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.
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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.
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