Amended Quarterly Report (10-q/a)

Date : 08/22/2019 @ 10:02AM
Source : Edgar (US Regulatory)
Stock : Alpine 4 Technologies Ltd (QB) (ALPP)
Quote : 0.21  -0.008 (-3.67%) @ 9:59PM

Amended Quarterly Report (10-q/a)



U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q/A
(Amendment No. 2)
 

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

For the quarterly period ended June 30, 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 August 19, 2019, the issuer had 95,170,161 shares of its Class A common stock issued and outstanding and 5,000,000 shares of its Class B common stock issued and outstanding.

EXPLANATORY NOTE
 
This Amendment No. 2 to the Quarterly Report on Form 10-Q (“Form 10-Q/A”) of Alpine 4 Technologies, Ltd. (the “Company”) amends our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, which was originally filed with the Securities and Exchange Commission on August 19, 2019. The filing is being amended to update the shares of Class A Common Stock issued subsequent to June 30, 2019 and to update the number of shares of Class A common stock on the cover page.  Other than the changes referred to above, all other information in the Report remains unchanged.


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
26
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
31
 
 
 
Item 4.
Controls and Procedures
31
 
 
 
PART II
 
 
 
 
 
Item 1.
Legal Proceedings
32
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
 
 
 
Item 3.
Defaults Upon Senior Securities
32
 
 
 
Item 5.
Other Information
32
 
 
 
Item 6.
Exhibits
33
 
 
 
 
Signatures
34
 
2

 
PART I - FINANCIAL INFORMATION
 

Item 1.  Financial Statements.

ALPINE 4 TECHNOLOGIES, LTD. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
   
   
June 30,
   
December 31,
 
   
2019
   
2018
 
   
(unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash
 
$
160,177
   
$
207,205
 
Accounts receivable
   
5,006,650
     
2,610,354
 
Inventory
   
3,054,417
     
2,175,795
 
Capitalized contract costs
   
64,234
     
64,234
 
Prepaid expenses and other current assets
   
1,002,819
     
222,200
 
Assets of discontinued operations
   
-
     
121,296
 
Total current assets
   
9,288,297
     
5,401,084
 
                 
Property and equipment, net
   
11,912,039
     
7,990,556
 
Intangible asset, net
   
1,363,671
     
677,210
 
Right of use assets, net
   
583,761
     
-
 
Goodwill
   
3,007,453
     
3,193,861
 
Other non-current assets
   
346,655
     
290,238
 
Assets of discontinued operations
   
-
     
387,727
 
                 
 TOTAL ASSETS
 
$
26,501,876
   
$
17,940,676
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES:
               
Accounts payable
 
$
3,606,209
   
$
3,102,970
 
Accrued expenses
   
2,653,876
     
1,254,853
 
Deferred revenue
   
-
     
25,287
 
Derivative liabilities
   
5,730,110
     
1,892,321
 
Deposits
   
12,509
     
12,509
 
Notes payable, current portion
   
6,863,646
     
3,585,603
 
Notes payable, related parties, current portion
   
209,500
     
192,000
 
Convertible notes payable, current portion, net of discount of $353,523 and $942,852
   
1,132,396
     
2,644,735
 
Financing lease obligation, current portion
   
224,002
     
105,458
 
Operating lease obligation, current portion
   
203,504
         
Acquisition contingency
   
500,000
     
-
 
Net liabilities of discontinued operations
   
-
     
2,752,447
 
Total current liabilities
   
21,135,752
     
15,568,183
 
                 
Notes payable, net of current portion
   
5,703,994
     
4,517,441
 
Convertible notes payable, net of current portion
   
1,971,589
     
450,000
 
Financing lease obligations, net of current portion
   
11,518,290
     
8,295,176
 
Operating lease obligations, net of current portion
   
384,410
     
-
 
Deferred tax liability
   
608,304
     
608,304
 
                 
 TOTAL LIABILITIES
   
41,322,339
     
29,439,104
 
                 
STOCKHOLDERS' DEFICIT:
               
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at June 30, 2019 and December 31, 2018
   
-
     
-
 
Class A Common stock, $0.0001 par value, 100,000,000 shares authorized, 62,213,334 and 26,567,410 shares issued and outstanding at June 30, 2019 and December 31, 2018
   
6,222
     
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 June 30, 2019 and December 31, 2018
   
500
     
500
 
Additional paid-in capital
   
17,660,074
     
17,018,509
 
Accumulated deficit
   
(32,487,259
)
   
(28,520,094
)
Total stockholders' deficit
   
(14,820,463
)
   
(11,498,428
)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
26,501,876
   
$
17,940,676
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3


ALPINE 4 TECHNOLOGIES, LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
 
                         
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Revenue
 
$
6,475,843
   
$
3,621,348
   
$
13,601,832
   
$
6,227,829
 
Cost of revenue
   
5,222,415
     
2,414,603
     
10,230,871
     
4,358,177
 
Gross Profit
   
1,253,428
     
1,206,745
     
3,370,961
     
1,869,652
 
                                 
Operating expenses:
                               
General and administrative expenses
   
1,303,627
     
1,240,504
     
3,770,129
     
1,867,943
 
                                 
Total operating expenses
   
1,303,627
     
1,240,504
     
3,770,129
     
1,867,943
 
Income (loss) from operations
   
(50,199
)
   
(33,759
)
   
(399,168
)
   
1,709
 
                                 
Other expenses
                               
Interest expense
   
(1,006,494
)
   
(604,110
)
   
(2,038,124
)
   
(941,448
)
Change in value of derivative liability
   
(3,970,614
)
   
239,610
     
(4,078,485
)
   
246,025
 
Gain on extinguishment of debt
   
-
     
-
     
-
     
6,305
 
Other income
   
70,631
     
49,811
     
128,763
     
117,659
 
Total other expenses
   
(4,906,477
)
   
(314,689
)
   
(5,987,846
)
   
(571,459
)
                                 
Loss before income tax
   
(4,956,676
)
   
(348,448
)
   
(6,387,014
)
   
(569,750
)
                                 
Income tax (benefit)
   
-
     
-
     
-
     
-
 
                                 
Loss from continuing operations
   
(4,956,676
)
   
(348,448
)
   
(6,387,014
)
   
(569,750
)
                                 
Discontinued operations:
                               
Loss from operations of discontinued operations
   
-
     
(228,846
)
   
(95,179
)
   
(668,622
)
Gain on disposition of discontinued operations
   
-
     
-
     
2,515,028
     
-
 
Total discontinued operations
   
-
     
(228,846
)
   
2,419,849
     
(668,622
)
                                 
Net income (loss)
 
$
(4,956,676
)
 
$
(577,294
)
 
$
(3,967,165
)
 
$
(1,238,372
)
                                 
Weighted average shares outstanding :
                               
Basic
   
38,675,118
     
27,942,042
     
35,347,086
     
26,642,693
 
Diluted
   
38,675,118
     
27,942,042
     
35,347,086
     
26,642,693
 
                                 
Basic Income (loss) per shares
                               
Continuing operations
 
$
(0.13
)
 
$
(0.01
)
 
$
(0.18
)
 
$
(0.02
)
Discontinued operations
   
-
   
$
(0.01
)
   
0.07
   
$
(0.03
)
  
 
$
(0.13
)
   
(0.02
)
 
$
(0.11
)
   
(0.05
)
                                 
Diluted income (loss) per shares
                               
Continuing operations
 
$
(0.13
)
 
$
(0.01
)
 
$
(0.18
)
 
$
(0.02
)
Discontinued operations
   
-
   
$
(0.01
)
   
0.07
   
$
(0.03
)
  
 
$
(0.13
)
   
(0.02
)
 
$
(0.11
)
   
(0.05
)
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4

 
ALPINE 4 TECHNOLOGIES, LTD. AND SUBSIDIARIES
 
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 income for the three months
   
-
     
-
     
-
     
-
     
-
     
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
)
                                                         
Issuance of shares of common stock for convertible note payable and accrued interest
   
33,975,924
     
3,398
     
-
     
-
     
232,551
     
-
     
235,949
 
Derivative liability resolution
   
-
     
-
     
-
     
-
     
332,703
     
-
     
332,703
 
Share-based compensation expense
   
-
     
-
     
-
     
-
     
19,556
     
-
     
19,556
 
Net loss for the three months
   
-
     
-
     
-
     
-
     
-
     
(4,956,676
)
   
(4,956,676
)
                                                         
 Balance, June 30, 2019
   
62,213,334
   
$
6,222
     
5,000,000
   
$
500
   
$
17,660,074
   
$
(32,487,259
)
 
$
(14,820,463
)
                                                         
                                                         
 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
)
                                                         
Issuance of shares of common stock for convertible note payable and accrued interest
   
713,033
     
72
     
-
     
-
     
16,762
     
-
     
16,834
 
Derivative liability resolution
   
-
     
-
     
-
     
-
     
(182,425
)
   
-
     
(182,425
)
Stock-based compensation expense
   
-
     
-
     
-
     
-
     
17,555
     
-
     
17,555
 
Shares issued for employee compensation
   
-
     
-
     
3,400,000
     
340
     
176,460
     
-
     
176,800
 
Net loss for the three months
   
-
     
-
     
-
     
-
     
-
     
(577,294
)
   
(577,294
)
                                                         
 Balance, June 30, 2018
   
24,867,856
   
$
2,487
     
5,000,000
   
$
500
   
$
16,835,066
   
$
(21,850,449
)
 
$
(5,012,396
)
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5

 
ALPINE 4 TECHNOLOGIES, LTD. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited)
 
             
   
Six Months Ended June 30,
 
   
2019
   
2018
 
             
OPERATING ACTIVITIES:
           
Net loss
 
$
(3,967,165
)
 
$
(1,238,372
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
   
471,494
     
428,500
 
Amortization
   
103,539
     
37,706
 
Gain on extinguishment of debt
   
-
     
(136,300
)
Loss on disposal of fixed assets
   
-
     
356,933
 
Change in fair value of derivative liabilities
   
4,078,485
     
(246,025
)
Stock issued for services
   
-
     
176,800
 
Employee stock compensation
   
38,897
     
33,395
 
Amortization of debt issuance costs
   
-
     
53,499
 
Amortization of debt discounts
   
692,329
     
302,837
 
Gain on disposal of discontinued operations
   
(2,515,028
)
   
-
 
Issuance of convertible debentures for penalty interest
   
128,777
     
-
 
Operating lease expense
   
93,183
     
-
 
Change in current assets and liabilities:
               
Accounts receivable
   
(883,089
)
   
(892,773
)
Inventory
   
(424,781
)
   
(367,940
)
Capitalized contracts costs
   
-
     
37,300
 
Prepaid expenses and other assets
   
58,451
     
182,028
 
Accounts payable
   
174,854
     
21,285
 
Accrued expenses
   
1,389,162
     
175,687
 
Operating lease liability
   
(89,030
)
   
-
 
Deferred revenue
   
(25,287
)
   
(149,407
)
Net cash used in operating activities
   
(675,209
)
   
(1,224,847
)
                 
INVESTING ACTIVITIES:
               
Capital expenditures
   
(28,679
)
   
(143,480
)
Proceeds from insurance claim on automobiles and trucks
   
-
     
229,257
 
Cash paid for acquisitions, net of cash acquired
   
(1,967,606
)
   
(1,976,750
)
Net cash used in financing activities
   
(1,996,285
)
   
(1,890,973
)
                 
FINANCING ACTIVITIES:
               
Proceeds from issuances of notes payable, related party
   
37,500
     
125,000
 
Proceeds from issuances of notes payable, non-related party
   
500,000
     
779,750
 
Proceeds from issuances of convertible notes payable
   
103,000
     
700,500
 
Proceeds from financing lease
   
3,267,000
     
1,900,000
 
Repayments of notes payable, related party
   
(20,000
)
   
(11,500
)
Repayments of notes payable, non-related party
   
(1,376,670
)
   
(201,978
)
Repayments of convertible notes payable
   
(601,200
)
   
(745,959
)
Proceeds from line of credit, net
   
795,983
     
892,866
 
Cash paid on financing lease obligations
   
(81,147
)
   
(121,934
)
             
 
 
Net cash provided by financing activities
   
2,624,466
     
3,316,745
 
                 
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH
   
(47,028
)
   
200,925
 
                 
CASH AND RESTRICTED CASH, BEGINNING BALANCE
   
414,516
     
335,823
 
                 
CASH AND RESTRICTED CASH, ENDING BALANCE
 
$
367,488
   
$
536,748
 
                 
CASH PAID FOR:
               
Interest
 
$
1,474,484
   
$
634,400
 
Income taxes
 
$
-
   
$
-
 
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
         
Common stock issued for convertible note payable and accrued interest
 
$
262,537
   
$
22,850
 
Common stock issued for convertible note discount
 
$
-
   
$
9,584
 
Issuance of convertible payable for acquisition
 
$
-
   
$
450,000
 
Issuance of note payable for acquisition
 
$
3,450,000
   
$
1,950,000
 
Debt discount due to derivative liabilities
 
$
103,000
   
$
524,470
 
Notes payable and redeemable common stock restructuring
 
$
-
   
$
3,197,538
 
Release of derivative liability
 
$
343,696
   
$
-
 
ROU asset and operating lease obligation recognized upon adoption of Topic 842
 
$
676,944
   
$
-
 
Goodwill adjustment to intangible asset for APF acquisition
 
$
790,000
   
$
-
 

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 Six Months ended June 30, 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 six months ended June 30, 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 June 30, 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 June 30, 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.
 
   
June 30,
   
December 31,
 
   
2019
   
2018
 
Cash
 
$
160,177
   
$
207,205
 
Restricted cash included in other non-current assets
   
207,311
     
207,311
 
Total cash and restricted cash shown in statement of cash flows
 
$
367,488
   
$
414,516
 
 
Major Customers
 
The Company had two customers that made up 15% and 11%, respectively, of accounts receivable as of June 30, 2019.  The Company had two customers that made up 29 % and 27%, respectively, of accounts receivable as of December 31, 2018.
 
For the six months ended June 30, 2019, the Company had two customers that made up 14% and 11%, respectively, of total revenues.  For the six months ended June 30, 2018, the Company had one customer that made up 23% 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 June 30, 2019, and December 31, 2018, allowance for bad debt was $0 and $0, respectively.
 
8

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, work in progress (WIP) and finished goods.  Below is a breakdown of how much inventory was in each area as of June 30, 2019  and December 31, 2018:
 
   
June 30,
   
December 31,
 
   
2019
   
2018
 
Raw materials
 
$
1,425,343
   
$
676,621
 
WIP
   
14,558
     
-
 
Finished goods
   
1,614,516
     
1,499,174
 
   
$
3,054,417
   
$
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 June 30, 2019 and December 31, 2018:
 
   
June 30,
   
December 31,
 
 
 
2019
   
2018
 
Automobiles and trucks
 
$
155,179
   
$
155,179
 
Machinery and equipment
   
3,638,018
     
2,548,855
 
Office furniture and fixtures
   
114,867
     
109,619
 
Building
   
9,062,000
     
5,795,000
 
Leasehold improvements
   
303,841
     
261,608
 
Less: Accumulated depreciation
   
(1,361,866
)
   
(879,705
)
 
 
$
11,912,039
   
$
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 lists
15 years
Non-compete agreements
15 years
Software development
5 years
 
9

Intangible assets consisted of the following as of June 30, 2019 and December 31, 2018:
 
   
June 30,
   
December 31,
 
 
 
2019
   
2018
 
Software
 
$
278,474
   
$
278,474
 
Noncompete
   
100,000
     
100,000
 
Customer lists
   
1,321,187
     
531,187
 
Less: Accumulated amortization
   
(335,990
)
   
(232,451
)
 
 
$
1,363,671
   
$
677,210
 

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

Twelve Months Ending June 30,
     
2020
   
132,627
 
2021
   
132,627
 
2022
   
132,627
 
2023
   
99,028
 
2024
   
99,028
 
Thereafter
   
767,734
 
Total
   
1,363,671
 
 
Other long-term assets consisted of the following as of June 30, 2019 and December 31, 2018:
 
   
June 30,
   
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 June 30, 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 and line of credit.  The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.  For additional information, please see Note 11 – Derivative Liabilities and Fair Value Measurements.
 
Revenue Recognition
 
On January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the historic accounting under ASC Topic 605.

The Company recorded a net increase to its opening accumulated deficit of $178,202 as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with the impact related to recognition of revenue and costs relating to the sales of the 6th Sense Auto service.  Under the new revenue standard, sales of the Company’s 6th Sense Auto service, which includes a hardware and a monthly subscription component, are required to be treated as a single performance obligation and recognized over time.  As a result, the deferred revenue increased by $279,736 and capitalized contract costs increased by $101,534.  The impact to the consolidated statement of operations for the 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 6th Sense Auto service.  The Company accounts for its revenue by deferring the total contract amount and recognizing the amounts over the monthly subscription period, ranging from 12 to 36 months.  

QCA
QCA is a contract manufacturer and recognizes revenue when the products have been built and control has been transferred to the customer.  If a deposit for product or service is received prior to completion, the payment is recorded to deferred revenue until such point the product or services meets our revenue recognition policy.  Management assesses the materiality and likelihood of warranty work and returns, and records reserves as needed.  For all periods presented, management determined that the warranty and returns would be immaterial.

 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 mechanical contractor and recognizes revenue when the services have been performed to the customer.  If a deposit for product or service is received prior to completion, the payment is recorded to deferred revenue until such point the product or services meets our revenue recognition policy.  Management assesses the materiality and likelihood of warranty work and returns, and records reserves as needed.  For all periods presented, management determined that the warranty and returns would be immaterial.
 
Earnings (loss) per share
 
Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if potentially dilutive securities had been issued. The only potentially dilutive securities outstanding during the periods presented were the convertible debentures, but they are anti-dilutive due to the net loss incurred. 
 
Stock-based compensation
 
The Company accounts for equity instruments issued in exchange for the receipt of goods or services 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. 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 seek new non-convertible debt agreements to fund any deficits in cash requirements.
 
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 June 30, 2019, the future minimum financing and operating lease payments, net of amortization of debt issuance costs, were as follows:
 
   
Finance
   
Operating
 
Twelve Months Ending June 30,
 
Leases
   
Leases
 
2020
 
$
1,199,692
   
$
278,230
 
2021
   
1,224,603
     
286,577
 
2022
   
1,242,009
     
145,406
 
2023
   
1,266,282
     
-
 
2024
   
1,254,146
     
-
 
Thereafter
   
12,158,252
     
-
 
Total
   
18,344,984
     
710,213
 
Less: current lease obligation
   
(224,002
)
   
(203,504
)
Less: imputed interest
   
(6,602,692
)
   
(122,299
)
Non-current capital leases obligations
 
$
11,518,290
   
$
384,410
 
 
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.

14

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 June 30, 2019.
 
Operating Leases
 
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheet as of June 30, 2019:
 
Assets
 
Classification on Balance Sheet
 
June 30,
2019
 
  Operating lease assets
Operating lease right of use assets
 
$
583,761
 
Total lease assets
   
$
583,761
 
           
Liabilities
         
Current liabilities
         
  Operating lease liability
Current operating lease liability
 
$
203,504
 
Noncurrent liabilities
         
  Operating lease liability
Long-term operating lease liability
   
384,410
 
Total lease liability
   
$
587,914
 

The lease expense for the six months ended June 30, 2019 was $93,183.  The cash paid under operating leases during the six months ended June 30, 2019 was $89,030.  At June 30, 2019, the weighted average remaining lease terms were 2.5 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 is secured by the assets of VWES and bears interest at 7% per annum and is due in semi-annual payments of $150,000 commencing on June 1, 2018, through June 1, 2020. The remaining principal and accrued interest is due on the 3 year anniversary.
 
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 in January 2019, the Company issued three promissory notes for an aggregate of $3,100,000.  The notes bear interest at 4.25% per annum, require 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: 

   
June 30,
   
December 31,
 
   
2019
   
2018
 
Lines of credit, current portion
 
$
3,300,424
   
$
2,504,440
 
Equipment loans, current portion
   
213,747
     
260,301
 
Term notes, current portion
   
3,349,475
     
820,862
 
Total current
   
6,863,646
     
3,585,603
 
Long-term portion
   
5,703,994
     
4,517,441
 
Total notes payable
 
$
12,567,640
   
$
8,103,044
 

Future scheduled maturities of outstanding notes payable from related parties are as follows:
 
Twelve Months Ending June 30,
     
2020
 
$
6,863,646
 
2021
   
2,759,780
 
2022
   
2,804,214
 
2023
   
80,000
 
2024
   
60,000
 
Total
 
$
12,567,640
 
 
Note 6 – Notes Payable, Related Parties
 
At June 30, 2019 and December 31, 2018, notes payable due to related parties consisted of the following:

   
June 30,
   
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 20% per annum, with maturity dates from April 2018 to August 2019, unsecured
   
197,500
     
180,000
 
Total notes payable - related parties
 
$
209,500
   
$
192,000
 

16

 The above notes which are in default as of June 30, 2019, were due on demand by the lenders as of the date of this Report.
 
  Note 7 – Convertible Notes Payable
 
At June 30, 2019 and December 31, 2018, convertible notes payable consisted of the following:
 
   
June 30,
   
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 exercise prices ranging from $0.10 to $1 per share.
 
$
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. In June 2019, one note with a balance of $843,685 was extended to December 31, 2022. 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 $1 per share.
   
1,521,587
     
1,654,588
 
Convertible note payable issued in January 2017, bearing interest at rates of 10% per annum, and due in January 2018.  The outstanding principal and interest balances are convertible into shares of Class A common stock at the option of the debt holder at an exercise price of $1 per share.
   
10,000
     
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.
   
500
     
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.
   
75,434
     
37,800
 
On June 4, 2018, the Company entered into a variable convertible note for $165,000 with net proceeds of $151,500.  The note is due December 4, 2019 and bears interest at 10% per annum.  The note is immediately convertible into shares of the Company's Class A common stock at a discount of 42% to the average of the two lowest trading closing prices of the stock for ten days prior to conversion.  The Company issued 850,000 shares of Class A common stock to the note holder which are returnable if no event of default has occurred and the note is paid in full within 180 days of the note date.
   
148,980
     
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.
   
292,907
     
337,500
 
On September 27, 2018, the Company entered into a variable convertible note for $93,000 with net proceeds of $93,000.  The note is due July 15, 2019 and bears interest at 12% per annum.  The note is immediately convertible into shares of the Company's Class A common stock at a discount of 42% to the average of the two lowest trading closing prices of the stock for ten days prior to conversion.
   
-
     
93,000
 
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.
   
49,000
     
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.
   
657,100
     
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.
   
124,000
     
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
   
3,457,508
     
4,037,587
 
Less: discount on convertible notes payable
   
(353,523
)
   
(942,852
)
Total convertible notes payable, net of discount
   
3,103,985
     
3,094,735
 
Less: current portion of convertible notes payable
   
(1,132,396
)
   
(2,644,735
)
Long-term portion of convertible notes payable
 
$
1,971,589
   
$
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 six months ended June 30, 2019 and 2018 amounted to $692,329 and $302,837, respectively, and is recorded as interest expense in the accompanying consolidated statements of operations.  The unamortized discount balance for these notes was $353,523 as of June 30, 2019, which is expected to be amortized over the next 12 months.
 
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
 
Issuance of convertible notes payable for penalty interest
   
128,777
 
Repayment of notes
   
(601,200
)
Conversion of notes payable to common stock
   
(210,656
)
Discount from derivative liability
   
(103,000
)
Amortization of debt discounts
   
692,329
 
Balance outstanding, June 30, 2019
 
$
3,103,985
 
 
Note 8 – Stockholders' Equity
 
Preferred Stock
 
The Company is authorized to issue 10,000,000 shares of $.0001 par value preferred stock. As of June 30, 2019 and December 31, 2018, no shares of preferred stock were outstanding.
 
Common Stock
 
Pursuant to the Second Amended and Restated Certificate of Incorporation, the Company is authorized to issue two classes of common stock: Class A common stock, which has one vote per share, and Class B common stock, which has ten votes per share. Any holder of Class B common stock may convert his or her shares at any time into shares of Class A common stock on a share-for-share basis. Otherwise the rights of the two classes of common stock will be identical.
 
The Company had the following transactions in its common stock during the six months ended June 30, 2019:
 
        •           Issued 35,645,924 shares of Class A common stock for the conversion of $210,656 of outstanding convertible notes payable and $51,881 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 six months ended June 30, 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 June 30, 2019
   
1,790,000
   
$
0.19
     
8.85
   
$
-
 

                               
Vested and expected to vest at June 30, 2019
   
1,790,000
   
$
0.19
     
8.60
   
$
-
 
 
                               
Exercisable at June 30, 2019
   
615,719
   
$
0.27
     
8.33
   
$
-
 
 
18

The following table summarizes information about options outstanding and exercisable as of June 30, 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
     
9.13
   
$
0.05
     
210,375
   
$
0.05
 
 
0.10
     
85,000
     
9.04
     
0.10
     
21,250
     
0.10
 
 
0.13
     
388,500
     
8.34
     
0.13
     
194,250
     
0.13
 
 
0.26
     
114,000
     
8.10
     
0.26
     
64,125
     
0.26
 
 
0.90
     
223,500
     
8.02
     
0.90
     
125,719
     
0.90
 
         
1,790,000
                     
615,719
         
 
During the six months ended June 30, 2019 and 2018, stock option expense amounted to $38,897 and $33,395, respectively.  Unrecognized stock option expense as of June 30, 2019 amounted to $166,139, 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 June 30, 2019, the Company had 277,001 warrants outstanding with a weighted average exercise price of $1.01 and a weighted average remaining life of 1.73 years.
 
19

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
   
453,841
 
Prepaid expenses and other current assets
   
858,456
 
Property and equipment
   
4,214,965
 
Goodwill
   
603,592
 
Accounts payable
   
(234,236
)
Accrued expenses
   
(443,908
)
Notes payable
   
(1,033,695
)
 
 
$
6,109,906
 
 
The purchase price was paid as follows:
 
Cash
   
2,159,906
 
Seller notes
   
3,450,000
 
Acquisition contingency
   
500,000
 
   
$
6,109,906
 

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.  At the closing date, the Company and the Sellers agreed to a reduction of the purchase price of $123,250, resulting from a net working capital adjustment which was deducted from the cash consideration due to the Sellers.  As a result, the total purchase price of APF was $4,376,750.

A summary of the purchase price allocation at fair value is below.  During the period ended June 30, 2019, the Company finalized the purchase price allocation.  As a result the Company took a charge to earnings during the three months ended June 30, 2019 for $65,833 for amortization on the customer list from the purchase date to June 30, 2019.
20


 
 
Purchase
Allocation
 
Accounts receivable
 
$
945,050
 
Inventory
   
675,074
 
Prepaid expenses and other current assets
   
250,040
 
Property and equipment
   
3,300,000
 
Customer list
   
790,000
 
Goodwill
   
440,100
 
Accounts payable
   
(1,234,328
)
Accrued expenses
   
(154,186
)
Line of credit
   
(165,000
)
Deferred tax liability
   
(470,000
)
 
 
$
4,376,750
 

The following are the unaudited pro forma results of operations for the six months ended June 30, 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.

   
Six Months Ended
June 30,
 
   
2019
   
2018
 
Sales
 
$
13,601,832
   
$
12,545,597
 
Cost of goods sold
   
10,230,871
     
9,706,527
 
Gross profit
   
3,370,961
     
2,839,070
 
Operating expenses
   
3,770,129
     
3,006,447
 
Loss from operations
   
(399,168
)
   
(167,377
)
Net loss from continuing operations
   
(6,387,014
)
   
(621,621
)
Loss per share
   
(0.18
)
   
(0.02
)
 
21

Note 10 – Industry Segments
 
This summary presents the Company's segments, QCA, APF and Morris for the three and six months ended June 30, 2019 and 2018:
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2019
   
2018
 
2019
 
2018
 
                     
 Revenue
                   
  QCA
 
$
2,326,135
   
$
2,499,853
   
$
4,803,677
   
$
4,945,746
 
  APF
   
1,249,463
     
961,597
     
2,958,455
     
961,597
 
 Morris
   
2,870,574
     
-
     
5,741,371
     
-
 
 Unallocated and eliminations
   
29,671
     
159,898
     
98,329
     
320,486
 
  
 
$
6,475,843
   
$
3,621,348
   
$
13,601,832
   
$
6,227,829
 
                                 
 Gross profit
                               
  QCA
 
$
714,282
   
$
956,859
   
$
1,372,676
   
$
1,682,383
 
  APF
   
185,697
     
103,641
     
885,897
     
103,641
 
 Morris
   
323,778
     
-
     
1,044,944
     
-
 
 Unallocated and eliminations
   
29,671
     
146,245
     
67,444
     
83,628
 
  
 
$
1,253,428
   
$
1,206,745
   
$
3,370,961
   
$
1,869,652
 
                                 
 Income (loss) from operations
                               
  QCA
 
$
68,354
   
$
916,126
   
$
67,875
   
$
731,871
 
  APF
   
40,134

   
(148,080
)
   
451,536
     
(148,080
)
 Morris
   
62,786

   
-
     
84,079
     
-
 
 Unallocated and eliminations
   
(221,473
)
   
(801,805
)
   
(1,002,658
)
   
(582,082
)
  
 
$
(50,199
)
 
$
(33,759
)
 
$
(399,168
)
 
$
1,709
 
                                 
 Depreciation and amortization
                               
  QCA
 
$
84,397
   
$
72,610
   
$
168,794
   
$
145,221
 
  APF
   
134,897
     
95,817
     
203,605
     
95,817
 
 Morris
   
94,109
     
-
     
185,968
     
-
 
 Unallocated and eliminations
   
8,333
     
105,626
     
16,666
     
225,168
 
  
 
$
321,736
   
$
274,053
   
$
575,033
   
$
466,206
 
                                 
 Interest Expenses
                               
  QCA
 
$
177,656
   
$
147,597
   
$
358,238
   
$
298,583
 
  APF
   
168,509
     
28,706
     
168,509
     
28,706
 
 Morris
   
106,755
     
-
     
152,586
     
-
 
 Unallocated and eliminations
   
553,574
     
427,807
     
1,358,791
     
614,159
 
  
 
$
1,006,494
   
$
604,110
   
$
2,038,124
   
$
941,448
 
                                 
 Net income (loss)
                               
  QCA
 
$
(36,171
)
 
$
652,065
   
$
(166,613
)
 
$
550,948
 
  APF
   
(128,375
)
   
(176,786
)
   
283,027
     
(176,786
)
 Morris
   
(46,469
)
   
-
     
(63,882
)
   
-
 
 Unallocated and eliminations
   
(4,745,661
)
   
(823,727
)
   
(6,439,546
)
   
(943,912
)
  
 
$
(4,956,676
)
 
$
(348,448
)
 
$
(6,387,014
)
 
$
(569,750
)
                                 
                 
As of
 
As of
 
                 
June 30,
 
December 31,
 

                 
2019
   
2018
 
 Total Assets
                               
  QCA
                 
$
13,317,973
   
$
10,767,883
 
  APF
                   
11,631,473
     
6,159,098
 
 Morris
                   
15,353,023
     
-
 
 Unallocated and eliminations
                   
(13,800,593
)
   
1,013,695
 
                   
$
26,501,876
   
$
17,940,676
 
                                 
 Goodwill
                               
  QCA
                 
$
1,963,761
   
$
1,963,761
 
  APF
                   
440,100
     
1,230,100
 
 Morris
                   
603,592
     
-
 
 Unallocated and eliminations                     -
      -
 
                   
$
3,007,453
   
$
3,193,861
 
                                 
 Accounts receivable, net
                               
  QCA
                 
$
1,769,615
   
$
1,649,701
 
  APF
                   
1,279,427
     
958,153
 
 Morris
                   
1,810,795
     
-
 
 Unallocated and eliminations
                   
146,813
     
2,500
 
                   
$
5,006,650
   
$
2,610,354
 
 
22

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.

The Company estimated the fair value of the derivative liabilities using the Black-Scholes Option Pricing Model and the following key assumptions at June 30, 2019 and December 31, 2018:

 
June 30,
2019
December 31,
2018
 
       
Risk free rate
2.04 to 2.51%
   
1.89
%
Volatility
231% to 321%
   
200
%
Expected terms (years)
0.5 to 1.77
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