DERIVATIVE LIABILITIES

9 Months Ended

Sep. 30, 2023

NOTE 7 – DERIVATIVE LIABILITIES

The Company analyzed the notes payable – related parties and convertible notes payable referred to in Notes 4 and 5 based on the provisions of ASC 815-15 and determined that the conversion options of the convertible notes qualify as embedded derivatives and required the recognition of derivative liabilities.

For the derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date and any resulting gain or loss is recognized as a current period charge to the consolidated statements of operations. The Company estimates the fair value of the embedded derivatives using a Monte Carlo simulation valuation model that combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, probability of a change of control and the trading information of our common stock into which the notes are convertible, as appropriate to value the derivative instruments at inception and subsequent valuation dates and the value is reassessed at the end of each reporting period, in accordance with FASB ASC Topic 815-15.

The aggregate fair value of derivative liabilities as of September 30, 2023 and December 31, 2022 amounted to $801,449 and $801,449, respectively. The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the assets that are measured at fair value on a recurring basis.

Quoted

Prices in

Prices for

Active

Similar

Markets for

Assets or

Identical

Liabilities in

Significant

Consolidated

Assets or

Active

Unobservable

Balance

Liabilities

Markets

Inputs

Sheet

(Level 1)

(Level 2)

(Level 3)

Derivative Liabilities:

September 30, 2023

801,449

–

801,449

December 31, 2022

801,449

–

801,449

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:

	Period Ended		Year Ended
	September 30,		December 31,
	2023		2022
Beginning balance	$	801,449	$	793,997
Aggregate fair value of conversion features upon issuance		–		–
Fair value of derivatives reclassified to equity		–		–
Net transfer into level 3		–		–
Fair value of warrants netted against common stock issued for stock		–		–
Change in fair value of conversion features		–		7,452
Change in fair value of warrant and stock option derivative liabilities		–		–
Ending balance	$	801,449	$	801,449

HFactor, Inc. 10-Q