Notes to Unaudited Consolidated Financial Statements

For the Six Months Ended June 30, 2021

Note 1 – Organization and Basis of Presentation

The unaudited consolidated financial statements were prepared by Alpine 4 Holdings, Inc. (‘we,” “our,” or the "Company"), pursuant to the rules and regulations of the Securities Exchange Commission ("SEC"). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2021. The results for the six months ended June 30, 2021, are not necessarily indicative of the results to be expected for the year ending December 31, 2021.

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

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

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

Effective February 21, 2020, the Company purchased all of the outstanding units of Excel Fabrication, LLC., an Idaho limited liability company (“Excel”).  Excel subsequently changed its name to Excel Construction Services, LLC.

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

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

On May 5, 2021, the Company acquired all of the outstanding shares of stock of Thermal Dynamics, Inc., a Delaware corporation (“TDI”).

On May 10, 2021, the Company acquired all of the outstanding membership interests of KAI Enterprises, LLC, a Florida limited liability company, the sole asset of which was all of the outstanding membership interests of Alternative Laboratories, LLC, a Delaware limited liability company (“Alt Labs”).

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

·A4 Corporate Services, LLC;  

·ALTIA, LLC;  

·Quality Circuit Assembly, Inc.;  

·Morris Sheet Metal, Corp;  

·JTD Spiral, Inc.;  

·Excel Construction Services, LLC;  

·SPECTRUMebos, Inc.;  

·Impossible Aerospace, Inc.;   

·Vayu (US); 

·Thermal Dynamics, Inc.; and 

·Alternative Laboratories, LLC. 

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Basis of presentation

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

While the Company experienced a loss for the six months ended June 30, 2021, of $9.3 million, and had a negative cash flow used in operations, there were significant non-recurring items related to the RSU purchases totaling approximately $1.8 million contributing to the loss.

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

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

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

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

Based on the capital raise as indicated above and management’s plans to improve cash flows from operations, management believes the Company has sufficient working capital to satisfy the Company’s estimated liquidity needs for the next 12 months. The Company ended the June 30, 2021, quarter with $10.5 million in cash and $1.4 million in restricted cash after the purchase of the two operating companies in May 2021. As of the date of this Report, the Company had $7.1 million in cash and $1.4 million in restricted cash. During the six months ended June 30, 2021, the Company paid down liabilities of approximately $13.0 million. In addition, approximately $3.0 million was used to build inventory and for capital expenditures.

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

Note 2 - Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as of June 30, 2021 and December 31, 2020.  Significant intercompany balances and transactions have been eliminated.

Use of estimates

The consolidated financial statements are prepared in accordance with U.S. GAAP.  Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable. In many instances, the Company could have reasonably used different accounting estimates and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. This applies in particular to useful lives of long-lived assets, valuation allowance for deferred tax assets 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

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and cash flows will be affected.  The ultimate impact from COVID-19 on the Company’s operations and financial results during 2021 will depend on, among other things, the ultimate severity and scope of the pandemic, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, and the speed with which the economy recovers. The Company is not able to fully quantify the impact that these factors will have on the Company’s financial results during 2021 and beyond.  COVID-19 did have a negative impact on the Company’s financial performance in 2020.  During the six months ended June 30, 2021, there was no impairment charge related to intangible assets and goodwill.

Cash and Restricted Cash

Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days. As of June 30, 2021, and December 31, 2020, the Company had no cash equivalents. As of June 30, 2021, and December 31, 2020, the Company had $1,400,000 and $444,845 in restricted cash, respectively, for amounts held in escrow. The $1,400,000 held in escrow as of June 30, 2021 was for the purchase of the building located at 4740 Cleveland Ft. Myers, FL, for Alt Labs (see Note 8).

The following table sets forth a reconciliation of cash, and restricted cash reported in the consolidated statements of cash flows that agrees to the total of those amounts presented in the consolidated statements of cash flows.

Major Customers

The Company had two customers that made up 13% and 12%, respectively, of accounts receivable as of June 30, 2021. The Company had two customers that made up 10% and 8%, respectively, of accounts receivable as of December 31, 2020.

For the six months ended June 30, 2021 and 2020, the Company had one customer that made up 13% and 10% of total revenues, respectively

Fair value measurements

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

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

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

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

The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, convertible notes, notes 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.

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The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates.  As of June 30, 2021 and December 31, 2020, the Company had no financial assets or liabilities that were required to be fair valued on a recurring basis.

Research and Development

The Company focuses on quality control and development of new products and the improvement of existing products. All cost related to research and development activities are expensed as incurred. During the six months ended June 30, 2021, research and development cost totaled $515,202.

Earnings (loss) per shares

The Company presents both basic and diluted net loss per share on the face of the consolidated statements of operations. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants, and using the treasury-stock method. If antidilutive, the effect of potentially dilutive shares of common stock is ignored. The only potentially dilutive securities outstanding during the periods presented were the convertible debt, options and warrants.  The following table illustrates the computation of basic and diluted earnings per share (“EPS”) for the three and six months ended June 30, 2021 and 2020:

Note 3 – Leases

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

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As of June 30, 2021, the future minimum finance and operating lease payments were as follows:

As of October 1, 2020, the American Precision Fabricators, Inc. (“APF”) building lease with Harbor Island Properties, LLC was modified, assignment was transferred to Excel Fabrication, LLC (“Excel”), and Quality Circuit Assembly, Inc. (“QCA”). As part of the modification, the lease was extended through 2037 and the payment terms were amended effective January 15, 2021. As a result of this amendment, the Company remeasured the finance lease liability and recorded an additional $279,287 to the related asset and finance lease liability on the date of the modification.

On May 3, 2021, the Company entered into a lease agreement for the building on 4740 Cleveland in Ft. Myers, Fl. The lease has a term of 72 months with monthly payments ranging from $40,833 to $49,583 from May 2021-July 2021 and $58,333 from August 2021 through the end of the term. The Company determined the lease to be an operating lease and recognized a right-of-use asset and operating lease liability of $3,689,634 based on the present value of the minimum lease payments discounted using an incremental borrowing rate of 3.96%.

At June 30, 2021 and December 31, 2020, the weighted average remaining lease terms were 5.49 and 2.98 years; respectively, and the weighted average discount rate were 11% and 15%, respectively.

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Future scheduled maturities of outstanding notes payable are as follows:

During the six months ended June 30, 2021, the Company received forgiveness on four loans under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The Company recognized a gain on forgiveness of debt of $589,282.   

In connection with the Deluxe acquisition in November 2019, the Company issued two subordinated secured promissory notes to the seller.  The first note for $1,900,000 bears interest at 4.25% per annum, require monthly payment for the first 35 months of $19,463 with any remaining principal and accrued interest due on the 3 year-anniversary.  The second note for $496,343 bore interest at 8.75% matured in January 2020 and was fully settled through a debt conversion agreement with the seller.  On April 8, 2021, the Company entered into a settlement agreement with the seller wherein the outstanding balance on the first note amounting to $1,883,418 including accrued interest and net other costs was settled in full through a payment of approximately $887,000 and the exchange of 1,617,067 shares of the Company’s Class C common shares held by the seller for the same number of shares of the Company’s Class A common stock. The Company recognized a gain on extinguishment of debt totaling $803,079 during the six months ended June 30, 2021 as a result of the settlement of the note.

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Two non-interest-bearing notes totaling $3,000 were in default as of June 30, 2021. These notes were due on demand by the lenders as of the date of this Report.

In May and June 2020 the Company amended the following seller notes:

-The convertible note with Jeff Moss with a $720,185 balance as of May 4, 2020, was amended to extend the maturity date to May 4, 2027, at 5% interest with weekly payments of $2,605.   The principal balance was increased to $798,800 and the balance outstanding at December 31, 2020, was $735,329.  

-The convertible note with Dwight Hargreaves with a $551,001 balance as of June 5, 2020, was amended to extend the maturity date to June 5, 2026, at 6% interest with weekly payments of $2,316.  The principal balance was increased to $605,464 and the balance outstanding at June 30, 2021 and December 31, 2020, was $0 and $556,135, respectively.   

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A loss on extinguishment of debt of $192,272 was recognized on these transactions in June 2020.   

During the six months ended June 30, 2021, and the year ended December 31, 2020, the Company issued convertible notes with fixed conversion prices.  The Company recognized a beneficial conversion feature related to these convertible notes amounting to $92,428 and $1,482,500 for the six months ended June 30, 2021, and the year ended December 31, 2020, respectively, as a debt discount to the convertible notes and as a component of equity.  The discounts are being amortized over the terms of the convertible notes payable.  Amortization of debt discounts during the six months ended June 30, 2021 and 2020, amounted to $1,436,052 and $370,136, respectively, and is recorded as interest expense in the accompanying consolidated statements of operations.  There was no remaining unamortized discount balance for these notes as of June 30, 2021.

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

Note 7 – Stockholders' Equity

Common Stock

The Company had the following transactions in its common stock during the six months ended June 30, 2021:

·On February 11, 2021, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors to purchase 8,333,333 shares of the Company’s Class A common stock for aggregate gross proceeds of approximately $50 million.  A.G.P./Alliance Global Partners served as the placement agent and received a cash fee of 7% of the aggregate gross proceeds and warrants to purchase shares of the Company’s Class A Common Stock equal to 5% of the number of shares sold in the offering with an exercise price of $6.60 per share and are not exercisable until August 16, 2021. Net proceeds from the sale of shares amounted to approximately $45 million.  

·In February 2021, the Company issued 1,524,064 shares of Class A common stock to an investor for cash for total proceeds of $9.3 million.   

·During the six months ended June 31, 2021, the Company issued 5,998,185 shares of Class A common stock for the conversion of total debt and accrued liabilities totaling $1,529,398.   

·repurchased 45,000 shares of Class C common stock for $185,850.  

·On May 5, 2021, the Company issued 281,223 shares of Class A common stock that were valued at $1,102,394 in connection with the acquisition of TDI. 

·On May 10, 2021, the Company issued 361,787 shares of Class A common stock that were valued at $1,432,677 in connection with the acquisition of Alt Labs. 

·On April 30, 2021, the Company issued 1,617,067 shares of Class A common stock for no additional consideration upon conversion of that number of shares of Class C common stock by the holder of the Class C common stock. 

·On May 17, 2021, the Company issued 350,000 shares of Class A common stock for no additional consideration upon conversion of that number of shares of Class B common stock by the holder of the Class B common stock. 

Preferred Stock

·On February 8, 2021, the Company issued 1,428,570 shares of Series D Preferred Stock in connection with the acquisition of assets of Vayu that were valued at $6,653,309.  

·In March 2021, the Company repurchased 514,286 outstanding restricted stock units (RSUs) which had not yet settled, from two individuals in privately negotiated transactions. The Company repurchased 314,286 shares of Series C Preferred Stock and 200,000 shares of Series D Preferred Stock at $3.50 per share. The RSUs had been issued to the individuals in connection with the IA and Vayu acquisitions. 

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The following table summarizes information about options outstanding and exercisable as of June 30, 2021: