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TRULEUM, INC. - Quarter Report: 2021 June (Form 10-Q)

aphe20210630_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 June 30, 2021.

 

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)

 

Colorado90-1020566

(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 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, 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 August 3, 2021 the issuer had 18,280,428 shares of common stock issued and outstanding.

 

 

 

 
 

 TABLE OF CONTENTS

 

Page

 PART I – FINANCIAL INFORMATION
     

Item 1.

Financial Statements

3

Item 2.

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

13

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

15

Item 4.

Controls and Procedures

15

 
PART II – OTHER INFORMATION
     

Item 1.

Legal Proceedings

16

Item 1A.

Risk Factors

16

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

16

Item 3.

Defaults Upon Senior Securities

16

Item 4.

Mine Safety Disclosures

16

Item 5.

Other Information

16

Item 6.

Exhibits

17

 

 

 

 

 

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)

 

  

June 30, 2021

  

December 31, 2020

 
         
         

Assets

        

Current assets:

        

Cash and cash equivalents

 $124  $- 

Prepaid assets and other current assets

  5,000   30,000 

Total current assets

  5,124   30,000 
         

Noncurrent assets:

        

Oil and gas property, unproved, full cost

  90,000   70,000 
         

Total assets

 $95,124  $100,000 
         

Liabilities and Stockholders' Deficit

        
         

Current liabilities:

        

Accounts payable and accrued expenses

 $425,930  $585,732 

Accounts payable and accrued expenses - related parties

  176,079   120,568 

Interest payable

  60,294   31,295 

Short term advances from related parties

  484,344   181,000 

Short term note payable

  1,210,000   1,160,000 

Derivative liability

  101,468   96,369 

Total current liabilities

  2,458,115   2,174,964 
         

Convertible credit line payable – related party, net of discount of $0 and $2,754, respectively

  148,328   145,574 

Asset retirement obligation

  900   862 

Total liabilities

  2,607,343   2,321,400 
         

Commitments and contingencies

          
         

Stockholders' deficit:

        

Preferred stock, 10,000,000 shares authorized:

        

Series A convertible preferred stock, $0.001 par value, 2,000,000 shares authorized and 0 shares issued and outstanding

  -   - 

Common stock, $0.001 par value, 65,000,000 shares authorized and 18,351,428 and 18,145,428 shares issued and outstanding, respectively

  18,351   18,145 

Additional paid-in capital

  2,267,429   2,061,635 

Accumulated deficit

  (4,797,999)  (4,301,180)

Total stockholders' deficit

  (2,512,219)  (2,221,400)
         

Total liabilities and stockholders' deficit

 $95,124  $100,000 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4

 

 

ALPHA ENERGY, INC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE  AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

 

   

Three months ended

   

Six months ended

 
   

June 30, 2021

   

June 30, 2020

   

June 30, 2021

   

June 30, 2020

 
                                 

Oil and gas sales

  $ -     $ 871     $ -     $ 1,217  
                                 

Lease operating expenses

    -       1,290       -       2,218  

Gross loss

    -       (419 )     -       (1,001 )
                                 

Operating expenses:

                               

Professional services

    35,643       15,633       47,562       15,633  

Board of director fees

    48,000       48,000       96,000       96,000  

General and administrative

    129,318       78,695       358,821       161,996  

Gain on settlement of accounts payable

    -       -       (120,250 )     -  

Total operating expenses

    212,961       142,328       382,133       273,629  

Loss from operations

    (212,961 )     (142,747 )     (382,133 )     (274,630 )
                                 

Other income (expense):

                               

Interest expense

    (35,675 )     (10,898 )     (109,587 )     (23,379 )

Gain on extinguishment of debt

    -       10,750       -       10,750  

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

    (18,403 )     10,825       (5,099 )     49,874  

Total other income (expense)

    (54,078 )     10,677       (114,686 )     37,245  
                                 

Net loss

  $ (267,039 )   $ (132,070 )   $ (496,819 )   $ (237,385 )
                                 

Loss per share:

                               

Basic

  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.01 )

Diluted

  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ (0.02 )
                                 

Weighted average shares outstanding:

                               

Basic

    18,309,939       17,910,296       18,249,450       17,881,087  

Diluted

    18,309,939       18,039,624       18,249,450       18,010,415  

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

 

 

ALPHA ENERGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Unaudited)

 

   

Common Stock

   

Additional

   

Accumulated

   

Total Stockholders'

 
   

Shares

   

Amount

   

Paid-in Capital

   

Deficit

   

Deficit

 
                                         

Balance, December 31, 2019

    17,822,428     $ 17,822     $ 1,738,958     $ (2,314,202 )   $ (557,422 )
                                         

Stock issued for cash

    18,000       18       17,982       -       18,000  
                                         

Stock-based compensation

    48,000       48       47,952       -       48,000  
                                         

Net loss

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

Balance, March 31, 2020

    17,888,428       17,888       1,804,892       (2,419,517 )     (596,737 )
                                         

Stock issued for cash

    52,000       52       51,948       -       52,000  
                                         

Stock-based compensation

    48,000       48       47,952       -       48,000  
                                         

Net loss

    -       -       -       (132,070 )     (132,070 )
                                         

Balance, June 30, 2020

    17,988,428     $ 17,988     $ 1,904,792     $ (2,551,587 )   $ (628,807 )
                                         
                                         

Balance, December 31, 2020

    18,145,428     $ 18,145     $ 2,061,635     $ (4,301,180 )   $ (2,221,400 )
                                         

Stock issued for settlement of accounts payable

    90,000       90       89,910       -       90,000  
                                         

Stock-based compensation

    48,000       48       47,952       -       48,000  
                                         

Net loss

    -       -       -       (229,780 )     (229,780 )
                                         

Balance, March 31, 2021

    18,283,428       18,283       2,199,497       (4,530,960 )     (2,313,180 )
                                         

Stock issued for cash

    5,000       5       4,995       -       5,000  
                                         

Stock-based compensation

    63,000       63       62,937       -       63,000  
                                         

Net loss

    -       -       -       (267,039 )     (267,039 )
                                         

Balance, June 30, 2021

    18,351,428     $ 18,351     $ 2,267,429     $ (4,797,999 )   $ (2,512,219 )

 

See accompanying notes to the unaudited consolidated financial statements.

 

6

 

 

 

ALPHA ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 31, 2021 AND 2020

 

   

June 30, 2021

   

June 30, 2020

 
                 
                 

Cash flows from operating activities:

               

Net loss

  $ (496,819 )   $ (237,385 )

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

               

Stock-based compensation

    111,000       96,000  

Amortization of debt discount

    2,754       10,179  

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

    5,099       (49,874 )

Gain on extinguishment of debt

    -       (10,750 )

Gain on settlement of accounts payable

    (120,250 )     -  

Write off of option contract associated with oil and gas properties

    85,500       -  

Asset retirement obligation expense

    38       38  

Default interest added to note payable

    50,000       -  

Changes in operating assets and liabilities:

               

Prepaid expenses and other current assets

    25,000       -  

Accounts payable

    63,692       106,477  

Accounts payable-related party

    55,511       9,508  

Interest payable

    28,999       13,200  

Net cash used in operating activities

    (189,476 )     (62,607 )
                 

Cash flows from investing activities:

               

Deposits for purchase of oil and gas properties

    (40,000 )     -  

Net cash used in investing activities

    (40,000 )     -  
                 

Cash flows from financing activities:

               

Payment on convertible credit line payable - related party

    -       (4,250 )

Proceeds from convertible credit line payable - related party

    -       3,000  

Advances from related parties

    224,600       -  

Payments on short term advances - related parties

    -       (856 )

Proceeds from sale of common stock

    5,000       70,000  

Net cash provided by financing activities

    229,600       67,894  
                 

Net change in cash and cash equivalents

    124       5,287  
                 

Cash and cash equivalents, at beginning of period

    -       -  
                 

Cash and cash equivalents, at end of period

  $ 124     $ 5,287  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 27,834     $ -  

Cash paid for income taxes

  $ -     $ -  
                 

Supplemental disclosure of non-cash investing and financing activities:

               

Expenses paid on behalf of the Company by related party

  $ 13,244     $ 459  

Oil and gas payments made by related party on behalf of the Company

  $ 65,500     $ 1,010,000  

Stock issued for settlement of accounts payable

  $ 90,000     $ -  

Accrued interest added to note principal

  $ -     $ 10,000  

Debt discount from derivative liability

  $ -     $ 365  

 

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, 2020 and 2019 which are included on the Form 10-K filed on April 29, 2021. 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 and six months ended June 30, 2021 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 consolidated financial statements for years ended December 31, 2020 and 2019 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 Loss per share

 

Net loss per share is provided in accordance with FASB ASC 260-10, "Earnings (Loss) per Share". Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. For the three and six months ended June 30, 2021, there were 148,328 shares issuable from convertible credit line payable which were considered for their dilutive effects but concluded to be anti-dilutive. For the three and six months ended June 30, 2020, there were 129,328 shares issuable from convertible credit line payable which were considered for their dilutive effect.

 

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

 

  

Three months ended

  

Six months ended

 
  

June 30, 2021

  

June 30, 2020

  

June 30, 2021

  

June 30, 2020

 
                 

Basic net loss

 $(267,039) $(132,070) $(496,819) $(237,385)

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

  -   (10,825)  -   (49,874)

Diluted net loss

 $(267,039) $(142,895) $(496,819) $(287,259)
                 

Basic and dilutive shares:

                

Weighted average basic shares outstanding

  18,309,939   17,910,296   18,249,450   17,881,087 

Shares issuable from convertible credit line payable

  -   129,328   -   129,328 

Dilutive shares

  18,309,939   18,039,624   18,249,450   18,010,415 
                 

Loss per share:

                

Basic

 $(0.01) $(0.01) $(0.03) $(0.01)

Diluted

 $(0.01) $(0.01) $(0.03) $(0.02)

 

 

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. 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 there are no recently issued accounting pronouncements that will have a significant effect on its financial statements.

 

 

Reclassification

 

Certain reclassifications may have been made to our prior year’s financial statements to conform to our current year presentation. These reclassifications had no effect on our previously reported results of operations or accumulated deficit.

 

9

 

 

 

NOTE 2 GOING CONCERN

 

The Company’s interim unaudited consolidated 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 OIL AND GAS PROPERTIES

 

On September 8, 2020, the Company entered into an Option 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. During due diligence it was discovered that Kadence did not have title to the properties in the agreement. The Company had advanced $85,500 in option payments through June 30, 2021. The agreement is cancelled, and the Company wrote off the $85,500 as of June 30, 2021.

 

During the six months ended June 30, 2021, the Company paid $70,000 in Option Payments to Progressive Well Services in connection with its Option Agreement dated June 30, 2020 to acquire oil and gas assets in Logan County, Oklahoma. The Option Agreement has been extended to August 31, 2021.

 

 

 

NOTE 4 RELATED PARTY TRANSACTIONS

 

The Company received advances from related parties totaling $224,600 and $0 during the six months ended June 30, 2021 and 2020, respectively. The advances from related parties are not convertible, bear no interest and are due on demand. During the six months ended June 30, 2021, a related party paid $13,244 of expenses on behalf of the Company and $65,500 for unpaid oil and gas assets acquired. As of June 30, 2021, and December 31, 2020, there was $484,344 and $181,000 of short-term advances due to related parties, respectively.

 

As of June 30, 2021 and December 31, 2020, there was $176,079 and $120,568 of accounts payable, $170,985 due Leaverite Exploration for Interim President Jay Leaver, $5,094 due CFO John Lepin in accrued expenses and $110,904 due Leaverite Exploration for Interim President Jay Leaver, $3,884 due CFO John Lepin in accrued expenses, $5,780 Staley Engineering LLC for consulting Services due to related parties, respectively.

 

The Chief Financial Officer allows the use of his residence as an office for the Company at no charge.

 

 

 

NOTE 5 COMMON STOCK

 

The Company is authorized to issue up to 10,000,000 shares of $0.001 par value preferred stock and 65,000,000 shares of $0.001 par value common stock.

 

The Company compensates each of its directors with 4,000 shares of common stock each month. During the six months ended June 30, 2021 and 2020, the Company issued 96,000 shares of common stock valued at $96,000.

 

 

During the six months ended June 30, 2021, the Company issued 90,000 shares of common stock with a fair value of $90,000 to settle accounts payable of $210,250. The Company recognized a gain of $120,250 on settlement of accounts payable.

 

During the six months ended June 30, 2021 and 2020, the Company sold 5,000 and 70,000 shares of the common stock for total proceeds of $5,000 and $70,000, respectively.

 

On April 1, 2021, the Company entered into a month-to-month consulting agreement with Kelloff Oil & Gas, LLC for consulting services that includes cash compensation of $10,000 and the issuance of 5,000 shares of common stock per month. The Company may terminate the agreement at any with a ten-day notice. During the six months ended June 30, 2021, the Company issued 15,000 common shares and recognized $15,000 of stock-based compensation related to the agreement.

 

10

 

 

NOTE 6 NOTE PAYABLE

 

On March 30, 2019, the Company executed a promissory note for $50,000 to ZQH (75%) and Pure (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. On June 25, 2020, the Company entered into a Purchase and Sale Agreement with Pure and ZQH to acquire oil and gas assets in Oklahoma in consideration of a purchase price of $1,000,000. In connection with the purchase, the $50,000 note and accrued interest of $10,000 was added to the purchase price resulting in a total note payable balance of $1,060,000. During the year ended December 31, 2020, $10,750 of accrued interest which was previously outstanding was discharged and recorded as a gain on extinguishment of debt. The note payable of $1,060,000 was due to be paid on or before July 31, 2020 but remains outstanding to date. The balance of the note will increase by $50,000 per month thereafter up to a maximum amount of $200,000 through December 1, 2020. As of December 31, 2020, the Company recognized $200,000 of default interest that was added to the principal and made payments of $100,000 for a total payable of $1,160,000. If the purchase price is not fully paid on or before December 1, 2020, ZQH and Pure have the option to convert the balance outstanding into the Company’s common stock at a conversion price of $1.00 per share and the note will also be subject to a monthly interest of 1%. During the six months ended June 30, 2021, the Company recognized $50,000 of default interest that was added to the principal of the note payable. As of June 30, 2021, the note payable balance was $1,210,000 with accrued interest of $60,294. The Company, Pure, and ZQH have entered into various Extension Agreements, the current one of which is dated March 28th, 2021 (the “Extension Agreement”). The Extension Agreement prevents Pure and ZQH from taking stock rather than cash through June 1, 2021, in return for which Company makes a monthly interest payment to ZQH and Pure of $10,083, which represents 1% annual interest on the Purchase Price, compounded monthly. The Extension Agreement allows the Company to extend that period beyond June 1, 2021 under similar terms. No further Extension Agreement has been entered into.

 

 

NOTE 7 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. In 2019, the Company recognized an additional debt discount of $7,568. During the six months ended June 30, 2021 and 2020, the Company amortized $2,754 and $10,179 of the discount as interest expense, respectively. As of June 30, 2021 and December 31, 2020, the unamortized discount was $0 and $2,754, respectively. See discussion of derivative liability in Note 8 – Derivative Liability.

 

On June 1, 2021, the Company entered into a new convertible credit line agreement to borrow up to $1,500,000. The new convertible line agreement supersedes the original note dated September 1, 2017. 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 $4.00. 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.

 

During the six months ended June 30, 2021 and 2020, the Company recorded $0 and $4,250 in cash payment to the outstanding balance on the credit line, respectively.

 

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NOTE 8 DERIVATIVE LIABILITY

 

As discussed in Note 1, we measure certain financial assets and liabilities based upon the fair value hierarchy. The following table presents information about the Company’s financial liabilities, measured at fair value on a recurring basis, as of June 30, 2021 and December 31, 2020:

 

  

Level 1

  

Level 2

  

Level 3

  

Fair Value at

June 30,

2021

 

Liabilities:

                

Derivative liability

 $-  $-  $101,468  $101,468 

 

  

Level 1

  

Level 2

  

Level 3

  

Fair Value at

December 31, 2020

 

Liabilities:

                

Derivative liability

 $-  $-  $96,369  $96,369 

 

 

Utilizing Level 3 Inputs, the Company recorded a loss on fair market value adjustments related to convertible credit line payable for the six months ended June 30, 2021 of $5,099. The fair market value adjustments as of June 30, 2021 were calculated utilizing the Black-Scholes option pricing model using the following assumptions: exercise price of $1.00, computed volatility of 145% and 37% and discount rate of 0.25% and 0.16%, respectively.

 

A summary of the activity of the derivative liability is shown below at June 30, 2021:

 

Balance at December 31, 2020

 $96,369 

Loss on change in derivative fair value adjustment

  5,099 

Balance at June 30, 2021

 $101,468 

 

 

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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.

 

13

 

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.

 

Liquidity and Capital Resources

 

As of June 30, 2021, we had total current assets of $5,124 and total current liabilities of $2,458,115.

 

The Company used $189,476 of cash in operating activities during the six months ended June 30, 2021, compared to $62,607 used in operations during the same period in 2020. Net cash used in operating activities during the six months ended June 30, 2021 was mainly comprised of our $496,819 net loss during the period, adjusted by a non-cash charges of $120,250 gain on settlement of accounts payable, $5,099 for loss on change in fair value of derivative liabilities, stock-based compensation of $111,000, amortization of debt discounts of $2,754, write off of option contract associated with oil and gas properties of $85,500, default interest added to note payable of $50,000, asset retirement obligations expense of $38 and changes in operating assets and liabilities of $173,202. Net cash used in operating activities during the six months ended June 30, 2020 was mainly comprised of our $237,385 net loss during the period, adjusted by a non-cash charges of $49,874 for gain on change in fair value of derivative liabilities, $96,000 of stock compensation, amortization of debt discounts of $10,179, asset retirement obligations expense of $38, gain on extinguishment of debt of $10,750 and changes in operating assets and liabilities of $129,185.

 

The Company used cash of $40,000 for investing activities during the six months ended June 30, 2021 which consisted of a $40,000 deposit for oil and gas properties.

 

The Company generated cash of $229,600 from financing activities during the six months ended June 30, 2021 which consisted of $224,600 in proceeds from advances from related parties and $5,000 in proceeds from the sale of common stock. The Company generated cash of $67,894 from financing activities during the six months ended June 30, 2020, which consisted of $70,000 in proceeds from the sale of common stock, $3,000 in proceeds from convertible credit line related party which was offset by $4,250 repayment on convertible credit line payable - related party and $856 in repayments of short term advances related parties.

 

14

 

 

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 $0 and $1,217 during the six months ended June 30, 2021 and 2020, respectively. Total operating expenses were $382,133 during the six months ended June 30, 2021 compared to $273,629 during the same period in 2020. The increase in operating expenses were due to an increase in general and administrative expenses of $196,825, increase in professional fees of $31,929 which were offset by a gain on settlement of accounts payable of $120,250.

 

We generated revenues of $0 and $871 during the three months ended June 30, 2021 and 2020, respectively. Total operating expenses were $212,961 during the three months ended June 30, 2020 compared to $142,328 during the same period in 2020. The increase in operating expenses were due to an increase in general and administrative expenses of $50,623 and an increase in professional fees of $20,010.

 

Off-Balance sheet arrangements

 

As of June 30, 2021, 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 consolidated 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 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 June 30, 2021, 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). Based on that evaluation, they have concluded that, as of June 30, 2021, the disclosure controls and procedures are not effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, 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 the quarter that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

 

15

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On July 6, 2020, Premier Gas Company, LLC filed a mechanic’s lien against the interests of Pure, ZQH and the Company in the Rogers County 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 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 is now obligated to spend substantial amounts to re-audit the filings that Lopez, LBB, and Vine handled. Also, the Company is 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, 2020.

 

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

 

During the 3 months ended June 30, 2021, the Company sold 5,000 shares of its common stock at $1.00 per share. The stock is unissued at this date.      

   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable to our operations.

 

ITEM 5. OTHER INFORMATION

 

None.

 

16

 

ITEM 6. EXHIBITS

 

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

 

Number Ddescription

 

 

31.1

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

 

 

31.2

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

     
  32.1 Centification 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 Centification 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**

Inline XBRL Instance

101.SCH**

Inline XBRL Taxonomy Extension Schema

101.CAL**

Inline XBRL Taxonomy Extension Calculation

101.DEF**

Inline XBRL Taxonomy Extension Definition

101.LAB**

Inline XBRL Taxonomy Extension Labels

101.PRE**

Inline XBRL Taxonomy Extension Presentation

104

Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

 

** 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.

 

 

17

 

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: August 9, 2021

 

 

Aalpha Energy, Inc.

Registrant

 

 

 

 

 

 

 

 

 

 

By:

/s/ John Lepin

 

 

 

John Lepin, Principal Executive

Officer, Principal Financial Officer

and Director

 

 

 

18