Today’s article will be the second part in the three-part series going through how ALPP has raised capital and likely will raise capital in the future. If you haven’t checked out part one yet, it may provide more context and I recommend reading that first.
Part two of this series will be covering the FY 2021 period where we saw a dramatic shift in ALPP’s popularity and share price. Because of this, ALPP took full advantage of the circumstances and completely recapitalized their company. This was through new shares issuances, or dilution as people like to call it. ALPP then used these proceeds to pay down most of their debt and acquire new companies.
This article will therefore give a brief introduction into what dilution is and then get into how ALPP recapitalized their company through dilution for the benefit of shareholders (in my opinion).
Setting the Stage
Just to give you some context, ALPP was no stranger to the great OTC hype of late 2020 and early 2021. From 12/4/2020 to 2/5/2021, ALPP’s share price increased by more than 1,500% due to the general OTC hype, as well as the acquisitions of Vayu and Impossible Aerospace which added to the hype. For a short period of time, the company’s market cap even eclipsed 1bn.
Was all of this hype and that valuation justified? Probably not. However, ALPP wasted no time with the newfound success their share price had found and immediately worked to sell new shares of the company in exchange for cash. At the end of the day, ALPP raised about 54m in cash by selling about 9.8m common shares, representing about 7% of the company’s Class A common stock.
Now that this period is done and dusted, what we need to ask ourselves then is: Was this dilution bad? What did it accomplish for the company? Did ALPP do a good job? To answer this, we’ll first need to get into a brief explanation of the effect of dilution and why it isn’t always bad (despite what angry redditors might say).
Dilution
The Basics
At the core of it, share dilution is when a company issues (sells) news shares of its common stock in exchange for cash, services, or assets (an acquisition). Say I want to start a hotdog stand; but there’s one problem… I have no money. What do I do?
First, you can’t have a company until you incorporate, so I use my last dollars to hire an attorney and I am now the 100% owner of Sam’s Hot Dogs with 100 common shares.
Now that I have my company, now I need some money to build the business. The first thing I do is try to find someone to loan me the money. I have no assets, no income, nothing as collateral. And I’m not even making money yet.
What’s my next option? The most common option is to bring someone in as a partner in exchange for some seed capital. My grandma always believed in me, but she’s a wily investor. I need the money, and she knows that she could make a lot of money on this investment. So, I negotiate a price with her for her to buy an additional 50 shares from me, leaving me with 66% ownership (100/150).
Just a note for the angry redditors once again. They seem to think money just falls from the sky and companies should be able to just reach into their magic pot of gold to fund a company. Every amount of capital raised has some cost to a company and current shareholders. But it every single time a company raises capital through dilution, for example, it isn’t a bad thing to investors.
With that being said, let’s set this up into good versus bad dilution.
Good Dilution
This will seem a bit self-explanatory, but good dilution would be Sam selling off a portion of a company at a value he thinks the future company is worth today, or even at a better price. Say he thinks the company is worth 100 dollars considering his big ideas, business plans, future profits, etc. all discounted back to today. He then thinks, okay, 33% of my investment grandma wants to buy is 33% of 100 dollars, so 33 dollars.
Much to my surprise, she agrees to my price per share! She gives me 33 dollars for a 33% stake, and in doing so I dilute my share ownership by issuing 50 new shares in exchange for 33 dollars. The price was fair in my opinion, so technically I am right back where I was before, but now with seed capital.
Sure, I could pick up loose change for 20 years until I scrape together enough money to build my first Hot Dog Stand, but realistically this company doesn’t exist without grandma. Would I rather have a 66% stake in a company that makes lots of money, or a 100% stake in a company that is an utter failure?
This is good dilution in a nutshell. Everyone wins. If the company bombs, it bombs, it’s part of doing business. Grandma and I knew what the risks were. If that’s good dilution, then what’s bad dilution?
Bad Dilution
Using my same example above, I’m going to go through some examples of bad dilution and how it many times becomes a death spiral.
Let’s say grandma will only give me ten dollars for a 33% stake. But I am desperate to put this idea into action and I can’t wait much longer to get started because I already owe attorney fees, I have to pay my accountant, and pay myself of course. Also, I’m having trouble convincing other investors that my idea is a winner. At least with the ten dollars I can buy the absolute bare minimum to get the worst hot dog stand in the history of mankind. It’s going to be ugly, but by God I’m going to make it work.
So, I cave and sell her a 33% stake for ten dollars and issue 50 new common shares. This is the most basic case of bad dilution. What it means is that shares were issued at a poor return to the current shareholders. The current investors, only Sam in this case, is now left “worse off”.
Here is where a death spiral starts for many, but not all, companies that dilute…
Well, it turns out that ten dollars didn’t go very far, all I did was pay off some administrative fees and was only able to get half of the equipment I need for the hot dog stand. Seems like I should have held out for a better deal, right? But how could I? I had my accountant and attorney sending me collections notices. I did what I had to do to keep the ship sailing!
It’s okay, I know my idea is still great, but now I need more cash. I convinced grandma to buy 50 shares for ten dollars, maybe I can convince someone to buy 200 shares for 20 dollars. I’m diluting, but hey my dream is coming alive. And maybe I’ll even be able to pay my rent from those 20 dollars of capital. So, not only was I getting a terrible deal for my new shares, but I also couldn’t even invest it back into the business properly. And on and on it goes…
Good vs. Bad Dilution Investor’s Perspective
The key for investors when it comes to dilution then is two-fold. First, is the company (mostly) able to raise capital at a price to the current shareholders that you think is fair? Second, is the company effectively reinvesting the money? If you answer “yes” to both of those questions, then you have likely drastically increased your probability of investing in a winner. Remember, going from a probability of 0.001% to 1%, for example, is still a drastic increase!
Your primary risk then becomes, does the product, service, etc. work, or does it not work? It stops becoming as much of a financial issue as it does become a question of “Does the business model make sense to me?” If you answer “yes” to that, then you should get excited about the company. Again, it doesn’t mean it will be a winner, but you should only invest in something you personally believe in.
Now that we have the baseline of good vs. bad dilution, let’s get into ALPP.
ALPP’s 2021 Capital Raising – February Share Sales
Funding Raised
To recap from above, ALPP raised about 54m in cash by selling about 9.8m common shares, representing about 7% of the company’s Class A common stock. This was as part of a rapid funding raise which was announced and completed within a month. These took the form of two simultaneous funding rounds:
- 45m in net proceeds in return for 8.3m common shares. After fees, this was approximately 5.42 per share.
- 9.3m in net proceeds in return for 1.5m common shares. After fees, this was approximately 6.12 per share.
- When combined, this is about 54.3m at a price of 5.54 per share.
Let’s put this into perspective.
As of the end of December 2021, ALPP has about 151m shares outstanding and is trading at around 1.89 per share. This brings us to a market cap of around 300m. So about 10 months ago, ALPP was able to raise capital at 5.54 per share, which is 193% higher than where the market is currently valuing ALPP.
The above paragraph should evoke some sort of thought that is different for each reader and likely speak for itself…
At the end of the day though, factually ALPP got an absolute steal from this funding round when compared to where the company is trading today, and it did wonders for the company. As a bystander without skin the game, I will credit the CEO of ALPP for working as quickly as he did to secure this level of funding at, quite honestly, and unrealistic price for the company. Obviously, the investors who bought into the company at those prices are likely unhappy with their timing of purchases, but that doesn’t mean it wasn’t a good long-term investment.
But I cannot in my right mind understand how anyone could think that this round of dilution was a bad thing for the company.
But let’s remember…it’s great that the CEO achieved this impressive funding. But what did they actually do with it?
How was it Reinvested?
ALPP also wasted no time in deploying this injection of capital. This took three forms: cleaning up the balance sheet, acquisitions, and funding the business.
From a balance sheet perspective, you’ll recall from my prior article that ALPP had a fair amount of debt on the books, including some toxic convertible debt. Shortly after this funding round, ALPP allocated $12m to pay down approximately half of its debt, including all of its toxic debt that hadn’t already been converted. This provided ALPP with some much-needed breathing room and flexibility as the company was not, and still is not, profitable nor generating positive operating cash flow.
From an acquisition perspective (and we’ll get to the Series C, Series D, and common stock issued for acquisitions down below), ALPP used about 16.8m in cash on acquisitions as of Q3 2021. This was TDI for 6.3m in cash and Alt Labs for 10.5m in cash, again excluding equity compensation.
If you’ve done your back of the napkin math, that’s about 12m for debt and 16.8m for acquisitions at a total of 28.8m. Where did the rest of the 54m go?
Remember I mentioned ALPP is not profitable nor cash flow positive? So, you can guess where the majority of the rest of the money went. For the nine months ended 9/30/2021, ALPP had a negative cash flow of $21m from operations. This was mostly from a large uptick in their accounts receivable and an increase in inventories, as well as just the general funding of the business as they were in losses. Much of that cash burn was temporary as they were folding in new acquisitions, etc., so I wouldn’t expect that to continue.
So, what did ALPP get at the end of the day? They cleaned up their balance sheet, invested in some new acquisitions, and were able to smoothly operate the business at a tricky early phase when acquisitions were being on boarded. Not too bad then.
ALPP Capital Raising – D Series, and Common Stock Dilution for Acquisitions
I alluded to it above, but ALPP also diluted through some convertible preferred stock and common stock issuances to help fund acquisitions. They were:
- Vayu: D Series preferred stock valued at 6.6m
- TDI: Shares of Class A common stock valued at 1.1m
- Alt Labs: Shares of Class A common stock valued at 1.4m
So in lieu of cash, ALPP funded many of their acquisitions partially through equity issuances. TDI and Alt Labs were through straight common stock issuances, whereas Vayu was through a convertible instrument that ultimately resulted in a bit over 1m common shares being issued on 11/1/2021.
I can’t get into these too much in this article because I could write separate articles for each of these acquisitions. But just know that ALPP, from 12/31/2020 until 9/30/2021, has increased the outstanding Class A common share count from about 126m to 146m, with Class B and Class C decreasing by about 2m in total.
Other than the 54m in capital raised, this funded the three acquisitions above as well as one convertible debt conversion.
Final Note – November Common Share Issuances
In November 2021, ALPP did one more equity funding round to raise 24m in return for 8.6m common shares and warrants to purchase 4.3m common shares. As this move has not hit a regulatory filing yet (it will be reflected in the next 10k) and it is more difficult to see exactly where the cash went (but likely it was used to purchase Elecjet and RCA). In the meantime, I will hold off on analyzing in this article and it will be its own article.
How did ALPP do through 9/30/2021
On the 54m offering, ALPP did outstanding in my opinion raising that capital as quickly as they did and at that price. Despite what some people who bought at the peak might say, that was obviously not a fair valuation for the company back then. It might be one day, but it wasn’t in February 2021.
If anything, the 54m capital raise actually helped keep the share price where it is today due to the reinvestment it achieved. Imagine if the stock price rocketed like that and the company did absolutely nothing in terms of fundraising. ALPP was able to really stabilize the business and acquire some companies which (they hope) will perform for current shareholders.
On the acquisition front, the dilution was relatively minor, and to be quite frank I must leave that up to the reader for now to decide on ALPP’s performance. We haven’t had enough time yet to measure the impact of those three companies and determine their profitability. For a company like Vayu, given its “Driver” status, it might be years before we see any profitability impact.
I will need to come back to the acquisitions in the coming months as we get more info on performance. In general, especially with shares issued for acquisitions, we don’t have a ton of information on the acquired companies. So, a lot of it comes down to trust in management. If you trust ALPP’s management, then you sort of have to “trust” that the dilution was good dilution. Only after months or even years can we assess its true impact.
So, was this good or bad dilution? The 54m in my opinion was absolutely good dilution. For the acquisitions, it’s too soon to tell. In general, though, ALPP made a ton of progress this year with relatively minimal dilution and I think shareholders should take solace in that.
Hopefully this was helpful in explaining how ALPP raised capital and it gave you some tools in assessing how ALPP diluted and whether or not you think it was beneficial to current shareholders.
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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.
