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. 10 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, 2023, compared to year ended September 30, 2022 Our operating results for the years ended September 30, 2023 and 2022 are summarized as follows: Years Ended September 30, 2023 2022 Change $ Change % Revenues $ 307,284 $ 55,509 $ 251,775 454 % Cost of revenue 238,763 38,898 199,865 513 % Gross Profit 68,521 16,611 51,910 313 % Operating expense 830,976 1,201,767 (370,791 ) (31 % ) Operating loss (762,455 ) (1,185,156 ) 422,701 (36 % ) Other Income (expense) (167,682 ) (290,209 ) 122,527 (42 % ) Net loss $ (930,137 ) $ (1,475,365 ) $ 545,228 (37 %) Revenues for the year ended September 30, 2023 was $307,284, as compared to $55,509 for the year ended September 30, 2022, an increase of $251,775 primarily due to a $151,464 increase in rental revenue. Operating expenses for the year ended September 30, 2023 were $830,976 as compared to $1,201,767 for the year ended September 30, 2022. The decrease of $370,791 was primarily attributable to a $299,088 decrease in professional fees and a $90,475 reduction in salaries and payroll taxes. Operating loss was $762,455 for the year ended September 30, 2023, as compared to $1,185,156 for the year ended September 30, 2022. The decrease of $422,701 was largely attributable to a decrease in professional fees, salaries, and payroll taxes and a large increase in rental revenue. 11 Other income (expenses) for year ended September 30, 2023 were ($167,682), as compared to ($290,209) for the year ended September 30, 2022. The increase of $122,527 was attributable to an increase in amortization debt discount of $555,282, partially offset by decreases in gain (loss) on change in fair value of derivative liability, gain on PPP loan forgiveness, and interest expense of $265,465, $24,148, and $103,549, respectively. Liquidity and Capital Resources: The following table provides selected financial data about our Company as of September 30, 2023 and 2022. Working Capital September 30, September 30, 2023 2022 Change $ Cash $ 4,632 $ 127,109 $ (122,477 ) Current assets, net of restricted cash $ 16,216 $ 143,689 $ (127,473 ) Current liabilities 1,878,080 1,094,299 783,781 Working capital (deficiency) $ (1,861,864 ) $ (950,610 ) $ (911,254 ) As of September 30, 2023, and September 30, 2022, our total current assets net of restricted cash were $16,216 and $143,689 which were comprised of $4,632 and $127,109 in cash, $11,584 and $6,082 in accounts receivable and $0 and $10,498 in prepaid expenses, respectively. As of September 30, 2023, our current liabilities were $1,861,080 which were comprised of $664,707 in accounts payable and accrued liabilities, $4,918 in accrued interest – related party, $7,233 in deferred revenue, $2,234 in customer deposits, $25,080 in due to related party, $27,437 in promissory notes payable, $12,500 in promissory notes payable in default, $50,000 in promissory notes payable – related parties, $1,082,654 in convertible notes payable, and $1,317 in derivative liability. As of September 30, 2022, our current liabilities were $1,094,299 which were comprised of $227,109 in accounts payable and accrued liabilities, $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, 2023, and September 30, 2022, our working capital deficiency was $1,861,864 and $950,610, respectively. Cash Flow Data: Years ended September 30, 2023 2022 Change $ Cash used in operating activities $ (445,105 ) $ (827,611 ) $ 382,506 Cash provided by (used in) investing activities $ (72,872 ) $ (87,504 ) $ 14,632 Cash provided by financing activities $ 414,059 $ 1,032,450 $ (618,391 ) Net Change in Cash and Restricted Cash $ (103,918 ) $ 117,335 $ (221,253 ) Cash Flows from Operating Activities During the year ended September 30, 2023, the company did not generate positive cash flows from operating activities. For the year ended September 30, 2023, net cash flows used in operating activities was $445,105 consisting of a net loss of $930,137, reduced by stock-based compensation expenses of $15,000, amortization debt discount of $122,279, depreciation of $36,783, a loss on debt extinguishment of $36,313, a change in operating assets and liabilities of $444,380, and gain on change in fair value of derivative liability of $169,723. 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 a gain on PPP loan forgiveness of $24,148 and a gain on change in fair value of derivative liability of $435,188. 12 Cash Flows from Investing Activities During the year ended September 30, 2023, purchased two vehicles for $67,039 and developed a website for a total of $5,833. 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. Cash Flows from Financing Activities During the year ended September 30, 2023, the Company generated $310,000 from the issuance of convertible notes, $104,458 from the promissory notes, $50,000 from related party notes payable, and $26,460 from related party advances. These proceeds were partially offset by repayments on related party advances, promissory notes payable, and payments for debt issuance costs of $1,460, $42,011, and $33,388, respectively. 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. Going Concern As of September 30, 2023, the Company had a net loss of $930,137 accumulated deficit of $3,310,896 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, 2024. 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 (“platform”), operates in the automotive rental industry. The Company assists subprime and deep subprime candidates to rent/lease vehicles on a short-term basis, generally on a weekly or, in some cases monthly, basis under a Pay-As You-Go program. Through its platform the Company will track vehicle values and reduce vehicle pricing through the customers usage payments to show drivers a vehicle purchase price should they be interested in buying the vehicle, at which time the customer would procure financing if the Company determined they wanted to sell the vehicle at the listed purchase price. 13 During the years ended September 30, 2023, and 2022, the Company derived its revenue from signed contracts for vehicle rentals between the Company, other leasing companies, or car dealerships and individual car rental customers (“customers”). Customers book a vehicle through the Company’s platform, starting first with a rental contract with the vehicle. When the customer books the vehicle, per the terms of the individual rental agreements, the customer shall pay a stated rental rate, a stated insurance amount, an initial non-refundable fee, and, in some cases, a refundable deposit. At the end of the usage cycle, the system calculates miles driven and if the customer has driven more than the prorated, included amount, they pay extra usage/mileage fees. In instances when a customer pays late, they pay a late fee and in cases of incurring charges for tolls they pay for the toll costs incurred. Additionally, contracts may be extended (a new contract is signed) at which time the credit card on file for the customer will be charged at the beginning of the contract extension period for rental rate and insurance amount for the new extension period. Vehicles available in the platform can be owned or leased by the Company or made available through arrangements with independent car dealerships (“dealerships”). For vehicles owned or leased by the Company, the Company’s performance obligation for rental revenue is to provide customers with a vehicle and an application to track vehicle rental arrangements. For vehicles made available through dealerships the Company’s performance obligation for rental revenue is to provide an application to track vehicle rental arrangements and to collect cash from customers and remit those amounts to dealerships net of the Company’s revenue share. The vehicle rental arrangements are over a fixed contracted period; therefore, the Company recognizes rental revenue ratably over the contract term. Costs related to rental revenue include depreciation for Company owned vehicles and monthly lease payments when the vehicles are leased from a leasing company. The amount of revenue transferred to dealerships is treated as contra-revenue because the Company acts as an agent in these transactions resulting in only the Company’s revenue share being recognized. The Pay-As-You-Go program manages or includes insurance. Fleet insurance is sometimes provided where the Company has a fleet policy and the driver is added to it when needed. In this case, the driver pays the cost of insurance as a separate payment in the system. This payment is a type of revenue. The Company pays the insurance company providing the coverage. This is a cost of goods sold. The Company also allows for drivers to bring their own insurance. The Company works with associated insurance brokers to write a policy for the customer for that vehicle and a separate finance company that pays for the policy in full. The Company acts as trustee in collecting installments and transferring them to the finance company. Collected payments are treated as a revenue and transfers to the finance company are treated as contra-revenue because the Company acts as an agent in these transactions. Lastly, in markets where the Company cannot support this program, drivers are allowed to bring their own insurance and pay it directly themselves with no involvement of the Company. No revenue is collected or recognized in this instance. Because any insurance revenue is collected at contract inception and covers the fixed contract period the Company recognizes insurance revenue ratably over the contract term. Initial non-refundable fees are recognized when payment is received as the Company has no obligation to provide additional services at that point. Miscellaneous charges for extra mileage, late fees, or toll charges calculated and charged to the customer credit card at the end of the usage cycle are recognized when the credit card charge goes through. Refundable deposits are recorded on the balance sheet until deposits are returned to customers or applied to their account for fees incurred. Deferred revenue includes rental and insurance amounts that are paid for contracts that overlap a reporting date and relate to usages after that date. As of September 30, 2023 and 2022 refundable deposits were $2,234 and $0 and deferred revenue was $7,233 and $2,101, respectively. In addition to the costs associated with rental revenue and insurance revenue, within the Cost of Goods Sold account the Company also records 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. 14 Fair Value Measurements 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 are approximate fair value due to their short-term nature. Derivative Financial Instruments The Company accounts for their derivative financial instruments in accordance with ASC 815 “Derivatives and Hedging” therefore any embedded conversion options and warrants accounted for as derivatives are to be recorded 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.