10-Q 1 aphe20220630_10q.htm FORM 10-Q aphe20220630_10q.htm
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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, 2022.

  

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

  
 

For the Transition Period from          to          

 

Commission File Number: 000-55586

 

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)

 

 

 

 

14143 Denver West Parkway, Suite 100,

Golden, CO 80401

(Address of principal executive offices) (Zip Code)

 

Registrant's Phone: 800-819-0604

 

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

None

  

 

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

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of August 18, 2022, was 18,824,106.

 

 

 

 
 

 

 

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

15

Item 1A.

Risk Factors

15

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

15

Item 3.

Defaults Upon Senior Securities

15

Item 4.

Mine Safety Disclosures

15

Item 5.

Other Information

15

Item 6.

Exhibits

16

 

 

 
 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

Page(s)

Consolidated Balance Sheets (unaudited)

4

   

Consolidated Statements of Operations (unaudited)

5

   

Consolidated Statements of 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, 2022

  

December 31, 2021

 
         
         

Assets

        

Current assets:

        

Cash and cash equivalents

 $1,092,748  $217 

Joint interest billing receivable

  7,890   - 

Prepaid assets and other current assets

  25,000   23,750 

Total current assets

  1,125,638   23,967 
         

Noncurrent assets:

        

Oil and gas property, unproved, full cost

  902,089   145,791 
         

Total assets

 $2,027,727  $169,758 
         

Liabilities and Stockholders' Deficit

        
         

Current liabilities:

        

Accounts payable and accrued expenses

 $393,681  $270,250 

Accounts payable and accrued expenses - related parties

  203,484   228,668 

Interest payable

  79,248   77,563 

Advances from related parties

  -   628,550 

Note payable - related party

  -   65,000 

Subscription liability

  1,761,570   - 

Derivative liability

  341,306   145,041 

Convertible note payable

  1,210,000   1,210,000 

Total current liabilities

  3,989,289   2,625,072 
         

Convertible credit line payable – related party, net of discount of $7,856 and $11,100, respectively

  160,472   157,228 

Senior secured convertible notes payable, related party, net of discount of $172,778

  1,147,181   - 

Asset retirement obligation

  918   918 

Total liabilities

  5,297,860   2,783,218 
         

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 18,824,106 shares issued and outstanding

  18,824   18,824 

Additional paid-in capital

  2,853,634   2,739,634 

Accumulated deficit

  (6,142,591)  (5,371,918)

Total stockholders' deficit

  (3,270,133)  (2,613,460)
         

Total liabilities and stockholders' deficit

 $2,027,727  $169,758 

 

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, 2022 and 2021

(Unaudited)

 

  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 
                 

Oil and gas sales

 $5,239  $-  $5,239  $- 
                 

Lease operating expenses

  47,558   -   49,434   - 

Gross loss

  (42,319)  -   (44,195)  - 
                 

Operating expenses:

                

Professional services

  61,005   35,643   209,693   47,562 

Board of director fees

  36,000   48,000   84,000   96,000 

General and administrative

  215,264   129,318   364,594   358,821 

Gain on settlement of accounts payable

  -   -   -   (120,250)

Total operating expenses

  312,269   212,961   658,287   382,133 

Loss from operations

  (354,588)  (212,961)  (702,482)  (382,133)
                 

Other income (expense):

                

Interest expense

  (54,916)  (35,675)  (80,402)  (109,587)

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

  14,969   (18,403)  12,211   (5,099)

Total other income (expense)

  (39,947)  (54,078)  (68,191)  (114,686)
                 

Net loss

 $(394,535) $(267,039) $(770,673) $(496,819)
                 

Loss per share:

                

Basic

 $(0.02) $(0.01) $(0.04) $(0.03)

Diluted

 $(0.02) $(0.01) $(0.04) $(0.03)
                 

Weighted average shares outstanding:

                

Basic

  18,824,106   18,309,939   18,824,106   18,249,450 

Diluted

  19,256,426   18,309,939   19,256,426   18,249,450 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

 
 

 

Alpha Energy, Inc. 

Consolidated Statements of Stockholders' Deficit 

For the six months ended June 30, 2022 and 2021

(Unaudited)

 

  

Common Stock

  

Additional

  

Accumulated

  

Total

Stockholders'

 
  

Shares

  

Amount

  

Paid-in Capital

  

Deficit

  

Deficit

 
                     

Balance, December 31, 2021

  18,824,106  $18,824  $2,739,634  $(5,371,918) $(2,613,460)
       .             

Stock-based compensation

  -   -   63,000   -   63,000 
                     

Net loss

  -   -   -   (376,138)  (376,138)
                     

Balance, March 31, 2022

  18,824,106   18,824   2,802,634   (5,748,056)  (2,926,598)
                     

Stock-based compensation

  -   -   51,000   -   51,000 
                     

Net loss

  -   -   -   (394,535)  (394,535)
                     

Balance, June 30, 2022

  18,824,106  $18,824  $2,853,634  $(6,142,591) $(3,270,133)
                     

Balance, December 31, 2020

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

Stock issued for settlement of liabilities

  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 30, 2022 and 2021

(Unaudited)

 

  

June 30, 2022

  

June 30, 2021

 
         
         

Cash flows from operating activities:

        

Net loss

 $(770,673) $(496,819)

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

        

Stock-based compensation

  114,000   111,000 

Amortization of debt discount

  38,942   2,754 

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

  (12,211)  5,099 

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 

Default interest added to note payable

  -   50,000 

Changes in operating assets and liabilities:

        

Accounts receivable

  (7,890)  - 

Prepaid expenses and other current assets

  (1,250)  25,000 

Accounts payable

  111,332   63,692 

Accounts payable-related party

  (13,085)  55,511 

Interest payable

  17,863   28,999 

Net cash used in operating activities

  (522,972)  (189,476)
         

Cash flows from investing activities:

        

Acquisition of oil and gas property

  (756,298)  - 

Deposits for purchase of oil and gas properties

  -   (40,000)

Net cash used in investing activities

  (756,298)  (40,000)
         

Cash flows from financing activities:

        

Advances from related parties

  110,235   159,600 

Proceeds from note payable, related party

  -   65,000 

Proceeds from senior secured convertible notes payable, related party

  499,996   - 

Proceeds from the sale of common stock

  -   5,000 

Proceeds from unexecuted subscription agreements

  1,761,570   - 

Net cash provided by financing activities

  2,371,801   229,600 
         

Net change in cash and cash equivalents

  1,092,531   124 
         

Cash and cash equivalents, at beginning of period

  217   - 
         

Cash and cash equivalents, at end of period

 $1,092,748  $124 
         

Supplemental disclosures of cash flow information:

        

Cash paid for interest

 $23,596  $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 

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

 $-  $65,500 

Stock issued for settlement of accounts payable

 $-  $90,000 

Debt discount on senior secured convertible notes payable - related party

 $208,476  $- 

Advances and other liabilities converted to senior secured convertible notes payable, related party

 $819,963  $- 

 

See accompanying notes to the unaudited consolidated financial statements.

 

7

 

 

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 six months ended June 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 six months ended June 30, 2022 and 2021, there were 263,992 and 0 shares issuable from the senior secured convertible notes payable and 168,328 and 148,328 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:

 

  

Three months ended

  

Six months ended

 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 
                 

Basic net loss

 $(394,535) $(267,039) $(770,673) $(496,819)

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

  (14,969)  18,403   (12,211)  5,099 

Diluted net loss

 $(409,504) $(248,636) $(782,884) $(491,720)
                 

Basic and dilutive shares:

                

Weighted average basic shares outstanding

  18,824,106   18,309,939   18,824,106   18,249,450 

Shares issuable from convertible credit line payable

  168,328   -   168,328   - 

Shares issuable from senior secured convertible notes payable

  263,992   -   263,992   - 

Dilutive shares

  19,256,426   18,309,939   19,256,426   18,249,450 
                 

Loss per share:

                

Basic

 $(0.02) $(0.01) $(0.04) $(0.03)

Diluted

 $(0.02) $(0.01) $(0.04) $(0.03)

 

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.

 

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.

 

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 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 six months ended June 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 $133,844 during the six months ended  June 30, 2022 and 2021, respectively. The advances are unsecured, non-interest bearing and are payable on demand. During the six months ended June 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 $104,500 during the six months ended  June 30, 2022 and 2021, respectively. The advances are unsecured, non-interest bearing and is payable on demand. During the six months ended June 30, 2022, the Company converted $325,580 of advances to a senior secured convertible note due February 24, 2024.

 

As of  June 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 June 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.

 

10

 
 

Notes Payable - Related Party

 

On  December 3, 2020, the Company executed a promissory note for $65,000 with the 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 six months ended June 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 six months ended June 30, 2022, the Company recorded stock compensation of $84,000 for directors which was recorded in additional paid in capital, but has not recorded the share compensation as issued and outstanding as of the date hereof

 

During the six months ended June 30, 2022, the Company recorded stock compensation in the amount of $30,000 for Kelloff Oil & Gas, LLC.

 

During the six months ended  June 30, 2022, the Company received cash proceeds of $1,761,570 from investor subscriptions to purchase common stock at a purchase price of $1.00 per share recorded as a current liability.

 

 

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 six months ended  June 30, 2022, the Company amortized $3,244 of the discount as interest expense. As of  June 30, 2022, and  December 31, 2021, the unamortized discount was $7,856 and $11,100, respectively. The outstanding principal balance on the convertible credit line as of  June 30, 2022 and  December 31, 2021 amounted to $168,328. 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 six months ended  June 30, 2022, the Company amortized $11,175 of the discount as interest expense. As of  June 30, 2022, the unamortized discount was $54,087. The outstanding principal balance on the convertible credit line as of  June 30, 2022 amounted to $413,206. See discussion of derivative liability in Note 8 – Derivative Liability. 

 

11

 

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 six months ended  June 30, 2022, the Company amortized $24,523 of the discount as interest expense. As of  June 30, 2022, the unamortized discount was $118,691. The outstanding principal balance on the convertible credit line as of  June 30, 2022 amounted to $906,753. See discussion of derivative liability in Note 8 – Derivative Liability.

 

As of  June 30, 2022, the senior secured convertible notes payable balance, net of discount was $1,147,181 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 June 30, 2022 and December 31, 2021:

 

  

Level 1

  

Level 2

  

Level 3

  

Fair Value at

June 30, 2022

 

Liabilities:

                

Derivative liability

 $-  $-  $341,306  $341,306 

 

  

Level 1

  

Level 2

  

Level 3

  

Fair Value at

December 31, 2021

 

Liabilities:

                

Derivative liability

 $-  $-  $145,041  $145,041 

 

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 six months ended June 30, 2022 of $12,211. The fair market value adjustments as of June 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 247% - 274% and discount rate of 2.80% - 2.92%.

 

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

 

Balance at December 31, 2021

 $145,041 

Debt discount on senior secured notes payable

  208,476 

Gain on change in derivative fair value adjustment

  (12,211)

Balance at June 30, 2022

 $341,306 

 

12

 
 

 

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.

 

13

 

 

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 June 30, 2022, we had total current assets of $1,125,638 and total current liabilities of $3,989,289.

 

The Company used $522,971 of cash in operating activities during the six months ended June 30, 2022, compared to $189,476 used in operations during the same period in 2021. Net cash used in operating activities during the six months ended June 30, 2022 was mainly comprised of our $770,673 net loss during the period, adjusted by a non-cash charges of $12,211 for gain on change in fair value of derivative liabilities, stock-based compensation of $114,000, amortization of debt discounts of $38,943 and changes in operating assets and liabilities of $106,971. 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 $19 and changes in operating assets and liabilities of $173,202.

 

The Company used cash of $756,298 for investing activities during the six months ended June 30, 2022 which consisted of $756,298 for the acquisition of oil and gas property. The Company used cash of $40,000 for investing activities during the six months ended June 30, 2022 related to deposits for oil and gas properties.

 

The Company generated cash of $2,371,801 from financing activities during the six months ended June 30, 2022 which consisted of $110,235 in proceeds from advances from related parties, $499,996 from senior secured convertible notes payable from related party and $1,761,570 in proceeds from unexecuted subscription agreements. The Company generated cash of $229,600 from financing activities during the six months ended June 30, 2021 which consisted of $159,600 advances from related party, $65,00 of proceeds from note 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 $5,239 and $0 during the three months ended June 30, 2022 and 2021, respectively. Lease operating expenses were $47,558 and $0 during the three months ended June 30, 2022 and 2021, respectively. The increase in lease operating expenses was due to an increase in geological expenses. Total operating expenses were $312,269 during the three months ended June 30, 2022 compared to $212,961 during the same period in 2021. The increase in operating expenses was due to a $25,362 increase in professional fees and $85,946 increase in general and administrative expenses which were offset by $12,000 decrease in board of director fees.

 

We generated revenues of $5,239 and $0 during the six months ended June 30, 2022 and 2021. Lease operating expenses were $49,434 and $0 during the six months ended June 30, 2022 and 2021, respectively. The increase in lease operating expenses was due to an increase in geological expenses. Total operating expenses were $658,287 during the six months ended June 30, 2022 compared to $382,133 during the same period in 2021. The increase in operating expenses was due to a $162,131 increase in professional fees and $5,773 increase in general administrative expenses which were offset by $12,000 decrease in board of director fees and a $120,250 gain on settlement of accounts payable in 2021.

 

Off-Balance sheet arrangements

 

As of June 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.

 

14

 

 

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.

 

15

 

 

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 adopted 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 adopted 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 of 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 of 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 (formatted as 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.

 

16

 

 

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 18, 2022

 

 

Alpha Energy, Inc. 

 
       
 

By:

/s/ Jay Leaver

 
   

Jay Leaver, Principal Executive

Officer, Principal Financial Officer

 

 

17