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TRULEUM, INC. - Quarter Report: 2018 September (Form 10-Q)

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018.

 

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934

 

For the Transition Period from ________to __________

 

Commission File Number: 333-197642

 

Alpha Energy, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Colorado

 

90-1020566

(State of other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer

[   ]

Accelerated filer

[   ]

Non-accelerated filer

[   ]

Smaller reporting company

[X]

 

 

Emerging Growth Company

[X]

 

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. [    ]

 

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

 

As of September 30, 2018, the issuer had 17,100,428 shares of common stock issued and outstanding.


1


 

 

 

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

 

 

Page

Item 1.

Financial Statements- unaudited

3

Item 2.

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

11

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

13

Item 4.

Controls and Procedures

13

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

14

Item 1A.

Risk Factors

14

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

14

Item 3.

Defaults Upon Senior Securities

14

Item 4.

Submission of Matters to a Vote of Security Holders

14

Item 5.

Other Information

14

Item 6.

Exhibits

14


2


 

 

ITEM 1. FINANCIAL STATEMENTS

 

ALPHA ENERGY, INC.

 

Unaudited Financial Statements

September 30, 2018

 

 

 

Page(s)

Unaudited Balance Sheets as of September 30, 2018 and December 31, 2017

4

 

 

 

Unaudited Statements of Operations for the three and nine months ended September 30, 2018 and 2017

5

 

 

 

Unaudited Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

6

 

 

 

Notes to the Unaudited Financial Statements

7


3


 

 

ALPHA ENERGY, INC.

BALANCE SHEETS

(UNAUDITED)

 

 

 

 

 

 

 

 

September 30,

2018

 

 

December 31,

2017

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

$

2,822

 

$

1,061

Account receivable

 

-

 

 

1,285

Total current assets

 

2,822

 

 

2,346

 

 

 

 

 

 

Other assets

 

 

 

 

 

Oil and gas property, unproved, full cost

 

10,000

 

 

-

 

 

 

 

 

 

Total assets

$

12,822

 

$

2,346

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER'S DEFICIT

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable and accrued liabilities

$

201,011

 

$

14,759

Interest payable

 

8,213

 

 

3,192

Derivative liability

 

878,995

 

 

238,674

Total current liabilities

 

1,088,219

 

 

256,625

 

 

 

 

 

 

Convertible Credit line payable – related party, net of unamortized discount of $77,329 and $68,005, respectively

 

87,483

 

 

22,861

Asset retirement obligation

 

691

 

 

635

Total liabilities

 

1,176,393

 

 

280,121

 

 

 

 

 

 

Stockholders' deficit

 

 

 

 

 

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

 

-

 

 

-

Common stock, $0.0001 par value; 65,000,000 shares authorized; 17,100,428 and 17,016,428 issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

1,711

 

 

1,702

Additional paid in capital

 

481,769

 

 

101,378

Accumulated deficit

 

(1,647,051)

 

 

(380,855)

Total stockholders' deficit

 

(1,163,571)

 

 

(277,775)

 

 

 

 

 

 

Total liabilities and stockholders' deficit

$

12,822

 

$

2,346

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited financial statements.


4


 

 

ALPHA ENERGY, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Revenues

$

481

 

$

955

 

$

2,024

 

$

2,383

Lease operating expenses

 

1,048

 

 

1,034

 

 

2,427

 

 

2,480

Gross margin

 

(567)

 

 

(79)

 

 

(403)

 

 

(97)

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Board of Director Fees

 

184,600

 

 

-

 

 

565,000

 

 

-

Professional services

 

12,051

 

 

20,910

 

 

33,436

 

 

53,320

General and administrative

 

13,256

 

 

550

 

 

31,340

 

 

4,225

Impairment Loss

 

-

 

 

-

 

 

-

 

 

11,250

Total operating expenses

 

209,907

 

 

21,460

 

 

629,776

 

 

68,795

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(210,474)

 

 

(21,539)

 

 

(630,179)

 

 

(68,892)

 

 

 

 

 

 

 

 

 

 

 

 

Other expense

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(26,645)

 

 

(5,727)

 

 

(69,642)

 

 

(6,966)

Loss on initial measurement of derivative liability

 

(102,350)

 

 

(2,912)

 

 

(164,179)

 

 

(2,912)

Loss on fair market value of derivative liability

 

(379,529)

 

 

(66,226)

 

 

(402,196)

 

 

(66,226)

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense

 

(508,524)

 

 

(74,865)

 

 

(636,017)

 

 

(76,104)

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(718,998)

 

$

(96,404)

 

$

(1,266,196)

 

$

(144,996)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share, basic and diluted

$

(0.04)

 

$

(0.01)

 

$

(0.07)

 

$

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

17,100,428

 

 

17,016,428

 

 

17,100,428

 

 

17,016,428

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited financial statements.


5


 

 

ALPHA ENERGY, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30

 

 

 

2018

 

 

2017

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(1,266,196)

 

$

(144,996)

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

 

 

 

 

 

 

Stock compensation

 

 

380,400

 

 

-

Debt discount amortization

 

 

64,622

 

 

4,640

Excess fair market value of initial measurement of derivative liability

 

 

164,179

 

 

2,912

Loss on fair market value of derivative liability

 

 

402,196

 

 

66,226

Impairment loss

 

 

-

 

 

11,250

Asset retirement obligation expense

 

 

56

 

 

50

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

-

 

 

(943)

Account receivable

 

 

1,285

 

 

-

Accounts payable and accrued liabilities

 

 

186,252

 

 

1,178

Interest payable

 

 

5,021

 

 

1,686

Net cash used in operating activities

 

 

(62,185)

 

 

(57,997)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Oil and gas lease purchase

 

 

(10,000)

 

 

-

Advance to related parties

 

 

-

 

 

(445)

Repayment from related parties

 

 

-

 

 

445

Net cash used in investing activities

 

 

(10,000)

 

 

-

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from notes payable

 

 

-

 

 

87,366

Payments on convertible credit line payable – related party

 

 

-

 

 

(2,000)

Proceeds from related party loans

 

 

73,946

 

 

8,031

Repayments of related party loans

 

 

-

 

 

(18,736)

Net cash provided by financing activities

 

 

73,946

 

 

74,661

 

 

 

 

 

 

 

Net change in cash

 

 

1,761

 

 

16,664

Cash, beginning of period

 

 

1,061

 

 

453

Cash, end of period

 

$

2,822

 

$

17,117

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

-

 

$

-

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

-

 

$

-

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

Debt discount on convertible line of credit - related party

 

$

73,946

 

$

87,366

Payment of expenses by related party on behalf of the Company

 

$

-

 

$

2,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited financial statements.

 

 

 


6


 

 

ALPHA ENERGY, INC.

Notes to Unaudited Financial Statements

September 30, 2018

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited interim financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows as of September 30, 2018, and for all periods presented herein, have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted. It is suggested that these unaudited interim financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2017 audited financial statements. The results of operations for the nine months ended September 30, 2018 are not necessarily indicative of the operating results for the full year.

 

Related party policy

 

In accordance with ASC 850, the Company discloses: the nature of the related party relationship(s) involved; a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Revenue and Cost Recognition

 

The Company records revenues from the sales of natural gas and crude oil when the production is produced and sold, and also when collectability is ensured. The Company may in the future have an interest with other producers in certain properties, in which case the Company will use the sales method to account for gas imbalances. Under this method, revenue will be recorded on the basis of natural gas actually sold by the Company. The Company also reduces revenue for other owners’ natural gas sold by the Company that cannot be volumetrically balanced in the future due to insufficient remaining reserves. The Company’s remaining over- and under-produced gas balancing positions are considered in the Company’s proved oil and natural gas reserves. The Company had no gas imbalances at September 30, 2018 or December 31, 2017. The Company recorded revenues of $2,024 and $ 2,383 and operating costs of $2,427 and $2,480 during the nine months ended September 30, 2018 and 2017, respectively. There was $0 and $1,285 of accounts receivable at September 30, 2018 and December 31, 2017, respectively.

 

Derivative Liabilities

 

The Company records a debt discount related to the issuance of convertible debts that have conversion features at adjustable rates. The debt discount for the convertible instruments is recognized and measured by allocating a portion of the proceeds as an increase in additional paid-in capital and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features. The debt discount will be accreted by recording additional non-cash gains and losses related to the change in fair market values of derivative liabilities over the life of the convertible notes.

 

NOTE 2 – GOING CONCERN

 

The Company’s interim unaudited financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an 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 for a period of twelve months from the date of issuance of this report. 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.


7


 

 

ALPHA ENERGY, INC.

Notes to Unaudited Financial Statements

September 30, 2018

 

NOTE 2 – GOING CONCERN (CONTINUED)

 

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

 

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

 

NOTE 3 – RELATED PARTY TRANSATIONS

 

The Company neither owns nor leases any real or personal property. The officers and directors for the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between the Company and their other business interest. The Company has not formulated a policy for the resolution of such conflicts. The Chief Financial Officer allows the use of his residence as an office for the Company at no charge.

 

During the nine months ended September 30, 2018, the Company received advances totaling $73,946 from AEI Acquisition Company, a majority shareholder, from its convertible credit line. See Note 4 – Convertible Credit Line Payable – Related Party.

 

NOTE 4 – CONVERTIBLE CREDIT LINE PAYABLE – RELATED PARTY

 

On September 1, 2017, the Company entered into a convertible credit line agreement to borrow up to $500,000. On the same date, the outstanding balance on a note payable of $87,366 was exchanged as a draw on the credit line. The loan modification is considered substantial under ASC 470-50. The outstanding balance accrues interest at a rate of 7% per annum and the outstanding balance is convertible to common stock of the Company at the lesser of the close price of the common stock as quoted on the OTCBB on the day interest is due and payable immediately preceding the conversion or $1.50. The Company analyzed the conversion options in the convertible line of credit for derivative accounting consideration under ASC 815, Derivative and Hedging, and determined that the transaction does qualify for derivative treatment. The Company measured the derivative liability and recorded a debt discount of $87,366 upon initial measurement. During the year ended December 31, 2017, the Company amortized $19,361 of the discount as interest expense leaving an unamortized discount of $68,005 as of December 31, 2017. See discussion of derivative liability in Note 5 – Derivative Liability

 

The Company made payments of $2,000 on the credit line during the year ended December 31, 2017 and received additional advances of $5,500. There was $90,866 of principal and $3,192 of accrued interest outstanding as of December 31, 2017. As of December 31, 2017 there was an unamortized debt discount of $68,005 resulting in a net balance represented on the balance sheet of $22,861.

 

During the nine months ended September 30, 2018, the Company received additional advances of $73,946 and made no repayments. Additionally, the Company recorded a debt discount of $73,946 related to the additional advances. There was $164,812 of principal and $8,213 of accrued interest outstanding as of September 30, 2018. As of September 30, 2018, there was an unamortized debt discount of $77,329 resulting in a net balance represented on the balance sheet of $87,483.


8


 

 

ALPHA ENERGY, INC.

Notes to Unaudited Financial Statements

September 30, 2018

 

NOTE 5 – DERIVATIVE LIABILITY

 

As discussed in Note 1, on a recurring basis, we measure certain financial assets and liabilities based upon the fair value hierarchy. The following table presents information about the Company’s liabilities measured at fair value as of September 30, 2018 and December 31, 2017:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

at

September 30,

2018

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Derivative Liability

$

-

 

$

-

 

$

878,995

 

$

878,995

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

at

December 31,

2017

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Derivative Liability

$

-

 

$

-

 

$

238,674

 

$

238,674

 

As of September 30, 2018, the Company had an $878,995 derivative liability balance on the balance sheet and recorded a loss from derivative liability fair value adjustment of $379,529, during the three months and $402,196 for the nine months ended September 30, 2018. The Company assessed its outstanding convertible credit line payable as summarized in Note 4 – Convertible Credit Line Payable- Related Party and determined certain convertible credit lines payable with variable conversion features contain embedded derivatives and are therefore accounted for at fair value under ASC 920, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments.

 

Utilizing Level 3 Inputs, the Company recorded fair market value adjustments related to convertible notes payable for the three months ended of $102,350 and $164,179 for the nine months September 30, 2018 .The fair market value adjustments as of September 30, 2018 were calculated utilizing a max valuation method using the following assumptions: exercise price of $1.50, 109,874 common shares the balance can be converted into and a stock price at measurement date of $8.00.

 

A summary of the activity of the derivative liability for the year ended December 31, 2017 is shown below:

 

Balance at December 31, 2016

$

-

Derivative liabilities recorded

 

87,366

Day one loss

 

2,912

Change due to note conversion

 

-

Loss on change in derivative fair value adjustment

 

148,396

Balance at December 31, 2017

$

238,674

 

A summary of the activity of the derivative liability for the nine months ended September 30, 2018 is shown below:

 

Balance at December 31, 2017

$

238,674

Derivative liabilities recorded

 

73,946

Day one loss

 

164,179

Change due to note conversion

 

-

Loss on change in derivative fair value adjustment

 

402,196

Balance at September 30, 2018

$

878,995


9


 

 

ALPHA ENERGY, INC.

Notes to Unaudited Financial Statements

September 30, 2018

 

NOTE 6 – EQUITY

 

On January 25, 2018, the Company agreed to compensate the board of directors 4,000 shares of common stock per month. On March 28, 2018, the Company granted 48,000 common shares with a fair value of $204,000 and on June 30, 2018 the Company approved to issue 36,000 shares with a fair value of $176,400. The total stock compensation for the six months ended June 30, 2018 is $380,400 and has been recorded as board of director fees on the income statement. 36,000 of the common shares were physically issued on July 9, 2018.

 

For the three months ended September 30, 2018, 44,000 shares with a fair value of $184,600 were accrued for stock compensation, 36,000 of which were physically issued on October 3, 2018. 12,000 shares were owed to as of the date this financial statements were made available.

 

NOTE 7 – OIL AND GAS PROPERTIES

 

Effective August 13, 2018, the Company entered into a Letter of Intent to purchase oil and gas prospects in New Mexico. The Company paid $10,000 towards the purchase of oil and gas properties which will be applied to the final purchase in accordance with the Letter of Intent. A final agreement has not been signed as of November 9, 2018.


10


 

 

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 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.


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In the first phase we intend on concentrating on prospects in eastern Colorado, western Kansas and southern Wyoming. The depth of the wells in the target areas average from 1500 ft. for the Niobrara formation to a total depth of 5800 ft. for the Topeka, Heebner, Lansing-Kansas City, Marmaton, Cherokee, Atoka, Morrow, Mississippian, Spergen, and Osage formations. By concentrating our initial efforts on shallower prospects we minimize drilling and operating costs. As we grow we plan to expand into the Front Range (Northern Front Range Outcrop) and Denver Basin Province (D-J Basin, Wattenberg) of Colorado and into western Kansas (Hugoton Embayment Anadarko Basin – Central Kansas Uplift). The wells in these areas range from 4,000 ft. to 10,000 ft. Such wells are more expensive to drill and operate, but also offer bigger returns. Some of the formations in these areas are the Sussex, Niobrara, Codell, J Sand and the D Sand formations. The Company intends to develop prospects and intends to obtain partners to participate in the costs of drilling or acquisitions with the Company serving as the designated Operator. The Company intends to also retain a royalty or working interest in the wells drilled or acquired.

 

The Company has engaged in verbal negotiations for acquisition of oil and gas leases located in northern and eastern Colorado basin and intends to engage in additional negotiations in the future.

 

In the second phase of operations, we intend to expand into Oklahoma, Texas, and eastern Kansas. We intend to place a great deal of emphasis on natural gas production and the transportation of natural gas. We believe natural gas will be the fuel of the future for automobiles, trucks and buses because of the clean-air standards that are proposed and will soon be going into effect, and now is an ideal time to acquire natural gas assets due to the current pricing matrix. The Company also plans on acquiring field transportation and short haul lines as part of our future business plan expansion. Acquiring these types of company lines, specifically in the areas where the company will have production located, will be advantageous due to savings in internal transportation costs, and the profitability margins of operating the lines and marketing natural gas. Managing the transportation system, in conjunction with field operations, will enhance cash flow. After obtaining the transportation lines, we hope to then develop our own end-users for natural gas. This will further enhance the profit margin of the company.

 

The company is actively pursuing acquisition of additional properties. Effective August 13, 2018, the Company entered into a Letter of Intent to purchase prospects in New Mexico. The Company paid $10,000 towards the purchase of oil and gas properties which will be applied to the final purchase in accordance with the Letter of Intent.

 

Liquidity and Capital Resources

 

As of September 30, 2018, we had $2,822 in cash, total current assets of $2,822 and total current liabilities of $1,088,219. Current liabilities consisted mainly of $878,995 of derivative liability, $10,410 in accounts payable and accrued liabilities, $190,601 in accrued Directors’ fees and $8,213 in interest payable.

 

The Company used $62,185 of cash in operating activities during the nine months ended September 30, 2018 compared to $57,997 used in operations during the same period in 2017. Net cash used during the nine months ended September 30, 2018 consisted mainly of a net loss of $1,266,196.

 

The Company used $10,000 of cash as an initial payment on oil and gas properties during the nine months ended September 30, 2018. There was $445 cash used in or provided by investing activities during the nine months ended September 30, 2017.

 

The Company generated cash of $73,946 from financing activities during the nine months ended September 30, 2018 which consisted of proceeds from related party convertible credit line payable. The Company generated cash of $74,661 from financing activities during the nine months ended September 30, 2017 which consisted of proceeds from notes payable of $95,397, and repayments of related party loans in the amount of $20,736.

 

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 financial statements for additional information.

 

Results of Operations

 

We generated revenues of $2,024 and $2,383 during the nine months ended September 30, 2018 and 2017. Total operating expenses were $629,776 during the nine months ended September 30, 2018 compared to $68,795 during the same period in 2017. The increase in operating expenses is the result of common shares issued to the directors for compensation recorded as professional services rendered in conjunction with reporting requirements and a general increase in operational activity.


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CRITICAL ACCOUNTING POLICIES

 

In Financial Reporting release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), the Securities and Exchange Commission suggested that companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include: non-cash compensation valuation that affects the total expenses reported in the current period and the valuation of shares and underlying mineral rights acquired with shares. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is not exposed to market risk related to interest rates or foreign currencies.

 

CONTROLS AND PROCEDURES

 

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, 2018, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), who concluded, that because of the material weakness in our internal control over financial reporting (“ICFR”) described below, our disclosure controls and procedures were not effective as of September 30, 2018.

 

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

 

Changes in Internal Control over Financial Reporting

 

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


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PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is not a party to any legal proceedings.

 

ITEM 1A. RISK FACTORS

 

There has been no material changes in the risk factors set forth in the Company’s Form 10K for the period ended December 31, 2017.

 

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

 

There were no sales of unregistered equity securities during the covered time period.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

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 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 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.

32.1

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.

 

(b) REPORTS ON FORM 8-K

 

None.


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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 12, 2018

 

 

 

Alpha Energy, Inc.

 

Registrant

 

 

 

 

 

By: /s/ John Lepin

 

John Lepin

President/CFO

 

 


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