Driveitaway Holdings, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K. All information presented herein is based on the Company’s fiscal year, which ends September 30. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Note on COVID- 19 The COVID-19 pandemic is a highly fluid situation and it is not currently possible for us to reasonably estimate the impact it may have on our financial and operating results. We will continue to evaluate the impact of the COVID-19 pandemic on our business as we learn more and the impact of COVID-19 on our industry becomes clearer. We are complying with health guidelines regarding safety procedures, including, but are not limited to, social distancing, remote working, and teleconferencing. The extent of the future impact of the COVID-19 pandemic on our business is uncertain and difficult to predict. Adverse global economic and market conditions as a result of COVID-19 could also adversely affect our business. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be adversely impacted. Overview The Company was formed in Delaware on March 8, 2006 as B2 Health, Inc. On July 2, 2010, the Company acquired BFK Franchise Company, LLC (“BFK”), a Nevada limited liability company, and concurrently changed its name to Creative Learning Corporation. On February 24, 2022, the Company acquired DriveItAway, Inc., and on March 18, 2022, disposed of BFK and its other subsidiaries involved in the learning business. On April 18, 2022, the name was changed to DriveItAway Holdings, Inc. The Company is a national dealer focused mobility platform that enables car dealers to sell more vehicles in a seamless way through eCommerce, with its exclusive “Pay as You Go” app-based subscription program. DIA provides a comprehensive turnkey, solutions driven program with proprietary mobile technology and driver app, insurance coverages and training to get dealerships up and running quickly and profitably in emerging online sales opportunities. The company is planning to soon expand its easy and transparent consumer app ‘subscription to ownership’ platform to enable entry level consumers to drive and acquire new Electric Vehicles. RESULTS OF OPERATIONS For the year ended September 30, 2022, compared to year ended September 30, 2021 Our operating results for the years ended September 30, 2022 and 2021 are summarized as follows: 12 Years Ended September 30, 2022 2021 $ Change % Change Revenues $ 55,509 $ 118,591 (63,082 ) (53 %) Cost of revenue 38,898 37,832 1,066 3 % Gross Profit 16,611 80,759 (64,148 ) (79 %) Operating expense 1,201,767 741,899 459,868 62 % Operating loss (1,185,156 ) (661,140 ) (524,016 ) 79 % Other expense 290,209 14,544 275,665 n/a Net loss $ (1,475,365 ) $ (675,684 ) (799,681 ) 118 % Revenues for the year ended September 30, 2022 was $55,509, as compared to $118,591 for the year ended September 30, 2021, a decrease of $63,082, primarily due to the nation-wide used car shortage resulting from supply chain disruptions due in part to the COVID-19 pandemic. In addition, semiconductor chips, one of the main components that run vehicle electronics, came in short supply, which affected both new and used car markets, causing significantly higher prices and low inventory. Operating expenses for the year ended September 30, 2022 were $1,201,767, as compared to $741,899 for the year ended September 30, 2021. The increase of $459,868 was attributable to an increase in professional fees of $236,207, salaries and payroll taxes of $204,343, general and administrative expense of $14,306 and selling expenses of $24,627, reduced by a decrease in software development expenses of $19,615. Operating loss was $1,185,156 for the year ended September 30, 2022, as compared to $661,140 for the year ended September 30, 2021. The increase of $524,016 was largely attributable to an increase in professional fees, salaries, payroll taxes, selling expenses and a decrease in revenues. Other expenses for year ended September 30, 2022 were $290,209, as compared to $14,544 for the year ended September 30, 2021. The increase of $275,665 was attributable to amortization debt discount of $677,561 and an increase in interest expenses of $58,097, offset by a gain on PPP loan forgiveness of $24,148 and gain on change in fair value of derivative liability of $435,188. Liquidity and Capital Resources: The following table provides selected financial data about our Company as of September 30,2022 and 2021. Working Capital September 30, September 30, 2022 2021 Change Cash $ 127,109 $ 9,774 $ 117,335 Current assets $ 143,689 $ 31,229 $ 112,460 Current liabilities 1,100,139 229,228 870,910 Working capital (deficiency) $ (956,450 ) $ (197,999 ) $ (758,450 ) As of September 30, 2022, and September 30, 2021, our total current assets were $143,689 and $31,229 which were comprised of $127,109 and $9,774 in cash, $6,082 and $21,455 in accounts receivable and $10,498 and $0 in prepaid expenses, respectively. 13 As of September 30, 2022, our current liabilities were $1,100,139 which were comprised of $198,065 in accounts payable, $29,044 in accrued liabilities, $5,840 in SBA loan, $2,101 in deferred revenue, $750,000 in convertible notes payable, $115,009 in derivative liability and $80 in due to related party. As of September 30, 2021, our current liabilities were $229,228 which were comprised of $132,696 in accounts payable, $29,386 in accrued liabilities, $29,878 in SBA and PPP loans, $7,268 in due to related party and $30,000 in convertible note-related parties. As of September 30, 2022, and September 30, 2021, our working capital deficiency was $956,450 and $197,999, respectively. Cash Flow Data: Years Ended September 30, 2022 2021 Change Cash used in operating activities $ (827,611 ) $ (239,767 ) $ (587,844 ) Cash used in investing activities $ (87,504 ) $ — $ (87,504 ) Cash provided by financing activities $ 1,032,450 $ 220,566 $ 811,884 Net Change in Cash for period $ 117,335 $ (19,201 ) $ 136,536 Cash Flows from Operating Activities During the year ended September 30, 2022, we did not generate positive cash flows from operating activities. For the year ended September 30, 2022, net cash flows used in operating activities was $827,611, consisting of a net loss of $1,475,365, reduced by stock-based compensation expenses of $288,461, amortization debt discount of $677,561, depreciation of $8,436, a change in operating assets and liabilities of $132,632 and increased by gain on PPP loan forgiveness of $24,148 and gain on change in fair value of derivative liability of $435,188. During the nine months ended September 30, 2021, we did not generate positive cash flows from operating activities. For the year end September 30, 2021, net cash flows used in operating activities was $239,767, consisting of a net loss of $675,684, reduced by an increase in stock -based compensation expenses of $403,847 and a change in operating assets and liabilities of $32,070. Cash Flows from Investing Activities During the year ended September 30, 2022, the Company generated cash of $70,360 from the acquisition of a subsidiary and purchased three vehicles for $157,864. The Company did not use any funds for investing activities during the year ended September 30, 2021. Cash Flows from Financing Activities During the year ended September 30, 2022, the Company generated $1,125,000 from the issuance of convertible notes and $36,200 from an SBA loan, offset by $128,750 of debt issuance costs. During the year ended September 30, 2021, the Company generated $150,000 from issuance of convertible notes, $65,000 from related party convertible debt and $5,566 contribution from related party as additional paid-in-capital. Going Concern As of September 30, 2022, the Company had a net loss of $1,475,365, accumulated deficit of $2,380,759 and did not have sufficient cash on hand to cover expenses for the next twelve (12) months. The Company intends to convert its convertible debt into common stock and to fund operations through equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending September 30, 2023. 14 The ability of our Company to emerge from the development stage is dependent upon, among other things, obtaining additional financing to continue operations, and development of our business plan. In response to these requirements, management intends to raise additional funds through public or private placement offerings. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which require management to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We believe our most critical accounting policies and estimates relate to the following: ● Revenue Recognition ● Stock-Based Compensation ● Income Taxes ● Financial Instruments ● Derivative Financial Instruments While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. For a discussion of the Company’s significant accounting policies, refer to Note 2 of Notes to the Consolidated Financial Statements. Revenue Recognition The Company’s revenue is recognized in accordance with Accounting Standards Codification(“ASC”) 606, Revenue from Contracts with Customers, for all periods presented. The Company, through its DriveItAway online/app-based platform, operates in the retail automotive industry. The Company assists subprime and deep subprime candidates, with little or no down payment, in purchasing the used vehicle of his/her choice by first starting in an app based, turnkey rental, through participating franchise and independent car dealers. During the years ended September 30, 2022 and 2021, the Company derived its rental revenue from contract revenue share for rentals between participating franchise and independent car dealers and individual car rental customers (“customers”). In conjunction with the rental revenue, the Company generates revenue by providing driver and vehicle insurance through a third party, included in the rental contract with each customer. 15 The Company’s performance obligation for rental revenue is to provide an application to track car rental arrangements and to collect cash from car rental customers and remit those payments to participating franchise and independent car dealers, net of the Company’s revenue share. The car rental arrangements are over a fixed contracted period; therefore, the Company recognizes revenue ratably during the contract term. The Company’s performance obligation for insurance revenue is to collect insurance fees from the customer and provide the third-party provider payment for the insurance provided to the customer. The insurance is offered over a fixed contracted period; therefore, the Company recognizes revenue ratably during the contract term. Rental and insurance transactions are prepaid at the beginning of the rental cycle (typically a one-week rental that has an automatic renewal) with an automatic charge to the customer’s credit card on file through the DIA system. The DIA system then distributes the vehicle owner share (typically 85% of rental revenue) to the vehicle owner’s bank account from the Stripe Account. This amount is shown as a deduction to Revenues (“Vehicle Owner Share”) on the Company’s Statements of Operations. The net amount is then transferred from the Company’s Stripe Account to the DIA operating bank account. DIA also distributes insurance amounts due to the third - party insurance provider on a monthly basis. This amount is shown as a deduction to revenues (“Driver & Dealer Insurance Cost”) on the Company’s Statements of Operations. DIA also generates miscellaneous revenue in a number of ways. At the end of the rental term, the DIA software system checks for any excess usage and charges, based on the terms of the rental contract, and will automatically charge a customer’s credit card. These charges are recognized when the credit card charge goes through and recorded as miscellaneous revenue on the Company’s Statements of Operations. Additional miscellaneous revenue represents amounts earned on telematics equipment and telematics software services related to each rental vehicle used to track excess usage and charges. DIA performance obligation is to provide the equipment to the vehicle owner for self-installation and allow access to the software throughout the rental term. The Company recognizes revenue when the equipment is delivered to the vehicle owner. Miscellaneous revenue associated with use of the telematics software is recognized on a monthly basis. The Company’s Cost of Goods sold consists of credit card fees incurred from the cash collections and cash remittance process, as a significant portion of its performance obligation is to collect and remit payments through its credit card processors. Stock-Based Compensation The Company recognizes compensation expense for all restricted stock awards and stock options. The fair value of restricted stock awards is measured using the grant date fair value of our stock, as determined by the Board of Directors. The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model, and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. We have elected to recognize compensation expense for all options with graded vesting on a straight-line basis over the vesting period of the entire option. The determination of fair value using the Black-Scholes pricing model is affected by our stock value as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility and the risk-free interest rate. 16 Financial Instruments The Company follows ASC 820, “Fair Value Measurements and Disclosures”, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below: Level 1 Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2 Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The carrying amounts shown of the Company’s financial instruments including cash, accounts receivable, prepaid expense, accounts payable, and accrued liabilities approximate fair value due to their short-term nature. Derivative Financial Instruments The fair value of an embedded conversion option that is convertible into a variable amount of shares and warrants that include price protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative under ASC 815 “Derivatives and Hedging”, since “down-round protection” is not an input into the calculation of the fair value of the conversion option and warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815. The accounting treatment of derivative financial instruments requires that the Company record embedded conversion options and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. The Black-Scholes option valuation model was used to estimate the fair value of the embedded conversion options and warrants. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time, of our common stock, equal to the weighted average life of the options. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, we are not required to provide the information required by this Item.