NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization and Basis of Presentation
The unaudited consolidated financial statements were prepared by Alpine 4 Holdings, Inc. (‘we,” “our,” or the "Company"), pursuant to the rules and regulations of the Securities Exchange Commission ("SEC"). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on May 5, 2023. The results for the three months ended March 31, 2023, are not necessarily indicative of the results to be expected for the year ending December 31, 2023.
The Company was incorporated under the laws of the State of Delaware in April 2014. We are a publicly traded conglomerate that acquires businesses that fit into our disruptive DSF business model of Drivers, Stabilizers, and Facilitators.
As of the date of this Report, the Company was a holding company owning, directly or indirectly, fourteen companies:
•A4 Corporate Services, LLC;
•ALTIA, LLC;
•Quality Circuit Assembly, Inc. ("QCA");
•Morris Sheet Metal, Corporation ("MSM");
•JTD Spiral, Inc.;
•Excel Construction Services, LLC ("Excel");
•SPECTRUMebos, Inc.;
•Vayu Aerospace Corporation;
•Thermal Dynamics International, Inc. ("TDI");
•Alternative Laboratories, LLC. ("Alt Labs");
•Identified Technologies, Corporation ("IDT");
•ElecJet Corporation.;
•DTI Services LLC (doing business as RCA Commercial Electronics ("RCA")); and
•Global Autonomous Corporation ("GAC").
In February 2023, the Company made a $0.3 million investment for a 10% equity interest in a battery materials company, which includes a seat on its board of directors, and participation rights in future funding rounds. The investment is accounted for as an equity method investment as the board representation allows us to have significant influence over the operating and financial policies of the battery materials company. The investment is presented in other non-current assets on the consolidated balance sheet with the value of the investment being adjusted in arrears on a quarterly basis based on its financial performance.
Basis of presentation
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).
Liquidity
The Company’s financial statements are prepared in accordance with U.S. GAAP applicable to a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued. In accordance with Financial Accounting Standards Board (the “FASB”), Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued (further detail in the Going Concern sub-section below).
As shown in the accompanying consolidated financial statements, the Company has incurred significant recurring losses and negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a
going concern. Although the Company has experienced net losses of $5.8 million and $4.0 million for the three months ended March 31, 2023 and 2022, respectively, net cash flows used in operations has improved to nearly breakeven for the three months ended March 31, 2023, from $5.9 million for the three months ended March 31, 2022.
As of March 31, 2023, the Company had positive working capital of approximately $4.0 million, which was a decrease of $11.5 million compared to December 31, 2022. The Company has bank financing totaling $33.0 million ($33.0 million in lines of credit including $0.1 million in capital expenditures lines of credit availability) of which approximately $3.8 million was available and unused as of March 31, 2023. There are three lines of credit that are set to mature during the next twelve months. These three lines of credits total $11.7 million, of which $9.0 million was used as of March 31, 2023, and are shown as a Current Liability on the Consolidated Balance Sheet.
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 also may raise funds through debt financing, securing additional lines of credit, and the sale of shares in public or private offerings.
Going Concern
The accompanying financial statements have been prepared on a going concern basis. While the working capital deficiency of prior years has improved, and working capital of the Company is currently positive, continued operating losses causes doubt as to the ability of the Company to continue. 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 profitable operations are necessary for the Company to continue. The uncertainty that exists with these factors raises substantial doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
In order to mitigate the risk related to the going concern uncertainty, the Company has a three-fold plan to resolve these risks. First, the operating subsidiaries of QCA, QCA-C, IDT, TDI, and RCA plan to expand their revenues and profits yielding increased cash flow in those operating segments. This plan will allow for an increased level of cash flow to the Company. Second, the Company has expanded its credit facilities at the subsidiary level over the past twelve months to allow for greater borrowing accessibility if needed for the expansion of product lines and sales opportunities and plans to extend or refinance any lines of credit coming due over the next twelve months in order to provide additional financing. Finally, operating companies hard hit by the supply-chain related price increases such as MSM, Alt Labs, and Excel Construction have begun to experience an easing in the procurement and cost overruns of limited product supply. This subsequently has added to increased cash flow to those entities and less reliance on the Company to fund those activities. Although this plan is in place to mitigate the risk related to the going concern uncertainty, substantial doubt remains due to uncertainty around the growth projections and lack of control of many of the factors included in the Company’s plan.
Entity level risks
Our operations and performance may depend on global, regional, economic and geopolitical conditions. Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from North American and European leaders. As of the date of this Report, those events were continuing to escalate and create increasingly volatile global economic conditions. Resulting changes in North American trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a “trade war.” A trade war could result in increased costs for raw materials that we use in our manufacturing and could otherwise limit our ability to sell our products abroad. These increased costs would have a negative effect on our financial condition and profitability. Furthermore, the military conflict between Russia and Ukraine is increasing supply interruptions and further hindering our ability to find the materials we need to make our products. If the conflict between Russia and Ukraine continues for a long period of time, or if other countries become further involved in the conflict, we could face significant adverse effects to our business and financial condition. The Company is not able to fully quantify the impact that these factors will have on the Company’s financial results during 2023 and beyond.
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, 2023, and December 31, 2022. Significant intercompany balances and transactions have been eliminated.
Use of estimates
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. Preparation of these financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable. In many instances, the Company could have reasonably used different accounting estimates and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. This applies in particular to useful lives of long-lived assets, reserves for accounts receivable and inventory, valuation allowance for deferred tax assets, fair values assigned to intangible assets acquired, and impairment of long-lived assets. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, the Company’s future financial statement presentation, financial condition, results of operations and cash flows will be affected.
Cash
Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days. As of March 31, 2023, and December 31, 2022, the Company had no cash equivalents.
The FDIC insures up to $250,000 per account with any excess amount in each account being uninsured. Total bank balances were $0.8 million and $3.2 million as of March 31, 2023, and December 31, 2022, respectively. Of this amount, $0.1 million and $2.0 million were uninsured as of March 31, 2023, and December 31, 2022, respectively. All uninsured amounts are held with J.P. Morgan Chase.
Major Customers & Vendors
The Company had no customers which made up over 10% of total Company accounts receivable as of March 31, 2023, or December 31, 2022.
For the three months ended March 31, 2023, the Company had no customers which made up over 10% of total Company revenues. For the three months ended March 31, 2022, the Company had one customer within the A4 Technology - RCA segment, which made up 13% of total Company revenues.
For the three months ended March 31, 2023 and 2022, the Company received 12% and 11%, respectively, of total Company revenues from prime contractors.
For the three months ended March 31, 2023, the Company had no vendors, which made up over 10% of total Company purchases. For the three months ended March 31, 2022, the Company had one vendor within the A4 Technology - RCA segment, which made up 17% of total Company purchases.
Inventory
Inventory for all subsidiaries is valued at weighted average cost. 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-process and finished goods. Inventory at March 31, 2023, and December 31, 2022, consists of:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Raw materials | $ | 10,083,241 | | | $ | 9,116,824 | |
| Work in process | 3,236,331 | | | 3,165,876 | |
| Finished goods | 11,943,087 | | | 12,975,669 | |
| Inventory | 25,262,659 | | | 25,258,369 | |
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of 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 the three months ended March 31, 2023, there were no events or changes in circumstances that indicated a quantitative impairment analysis was necessary.
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, 2023, and December 31, 2022, the reporting units with goodwill were QCA, MSM, Excel, Alt Labs, TDI, Identified Technology, ElecJet, and RCA. Consistent with our prior year assessment, the ElecJet reporting unit is considered an at-risk reporting unit. Our methods and assumptions were consistent with those discussed below in the Fair Value Measurement subsection. This reporting unit is primarily considered at-risk as it is a start-up subsidiary with minimal to no revenue to offset its research & development expenses. The DCF model includes revenue growth assumptions of us executing large new customer and/or supplier agreements within the next two years and then steadily increasing revenue at a more normalized rate thereafter. Any failure to execute these customer and/or supplier arrangements would negatively impact the key growth assumptions.
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.
We apply the provisions of fair value measurement to various nonrecurring measurements for our financial and nonfinancial assets and liabilities. The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, notes payable and lines 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.
We calculate the estimated fair value of a reporting unit using a combination of the income and market approaches. For the income approach, we use a discounted cash flow models developed in connection with our third-party valuation specialists that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates; and estimated discount rates. For the market approach, we use analyses based primarily on market comparables. We base these assumptions on historical data and experience, industry projections, and general economic conditions.
The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates. As of March 31, 2023, and December 31, 2022, the Company had no financial assets or liabilities that were required to be fair valued on a recurring basis, as all of our financial assets and liabilities were Level 1.
Research and Development
The Company focuses on quality control and development of new products and the improvement of existing products. All costs related to research and development activities are expensed as incurred. During the three months ended March 31, 2023 and 2022, research and development costs totaled $0.1 million and $0.2 million, respectively.
Earnings (loss) per share
The Company presents both basic and diluted net income (loss) per share on the face of the consolidated statements of operations. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants, using the treasury-stock method. If antidilutive, the effect of potentially dilutive shares of common stock is ignored. The amount of anti-dilutive shares related to stock options and warrants as of March 31, 2023 and 2022 was 2,700,473 and 837,472. respectively. The following table illustrates the computation of basic and diluted earnings per share (“EPS”) inclusive of all classes of
common stock as the only difference between the classes of common stock are related to the voting rights for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2023 | | For the Three Months Ended March 31, 2022 |
| Net Loss | | Shares | | Per Share Amount | | Net Loss | | Shares | | Per Share Amount |
| Basic EPS | | | | | | | | | | | |
| Net loss | $ | (5,769,143) | | | 24,901,733 | | | $ | (0.23) | | | $ | (3,999,560) | | | 22,879,056 | | | $ | (0.17) | |
| Effect of Dilutive Securities | | | | | | | | | | | |
| Stock options and warrants | — | | | — | | | — | | | — | | | — | | | — | |
| Dilute EPS | | | | | | | | | | | |
| Total | $ | (5,769,143) | | | 24,901,733 | | | $ | (0.23) | | | $ | (3,999,560) | | | 22,879,056 | | | $ | (0.17) | |
Revenue Recognition
The Company recognizes revenue under ASC Topic 606, Revenue from contract with Customers ("Topic 606"). The following is a summary of the revenue recognition policy for each of the Company’s subsidiaries.
Revenue is recognized under Topic 606, at a point in time and over a period of time, in a manner that reasonably reflects the delivery of its services and products to customers in return for expected consideration and includes the following elements:
–executed contract with the Company's customers that it believes are legally enforceable;
–identification of performance obligations in the respective contract;
–determination of the transaction price for each performance obligation in the respective contract;
–allocation of the transaction price to each performance obligation; and
–recognition of revenue only when the Company satisfies each performance obligation.
The following tables presents our revenues disaggregated by type for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Construction Services | | Manufacturing | | Defense | | Technologies | | Aerospace | | Total |
| Sale of goods | $ | — | | | $ | 9,320,821 | | | $ | — | | | $ | 7,555,918 | | | $ | — | | | $ | 16,876,739 | |
| Sale of services | 4,146,004 | | | — | | | 2,970,087 | | | — | | | 368,883 | | | 7,484,974 | |
| Total revenues | $ | 4,146,004 | | | $ | 9,320,821 | | | $ | 2,970,087 | | | $ | 7,555,918 | | | $ | 368,883 | | | $ | 24,361,713 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Construction Services | | Manufacturing | | Defense | | Technologies | | Aerospace | | Total |
| Sale of goods | $ | — | | | $ | 8,648,095 | | | $ | — | | | $ | 9,793,988 | | | $ | — | | | $ | 18,442,083 | |
| Sale of services | 4,056,204 | | | — | | | 2,687,981 | | | — | | | 405,886 | | | 7,150,071 | |
| Total revenues | $ | 4,056,204 | | | $ | 8,648,095 | | | $ | 2,687,981 | | | $ | 9,793,988 | | | $ | 405,886 | | | $ | 25,592,154 | |
Recent Accounting Pronouncements
Effective January 1, 2023, we adopted ASU 2016-13, Credit Losses Topic 326 (the new credit losses standard), using the modified retrospective approach. The comparative periods have not been restated and continue to be reported under the accounting standard in effect for those periods. The new credit losses standard amends the impairment model to use a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Our adoption of ASU 2016-13 did not have a material impact on
our consolidated financial statements for the three months ended March 31, 2023, and we did not recognize a cumulative effect adjustment to retained earnings as of January 1, 2023.
To assist in quantifying the impact on our consolidated financial statements and supplementing our existing disclosures, we identified financial assets measured at an amortized cost basis in our consolidated balance sheet and evaluated the collectability considerations based on an expected credit loss assessment. We perform ongoing credit evaluations of our customers, but generally do not require collateral to support customer receivables. We establish an allowance for doubtful accounts based on various factors including the age of receivables outstanding, historical trends, economic conditions and other information. We also review outstanding balances on an account-specific basis based on the credit risk of the customer. We determined that all of our accounts receivable share similar risk characteristics within our operating segments based on historical data. We monitor our credit exposure on an ongoing basis and assess whether assets in the pool continue to display similar risk characteristics. We actively monitor the credit risk of our specific customers, age of receivables outstanding, recent collection trends and general economic conditions to evaluate the risk of credit loss. The consolidated statement of income for the three months ended March 31, 2023, reflects the measurement of credit losses for newly recognized financial assets as well as any changes to historical financial assets.
| | | | | |
| Allowance for Doubtful Accounts |
| Balance as of December 31, 2022 | $ | 52,531 | |
| Additions charged to expense | 153,243 | |
| Accounts written-off | (18,937) | |
| Balance as of March 31, 2023 | $ | 186,837 | |
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 – 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 discounts lease payments based on an estimate of its incremental borrowing rate.
As of March 31, 2023, the future minimum finance and operating lease payments were as follows:
| | | | | | | | | | | |
Twelve Months Ending March 31, | Finance
Leases | | Operating
Leases |
| 2024 | $ | 1,931,757 | | | $ | 2,398,681 | |
| 2025 | 1,962,353 | | | 2,423,929 | |
| 2026 | 1,852,006 | | | 1,823,638 | |
| 2027 | 1,880,265 | | | 1,814,303 | |
| 2028 | 1,923,136 | | | 1,708,631 | |
| Thereafter | 14,368,333 | | | 12,855,124 | |
| Total payments | 23,917,850 | | | 23,024,306 | |
| Less: imputed interest | (8,778,767) | | | (6,698,331) | |
| Total obligation | 15,139,083 | | | 16,325,975 | |
| Less: current portion | (743,157) | | | (1,484,846) | |
| Non-current financing leases obligations | $ | 14,395,926 | | | $ | 14,841,129 | |
Finance Leases
As of March 31, 2023, all finance leases in the table above were related to property and equipment. Depreciation expense associated with the finance leases within Property and Equipment was $312,954 and $312,954 for the three months ended March 31, 2023 and 2022, respectively. Of this amount $44,503 and $0 is recorded within Cost of Revenues with the remainder recorded in General & Administrative expenses on the Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, respectively. Interest expense on finance leases for the three months ended March
31, 2023, and 2022 was $305,262 and $317,905, respectively, and is recorded in Interest Expense on the Consolidated Statements of Operations. At March 31, 2023, the weighted average remaining lease terms were 11.7 years, and the weighted average discount rate was 8.01%.
Operating Leases
The table below presents the operating lease related assets and liabilities recorded on the Company’s consolidated balance sheets as of March 31, 2023, and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31,
2023 | | December 31,
2022 |
| Assets | | | | |
| Operating lease assets | Operating lease right of use assets | $ | 15,949,731 | | | $ | 16,407,566 | |
| Total lease assets | | $ | 15,949,731 | | | $ | 16,407,566 | |
| | | | |
| Liabilities | | | | |
| Current liabilities | | | | |
| Operating lease liability | Current operating lease liability | $ | 1,484,846 | | | $ | 1,318,885 | |
| Noncurrent liabilities | | | | |
| Operating lease liability | Long-term operating lease liability | 14,841,129 | | | 15,262,494 | |
| Total lease liability | | $ | 16,325,975 | | | $ | 16,581,379 | |
The lease expense for the three months ended March 31, 2023 and 2022, was $598,590 and $126,561, respectively. Of this amount $216,754 and $0 is recorded within Cost of Revenues with the remainder recorded in General & Administrative expense on the Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, respectively. The cash paid under operating leases during the three months ended March 31, 2023 and 2022, was $540,833 and $124,654, respectively. At March 31, 2023, the weighted average remaining lease terms were 11.7 years, and the weighted average discount rate was 6.01%.
Note 4 – Debt
The outstanding balances for the loans as of March 31, 2023, and December 31, 2022, were as follows:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Lines of credit, current portion | $ | 8,970,460 | | | $ | 7,426,814 | |
| Equipment loans, current portion | 82,787 | | | 68,410 | |
| Related Party term notes, current portion | 535,000 | | | — | |
| Term notes, current portion | 5,915,560 | | | 3,132,726 | |
| Total current | 15,503,807 | | | 10,627,950 | |
| Lines of credit, net of current portion | 3,928,105 | | | 7,215,520 | |
| Long-term portion of equipment loans and term notes | 2,229,684 | | | 4,266,350 | |
| Total notes payable and line of Credit | $ | 21,661,596 | | | $ | 22,109,820 | |
Future scheduled maturities of outstanding debt are as follows:
| | | | | |
Twelve Months Ending March 31, | |
| 2024 | $ | 15,503,807 | |
| 2025 | 1,785,069 | |
| 2026 | 709,653 | |
| 2027 | 3,562,900 | |
| 2028 | 26,035 | |
| Thereafter | 74,132 | |
| Total | $ | 21,661,596 | |
In August 2020, the Company filed a lawsuit against Alan Martin regarding his note payable. As of March 31, 2023 and 2022, the note had a balance of $2.9 million, and accrued interest of $1.8 million and $1.2 million, respectively, which are reflective in current liabilities. The default rate is 10% and the daily late charge is $575 (See a description of the Company’s ongoing legal proceedings relating to this transaction in Note 7, Commitments and Contingencies, below).
During January and February 2023, the Company issued a total of $1.3 million in six-month note payables ranging in size from $10,000 to $200,000 to executive officers and various investors with an annual interest rate of 30% to be used for general corporate purposes. Of this amount, $0.5 million was issued to related parties.
During 2023, the Company had four revolving lines of credit in the aggregate of $33.0 million, including one capital expenditures line of credit of $0.1 million. The revolving lines of credit used as of March 31, 2023, totaled $12.9 million with interest rates ranging from WSJ prime plus 2.50% - 4.25% and terms ranging from one to five years. Accounts receivables, inventory, and property and equipment are pledged as collateral on the various lines of credit. As of March 31, 2023, the Company had $3.8 million in additional funds available to borrow. The Company is required to maintain covenants including financial ratios as a condition of the line of credit agreements. As of the date of this Report, the Company was not in compliance with these covenants. However, the Company received a forbearance agreement and waivers from the banking institutions regarding these failed covenants. As such, the Company was in compliance with the covenants as of the date of this report.
Note 5 – Stockholders' Equity
On May 12, 2023, a Certificate of Amendment was filed to effect a one-for-eight (1-for-8) reverse split (the “Reverse Split”) of the shares of the Company’s the Class A, Class B, and Class C Common Stock, and to decrease the number of shares of Class A Common Stock from 295,000,000 shares to 200,000,000 shares (the “Class A Common Stock Decrease”). The Reverse Split and the Class A Common Stock Decrease became effective on May 12, 2023. As a result of the Reverse Split, every eight shares of the Company’s issued and outstanding Class A Common Stock automatically converted into one share of Class A Common Stock, without any change in the par value per share, and began trading on a post-split basis under the Company’s existing trading symbol, “ALPP,” when the market opened on May 15, 2023. Additionally, every eight shares of the Company’s issued and outstanding Class B Common Stock automatically converted into one share of Class B Common Stock, without any change in the par value per share, and every eight shares of the Company’s issued and outstanding Class C Common Stock automatically converted into one share of Class C Common Stock, without any change in the par value per share. The Reverse Split affected all holders of Class A, Class B, and Class C Common Stock uniformly and did not affect any common stockholder’s percentage ownership interest in the Company, except for de minimis changes as a result of the elimination of fractional shares. A total of 180,037,350 shares of Class A Common Stock were issued and outstanding immediately prior to the Reverse Split, and approximately 22,504,669 shares of common stock were issued and outstanding immediately after the Reverse Split. No fractional shares will be outstanding following the Reverse Split. Any holder who would have received a fractional share of common stock will automatically be entitled to receive an additional fraction of a share of common stock to round up to the next whole share. In addition, effective as of the same time as the Reverse Split, proportionate adjustments were made to all then-outstanding options and warrants with respect to the number of shares of Class A Common Stock subject to such options or warrants and the
exercise prices thereof. The impact of this change in capital structure has been retrospectively applied to all periods presented herein.
Common Stock
The Company had the following transactions in its common stock during the three months ended March 31, 2023:
•In January 2023, certain shareholders converted 1,428 shares of Class C common stock into 1,428 shares of Class A common stock.
Series B Preferred Stock
During February 2023, the Company identified that it had inappropriately awarded a Series B Preferred Share to an executive officer who is not also a board member. As the Series B Preferred Shares can only be held by members of the Board, the share issuance was rescinded.
Stock Options
The following summarizes the stock option activity for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Life (Years) | | Aggregate
Intrinsic
Value |
Outstanding at December 31, 2022 | 386,751 | | | $ | 4.39 | | | 7.94 | | $ | 463,495 | |
| Granted | — | | | — | | | | | |
| Forfeited | (7,689) | | | 6.16 | | | | | |
| Exercised | — | | | — | | | | | |
Outstanding at March 31, 2023 | 379,062 | | | $ | 4.35 | | | 7.67 | | $ | 444,942 | |
| | | | | | | |
Vested and expected to vest at March 31, 2023 | 379,062 | | | $ | 4.35 | | | 7.67 | | $ | 444,942 | |
| | | | | | | |
Exercisable at March 31, 2023 | 135,567 | | | $ | 1.11 | | | 5.12 | | $ | 444,942 | |
The following table summarizes information about options outstanding and exercisable as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Exercise
Price | | Number
of Shares | | Weighted
Average
Remaining
Life (Years) | | Weighted
Average
Exercise
Price | | Number
of Shares | | Weighted
Average
Exercise
Price |
| $ | 0.05 | | | 111,438 | | | 5.26 | | $ | 0.40 | | | 111,438 | | | $ | 0.40 | |
| 0.10 | | | 10,625 | | | 5.03 | | 0.80 | | | 10,625 | | | 0.80 | |
| 0.77 | | | 243,495 | | | 9.08 | | 6.16 | | | — | | | — | |
| 0.90 | | | 13,504 | | | 4.02 | | 7.20 | | | 13,504 | | | 7.20 | |
| | 379,062 | | | | | | | 135,567 | | | |
During the three months ended March 31, 2023 and 2022, stock option expense amounted to $0.2 million and $0.2 million, respectively. Unrecognized stock option expense as of March 31, 2023, amounted to $0.9 million, which will be recognized over a period extending through April 2025.
Warrants
The following summarizes the warrants activity for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Warrants | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Life (Years) | | Aggregate
Intrinsic
Value |
Outstanding at December 31, 2022 | 2,321,411 | | | $ | 11.78 | | | 4.31 | | $ | — | |
| Granted | — | | | — | | | 0 | | |
| Forfeited | — | | | — | | | | | |
| Exercised | — | | | — | | | | | |
Outstanding at March 31, 2023 | 2,321,411 | | | $ | 11.78 | | | 4.02 | | $ | — | |
| | | | | | | |
Vested and expected to vest at March 31, 2023 | 2,321,411 | | | $ | 11.78 | | | 4.02 | | $ | — | |
| | | | | | | |
Exercisable at March 31, 2023 | 2,321,411 | | | $ | 11.78 | | | 4.02 | | $ | — | |
The following table summarizes information about warrants outstanding and exercisable as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Warrants Outstanding | | Warrants Exercisable |
Exercise
Price | | Number
of Shares | | Weighted
Average
Remaining
Life (Years) | | Weighted
Average
Exercise
Price | | Number
of Shares | | Weighted
Average
Exercise
Price |
| $ | 52.80 | | | 52,084 | | | 1.89 | | $ | 52.80 | | | 52,084 | | | $ | 52.80 | |
| 20.16 | | | 49,604 | | | 1.70 | | 20.16 | | | 49,604 | | | 20.16 |
| 24.80 | | | 535,716 | | | 3.66 | | 24.80 | | | 535,716 | | | 24.80 |
| 24.64 | | | 53,572 | | | 3.65 | | 24.64 | | | 53,572 | | | 24.64 |
| 5.52 | | 1,630,435 | | | 4.29 | | $ | 5.52 | | | 1,630,435 | | | 5.52 |
| | | 2,321,411 | | | | | | | 2,321,411 | | | |
Note 6 – Segment Reporting
The Company discloses segment information that is consistent with the way in which management operates and views its business. Effective during the quarter ended September 30, 2022, the Company increased its reportable segments to eight segments. All segments and the subsidiaries within each segment are geographically located in North America. The financial results are logical to review in this manner for comparison, trend, deviations, etc. purposes.
Management excludes the following when reviewing the profit/loss by segment.
•Intercompany Sales/COGS
•Management fees to the parent Company
•Income tax benefit/expense
There has not been any change to the measurement method in how management reviews the profit/loss by segment.
The operating segments and their business activity are as follows:
A4 Construction Services - Morris Sheet Metal (“MSM”) provides commercial construction services primarily as a sheet metal contractor.
A4 Construction Services - Excel Construction (“Excel”) provides commercial construction services primarily as a sheet metal contractor.
A4 Manufacturing - Quality Circuit Assembly ("QCA") is a contract manufacturer within the technology industry.
A4 Manufacturing - Alternative Labs (“Alt Labs”) is a contract manufacturer within the dietary & nutraceutical supplements industry.
A4 Defense - Thermal Dynamics does contracting for the US Government particularly for the US Defense Department and US Department of State.
A4 Technologies - RCA Commercial Electronics (“RCA”) is a business-to-business ("B2B") commercial electronics manufacturer.
A4 Technologies - ElecJet is a battery research and development company.
A4 Aerospace - Vayu is a drone aircraft manufacturer.
A4 All Other includes the QCA-Central, Identified Technologies and Corporate.
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Revenue | | | |
| A4 Construction Services - MSM | $ | 3,813,140 | | | $ | 3,767,390 | |
| A4 Construction Services - Excel | 332,864 | | | 288,814 | |
| A4 Manufacturing - QCA | 4,191,643 | | | 4,318,860 | |
| A4 Manufacturing - Alt Labs | 4,226,914 | | | 3,824,138 | |
| A4 Defense - TDI | 2,970,087 | | | 2,687,981 | |
| A4 Technologies - RCA | 7,453,423 | | | 9,237,259 | |
| A4 Technologies - ElecJet | 102,495 | | | 556,729 | |
| A4 Aerospace - Vayu | — | | | 25,000 | |
| All Other | 1,271,147 | | | $ | 885,983 | |
| $ | 24,361,713 | | | $ | 25,592,154 | |
| Gross profit | | | |
| A4 Construction Services - MSM | $ | 231,888 | | | $ | 463,806 | |
| A4 Construction Services - Excel | (150,008) | | | (98,974) | |
| A4 Manufacturing - QCA | 897,715 | | | 1,027,184 | |
| A4 Manufacturing - Alt Labs | 948,752 | | | 901,479 | |
| A4 Defense - TDI | 616,582 | | | 843,189 | |
| A4 Technologies - RCA | 2,374,178 | | | 2,184,328 | |
| A4 Technologies - ElecJet | (73,809) | | | (62,029) | |
| A4 Aerospace - Vayu | (2,410) | | | 25,000 | |
| All Other | 373,568 | | | $ | 353,474 | |
| $ | 5,216,456 | | | $ | 5,637,457 | |
| Income (loss) from operations | | | |
| A4 Construction Services - MSM | $ | (404,413) | | | $ | (315,698) | |
| A4 Construction Services - Excel | (432,081) | | | (319,990) | |
| A4 Manufacturing - QCA | 19,097 | | | 414,448 | |
| A4 Manufacturing - Alt Labs | (559,125) | | | (987,483) | |
| A4 Defense - TDI | 181,534 | | | 423,140 | |
| A4 Technologies - RCA | 475,864 | | | 566,290 | |
| A4 Technologies - ElecJet | (245,421) | | | (304,346) | |
| A4 Aerospace - Vayu | (820,967) | | | (806,897) | |
| All Other | (3,354,961) | | | (2,425,619) | |
| | | | | | | | | | | |
| $ | (5,140,473) | | | $ | (3,756,155) | |
| Depreciation and amortization | | | |
| A4 Construction Services - MSM | $ | 174,298 | | | $ | 166,404 | |
| A4 Construction Services - Excel | 67,525 | | | — | |
| A4 Manufacturing - QCA | 116,879 | | | 100,479 | |
| A4 Manufacturing - Alt Labs | 208,554 | | | 307,035 | |
| A4 Defense - TDI | 72,433 | | | 72,090 | |
| A4 Technologies - RCA | 244,804 | | | 170,046 | |
| A4 Technologies - ElecJet | 105,666 | | | 101,500 | |
| A4 Aerospace - Vayu | 258,911 | | | 274,669 | |
| All Other | 278,713 | | | 277,441 | |
| $ | 1,527,783 | | | $ | 1,469,664 | |
| Interest expense | | | |
| A4 Construction Services - MSM | $ | 113,710 | | | $ | 103,025 | |
| A4 Construction Services - Excel | 60,570 | | | 61,985 | |
| A4 Manufacturing - QCA | 163,645 | | | 36,289 | |
| A4 Manufacturing - Alt Labs | 64,680 | | | 57,116 | |
| A4 Defense - TDI | 17,347 | | | — | |
| A4 Technologies - RCA | 85,956 | | | 54,817 | |
| A4 Technologies - ElecJet | — | | | — | |
| A4 Aerospace - Vayu | 5,958 | | | — | |
| All Other | 487,004 | | | 295,729 | |
| $ | 998,870 | | | $ | 608,961 | |
| Net income (loss) | | | |
| A4 Construction Services - MSM | $ | (480,600) | | | $ | (362,367) | |
| A4 Construction Services - Excel | (492,651) | | | (381,975) | |
| A4 Manufacturing - QCA | (144,187) | | | 373,867 | |
| A4 Manufacturing - Alt Labs | (658,756) | | | (1,111,462) | |
| A4 Defense - TDI | 164,187 | | | 423,140 | |
| A4 Technologies - RCA | 389,908 | | | 511,473 | |
| A4 Technologies - ElecJet | (245,421) | | | (304,346) | |
| A4 Aerospace - Vayu | (826,925) | | | (806,897) | |
| All Other | (3,474,698) | | | (2,340,993) | |
| $ | (5,769,143) | | | $ | (3,999,560) | |
The Company’s reportable segments as of March 31, 2023, and December 31, 2022, were as follows:
| | | | | | | | | | | |
| As of March 31, 2023 | | As of December 31, 2022 |
| Total assets | | | |
| A4 Construction Services - MSM | $ | 10,699,259 | | | $ | 11,309,049 | |
| A4 Construction Services - Excel | 3,390,848 | | | 3,359,818 | |
| A4 Manufacturing - QCA | 21,046,251 | | | 20,988,492 | |
| A4 Manufacturing - Alt Labs | 27,083,918 | | | 26,636,905 | |
| A4 Defense - TDI | 13,748,110 | | | 13,497,381 | |
| A4 Technologies - RCA | 23,339,534 | | | 27,191,977 | |
| A4 Technologies - ElecJet | 12,972,480 | | | 12,897,440 | |
| A4 Aerospace - Vayu | 13,594,000 | | | 14,632,530 | |
| All Other | 16,070,325 | | | 15,118,622 | |
| $ | 141,944,725 | | | $ | 145,632,214 | |
| Goodwill | | | |
| A4 Construction Services - MSM | $ | 113,592 | | | $ | 113,592 | |
| A4 Construction Services - Excel | — | | | — | |
| A4 Manufacturing - QCA | 1,963,761 | | | 1,963,761 | |
| A4 Manufacturing - Alt Labs | 4,410,564 | | | 4,410,564 | |
| A4 Defense - TDI | 6,426,786 | | | 6,426,786 | |
| A4 Technologies - RCA | 1,355,728 | | | 1,355,728 | |
| A4 Technologies - ElecJet | 6,496,343 | | | 6,496,343 | |
| A4 Aerospace - Vayu | — | | | — | |
| All Other | 1,913,310 | | | 1,913,310 | |
| $ | 22,680,084 | | | $ | 22,680,084 | |
| Accounts receivable, net | | | |
| A4 Construction Services - MSM | $ | 3,790,520 | | | $ | 5,188,521 | |
| A4 Construction Services - Excel | 222,895 | | | 288,243 | |
| A4 Manufacturing - QCA | 3,397,802 | | | 3,867,141 | |
| A4 Manufacturing - Alt Labs | 1,994,703 | | | 1,833,502 | |
| A4 Defense - TDI | 2,367,869 | | | 1,905,314 | |
| A4 Technologies - RCA | 2,845,356 | | | 3,232,559 | |
| A4 Technologies - ElecJet | 22,959 | | | 12,888 | |
| A4 Aerospace - Vayu | (491) | | | — | |
| All Other | 898,915 | | | 811,776 | |
| $ | 15,540,528 | | | $ | 17,139,944 | |
Note 7 – Commitments and Contingencies
Licensing Agreement
DTI has entered into licensing agreements with RCA Trademark Management for the licensing rights to the respective trademarks in the United States of America and Canada. The RCA licensing agreement was amended with Technicolor, S.A., as licensor, and expires December 31, 2024. DTI agrees to pay a royalty fee of 2.50% on net sales of the licensed products with a minimum annual payment of $440,000 for the year ended 2022, $460,000 for the year ended 2023, and $480,000 for the year ended 2024. These amounts were amended as part of the agreement signed in May 2023. The amended agreement extended our licensing agreement under December 31, 2027, and provides us the ability to sell additional products under the trademark in exchange for higher royalty payments (See Note 8).
Warranty Service Agreement
DTI entered into a warranty service agreement to provide certain warranty services for a lighting supplier through December 31, 2024, except for one class of customer, for whom services will be provided through 2030. In exchange for these services, DTI expects to receive $66,626 and $59,964 during the year ended 2023 and 2024, respectively.
Royalty Agreement
On November 28, 2021, the Company entered into a Royalty Agreement with the sellers of ElecJet. Upon closing the Company desires to build its initial factory (“Factory”) to manufacture graphene batteries in the territory of the United States. The Company agrees to pay the sellers 1.5% of net sales for batteries produced by the Factory. Royalty payments shall continue to be paid for a period of ten years from the starting date, or until the total of the royalty payments equals $50 million, whichever occurs first.
Legal Proceedings
From time to time, the Company may become involved in lawsuits and other legal proceedings that arise in the course of business. Litigation is subject to inherent uncertainties, and it is not possible to predict the outcome of litigation with total confidence. As of the date of this Report, the Company was not aware of any legal proceedings or potential claims against it whose outcome would be likely, individually or in the aggregate, to have a material adverse effect on the Company’s business, financial condition, operating results, or cash flows.
In August 2020, in a matter relating to the Company’s 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”). The Company brought suit in 2020 seeking to avoid the claimed liability due from the Company to Alan Martin, for the Company’s 2017 purchase of Mr. Martin’s business, Horizon. On summary judgment, the court found that the Company’s claim was barred by a time-limiting clause for indemnification claims. The Company disagrees with the court’s ruling and intends to appeal. Before the Company can file its appeal of the summary judgment order, the court must resolve Mr. Martin’s counterclaim in which Mr. Martin claims that Mr. Martin remains unpaid on the promissory note, as modified, under which the Company purchased the Horizon. The note balance is 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 (see Note 4). The Company continues to dispute the amount claimed due. As well, the Company’s legal position remains that the indebtedness should be discharged due to material misrepresentations by Mr. Martin in the original transaction.
In August 2021, in a matter relating to Horizon, Rob 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 was owed under his employment contract with the Company as President of Horizon. In October 2021, the Company filed its answer denying such claims. In October 2021, the Company also filed counterclaims against Mr. Porter for conversion and breach of fiduciary duties. The Company believes this is a frivolous lawsuit and as such, no accrual has been recorded as of March 31, 2023, and December 31, 2022. As of the date of this Report, a pre-trial scheduling conference was scheduled for June 21, 2023, and the Company was participating in discovery.
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. On January 19, 2022, the Company filed answers to all three lawsuits that denied these claims. The Company believes these are frivolous lawsuits. In July 2022, the Company and Mr. Morse settled his claims against the Company. The settlement included the cash payment of $24,375 for Mr. Morse's claimed 37,500 shares of Class A Common stock, and subsequently Mr. Morse’s case has been dismissed. Subsequently, Mr. Hobbs and Mr. Karraker have also expressed interest in settling claims on similar terms, and negotiations were ongoing as of the date of this Report. As no formal settlement offer has been extended, no accrual has been recorded as of March 31, 2023, and December 31, 2022.
In June 2022, in a matter relating to the Company’s subsidiaries, DTI Services Limited Liability Company and Direct Tech Sales, LLC (doing business as RCA Commercial Electronics) (“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. RCA has answered the complaint and asserted counterclaims of fraud and breach of contract. After a long delay in prosecution of the case by the plaintiff Gatehouse, motion practice has begun in this matter, however no scheduling, hearings, or trial date has yet been set in this matter.
In November 2022, the Company received a complaint filed by Mr. Mark Bell in the district court of Idaho (CV42-22-4066) with regard to the Company’s February 2020 purchase of Excel Fabrication LLC (“Excel”) from Mr. Bell, over the Company’s refusal to continue paying on a $2.3 million note comprising part of the purchase consideration (Note 4). In December 2022 the Company counter-sued Mr. Bell for breach of contract, fraud, and misrepresentation in the February 2020 sale of Excel to the Company. The case is set for trial in June of 2024.
In December 2022, the Company’s subsidiary Excel Fabrication LLC (“Excel”) received a demand for binding arbitration (AAA Case No. 01-22-0004-9935) by Starr Corporation of Idaho, a contractor for whom Excel Fabrication LLC was performing as sub-contractor and who stopped its work for Starr Corporation pursuant to its claimed contract right of termination due to failure of Starr Corporation to make payment within the contracted period for payment for work satisfactorily performed. Starr Corporation claims that Excel’s termination was wrongful, and seeks approximately $0.5 million, reflecting its costs in having to complete work that was called for under the contract. Excel is seeking a determination that its termination was rightful under the terms of the contract between the parties, and in addition seeks payment on its unpaid billing submittals and additional costs. Arbitration hearings are scheduled to commence in April 2024. As no formal settlement offer has been extended, no accrual has been recorded as of March 31, 2023, and December 31, 2022.
In February 2023, the Company learned that a complaint the State of New York brought against Vayu in 2019 (prior to the Company’s ownership of Vayu) seeking a refund for two returned airframes, a case which had originally been dismissed for lack of jurisdiction, had become revived by virtue of New York’s highest court ruling (State of New York v Vayu, APL-2021-00148) that the State’s long arm statute applied to the 2016 transaction between Vayu and the State University of New York at Stonybrook. Total damages sought by the State of New York are less than $100,000, including interest and costs. In light of the decision by the Court of Appeals to return the case to the trial courts for adjudication, the Company has expressed its wish to settle the matter and is currently awaiting the State of New York's response to the Company's response including the possibility of the State providing information useful to the Company should it wish to subsequently seek redress from the previous owners of Vayu.
Note 8 – Subsequent Events
In April 2023, a shareholder converted 1,300,000 shares of Class B common stock and 1 share of Series B preferred stock into 1,300,001 shares of Class A common stock.
On May 12, 2023, a Certificate of Amendment was filed to effect a one-for-eight (1-for-8) reverse split (the “Reverse Split”) of the shares of the Company’s the Class A, Class B, and Class C Common Stock, and to decrease the number of shares of Class A Common Stock from 295,000,000 shares to 200,000,000 shares (the “Class A Common Stock Decrease”). The Reverse Split and the Class A Common Stock Decrease became effective on May 12, 2023. As a result of the Reverse Split, every eight shares of the Company’s issued and outstanding Class A Common Stock automatically converted into one share of Class A Common Stock, without any change in the par value per share, and began trading on a post-split basis under the Company’s existing trading symbol, “ALPP,” when the market opened on May 15, 2023. Additionally, every eight shares of the Company’s issued and outstanding Class B Common Stock automatically converted into one share of Class B Common Stock, without any change in the par value per share, and every eight shares of the Company’s issued and outstanding Class C Common Stock automatically converted into one share of Class C Common Stock, without any change in the par value per share. The Reverse Split affected all holders of Class A, Class B, and Class C Common Stock uniformly and did not affect any common stockholder’s percentage ownership interest in the Company, except for de minimis changes as a result of the elimination of fractional shares. A total of 180,037,350 shares of Class A Common Stock were issued and outstanding immediately prior to the Reverse Split, and approximately 22,504,669 shares of common stock were issued and outstanding immediately after the Reverse Split. No fractional shares will be outstanding following the Reverse Split. Any holder who would have received a fractional share of common stock will automatically be entitled to receive an additional fraction of a share of common stock to round up to the next whole share. In addition, effective as of the same time as the Reverse Split, proportionate adjustments were made to all then-outstanding options and warrants with respect to the number of shares of Class A Common Stock subject to such options or warrants and the exercise prices thereof.
In May 2023, Mr. Kevin Thomas, who sold Alternative Laboratories, LLC to the Company in May of 2021, sued the Company in the State circuit court for Collier County Florida (Case Number 23-CA-1981), alleging that the Company failed to deliver shares in the Company as promised by the terms of the purchase agreement, and additionally claims that with respect to an amount of $610,000 in Employee Retention Credits received by the Company, that portion representing the credit attributed to the 1st quarterly period of 2021 and the part of the 2nd quarterly period of 2021 prior to the May 4th, 2021 date of sale, should be remitted to him rather than retained by the Company. The Company believes that Mr. Thomas’
complaint is wholly without merit, and the Company is in the process of answering the complaint and considering possible motions and counterclaims.
In May 2023, the RCA licensing agreement was amended and extended with a new expiration date of December 31, 2027 except for the agreement relating to Computer Monitors & Outdoor Televisions which expires on December 31, 2025. DTI Services LLC agreed to pay the following royalty fees ranging from 2.50% - 3.50% of net sales based on product type with a total minimum annual payment of $550,000 for the year ended 2023, and $600,000 for the year ended 2024, $620,000 for the year ended 2025, $660,000 for the year ended 2026, and $700,000 for the year ended 2027.
In May 2023, the Company issued a nine-month $0.2 million note payable to an outside investor with an annual interest rate of 15%, with the proceeds to be used for general corporate purposes.
In May 2023, the Company issued a one-year $0.4 million convertible note payable to an outside investor with an annual interest rate of 12% with the proceeds to be used for general corporate purposes. In connection with this convertible note payable, the Company issued 13,750 restricted shares of Class A Common Stock to the investor as additional consideration for the purchase of the note and 196,250 restricted shares of Class A Common Stock, which shall be returned to the Company if timely repayments are made against the note.
Morris had a revolving line of credit totaling $2.5 million that was scheduled to expire on May 31, 2023. In June 2023, Morris entered into a Forbearance agreement with its banking partner that extended the maturity of the line of credit to July 21, 2023.
In June 2023, Quality Circuit Assembly entered into the third amendment on its loan and security agreement that increased the maximum limit to $7 million from $5 million.