ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included or incorporated by reference in this Form 10-Q which address activities, events or developments which the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof); finding suitable merger or acquisition candidates; expansion and growth of the Company's business and operations; and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate under the circumstances. However, whether actual results or developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including general economic, market and business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulation; and other factors, most of which are beyond the control of the Company.
These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as "believes," "anticipates," "expects," "estimates," "plans," "may," "will," or similar terms. These statements appear in a number of places in this Filing and include statements regarding the intent, belief or current expectations of the Company, and its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations for its limited history; (ii) the Company's business and growth strategies; and, (iii) the Company's financing plans. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Such factors that could adversely affect actual results and performance include, but are not limited to, the Company's limited operating history, potential fluctuations in quarterly operating results and expenses, government regulation, technological change and competition.
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements.
General Business Development
The Company was formed on September 26, 2013 in the State of Colorado.
Business Strategy
The Company was incorporated in September 2013. Our business model is to purchase or trade stock for oil and gas properties to be held as long-term assets. Oil and gas commodity pricing has stabilized under the current economic market conditions bringing the U.S. to become one of the top the number one producers in the world. The momentum to drill using enhanced drilling technology in previously undeveloped areas assures the continued value of these properties. Our lean operating structure positions us well to compete in this very competitive market. Our strategy is to acquire producing properties that the Company can operate which have proven un-drilled locations available for further development. At this time the Company is reviewing several properties but have no contractual commitments to date. Our management’s years of experience and knowledge of the oil and gas industry leads us to believe that there are an abundance of good drilling prospects available that have either been overlooked or are not big enough for the larger companies. In the process of identifying these drilling prospects, the Company will utilize the expertise of existing management and employ the highest caliber contract engineering firms available to further evaluate the properties. To qualify for acquisition, the calculated cash flow after taxes and operating expenses, including ten percent (10%) interest per year, will recover the acquisition cost in 22 to 30 months. The cash flow calculation will be based conservatively on $51 per barrel of oil and $2.89 per MCF of gas. In addition, the selection criteria will require the life of current producing wells to be 7 years or longer and the field must have a minimum total life of 15 years.
On June 25, 2020, the Company entered into a Purchase and Sale Agreement with Pure Oil & Gas, Inc. (“Pure”) and ZQH Holding, LLC (“ZQH”) to acquire oil and gas assets in Rogers County Oklahoma (the “Project”). The Project consists of approximately 3,429 acres of proven developed and non-developed oil and gas leases. Alpha has acquired through assignment Pure and ZQHs’ 87.5% Working Interest in the Project. The current Operator is Premier Gas Company, LLC, who owns the residual interest. Alpha intends to assert that applicable agreements covering the Project give it the right to remove the current operator and select a new one. On July 6, 2020, Premier filed a mechanic’s lien in Rogers County alleging past unpaid invoices and also claiming incorrectly that Alpha’s ownership is 75% rather than 87.5%. No documentation has been provided Alpha of any past due invoices by Premier, Pure, or ZQH, and we intend to contest the lien vigorously. The leases contain 126 wells either producing or capable of being brought on line, four salt water injection wells, and well production equipment. Included is 20.5 miles of 4" gas gathering lines, four miles of 2" saltwater gathering lines, two delivery connections for natural gas sales and one LTX-LNG natural gas processing equipment. Since the infrastructure currently exists, it will reduce the capital necessary to increase production. Upon completion of the acquisition, the first objective is to recomplete, rework and repair older equipment. Once the first phase is complete and cash flow is established, phase two will be implemented. In phase two, Alpha intends to drill shallow wells in order to test formations from the Bartlesville (600') to the bottom of the Granite Wash (2,520'). Alpha anticipates that these operations increase total production and add reserves.
The Coral Project is approximately 1,100 acres of developed and undeveloped proven production in the Cherokee Uplift in central Oklahoma. This project area is very prolific and has several (up to 12) additional formations in addition to the Mississippi formation that is currently the producing formation in the 28 wells that make up this project. Logs and drilling data indicate many of these units, which are behind pipe in most wells in the Project, have productive characteristics and provide excellent recompletion targets. The engineering reserve report commissioned by Alpha identifies four behind pipe targets for immediate exploitation. The Project has numerous infill drilling opportunities in the Mississippian, three of which rank as Proven Undeveloped in the reserve report. The greatest potential in the Coral Project may be in the Woodford, a prolific producer in the nearby STACK play area. Log analysis indicates the Woodford has excellent productive characteristics; the reserve report identifies ten Probable locations that adds 1.1 million barrels of oil and over 7 billion cubic feet of natural gas in net reserves per the year-end 2019 independent engineer’s reserve report.
The Company notes that the Project is west of the lands in eastern Oklahoma affected by the decision of the U.S. Supreme Court issued on July 9, 2020, McGirt v. Oklahoma, and therefore is unaffected by that decision.
The Logan 2 Project is approximately 6,900 acres of developed and undeveloped proven production in the Cherokee Uplift in central Oklahoma. This prolific area includes thirty-four formerly producing wells, primarily from the Hunton Formation. While none of these wells are currently producing, the engineering reserve report commissioned by Alpha as of December 31, 2019 has identified sixteen that could be returned to production with minimal effort. Logs and drilling data indicate six wells with Probable behind-pipe pay that can be recompleted. Additionally, the reserve report identifies twelve Proved or Probable undeveloped locations for new drilling in the Hunton, Viola, or Layton Formations. As drilling progresses, additional PUD locations are likely to be found on this large acreage block. The reserve report indicates over 340 thousand barrels oil and over 610 million cubic feet gas of net reserves.
The Company is actively pursuing acquisition of additional properties in Oklahoma, Texas and New Mexico.
Liquidity and Capital Resources
As of September 30, 2020, we had total current assets of $5,470 and total current liabilities of $1,938,066.
The Company used $73,924 of cash in operating activities during the nine months ended September 30, 2020 compared to $143,515 used in operations during the same period in 2019. Net cash used in operating activities during the nine months ended September 30, 2020 was mainly comprised of our $575,017 net loss during the period, adjusted by a non-cash charges of $22,252 for gain on change in fair value of derivative liabilities, $10,750 gain on extinguishment of debt, stock compensation of $144,000, amortization of debt discounts of $14,926, asset retirement obligation expense of $57, default interest added to note payable of $100,000 and changes in operating assets and liabilities of $275,112. Net cash used in operating activities during the nine months ended September 30, 2019 was mainly comprised of our $261,594 net loss during the period, adjusted by a non-cash charges of $465,575 for gain on change in fair value of derivative liabilities, $50,000 impairment loss, stock compensation of $304,000, amortization of debt discounts of $29,636, asset retirement obligation expense of $57 and changes in operating assets and liabilities of $199,961.
The Company generated cash of $74,394 from financing activities during the nine months ended September 30, 2020 which consisted of $70,000 in proceeds from the sale of common stock, $8,500 proceeds from convertible credit line – related party, $1,000 advances from related party, $856 payments on short term advances – related party and $4,250 payments on convertible credit line payable - related party. The Company generated cash of $148,625 from financing activities during the nine months ended September 30, 2019 which consisted of proceeds of sale of common stock of $213,000, repayments on related party advances of $53,375 and repayments on convertible credit line payable – related party of $11,000.
Going Concern
The future of our Company is dependent upon its ability to obtain financing and upon future profitable operations. Management has plans to seek additional capital through a private placement and public offering of its common stock, if necessary. See Note 2 to the unaudited consolidated financial statements for additional information.
Results of Operations
We generated revenues of $1,217 and $3,857 during the nine months ended September 30, 2020 and 2019, respectively. Total operating expenses were $475,676 during the nine months ended September 30, 2020 compared to $680,935 during the same period in 2019. The decrease in operating expenses were due to a decrease in consulting fees of $160,456, $50,000 decrease in impairment loss which were offset with a $20,850 increase in legal expenses. The remaining difference in operating expenses were related to other general and administrative expenses.
We generated revenues of $0 and $873 during the three months ended September 30, 2020 and 2019, respectively. Total operating expenses were $202,047 during the three months ended September 30, 2020 compared to $195,236 during the same period in 2019. The increase in operating expenses were due to a $20,850 increase in legal expenses and a $9,871 increase in professional fees which were offset with a decrease of $29,100 in consulting fees. The remaining difference in operating expenses were related to other general and administrative expenses.
Off-Balance sheet arrangements
As of September 30, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. Our accounting policies are described in Note 1 to our audited financial statements for 2019 appearing in our Annual Report on Form 10-K for the year ended December 31, 2019.