ALPP - Alpine 4: Revenues And Margins Continue To Deteriorate And The Future Looks Bleak

• The company closed Q2 2022 with revenues of $25.3 million and an operating loss of $2.87 million, which is worse compared to the Q2 2021 pro forma results.
• The financial performance of Alt Labs seems particularly underwhelming as revenues were only $6.78 million.
• Cash was down to $7.4 million as of August 11, and I think that another capital raise is likely to take place in early 2023.
• I’m bearish, and the short borrow fee rate is 13.98%, but short selling could be dangerous as it takes over 16 days to cover.

Introduction

In May 2022, I wrote a bearish article on SA about holding company Alpine 4 Holdings (ALPP) in which I said that the business was far from achieving profitability and that an equity offering was likely to take place in the next few months.

Well, the company completed a $10 million direct offering in July at just $0.69 per share. In addition, the deal included warrants to purchase up to 14,492,754 shares that are exercisable at the same price. Turning our attention to the financial results, Alpine 4 was in the black in Q2 2022 but this was due to gains from the sale of property. Overall, I think that the fundamentals of the company look poor as margins are deteriorating and it's unclear if revenues for 2022 will surpass $100 million.

Overview of the recent developments

In case you haven't read any of my previous articles on Alpine 4, here's a quick description of the business. The company specializes in acquiring small market businesses that hold defensible positions in their individual market space, and it had a total of 14 operating subsidiaries as of the end of June 2022. They are grouped into five segments, namely construction services, manufacturing, defense, technologies, and aerospace.

As you can see from the table below, the majority of the revenues of Alpine 4 currently come from the technologies and manufacturing segments. The technologies segment includes graphene battery maker ElecJet and LED lighting and electronics products maker RCA Commercial Electronics, which were bought for $31.5 million in cash and shares in 2021. The manufacturing segment, in turn, is made up of nutraceuticals contract manufacturer Alt Labs and printed circuit board assembly services provider Quality Circuit Assembly.

At first glance, it seems that the revenues of Alpine 4 are growing rapidly and that the defense and technologies segments are driving an improvement in margins. However, when we compare apples to apples through the pro forma results which show the financial as if Vayu, TDI, Alt Labs, Identified Technologies, Elecjet, and RCA were acquired on January 1, 2021, we can see that the companies that make up Alpine 4 had higher sales and a much lower loss from operations a year ago.

It seems that Alpine 4 is unable to boost the revenues of the companies it has acquired in the recent past and that there aren't significant synergies between these businesses. I think that the financial performance of Alt Labs is particularly disappointing considering Alpine 4 said in May 2021 that this company had great margins and that its 2019 revenues stood at just over $40 million (at 2:48 here ). Well, Alt Labs finished Q2 with revenues of only $6.78 million and had an operating loss of $1.62 million for the period.

I also find it concerning that the gross profit margin of Alpine 4 has slumped to 26.15% for Q2 2022 from 31.46% a year earlier according to the pro forma results. And with general and administrative expenses soaring past $9 million per quarter, sustainable profitability will be hard to achieve.

In April, Alpine 4 gave a revenues guidance for 2022 of over $100 million but I doubt this target will be achieved considering Q2 revenues declined by over $2 million compared to the pro forma figures for the same period of 2021. Yet, it's worth keeping an eye on the financial performance of RCA Commercial as the second part of the year is usually stronger for this company. In Q2, RCA Commercial booked revenues of $18.1 million, and it recently launched a new solid state battery line together with Elecjet. Unfortunately, Alpine 4 hasn't given any forecasts about the sales of this new product.

Turning our attention to the balance sheet, the situation didn't look good at the end of June despite proceeds of $12.5 million from the sale of a property as cash and working capital were $4.17 million and $15.3 million, respectively. However, the situation should be significantly improved by now thanks to the $10 million direct offering in July. In addition, 1,449,276 warrants were exercised in early August which brought in another $1 million. Alpine 4 had around $7.4 million in cash as of August 11.

Overall, I think that Q2 2022 was another disappointing quarter for Alpine 4 from a financial point of view. Sales were weak, margins contracted and the loss from operations was $2.87 million. Unless the company manages to turn its business around in the near future, I think that another equity offering is likely to take place in early 2023. So far, the companies Alpine 4 acquired in 2021 aren't showing synergies or revenue growth. I'm bearish and I think it could be worth opening a small short position. According to data from Fintel , the short borrow fee rate is 13.98% as of the time of writing. However, I'm concerned that it takes more than 16 days to cover. In addition, hedging risk through call options offers little protection as the lowest available strike price here is $2.50.

Turning our attention to the risks for the bull case, I think that there are two major ones. First, I could be underestimating the prospects of Alt Labs or the new solid state battery line. It's possible that the revenues and margins of Alpine 4 show a significant improvement in the second part of 2022. Second, sometimes the share prices of microcap companies can increase for spurious and unknown reasons, and it's possible this could take place here.

Investor takeaway

Alpine 4 bought several companies in 2021 but their financial performance is failing to live up to expectations so far and I see no significant signs this could change in the near future. I think that G&A expenses are high for a business of this size, and that another equity offering is likely to take place in early 2023 as cash is down to $7.4 million.

I'm bearish and I think it could be a viable idea to open a small short position. However, it seems that a short squeeze could take place here as it takes a long time to cover so it might be best for risk-averse investors to avoid Alpine 4 for now.

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