Today’s article is the first in a three-part series discussing the evolution of how ALPP has raised capital and how it may in the future. The three phases I’ve broken it down into for ALPP are the pre-2021 phase, the current 2021 phase, and lastly the future stage. I wrote a similar series to this for AITX, so I will be using some of the same general educational material to help explain. So, to my AITX readers, feel free to skip over some sections!
For today’s article then, let’s get into the relatively near-term history of ALPP’s raising of capital back when it was a much smaller company. I’ll first go through how most early-stage companies on the OTC raise capital, and then we’ll get into how ALPP did it.
Early-Stage Capital Raising in General
In general, most OTC’s go through two early-stage phases, let’s call them Phase 1 and Phase 2.
Phase 1 is when a company is borderline un-investable. These are those companies where you feel like 90% of them are scams, there isn’t really much of a business yet, likely no revenue, they could be a shell, etc. Phase 2 is when a company exits Phase 1 and it has more of a business model, growing revenues, a clear plan, etc. However, it is still hampered by any toxic financing it raised during Phase 1. It therefore still has more limited options.
In general, though, you see the same sorts of financing options in Phase 1 and Phase 2, but with Phase 2 bringing the company more favorable terms and with more risk placed on the investors. In general, think Phase 1 is where investors are trying to bleed a company and are just hoping the company survives six months. Phase 2, however, is where you start getting more long-term partners who have a more vested interest in the company’s success.
With that in mind, the most common methods of raising capital are as follows.
Say I own a company trading at 0.02 per share and I want to raise money. I reach out to accredited investors and ask for a 1m loan at 25% interest annually, for 3 years. But that’s still not a good enough deal because I’m in such an early phase! So, I add in the following, you can convert any owed principal and interest into common stock at 0.002 per share. This conversion may have a time limit, could be whenever, or could be at the discretion of the company (not usually).
The company is getting hammered on the conversion price. That conversion price is well below the current trading price. But the company needs money or it’s going under. So, they don’t really have a choice. Would they rather have a crummy deal and some money to stay afloat for 6 months, or to go under? Who knows, maybe we’ll become more successful and can pay off the debt! Worst case, we issue more shares, our stock price goes down, and I dilute my ownership, but the company lives.
From the investor’s perspective, the conversion makes sense. But why the debt in the first place? Why not just purchase share at a cheaper price to the market price? One reason: priority of claims under liquidation. Investors think there’s a high chance this company goes bankrupt before the principal is due.
As a debt holder, your claim on your unpaid debt principal and interest comes before common and preferred shareholders. You likely won’t get all of your money back, but you’d get much more than if you had only owned shares. You’d be down in the pit with all of the pumpers on Twitter trying to get two cents on the dollar back in liquidation. Debt holders then need to be very strategic about when they convert and convert only when you know for certain you can sell your shares at a hefty profit and not get caught holding the bag.
This is where a company sells a call option where they pay the company, for example, 1m. I give them the transferable option to purchase shares at 0.07, while currently the stock is trading at 0.03. The investors only make money when the company performs better. We also get cash for the shares if they’re exercised. If we languish or don’t make it, the investor is out the cash. If we do make it big, the investor makes it big. But who cares, we’re all rich!
Convertible Preferred Shares
Imagine the above scenario with convertible debt/notes, but this time, the investor doesn’t have claims in liquidation. The investor is then allowed to convert their preferred shares after certain time periods are up, milestones are achieved, or sometimes whenever. This transfers more risk to the preferred shareholder, but they have much more of a vested interest in the company succeeding as they don’t have liquidation rights. It works in a very similar way to a warrant, but they are more complex and can have more specialized terms.
One-Off Common Stock Sales
Another method is one-off sales of common stock to individual investors and service providers. These are costly and inefficient, but many times companies will sell varying amounts of stock to accredited investors off the street. These could be for a few thousand dollars to help make payroll that month, or for more. The most common use of this method is to issue common stock in return for services, pay employees in lieu of cash, etc. Need to pay your accountant, give them stock!
Just to be clear, these aren’t shelf registrations with the SEC, large capital funding rounds, etc. This are small time sales/issuances.
Traditional Non-Convertible Debt
This is much less common at this stage, but some companies are able to get straight, non-convertible debt, at a somewhat reasonable interest rate. These typically have terms around two years, with the idea being that the company will be able to pay it off by then.
What did ALPP Do?
After reading a few 10K’s and 10Q’s from ALPP, the many ways they raised capital were actually quite clever and unique. They pretty much raised capital using every method you can imagine, including many of the ones I mentioned above. Just note, I didn’t go further back than 2018 because at this point, it really isn’t relevant anymore.
To cite the large examples…
During FY 2018 ALPP was able to secure around 5.5m in funding through traditional debt. Why were they able to do that when most OTC’s were using the funky methods I outlined above? By FY 2018, ALPP was in the unique position where it was already the owner of asset intensive manufacturing companies and was actually generating some cash flow, albeit not book profits.
As a lender, you have a skewed way of assessing the risk of a company versus a traditional common stock investor. You don’t necessarily care of a company is going to become the next big thing. You really just care if they’re going to be able to service their debt load over the term of the debt. If they can’t service their debt, you then care about what assets you can seize. For example, ALPP mentions they secured their loans against equipment, inventory, customer contracts, and IP they owned.
In this case, ALPP was not profitable, but it had enough assets and cash flow on hand where debt holders deemed the company as a lend-able (if that’s a word). This was extremely beneficial to the company as they were able to raise capital in a relatively inexpensive manner.
Sale and Leaseback (“SL”) Transactions
This was probably one of the more fascinating things I’ve seen in the OTC. In FY 2019, when ALPP purchased Deluxe and Morris, they entered into something called a leaseback transaction with third party investors.
The way it worked was, using Deluxe as the example, ALPP purchased Deluxe for around 3.5m, which consisted of 1.1m in cash and 2.4m in debt. The 2.4m is where ALPP agreed to pay that amount over a prolonged period growing at some interest rate.
As part of the Deluxe acquisition, ALPP assumed the ownership of certain property, plants, and equipment (“PPE”), as well as any debt Deluxe already owed. See below:
Simultaneously with purchasing Deluxe, ALPP sold some of the PPE they had just purchased from Deluxe in what’s called an SL transaction. ALPP received about 9m in cash in exchange for the building, and also agreed to lease the building back from the buyer for 15 years, with rent growing at some rate.
It’s actually a quite clever way to raise money, but very risky. Notice how ALPP assumed significant debt from Deluxe in the form of notes payable. ALPP still owed that money and now they also have a hefty lease obligation to pay. But they then had some relatively significant capital to work with to expand the business, etc.
Risky, but sort of clever, right?
ALPP proceeded to do this when it acquired not only Deluxe, but Excel and Morris, for example, and raised about 12m in 2019 this way and 2m in 2020.
ALPP did not escape this bane of many OTC’s and did issue some convertible notes. However, most of this was pre-2018. For example, the acquisition of QCA was paid for using about 1.6m in convertible debt. By 2020, ALPP had stopped issuing new convertible debt for the most part, but they did do some damage. For example, in 2018, ALPP had to issue 68m in common shares due to convertible notes. This, along with some smaller issuances, increased the Class A share count from about 26m at 12/31/2018 to about 100m at 12/31/2019.
I’ll get into it in my next article, but by early 2021 ALPP mostly cleared these from their balance sheet.
Convertible Preferred Shares
Lastly, to fund the acquisitions of Impossible Aerospace and Vayu. The previous owners of Impossible Aersospace and Vayu received the C Series and D Series preferred shares, respectively, which allowed them an option to convert their preferred shares to common shares.
Series C, for example, was issued at a value of around 6m and was ultimately converted into about 2.5m common shares in November 2021 at an approximate value of 7m using a 3.0 share price (an approximate market price per share for that month.)
So not too bad of a hit to the common shareholders, but not ideal.
To be quite honest, as someone without a long position in ALPP at this time, I thought ALPP did a pretty good job raising capital during these early phases. You can see some absolute nightmare level capital raising going on in some companies where the stock dilution achieves absolutely nothing, and the money is squandered.
But in ALPP’s case, while the business didn’t really take off until late 2020/early 2021, it didn’t completely sandbag the common shareholders like it does in so many companies who reach some level of moderate success. They did have to use the usual suspects of tricky capital raising like convertible debt to get the business going. But money doesn’t just fall from the sky, and they were quite frankly a very risky company back then. So, it wasn’t exactly out of left field that they decided to use some convertible debt.
All of that being said, ALPP hit the figurative jackpot late in 2020 and early 2021 with its share price increase, which I’ll get into in the next article. Because of this, I don’t know if the dilution, etc. would have gotten more toxic over time. But at the end of the day that doesn’t matter because the days of small-time OTC capital raising are over…
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I DO NOT HAVE A FINANCIAL INTEREST, LONG OR SHORT, IN $ALPP. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. AT THE TIME OF WRITING THIS ARTICLE, PERSONS AFFILIATED WITH THE COMPANY ANALYZED ABOVE MAY BE PROVIDING MONETARY COMPENSATION AS MONTHLY PATRONS THROUGH MY PATREON. THIS COMPENSATION IS NOT PROVIDED IN RETURN FOR ANY SERVICE, WRITING ABOUT A PARTICULAR TOPIC, AND/OR FAVORABLE OR UNFAVORABLE OPINIONS. MY PATREON SUPPORTERS HAVE NO INFLUENCE ON THE CONTENT OF MY ARTICLES.