Andover National (AANC) 10-Q2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-55882

ANDOVER NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

(786) 871-3333

(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 7, 2020, there were 1,923,382 shares of Class A Common Stock, and 81,198 shares of Class B Common Stock, outstanding.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,” “expect,” “may,” “will,” “should,” “would,” “could,” “seek,” “intend,” “plan,” “goal,” “project,” “estimate,” “anticipate,” “strategy,” “future,” “likely” or the negative thereof or other variations thereon or other comparable terminology. All statements other than statements of historical facts included in this Quarterly Report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding: expectations for revenues, cash flows and financial performance and the anticipated results of our ongoing development and business strategies.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, but are not limited to, the following:

Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. Except as required by law, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

ANDOVER NATIONAL CORPORATION

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ANDOVER NATIONAL CORPORATION

BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ANDOVER NATIONAL CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ANDOVER NATIONAL CORPORATION

STATEMENT OF EQUITY AND REDEEMABLE NONCONTROLLING INTEREST

(Unaudited)

Successor

Predecessor

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ANDOVER NATIONAL CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

ANDOVER NATIONAL CORPORATION

Notes to the Financial Statements

(Unaudited)

Note 1 – Nature of the Business

Andover National Corporation, (the “Company” or “Successor”) was organized in the State of Utah on July 11, 2007, and reincorporated on March 20, 2014. Effective February 14, 2019, the Company completed a change of domicile to Delaware from Utah (the “Reincorporation”) by means of a merger of the Company with and into the Company’s wholly-owned subsidiary, Andover National Corporation, a Delaware corporation (“Andover”).

On October 4, 2019, Andover Environmental Solutions, LLC, a wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement with Heath L. Legg, pursuant to which Andover Environmental Solutions, LLC purchased sixty percent (60%) of the membership interests of ANC Green Solutions I, LLC, a Delaware limited liability company, for $4.0 million, subject to certain adjustments (the “Business Combination”).

ANC Green Solutions I, LLC, formerly known as Legg Holdings, Inc. (“ANC Green Solutions I” or “Legg”), is an operator and franchisor of commercial and residential landscaping, lawn care and pest control services, operating under the commercial trade name Superior Services. ANC Green Solutions I’s core service offerings provide residential homeowners and commercial customers with year-round monitoring and treatment by focusing on weed and insect control, irrigation, seeding, fertilization, general landscape maintenance and installation services. Additionally, ANC Green Solutions I is a master franchisor for outdoor insect control service businesses operating independently throughout the United States.

On February 3, 2020, ANC Green Solutions - Potter’s, LLC, a wholly-owned subsidiary of the Company (“ANC Potter’s”), entered into an Asset Purchase and Contribution Agreement with Potter’s Professional Lawn Care, Inc, and its shareholders, pursuant to which ANC Potter’s purchased a sixty (60%) interest in Potter’s Professional Lawncare, Inc.’s property and assets, for $1.68 million, subject to certain adjustments. Potter’s Professional Lawn Care, Inc., a Florida corporation, is engaged in the business of commercial and residential fully-integrated lawn maintenance and landscape services including lawn care, new landscape design and installation, pest control, irrigation and arbor care.

On February 28, 2020, Smith’s Tree Care, LLC, a wholly-owned subsidiary of the Company (“Smith’s Buyer”), entered into an Asset and Equity Purchase and Contribution Agreement (the “Smith Acquisition Agreement”) with Smith’s Tree Care, Inc., a Virginia corporation (“Smith’s Seller”), Utro Crane Company, Inc., a Virginia corporation, Utro Crane Company, LLC, a Delaware limited liability company and indirect subsidiary of the Company, and ANC Green Solutions - Smith’s, LLC, a Delaware limited liability company and indirect subsidiary of the Company (“ANC Smith’s”). Pursuant to the Smith Acquisition Agreement, among other things, (a) Smith’s Buyer acquired a sixty percent (60%) interest in all of property and assets of Smith Tree Care, Inc. and Utro Crane Company, Inc, (together, the “Seller Parties”) for an aggregate purchase price of approximately $3.0 million, subject to certain adjustments and (b) Smith’s Seller conveyed, transferred, assigned and delivered to ANC Smith’s an undivided forty percent (40%) interest in the acquired assets in exchange for equity securities of ANC Smith’s. The Seller Parties are engaged in the business of commercial and residential fully-integrated tree care, tree service, tree removal, stump grinding, mulching, logging, and related services.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the period ended December 31, 2019 included in the Company’s Annual Report on Form 10-K (the “Annual Report”) filed with the SEC on March 30, 2020. The accompanying financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, the accompanying unaudited condensed consolidated financial statements for the periods presented reflect all adjustments, consisting of only normal, recurring adjustments, necessary to fairly state the Company’s financial position, results of operations and cash flows. The unaudited condensed consolidated financial statements for the interim periods are not necessarily indicative of results for the full year. The preparation of these unaudited condensed consolidated financial statements requires the Company to make estimates and judgments that affect the amounts reported in the financial statements and the accompanying notes. The Company’s actual results may differ from these estimates under different assumptions or conditions.

ANDOVER NATIONAL CORPORATION

Notes to the Financial Statements

(Unaudited)

As a result of the Business Combination, the Company is the acquirer for accounting purposes and ANC Green Solutions I is the acquiree and accounting predecessor. The Company’s financial statement presentation distinguishes the Company’s financial performance into two distinct periods, the period up to the closing date of the Business Combination (labeled “Predecessor”) and the period including and after that date (labeled “Successor”).

The Business Combination was accounted for as a business combination using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired. Determining the fair value of the assets acquired and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions. See Note 4 – Business Combinations for a discussion of the estimated fair values of assets and liabilities recorded in connection with the Company’s acquisition of ANC Green Solutions I.

As a result of the application of the acquisition method of accounting as of the closing date of the Business Combination, the accompanying consolidated financial statements include a black line division which indicates that the Predecessor and Successor reporting entities shown are presented on a different basis and are therefore, not comparable.

The historical financial information of the Company prior to the Business Combination has not been reflected in the Predecessor financial statements as these historical amounts have been determined to be not useful information to a reader of the financial statements. The operations of the Company, until the closing of a business combination, other than income from investments and general and administrative expenses, were nominal. Accordingly, no other activity in the Company was reported for periods prior to October 4, 2019 besides ANC Green Solutions I’s’ operations as Predecessor.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Management makes estimates that affect certain accounts including deferred income tax assets, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the period in which such adjustments are determined.

Principles of Consolidation

The Company’s policy is to consolidate all entities in which it has a controlling financial interest. For consolidated entities that are less than wholly owned, the third party’s holding of equity interest is presented as noncontrolling interests in the Company’s consolidated balance sheets and consolidated statement of equity and redeemable noncontrolling interest. The portion of net income (loss) attributable to the noncontrolling interests is presented as net income (loss) attributable to noncontrolling interests in the Company’s unaudited condensed consolidated statement of operations.

The accompanying Successor unaudited condensed consolidated financial statements include the accounts of Andover National Corporation and its consolidated subsidiaries, ANC Green Solutions I, ANC Potter’s and ANC Smith’s. The accompanying Predecessor consolidated financial statements include the accounts of ANC Green Solutions I and its consolidated subsidiaries, Legg Lawncare, Inc. and Legg SMS Franchising, Inc.

All material inter-company balances and transactions have been eliminated.

Redeemable Noncontrolling Interest

The Company classifies noncontrolling interests that contain an option of the noncontrolling shareholders to require the Company to purchase their interest as redeemable noncontrolling interests within mezzanine equity on the Company’s consolidated balance sheet.

ANDOVER NATIONAL CORPORATION

Notes to the Financial Statements

(Unaudited)

Concentration and credit risk

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the number of customers comprising the customer base. No customer accounted for more than 10% of total revenue for the three and six months ended June 30, 2020 and 2019.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reserves for all accounts that are deemed to be uncollectible and reviews its allowance for doubtful accounts regularly. The allowance is based on the age of receivables and a specific identification of receivables considered at risk. Account balances are written off against the allowance when the potential for recovery is considered remote.

The following table provides a roll forward of the allowance for doubtful accounts:

Property and Equipment

Property and equipment, stated at cost, are depreciated using the straight-line method over the estimated useful life of the asset, or for leasehold improvements, over the shorter of the estimated useful life or the lease term. As of June 30, 2020 and December 31, 2019, the estimated useful lives (in years) of each of the Company’s classes of property and equipment were as follows:

Fair Value Measurements

Fair value measurements are based on the premise that fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the following three-tier fair value hierarchy has been used in determining the inputs used in measuring fair value:

Level 1- Quoted prices in active markets for identical assets or liabilities on the reporting date.

Level 2- Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited)

Level 3- Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including but not limited to private and public comparables, third-party appraisals, discounted cash flow models and fund manager estimates.

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange.

As of June 30, 2020 and December 31, 2019, the recorded values of cash and cash equivalents, accounts receivable, accounts payable and notes payable, approximate the fair values due to the short-term nature of the instruments.

Recent Issued Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 also provides updated guidance regarding the impairment of available-for-sale debt securities and includes additional disclosure requirements. The new guidance is effective for public business entities that meet the definition of a Smaller Reporting Company as defined by the Securities and Exchange Commission for interim and annual periods beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies goodwill impairment testing. This new guidance is effective for public business entities that meet the definition of a Smaller Reporting Company as defined by the Securities and Exchange Commission for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

Note 3 – Revenue

The following table presents the Company’s revenue disaggregated by source:

The Company’s revenue is primarily generated from residential and commercial lawn care programs and services, which includes lawncare, landscaping and hardscaping, irrigation, and mosquito, termite and pest control services and from tree care services, which includes tree trimming service, tree removal, stump grinding, mulching, logging and related services. The Company generally recognizes revenue from the sale of services as the services are performed, which is typically ratably over the term of the contract(s), which the Company believes to be the best measure of progress. The Company recognizes revenues as it completes services to its customers in an amount reflecting the total consideration it expects to receive from the customer.

Payment terms vary by customer, but payments are generally due at the point of service. The Company incurs certain direct incremental costs to obtain contracts with customers, such as sales-related commissions, where the recognition period for the related revenue is less than one years. These costs are expensed as incurred and recorded within general and administrative expense in the consolidated statement of operations.

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited)

The Company also grants franchises to operators in exchange for an initial franchise license fee and continuing royalty payments. Franchise revenue is recognized over the license term as the Company has determined that all obligations under the franchise agreements represent a single performance obligation that is satisfied over time.

Note 4 – Business Combination (Successor)

ANC Green Solutions I

As described in Note 1, on October 4, 2019, the Company acquired sixty percent (60%) of the membership interests of ANC Green Solutions I for $4.0 million in cash, consisting of $3.5 million paid at the closing of the Business Combination and an aggregate of $0.5 million in deferred consideration to be paid on the one- and two- year anniversary of the closing of the Business Combination.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of ANC Green Solutions I (in thousands):

During the three months ended June 30, 2020, the Company made certain measurement period adjustments to accounts receivable and other current assets, property and equipment, goodwill, accounts payable and accrued expenses, and deferred cash consideration. The impact of these measurement period adjustments, both individually and in aggregate, were nominal.

The Company identified tradename and customer relationship intangible assets. The tradename and customer relationships will be amortized on a straight-line basis over its estimated useful life (see Note 6).

The goodwill recognized results from such factors as an assembled workforce and management’s industry know-how and is expected to be deductible for income tax purposes.

The acquisition-date fair value of the noncontrolling interest was determined using a market approach based on the transaction price observed in the Business Combination.

Unaudited Pro forma Financial Information

The following pro forma financial information presents the combined results of operations for the Company and gives effect to the Business Combination discussed above as if it had occurred on January 1, 2019. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the Business Combination had been completed on January 1, 2019, nor does it purport to project the results of operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration costs related to the acquired company.

For purposes of the pro forma disclosures above, the primary adjustments for the three and six months ended June 30, 2019 include amortization of intangible assets of $81,791 and $163,583, respectively.

ANDOVER NATIONAL CORPORATION

Notes to the Financial Statements

(Unaudited)

ANC Green Solutions Potter’s

As described in Note 1, on February 3, 2020, the Company acquired a 60% membership interest in ANC Potter’s for $1.68 million in cash, consisting of approximately $1.5 million paid at closing and $0.146 million in deferred consideration to be paid on the two- year anniversary of the closing of the acquisition.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of ANC Potter’s (in thousands):

The Company identified tradename, customer relationship and non-compete intangible assets. The tradename, customer relationship and non-compete intangible assets will be amortized on a straight-line basis over its estimated useful life (see Note 6).

The goodwill recognized results from such factors as an assembled workforce and management’s industry know-how and is expected to be deductible for income tax purposes.

The ANC Potter’s acquisition resulted in a redeemable noncontrolling interest, which has been classified as mezzanine equity due to the option of the noncontrolling shareholders to require the Company to purchase their interest. The acquisition-date fair value of the noncontrolling interest was determined using a market approach based on the transaction price observed in the ANC Potter’s acquisition.

The six months ended June 30, 2020 includes the operations of ANC Potter’s for the period from February 3, 2020, the date of acquisition, to June 30, 2020. The condensed consolidated statement of operations for the three and six months ended June 30, 2020, includes revenue of approximately $517,000 and $852,000, respectively, and income from operations, including intangible amortization expense, of approximately $19,000 and $19,000, respectively, contributed by ANC Potter’s.

In the six months ended June 30, 2020, the Company incurred $96,000 of transaction costs related to the acquisition of ANC Potter’s.

Unaudited Pro forma Financial Information

The following pro forma financial information presents the combined results of operations for the Company and gives effect to the ANC Potter’s acquisition discussed above as if it had occurred on January 1, 2019. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the ANC Potters acquisition had been completed on January 1, 2019, nor does it purport to project the results of operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration costs related to the acquired company.

For purposes of the pro forma disclosures above, the primary adjustments for the three and six months ended June 30, 2020 include the amortization of intangible assets of $0 and $16,057, respectively, and the elimination of transaction costs of $0 and $96,000, respectively. For purposes of the pro forma disclosures above, the primary adjustments for the three and six months ended June 30, 2019 include amortization of intangible assets of $48,170 and $96,340, respectively.

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited)

ANC Green Solutions Smith’s

As described in Note 1, on February 28, 2020, the Company acquired a 60% membership interest in ANC Smith’s for $3.0 million cash, consisting of $2.6 million paid at closing and an aggregate of $0.4 million in deferred consideration to be paid on the one- and two- year anniversary of the closing of acquisition. In addition, the ANC Smith’s acquisition agreement provides that the Smith Seller is entitled to an amount, if any, by which the final working capital, as defined in the agreement, delivered by the Smith Seller is greater than the target working capital provided for in the agreement, (the “Smith Working Capital Adjustment”). As of June 30, 2020, the Company’s preliminary estimate of the Smith Working Capital Adjustment due to Smith Seller is $0.9 million and is included in Current portion of deferred consideration on the Company’s condensed consolidated balance sheet.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of ANC Smith’s (in thousands):

The Company identified tradename, customer relationship and non-compete intangible assets. The tradename, customer relationships and non-compete intangible assets will be amortized on a straight-line basis over its estimated useful life (see Note 6).

The goodwill recognized results from such factors as an assembled workforce and management’s industry know-how and is expected to be deductible for income tax purposes.

The ANC Smith’s acquisition resulted in a redeemable noncontrolling interest, which has been classified as mezzanine equity due to the option of the noncontrolling shareholders to require the Company to purchase their interest. The acquisition-date fair value of the noncontrolling interest was determined using a market approach based on the transaction price observed in the acquisition of ANC Smith’s.

The six months ended June 30, 2020 includes the operations of ANC Smith’s for the period from February 28, 2020, the date of acquisition, to June 30, 2020. The condensed consolidated statement of operations for the three and six months ended June 30, 2020, includes revenue of approximately $0.8 million and $1.1 million, respectively, and income (loss) from operations, including amortization expense, of approximately $(24,000) and $1,000, respectively contributed by ANC Smith’s.

In the six months ended June 30, 2020, the Company incurred $96,000 of transaction costs related to the acquisition of ANC Smith’s.

Unaudited Pro forma Financial Information

The following pro forma financial information presents the combined results of operations for the Company and gives effect to the ANC Smith’s acquisition discussed above as if it had occurred on January 1, 2019. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the ANC Smith’s acquisition had been completed on January 1, 2019, nor does it purport to project the results of operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration costs related to the acquired company.

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited) 

For purposes of the pro forma disclosures above, the primary adjustments for the three and six months ended June 30, 2020 include the amortization of intangible assets of $0 and $46,346, respectively, and the elimination of transaction costs of $0 and $96,000, respectively. For purposes of the pro forma disclosures above, the primary adjustments for the three and six months ended June 30, 2019 include amortization of intangible assets of $69,519 and $139,038, respectively.

Note 5 - Property and Equipment

Property and equipment consisted of the following:

Depreciation expense was $113,733 and $167,847 for the three and six months ended June 30, 2020 (Successor), respectively, and $20,768 and $41,421 for the three and six months ended June 30, 2019 (Predecessor), respectively.

Note 6 - Goodwill and Intangible Assets (Successor)

Changes in goodwill during the six months ended June 30, 2020 consists of the following:

As of June 30, 2020 and December 31, 2019, the Company’s intangible assets consisted of the following:

Amortization expense was $201,480 and $336,558 for the three and six months ended June 30, 2020, respectively.

The estimated aggregate amortization expense for intangible assets over the next five fiscal years and thereafter is as follows:

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited)

Note 7 - Leases

Successor

The Company leases facilities under agreements classified as operating leases that expire in 2023 and 2024. The Company’s leases include renewal options; however, renewal options have not been included in the calculation of the lease liabilities and right of use assets as the Company is not reasonably certain to exercise the options. Leases with an initial term of 12 months or less are not recorded on the balance sheet and expense is recognized on a straight-line basis over the lease term. The Company does not act as a lessor or have any leases classified as financing leases.

At June 30, 2020 and December 31, 2019, the Company had operating lease liabilities of $298,015 and $220,294, respectively, and right of use assets of $298,015 and $220,294, respectively.

Lease expenses during the three and six months ended June 30, 2020 is as follows:

The weighted-average remaining lease term as of June 30, 2020 was 3.7 years. The weighted-average discount rate was 5%.

Supplemental cash flow information related to the Company’s leases is as follows:

The Company’s future maturity of its operating lease liability is as follows:

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited) 

Predecessor

Rent expense during the three and six months ended June 30, 2019 was $14,262 and $28,524, respectively.

Note 8 – Accounts Payable and Accrued Liabilities (Successor)

As of June 30, 2020 and December 31, 2019, the Company’s accounts payable and accrued liabilities consisted of the following:

Note 9 – Notes Payable (Successor)

Equipment notes

The Company is party to secured loan agreements, the proceeds of which were used to purchase certain equipment and a truck. As of June 30, 2020 and December 31, 2019, $213,359 and $0, respectively, was outstanding under the equipment loan agreements. The loans have remaining terms ranging from less than 1 year to 4.5 years and bear a weighted average annual interest rate of 4.0%.

During the six months ended June 30, 2020, the Company made principal payments of $15,113.

PPP loans

In April 2020, ANC Green Solutions I, ANC Potter’s and ANC Smith’s each qualified for and received a loan pursuant to the Paycheck Protection Program, a program implemented by the U.S. Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act, from qualified lenders, for an aggregate principal amount of $569,746 (the “PPP Loans”). The PPP Loans bear interest at a fixed rate of 1.0% per annum, with the first six months of interest deferred, have terms of two years, and are unsecured and guaranteed by the U.S. Small Business Administration. The principal amounts of the PPP Loans are subject to forgiveness under the Paycheck Protection Program upon the Company’s request to the extent that the PPP Loan proceeds are used to pay expenses permitted by the Paycheck Protection Program, including payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the borrower. The Company intends to apply for forgiveness of the PPP Loans with respect to these covered expenses. To the extent that all or part of the PPP Loans are not forgiven, the Company will be required to pay interest on the PPP Loan at a rate of 1.0% per annum, and commencing in October 2020 principal and interest payments will be required through the maturity dates in April 2022. The terms of the PPP Loans provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loans may be accelerated upon the occurrence of an event of default.

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited)

Note 10 – Stockholders Equity

Successor

Preferred Stock

The Company is authorized to issue 5.0 million shares of preferred stock, par value $0.001 as of June 30, 2020. No shares of preferred stock were issued or are outstanding as of June 30, 2020.

Common Stock

The Company has authorized 67.5 million shares of common stock, $0.001 par value per share as of June 30, 2020, of which 60.0 million shares are designated as Class A Common Stock and of which 7.5 million are designated as Class B Common Stock.

Class A Common Stock

As of June 30, 2020 and December 31, 2019, there were 1,923,382 and 1,683,691, respectively, shares of Class A Common Stock outstanding.

During the three and six months ended June 30, 2020, the Company entered into separate subscription agreements with certain accredited investors, pursuant to which the Company, in a private placement, issued and sold to the investors an aggregate of 18,000 and 205,114, respectively, of shares of its Class A Common Stock, at an offering price of $11.00 per share, for net proceeds to the Company of $198,021 and $2,233,273, respectively.

Class B Common Stock

As of June 30, 2020 and December 31, 2019, there were 81,198 shares of Class B Common Stock outstanding.

Warrants

As of June 30, 2020 and December 31, 2019, the Company’s outstanding warrants were as follows:

As of June 30, 2020, no warrants were exercisable.

Predecessor

Prior to the Business Combination there were 600 issued and outstanding shares of ANC Green Solutions, Inc.

Note 11 – Share-based Compensation (Successor)

As of June 30, 2020, an aggregate of 1,084,132 shares of common stock were authorized under the Andover National Corporation 2019 Equity Incentive Plan (the “Plan”), subject to an “evergreen” provision that will automatically increase the maximum number of shares of Common Stock that may be issued under the term of the Plan. As of June 30, 2020, 937,882 shares of common stock were available for future grants under the Plan.

The fair value of the Company’s restricted stock and restricted stock unit grants were determined by reference to recent or anticipated cash transactions involving the sale of the Company’s common stock. The fair value of the Company’s common stock was estimated to be $11.00 per share at June 30, 2020.

The Company recorded total share-based compensation expense of $197,335 and $582,301 during the three and six months ended June 30, 2020.

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited)

Restricted Stock

No restricted stock vested during the three months ended June 30, 2020. During the six months ended June 30, 2020, 10,000 shares of restricted stock vested with a weighted average grant date fair value of $10 per share. The fair market value of restricted stock vesting during the six months ended June 30, 2020 was $110,000.

Restricted Stock Units

Below is a table summarizing the unvested restricted stock units for the six months ended June 30, 2020:

The fair value of restricted stock units that vested during the three and six months ended June 30, 2020 was approximately $128,000 and $270,000, respectively.

Note 12 – Income (Loss) Per Common Share (Successor)

The Company calculates basic income (loss) per share by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share includes the dilutive effect, if any, from the potential exercise or conversion of securities, such as warrants, stock options and restricted stock units, that would result in the issuance of incremental shares of common stock. For the three and six months ended June 30, 2020, the earnings per share amounts are the same for Class A Common and Class B Common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. The calculations of basic and diluted income (loss) per common share are as follows:

ANDOVER NATIONAL CORPORATION
Notes to the Financial Statements
(Unaudited)

The following potentially dilutive securities outstanding for the three and six months ended June 30, 2020 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive.

Note 13 – Related Party Transactions

Successor

The Company occupies a portion of commercial office space that is leased by Peter Cohen, the Company’s Chief Executive Officer, who provides the space to the Company on a month-to-month basis for approximately $6,000 per month. There is no formal lease agreement or security deposit associated with this agreement. The Company paid $18,225 and $38,199 to Mr. Cohen during the three and six months ended June 30, 2020, respectively, related to this lease agreement.

In connection with the Business Combination, the Company entered into a lease agreement with the minority interest holders of ANC Green Solutions I. The lease agreement is for a period of five years. The Company paid $12,750 and $25,500 during the three and six months ended June 30, 2020, respectively, related to this lease agreement.

In connection with the Potters Acquisition, the Company entered into a lease agreement with the minority interest holders of ANC Potter’s. The lease agreement is for a period of three years. The Company paid $10,500 and $17,500 during the three and six months ended June 30, 2020, respectively, related to this agreement.

On January 30, 2020, the Company entered into a subscription agreement at an offering price of $11.00 per share, with PENSCO Trust Company Custodian FBO Peter Cohen SEP IRA, on behalf of Peter A. Cohen, for 22,728 shares of Class A Common Stock in exchange for $250,000 cash. In addition, on January 30, 2020, the Company entered into a subscription agreement at an offering price of $11.00 per share, with PENSCO Trust Company LLC, Custodian FBO Milun K. Patel IRA, on behalf of Milun K. Patel, for 6,900 shares of Class A Common Stock in exchange for $75,900 cash.

Predecessor

Shareholder distributions during the three and six months ended June 30, 2019 were approximately $54,784 and $55,354, respectively.

During the three and six months ended June 30, 2019, the Company was party to a lease agreement with a shareholder of the Company and paid $14,262 and $28,524, respectively, related to this lease agreement.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that are based on our management’s current beliefs and assumptions, which statements are subject to substantial risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors. Please also see “Cautionary Note Regarding Forward Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.

Overview

We were organized in the State of Utah on July 11, 2007, and reincorporated on March 20, 2014. Effective February 14, 2019, we completed a change of domicile to Delaware from Utah (the “Reincorporation”) by means of a merger of us with and into our wholly-owned subsidiary, Andover National Corporation, a Delaware corporation.

On October 4, 2019, Andover Environmental Solutions, LLC, our wholly-owned subsidiary, entered into a Membership Interest Purchase Agreement with Heath L. Legg, pursuant to which Andover Environmental Solutions, LLC purchased sixty percent (60%) of the membership interests of ANC Green Solutions I, LLC, a Delaware limited liability company, for $4.0 million , subject to certain adjustments (the “Business Combination”).

ANC Green Solutions I, LLC, formerly known as Legg Holdings, Inc. (“ANC Green Solutions I” or “Legg”), is an operator and franchisor of commercial and residential landscaping, lawn care and pest control services, operating under the commercial trade name Superior Services. ANC Green Solutions I’s core service offerings provide residential homeowners and commercial customers with year-round monitoring and treatment by focusing on weed and insect control, irrigation, seeding, fertilization, general landscape maintenance and installation services. Additionally, ANC Green Solutions I is a master franchisor for outdoor insect control service businesses operating independently throughout the United States.

On February 3, 2020, ANC Green Solutions - Potter’s, LLC, a wholly-owned subsidiary of the Company (“ANC Potter’s”), entered into an Asset Purchase and Contribution Agreement with Potter’s Professional Lawn Care, Inc, and its shareholders, pursuant to which ANC Potter’s purchased a sixty (60%) interest in Potter’s Professional Lawncare, Inc.’s property and assets, for $1.68 million, subject to certain adjustments. Potter’s Professional Lawn Care, Inc., a Florida corporation, is engaged in the business of commercial and residential fully-integrated lawn maintenance and landscape services including lawn care, new landscape design and installation, pest control, irrigation and arbor care.

On February 28, 2020, Smith’s Tree Care, LLC, a wholly-owned subsidiary of the Company (“Smith’s Buyer”), entered into an Asset and Equity Purchase and Contribution Agreement (the “Smith Acquisition Agreement”) with Smith’s Tree Care, Inc., a Virginia corporation (“Smith’s Seller”), Utro Crane Company, Inc., a Virginia corporation, Utro Crane Company, LLC, a Delaware limited liability company and indirect subsidiary of the Company, and ANC Green Solutions - Smith’s, LLC, a Delaware limited liability company and indirect subsidiary of the Company (“ANC Smith’s”). Pursuant to the Smith Acquisition Agreement, among other things, (a) Smith’s Buyer acquired a sixty percent (60%) interest in all of property and assets of Smith Tree Care, Inc. and Utro Crane Company, Inc, (together, the “Seller Parties”) for an aggregate purchase price of approximately $3.0 million, subject to certain adjustments and (b) Smith’s Seller conveyed, transferred, assigned and delivered to ANC Smith’s an undivided forty percent (40%) interest in the acquired assets in exchange for equity securities of ANC Smith’s. The Seller Parties are engaged in the business of commercial and residential fully-integrated tree care, tree service, tree removal, stump grinding, mulching, logging, and related services.

Recent Developments

COVID-19-Related Considerations

The COVID-19 outbreak, which surfaced in Wuhan, China in December 2019 and which was subsequently declared a pandemic by the World Health Organization in March 2020, has had a pronounced effect on the domestic and global economies. In March and April 2020, our businesses began to feel the impact of the COVID-19 pandemic which resulted in a temporary decline in the demand for our services. Subsequently, demand for our services stabilized and eventually normalized to historical levels. As the demand for our services returned to historical levels, we began to experience some shortages of skilled labor to perform certain of our select services. We have continued to experience isolated difficulties in hiring additional seasonally required employees to staff our various businesses and we have been required to implement safety protocols that has reduced our efficiency. Additionally, certain of our employees have experienced illness related to the pandemic which has temporarily reduced our capacity. Further, as our businesses are located in the Southeastern United States, which is currently an area with significant COVID-19 infection, the extent of the impact of COVID-19 on our business, financial results, liquidity and cash flows will depend largely on future developments, including new information that may emerge concerning the severity and action taken to contain or prevent further spread within the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted.

Results of Operations

As a result of the Business Combination, we are the acquirer for accounting purposes and ANC Green Solutions I is the acquiree and accounting predecessor. Our financial statement presentation distinguishes our financial performance into two distinct periods, the period up to the closing date of the Business Combination (labeled “Predecessor”) and the period including and after that date (labeled “Successor”).

Our historical financial information prior to the Business Combination has not been reflected in the Predecessor financial statements as these historical amounts have been determined to be not useful information to a reader of the financial statements. Our operations, until the closing of the Business Combination, other than income from investments and general and administrative expenses, were nominal. Accordingly, no other activity of ours was reported for the three and six months ended June 30, 2019 besides ANC Green Solutions I’s operations as Predecessor.

Comparison of the Three Months Ended June 30, 2020 (Successor) to the Three Months Ended June 30, 2019 (Predecessor)

Revenue

Our revenue was generated from residential and commercial lawn care programs and services, which includes lawncare, landscaping and hardscaping, irrigation and pest-control services, in addition to pest-control franchisor revenue. In addition, revenue was generated from tree care services, which includes tree service, tree removal, stump grinding, mulching, logging and related services. We generated revenues of approximately $2.1 million during the three months ended June 30, 2020 (Successor) as compared to revenue of $0.7 million during the three months ended June 30, 2019 (Predecessor). The increase in revenue was primarily attributable to the acquisitions of ANC Potter’s and ANC Smith’s, which contributed combined revenue of approximately $1.3 million for the three months ended June 30, 2020 (Successor).

Costs of services provided

Costs of services provided represents costs directly related to the provision of the lawn care, landscaping, tree care and pest-control services and include direct labor, materials and equipment depreciation. Costs of services provided during the three months ended June 30, 2020 (Successor) increased $0.8 million, as compared to costs of services provided in the three months ended June 30, 2019 (Predecessor) primarily due to the acquisitions of ANC Potter’s and ANC Smith’s. ANC Potter’s and ANC Smith’s combined cost of services provided was approximately $0.7 million for the three months ended June 30, 2020 (Successor).

General and administrative expenses

General and administrative expenses were $1.7 million during the three months ended June 30, 2020 (Successor) as compared to $0.2 million during the three months ended June 30, 2019 (Predecessor). The increase was attributable to the inclusion of Andover’s expenses primarily associated with compensation and benefits and professional fees during the three months ended June 30, 2020, which are not included in the general and administrative expenses for the three months June 30, 2019 (Predecessor), as those results include only the results of ANC Green Solutions I.

Sales and marketing expenses

Sales and marketing expenses increased by approximately $1,354 during the three months ended June 30, 2020 (Successor) as compared to the three months ended June 30, 2019 (Predecessor), which was primarily attributable to ANC Potter’s and ANC Smith’s.

Other income (expense)

Other income (expense) was nominal during the three months ended June 30, 2020 (Successor) and the three months ended June 30, 2019 (Predecessor).

Comparison of the Six Months Ended June 30, 2020 (Successor) to the Six Months Ended June 30, 2019 (Predecessor)

Revenue

We generated revenues of approximately $3.3 million during the six months ended June 30, 2020 (Successor) as compared to revenue of $1.3 million during the six months ended June 30, 2019 (Predecessor). The increase in revenue was primarily attributable to the acquisitions of ANC Potter’s and ANC Smith’s, which contributed combined revenue of approximately $2.0 million for the six months ended June 30, 2020 (Successor).

Costs of services provided

Costs of services provided during the six months ended June 30, 2020 (Successor) increased $1.1 million, as compared to costs of services provided in the six months ended June 30, 2019 (Predecessor), primarily due to the acquisitions of ANC Potter’s and ANC Smith’s. ANC Potter’s and ANC Smith’s combined cost of services provided was approximately $1.0 million for the six months ended June 30, 2020 (Successor).

General and administrative expenses

General and administrative expenses were $3.4 million during the six months ended June 30, 2020 (Successor), as compared to $0.4 million during the six months ended June 30, 2019 (Predecessor). The increase was attributable to the inclusion of Andover’s expenses primarily associated with compensation and benefits and professional fees during the six months ended June 30, 2020.

Sales and marketing expenses

Sales and marketing expenses increased by approximately $19,064 during the six months ended June 30, 2020 (Successor) as compared to the six months ended June 30, 2019 (Predecessor), which was primarily attributable to ANC Potter’s and ANC Smith’s.

Other income (expense)

Other income (expense) of approximately $33,000 during the six months ended June 30, 2020 (Successor) primarily reflects investment income from our holdings of highly liquid investments, which are classified as cash equivalents. Other income (expense) was nominal during the three months ended June 30, 2019 (Predecessor).

Liquidity and Capital Resources

As of June 30, 2020, we had cash and cash equivalents of $9.3 million and total equity of $17.9 million. Net working capital was $7.9 million.

In April 2020, ANC Green Solutions I, ANC Potter’s and ANC Smith’s each qualified for and received a loan pursuant to the Paycheck Protection Program, a program implemented by the U.S. Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act, from qualified lenders, for an aggregate principal amount of $569,746 (the “PPP Loans”). The PPP Loans bear interest at a fixed rate of 1.0% per annum, with the first six months of interest deferred, have terms of two years, and are unsecured and guaranteed by the U.S. Small Business Administration. The principal amounts of the PPP Loans are subject to forgiveness under the Paycheck Protection Program upon our request to the extent that the PPP Loan proceeds are used to pay expenses permitted by the Paycheck Protection Program, including payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the borrower. We intend to apply for forgiveness of the PPP Loans with respect to these covered expenses. To the extent that all or part of the PPP Loans are not forgiven, we will be required to pay interest on the PPP Loan at a rate of 1.0% per annum, and commencing in October 2020, principal and interest payments will be required through the maturity dates in April 2022. The terms of the PPP Loans provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loans may be accelerated upon the occurrence of an event of default.

Our principal capital requirements are to fund our working capital needs and to make investments in line with our business strategy. We calculate working capital as current assets less current liabilities. Our principal sources of liquidity are existing cash and cash equivalents, cash flows from operations and financing activities. In addition, as a public company, we may from time to time access the capital markets through the offering and sale of our securities. However, there can be no assurance that any such alternative sources would be available or sufficient. We believe that future operating cash flows, together with cash on hand will be sufficient to meet our future operating and capital expenditure cash requirements for the next twelve months.

The COVID-19 outbreak, which surfaced in Wuhan, China in December 2019 and which was subsequently declared a pandemic by the World Health Organization in March 2020, has had a pronounced effect on the domestic and global economies. In March and April 2020, our businesses began to feel the impact of the COVID-19 pandemic which resulted in a temporary decline in the demand for our services. Subsequently, demand for our services stabilized and eventually normalized to historical levels. As the demand for our services returned to historical levels, we began to experience some shortages of skilled labor to perform certain of our select services. We have continued to experience isolated difficulties in hiring additional seasonally required employees to staff our various businesses and we have been required to implement safety protocols that has reduced our efficiency. Additionally, certain of our employees have experienced illness related to the pandemic which has temporarily reduced our capacity. Further, as our businesses are located in the Southeastern United States, which is currently an area with significant COVID-19 infection, the extent of the impact of COVID-19 on our business, financial results, liquidity and cash flows will depend largely on future developments, including new information that may emerge concerning the severity and action taken to contain or prevent further spread within the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted.

Cash Flow Summary

The following table summarizes selected items in our consolidated statements of cash flows:

Operating Activities

During the six months ended June 30, 2020 (Successor), cash used in operating activities was $1.3 million primarily as a result of our net loss offset, in part, by share-based compensation of $0.6 million, depreciation and amortization expense of $0.5 million and changes in operating assets and liabilities. During the six months ended June 30, 2019 (Predecessor) operating activities provided $0.3 million of cash primarily as a result of our net income.

Investing Activities

During the six months ended June 30, 2020 (Successor), we used $3.7 million of cash in investing activities primarily as a result of our acquisitions of ANC Potter’s and ANC Smith’s, net of cash acquired, for $1.5 million and $1.7 million, respectively. During the six months ended June 30, 2019 (Predecessor), investing activities used approximately $38,000 of cash primarily for the purchase of property and equipment.

Financing Activities

During the six months ended June 30, 2020 (Successor), $2.9 million of cash was provided by financing activities from the issuance of shares in a private placement and the proceeds from borrowings under notes payable. During the six months ended June 30, 2019 (Predecessor) financing activities used approximately $58,000 of cash as distributions to shareholders and repayment of an equipment loan.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

We have deferred purchase consideration associated with the acquisitions of ANC Green Solutions I, ANC Potter’s and ANC Smith’s of approximately $1.9 million in aggregate, of which, approximately $1.3 million is payable within the next twelve months and $0.6 million is classified as a long term obligation.

We are also party to loan agreements, the proceeds of which were used to purchase certain equipment and a truck. As of June 30, 2020 and December 31, 2019, $213,359 and $0, respectively, was outstanding under the equipment related loan agreements. The loans have remaining terms ranging from less than one year to 4.5 years.

As described above, we are party to PPP Loans which are subject to forgiveness under the Paycheck Protection Program upon our request to the extent that the PPP Loan proceeds are used to pay expenses permitted by the Paycheck Protection Program. We intend to apply for forgiveness of the PPP Loans with respect to these covered expenses. To the extent that all or part of the PPP Loans are not forgiven, we will be required to pay interest on the PPP Loan at a rate of 1.0% per annum, and commencing in October 2020 principal and interest payments will be required through the maturity dates in April 2022.

Critical accounting policies

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. Our accounting policies are described in Note 1 to our audited financial statements for 2019 appearing in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

As a smaller reporting company, we are not required to provide this information.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our principal executive officer and principal financial officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Management’s evaluation identified the following material weakness as of June 30, 2020: insufficient personnel resources within the accounting function to segregate the duties over financial transaction processing and reporting. Based on the foregoing evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2020, our disclosure controls and procedures were not effective.

Changes in Internal Control over Financial Reporting

There was no change to our internal controls or in other factors that could affect these controls during the three months ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, our management is currently seeking to improve our controls and procedures in an effort to remediate the deficiency described above.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any legal proceedings, and to the best of our knowledge, no such proceeding is threatened, the results of which would have a material impact on our properties, results of operation, or financial condition. Nor, to the best of our knowledge, are any of our officers or directors involved in any legal proceedings in which we are an adverse party.

From time to time, we are also a party to certain legal proceedings incidental to the normal course of our operating businesses. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following documents are filed as exhibits to this Form 10-Q:

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.