ALPINE 4 HOLDINGS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the unaudited Financial Statements and notes thereto for the nine months endedSeptember 30, 2022 , included under Item 1 - Financial Statements in this Quarterly Report, and our audited Financial Statements and notes thereto for the year endedDecember 31, 2021 , contained in our Annual Report on Form 10-K/A. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.
Overview and Highlights
Company Background
Alpine 4 Holdings, Inc. ("we," "our," 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; -JTD Spiral, Inc. ; -Excel Construction Services, LLC ; -SPECTRUMebos, Inc. ; -Vayu (US), Inc. ; -Thermal Dynamics International, Inc. ; -Alternative Laboratories, LLC .; -Identified Technologies Corporation ; -ElecJet Corp. ; -DTI Services Limited Liability Company (doing business asRCA Commercial Electronics ); and -Global Autonomous Corporation . InMarch 2021 , the Company announced the combination of its subsidiariesDeluxe Sheet Metal, Inc. (Deluxe) andMorris Sheet Metal Corporation (Morris) to become one of the largest sheet metal contractors in the Midwest region ofthe United States . Both companies will be under the Morris Sheet Metal brand. The Company's management believes that the combination of these businesses will create a more harmonious relationship between the two companies. The combining of resources should empower Morris to strengthen its brand through its strategic banking relationship, eliminate duplicative and competitive interests, and expand its footprint beyond theIndiana home base.
On
OnMay 10, 2021 , the Company acquired all of the outstanding membership interests ofKAI Enterprises, LLC , aFlorida limited liability company, the sole asset of which was all of the outstanding membership interests ofAlternative Laboratories, LLC , aDelaware limited liability company ("Alt Labs "). InJune 2021 , the Company announced the combination of its subsidiariesImpossible Aerospace ("IA") and Vayu (US) ("Vayu US") to becomeVayu Aerospace Corporation ("Vayu"). The Company's management believes that the combination of these businesses will create a more harmonious relationship between the two companies. The combining of 27
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resources should empower Vayu to strengthen its brand through its strategic
banking relationship, eliminate duplicative and competitive interests, and
expand its footprint beyond the
OnOctober 20, 2021 , the Company, and the Company's subsidiary,A4 Aerospace, Inc. , aDelaware corporation ("A4 Aerospace "), entered into a Stock Purchase Agreement withIdentified Technologies Corporation , aDelaware corporation with foreign registration inPennsylvania ("Identified Technologies"). Pursuant to the Stock Purchase Agreement,A4 Aerospace purchased all of the outstanding shares of capital stock of Identified Technologies, a total of 6,486,044 shares of Identified Technologies' capital stock (the "ITC Shares"). The total purchase price for the ITC Shares was$4,000,000 and was paid in shares of the Company's Class A common stock, issued to the Shareholders. Following the closing of the transaction,A4 Aerospace owned 100% of the capital stock of Identified Technologies. OnNovember 29, 2021 , the Company, and a newly formed and wholly owned subsidiary of the Company namedALPP Acquisition Corporation 3, Inc.("AC3"), entered into a merger agreement withElecJet Corp. , aDelaware corporation ("ElecJet") and the three ElecJet shareholders. Pursuant to the Agreement, AC3 merged with and into ElecJet, with ElecJet being the surviving entity following the merger. OnDecember 9, 2021 , the Company, andA4 Technologies, Inc. , a wholly owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement withDTI Services Limited Liability Company (doing business asRCA Commercial Electronics ), ("DTI"),Direct Tech Sales LLC , (also having an assumed business name ofRCA Commercial Electronics ), ("Direct Tech"),PMI Group, LLC , ("PMI"), Continu.Us, LLC , ("Continu.Us"),Solas Ray, LLC , ("Solas"), and the two individual owners of these entities. DTI, Direct Tech, PMI, Continu.Us, and Solas were referred to in the Membership Interest Purchase Agreement collectively as "RCA." Pursuant to the Membership Interest Purchase Agreement, the Company acquired all of the outstanding membership interests of RCA.Alpine 4 maintains our corporate office located at2525 E. Arizona Biltmore Circle , Suite 237,Phoenix, Arizona 85016. ALTIA works out of the headquarters offices. QCA rents a location at1709 Junction Court #380San Jose, California 95112. Morris Sheet Metal and JTD Spiral are located at 6212 Highview Dr,Fort Wayne, Indiana 46818.Excel Construction Services' office and fabrication space are located at 297 Wycoff Cir,Twin Falls, Idaho 83301. Vayu (US) has its headquarters at3753 Plaza Drive ,Ann Arbor, Michigan 48108. The headquarters for TDI are located at 14955 Technology Ct,Fort Myers, Florida 33912.Alt Labs has its headquarters at4740 S. Cleveland Ave. Fort Myers, Florida 33907.The Identified Technologies Corporation headquarters are located at6401 Penn Ave , Suite 211,Pittsburgh, Pennsylvania 15206. ElecJet has its headquarters at5935 W 84th St ,Indianapolis, Indiana 46278.RCA Commercial Electronics has its headquarters at5935 W 84th St ,Indianapolis, Indiana 46278.Global Autonomous Corporation has its offices at2525 E Arizona Biltmore Circle , Suite 237,Phoenix Arizona 85016. 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. 28
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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 do not 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 do not have.
How We Do It:
Optimization vs. Asset Producing
The process to purchase a perspective company can be long and arduous. During
our due diligence period, we are validating and determining three major points,
not just the historical record of the company we are buying. Those three major
points are what we call the "What is, What Should Be and What Will Be".
•"The What Is" (TWI). TWI is the defining point of where a company is
holistically in a myriad of metrics; Sales, Finance, Ease of Operations,
Ownership and Customer Relations to name a few. Subsequently, this is usually
the point where most acquirers stop in their due diligence. We look to define
this position not just from a number's standpoint, but also how does this
perspective map out to a larger picture of culture and business environment.
•"The What Should Be" (TWSB). TWSB is the validation point of inflection where
we use many data inputs to assess if TWI is out of the norm with competitors,
and does that data show the potential for improvement.
•"The What Will Be" (TWWB). TWWB is how we seek to identify the net results or
what we call Kinetic Profit (KP) between the TWI and TWSB. The keywords are
Kinetic Profit. KP is the profit waiting to be achieved by some form of action
or as we call it, the Optimization Phase of acquiring a new company.
Optimization: During the Optimization Phase, we seek to root up employees with
in-depth training on various topics. Usually, these training sessions include;
Profit and Expense Control, Production Planning, Breakeven Analysis and Profit
Engineering to name a few. But the end game is to guide these companies to:
become net profitable with the new debt burden placed on them post-acquisition,
mitigate the loss of sales due to acquisition attrition (we typically plan on
10% of our customers leaving simply due to old ownership not being involved in
the company any longer), potential replacement of employees that no longer wish
to be employed post-acquisition and other ancillary issues that may arise. The
Optimization Phase usually takes 12-18 months post-acquisition and a company can
fall back into Optimization if it is stagnant or regresses in its training.
Asset Producing: Asset Producing is the ideal point where we want our
subsidiaries to be. To become Asset Producing, subsidiary management must have
completed prescribed training formats, proven they understand the 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 three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 . Three Months Three Months Ended Ended September 30, September 30, 2022 2021 $ Change Revenue$ 27,486,415 $ 17,398,316 $ 10,088,099 Cost of revenue 21,218,317 12,950,180 8,268,137 Gross Profit 6,268,098 4,448,136 1,819,962 Operating expenses: General and administrative expenses 10,186,857 5,539,465 4,647,392 Research and development 88,960 581,131 (492,171) Gain on sale of property (115,700) - (115,700) Total operating expenses 10,160,117 6,120,596 4,039,521 Loss from operations (3,892,019) (1,672,460) (2,219,559) Other income (expenses) Interest expense (1,055,687) (351,823) (703,864) Gain on forgiveness of debt - 3,457,499 (3,457,499) Other income (expense) (12,940) 438,701 (451,641) Total other income (expenses) (1,068,627) 3,544,377 (4,613,004) Income (loss) before income tax (4,960,646) 1,871,917 (6,832,563) Income tax expense (benefit) (196,276) 54,058 (250,334) Net income (loss)$ (4,764,370) $ 1,817,859 $ (6,582,229) Revenue Our revenues for the three months endedSeptember 30, 2022 , increased by$10,088,099 as compared to the three months endedSeptember 30, 2021 . In 2022, the increase in revenue was related to the RCA acquisition. Revenues for RCA for the three months endedSeptember 30, 2022 was$11,477,833 . The remaining decline in revenues is due to loss of major customers forAlt Labs .
Cost of revenue
Our cost of revenue for the three months endedSeptember 30, 2022 , increased by$8,268,137 as compared to the three months endedSeptember 30, 2021 . In 2022, the increase in cost of revenue is related to the acquisition of RCA. Cost of revenue for RCA was$7,671,891 . The remaining increase in cost of revenues is related to increased pricing from supply chain shortage.
Operating expenses
Our operating expenses for the three months ended
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Other income (expenses)
Other income for the three months endedSeptember 30, 2022 , decreased by$4,613,004 as compared to the same period in 2021. This decrease was primarily due to the gain on forgiveness of debt from the PPP loans forgiven in 2021. The increase in interest expense is due to interest incurred on the various lines of credit totaling$232,506 for the three months endedSeptember 30, 2022 . The following are the results of our operations for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . Nine Months Nine Months Ended Ended September 30, September 30, 2022 2021 $ Change Revenue$ 78,349,695 $ 39,938,585 $ 38,411,110 Cost of revenue 60,283,597 30,771,770 29,511,827 Gross Profit 18,066,098 9,166,815 8,899,283 Operating expenses: General and administrative expenses 28,604,937 17,719,228 10,885,709 Research and development 675,725 1,096,333 (420,608) Gain on sale of property (5,938,150) - (5,938,150) Total operating expenses 23,342,512 18,815,561 4,526,951 Loss from operations (5,276,414) (9,648,746) 4,372,332 Other income (expenses) Interest expense (2,627,122) (2,736,369) 109,247 Gain on extinguishment of debt - 803,079 (803,079) Gain on forgiveness of debt - 3,617,241 (3,617,241) Other income 278,439 454,191 (175,752) Total other income (expense) (2,348,683) 2,138,142 (4,486,825) Loss before income tax (7,625,097) (7,510,604) (114,493) Income tax expense (benefit) (400,973) 54,058 (455,031) Net loss$ (7,224,124) $ (7,564,662) $ 340,538 Revenue Our revenues for the nine months endedSeptember 30, 2022 , increased by$38,411,110 as compared to the nine months endedSeptember 30, 2021 . In 2022, the increase in revenue was related to the acquisition of RCA. Revenues for RCA were$29,625,368 . The remaining increase was due to the full year of operations forAlt Labs and TDI in 2022 compared to only five months of operations in 2021. The additional four months of operations in 2022 resulted in additional sales forAlt Labs and TDI of approximately$4.7 million and$3.1 million , respectively. The remaining operations remained relatively consistent between years. 31
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Cost of revenue
Our cost of revenue for the nine months endedSeptember 30, 2022 , increased by$29,511,827 as compared to the nine months endedSeptember 30, 2021 . In 2022, the increase in cost of revenue was related to the acquisition of RCA. Cost of revenue for RCA was$21,475,175 . The remaining increase was due to the full year of operations forAlt Labs and TDI in 2022 compared to only five months of operations in 2021. The additional four months of operations in 2022 resulted in additional sales forAlt Labs and TDI of approximately$1.0 million and$1.1 million , respectively. The remaining increase in cost of revenues is related to increased pricing from supply chain shortage seen within the construction and manufacturing companies. The net result of the increase in our cost of revenue dollars in comparison to our revenue was an increase in our gross profit percentage from 23.0% during the first nine months endedSeptember 30, 2021 , to 23.1% in the first nine months endedSeptember 30, 2022 . The Company expects as supply chain constraints ease that gross profit will continue to rise.
Operating expenses
Our operating expenses for the nine months endedSeptember 30, 2022 , increased by$4,526,951 as compared to the nine months endedSeptember 30, 2021 . The increase is due to the acquisitions of RCA,Alt Labs , and TDI. Operating expenses for RCA was$5,755,325 . General and administrative expenses also increased due to the full year of operations forAlt Labs and TDI in 2022 compared to only five months of operations in 2021. The increase in expenses was also offset by a$5.9 million gain on sale of property for the nine months endedSeptember 30, 2022 . Other income (expenses)
Other income for the nine months ended
Liquidity and Capital Resources
We have financed our operations since inception from existing revenue, 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. The Company raised$10 million in gross proceeds from the sale of 14,492,754 shares of Class A Common Stock and warrants to purchase 14,492,754 shared in a registered direct public offering that closed onJuly 13, 2022 , the details of which are outlined in a Current Report on form 8-K filed by the Company onJuly 13, 2022 . InAugust 2022 , certain investors in the ATM Offering executed 1,449,276 warrants at an exercise price of$0.69 for cash proceeds to the Company of$1,000,000 . 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 . 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.
Off-Balance Sheet Arrangements
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company.
Critical Accounting Policies and Estimates
Our 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 32
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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. Management believes that there have been no changes in our critical accounting policies during the nine months endedSeptember 30, 2022 . For a summary of our significant accounting policies, refer to Note 3 of our consolidated financial statements included under Item 8 - Financial Statements in our Annual Report on Form 10-K/A filed onMarch 17, 2023 .
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