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TRULEUM, INC. - Quarter Report: 2020 March (Form 10-Q)

aphe20200331_10q.htm
 

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2020

 

Transition Report under Section 13 or 15(d) of the Exchange Act

 

For the Transition Period from                                                   to                                              

 

Commission File Number: 333-197642

 

Alpha Energy, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

  Colorado 90-1020566  
 

(State of other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

     

 

4162 Meyerwood Drive, Houston TX       77025
(Address of principal executive offices)  (Zip Code)

 

Registrant's Phone: 713-316-0061

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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. ☐

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common

APHE

Other OTC

 

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 4, 2020, the issuer had 18,056,428 shares of common stock issued and outstanding.

 

 

 

 

 
 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Page

     

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

16

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

17

Item 4.

Controls and Procedures

17

     
  PART II – OTHER INFORMATION  
     

Item 1.

Legal Proceedings

18

Item 1A.

Risk Factors

18

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

18

Item 3.

Defaults Upon Senior Securities

18

Item 4.

Mine Safety Disclosures

18

Item 5.

Other Information

18

Item 6.

Exhibits

19

 

2

 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

  Page(s)

Consolidated Balance Sheets (unaudited)

4

   

Consolidated Statements of Operations (unaudited)

5

   

Consolidated Statements of Changes in Stockholders' Deficit (unaudited)

6

   

Consolidated Statements of Cash Flows (unaudited)

7

   

Notes to the Consolidated Financial Statements (unaudited)

8

 

3

 

 

ALPHA ENERGY, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

   

March 31, 2020

   

December 31, 2019

 
                 

Assets

               

Noncurrent assets:

               

Oil and gas property, unproved, full cost

  $ 10,000     $ 10,000  
                 

Total assets

  $ 10,000     $ 10,000  
                 

Liabilities and Stockholders' Deficit

               
                 

Current liabilities:

               

Accounts payable

  $ 366,059     $ 300,428  

Accounts payable and accrued expenses - related party

    5,461       3,687  

Interest payable

    40,403       33,653  

Short term advance from related party

    856       397  

Short term note payable

    50,000       50,000  

Derivative liability

    26,240       65,289  

Current portion of convertible credit line payable – related party, net of discount of $11,665

    116,913       -  

Total current liabilities

    605,932       453,454  
                 

Convertible credit line payable – related party, net of discount of $17,396

    -       113,182  

Asset retirement obligation

    805       786  

Total liabilities

    606,737       567,422  
                 

Commitments and contingencies

               
                 

Stockholders' deficit:

               

Preferred stock, $0.0001 par value, 10,000,000 shares authorized and 0 shares issued and outstanding

    -       -  

Common stock, $0.0001 par value, 65,000,000 shares authorized and 17,888,428 and 17,822,428 shares issued and outstanding, respectively

    1,790       1,783  

Additional paid-in capital

    1,820,990       1,754,997  

Accumulated deficit

    (2,419,517 )     (2,314,202 )

Total stockholders' deficit

    (596,737 )     (557,422 )
                 

Total liabilities and stockholders' deficit

  $ 10,000     $ 10,000  

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4

 

 

ALPHA ENERGY, INC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

 

 

   

March 31, 2020

   

March 31, 2019

 
           

As Revised

 
                 

Oil and gas sales

  $ 346     $ 2,270  

Lease operating expenses

    928       2,902  

Gross loss

    (582 )     (632 )
                 

Operating expenses:

               

Professional services

    -       13,908  

Board of director fees

    48,000       48,000  

General and administrative

    83,301       166,849  

Total operating expenses

    131,301       228,757  

Loss from operations

    (131,883 )     (229,389 )
                 

Other income (expense):

               

Interest expense

    (12,481 )     (12,608 )

Gain on change in fair value of derivative liabilities

    39,049       449,133  

Total other income

    26,568       436,525  
                 

Net income (loss)

  $ (105,315 )   $ 207,136  
                 

Income (loss) per share:

               

Basic

  $ (0.01 )   $ 0.01  

Diluted

  $ (0.01 )   $ (0.01 )
                 

Weighted average shares outstanding:

               

Basic

    17,851,879       17,297,372  

Diluted

    17,980,457       17,433,818  

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

 

 

ALPHA ENERGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

 

 

   

Common Stock

   

Additional

   

Accumulated

   

Total Stockholders'

 
   

Shares

   

Amount

   

Paid-in Capital

   

Deficit

   

Deficit

 
                                         

Balance, December 31, 2018

    17,217,428     $ 1,722     $ 1,150,059     $ (1,881,265 )   $ (729,484 )
                                         

Stock issued for cash

    131,000       13       130,987       -       131,000  
                                         

Stock-based compensation

    108,000       11       107,989       -       108,000  
                                         

Net income

    -       -       -       207,136       207,136  
                                         

Balance, March 31, 2019 - As Revised

    17,456,428     $ 1,746     $ 1,389,035     $ (1,674,129 )   $ (283,348 )
                                         
                                         

Balance, December 31, 2019

    17,822,428       1,783       1,754,997       (2,314,202 )     (557,422 )
                                         

Stock issued for cash

    18,000       2       17,998       -       18,000  
      -                                  

Stock-based compensation

    48,000       5       47,995       -       48,000  
                                         

Net loss

    -       -       -       (105,315 )     (105,315 )
                                         

Balance, March 31, 2020

    17,888,428     $ 1,790     $ 1,820,990     $ (2,419,517 )   $ (596,737 )

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6

 

 

ALPHA ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

 

 

   

March 31, 2020

   

March 31, 2019

 
           

As Revised

 
                 

Cash flows from operating activities:

               

Net income (loss)

  $ (105,315 )   $ 207,136  

Adjustments to reconcile net income (loss) to net cash used in operating activities:

               

Stock-based compensation

    48,000       108,000  

Amortization of debt discount

    5,731       9,879  

Gain on change in fair value of derivative liabilities

    (39,049 )     (449,133 )

Asset retirement obligation expense

    19       19  

Changes in operating assets and liabilities:

               

Accounts payable

    66,090       16,118  

Accounts payable-related party

    1,774       (6,579 )

Interest Payable

    6,750       2,729  

Net cash used in operating activities

    (16,000 )     (111,831 )
                 

Cash flows from financing activities:

               

Payment on convertible credit line payable - related party

    (2,000 )     (4,000 )

Advances from related party

    -       23,841  

Payments on short term advances - related party

    -       (30,875 )

Proceeds from sale of common stock

    18,000       131,000  

Net cash provided by financing activities

    16,000       119,966  
                 

Net change in cash and cash equivalents

    -       8,135  
                 

Cash and cash equivalents, at beginning of period

    -       240  
                 

Cash and cash equivalents, at end of period

  $ -     $ 8,375  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes

  $ -     $ -  
                 

Supplemental disclosure of non-cash investing and financing activities:

               

Expenses paid on behalf of the Company by related party

  $ 459     $ -  

Non cash short term loan payable

  $ -     $ 50,000  

 

See accompanying notes to the unaudited consolidated financial statements.

 

7

 

ALPHA ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

NOTE 1 – BASIS OF PRESENTATION

 

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and should be read in conjunction with the audited financial statements and notes thereto for the years ended December 31, 2019 and 2018 which are included on a Form 10-K filed on September 24, 2020. In the opinion of management, all adjustments which include normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows for the periods shown have been reflected herein. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the operating results for the full year. Certain information and footnote disclosures which would substantially duplicate the disclosures contained in the audited financial statements for years ended December 31, 2019 and 2018 have been omitted.

 

Principles of Consolidation

 

Our consolidated financial statements include our accounts and the accounts of our 100% owned subsidiary, Alpha Energy Texas Operating, LLC. All intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that (1) recorded transactions are valid; (2) all valid transactions are recorded and (3) transactions are recorded in the period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the company for the respective periods being presented.

 

Basic and Diluted Income (Loss) per share

 

Net income (loss) per share is provided in accordance with FASB ASC 260-10, "Earnings (Loss) per Share". Basic income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive income (loss) per share excludes all potential common shares if their effect is anti-dilutive. For the three months ended March 31, 2020 and 2019, there were 128,578 and 136,446 shares issuable from convertible credit line payable which were considered for their dilutive effects, respectively.

 

The reconciliation of basic and diluted loss per share is as follows:

 

   

March 31, 2020

   

March 31, 2019

 
                 

Basic net income (loss)

  $ (105,315 )   $ 207,136  

Add back: Gain on change in fair value of derivative liabilities

    (39,049 )     (449,133 )

Diluted net loss

  $ (144,364 )   $ (241,997 )
                 

Basic and dilutive shares:

               

Weighted average basic shares outstanding

    17,851,879       17,297,372  

Shares issuable from convertible credit line payable

    128,578       136,446  

Dilutive shares

    17,980,457       17,433,818  
                 

Income (loss) per share:

               

Basic

  $ (0.01 )   $ 0.01  

Diluted

  $ (0.01 )   $ (0.01 )

 

8

 

Fair Value of Financial Instruments

 

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

The carrying amount of the Company’s financial instruments consisting of cash and cash equivalents, accounts payable, notes payable and convertible notes approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

 

 

Recently Issued Accounting Standards Not Yet Adopted

 

The Company has reviewed all recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that no other pronouncements will have a significant effect on its financial statements.

 

Revision of Prior Period Financial Statements

 

In 2020, the Company identified errors in account balances in the Form 10Q filed for the three months ended March 31, 2019. The following accounts were deemed to contain errors: accounts payable, derivative liability, common stock, additional paid in capital, operating expenses, interest expense and loss on derivative liabilities. The errors resulted from incorrect recording of stock-based compensation and overstatements of derivative liability and amortization of debt discount.

 

Based on an analysis of Accounting Standards Codification (“ASC”) 250 – “Accounting Changes and Error Corrections” (“ASC 250”) and Staff Accounting Bulletin 108 – “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), the Company determined that these errors were immaterial to the previously issued financial statements, and as such no restatement was necessary. Correcting prior period financial statements for immaterial errors would not require previously filed reports to be amended. Such correction may be made the next time the registrant files the prior period financial statements. Accordingly, the misstatements were corrected in the consolidated balance sheet as of March 31, 2019 and consolidated statements of operations and cash flows for the three months ended March 31, 2019.

 

9

 

The tables below summarize previously reported amounts and the adjusted presentation of the consolidated balance sheet and consolidated statements of operations and cash flows for the affected period:

 

ALPHA ENERGY, INC.

CONSOLIDATED BALANCE SHEET

(Unaudited)

 

 

   

March 31, 2019

 
   

As Reported

   

Adjustment

   

As Revised

 

Current assets

                       

Cash

  $ 8,375     $ -     $ 8,375  

Total current assets

    8,375       -       8,375  
                         

Oil and gas property, unproved, full cost

    80,000       (20,000 )     60,000  

Total assets

  $ 88,375     $ (20,000 )   $ 68,375  
                         

Liabilities and Stockholders' Deficit

                 
                         

Current liabilities

                       

Accounts payable

  $ 71,868       (181 )   $ 71,687  

Interest payable

    14,208       -       14,208  

Short term advance from related party

    17,332       -       17,332  

Short term note payable

    50,000       -       50,000  

Derivative liability

    136,446       (35,660 )     100,786  

Total current liabilities

    289,854       (35,841 )     254,013  
                         

Convertible credit line payable - related party

    127,555       (30,574 )     96,981  

Asset retirement obligation

    729       -       729  

Total liabilities

    418,138       (66,415 )     351,723  
                         

Stockholders' deficit

                       

Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued or outstanding

    -       -       -  

Common stock, $0.0001 par value; 65,000,000 shares authorized; 17,456,428 issued and outstanding at March 31, 2019

    1,746       -       1,746  

Additional paid in capital

    1,335,475       53,560       1,389,035  

Accumulated deficit

    (1,666,984 )     (7,145 )     (1,674,129 )

Total stockholder deficit

    (329,763 )     46,415       (283,348 )
                         

Total liabilities and stockholders' deficit

  $ 88,375     $ (20,000 )   $ 68,375  

 

10

 

ALPHA ENERGY, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

 

   

For the three months ended March 31, 2019

 
   

As Reported

   

Adjustment

   

As Revised

 
                         

Oil & Gas Sales

  $ 2,270     $ -     $ 2,270  

Lease operating expenses

    2,902       -       2,902  

Gross margin

    (632 )     -       (632 )
                         

Operating expenses:

                       

Professional services

    118,908       (105,000 )     13,908  

Board of directors fees

    48,000       -       48,000  

General and administrative

    42,031       124,818       166,849  

Total operating expenses

    208,939       19,818       228,757  
                         

Loss from operations

    (209,571 )     (19,818 )     (229,389 )
                         

Other income (expense):

                       

Interest expense

    (23,332 )     10,724       (12,608 )

Gain (loss) on change in fair value of derivative liabilities

    472,152       (23,019 )     449,133  

Total other income (expense)

    448,820       (12,295 )     436,525  
                         

Net income (loss)

  $ 239,249     $ (32,113 )   $ 207,136  
                         
                         

Income per share:

                       

Basic

  $ 0.01     $ -     $ 0.01  

Diluted

  $ 0.01     $ -     $ 0.01  
                         
                         

Weight average shares common share outstanding: basic and diluted

                       

Basic

    17,323,284       (25,912 )     17,297,372  

Diluted

    17,459,730       (25,912 )     17,433,818  

 

11

 

ALPHA ENERGY, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

   

For the three months ended March 31, 2019

 
   

As Reported

   

Adjustments

   

As Revised

 

Cash flows from operation activities

                       

Net income

  $ 239,249     $ (32,113 )   $ 207,136  

Adjustments to reconcile net loss to net cash used in operating activities

                       

Stock-based compensation

    60,000       48,000       108,000  

Amortization of debt discount

    20,603       (10,724 )     9,879  

(Gain) loss on change in fair value of derivative liabilities

    (472,152 )     23,019       (449,133 )

Asset retirement obligation expense

    19       -       19  

Change in operating assets and liabilities:

                       

Accounts payable

    57,721       (41,603 )     16,118  

Accounts payable related party

    -       (6,579 )     (6,579 )

Interest payable

    2,729       -       2,729  

Net cash used in operating activities

    (91,831 )     (20,000 )     (111,831 )
                         

Cash flows from investing activities

                       

Deposit for purchase of oil and gas properties

    (70,000 )     70,000       -  

Net cash used in investing activities

    (70,000 )     70,000       -  
                         

Cash flows from financing activities

                       

Advances from related party

    19,841       4,000       23,841  

Payment on convertible credit line payable - related party

    -       (4,000 )     (4,000 )

Proceeds from notes payable

    50,000       (50,000 )     -  

Proceeds from sale of stock

    131,000       -       131,000  

Repayments of related party advances

    (30,875 )     -       (30,875 )

Net cash provided by financing activities

    169,966       (50,000 )     119,966  
                         

Net change in cash and cash equivalents

    8,135       -       8,135  

Cash and cash equivalent, beginning of period

    240       -       240  

Cash and cash equivalent, end of period

  $ 8,375     $ -     $ 8,375  
                         

Supplemental disclosure of non-cash financing activities

                       

Stock issued for accrued compensation and directors fees

  $ 536,701     $ (536,701 )   $ -  

Non cash short term loan payable

  $ 50,000     $ 50,000     $ 50,000  

 

12

 

 

NOTE 2 – GOING CONCERN

 

The Company’s interim unaudited financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company does not have any cash or other current assets, nor does it have an established ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

 

NOTE 3 – RELATED PARTY TRANSACTIONS

 

The Company received advances from related parties totaling $0 and $23,841 and repaid $0 and $30,875 during the three months ended March 31, 2020 and 2019, respectively. The advances from related parties are not convertible, bear no interest and are due on demand. During the three months ended March 31, 2020, a related party paid $459 of expenses on behalf of the Company.

 

There was $856 and $397 due to related parties as of March 31, 2020 and December 31, 2019, respectively. The Chief Financial Officer allows the use of his residence as an office for the Company at no charge.

 

 

 

NOTE 4 – COMMON STOCK

 

The Company is authorized to issue up to 10,000,000 shares of $0.0001 par value preferred stock and 65,000,000 shares of $0.0001par value common stock.

 

The Board of Directors authorized the Company to sell 750,000 shares of common stock at $1.00 per share to raise working capital.

 

During the quarter ended March 31, 2020, the Company sold 18,000 shares of the common stock for total proceeds of $18,000.

 

The Company compensates each of its directors with 4,000 shares of common stock each month. During each of the quarters ended March 31, 2020 and 2019, the Company issued 48,000 shares of common stock valued at $48,000.


During the quarter ended March 31, 2019, the Company issued 60,000 shares of common stock with a fair value of $60,000 for consulting services.

 

During March 2019, the Company sold 131,000 shares of common stock for $1 per share in a private placement for total proceeds of $131,000.

 

 

 

NOTE 5 – NOTE PAYABLE

 

On March 30, 2019, the Company executed a promissory note for $50,000 to ZHQ Holdings, LLP (75%) and Pure Oil & Gas, Inc (25%). The due date of the note is April 30, 2019 and has an interest rate of $50 per day. The note is for an escrow payment made directly to Premier Gas Company, LLC to hold the Purchase and Sale Agreement dated January 29, 2019. The note is secured by 50,000 shares of the Company’s common stock at $1 per share. As of March 31, 2020, the note is outstanding with accrued interest of $16,550.

 

13

 

 

NOTE 6 – CONVERTIBLE CREDIT LINE PAYABLE – RELATED PARTY

 

On September 1, 2017, the Company entered into a convertible credit line agreement to borrow up to $500,000. On the same date, the outstanding balance on a note payable of $87,366 was exchanged as a draw on the credit line. The loan modification is considered substantial under ASC 470-50. The outstanding balance accrues interest at a rate of 7% per annum and the outstanding balance is convertible to common stock of the Company at the lesser of the close price of the common stock as quoted on the OTCBB on the day interest is due and payable immediately preceding the conversion or $1.50. The Company analyzed the conversion options in the convertible line of credit for derivative accounting consideration under ASC 815, Derivative and Hedging, and determined that the transaction does qualify for derivative treatment. The Company measured the derivative liability and recorded a debt discount of $87,366 upon initial measurement. During the year ended December 31, 2019, the Company recognized an additional debt discount of $7,568 and amortized $39,514 of the discount as interest expense leaving an unamortized discount of $17,396 as of December 31, 2019. During the three months ended March 31, 2020, the Company amortized $5,731 of the discount as interest expense leaving an unamortized discount of $11,665 as of March 31, 2020. See discussion of derivative liability in Note 7 – Derivative Liability.

 

During the three months ended March 31, 2020 and 2019, the Company recorded $2,000 and $4,000 in cash payment to the outstanding balance on the credit line, respectively.

 

 

 

NOTE 7 – DERIVATIVE LIABILITY

 

As discussed in Note 1, on a recurring basis, we measure certain financial assets and liabilities based upon the fair value hierarchy. The following table presents information about the Company’s liabilities measured at fair value as of March 31, 2020 and December 31, 2019:

 

   

Level 1

   

Level 2

   

Level 3

   

Fair Value at

March 31, 2020

 

Liabilities:

                               

Derivative liability

  $ -     $ -     $ 26,240     $ 26,240  

 

 

   

Level 1

   

Level 2

   

Level 3

   

Fair Value at

December 31, 2019

 

Liabilities:

                               

Derivative liability

  $ -     $ -     $ 65,289     $ 65,289  

 

 

Utilizing Level 3 Inputs, the Company recorded fair market value adjustments related to convertible credit line payable for the three months ended March 31, 2020 and 2019 of $39,049 and $449,133, respectively. The fair market value adjustments as of March 31, 2020 and 2019 were calculated utilizing the Black-Scholes option pricing model using the following assumptions: exercise price of $1.00, computed volatility of 54% and 162% and discount rate of 0.17% and 2.27, respectively.

 

A summary of the activity of the derivative liability is shown below at March 31, 2020:

 

Balance at December 31, 2019

  $ 65,289  

Gain on change in derivative fair value adjustment

    (39,049 )

Balance at March 31, 2020

  $ 26,240  

 

  

 

NOTE 8 – SUBSEQUENT EVENTS

 

On June 1, 2020, the Company entered an agreement with Jay Leaver, dba Leaverite Consulting, to be retained as President of the Company at a salary of $10,000 per month. Mr. Leaver is also President of Chicorica, LLC and Visionary Resources, LLC (Battlewagon Project) which the Company has ongoing contracts with for exploration projects.

 

On June 1, 2020, the Company entered into an agreement with Conner Staley and Staley Consulting, LLC, to be retained as Chief Operating Officer for his expertise in oil and gas exploration. The compensation is based on an hourly rate of $200 plus expenses.

 

On June 25, 2020, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with Pure Oil & Gas, Inc. (“Pure”) and ZQH Holding, LLC (“ZQH”) to acquire oil and gas assets in Oklahoma (the "Project") in consideration of a purchase price of $1,000,000 (the “Purchase Price”). The Company also agrees in the Agreement to discharge a promissory note to ZQH in the amount of $50,000 plus $10,000 interest (see Note 5). The payment in full was not tendered prior to close of business on July 31, 2020. As of July 31, 2020, the Purchase Price will increase by $50,000 per month thereafter to a maximum possible Purchase Price of $1,200,000. If the Purchase Price and promissory note are not paid in full by December 1, 2020, ZQH and Pure have the option to convert all or part of the unpaid balance to the Company’s stock at a price of $1.00 per share.

 

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Pursuant to the Agreement, the Company has taken assignment of all of ZQH and Pure's working interest in the Project. Company, ZQH, and Pure agree the sellers' combined working interest in the Project is 87.5%. The current operator of the Project and owner of the residual working interest is Premier Gas Company, LLC (“Premier”).

 

On July 6, 2020, Premier filed a mechanic’s lien against the interests of Pure, ZQH and the Company in the Project, alleging past unpaid invoices on the part of ZQH and Pure and also alleging that the Company’s ownership is 75% rather than 87.5%. No documentation has been provided to Alpha by ZQH, Pure, or Premier of any unpaid invoices. The Company intends to contest the lien vigorously.

 

On June 30, 2020, the Company entered into an Option Agreement (the “Agreement”) with Progressive Well Service, LLC. (“Progressive”) to acquire oil and gas assets in Lincoln and Logan Counties in Central Oklahoma (the “Coral Project”, called the “Logan 1 Project” in the Agreement). The Agreement gives the Company until December 31, 2020 to exercise its option (the “Option Period”). During the Option Period, Progressive may not sell the Coral Project to any third party. In return for this exclusivity, the Company is to issue 10,000 shares of its common stock, such shares to bear a legend restricting sale during the Option Period. At any time during the Option Period, the Company may exercise its Option with a cash payment of $50,000.

 

On September 8, 2020, the Company entered into an Option Agreement (the “Agreement”) with Kadence Petroleum, LLC. (“Kadence”) to acquire oil and gas assets in Logan County in Central Oklahoma, called the “Logan 2 Project” in the Agreement). The Agreement gives the Company until December 31, 2020 to exercise its option (the “Option Period”). During the Option Period, Progressive may not sell the Logan 2 Project to any third party. In return for this exclusivity, the Company paid $10,000 to Brian Tribble, Managing Member of Kadence, through AEI Acquisition, LLC revolving credit note, on September 18, 2020.

 

Subsequent to March 31, 2020, the Company sold 57,000 shares of the common stock for total proceeds of $57,000, issued 96,000 shares to compensates its directors and issued 15,000 shares to settle accounts payable. On August 6, 2020, the Board authorized an additional 550,000 shares of common stock for sale at $1.00 per share bringing the total to 1,300,000 shares.

 

15

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q includes "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. All statements, other than statements of historical facts, included or incorporated by reference in this Form 10-Q which address activities, events or developments which the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof); finding suitable merger or acquisition candidates; expansion and growth of the Company's business and operations; and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate under the circumstances. However, whether actual results or developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including general economic, market and business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulation; and other factors, most of which are beyond the control of the Company.

 

These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as "believes," "anticipates," "expects," "estimates," "plans," "may," "will," or similar terms. These statements appear in a number of places in this Filing and include statements regarding the intent, belief or current expectations of the Company, and its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations for its limited history; (ii) the Company's business and growth strategies; and, (iii) the Company's financing plans. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Such factors that could adversely affect actual results and performance include, but are not limited to, the Company's limited operating history, potential fluctuations in quarterly operating results and expenses, government regulation, technological change and competition.

 

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements.

 

General Business Development

 

The Company was formed on September 26, 2013 in the State of Colorado.

 

Business Strategy

 

The Company was incorporated in September 2013. Our business model is to purchase or trade stock for oil and gas properties to be held as long-term assets. Oil and gas commodity pricing has stabilized under the current economic market conditions bringing the U.S. to become one of the top the number one producers in the world. The momentum to drill using enhanced drilling technology in previously undeveloped areas assures the continued value of these properties. Our lean operating structure positions us well to compete in this very competitive market. Our strategy is to acquire producing properties that the Company can operate which have proven un-drilled locations available for further development. At this time the Company is reviewing several properties but have no contractual commitments to date. Our management’s years of experience and knowledge of the oil and gas industry leads us to believe that there are an abundance of good drilling prospects available that have either been overlooked or are not big enough for the larger companies. In the process of identifying these drilling prospects, the Company will utilize the expertise of existing management and employ the highest caliber contract engineering firms available to further evaluate the properties. To qualify for acquisition, the calculated cash flow after taxes and operating expenses, including ten percent (10%) interest per year, will recover the acquisition cost in 22 to 30 months. The cash flow calculation will be based conservatively on $51 per barrel of oil and $2.89 per MCF of gas. In addition, the selection criteria will require the life of current producing wells to be 7 years or longer and the field must have a minimum total life of 15 years.

 

The company is actively pursuing acquisition of additional properties in Oklahoma, Texas and New Mexico.

 

16

 

Liquidity and Capital Resources

 

As of March 31, 2020, we had total current assets of $0 and total current liabilities of $605,932.

 

The Company used $16,000 of cash in operating activities during the three months ended March 31, 2020 compared to $111,831 used in operations during the same period in 2019. Net cash used in operating activities during the three months ended March 31, 2020 was mainly comprised of our $105,315 net loss during the period, adjusted by a non-cash charges of $39,049 for gain on change in fair value of derivative liabilities, stock-based compensation of $48,000, amortization of debt discounts of $5,731, asset retirement obligations expense of $19 and changes in operating assets and liabilities of $74,614. Net cash used in operating activities during the three months ended March 31, 2019 was mainly comprised of our $207,136 net income during the period, adjusted by a non-cash charges of $449,133 for gain on change in fair value of derivative liabilities, $108,000 of stock compensation, amortization of debt discounts of $9,879, asset retirement obligations expense of $19 and changes in operating assets and liabilities of $12,268.

 

The Company generated cash of $16,000 from financing activities during the three months ended March 31, 2020 which consisted of $18,000 in proceeds from the sale of common stock and $2,000 payment on convertible credit line payable - related party. The Company generated cash of $119,966 from financing activities during the three months ended March 31, 2019 which consisted of proceeds of sale of common stock of $131,000, proceeds from related party advances of $23,841 offset by repayments on short term advances - related party of $30,875 and repayment on convertible credit line payable – related party of $4,000.

 

Going Concern

 

The future of our company is dependent upon its ability to obtain financing and upon future profitable operations. Management has plans to seek additional capital through a private placement and public offering of its common stock, if necessary. See Note 2 to the unaudited consolidated financial statements for additional information.

 

Results of Operations

 

We generated revenues of $346 and $2,270 during the three months ended March 31, 2020 and 2019, respectively. Total operating expenses were $131,301 during the three months ended March 31, 2020 compared to $228,757 during the same period in 2019. The decrease in operating expenses were due to a decrease in consulting fees of $73,093 and professional fees of $13,908.

 

Off-Balance sheet arrangements

 

As of March 31, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Critical Accounting Policies

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Smaller reporting companies are not required to provide information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”), as of March 31, 2020, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), who concluded, that because of the material weakness in our internal control over financial reporting (“ICFR”) described below, our disclosure controls and procedures were not effective as of March 31, 2020.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our first quarter that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

 

17

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On July 22, 2020, the Company filed a lawsuit in Texas State Court against its predecessor auditor, LBB & Associates and Vine Advisors, LLP, and their principal, Carlos Lopez, seeking damages up to $1,000,000.

 

In March 6, 2020, the Company was informed by the United States Securities and Exchange Commission that (a) Lopez and LBB were investigated by the SEC through an Order Instituting Administrative Proceedings; (b) Lopez and LBB ultimately agreed to the imposition of remedial sanctions against them by the SEC; and (c) Lopez had been suspended from appearing or practicing before the SEC for a period of at least two years (the “Suspension Order”) beginning on February 6, 2020. A copy of the Suspension Order can be found on the SEC’s website.

 

The Suspension Order finds, among other things, that:

 

For three consecutive years, Lopez and LBB “engaged in a pattern of improper professional conduct as auditors”

 

Lopez failed to exercise due professional care in performing his audit work; and

 

Lopez and LBB committed “multiple instances of highly unreasonable conduct in circumstances that warranted heightened scrutiny.”

 

The Suspension Order and the predecessor auditor’s failure to disclose it or the SEC investigation when it was occurring has had very damaging repercussions for the Company. Due to the misdeeds of Lopez, LBB, and Vine, the Company was obligated to spend substantial amounts to re-audit the filings that Lopez, LBB, and Vine handled. Also, the Company was obligated to undertake this re-audit for 2018 since it can no longer trust the work of someone who admittedly “engaged in a pattern of improper professional conduct” and committed “multiple instances of highly unreasonable conduct in circumstances that warranted heightened scrutiny.”

 

Upon discovery of the misdeeds of Lopez, LBB, and Vine, the Company notified the predecessor auditors of their claims. The predecessor auditors have ignored the Company’s communications and failed to respond or even return the Company’s work papers and property.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes in the risk factors set forth in the Company’s Form 10K for the period ended December 31, 2019.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the period end March 31, 2020, the Company has sold 18,000 shares of common stock at $1.00 per share to raise working capital.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable to our operations. 

 

ITEM 5. OTHER INFORMATION

 

None.

 

18

 

ITEM 6. EXHIBITS

 

The following documents are included or incorporated by reference as exhibits to this report:

 

Exhibit

Number

Description

31.1

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as a dopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as a dopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 o f the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 o f the Sarbanes-Oxley Act of 2002.

 

101.INS** XBRL Instance

101.SCH** XBRL Taxonomy Extension Schema

101.CAL** XBRL Taxonomy Extension Calculation

101.DEF** XBRL Taxonomy Extension Definition

101.LAB** XBRL Taxonomy Extension Labels

101.PRE** XBRL Taxonomy Extension Presentation

 

** XBRL

information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

19

 

SIGNATURES

 

In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 9, 2020

 

 

Alpha Energy, Inc.

Registrant 

 

 

 

 

 

 

 

 

 

 

By:

/s/ John Lepin

 

 

 

John Lepin 

 

 

 

President/Chief Financial Officer 

 

 

20