ALPP Alpine 4 Holdings Inc (CE)

NOTES TO FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

Note 1 – Organization and Basis of Presentation

Alternative Laboratories, LLC (the “Company,” “we,” or “our”), was incorporated under the laws of the State of Delaware on November 4, 2009.  The Company operates as a contract manufacturer of dietary and nutritional supplements.

Basis of presentation

The accompanying financial statements present the balance sheets, statements of operations, changes in member’s equity 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”).

Note 2 - Summary of Significant Accounting Policies

Use of estimates

The 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. On an ongoing basis, the Company reviews its estimates, including, but not limited to, those related to inventory valuation and obsolescence, estimated useful lives of property and equipment, impairment of assets and loss contingencies. 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 and cash equivalents

Cash and cash equivalents consist of cash and short-term investments with original maturities of less than 90 days. As of December 31, 2020 and 2019, the Company had no cash equivalents. Periodically, the Company may carry cash balances at financial institutions in excess of the federally insured limit of $250,000. The amount in excess of the FDIC insurance at December 31, 2020 and 2019 was approximately $1,268,000 and $2,948,000, respectively. The Company has not experienced losses on these accounts and management believes, based upon the quality of the financial institutions, that the credit risk with regard to these deposits is not significant.

Major Customers

For the years ended December 31, 2020 and 2019, the Company had two customers that made up 86% and 80% of total revenues, respectively.  These two customers made up 78% and 89% of accounts receivable as of December 31, 2020 and 2019, respectively.

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:

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Alternative Laboratories, LLC

NOTES TO FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

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, and notes payable. 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.

As of December 31, 2020 and 2019, the Company has no financial assets or liabilities that are required to be fair valued on a recurring basis.

Accounts Receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.  As of December 31, 2020 and 2019, allowance for bad debt was $6,766 and $19,591, respectively.

Inventory

Inventory is valued at the lower of cost or net realizable value, cost being determined using the weighted average method. 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, net at December 31, 2020 and 2019 consists of:

Long-lived Assets

We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. We did not recognize any impairment losses during the years ended December 31, 2020 and 2019.

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Alternative Laboratories, LLC

NOTES TO FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the assets, which range from five years to 15 years as follows:

Maintenance and repair costs are charged to expense as incurred.  Significant improvements or betterments are capitalized and depreciated over the remaining life of the related asset.

Property and equipment consisted of the following as of December 31, 2020 and 2019:

Depreciation expense for the years ended December 31, 2021 and 2020 amounted to $556,761 and $209,824, respectively, of which $266,966 and $166,788 are reported in cost of goods sold. During the year December 31, 2020 the Company sold equipment for proceeds of $803,389 which resulted in a gain of $647,787.

In August of 2020, the Company ceased occupying the Naples lease (see Note 6) and wrote off leasehold improvements of $147,822.

Income Taxes

A limited liability company is a flow through entity for income tax purposes and as such earnings or losses flow through to the members income tax returns. Accordingly, the Company does not incur income tax obligations and the financial statements do not include a provision for income taxes.

Revenue Recognition

On January 1, 2019, the Company adopted ASC Topic 606, Revenue from Contracts with Customers using the modified retrospective method applied to those contracts which were not completed as of January 1, 2019.  This adoption did not materially impact the financial statements.

Revenue is recognized under Topic 606 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:

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Alternative Laboratories, LLC

NOTES TO FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

·contracts with the Company’s customers in the form of purchase orders, supply agreements and documented master formula sign off sheets; 

·identification of performance obligations in the respective contract; 

·determination of the transaction price for each performance obligation in the respective contract; 

·allocation the transaction price to each performance obligation; and 

·recognition of revenue only when the Company satisfies each performance obligation.  

The Company recognizes revenues for finished goods at the time the goods are shipped. Included in the revenues recognized at the time the finished goods are shipped are fees for potency testing, microbiological testing, reimbursement for shipping costs when paid by the Company, and other miscellaneous fees associated with the finished goods. The Company has the right to payment for the goods when the order ships from the warehouse, at this control of the goods transfers to the customer.

Typically, a fifty percent deposit for the contractual obligation is required from the customer prior to activating the order in the system. These deposits are held on the balance sheet in the contract liability account. This liability account is reduced and applied to invoices once the product to which the deposit relates is shipped. As of December 31, 2020 and 2019, the Company had customer deposits totaling $1,727,684 and $27,269, respectively.

Related Parties

The Company has historically engaged in and may continue to engage in certain business transactions with related parties (See Note 3). Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in best interest of our company.

Leases

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)” in February 2016 and subsequently issued related ASUs in 2018 and 2019 (collectively, “ASC 842”). ASC 842 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than 12 months.  The Company adopted ASC 842 on January 1, 2019. As part of the adoption, the Company elected to utilize the package of practical expedients included in ASC 842, which permitted the Company to not reassess (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) the initial direct costs for existing leases. The Company also elected the short-term lease recognition exemption for leases with terms of 12 months or less. This adoption did not have a material impact on the Company’s financial statements as the Company’s leases are either less than 12 months or effectively on a month to month basis.

Research and Development Costs

The Company focuses on quality control and development of new science-based products and the improvement of existing products. All cost related to research and development activities are expensed as incurred.

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in ASC 350, Intangibles - Goodwill and Other. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after

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Alternative Laboratories, LLC

NOTES TO FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures.

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– Related Party Transactions

On April 8, 2019, the Company entered into a lease agreement for its manufacturing and warehouse facility located in Ft. Meyers, Florida. The property is owned by the former owner of the Company. The Company is obligated to pay $150,000 per annum or through the point in time when the tenant and landlord are no longer jointly owned.

As of December 31, 2020 the Company owed $50,255 to the former owner for earned wages in 2020 subsequently paid in January 2021 and $12,500 for December 2020 rent paid in April 2021.

In March 2019, the Company entered into an oral agreement with Latitude 26 Builder, a company owned by a family member of the former owner of the Company, for the buildout of the manufacturing and warehouse facility located in Ft. Meyers, Florida. In 2020 and 2019 the Company paid $1,128,793 and $89,997, respectively in connection with the buildout. The project was completed in March 2020. There were no amounts owed to Latitude 26 Builder as of December 31, 2020 and 2019.

Note 4– Notes Payable

In November 2013, the Company entered into a loan agreement with Linwood Holdings LLC, a related party, in the amount of $357,275, that is secured by certain assets of the Company. The note bears interest at a rate of 5% per annum and matured on November 15, 2015. Payment of principal and interest is due at maturity. The loan was fully paid on October 21, 2020.

In April 2020, the Company received a loan under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act totaling $849,793.  The loan has a term of 24 months and accrue interest at 1% per annum.  The Company has the option for some or all of these loans to be forgiven as provided in the CARES Act. Subsequent to December 31, 2020, the principal amount of $849,793 and related interest were forgiven.

In June 2020, the Company received a loan from Ascentium Capital LLC for the purposes of acquiring equipment amounting to $21,589. The loan has a term of 36 months and matures in June 2023. The loan requires monthly payments of $698 and bears interest at a rate of 10% per annum. The loan is secured by the equipment.

The outstanding balances for the above loans as of December 31, 2020 and 2019 were as follows:

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Note 5 – Member’s Equity

The Company had the following transactions in member’s equity during the years ended December 31, 2020 and 2019:

·For the year ended December 2019, cash distributions to its member totaled $5,567,806. 

·For the year ended December 2019, the Company wrote off $100,000 in accounts payable owed to the former owner which was recognized as contributed capital. 

·For the year ended December 2020, cash distributions to its member totaled $8,589,700. 

Note 6 – Commitments and Contingencies

Leases

The Company entered into a lease agreement with a related party for its manufacturing and warehouse facility in Ft. Meyers, Florida on April 8, 2019. The lease requires an annual payment of $150,000 and is considered a short-term lease as it does not have a set term and can be terminated at any time.

In 2019, the Company had an existing lease on its former manufacturing and warehouse facility which matured in December 2019 and was extended on a month to month basis up to April 2020, and a 12 month lease on two warehouses in Naples, Florida which ceased in November 2019.  The above leases required monthly lease payments totaling $13,917.

For the years ended December 31, 2020 and 2019, rent expense related to the Company’s leases amounted to $232,387 and $299,153, respectively.

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. The Company is currently 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.

Note 7 – Subsequent Events

The Company evaluated events occurring after December 31, 2020, and through the date the financial statements were issued, July 20, 2021 and identified the following events or transactions that require disclosure in these financial statements:

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Alternative Laboratories, LLC

NOTES TO FINANCIAL STATEMENTS

For the Years Ended December 31, 2020 and 2019

On May 4, 2021, the Company, KAI Enterprises, LLC (the Company’s sole member) and Kevin Thomas, the Company’s CEO, entered into a purchase agreement with Alpine 4 Holdings, Inc. (“Alpine”) wherein Alpine acquired all the membership interests in the Company in exchange for a cash consideration of $10 million and 361,787 shares of Alpine’s class A common stock. The Company incurred legal and broker fees of $470,000, in connection with this transaction, which were paid by Alpine.

On February 10, 2021, the Company received a PPP loan in the amount of $812,083.  The loan has a term of 24 months and accrues interest at 1% per annum.

On July 8, 2021, the Company received notice from the Small Business Administration that the PPP Loan with a principal amount of $849,793 and interest of $10,339 was forgiven.

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