ALPINE 4 HOLDINGS, INC. 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 or intention to update or revise any forward-looking statements. Overview and Highlights Company BackgroundAlpine 4 Holdings, Inc. ("we" or the "Company"), was incorporated under the laws of theState of Delaware onApril 22, 2014 . We are a publicly traded conglomerate that is acquiring businesses that fit into its disruptive DSF business model of Drivers, Stabilizers, and Facilitators. AtAlpine 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.
As of the date of this Report, the Company was a holding company that owned fourteen operating subsidiaries:
-A4 Corporate Services, LLC ; -ALTIA, LLC ; -Quality Circuit Assembly, Inc. ; -Morris Sheet Metal, Corp; 31 -------------------------------------------------------------------------------- Table of Contents -JTD Spiral, Inc. ; -Excel Construction Services, LLC ; -SPECTRUMebos, Inc. ; -Vayu (US), Inc. ; -Thermal Dynamics, Inc. ; -Alternative Laboratories, LLC .; -Identified Technologies Corporation ; -ElecJet Corp. ; -DTI Services Limited Liability Company (doing business asRCA Commercial Electronics ); and -Global Autonomous Corporation . Starting in the first quarter of 2020, we also created additional subsidiaries to act as silo holding companies, organized by industries. These silo subsidiaries areA4 Construction Services, Inc. ("A4 Construction "),A4 Manufacturing, Inc. ("A4 Manufacturing"), andA4 Technologies, Inc. ("A4 Technologies"),A4 Aerospace Corporation ("A4 Aerospace "), andA4 Defense Services, Inc. ("A4 Defense Services"). All of these holding companies areDelaware corporations. Each is authorized to issue 1,500 shares of common stock with a par value of$0.01 per share, and the Company is the sole shareholder of each of these subsidiaries. Business Strategy What We Do:Alexander Hamilton in his "Federalist paper #11", said that our adventurous spirit distinguishes the commercial character of America. Hamilton knew that our freedom to be creative gave American businesses a competitive advantage over the rest of the world. We believe thatAlpine 4 also exemplifies this spirit in our subsidiaries and that our greatest competitive advantage is our highly diverse business structure combined with a culture of collaboration. It is our mandate to growAlpine 4 into a leading, multi-faceted holding company with diverse subsidiary holdings with products and services that not only benefit from one another as a whole, but also have the benefit of independence. This type of corporate structure is about having our subsidiaries prosper through strong onsite leadership while working synergistically with otherAlpine 4 holdings . The essence of our business model is based around acquiring B2B companies in a broad spectrum of industries via our acquisition strategy of DSF (Drivers, Stabilizer, Facilitator). Our DSF business model (which is discussed more below) offers our shareholders an opportunity to own small-cap businesses that hold defensible positions in their individual market space. Further,Alpine 4's greatest opportunity for growth exists in the smaller to middle-market operating companies with revenues between$5 to$150 million annually. In this target-rich environment, businesses generally sell at more reasonable multiples, presenting greater opportunities for operational and strategic improvements that have greater potential to enhance profit.
Driver, Stabilizer, Facilitator (DSF)
Driver: A Driver is a company that is in an emerging market or technology, that has enormous upside potential for revenue and profits, with a significant market opportunity to access. These types of acquisitions are typically small, brand new companies that need a structure to support their growth.
Stabilizer: Stabilizers are companies that have sticky customers, consistent
revenue and provide solid net profit returns to
Facilitators: Facilitators are our "secret sauce". Facilitators are companies that provide a product or service that anAlpine 4 sister company can use as leverage to create a competitive advantage. When you blend these categories into a longer-term view of the business landscape, you can then begin to see the value-driving force that makes this a truly purposeful and powerful business model. As stated earlier, our greatest competitive advantage is our highly diversified business structure combined with a collaborative business culture, that helps drive out competition in our markets by bringing; resources, planning, technology and capacity that our competitors simply don't have. DSF reshapes the environment each subsidiary operates in by sharing and exploiting the resources each company has, thus giving them a competitive advantage that their peers don't have. 32
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How We Do It:
Optimization vs. Asset Producing
The process to purchase a perspective company can be long and arduous. During our due diligence period, we are validating and determining three major points, not just the historical record of the company we are buying. Those three major points are what we call the "What is, What Should Be and What Will Be". •"The What Is" (TWI). TWI is the defining point of where a company is holistically in a myriad of metrics; Sales, Finance, Ease of Operations, Ownership and Customer Relations to name a few. Subsequently, this is usually the point where most acquirers stop in their due diligence. We look to define this position not just from a number's standpoint, but also how does this perspective map out to a larger picture of culture and business environment.
•"The What Should Be" (TWSB). TWSB is the validation point of inflection where we use many data inputs to assess if TWI is out of the norm with competitors, and does that data show the potential for improvement.
•"The What Will Be" (TWWB). TWWB is how we seek to identify the net results or what we call Kinetic Profit (KP) between the TWI and TWSB. The keywords are Kinetic Profit. KP is the profit waiting to be achieved by some form of action or as we call it, the Optimization Phase of acquiring a new company.
Optimization: During the Optimization Phase, we seek to root up employees with
in-depth training on various topics. Usually, these training sessions include;
Profit and Expense Control, Production Planning, Breakeven Analysis and Profit
Engineering to name a few. But the end game is to guide these companies to:
become net profitable with the new debt burden placed on them
post-acquisition, mitigate the loss of sales due to acquisition attrition (we
typically plan on 10% of our customers leaving simply due to old ownership not
being involved in the company any longer), potential replacement of employees
that no longer wish to be employed post-acquisition and other ancillary issues
that may arise. The Optimization Phase usually takes 12-18 months
post-acquisition and a company can fall back into Optimization if it is stagnant
or regresses in its training.
Asset Producing: Asset Producing is the ideal point where we want our
subsidiaries to be. To become Asset Producing, subsidiary management must have
completed prescribed training formats, proven they understand the key
performance indicators that run their respective departments and finally, the
subsidiaries they manage must have posted a net profit for 3 consecutive months.
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Results of Operations
The following are the results of our operations for the year ended
Year Ended Year Ended
December 31, 2022 December 31, 2021 $ Change
Revenues, net $ 104,563,002 $ 51,640,813 $ 52,922,189
Costs of revenue 82,848,600 43,942,815 38,905,785
Gross Profit 21,714,402 7,697,998 14,016,404
Operating expenses:
General and administrative expenses 37,531,794 27,987,920 9,543,874
Research and development 876,542 1,464,918 (588,376)
Impairment loss of intangible asset and goodwill - 367,519 (367,519)
Gain on sale of property (5,938,150) - (5,938,150)
Total operating expenses 32,470,186 29,820,357 2,649,829
Loss from operations (10,755,784) (22,122,359) 11,366,575
Other income (expenses)
Interest expense (3,124,132) (3,289,233) 165,101
Gain on extinguishment of debt - 803,079 (803,079)
Gain on forgiveness of debt - 3,896,108 (3,896,108)
Impairment loss on equity investment - (1,350,000) 1,350,000
Other income 270,609 635,526 (364,917)
Total other income (expenses) (2,853,523) 695,480 (3,549,003)
Loss before income tax (13,609,307) (21,426,879) 7,817,572
Income tax benefit (733,994) (1,943,741) 1,209,747
Net loss $ (12,875,313) $ (19,483,138) $ 6,607,825
Revenues
Our revenues for the year ended December 31, 2022 , increased by $52,922,189 as
compared to the year ended December 31, 2021 . In 2022, the increase in revenue
is related to an increase of $38,638,161 for RCA, $1,215,772 for Alt Labs ,
$6,016,168 for TDI, and $2,505,905 for QCA. We expect our revenue to continue to
grow during 2023 due to the continued maturation of new product lines and new
customer contracts, although there can be no guarantee relating to the amount of
growth as each segment has lingering events related COVID-19 and the global
supply chain.
Costs of revenue
Our cost of revenue for the year endedDecember 31, 2022 , increased by$38,905,785 as compared to the year endedDecember 31, 2021 . In 2022, the increase in our cost of revenue is related to an increase of$28,336,699 for RCA,$2,622,282 forAlt Labs ;$3,570,074 for TDI; and$2,346,823 for QCA. The increase in cost of revenue among all the different segments was the result of the increase in revenues as described above. Further, we have improved our gross margin percentage as we have implemented operational efficiencies at our newly acquired business. We expect our cost of revenue to increase over the next year as our revenue increases, however, at a lower rate year over year, resulting in continued gross margin improvement.
Operating expenses
Our operating expenses for the year endedDecember 31, 2022 , increased by$2,649,829 as compared to the year endedDecember 31, 2021 . In 2022, the increase in our operating expenses is related to an increase of$7,675,515 for RCA (full year of operations, acquiredDecember 2021 ), a decrease of$895,571 forAlt Labs ; an increase of$654,020 for TDI; and 34
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an increase of$882,348 for QCA. This was offset by a gain on sale of property of$5,938,150 largely due to a gain on the sale of theAlt Labs building inFort Myers, Florida .
Other income (expenses)
Other income (expenses) for the year endedDecember 31, 2022 , decreased by$3,549,003 as compared to the same period in 2021. This decrease was primarily due to$4.7 million related to the gain on forgiveness & extinguishment of debt from 2021 that did not repeat.
Liquidity and Capital Resources
We have financed our operations since inception from the sale of common stock, capital contributions from stockholders, and from the issuance of notes payable and convertible notes payable. We expect to continue to finance our operations from our current operating cash flow and by the selling shares of our common stock and or debt instruments. In the first quarter of 2021, we raised approximately$55.0 million through the sale of our common stock in public and private transactions. OnNovember 26, 2021 , a direct offering of common stock was issued raising$22.0 million in cash. InJuly 2022 , the Company raised$9.2 million in net cash through the sale of warrants and an additional$1 million inAugust 2022 when a portion of these warrants were exercised. In April andMay 2020 , the Company received seven loans under the Paycheck Protection Program of theU.S. Coronavirus Aid, Relief and Economic Security ("CARES") Act totaling$3,896,108 . The loans had terms of 24 months and accrued interest at 1% per annum. The Company paid$88,160 for the loan assumed in connection with the IA acquisition, and the remaining$356,690 was forgiven. The remaining ten loans were forgiven in whole as provided in the CARES Act during the year endedDecember 31, 2021 . The Company also assumed an Economic Injury Disaster Loan (EIDL) of$65,000 in connection with the Vayu acquisition, which was still outstanding as ofDecember 31, 2022 . Management expects to have sufficient working capital for continuing operations from either the sale of its products or through the raising of additional capital through private offerings of our securities and improved cash flows from operations including the 2021 acquisitions. The Company also has bank lines of credit totaling$33.0 million as ofDecember 31, 2022 , of which$18.8 million was secured as ofDecember 31, 2021 . Of the$33.0 million ,$3.8 million was unused as ofDecember 31, 2022 . There are two lines of credit that are set to mature during 2023. These two line of credits total$8.0 million , of which$7.5 million was used as ofDecember 31, 2022 , and are shown as a current liability on the consolidated balance sheet. Additionally, the Company is monitoring additional businesses to acquire which management hopes will provide additional operating revenues to the Company. There can be no guarantee that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule anticipated by management.
The Company also may elect to seek additional bank financing, engage in debt financing through a placement agent, or sell shares of its common stock in public or private offering transactions.
Liquidity Outlook
The Company's financial statements are prepared in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP") applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued. In accordance withFinancial Accounting Standards Board ("FASB"), Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses and negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. While the Company experienced a loss for the year endedDecember 31, 2022 , of$12.9 million , and had a negative cash flow used in operations of$19.6 million , this was an improvement over the same period last year, for the year endedDecember 31, 2021 , when there was a net loss of$19.5 million had a negative cash flow used in operations of$25.4 million .
The Company received a total of approximately
-The Company raised approximately
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-The Company raised approximately $1.0 million in net proceeds in connection
with certain investors exercising of 1,449,276 warrants.
The Company received a total of approximately
-The Company raised approximately$67.2 million in net proceeds in connection with a registered direct offering of its stock and; -The Company raised approximately$9.3 million in net proceeds in connection with an equity line of credit financing arrangement.
As of
The Company plans to continue to generate additional revenue (and improve cash flows from operations) partly from the acquisitions of six operating companies which closed in 2021, combined with improved gross profit performance from the existing operating companies. The Company also plans to continue to raise funds through debt financing and the sale of shares through its public and private offerings. Going Concern The accompanying financial statements have been prepared on a going concern basis. While the working capital deficiency of prior years has improved, and working capital of the Company is currently positive, continued operating losses causes doubt as to the ability of the Company to continue. 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 profitable operations are necessary for the Company to continue. The uncertainty that exists with these factors raises substantial doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties. In order to mitigate the risk related to the going concern uncertainty, the Company has a three-fold plan to resolve these risks. First, the operating subsidiaries of QCA, TDI, IDT and RCA plan to expand their revenues and profits yielding increased cash flow in those operating segments. This plan will allow for an increased level of cash flow to the Company. Second, the Company has expanded its credit facilities at the subsidiary level over the past 12 months to allow for greater borrowing accessibility if needed for the expansion of product lines and sales opportunities and plans to extend or refinance any lines of credit coming due over the next 12 months in order to provide additional financing. Finally, operating companies hard hit by the supply-chain related price increases such as Morris Sheet Metal,Alternative Laboratories , andExcel Construction have begun to experience an easing in the procurement and cost overruns of limited product supply. This subsequently has added to increased cash flow to those entities and less reliance on the Company to fund those activities. Although this plan is in place to mitigate the risk related to the going concern uncertainty, substantial doubt remains due to uncertainty around the growth projections and lack of control of many of the factors included in the Company's plan. Entity Level Risks The ultimate impact from COVID-19 on the Company's operations and financial results during 2023 will depend on, among other things, the ultimate severity and scope of the pandemic, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, and the speed with which the economy recovers. The Company is not able to fully quantify the impact that these factors will have on the Company's financial results during 2023 and beyond. COVID-19 did have a material negative impact on the Company's financial performance in 2022.
Off-Balance Sheet Arrangements
The Company has not entered into any transactions with unconsolidated entities
whereby the Company has financial guarantees, subordinated retained interests,
derivative instruments, or other contingent arrangements that expose the Company
to material continuing risks, contingent liabilities, or any other obligation
under a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk, or credit risk support to the Company.
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States , orU.S. GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. In many instances, we could have reasonably used different accounting estimates and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. This applies in particular to useful lives and valuation of long-lived assets. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our judgments and estimates.
Intangible Assets
The Company uses a third-party specialty valuation firm to value its intangible assets acquired in its business combination and asset acquisitions. The Company amortizes intangible assets with finite lives over their estimated useful lives, which range between one and seventeen years as follows: Customer list 3-16 years Non-compete agreements 1-15 years Software development 5 years Patent, trademarks, and licenses 3-17 years Proprietary technology 15 years The intangible assets with finite useful lives are reviewed for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. The Company has not changed its estimate for the useful lives of its intangible assets, but would expect that a decrease in the estimated useful lives of intangible assets by 20% would result in an annual increase to amortization expense of approximately$620,000 , and an increase in the estimated useful lives of intangible assets by 20% would result in an annual decrease to amortization expense of approximately$620,000 .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 ofDecember 31, 2022 and 2021, the reporting units with goodwill were QCA, Morris,Alt Labs , TDI, Identified Technology, ElecJet, and RCA. During the 2022 fourth quarter, we conducted our annual goodwill impairment test and no impairment charges were recorded. The estimated fair values of all our reporting units exceeded their carrying amounts. Based on the analysis, the ElecJet reporting unit is considered an at-risk reporting unit. The fair value of this reporting unit exceeded its carrying value of$12.14 million by 4% based on our most recent impairment test. Our methods and assumptions were consistent with those discussed below in the Fair Value Measurement subsection. This reporting unit is primarily considered at-risk as it is a start-up subsidiary with minimal to no revenue to offset its research & development expenses. The DCF model includes revenue growth assumptions of us executing large new customer and/or supplier agreements within the next two years and then steadily increasing revenue at a more normalized rate thereafter. If we fail to execute these customer and/or supplier arrangements, this would negatively impact the key growth assumptions. Construction Contracts For the Company's material construction contracts, estimates are used to determine the total estimated costs for a job and throughout the respective jobs' progress and adjusted accordingly. Revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price 37 -------------------------------------------------------------------------------- Table of Contents construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For certain of our revenue streams, that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicates a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. Contract Assets and Contract Liabilities The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In addition, many of our time and materials arrangements, are billed pursuant to contract terms that are standard within the industry, resulting in contract assets being recorded, as revenue is recognized in advance of billings. Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the consolidated balance sheets. Contract liabilities from our construction contracts arise when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation.
Contract Retentions
As ofDecember 31, 2022 and 2021, accounts receivable included retainage billed under terms of our contracts. These retainage amounts represent amounts which have been contractually invoiced to customers where payments have been partially withheld pending the achievement of certain milestones, satisfaction of other contractual conditions or completion of the project. The Company has recorded a receivable for retainage of$2.0 million and$1.6 million as ofDecember 31, 2022 and 2021, respectively. For a summary of our significant accounting policies, refer to Note 2 of our consolidated financial statements included under "Item 8 - Financial Statements and Supplementary Data" in this Form 10-K.
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