Notes to Unaudited Consolidated Financial Statements

For the Three Months Ended March 31, 2021

Note 1 – Organization and Basis of Presentation

The unaudited consolidated financial statements were prepared by Alpine 4 Holdings, Inc. (‘we,” “our,” or the "Company"), pursuant to the rules and regulations of the Securities Exchange Commission ("SEC"). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2021. The results for the three months ended March 31, 2021, are not necessarily indicative of the results to be expected for the year ending December 31, 2021.

The Company was incorporated under the laws of the State of Delaware on April 22, 2014.  The Company was formed to serve as a vehicle to affect an asset acquisition, merger, exchange of capital stock, or other business combination with a domestic or foreign business.  On March 2, 2021, the Company changed its name from Alpine 4 Technologies Ltd. to Alpine 4 Holdings, Inc.

Effective January 1, 2019, the Company purchased all of the outstanding capital stock of Morris Sheet Metal Corp., an Indiana corporation (“MSM”), JTD Spiral, Inc. a wholly owned subsidiary of MSM, an Indiana corporation, Morris Enterprises LLC, an Indiana limited liability company, and Morris Transportation LLC, an Indiana limited liability company (collectively “Morris”).  

Effective November 6, 2019, the Company purchased all of the outstanding capital stock and units of Deluxe Sheet Metal, Inc., an Indiana corporation, and DSM Holding, LLC, an Indiana limited liability company, and purchased certain real estate from Lonewolf Enterprises, LLC, an Indiana limited liability company (collectively “Deluxe”) (see Note 8).  

Effective February 21, 2020, the Company purchased all of the outstanding units of Excel Fabrication, LLC., an Idaho limited liability company (“Excel”).  

Effective December 15, 2020, the Company purchased the assets of Impossible Aerospace Corporation, a Delaware corporation (“IA”).

Effective February 8, 2021, the Company purchased the assets of Vayu (US), Inc., a Delaware corporation (“Vayu”).

Effective May 1, 2021, the Company acquired all of the outstanding shares of stock of Thermal Dynamics, Inc., a Delaware corporation (“TDI”).

Effective May 4, 2021, the Company acquired all of the outstanding membership interests of KAI Enterprises, LLC, a Florida limited liability company, the sole asset of which was all of the outstanding membership interests of Alternative Laboratories, LLC, a Delaware limited liability company (“Alt Labs”).

As of the date of this Report, the Company is a holding company owning, directly or indirectly, eleven companies:

·A4 Corporate Services, LLC;  

·ALTIA, LLC;  

·Quality Circuit Assembly, Inc.;  

·Morris Sheet Metal, Corp;  

·JTD Spiral, Inc.;  

·Excel Construction Services, LLC;  

·SPECTRUMebos, Inc.;  

·Impossible Aerospace, Inc.;   

·Vayu (US); 

·Thermal Dynamics, Inc.; and 

·Alternative Laboratories, LLC. 

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Basis of presentation

The accompanying consolidated financial statements present the balance sheets, statements of operations, stockholders' deficit and cash flows of the Company. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Liquidity

The Company’s financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued.

In accordance with Financial Accounting Standards Board (the “FASB”), Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.

While the Company experienced a loss for the quarter ended March 31, 2021, of $6.1 million, and had a negative cash flow used in operations, there were significant non-recurring items related to the RSU purchases totaling approximately $1.8 million contributing to the loss.

The Company received a total of approximately $54.0 million in February 2021 in the following two transactions:

·The Company raised approximately $45.0 million in net proceeds in connection with a registered direct offering of its stock and;  

·The Company raised approximately $9.0 million in net proceeds in connection with an equity line of credit financing arrangement.  

The Company plans to continue to generate additional revenue (and improve cash flows from operations) partly from the acquisitions of two operating companies which closed in May 2021 combined with improved performance from the existing operating companies. 

Based on the capital raise as indicated above and management plans to improve cash flows from operations, management believes the Company has sufficient working capital to satisfy the Company’s estimated liquidity needs for the next 12 months. The Company ended the March 31, 2021 quarter with $36.0 million in cash, and as of the date of this Report had $14.3 million in cash after the purchase of the two operating companies in May 2021. During the quarter, the Company paid down liabilities of approximately $13.0 million. In addition, approximately $1.0 million was used to build inventory and for capital expenditures. The current ratio was at 3.2 times at March 31, 2021.

However, there is no assurance that management’s plans will be successful due to the current economic climate in the United States and globally.

Note 2 - Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as of March 31, 2021, and December 31, 2020.  Significant intercompany balances and transactions have been eliminated.

Use of estimates

The consolidated financial statements are prepared in accordance with U.S. GAAP.  Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable. In many instances, the Company could have reasonably used different accounting estimates and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. This applies in particular to useful lives of non-current assets, valuation allowance for deferred tax assets and impairment of non-current assets. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, the Company’s future financial statement presentation, financial condition, results of operations

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and cash flows will be affected.  The ultimate impact from COVID-19 on the Company’s operations and financial results during 2021 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 2021 and beyond.  COVID-19 did have a negative impact on the Company’s financial performance in 2020.  During the three months ended March 31, 2021, there was no impairment charge related to intangible assets and goodwill.

Major Customers

The Company had two customers that made up 14% and 9%, respectively, of accounts receivable as of March 31, 2021. The Company had two customers that made up 10% and 8%, respectively, of accounts receivable as of December 31, 2020.

For the three months ended March 31, 2021, the Company had two customers that made up 15% and 10% of total revenues. For the three months ended March 31, 2020, the Company had two customers that made up 14% and 11%, respectively, of total revenues. 

Fair value measurements

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

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

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

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

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.

The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates.  As of March 31, 2021 and December 31, 2020, the Company has no financial assets or liabilities that required to be fair valued on a recurring basis.

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Earnings (loss) per shares

The Company presents both basic and diluted net loss per share on the face of the consolidated statements of operations. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants, and using the treasury-stock method. If antidilutive, the effect of potentially dilutive shares of common stock is ignored. The only potentially dilutive securities outstanding during the periods presented were the convertible debt, options and warrants.  The following table illustrates the computation of basic and diluted earnings per share (“EPS”) for the three months ended March 31, 2021 and 2020:

Note 3 – Leases

The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.

As of March 31, 2021, the future minimum finance and operating lease payments were as follows:

As of October 1, 2020, the American Precision Fabricators, Inc. (“APF”) building lease with Harbor Island Properties, LLC was modified, assignment was transferred to Excel Fabrication, LLC (“Excel”), and Quality Circuit Assembly, Inc. (“QCA”). As part of the modification, the lease was extended through 2037 and the payment terms were amended effective January 15, 2021.  

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The negative line of credit balance represents funds owed to the Company from the prior lender as a direct result of transitioning out of the credit facility. The funds are being remitted from the lender on a weekly basis.

Future scheduled maturities of outstanding notes payable are as follows:

The above notes which were in default as of March 31, 2021, were due on demand by the lenders as of the date of this Report.

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(A) In May and June 2020 the Company amended the following seller notes:   The convertible note with Jeff Moss with a $720,185 balance as of May 4, 2020, was amended to extend the maturity date to May 4, 2027, at 5% interest with weekly payments of $2,605.   The principal balance was increased to $798,800 and the balance outstanding at December 31, 2020, was $735,329.  The convertible note with Dwight Hargreaves with a $551,001 balance as of June 5, 2020, was amended to extend the maturity date to June 5, 2026, at 6% interest with weekly payments of $2,316.  The principal balance was increased to $605,464 and the balance outstanding at December 31, 2020, was $556,135.  A loss on extinguishment of debt of $192,272 was recognized on these transactions.   

The discounts on convertible notes payable arise from beneficial conversion features.  During the three months ended March 31, 2021, and the year ended December 31, 2020, the Company issued convertible notes with a fixed conversion price.  The beneficial conversion feature related to these convertible notes that have been recorded as a discount on the convertible notes and as a component of equity was $92,428 and $1,482,500 for the three months ended March 31, 2021, and the year ended December 31, 2020, respectively.  The discounts are being amortized over the terms of the convertible notes payable.  Amortization of debt discounts during the three months ended March 31, 2021 and 2020, amounted to $801,340 and $245,774, respectively, and is recorded as interest expense in the accompanying consolidated statements of operations.  The unamortized discount balance for these notes was $634,712 as of March 31, 2021, which is expected to be amortized over the next 12 months.

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A summary of the activity in the Company's convertible notes payable is provided below:

Note 7 – Stockholders' Equity

Common Stock

The Company had the following transactions in its common stock during the three months ended March 31, 2021:

Stock Options

The following summarizes the stock option activity:

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The following table summarizes information about options outstanding and exercisable as of March 31, 2021:

During the three months ended March 31, 2021 and 2020, stock option expense amounted to $19,341 and $19,556, respectively.  Unrecognized stock option expense as of March 31, 2021, amounted to $24,407, which will be recognized over a period extending through December 2022.    

The following table summarizes information about warrants outstanding and exercisable as of March 31, 2021:

During the three months ended March 31, 2021, the Company issued 416,667 warrants to a placement agent in connection with sale of its common stock (Note 7). The warrants have an exercise price of $6.60, become exercisable on August 16, 2021 and expire on February 16, 2025.

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The fair value of the warrants of $2,498,637 was determined using the Black-Scholes option pricing model with the following assumptions:

The fair value of the warrants was recorded as offering costs with a corresponding credit to additional paid in capital.

Note 8 – Business Combinations

Vayu (US)

Effective February 8, 2021, the Company purchased the assets of Vayu (US), Inc., a Delaware corporation (“Vayu”).

Under the provision of Accounting Standards Codification (“ASC”) 805, the Company had to determine whether this acquisition was a business combination or an asset (or a group of assets) acquisition. In doing so, the Company determined that the acquisition of Vayu was in fact an asset purchase.  Of the consideration given for the Vayu acquisition more than 95% was concentrated in a single asset or a group of assets in Intellectual Property. As such, the Company accounted for this acquisition as an asset acquisition in accordance with ASC 805-10-20.  Accordingly, the assets acquired are initially recognized at the consideration paid, which was the fair value of the series D preferred stock issued, including direct acquisition costs, of which there were none. The cost is allocated to the group of assets acquired based on their relative fair values. The assets acquired and liabilities assumed of were as follows at the purchase date:

The purchase price was paid as follows:

The following are the unaudited pro forma results of operations for the three months ended March 31, 2021 and 2020, as if Excel, Impossible Aerospace, Inc. (“IA”), and Vayu had been acquired on January 1, 2020.  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.

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Note 9 – Industry Segments

This summary presents the Company's segments, QCA; APF; Morris Sheet Metal Corp, Morris Enterprises LLC, and Morris Transportation LLC (collectively, “Morris”); Deluxe Sheet Metal, Inc., DSM Holding, LLC (collectively, “DSM”), Excel, IA, and Vayu for the three months ended March 31, 2021, March 31, 2020, and December 31, 2020: