10-Q: Alpine 4 Holdings Reports Q3 2023 Results, Impacted by Significant Impairment Losses

Sentiment:

Quarterly Report 5 June 2024 9:09 PM

Alpine 4 Holdings' Q3 2023 results reveal a substantial net loss due to goodwill and intangible asset impairments, despite efforts to improve operational cash flow.

Delay expectedContract work at TDI has been delayed into future quarters.The January 15, 2024 payment of $2,000,000 was renegotiated with a final due date of December 1, 2024, including an incremental 100,000 warrants, as mutually agreed upon between Mr. Martin and the Company.The Company has not yet made the monthly payments as called for under the modified agreement, and talks between the Company and Mr. Martin are proceeding on a possible further resolution agreeable to both parties.

Capital raiseThe company may raise funds through debt financing, securing additional lines of credit, and the sale of shares in public or private offerings.The company entered into a purchase agreement with Ionic Ventures, LLC, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right to direct Ionic Ventures to purchase up to an aggregate of $32,000,000 of shares of our Class A common stock over the 36-month term of the Purchase Agreement.

Worse than expectedThe company's net loss significantly increased due to substantial impairment losses.Revenues decreased compared to the same period last year.Operating expenses increased substantially due to the impairment losses.

Summary

Alpine 4 Holdings reported a net loss of $40.96 million for the three months ended September 30, 2023, compared to a net loss of $4.76 million for the same period in 2022.
Revenues decreased to $25.60 million from $27.49 million year-over-year.
The company recognized significant non-cash impairment losses of $14.90 million for goodwill and $18.41 million for intangible assets.
Operating expenses increased substantially to $43.69 million, up from $9.49 million in the prior year.
For the nine months ended September 30, 2023, the net loss was $51.28 million, compared to $7.22 million in 2022.
Revenues for the nine-month period were slightly down at $77.98 million compared to $78.35 million in the previous year.
The company's financial statements indicate a going concern uncertainty due to recurring losses and negative working capital of $7.2 million as of September 30, 2023.
Management plans to increase revenue, improve cash flows, and potentially raise funds through debt or equity financing to mitigate this risk.
The company has five revolving lines of credit totaling $35.0 million, with $3.1 million available as of September 30, 2023.
The company was in technical non-compliance with certain covenants related to the lines of credit, but received waivers from the banking institutions.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant losses, a going concern warning, and reliance on debt financing, although there are some positives such as improved operating cash flow and revenue growth in certain segments.

Positives

Net cash flows provided by operating activities improved to $2.1 million for the nine months ended September 30, 2023, from $17.7 million used in operating activities for the nine months ended September 30, 2022.
Alt Labs experienced organic growth with a $7.9 million increase in revenue for the nine months ended September 30, 2023.
The company received waivers from banking institutions regarding technical non-compliance with certain covenants related to the lines of credit.
Gross margin for the nine months ended September 30, 2023 was 21.0% compared to 20.5% for the nine months ended September 30, 2022.

Negatives

The company reported a significant net loss of $40.96 million for Q3 2023, primarily due to impairment losses.
The company's financial statements indicate a going concern uncertainty due to recurring losses and negative working capital.
Revenues decreased to $25.60 million in Q3 2023 from $27.49 million in Q3 2022.
Operating expenses surged to $43.69 million, driven by the impairment losses.
The company was in technical non-compliance with certain covenants related to the lines of credit.

Risks

The company faces a going concern uncertainty due to recurring losses and negative working capital.
The company was in technical non-compliance with certain covenants related to the lines of credit.
The company's ability to raise additional capital through future issuances of common stock is unknown.
The company is exposed to global, regional, economic and geopolitical conditions, including the military conflict between Russia and Ukraine.
The company has material weaknesses in its internal control over financial reporting.
The company is involved in several legal proceedings, including lawsuits and arbitration claims.

Future Outlook

The company plans to continue to generate additional revenue, improve cash flows from operations, and improve gross profit performance across all of its subsidiaries, and may raise funds through debt financing, securing additional lines of credit, and the sale of shares in public or private offerings.

Management Comments

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.

Industry Context

The company operates in a variety of industries, including construction, manufacturing, defense, technology, and aerospace, making it susceptible to a wide range of economic and market conditions.

Comparison to Industry Standards

It is difficult to compare Alpine 4's results directly to industry standards due to its conglomerate structure and diverse business segments.
Companies like Roper Technologies or TransDigm Group, which also operate under a decentralized business model, may serve as broader benchmarks, but their specific industry focuses differ significantly.
The impairment losses suggest potential overvaluation of acquired assets, a risk common in acquisitive companies if due diligence and integration are not carefully managed.
The company's reliance on lines of credit and merchant cash advance agreements, especially with high effective interest rates, indicates potential liquidity challenges compared to peers with stronger balance sheets.

Legal Proceedings

The Company is involved in several legal proceedings, including lawsuits related to Horizon Well Testing, Excel Fabrication, and various contract disputes.
In August 2020, in a matter relating to our former subsidiary Horizon Well Testing, LLC (Horizon), the Company filed a lawsuit in the United States District Court, District of Arizona (Case No.2:20-cv-01679-DJH), against Alan Martin, the seller of Horizon dba Venture West Energy Services, LLC (VWES).
In August 2021, in a matter relating to Horizon, Robert Porter filed a lawsuit in the District Court of Oklahoma County, State of Oklahoma (CJ-2021-3421), alleging unjust enrichment and breach of contract with respect to shares of Company that Mr. Porter claims were owed to him pursuant to his employment contract with the Company as President of Horizon.
In October 2021, in a matter relating to Horizon, the Company received three complaints in the District Court of Oklahoma Country State of Oklahoma from former VWES employees Bruce Morse (CJ-2021-4316), Brian Hobbs (CJ-2021-4315), Thomas Karraker (CJ-2021-4314) for unjust enrichment, and breach of contract with respect to their employment contracts with Horizon.
In June 2022, in a matter relating to the Companys subsidiaries, DTI Services Limited Liability Company and Direct Tech Sales, LLC (doing business as RCA), the Company received a complaint filed in the Superior Court of Marion County State of Indiana (CAUSE NO. 49D01-2203-PL-006662) by Gatehouse, LLC (Gatehouse), a supplier of PPP gloves for resale by RCA, seeking payment of $213,000 for supplied goods that RCA has good reason to believe are counterfeit, and thus unsalable.
In November 2022, the Company and its subsidiaries Excel and A4 Construction received a complaint filed by Mark Bell in the district court of Idaho (CV42-22-4066) with regard to the Companys February 2020 purchase of Excel Fabrication LLC (Excel) from Mr. Bell.
In December 2022, the Companys subsidiary Excel received a demand for binding arbitration (AAA Case No. 01-22-0004-9935) by Starr Corporation of Idaho (Starr Corporation), a contractor for whom Excel was performing as sub-contractor.
In February 2023, the Company learned that a complaint was brought in the State of New York against Vayu in 2019 (prior to the Companys ownership of Vayu) seeking a refund for two returned airframes.
In May 2023, Kevin Thomas, who sold Alt Labs to the Company in May of 2021, sued the Company and its subsidiaries Alt Labs and A4 Manufacturing in the State circuit court for Collier County Florida (Case Number 23-CA-1981), alleging that the Company failed to deliver shares of the Company as promised by the terms of the purchase agreement.
In September 2023, Page Management Inc, who sold TDI to the Company in May of 2021, sued the Companys A4 Defense subsidiary in the state circuit court for Lee County Florida (Case Number 23-CA-10426), alleging that an amount of $256,433 in Employee Retention Credits was received by the Company attributed to the fourth quarter of 2020 and first quarter of 2021 should be remitted to him rather than retained by the Company.
On December 9, 2023, in a matter relating to the Companys subsidiary, Quality Circuit Assembly, Inc. (QCA), the Company received a complaint filed in the Superior Court of Santa Clara County, State of California (Case number 23CV428025) by KW FUND VI-SVRD PORTFOLIO, LLC (KW), a landlord of a vacant facility rented by QCA but never occupied, seeking damages from QCA as Tenant and from the Company as guarantor for default on the lease.
On January 15, 2024, in a matter relating to the Companys subsidiary, Excel Construction Services, LLC (Excel), the Company received a complaint filed in the District Court of Twin Falls County, State of Idaho (Case number CV42-24-0190) by Newport Edgewater LLLP (Newport), a landlord of a facility rented by Excel, seeking damages from Excel as Tenant and from the Company as guarantor for default on the lease.
On April 12, 2024, in a matter relating to the Companys prior purchase of Horizon Well Testing, LLC (HWT), the Company and HWT were named as third-party defendant in a complaint filed in the District Court of Creek County, State of Oklahoma (Case number CJ-2018-11) by U.S. Energy Devlopment Corporation (US Energy), seeking damages associated with liens filed by the original owner of HWT against the property interests of US Energy.

Related Party Transactions

As of the date of the settlement, the note had a balance of $2.9 million, and accrued interest and late fees of $2.0 million, which were reflected in current liabilities.
The note balance alleged to have a principal sum due of $3.3 million, plus interest at 8% accruing from 2019 to present, plus late fees accruing at $575 per day.

Stakeholder Impact

Shareholders face potential dilution from future equity offerings.
Employees may experience uncertainty due to the company's financial instability and potential restructuring.
Customers could be affected by potential disruptions in service or product availability.
Suppliers may face increased credit risk due to the company's financial challenges.
Creditors face increased risk of default due to the company's financial instability.

Next Steps

The company plans to continue to generate additional revenue, improve cash flows from operations, and improve gross profit performance across all of its subsidiaries.
The company may raise funds through debt financing, securing additional lines of credit, and the sale of shares in public or private offerings.
The company is committed to remediating material weaknesses in internal control over financial reporting.
The company intends to wind down the operations of TDI over approximately three months, subject to discussions with customers and suppliers of the business.

Key Dates

Date	Description
2014-04-01	Company incorporated in Delaware
2020-08-01	Lawsuit filed against Alan Martin regarding note payable
2023-05-12	Certificate of Amendment filed to effect a one-for-eight reverse split
2023-05-12	Reverse Split and Class A Common Stock Decrease became effective
2023-05-15	Shares began trading on a post-split basis
2023-07-31	Company and Alan Martin agreed to a settlement to resolve litigation
2023-09-29	RCA Commercial Electronics entered into an amendment to its credit agreement with JPMorgan Chase Bank to revise the maturity date of the credit agreement to December 8, 2023
2023-09-29	Company entered into a Standard Merchant Cash Advance Agreement with Cedar Advance, LLC
2023-09-30	End of the quarterly period
2023-10-26	Settlement with Alan Martin was amended
2023-11-08	Company entered into a Standard Merchant Cash Advance Agreement with Meged Funding Group
2023-11-17	Company entered into a purchase agreement with Ionic Ventures, LLC
2023-12-08	Revised maturity date of the credit agreement with JPMorgan Chase Bank
2023-12-27	Company entered into a Standard Merchant Cash Advance Agreement with AEC GAP Capital
2024-01-12	Company entered into an asset purchase agreement with Bright-MSM Newco, Inc.
2024-02-22	Compensation Committee approved the issuance of new Stock Options to be distributed to the Company's employees and executives
2024-03-15	Board of Directors approved the Company’s plan to wind-down its wholly owned subsidiary Thermal Dynamics International, Inc. (TDI)
2024-04-12	Company and HWT were named as third-party defendant in a complaint filed in the District Court of Creek County, State of Oklahoma
2024-04-15	Excel filed a voluntary petition of bankruptcy with the U.S. Bankruptcy Court, District of Idaho
2024-06-04	Latest practicable date for shares outstanding information
2024-06-05	Date of report

Keywords

financial results, impairment losses, going concern, lines of credit, revenue, net loss, Alpine 4 Holdings, Q3 2023

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