The accompanying notes are an integral part of the
condensed consolidated financial statements.
The accompanying notes are an integral part of the
condensed consolidated financial statements.
The accompanying notes are an integral part of the
condensed consolidated financial statements.
The accompanying notes are an integral part of the
condensed consolidated financial statements.
The accompanying notes are an integral part of the
condensed consolidated financial statements.
Notes to the Condensed
Consolidated Financial Statements
March 31, 2022
(Unaudited)
Note 1 - Nature of Organization and Summary
of Significant Accounting Policies
Nature of Organization
DriveItAway Holdings, Inc.
(“DIA Holdings”, “we” or “us”) 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.
DIA
Holdings 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. For further information, please
see www.driveitaway.com.
Share Exchange and Reorganization
On February 24, 2022 (the “Effective Date”),
the Company, DriveItAway, Inc., and the existing shareholders of DriveItAway, Inc. (“DIA”) executed an Agreement and Plan
of Share Exchange, under which the Company acquired all of the issued and outstanding common stock of DIA by issuing one share of Series
A Convertible Preferred Stock (the “Series A Preferred”) of the Company for each outstanding share of DIA common stock (the
“Share Exchange”). At the closing, the Company agreed to issue one share of Series A Preferred for each share of DIA common
stock that was subsequently issued in conversion of certain outstanding convertible notes of DIA, provided that the holders converted
their notes prior to December 31, 2022. All of the holders of the convertible notes of DIA agreed to convert their notes in March 2022,
and were issued one share of Series A Preferred in exchange for the DIA common stock they acquired as a result of the conversion. A total
of 2,594,593 shares of Series A Preferred were issued in exchange for all of the outstanding shares of DIA, including DIA shares
issued at closing or shortly thereafter as a result of the exercise or conversion of all outstanding options or convertible notes issued
by DIA.
Recapitalization
For financial accounting purposes, this transaction
was treated as a reverse acquisition by DIA and resulted in a recapitalization with DIA being the accounting acquirer and DIA, Inc. as
the acquired company. The consummation of this reverse acquisition resulted in a change of control. Accordingly, the historical financial
statements prior to the acquisition are those of the accounting acquirer, DIA and have been prepared to give retroactive effect to the
reverse acquisition completed on February 24, 2022, and represent the operations of DIA. The consolidated financial statements after the
acquisition date, February 24, 2022, include the balance sheets of both companies at fair value, the historical results of DIA and the
results of the Company from the acquisition date. All share and per share information in the accompanying consolidated financial statements
and footnotes has been retroactively restated to reflect the recapitalization.
Basis of Presentation
The Company
prepares its financial statements in accordance with rules and regulations of the Securities and Exchange Commission (“SEC”)
and Generally Accepted Accounting Principles (“GAAP”) in the United States of
America. The accompanying interim financial statements have been prepared in accordance with GAAP for interim financial information in
accordance with Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the Company’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six months ended March 31, 2022, are not necessarily indicative
of the results for the full year. While management of the Company believes that the disclosures presented herein are adequate and not
misleading, these interim financial statements should be read in conjunction with the audited financial statements and the footnotes thereto
for the year ended September 30, 2021, contained in the Company’s Form 8-K/A, exhibit 99.1, as filed on February 24, 2022.
Basis of Consolidation
The consolidated
financial statements include the accounts of DriveItAway Holdings Inc. and its wholly owned subsidiary DriveItAway, Inc., collectively
referred to as the “Company”. All inter-company balances and transactions are eliminated in consolidation.
Fiscal year
The Company operates on a September 30 fiscal year-end.
Use of Estimates
The preparation of financial statements in accordance
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates and assumptions made by management include allowance for doubtful accounts, allowance for
deferred tax assets, fair value of equity instruments. Actual results could differ from those estimates as the current economic environment
has increased the degree of uncertainty inherent in these estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid securities
with original maturities of three months or less when acquired, to be cash equivalents. As of March 31, 2022 and September 30, 2021 the
Company had cash of $593,059 and $9,774, respectively and did not have cash equivalents.
Accounts Receivable
The Company reviews accounts receivable periodically
for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. The Company
records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and considers the
aging of the accounts receivable balances combined with management’s estimate of future potential recoverability. Accounts and receivables
are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowances for
doubtful accounts as of March 31, 2022 and September 30, 2021 are adequate, but actual write-offs could exceed the recorded allowance.
During the year ended March 31, 2022, and September 30, 2021 the balances in the allowance for doubtful accounts was $0.
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 period ended March 31, 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.
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 generate 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 as it is a monthly service.
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.
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.
Net Loss per Share
of Common Stock
The Company
calculates net loss per share in accordance with ASC Topic 260, “Earnings per Share.” Basic loss per share is computed
by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share
of common stock are computed by dividing net earnings by the weighted average number of shares and potential shares outstanding
during the period. Potential shares of common stock consist of shares issuable upon the conversion of outstanding convertible debt,
preferred stock, warrants and stock option. For the periods ended March 31, 2022 and 2021, the common stock equivalents were excluded
from the computation of diluted net loss per share as the result of the computation was anti-dilutive.
For the six months ended March 31, 2022, and 2021,
respectively, the following common stock equivalents were excluded from the computation of diluted net loss per share as the result was
anti-dilutive.
Schedule of antidilutive securities excluded from computation of earnings per share | |
March 31, | |
March 31, |
| |
2022 | |
2021 |
Series A Convertible Preferred Stock | |
| 88,085,681 | | |
| 78,084,333 | |
Convertible notes | |
| — | | |
| 17,207 | |
Warrants | |
| 2,882,793 | | |
| — | |
Stock options | |
| — | | |
| 300,000 | |
| |
| 90,968,474 | | |
| 78,401,540 | |
Recent accounting pronouncements
In August 2020, the FASB
issued ASU 2020-06, ASC Subtopic 470-20 “Debt—Debt with “Conversion and Other Options” and ASC subtopic 815-40
“Hedging—Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible
debt instruments and convertible preferred stock. 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. The amendments in this update are effective for fiscal years beginning
after December 15, 2021, 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 within those fiscal years. On October 1, 2021, the Company adopted
this standard on its consolidated financial statements.
The Company has considered all other recently issued
accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its consolidated financial
statements.
Note 2 – Going Concern
During the six months ended March 31,
2022, the Company had a net loss of $1,092,807 and
did not have sufficient cash on hand to cover expenses for the next twelve (12) months. The reported net cash used in
operating activities of $289,526
in the six months ended March 31, 2022, which is offset by an increase in cash of $802,450
during the period ended March 31, 2022, from financings and $70,361
from the acquisition of a subsidiary. These factors, among others, raise substantial doubt about the entities ability to
continue as a going concern.
Management plans include converting its Convertible
Debt into the Company’s Common Stock in addition to raising equity capital.
The financial statements of the Company do not include
any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities
that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Related Party Transactions
Related Party Convertible Notes Payable
On September 13, 2019, the Company issued a Convertible
Promissory Note to Driveitaway, LLC, a company controlled by John Possumato, the Company’s CEO, for $30,000, with a maturity date
of September 13, 2022. On October 13 and October 14, 2020, the Company issued Convertible Promissory Notes to Driveitaway, LLC and
Adam Potash, the Company’s COO, for $25,000 each, which mature on October 13 and 14, 2022, respectively. On December 24, 2020,
the Company issued a Convertible Promissory Note to Adam Potash, for $15,000, which matures on December 24, 2022. Each of the notes
bear interest at a rate of 6% per annum. The notes automatically convert into preferred stock of DIA in the event DIA raises
at least $1,000,000 by the issuance of preferred stock prior to the maturity dates of the notes (a “Qualified Financing”).
In the event DIA enters into a financing that is not a Qualified Financing prior to the maturity dates of the notes, the holders have
the right to convert their notes into the class and series of equity securities offered in the non-Qualified Financing at the offer price
thereof. In the event DIA effects a change of control, the holders have the option of converting their notes into common stock in order
to participate in the change of control or accelerating the maturity date and receiving cash at the time of the change of control.
During the six months ended March 31, 2022 and 2021,
the Company recorded interest expense of $2,296 and $2,522, respectively.
At the closing of the Share Exchange on February 24,
2022, the holders of the related party Convertible Promissory Notes agreed to convert all of the principal and interest of $104,564 due
under the notes into 52,284 shares of DIA common stock, which was automatically converted into 52,284 shares of Series A Preferred (see
Note 6).
Note 4 – Goodwill
The following table summarizes the consideration paid
for DriveItAway Holdings, Inc and the amounts of the assets acquired and liabilities assumed at the acquisition date of February 24, 2022:
Schedule of assets acquired and liabilities assumed | |
| | |
Consideration: | |
|
Convertible
Preferred A stock | |
$ | 1,720,867 | |
| |
| | |
Assets
acquired and liabilities assumed: | |
| | |
Cash | |
| 70,361 | |
Note
receivable | |
| 100,000 | |
Accounts
payable and accrued liabilities | |
| (6,600 | ) |
Total
Goodwill | |
$ | 1,557,106 | |
Note 5 - Note receivable
A note receivable of $100,000 was issued to DriveItAway
Holdings in consideration for the sale of certain subsidiaries as a part of recapitalization. The note receivable is unsecured, due on
April 20, 2022 and bears interest at 15% per annum, provided that the payor has the right to satisfy the note in full by the return of
500,000 shares of the Company’s common stock for cancellation.
Note 6 – Equity
Authorized
On April 18, 2022, the Company filed Amended and Restated
Articles of Incorporation (the “Amended and Restated Articles”) with the Secretary of State of the State of Delaware to authorize
one billion (1,000,000,000) shares of common stock having a par value of $0.0001 per share, and ten million (10,000,000) shares of preferred
stock having a par value of $0.0001 per share. All or any part of the capital stock may be issued by the Corporation from time to time
and for such consideration and on such terms as may be determined and fixed by the Board of Directors, without action of the stockholders,
as provided by law, unless the Board of Directors deems it advisable to obtain the advice of the stockholders.
Series A Preferred Stock
The Company has authorized one series of preferred
stock, which is known as the Series A Convertible Preferred Stock (the “Series A Preferred”). The Board has
authorized the issuance of 5,000,000 shares of Series A Preferred. The Series A Preferred Stock has the following rights and preferences:
Dividends: The Series A Preferred Stock
is entitled to receive non-cumulative dividends equal to the amount of dividends that the holder of such share would have received if
such share of Series A Preferred Stock were converted into shares of Common Stock immediately prior to the record date of the dividend
declared on the Common Stock.
Liquidation Preference: The Series A
Preferred Stock is entitled to receive, prior to any distribution to any junior class of securities, an amount equal to $0.01 per share
as a liquidation preference before any distribution may be made to the holders of any junior security, including the Common Stock.
Voting Rights: Each holder of Series
A Preferred Stock shall vote with holders of the Common Stock upon any matter submitted to a vote of shareholders, in which event it shall
have the number of votes equal to the number of shares of Common Stock into which such share of Series A Preferred Stock would be convertible
on the record date for the vote or consent of shareholders. Each holder of Series A Preferred Stock shall also be entitled to one vote
per share on each submitted to a class vote of the holders of Series A Preferred Stock.
Voluntary
Conversion Rights: Each
share of Series A Preferred Stock is convertible into 33.94971 shares of Common Stock at the option of the holder thereof.
Mandatory
Conversion Right: The Company has the right to convert each share of Series A Preferred Stock into 33.94971 shares of Common Stock
at any time that there are less than 200,000 shares of Series A Preferred Stock outstanding.
During the six months ended March 31, 2021,
the Company issued 300,000 shares of DIA common stock which was automatically converted into 300,000 shares of Series A Preferred
at the closing of the Share Exchange on February 24, 2022. The shares were issued to a consulting firm pursuant to one year consulting
agreement and valued at $692,308. Stock-based compensation expense related to this issuance for the six months ended March 31,
2022 and 2021 was $288,461 and $57,693, respectively, and is included in general and administrative expense.
During the six months ended March 31, 2022, the Company
issued 294,593 shares of DIA common stock which was automatically converted into 294,593 shares of Series A Preferred at the closing of
the Share Exchange on February 24, 2022. The preferred stock is reflected retroactively for all periods presented.
| · | 52,284 shares issued for conversion
of debt – related party and accrued interest of $104,564 |
| · | 129,809 shares issued for conversion
of debt and accrued interest of $288,458 |
| · | 112,500 shares issued for exercise
of stock option - related party as stock-based compensation to related parties |
As of March 31, 2022 and September 30, 2021, the Company
had 2,594,593 and 2,300,000 shares of Series A Preferred stock outstanding, respectively.
Common Stock Issuances
On February 24, 2022, the Company recognized
the equity of DIA Holdings as part of the reorganization which resulted in the Company recognizing the issuance of 13,716,041 shares
of common stock and 15,100 shares of treasury stock,at a value of $1,720,867 (see Note 4).
On February 24, 2022, the Company issued 4,000,000
shares of common stock valued at $316,324 for commitment fees in conjunction with the issuance of promissory note of $750,000 (see Note
8).
As of March 31, 2022 and September 30, 2021, the Company
had 17,716,041 and 0 common shares issued, respectively.
Treasury stock
The Company
records treasury stock at cost. Treasury stock is comprised of shares of common stock purchased by the Company in the secondary market.
As of March 31, 2022 and September 30, 2021, the Company had 15,100 and 0 shares of treasury stock, respectively.
Stock Options
On June 12, 2020, DIA’s Board of Directors and
its shareholders approved its 2020 Equity Compensation Plan (“Equity Plan”). The Equity Plan permits DIA to issue awards or
options to the employees, directors, consultants and advisors who provide services to the Company or a subsidiary. Pursuant to the Equity
Plan, 400,000 shares of DIA’s common stock were reserved for issuance. The Equity Plan allows DIA’s board or a committee of
the board to issue grants of incentive stock options, nonqualified stock options, stock awards, stock units, stock appreciation rights
and other equity-based awards.
As of December 31, 2021, DIA had 300,000 stock options
outstanding under the Equity Plan to Messrs. Possumato, CEO, and Potash, COO in equal amounts, of which 112,500 had vested as of December
31, 2021. At the closing of the Share Exchange, Messrs. Possumato and Potash each agreed to exercise the 56,250 vested stock
options issued to them, which was the number of stock options which had vested as of the date the Share Exchange Agreement was executed.
The options were converted into 112,500 shares of DIA common stock, which was automatically converted into 112,500 shares of Series A
Preferred. The balance of the stock options issued to Messrs. Possumato and Potash were cancelled. The stock options had an exercise price
of $0.75 per share. In lieu of paying the exercise price in cash, the exercise price was recorded as compensation expense of $42,188 to
each of Messrs. Possumato and Potash.
Also, at the closing of the Share Exchange, DIA’s
board cancelled the Equity Plan and all outstanding options were cancelled. Accordingly, as of March 31, 2022 the Company had no options
outstanding.
Warrants
On February 24, 2022, in conjunction with the
issuance of promissory note of $750,000, the Company issued 1,000,000 warrants for $0.30 per share, which were assigned
a value of $28,372, and recorded to additional paid in capital. The warrants expire on February 24, 2027. The warrants were valued
using the Black-Scholes pricing model. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time
to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future,
and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement.
For the six months ended March 31, 2022, the estimated
fair values of the warrants were measured using the following inputs:
Schedule
of assumptions used in valuing the stock options and warrants | |
March 31, |
| |
2022 |
Stock price at time of issuance | |
$ | 0.10 | |
Exercise price | |
$ | 0.30 | |
Expected term | |
| 5 years | |
Expected average volatility | |
| 120 | % |
Expected dividend yield | |
| — | |
Risk-free interest rate | |
| 1.84 | % |
A summary of activity during the six months ended
March 31, 2022 is as follows:
Summary
of common stock warrants activity | |
Warrants | |
Weighted-Average | |
Weighted-Average |
| |
Outstanding | |
Exercise Price | |
Life (years) |
Balance as of October 1, 2021 | |
| — | | |
$ | — | | |
| — | |
Issuance | |
| 1,000,000 | | |
| 0.30 | | |
| 5.00 | |
Warrants assumed in reorganization | |
| 1,882,793 | | |
| 0.29 | | |
| 0.16 | |
Exercised | |
| — | | |
| — | | |
| — | |
Expiry | |
| — | | |
| — | | |
| — | |
Balance as of March 31, 2022 | |
| 2,882,793 | | |
$ | 0.30 | | |
| 1.79 | |
1,882,793 warrants outstanding
in the Company prior to February 24, 2022, reflect the warrants as assumed in the reorganization.
The
intrinsic value of the warrants as of March 31, 2022, is $0.
All of the outstanding warrants are exercisable as of March 31, 2022.
Note 7 – Notes Payable
PPP Loan
On April 28, 2020, the Company was granted a loan
(the “Loan”) from First Bank of the Lake in aggregate amount of $23,750, pursuant to the Paycheck Protection Program (the
“PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The Loan, which was in the form of a
Note dated May 9, 2020 issued by the Company, matures on May 8, 2022 and bears interest at a rate of 1% per annum, payable monthly commencing
on October 23, 2020. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the
Loan may only be used for payroll costs, cost used to continue group health care benefits, mortgage payments, rent, utilities and interest
on other debt obligations incurred before February 15, 2020. The Company used the entire Loan amount for qualifying expenses. Under the
terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.
In December 2021, the PPP Loan of $23,750 and accrued interest of $398 were forgiven and recognized as other income. During the six months
ended March 31, 2022, the Company recorded interest expense of $59.
SBA Loan
On June 3, 2020, the Company entered into a SBA Loan
for $78,500 at a rate of 3.75%. On August 12, 2021 the loan increased to $114,700 and the Company obtained $36,200 on October 8, 2021.
The SBA Loan matures on May 31, 2050. During the six months ended March 31, 2022, the Company recorded interest expense of $2,115 on the
SBA Loan and as of March 31, 2022 the accrued interest on the SBA Loan was $6,018.
Note 8 - Convertible Notes Payable
AJB Capital Investments, LLC Note
Effective February 24, 2022,
Creative Learning Corporation (the “Company”) entered into a Securities Purchase Agreement (the “SPA”)
with AJB Capital Investments, LLC (“AJB”), and issued a Promissory Note in the principal amount of $750,000 (the “AJB
Note”) to AJB in a private transaction for a purchase price of $675,000 (after giving effect to a 10% original issue discount).
In connection with the sale of the AJB Note, the Company also paid certain fees and due diligence costs of AJB and brokerage fees to J.H.
Darbie & Co., a registered broker-dealer. After payment of the fees and costs, the net proceeds to the Company were $641,250, which
will be used for working capital and other general corporate purposes.
The maturity date of the
AJB Note is August 24, 2022, but it may be extended for six months upon the consent of AJB and the Company. The AJB Note bears interest
at 10% per year, and principal and accrued interest is due on the maturity date. The Company may prepay the AJB Note at any time without
penalty.
The note is convertible into Common Stock
of the Company at any time that the note is in default, provided that at no time may the note be convertible into an amount of common
stock that would result in the holder having beneficial ownership of more than 4.99% of the outstanding shares of common stock, as determined
in accordance with Section 13(d) under the Securities Exchange Act of 1934 (the “Exchange Act”). The conversion price
equals the lowest trading price during either the 20 days trading days prior to the date of conversion or the 20 trading days prior to
the date of issuance of the note (which was $0.14 per share). The conversion is subject to reduction in the following situations:
(i) a 10% discount will apply anytime a conversion occurs when the company is not eligible to deliver the shares by DWAC; (ii) a 15% discount
will apply whenever the shares are “chilled” for deposit into the DTC system; (iii) a 15% discount will apply if the Company’s
common stock ceases to be registered under Section 12 of the Exchange Act; (iv) a 15% discount will apply if the note cannot be converted
into free trading shares 181 days after its issue date; (v) in the event any other party has the right to convert debt into Common Stock
at a greater discount to market than under the note, then the holder has the right to utilize such discount in determining the conversion
price; or (vi) if the Company issues any shares of Common Stock for less than the conversion price in effect on the date of issuance,
including any options, warrants or securities convertible into Common Stock at price less than the conversion price, then the conversion
price shall be automatically reduced to the amount of consideration received by the company for such shares, except for any issuance that
is an exempt issuance.
Also pursuant to
the SPA, the Company paid AJB a commitment fee of $800,000,
payable in the form of 4,000,000 unregistered
shares of the Company’s common stock (the “Commitment Fee Shares”). If, after the sixth month
anniversary of closing and before the thirty-sixth month anniversary of closing, AJB has been unable to sell the Commitment
Fee Shares for $800,000,
then the Company may be required to issue additional shares or pay cash in the amount of the shortfall. However, if the
Company pays the AJB Note off on or before its maturity date, then the Company may redeem 2,000,000 of
the Commitment Fee Shares for one dollar and the amount of the commitment fee will be reduced to $400,000.
The Company calculated and recorded a contingent liability for the Commitment Fee Shares, based on the closing stock price on
reporting date. On issuance of the note, the Company valued the 4,000,000 Commitment Fee Shares of common stock at $316,324
and recorded this as additional paid in capital (see Note 6).
Pursuant to the SPA, the Company also issued to AJB common stock purchase warrants (the “warrants”) to
purchase shares of the Company’s common stock for $0.30 per share, which was assigned a value of $28,372 that was
recorded as additional paid in capital. The warrants expire on February 24, 2027. The warrants also include various covenants of
the Company for the benefit of the warrant holder and includes a beneficial ownership limitation on the holder that, in certain
circumstances, may serve to restrict the holder’s right to exercise the warrants.
The
allocation of financing costs, issuance of the Commitment Fee shares, and the warrant to the debt component resulted in a $453,446 debt
discount that is being amortized to interest expense over the term of the AJB Note.
During the six months ended March 31,
2022, the Company recorded interest expense of $7,292,
amortization of debt discount of $87,683,
and a loss on contingency liability of $400,000
for the Commitment Fee Shares. As of March 31, 2022, the contingent liability balance was $400,000 and the debt discount recorded on the
note was $365,763, resulting in a note payable balance of $384,237.
Knightsgate Ventures II, LP Note
On April 1, 2021, DIA borrowed $150,000 in Convertible
Notes from Knightsgate Ventures II, LP, a third-party lender at a rate of 8%. The loan matures on December 31, 2022. During
the year ended September 30, 2021 the Company recorded interest expense of $5,983 on the note and that amount is recorded as accrued
interest as of September 30, 2021.
The Convertible Note automatically converts into preferred
stock of DIA in the event DIA raised at least $2,000,000 by the issuance of preferred stock prior to the maturity date of the Convertible
Note (a “Qualified Financing”), in which case the conversion price is equal to the lesser of (i) 90% of the price paid by
investors in the Qualified Financing or (ii) the price obtained by dividing $6,000,000 by the Company’s fully diluted shares outstanding
immediately prior to conversion (the “Cap Price”). In the event DIA had not entered into a Qualified Financing prior to the
maturity date, the Convertible Note is convertible at the option of the holder into DIA common stock on the Maturity Date at a price per
share equal to the Cap Price. In the event DIA effects a change of control, the holder has the option of converting the Convertible Note
into DIA’s common stock at a price per share equal to the Cap Price or accelerating the maturity date and receiving cash at the
time of the change of control.
During the six months ended March 31, 2022, the Company
recorded interest expense of $4,833.
Individual Investor Notes
During the six months ended March 31, 2022, DIA issued
an aggregate of five convertible notes to five investors, each for $25,000. The notes bear interest at a rate of 8% per annum, mature
on December 31, 2022, and are convertible into DIA’s common stock on the same basis that is described for the Convertible Note issued
to Knightsgate Ventures II, LP on April 1, 2021, as described above. During the six months ended March 31, 2022 the Company recorded interest
expense of $2,641 on the notes.
In March 2022, the holders of all of the convertible
notes issued to unrelated investors agreed to convert their notes of $275,000 and accrued interest of $13,458 into 129,809 shares
of DIA’s common stock, each of which was automatically converted into one share of Series A Preferred of the Company Holdings in
accordance with the Share Exchange Agreement (see Note 6).
Note 9 – Subsequent Events
The Company has evaluated all subsequent events through
the date these financial statements were available to be issued.
On April 20, 2022, holders of 2,464,784 shares of
Series A Preferred agreed to convert their Series A Preferred into common stock, which resulted in the issuance of 83,678,702 shares of
common stock. On the same date, the board of directors approved a resolution to exercise the Company’s right to mandatorily convert
the remaining Series A Preferred into common stock, which resulted in the issuance of an additional 4,406,979 shares of common stock.
As a result of the conversions, the Company does not have outstanding any shares of Series A Preferred.
In May 2022, the payor under a note receivable in
the principal amount of $100,000 satisfied the note in full by returning 500,000 shares of the Company’s common stock for cancellation.
See Note 5.
On June 30,
2022, the Company closed on a transaction with two (2) investors pursuant to respective Subscription Agreements for an aggregate amount
of $250,000,
for five (5) Units. Each Unit, priced at $50,000,
consists of a twenty-four (24) month Secured Promissory Note (the “Note”), at an interest rate of 15%,
which is convertible at $0.20
per share into shares of the Company’s common stock. Each Unit also provides
for warrants issued to the investors subject to a Common Stock Purchase Warrant, issued by the Company, for 25,000
shares of the Company’s common stock at an exercise price of $0.30
per share, exercisable within five (5)
years from the date of issuance. The Notes are secured by a Security Agreement upon an Event of Default.