Notes to Unaudited Consolidated Financial Statements
For the Three Months Ended March 31, 2022
Note 1 – Organization and Basis of Presentation
The unaudited consolidated financial statements were prepared by Alpine 4 Holdings, Inc. (‘we,” “our,” or the "Company"), pursuant to the rules and regulations of the Securities Exchange Commission ("SEC"). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K filed with the SEC on April 14, 2022. The results for the three months ended March 31, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
The Company was incorporated under the laws of the State of Delaware on April 22, 2014. The Company was formed to serve as a vehicle to affect an asset acquisition, merger, exchange of capital stock, or other business combination with a domestic or foreign business. On March 2, 2021, the Company changed its name from Alpine 4 Technologies Ltd. to Alpine 4 Holdings, Inc.
Effective April 1, 2016, the Company purchased all of the outstanding capital stock of Quality Circuit Assembly, Inc., a California corporation (“QCA”).
Effective January 1, 2019, the Company purchased all of the outstanding capital stock of Morris Sheet Metal Corp., an Indiana corporation (“MSM”); JTD Spiral, Inc., an Indiana corporation wholly owned by MSM; Morris Enterprises LLC, an Indiana limited liability company; and Morris Transportation LLC, an Indiana limited liability company (collectively “Morris”).
Effective November 6, 2019, the Company purchased all of the outstanding capital stock and units of Deluxe Sheet Metal, Inc., an Indiana corporation, and DSM Holding, LLC, an Indiana limited liability company; and purchased certain real estate from Lonewolf Enterprises, LLC, an Indiana limited liability company (collectively “Deluxe”).
Effective February 21, 2020, the Company purchased all of the outstanding units of Excel Fabrication, LLC., an Idaho limited liability company (“Excel”). Excel subsequently changed its name to Excel Construction Services, LLC.
Effective December 15, 2020, the Company purchased the assets of Impossible Aerospace Corporation, a Delaware corporation (“IA”).
Effective February 8, 2021, the Company purchased the assets of Vayu (US), Inc., a Delaware corporation (“Vayu”).
On May 5, 2021, the Company acquired all of the outstanding shares of stock of Thermal Dynamics International, Inc., a Delaware corporation (“TDI”).
On May 10, 2021, the Company acquired all of the outstanding membership interests of KAI Enterprises, LLC, a Florida limited liability company, the sole asset of which was all of the outstanding membership interests of Alternative Laboratories, LLC, a Delaware limited liability company (“Alt Labs”).
On October 20, 2021, the Company acquired 100% of the outstanding shares of Identified Technologies Corporation, a Delaware corporation (“Identified Technologies”).
On November 29, 2021, the Company, and a newly formed and wholly owned subsidiary of the Company named ALPP Acquisition Corporation 3, Inc. (“AC3”), entered into a merger agreement with ElecJet Corp., (“ElecJet”) and the three ElecJet shareholders. Pursuant to the agreement, AC3 merged with and into ElecJet with ElecJet being the surviving entity following the merger.
On December 9, 2021, the Company, and A4 Technologies, Inc., a wholly owned subsidiary of the Company (“A4 Technologies”), entered into a Membership Interest Purchase Agreement with DTI Services Limited Liability Company (doing business as RCA Commercial Electronics), (“DTI”), Direct Tech Sales LLC, (also having an assumed business name of RCA Commercial Electronics), (“Direct Tech”), PMI Group, LLC, (“PMI”), Continu.Us, LLC, (“Continu.Us”), Solas Ray, LLC, (“Solas”), and the individual owners of the interests of the various entities. DTI, Direct Tech, PMI, Continu.Us, and Solas were each referred to in the Membership Interest Purchase Agreement collectively as “RCA.” Pursuant to the MIPA, the Company acquired all of the outstanding membership interests of RCA.
As of the date of this Report, the Company was a holding company owning, directly or indirectly, fourteen companies:
•A4 Corporate Services, LLC;
•ALTIA, LLC;
•Quality Circuit Assembly, Inc.;
•Morris Sheet Metal, Corp;
•JTD Spiral, Inc.;
•Excel Construction Services, LLC;
•SPECTRUMebos, Inc.;
•Vayu (US);
•Thermal Dynamics International, Inc.;
•Alternative Laboratories, LLC.;
•Identified Technologies, Corp.;
•ElecJet Corp.;
•DTI Services Limited Liability Company (doing business as RCA Commercial Electronics); and
•Global Autonomous Corporation
Basis of presentation
The accompanying consolidated financial statements present the balance sheets, statements of operations, stockholders' deficit and cash flows of the Company. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).
Liquidity
The Company’s financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.
In accordance with Financial Accounting Standards Board (the “FASB”), Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses and negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. While the Company experienced an operating loss for the quarter ended March 31, 2022, of $3.6 million, this was an improvement over the previous quarter ended December 31, 2021 and the same quarter last year ended March 31, 2021, during which the Company had an operating loss of $12.4 million and $5.1 million, respectively. While the Company had a negative cash flow used in operation of $5.9 million for the quarter ended March 31, 2022, it was an improvement over the same quarter last year when the Company had a negative cash flow used in operations of $9.0 million.
As of March 31, 2022, the Company has positive working capital of approximately $15.1 million, which was an increase of $1.1 million compared to December 31, 2021. The Company has secured bank financing totaling $ 23 million in lines of credit of which approximately $1.5 million was unused at March 31, 2022. As of the date of the Report, the Company had approximately $2.5 million in cash.
The Company plans to continue to generate additional revenue (and improve cash flows from operations) partly from the acquisitions of six operating companies which closed in 2021 combined with improved gross profit performance from the
existing operating companies. The Company also may raise funds through debt financing, securing additional lines of credit, and the sale of shares through its planned at-the-market offering.
Based on management’s plans to improve cash flows as disclosed above management believes the Company has sufficient working capital to satisfy the Company’s estimated liquidity needs for the next 12 months. Because of the above factors, the Company believes that this alleviates the substantial doubt in connection with the
Company's ability to continue as a going concern.
However, there is no assurance that management’s plans will be successful due to the current economic climate in the United States and globally.
Note 2 – Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as of March 31, 2022, and December 31, 2021. Significant intercompany balances and transactions have been eliminated.
Use of estimates
The consolidated financial statements are prepared in accordance with U.S. GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable. In many instances, the Company could have reasonably used different accounting estimates and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. This applies in particular to useful lives of long-lived assets, reserves for accounts receivable and inventory, valuation allowance for deferred tax assets, fair values assigned to intangible assets acquired, and impairment of long-lived assets. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, the Company’s future financial statement presentation, financial condition, results of operations and cash flows will be affected. The ultimate impact from COVID-19 on the Company’s operations and financial results during 2022 will depend on, among other things, the ultimate severity and scope of the pandemic, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, and the speed with which the economy recovers. The Company is not able to fully quantify the impact that these factors will have on the Company’s financial results during 2022 and beyond. COVID-19 did have a negative impact on the Company’s financial performance in 2021. Our operations and performance may depend on global, regional, economic and geopolitical conditions. Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from North American and European leaders. These events are currently escalating and creating increasingly volatile global economic conditions. Resulting changes in North American trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a “trade war.” A trade war could result in increased costs for raw materials that we use in our manufacturing and could otherwise limit our ability to sell our products abroad. These increased costs would have a negative effect on our financial condition and profitability. Furthermore, the military conflict between Russia and Ukraine may increase the likelihood of supply interruptions and further hinder our ability to find the materials we need to make our products. If the conflict between Russia and Ukraine continues for a long period of time, or if other countries become further involved in the conflict, we could face significant adverse effects to our business and financial condition. The Company is not able to fully quantify the impact that these factors will have on the Company’s financial results during 2022 and beyond.
Reclassification
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.
Cash
Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days. As of March 31, 2022, and December 31, 2021, the Company had no cash equivalents.
Major Customers
The Company had one customer, W.W. Grainger Inc., that made up 13% of accounts receivable as of March 31, 2022. The Company had no customer that made up over 10% of accounts receivable as of December 31, 2021.
For the three months ended March 31, 2022, the Company had one customer, W.W. Grainger Inc., that made up 13% of total revenues. For the three months ended March 31, 2021, the Company had two customers, Rivian Automotive, Inc. and Lighthouse Worldwide Solutions, that made up 15% and 10% of total revenues, respectively.
For the three months ended March 31, 2022, the Company had 11% of total revenues made up of prime contractors.
Major Customer by Segment
Manufacturing
As of as of March 31, 2022, and December 31, 2021, the manufacturing segment had two customers, Rivian Automotive, Inc. and Lighthouse Worldwide Solutions, that made up 28% and 25%, respectively, and 31% and 20%, respectively, of accounts receivable.
For the three months ended March 31, 2022, the manufacturing segment had two customers, Rivian Automotive, Inc. and Lighthouse Worldwide Solutions, that made up 23% and 13%, respectively, of total manufacturing revenues. For the three months ended March 31, 2021, the manufacturing segment had two customers, Rivian Automotive, Inc. and Lighthouse Worldwide Solutions, that made up 34% and 23%, respectively, of total manufacturing revenues.
Construction
As of March 31, 2022, the construction segment had one customer, A. Hattersley & Sons, Inc., that made up 24% of accounts receivable. As of December 31, 2021, the construction segment had two customers, A. Hattersley & Sons, Inc. and Shambaugh & Sons L.P., that made up 25% and 17%, respectively, of accounts receivable.
For the three months ended March 31, 2022, the construction segment had one customer, A. Hattersley & Sons, Inc., that made up 19% of total construction revenues. For the three months ended March 31, 2021, the construction segment had one customer, A. Hattersley & Sons, Inc., that made up 11% of total construction revenues.
Defense
Of the defense segment, 100% of accounts receivables and defense revenues were related to prime contractors.
Technologies
In the technologies segment, the Company had one customer, W.W. Grainger Inc., that made up 39% of accounts receivable as of March 31, 2022, and two customers, Direct Supply Inc. and W.W. Grainger Inc., that made up 14% and 30%, respectively, of accounts receivable as of December 31, 2021.
For the three months ended March 31, 2022, the technology segment had one customer, W.W. Grainger Inc., that made up 33% of their total revenues.
Aerospace
As of December 31, 2021, the aerospace segment had one customer, Branch Civil, Inc., that made up 57% of accounts receivable.
For the three months ended March 31, 2022, the aerospace segment had no customer that made up over 10% of total aerospace revenues.
Fair value measurements
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, convertible notes, notes payable and lines of credit. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.
The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates. As of March 31, 2022, and December 31, 2021, the Company had no financial assets or liabilities that were required to be fair valued on a recurring basis.
Research and Development
The Company focuses on quality control and development of new products and the improvement of existing products. All cost related to research and development activities are expensed as incurred. During the three months ended March 31, 2022 and 2021, research and development cost totaled $191,930 and $253,971, respectively.
Earnings (loss) per shares
The Company presents both basic and diluted net income (loss) per share on the face of the consolidated statements of operations. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants, and using the treasury-stock method. If antidilutive, the effect of potentially dilutive shares of common stock is ignored. The only potentially dilutive securities outstanding during the periods presented were the convertible debt, options and warrants. The following table illustrates the computation of basic and diluted earnings per share (“EPS”) for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2022 | | For the Three Months Ended March 31, 2021 |
| Net loss | | Shares | | Per Share Amount | | Net loss | | Shares | | Per Share Amount |
| Basic EPS | | | | | | | | | | | |
| Net loss | $ | (4,175,953) | | | 183,032,447 | | | $ | (0.02) | | | $ | (6,129,468) | | | 154,616,490 | | | $ | (0.04) | |
| Effect of Dilutive Securities | | | | | | | | | | | |
| Stock options and warrants | — | | | — | | | — | | | — | | | — | | | — | |
| Dilute EPS | | | | | | | | | | | |
| Net loss plus assumed conversions | $ | (4,175,953) | | | 183,032,447 | | | $ | (0.02) | | | $ | (6,129,468) | | | 154,616,490 | | | $ | (0.04) | |
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.
The following is a summary of the revenue recognition policy for each of the Company’s subsidiaries.
Revenue is recognized under Topic 606 in a manner that reasonably reflects the delivery of its services and products to customers in return for expected consideration and includes the following elements:
–executed contract with the Company's customers that it believes are legally enforceable;
–identification of performance obligations in the respective contract;
–determination of the transaction price for each performance obligation in the respective contract;
–allocation of the transaction price to each performance obligation; and
–recognition of revenue only when the Company satisfies each performance obligation.
The following table presents our revenues disaggregated by type for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction Services | | Manufacturing | | Defense | | Technologies | | Aerospace | | Total |
| Sale of goods | | | | | | | | | | | |
| Circuit boards and cables | $ | — | | | $ | 4,823,957 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,823,957 | |
| Dietary supplements | — | | | 3,824,138 | | | — | | | — | | | — | | | 3,824,138 | |
| Electronics | — | | | — | | | — | | | 9,793,988 | | | — | | | 9,793,988 | |
| Total sale of goods | $ | — | | | $ | 8,648,095 | | | $ | — | | | $ | 9,793,988 | | | $ | — | | | $ | 18,442,083 | |
| | | | | | | | | | | |
| Sale of services | | | | | | | | | | | |
| Construction contracts | $ | 4,056,204 | | | $ | — | | | $ | 2,687,981 | | | $ | — | | | $ | — | | | $ | 6,744,185 | |
| Drone 3D mapping | — | | | — | | | — | | | — | | | 405,886 | | | 405,886 | |
| Total sale of services | $ | 4,056,204 | | | $ | — | | | $ | 2,687,981 | | | $ | — | | | $ | 405,886 | | | $ | 7,150,071 | |
| Total revenues | $ | 4,056,204 | | | $ | 8,648,095 | | | $ | 2,687,981 | | | $ | 9,793,988 | | | $ | 405,886 | | | $ | 25,592,154 | |
The following table presents our revenues disaggregated by type for the three months ended March 31, 2021:
| | | | | | | | | | | | | | | | | |
| Construction Services | | Manufacturing | | Total |
| Sale of goods | | | | | |
| Circuit boards and cables | $ | — | | | $ | 3,738,309 | | | $ | 3,738,309 | |
| | | | | |
| | | | | |
| Total sale of goods | $ | — | | | $ | 3,738,309 | | | $ | 3,738,309 | |
| | | | | |
| Sale of services | | | | | |
| Construction contracts | $ | 4,930,096 | | | $ | — | | | $ | 4,930,096 | |
| | | | | |
| Total sale of services | $ | 4,930,096 | | | $ | — | | | $ | 4,930,096 | |
| Total revenues | $ | 4,930,096 | | | $ | 3,738,309 | | | $ | 8,668,405 | |
Note 3 – Leases
The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.
As of March 31, 2022, the future minimum finance and operating lease payments were as follows:
| | | | | | | | | | | |
Twelve Months Ending March 31, | Finance
Leases | | Operating
Leases |
| 2023 | $ | 1,913,037 | | | $ | 507,765 | |
| 2024 | 1,931,586 | | | 519,298 | |
| 2025 | 1,962,256 | | | 494,972 | |
| 2026 | 1,851,918 | | | — | |
| 2027 | 1,880,265 | | | — | |
| Thereafter | 16,292,620 | | | — | |
| Total payments | 25,831,682 | | | 1,522,035 | |
| Less: imputed interest | (10,020,457) | | | (130,252) | |
| Total obligation | 15,811,225 | | | 1,391,783 | |
| Less: current portion | (670,619) | | | (437,490) | |
| Non-current financing leases obligations | $ | 15,140,606 | | | $ | 954,293 | |
Operating Leases
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets as of March 31, 2022, and December 31, 2021:
| | | | | | | | | | | | | | |
| Classification on Balance Sheet | March 31,
2022 | | December 31,
2021 |
| Assets | | | | |
| Operating lease assets | Operating lease right of use assets | $ | 1,354,925 | | | $ | 1,460,206 | |
| Total lease assets | | $ | 1,354,925 | | | $ | 1,460,206 | |
| | | | |
| Liabilities | | | | |
| Current liabilities | | | | |
| Operating lease liability | Current operating lease liability | $ | 437,490 | | | $ | 428,596 | |
| Noncurrent liabilities | | | | |
| Operating lease liability | Long-term operating lease liability | 954,293 | | | 1,066,562 | |
| Total lease liability | | $ | 1,391,783 | | | $ | 1,495,158 | |
The lease expense for the three months ended March 31, 2022, was $126,561. The cash paid under operating leases during the three months ended March 31, 2022, was $124,654. At March 31, 2022, the weighted average remaining lease terms were 2.96 years and the weighted average discount rate was 3.15%.
Note 4 – Debt
The outstanding balances for the loans as of March 31, 2022, and December 31, 2021, were as follows:
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| Lines of credit, current portion | $ | 3,590,862 | | | $ | 4,473,489 | |
| Equipment loans, current portion | 86,173 | | | 61,640 | |
| Term notes, current portion | 5,447,371 | | | 5,628,884 | |
| Total current | 9,124,406 | | | 10,164,013 | |
| Lines of credit, net of current portion | 10,339,420 | | | 5,640,051 | |
| Long-term portion of equipment loans and term notes | 8,555,477 | | | 8,426,105 | |
| Total notes payable and line of Credit | $ | 28,019,303 | | | $ | 24,230,169 | |
Future scheduled maturities of outstanding debt are as follows:
| | | | | |
Twelve Months Ending March 31, | |
| 2023 | $ | 9,124,406 | |
| 2024 | 10,674,063 | |
| 2025 | 2,407,852 | |
| 2026 | 359,791 | |
| 2027 | 370,582 | |
| Thereafter | 5,082,609 | |
| Total | $ | 28,019,303 | |
In August 2020, the Company filed a lawsuit against Alan Martin regarding his note payable (See Note 8). As of March 31, 2022, the note had a balance of $2,857,500 and accrued interest of $1,248,779 which is reflective in the current liabilities.
During 2022, the Company had four revolving lines of credit totaling in the aggregate $23.5 million including one capital expenditures line of credit totaling $0.5 million. The revolving lines of credit used as of March 31, 2022, totaled $13.9 million with an interest rate ranging from prime plus 2.50% - 4.25% and a term of one-two years. As of March 31, 2022, the Company had $1.5 million in additional funds available to borrow. The Company is required to maintain covenants including financial ratios as a condition of the line of credit agreements. We are in compliance with these covenants.
In April 2022, the Company had three notes payable due to the seller of Morris that matured. As of the date of this report the notes carry a balance of $2,280,177. This balance is expected to be paid off by June 2022.
Note 5 – Stockholders' Equity
Common Stock
The Company had the following transactions in its common stock during the three months ended March 31, 2022:
•In January 2022, the Company issued 72,152 shares of Class A common stock for no additional consideration upon conversion of 10,149 shares of Series C Preferred Stock and 78,674 of Series D Preferred Stock.
•In March 2022, the Company issued 39,386 shares of Class A common stock for services with a value of $99,252.
•On January 13, 2022 the Company amended the Corporation's Amended and Restated Certificate of Incorporation increasing the authorized capital stock from 195,000,000 to 295,000,000.
Stock Options
The following summarizes the stock option activity for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Life (Years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2021 | 1,790,000 | | | $ | 0.19 | | | 6.09 | | $ | 3,098,055 | |
| Granted | — | | | | | | | |
| Forfeited | (618,000) | | | 0.30 | | | | | |
| Exercised | — | | | | | | | |
Outstanding at March 31, 2022 | 1,172,000 | | | $ | 0.13 | | | 6.17 | | $ | 1,075,950 | |
| | | | | | | |
Vested and expected to vest at March 31, 2022 | 1,172,000 | | | $ | 0.13 | | | 6.17 | | $ | 1,075,950 | |
| | | | | | | |
Exercisable at March 31, 2022 | 1,071,125 | | | $ | 0.14 | | | 6.14 | | $ | 975,341 | |
The following table summarizes information about options outstanding and exercisable as of March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Exercise
Price | | Number
of Shares | | Weighted
Average
Remaining
Life (Years) | | Weighted
Average
Exercise
Price | | Number
of Shares | | Weighted
Average
Exercise
Price |
| | | | | | | | | | |
| $ | 0.05 | | | 979,000 | | | 6.38 | | $ | 0.05 | | | 883,437 | | | $ | 0.05 | |
| 0.10 | | | 85,000 | | | 6.28 | | 0.10 | | | 79,688 | | | 0.10 | |
| 0.90 | | | 108,000 | | | 5.27 | | 0.90 | | | 108,000 | | | 0.90 | |
| | 1,172,000 | | | | | | | 1,071,125 | | | |
During the three months ended March 31, 2022 and 2021, stock option expense amounted to $1,026 and $19,341, respectively. Unrecognized stock option expense as of March 31, 2022, amounted to $6,184, which will be recognized over a period extending through December 2022.
Warrants
The following summarizes the warrants activity for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Warrants | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Life (Years) | | Aggregate
Intrinsic
Value |
| | | | | | | |
Outstanding at December 31, 2021 | 5,527,778 | | | $ | 3.32 | | | 4.62 | | $ | — | |
| Granted | — | | | | | | | |
| Forfeited | — | | | | | | | |
| Exercised | — | | | | | | | |
Outstanding at March 31, 2022 | 5,527,778 | | | $ | 3.32 | | | 4.38 | | $ | — | |
| | | | | | | |
Vested and expected to vest at March 31, 2022 | 5,527,778 | | | $ | 3.32 | | | 4.38 | | $ | — | |
| | | | | | | |
Exercisable at March 31, 2022 | 5,099,207 | | | $ | 3.34 | | | 4.38 | | $ | — | |
The following table summarizes information about warrants outstanding and exercisable as of March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Warrants Outstanding | | Warrants Exercisable |
Exercise
Price | | Number
of Shares | | Weighted
Average
Remaining
Life (Years) | | Weighted
Average
Exercise
Price | | Number
of Shares | | Weighted
Average
Exercise
Price |
| | | | | | | | | | |
| $ | 6.60 | | | 416,667 | | | 2.89 | | $ | 6.60 | | | 416,667 | | | $ | 6.60 | |
| 2.52 | | | 396,825 | | | 2.70 | | 2.52 | | | 396,825 | | | 2.52 |
| 3.10 | | | 4,285,715 | | | 4.65 | | 3.10 | | | 4,285,715 | | | 3.10 |
| 3.09 | | | 428,571 | | | 4.65 | | 3.08 | | | — | | | |
| | | 5,527,778 | | | | | | | 5,099,207 | | | |
During the year ended December 31, 2021, the Company issued 416,667 warrants to a placement agent in connection with sale of its common stock The warrants have an exercise price of $6.60, are exercisable as of August 16, 2021 and expire on February 16, 2025. The Company issued another 428,571 warrants to a placement agent in connection with the sale of its common stock. The warrants have an exercise price of $3.08, are exercisable as of May 26, 2022, and expire November 22, 2026. The Company issued another 396,825 warrants in connection to the RCA acquisition. The warrants have an exercise price of $2.52, were exercisable as of December 9, 2021, and expire December 9, 2024.
The fair value of the 416,667, the 428,571, and the 396,825 warrants issued to the placement agent and RCA sellers during the year ended December 31, 2021, are $2,498,637, $902,414, and $668,863 respectively and was determined using the Black-Scholes option pricing model with the following assumptions:
| | | | | |
| Stock price | $2.51-$7.03 |
| Risk-free interest rate | 0.01%-1.02% |
| Expected life of the options | 2-5 years |
| Expected volatility | 159-347% |
| Expected dividend yield | 0% |
The fair value of the warrants was recorded as offering costs with a corresponding credit to additional paid in capital.
Note 6 – Business Combinations
DTI Services (doing business as RCA Commercial Electronics) ("RCA")
On December 13, 2021, the Company closed the acquisition of RCA. The acquisition was considered an acquisition of a business under ASC 805. 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 adjustment to the provisional amounts as new information is obtained about facts and circumstances that existed at the acquisition date. A summary of the purchase price allocation at fair value is presented below:
| | | | | |
| Purchase Allocation |
| Accounts receivable | $ | 3,409,230 | |
| Other current assets | 1,259,556 | |
| Inventory | 14,040,123 | |
| Property and equipment | 761,370 | |
| Customer list | 4,700,000 | |
| Trademark | 1,800,000 | |
| Non-compete agreement | 690,000 | |
| Goodwill | 213,477 | |
| ROU asset | 1,196,764 | |
| Accounts payable | (951,302) | |
| Accrued expenses and other current liabilities | (677,720) | |
| Customer deposits | (153,201) | |
| Operating lease liability | (1,226,128) | |
| Line of credit | (4,710,768) | |
| $ | 20,351,401 | |
The purchase price was paid as follows:
| | | | | |
| Cash | $ | 14,000,000 | |
Class A Common Stock (1,587,301 shares) | 3,682,538 | |
Warrants (396,852 shares) | 668,863 | |
| Seller notes | 2,000,000 | |
| $ | 20,351,401 | |
The following are the unaudited pro forma results of operations for the three months ended March 31, 2022 and 2021, as if Vayu, TDI, Alt Labs, Identified Technologies, ElecJet, and RCA had been acquired on January 1, 2021. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results do not
include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated.
| | | | | | | | | | | | | | |
| Pro Forma Combined Financials (unaudited) |
| Three Months Ended March 31, | |
| 2022 | | 2021 | |
| Sales | $ | 25,592,154 | | | $ | 24,481,464 | | |
| Cost of goods sold | 19,954,697 | | | 17,791,716 | | |
| Gross profit | 5,637,457 | | | 6,689,748 | | |
| Operating expenses | 9,237,168 | | | 8,815,016 | | |
| Loss from operations | (3,599,711) | | | (2,125,268) | | |
| Net loss | (4,175,953) | | | (2,560,359) | | |
| Net loss per share | (0.02) | | | (0.02) | | |
Note 7 – Segment Reporting
The Company discloses segment information that is consistent with the way in which management operates and views its business. Effective during the quarter ended March 31, 2022, the Company has reduced its reportable segments to five operating segments as represented by the Company’s five silo companies: A4 Construction Services, Inc.; A4 Manufacturing, Inc.; A4 Technologies, Inc.; A4 Aerospace Corporation; and A4 Defense Systems, Inc. The Company’s reportable segments for the three months ended March 31, 2022, and March 31, 2021, and as of March 31, 2022, and December 31, 2021, were as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| | | |
| Revenue | | | |
| Construction Services | $ | 4,056,204 | | | $ | 4,930,096 | |
| Manufacturing | 8,648,095 | | | 3,738,309 | |
| Defense | 2,687,981 | | | — | |
| Technologies | 9,793,988 | | | — | |
| Aerospace | 405,886 | | | — | |
| $ | 25,592,154 | | | $ | 8,668,405 | |
| | | |
| Gross profit | | | |
| Construction Services | $ | 364,832 | | | $ | (157,658) | |
| Manufacturing | 2,004,169 | | | 912,277 | |
| Defense | 843,189 | | | — | |
| Technologies | 2,122,299 | | | — | |
| Aerospace | 302,968 | | | — | |
| $ | 5,637,457 | | | $ | 754,619 | |
| | | |
| Income (loss) from operations | | | |
| Construction Services | $ | (635,688) | | | $ | (2,103,802) | |
| Manufacturing | (653,349) | | | 254,189 | |
| Defense | 423,140 | | | — | |
| Technologies | 289,777 | | | — | |
| Aerospace | (851,130) | | | (2,217,779) | |
| Unallocated | (2,172,461) | | | (1,004,677) | |
| | | | | | | | | | | |
| $ | (3,599,711) | | | $ | (5,072,069) | |
| | | |
| Depreciation and amortization | | | |
| Construction Services | $ | 166,404 | | | $ | 332,722 | |
| Manufacturing | 481,687 | | | 163,359 | |
| Defense | 72,090 | | | — | |
| Technologies | 243,713 | | | — | |
| Aerospace | 282,690 | | | 178,244 | |
| Unallocated | 158,807 | | | 48,101 | |
| $ | 1,405,391 | | | $ | 722,426 | |
| | | |
| Interest Expense | | | |
| Construction Services | $ | 165,010 | | | $ | 381,836 | |
| Manufacturing | 129,989 | | | 142,356 | |
| Technologies | 54,817 | | | — | |
| Aerospace | 1,440 | | | — | |
| Unallocated | 257,705 | | | 947,531 | |
| $ | 608,961 | | | $ | 1,471,723 | |
| | | |
| Net income (loss) | | | |
| Construction Services | $ | (744,342) | | | $ | (2,480,268) | |
| Manufacturing | (845,765) | | | 91,247 | |
| Defense | 423,140 | | | — | |
| Technologies | 234,960 | | | — | |
| Aerospace | (835,748) | | | (1,788,239) | |
| Unallocated | (2,408,198) | | | (1,952,208) | |
| $ | (4,175,953) | | | $ | (6,129,468) | |
| | | | | | | | | | | |
| As of March 31, 2022 | | As of December 31, 2021 |
| | | |
| Total Assets | | | |
| Construction Services | $ | 22,601,572 | | | $ | 13,985,561 | |
| Manufacturing | 34,397,698 | | | 39,964,186 | |
| Defense | 11,030,976 | | | 11,982,580 | |
| Technologies | 44,108,997 | | | 39,516,284 | |
| Aerospace | 11,505,876 | | | 17,078,926 | |
| Unallocated | 6,735,899 | | | 10,507,786 | |
| $ | 130,381,018 | | | $ | 133,035,323 | |
| | | |
| Goodwill | | | |
| Construction Services | $ | 113,592 | | | $ | 113,592 | |
| Manufacturing | 8,036,200 | | | 8,036,200 | |
| Defense | 6,426,786 | | | 6,426,786 | |
| Technologies | 5,447,746 | | | 5,447,746 | |
| Aerospace | 1,913,310 | | | 1,913,310 | |
| $ | 21,937,634 | | | $ | 21,937,634 | |
| | | |
| Accounts receivable, net | | | |
| Construction Services | $ | 4,140,179 | | | $ | 4,193,243 | |
| Manufacturing | 3,354,509 | | | 3,192,030 | |
| Defense | 1,592,054 | | | 1,371,184 | |
| Technologies | 4,385,115 | | | 2,998,945 | |
| Aerospace | 144,837 | | | 119,774 | |
| $ | 13,616,694 | | | $ | 11,875,176 | |
Note 8 – Commitments and Contingencies
Licensing Agreement
DTI has entered into licensing agreements with RCA Trademark Management for the licensing rights to the respective trademarks in the United States of America and Canada.
The RCA licensing agreement was amended with Technicolor, S.A., as licensor and expires December 31, 2024. DTI agreed to pay a royalty fee of 2.5% on net sales of the licensed products with a minimum annual payment of $420,000 for the years ended 2020 and 2021, $440,000 for the year ended 2022, $460,000 for the year ended 2023, and $480,000 for the year ended 2024.
Warranty Service Agreement
DTI entered into a warranty service agreement to provide certain warranty services for a lighting supplier through December 31, 2024, except for one class of customer, for whom services will be provided through 2030. In exchange for these services, DTI receives annual payments as follows:
Years Ending March 31, | | | | | | | | |
| 2023 | $ | 66,626 | |
| 2024 | | 59,964 | |
| Total | $ | 126,590 | |
Royalty Agreement
On November 28, 2021, the Company entered into a Royalty Agreement with the sellers of ElecJet. In the Royalty Agreement, the Company noted that upon closing of the merger with ElecJet, the Company desired to build its initial factory (“Factory”) to manufacture batteries in the United States. The Company agreed to pay the sellers 1.5% of net sales for batteries produced by the Factory. Royalty payments shall continue to be paid for a period of ten years from the starting date, or until the total of the royalty payments equals $50 million, whichever occurs first.
Legal Proceedings
From time to time, the Company may become involved in lawsuits and other legal proceedings that arise in the course of business. Litigation is subject to inherent uncertainties, and it is not possible to predict the outcome of litigation with total confidence. As of the date of this Report, the Company was not aware of any legal proceedings or potential claims against it whose outcome would be likely, individually or in the aggregate, to have a material adverse effect on the Company’s business, financial condition, operating results, or cash flows, except as set forth below.
In June 2020, the Company’s subsidiary Excel Fabrication, LLC filed a lawsuit against Fusion Mechanical, LLC, in the Fifth Judicial District Court, State of Idaho (Case Number CV42-20-2246). The Company claimed tortious interference and trade secret violations by the defendant. The defendant filed a motion to dismiss, which was denied by the Court. As of the date of this Report, discovery was proceeding. The defendant filed a second motion to dismiss and the Company filed a memorandum in response to the second motion to dismiss, for which a hearing was held on May 10, 2021. On June 11, 2021, the court issued a decision narrowing the claims of the plaintiffs to three items: breach of contract, good faith and fair dealings and intentional interference for economic advantage. These were the Company’s three main points of contention. As of the date of this Report, trial is set for Spring 2023.
In August 2020, the Company filed a lawsuit in the United States District Court, District of Arizona (Case No.2:20-cv-01679-DJH), against Alan Martin, the seller of Horizon Well Testing LLC (“HWT”) dba Venture West Energy Services, LLC. The Company brought claims for breach of contract, including but not limited to breaches of the seller’s representations and warranties in the purchase agreement in connection with the acquisition of HWT. The defendant answered and counterclaimed, claiming breach by the Company of its obligation to issue a promissory note (to be issued in connection with the acquisition of HWT). As of the date of this Report, the discovery period had ended but no trial date had been scheduled. A summary judgement motion was filed on December 22, 2021, which was pending as of the date of this Report.
In May 2021, the Company and several shareholders filed a lawsuit in the United States District Court for the District of Arizona (Case number 2:21-cv-00886-MTL) against Fin Capital LLC ("Fin Cap"), and Grizzly Research LLC ("Grizzly") alleging securities fraud, tortious interference with business expectancy and libel slander for disseminating false and misleading statements about Alpine 4 and its employees to manipulate the stock price and further their own financial interests. As of the date of this Report Fin Capital and Grizzly Research LLC filed motions to dismiss for lack of jurisdiction. The Court has denied Fin Capital’s motion to dismiss and accepted Grizzly Research motion, however the Court granted the Company until May 12th to file a modification of its complaint order. The Company has filed its response and anticipates the Court to move to dismiss Grizzly Research’s motion to dismiss but the date of such dismissal is unknown as of the date of this report.
In August of 2021 Rob Porter filed a lawsuit in the District Court of Oklahoma Country State of Oklahoma CJ-2021-3421 alleging Unjust Enrichment and Breach of Contract for Class B Shares. In October 2021 the Company responded with its answer denying such claims. In October 2021 the Company also filed a counter claims against Mr. Porter for conversion and breach of fiduciary duties. The Company believes this is a frivolous lawsuit.
In October 2021 the Company received three complaints in the District Court of Oklahoma Country State of Oklahoma from former VWES employees Bruce Morse CJ-2021-4316, Brian Hobbs CJ-2021-4315, Thomas Karraker CJ-2021-4314 for Unjust Enrichment, and Breach of Contract. On January 19, 2022, the Company filed a response that denied these claims and believes these are frivolous lawsuits.
Note 9 – Subsequent Events
On April 29, 2022, the Company issued 171,850 shares of Class A at a value of $132,325 as employee compensation.