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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, 2021

☐ 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)

Delaware		83-2216345
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

333 Avenue of the Americas, Suite 2000, Miami, Florida		33131
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (786) 871-3333

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Not Applicable		Not Applicable		Not Applicable

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. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒	Smaller reporting company ☒
			Emerging growth company ☒

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 ☒

As of November 22, 2021, there were 3,696,326 shares of Class A Common Stock, and no shares of Class B Common Stock, outstanding.

Table of Contents

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:

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our history of, and expectation of future, losses;

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our limited operating history;

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the success of our growth strategy;

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our ability to generate revenue or achieve profitability;

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our ability to identify and successfully integrate acquisitions;

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our ability to obtain additional financing on acceptable terms, if at all;

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our ability to attract and retain key personnel, including our strategic operating partners;

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general business, financial market and economic conditions;

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the impact on our business and the overall economy of public health epidemics, including the recent coronavirus pandemic;

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competition in the markets in which we operate;

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seasonality of our operating businesses and the impact of weather conditions;

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costs of raw materials, fuel prices and wages;

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product shortages, loss of key suppliers, failure to develop relationships with qualified suppliers or dependence on third-party suppliers and manufacturers;

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fluctuations in new commercial and residential construction and housing sectors;

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our ability to attract, retain and maintain positive relations with our employees;

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compliance with government regulations;

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the marketability of our Class A Common Stock;

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the volatility of the price of our Class A Common Stock;

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public company costs; and

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our lack of effective internal controls.

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.

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PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2021 (unaudited) and December 31, 2020	1

	Consolidated Statements of Operations for the three months ended September 30, 2021 and 2020 (unaudited) and for the nine months ended September 30, 2021 and 2020 (unaudited)	2

	Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interest for the three months ended September 30, 2021 and 2020 (unaudited) and for the nine months ended September 30, 2021 and 2020 (unaudited)	3

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	29

PART II	OTHER INFORMATION	29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	29

Item 6.	Exhibits	30

Signatures

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ANDOVER NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30,		December 31,
	2021		2020

ASSETS
Current assets:
Cash and cash equivalents	$	20,103,435	$	14,302,699
Accounts receivable, net		1,634,925		490,987
Prepaid expenses and other current assets		640,534		49,547
Total current assets		22,378,894		14,843,233

Non-current assets:
Property and equipment, net		3,537,181		2,147,918
Right of use assets, net		618,997		258,523
Goodwill		12,506,873		7,913,123
Intangible assets, net		3,369,252		3,967,690
Loans receivable – related party, net		1,210,750		—
Total non-current assets		21,243,053		14,287,254

TOTAL ASSETS	$	43,621,947	$	29,130,487

LIABILITIES, MEZZANINE EQUITY AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	1,976,297	$	685,364
Current portion of deferred consideration		776,762		1,575,443
Notes payable		213,597		385,963
Unearned revenue		68,336		—
Lease liabilities		217,359		82,225
Total current liabilities		3,252,351		2,728,995

Non-current liabilities
Notes payable, net of current portion		2,400,112		753,458
Lease liabilities, net of current portion		410,379		176,298
Deferred consideration, net of current portion		227,755		346,884
Total long-term liabilities		3,038,246		1,276,640

Total liabilities		6,290,597		4,005,635

COMMITMENTS AND CONTINGENCIES

Mezzanine equity:
Redeemable noncontrolling interest		3,526,641		3,265,892
Stockholders’ equity
Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding as of September 30, 2021, and December 31, 2020, respectively		—		—
Class A Common stock, $0.001 par value; 60,000,000 shares authorized, 3,615,128 and 2,416,866 shares issued and outstanding as of September 30, 2021, and December 31, 2020, respectively		3,615		2,417
Class B Common stock, $0.001 par value; 7,500,000 shares authorized, 81,198 shares issued and outstanding as of September 30, 2021, and December 31, 2020, respectively		81		81
Additional paid-in capital		38,834,404		25,704,408
Accumulated deficit		(9,537,696)		(6,559,361)
Total stockholders' equity		29,300,404		19,147,545
Noncontrolling interest		4,504,305		2,711,415
Total equity		33,804,709		21,858,960
TOTAL LIABILITIES, MEZZANINE EQUITY AND EQUITY	$	43,621,947	$	29,130,487

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

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ANDOVER NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Revenues:
Revenue	$	5,292,647	$	2,148,538	$	13,686,261	$	5,471,741
Total revenue		5,292,647		2,148,538		13,686,261		5,471,741
Operating costs and expenses
Cost of services provided		3,386,990		1,483,885		8,737,395		3,458,056
General and administrative		3,340,961		1,393,940		7,821,341		4,543,347
Sales and marketing		99,876		37,914		459,541		159,692
Total operating costs and expenses		6,827,827		2,915,739		17,018,277		8,161,095
Loss from operations		(1,535,180)		(767,201)		(3,332,016)		(2,689,354)

Other Income (expense):
Other income		7,008		-		45,802		34,976
Forgiveness of note payable		-		-		382,346		-
Interest income		73,568		700		94,190		3,465
Interest expense		(57,252)		(1,453)		(65,784)		(6,006)
Total other income (expense):		23,324		(753)		456,554		32,435
Net loss		(1,511,856)		(767,954)		(2,875,462)		(2,656,919)
Less: Net income (loss) attributable to noncontrolling interest		(255,666)		(3,973)		102,873		(27,174)
Net loss attributable to common shareholders	$	(1,256,190)	$	(763,981)	$	(2,978,335)	$	(2,629,745)

Net loss per common share
Net loss per share attributable to Class A and Class B Common shareholders - Basic	$	(0.34)	$	(0.38)	$	(0.84)	$	(1.34)
Net loss per share attributable to Class A and Class B Common shareholders - Diluted	$	(0.34)	$	(0.38)	$	(0.84)	$	(1.34)
Weighted average shares outstanding
Weighted average Class A and Class B Common shares outstanding - Basic		3,675,869		2,009,271		3,532,318		1,960,403
Weighted average Class A and Class B Common shares outstanding - Diluted		3,675,869		2,009,271		3,532,318		1,960,403

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

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ANDOVER NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF EQUITY AND REDEEMABLE NONCONTROLLING INTEREST

(Unaudited)


	Class A			Class B			Additional				Total						Redeemable
	Common Stock			Common Stock			Paid In		Accumulated		Stockholders’		Non-controlling		Total		Noncontrolling
	Shares	Amount		Shares	Amount		Capital		Deficit		Equity		Interest		Equity		Interest
Balance at June 30 , 2021	3,588,694	$	3,589	81,198	$	81	$	38,756,907	$	(8,281,506)	$	30,479,071	$	4,791,432	$	35,270,503	$	3,495,180
Stock-based compensation	—		—	—		—		317,523		—		317,523		—		317,523		—
Issuance of Class A Common Stock for vested RSU's	26,434		26	—		—		(26)		—		-		—		—		—
Share issuance fees	—		—	—		—		(240,000)		—		(240,000)		—		(240,000)		—
Net income (loss)	—		—	—		—		—		(1,256,190)		(1,256,190)		(287,127)		(1,543,317)		31,461
Balance at September 30, 2021	3,615,128	$	3,615	81,198	$	81	$	38,834,404	$	(9,537,696)	$	29,300,404	$	4,504,305	$	33,804,709	$	3,526,641


	Class A			Class B			Additional				Total						Redeemable
	Common Stock			Common Stock			Paid In		Accumulated		Stockholders’		Non-controlling		Total		Noncontrolling
	Shares	Amount		Shares	Amount		Capital		Deficit		Equity		Interest		Equity		Interest
Balance at January 1, 2021	2,416,866	$	2,417	81,198	$	81	$	25,704,408	$	(6,559,361)	$	19,147,545	$	2,711,415	$	21,858,960	$	3,265,892
Impact on noncontrolling interest from acquisition of ANC Zodega	—		—	—		—		—		—		—		1,950,766		1,950,766		—
Stock-based compensation	—		—	—		—		1,153,161		—		1,153,161		—		1,153,161		—
Issuance of Class A Common Stock for vested RSUs	64,048		64	—		—		(64)		—		-		—		-		—
Repurchase of warrant issued for cash	—		—	—		—		(75,000)		—		(75,000)		—		(75,000)		—
Issuance of Class A Common Stock in private placement, net of issuance costs	1,088,053		1,088	—		—		11,487,760		—		11,488,848		—		11,488,848		—
Issuance of Class A Common Stock in Zodega transaction, net of issuance cost	46,161		46	—		—		564,139		—		564,185		—		564,185		—
Net income (loss)	—		—	—		—		—		(2,978,335)		(2,978,335)		(157,876)		(3,136,211)		260,749
Balance at September 30, 2021	3,615,128	$	3,615	81,198	$	81	$	38,834,404	$	(9,537,696)	$	29,300,404	$	4,504,305	$	33,804,709	$	3,526,641

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

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ANDOVER NATIONAL CORPORATION

CONSOLIDATED STATEMENT OF EQUITY AND REDEEMABLE NONCONTROLLING INTEREST

(Unaudited)


	Class A		Class B		Additional		Total			Redeemable
	Common Stock		Common Stock		Paid In	Accumulated	Stockholders’	Non-controlling	Total	Noncontrolling
	Shares	Amount	Shares	Amount	Capital	Deficit	Equity	Interest	Equity	Interest
Balance at June 30, 2020	1,923,382	1,924	81,198	81	20,370,047	(5,199,850)	15,172,202	2,696,859	17,869,061	3,152,549
Stock-based compensation	—	—	—	—	208,170	—	208,170	—	208,170	—
Issuance of Class A Common Stock for vested RSUs	11,664	11	—	—	(11)	—	—	—	—	—
Net income (loss)	—	—	—	—	—	(763,981)	(763,981)	(13,972)	(777,953)	9,999
Balance at September 30, 2020	1,935,046	1,935	81,198	81	20,578,206	(5,963,831)	14,616,391	2,682,887	17,299,278	3,162,548


	Class A		Class B		Additional		Total			Redeemable
	Common Stock		Common Stock		Paid In	Accumulated	Stockholders’	Non-controlling	Total	Noncontrolling
	Shares	Amount	Shares	Amount	Capital	Deficit	Equity	Interest	Equity	Interest
Balance at January 1, 2020	1,683,691	1,684	81,198	81	17,554,713	(3,334,086)	14,222,392	2,727,427	16,949,819	—
Impact on noncontrolling interest from acquisition of ANC Potter’s	—	—	—	—	—	—	—	—	—	1,145,363
Impact on noncontrolling interest from acquisition of ANC Smith's	—	—	—	—	—	—	—	—	—	2,000,197
Stock-based compensation	—	—	—	—	790,471	—	790,471	—	790,471	—
Issuance of Class A Common Stock for vested RSUs	36,241	36	—	—	(36)	—	-	—	-	—
Issuance of Class A Common Stock for vested restricted stock	10,000	10	—	—	(10)	—	-	—	-	—
Issuance of Class A Common Stock in private placement, net of issuance costs	205,114	205	—	—	2,233,068	—	2,233,273	—	2,233,273	—
Distributed to noncontrolling interest	—	—	—	—	—	—	-	(200)	(200)	(178)
Net income (loss)	—	—	—	—	—	(2,629,745)	(2,629,745)	(44,340)	(2,674,085)	17,166
Balance at September 30, 2020	1,935,046	1,935	81,198	81	20,578,206	(5,963,831)	14,616,391	2,682,887	17,299,278	3,162,548

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

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ANDOVER NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)


	For the Nine Months Ended September 30,
	2021		2020

Cash Flows from Operating Activities
Net loss	$	(2,875,462)	$	(2,656,919)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization		1,159,626		834,010
Stock-based compensation		1,153,161		790,471
Bad debt expense		70,013		—
Forgiveness of note payable		(382,346)		—
Loss on disposal of fixed asset		-		37,490
Changes in operating assets and liabilities (excluding the effects of business acquisitions):
Accounts receivable		(1,155,691)		(28,375)
Prepaid expenses and other current assets		(590,987)		(64,056)
Accounts payable and accrued expenses		570,039		(380,200)
Unearned revenue		68,336		—
Right of use assets and lease liabilities, net		8,741		—
Net cash used in operating activities		(1,974,570)		(1,467,579)

Cash Flows from Investing Activities
Purchases of property and equipment		(391,421)		(509,094)
Disposal of property and equipment		16,154		—
Loan receivables – related party, net		(1,210,750)		—
Acquisition of ANC Potter’s, net of cash acquired		—		(1,529,280)
Acquisition of ANC Smith’s, net of cash acquired		—		(1,651,114)
Acquisition of ANC Zodega, net of cash acquired		(1,212,694)		—
Net cash used in investing activities		(2,798,711)		(3,689,488)

Cash Flows from Financing Activities
Proceeds from notes payable		558,617		658,746
Repayment of notes payable		(250,451)		(32,731)
Payment of deferred consideration		(1,147,997)		—
Repurchase of warrant issued for cash		(75,000)		—
Distribution to noncontrolling interest		—		(378)
Proceeds from the issuance of shares in private placement, net of issuance costs		11,488,848		2,233,273
Net cash provided by financing activities		10,574,017		2,858,910
Net increase (decrease) in cash		5,800,736		(2,298,157)

Cash and cash equivalents, beginning of period		14,302,699		11,407,971
Cash and cash equivalents, end of period	$	20,103,435	$	9,109,814

Supplemental disclosure of cash and non-cash transactions:
Cash paid for interest	$	65,784	$	6,006
Cash paid for income taxes	$	—	$	—
Non-cash investing and financing activities
Capital expenditures in accounts payable	$	216,414	$	13,348
Capital expenditures financed with notes payable	$	620,469	$	—
Issuance of Class A shares for vested RSUs	$	64	$	—
Shares issued in acquisition of Zodega	$	564,185
Acquisition of ANC Smith - Reclassification from deferred consideration to accounts payable	$	111,480	$	—
Recognition of deferred consideration payable in acquisition of ANC Potter’s	$	—	$	146,844
Recognition of redeemable noncontrolling interest in acquisition of ANC Potter’s	$	—	$	1,145,363
Recognition of deferred consideration payable in acquisition of ANC Smith’s	$	—	$	1,275,443
Recognition of redeemable noncontrolling interest in acquisition of ANC Smith’s	$	—	$	2,000,197
Recognition of deferred consideration payable in acquisition of ANC Zodega	$	341,667	$	—
Recognition of non-redeemable noncontrolling interest in acquisition of ANC Zodega	$	1,950,766	$	—

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

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of the Business

Andover National Corporation, (the “Company”) 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 Solution 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.

On January 20, 2021, the Company, through an indirect wholly-owned subsidiary, entered into an Asset and Equity Purchase and Contribution Agreement (the “Zodega Purchase Agreement”) with Litton Enterprises Inc. D/B/A Zodega-TIS Services, a Texas corporation (“Zodega Seller”), the Zodega Seller shareholders and ANC Green Solutions-Zodega, LLC, a Delaware limited liability company (“ANC Zodega”), pursuant to which, among other things, (i) the Company purchased an undivided fifty-one percent (51)% interest in all of Zodega Seller’s right, title and interest in and to all of Zodega Seller’s property and assets (the “Acquired Assets”), in consideration for 46,161 shares of the Company’s Class A common stock, with a value of approximately $0.6 million, subject to certain adjustments, as set forth in the Zodega Purchase Agreement and (ii) Zodega Seller conveyed, transferred, assigned and delivered to ANC Zodega’s an undivided forty percent (49)% interest in the Acquired Assets in exchange for equity securities of ANC Zodega’s. The acquisition was accounted for as a business combination using the acquisition method of accounting for all identifiable assets acquired and liabilities assumed at fair value as of the date control is obtained. The accounting for this acquisition is preliminary.

On January 26, 2021, the Company’s subsidiary ANC Green Solutions- Zodega made a capital call, as defined in the limited liability agreement of ANC Zodega, of $0.8 million, to fund the acquisition of substantially all of the assets and property of Texas Seasons Corporation through the Company’s indirect subsidiary and ANC Zodega’s wholly-owned subsidiary Zodega Landscape Services, LLC. In connection with funding the capital call for the acquisition, the Company entered into a promissory note agreement with Litton Enterprises Inc. for $0.3 million. The promissory note agreement bears interest at a rate of WSJ Prime plus 7.0% and is due to be repaid by the minority interest holder to the Company on the fourth anniversary of the note agreement.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 18, 2021, the Company’s subsidiary ANC Green Solutions- Zodega made a capital call, as defined in the limited liability agreement of ANC Zodega, of $0.3 million, to fund the acquisition of substantially all of the assets and property of Greentex Landscaping Inc., through the Company’s indirect subsidiary and ANC Zodega’s wholly-owned subsidiary Zodega Landscape Services, LLC. In connection with funding the capital call for the acquisition, the Company entered into a promissory note agreement with Litton Enterprises Inc. for $0.1 million. The promissory note agreement bears interest at a rate of Prime plus 7.0% and is due to be repaid by the minority interest holder to the Company on the fourth anniversary of the note agreement.

On February 19, 2021, the Company’s subsidiary ANC Green Solutions- Zodega made a capital call, as defined in the limited liability agreement of ANC Zodega, of $2.0 million, to fund the acquisition of substantially all of the assets and property of C.J.’s Yardworks, Inc. through the Company’s indirect subsidiary and ANC Zodega’s wholly-owned subsidiary Zodega Landscape Services, LLC. In connection with funding the capital call for the acquisition, the Company entered into a promissory note agreement with Litton Enterprises Inc. for $0.8 million. The promissory note agreement bears interest at a rate of Prime plus 7.0% and is due to be repaid by the minority interest holder to the Company on the fourth anniversary of the note agreement.

On March 12, 2021, the Company’s subsidiary ANC Green Solutions- Zodega made a capital call, as defined in the limited liability agreement of ANC Zodega, of $0.8 million, to fund the acquisition of substantially all of the assets and property of Lillard Lawn & Landscaping, Inc. through the Company’s indirect subsidiary and ANC Zodega’s wholly-owned subsidiary Zodega Landscape Services, LLC. In connection with funding the capital call for the acquisition, the Company entered into a promissory note agreement with Litton Enterprises Inc. for $0.2 million. The promissory note agreement bears interest at a rate of Prime plus 7.0% and is due to be repaid by the minority interest holder to the Company on the fourth anniversary of the note agreement.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

These unaudited interim 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, 2020 included in the Company’s Annual Report on Form 10-K (the “Annual Report”) filed with the SEC on March 31, 2021. 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 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 consolidated financial statements for the interim periods are not necessarily indicative of results for the full year. The preparation of these unaudited 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.

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.

Reclassifications

Certain amounts in prior periods have been reclassified to conform with current period presentation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 consolidated statement of operations.

The accompanying unaudited consolidated financial statements include the accounts of Andover National Corporation and its consolidated subsidiaries, ANC Green Solutions I, ANC Potter’s, ANC Smith’s and ANC Zodega’s. 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.

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 nine months ended September 30, 2021 and 2020.

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:


	Nine Months Ended
	September 30, 2021		September 30, 2020
Allowance for doubtful accounts, beginning of period	$	27,162	$	2,467
Bad debt expense		70,013		15,836
Allowance for doubtful accounts, end of period	$	97,175	$	18,303

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2021 and December 31, 2020, the estimated useful lives (in years) of each of the Company’s classes of property and equipment were as follows:


		Useful Lives (in years)
Vehicles		5-10
Equipment		5-7
Buildings		15
Leasehold improvements		5
Office equipment		5-7

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.

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 September 30, 2021, and December 31, 2020, 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 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.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – Revenue

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


	Three Months Ended
	September 30, 2021		September 30, 2020
Lawncare and tree care service revenue	$	5,265,517	$	2,123,542
Franchise revenue		27,130		24,996
Total revenue	$	5,292,647	$	2,148,538


	Nine Months Ended
	September 30, 2021		September 30, 2020
Lawncare and tree care service revenue	$	13,616,840	$	5,406,033
Franchise revenue		69,421		65,708
Total revenue	$	13,686,261	$	5,471,741

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 year. These costs are expensed as incurred and recorded in general and administrative expense in the consolidated statement of operations.

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

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 $0.147 million in deferred consideration to be paid on the two-year anniversary of the closing of the acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


Total purchase price	$	1,529

Assets acquired:
Accounts receivable and other current assets	$	107
Property and equipment		234
Right-of-use asset		113
Identifiable intangible assets		1,285
Total assets acquired	$	1,739

Liabilities assumed:
Accounts payable and accrued liabilities	$	84
Lease liability		113
Notes payable		139
Deferred cash consideration		147
Non-controlling interest in ANC Green Solutions- Potters		1,145
Total liabilities assumed	$	1,628
Estimated fair value of net assets acquired:	$	111

Goodwill	$	1,418

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 nine months ended September 30, 2020 includes the operations of ANC Potter’s for the period from February 3, 2020, the date of acquisition, to September 30, 2020. The consolidated statement of operations for the three months ended September 30, 2020 includes approximately $0.4 million and $0.1 million of revenue and loss from operations, respectively, contributed by ANC Potter’s. The consolidated statement of operations for the nine months ended September 30, 2020 includes approximately $1.3 million and $0.1 million of revenue and loss from operations respectively, contributed by ANC Potter’s.

In the nine months ended September 30, 2020, the Company incurred $0.1 million of transaction costs related to the acquisition of ANC Potter’s.

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, and working capital adjustment, to be paid on the one- and two-year anniversary of the closing of the 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 September 30, 2021, the Company settled the Smith Working Capital Adjustment due to Smith Seller for approximately $1.0 million.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


Total purchase price	$	1,651

Assets acquired:
Accounts receivable and other current assets	$	167
Property and equipment		1,117
Identifiable intangible assets		1,537
Total assets acquired	$	2,821

Liabilities assumed:
Accounts payable and accrued liabilities	$	80
Deferred cash consideration		1,276
Non-controlling interest in ANC Green Solutions - Smith		2,000
Total liabilities assumed	$	3,356
Estimated fair value of net assets acquired:	$	(535)

Goodwill	$	2,186

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 nine months ended September 30, 2020 includes the operations of ANC Smith’s for the period from February 28, 2020, the date of acquisition, to September 30, 2020. The consolidated statement of operations for the three and nine months ended September 30, 2020, includes revenue of approximately $1.0 million and $2.2 million, respectively, and net income, including amortization expense, of approximately $0.2 million in both periods contributed by ANC Smith’s.

In the nine months ended September 30, 2020, the Company incurred $0.1 million of transaction costs related to the acquisition of ANC Smith’s.

ANC Zodega and subsidiaries

As described in Note 1, on January 20, 2021, the Company acquired a 51% membership interest in ANC Green Solutions- Zodega, in exchange for consideration of 46,161 shares of the Company’s Class A common stock, with a value of approximately $0.6 million.

On January 26, 2021, the Company’s subsidiary ANC Green Solutions- Zodega acquired all of the assets and property of Texas Seasons Corporation through the Company’s indirect subsidiary and ANC Zodega’s wholly-owned subsidiary Zodega Landscape Services, LLC for $0.8 million cash, consisting of $0.5 million paid at closing and an aggregate of $0.3 million in deferred consideration to be paid on the one-two-and three year anniversary of the closing of the acquisition.

On February 18, 2021, the Company’s subsidiary ANC Green Solutions- Zodega acquired all of the assets and property of Greentex Landscaping Inc., through the Company’s indirect subsidiary and ANC Zodega’s wholly-owned subsidiary Zodega Landscape Services,

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LLC for $0.3 million cash, consisting of $0.2 million paid at closing and an aggregate of $0.1 million in deferred consideration to be paid on the one-two-and three year anniversary of the closing of the acquisition.

On February 19, 2021, the Company’s subsidiary ANC Green Solutions- Zodega acquired all of the assets and property of C.J.’s Yardworks, Inc. through the Company’s indirect subsidiary and ANC Zodega’s wholly-owned subsidiary Zodega Landscape Services, LLC for $2.0 million, consisting of $1.6 million paid at closing and a $0.4 million promissory note.

On March 12, 2021, the Company’s subsidiary ANC Green Solutions- Zodega acquired all of the assets and property of Lillard Lawn & Landscaping, Inc. through the Company’s indirect subsidiary and ANC Zodega’s wholly-owned subsidiary Zodega Landscape Services, LLC for $0.8 million, consisting of $0.4 million paid at closing and a $0.4 million promissory note.

The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for all of the acquisitions of ANC Zodega and subsidiaries (in thousands):

Purchase Price Allocation- Zodega and subsidiaries


Stock purchase price	$	564
Cash purchase price, net of cash acquired		1,212
Total purchase price	$	1,776

Assets acquired:
Accounts receivable and other current assets	$	58
Property and equipment		738
Right-of-use asset		501
Total assets acquired
	$	1,297
Liabilities assumed:
Holdback	$	29
Accounts payable and accrued expenses		91
Contract liability		93
Warranty liability		180
Notes payable		108
Promissory notes		820
Lease liability		501
Deferred cash consideration		341
Non-controlling interest in Zodega subsidiaries		1,951
Total liabilities assumed	$	4,114
Estimated fair value of net assets acquired:	$	(2,817)

Goodwill	$	4,593

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 Zodega acquisition resulted in a noncontrolling 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 Zodega’s acquisition.

The nine months ended September 30, 2021 includes the operations of Zodega Landscape Services, LLC for the period from January 20, 2021, the date of acquisition, to September 30, 2021, the operations of Zodega Landscape Services, LLC - Texas Seasons for the period from January 26, 2021, the date of acquisition, to September 30, 2021, the operations of Zodega Landscape Services, LLC - Greentex Landscaping from February 18, 2021, the date of acquisition, to September 30, 2021, the operations of Zodega Landscape

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Services, LLC - C.J.’s Yardworks, Inc. from February 19, 2021, the date of acquisition, to September 30, 2021, and the operations of Zodega Landscape Services, LLC - Lillard Lawn & Landscaping, Inc. from March 12, 2021, date of acquisition, to September 30, 2021. The consolidated statement of operations for the three months ended September 30, 2021 includes approximately $2.9 million and $0.5 million of revenue and net loss, respectively, contributed by ANC Zodega. The consolidated statement of operations for the nine months ended September 30, 2021 includes approximately $6.7 million and $0.3 million of revenue and net loss respectively, contributed by ANC Zodega.

In the three and nine months ended September 30, 2021, the Company recognized $237,269 and $237,269, respectively of transaction costs related to the acquisition of Zodega in general and administrative expenses. In the three months ended March 31, 2021, the Company recognized $130,616 of transaction costs related to the acquisition of Zodega and in the three months ended June 30, 2021, the Company inadvertently reversed $130,616 of such transaction costs resulting in a reduction to general and administrative expenses by this amount. The Company should have recognized $237,269 of transaction costs in the three months ended March 31, 2021 and $0 transaction costs for each of the three months ended June 30, 2021 and September 30, 2021. The Company corrected this error in the statement of operations for the three months ended September 30, 2021 as the Company concluded that the error was not material to any previously issued financial statements or to the financial statements for the three months ended September 30, 2021.

Unaudited Pro forma Financial Information

The following unaudited proforma financial information presents the combined results of operations of the Company and gives effect to the ANC Potter’s, ANC Smith’s and ANC Zodega and Subsidiaries’ acquisitions discussed above for the three and nine months ended September 30, 2020, as if the acquisitions had occurred as of the beginning of the first period presented instead of on February 3, 2020, February 28, 2020 and January 20, 2021, respectively.

The following unaudited proforma financial information presents the combined results of operations of the Company and gives effect to the ANC Zodega and Subsidiaries’ acquisitions discussed above for the three and nine months ended September 30, 2021, as if the acquisition had occurred as of the beginning of the first period presented instead of on January 20, 2021.

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, ANC Smith and ANC Zodega and Subsidiaries’ acquisition had been completed on January 1, 2020, 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 and does not include the pro forma effect of the other business combinations which occurred during the periods presented.

The proforma financial information for the Company, ANC Potter’s, ANC Smith’s and ANC Zodega and Subsidiaries is as follows. Pro forma adjustments for ANC Potter’s and ANC Smith’s are not included in 2021 proforma information as the acquisitions occurred on February 3, 2020 and February 28, 2020, respectively:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
Description	2021		2020		2021		2020
Revenues	$	5,292,647	$	4,530,276	$	14,270,411	$	13,419,673
Net loss attributable to common shareholders	$	(1,256,190)	$	(674,740)	$	(2,807,787)	$	(2,109,367)

For purposes of the pro forma disclosures above, the primary adjustments for the nine months ended September 30, 2021 include the elimination of transaction costs of approximately $0.2 million. The primary adjustments for the three and nine months ended September 30, 2020 include the elimination of transaction costs of approximately $0 million and $0.1 million, respectively.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5- Property and Equipment

Property and equipment consisted of the following:


	September 30, 2021		December 31, 2020
Vehicles	$	644,374	$	469,400
Equipment		3,556,386		1,815,094
Land		174,585		174,585
Buildings		51,947		51,947
Leasehold improvements		102,886		66,886
Office equipment		4,077		5,892
Total property and equipment		4,534,255		2,583,804
Less: Accumulated depreciation		(997,074)		(435,886)
Property and equipment, net	$	3,537,181	$	2,147,918

Depreciation expense was $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2020, respectively.

Note 6- Goodwill and Intangible Assets

Changes in goodwill for the nine months ended September 30, 2021 consists of the following:


	Goodwill
Balance at December 31, 2020	$	7,913,123
Acquisition of Zodega subsidiaries		4,593,750
Balance at September 30, 2021	$	12,506,873

As of September 30, 2021 and December 31, 2020, the Company’s intangible assets consisted of the following:


	Weighted average	September 30, 2021
	amortization period			Accumulated
	(in years)	Gross		Amortization		Net
Tradenames	7.5	$	932,000	$	(220,927)	$	711,073
Customer relationships	5.7		3,289,000		(1,048,233)	$	2,240,767
Non-compete agreements	6.6		564,000		(146,588)	$	417,412
		$	4,785,000	$	(1,415,748)	$	3,369,252


	Weighted average	December 31, 2020
	amortization period			Accumulated
	(in years)	Gross		Amortization		Net
Tradenames	7.5	$	932,000	$	(125,708)	$	806,292
Customer relationships	5.7		3,289,000		(611,709)	$	2,677,291
Non-compete agreements	6.6		564,000		(79,893)	$	484,107
		$	4,785,000	$	(817,310)	$	3,967,690

Amortization expense was $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2020, respectively.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


2021 (excluding the nine months ended September 30, 2021)	$	199,480
2022		797,920
2023		797,920
2024		781,670
2025		535,087
Thereafter		257,175
Total	$	3,369,252

Note 7- Leases

The Company leases facilities under agreements classified as operating leases that expire in 2022, 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.

In connection with the ANC-Zodega Subsidiaries acquisitions, as described in Note 1, the Company assumed lease agreements with third party vendors. The leases resulted in a $0.5 million right of use asset and a $0.5 million lease liabilities.

At September 30, 2021 and December 31, 2020, the Company had operating lease liabilities of $0.6 million and $0.3 million, respectively, and right of use assets of $0.6 million and $0.3 million, respectively.

Lease expenses during the three and nine months ended September 30, 2021 and September 30, 2020 are as follows:


	Three Months Ended September 30,
	2021		2020
Operating lease expense	$	79,809	$	23,250
Short-term lease rent expense		10,349		23,221
	$	90,158	$	46,471


	Nine Months Ended September 30,
	2021		2020
Operating lease expense	$	220,618	$	66,250
Short-term lease rent expense		30,400		61,420
	$	251,018	$	127,670

The weighted-average remaining lease term as of September 30, 2021 was 2.6 years. The weighted-average discount rate was 6%.

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


	Nine Months Ended
	September 30, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	220,618


	Nine Months Ended
	September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	66,250

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Lease Maturity


	As of September 30, 2021
2021 (excluding the nine months ended September 30, 2021)	$	79,809
2022		297,366
2023		227,945
2024		51,843
2025		—
Thereafter		—
Total future minimum lease payments	$	656,963
Less imputed interest		(29,225)
Total	$	627,738

Note 8 – Accounts Payable and Accrued Liabilities

As of September 30, 2021 and December 31, 2020, the Company’s accounts payable and accrued liabilities consisted of the following:


	September 30, 2021		December 31, 2020
Accounts payable	$	1,317,468	$	317,038
Accrued professional fees		320,510		197,597
Accrued franchise tax		—		77,600
Accrued payroll		291,186		26,423
Due to noncontrolling interest		47,133		66,706
Accounts payable and accrued liabilities	$	1,976,297	$	685,364

Current portion of deferred consideration	$	(776,762)	$	(1,575,443)
Deferred consideration, net of current portion	$	(227,755)	$	(346,884)

Note 9 - Notes Payable

Notes payable consists of the following:


	September 30, 2021		December 31, 2020

Equipment notes	$	1,302,935	$	761,075
Promissory notes		1,310,774		—
PPP loans		—		378,346
		2,613,709		1,139,421
Less: current portion of Notes Payable		(213,597)		(385,963)
Notes payable, net of current portion	$	2,400,112	$	753,458

Equipment notes

During the year ended December 31, 2020, ANC Smith’s entered into secured loan agreements with an aggregate principal balance of $0.7 million for the purchase of certain equipment. The equipment notes bear interest at a fixed rate of 2.85% and are due to be repaid in monthly installments over their five year terms.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ANC Potter’s is party to equipment loan agreements, the proceeds of which were used to purchase certain equipment and a truck. The loans have remaining terms ranging from less than one year to five years, with approximate monthly principal payments of $8,505, and bear a weighted average annual interest rate of 4.5%. There were no security interests granted under the terms of the equipment notes.

ANC Zodega assumed secured loan agreements, as part of the acquisition discussed in Note 1, with an aggregate principal balance of $0.1 million for the purchase of certain equipment. The equipment notes bear interest at a fixed rate of 6.0% and are due to be repaid in monthly installments over the three year terms.

During the nine months ended September 30, 2021, the Company made aggregate principal payments of approximately $173,000 on its equipment notes.

During the nine months ended September 30, 2020, the Company made aggregate principal payments of approximately $33,000 on its equipment notes.

Promissory notes

On February 19, 2021, the Company entered into an agreement with CJ’s Yardworks, Inc. to issue a promissory note of $400,000, which bears interest at 5.0% of the principal amount. The payments for this note began three months after closing (May 19, 2021). The promissory note matures on February 19, 2026. The note is to be repaid by sixty equal payments of $7,548 commencing in March 2021.

On March 12, 2021, the Company entered into an agreement with Lillard Lawn & Landscape Inc. to issue a promissory note of $420,000, which bears interest at 6.0% of the principal amount. The payments for this note shall not begin until the first business day of the seventh full calendar month after closing (October 12, 2021), and no interest shall accrue on the note until such time. The promissory note matures on March 12, 2026. The note is to be repaid by sixty equal payments of $8,120 commencing in October of 2021.

During the nine months ended September 30, 2021, the Company made aggregate principal payments of approximately $78,000 on its promissory notes.

PPP loans

In April 2020, ANC Green Solutions I, ANC Potter’s and ANC Smith’s each qualified for and received a loan (the “PPP Loans”) pursuant to the Paycheck Protection Program, a program implemented by the U.S. Small Business Administration (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act, from qualified lenders. The PPP Loans bear interest at a fixed rate of 1.0% per annum, have terms of two years, and are unsecured and guaranteed by the SBA. 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.

During the twelve months ended December 31, 2020, the Company applied for forgiveness of the PPP Loans with respect to these covered expenses. ANC Smith’s forgiveness application was accepted in November 2020 and the Company recognized $0.2 million in Other income on its consolidated statement of operations.

In March 2021, ANC Potter’s PPP loan forgiveness application was accepted and the Company recognized $0.2 million in other income on its consolidated statement of operations.

In April 2021, ANC Green Solutions’ PPP Loan forgiveness application was accepted and the Company recognized $0.2 million in other income on its consolidated statement of operations.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 – Stockholders Equity

Preferred Stock

The Company is authorized to issue 5.0 million shares of preferred stock, par value $0.001 as of September 30, 2021 and December 31, 2020. No shares of preferred stock were issued or are outstanding as of September 30, 2021 and December 31, 2020.

Common Stock

The Company has authorized 67.5 million shares of common stock, $0.001 par value per share as of September 30, 2021 and December 31, 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. Both classes of common stock qualify for and share equally in dividends, if declared by the Company’s board of directors (the “Board”). In the event of liquidation, dissolution, distribution of assets or winding-up of the Company, the holders of both classes of common stock have equal rights to receive all the assets of the Company, after rights of the holders of the preferred stock, if any, have been satisfied.

Class A Common Stock

Holders of Class A Common Stock are entitled to one vote per share on matters to be voted upon by stockholders. Holders of Class A Common Stock have no preemptive rights to subscribe for or to purchase any additional shares of Class A Common Stock or other obligations convertible into shares of Class A Common Stock which the Company may issue in the future.

All of the outstanding shares of Class A Common Stock are fully paid and non-assessable. Holders of our Class A Common Stock are not liable for further calls or assessments.

During the nine months ended September 30, 2021, the Company entered into separate subscription agreements with certain accredited investors, pursuant to which the Company, in private placements, issued and sold to the accredited investors an aggregate of 1,088,053 shares of its Class A Common Stock, at an offering price of $11.00 per share, for gross proceeds to the Company of $12.0 million and net proceeds of $11.5 million.

During the three months ended September 30, 2021, the Company paid a second tranche of share issuance fees in the amount of $240,000 in connection with the private placements, issued and sold to certain accredited investors.

As noted in Note 1, the Company purchased an undivided fifty-one percent (51%) interest in all of Zodega Seller’s right, title and interest in and to all of Zodega Seller’s property and assets in consideration for 46,161 shares of the Company’s Class A common stock, with a value of approximately $0.6 million, subject to certain adjustments, as set forth in the Zodega Purchase Agreement.

As of September 30, 2021 and December 31, 2020, there were 3,615,128 and 2,416,866 shares of Class A Common Stock outstanding, respectively.

During the nine months ended September 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 accredited investors an aggregate of 205,114 shares of its Class A Common Stock, at an offering price of $11.00 per share, for net proceeds to the Company of $2.2 million.

As of September 30, 2020 there were 1,935,046 shares of Class A Common Stock outstanding.

Class B Common Stock

Holders of Class B Common Stock are entitled to fifty votes per share on matters to be voted upon by stockholders. Holders of our Class B Common Stock are entitled to elect, exclusively and as a separate class, three of the Company’s six members of the Board, who may not be removed without cause without the affirmative vote of holders of a majority of the outstanding shares of Class B Common Stock, voting as a separate class.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Holders of the Class B Common Stock may, at any time, convert their Class B Common Stock into one share of Class A Common Stock. The Class B conversion ratio is subject to adjustments upon the occurrence of certain events.

As of September 30, 2021 and December 31, 2020, there were 81,198 shares of Class B Common Stock outstanding.

On November 1, 2021, 81,198 shares of Class B Common Stock were converted into 81,198 shares of Class A Common Stock.

Warrants

As of September 30, 2021, the Company had no outstanding warrants.

The Class W-1 and Class W-2 warrants, (together, the “Warrants”) were issued by the Company and were fully vested. On February 1, 2021, all outstanding Warrants were terminated and a refund of $75,000 was returned to the Warrant Holders for the original purchase price for the Warrants.

A summary of warrant activity during the period December 31, 2020 through September 30, 2021 is as follows:


		Weighted		Weighted average
		average		remaining contractual
	Warrants	exercise price		life (in years)
Outstanding as of December 31, 2020	2,250,000	$	13.75		7.70
Forfeited	(2,250,000)		13.75		—
Outstanding as of September 30, 2021	—	$	—		—

Note 11 – Share-based Compensation

The Andover National Corporation 2019 Equity Incentive Plan (the “Plan”) provides for the issuance of incentive and non-incentive stock options, stock grants and share-based awards. Options and restricted stock units granted generally vest over a period of one to four years and have a maximum term of ten years from the date of grant.

As of September 30, 2021 an aggregate of 1,705,028 shares of common stock were authorized under 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 September 30, 2021, 1,411,095 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 September 30, 2021.

The Company recorded total share-based compensation expense of $0.3 million and $1.2 million for the three and nine months ended September 30, 2021.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

Below is a table summarizing the unvested restricted stock units through September 30, 2021:


			Weighted average
	Units		grant-date fair value
Unvested as of December 31, 2020		105,008	$	11.00
Granted		139,500		11.00
Vested		(64,046)		11.00
Unvested as of September 30, 2021		180,462	$	11.00
Total unrecognized expense remaining	$	856,303
Weighted average years expected to be recognized over		1.1

The fair value of restricted stock units that vested during the three and nine months ended September 30, 2021 was approximately $0.3 million and $0.7 million, respectively.

Note 12 – Income (Loss) Per Common Share

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 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 nine months ended September 30, 2021 and September 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:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Numerator:
Net loss attributable to common shareholders	$	(1,256,190)	$	(763,981)	$	(2,978,335)	$	(2,629,745)

Denominator:
Weighted average Class A common shares outstanding		3,594,671		1,928,073		3,451,120		1,879,205
Weighted average Class B common shares outstanding		81,198		81,198		81,198		81,198
Weighted average Class A and Class B common shares outstanding - Basic		3,675,869		2,009,271		3,532,318		1,960,403
Dilutive effect of potential common shares		—		—		—		—
Weighted average Class A and Class B common shares outstanding - Diluted		3,675,869		2,009,271		3,532,318		1,960,403

Net loss per share attributable to Class A and Class B Common shareholders - Basic	$	(0.34)	$	(0.38)	$	(0.84)	$	(1.34)
Net loss per share attributable to Class A and Class B Common shareholders - Diluted	$	(0.34)	$	(0.38)	$	(0.84)	$	(1.34)

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following potentially dilutive securities outstanding for the periods ended September 30, 2021 and September 30, 2020 have been excluded from the computation of diluted weighted average shares outstanding, as they would be antidilutive.


	September 30, 2021	September 30, 2020
Unvested Restricted Stock Units	180,462	118,191
Warrants	—	2,250,000
	180,462	2,368,191

Note 13 – Related Party Transactions

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 approximately $18,000 and $54,000 to Mr. Cohen during the three and nine months ended September 30, 2021, and $23,000 and $61,000 during the three and nine months ended September 30, 2020, related to this lease agreement.

In January 2021, the Company entered into a subscription agreement at an offering price of $11.00 per share with The Brandon T. Greenblatt, 2015 Trust, The Maggie S. Greenblatt, 2015 Trust, and The Steven J. Greenblatt 2015 Trust for 109,090 shares of Class A Common Stock each in exchange for an aggregate of $1,199,990 cash. The trusts are affiliated with our board member William Greenblatt.

In February 2021, the Company and each of Blumenthal Family Investment Joint Venture, L.P., Jeffrey C. Piermont and The Peter A. Cohen Revocable Trust (the “Warrant Holders”) entered into Warrant Cancellation Agreements in order to terminate the Warrants and to refund the Warrant Holders the original purchase price for the Warrants. The Warrant Holders were an entity controlled by an advisor, an officer of the Company and an entity controlled by an officer, respectively.

In February 2021, the Company entered into a subscription agreement at an offering price of $11.00 per share, with Cacti Asset Management, which maintains board member Joshua Pechter as Chief Compliance Officer, for 18,182 shares of Class A Common Stock in exchange for $200,000 cash.

In February 2021, 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 45,455 shares of Class A Common Stock in exchange for $500,000 cash.

In connection with the funding of the capital calls for the ANC-Zodega Subsidiaries acquisitions, as described in Note 1, the Company entered into unsecured promissory note agreements with Litton Enterprises Inc. for $1.4 million. The outstanding balance of the promissory note receivable as of September 30, 2021 was approximately $1.2 million. The promissory note agreements bear interest at a rate of Prime plus 7.0%, payable on the first day of each month, and the entire principal amount is due to be repaid by the minority interest holder to the Company on the fourth anniversary of the note agreement. The Company recognized $36,099 and $88,783 in interest income during the three and nine months ended September 30, 2021, respectively related to this 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 $38,250 during the three and nine months ended September 30, 2021 and 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 $31,500 during the three and nine months ended September 30, 2021, respectively, and $10,500 and $28,000 during the three and nine months ended September 30, 2020, respectively related to this agreement.

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ANDOVER NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 – Commitments and Contingencies

Legal Proceedings

We are not currently subject to any material 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.

Note 15 – Subsequent Events

On October 5, 2021, the Board granted a total of 225,579 performance restricted stock units (“PSUs”) to certain directors, officers, and advisors of the Company in exchange for the cancellation of 180,455 previously issued and unvested restricted stock units (“RSUs”). The PSUs add a performance vesting condition that will only be satisfied upon the occurrence of a “Liquidity Event” as defined in the PSU Agreement to include the listing of a class of the Company’s equity securities on a national securities exchange or the occurrence of a Change of Control (as defined in the Plan). The PSUs were granted under the Plan. Each PSU represents a contingent right to receive one share of the Company’s Class A Common Stock. In addition to the performance vesting condition described above, the grants are also subject to time-based vesting conditions set forth in the individual PSU agreements.

On November 1, 2021, 81,198 shares of Class B Common Stock were converted into 81,198 shares of Class A Common Stock. There are no remaining Class B shares outstanding as of November 1, 2021.

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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 March 20, 2014 as Acadia Technologies, Inc. We changed our name to Edgar Express, Inc. (“Edgar Express”) on September 15, 2016.

On September 25, 2018, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) by and among us, our stockholders (collectively, the “Sellers”), John D. Thomas, P.C., as the Sellers’ representative, and Windber National LLC, The Peter A. Cohen Revocable Trust, Blumenthal Family Investment Joint Venture, L.P., and Jeffrey C. Piermont (collectively, the “Buyers”), pursuant to which the Buyers paid $450,000 in aggregate cash consideration for (i) 2,340,000 shares of our Class A Common Stock, par value $0.001, from the Sellers, which shares constituted 99.96% of our issued and outstanding shares as of September 25, 2018 and (ii) the extinguishment and payment in full of (A) an aggregate of approximately $307,371 in our notes payable, and (B) an aggregate of approximately $54,187 in loans payable by us (the “Acquisition”). As a result of the Acquisition, the Buyers held a controlling interest in us. The above share amounts have been adjusted to reflect the Reincorporation (as defined below).

Effective February 14, 2019, we completed a change of domicile to Delaware from Utah (the “Reincorporation”) by means of a merger of Edgar Express with and into us, its wholly-owned subsidiary. In connection with the Reincorporation, and effective upon the effectiveness of the Reincorporation, each issued and outstanding share of common stock, par value $0.001 per share, of Edgar Express automatically converted into and became one-fifth (¹/₅^th) of one validly issued, fully paid and non-assessable share of our Class A Common Stock without any action on the part of Edgar Express’ stockholders.

On October 4, 2019, Andover Environmental Solutions, LLC, our wholly-owned subsidiary (“Andover Environmental”), entered into a Membership Interest Purchase Agreement with Heath L. Legg, pursuant to which Andover Environmental purchased sixty percent (60%) of the membership interests of ANC Green Solutions I, LLC, a Delaware limited liability company, for $4,000,000 in cash, subject to certain adjustments (the “Business Combination”). The primary reason for this acquisition was to expand our existing business into new markets, and to increase the revenue through acquisitions using cash we have available through recent sales of equity securities. We were able to obtain control through the cash purchase of membership interests in a newly formed subsidiary.

On February 3, 2020, Potter’s Professional Lawn Care, LLC, our indirect subsidiary (“Potter’s Buyer”), entered into an Asset Purchase and Contribution Agreement (the “Purchase Agreement”) with Potter’s Professional Lawn Care, Inc., a Florida corporation (“Potter’s Seller”), and the shareholders of Potter’s Seller party thereto, pursuant to which Potter’s Buyer purchased from Potter’s Seller a sixty percent (60%) interest in all of Potter’s Seller’s right, title and interest in and to all of Potter’s Seller’s property and assets, for $1,680,000 in cash, subject to certain adjustments.

On February 28, 2020, Smith’s Tree Care, LLC (“Smith’s Buyer”), our indirect subsidiary, entered into an Asset and Equity Purchase and Contribution Agreement (the “Smith’s Purchase Agreement”) with Smith’s Tree Care, Inc., a Virginia corporation (“Smith’s Seller”), Utro Crane Company, LLC, our indirect subsidiary, Utro Crane Company, Inc., a Virginia corporation, and ANC Green Solutions - Smith’s, LLC, our indirect subsidiary (“ANC Smith’s”), pursuant to which, among other things, (i) Smith’s Buyer purchased an undivided sixty percent (60%) interest in all of Smith’s Seller’s right, title and interest in and to all of Smith’s Seller’s property and assets (the “Smith’s Acquired Assets”), in consideration for an aggregate purchase price payable by Smith’s Buyer of approximately $3.0 million, subject to certain adjustments, as set forth in the Smith’s Purchase Agreement and (ii) Smith’s Seller conveyed, transferred, assigned and delivered to ANC Smith’s an undivided forty percent (40%) interest in the Smith’s Acquired Assets in exchange for equity securities of ANC Smith’s.

On January 20, 2021, Zodega Landscape Services, LLC (“Zodega Buyer”), our indirect subsidiary, entered into an Asset Purchase and Contribution Agreement (the “Zodega Purchase Agreement”) with Litton Enterprises Inc. (d/b/a Zodega-TIS Services), a Texas corporation (“Zodega Seller”), ANC Green Solutions - Zodega, LLC (“ANC Zodega”), our indirect subsidiary, and

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Messrs. Robert Dihu and Larry Litton Jr., pursuant to which, among other things, (i) Zodega Buyer purchased an undivided fifty-one percent (51%) interest in all of Zodega Seller’s right, title and interest in and to all of Zodega Seller’s property and assets (the “Zodega Acquired Assets”), in consideration for shares of our Class A Common Stock, (ii) Zodega Seller conveyed, transferred, assigned and delivered to ANC Zodega an undivided forty-nine percent (49%) interest in the Zodega Acquired Assets (the “Zodega Contributed Assets”) in exchange for equity securities of ANC Zodega, and (iii) ANC Zodega conveyed, transferred, assigned and delivered the Zodega Contributed Assets to Zodega Buyer. The closing of the transactions contemplated by the Zodega Purchase Agreement occurred on January 20, 2021. Following our initial acquisition of the Zodega business, Zodega has completed four bolt-on acquisitions of businesses providing landscaping and hardscaping, landscape design, lawn and landscape maintenance 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 temporarily reduced our capacity. 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

Reclassifications

The Company revised its consolidated financial statements for 2020 and 2021 to correct the classification of certain expenses between General and Administrative Expense and Cost of Services. The revision resulted in an increase to Cost of Services and an equal and offsetting decrease to General and Administrative Expense. There is no impact on loss from operations, net loss, net loss attributable to noncontrolling interest, net loss attributable to common shareholders, or net loss per common share. In addition, there is no impact on the Company’s consolidated balance sheet, consolidated statement of equity and redeemable noncontrolling interest, or the consolidated statement of cash flow.

Comparison of the Three Months Ended September 30, 2021 and 2020


	Three Months		Three Months
	Ended September		Ended September		Increase (Decrease)
	30, 2021		30, 2020		in Dollars
Revenues	$	5,292,647	$	2,148,538	$	3,144,109
Operating costs and expenses:
Cost of services provided		3,386,990		1,483,885		1,903,105
General and administrative expenses		3,340,961		1,393,940		1,947,021
Sales and marketing		99,876		37,914		61,962
Total operating costs and expenses		6,827,827		2,915,739		3,912,088
Loss from operations		(1,535,180)		(767,201)		(767,979)
Other income (loss)		23,324		(753)		24,077
Net loss		(1,511,856)		(767,954)		(743,902)
Less: Net loss attributable to noncontrolling interest		(255,666)		(3,973)		(251,693)
Net loss attributable to common shareholders	$	(1,256,190)	$	(763,981)	$	(492,209)

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Revenue

Our revenue was generated from residential and commercial lawn care programs and services, which includes lawn care, landscaping and hardscaping, irrigation and pest-control services, in addition to pest-control franchisor revenue. In addition, revenue is generated from tree care services, which includes tree service, tree removal, stump grinding, mulching, logging and related services. We generated revenues of approximately $5.3 million during the three months ended September 30, 2021 as compared to revenue of $2.1 million the three months ended September 30, 2020. The increase in revenue was primarily attributable to the acquisition of Zodega in the first quarter of 2021, which contributed revenue of approximately $2.9 million for the three months ended September 30, 2021.

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 September 30, 2021 increased $1.9 million as compared to costs of services provided in the three months ended September 30, 2020 primarily due to the acquisition of ANC Zodega in the first quarter of 2021.

General and administrative expenses

General and administrative expenses were $3.3 million during the three months ended September 30, 2021 as compared to $1.4 million during the three months ended September 30, 2020. The increase was primarily attributable to the acquisition of Zodega in the first quarter of 2021 and an increase in professional fees during the three months ended September 30, 2021.

Sales and marketing expenses

Sales and marketing expenses increased by approximately $0.1 million during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, which was primarily attributable to the acquisition of ANC Zodega.

Comparison of the nine months ended September 30, 2021 and 2020


	Nine Months		Nine Months		Increase
	Ended September		Ended September		(Decrease) in
	30, 2021		30, 2020		Dollars
Revenues	$	13,686,261	$	5,471,741	$	8,214,520
Operating costs and expenses:
Cost of services provided		8,737,395		3,458,056		5,279,339
General and administrative expenses		7,821,341		4,543,347		3,277,994
Sales and marketing		459,541		159,692		299,849
Total operating costs and expenses		17,018,277		8,161,095		8,857,182
Loss from operations		(3,332,016)		(2,689,354)		(642,662)
Other income		456,554		32,435		424,119
Net loss		(2,875,462)		(2,656,919)		(218,543)
Less: Net loss attributable to noncontrolling interest		102,873		(27,174)		130,047
Net loss attributable to common shareholders	$	(2,978,335)	$	(2,629,745)	$	(348,590)

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 is generated from tree care services, which includes tree service, tree removal, stump grinding, mulching, logging and related services. We generated revenues of approximately $13.7 million during the nine months ended September 30, 2021 as compared to revenue of $5.5 million during the nine months ended September 30, 2020. The increase in revenue was primarily attributable to the acquisition of ANC Zodega in the first quarter of 2021 and a full nine months’ revenue from ANC Potter’s and ANC Smith’s.

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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 nine months ended September 30, 2021 increased $5.3 million as compared to costs of services provided in the nine months ended September 30, 2020 primarily due to the acquisitions of ANC Zodega in the first quarter of 2021 and a full nine months of ANC Potter’s and ANC Smith’s costs.

General and administrative expenses

General and administrative expenses were $7.8 million during the nine months ended September 30, 2021 as compared to $4.5 million during the nine months ended September 30, 2020. The increase was attributable to the acquisition of ANC Zodega in the first quarter of 2021, a full nine months of ANC Potter’s and ANC Smith’s expenses, and an increase in professional fees.

Sales and marketing expenses

Sales and marketing expenses increased by approximately $0.3 million during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, which was primarily due to the acquisition of ANC Zodega in the first quarter of 2021 and a full nine months of ANC Green’s and ANC Smith’s expenses.

Other income (expense)

Other income (expense) of approximately $0.5 million for the nine months ended September 30, 2021 includes $0.4 million of other income related to forgiveness of a PPP loan and investment income from our holdings of highly liquid investments, which are classified as cash equivalents.

Liquidity and Capital Resources

As of September 30, 2021, we had cash and cash equivalents of $20.1 million and total equity of $33.8 million. Net working capital was $19.1 million.

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, and cash flows from 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 our cash on hand will be sufficient to meet our future operating and capital expenditure cash requirements for the next twelve month.

Cash Flow Summary

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


	Nine Months Ended
	September 30,		September 30,
	2021		2020
Net cash used in operating activities	$	(1,974,570)	$	(1,467,579)
Net cash used in investing activities	$	(2,798,711)	$	(3,689,488)
Net cash provided by financing activities	$	10,574,017	$	2,858,910

Operating Activities

During the nine months ended September 30, 2021, cash used in operating activities was $2.0 million primarily as a result of our net loss offset, in part, by stock-based compensation of $1.2 million, and depreciation and amortization expense of $1.2 million. During the nine months ended September 30, 2020, cash used in operating activities was $1.5 million primarily as a result of our net

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loss offset, in part, by share-based compensation of $0.8 million, depreciation and amortization expense of $0.8 million and changes in operating assets and liabilities.

Investing Activities

During the nine months ended September 30, 2021, we used $2.8 million of cash in investing activities primarily as a result of our acquisition of ANC Zodega and the subsidiaries for $1.2 million, the issuance of a related party loan of $1.2 million, and the purchase of fixed assets for $0.4 million. During the nine months ended September 30, 2020, 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.

Financing Activities

During the nine months ended September 30, 2021, $10.6 million of cash was provided by financing activities, primarily from the net proceeds from the issuance of shares in private placements of $11.5 million. During the nine months ended September 30, 2020, $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.

Contractual Obligations

We have deferred purchase consideration associated with the acquisitions of ANC Green Solutions I, ANC Potter’s, ANC Smith’s and ANC Zodega of approximately $1.0 million in aggregate, of which $0.8 million is payable within the next twelve months and $0.2 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 trucks. As of September 30, 2021 and December 31, 2020, $2.6 million and $1.1 million, respectively, was outstanding under the loan agreements. The loans have remaining terms ranging from 1 year to 5 years.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates, which also would have been reasonable, could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in Note 2 to our audited financial statements for 2020 appearing in our Annual Report on Form 10-K for the year ended December 31, 2020. The following are the areas that we believe require the greatest amount of judgments or estimates in the preparation of the financial statements: deferred income tax assets, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our accounting policies are described in Note 2 to our audited financial statements for 2020 appearing in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

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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 September 30, 2021: 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 September 30, 2021, 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 nine months ended September 30, 2021 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

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, 2020.

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.

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Item 6. Exhibits

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

Exhibit Number
10.1		Form of Performance Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 5, 2021 (File No. 000-55882)).
10.2		Separation Agreement and Release of All Claims, dated November 1, 2021, between the Company and Jeffrey C. Piermont (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 1, 2021 (File No. 000-55882)).
31.1		Certification of Periodic Report by Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Periodic Report by Principal Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1		Certification of Periodic Report by Principal Executive Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2		Certification of Periodic Report by Principal Financial and Accounting Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
99.1		Chairman’s Letter dated October 19, 2021 (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on October 19, 2021 (File No. 000-55882)).
101.INS		XBRL Instance Document (filed herewith)
101.SCH		XBRL Taxonomy Schema (filed herewith)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
101.DEF		XBRL Taxonomy Extension Definition Linkbase (filed herewith)
101.LAB		XBRL Taxonomy Extension Label Linkbase (filed herewith)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

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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.

	ANDOVER NATIONAL CORPORATION
	(Registrant)

Date: November 22, 2021	By:	/s/ Peter A. Cohen
		Peter A. Cohen
		Chief Executive Officer
		Principal Executive Officer

Date: November 22, 2021	By:	/s/ Milun K. Patel
		Milun K. Patel
		Chief Financial Officer
		Principal Financial and Accounting Officer

Andover National Corp 10-Q