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EX-32 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUAN - ALPINE 4 HOLDINGS, INC.exh32.htm
EX-31 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO - ALPINE 4 HOLDINGS, INC.exh31.htm

 

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

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

For the quarterly period ended September 30, 2018

[   ]           TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number:  000-55205
Alpine 4 Technologies Ltd.
(Exact name of registrant as specified in its charter)

Delaware
46-5482689
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
2525 E Arizona Biltmore Circle, Suite 237
 
Phoenix, AZ
85016
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant's telephone number, including area code: 855-777-0077 ext 801

 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes        No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes        No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.

Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes        No
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(1) of the Exchange Act. 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:  As of November 20, 2018, the issuer had 25,537,107 shares of its Class A common stock issued and outstanding and 5,000,000 shares of its Class B common stock issued and outstanding.

TABLE OF CONTENTS
 
PART I
 
Page
 
 
 
Item 1.
Financial Statements
3
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
28
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32
 
 
 
Item 4.
Controls and Procedures
32
 
 
 
PART II
 
 
 
 
 
Item 1.
Legal Proceedings
32
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
33
 
 
 
Item 3.
Defaults Upon Senior Securities
33
     
Item 5.
Other Information
33
 
 
 
Item 6.
Exhibits
33
 
 
 
 
Signatures
34
 
2



PART I - FINANCIAL INFORMATION
 

Item 1.  Financial Statements.
ALPINE 4 TECHNOLOGIES, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2018
   
2017
 
   
(unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
 Cash
 
$
337,242
   
$
128,512
 
 Accounts receivable
   
3,739,774
     
2,067,081
 
 Inventory
   
2,393,897
     
1,212,546
 
 Capitalized contract costs
   
64,234
     
-
 
 Prepaid expenses and other current assets
   
268,992
     
221,958
 
 Total current assets
   
6,804,139
     
3,630,097
 
                 
 Property and equipment, net
   
11,278,245
     
9,198,387
 
 Intangible asset, net
   
704,396
     
752,622
 
 Goodwill
   
3,361,706
     
2,131,606
 
 Other non-current assets
   
290,238
     
258,238
 
                 
 TOTAL ASSETS
 
$
22,438,724
   
$
15,970,950
 
                 
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
 
                 
 CURRENT LIABILITIES:
               
 Accounts payable
 
$
3,798,622
   
$
1,980,995
 
 Accrued expenses
   
1,716,269
     
1,049,185
 
 Deferred revenue
   
67,994
     
64,918
 
 Derivative liabilities
   
2,243,258
     
271,588
 
 Deposits
   
12,509
     
12,509
 
 Notes payable, current portion
   
5,226,510
     
3,893,617
 
 Notes payable, related parties, current portion
   
180,500
     
387,000
 
 Convertible notes payable, current portion, net of discount of $745,915 and $79,630
   
2,300,847
     
2,302,620
 
 Financing lease obligation, current portion
   
130,278
     
24,590
 
 Total current liabilities
   
15,676,787
     
9,987,022
 
                 
Notes payable, net of current portion
   
5,001,457
     
-
 
Convertible notes payable, net of current portion
   
450,000
     
1,660,106
 
Financing lease obligations, net of current portion
   
8,435,197
     
6,560,112
 
Deferred revenue
   
-
     
43
 
Deferred tax liability
   
651,703
     
181,703
 
                 
 TOTAL LIABILITIES
   
30,215,144
     
18,388,986
 
                 
 REDEEMABLE COMMON STOCK
               
 Class A Common stock, $0.0001 par value, 0 and 379,403 shares issued and outstanding at September 30, 2018 and December 31, 2017
   
-
     
1,439,725
 
               
 STOCKHOLDERS' DEFICIT:
               
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstandingat September 30, 2018 and December 30, 2017
   
-
     
-
 
Class A Common stock, $0.0001 par value, 100,000,000 shares authorized, 25,537,107 and 23,222,087 shares issued and outstanding at September 30, 2018 and December 31, 2017
   
2,553
     
2,322
 
Class B Common stock, $0.0001 par value, 5,000,000 shares authorized, 5,000,000 and 1,600,000 shares issued and outstanding at September 30, 2018 and December 31, 2017
   
500
     
160
 
Additional paid-in capital
   
16,945,602
     
16,573,632
 
Accumulated deficit
   
(24,725,075
)
   
(20,433,875
)
 Total stockholders' deficit
   
(7,776,420
)
   
(3,857,761
)
 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
22,438,724
   
$
15,970,950
 
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3

ALPINE 4 TECHNOLOGIES, LTD. AND SUBSIDIARIES       
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS       
(unaudited)            
                         
   
Three Months
 Ended September 30,
   
Nine Months
Ended September 30,
 
   
2018
   
2017
   
2018
   
2017
 
                         
Revenue
 
$
4,795,169
   
$
2,221,533
   
$
13,508,473
   
$
7,044,806
 
Cost of revenue (exclusive of depreciation)
   
2,709,133
     
1,520,224
     
8,967,363
     
4,661,163
 
Gross Profit
   
2,086,036
     
701,309
     
4,541,110
     
2,383,643
 
                                 
Operating expenses:
                               
General and administrative expenses
   
3,006,974
     
1,001,921
     
5,369,706
     
3,238,927
 
Depreciation
   
262,243
     
173,693
     
690,743
     
498,732
 
Amortization
   
10,519
     
31,354
     
48,225
     
69,060
 
Loss on sale of property and equipment
   
57,271
     
-
     
414,204
     
-
 
                                 
     Total operating expenses
   
3,337,007
     
1,206,968
     
6,522,878
     
3,806,719
 
Loss from operations
   
(1,250,971
)
   
(505,659
)
   
(1,981,768
)
   
(1,423,076
)
                                 
Other expenses
                               
Interest expense
   
(666,861
)
   
(423,986
)
   
(1,674,420
)
   
(1,080,476
)
Change in value of derivative liability
   
(1,012,743
)
   
72,361
     
(766,718
)
   
72,361
 
Gain on extinguishment of debt
   
-
     
-
     
136,300
     
-
 
Other income
   
55,949
     
47,880
     
173,608
     
181,444
 
     Total other expenses
   
(1,623,655
)
   
(303,745
)
   
(2,131,230
)
   
(826,671
)
                                 
Loss before income tax
   
(2,874,626
)
   
(809,404
)
   
(4,112,998
)
   
(2,249,747
)
                                 
Income tax
   
-
     
8,303
     
-
     
8,670
 
                                 
Net loss
 
$
(2,874,626
)
 
$
(817,707
)
 
$
(4,112,998
)
 
$
(2,258,417
)
                                 
Weighted average shares outstanding :
                               
Basic
   
30,358,570
     
23,829,713
     
27,813,506
     
23,589,017
 
Diluted
   
30,358,570
     
23,829,713
     
27,813,506
     
23,589,017
 
                                 
Loss per share
                               
Basic
 
$
(0.09
)
 
$
(0.03
)
 
$
(0.15
)
 
$
(0.10
)
Diluted
 
$
(0.09
)
 
$
(0.03
)
 
$
(0.15
)
 
$
(0.10
)


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

ALPINE 4 TECHNOLOGIES, LTD. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
(unaudited)
 
             
   
Nine Months Ended
September 30,
 
   
2018
   
2017
 
             
OPERATING ACTIVITIES:
           
Net loss
 
$
(4,112,998
)
 
$
(2,258,417
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
   
690,743
     
498,732
 
Amortization
   
48,225
     
69,060
 
Gain on extinguishment of debt
   
(136,300
)
       
Loss on disposal of fixed assets
   
414,204
     
7,949
 
Gain on derivatives
   
766,718
     
(72,351
)
Employee stock compensation
   
52,309
     
69,290
 
Stock issued for services
   
176,800
     
21,170
 
Amortization of debt issuance
   
606,270
     
22,500
 
Amortization of debt discounts
   
95,580
     
76,322
 
Change in current assets and liabilities:
               
Accounts receivable
   
(727,643
)
   
(194,192
)
Inventory
   
(506,277
)
   
(269,457
)
Capitalized contracts costs
   
37,300
         
Prepaid expenses and other current assets
   
171,006
     
(90,370
)
Accounts payable
   
583,299
     
621,216
 
Accrued expenses
   
606,234
     
508,149
 
Deferred tax
   
-
     
(304
)
Deferred revenue
   
(276,703
)
   
117,744
 
Net cash used in operating activities
   
(1,511,233
)
   
(872,959
)
                 
INVESTING ACTIVITIES:
               
Capital expenditures
   
(71,268
)
   
(183,125
)
Proceeds from insurance claim on automobiles and trucks
   
-
     
86,807
 
Proceeds from the sale of fixed assets
   
260,467
     
-
 
Acquisition, net of cash acquired
   
(1,976,750
)
   
(1,937,616
)
Net cash used in financing activities
   
(1,787,551
)
   
(2,033,934
)
                 
                 
FINANCING ACTIVITIES:
               
Proceeds from issuances of notes payable, related party
   
125,000
     
105,500
 
Proceeds from issuances of notes payable, non-related party
   
924,750
     
1,952,392
 
Proceeds from issuances of convertible notes payable
   
1,399,250
     
389,000
 
Proceeds from sale of common stock
   
-
     
15,000
 
Proceeds from sale leaseback transaction
   
1,900,000
     
-
 
Repayments of notes payable, related party
   
(31,500
)
   
(123,500
)
Repayments of notes payable, non-related party
   
(777,727
)
   
(289,195
)
Repayments of convertible notes payable
   
(937,959
)
   
(66,370
)
Proceeds from line of credit, net
   
1,072,327
     
419,670
 
Cash paid on financing lease obligations
   
(166,627
)
   
(16,287
)
             
-
 
Net cash provided by financing activities
   
3,507,514
     
2,386,210
 
                 
                 
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH
   
208,730
     
(520,683
)
                 
CASH AND RESTRICTED CASH, BEGINNING BALANCE
   
335,823
     
839,764
 
                 
CASH AND RESTRICTED CASH, ENDING BALANCE
 
$
544,553
   
$
319,081
 
                 
CASH PAID FOR:
               
Interest
 
$
955,741
   
$
570,614
 
Income taxes
 
$
-
   
$
1,104
 
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
 
Common stock issued for convertible note payable and accrued interest
 
$
63,773
   
$
57,320
 
Issuance of convertible note for acquisition of HWT
 
$
450,000
   
$
1,500,000
 
Issuance of note payable for acquisition of HWT
 
$
1,950,000
   
$
300,000
 
Issuance of warrants for acquisition of HWT
 
$
-
   
$
40,941
 
Issuance of redeemable common stock for acquisition of HWT
 
$
-
   
$
1,439,725
 
Debt discount from convertible note payable
 
$
-
   
$
30,000
 
Debt discount due to derivative liabilities
 
$
1,262,970
   
$
115,000
 
Reclassification of warrants embedded conversion option as derivative liability
 
$
-
   
$
132,693
 
Notes payable and redeemable common stock restructuring
 
$
3,197,538
   
$
-
 
Capital leases
 
$
247,000
   
$
-
 
Release of derivative liability   $ 58,018     $ -  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

 
Alpine 4 Technologies Ltd.
Notes to Unaudited Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2018
(Unaudited)

Note 1 – Organization and Basis of Presentation
The unaudited financial statements were prepared by Alpine 4 Technologies Ltd. (the "Company"), pursuant to the rules and regulations of the Securities Exchange Commission ("SEC"). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company's Annual Report on Form 10-K filed with the SEC on April 17, 2018. The results for the three and nine months ended September 30, 2018, are not necessarily indicative of the results to be expected for the year ending December 31, 2018.
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 four companies (ALTIA, LLC; Quality Circuit Assembly, Inc. ("QCA"); Venture West Energy Services ("VWES") (formerly Horizon Well Testing, LLC); and American Precision Fabricators, Inc., an Arkansas corporation ("APF").   On April 5, 2018, the Company acquired 100% of the outstanding shares of APF (see Note 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, 2018, and December 31, 2017.  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.

6

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.

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, 2018, and December 31, 2017, the Company had no cash equivalents.

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

 
 
September 30,
2018
(Unaudited)
   
September 30,
2017
 (Unaudited)
 
Cash
 
$
337,242
   
$
63,372
 
Restricted cash included in other non-current assets
   
207,311
     
255,709
 
Total cash and restricted cash shown in statement of cash flows
 
$
544,553
   
$
319,081
 
 
Major Customers

The Company had two customers that made up 20% and 11%, respectively, of accounts receivable as of September 30, 2018.  The Company had two customers that made up 41% and 13%, respectively, of accounts receivable as of December 31, 2017.

For the three months ended September 30, 2018, the Company had two customers that made up 24% and 10%, respectively, of total revenues.  For the nine months ended September 30, 2018, the Company had one customer that made up 23% of total revenues.  For the three months ended September 30, 2017, the Company had one customer that made up approximately 38% of total revenues.  For the nine months ended September 30, 2017, the Company had one customer that made up approximately 35% 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, 2018 (unaudited), and December 31, 2017, allowance for bad debt was $18,710 and $18,710, respectively.

7

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 four areas, raw materials, WIP, finished goods, and In-Transit.  Below is a breakdown of how much inventory was in each area as of September 30, 2018 (unaudited), and December 31, 2017:

   
September 30,
 2018
 (Unaudited)
   
December 31,
2017
 
Raw materials
 
$
492,148
   
$
577,259
 
WIP
   
188,276
     
440,586
 
Finished goods
   
1,713,473
     
161,310
 
In Transit
   
-
     
33,391
 
   
$
2,393,897
   
$
1,212,546
 
 
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.

During the nine months ended September 30, 2018 (unaudited), the Company sold automobiles and trucks with a book value of $674,671 for $260467 of proceeds, resulting in a loss on disposal of $414,204 which is reflected in the Company's operating expenses for the nine months ended September 30, 2018.

Property and equipment consisted of the following as of September 30, 2018 (unaudited), and December 31, 2017:

 
 
September 30,
2018
(Unaudited)
   
December 31,
2017
 
Automobiles and trucks
 
$
594,028
   
$
1,208,935
 
Machinery and equipment
   
6,051,329
     
4,454,466
 
Office furniture and fixtures
   
40,668
     
7,056
 
Building
   
5,795,000
     
3,945,952
 
Land
   
-
     
126,347
 
Leasehold improvements
   
294,524
     
294,524
 
Less: Accumulated depreciation
   
(1,497,304
)
   
(838,893
)
 
 
$
11,278,245
   
$
9,198,387
 

8

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:

Customer List
15 years
Non-compete agreements
15 years
Software development
5 years

Intangible assets consisted of the following as of September 30, 2018 (unaudited), and December 31, 2017:

 
 
September 30,
2018
 (Unaudited)
   
December 31,
 2017
 
Software
 
$
278,474
   
$
278,474
 
Noncompete
   
100,000
     
100,000
 
Customer lists
   
531,187
     
531,187
 
Less: Accumulated amortization
   
(205,265
)
   
(157,039
)
 
 
$
704,396
   
$
752,622
 

Other long-term assets consisted of the following as of September 30, 2018 (unaudited), and December 31, 2017:

 
 
September 30,
2018
 (Unaudited)
   
December 31,
2017
 
Restricted Cash
 
$
207,311
   
$
207,311
 
Deposits
   
50,927
     
50,927
 
Other
   
32,000
     
-
 
   
$
290,238
   
$
258,238
 

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

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, 2018, and December 31, 2017, the reporting units with goodwill were QCA, VWES and APF.
 
The Company used qualitative factors according to ASC 350-20-35-3 to determine whether it is more likely than not that the fair value of goodwill is less than its carrying amount.  Based on the qualitative criteria the company believes there not to be any triggers for potential impairment of goodwill and therefore the Company has recorded no impairment of goodwill in any period presented.
9


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 quarter ended September 30, 2018 was a net increase of $103,249 to revenue and a net increase of $31,630 to cost of revenue an increase of as a result of applying ASC Topic 606.  The impact to the consolidated statement of operations for the nine months ended September 30, 2018 was a net increase of $119,137 to revenue and a net increase of $37,300 to cost of revenue an increase of as a result of applying ASC Topic 606.  The impact to the consolidated statement of operations for the three and nine months ended September 30, 2017 was a net decrease of $103,708 to revenue and a net decrease of $32,385 to cost of revenue.

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.

10

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

APF
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.

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 due to the net loss incurred. 
 
Stock-based compensation

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10, "Compensation – Stock Compensation," and the conclusions reached by FASB ASC 505-50, "Equity – Equity-Based Payments to Non-Employees." Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment is reached or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.

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.
11


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

FASB ASC 850, "Related Party Disclosures," requires companies to include in their financial statements disclosures of material related party transactions. The Company discloses all material related party transactions. Related parties are defined to include any principal owner, director or executive officer of the Company and any immediate family members of a principal owner, director or executive officer.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance in ASU No. 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its financial statements.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.
 
Note 3 – Going Concern

The accompanying financial statements have been prepared on a going concern basis. The working capital of the Company is currently negative and causes doubt of the ability for the Company to continue. The Company requires capital for its operational and marketing activities.  The Company's ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company's plan of operations, and its ultimate transition to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
12


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, VWES, and APF have allowed for an increased level of cash flow to the Company.  Second, the Company is considering other potential acquisition targets that, like QCA, should increase income and cash flow to the Company.  Third, the Company plans to issue additional shares of common stock for cash and services during the next 12 months and has engaged professional service firms to provide advisory services in connection with that capital raise.
 
Note 4 – Leases

As of September 30, 2018, the future minimum capital lease and financing transaction payments, net of amortization of debt issuance costs, were as follows:
 
12 Months Ended September 30:
     
2019
   
849,577
 
2020
   
868,308
 
2021
   
884,248
 
2022
   
897,408
 
2023
   
908,087
 
Thereafter
   
8,982,331
 
Total
   
13,389,959
 
Less: Current capital leases and financing transaction
   
(130,278
)
Less: imputed interest
   
(4,824,484
)
Non-current capital leases and financing transaction
 
$
8,435,197
 
 
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 (see Note 9).  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 resulting capital lease obligation liability of $1,769,770 as of September 30, 2018 is reflected in financing lease obligation in the accompanying consolidated balance sheets.  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, 2018.

Operating Leases

The Company has two non-cancellable operating leases as of September 30, 2018 for its locations in San Jose, California and Oklahoma City, Oklahoma.  Approximate monthly rent obligations for these locations amount to $21,500 and $5,000 respectively.  The Company also has an office it leases in Phoenix, Arizona on a month-to-month basis.  VWES also rents certain equipment on a temporary basis to perform its services.

13

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

Fiscal Year
 
San Jose,
CA
   
Oklahoma City,
OK
   
Total
 
2018 (remainder of)
 
$
22,178
   
$
5,000
   
$
27,178
 
2019
   
274,118
     
35,000
     
309,118
 
2020
   
282,342
     
-
     
282,342
 
2021
   
290,812
     
-
     
290,812
 
Thereafter
   
-
     
-
     
-
 
Total
 
$
869,450
   
$
40,000
   
$
909,450
 

Rent expense for the three months ended September 30, 2018 and 2017 amounted to $362,327 and $88,500, respectively.  Rent expense for the nine months ended September 30, 2018 and 2017 amounted to $1,183,229 and $270,300, respectively.

Note 5 – Notes Payable

During the year ended December 31, 2017, VWES secured a line of credit with a third-party lender, Crestmark.  The line of credit is collateralized by VWES's outstanding accounts receivable, up to 85% with maximum draws of $2,000,000 and a variable interest rate.  The Company also secured a five-year fixed rate (10.14%) term loan with Crestmark Equipment Finance for $1,872,392 which is collateralized by VWES's equipment.  Both are guaranteed by the Company.

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. 

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

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

On 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.

14

The outstanding balances for the loans were as follows:
 
   
September 30,
2018
 (Unaudited)
   
December 31,
2017
 
Lines of credit, current portion
 
$
3,249,443
   
$
2,012,116
 
Equipment loans, current portion
   
1,451,076
     
1,871,501
 
Term notes, current portion
   
525,991
     
10,000
 
Total current
   
5,226,510
     
3,893,617
 
Long-term portion
   
5,001,457
     
-
 
Total notes payable
 
$
10,227,967
   
$
3,893,617
 

 
Future scheduled maturities of outstanding notes payable from related parties are as follows:
 
   
12 Months Ended
 
   
September 30:
 
       
2019
 
$
5,226,510
 
2020
   
604,329
 
2021
   
4,183,422
 
2022
   
178,607
 
2023
   
35,099
 
Total
 
$
10,227,967
 

Note 6 – Notes Payable, Related Parties

At September 30, 2018 (unaudited), and December 31, 2017, notes payable due to related parties consisted of the following:


   
September 30,
2018
(Unaudited)
   
December 31,
2017
 
Notes payable; non-interest bearing; due upon demand; unsecured
 
$
4,500
   
$
4,500
 
                 
Note payable; bearing interest at 3.33% per month for the first 90 days and 2.22% per month thereafter; due May 26, 2017; unsecured
   
43,500
     
43,500
 
                 
Note payable; bearing interest at 8% per annum; due June 30, 2017; unsecured
   
7,500
     
7,500
 
                 
Note payable to the seller of VWES; bearing interest at 1% per annum; due July 31, 2017; secured by assets of VWES.  The amount was extinguished and replaced by Amended and Restated Secured Promissory Note on February 22, 2018 (see Note 9).
   
-
     
300,000
 
                 
Note payable; bearing at 30% per annum; due March 3, 2018; unsecured
   
-
     
11,500
 
                 
Note payable; bearing at 20% per annum; due April 28, 2018; unsecured
   
-
     
20,000
 
                 
Series of notes payable, bearing interest at rates from 10% to 15% per annum, with maturity dates from April 2018 to July 2018, unsecured
   
125,000
     
-
 
                 
Total notes payable - related parties
 
$
180,500
   
$
387,000
 

The above notes which are in default as of September 30, 2018, were due on demand by the lenders as of the date of this Report.
15

Note 7 – Convertible Notes Payable

At September 30, 2018 (unaudited) and December 31, 2017, convertible notes payable consisted of the following:

   
September 30,
 2018
 (Unaudited)
   
December 31,
2017
 
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 an exercise price of $1 per share.
 
$
25,000
   
$
40,000
 
                 
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.  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 $10 per share.
   
1,739,147
     
1,827,108
 
                 
Secured convertible note payable issued to the seller of VWES on January 1, 2017 for an aggregate of $1,500,000, bearing interest at 5% per annum, due in full on July 1, 2018.  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 $8.50 per share.  The amount was extinguished and replaced by the Amended and Restated Secured Promissory Note (see Note 9).
   
-
     
1,500,000
 
                 
Series of convertible notes 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
     
30,000
 
                 
On July 13, 2017, the Company entered into a variable convertible note for $43,000 with net proceeds of $40,000.  The note is due April 30, 2018 and bears interest at 12% per annum.  After 180 days, the note is convertible into shares of Class A common stock at a discount of 38% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the note up to 180 days prior to the due date, with the prepayment penalty ranging from 10% to 27% depending on when prepaid.
   
-
     
43,000
 
                 
On July 19, 2017, the Company entered into a variable convertible note for $115,000 with net proceeds of $107,000.  The note is due January 21, 2018 and bears interest at 10% per annum.  The note is immediately convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from July 19, 2017.  The Company issued 500,000 shares of Class A common stock to the note holder which are returnable if no event of default has occurred and the note is paid in full within 180 days of the note date.  Management had determined that it was probable that the Company would meet the conditions under the note and therefore the shares and the cost of issuance were not recorded.  During the three months ended March 31, 2018, the Company repaid the note and the shares were returned. 
   
-
     
72,748
 
                 
On September 5, 2017, the Company entered into a variable convertible note for $105,000 with net proceeds of $100,000.  The note is due September 5, 2018 and bears interest at 10% per annum.  After 180 days, the note is convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from September 5, 2017.  The prepayment penalty is equal to 10% to 25% of the outstanding note amount depending on the prepayment date.
   
-
     
105,000
 
 
 
16

On October 4, 2017, the Company entered into a variable convertible note for $60,000 with net proceeds of $55,000.  The note is due July 4, 2018 and bears interest at 12% per annum.  After 180 days, the note is convertible into shares of Class A common stock at a discount of 35% of the lowest trading price during the previous ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from October 4, 2017.  The prepayment penalty is equal to 10% to 25% of the outstanding note amount depending on the prepayment date.
   
-
     
60,000
 
                 
On October 11, 2017, the Company entered into a variable convertible note for $58,500 with net proceeds of $55,500.  The note is due on July 20, 2018 and bears interest at 12% per annum.  After 180 days, the note is convertible into shares of Class A common stock at a discount of 38% of the average of the three lowest trading prices of the stock for ten days prior to conversion.    The Company can prepay the convertible note up to 180 days from October 11, 2017.  The prepayment penalty is equal to 10% to 27% of the outstanding note amount depending on the prepayment date.
   
-
     
58,500
 
                 
On November 2, 2017, the Company entered into a variable convertible note for $115,000 with net proceeds of $107,000.  The note is due May 2, 2018 and bears interest at 10% per annum.  The note is immediately convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.  The Company issued 150,000 shares to the lender with this note, which has been recorded as a discount.
   
-
     
115,000
 
                 
On November 28, 2017, the Company entered into a variable convertible note for $105,000 with net proceeds of $100,000.  The note is due November 28, 2018 and bears interest at 10% per annum.  After 180 days, the note is convertible into shares of Class A common stock at a discount of 35% of the average of the three lowest trading price during the previous ten days prior to conversion.  The Company can prepay the convertible note up to 180 days from November 28, 2017.  The prepayment penalty is equal to 10% to 25% of the outstanding note amount depending on the prepayment date.
   
-
     
105,000
 
                 
On December 6, 2017, the Company entered into a variable convertible note for $86,000 with net proceeds of $79,000.  Additional borrowings of $64,000 were received under this convertible note in January 2018.  The note is due June 6, 2018 and bears interest at 10% per annum.  After 180 days at the maturity date, the note is convertible to the Company's Class A common stock at a discount of 35% to the average of the three lowest trading closing prices of the stock for ten days prior to conversion.
   
-
     
86,000
 
                 
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.
   
150,000
     
-
 
                 
On March 13, 2018, the Company entered into a variable convertible note for $128,000 with net proceeds of $125,000.  The note is due December 30, 2018 and bears interest at 12% per annum.  After 180 days, the note is convertible into shares of Class A common stock at a discount of 42% of the average of the 2 lowest trading price the previous 10 days prior to conversion.  The Company can prepay the note at a penalty ranging from 15% to 40%.
   
-
     
-
 
                 
On April 3, 2018, the Company entered into a variable convertible note for $85,000 with net proceeds of $79,000.  The note is due January 2, 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.  In connection with this variable convertible note, the Company issued 386,363 shares of its Class A common stock, which has been recorded as a discount.
   
81,116
     
-
 
                 
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
     
-
 
 
17

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.
   
124,199
     
-
 
                 
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.
   
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.  Management had determined that it was probable that the Company would meet the conditions under the note and therefore the shares and the cost of issuance were not recorded.
   
141,000
     
-
 
                 
On July 16, 2018, the Company entered into a variable convertible note for $220,000 with net proceeds of $214,000.  The note is due July 16, 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.
   
220,000
     
-
 
                 
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.
   
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
     
-
 
                 
Total convertible notes payable
   
3,496,762
     
4,042,356
 
                 
Less: discount on convertible notes payable
   
(745,915
)
   
(79,630
)
                 
Total convertible notes payable, net of discount
   
2,750,847
     
3,962,726
 
                 
Less: current portion of convertible notes payable
   
(2,300,847
)
   
(2,302,620
)
                 
Long-term portion of convertible notes payable
 
$
450,000
   
$
1,660,106
 

18

The discounts on convertible notes payable arise from stock issued with notes payable, beneficial conversion features, as well as conversion features of certain convertible notes being treated as derivative liabilities (see Note 11).  The discounts are being amortized over the terms of the convertible notes payable.  Amortization of debt discounts during the three months ended September 30, 2018 and 2017 amounted to $303,433 and $11,468, respectively.  Amortization of debt discounts during the nine months ended September 30, 2018 and 2017 amounted to $606270 and $22,500, respectively, and is recorded as interest expense in the accompanying consolidated statements of operations.  The unamortized discount balance for these notes was $745,915 as of September 30, 2018, which is expected to be amortized over the next 12 months.

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

   
12 Months Ended
 
   
September 30:
 
       
2019
 
$
3,046,762
 
2020
   
-
 
2021
   
450,000
 
Total
 
$
3,496,762
 

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, 2018 and December 31, 2017, no shares of preferred stock were outstanding.

Common Stock

Pursuant to the Second Amended and Restated Certificate of Incorporation, the Company is authorized to issue two classes of common stock: Class A common stock, which has one vote per share, and Class B common stock, which has ten votes per share. Any holder of Class B common stock may convert his or her shares at any time into shares of Class A common stock on a share-for-share basis. Otherwise the rights of the two classes of common stock will be identical.

The Company had the following transactions in its common stock during the nine months ended September 30, 2018:

Issued 333,333 shares of its Class A common stock on January 10, 2018 in connection with a convertible note payable.  The note payable had an embedded conversion option that was a derivative, and the residual amount after allocating proceeds to the derivative was $0.  Accordingly, no discount was recognized.
   
Issued 120,000 shares of its Class A common stock in connection with the conversion of convertible notes payable and accrued interest with a value of $15,600;
   
Issued 100,000 shares of the Company's Class A common stock related to the Amended Agreement with the seller of VWES (see Note 9).
   
Issued 386,363 shares of Class A common stock on April 3, 2018 in connection with a convertible note payable.  The note payable had an embedded conversion option that was a derivative, and the residual amount after allocating proceeds to the derivative was $0.  Accordingly, no discount was recognized.
   
Issued 76,670 shares of Class A common stock on April 9, 2018 in connection with a convertible note payable.  The value of the shares amounted to $9,584 and has been recorded as a discount to the note payable.
   
Issued 3,400,000 shares of Class B common stock on May 16, 2018 to various employees, officers and board members as compensation.  The value of the shares amounted to $176,800 and has been recorded as a component of general and administrative expenses for the three and nine months ended September 30, 2018.
 
19

Issued 250,000 shares of Class A common stock on June 7, 2018 for the conversion of $7,250 of outstanding convertible notes payable.
   
Issued 23,330 shares of Class A common stock on July 6, 2018 for a settlement valued at $2,333
   
Issued 274,295 shares of Class A common stock on July 9, 2018 for the conversion of $14,000 of outstanding convertible notes payable.
   
Issued 195,924 shares of Class A common stock on July 9, 2018 for the conversion of $10,000 of outstanding convertible notes payable.
   
Issued 175,702 shares of Class A common stock on September 7, 2018 for the conversion of $3,883 of outstanding convertible notes payable and $3,454 of accrued interest.
 
Redeemable Common Stock
 
During 2017, the Company issued 379,403 shares of its Class A common stock in connection with the purchase of VWES.  Of these shares, 260,000 shares were redeemable at $4.25 per share at three different redemption periods:  130,000 shares at 12 months, 65,000 shares at 18 months and 65,000 shares at 24 months from the closing date of the purchase of VWES.  Additionally, 119,403 shares were redeemable at $3.35 per share at 12 months from the closing date of the purchase of VWES.  These shares were valued at the redemption value of $1,439,725.  The redemption right on these shares was cancelled in connection with the Amended Agreement entered on February 22, 2018 (see Note 9).

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

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, 2018:

 
             
Weighted-
       
 
       
Weighted-
   
Average
       
 
       
Average
   
Remaining
   
Aggregate
 
 
       
Exercise
   
Contractual
   
Intrinsic
 
 
 
Options
   
Price
   
Life (Years)
   
Value
 
 
                       
Outstanding at December 31, 2017
   
782,250
   
$
0.42
     
9.44
       
Granted
   
789,000
     
0.06
               
Forfeited
   
(56,250
)
   
0.81
               
Exercised
   
-
     
0.00
               
Outstanding at September 30, 2018 (unaudited)
   
1,515,000
   
$
0.21
     
9.18
   
$
47,035
 
 
                               
Vested and expected to vest at September 30, 2018 (unaudited)
   
1,515,000
   
$
0.21
     
9.18
   
$
47,035
 
 
                               
Exercisable at September 30, 2018 (unaudited)
   
247,969
   
$
0.42
     
8.69
   
$
-
 

20

The following table summarizes information about options outstanding and exercisable as of September 30, 2018:

     
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
     
704,000
     
9.63
   
$
0.05
     
-
   
$
0.05
 
 
0.10
     
85,000
     
9.53
     
0.10
     
-
     
0.10
 
 
0.13
     
388,500
     
8.84
     
0.13
     
121,406
     
0.13
 
 
0.26
     
114,000
     
8.56
     
0.26
     
42,750
     
0.26
 
 
0.90
     
223,500
     
8.52
     
0.90
     
83,813
     
0.90
 
         
1,515,000
                     
247,969
         

During the three months ended September 30, 2018 and 2017, stock option expense amounted to $18,914 and $36,617, respectively.  During the nine months ended September 30, 2018 and 2017, stock option expense amounted to $52,309 and $69,290, respectively.  Unrecognized stock option expense as of September 30, 2018 amounted to $205,134, which will be recognized over a period extending through May 2022. 

Warrants

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.

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.

During the nine months ended September 30, 2017, the Company granted an aggregate total of 2,001 warrants to individuals.  These warrants all have a 3 year contractual life, an exercise price of $2.00 per share and are vested immediately.

Note 9 – Business Combinations

Venture West Energy Services

Effective January 1, 2017, the Company purchased 100% of the outstanding interests of Venture West Energy Services ("VWES") (formerly Horizon Well Testing, LLC).

Alpine 4 purchased 100% of the outstanding interests of VWES for $2,200,000 cash, two notes payable ($1,500,000 and $300,000), 379,403 shares of Alpine 4's Class A common stock, valued at $1,439,725, and 75,000 warrants, to purchase one share of Alpine 4 Class A common stock, valued at $40,941.  The $300,000 note bears interest at 1% and was payable in full by July 31, 2017 (see Note 6).  The $1,500,000 note is a convertible note with an option to convert at $8.50 into Alpine 4's Class A common stock.  The $1,500,000 note bears interest at 5% per annum and has a balloon payment due on the 18-month anniversary of the closing of the purchase.  There were also post-closing adjustments of $25,232.
21


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

 
 
Purchase
Allocation
 
Cash
 
$
262,384
 
Accounts Receivable, net
   
245,833
 
Property, Plant & Equipment
   
4,804,458
 
Intangibles
   
-
 
Goodwill
   
167,845
 
Accrued Expenses
   
(25,086
)
Total consideration
 
$
5,455,434
 

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

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

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

The Company compared the value of the extinguished debt, returned land and building and cancelled stock and warrants to the value of the new Amended and Restated Secured Promissory Note and new instruments issued as of February 22, 2018.  The difference of $136,300 was reflected as a gain on extinguishment of debt during the accompanying consolidated statements of operations for the nine months ended September 30, 2018.
22


The following is a summary of the non-cash items given as consideration to the seller of VEWS in connection with the Amended and Restated Secured Promissory Note, which is reflected in the supplemental disclosure of non-cash financing activities in the accompanying consolidated statement of cash flows for the nine months ended September 30, 2018.

   
Non-Cash
 
   
Consideration
 
Note payable
 
$
3,000,000
 
Common stock
   
15,000
 
Warrants
   
9,142
 
Land and building
   
173,396
 
Total
 
$
3,197,538
 


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 (see Note 7).  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.  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
 
Accounts receivable
 
$
945,050
 
Inventory
   
675,074
 
Prepaid expenses and other current assets
   
250,040
 
Property and equipment
   
3,300,000
 
Goodwill
   
1,230,100
 
Accounts payable
   
(1,234,328
)
Accrued expenses
   
(154,186
)
Line of credit
   
(165,000
)
Deferred tax liability
   
(470,000
)
 
 
$
4,376,750
 


In connection with the SPA, and as consideration for the Company to enter into the SPA, APF and Galbach entered into a Consulting Services Agreement (the "Consulting Agreement"), pursuant to which Galbach agreed for a period of 90 days following the closing date to provide strategic management services to APF, meet with APF's new management, and provide his knowledge in customer relations, trade and service implementation, and other business disciplines. Additionally, APF agreed to reimburse Galbach for his expenses incurred by Galbach in connection with providing the services under the Consulting Agreement.
23


Simultaneous with the purchase of APF, a building, owned by APF 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 $1,900,000 were used to fund the cash consideration to the sellers.  The building and the lease is being treated as a capital lease (see Note 4).

The following are the unaudited pro forma results of operations for the three and nine months ended September 30, 2018 and 2017, as if APF had been acquired on January 1, 2017.  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.

 
 
Pro Forma
Combined Financials
(Unaudited)
 
 
 
Nine Months
 Ended
September 30,
2018
   
Nine Months
 Ended
 September 30,
2017
 
 
           
Revenue
 
$
14,653,691
   
$
9,898,278
 
                 
Net Loss
 
$
(4,348,695
)
 
$
(2,665,537
)
                 
Net Loss per Common Share - Basic and Diluted
 
$
(0.16
)
 
$
(0.11
)
 
               
 
 
Pro Forma
 Combined Financials
(Unaudited)
 
 
 
Three Months
Ended
September 30,
2018
   
Three Months
Ended
 September 30,
2017
 
 
               
Revenue
 
$
4,795,169
   
$
2,983,003
 
                 
Net Loss
 
$
(2,874,626
)
 
$
(976,002
)
                 
Net Loss per Common Share - Basic and Diluted
 
$
(0.10
)
 
$
(0.04
)


24


Note 10 – Industry Segments

This summary presents the Company's segments, QCA, VWES and APF for the three and nine months ended September 30, 2018 and 2017: 
 
   
Three Months Ended September 30, 2018
 
                     
Unallocated
       
                     
and
   
Total
 
   
QCA
   
VWES
   
APF
   
Eliminations
   
Consolidated
 
Revenue
 
$
2,910,462
   
$
452,966
   
$
1,200,529
   
$
231,212
   
$
4,795,169
 
Segment gross profit
   
1,108,857
     
83,745
     
617,230
     
276,204
     
2,086,036
 
Segment depreciation and amortization
   
75,755
     
101,190
     
95,817
     
-
     
272,762
 
Segment interest expense
   
170,785
     
(34,253
)
   
39,443
     
490,886
     
666,861
 
Segment net income (loss)
   
337,956
     
(1,051,916
)
   
(295,511
)
   
(1,865,155
)
   
(2,874,626
)
                                         
       
   
As of September 30, 2018
 
                           
Unallocated
         
                           
and
   
Total
 
   
QCA
   
VWES
   
APF
   
Eliminations
   
Consolidated
 
Accounts receivable, net
 
$
2,171,838
   
$
417,188
   
$
1,142,714
   
$
8,034
   
$
3,739,774
 
Goodwill
   
1,963,761
     
167,845
     
1,230,100
     
-
     
3,361,706
 
Total assets
   
11,434,205
     
3,892,825
     
6,289,994
     
679,584
     
22,296,608
 
                                         
                                         
   
Three Months Ended September 30, 2017
 
                           
Unallocated
         
                           
and
   
Total
 
   
QCA
   
VWES
   
APF
   
Eliminations
   
Consolidated
 
Revenue
 
$
2,084,565
   
$
74,301
   
$
-
   
$
62,667
   
$
2,221,533
 
Segment gross profit
   
645,360
     
51,706
     
-
     
4,243
     
701,309
 
Segment depreciation and amortization
   
72,538
     
111,674
     
-
     
20,835
     
205,047
 
Segment interest expense
   
179,491
     
71,404
     
-
     
173,091
     
423,986
 
Segment net income (loss)
   
38,192
     
(489,950
)
   
-
     
(365,949
)
   
(817,707
)
Purchase and acquisition of long-lived assets
   
6,480
     
73,042
     
-
     
16,344
     
95,866
 
                                         
                                         
   
Nine Months Ended September 30, 2018
 
                           
Unallocated
         
                           
and
   
Total
 
   
QCA
   
VWES
   
APF
   
Eliminations
   
Consolidated
 
Revenue
 
$
7,856,208
   
$
2,938,441
   
$
2,162,126
   
$
551,698
   
$
13,508,473
 
Segment gross profit
   
2,915,421
     
449,168
     
816,688
     
359,833
     
4,541,110
 
Segment depreciation and amortization
   
220,976
     
309,692
     
191,634
     
16,666
     
738,968
 
Segment interest expense
   
469,368
     
31,858
     
68,149
     
1,105,045
     
1,674,420
 
Segment net income (loss)
   
888,904
     
(1,720,538
)
   
(472,297
)
   
(2,809,067
)
   
(4,112,998
)
Purchase and acquisition of long-lived assets
   
20,234
     
104,713
     
3,306,959
     
11,574
     
3,443,480
 
                                         
                                         
   
Nine Months Ended September 30, 2017
 
                           
Unallocated
         
                           
and
   
Total
 
   
QCA
   
VWES
   
APF
   
Eliminations
   
Consolidated
 
Revenue
 
$
5,648,285
   
$
1,200,381
   
$
-
     
196,140
   
$
7,044,806
 
Segment gross profit
   
1,742,209
     
(409,113
)
   
-
     
75,547
     
1,408,643
 
Segment depreciation and amortization
   
217,136
     
313,155
     
-
     
37,501
     
567,792
 
Segment interest expense
   
528,144
     
209,395
     
-
     
342,937
     
1,080,476
 
Segment net income (loss)
   
(99,724
)
   
(1,279,928
)
   
-
     
(878,765
)
   
(2,258,417
)
Purchase and acquisition of long-lived assets
   
75,480
     
4,803,164
     
-
     
28,344
     
4,906,988
 


25

Note 11 – Derivative Liabilities and Fair Value Measurements

Derivative liabilities

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

During the nine months ended September 30, 2018, the Company had new convertible notes which became convertible that resulted in an additional $2,305,872 initial derivative fair value, which was recorded as a derivative liability and a discount to the note payable, of which $1,042,902 was immediately recorded as a derivative expense due to the value of the derivative liability exceeding the book value of the note payable.  In addition, the Company paid off existing convertible notes which resulted in a reduction of the derivative liability and a loss on the change in value of derivatives of $766,718.

As of December 31, 2017, the fair value of the derivative liability amounted to $271,588.  As of September 30, 2018, the fair value of the derivative liability amounted to $550,033.  The change in value of the derivative liabilities for the three and nine months ended September 30, 2018 in the accompanying consolidated statements of operations amounted to a gain of $246,025 and $239,610, respectively.

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

The Company estimated the fair value of the derivative liabilities using the Black-Scholes Option Pricing Model and the following key assumptions during the nine months ended September 30, 2018.

Expected dividend yield
 
 
0
%
Weighted average expected volatility
 
 
200
%
Weighted average risk-free interest rate
 
 
1.89
%
Expected terms (years)
 
.5 to 0.79
 

26

Fair value measurements

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

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

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

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

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

The following table provides a summary of the fair value of our derivative liabilities as of September 30, 2018 (unaudited), and December 31, 2017:

 
Fair value measurement
 on a recurring basis
 
 
Level 1
 
Level 2
 
Level 3
 
As of September 30, 2018
           
Liabilities
           
Derivatives
 
$
-
   
$
-
   
$
2,243,258
 
 
                       
As of December 31, 2017
                       
Liabilities
                       
Derivatives
 
$
-
   
$
-
   
$
271,588
 

The below table presents the change in the fair value of the derivative liabilities during the nine months ended September 30, 2018:
 
Fair value as of December 31, 2017
 
$
271,588
 
New derivative liabilities from embedded conversion features, net
   
1,262,970
 
Relief of derivative liability     (58,018 )
Loss on change in fair value of derivatives
   
766,718
 
Fair value as of September 30, 2018 (unaudited)
 
$
2,243,258
 

27

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

Business Strategy

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

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

-
Alpine 4 Mini MBA program; and
 
-
An Alpine 4 developed ERP (Enterprise Resource Planning system) and collaboration system called SPECTRUMebos.  SPECTRUMebos is what we are defining as an Enterprise Business Operating System (ebos).  This system will combine the key technology software components of Accounting and Financial Reporting, an Enterprise Resource Planning System (ERP), a Document Management System (DMS), a Business Intelligence (BI) platform and a Customer Resource Management (CRM) hub which will be tethered to management reporting and collaboration toolsets. Management believes that these tools will help drive real-time information in two directions: first, to the front lines by empowering customer-facing stakeholders; and second, back to management for planning, problem solving, and integration.   Management believes that SPECTRUMebos will be the technology "secret sauce" in managing our portfolio of companies and, in time, may be offered to external customers.

28

Business Seasonality and Product Introductions

Following the acquisition of the Quality Circuit Assembly, Inc., VWES and APF, and with the newly acquired dealership pilot and contract for ALTIA, LLC, the Company expects to experience higher net sales in its third and fourth quarters compared to other quarters in its fiscal year.   Each company has varying seasonality to their sales and will be reflected in the financial statements.

Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception and had accumulated a deficit of $24,725,075 as of September 30, 2018.  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, VWES, and APF have allowed for an increased level of cash flow to the Company.  Second, the Company is considering other potential acquisition targets that, like QCA, should increase income and cash flow to the Company.  Third, the Company plans to issue additional shares of common stock for cash and services during the next 12 months and has engaged professional service firms to provide advisory services in connection with that capital raise.

Results of Operations

The following are the results of our operations for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017:
 
 
   
Three Months
Ended
September 30,
2018
   
Three Months
Ended
September 30,
2017
   
$ Change
 
                   
Revenue
 
$
4,795,169
   
$
2,221,533
   
$
2,573,636
 
Cost of revenue (exclusive of depreciation)
   
2,709,133
     
1,520,224
     
1,188,909
 
Gross Profit
   
2,086,036
     
701,309
     
1,384,727
 
                         
Operating expenses:
                       
General and administrative expenses
   
3,006,974
     
1,001,921
     
2,005,053
 
Depreciation
   
262,243
     
173,693
     
88,550
 
Amortization
   
10,519
     
31,354
     
(20,835
)
Loss on sale of property and equipment
   
57,271
     
0
     
57,271
 
     Total operating expenses
   
3,337,007
     
1,206,968
     
2,130,039
 
Loss from operations
   
(1,250,971
)
   
(505,659
)
   
(745,312
)
                         
Other expenses
                       
Interest expense
   
666,861
     
423,986
     
242,875
 
Change in value of derivative liabilities
   
1,012,743
     
(72,361
)
   
1,085,104
 
Other (income)
   
(55,949
)
   
(47,880
)
   
(8,069
)
     Total other expenses
   
1,623,655
     
303,745
     
1,319,910
 
                         
Loss before income tax
   
(2,874,626
)
   
(809,404
)
   
(2,065,222
)
                         
Income tax expense
   
-
     
8,303
     
(8,303
)
                         
Net loss
 
$
(2,874,626
)
 
$
(817,707
)
 
$
(2,056,919
)

 
29

Revenue

Our revenues for the three months ended September 30, 2018, increased by $2,573,636 as compared to the three months ended September 30, 2018.  In 2018, the increase in revenue related to $825,897 for QCA, $378,665 for VWES, $1,200,529 for APF which did not exist in 2017, and $168,545 relating to the 6th Sense Auto and Brake Active services of ALTIA.  The increase in revenue was driven by the continued growth of QCA and VWES through the acquisition of new customers and expanded business with existing customers, as well as the acquisition of APF.  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, 2018, increased by $1,188,909 as compared to the three months ended September 30, 2017.  In 2018, the increase in our cost of revenue related to $362,400 for QCA, $346,626 for VWES, $583,299 for APF which did not exist in 2017, and $(103,416) for ALTIA services and other.  The increase in cost of revenue among all the different segments was the result of the increase in revenues.  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, 2018, increased by $2,130,039 as compared to the three months ended September 30, 2017.  The increase consisted primarily of an increase to general and administrative expenses of $2,005,053, which was the result of increased operating activity during the third quarter of 2018 due general and administrative expenses from the acquisition of APF during the second quarter of 2018 which did not exist in 2017.

Other expenses

Other expenses for the three months ended September 30, 2018, increased by $1,319,910 as compared to 2017.  This increase was primarily due to the change in the fair value of our derivative liability.

The following are the results of our operations for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017.
 
 
   
Nine Months
Ended
September 30,
2018
   
Nine Months
Ended
September 30,
2017
   
$ Change
 
                   
Revenue
 
$
13,508,473
   
$
7,044,806
   
$
6,463,667
 
Cost of revenue (exclusive of depreciation)
   
8,967,363
     
5,636,163
     
3,331,200
 
Gross Profit
   
4,541,110
     
1,408,643
     
3,132,467
 
                         
Operating expenses:
                       
General and administrative expenses
   
5,369,706
     
2,263,927
     
3,105,779
 
Depreciation
   
690,743
     
498,732
     
192,011
 
Amortization
   
48,225
     
69,060
     
(20,835
)
Loss on sale of property and equipment
   
414,204
     
-