Driveitaway Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS Special Note Regarding Forward-Looking Information The following discussion and analysis of the results of operations and financial condition of DriveItAway Holdings, Inc., and its wholly owned subsidiary, DriveItAway, Inc., should be read in conjunction with the financial statements of the Company. and the notes to those financial statements that are included elsewhere in this Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. U.S. Dollars are denoted herein by “USD,” “$” and “dollars”. Overview DIA is the first 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 to 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 three months ended December 31, 2023, compared to the three months ended December 31, 2022 Our operating results for the three months ended December 31, 2023, and 2022 are summarized as follows: Three months ended December 31, 2023 2022 Change % Revenues $ 96,503 $ 48,083 $ 48,420 101 % Cost of revenue 85,679 39,872 45,807 115 % Gross Profit 10,824 8,211 2,613 32 % Gross Profit Percentage 11 % 17 % Operating expense 206,010 223,644 (17,634 ) (8 )% Operating loss (195,186 ) (215,433 ) 20,247 (9 )% Other expense 520,243 505,575 (14,668 ) (3 )% Net loss $ (715,429 ) $ (721,008 ) $ 5,579 (1 )% Revenues for the three months ended December 31, 2023, increased $48,420 from $48,083 for the period ending December 31, 2022, to $96,503 for the period ending December 31, 2023. This was due to a $63,696 increase in rental revenue and $22,373 increase in insurance revenue, offset by an increase of $37,649 in insurance lender payback costs. 1 We anticipate that, in 2024 automotive supply and demand will see a continuing return to more historically normal levels which should translate into greater vehicle availability for vehicles on our platform, leading to a further increase in revenues. Cost of revenue for the three months ended December 31, 2023, increased $45,807, from $39,872 for the period ending December 31, 2022, to $85,679 for the period ending December 31, 2023. This was primarily due to DIA fleet payments which increased alongside an increase in revenue. Operating expenses for the three months ended December 31, 2023, decreased $17,634 as compared to the three months ended December 31, 2022. The decrease was primarily attributable to a decrease in salaries and payroll taxes of $15,250 and advertising and marketing expenses of $8,375, offset by an increase in professional fees of $6,585. Loss from operations was $195,186 for the three months ended December 31, 2023, as compared to $215,433 for the three months ended December 31, 2022. The decrease of $20,247 was largely attributable to the change in operating expenses of $17,634 and an increase in gross profit of $2,613. Other expenses for the three months ended December 31, 2023, were $520,243, as compared to $505,575 for the three months ended December 31, 2022. The increase of $14,668 is primarily attributable to increases in amortization of debt discount and interest expense of $21,987 and $112,059, respectively. The increases are partially offset by a decrease in loss on change in fair value of derivative liabilities of $119,378. Liquidity and Capital Resources: The following table provides selected financial data about our Company as of December 31, 2023, and September 30, 2023. Working Capital December 31, September 30, 2023 2023 Change % Cash $ 61,167 $ 4,632 $ 56,535 1220 % Current assets, net of restricted cash $ 68,699 $ 16,216 $ 52,483 323 % Current liabilities 2,805,998 1,878,080 927,918 49 % Working capital (deficiency) $ (2,737,299 ) $ (1,861,864 ) $ (875,435 ) (47 )% As of December 31, 2023, our working capital deficiency increased $875,435 as compared to September 30, 2023. This was primarily attributable to a $584,229 increase in derivative liabilities, a $230,093 increase in convertible notes payable, and a $129,791 increase to accounts payable and accrued liabilities. Cash Flow Data: Three months ended December 31, 2023 2022 Change Cash provided by (used in) operating activities $ (104,496 ) $ (193,541 ) $ 89,045 Cash provided by (used in) investing activities $ — $ (72,872 ) $ 72,872 Cash provided by (used in) financing activities $ 142,472 $ 179,434 $ (36,962 ) Net Change in Cash and Restricted Cash $ 37,976 $ (86,979 ) $ 124,955 Cash Flows from Operating Activities During the three months ended December 31, 2023, we did not generate positive cash flows from operating activities. For the three months ended December 31, 2023, net cash flows used in operating activities was $104,496, consisting of a net loss of $715,429, reduced by a loss on change in fair value of derivative liability of $335,277, amortization debt discount of $35,407, depreciation and amortization of $9,471, a financing fee of $98,202, and a change in operating assets and liabilities of 132,576. 2 During the three months ended December 31, 2022, we did not generate positive cash flows from operating activities. For the three months ended December 31, 2022, net cash flows used in operating activities was $193,541, consisting of a net loss of $721,008, reduced by a loss on change in derivative liability of $454,655, stock-based compensation expenses of $15,000, amortization debt discount of $13,420, depreciation and amortization of $7,653, a change in operating assets and liabilities of $36,739. Cash Flows from Investing Activities During the three months ended December 31, 2023, the Company did not use or generate any cash from investing activities. During the three months ended December 31, 2022, the Company used cash of $72,872 for intangible asset purchases of $5,833 and fixed asset acquisition costs of $67,039. Cash Flows from Financing Activities During the three months ended December 31, 2023, the Company generated $22,222 from the issuance of convertible notes, and $195,000 from the issuance of promissory notes, this was partially offset by $28,278 for repayment of promissory notes payable and payment for debt issuance costs of $46,472. During the three months ended December 31, 2022, the Company generated $200,000 from the issuance of convertible notes, repaid $566 on their SBA loan, and paid debt issuance costs of $20,000. Going Concern As of December 31, 2023, the Company had a net loss of $715,429, accumulated deficit of $4,026,325 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 December 31, 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. 3 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. During the periods ended December 31, 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 December 31, 2023 and September 30, 2023 refundable deposits were $1,339 and $2,234 and deferred revenue was $4,967 and $7,233, respectively. 4 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. Income Taxes The provision for income taxes and deferred income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized. 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. 5 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. All financial assets and liabilities are approximate to their fair value. Derivative liabilities are valued at Level 3. Fair Value Measurements as of December 31, 2023 using: December 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Liabilities $ — — — $ — Derivative Liabilities $ 585,546 — — $ 585,546 Fair Value Measurements as of September 30, 2023 using: September 30, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Liabilities $ — — — $ — Derivative Liabilities $ 1,317 — — $ 1,317 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item. 6