NOTE 2 –GOING CONCERN AND MANAGEMENT’S LIQUIDITY
PLANS
As of September 30, 2016, the Company
had cash of $126,615 and working capital deficit (current liabilities in excess of current assets) of $2,618,860. During
the nine months ended September 30, 2016, the Company used net cash in operating activities of $2,915,832. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management believes that the Company
does not have sufficient funds to meet its funding requirements.
In October
and November 2016, the Company sold shares of common stock and warrants for gross proceeds of approximately $3,600,000. In
addition, the Company received approximately $407,000 from the exercise of common stock warrants. It is anticipated that the proceeds
from the sale of its common stock and warrants and from the warrant exercise will provide the Company with cash sufficient to
fund operations through August 2017. (See Subsequent Events-Note 11)
The Company's primary source of operating
funds since inception has been cash proceeds from private placements of common stock, proceeds from the exercise of warrants and
options and issuance of notes payable. The Company has experienced net losses and negative cash flows from operations since inception
and expects these conditions to continue for the foreseeable future. The Company has stockholders' deficiencies at September 30,
2016 and will require additional financing to fund future operations.
Management’s plans with regard to
these matters encompass the following actions: 1) obtain funding from new and potentially current investors to alleviate the Company’s
working deficiency, and 2) implement a plan to generate sales. The Company’s continued existence is dependent upon its ability
to translate its user base into sales. However, the outcome of management’s plans cannot be ascertained with any degree
of certainty.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
Accordingly, the accompanying unaudited condensed
interim financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company
as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent
realizable or settlement values. The unaudited condensed interim financial statements do not include any adjustment that
might result from the outcome of this uncertainty.
NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include the recoverability and useful lives of long-lived assets,
the fair value of the Company’s stock, stock-based compensation, fair values relating to derivative liabilities and the
valuation allowance related to deferred tax assets. Actual results may differ from these estimates.
Fair Value of Financial Instruments
Accounting Standards Codification subtopic
825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments.
The carrying value of cash and cash equivalents, accounts payable and accrued liabilities as reflected in the balance sheets,
approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial
liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with
other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where
practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available
information pertinent to fair value has been disclosed.
The Company follows Accounting Standards
Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification
subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial
instruments and certain other items at fair value.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows,
the Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
Accounts Receivable and Allowance for Doubtful
Accounts
The Company monitors outstanding receivables
based on factors surrounding the credit risk of specific customers, historical trends, and other information. The allowance for
doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts receivable.
There is judgment involved with estimating the allowance for doubtful accounts and if the financial condition of the Company’s
customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record
additional allowances or charges against revenues. The Company writes-off accounts receivable against the allowance when it determines
a balance is uncollectible and no longer actively pursues its collection. As of September 30, 2016 and December 31, 2015, based
upon the review of the outstanding accounts receivable, the Company has determined that an allowance for doubtful accounts is
not required.
Property and Equipment
Property and equipment are stated at cost
and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years. When retired or otherwise disposed,
the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any
amount realized from disposition, is reflected in earnings.
Revenue Recognition
The Company recognizes revenue when services
are realized or realizable and earned less estimated future doubtful accounts. The Company considers revenue realized or realizable
and earned when all of the following criteria are met:
|
(i)
|
persuasive
evidence of an arrangement exists,
|
|
(ii)
|
the
services have been rendered and all required milestones achieved,
|
|
(iii)
|
the
sales price is fixed and determinable, and
|
|
(iv)
|
collectability
is reasonably assured.
|
The Company primarily generates revenue by
charging businesses to advertise on the network. The Company has the ability to target advertisements directly to a clients’
target audience, based on their location, on their mobile devices. In cases where clients sign advertising contracts for an extended
period of time, the Company only realizes revenue for services provided during that quarter and defers all other revenue to future
quarters.
The Company’s secondary source of income
is merchandise sales. The objective with the sales is not to generate large profit margins, but to help offset the cost of marketing.
Each t-shirt, sticker and jar the Company sells will likely lead to more downloads and active users.
Cost of Revenue
The Company’s main cost of revenue originates
from its merchandise store, where often times the Company realizes low profit margins and is not the main focus of the Company.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
Income Taxes
The Company follows Accounting Standards
Codification subtopic 740-10, Income Taxes (“ASC 740-10”) for recording the provision for income taxes. Deferred tax
assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.
Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period. If available evidence
suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes
in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes
may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes
in different periods.
Convertible Instruments
U.S. GAAP requires companies to bifurcate
conversion options from their host instruments and account for them as free standing derivative financial instruments according
to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid
instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under
otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and
(c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable
ASC 480-10.
When the Company has determined that the embedded
conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible
notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value
of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the
note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
Derivative Financial Instruments
The Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement
or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the
Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including
a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or
(ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
The Company assesses classification of its common stock purchase warrants and other free standing derivatives at each reporting
date to determine whether a change in classification between assets and liabilities is required.
The Company’s free standing derivatives
consisted of warrants to purchase common stock that were issued in connection with the issuance of debt and of embedded conversion
options with convertible debentures. The Company evaluated these derivatives to assess their proper classification in the balance
sheet as of September 30, 2016 using the applicable classification criteria enumerated under ASC 815-Derivatives and Hedging.
The Company determined that certain embedded conversion and/or exercise features do not contain fixed settlement provisions. The
convertible debentures contain a conversion feature such that the Company could not ensure it would have adequate authorized shares
to meet all possible conversion demands.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
As such, the Company was required to record
the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value
at the end of each reporting period.
Stock Based Compensation
The Company measures the cost of services
received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the
fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured
on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized
over the period during which services are required to be provided in exchange for the award, usually the vesting period.
Net Earnings (Loss) Per Common Share
The Company computes earnings (loss) per share
under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”). Net loss per common share
is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted
earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially
dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The computation of basic and diluted income
(loss) per share as of September 30, 2016 and 2015 excludes potentially dilutive securities when their inclusion would be anti-dilutive,
or if their exercise prices were greater than the average market price of the common stock during the period.
Potentially dilutive securities excluded
from the computation of basic and diluted net loss per share are as follows:
|
|
September
30,
2016
|
|
Common stock issuable upon
conversion of convertible debt
|
|
|
2,744,432
|
|
Options to purchase common stock
|
|
|
5,569,883
|
|
Warrants to purchase
common stock
|
|
|
14,079,715
|
|
Totals
|
|
|
22,394,030
|
|
Reclassification
Certain reclassifications have been made to
the prior years’ data to conform to the current year presentation. These reclassifications had no effect on reported income
(losses).
Recent Accounting Pronouncements
There are various updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to have a material impact on the Company's financial position, results of operations or cash flows.
Subsequent Events
The Company evaluates events that have occurred
after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did
not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed
financial statements, except as disclosed.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2016 and December
31, 2015 is summarized as follows:
|
|
September
30,
2016
|
|
|
December
31,
2015
|
|
Computers
|
|
$
|
69,116
|
|
|
$
|
58,121
|
|
Office equipment
|
|
|
35,209
|
|
|
|
27,083
|
|
Subtotal
|
|
|
104,325
|
|
|
|
85,224
|
|
Less accumulated
depreciation
|
|
|
(26,426
|
)
|
|
|
(12,201
|
)
|
Property and equipment, net
|
|
$
|
77,899
|
|
|
$
|
73,023
|
|
Depreciation expense for the nine months ended
September 30, 2016 and 2015 was $14,224 and $6,658, respectively.
NOTE 5 – CONVERTIBLE NOTES PAYABLE
On March 24, 2014, the Company issued convertible
debentures to certain accredited investors. The total principal amount of the debentures is $269,100 and originally matured on
March 24, 2016 with a zero percent interest rate. The debentures are convertible into shares of the Company’s common stock
at $0.10 per share. In March 2016, the debentures were amended to extend the maturity date to March 24, 2018. As of September
30, 2016 and December 31, 2015, the aggregate carrying value of the debentures was $209,100, net of debt discounts of $0.
In February 2016, the Company issued to a service provider a
12 month convertible debenture at 15% interest with a principal amount of $35,000 along with 35,000 3-year warrants to
purchase shares of common stock at $1.00 per share. The convertible debenture is payable at maturity, and convertible at the
investor’s determination at a price equal to 90% of the price of a subsequent public underwritten offering if
one occurs over $5 million, or, if no such subsequent offering occurs, at $0.75 per share. During the nine months ended
September 30, 2016, the Company issued or is obligated to issue an aggregate of 343,767 shares in full settlement of the
debenture obligation.
On March 14, 2016, the Company sold to investors
six (6) month secured convertible original issue discount notes with a principal amount in the aggregate of $1,514,669, together
with five year warrants to purchase an amount of shares of the Company’s common stock equal to the number of shares of common
stock issuable upon the conversion of the notes in full and having an exercise price of $1.00 per share with reset provisions.
If the Company exercises its right to prepay the note, the Company must make payment to the investor of an amount in cash equal
to the sum of the then outstanding principal amount of the note that it desires to prepay, multiplied by (a) 1.2, during the first
ninety (90) days after the execution of the note, or (b) 1.35, at any point thereafter. The notes are convertible into shares
of the Company’s common stock at a price per share equal to the lower of (i) $1.00, and (ii) a 25% discount to the price
at which the Company next conducts an offering after the issuance date of the note; provided, however, for any part of the principal
amount of the note that is not paid at its maturity date, September 14, 2016, the conversion price for such amount is equal to
65% of the average of the three trading days with the lowest daily weighted average prices of the Company’s common stock
occurring during the fifteen days prior to the notes’ maturity date, September 14, 2016. The notes require that any net
proceeds received in subsequent offerings made by the Company first be used to repay the notes’ outstanding principal amount.
Because the note was not repaid by the maturity date, the investors became entitled to receive, in aggregate, but calculated pro
rata to the principal amounts remaining outstanding at the time of maturity, up to five hundred thousand (500,000) shares of the
Company’s common stock. Gross proceeds received by the Company for the notes and warrants in this offering was $1,420,000,
while net proceeds were $1,271,600 (excluding any legal fees). On September 14, 2016, upon maturity of the notes, the Company
was unable to make the required payment of the then outstanding aggregate principal amount of $966,384 and was in default under
the notes. Penalties in aggregate of $584,735 were added to the carrying amount of the notes and were charged to current period
interest.
During the nine months ended September 30,
2016, the Company paid an aggregate of $1,026,800 cash and issued 929,805 shares of its common stock upon conversion of $305,000
of the debenture obligation. In addition, the Company issued an aggregate of 304,523 shares of its common stock as penalty shares
valued at $163,621 and was charged to current period interest.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
As of September 30, 2016 and December 31,
2015, the aggregate carrying value of the notes were $979,494.
The Company’s convertible debt is summarized
as follows as of September 30, 2016 and December 31, 2015:
|
|
September
30,
2016
|
|
|
December
31,
2015
|
|
Note payable dated March
24, 2014
|
|
$
|
209,100
|
|
|
$
|
209,100
|
|
Secured convertible
debentures dated March 17, 2016
|
|
|
767,604
|
|
|
|
-
|
|
Subtotal
|
|
|
976,704
|
|
|
|
209,100
|
|
Less: current
portion
|
|
|
(767,604
|
)
|
|
|
-
|
|
Long term portion
|
|
$
|
209,100
|
|
|
$
|
209,100
|
|
NOTE 6 – DERIVATIVE LIABILITIES AND FAIR VALUE
MEASUREMENTS
The Company identified conversion features
embedded within convertible debt and warrants outstanding for the nine months ended September 30, 2016 and the year ending December
31, 2015. The Company has determined that the features associated with the embedded conversion option and exercise prices, in
the form of ratchet provisions, should be accounted for at fair value, as a derivative liability, as the Company cannot determine
if a sufficient number of shares would be available to settle all potential future conversion transactions.
During the third quarter of 2015, the Company
and the convertible debt note and warrant holders agreed to amend terms of the agreements to remove the ratchet provisions. Accordingly,
the Company reclassified the derivative liability to equity classification resulting in an increase to additional paid in capital
by $3,336,109.
During the fourth quarter of 2015, the Company
and the holders of warrants previously issued as part of our offering from September 2014 to March 2015 with an exercise price
of $1.00 per share and all other warrants agreed to amend the warrants to remove the ratchet provision in exchange for a warrant
for an additional 20% of their original warrant shares at $1.06 per share. This reduced the Company’s derivative liability
by $1,155,199 and increased additional paid in capital by $761,426.
On March 17, 2016, upon issuance of the secured
convertible debentures (see Note 5), the Company has determined that the features associated with the embedded conversion option
and reset provisions embedded in the issued warrants, in the form of a ratchet provision, should be accounted for at fair value,
as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential
future conversion transactions. At the date of inception, the Company estimated the fair value of the embedded derivatives of
$1,769,121 using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected
volatility of 112.29%, (3) weighted average risk-free interest rate of 0.47% to 1.04% (4) expected life of 0.05 to 5.00 years,
and (5) estimated fair value of the Company's common stock of $1.04 per share. The estimated fair value of the embedded derivative
of $1,769,121 was charged to debt discount up to the net proceeds of $1,420,000 and amortized over the term of the debenture with
the excess charged to current period interest.
On September 14, 2016, upon the maturity of
certain secured convertible debentures (see Note 5), the embedded conversion terms changed. As such, the Company estimated the
fair value of the change in the embedded derivative of $951,254 using the Binomial Option Pricing Model based on the following
assumptions: (1) dividend yield of 0%, (2) expected volatility of 106.24%, (3) weighted average risk-free interest rate of 0.30%,
(4) expected life of 3 months, and (5) estimated fair value of the Company's common stock of $0.51 per share. The estimated
fair value of the embedded derivative of $951,254 was charged to current period interest.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
On September 30, 2016, the Company estimated
the fair value of the embedded derivatives of $1,288,302 using the Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%, (2) expected volatility of 107.61%, (3) weighted average risk-free interest rate of 0.29% to 1.14%,
(4) expected life of 0.25 to 4.46 year, and (5) estimated fair value of the Company's common stock of $0.402 per share.
The Company adopted the provisions of Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”). ASC 825-10 defines fair value as the
price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions
that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk
of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may
be used to measure fair value:
Level 1 – Quoted prices in active markets
for identical assets or liabilities.
Level 2 – Observable inputs other than
Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived
principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs to the
valuation methodology that are significant to the measurement of fair value of assets or liabilities.
All items required to be recorded or measured
on a recurring basis are based upon Level 3 inputs.
To the extent that valuation is based on models
or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain
cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure
purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on
the lowest level input that is significant to the fair value measurement.
The Company recognizes its derivative liabilities
as Level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods
are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions
to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting
date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility
and market price of the underlying common stock of the Company.
As of September 30, 2016 and December 31,
2015, the Company did not have any derivative instruments that were designated as hedges.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
Items recorded or measured at fair value on
a recurring basis in the accompanying financial statements consisted of the following items as of September 30, 2016:
|
September
30,
2015
|
|
Quoted
Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Derivative liability
|
$
|
1,288,302
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,288,302
|
The following table provides a summary of
changes in fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2016:
Balance, December 31, 2015
|
|
$
|
—
|
|
Transfers
in to Level 3:
|
|
|
2,720,375
|
|
Transfers out due to
conversions and payoffs
|
|
|
(111,419
|
)
|
Mark
to market to September 30, 2016
|
|
|
(1,320,654
|
)
|
Balance, September 30, 2016
|
|
$
|
1,288,302
|
|
Gain on change in warrant
and derivative liabilities for the nine months ended September 30, 2016
|
|
$
|
1,320,654
|
|
Fluctuations in the Company’s stock
price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price decreases
for each of the related derivative instruments, the value to the holder of the instrument generally decreases, therefore decreasing
the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable
inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these
liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally
result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would
not result in a material change in our Level 3 fair value.
NOTE 7 – CAPITAL STOCK
The Company is currently authorized to issue
200,000,000 shares of its common stock at $0.001 par value per share. As of December 31, 2015, there were 46,939,965 shares of
common stock issued and outstanding and 624,000 shares of common stock to be issued. As of September 30, 2016, there were 54,010,150
shares of common stock issued and outstanding and 790,374 shares of common stock to be issued.
T
he Company
is currently authorized to issue 21 Series A preferred shares at $1.00 par value per share with 1:1 conversion and voting rights.
As of September 30, 2016, there were no shares of Series A preferred shares issued and outstanding.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The following common stock transactions were
recorded during the nine months ended September 30, 2016:
The Company issued an aggregate of 624,000
shares of its common stock which was previously classified as shares to be issued as of December 31, 2015.
The Company issued an aggregate of 611,675
shares of its common stock for services rendered and recorded another 25,000 shares to be issued for services rendered at an average
stock price of $0.74 per share.
The Company issued an aggregate of 5,277 shares
of its common stock for the cashless exercise of a stock warrant.
The Company issued an aggregate of 1,505,734
shares of its common stock for the cash exercise of stock warrants.
The Company issued an aggregate of 264,158
shares of its common stock for the cashless exercises of stock options.
The Company issued an aggregate of 210,000
shares of its common stock for the cash exercise of stock options.
The Company issued an aggregate of 2,881,002
shares of its common stock and is obligated to issue an additional 440,000 shares of its common stock and warrants for net sales
proceeds of $1,660,500.
The Company issued an aggregate of 663,816
shares of its common stock and is obligated to issue an additional 350,374 shares of its common stock in settlement of $305,000
secured convertible debentures (see Note 5).
The Company issued an aggregate of 304,523
shares of its common stock in payment of penalties relating to secured convertible debentures of $163,621 (see Note 5).
NOTE 8 – WARRANTS
In January 2016, the Company issued warrants
to purchase 100,000 shares of common stock at $0.83 per share to certain service providers, valued at $68,369.
In February 2016, the Company issued warrants
to purchase 35,000 shares of common stock at $1.00 per share to a service provider, valued at $24,301.
On March 24, 2016, in connection with the
issuance of convertible notes, the Company granted to the same investors five year warrants to purchase an aggregate of 1,514,669
shares of the Company’s common stock at $1.00 per share. The warrants may be exercised any time after the issuance through
and including the fifth (5
th
) anniversary of its original issuance. The warrants have a fair market value of $910,596.
The fair market value was calculated using the Binomial Option Pricing Model, assuming approximately 0% risk-free interest, 0%
dividend yield, 112.3% volatility, and expected life of 5 years.
In August and September 2016, the Company issued an aggregate of
3,385,002 warrants to purchase the Company’s common stock at $0.90 per share, exercisable for 3 years in connection with
the sale of common stock.
In August 2016, upon the sale of the Company’s
common stock, the Company issued an additional 1,514,669 warrants to purchase the Company’s common stock at $0.50 per share,
exercisable through March 14, 2021. The exercise price of the previously issued 1,514,669 warrants issued in connection with the
debt was reset from $1.00 per share to $0.50
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
Warrants outstanding and exercisable on September
30, 2016 are as follows:
Warrants
Outstanding
|
|
Warrants
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Exercisable
|
|
Exercise
|
|
Number
of
|
|
Remaining
Life
|
|
Number
of
|
|
Price
|
|
Warrants
|
|
In
Years
|
|
Warrants
|
|
$
|
0.001
|
|
|
|
3,963,659
|
|
|
|
0.81
|
|
|
|
3,963,659
|
|
|
0.40
|
|
|
|
1,927,041
|
|
|
|
0.48
|
|
|
|
1,927,041
|
|
|
0.50
|
|
|
|
3,129,338
|
|
|
|
4.42
|
|
|
|
3,129,338
|
|
|
0.60
|
|
|
|
50,000
|
|
|
|
3.52
|
|
|
|
50,000
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
4.30
|
|
|
|
100,000
|
|
|
0.90
|
|
|
|
3,560,002
|
|
|
|
2.95
|
|
|
|
3,560,002
|
|
|
1.00
|
|
|
|
796,000
|
|
|
|
1.18
|
|
|
|
796,000
|
|
|
1.06
|
|
|
|
146,200
|
|
|
|
2.23
|
|
|
|
146,200
|
|
|
3.00
|
|
|
|
407,475
|
|
|
|
2.11
|
|
|
|
407,475
|
|
|
|
|
|
|
14,079,715
|
|
|
|
2.20
|
|
|
|
14,079,715
|
|
A summary of the warrant activity for the nine months
ended September 30, 2016 is as follows:
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1,
2016
|
|
|
9,018,609
|
|
|
$
|
0.42
|
|
|
|
2.26
|
|
|
|
6,857,509
|
|
Grants
|
|
|
6,549,340
|
|
|
|
0.71
|
|
|
|
3.95
|
|
|
|
-
|
|
Exercised
|
|
|
(1,488,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
14,079,715
|
|
|
$
|
0.56
|
|
|
|
2.20
|
|
|
$
|
1,593,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30,
2016
|
|
|
14,079,715
|
|
|
$
|
2.00
|
|
|
|
2.3
|
|
|
$
|
1,593,281
|
|
Exercisable at September 30, 2016
|
|
|
14,079,715
|
|
|
$
|
2.00
|
|
|
|
2.3
|
|
|
$
|
1,593,281
|
|
The aggregate intrinsic value outstanding
stock warrants was $1,593,281, based on warrants with an exercise price less than the Company’s stock price of $0.402 as
of September 30, 2016, which would have been received by the warrant holders had those warrant holders exercised their warrants
as of that date.
During the nine months ended September 30,
2016, the Company issued 100,000 warrants to purchase the Company’s common stock at $0.83 per share, exercisable for five
years for services rendered. The estimated fair value of $68,369 was charged to current period operations. The fair market
value was calculated using the Black Scholes Option Pricing Model, assuming approximately 1.46% risk-free interest, 0% dividend
yield, 119.14% volatility, and expected life of 5 years.
During the nine months ended September 30,
2016, the Company issued an aggregate of 1,549,669 warrants to purchase the Company’s common stock at $1.00 per share, exercisable
for five years in connection with the issuance of debt (see Note 5). As a result of certain reset provisions, an additional 1,514,669
warrants were required to be issued and, along with 1,514,669 previously issued warrants, all were reset to an exercise price
of $0.50 per share.
During the nine months ended September 30,
2016, the Company issued an aggregate of 3,385,002 warrants to purchase the Company’s common stock at $0.90 per share, exercisable
for three years.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
NOTE 9 – EMPLOYEE EQUITY INCENTIVE PLANS
During the nine months ended September 30,
2016, the Company granted options to purchase 691,250 shares at an average of $0.96 per share to 12 employees and consultants
of the Company under the Company’s 2015 equity incentive plan, with most vesting monthly over the course of one year. The
fair market value of the options is $1,330,984.
Stock options outstanding and exercisable
on September 30, 2016 are as follows:
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Exercisable
|
|
Exercise
|
|
Number
of
|
|
Remaining
Life
|
|
Number
of
|
|
Price
|
|
Options
|
|
In
Years
|
|
Options
|
|
$
|
0.10
|
|
|
|
1,500,000
|
|
|
|
7.68
|
|
|
|
875,000
|
|
|
0.50
|
|
|
|
628,220
|
|
|
|
8.33
|
|
|
|
614,880
|
|
|
0.60
|
|
|
|
105,000
|
|
|
|
8.53
|
|
|
|
105,000
|
|
|
0.80
|
|
|
|
145,000
|
|
|
|
9.30
|
|
|
|
136,652
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
9.30
|
|
|
|
0
|
|
|
0.90
|
|
|
|
1,860,413
|
|
|
|
9.20
|
|
|
|
1,761,564
|
|
|
1.00
|
|
|
|
850,000
|
|
|
|
9.22
|
|
|
|
37,494
|
|
|
1.05
|
|
|
|
381,250
|
|
|
|
9.48
|
|
|
|
379,136
|
|
|
|
|
|
|
5,569,883
|
|
|
|
8.71
|
|
|
|
3,909,726
|
|
A summary of the stock option activity
for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1,
2016
|
|
|
5,625,000
|
|
|
$
|
0.59
|
|
|
|
9.30
|
|
|
$
|
6,044,500
|
|
Grants
|
|
|
691,250
|
|
|
|
0.97
|
|
|
|
9.70
|
|
|
|
-
|
|
Exercised
|
|
|
(636,780
|
)
|
|
|
0.50
|
|
|
|
8.80
|
|
|
|
|
|
Forfeiture/Canceled
|
|
|
(109,587
|
)
|
|
$
|
0.50
|
|
|
|
8.80
|
|
|
|
-
|
|
Outstanding at September 30, 2016
|
|
|
5,569,883
|
|
|
$
|
0.66
|
|
|
|
8.71
|
|
|
$
|
453,000
|
|
Exercisable at September 30, 2016
|
|
|
3,909,726
|
|
|
$
|
0.66
|
|
|
|
8.74
|
|
|
$
|
264,250
|
|
The aggregate intrinsic value of outstanding
stock options was based on options with an exercise price less than the Company’s stock price of $0.402 as of September
30, 2016, which would have been received by the option holders had those option holders exercised their options as of that date.
Option valuation models require the input
of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model
with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data exists
to estimate the volatility using the Company’s own historical stock prices. Management determined this assumption to
be a more accurate indicator of value. The Company accounts for the expected life of options based on the contractual life of
options for non-employees.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The fair value of the granted options for
the nine months ended September 30, 2016 was determined using the Black Scholes option pricing model with the following assumptions:
|
September
30,
2016
|
|
Risk-free interest rate
|
|
|
1.75%
- 2.10
|
%
|
Dividend yield
|
|
|
0
|
%
|
Stock price volatility
|
|
|
111.89% to 119.16
|
%
|
Expected life
|
10 years
|
|
Weighted average grant date fair value
|
|
$
|
$0.80 to $1.05
|
|
The fair value of all options vesting
during the three and nine months ended September 30, 2016 of $643,726 and $1,974,710, respectively, and during the three and nine
months ended September 30, 2015 of $159,809 and $473,380, respectively, was charged to current period operations. Unrecognized
compensation expense of $717,107 at September 30, 2016 will be expensed in future periods.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Operating leases
On April 14, 2015, the Company completed the
relocation of its headquarters to 1624 Market Street, Suite 201, Denver, CO 80202 which we leased on March 20, 2015 pursuant to
a lease agreement with RVOF Market Center, LLC (“201 Lease”). Under the 201 Lease, we agreed to rent 3,552 square
feet of office space at that location for a term of 37 months, under which the Company will pay a base rate of $0 for the first
month, $8,288 for months two through 13, $8,584 for months 14 through 25, and $8,880 for months 26 through 37. We did not incur
a significant cost related to the move to this location.
The Company amended this lease in January
2016 to include Suite 203, also located at 1624 Market Street in Denver, CO 80202, which allows us to expand our headquarters
by an additional 1,508 square feet of office space. For this expansion (and in addition to the rent paid under the 201 Lease),
we will pay $0 until May 30, 2016, $3,644 for each month from June 1, 2016 to May 30, 2017, $3,770 for each month from June 1,
2017 to May 30, 2018, and $3,896 for each month from June 1, 2018 to November 30, 2018.
Rent expense charged to operations, which
differs from rent paid due to rent credits and to increasing amounts of base rent, is calculated by allocating total rental payments
on a straight-line basis over the term of the lease. During the nine months ended September 30, 2016, rent expense was $100,630.
NOTE 11 – SUBSEQUENT EVENTS
From October 1, 2016 to October 21, 2016,
the Company completed it registered direct offering to certain investors pursuant to which we raised an aggregate in $3,559,499
in gross proceeds from the sale of shares of the Company’s common stock, together with warrants, with one warrant entitling
the holder to purchase one share of common stock at a price equal to $0.90 per share. The purchase price paid by the investors
was $0.50 for one share of common stock and one warrant. The warrants are immediately exercisable and expire three years from
the date of issuance. The shares of common stock and warrants are immediately separable and are issued separately. This offering
was closed on October 21, 2016.
MASSROOTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
A total of 10,000,000 shares of common stock
and warrants to purchase a total of 10,000,000 shares of common stock were sold in the offering and have been or will be issued
pursuant to the Company’s Prospectus dated August 12, 2016, as amended, on August 19, 2016 and October 5, 2016,
of which 7,131,448 shares were issued subsequent to September 30, 2016.
From October 1 to November 9, 2016, the
Company issued 790,374 shares recorded as to be issued as of September 30, 2016; received exercises for 450,000 shares of the
Company’s $0.90 warrants for cash proceeds to the Company of $405,000; received exercises for 2,963,659 shares of the Company’s
$0.001 warrants for cash proceeds to the Company of $2,963; received conversions under the Company’s March 2016 convertible
debentures for 1,434,413 shares; received exercises for 1,140,000 shares of the Company’s $0.50 warrants for cash proceeds
to the Company of $0 with total shares issued of 614,893 shares; and 500,000 shares for received conversions for $50,000 in convertible
debt at $0.10 per share.
The Company had 585,476 shares recorded as to be issued on
November 9, 2016.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and
analysis in conjunction with our unaudited financial statements and related notes contained in Part I, Item 1 of this Quarterly
Report. Please also refer to the Note About Forward Looking Statements for information on such statements contained in this Quarterly
Report immediately preceding Item 1.
Overview
MassRoots, Inc. is a Delaware corporation
formed on April 24, 2013. Our principal place of business is located at 1624 Market Street, Suite 201, Denver, CO 80202, our telephone
number is (720) 442-0052 and our corporate website is www.MassRoots.com/Investors. The information on our website, mobile apps,
and blog is not a part of this Quarterly Report on Form 10-Q.
As discussed in the Notes to the Financial
Statements, the Company has experienced recurring losses and negative cash flows from operations since inception. We have relied
on equity financing to fund operations. There can be no guarantee that we will ever become profitable, or that adequate additional
financing will be realized in the future or otherwise may not be available to us on acceptable terms, or at all. If we are unable
to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our development efforts.
We will need to generate significant revenues to achieve profitability and we may never do so. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. We have been implementing our strategic plan, as set forth
below, on which we believe we will be able to continue operations and become profitable in the future.
Revamped MassRoots for Business Portal
We originally introduced MassRoots for Business
in early 2015 as an online portal for businesses to schedule posts and view analytics; while useful for businesses, it did not
have the features or capacity to scale to millions of dollars in revenue. Simultaneously with our migration from Parse, MassRoots
began developing a new business portal directly on Amazon Web Services that took into account the feedback and research we received
from over 2,500 cannabis-related businesses over the past year.
When fully developed, the revamped MassRoots
for Business portal will consolidate many online marketing functions for cannabis-related businesses in one central platform.
We expect businesses will be able to schedule posts on MassRoots, Facebook and Twitter; purchase advertising on both MassRoots
owned-properties as well as third party digital properties; and view actionable, real-time data from MassRoots and third party
sources in easy-to-read formats. We believe this will serve as a solid foundation for future business-related features as we prepare
to integrate dispensary point-of-sale data later this year.
We believe that MassRoots can reach profitability
from its current userbase and web traffic. We are focused on including features in our app and website that they previously lacked,
including the ability to connect users with the dispensaries and products for which they are looking. We believe that our dispensary
finder is a solid first step in fixing this deficiency and product pages with live menu pricing will mostly resolve the problem
by the end of Q4 2016. MassRoots’ management believes it can get the Company to cash-flow positive on a monthly basis by
the end of 2016.
Continued Focus on Search Engine Optimization
There are currently tens of millions of Google
searches every month for cannabis-related terms and questions – consumers, voters, activists and government officials looking
for high-quality, reliable information on cannabis. Since launching MassRoots’ web platform in December 2015, we have been
able to generate over 2 million page views from hundreds of thousands of unique visitors by indexing the content on our network
and integrating our blog; however, this is only a fraction of the total searches that occurred during the same timeframe. In order
to expand our market share of search results and web traffic, we intend to expand the functionality and content of MassRoots’
discover page to better connect consumers with the information for which they are looking.
Expense Reductions
From July to September 2016, the Company eliminated
$150,000 in monthly expenses by terminating relationships with certain vendors, reducing headcount from 33 to 24 full-time employees,
cutting executive salaries, and utilizing new technological tools to achieve better results with fewer resources. As many of these
contracts and agreements had 30, 60 or 90-day termination clauses, we expect these expense reductions not to be fully reflected
until the fourth quarter of 2016. Reductions in staff were concentrated on the content, account services, and sales teams, while
the team focused on our core product – development – remains fully intact. Even as MassRoots continues to scale its
user base and revenues, we do not expect a significant increase in the size of our team as we plan to automate as many processes
as possible in a self-service platform for our clients. Like other leaders in the technology field, our plan is to scale through
automation and technology, not by increasing our staff and overhead. We believe these expense reductions could result in significant
savings for the Company, currently estimated to be approximately $1,300,000 annually. MassRoots’ management will continue
to review for unnecessary expenses on a weekly basis and believes the Company can reach cash-flow positive on a monthly basis
by the end of 2016.
The Team
MassRoots has 24 full-time employees working
out of headquarters in downtown Denver, Colorado. The majority of these employees are engineers focused on developing new features
for the MassRoots platform. We believe that over the long run, a small, talented and close knit team will outperform larger teams.
We believe we have found talented individuals at every level – sales representatives who outperform expectations; managers
who make architectural decisions that will prevent costly and time-consuming blunders; and engineers developing new features that
have the potential to provide significant long term returns.
One of MassRoots’ top priorities in
2016 has been recruiting and retaining some of the top talent in the cannabis and technology industries. In June 2016, we hired
Lance Galey as MassRoots’ Chief Technology Officer. Previously, Mr. Galey served as Chief Software Architect of Cloud Services
for Autodesk and Vice President and Principle Architect at Salesforce, where he led the architecture and development of numerous
core infrastructure and platform services underlying a large portfolio of Salesforce SaaS applications. In 2013, he
was selected as the executive MVP for the technology division of Salesforce.com.
State and National Brand Business Model
While MassRoots’ consumer-facing network
launched in July 2013, we did not start generating advertising revenue until we crossed a half million users in mid-August 2015.
Our clients have primarily been ancillary businesses marketing their products to cannabis consumers through endorsed posts on
MassRoots, sponsored content on our blog, and mentions in our email newsletter. It is not necessary for a user to join MassRoots
in order for us to generate revenue from them – we are finding that many people will visit our website, join our email newsletter,
or view a dispensary’s profile without registering for our MassRoots network.
While the vast majority of MassRoots’
advertising revenue to date has come from brands within the cannabis industry, we have started to see significant interest from
mainstream brands and advertising agencies looking to market to cannabis consumers. Uber and Fusion, a division of Univision,
became the first mainstream brands to advertise with MassRoots and have opened the doors for other major brands to evaluate the
space. We believe that as the regulated cannabis market continues to expand, mainstream brands and advertising agencies will begin
to allocate portions of multi-million advertising budgets towards outreach to the millions of cannabis consumers in the United
States – especially food, lighter and agricultural brands. We are positioning MassRoots to be one of the first companies
to receive these budget allocations.
Local Store Business Model
We launched a beta version of MassRoots’
dispensary finder on August 8, 2016 and currently have over 175 dispensary locations paying for a basic listing. With the core
functionality now in place, we aim to rapidly iterate and expand on its functionality to include menus with live pricing, product
pages with reviews, and top search result placement for paid advertisers. We believe that each of these features will create new
revenue streams for our business. Other businesses have generated tens of millions in revenue off of such features.
Our Competitive Advantage and Network Effects
We believe network effects serve as the most
powerful form of competitive advantage for consumer-facing networks, including MassRoots. Once a person and their friends join
a consumer or social network, it is unlikely they switch their active usage to another network in the same category. In 2011,
Google+ launched to much fanfare as the “Facebook Killer,” with the resources of Google at its disposal: billions
of dollars in launch and advertising costs, immediate integration with the largest search engine in the world, and the use of
the Google brand. However, it failed to gain traction because Facebook already dominated the market. Similarly, Facebook launched
Poke in 2013 to compete with Snapchat. However, even with arguably more advanced features and Facebook’s backing, Poke failed
to make a dent in Snapchat’s market share and was shuttered shortly after.
Market Share
As of early August 2016, MassRoots had approximately
950,000 users of an estimated 10 million Americans who consume cannabis on a monthly basis according to ArcView Market Research,
a market that we believe will continue to grow as additional states pass laws to regulate and control the sale of cannabis. We
have approximately 2,500 of the estimated 15,000 cannabis-related businesses in America actively posting on our network according
to ArcView Market Research, a market that we believe will continue to grow as additional states pass laws to regulate and control
the sale of cannabis.
2016 Elections
On November 8, 2016, voters in California,
Nevada, Maine and Massachusetts voted to regulate the production and sale of cannabis for recreational purposes while Florida,
North Dakota, Arkansas and Montana voters authorized its medical use. According to ArcView Market Research, these initiatives
will cause the regulated cannabis industry to expand from roughly $6 billion in 2016 to more than $23 billion once these initiatives
take effect.
Our business model is designed to benefit
from this trend. When a new state passes a medical or recreational cannabis law, we are able to start registering users and businesses
in that state with minimal marginal cost. Because MassRoots is not involved in the production or sale of cannabis, we do not have
to build outgrow operations, open retail stores, or have a significant physical presence in the state in order to generate revenue.
At the same time, MassRoots’ financial model is not tied to the success of a particular location or brand – we believe
we will have a significant percentage of all dispensaries and brands on our platform, making MassRoots a play on the industry
as a whole.
Sitting at the intersection of healthcare
on the medical cannabis side and a vice industry on the recreational cannabis side, we believe the cannabis industry can continue
to grow in any economic climate.
Competition
We do not believe we face any significant
competition as a social platform for the cannabis community; there are no other companies with more than 100,000 users or significant
capital. However, as more of our localized advertising features come online through the rest of 2016, we have begun to actively
compete with dispensary locators and strain guides, such as WeedMaps and Leafly, for dispensaries' advertising budgets.
Results of Operations
|
Three
months ended September 30,
|
|
|
|
2016
|
2015
|
$
Change
|
%
Change
|
Revenues:
|
$ 209,003
|
$ 60,916
|
$
148,087
|
243%
|
Total
operating expense
|
2,094,211
|
1,442,154
|
652,057
|
43%
|
Loss
from operations
|
(1,885,208)
|
(1,381,238)
|
(477,170)
|
35%
|
Total
other income (expense):
|
(1,567,456)
|
(716,009)
|
(851,447)
|
119%
|
NET
LOSS
|
$ (3,452,664)
|
$ (2,097,247)
|
$ (1,355,417)
|
63%
|
|
Nine
months ended September 30,
|
|
|
|
2016
|
2015
|
$
Change
|
%
Change
|
Revenues:
|
$ 794,621
|
$ 63,982
|
$
730,639
|
1,142%
|
Total
operating expense
|
6,795,371
|
3,501,039
|
3,294,332
|
94%
|
Loss
from operations
|
(6,000,750)
|
(3,437,057)
|
(2,563,693)
|
74%
|
Total
other income (expense):
|
(2,254,354)
|
(727,999)
|
(1,526,355)
|
210%
|
NET
LOSS
|
$ (8,255,104)
|
$ (4,165,056)
|
$ (4,090,048)
|
98%
|
Revenues
While MassRoots’ consumer-facing network
launched in July 2013, we did not start generating advertising revenue until we crossed a half million users in mid-August 2015.
Our clients have primarily been ancillary businesses marketing their products to cannabis consumers through endorsed posts on
MassRoots, sponsored content on our blog, and mentions in our email newsletter.
For the three months ended September 30, 2016
and 2015, we generated revenues of $209,003 and $60,916, respectively, an increase of $148,087. For the nine months ended September
30, 2016 and 2015, we generated revenues of $794,621 and $63,982, respectively, an increase of $730,639. Of this $794,621 generated
in the nine months ended September 30, 2016, $554,621 was made up of advertising revenue related to the MassRoots network, $240,000
was related to the 420 Rally, while the remaining revenue of $20,000 was made up of sales on our online merchandise store. The
increase in revenues for both the three and nine months ended September 30, 2016 was primarily caused by more digital advertising
sales and 420 Rally ticket sales.
Operating Expenses
For the three months ended September 30, 2016
and 2015, our operating expenses were $2,094,211 and $1,442,154, respectively, an increase of $652,057. For the three months ended
September 30, 2016, these increases were mainly attributed to an increase in consulting and other service provider fees and increases
in payroll and payroll-related expenditures. For the nine months ended September 30, 2016 and 2015, our operating expenses were
$6,795,371 and 3,501,039, respectively. This $3,294,332 increase for the nine months ended September 30, 2016 is attributed mainly
to an increase of $798,273 in payroll-related expenditures, an increase in advertising of $257,979, an increase of $294,179 in
cost of revenues, an increase of $1,041,126 in options issuances for services to employees and service providers, and a $902,775
increase in other general and administrative expenditures, including rent, travel, and legal expenses. Approximately $200,000
of these expenditures were related to commissions, legal, and closing fees of the convertible debt financing closed in March 2016.
Other Income (Expense)
For the three months ended September 30, 2016
and 2015, the Company recorded interest expense of $2,573,814 and $57,080, respectively. For the three months ended September
30, 2016 and 2015, the Company realized gains (loss) related to the fair value mark to market adjustments of its derivative liabilities
of $1,006,358 and $(658,929), respectively. The derivative liabilities are caused by certain price protections found in the warrants
issued as part of the Company’s convertible debt offering. For the three months ended September 30, 2016 and 2015, the Company
recorded amortization of discount on notes payable of $676,617 and $56,670, respectively. In addition, during the three months
ended September 30, 2016, we incurred non-cash interest and penalties relating to our convertible debt of $1,265,375 and $584,735,
respectively.
For the nine months ended September 30, 2016
and 2015, the Company recorded interest expense of $3,575,008 and $111,807, respectively, with the increase primarily caused by
interest on the Company’s convertible debt offering. For the nine months ended September 30, 2016 and 2015, the Company
realized gains (losses) related to the fair value mark to market adjustments of its derivative liabilities of $1,320,654 and $(616,192),
respectively. The derivative liabilities are caused by certain price protections found in the warrants issued as part of the Company’s
convertible debt offering. For the nine months ended September 30, 2016 and 2015, the Company recorded amortization of discount
on notes payable of $1,549,669 and $6,658, respectively. In addition, during the nine months ended September 30, 2016, we incurred
non-cash interest and penalties relating to our convertible debt of $1,265,375 and $584,735, respectively.
For the three months ended September 30, 2016
and 2015, we had net losses of $3,452,664 and $2,097,247, respectively, an increase of $1,355,417, for the reasons discussed above.
For the nine months ended September 30, 2016
and 2015, we had net losses of $8,255,104 and $4,090,048, respectively, an increase of $4,063,248, for the reasons discussed above.
Liquidity and Capital Resources
Net cash used in operations for the nine months
ended September 30, 2016 and 2015 was $2,915,832 and $1,990,774, respectively. This increase was primarily caused by a widening
net loss in the Company’s operations, an increase in the value of options issued to employees, and the interest charged
on the Company’s March 2016 convertible debt offering. The root cause of these expenses is an increase of the size of MassRoots’
team from 7 employees in early 2015 to 33 in early 2016.
Net cash used in investing activities for the nine
months ended September 30, 2016 and 2015 was $19,100 and $220,776, respectively. These investing activities were related to
the purchase of equipment, primarily computers, for the nine months ended September 30, 2016 and 2015 of $19,100 and $45,776,
respectively. During the nine months ended September 30, 2015, MassRoots made a one-time investment in Flowhub, LLC
of $175,000; as we did not make any such investment in 2016, the net cash used in investing activities decreased.
Net cash provided by financing activities for
the nine months ended September 30, 2016 and 2015 was $2,675,231 and $2,414,707, respectively. During the nine months ended
September 30, 2016, these funds came mainly from warrant exercises, the Company’s March 2016 convertible debt offering and
equity issuances, while during the nine months ended September 30, 2015, they came primarily from equity issuances and warrant
exercises.
Capital Resources
As of September 30, 2016, we had cash on hand
of $126,615 and receivables of $111,824, primarily from clients for advertising services. We believe this is sufficient to fund
the Company’s operations through the end of November 2016; however, as of September 30, 2016, there are warrants outstanding
to purchase up to 1,927,041 shares with an exercise price of $0.40 per share, which, if all were exercised, would supply $770,816
in cash to the Company.
We currently have no external sources of liquidity
such as arrangements with credit institutions or off-balance sheet arrangements that will have or are reasonably likely to have
a current or future effect on our financial condition or immediate access to capital.
We are dependent on the sale of our securities
to fund our operations, and will remain so until we generate sufficient revenues to pay for our operating costs. Our officers
and directors have made no written commitments with respect to providing a source of liquidity in the form of cash advances, loans
and/or financial guarantees.
Fundraising
On March 14, 2016, the Company sold to investors
six (6) month secured convertible original issue discount notes with principal amount in the aggregate of $1,514,669, together
with five year warrants to purchase an amount of shares of the Company’s common stock equal to the number of shares of common
stock issuable upon the conversion of the notes in full and having an exercise price of $1.00 per share with reset provisions.
If the Company exercises its right to prepay the note, the Company shall make payment to the investor of an amount in cash equal
to the sum of the then outstanding principal amount of the note that it desires to prepay, multiplied by (a) 1.2, during the first
ninety (90) days after the execution of the note, or (b) 1.35, at any point thereafter. The notes are convertible into shares
of the Company’s common stock at a price per share equal to the lower of (i) $1.00, and (ii) a 25% discount to the price
at which the Company next conducts an offering after the issuance date of the note; provided, however, for any part of the principal
amount of the note that is not paid at its maturity date, September 14, 2016, the conversion price for such amount is equal to
65% of the average of the three trading days with the lowest daily weighted average prices of the Company’s common stock
occurring during the fifteen days prior to the notes’ maturity date, September 14, 2016. The notes require that any net
proceeds received in subsequent offerings made by the Company first be used to repay the notes’ outstanding principal amount.
Because the note was not repaid by the maturity date, the investors became entitled to receive, in aggregate, but calculated pro
rata to the principal amounts remaining outstanding at the time of maturity, up to five hundred thousand (500,000) shares of the
Company’s common stock. Gross proceeds received by the Company for the notes and warrants in this offering was $1,420,000,
while net proceeds were $1,271,600 (excluding any legal fees). On September 14, 2016, upon maturity of the notes, the Company
was unable to make the required payment of the then outstanding aggregate principal amount of $966,384.27 and was in default under
the notes. As of October 7, 2016, the Company completed the repayment of all outstanding principal and other amounts due under
the notes. Since the issuance of the notes on March 14, 2016, the Company made payment to the holders of (i) an aggregate of $1,479,298
in cash and (ii) pursuant to the right of conversion of the notes, issued an aggregate of 2,377,861 shares of the Company’s
common stock at a conversion price equal to 65% of the average of the three trading days with the lowest daily weighted average
prices of the Company’s common stock occurring during the fifteen days prior to September 14, 2016. The Company believes
that it has completed all of its obligations under the notes and is no longer in default under the notes or any related agreements.
The notes are being retired.
From August 12, 2016 to October 21, 2016,
Company completed it registered direct offering to certain investors pursuant to which we raised an aggregate in $5,000,000 in
gross proceeds from the sale of shares of the Company’s common stock, together with warrants, with one warrant entitling
the holder to purchase one share of common stock at a price equal to $0.90 per share. The purchase price paid by the investors
was $0.50 for one share of common stock and one warrant. The warrants are immediately exercisable and expire three years from
the date of issuance. The shares of common stock and warrants are immediately separable and are issued separately. This offering
was closed on October 21, 2016. A total of 10,000,000 shares of common stock and warrants to purchase a total of 10,000,000
shares of common stock were sold in the offering and have been or will be issued pursuant to the Prospectus dated August 12, 2016,
as amended on August 19, 2016 and October 5, 2016.
Required Capital Over the Next Fiscal Year
We believe MassRoots has sufficient capital
to reach cash-flow positive.
Our independent registered public accounting
firm has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability
to implement our business plan, raise capital and generate revenues. See Note 2 of our financial statements.
Off-Balance Sheet Arrangements
As of September 30, 2016, we did not have
any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
For a discussion of our accounting policies
and related items, please see the Notes to the Financial Statements, included in Part I, Item 1 of this Quarterly Report.