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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022.

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission file number: 000-56111

 

INTERNATIONAL LAND ALLIANCE, INC.

(Exact name of registrant as specified in its charter)

 

Wyoming   46-3752361

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

350 10th Avenue, Suite 1000, San Diego, California 92101

(Address of principal executive offices) (Zip Code)

 

(877) 661-4811

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large-accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large-accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large-accelerated filer ☐ Accelerated filer ☐
  Non-accelerated filer ☒ Smaller reporting company ☒
      Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of November 18, 2022, the registrant had 36,796,365 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

Part I. Financial Information 3
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets – As of September 30, 2022 (unaudited) and December 31, 2021(audited) 3
Consolidated Statements of Operations – For the three and nine months ended September 30, 2022, and 2021 (unaudited) 4
Consolidated Statements of Changes in Stockholders’ Equity (deficit) for the three and nine months ended September 30, 2022, and 2021 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2022, and 2021 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
   
Part II. Other Information 32
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults upon Senior Securities 33
Item 4. Mine Safety Disclosures 33
Item 5. Other Information 33
Item 6. Exhibits 33
   
Signatures 34

 

2

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INTERNATIONAL LAND ALLIANCE, INC.

CONSOLIDATED BALANCE SHEETS

 

  

September 30,

2022

  

December 31,

2021

 
    (unaudited)    (audited) 
ASSETS          
Current assets          
Cash  $95,841   $56,590 
Accounts Receivable   55,472    30,273 
Prepaid and other current assets   206,110    251,665 
Total current assets   357,423    338,528 
           
Accounts receivable   283,817    283,817 
Land   203,419    203,419 
Land Held for Sale   647,399    647,399 
Buildings, net   876,847    915,884 
Furniture and equipment, net   2,012    2,682 
Construction in Process   1,296,555    852,020 
Note receivable   100,000    100,000 
Accrued interest on note receivable   9,153    3,234 
Equity-method investment   2,279,985    2,511,830 
Total assets  $6,056,610   $5,858,813 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current liabilities          
Accounts payable and accrued liabilities  $734,613   $1,022,384 
Accounts payable and accrued liabilities – Related party   1,045,454    634,149 
Contract liability   487,545    146,663 
Deposits   500    - 
Derivative liability   278,466    - 
Promissory notes, net of debt discounts   2,208,898    102,762 
Promissory notes, net of debt discounts– Related Parties   1,298,880    834,984 
Total current liabilities   6,054,356    2,740,942 
           
Promissory notes, net of current portion   -    1,735,538 
           
Total liabilities   6,054,356    4,476,480 
           
Commitments and Contingencies (Note 9)   -       
           
Preferred Stock Series B (Temporary Equity)   293,500    293,500 
           
Stockholders’ equity (deficit)          
Preferred stock; $0.001 par value; 2,000,000 shares authorized; 28,000 Series A shares issued and outstanding as of September 30, 2022, and December 31, 2021   28    28 
1,000 Series B shares issued and outstanding as of September 30, 2022, and December 31, 2021   1    1 
           
Common stock; $0.001 par value; 150,000,000 shares authorized; 36,471,365 and 31,849,327 shares issued and outstanding as of September 30, 2022, and December 31, 2021, respectively   36,472    31,850 
Additional paid-in capital   18,707,352    15,760,772 
Accumulated deficit   (19,035,099)   (14,703,818)
Total stockholders’ equity (deficit)   (291,246)   1,088,833 
           
Total liabilities and stockholders’ equity (deficit)  $6,056,610   $5,858,813 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3

 

 

INTERNATIONAL LAND ALLIANCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
   For the three months ended   For the nine months ended 
   September 30, 2022   September 30, 2021   September 30, 2022   September 30, 2021 
Revenues and lease income  $16,973   $8,340   $50,919   $25,899 
                     
Cost of revenues   -    -    -    - 
                     
Gross profit   16,973    8,340    50,919    25,899 
                     
Operating expenses                    
Sales and marketing   100,600    61,000    903,283    1,276,200 
General and administrative expense   432,434    496,822    2,506,181    1,917,067 
Total operating expenses   533,034    557,822    3,409,464    3,193,267 
                     
Loss from operations   (516,061)   (549,482)   (3,358,545)   (3,167,368)
                     
Other income (expense)                    
Other income   -    100,000    536    91,624 
Income (loss) from equity-method investment   (49,752)   32,270    (231,845)   39,212 
Change in fair value derivative   219,069    -    219,069    - 
Interest income   -    1,534    -    1,534 
Interest expense   (631,308)   (226,379)   (960,496)   (572,372)
Total other expense   (461,991)   (92,575)   (972,736)   (440,002)
                     
Net loss  $(978,052)  $(642,057)  $(4,331,281)  $(3,607,370)
                     
Loss per common share - basic and diluted  $(0.03)  $(0.02)  $(0.12)  $(0.14)
                     
Weighted average common shares outstanding - basic and diluted   36,394,441    30,418,295    34,917,678    26,662,971 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4

 

 

INTERNATIONAL LAND ALLIANCE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2022, and 2021

(unaudited)

 

Activity for the Nine Months Ended September 30, 2022

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital  1 Deficit   Equity 
  

Series A

Preferred Stock

  

Series B

Preferred Stock

   Common Stock  

Additional

Paid-in

 Accumulated  

Total

Stockholders’

 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
                                     
Balance, December 31, 2021   28,000   $      28    1,000   $         1    31,849,327   $31,850   $15,760,772  - $(14,703,818)  $1,088,833 
Common shares issued pursuant to promissory notes   -    -    -    -    450,000    450    201,825    -    202,275 
Common stock issued for option exercise   -    -    -    -    600,000    600    -    -    600 
Common stock issued for consulting services   -    -    -    -    814,714    815    446,463    -    447,278 
Stock-based compensation   -    -    -    -    -    -    871,688    -    871,688 
Warrants issued in connection with debt financing   -    -    -    -    -    -    159,664    -    159,664 
Dividend on Series B Preferred   -    -    -    -    -    -    (15,000)   -    (15,000)
Net loss   -    -    -    -    -    -    -  -  (1,492,722)   (1,492,722)
Balance, March 31, 2022   28,000   $28    1,000   $1    33,714,041   $33,715   $17,425,412  - $(16,196,540)  $1,262,616 
                                              
Common stock issued with Finders’ Fee agreement   -    -    -    -    88,988    89    40,401    -    40,490 
Common stock issued for option exercise   -    -    -    -    700,000    700    -    -    700 
Common stock issued for consulting services   -    -    -    -    1,635,000    1,635    728,250    -    729,885 
Dividend on Series Preferred   -    -    -    -    -    -    (15,000)   -    (15,000)
Stock-based compensation   -    -    -    -    -    -    410,288    -    410,288 
Net loss   -    -    -    -    -    -    - -  (1,860,507)   (1,860,507)
Balance, June 30, 2022   28,000   $28    1,000   $1    36,138,029   $36,139   $18,589,351 - $(18,057,047)  $568,472 
                                              
Common stock issued for consulting services   -    -    -    -    333,336    333    133,001    -    133,334 
Dividend on Series Preferred   -    -    -    -    -    -    (15,000)   -    (15,000)
Net loss   -    -    -    -    -    -    -  -  (978,052)   (978,052)
Balance, September 30, 2022   28,000   $28    1,000   $1    36,471,365    36,472    18,707,352 - $(19,035,099)  $(291,246)

 

Activity for the Nine Months Ended September 30, 2021

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   payable   Deficit   Equity 
Balance, December 31, 2020   28,000   $28    1,000   $1    23,230,654   $23,231   $8,705,620   $(289,044)  $(9,641,756)  $(1,201,920)
Common stock issued with debt settlement   -    -    -    -    118,000    118    84,480    (75,628)   -    8,970 
Commitment shares issued   -    -    -    -    85,000    85    130,815    -    -    130,900 
Common stock issued against accrued interest due to related party   -    -    -    -    29,727    30    10,969    -    -    10,999 
Common stock to be issued for cash   -    -    -    -    -    -    -    45,000    -    45,000 
Common stock issued from plot sale   -    -    -    -    100,000    100    32,412    (32,512)   -    - 
Common stock granted for services   -    -    -    -    -    -    (315,288)   315,288    -    - 
Stock-based compensation   -    -    -    -    -    -    67,380    280,000    -    347,380 
Dividend on Series Preferred   -    -    -    -    -    -    (15,000)   -    -    (15,000)
Net loss   -    -    -    -    -    -    -    -    (990,483)   (990,483)
Balance, March 31, 2021   28,000   $28    1,000   $1    23,563,381   $23,564   $8,701,388   $243,104   $(10,632,239)  $(1,664,154)
Common stock issued with plot purchase   -    -    -    -    70,000    70    29,451    -    -    29,521 
Common stock issued for warrant and option exercise   -    -    -    -    1,160,000    1,160    98,840    -    -    100,000 
Common stock issued with equity-method investment   -    -    -    -    3,000,000    3,000    2,577,000    -    -    2,580,000 
Common stock issued for cash   -    -    -    -    140,000    140    64,860    (45,000)   -    20,000 
Common stock issued pursuant to consulting agreements   -    -    -    -    395,946    396    538,712    (280,000)   -    259,108 
Dividend on Series Preferred   -    -    -    -    -    -    (15,000)   -    -    (15,000)
Stock-based compensation   -    -    -    -    -    -    1,307,078    -    -    1,307,078 
Net loss   -    -    -    -    -    -    -    -    (1,974,830)   (1,974,830)
Balance, June 30, 2021   28,000   $28    1,000   $1    28,329,327   $28,330   $13,302,329   $(81,896)  $(12,607,069)  $641,723 
                                                   
Common stock issued with debt settlement     -       -       -       -       35,000       35       12,570       (12,605 )     -       -
Common stock issued with cash, net of offering costs     -       -       -       -       3,000,000       3,000       1,736,750       -       -       1,739,750
Dividend on Series Preferred     -       -       -       -       -       -       (15,000)       -       -       (15,000)
Stock-based compensation     -       -       -       -       -       -       78,485       -       -       78,485
Net loss     -       -       -       -       -       -       -       -       (642,057)       (642,057)
Balance, September 30, 2021     28,000     $ 28       1,000     $ 1       31,364,327     $ 31,365     $ 15,115,134     $ (94,501 )   $ (13,249,126 )   $ 1,802,901

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5

 

 

INTERNATIONAL LAND ALLIANCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

September 30,

2022

  

September 30,

2021

 
   For the nine months ended 
  

September 30,

2022

  

September 30,

2021

 
         
Cash Flows from Operating Activities          
Net loss  $(4,331,281)  $(3,607,370)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation   1,281,976    2,001,021 
Fair value equity securities issued for services   1,310,497    - 
Loss on debt extinguishment   -    10,876 
Depreciation and amortization   39,708    35,311 
Loss (Income) from equity-method investment   231,845    (39,212)
Amortization of debt discount   291,374    284,616 
Excess Fair Value of derivative   356,785    - 
Change in fair value of derivative liability   (219,069)   - 
Changes in operating assets and liabilities          
Accounts Receivable   (25,199)   - 
Prepaid and other current assets   45,557    157,212 
Accounts payable and accrued liabilities   (235,002)   287,596 
Accounts payable and accrued liabilities   411,305      
Other non-current assets   -    (8,379)
Accrued interest on note receivable   (5,919)   - 
Contract liability   340,882    37,000 
Deposits   500    137,980 
Net cash used in operating activities   (506,041)   (703,349)
           
Cash Flows from Investing Activities          
Equity-method investee acquisition   -    (100,000)
Cash payment to collaborative agreement   -    (100,000)
Building and Construction in Progress payments   (444,535)   (241,259)
Net cash used in investing activities   (444,535)   (441,259)
           
Cash Flows from Financing Activities          
Common stock, warrants and options sold for cash   -    1,804,750 
Common stock issued from options exercise   1,300    - 
Common stock, warrants and plots promised for cash, net   -    100,000 
Cash payments on promissory notes- related party   (262,596)   (510,661)
Cash payments on promissory notes   (89,474)   (982,086)
Cash proceeds from convertible notes   663,250    288,874 
Cash proceeds from promissory notes- related party   677,347    763,812 
Cash proceeds from refinancing   -    368,736 
Net cash provided by financing activities   989,827    1,833,425 
           
Net increase in Cash   39,251    688,817 
           
Cash, beginning of period   56,590    13,171 
           
Cash, end of period  $95,841   $701,988 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $115,084   $127,174 
Cash paid for income tax  $-   $- 
           
Non-Cash investing and financing transactions          
Dividend on Series B  $45,000   $45,000 
Debt discount from issuance of promissory notes  $102,200   $- 
Debt discount from bifurcated derivative  $140,750   $- 
Common stock issued for finder’s fee agreement  $40,490   $- 
Debt discount created from warrants embedded in financing  $159,664   $- 
Corporate expenses paid by related party note  $49,145   $- 
Shares issued with debt modification  $-   $8,970 
Cancellation of previously issued common stock  $-   $315,288 
Interest on notes paid by related party  $-   $17,734 
Construction in progress paid by related party  $-   $84,614 
Common stock issued as consideration for equity-method investee  $-   $2,580,000 
Commitment shares issued with convertible note  $202,275   $130,900 
Corporate expenses paid through related party note  $-    $25,462
Common stock issued in settlement of related party accrued interest on note  $-   $10,999 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6

 

 

INTERNATIONAL LAND ALLIANCE, INC.

Notes to Financial Statements

September 30, 2022

 

NOTE 1 – NATURE OF OPERATIONS AND GOING CONCERN

 

Nature of Operations

 

International Land Alliance, Inc. (the “Company”) was incorporated under the laws of the State of Wyoming on September 26, 2013. The Company is a residential land development company with target properties located in the Baja California, Northern region of Mexico and Southern California. The Company’s principal activities are purchasing properties, obtaining zoning and other entitlements required to subdivide the properties into residential and commercial building plots, securing financing for the purchase of the plots, improving the properties infrastructure and amenities, and selling the plots to homebuyers, retirees, investors, and commercial developers.

 

Certain information and note disclosures included in the financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP” or “GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the audited financial statements and notes for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2022.

 

Liquidity and Going Concern

 

The accompanying consolidated unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

 

Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated financial statements were available to be issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company has faced significant liquidity shortages as shown in the accompanying financial statements. As of September 30, 2022, the Company’s current liabilities exceeded its current assets by approximately $5.7 million. The Company has recorded a net loss of $4.3 million for the nine months ended September 30, 2022, has an accumulated deficit of approximately $19.0 million as of September 30, 2022. Net cash used in operating activities for the nine months ended September 30, 2022, was approximately $506,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company continues to raise additional capital through the issuance of debt instruments and equity to fund its ongoing operations, which may have the effect of potentially diluting the holdings of existing shareholders.

 

Management anticipates that the Company’s capital resources will significantly improve if its plots of land gain wider market recognition and acceptance resulting in increased plot sales and house construction. If the Company is not successful with its marketing efforts to increase sales, the Company will continue to experience a shortfall in cash, and it will be necessary to obtain funds through equity or debt financing in sufficient amounts or to further reduce its operating expenses in a manner to avoid the need to curtail its future operations subsequent to September 30, 2022. The direct impact of these conditions is not fully known.

 

However, there can be no assurance that the Company would be able to secure additional funds if needed and that if such funds were available on commercially reasonable terms or in the necessary amounts, and whether the terms or conditions would be acceptable to the Company. In such case, the reduction in operating expenses might need to be substantial in order for the Company to generate positive cash flow to sustain the operations of the Company. (See Note 11 regarding subsequent events).

 

7

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The Company maintains its accounting records on an accrual basis in accordance with GAAP. These consolidated financial statements are presented in United States dollars. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods have been made and are of a recurring nature unless otherwise disclosed herein.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, ILA Fund I, LLC (the “ILA Fund”), a company incorporated in the State of Wyoming, International Land Alliance, S.A. de C.V., a company incorporated in Mexico (“ILA Mexico”), and Emerald Grove Estates LLC, incorporated in the State of California, Plaza Bajamar, LLC, incorporated in State of Wyoming, Plaza Valle Divino, LLC, incorporated in the State of Wyoming. ILA Fund includes cash as its only assets with minimal expenses as of September 30, 2022. The sole purpose of this entity is strategic funding for the operations of the Company. ILA Mexico has plots held for sale for the Oasis Park Resort, no liabilities, and minimal expenses as of September 30, 2022. All intercompany balances and transactions are eliminated in consolidation.

 

The Company’s consolidated subsidiaries and/or entities were as follows:

 

Name of Consolidated Subsidiary or Entity 

State or Other

Jurisdiction of

Incorporation or

Organization

  Attributable Interest 
ILA Fund I, LLC  Wyoming   100%
International Land Alliance, S.A. de C.V. (ILA Mexico)  Mexico   100%
Emerald Grove Estates, LLC  California   100%
Plaza Bajamar LLC  Wyoming   100%
Plaza Valle Divino, LLC  Wyoming   100%

 

Investments - Equity Method

 

The Company accounts for equity method investments at cost, adjusted for the Company’s share of the investee’s earnings or losses, which are reflected in the consolidated statements of operations. The Company periodically reviews the investments for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As of September 30, 2022, management believes the carrying value of its equity method investments was recoverable in all material respects.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management regularly evaluates estimates and assumptions related to the valuation of assets and liabilities. Management bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. Significant estimates include:

 

  ■ Liability for legal contingencies.

 

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  ■ Useful life of buildings.
  ■ Assumptions used in valuing equity instruments.
  ■ Deferred income taxes and related valuation allowances.
  ■ Going concern.
  ■ Assessment of long-lived asset for impairment.
  ■ Significant influence or control over the Company’s investee.
  ■ Revenue recognition.

 

Segment Reporting

 

The Company operates as one reportable segment under ASC 280, Segment Reporting. The Chief Operating Decision Maker (“CODM”) regularly reviews the financial information of the Company at a consolidated level in deciding how to allocate resources and in assessing performances.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. The Company did not have any cash equivalents as of September 30, 2022, and December 31, 2021, respectively.

 

Fair Value of Financial Instruments and Fair Value Measurements

 

Accounting Standards Codification (“ASC”) 820 Fair Value Measurements and Disclosures, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1: uses quoted market prices in active markets for identical assets or liabilities.

 

Level 2: uses observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: uses unobservable inputs that are not corroborated by market data.

 

As defined by ASC 820, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants at the measurement date.

 

The reported fair values for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety of factors and assumptions. Accordingly, certain fair values may not represent actual values of the Company’s financial instruments that could have been realized as of any balance sheet dates presented or that will be recognized in the future, and do not include expenses that could be incurred in an actual settlement.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid, and other current assets, accounts payable and accrued liabilities, contracts liability, deposits, promissory notes, net of debt discounts and promissory notes related party approximate fair value due to their relatively short maturities. Equity-method investment is recorded at cost, which approximates its fair value since the consideration transferred includes cash and a non-monetary transaction, in the form of the Company’s common stock, which was valued based on a combination of a market and asset approach.

 

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The fair value of the Company’s recorded derivative liability is determined based on unobservable inputs that are not corroborated by market data, which require a Level 3 classification. A Black-Sholes option valuation model was used to determine the fair value. The Company records derivative liability on the consolidated balance sheets at fair value with changes in fair value recorded in the consolidated statements of operation.

 

The following table presents balances of the liabilities with significant unobservable inputs (Level 3) as of September 30, 2022:

 

   Fair Value Measurements at September 30, 2022 Using 
   Quoted Prices in
Active
Markets for		   Significant
Other		   Significant