Notes to Financial Statements
December 31, 2017 and 2016
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies of Alpha Energy, Inc. (the Company) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.
Organization, Nature of Business and Trade Name
The Company was incorporated in the State of Colorado on September 26, 2013 for the purpose of acquiring and executing on oil and gas leases. The Company has realized limited revenues from its planned business activities.
Basis of Presentation and 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.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with maturity of three months or less to be cash equivalents.
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 December 31, 2017 or 2016. The Company recorded revenues of $4,472 and $0 and costs of revenues totaling $5,735 and $0 during the years ended December 31, 2017 and 2016. There was $1,285 and $0 of accounts receivable at December 31, 2017 and 2016.
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 on a recurring basis. 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:
F-6
ALPHA ENERGY, INC.
Notes to Financial Statements
December 31, 2017 and 2016
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments (continued)
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 Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company measured derivative liabilities at fair value as of December 31, 2017 and 2016 which totaled:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at
December 31, 2017
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
$
|
-
|
|
$
|
-
|
|
$
|
238,674
|
|
$
|
238,674
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at
December 31, 2016
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Oil and natural gas properties
We account for our oil and natural gas producing activities using the full cost method of accounting as prescribed by the United States Securities and Exchange Commission (SEC). Under this method, subject to a limitation based on estimated value, all costs incurred in the acquisition, exploration, and development of proved oil and natural gas properties, including internal costs directly associated with acquisition, exploration, and development activities, the costs of abandoned properties, dry holes, geophysical costs, and annual lease rentals are capitalized within a cost center. Costs of production and general and administrative corporate costs unrelated to acquisition, exploration, and development activities are expensed as incurred.
Costs associated with unevaluated properties are capitalized as oil and natural gas properties but are excluded from the amortization base during the evaluation period. When we determine whether the property has proved recoverable reserves or not, or if there is an impairment, the costs are transferred into the amortization base and thereby become subject to amortization.
We assess all items classified as unevaluated property on at least an annual basis for inclusion in the amortization base. We assess properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate that there would be impairment, or if proved reserves are assigned to a property, the cumulative costs incurred to date for such property are transferred to the amortizable base and are then subject to amortization.
F-7
ALPHA ENERGY, INC.
Notes to Financial Statements
December 31, 2017 and 2016
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalized costs included in the amortization base, including estimated asset retirement costs, plus the estimated future expenditures to be incurred in developing proved reserves, net of estimated salvage values. Sales or other dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless the ratio of cost to proved reserves would significantly change.
During the year ended December 31, 2016, the Company issued 150,000 shares of common stock in exchange for an unproved lease of $2,924 and a proved lease of $8,326 and none issued during 2017.
Concentrations of Risk
The Company has interested in three separate oil and gas leases, all of which are located in the state of Colorado. Environmental and regulatory factors within the state beyond the control of the Company may limit the Company’s future production of all its leases.
The Company has a single buyer for the gas produces from one of its leases. The loss of this buyer would have a material adverse impact on our business.
Impairment
The net book value of all capitalized oil and natural gas properties within a cost center, less related deferred income taxes, is subject to a full cost ceiling limitation which is calculated quarterly. Under the ceiling limitation, costs may not exceed an aggregate of the present value of future net revenues attributable to proved oil and natural gas reserves discounted at 10 percent using current prices, plus the lower of cost or market value of unproved properties included in the amortization base, plus the cost of unevaluated properties, less any associated tax effects. Any excess of the net book value, less related deferred tax benefits, over the ceiling is written off as expense. Impairment expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period. During the years ended December 31, 2017 and 2016, the Company evaluated the future production of its leases through the termination of each lease. Through its analysis, the Company determined the present value of future production was less than the carrying value of the leases on the balance sheet. The Company recorded an impairment loss of $11,250 and $35,432 during the years ended December 31, 2017 and 2016.
Asset retirement obligation
We record the fair value of an asset retirement cost, and corresponding liability as part of the cost of the related long-lived asset and the cost is subsequently allocated to expense using a systematic and rational method. We record an asset retirement obligation to reflect our legal obligations related to future plugging and abandonment of our oil and natural gas wells and gathering systems. We estimate the expected cash flow associated with the obligation and discount the amount using a credit-adjusted, risk-free interest rate. At least annually, we reassess the obligation to determine whether a change in the estimated obligation is necessary. We evaluate whether there are indicators that suggest the estimated cash flows underlying the obligation have materially changed. Should those indicators suggest the estimated obligation may have materially changed on an interim basis (quarterly), we will update our assessment accordingly. Additional retirement obligations increase the liability associated with new oil and natural gas wells and gathering systems as these obligations are incurred. The Company had accrued an asset retirement obligation liability totaling $635 and $567 as of December 31, 2017 and 2016.
Capital Stock
The Company has authorized sixty five million (65,000,000) shares of common stock with $0.0001 par value and ten million (10,000,000) shares of preferred stock with $0.0001 par value. There were 17,016,428 shares of common stock and no shares of preferred stock issued and outstanding at December 31, 2017 and 2016, respectively.
Income Taxes
The Company recognizes the tax effects of transactions in the year in which such transactions enter into the determination of net income, regardless of when reported for tax purposes.
F-8
ALPHA ENERGY, INC.
Notes to Financial Statements
December 31, 2017 and 2016
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements
In February 2015, the FASB issued ASC 2015-02, "Consolidation (Topic 810) - Amendments to the Consolidation Analysis." This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The Company adopted has this standard and determined it does not have a significant impact on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.” This update eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard should be applied prospectively to measurement period adjustments that occur after the effective date. The new standard is effective for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. The Company has adopted this guidance and the adoption of this guidance did not have an impact on the Company’s results of operations, financial position, or cash flows for the years ended September 30, 2017 or 2016.
In March 2016, the FASB issued ASU 2016-09,
“Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.
”
The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the new guidance on January 1, 2017. The primary impact of adoption was the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital. However, as the Company has a full valuation allowance against its deferred tax asset, a corresponding adjustment was recorded to increase the valuation allowance.
In January 2017, the FASB issued ASU 2017-04, “
Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”.
The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “
Business Combinations (Topic 805): Clarifying the Definition of a Business,
” which revises the definition of a business. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company notes that this guidance will impact its acquisitions beginning January 1, 2018.
In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-1O"). The amendments in this update clarify the following two aspects to Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The entity first identifies the promised goods or services in the contract and reduces the cost and complexity. An entity evaluates whether promised goods and services are distinct. Topic 606 includes implementation guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). The Company evaluated the impacts of ASU 2016-10 and determined it did not have an impact on the Company’s revenue recognition practices.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption
F-9
ALPHA ENERGY, INC.
Notes to Financial Statements
December 31, 2017 and 2016
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 financial statements are prepared using accounting principles generally accepted 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. However, the Company does not have significant cash or other current assets, nor does it have an established 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 for a period of twelve months from the date of issuance of this report.
Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading, or seeking protection from creditors pursuant to laws or regulations. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the Business paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.
During the next year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with research and development. The Company may experience a cash shortfall and be required to raise additional capital.
Historically, it has mostly relied upon internally generated funds and funds from the sale of shares of stock to finance its operations and growth. Management may raise additional capital through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.
NOTE 3 – INCOME TAXES
We did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because we have experienced operating losses since inception. When it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit. We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward period.
The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the year ended December 2017 applicable under FASB ASC 740. We did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. All tax returns for the Company remain open for IRS inspection.
F-10
ALPHA ENERGY, INC.
Notes to Financial Statements
December 31, 2017 and 2016
NOTE 3 – INCOME TAXES (CONTINUED)
The 2017 Act reduces the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. For net operating losses (NOLs) arising after December 31, 2017, the 2017 Act limits a taxpayer’s ability to utilize NOL carryforwards to 80% of taxable income. In addition, NOLs arising after 2017 can be carried forward indefinitely, but carryback is generally prohibited. NOLs generated in tax years beginning before January 1, 2018 will not be subject to the taxable income limitation. The 2017 Act would generally eliminate the carryback of all NOLs arising in a tax year ending after 2017 and instead would permit all such NOLs to be carried forward indefinitely.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences for the periods presented are as follows:
Income tax provision at the federal statutory rate
|
|
35.00%
|
Income tax provision at the state statutory rate
|
|
4.63%
|
Effect on operating losses
|
|
(39.63%)
|
Change in federal statutory tax rate
|
|
21.00%
|
Net effect
|
|
(14%)
|
|
|
-
|
Changes in the net deferred tax assets consist of the following:
|
|
2017
|
|
|
2016
|
Net operating loss carry forward
|
$
|
170,067
|
|
$
|
70,040
|
Change in statutory tax rate
|
|
(23,809)
|
|
|
-
|
Valuation allowance
|
|
(146,258)
|
|
|
(70,040)
|
Net deferred tax asset
|
$
|
-
|
|
$
|
-
|
A reconciliation of income taxes computed at the statutory rate is as follows:
|
|
2017
|
|
|
2016
|
Tax at effective rate (25.63%)
|
$
|
43,588
|
|
$
|
27,757
|
Increase in valuation allowance
|
|
(43,588)
|
|
|
(27,757)
|
Net deferred tax asset
|
$
|
-
|
|
$
|
-
|
The net federal operating loss carry forward will expire in 2033. This carry forward may be limited upon the consummation of a business combination under IRC Section 381.
NOTE 4 – STOCK
The Company is authorized to issue up to 10,000,000 shares of $0.0001 par value preferred stock and 65,000,000 shares of $0.0001 par value common stock.
During the year ended December 31, 2016, the Company issued a total of 150,000 common shares in exchange for an oil and gas lease valued at $11,250.
There were no shares of preferred stock issued or outstanding at December 31, 2017 or 2016. There were 17,016,428 shares of common stock issued and outstanding at December 31, 2017 and 2016, respectively.
F-11
ALPHA ENERGY, INC.
Notes to Financial Statements
December 31, 2017 and 2016
NOTE 5 – STOCK WARRANTS
Through the year ended December 31, 2014, the Company issued warrants in connection with common stock issued for cash. The following table summarizes all stock warrant activity for the year ended December 31, 2017 and 2016:
|
|
Shares
|
|
|
Weighted- Average
Exercise Price
Per Share
|
Outstanding, December 31, 2016
|
|
|
500,000
|
|
|
$
|
0.125
|
Granted
|
|
|
-
|
|
|
|
-
|
Exercised
|
|
|
-
|
|
|
|
-
|
Forfeited
|
|
|
-
|
|
|
|
-
|
Expired
|
|
|
(260,000)
|
|
|
|
0.125
|
Outstanding, December 31, 2016
|
|
|
240,000
|
|
|
|
0.125
|
Granted
|
|
|
-
|
|
|
|
-
|
Exercised
|
|
|
-
|
|
|
|
-
|
Forfeited
|
|
|
-
|
|
|
|
-
|
Expired
|
|
|
(240,000)
|
|
|
|
0.125
|
Outstanding, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
The weighted average remaining contractual life of options outstanding as of December 31, 2017 and December 31, 2016, was approximately 0.00 and 0.20 years, respectively. The exercise price of these options was $0.125 and the intrinsic value of the options as of December 31, 2017 and December 31, 2016 is $0.00, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
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.
The Company received advances from related parties totaling $8,030 and $14,880 and were repaid $19,415 and $0 during the years ended December 31, 2017 and 2016, respectively. Additionally, the Company recorded forgiveness of related party loans to additional paid in capital totaling $9,100 during the year ended December 31, 2017. The advances from related parties are not convertible, bear no interest and are due on demand. There was $0 and $17,855 due to related parties as of December 31, 20167 and 2016, respectively.
During the year ended December 31, 2017, the Company made advances to related parties of $445 which were repaid during the same year. The advances are non-interest bearing and due on demand. There was $0 due from related parties as of December 31, 2017and 2016, respectively
During the year ended December 31, 2017, the majority owners of the Company sold their stock in a private transaction to AEI Acquisition Company, LLC. Immediately after the close of the transaction, AEI Acquisition Company owned 93% of the issued and outstanding shares of the Company.
During the year ended December 31, 2017, the Company converted existing notes payable due to AEI Acquisition Company of $87,366 to a convertible credit line. See Note 8 – Convertible Credit Line Payable – Related Party
F-12
ALPHA ENERGY, INC.
Notes to Financial Statements
December 31, 2017 and 2016
NOTE 7 – NOTES PAYABLE
On February 1, 2017, the Company executed a promissory note for $56,216. The note bears simple interest at a rate of 3.75%, is not convertible to equity of the Company and is due on February 1, 2018. During the three months ended June 30, 2017, the Company received additional advances of $7,600. During the three months ended September 30, 2017, the Company made repayments of $2,000 and received additional advances of $23,550. On September 1, 2017, the outstanding balance of $87,366 on the note payable was converted to a convertible credit line payable as discussed in
Note 8 – Convertible Credit Line Payable – Related Party
.
NOTE 8 – 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 9 – 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.
NOTE 9 – 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 December 31, 2017 and 2016:
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at
December 31, 2017
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
$
|
-
|
|
$
|
-
|
|
$
|
238,674
|
|
$
|
238,674
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value at
December 31, 2016
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liability
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
As of December 31, 2017, the Company had a $238,674 derivative liability balance on the balance sheet and recorded a loss from derivative liability fair value adjustment of $148,396 during the year ended December 31, 2017. The Company assessed its outstanding convertible credit line payable as summarized in
Note 8 – 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 year ended December 31, 2017 of $148,396. The derivative liability was initially measured at $90,278, resulting in a loss on initial measurement of $2,912, on September 1, 2017 using the following assumptions: exercise price of $1.50, 58,244 common share equivalents, and a fair value of the common stock of $1.55 per share. The fair market value adjustments as of December 31, 2017 were calculated utilizing a max valuation method using the following assumptions: exercise price of $1.50, 60,577 common share equivalents, and a fair value of the common stock of $3.94 per share.
F-13
ALPHA ENERGY, INC.
Notes to Financial Statements
December 31, 2017 and 2016
NOTE 9 – DERIVATIVE LIABILITY (CONTINUED)
A summary of the activity of the derivative liability 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
|
NOTE 10 – SUBSEQUENT EVENTS
Subsequent to December 31, 2017, the Company drew an additional $19,930 from convertible credit line payable - related party disclosed in Note 8.
On March 28, 2018, the Company granted 48,000 common shares for services to the board of directors. These shares have not been issued as of the filing date.
F-14