International Land Alliance Inc 10-Q, filed Jul 18, 2023
International Land Alliance Inc. (ILAL)
About this 10-Q
International Land Alliance Inc filed this 10-Q on July 18, 2023, covering the quarter ended March 31, 2023.
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 March 31, 2023
☐ 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 July 18, 2023, the registrant had 64,943,897 shares of common stock, $0.001 par value per share, outstanding.
TABLE OF CONTENTS
| 2 |
PART I — FINANCIAL INFORMATION
INTERNATIONAL LAND ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
| March 31, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 199,393 | $ | 49,374 | ||||
| Accounts receivable | 1,673,303 | - | ||||||
| Prepaid and other current assets | 8,835 | 49,198 | ||||||
| Total current assets | 1,881,531 | 98,572 | ||||||
| Other non-current assets | 47,644 | - | ||||||
| Land | 1,351,735 | 203,419 | ||||||
| Buildings, net | 1,869,880 | 863,745 | ||||||
| Furniture and equipment, net | 10,126 | 1,877 | ||||||
| Total assets | $ | 5,160,916 | $ | 1,167,613 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 1,343,075 | $ | 675,202 | ||||
| Accounts payable and accrued liabilities related parties | 343,728 | 189,266 | ||||||
| Deferred revenue | 9,580,333 | - | ||||||
| Accrued interest | 539,985 | 352,884 | ||||||
| Accrued interest related party | 168,218 | 132,841 | ||||||
| Contract liability | 85,407 | 85,407 | ||||||
| Deposits | 20,500 | 20,500 | ||||||
| Derivative liability | 922,693 | 531,527 | ||||||
| Convertible notes, net of debt discounts | 569,356 | 558,657 | ||||||
| Convertible note RCVD acquisition – related party | 8,900,000 | - | ||||||
| Promissory notes, net of debt discounts | 1,889,762 | 1,885,616 | ||||||
| Promissory notes, net discounts – Related Parties | 1,609,204 | 1,286,695 | ||||||
| Other loans | 6,602,342 | - | ||||||
| Total current liabilities | 32,574,603 | 5,718,595 | ||||||
| Promissory notes, net of current portion | - | - | ||||||
| Total liabilities | 32,574,603 | 5,718,595 | ||||||
| Commitments and Contingencies (Note 10) | - | - | ||||||
| Preferred Stock Series B (Temporary Equity) | 293,500 | 293,500 | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock; $0.001 par value; 2,000,000 shares authorized; 28,000 Series A shares issued and outstanding as of March 31, 2023 and December 31, 2022 | 28 | 28 | ||||||
| 1,000 Series B shares issued and outstanding as of March 31, 2023 and December 31, 2022 | 1 | 1 | ||||||
| Common stock; $0.001 par value; 150,000,000 shares authorized; 64,676,587 and 61,676,587 shares issued and outstanding as of March 31, 2023, respectively, and 43,499,423 shares issued and outstanding as of December 31, 2022. | 64,677 | 43,500 | ||||||
| Additional paid-in capital | - | 20,233,446 | ||||||
| Treasury stock (3,000,000 shares as of March 31, 2023) | (300,000 | ) | - | |||||
| Accumulated deficit | (27,471,893 | ) | (25,121,457 | ) | ||||
| Total stockholders’ deficit | (27,707,187 | ) | (4,844,482 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 5,160,916 | $ | 1,167,613 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
INTERNATIONAL LAND ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For the Three Months Ended March 31 | ||||||||
| 31-Mar | March 31, | |||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 240,932 | $ | 0 | ||||
| Cost of revenues | $ | (3,001 | ) | 0 | ||||
| Gross profit | 237,931 | 0 | ||||||
| Operating expenses | ||||||||
| Sales and marketing | 260,084 | 30,278 | ||||||
| Impairment loss | 245,674 | |||||||
| General and administrative expenses | 610,180 | 1,333,946 | ||||||
| Total operating expenses | 1,115,938 | 1,364,224 | ||||||
| Loss from operations | (878,007 | ) | (1,364,224 | ) | ||||
| Other income (expense) | ||||||||
| Loss from debt extinguishment | $ | (49,329 | ) | 0 | ||||
| Change in fair value derivative liability | $ | (397,678 | ) | |||||
| Income from equity-method investment | - | (41,104 | ) | |||||
| Interest income | - | 16,973 | ||||||
| Interest expense | $ | (583,547 | ) | (104,367 | ) | |||
| Total other income (expense) | $ | (1,030,554 | ) | (128,498 | ) | |||
| Net loss | $ | (1,908,561) | $ | (1,492,722 | ) | |||
| Deemed dividend from RCVD acquistion | $ | (25,354,976 | ) | 0 | ||||
| Net comprehensive loss attributable to common shareholders | $ | (27,263,537 | ) | 0 | ||||
| Loss per common share - basic and diluted | $ | (0.45) | $ | (0.05) | ||||
| Weighted average common shares outstanding - basic and diluted | 60,159,088 | 32,866,288 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
INTERNATIONAL LAND ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Three Months Ended March 31, 2023 and 2022
(unaudited)
Activity for the Three Months Ended March 31, 2023
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Treasury | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Stock | Capital | Deficit | Deficit | |||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 28,000 | $ | 28 | 1,000 | $ | 1 | 43,499,423 | $ | 43,500 | - | $ | 20,233,446 | $ | (25,121,457 | ) | $ | (4,844,482 | ) | ||||||||||||||||||||||
| Common shares issued from related party acquisition | - | - | - | - | 20,000,000 | 20,000 | - | 1,780,000 | - | 1,800,000 | ||||||||||||||||||||||||||||||
| Fair value common shares warrants issued from related party acquisition | - | - | - | - | - | - | - | 2,674,976 | - | 2,674,976 | ||||||||||||||||||||||||||||||
| Deemed dividend from related party acquisition | - | - | - | - | - | - | - | (24,913,097 | ) | (441,875 | ) | (25,354,972 | ) | |||||||||||||||||||||||||||
| Reciprocal interest in business acquisition | - | - | - | - | - | (300,000 | ) | - | - | (300,000 | ) | |||||||||||||||||||||||||||||
| Common stock issued from debt conversion | - | - | - | - | 1,077,164 | 1,077 | - | 146,728 | - | 147,805 | ||||||||||||||||||||||||||||||
| Common stock issued for consulting services | - | - | - | - | 100,000 | 100 | - | 14,900 | - | 15,000 | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | - | 78,047 | - | 78,047 | ||||||||||||||||||||||||||||||
| Dividend on Series B Preferred | - | - | - | - | - | - | - | (15,000 | ) | - | (15,000 | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (1,908,561 | ) | (1,908,561 | ) | ||||||||||||||||||||||||||||
| Balance, March 31, 2023 | 28,000 | $ | 28 | 1,000 | $ | 1 | 64,676,587 | $ | 64,677 | $ | (300,000 | ) | $ | - | $ | (27,471,893 | ) | $ | (27,707,187 | ) | ||||||||||||||||||||
Activity for the Three Months Ended March 31, 2022
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| 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 from promissory notes | - | - | - | - | 450,000 | 450 | 201,825 | - | 202,275 | |||||||||||||||||||||||||||
| Common stock issued from options exercise | - | - | - | - | 600,000 | 600 | - | - | 600 | |||||||||||||||||||||||||||
| Common stock issued for consulting services | - | - | - | - | 814,714 | 815 | 446,463 | - | 447,278 | |||||||||||||||||||||||||||
| Warrants issued in connection with promissory notes | - | - | - | - | - | - | 159,664 | - | 159,664 | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 871,688 | - | 871,688 | |||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
INTERNATIONAL LAND ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the three months ended | ||||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (1,908,561 | ) | $ | (1,492,722 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | 78,047 | 871,688 | ||||||
| Impairment loss | 245,675 | - | ||||||
| Fair value equity securities issued for services | 15,000 | - | ||||||
| Loss on debt extinguishment | 49,329 | - | ||||||
| Depreciation and amortization | 29,748 | 13,102 | ||||||
| Loss (Income) from equity-method investment | - | 41,104 | ||||||
| Amortization of debt discount | 160,830 | 19,241 | ||||||
| Excess Fair Value of derivative | 36,062 | - | ||||||
| Change in fair value of derivative liability | 397,678 | - | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts Receivable | 31,280 | (1,599 | ) | |||||
| Prepaid and other current assets | 40,363 | 27,796 | ||||||
| Other non-current assets | (5,070 | ) | - | |||||
| Accounts payable and accrued liabilities | (15,754 | ) | 170,921 | |||||
| Accounts payable and accrued liabilities related parties | 154,462 | - | ||||||
| Deferred revenue | 303,713 | - | ||||||
| Accrued interest on note receivable | 294,346 | (1,973 | ) | |||||
| Contract liability | 129,830 | 7,500 | ||||||
| Deposits | - | - | ||||||
| Net cash provided by (used in) operating activities | 36,978 | (344,942 | ) | |||||
| Cash Flows from Investing Activities | ||||||||
| Cash acquired from RCVD acquisition | 321,919 | - | ||||||
| Additional expenditures on land | (215,266 | ) | - | |||||
| Building and Construction in Progress payments | (179,700) | (109,000 | ) | |||||
| Net cash used in investing activities | (73,047) | (109,000 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Common stock, warrants and options sold for cash | - | 600 | ||||||
| Cash payments on promissory notes- related party | (100,850 | ) | (90,954 | ) | ||||
| Cash payments on promissory notes | (63,058 | ) | (11,620 | ) | ||||
| Cash proceeds from convertible notes | 100,000 | 522,500 | ||||||
| Cash proceeds other loans | 23,776 | - | ||||||
| Cash proceeds from promissory notes- related party | 226,220 | 170,102 | ||||||
| Net cash provided by financing activities | 186,088 | 590,628 | ||||||
| Net increase in Cash | 150,019 | 136,686 | ||||||
| Cash, beginning of period | 49,374 | 56,590 | ||||||
| Cash, end of period | $ | 199,393 | $ | 193,276 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | 47,285 | $ | 45,702 | ||||
| Cash paid for income tax | $ | - | $ | - | ||||
| Non-Cash investing and financing transactions | ||||||||
| Dividend on Series B | $ | 15,000 | $ | 15,000 | ||||
| Common shares issued with convertible debt | $ | - | $ | 202,275 | ||||
| Debt discount from issuance of new promissory notes | $ | 104,250 | $ | 93,700 | ||||
| Common stock issued for settlement of liability for consulting agreement | $ | - | $ | 447,278 | ||||
| Debt discount created from warrants embedded in financing | $ | - | $ | 159,664 | ||||
| Common shares issued for services | $ | 15,000 | - | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
INTERNATIONAL LAND ALLIANCE, INC.
Notes to the Consolidated Financial Statements
March 31, 2023
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.
In May 2021, the Company acquired a 25% investment in Rancho Costa Verde Development LLC (“RCVD”). RCVD is a 1,100-acre master planned second home, retirement home and vacation home real estate community located on the east coast of Baja California. RCV is a self-sustained solar powered green community that takes advantage of the advances in solar and other green technology. On January 3, 2023, the Company completed the acquisition of the remaining 75% interest in RCVD for a contractual price of $13.5 million, paid through a combination of a promissory note, common stock and common stock purchase warrants. As a result of the transaction, RCVD became a wholly owned subsidiary of the Company. The transaction was accounted for as a business acquisition pursuant to ASC 805 Business Combinations.
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 three months ended March 31, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the audited financial statements and notes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on July 6, 2023.
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 March 31, 2023, the Company’s current liabilities exceeded its current assets by approximately $30.7 million. The Company has recorded a net loss of $1.9 million for the three months ended March 31, 2023, has an accumulated deficit of approximately $27.5 million as of March 31, 2023. 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 March 31, 2023. 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 13 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 and Rancho Costa Verde Development, LLC incorporated in State of Nevada.
ILA Fund includes cash as its only assets with minimal expenses as of March 31, 2023. 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 March 31, 2023. As of March 31, 2023, Emerald Grove Estates LLC, Plaza Bajamar LLC, and Plaza Valle Divino LLC have no operations. 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 | % | |||
| Rancho Costa Verde Development, LLC | Nevada | 100 | % | |||
| 8 |
On January 1, 2023, the Company executed a securities purchase agreement pursuant to which the Company acquired all of the issued and outstanding units of Rancho Costa Verde Development, LLC. for a total contractual consideration of $13,500,000, paid through a combination of a promissory note, common stock and common stock purchase warrants.
Reclassification
Certain numbers from 2022 have been reclassified to conform with the current year presentation.
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. On January 3, 2023, the Company acquired a controlling financial interest in its previous equity method investment, which resulted in the consolidation pursuant to ASC 805 Business Combinations of such entity on the effective date.
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. | |
| ● | Useful life of buildings. | |
| ● | Assumptions used in valuing equity instruments. | |
| ● | Deferred income taxes and related valuation allowances. | |
| ● | Going concern. | |
| ● | Assessment of long-lived assets 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 March 31, 2023, and December 31, 2022, respectively.
| 9 |
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 , deferred revenue, other notes 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.
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 March 31, 2023:
| Fair Value Measurements at March 31, 2023 Using | ||||||||||||||||
| Quoted Prices in Active Markets for | Significant Other | Significant | ||||||||||||||
| Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| Derivative liability | $ | - | $ | - | $ | 922,693 | $ | 922,693 | ||||||||
| Total | $ | - | $ | - | $ | 922,693 | $ | 922,693 | ||||||||
| 10 |
The following table presents changes of the liabilities with significant unobservable inputs (Level 3) for the three months ended March 31, 2023:
| Derivative | ||||
| Liability | ||||
| Balance December 31, 2022 | $ | 531,527 | ||
| New derivative from convertible notes | 136,062 | |||
| Settlement by debt extinguishment | (142,574 | ) | ||
| Change in estimated fair value | 397,678 | |||
| Balance March 31, 2023 | $ | 922,693 | ||
Derivative Liability
As of March 31, 2023, the Company has variable rate convertible promissory notes, which contained variable conversion rates based on unknown future prices of the Company’s common stock. This resulted in the recognition of a derivative liability as the conversion feature failed the scope exception for derivative accounting due to the variability of its conversion price. The Company measures the derivative liability using the Black-Scholes option valuation model using the following assumptions:
For the Three Months Ending March 31, | ||||
| 2023 | 2022 | |||
| Expected term | 1 month – 1 year | - | ||
| Exercise price | $0.05 - $0.10 | - | ||
| Expected volatility | 139% - 163% | - | ||
| Expected dividends | None | - | ||
| Risk-free interest rate | 4.74% - 5.09% | - | ||
| Forfeitures | None | - | ||
The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, managements’ assessment, or significant fluctuations in the volatility of the trading market for the Company’s common stock, the Company’s fair value estimates could be materially different in the future.
The Company computes the fair value of the derivative liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in the value of the derivative liability is the Company’s stock price, which is subject to significant fluctuation and is not under its control, and the assessment of volatility. The resulting effect on net loss is therefore subject to significant fluctuation and will continue to be so until the Company’s variable convertible notes, which the convertible feature is associated with, are converted into common stock or paid in full with cash. Assuming all other fair value inputs remain constant, the Company will record non-cash expense when its stock price increases and non-cash income when its stock price decreases.
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Cost Capitalization
The cost of buildings and improvements includes the purchase price of the property, legal fees, and other acquisition costs. Costs directly related to planning, developing, initial leasing and constructing a property are capitalized and classified as Buildings in the consolidated balance sheets. Capitalized development costs include interest, property taxes, insurance, and other direct project costs incurred during the period of development are also capitalized.
A variety of costs are incurred in the acquisition, development, and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete, and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC 835-20 Interest – Capitalization of Interest and ASC 970 Real Estate - General. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy or sale upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.
Land Held for Sale
The Company considers properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) the property is available for immediate sale in its present condition and (3) the property is actively being marketed for sale at a price that is reasonable given our estimate of current market value. Upon designation of a property as an asset held for sale, we record the property’s value at the lower of its’ carrying value or its estimated net realizable value. The Company fully impaired of the land held for sale as of December 31, 2022.
Land and Buildings
Land and buildings are stated at cost. Depreciation is provided by the use of the straight-line and accelerated methods for financial and tax reporting purposes, respectively, over the estimated useful lives of the assets. Buildings will have an estimated useful life of 20 years. Land is an indefinite lived asset that is stated at fair value at date of acquisition.
Construction in progress (“CIP”)
A CIP asset reflects the cost of construction work undertaken, but not yet completed on land not currently owned by the Company. For construction in progress assets, no depreciation is recorded until the asset is placed in service. When construction is completed, the assets should be reclassified as building, building improvement, infrastructure or land improvement and should be capitalized and depreciated. The land is currently owned by companies controlled by our Chief Executive Officer. The Company fully impaired the construction in progress on land currently owned by the Companies controlled by our Chief Executive Officer due to the uncertainty in title transfer as of March 31, 2023.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation, and amortization. Depreciation is computed using the double declining balance method over the estimated useful lives of the respective assets:
| Classification | Life | |
| Buildings | 20 years | |
| Furniture and equipment | 5 years |
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Revenue Recognition
The Company determines revenue recognition pursuant to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, through the following steps:
| ■ | Identification of the contract, or contracts, with a customer. | |
| ■ | Identification of the performance obligations in the agreement(s) for the sale of plots or house construction. | |
| ■ | Determination of the transaction price. | |
| ■ | Allocation of the transaction price to the performance obligation(s) in the contract. | |
| ■ | Recognition of revenue when, or as the Company satisfies a performance obligation. |
Revenue is measured based on considerations specified in the agreements with our customers. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on either the acceptance of standard terms and conditions as stated in our agreement of plot sales or house construction with customers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration which we will expect to receive in exchange for execution of the performance obligation(s).
The Company applies judgment in determining the customer’s ability and intention to pay the consideration to which the Company is entitled to. A performance obligation is a promise in a contract or agreement to transfer a distinct product or item to the customer. Performance obligations promised in a contract are identified based on the property that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the property is separately identifiable from other promises in the contract. Management considers the retention of title as merely a protective right, which would not disallow revenue recognition for the full consideration to which the Company is entitled upon the execution of a contract for deed.
Currently, upon execution of each contract for deed, the Company has not developed sufficient controls and procedures to provide reasonable assurance that collection of the consideration, which the Company is entitled to, is probable. In addition, the title of the land for the various projects (Bajamar and Divino) is held by an entity that is controlled by the Company’s Chief Executive Officer.
The Company’s principal activities in the real estate development industry which it generates its revenues from are the sale of developed and undeveloped land and house construction.
Rancho Costa Verde Development or RCVD generates revenue from the following sources: (1) lot sales, (2) home construction calculated as a set percentage of builders’ costs, (3) administrative income for loan servicing, (4) interest income resulting from monthly payments from financed loans made to customers on lost sales, (5) resale income as commission for selling homes for owners that have purchased lots at RCVD and (6) utilities revenue from waste water systems and solar systems.
The Company identified the following performance obligations related to the operations of RCVD: (1) subdivision of the developer parcel, (ii) casita free week for each customer allowing them to enjoy a free week to a casita per year. The Company determined that there was a significant financing component in most arrangements with customers, which results in the recognition of interest income.
The Company recognized approximately $241,000 of revenue during the three months ended March 31, 2023.
Advertising costs
The Company expenses advertising costs when incurred. Advertising costs incurred amounted to $260,084 and $30,278 for the three months ended March 31, 2023, and 2022, respectively.
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Debt issuance costs and debt discounts
Debt issuance costs and debt discounts are being amortized over the term of the related financings on a straight-line approach, which approximates the effective interest method. Costs and discounts are presented as a reduction of the related debt in the accompanying consolidated balance sheets.
Stock-Based Compensation
The fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based on historical volatility of our common stock. The Company has elected to use the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of employee stock options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value of stock awards is determined using the fair value of the Company’s common stock on the date of grant. The Company accounts for forfeitures as they occur. Any compensation cost previously recognized for an unvested award that is forfeited because of a failure to satisfy a service condition is reversed in the period of the forfeiture. Compensation expense is recognized on a straight-line basis over the requisite service period of the award. Stock-based compensation includes the fair value of options, warrants and restricted stocks issued to employees, directors, and non-employees.
Stock Options Plan – 2019 Equity Incentive Plan
On February 11, 2019, the Company’s Board of Directors approved a 2019 equity incentive Plan (the “2019 Plan”). In order for the 2019 plan to grant “qualified stock options” to employees, it requires approval by the Company’s shareholders within 12 months from the date of the 2019 Plan. The 2019 Plan was never approved by the shareholders. Therefore, any options granted under the 2019 Plan prior to shareholders’ approval will be “non-qualified”. Pursuant to the 2019 Plan, the Company has reserved a total of 3,000,000 shares of the Company’s common stock under the Plan. The Company has a total of 2,150,000 options issued and outstanding under the 2019 Plan as of March 31, 2023. The Company did not issue any stock options during the three months ended March 31, 2023.
Stock Options Plan – 2020 Equity Incentive Plan
On August 26, 2020, the Company’s Board of Directors approved the 2020 Equity Plan (the “2020 Plan”). The Company has reserved a total of 3,000,000 shares of the Company’s authorized common stock for issuance under the 2020 equity plan. The 2020 Equity Plan enables the Company’s board of directors to provide equity-based incentives through grants of awards to the Company’s present and future employees, directors, consultants, and other third-party service providers. The Company has a total of 1,700,000 options issued and outstanding under the 2020 plan as of March 31, 2023.
Stock Options Plan – 2022 Equity Plan
On December 1, 2022, the Company’s Board of Directors approved a 2022 Equity Plan (the “2022 Plan”). The 2022 Plan enables the Board of Directors to provide equity incentives through grants of awards to the Company’s present and future employees, directors, consultants, and other third-party service providers.
Pursuant to the 2022 Plan, the Company has reserved a total of 5,000,000 shares of the Company’s common stock to be available under the plan.
The Company did not issue any stock options during the three months ended March 31, 2023. The Company has a total of 2,150,000 options issued and outstanding under the 2022 Plan as of March 31, 2023
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, Income Taxes. The asset and liability method provide that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
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When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Management makes estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required. Management does not believe that it has taken any positions that would require the recording of any additional tax liability, nor does it believe that there are any unrealized tax benefits that would either increase or decrease within the next year.
Loss Per Share
The Company computes loss per share in accordance with ASC 260 – Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the consolidated statements of operations. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible notes payable using the if-converted method. Diluted EPS excludes all dilutive potential shares if their effect is antidilutive. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are antidilutive.
Securities that are excluded from the calculation of weighted average dilutive common shares because their inclusion would have been antidilutive are:
For the three months ended March 31, 2023 | For the three months ended March 31, 2022 | |||||||
| Options | 6,000,000 | 3,850,000 | ||||||
| Warrants | 36,867,500 | 3,867,500 | ||||||
| Total potentially dilutive shares | 42,867,500 | 7,717,500 | ||||||
Concentration of Credit Risk
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2023.
Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. If impairment is indicated, the asset is written down to its estimated fair value. The Company fully impaired its long-lived assets due to the uncertainty in title transfer of the land not currently owned by the Company and the estimated fair value of its construction in progress during the three months ended March 31, 2023.
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Convertible Promissory Note
The Company accounts for convertible promissory notes in accordance with ASC 470-20, Debt with Conversion and Other Options. The Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in the Income Statement. If the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition. When the Company records a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument with an offset to additional paid-in capital and amortized to interest expense over the life of the debt using the effective interest method.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. In addition, ASU 2020-06 amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The Amendments also affects the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments are effective for public entities excluding smaller reporting companies for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods. Management is currently evaluating the potential impact of the Update on its financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides guidance for estimating credit losses on certain types of financial instruments, including trade receivables, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The guidance requires a modified retrospective transition method and early adoption is permitted. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases (“ASU 2019-10”), which defers the adoption of ASU 2016-13 for smaller reporting companies until periods beginning after December 15, 2022. The Company has adopted ASU 2016-13 and will continue to evaluate the impact of ASU 2016-13 with no impact to the Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides guidance for estimating credit losses on certain types of financial instruments, including trade receivables, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The guidance requires a modified retrospective transition method and early adoption is permitted. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases (“ASU 2019-10”), which defers the adoption of ASU 2016-13 for smaller reporting companies until periods beginning after December 15, 2022. The Company has adopted ASU 2016-13 and will continue to evaluate the impact of ASU 2016-13 with no impact to the Financial Statements.
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The Company has evaluated all the recent accounting pronouncements and determined that there are no other accounting pronouncements that will have a material effect on the Company’s consolidated financial statements.
NOTE 3 – ASSET PURCHASE AND TITLE TRANSFER
Emerald Grove Asset Purchase
On July 30, 2018, Jason Sunstein, the Chief Financial Officer, entered into a Residential Purchase Agreement) to acquire real property located in Hemet, California, which included approximately 80 acres of land and a structure for $1.1 million from an unrelated seller. The property includes the main parcel of land with an existing structure along with three additional parcels of land which are vacant plots to be used for the purpose of development “vacant plots”. The purpose of the transaction was as an investment in real property to be assigned to the Company subsequent to acquisition. The property was acquired by Mr. Sunstein since it was required that the seller transfer the property for consideration to an individual versus a separate legal entity. On March 18, 2019, Mr. Sunstein assigned the deed of the property to the Company. The total of the consideration plus acquisition costs assets of $1,122,050 was allocated to land and building in the following amounts: $271,225 – Land; $850,826 – Building.
The land is an indefinite long-lived asset that was assessed for impairment as a grouped asset with the building on a periodic basis. The Company completed the refinancing of its existing first and second mortgage loans on the 80 acres of land and existing structure of its Emerald Grove property for aggregate principal amount of $1,787,000, which provided a net funding of approximately $387,000 during the first fiscal quarter of 2021.
Oasis Park Title Transfer
On June 18, 2019, Baja Residents Club SA de CV (“BRC”), a related party with common ownership and control by our CEO, Robert Valdes, transferred title to the Company for the Oasis Park property which was part of a previously held land project consisting of 497 acres to be acquired and developed into Oasis Park resort near San Felipe, Baja. ILA recorded the property held for sale on its balance sheet in the amount of $670,000 and accordingly reduced the value as plots are sold. As of September 30, 2022, the Company reported a balance for assets held for sale of $647,399.
The Company transferred title to individual plots of land to the investors since the Company received this approval of change in transfer of title to ILA.
During the three months ended March 31, 2023, the Company did not enter into any new contract to sell plots of land.
On September 29, 2021, the Company entered into a house construction contract for total consideration of $99,000, of which $43,967 was funded as of December 31, 2022, and presented under Contract Liability in the consolidated balance sheets. The Company has not received any payments during the three months ended March 31, 2023.
During the year ended December 31, 2021, the Company sold three (3) lots to an affiliate of a related party of the Company for a total purchase price of $120,000, of which $61,440 was funded as of December 31, 2022. The Company has not received any payments during the three months ended March 31, 2023.
The remaining unpaid amount owed to the Company was $58,560 as of March 31, 2023, and December 31, 2022.
NOTE 4 – LAND, BUILDING, NET AND CONSTRUCTION IN PROCESS
Land, buildings, net and construction in process as of March 31, 2023, and December 31, 2022:
| Useful life | March 31, 2023 | December 31, 2022 | ||||||||
| Land – Emerald Grove | $ | 203,419 | $ | 203,419 | ||||||
| Land – Rancho Costa Verde Development | $ | 1,148,316 | $ | - | ||||||
| Furniture & equipment, net | 5 years | $ | 10,126 | $ | 1,877 | |||||
| Building – Emerald Grove & RCVD | 20 years | 2,591,421 | 1,048,138 | |||||||
| Less: Accumulated depreciation | (721,541 | ) | (184,393 | ) | ||||||
| Building, net | $ | 1,869,880 | $ | 863,745 | ||||||
Depreciation expense was approximately $29,748 for the three months ended March 31, 2023, and 2022, respectively. Pursuant to the acquisition of RCVD, the Company recognized a total fair value of $1,977,182 of land, building and furniture and equipment.
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Valle Divino
The Valle Divino is the Company’s premier wine country development project in Ensenada, Baja California. This land project consists of 20 acres to be acquired from Baja Residents Club, a Company controlled by our Chief Executive Officer and developed into Valle Divino resort. The acquisition of title to the land for this project is subject to approval from the Mexican government in Baja, California. The Company broke ground of the Valle Divino development in July 2020 and has commenced site preparation for two model homes including a 1-bedroom and 2- bedroom option. The first Phase of the development includes 187 homes. This development will also have innovative microgrid solutions by our partner to power the model home and amenities.
There was no activity during the three-month ended March 31 ,2023. The construction contractor is also an entity controlled by our Chief Executive Officer. Construction began during the year ended December 31, 2020. The balance of construction in process for Valle Divino was $0 as of March 31, 2023 and December 31, 2022. The Company fully impaired the accumulated costs related to its Valle Divino project due to the uncertainty pertaining to the title transfer for a total amount of $457,275 during the year ended December 31, 2022.
Plaza Bajamar
The Plaza Bajamar community is an 80-unit development located within the internationally renowned Bajamar Ocean Front Hotel and Golf Resort. The Bajamar Ocean Front Golf Resort is an expertly planned, well-guarded, and gated wine and golf community located 45 minutes South of the San Diego-Tijuana Border along the scenic toll road to Ensenada on the Pacific Ocean.
Phase I will include 22 “Merlot” 1,150 square-foot single-family homes that feature two bedrooms and two baths. The home includes two primary bedroom suites – one on the first floor and one upstairs, as well as fairway and ocean views from a rooftop terrace. The Merlot villas will come with the installation of solar packages construction in mind. Planned amenities include a pool, wellness and fitness center and available office space.
The Company has not yet taken title to this property, which is currently owned by Valdeland, S.A. de C.V. (“Valdeland”), an entity controlled and 100% owned by Roberto Valdes, the Company’s Chief Executive Officer. In September 2019, the Company executed a land purchase agreement with Valdeland, under which the Company is to acquire from Valdeland the Plaza Bajamar property free of liens and encumbrances for a total consideration of $1,000,000.
In November and December 2019, $250,000 was paid to the Company’s Chief Executive Officer, Roberto Valdes, of which $150,000 was used for the construction of two model Villas at our planned Plaza Bajamar development and $100,000 as a down payment towards the acquisition of the land from Valdeland. As of March 31, 2023 and December 31, 2022 and 2021, the Company issued 250,000 shares of the Company’s common stock for total amount of $150,000 reported under Prepaid and other current assets in the consolidated balance sheets towards the purchase of the land. The amount has been fully impaired during the year ended December 31, 2022.
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Valdeland has completed a two-bedroom model home, an enhanced entrance, and interior roads as well as site preparation for four (4) new homes adjacent to the model home. It has commenced construction on four residential lots following the payment of the required minimum deposits from buyers.
The Company funded the construction by an additional $179,700 during the three months ended March 31 2023. Valdeland is the construction contractor is also an entity controlled and owned by Roberto Valdes.
The balance of construction in process for Plaza Bajamar totaled $0 as of March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, the Company fully impaired the accumulated costs related to Plaza Bajamar, due to the uncertainty pertaining to title transfer for a total amount of $179,700, which is presented under impairment loss in the consolidated statement of operations for the three months ended March 31, 2023.
Within the “restricted zone,” a foreigner can purchase the beneficial interest in real property through a bank trust or “fideicomiso.” Indeed, a bank trust must be used when acquiring property within the restricted zone. In this bank trust, the buyer of the property is designated as the “fideicomisario” or the beneficiary of the trust. While legal title is held by the bank, (specifically the trustee of the trust or the “fiduciario,”) the trustee must administer the property in accordance with the instructions of the buyer (the beneficiary of the trust). The property is not an asset of the bank, and the trustee is obligated to follow every lawful instruction given by the beneficiary to perform legal action. The Company has not yet established the bank trust, which is anticipated to occur before the end of the fiscal year 2023.
As of March 31, 2023, Valdeland sold six (6) house constructions on residential lots for estimated price of $1.5 million, of which $0.5 million has been paid and collected by the Company and initially presented under contract liability in the consolidated balance sheet as of March 31, 2023. However, the Company offset the balance of construction in process with the contract liability with the net balance written off due to the uncertainty pertaining to the transfer of title.
Rancho Costa Verde Development (“RCVD”)
RCVD is a 1,000 acre, 1,200 lot master planned community in Baja, California, located few miles from the Company’s Oasis Park resort on the sea of Cortez. To date, RCVD has sold over 1,000 residential lots and built 55 single-family homes with approximately 30 under construction. This is in addition to a completed boutique hotel and clubhouse.
NOTE 5 – RELATED PARTY TRANSACTIONS
Chief Executive Officer – Roberto Valdes
Effective January 1, 2020, the Company executed an employment agreement with its Chief Executive Officer.
The Company has not paid any salary to its Chief Executive Officer for the three months ended March 31, 2023. The Company has accrued $33,808 of compensation costs in relation to the employment agreement for the three months ended March 31, 2023. The balance owed is $66,846 and $33,038 as of March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023, the Company funded an aggregate amount of 1.4 million for construction on residential lots, projects amenities and towards the acquisition of land to companies controlled by the Company’s Chief Executive Officer. The land for the Plaza Bajamar and Valle Divino is currently owned by two entities controlled by the Chief Executive Officer (Valdeland S.A de C.V. and Valdetierra S.A de C.V) and all parties executed land purchase agreement for each project to transfer title of the land to a bank trust or “fideicomiso”, in which the Company will be named the beneficiary of the trust (“fideicomisario”). There can be no assurance as to what if any profit might have been received by Chief Executive Officer in his separate company as a result of these transactions. There can be no assurance title will ever transfer to the Company.
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During the three months ended March 31, 2023, the Company funded an aggregate amount of approximately $180,000 to the construction companies owned by the Company’s Chief Executive Officer for the two projects in Ensenada, Baja California. The Company has not yet established the bank trust, which is anticipated to occur before the end of the fiscal year 2023. The properties at Valle Divino and Plaza Bajamar have executed promise to purchase agreements between the Company and Roberto Valdes, which require the transfer of titles of the land free of liens and encumbrances to the Company. There can be no assurance as to what and if any profit might have been received by our Chief Executive Officer, in his separate company as a result of these transactions. There can be no assurance title will ever transfer to the Company.
On December 1, 2022, the Company issued 465,834 stock options under the 2022 Plan with a strike price of $0.20, vesting 25% on grant date and the remaining 75% monthly over a twelve-month period from grant date with an estimated fair value of approximately $90,188. The Company recognized approximately $16,900 of stock-based compensation related to these stock options during the three months ended March 31, 2023.
Chief Financial Officer – Jason Sunstein
Effective January 1, 2020, the Company executed an employment agreement with its Chief Financial Officer.
The Company has not paid any salary to its Chief Financial Officer for the three months ended March 31, 2023. The Company has accrued $33,808 of compensation costs in relation to the employment agreement for the three months ended March 31, 2023. The balance owed is $66,846 and $33,038 as of March 31, 2023 and December 31, 2022, respectively.
On December 1, 2022, the Company issued 465,834 stock options under the 2022 Plan with a strike price of $0.20, vesting 25% on grant date and the remaining 75% monthly over a twelve-month period from grant date with an estimated fair value of approximately $90,188. The Company recognized approximately $16,900 of stock-based compensation related to these stock options during the three months ended March 31, 2023.
The Company’s Chief Financial Officer is also the managing member of Six Twenty Management LLC, an entity that has been providing ongoing capital support to the Company (See Note 8).
The Company’s Chief Financial Officer also facilitated the Emerald Grove asset purchase as described in Note 3.
President – Frank Ingrande
In May 2021, the Company executed an employment agreement with its President.
The Company has not paid any salary to its Chief Executive Officer for the three months ended March 31, 2023. The Company has accrued $33,808 of compensation costs in relation to the employment agreement for the three months ended March 31, 2023. The balance owed is $66,846 and $33,038 as of March 31, 2023, and December 31, 2022, respectively.
Frank Ingrande is the co-founder and owner of 33% of the Company’s equity-method investee RCVD. During the three months ended March 31, 2023, the Company acquired the remaining 75% interest in RCVD, which became the Company wholly owned subsidiary as of March 31, 2023 (note 9).
On December 1, 2022, the Company issued 465,834 stock options under the 2022 Plan with a strike price of $0.20, vesting 25% on grant date and the remaining 75% monthly over a twelve-month period from grant date with an estimated fair value of approximately $90,188. The Company recognized approximately $16,900 of stock-based compensation related to these stock options during the three months ended March 31, 2023.
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NOTE 6 – PROMISSORY NOTES
Promissory notes consisted of the following at March 31, 2023, and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||
| Cash Call note payable, due August 2020 – past maturity | $ | 24,785 | $ | 24,785 | ||||
| Elder note payable, 10% interest, due March 2020 – past maturity | 1,500 | 1,500 | ||||||
| Elder note Payable, 15% interest, due March 2021- past maturity | 76,477 | 76,477 | ||||||
| Redwood Trust note payable, 12% interest, due February 2023 | 1,787,000 | 1,787,000 | ||||||
| Total Notes Payable | $ | 1,889,762 | $ | 1,889,762 | ||||
| Less discounts | - | (4,146 | ) | |||||
| Total Promissory notes, net of discount | 1,889,762 | 1,885,616 | ||||||
| Less current portion | (1,889,762 | ) | (1,885,616 | ) | ||||
| Total Promissory notes, net of discount - long term | $ | - | $ | - | ||||
Interest expense related to the amortization of the associated debt discount for the three months ended March 31, 2023 and 2022, was $4,146 and $0, respectively.
Redwood Trust
On January 21, 2021, the Company refinanced its existing first and second mortgage loans on the 80 acres of land and the structure located at Sycamore Road in Hemet, California for aggregate amount of $1,787,000, carrying coupon at twelve (12) percent, payable in monthly interest installments of $17,870 starting on September 1st, 2021, and continuing monthly thereafter until maturity on February 1st, 2023, at which time all sums of principal and interest then remaining unpaid shall be due and payable. The balloon payment promissory note is secured by deed of trust. The refinanced amount paid off the first and second mortgage loans with a net funding to the Company of approximately $387,000, net of finders’ fees. There has been no activity during the three months ended March 31, 2023. The Company incurred $53,610 of interest expense and paid $0 of interest during the three months ended March 31, 2023. Accrued interest was $126,650 and $73,040 as of March 31, 2023 and December 31, 2022, respectively.
On June 27, 2023, the Company, through Emerald Grove Estates, LLC, its wholly owned company, executed a modification agreement, under which the maturity date was extended to January 1, 2024, and the payment of all unpaid interest, late fees, charges for a total amount of $236,116.
Cash Call, Inc. – In default
On March 19, 2018, the Company issued a promissory note to CashCall, Inc. for $75,000 of cash consideration. The note bears interest at 94%, matures on August 1, 2020. The Company also recorded a $7,500 debt discount due to origination fees due at the beginning of the note, which was fully amortized as of March 31, 2023 and December 31, 2022. There was no activity during the three months ended March 31, 2023.
On August 2, 2022, the Company and Cash Call settled for an aggregate principal of $23,641 payable in one lump sum or a series of 9 installments of $3,152. No payment was made under this settlement agreement.
As of March 31, 2023 and December 31, 2022, the remaining principal balance was $24,785. The Company has not incurred any interest expense related to this promissory note during the three months ended March 31, 2023 due to the agreed upon settlement amount.
Christopher Elder – In default
On December 15, 2020, the Company entered into a promissory note pursuant to which the Company borrowed $126,477. Interest under the promissory note is 15% per annum, and the principal and all accrued but unpaid interest is due on March 15, 2021. The note is in technical default as it is past maturity date and the Company failed to repay the outstanding principal and accrued interest.
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There was no activity during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023 and December 31, 2022, the remaining principal balance was $77,977.
The Company incurred approximately $2,935 and $2,895 of interest during the three months ended March 31, 2023 and 2022, respectively. Accrued interest was $27,117 and $24,182 as of March 31, 2023 and December 31, respectively.
The Company also has a balance of $347,290 owed and currently recorded and presented as accounts receivable in the consolidated balance sheet as of March 31, 2023 and December 31, 2022. The Company fully impaired the remaining balance of its receivable as of March 31, 2023 and December 31, 2022, due to uncertainty pertaining to the capacity to pay of the Company’s debtor.
NOTE 7 – CONVERTIBLE NOTES
Convertible notes consisted of the following at March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||
| 1800 Diagonal convertible note #1, 9% interest, due July 2023 | - | 85,000 | ||||||
| 1800 Diagonal convertible note#2, 9% interest, due September 2023 | - | 64,250 | ||||||
| 1800 Diagonal convertible note #3, 10% interest, due October 2023 | 71,228 | 122,488 | ||||||
| 1800 Diagonal convertible note #4, 9% interest, due March 2024 | 104,250 | - | ||||||
| Mast Hill convertible note, 12% interest, due March 2023 (in default) | 250,000 | 250,000 | ||||||
| Blue Lake convertible note, 12% interest, due March 2023 (in default) | 250,000 | 250,000 | ||||||
| International Real Estate Development, 5% interest, due March 2024 | 8,900,000 | - | ||||||
| Total convertible notes | $ | 9,575,478 | $ | 771,738 | ||||
| Less discounts | (106,122 | ) | (213,081 | ) | ||||
| Total convertible notes, net of discount | 9,469,356 | 558,657 | ||||||
| Less current portion | (9,469,356 | ) | (558,657 | ) | ||||
| Total convertible notes, net of discount - long term | $ | - | $ | - | ||||
Interest expense related to the amortization of the associated debt discount for the three months ended March 31, 2023 and 2022, was 106,959 and 19,241, respectively.
Mast Hill Fund, L.P (“Mast note”)- In default
On March 23, 2022, the Company issued a convertible promissory note pursuant to which it borrowed gross proceeds of $250,000 for net proceeds of $211,250, net of issuance costs of $13,750 and original issuance discount of $25,000. The interest rate under the convertible promissory note is 12% per year, and the principal and all accrued but unpaid interest are due on March 23, 2023. The note requires eight (8) mandatory monthly installments of $35,000 starting in July 2022.
Additionally, as an incentive to the note holder, the securities purchase agreement also provided for the issuance of 225,000 shares of common stock with fair value of approximately $101,000, which were fully earned at issuance, and 343,750 warrants to purchase an equivalent number of shares of common stock at an exercise price of $0.80 and a term of five years. The note is convertible upon an event of default at the noteholder’s option into shares of our common stock at a fixed conversion price of $0.35, subject to standard anti-dilutive rights and down round protection. The conversion price of the convertible debt and the strike price of the warrants should be adjusted to the new effective conversion price following subsequent dilutive issuances.
During the three months ended March 31, 2023, the Company converted approximately $81,730 of interest and default premium into 834,760 shares of common stock.
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The principal balance owed to Mast Hill Fund was $250,000 as of March 31, 2023 and December 31, 2022. The Company incurred approximately $13,200 of interest during the three months ended March 31, 2023. Accrued interest totaled approximately $25,180 and $23,700 as of March 31, 2023 and December 31, 2022.
The Company is in default as the Company (i) consummated a variable rate transaction with another lender and (ii) failed to make the required installment payment as required under the terms of the agreement. Upon event of default, the Company is required to pay the outstanding principal plus accrued interest and a default penalty which is equal to 25% of the principal and accrued interest.
As of March 31, 2023 and December 31, 2022, the default penalty was $0 and $68,426, respectively. During the three months ended March 31, 2023, the Company recognized an additional $1,615 of default penalty for a total amount of $70,000, which was fully converted into shares of common stock during the three months ended March 31, 2023.
The Company initially recognized $219,832 of debt discount resulting from the original issue discount, the deferred financing costs, the fair value assigned to the commitment shares and the warrants. The Company amortized $50,742 through interest expenses during the three months ended March 31, 2023.
The balance of the unamortized debt discount was $0 and $50,742 as of March 31, 2023 and December 31, 2022.
Blue Lake Partners LLC (“Blue Lake note”) – In default
On March 28, 2022, the Company issued a convertible promissory note pursuant to which it borrowed gross proceeds of $250,000 for net proceeds of $211,250, net of issuance costs of $13,750 and original issuance discount of $25,000. The interest rate under the convertible promissory note is 12% per year, and the principal and all accrued but unpaid interest are due on March 28, 2023. The note requires eight (8) mandatory monthly installments of $35,000 starting in July 2022. Additionally, as an incentive to the note holder, the securities purchase agreement provided for the issuance of 225,000 shares of common stock with fair value of approximately $101,000, which were fully earned at issuance, and 343,750 warrants for the purchase of an equivalent number of shares of common stock at an exercise price of $0.80 and a term of five years.
The note is convertible upon an event of default at the noteholder’s option into shares of our common stock at a fixed conversion price of $0.35, subject to standard anti-dilutive rights and down round provisions. With the issuance of a variable rate transaction with any new investor, the conversion price of the convertible debt and the strike price of the warrants should be adjusted down to the new effective conversion price.
The principal balance owed to Blue Lake was $250,000 as of March 31, 2023 and December 31, 2022. The Company incurred approximately $13,400 of interest during the three months ended March 31, 2023. Accrued interest totaled approximately $36,740 and $23,400 as of March 31, 2023 and December 31, 2022.
The Company is in default of the note as the Company (i) consummated a variable rate transaction with another lender and (ii) failed to make the required installment payment as required under the terms of the agreement. The Company has not yet received any default notice from the investor. Upon event of default, the Company is required to pay the outstanding principal plus accrued interest and a default penalty which is equal to 25% of the principal and accrued interest.
As of March 31, 2023 and December 31, 2022, the Company accrued $68,344 as default penalty, which is presented in accounts payable and accrued interest in the consolidated balance sheet.
The Company initially recognized $219,607 of debt discount resulting from the original issue discount, the deferred financing costs, the fair value assigned to the commitment shares and the warrants. The Company amortized $53,097 through interest expenses during the three months ended March 31, 2023.
The balance of the unamortized debt discount was $0 and $53,097 as of March 31, 2023 and December 31, 2022.
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1800 Diagonal Lending Inc. (“Diagonal note”)
Diagonal note #1
On July 28, 2022, the Company issued a convertible promissory note pursuant to which it borrowed gross proceeds of $85,000 for net proceeds of $80,750, net of issuance costs of $4,250. Interest rate under the convertible promissory note is 9% per year, and the principal and all accrued but unpaid interest are due on July 28, 2023. At any time after issuance, the note is convertible into shares of our common stock at the greater of a fixed rate or discount to the market price. The note includes a prepayment feature at a premium of 25% from the issuance date and up to 180 days. The note includes a 50% penalty premium on unpaid principal and interest upon an event of default.
During the three months ended March 31, 2023, the Company converted $15,000 of principal into 242,404 shares of common stock. The Company repaid $111,594 from a related party note (note 8) for the outstanding principal and accrued interest and default interest.
The principal balance of Diagonal note #1was $0 and $85,000 as of March 31, 2023 and December 31, 2022. The Company incurred approximately $37,900 of interest expenses during the three months ended March 31, 2023. Accrued interest was $0 and $3,700 as of March 31, 2023 and December 31, 2022.
The Company initially recognized $4,250 of debt discount resulting from the original issue discount and the deferred financing costs. The Company amortized $1,060 through interest expenses during the three months ended March 31, 2023. The balance of the unamortized debt discount was $0 and $2,479 as of March 31, 2023 and December 31, 2022.
Diagonal note #2
On September 2, 2022, the Company issued a convertible promissory note pursuant to which it borrowed gross proceeds of $64,250 for net proceeds of $60,000, net of issuance costs of $4,250. Interest rate under the convertible promissory note is 9% per year, and the principal and all accrued but unpaid interest are due on September 2, 2023. At any time after issuance, the note is convertible into shares of our common stock at the greater of a fixed conversion rate or discount to the market price. The note includes a prepayment feature at a premium of 25% from the issuance date and up to 180 days. The note includes a 50% penalty premium on unpaid principal and interest upon an event of default.
The Company repaid $11,798 in cash for the outstanding principal and accrued interest and default interest. The Company repaid $71,000 from a related party note (note 8) for the outstanding principal and accrued interest and default interest.
The principal balance owed to Diagonal was $0 and $64,250 as of March 31, 2023 and December 31, 2022. The Company incurred approximately $16,620 of interest expenses during the three months ended March 31, 2023. Accrued interest was $0 and $1,900 as of March 31, 2023 and December 31, 2022. The Company reversed $27,019 as part of the debt extinguishment following extinguishment of the debt.
The Company amortized $16,200 of debt discount through interest expenses during the three months ended March 31, 2023. The balance of the unamortized debt discount was $0 and $42,876 as of March 31, 2023 and December 31, 2022.
Diagonal note #3
On October 17, 2022, the Company issued a convertible promissory note pursuant to which it borrowed gross proceeds of $142,276 for net proceeds of $122,782, net of issuance costs of $19,494. Interest under the convertible promissory note is 10% per year, and the note includes a guaranteed twelve-month coupon or $14,227.
The maturity date of the note is October 17, 2023. The convertible note is contingently convertible upon an event of default, and the conversion price is the greater of a fixed rate or a discount to the market price. The note requires ten (10) monthly installment payments of $15,650 starting on November 30, 2022.
The Company incurred approximately $14,227 of interest expenses and paid $1,423 of interest during the year ended December 31, 2022. Accrued interest was $12,804 as of December 31, 2022.
During the three months ended March 31, 2023, the Company repaid $5,691 of interest and repaid $51,260 of principal.
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The Company initially recognized $19,494 of debt discount resulting from the original issue discount and the deferred financing costs. The Company amortized $4,874 through interest expenses during the three months ended March 31, 2023. The balance of the unamortized debt discount was $10,559 and $15,433 as of March 31, 2023 and December 31, 2022.
The balance of the Diagonal note #3 was $71,228 and $122,488 as of March 31, 2023 and December 31, 2022, respectively. Diagonal #3 is current as the Company paid all the required monthly installments.
Diagonal note #4
On March 3, 2023, the Company issued a convertible promissory note pursuant to which it borrowed gross proceeds of $104,250 for net proceeds of $100,000, net of issuance costs of $4,250. Interest under the convertible promissory note is 9% per year and a default coupon of 22%.
The maturity date of the note is March 3, 2023. At any time after issuance, the note is convertible into shares of our common stock at the greater of a fixed conversion rate or discount to the market price. The note includes a prepayment feature at a premium of up to 25% from the issuance date and up to 180 days. The note includes a 50% penalty premium on unpaid principal and interest upon an event of default.
International Real Estate Development, LLC. (“IRED”)- In default
On January 1, 2023, the Company issued a convertible promissory note pursuant to the acquisition of RCVD for a total principal of $8,900,000, carrying a 5% coupon and maturing on March 31, 2024. The convertible note is payable in quarterly installment of $2,225,000 starting on March 31, 2023. The convertible note includes a twelve percent (12%) default interest. The Company failed to make the first installment in accordance with the terms of the agreement.
The convertible note is convertible commencing on April 1, 2023 at the option of the holder into shares of common stock at a 10% discount to market price. The Company can prepay the convertible note at any time.
The Company incurred $111,250 of interest during the three months ended March 31, 2023. Accrued interest was $111,250 as of March 31, 2023.
NOTE 8 – PROMISSORY NOTES – RELATED PARTY
Related party promissory notes consisted of the following at March 31, 2023, and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||
| RAS Real Estate LLC – Past maturity | $ | 237,289 | $ | 249,589 | ||||
| Six-Twenty Management LLC – On demand | 1,234,960 | 960,746 | ||||||
| Frank Ingrande | 14,546 | - | ||||||
| Lisa Landau – On demand | 122,409 | 76,360 | ||||||
| Total On demand notes, net of discount | $ | 1,609,204 | $ | 1,286,695 | ||||
Six Twenty Management LLC (“Six-Twenty”) – Manager is the Company’s Chief Financial Officer
Jason Sunstein, the Company’s Chief Financial Officer is also the managing member and 100% owner of Six Twenty Management LLC (“Six Twenty”), an entity that has been providing ongoing capital support to the Company.
On March 31, 2021, the Company executed a non-convertible promissory note with Six Twenty for an initial amount funded of $288,611 and carrying a coupon of eight percent (8%) and a maturity of twelve months. Six-Twenty subsequently funded the Company for additional cash of $609,200. The non-convertible promissory note is not updated with the additional activity but reverted to an on-demand advances.
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During the three months ended March 31, 2023, six twenty funded an additional $176,220 and repaid in cash $111,594 the remaining balance of one of the Diagonal notes (See note 7). The Company paid $13,600in cash towards the non-convertible promissory note.
As of March 31, 2023 and December 31, 2022, the principal balance owed to Six-Twenty was $1,234,960 and $960,746, respectively.
The Company incurred approximately $24,700 and $11,045 of interest expense during the three months ended March 31, 2023 and 2022, respectively. Accrued interest was $111,664 and $86,965 as of March 31, 2023 and December 31, 2022, respectively. Refer to note 5 for disclosures on related party.
RAS, LLC (past maturity)
On October 25, 2019, the Company issued a promissory note to RAS, LLC, a company controlled by an employee, who is a relative of the Company’s Chief Financial Officer for $440,803. The proceeds of the note were largely used to repay shareholders’ loans and other liabilities. The loan bears interest at 10%, and also carries a default coupon rate of 18%. The loan matured on April 25, 2020, is secured by 2,500,000 common shares and a Second Deed of Trust for property in Hemet, CA (Emerald Grove).
During the three months ended March 31, 2023, the Company paid $12,300 towards the promissory note. The outstanding balance is $237,289 and $249,589 as of March 31, 2023, and December 31, 2022, respectively.
During the three months ended March 31, 2023, the Company incurred $10,700 in interest based on the default coupon rate of 18%. As of March 31, 2023, and December 31, 2022, the accrued interest balance owed to RAS, LLC was $56,554 and $45,876, respectively.
Lisa Landau
Lisa Landau is a relative of the Company’s Chief Financial Officer. During the three months ended March 31, 2023, Lisa Landau advanced $50,000 to the Company for general corporate expenses and paid directly $71,000 towards one of the Diagonal convertible notes. The Company repaid $74,950 in cash during the three months ended March 31, 2023.
The principal balance was $122,409 and $76,360 as of March 31, 2023 and December 31, 2022, respectively. The advances are on demand but do not carry any interest.
NOTE 9 – BUSINESS ACQUISITION WITH RELATED PARTY
On January 3, 2023, the Company executed a securities purchase agreement with International Real Estate Development, LLC (“IRED”” or the “seller”), a related party, for the purchase of the remaining seventy five percent (75%) of the issued and outstanding membership interest in Rancho Costa Verde Development, LLC (“RCVD”) for a total consideration of $13.4 million. The Company’s President and director was the owner of one third of the issued and outstanding interest in International Real Estate Development LLC.
The consideration was paid through (i) a secured convertible promissory note in the principal amount of $8,900,000, (ii) issuance of 20,000,000 shares of common stock with a fair value of $1.8 million and (iii) 33,000,000 common stock warrants to purchase an equivalent number of shares of common stock with a fair value of approximately $2.7 million. The Company issued the 20,000,000 shares of common stock to International Real Estate Development, LLC (“IRED”) on January 3, 2023.
Prior to the acquisition of a controlling financial interest in RCVD, the Company held a twenty five percent (25%) interest in RCVD, which was previously accounted as an equity method investment under ASC 323 Investments – Equity Method and Joint Ventures. It was determined that the Company did not have the power to direct the activities that most significantly impact RCVD’s economic performance, and therefore, the Company was not the primary beneficiary of RCVD and RCVD was not consolidated under the variable interest model. The investment was initially recorded at cost, which was determined to be $2,680,000. The carrying value was fully written down to $0 as of December 31, 2022.
The Company accounted for this transaction as a business combination under ASC 805 Business Combinations. Accordingly, the assets acquired, and the liabilities assumed were recorded at their estimated fair value as of the closing date of the acquisition. While this is a business combination, since it is between related parties, there has been no step up in basis taken for the acquisition and the excess purchase price has been treated as a return of capital commonly referred to as a deemed dividend.
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The secured convertible promissory note has a principal amount of $8,900,000 and is payable in quarterly installments of $2,225,000, carries a five percent (5%) coupon with a maturity date of March 31, 2024. The note carries a default coupon of twelve percent (12%) on the unpaid principal after the maturity date. The note includes standard events of default, which will result in the principal and accrued interest to be payable immediately. The note is convertible at any time commencing on April 1, 2023, at the option of the holder, into shares of common stock of the company at a 10% discount to market. The note may be prepaid at any time without penalties. The Company has not made the first installment by March 31, 2023, but the Company obtained a default waiver from IRED. The Company incurred approximately $111,250 of interest during the three months ending March 31, 2023 (note 7).
RCVD was originally formed in the State of Nevada. RCVD is a 1,100-acre master planned second home, retirement home, and vacation home real estate community located on the east coast of Baja California, Mexico. It is just south of the small fishing village of San Felipe, where the Oasis Park Resort project of the Company is located.
The Company accounted for this transaction as a capital transaction due to the related party nature of this transaction. This resulted in what is known as a deemed dividend.
The acquisition-date fair value of the consideration transferred is as follows:
| January 3, 2023 | ||||
| Fair value of common stock | $ | 1,800,000 | ||
| Fair value of common stock warrants | 2,674,976 | |||
| Promissory notes | $ | 8,900,000 | ||
| Fair value of consideration transferred | $ | 13,374,976 | ||
The following is a provisional purchase price allocation as of the January 3, 2023, acquisition date:
| January 3, 2023 | ||||
| Cash | $ | 321,916 | ||
| Accounts receivable | 1,900,388 | |||
| Other current assets | 342,574 | |||
| Fixed Assets | 1,977,182 | |||
| Accounts payable and accrued expenses | (652,329 | ) | ||
| Mortgage loans | (6,576,566 | ) | ||
| Related party notes | (16,545 | ) | ||
| Deferred revenue | (9,276,620 | ) | ||
| Net Assets Acquired | $ | (11,980,000 | ) | |
| Deemed dividend as related party | 25,354,976 | |||
| Total consideration | $ | 13,374,976 | ||
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Common Stock warrants
At acquisition date, the Company measures the fair value of the common stock warrant using the Black-Scholes option valuation model using the following assumptions:
For the Three Months Ending March 31, | ||||||||
| 2023 | 2022 | |||||||
| Expected term | 5 years | - | ||||||
| Exercise price | $ | 0.10 | - | |||||
| Expected volatility | 162 | % | - | |||||
| Risk-free interest rate | 3.94 | % | - | |||||
| Forfeitures | None | - | ||||||
The assumptions used in determining fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change, including changes in the market value of the Company’s common stock, managements’ assessment, or significant fluctuations in the volatility of the trading market for the Company’s common stock, the Company’s fair value estimates could be materially different in the future.
The Company computes the fair value of the common stock warrants at the acquisition date, which does not have to be updated at each reporting period.
NOTE 10 – EQUITY METHOD INVESTMENT
In May 2021, the Company acquired a 25% investment in Rancho Costa Verde Development, LLC (“RCV”) in exchange for 3,000,000 shares of the Company’s common stock at a determined fair value of $0.86 per share and $100,000 in cash for total consideration of $2,680,000. The fair value of the non-monetary exchange was determined based on a valuation report obtained from an independent third-party valuation firm. The fair value of the Company’s common stock was determined based on weighted combination of market approach and asset approach. The market approach estimates fair value based on a weighted average between the listed price of the Company’s common shares and the Company’s recent private transaction adjusted for a lack of marketability discount.
The investment has been accounted for under the equity method. It was determined that the Company does not have the power to direct the activities that most significantly impact RCV’s economic performance, and therefore, the Company is not the primary beneficiary of RCV and RCV has not been consolidated under the variable interest model.
The investment was initially recorded at cost, which was determined to be $2,680,000. The Company impaired the remaining balance of its equity-method investment for a total amount of $2,089,337 for the year ended December 31, 2022.
On January 3, 2023, the Company executed a securities purchase agreement with International Real Estate Development, LLC, for the purchase of the remaining seventy five percent (75%) of the issued and outstanding membership interest in Rancho Costa Verde Development, LLC (“RCVD”) for a total contractual consideration of $13,500,000.
The Company acquired a controlling financial interest and accounted for this transaction as a business combination under ASC 805 (refer to note 9). Upon the acquisition of such controlling interest, the Company remeasured the previously held equity method interest to fair value and recognize any difference between the fair value and the carrying value in its statement of operations.
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NOTE 11 – COMMITMENTS AND CONTINGENCIES
Commitment to Purchase Land (Valle Divino)
The land project consisting of 20 acres to be acquired from Baja Residents Club (a Company controlled by our CEO Roberto Valdes) and developed into Valle Divino resort in Ensenada, Baja California, the acquisition of title to the land for this project is subject to approval from the Mexican government in Baja, California. Although management believes that the transfer of title to the land will be approved before the end of the Company fiscal year end 2023, there is no assurance that such transfer of title will be approved in that time frame or at all. The Company has promised to transfer title to the plots of land to the investors who have invested in the Company once the Company receives an approval of change in transfer of title to the Company through a Fideicomiso. As of December 31, 2022, and 2021, Valdetierra S.A de C.V., a company controlled and 100% owned by Roberto Valdes our Chief Executive Officer, has entered into fifteen (15) and thirteen (13) contracts for deed agreements to sell lots of land, respectively. The proceeds are collected by the Company and initially presented under contract liability in the consolidated balance sheets; however, the Company netted the balance in contract liability for $457,275 against the related capitalized construction in process, with the remaining net balance fully impaired and recorded under impairment loss in the consolidated statement of operation for the year ended December 31, 2022.
Land purchase- Plaza Bajamar.
On September 25, 2019, the Company, entered into a definitive Land Purchase Agreement with Valdeland, S.A. de C.V., a Company controlled by our CEO Roberto Valdes, to acquire approximately one acre of land with plans and permits to build 34 units at the Bajamar Ocean Front Golf Resort located in Ensenada, Baja California. Pursuant to the terms of the Agreement, the total purchase price is $1,000,000, payable in a combination of a new series of preferred stock (with a stated value of $600,000), 250,000 shares of common stock, a promissory note in the amount of $150,000, and an initial construction budget of $150,000 payable upon closing. The closing is subject to obtaining the necessary approval by the City of Ensenada and transfer of title, which includes the formation of a wholly owned Mexican subsidiary. As of March 31, 2023 and December 31, 2022, the agreement has not yet closed.
The total budget was established at approximately $1,556,000, inclusive of lots construction, of which approximately $995,747 has been paid, leaving a firm commitment of approximately $560,250 as of March 31, 2023.
Commitment to Sell Land (IntegraGreen)
On September 30, 2019, the Company entered into a contract for deed agreement “Agreement” with IntegraGreen whose principal, Christopher Elder, is also a creditor. Under the agreement the Company agreed to the sale of 20 acres of vacant land and associated improvements located at the Emerald Grove property in Hemet, California for a total purchase price of $630,000, $63,000 was paid upon execution and the balance is payable in a balloon payment on October 1, 2026, with interest only payments due on the 1st of each month beginning April 1, 2020. During the duration of the Agreement the Company retains title and is allowed to encumber the property with a mortgage at its discretion, however IntegraGreen has the right to use the property. The Company may also evict IntegraGreen from the premises in the case of default under the agreement. The principal owed under the agreement is $403,020.
The Company fully impaired the carrying balance of its account receivable owed by IntegraGreen as of March 31, 2023 and December 31, 2022.
Oasis Park Resort construction budget
During the year ended December 31, 2021, the Company engaged a general contractor to complete phase I of the project including the two-mile access road and the community entrance structure. Contractor also commenced phase II construction including the waterfront clubhouse, casitas, and model homes. The total budget was established at approximately $512,000, of which approximately $118,600 has been paid, leaving a firm commitment of approximately $393,400 as of March 31, 2023 and December 31, 2022.
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Litigation Costs and Contingencies
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business. Management is currently not aware of any such legal proceedings or claims that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, or operating results.
NOTE 12 – STOCKHOLDERS’ DEFICIT
The Company’s equity at March 31, 2023 consisted of 150,000,000 authorized common shares and 2,000,000 authorized preferred shares, both with a par value of $0.001 per share. As of March 31, 2023, there were 64,676,587 shares issued and 61,676,587 shares outstanding. As of December 31, 2023, there were 43,499,423 shares issued outstanding.
As of March 31, 2023, and December 31, 2022, there were 28,000 shares of Series A Preferred Stock issued and outstanding and 1,000 shares of Series B Preferred Stock were issued and outstanding, respectively.
Equity Incentive Plans
2022 Equity Incentive Plan
On December 1, 2022, the Company’s Board of Directors approved a 2022 Equity Incentive Plan (the “2022 Plan”). Pursuant to the 2022 Plan, the Company has reserved a total of 5,000,000 shares of the Company’s common stock to be available under the 2022 Plan. The 2022 Plan was never approved by the stockholders. Therefore, any options granted under the 2022 Plan prior to stockholder approval will be “non-qualified”. The Company granted 2,150,000 options during the year ended December 31, 2022. There was no activity during the three months ended March 31, 2023. The Company has 2,150,000 options issued and outstanding under the 2022 Plan as of March 31, 2023.
2020 Equity Incentive Plan
The Company has reserved a total of 3,000,000 shares of the authorized common stock for issuance under the 2020 Equity Plan. There was no activity during the three months ended March 31, 2023. The Company has 1,700,000 options issued and outstanding under the 2020 Plan as of March 31, 2023 and December 31, 2022.
2019 Equity Incentive Plan
On February 11, 2019, the Company’s Board of Directors approved a 2019 Equity Incentive Plan (the “2019 Plan”). In order for the 2019 Plan to grant “qualified stock options” to employees, it required approval by the Corporation’s shareholders within 12 months from the date of the 2019 Plan. The 2019 Plan was never approved by the shareholders. Therefore, any options granted under the 2019 Plan prior to shareholder approval will be “non-qualified”. Pursuant to the 2019 Plan, the Company has reserved a total of 3,000,000 shares of the Company’s common stock to be available under the 2019 Plan. No options under the 2019 Plan were issued, cancelled, forfeited, or exercised during the three months ended March 31, 2023. The Company has 2,150,000 options issued and outstanding under the 2019 Plan as of March 31, 2023 and December 31, 2022.
All shares of common stock issued during the three months ended March 31, 2023, and 2022, were unregistered.
Activity during the three months ended March 31, 2023
During the three months ended March 31, 2023, the Company issued 100,000 shares of common stock pursuant to a consulting agreement for a total fair value of approximately $15,000.
During the three months ended March 31, 2023, the Company issued 20,000,000 shares of common stock pursuant to a business acquisition with a fair value of 1,800,000.
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During the three months ended March 31, 2023, the Company issued 1,077,164 shares of common stock pursuant to the conversion of convertible notes.
Activity during the three months ended March 31, 2022
During the three months ended March 31, 2022, the Company issued an aggregate of 450,000 commitment shares pursuant to securities purchase agreements with two accredited investors (See note 6) for a total fair value of approximately $202,000.
During the three months ended March 31, 2022, the Company issued 600,000 shares of common stock from option exercise for total cash consideration of $600.
During the three months ended March 31, 2022, the Company issued 814,714 shares of common stock pursuant to a consulting agreement for a total fair value of approximately $447,300.
Preferred Stock
On November 6, 2019, the Company authorized and issued 1,000 shares of Series B Preferred Stock (“Series B”) and 350,000 shares of common stock to CleanSpark Inc. in a private equity offering for $500,000. Management determined that the Series B should not be classified as liability per the guidance in ASC 480 Distinguishing Liabilities from Equity as of December 31, 2022, even though the conversion would require the issuance of variable number of shares since such obligation is not unconditional. As of December 31, 2022, and 2021, Management recorded the value attributable to the Series B of $293,500 as temporary equity on the consolidated balance sheets since the instrument is contingently redeemable at the option of the holder. The Company recognized the beneficial conversion feature (“BCF”) that arises from a contingent conversion feature, since the instrument reached maturity during the year ended December 31, 2020. The Company recognized such BCF as a discount on the convertible preferred stock. The amortization of the discount created by a BCF recognized as a result of the resolution of the contingency is treated as a deemed dividend that reduced net income in arriving at income available to common stockholders. The holder can convert the Series B into shares of common stock at a discount of 35% to the market price.
The terms and conditions of the Series B include an in-kind accrual feature, which provides for a cumulative accrual at a rate of 12% per annum of the face amount of the Series B. The Company has recognized $15,000 of dividend on Series B during the three months ended March 31, 2023 and 2022, aggregating the total accrual to $205,000 and $190,000 as of March 31, 2023 and December 31, 2022, respectively. The recognition of the in-kind accrual was reported in Additional Paid In Capital on the Company’s consolidated balance sheets.
The Securities Purchase Agreement (“SPA”) states that the in-kind accrual rate should be increased by10% per annum upon each occurrence of an event of default. In addition, the SPA further states that the conversion price initially set at a discount of 35% to the market price should be further increased by an additional 10% upon each occurrence of an event of default. At the date of this Annual Report, CleanSpark claims that the Company was in default in three instances triggering further discount to the market price for the conversion feature and additional accrual rate. Management believes that it has never been in default of any covenant pursuant to the terms of the Securities Purchase Agreement. The Company has not been served with any notice of default stating the specific default events. As of the date of the filing of this Annual Report, the parties are cooperating to resolve this matter.
The Company did not issue any shares of preferred stock during the three months ended March 31, 2023.
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Warrants
A summary of the Company’s warrant activity during the three months ended March 31, 2023, is presented below:
| Weighted | Weighted Contract | |||||||||||
Number of Warrants | Average Exercise Price | Term (Year) | ||||||||||
| Outstanding at December 31, 2022 | 3,867,500 | $ | 0.71 | 4.11 | ||||||||
| Granted | 33,000,000 | 0.10 | 5.00 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited-Canceled | - | - | - | |||||||||
| Outstanding at March 31, 2023 | 36,867,500 | $ | 0.16 | 4.67 | ||||||||
| Exercisable at March 31, 2023 | 36,867,500 | |||||||||||
During the three months ended March 31, 2023, the Company issued 33,000,000 warrants, convertible into an equivalent number of shares of common stock, following the acquisition of Rancho Costa Verde Development, LLC (See note 9).
Options
A summary of the Company’s option activity during the three months ended March 31, 2023, is presented below:
| Weighted | Weighted Average Remaining Contract | |||||||||||
Number of Options | Average Exercise Price | Term (Year) | ||||||||||
| Outstanding at December 31, 2022 | 6,000,000 | $ | 0.34 | 3.88 | ||||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited-Canceled | - | - | - | |||||||||
| Outstanding at March 31, 2023 | 6,000,000 | $ | 0.34 | 3.64 | ||||||||
| Exercisable at March 31, 2023 | 4,925,000 | |||||||||||
Options outstanding as of March 31, 2023, and December 31, 2022, had aggregate intrinsic value of $0.
NOTE 13 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events for adjustment to or disclosure in its consolidated financial statements through the date of this report, and has not identified any recordable or disclosable events, not otherwise reported in these consolidated financial statements or the notes thereto, except for the following:
Subsequent to March 31, 2023, the Company exercised 343,750 common stock warrants under a cashless feature into 267,310 shares of common stock.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview of Our Company
The Company was incorporated pursuant to the laws of the State of Wyoming on September 26, 2013. We are based in San Diego, California. We are a residential land development company with target properties located primarily in the Baja California Norte region of Mexico and Southern California. Our 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 lots to homebuyers, retirees, investors, and commercial developers. We offer the option of financing (i.e. taking a promissory note from the buyer for all or part of the purchase price) with a guaranteed acceptance on any purchase for every customer.
Overview
The real estate market in Northern Baja California has continued to significantly improve and has fully recover from the negative impact of Covid-19. The housing prices has continued to rise in the Southwest U.S., and inventory has remained severely low, which generated additional attraction from home buyers seeking second homes or vacation homes.
The Company’s current portfolio includes residential, resort and commercial properties comprising the following projects:
| ■ | Oasis Park Resort is a 497-acres master planned real estate community including 1,344 residential home sites, south of San Felipe, Baja California, which offers a 180-degree sea and mountain views. In addition to the residential lots, there is a planned boutique hotel, a spacious commercial center, and a nautical center.
The Company recently allowed prospective homeowners and existing lot holders to tour the property again. 75 of the 1,344 planned residential lots were pre-sold to initial shareholders. The Company has made significant progress on the project, which included the completion of the two-mile access road and the community entrance structure. The Company also started construction of the waterfront clubhouse, and model homes.
There has been no activity during the three months ended March 31, 2023. | |
| ■ | Valle Divino is a self-contained solar 650-home site project in Ensenada, Baja California, with test vineyard at the property. This resort includes 137 residential lots and 3 commercial lots on 20 acres of land. This represents an estimated $60 million in gross sales opportunity. There has been no activity during the three months ended March 31, 2023. | |
| ■ | Plaza Bajamar Resort s an 80-unit project located at the internationally renowned Bajamar Ocean front hotel and golf resort. The Bajamar oceanfront golf resort is a master planned golf community located 45 minutes south of the San Diego-Tijuana border along the scenic toll road to Ensenada. The first Phase will include 22 “Merlot” 1,150 square-foot single-family homes that features two bedrooms and two baths. The home includes two primary bedroom suites - one on the first floor and one upstairs, as well as fairway and ocean views from a rooftop terrace. The Merlot villas will come with the installation of solar packages. | |
| ■ | Emerald Grove Estates is the Company’s newly renovated Southern California property, used for organized events at this 8,000 square foot event venue.
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| ■ | Rancho Costa Verde (“RCVD”) is a 1,100-acre master planned second home, retirement home and vacation home real estate community located on the east coast of Baja California. RCVD is a self-sustained solar powered green community that takes advantage of the advances in solar and other green technology. In May 2021, the Company acquired a 25% investment in RCVD in exchange for $100,000 and 3,000,000 shares of the Company’s common stock, and such investment was initially recorded as an equity-method investment in the Company’s condensed consolidated financial statements. On January 3, 2023, the Company acquired the remaining 75% membership interest in RCVD for a contractual consideration of $13.5 million, paid through $8,900,000 secured convertible note, 20,000,000 shares of common stock and 33,000,000 common stock warrants. Such transaction was recorded pursuant to ASC 805 Business Combinations.
|
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Summary of key operational and financial events:
| ▪ | During the three months ended March 31, 2023, the Company collected an aggregate amount of $129,830 from house construction at the Plaza Bajamar project, which was initially recorded and presented as contract liability in the consolidated balance sheets. However, the Company offset the balance with the additional cash funded for the construction of amenities at Bajamar, with the net balance presented as impairment loss in the consolidated statement of operations for the three months ended March 31, 2023. | |
| ▪ | Continued our research and marketing efforts to identify potential home buyers in the United States, Canada, Europe, and Asia. Through the formation of a partnership with a similar development company in the Baja California Norte Region of Mexico, we have been able to leverage additional resources with the use of their established and proven marketing plan which can help us with sophisticated execution and the desired results for residential plot sales and development. | |
| ▪ | Title of Oasis Park Resort in San Felipe was assumed during 2019. We are expecting the transfer of title on Valle Divino in Ensenada, Baja California and Plaza Bajamar in Ensenada, Baja California before the end of our fiscal year 2023, as we continue to follow the necessary steps to complete this legal process. However, there is no assurance that such transfer of title will occur on above timeframe or at all. |
Results of Operations for the Three Months Ended March 31, 2023, compared to the Three Months Ended March 31, 2022
| For the three months ended | ||||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Revenue, net | $ | 240,932 | $ | - | ||||
| Cost of revenue | (3,001 | ) | - | |||||
| Gross profit | 237,931 | - | ||||||
| Operating expenses | ||||||||
| Sales and marketing | 260,084 | 30,278 | ||||||
| Impairment loss | 245,674 | - | ||||||
| General and administrative expenses | 610,180 | 1,333,946 | ||||||
| Total operating expenses | 1,115,938 | 1,364,224 | ||||||
| Loss from operations | (878,007 | ) | (1,364,224 | ) | ||||
| Other income (expense) | ||||||||
| Other income | - | 16,973 | ||||||
| Loss from debt extinguishment | (49,329 | ) | - | |||||
| Income (loss) from equity-method investment | - | (41,104 | ) | |||||
| Change in fair value of derivative | (397,678 | ) | - | |||||
| Interest expense | (583,547 | ) | (104,367 | ) | ||||
| Total other expense | (1,030,554 | ) | (128,498 | ) | ||||
| Net loss | $ | (1,908,561 | ) | $ | (1,492,722 | ) | ||
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Revenue
Revenue increased by $240,932 to $240,932 for the three months ended March 31, 2023, from $0 for the three months ended March 31, 2022. The revenue recognized during the three months ended March 31, 2023. Revenue sources include real estate sales, interest from financed sales, financing fees, and components of home construction,
Cost of revenue
Cost of revenue increased by $3,001 to $3,001 for the three months ended March 31, 2023, from $0 for the three months ended March 31, 2022. Cost of revenue recognized during the three months ended March 31, 2023. Cost of revenue includes land cost and related land improvements including infrastructure and subdivision costs.
Operating Expenses
Operating expenses decreased by $248,286 to $1,115,938 for the three months ended March 31, 2023, from $1,364,224 for the three months ended March 31, 2022.
Sales and marketing costs increased by $229,806, to $260,084 in the three months ended March 31, 2023, from $30,278 in the three months ended March 31, 2022. Such increase mainly relates to the additional marketing efforts incurred by RCVD for a total amount of $198,085 during the three months ended March 31, 2023. Sales costs are related to real estate’s sales commissions. Marketing costs include advertising, prospective customers’ education, travel, and accommodation.
General and administrative costs decreased by $723,766 in the three months ended March 31, 2023, compared to the three months ended March 31, 2022. General and administrative was increased by approximately $204,550 from the acquisition of RCVD. Such amount was mainly comprised of commissions paid attributable to sales.
Other G&A increase approximately $245,674, which is mainly attributable to an increase in impairment by approximately $245,674.
Other expense
Other expenses increased by approximately $902,056 to $1,030,554 in the three months ended March 31, 2023, from $128,498 in the three months ended March 31, 2022.
Such increase is primarily due to a $479,180 increase in interest expense, which results from the additional convertible notes that the Company secured during fiscal year 2022 to fund its ongoing operations and the additional convertible note for an aggregate amount of $8,900,000 issued pursuant to the RCVD acquisition, an increase of $397,678 in the change in fair value of the Company’s derivative liability and $49,329 related to loss from debt extinguishment.
Net Loss
The Company finished the three months ended March 31, 2023, with a net loss of $1,908,561, as compared to a net loss of $1,492,722 for the three months ended March 31, 2022. The increase in our net loss resulted from the reasons outlined above.
The factors that will most significantly affect future operating results will be:
| ■ | The positive effect of implemented sales and marketing initiatives to drive opportunities into our various projects. | |
| ■ | The quality of our amenities. | |
| ■ | The global economy and the demand for vacation homes. | |
| ■ | The sale price of future plots and home construction compared to the sale price in other resorts in Mexico. | |
| ■ | The prime location of our projects. |
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Other than the foregoing we do not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a material impact on our revenues or expenses.
Capital Resources and Liquidity
Cash was $199,393 and $49,400 as of March 31, 2023, and December 31, 2022, respectively. As shown in the accompanying financial statements, we recorded a loss of $1.9 million for the three months ended March 31, 2023. Our working capital deficit as of March 31, 2023, was $30.7 million. These factors and our ability to raise additional capital to accomplish our objectives, raises substantial doubt about our ability to continue as a going concern. We expect our expenses will continue to increase during the foreseeable future as a result of increased operations, increased construction activity and the development of current and future projects which include our current business operations.
We anticipate generating revenues over the next twelve months, as we continue to market the sale of plots held for sale at our various projects, generate cash from the sale of house construction at our properties.
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.
Operating Activities
Net cash flows provided by operating activities for the three months ended March 31, 2023, was $36,978 which resulted primarily due to the loss of $1,908,561 offset by non-cash share-based compensation of $78,047, amortization of debt discount of $160,830, depreciation of $29,748, impairment loss of $245,675, loss from debt extinguishment of $49,329, fair value of equity securities issued for services for $15,000, excess fair value of derivative liability for $36,062, change in fair value of derivative liability of $397,678, and net change in assets and liabilities of $933,170.
Net cash flows provided by operating activities for the three months ended March 31, 2023, was $36,978 which resulted primarily due to the loss of $1,908,561 offset by non-cash share-based compensation of $871,688, amortization of debt discount of $19,241, loss from the Company’s equity-method investment of $41,104, depreciation of $13,102, and net change in assets and liabilities of $202,644.
Investing Activities
Net cash flows used in investing activities was $73,047 for the three months ended March 31, 2023. The funds were used for the development of the various projects and the purchased house construction at Plaza Bajamar and Valle Divino for $179,700, additional investment for land development for $215,266, and offset by the cash acquired for $321,919 from the acquisition of RCVD.
Net cash flows used in investing activities was $109,000 for the three months ended March 31, 2022. The funds were used for the development of the various projects at plaza Bajamar, and Valle Divino.
Financing Activities
Net cash flows provided by financing activities for the three months ended March 31, 2023, was $186,088, primarily from cash proceeds from additional funding from related parties for aggregate amount of $226,220, cash proceeds from convertible note of $100,000, cash proceeds from other loans for $23,776, offset by $100,850 repayment of related party advances, and $63,058 repayment of convertible notes.
Net cash flows provided by financing activities for the three months ended March 31, 2022, was $590,628 primarily from cash proceeds from issuance of promissory notes for aggregate amount of $522,500, cash proceeds from on-going funding from related party for aggregate amount of $170,102, offset by $90,954 repayment of related party advances, and $11,620 repayment of promissory notes.
As a result of these activities, we experienced an increase in cash of $150,019 for the three months ended March 31, 2023.
Our ability to continue as a going concern is dependent on our success in obtaining additional financing from investors or from sale of our common shares.
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Critical Accounting Polices
There have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on July 6, 2023.
Off-balance Sheet Arrangements
During the period ended March 31, 2023, we have not engaged in any off-balance sheet arrangements.
New and Recently Adopted Accounting Standards
For a listing of our new and recently adopted accounting standards, see Note 2, Summary of Significant Accounting Policies, to the Notes to the condensed consolidated financial statements in “Part I, Item 1. condensed consolidated financial statements” of this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required under Regulation S-K for “smaller reporting companies.”
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (Principal Executive Officer) and the Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, the Company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company conducted an evaluation under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of its disclosure controls and procedures as of March 31, 2023, as defined in Rule 13a -15(e) and Rule 15d -15(e) under the Exchange Act. This evaluation was carried out under supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting related to the lack of adequate accounting and finance personnel, inadequate controls over maintenance of records, inadequate internal controls relating to the authorization, recognition, capture, and review of transactions, facts, circumstances, and events that could have a material impact on the Company’s financial reporting process.as further discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, and which the Company determined continued to exist as of March 31, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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We are not party to, and our property is not the subject of, any material pending legal proceedings.
You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I, Item 1A, Risk Factors, contained in our Annual Report on Form 10-K for Fiscal 2022, as filed with the SEC on July 6, 2023. The risk factors described in the fiscal year ended 2022 Form 10-K have not materially changed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2023, the Company issued 100,000 shares of common stock pursuant to a consulting agreement for a total fair value of approximately $15,000.
During the three months ended March 31, 2023, the Company issued 20,000,000 shares of common stock pursuant to a business acquisition with a fair value of 1,800,000.
During the three months ended March 31, 2023, the Company issued 1,077,164 shares of common stock pursuant to the conversion of convertible notes.
In connection with the foregoing, we relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions not involving a public offering.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
(a) Exhibits
| Exhibit No. | Description | |
| 31.1* | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2022 | |
| 32.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | ||
| 101* | Inline XBRL Document set for the financial statements and accompanying notes in Part I, Item 1, of this Quarterly Report on Form 10-Q | |
| 104* | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. | |
| Exhibits designated by the symbol * are filed or furnished with this Quarterly Report on Form 10-Q |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: | July 18, 2023 | International Land Alliance, Inc. | ||
| By: | /s/ Roberto Jesus Valdes | |||
| Principal Executive Officer and a Director | ||||
| By: | /s/ Jason Sunstein | |||
| Principal Financial and Accounting Officer and a Director | ||||
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Exhibit 31.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Roberto Jesus Valdes, Principal Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Land Alliance, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared.
b) designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date July 18, 2023
| /s/ Roberto Jesus Valdes | |
| Roberto Jesus Valdes | |
| Principal Executive Officer and Director |
Exhibit 31.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jason Sunstein, Principal Financial Officer, and Principal Accounting Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of International Land Alliance, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared.
b) designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 18, 2023
| /s/ Jason Sunstein | |
| Jason Sunstein | |
| Principal Financial and Accounting Officer and Director |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Roberto Jesus Valdes, Principal Executive Officer and Director of International Land Alliance, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002 that:
(1) The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2023 (the “Report”) fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.
Date: July 18, 2023
| /s/ Roberto Jesus Valdes | |
| Roberto Jesus Valdes | |
| Principal Executive Officer and Director |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Jason Sunstein, Chief Financial Officer, Principal Financial Officer and Director of International Land Alliance, Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002 that:
(1) The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2023 (the “Report”) fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.
Date: July 18, 2023
| /s/ Jason Sunstein | |
| Jason Sunstein | |
| Principal Financial and Accounting Officer and Director |