Quarterly Report (10-q)

Date : 05/20/2019 @ 8:30PM
Source : Edgar (US Regulatory)
Stock : Alpine 4 Technologies Ltd (QB) (ALPP)
Quote : 0.218  0.0084 (4.01%) @ 9:58PM

Quarterly Report (10-q)



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 March 31, 2019

[   ]           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 May 20, 2019, the issuer had 29,310,056 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
27
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30
 
 
 
Item 4.
Controls and Procedures
30
 
 
 
PART II
 
 
 
 
 
Item 1.
Legal Proceedings
31
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
 
 
 
Item 3.
Defaults Upon Senior Securities
31
 
 
 
Item 5.
Other Information
31
 
 
 
Item 6.
Exhibits
32
 
 
 
 
Signatures
33
 
2

PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements.

Alpine 4 Technologies Ltd.
Consolidated Balance Sheets

   
March 31,
   
December 31,
 
   
2019
   
2018
 
   
(unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
 Cash
 
$
189,728
   
$
207,205
 
 Accounts receivable
   
4,938,998
     
2,610,354
 
 Inventory
   
3,028,305
     
2,175,795
 
 Capitalized contract costs
   
64,234
     
64,234
 
 Prepaid expenses and other current assets
   
900,436
     
222,200
 
 Assets of discontinued operations
   
-
     
121,296
 
 Total current assets
   
9,121,701
     
5,401,084
 
                 
 Property and equipment, net
   
12,140,827
     
7,990,556
 
 Intangible asset, net
   
658,357
     
677,210
 
 Right of use assets, net
   
633,258
     
-
 
 Goodwill
   
3,919,145
     
3,193,861
 
 Other non-current assets
   
346,655
     
290,238
 
 Assets of discontinued operations
   
-
     
387,727
 
                 
 TOTAL ASSETS
 
$
26,819,943
   
$
17,940,676
 
                 
 LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
               
                 
 CURRENT LIABILITIES:
               
 Accounts payable
 
$
3,332,374
   
$
3,102,970
 
 Accrued expenses
   
2,155,593
     
1,254,853
 
 Deferred revenue
   
4,920
     
25,287
 
 Derivative liabilities
   
2,092,199
     
1,892,321
 
 Deposits
   
12,509
     
12,509
 
 Notes payable, current portion
   
5,482,358
     
3,645,603
 
 Notes payable, related parties, current portion
   
132,000
     
132,000
 
 Convertible notes payable, current portion, net of discount of $648,302 and $942,852
   
2,845,066
     
2,644,735
 
 Financing lease obligation, current portion
   
215,117
     
105,458
 
 Operating lease obligation, current portion
   
194,054
         
 Acquisition contingency
   
500,000
     
-
 
 Net liabilities of discontinued operations
   
-
     
2,752,447
 
 Total current liabilities
   
16,966,190
     
15,568,183
 
                 
Notes payable, net of current portion
   
7,480,436
     
4,517,441
 
Convertible notes payable, net of current portion
   
200,000
     
450,000
 
Financing lease obligations, net of current portion
   
11,577,804
     
8,295,176
 
Opertaing lease obligations, net of current portion
   
439,204
     
-
 
Deferred tax liability
   
608,304
     
608,304
 
                 
 TOTAL LIABILITIES
   
37,271,938
     
29,439,104
 
                 
 STOCKHOLDERS' DEFICIT:
               
 Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at March 31, 2019 and December 31, 2018    
-
     
-
 
 Class A Common stock, $0.0001 par value, 100,000,000 shares authorized, 28,237,510 and 26,567,410 shares issued and outstanding at March 31, 2019 and December 31, 2018    
2,824
     
2,657
 
 Class B Common stock, $0.0001 par value, 5,000,000 shares authorized, 5,000,000 and 5,000,000 shares issued and outstanding at March 31, 2019 and December 31, 2018    
500
     
500
 
 Additional paid-in capital
   
17,075,264
     
17,018,509
 
 Accumulated deficit
   
(27,530,583
)
   
(28,520,094
)
 Total stockholders' deficit
   
(10,451,995
)
   
(11,498,428
)
 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
26,819,943
   
$
17,940,676
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3

Alpine 4 Technologies Ltd.
Consolidated Statements of Operations
  (Unaudited)
 
   
Three Months Ended
March 31,
 
   
2019
   
2018
 
             
Revenue
 
$
7,125,989
   
$
2,606,481
 
Cost of revenue
   
5,008,456
     
1,943,574
 
Gross Profit
   
2,117,533
     
662,907
 
                 
Operating expenses:
               
General and administrative expenses    
2,466,502
     
627,439
 
                 
     Total operating expenses
   
2,466,502
     
627,439
 
Income (loss) from operations
   
(348,969
)
   
35,468
 
                 
Other expenses
               
Interest expense    
(1,031,630
)
   
(337,338
)
Change in value of derivative liability    
(107,871
)
   
6,415
 
Gain on extinguishment of debt    
-
     
6,305
 
Other income    
58,132
     
67,848
 
     Total other expenses
   
(1,081,369
)
   
(256,770
)
                 
Loss before income tax
   
(1,430,338
)
   
(221,302
)
                 
Income tax (benefit)
   
-
     
-
 
                 
Loss from continuing operations
   
(1,430,338
)
   
(221,302
)
                 
Discontinued operations:
               
Loss from operations of discontinued operations    
(95,179
)
   
(439,776
)
Gain on disposition of discontinued operations    
2,515,028
     
-
 
     Total discontinued operations
   
2,419,849
     
(439,776
)
                 
Net income (loss)
 
$
989,511
   
$
(661,078
)
                 
Weighted average shares outstanding :
               
Basic    
30,782,076
     
25,328,907
 
Diluted    
30,782,076
     
25,328,907
 
                 
Basic income (loss) per shares
               
Continuing operations  
$
(0.05
)
 
$
(0.01
)
Discontinued operations    
0.08
   
$
(0.02
)
    
$
0.03
     
(0.03
)
                 
Diluted income (loss) per shares
               
Continuing operations  
$
(0.05
)
 
$
(0.01
)
Discontinued operations    
0.08
   
$
(0.02
)
    
$
0.03
     
(0.03
)

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

  Alpine 4 Technologies Ltd.
Consolidated Statements of Stockholders’ Deficit
(Unaudited)

                           
Additional
         
Total
 
   
Class A Common Stock
   
Class B Common Stock
   
Paid-in
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Deficit
 
Balance, December 31, 2018
   
26,567,410
   
$
2,657
     
5,000,000
         
$
500
   
$
17,018,509
   
$
(28,520,094
)
 
$
(11,498,428
)
                                                               
Issuance of shares of common stock for convertible note payable and accrued interest
   
1,670,000
     
167
             
-
     
-
     
26,421
     
-
     
26,588
 
Derivative liability resolution
   
-
     
-
     
-
             
-
     
10,993
     
-
     
10,993
 
Share-based compensation expense
   
-
     
-
     
-
             
-
     
19,341
             
19,341
 
Net loss
   
-
     
-
     
-
             
-
     
-
     
989,511
     
989,511
 
                                                                 
Balance, March 31, 2019
   
28,237,410
   
$
2,824
     
5,000,000
           
$
500
   
$
17,075,264
   
$
(27,530,583
)
 
$
(10,451,995
)
                                                                 
                                                                 
Balance, December 31, 2017
   
23,222,087
   
$
2,322
     
1,600,000
           
$
160
   
$
16,573,632
   
$
(20,433,875
)
 
$
(3,857,761
)
                                                                 
Adoption of ASC 606
   
-
     
-
     
-
             
-
     
-
     
(178,202
)
   
(178,202
)
Issuance of shares of common stock for convertible note payable and accrued interest
   
120,000
     
12
     
-
             
-
     
15,588
     
-
     
15,600
 
Issuance of common stock for modification of debt
   
100,000
     
10
                             
14,990
             
15,000
 
Issuance of shares for debt discount
   
333,333
     
33
                             
56,633
             
56,666
 
Reclassification of shares from mezzanine
   
379,403
     
38
                             
(38
)
           
-
 
Derivative liability resolution
                                           
125,759
             
125,759
 
Stock-based compensation expense
                                           
15,840
             
15,840
 
Change in fair value of warrant modification
                                           
4,310
             
4,310
 
Net loss for the three months
                                                   
(661,078
)
   
(661,078
)
                                                                 
Balance, March 31, 2018
   
24,154,823
   
$
2,415
     
1,600,000
           
$
160
   
$
16,806,714
   
$
(21,273,155
)
 
$
(4,463,866
)
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5

Alpine 4 Technologies Ltd.
Consolidated Statements of Cash Flows
(Unaudited) 
 
   
Three Months Ended
March 31,
 
   
2019
   
2018
 
             
OPERATING ACTIVITIES:
           
Net income (loss)
 
$
989,511
   
$
(661,078
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
               
Depreciation
   
234,444
     
173,300
 
Amortization
   
18,853
     
18,853
 
Gain on extinguishment of debt
   
-
     
(136,300
)
Loss on disposal of fixed assets
   
-
     
356,933
 
Change in value of derivative liabilities
   
107,871
     
(6,415
)
Employee stock compensation
   
19,341
     
15,840
 
Amortization of debt issuance costs
           
22,000
 
Amortization of debt discounts
   
397,550
     
122,590
 
Gain on disposal of discontinued operations
   
(2,515,028
)
   
-
 
Operating lease expense
   
43,686
     
-
 
Change in current assets and liabilities:
               
Accounts receivable
   
(815,437
)
   
(619,310
)
Inventory
   
(520,361
)
   
(272,674
)
Capitalized contracts costs
   
-
     
5,670
 
Prepaid expenses and other assets
   
160,834
     
(14,320
)
Accounts payable
   
56,824
     
390,158
 
Accrued expenses
   
860,066
     
124,643
 
Operating lease liability
   
(43,686
)
   
-
 
Deferred revenue
   
(20,367
)
   
(21,005
)
Net cash used in operating activities
   
(1,025,899
)
   
(501,115
)
                 
INVESTING ACTIVITIES:
               
Capital expenditures
   
(20,417
)
   
(23,516
)
Proceeds from insurance claim on automobiles and trucks
   
-
     
229,257
 
Cash paid for acquisition, net of cash acquired
   
(1,967,606
)
   
-
 
Net cash provided by (used in) financing activities
   
(1,988,023
)
   
205,741
 
                 
                 
FINANCING ACTIVITIES:
               
Proceeds from issuances of notes payable, related party
   
-
     
110,000
 
Proceeds from issuances of notes payable, non-related party
   
537,500
     
149,000
 
Proceeds from issuances of convertible notes payable
   
103,000
     
320,000
 
Proceeds from financing lease
   
3,267,000
     
-
 
Repayments of notes payable, related party
   
-
     
(11,500
)
Repayments of notes payable, non-related party
   
(1,214,257
)
   
(43,636
)
Repayments of convertible notes payable
   
(441,699
)
   
(282,526
)
Proceeds from line of credit, net
   
931,224
     
96,251
 
Cash paid on financing lease obligations
   
(186,323
)
   
(5,320
)
             
 
Net cash provided by financing activities
   
2,996,445
     
332,269
 
                 
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH
   
(17,477
)
   
36,895
 
                 
CASH AND RESTRICTED CASH, BEGINNING BALANCE
   
414,516
     
335,823
 
                 
CASH AND RESTRICTED CASH, ENDING BALANCE
 
$
397,039
   
$
372,718
 
                 
CASH PAID FOR:
               
Interest
 
$
 1,277,225
   
$
266,023
 
Income taxes
 
$
-
   
$
-
 
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
         
Common stock issued for convertible note payable and accrued interest
 
$
26,588
   
$
15,600
 
Common stock issued for convertible note discount
 
$
-
   
$
56,666
 
Issuance of note payable for acquisition
 
$
3,450,000
   
$
-
 
Debt discount due to derivative liabilities
 
$
103,000
   
$
93,711
 
ROU asset and operating lease obligation recognized upon adoption of Topic 842
 
$
676,944
   
$
-
 
Resolution of derivative liability
 
$
10,993
   
$
125,759
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6

  Alpine 4 Technologies Ltd.
Notes to Unaudited Consolidated Financial Statements
For the Three months ended March 31, 2019
(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 22, 2019. The results for the three months ended March 31, 2019, are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
 
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 five companies (ALTIA, LLC; Quality Circuit Assembly, Inc. ("QCA"); Venture West Energy Services (“VWES”) (formerly Horizon Well Testing, LLC, currently filed for Chapter 7 bankruptcy); American Precision Fabricators, Inc., an Arkansas corporation (“APF”) and Morris.   Effective January 1, 2019, The Company purchased Morris Sheet Metal Corp., an Indiana corporation, 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”) (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 March 31, 2019, and December 31, 2018.  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.
 
7

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 March 31, 2019, and December 31, 2018, 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.
 
 
March 31,
 
December 31,
 
 
2019
 
2018
 
Cash
 
$
189,728
   
$
207,205
 
Restricted cash included in other non-current assets
   
207,311
     
207,311
 
Total cash and restricted cash shown in the consolidated statements of cash flows
 
$
397,039
   
$
414,516
 
 
Major Customers
 
The Company had two customers that made up 20% and 11% , respectively, of accounts receivable as of March 31, 2019.  The Company had two customers that made up 29 % and 27% , respectively, of accounts receivable as of December 31, 2018.
 
For the three months ended March 31, 2019, the Company had two customers that made up 24% and 10%, respectively, of total revenues.  For the three months ended March 31, 2018, the Company had two customers that made up 22% and 15%, respectively, 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 March 31, 2019, and December 31, 2018, allowance for bad debt was $0 and $0, respectively.
 
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 three areas, raw materials, WIP and finished goods.  Below is a breakdown of how much inventory was in each area as of March 31, 2019  and December 31, 2018:
 
8

 
   
March 31,
   
December 31,
 
   
2019
   
2018
 
Raw materials
 
$
1,200,513
   
$
676,621
 
WIP
   
11,441
     
-
 
Finished goods
   
1,816,351
     
1,499,174
 
   
$
3,028,305
   
$
2,175,795
 
 
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.
 
Property and equipment consisted of the following as of March 31, 2019 and December 31, 2018:

   
March 31,
   
December 31,
 
 
 
2019
   
2018
 
Automobiles and trucks
 
$
155,179
   
$
155,179
 
Machinery and equipment
   
3,666,202
     
2,548,855
 
Office furniture and fixtures
   
111,338
     
109,619
 
Building
   
9,062,000
     
5,795,000
 
Leasehold improvements
   
270,924
     
261,608
 
Less: Accumulated depreciation
   
(1,124,816
)
   
(879,705
)
 
 
$
12,140,827
   
$
7,990,556
 
 
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
 
9

Intangible assets consisted of the following as of March 31, 2019 and December 31, 2018:
 
   
March 31,
   
December 31,
 
   
2019
   
2018
 
Software
 
$
278,474
   
$
278,474
 
Noncompete
   
100,000
     
100,000
 
Customer lists
   
531,187
     
531,187
 
Less: Accumulated amortization
   
(251,304
)
   
(232,451
)
 
 
$
658,357
   
$
677,210
 

Expected amortization expense of intangible assets over the next 5 years and thereafter is as follows.

Twelve Months Ending March 31,
     
2020
   
79,960
 
2021
   
79,960
 
2022
   
79,960
 
2023
   
46,361
 
2024
   
46,361
 
Thereafter
   
325,755
 
Total
   
658,357
 
 
Other long-term assets consisted of the following as of March 31, 2019 and December 31, 2018:
 
   
March 31,
   
December 31,
 
   
2019
   
2018
 
Restricted Cash
 
$
207,311
   
$
207,311
 
Deposits
   
105,927
     
50,927
 
Other
   
33,417
     
32,000
 
   
$
346,655
   
$
290,238
 

Restricted cash consists of deposit account collateralizing letters of credit in favor of the counterparty in our lease financing obligation. 
 
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 March 31, 2019, and December 31, 2018, the reporting units with goodwill were QCA, APF and Morris.
 
10

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.
 
Fair Value Measurement
 
The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, convertible notes, notes payable and lines of credit.  The carrying amounts 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 year ended December 31, 2018 was a net increase of $279,736 to revenue and a net increase of $101,534 to cost of revenue as a result of applying ASC Topic 606. 

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 6 th 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.

 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.

11

Morris
Morris 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 from continuing operations incurred. 
 
Stock-based compensation
 
The Company accounts for equity instruments issued in exchange for the receipt of goods or services in accordance with ASC 718-10, Compensation – Stock Compensation . 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.
 
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.
 
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.
12

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

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 June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. ASU 2018-07 is effective on January 1, 2019. The adoption of this ASU did not have any impact on the Company’s financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) . ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. .  ASU 2016-02 and additional ASUs are now codified as ASC 842, Leases . ASC 842 supersedes the lease accounting guidance in ASC 840 Leases , and requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements.  The Company adopted ASC 842 on January 1, 2019 and used the modified retrospective transition approach and did not restate its comparative periods.  The Company elected to utilize the “package” of three expedients, as defined in ASC 842, which retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. As of the date of implementation on January 1, 2019, the impact of the adoption of ASC 842 resulted in the recognition of a right of use asset and lease payable obligation on the Company’s consolidated balance sheets of $676,944.  As the right of use asset and the lease payable obligation were the same upon adoption of ASC 842, there was no cumulative effect impact on the Company’s accumulated deficit.
 
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, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  However, the Company has recurring losses and a working capital deficit.  These factors raise substantial doubt as to the Company’s ability to continue as a going concern. 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 financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
 
13

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, APF and Morris have allowed for an increased level of cash flow to the Company.  Second, the Company is considering other potential acquisition targets that, like QCA and Morris, 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
 
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, 2019, the future minimum financing and operating lease payments, net of amortization of debt issuance costs, were as follows:

   
Finance
   
Operating
 
Twelve Months Ended March 31,
 
Leases
   
Leases
 
2020
 
$
1,193,304
   
$
276,174
 
2021
   
1,218,878
     
284,459
 
2022
   
1,236,942
     
218,109
 
2023
   
1,262,047
     
-
 
2024
   
1,258,457
     
-
 
Thereafter
   
12,473,408
     
-
 
Total
   
18,643,036
     
778,742
 
Less: imputed interest
    (6,850,115
)
    (145,484
)
     
11,792,921
     
633,258
 
Less: current lease obligation
   
(215,117
)
   
(194,054
)
Non-current capital leases obligations
 
$
11,577,804
   
$
439,204
 
 
Finance Leases
 
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.  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 payments related to this lease are reflected in the table above.
 
On January 1, 2019, the Company acquired Morris.  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 Morris was sold for $3,267,000, and leased back to the company for a period of 15 years at a monthly rate of $27,500, subject to an annual increase of 2% throughout the term of the lease.  The transaction did not qualify as a sale and leaseback transaction under Topic 842 and as such was accounted for as a financing lease.   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 March 31, 2019.
14

  Operating Leases
 
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets as of March 31, 2019:
 
   
Classification on Balance Sheet
 
March 31,
2019
 
Assets
       
  Operating lease assets
Operating lease right of use assets
 
$
633,258
 
Total lease assets
   
$
633,258
 
           
Liabilities
         
Current liabilities
         
  Operating lease liability
Current operating lease liability
 
$
194,054
 
Noncurrent liabilities
         
  Operating lease liability
Long-term operating lease liability
   
439,204
 
Total lease liability
   
$
633,258
 
           
           

The lease expense for the three months ended March 31, 2019 was $70,606.  The cash paid under operating leases during the three months ended March 31, 2019 was $68,530.  At March 31, 2019, the weighted average remaining lease terms were 2.8 years and the weighted average discount rate was 15%.
 
Note 5 – Notes Payable
 
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. 
 

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.  The note 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.
15

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.
 
In connection with the Morris acquisition, the Company issued three promissory notes for an aggregate of $3,100,000.  The notes bear interest at 4.25% per annum, require a monthly payment for the first 35 months of  $31,755 with any remaining principal and accrued interest due on the 3 year-anniversary.  The Company also issued three supplemental notes payable for an aggregate of $350,000.  The notes bear interest at 4.25% per annum and are due on the 1-year anniversary.
 
The outstanding balances for the loans were as follows:

   
March 31,
   
December 31,
 
   
2019
   
2018
 
Lines of credit, current portion
 
$
3,435,665
   
$
2,504,440
 
Equipment loans, current portion
   
281,698
     
260,301
 
Term notes, current portion
   
1,764,995
     
880,862
 
Total current
   
5,482,358
     
3,645,603
 
Long-term portion
   
7,480,436
     
4,517,441
 
Total notes payable
 
$
12,962,794
   
$
8,163,044
 

Future scheduled maturities of outstanding notes payable from related parties are as follows:

Twelve Months Ending March 31,
     
2020
 
$
5,482,358
 
2021
   
4,448,139
 
2022
   
2,839,130
 
2023
   
113,183
 
2024
   
79,984
 
Total
 
$
12,962,794
 
 
Note 6 – Notes Payable, Related Parties
 
At March 31, 2019 and December 31, 2018, notes payable due to related parties consisted of the following:
 
   
March 31,
   
December 31,
 
   
2019
   
2018
 
Notes payable; non-interest bearing; due upon demand; unsecured
 
$
4,500
   
$
4,500
 
Note payable; bearing interest at 8% per annum; due June 30, 2017; unsecured
   
7,500
     
7,500
 
Series of notes payable, bearing interest at rates from 10% to 15% per annum, with maturity dates from April 2018 to July 2018, unsecured
   
120,000
     
120,000
 
Total notes payable - related parties
 
$
132,000
   
$
132,000
 
 
The above notes which are in default as of March 31, 2019, were due on demand by the lenders as of the date of this Report.
16

Note 7 – Convertible Notes Payable
 
At March 31, 2019 and December 31, 2018, convertible notes payable consisted of the following:
 
   
March 31,
   
December 31,
 
   
2019
   
2018
 
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.  The notes are currently past due.
 
$
25,000
   
$
25,000
 
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.
   
1,602,588
     
1,654,588
 
Convertible notes payable issued in January 2017, bearing interest at a rate 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.  The note is currently past due.
   
10,000
     
10,000
 
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.
   
-
     
95,000
 
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
     
450,000
 
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.
   
-
     
61,699
 
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.  The note is currently past due.
   
37,800
     
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 January 21, 2019, as amended, 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.  The note is currently past due.
   
159,480
     
165,000
 
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.  This note is currently past due.
   
337,500
     
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.
   
89,000
     
93,000
 
On October 23, 2018, the Company entered into a variable convertible note for $220,000 with net proceeds of $198,000.  The note is due December 14, 2018 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.  This note is currently past due.
   
79,000
     
220,000
 
On November 12, 2018, the Company entered into a variable convertible note for $670,000 with net proceeds of $636,000.  The note is due November 12, 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.
   
670,000
     
670,000
 
On December 7, 2018, the Company entered into a variable convertible note for $130,000 with net proceeds of $122,200.  The note is due September 7, 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 40% to the lowest trading closing prices of the stock for 20 days prior to conversion.
   
130,000
     
130,000
 
On February 5, 2019, the Company entered into a variable convertible note for $103,000 with net proceeds of $103,000.  The note is due November 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.
   
103,000
     
-
 
Total convertible notes payable
   
3,693,368
     
4,037,587
 
Less: discount on convertible notes payable
   
(648,302
)
   
(942,852
)
Total convertible notes payable, net of discount
   
3,045,066
     
3,094,735
 
Less: current portion of convertible notes payable
   
(2,845,066
)
   
(2,644,735
)
Long-term portion of convertible notes payable
 
$
200,000
   
$
450,000
 
 
17

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 March 31, 2019 and 2018 amounted to $397,550 and $122,590, respectively, and is recorded as interest expense in the accompanying consolidated statements of operations.  The unamortized discount balance for these notes was $648,302 as of March 31, 2019, which is expected to be amortized over the next 12 months.
 
Future scheduled maturities of outstanding convertible notes payable are as follows:

Twelve Months Ending March 31,
 
2020
 
$
3,493,368
 
2021
   
200,000
 
Total
 
$
3,693,368
 

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

Balance outstanding, December 31, 2018
 
$
3,094,735
 
Issuance of convertible notes payable for cash
   
103,000
 
Repayment of notes
   
(441,699
)
Conversion of notes payable to common stock
   
(5,520
)
Discount from beneficial conversion feature
   
(103,000
)
Amortization of debt discounts
   
397,550
 
Balance outstanding, March 31, 2019
 
$
3,045,066
 
 
Note 8 – Stockholders' Equity
 
Preferred Stock
 
The Company is authorized to issue 10,000,000 shares of $.0001 par value preferred stock. As of March 31, 2019 and December 31, 2018, no shares of preferred stock were outstanding.
18

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 three months ended March 31, 2019:
 
Issued 1,670,000 shares of Class A common stock for the conversion of $5,520 of outstanding convertible notes payable and $21,068 of accrued interest.

  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 three months ended March 31, 2019:

 
       
Weighted-
     
 
   
Weighted-
 
Average
     
 
   
Average
 
Remaining
 
Aggregate
 
 
   
Exercise
 
Contractual
 
Intrinsic
 
 
Options
 
Price
 
Life (Years)
 
Value
 
 
               
Outstanding at December 31, 2018
   
1,790,000
   
$
0.19
     
9.10
   
$
-
 
Granted
   
-
                         
Forfeited
   
-
                         
Exercised
                               
Outstanding at March 31, 2019
   
1,790,000
   
$
0.19
     
8.85
   
$
-
 

                               
Vested and expected to vest  at March 31, 2019
   
1,790,000
   
$
0.19
     
8.85
   
$
-
 
 
                               
Exercisable at March 31, 2019
   
503,844
   
$
0.32
     
8.42
   
$
-
 
 
19

The following table summarizes information about options outstanding and exercisable as of March 31, 2019:
 
   
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
     
979,000
     
9.38
   
$
0.05
     
149,187
   
$
0.05
 
   
0.10
     
85,000
     
9.28
     
0.10
     
15,938
     
0.10
 
   
0.13
     
388,500
     
8.59
     
0.13
     
169,969
     
0.13
 
   
0.26
     
114,000
     
8.34
     
0.26
     
57,000
     
0.26
 
   
0.90
     
223,500
     
8.27
     
0.90
     
111,750
     
0.90
 
           
1,790,000
                     
503,844
         
 
During the three months ended March 31, 2019 and 2018, stock option expense amounted to $19,341 and $15,840, respectively.  Unrecognized stock option expense as of March 31, 2019 amounted to $185,479, which will be recognized over a period extending through December 2022. 
 
Warrants
 
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.

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.

During the year ended December 31, 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.

As of March 31, 2019, the Company had 277,001 warrants outstanding with a weighted average exercise price of $1.01 and a weighted average remaining life of 1.98 years.
 
Note 9 – Business Combination

Morris
 
On January 9, 2019, (with an effective date of January 1, 2019) the Company entered into a Securities Purchase Agreement (the "SPA") with Morris Sheet Metal Corp., an Indiana corporation, 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.
 
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
 
Cash
 
$
192,300
 
Accounts receivable
   
1,498,591
 
Inventory
   
332,149
 
Prepaid expenses and other current assets
   
858,456
 
Property and equipment
   
4,214,965
 
Goodwill
   
725,284
 
Accounts payable
   
(234,236
)
Accrued expenses
   
(443,908
)
Notes payable
   
(1,033,695
)
 
 
$
6,109,906
 
 
20

The purchase price was paid as follows:
 
Cash
   
2,159,906
 
Seller notes
   
3,450,000
 
Acquisition contingency
   
500,000
 
   
$
6,109,906
 

If one year after the closing date, the sellers will calculate monthly the 85/25 requirement to meet the Construction Industry Exemption for the Withdraw Liability (WDL). If the calculations verify Morris Sheet Metal Corp. and/or JTD Spiral, Inc. met the Exemption requirement for six consecutive months the Company  will pay the sellers a $500,000 success fee.  The Company anticipates that this contingency will be met and it will be obligated to pay the additional $500,000

Simultaneous with the purchase of Morris, a building, owned by Morris 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 $3,267,000 were used to fund the cash consideration to the sellers.  The building and the lease is being treated as a financing lease (see Note 4).

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.
The following are the unaudited pro forma results of operations for the three months ended March 31, 2019 and 2018, as if Morris and APF had been acquired on January 1, 2018.  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.

   
Three Months Ended
March 31,
 
   
2019
   
2018
 
Sales
 
$
7,125,989
   
$
6,067,998
 
Cost of goods sold
   
5,008,456
     
4,986,963
 
Gross profit
   
2,117,533
     
1,081,035
 
Operating expenses
   
2,466,502
     
1,420,752
 
Loss from operations
   
(348,969
)
   
(339,717
)
Net loss from continuing operations
   
(1,430,338
)
   
(520,109
)
Loss per share
   
(0.05
)
   
(0.02
)

Note 10 – Industry Segments
 
This summary presents the Company's segments, QCA, APF and Morris for the three months ended March 31, 2019 and 2018: 
21

 

 
Three Months Ended
March 31,
 
 
2019
 
2018
 
         
 Revenue
       
  QCA
 
$
2,477,542
   
$
2,445,893
 
  APF
   
1,708,992
     
-
 
 Morris
   
2,870,797
     
-
 
 Unallocated and eliminations
   
68,658
     
160,588
 
    
$
7,125,989
   
$
2,606,481
 
                 
 Gross profit
               
  QCA
 
$
658,394
   
$
725,524
 
  APF
   
700,200
     
-
 
 Morris
   
721,166
     
-
 
 Unallocated and eliminations
   
37,773
     
(62,617
)
    
$
2,117,533
   
$
662,907
 
                 
 Income (loss) from operations
               
  QCA
 
$
(479
)
 
$
(184,255
)
  APF
   
411,402
     
-
 
 Morris
   
21,293
     
-
 
 Unallocated and eliminations
   
(781,185
)
   
219,723
 
    
$
(348,969
)
 
$
35,468
 
                 
 Depreciation and amortization
               
  QCA
 
$
84,397
   
$
72,611
 
  APF
   
68,708
     
-
 
 Morris
   
91,859
     
-
 
 Unallocated and eliminations
   
8,333
     
119,542
 
    
$
253,297
   
$
192,153
 
                 
 Interest Expenses
               
  QCA
 
$
180,582
   
$
150,986
 
  APF
   
-
     
-
 
 Morris
   
45,831
     
-
 
 Unallocated and eliminations
   
805,217
     
186,352
 
    
$
1,031,630
   
$
337,338
 
                 
 Net income (loss)
               
  QCA
 
$
(130,442
)
 
$
(101,117
)
  APF
   
411,402
     
-
 
 Morris
   
(17,413
)
   
-
 
 Unallocated and eliminations
   
(1,693,885
)
   
(120,185
)
    
$
(1,430,338
)
 
$
(221,302
)


22


 
As of
 
As of
 
 
March 31,
 
December 31,
 

2019
 
2018

 Total Assets
               
  QCA
 
$
13,414,313
   
$
10,767,883
 
  APF
   
11,758,356
     
6,159,098
 
 Morris
   
11,222,604
     
-
 
 Unallocated and eliminations
   
(9,575,330
)
   
1,013,695
 
    
$
26,819,943
   
$
17,940,676
 
                 
 Goodwill
               
  QCA
 
$
1,963,761
   
$
1,963,761
 
  APF
   
1,230,100
     
1,230,100
 
 Morris
   
725,284
     
-
 
 Unallocated and eliminations
   
-
     
-
 
    
$
3,919,145
   
$
3,193,861
 
                 
 Accounts receivable, net
               
  QCA
 
$
1,666,839
   
$
1,649,701
 
  APF
   
1,522,709
     
958,153
 
 Morris
   
1,716,950
     
-
 
 Unallocated and eliminations
   
32,500
     
2,500
 
    
$
4,938,998
   
$
2,610,354
 
 
Note 11 – Derivative Liabilities and Fair Value Measurements
 
Derivative liabilities

The Company has issued convertible notes payable that were evaluated under the guidance in 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. 

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.
23

The Company estimated the fair value of the derivative liabilities using the Black-Scholes Option Pricing Model and the following key assumptions at March 31, 2019 and December 31, 2018:

   
March 31,
   
December 31,
 
   
2019
   
2018
 
             
Risk free rate
   
2.44
%
   
1.89
%
Volatility
   
238%-414
%
   
200
%
Expected terms (years)
 
0.5 to 2.0
   
1.3 to 2.53
 
Dividend rate
   
0
%
   
0
%

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.

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 March 31, 2019 and December 31, 2018:

 
Fair Value
 
Fair Value Measurements at
 
 
As of
 
March 31, 2019
 
Description
March 31,
2019
 
Using Fair
Value Hierarchy
 
 
   
Level 1
 
Level 2
 
Level 3
 
Conversion feature on convertible notes
 
$
2,092,199
   
$
-
   
$
-
   
$
2,092,199
 
 
                               
 
Fair Value
 
Fair Value Measurements at
 
 
As of
 
December 31, 2018
 
Description
December 31,
2018
 
Using Fair
Value Hierarchy
 
 
       
Level 1
 
Level 2
 
Level 3
 
Conversion feature on convertible notes
 
$
1,892,321
   
$
-
   
$
-
   
$
1,892,321
 

24

The below table presents the change in the fair value of the derivative liabilities during the three months ended March 31, 2019:

Derivative liability balance, December 31, 2018
 
$
1,892,321
 
Issuance of derivative liability during the period
   
103,000
 
Derivative liability resolution
   
(10,993
)
Change in derivative liability during the period
   
107,871
 
Derivative liability balance, March 31, 2019
 
$
2,092,199
 
 
Note 12 – Discontinued Operations
 
In December 2018, the Company decided to shut down the operations of its VWES subsidiary.  In February 2019, VWES filed for Chapter 7 bankruptcy.

VWES has been presented as discontinued operations in the accompanying consolidated financial statements.

The operating results for VWES have been presented in the accompanying consolidated statement of operations for the three months ended March 31, 2019 and 2018 as discontinued operations and are summarized below:

   
Three Months Ended
March 31,
 
   
2019
   
2018
 
Revenue
 
$
-
   
$
1,025,927
 
Cost of revenue
   
-
     
869,841
 
Gross Profit
   
-
     
156,086
 
Operating expenses
   
95,179
     
708,705
 
Loss from operations
   
(95,179
)
   
(552,619
)
Other income (expenses)
   
-
     
112,843
 
Net loss
 
$
(95,179
)
 
$
(439,776
)

The assets and liabilities of the discontinued operations at December 31, 2018 and 2017 are summarized below:

   
March 31,
   
December 31,
 
   
2019
   
2018
 
             
Current assets
 
$
-
   
$
121,296
 
Property and equipment
   
-
     
387,727
 
  Total assets
 
$
-
   
$
509,023
 
                 
Current liabilities
 
$
-
   
$
2,493,049
 
Notes payable - related party
   
-
     
43,500
 
Notes payable
   
-
     
215,898
 
  Total liabilities
 
$
-
   
$
2,752,447
 
 
As of March 31, 2019, VWES’ bankruptcy was completed and the Company removed all the assets and liabilities since the assets were used to reduce the liabilities and any remaining liabilities were discharged by the Court.  The discharge of the remaining liabilities resulted in a gain on the disposition of discontinued operations of $2,515,028.
25

 
Note 13 – Subsequent Events

Subsequent to March 31, 2019, the Company issued 1,072,646 shares of common stock for the conversion of $15,000 of convertible notes and $5,980 of accrued interest.

26

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 was a holding company that owned five operating subsidiaries: ALTIA, LLC; Quality Circuit Assembly, Inc.; American Precision Fabricators, Inc.; Morris Sheet Metal, Corp; and JTD Spiral, Inc. (As discussed in more detail below, we previously had an additional subsidiary, Venture West Energy Services (formerly Horizon Well Testing, LLC). However, as of December 31, 2018, we discontinued operations on this company.)

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.

27

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.