TRULEUM, INC. - Quarter Report: 2022 September (Form 10-Q)

Alpha Energy, Inc.

Notes to the 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 consolidated financial statements and notes thereto for the years ended December 31, 2021 and 2020 which are included on the Form 10-K filed on April 4, 2022. 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 nine months ended September 30, 2022 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 the years ended December 31, 2021, and 2020 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 nine months ended September 30, 2022 and 2021, there were 263,992 and 0 shares issuable from the senior secured convertible notes payable and 168,328 shares issuable from the convertible credit line payable which were considered for their dilutive effects but were determined to be anti-dilutive due to the Company’s net loss, respectively.

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

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.

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.

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.

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 has minimal cash or other current assets and does not have an established ongoing source of revenues sufficient to cover its operating costs and to 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 June 30, 2020, the Company entered into an option Agreement with Progressive Well Service, LLC (“Progressive”) to acquire oil and gas assets in Lincoln and Logan Counties in Central Oklahoma. On March 9, 2022, the Company closed on the acquisition of 34 well bores and related assets under the PSA with cash payments of $726,298. The Company is entitled to receive the proceeds of production from January 1, 2022 under the terms of the PSA and Progressive is required to operate the properties and transfer ownership and royalty decks to Company following a one-month transition period. Under the PSA we are obligated to make a further payment of three (3%) percent of the net revenue from new wells drilled until Progressive receives an additional $350,000.

The Company entered into a Letter of Intent with Chicorica, LLC on December 13, 2018 and extended the agreement through March 4, 2022. On March 1, 2022, the Company entered into an extension agreement with Chicorica to extend the Closing through August 5, 2022. In return, the Company must pay $30,000 by April 1, 2022, $35,000 by July 8, 2022 and $30,000 by August 5, 2022. During the nine months ended September 30, 2022, the Company paid $30,000 related to the extension agreement.

NOTE 4 – RELATED PARTY TRANSACTIONS

Advances from Related Party

The Company received advances from AEI Management, Inc., a Company owned by a significant shareholder, totaling $88,956 and $185,860 during the nine months ended September 30, 2022 and 2021, respectively. The advances are unsecured, non-interest bearing and are payable on demand. During the nine months ended September 30, 2022, the Company repaid $10,000 of the advances and converted $413,206 of advances to a senior secured convertible note due February 24, 2024.

The Company received advances from Jay Leaver, President of the Company, totaling $31,280 and $149,600 during the nine months ended September 30, 2022 and 2021, respectively. The advances are unsecured, non-interest bearing and is payable on demand. During the nine months ended September 30, 2022, the Company converted $325,580 of advances to a senior secured convertible note due February 24, 2024.

As of September 30, 2022 and December 31, 2021, there was $0 and $628,550 of short-term advances due to related parties, respectively.

Accounts Payable and Accrued Expenses - Related Parties

As of September 30, 2022, there was $203,484 of accounts payable related parties which consisted of $203,484 due to Leaverite Exploration, Inc. d/b/a Leaverite Consulting (“Leaverite Exploration”), a corporation wholly-owned by our President, Jay Leaver pursuant to a consulting agreement.

As of December 31, 2021, there was $228,668 of accounts payable related parties which consisted of $203,484 due to Leaverite Exploration, $4,394 due to former CFO John Lepin, $10,000 due Kelloff Oil &Gas, LLC, a limited liability company and $5,790 due to Staley Engineering LLC for consulting services.

Notes Payable - Related Party

On December 3, 2020, the Company executed a promissory note for $65,000 with Jay Leaver, our President. The unsecured note matured three years from date of issuance and bore interest at a rate of 5% per annum. As of December 31, 2021, the note payable had unpaid accrued interest in the amount of $13,003. On February 23, 2022, the promissory note was amended to a principal amount of $406,750, which includes the original $65,000 plus additional advances of $325,580, and accrued interest of $16,170. An additional $110,235 was advanced during the nine months ended September 30, 2022 maturing February 23, 2025. In February 2022, Mr. Leaver advanced an additional $500,000 to the Company. On February 25, 2022, Mr. Leaver’s $406,750 promissory note and $500,000 advance were assigned to 20 Shekels, Inc, a corporation wholly-owned by Marshwiggle, LLC, a limited liability company jointly owned by Mr. Leaver and his spouse and on February 25, 2022 the Company issued $906,750 of its secured senior secured convertible notes due February 24, 2024, bearing interest at a rate of 7.25% per annum (the “7.25% Note”) in exchange for the prior obligations. The 7.25% Note is convertible into shares of the Company’s Common Stock at $5.00 per share. See Note 7 – Senior Secured Convertible Notes Payable.

NOTE 5 – COMMON STOCK

The Company is authorized to issue 75,000,000 shares of its capital stock, consisting of 10,000,000 shares of preferred stock, par value $0.001 per share, and 65,000,000 shares of common stock, par value $0.001 per share.

The Company compensates each of its directors with 4,000 shares of common stock each month. During the nine months ended September 30, 2022, the Company recorded stock compensation of $120,000 and issued 108,000 shares of common stock to directors.

During the nine months ended September 30, 2022, the Company recorded stock compensation in the amount of $78,720 and issued 78,720 shares of common stock to Kelloff Oil & Gas, LLC. In addition, the Company recorded stock compensation in the amount of $29,000 issued 37,000 shares of common stock for services provided during the nine months ended September 30, 2022.

On September 2, 2022, the Company entered into a six-month agreement with a consultant that includes the issuance of 60,000 common shares. During the nine months ended September 30, 2022, the Company issued 60,000 common shares and recorded $10,000 of expense. As of September 30, 2022, there was $50,000 of unrecognized expense related to this agreement. The Company will recognize the remaining expense over the service period.

During the nine months ended September 30, 2022, the Company issued 2,504,500 shares of common stock and received cash proceeds of $2,504,500.

NOTE 6 – CONVERTIBLE CREDIT LINE PAYABLE AND SENIOR SECURED CONVERTIBLE NOTES PAYABLE – RELATED PARTY

Convertible Credit Line Payable

On June 1, 2021, the Company entered into a new convertible credit line agreement to borrow up to $1,500,000 and matures on June 1, 2023. 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 option 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 evaluated the new convertible credit line for debt modification in accordance with ASC 470-50 and concluded that the debt qualified for debt modification as the borrowing capacity under the new credit line is greater than the borrowing capacity under the original credit line. There were no fees paid to the creditor and no unamortized deferred costs on the original credit line. Accordingly, no expense was recognized in connection with the transaction. On August 8, 2021, the Company received $20,000 in cash proceeds from the credit line. During the nine months ended September 30, 2022, the Company amortized $5,395 of the discount as interest expense. As of September 30, 2022, and December 31, 2021, the unamortized discount was $5,705 and $11,100, respectively. During the nine months ended September 30, 2022, the Company repaid $30,000 of principal on the convertible credit line. The outstanding principal balance on the convertible credit line as of September 30, 2022 and December 31, 2021 amounted to $138,328. See discussion of derivative liability in Note 8 – Derivative Liability.

Senior Secured Convertible Notes Payable

On February 25, 2022, the Company entered into secured senior secured convertible note for the purchase and sale of convertible promissory notes (“Convertible Note”) in the principal amount of $5,000,000. The Senior Convertible Note is convertible at any time after the date of issuance into shares of the Company’s common stock at a fixed conversion price of $5.00 per share. Upon conversion of the convertible note into the Company’s common stock, the noteholder would be issued 1,000,000 shares of the Company’s common stock. Interest on the Convertible Note shall be paid to the investors at a rate of 7.25% per annum, paid on a quarterly basis, and the maturity date of the Convertible Note is two years after the issuance date. The Convertible Note purports to be secured by certain oil and gas leases, lands, minerals and other properties of the Company, subject to prior liens and security interests. See Note 4 – Related Party Transactions. $413,206 from a related party were exchanged for a Convertible Note. Due to the variable conversion price in the convertible credit line, this fixed senior secured convertible note is treated as derivatives due to possibility of insufficient shares available at conversion to settle the notes. The day one derivative liability was $65,262, which was recorded as a discount on the senior secured convertible notes payable. During the nine months ended September 30, 2022, the Company amortized $19,401 of the discount as interest expense. As of September 30, 2022, the unamortized discount was $45,862. The outstanding principal balance on the convertible credit line as of September 30, 2022 amounted to $413,206. See discussion of derivative liability in Note 8 – Derivative Liability.

On February 25, 2022, Mr. Leaver assigned a $406,750 promissory note and advances of $500,000 to 20 Shekels, an affiliated Company. On the same day, the assigned promissory note and advance totaling $906,750 were transferred into a secured senior secured convertible note. The convertible note bears interest at 7.25% and matures on February 25, 2024. The note is convertible into shares of the Company at $5.00 per share. Due to the variable convertible credit line, this fixed senior secured convertible note are treated as derivatives due to possibility of insufficient shares available at conversion to settle the notes. The day one derivative liability was $143,214, which was recorded as a discount on the senior secured convertible notes payable. During the nine months ended September 30, 2022, the Company amortized $42,572 of the discount as interest expense. As of September 30, 2022, the unamortized discount was $100,642. The outstanding principal balance on the convertible credit line as of September 30, 2022 amounted to $906,754. See discussion of derivative liability in Note 8 – Derivative Liability.

As of September 30, 2022, the senior secured convertible notes payable balance, net of discount was $1,173,456 with accrued interest of $8,878.

NOTE 7 – 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 September 30, 2022 and December 31, 2021:

Utilizing Level 3 Inputs, the Company recorded a gain on fair market value adjustments related to convertible credit line payable and senior secured notes payable for the nine months ended September 30, 2022 of $78,397. The fair market value adjustments as of September 30, 2022 were calculated utilizing the Black-Scholes option pricing model using the following assumptions: exercise price of $1.00 - $5.00, computed volatility of 180% - 261% and discount rate of 3.92% - 4.05.

A summary of the activity of the derivative liability is shown below at September 30, 2022:

NOTE 8 – SUBSEQUENT EVENTS

Subsequent to September 30, 2022, the Company paid $138,328 in principal and $52,038 of accrued interest on the convertible credit line. As of November 18, 2022, the convertible credit line was paid in full.

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

FORWARD-LOOKING STATEMENTS

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below.

General Business Development

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

Business Strategy

Our strategy is to acquire producing properties that the Company can operate which have proven un-drilled locations available for further development. In the process of identifying drilling prospects, the Company will utilize the expertise of existing management and employ contract engineering firms available to further evaluate the properties.

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

Liquidity and Capital Resources

As of September 30, 2022, we had total current assets of $2,190,408 and total current liabilities of $2,091,465.

The Company used $1,122,354 of cash in operating activities during the nine months ended September 30, 2022, compared to $281,298 used in operations during the same period in 2021. Net cash used in operating activities during the nine months ended September 30, 2022 was mainly comprised of our $1,204,191 net loss during the period, adjusted by a non-cash charges of $78,397 for gain on change in fair value of derivative liabilities, stock-based compensation of $237,720, amortization of debt discounts of $67,368 and changes in operating assets and liabilities of $145,776. Net cash used in operating activities during the nine months ended September 30, 2021 was mainly comprised of our $770,004 net loss during the period, adjusted by a non-cash charges of $120,250 gain on settlement of accounts payable, $24,299 for loss on change in fair value of derivative liabilities, stock-based compensation of $174,000, amortization of debt discounts of $4,215, 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 $56 and changes in operating assets and liabilities of $270,886.

The Company used cash of $1,220,512 for investing activities during the nine months ended September 30, 2022 which consisted of $1,165,212 for the acquisition of oil and gas property and cash paid for purchase of equipment of $55,300. The Company used cash of $60,000 for investing activities during the nine months ended September 30, 2021 related to deposits for oil and gas properties.

The Company generated cash of $3,084,736 from financing activities during the nine months ended September 30, 2022 which consisted of $120,236 in proceeds from advances, related party, $500,000 from senior secured convertible notes payable from related party and $2,504,500 in proceeds from the sale of common stock, which were offset by repayments on the convertible credit line of $30,000 and $10,000 repayments of advances, related party. The Company generated cash of $342,200 from financing activities during the nine months ended September 30, 2021 which consisted of $252,200 advances, related party, $65,00 of proceeds from note payable, related party, $20,000 in proceeds from convertible credit line payable, related party and $5,000 in proceeds from the sale of common stock.

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 revenue of $138,900 and $2,369 during the three months ended September 30, 2022 and 2021, respectively. Lease operating expenses were $229,099 and $7,303 during the three months ended September 30, 2022 and 2021, respectively. The increase in oil and gas sales and lease operating expenses was due to an increase in Alpha Energy Texas operations. Total operating expenses were $352,634 during the three months ended September 30, 2022 compared to $243,832 during the same period in 2021. The increase in operating expenses was due to a $77,982 increase in professional fees and $42,820 increase in general and administrative expenses which were offset by $12,000 decrease in board of director fees.

We generated revenues of $144,139 and $2,369 during the nine months ended September 30, 2022 and 2021. Lease operating expenses were $278,533 and $7,303 during the nine months ended September 30, 2022 and 2021, respectively. The increase in oil and gas sales and lease operating expenses was due to an increase in Alpha Energy Texas operations. Total operating expenses were $1,010,921 during the nine months ended September 30, 2022 compared to $625,965 during the same period in 2021. The increase in operating expenses was due to a $240,113 increase in professional fees and $48,593 increase in general administrative expenses which were offset by $24,000 decrease in board of director fees and a $120,250 gain on settlement of accounts payable in 2021.

Off-Balance sheet arrangements

As of September 30, 2022, 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 2021 appearing in our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls

The Company and its subsidiaries maintain an effective system of “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act) that complies with the requirements of the Exchange Act. The Company and its subsidiaries have carried out evaluations of the effectiveness of their disclosure controls and procedures as required by Rule 13a-15 of the Exchange Act.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

You should carefully consider the factors discussed below in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which could materially affect our business, financial position, or future results of operations. The risks described below in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially, adversely affect our business, financial position, or future results of operations. There have been no material changes in the risk factors set forth in the Company’s Form 10K for the period ended December 31, 2021.

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

See Item 1, Note 5 and Item 1, Note 6.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable to our operations.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

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 21, 2022