service that an Alpine 4
sister company can use as leverage to create a competitive advantage.
When you blend these categories into a longer-term view of the business landscape, you can then begin to see the value-driving force
that makes this a truly purposeful and powerful business model. As I stated earlier, our greatest competitive advantage is our highly diversified business structure combined with a collaborative business culture, that helps drive out competition
in our markets by bringing; resources, planning, technology and capacity that our competitors simply don’t have. DSF reshapes the environment each subsidiary operates in by sharing and exploiting the resources each company has, thus giving them a
competitive advantage that their peers don’t have.
How We Do It:
Optimization vs. Asset Producing
The process to purchase a perspective company can be long and arduous. During our due diligence period, we are validating and
determining three major points, not just the historical record of the company we are buying. Those three major points are what we call the “What is, What Should Be and What Will Be”.
•
|
“The What Is” (TWI). TWI is the defining point of where a company is holistically in a myriad of metrics; Sales, Finance, Ease of Operations, Ownership and Customer
Relations to name a few. Subsequently, this is usually the point where most acquirers stop in their due diligence. We look to define this position not just from a number’s standpoint, but also how does this perspective map out to a larger
picture of culture and business environment.
|
|
|
•
|
“The What Should Be” (TWSB). TWSB is the validation point of inflection where we use many data inputs to assess if TWI is out of the norm with competitors, and does
that data show the potential for improvement.
|
|
|
•
|
“The What Will Be” (TWWB). TWWB is how we seek to identify the net results or what we call Kinetic Profit (KP) between the TWI and TWSB. The keywords are Kinetic Profit. KP is the profit waiting to be achieved by some form of action or as we call it, the Optimization Phase of acquiring a new company.
|
Optimization: During the Optimization Phase, we seek to root up employees with in-depth training on various topics. Usually, these
training sessions include; Profit and Expense Control, Production Planning, Breakeven Analysis and Profit Engineering to name a few. But the end game is to guide these companies to: become net profitable with the new debt burden placed on them
post-acquisition, mitigate the loss of sales due to acquisition attrition (we typically plan on 10% of our customers leaving simply due to old ownership not being involved in the company any longer), potential replacement of employees that no
longer wish to be employed post-acquisition and other ancillary issues that may arise. The Optimization Phase usually takes 12-18 months post-acquisition and a company can fall back into Optimization if it is stagnant or regresses in its
training.
Asset Producing: Asset Producing is the ideal point where we want our subsidiaries to be. To become Asset Producing, subsidiary
management must have completed prescribed training formats, proven they understand the KPI’s that run their respective departments and finally, the subsidiaries they manage must have posted a net profit for 3 consecutive months.
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 and had accumulated a deficit of $29,774,346 as of September 30, 2019. The Company requires capital for its contemplated operational
and marketing activities. The Company's ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company's contemplated plan of
operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise 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. Our net operating losses increase the difficulty in meeting such goals and
there can be no assurances that such methods will prove successful. Our financial statements contain additional note disclosures describing the management's assessment of our ability to continue as a going concern.
The management of Alpine 4 understands basis for including a going concern in this filing. However, the management points out that over the past 4
years, Alpine 4 has consistently been able to operate under the current working capital environment and the going concern is nothing new or a recent event. In order to mitigate the risk related with the going concern uncertainty, the Company has
a three-fold plan to resolve these risks. First, the acquisitions of QCA, APF and Morris have allowed for an increased level of cash flow to the Company. Second, the Company is considering other potential acquisition targets that, like QCA and
Morris, should increase income and cash flow to the Company. Third, the Company is exploring debt options that can supplement on going cash needs.
Results of Operations
The following are the results of our operations for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018.
|
|
Three Months
Ended
September 30,
2019
|
|
|
Three Months
Ended
September 30,
2018
|
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,088,182
|
|
|
$
|
4,342,203
|
|
|
$
|
2,745,979
|
|
Cost of revenue
|
|
|
5,311,323
|
|
|
|
2,119,913
|
|
|
|
3,191,410
|
|
Gross Profit
|
|
|
1,776,859
|
|
|
|
2,222,290
|
|
|
|
(445,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,739,867
|
|
|
|
2,387,092
|
|
|
|
(647,225
|
)
|
Total operating expenses
|
|
|
1,739,867
|
|
|
|
2,387,092
|
|
|
|
(647,225
|
)
|
Income (loss) from operations
|
|
|
36,992
|
|
|
|
(164,802
|
)
|
|
|
201,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
698,844
|
|
|
|
701,114
|
|
|
|
(2,270
|
)
|
Change in value of derivative liabilities
|
|
|
(3,389,116
|
)
|
|
|
1,012,743
|
|
|
|
(4,401,859
|
)
|
Other (income)
|
|
|
(77,918
|
)
|
|
|
(55,949
|
)
|
|
|
(21,969
|
)
|
Total other income (expenses)
|
|
|
(2,768,190
|
)
|
|
|
1,657,908
|
|
|
|
(4,426,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
2,805,182
|
|
|
|
(1,822,710
|
)
|
|
|
4,627,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
2,805,182
|
|
|
|
(1,822,710
|
)
|
|
|
4,627,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinue operations
|
|
|
-
|
|
|
|
(1,051,916
|
)
|
|
|
1,051,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,805,182
|
|
|
$
|
(2,874,626
|
)
|
|
$
|
5,679,808
|
|
Our revenues for the three months ended September 30, 2019, increased by $2,745,979 as compared to the three months ended September 30, 2018. In 2019,
the increase in revenue related to, $3,820,472 for Morris (acquired in January 2019) offset by a decrease of $233,794 for APF; $183,234 relating to the 6th Sense Auto and Brake Active services of ALTIA and $657,465 for QCA. The increase in revenue
was driven by the acquisition of Morris. We expect our revenue to continue to grow over the remainder of the year.
Cost of revenue
Our cost of revenue for the three months ended September 30, 2019, increased by $3,191,410 as compared to the three months ended September 30, 2018. In
2019, the increase in our cost of revenue related to $3,117,797 for Morris (acquired in January 2019); $184,531 for APF and $24,562 relating to the 6th Sense Auto and Brake Active services of ALTIA; offset by a decrease of $135,480 for QCA. The
increase in cost of revenue is principally the result of the increase in revenues as described above. We expect our cost of revenue to increase over the next year as our revenue increases.
Operating expenses
Our operating expenses for the three months ended September 30, 2019, decreased by $647,225 as compared to the three months ended
September 30, 2018. The decrease consisted primarily a decrease in general and administrative expenses at APF offset by additional general and administrative expenses associated with the operations of Morris which were acquired in January 2019.
Other income (expenses)
Other income (expenses) for the three months ended September 30, 2019, increased by $4,426,098 as compared to 2018. This increase
was primarily due to the change in the value of the derivative liability.
In December 2018, we decided to shut down the operations of our VWES subsidiary. In February 2019, VWES filed for Chapter 7 bankruptcy.
VWES has been presented as discontinued operations in the accompanying consolidated financial statements.
The operating results for VWES have been presented in the accompanying consolidated statement of operations for the three months ended September 30, 2019
and 2018 as discontinued operations and are summarized below:
|
|
Three Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
452,966
|
|
Cost of revenue
|
|
|
-
|
|
|
|
369,222
|
|
Gross Profit
|
|
|
-
|
|
|
|
83,744
|
|
Operating expenses
|
|
|
-
|
|
|
|
1,169,913
|
|
Loss from operations
|
|
|
-
|
|
|
|
(1,086,169
|
)
|
Other income (expenses)
|
|
|
-
|
|
|
|
34,253
|
|
Net loss
|
|
$
|
-
|
|
|
$
|
(1,051,916
|
)
|
As of September 30, 2019, VWES’ bankruptcy was completed and the Company removed all the assets and liabilities
of VWES resulting in a gain on the disposition of discontinued operations of $2,515,028.
The following are the results of our operations for the nine months ended September 30, 2019, as compared to the nine months
ended September 30, 2018.
|
|
Nine Months
Ended
September 30,
2019
|
|
|
Nine Months
Ended
September 30,
2018
|
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20,690,014
|
|
|
$
|
10,570,032
|
|
|
$
|
10,119,982
|
|
Cost of revenue
|
|
|
15,542,194
|
|
|
|
6,478,090
|
|
|
|
9,064,104
|
|
Gross Profit
|
|
|
5,147,820
|
|
|
|
4,091,942
|
|
|
|
1,055,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
5,509,996
|
|
|
|
4,255,035
|
|
|
|
1,254,961
|
|
Total operating expenses
|
|
|
5,509,996
|
|
|
|
4,255,035
|
|
|
|
1,254,961
|
|
Loss from operations
|
|
|
(362,176
|
)
|
|
|
(163,093
|
)
|
|
|
(199,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,736,968
|
|
|
|
1,642,562
|
|
|
|
1,094,406
|
|
Change in value of derivative liabilities
|
|
|
689,369
|
|
|
|
766,718
|
|
|
|
(77,349
|
)
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
(6,305
|
)
|
|
|
6,305
|
|
Other (income)
|
|
|
(206,681
|
)
|
|
|
(173,608
|
)
|
|
|
(33,073
|
)
|
Total other expenses
|
|
|
3,219,656
|
|
|
|
2,229,367
|
|
|
|
990,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(3,581,832
|
)
|
|
|
(2,392,460
|
)
|
|
|
(1,189,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(3,581,832
|
)
|
|
|
(2,392,460
|
)
|
|
|
(1,189,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinue operations
|
|
|
2,419,849
|
|
|
|
(1,720,538
|
)
|
|
|
4,140,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,161,983
|
)
|
|
$
|
(4,112,998
|
)
|
|
$
|
2,951,015
|
|
Our revenues for the nine months ended September 30, 2019, increased by $10,119,982 as compared to the nine months ended September 30, 2018. In 2019,
the increase in revenue related to, $1,763,064 for APF (acquired in April 2018), and $9,561,843 for Morris (acquired in January 2019) offset by a decrease of $405,391 relating to the 6th Sense Auto and Brake Active services of ALTIA and $799,534
for QCA. The increase in revenue was driven by the acquisitions of APF and Morris. We expect our revenue to continue to grow over the remainder of the year.
Cost of revenue
Our cost of revenue for the nine months ended September 30, 2019, increased by $9,064,104 as compared to the nine months ended September 30, 2018. In
2019, the increase in our cost of revenue related to $32,158 for QCA, $1,399,133 for APF (acquired in April 2018), and $7,814,224 for Morris (acquired in January 2019) offset by a decrease of $181,411 relating to the 6th Sense Auto and Brake Active
services of ALTIA. The increase in cost of revenue among all the different segments was the result of the increase in revenues as described above. We expect our cost of revenue to increase over the next year as our revenue increases.
Operating expenses
Our operating expenses for the nine months ended September 30, 2019, increased by $1,254,961 as compared to the nine months ended September 30, 2018. The increase consisted primarily of an
increase to general and administrative expenses associated with the operations of APF and Morris which were acquired in April 2018 and January 2019, respectively.
Other expenses
Other expenses for the nine months ended September 30, 2019, increased by $990,289 as compared to 2018. This increase was primarily due to the increase
in interest expense due to the increase in outstanding debt in 2019 compared to 2018 and the amortization of debt discounts.
Discontinued operations
In December 2018, we decided to shut down the operations of our VWES subsidiary. In February 2019, VWES filed for Chapter 7 bankruptcy.
VWES has been presented as discontinued operations in the accompanying consolidated financial statements.
The operating results for VWES have been presented in the accompanying consolidated statement of
operations for the nine months ended September 30, 2019 and 2018 as discontinued operations and are summarized below:
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
2,938,441
|
|
Cost of revenue
|
|
|
-
|
|
|
|
2,489,273
|
|
Gross Profit
|
|
|
-
|
|
|
|
449,168
|
|
Operating expenses
|
|
|
95,179
|
|
|
|
2,267,843
|
|
Loss from operations
|
|
|
(95,179
|
)
|
|
|
(1,818,675
|
)
|
Other income (expenses)
|
|
|
-
|
|
|
|
98,137
|
|
Net loss
|
|
$
|
(95,179
|
)
|
|
$
|
(1,720,538
|
)
|
A
s of September 30, 2019, VWES’ bankruptcy was completed and the Company removed all the assets and liabilities of VWES resulting
in a gain on the disposition of discontinued operations of $2,515,028.
Liquidity and Capital Resources
We have financed our operations since inception from the sale of common stock, capital contributions from stockholders and from the issuance of notes
payable and convertible notes payable. We expect to continue to finance our operations from our current operating cash flow and by the selling shares of our common stock and or debt instruments.
Management expects to have sufficient working capital for continuing operations from either the sale of its products or through the raising of additional
capital through private offerings of our securities. Additionally, the Company is monitoring additional businesses to acquire which management hopes 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.
The Company also may elect to seek bank financing or to engage in debt financing through a placement agent. If the Company is unable to raise sufficient
capital from operations or through sales of its securities or other means, we may need to delay implementation of our business plans.
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
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.
Item 3. Qualitative and Qualitative Disclosures About Market Risk.
As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this quarterly report, September 30, 2019. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer.
D
isclosure 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) inadequate segregation of duties and effective risk assessment; and (ii)
inadequate control activities and monitoring processes over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019, 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 alleged 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. Following negotiations with the plaintiffs, the Company and
the plaintiffs moved for dismissal of the Company. On January 28, 2019, the court dismissed all claims against the Company with prejudice.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended September 30, 2019, the Company issued 32,956,827 shares of its restricted Class A common stock for note
conversions and issued 200,000 shares of Class B common stock and 2,772,606 shares of Class C common stock to officer, directors and employees for services rendered.
The shares of Class A, Class B and Class C 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.
Item 5. Other Information
Not Applicable
Item 6. Exhibits.
3.1
|
|
|
|
3.2
|
|
|
|
3.3
|
|
|
|
3.4
|
|
|
|
10.13
|
|
|
|
10.14
|
|
|
|
10.15
|
|
|
|
10.16
|
|
|
|
10.17
|
|
|
|
31
|
|
|
|
32
|
|
|
|
101.INS*
|
XBRL Instance Document
|
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Definition
|
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.
|
Alpine 4 Technologies Ltd.
|
|
|
Dated: November 19, 2019
|
|
|
|
By: /s/ Kent B. Wilson
|
|
Kent B. Wilson
|
|
Chief Executive Officer, Chief Financial Officer, President and Director (Principal Executive Officer, Principal Accounting Officer)
|
35