[X]
|
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
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For
the fiscal year ended December 31, 2016
OR
[
]
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|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
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Commission File Number: 333-196735
MASSROOTS, INC.
(Exact name of registrant as specified
in its charter)
Delaware
|
46-2612944
|
(State
or other jurisdiction of
Incorporation or organization)
|
(IRS
Employer Identification No.)
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1624 Market Street, Suite
201, Denver, CO 80202
Address, including zip code, of principal executive offices)
(720) 442-0052
(Registrant’s telephone number, including area code)
Securities registered pursuant
to Section 12(b) of the Act: None
|
Securities
registered pursuant to Section 12(g) of the Act:
Title
of Each Class
|
Name
of Each Exchange on Which Registered
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Common
Stock, $0.001 par value per share
|
None
|
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ]
No
[
X
]
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
[X]
No [ ]
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
(Do not check if a smaller reporting company)
|
Smaller
reporting company [X]
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]
As of June 30, 2016, the aggregate market
value of the registrant’s common stock held by non-affiliates of the registrant was $23,299,600 based on the price at which
stock was last sold on that date.
As of March 31, 2017, there were 84,874,773
shares of the Registrant’s common stock issued and outstanding.
Documents incorporated by reference:
None.
MASSROOTS, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2016
TABLE OF CONTENTS
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Page
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PART
I
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|
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Item
1.
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Business
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2
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Item
1A.
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Risk
Factors
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14
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Item
1B.
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Unresolved
Staff Comments
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14
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Item
2.
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Properties
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14
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Item
3.
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Legal
Proceedings
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14
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Item
4.
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Mine
Safety Disclosures
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14
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PART
II
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15
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Item
5.
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Market
for the Registrant’s Common Stock and Related Stockholder Matters
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15
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Item
6.
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Selected
Financial Data
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16
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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16
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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22
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Item
8.
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Financial
Statements and Supplementary Data
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22
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Item
9.
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Changes
in and/or Disagreements with Accountants on Accounting and Financial Disclosure
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22
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Item
9A.
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Controls
and Procedures
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22
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Item
9B.
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Other
Information
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23
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|
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PART
III
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|
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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23
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Item
11.
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Executive
Compensation
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27
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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35
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Item
13.
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Certain
Relationships and Related Transactions and Director Independence
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37
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Item
14.
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Principal
Accountant Fees and Services
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38
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedule
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39
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FORWARD-LOOKING STATEMENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this report may be “forward-looking
statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs,
expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions.
These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions
made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions
that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed
or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed
from time to time in this report, including the risks described under “Risk Factors” in our most resent registration
statement and any risks described in any other filings we make with the SEC. Any forward-looking statements speak only as of the
date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events
or circumstances after the date of this report.
Management’s discussion and analysis
of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going
basis, we evaluate these estimates, including those related to useful lives of property and equipment, cost reimbursement income,
bad debts, impairment, contingencies and litigation. We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual
results will not differ from those estimates.
NOTE REGARDING KEY METRICS
We review a number of metrics, including active
Users, User Interactions, and other metrics to evaluate our business, measure our performance, identify trends affecting our business,
formulate business plans and make strategic decisions. For the definitions of these terms and additional information, see the
section entitled “Business – Definitions of Key Metrics.”
While these numbers are based on what we believe
to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring usage and User
engagement across our User-base around the country. For example, we treat multiple accounts held by a single person or organization
as multiple Users for purposes of calculating our Users because we permit people and organizations to have more than one account.
Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of
our Users may not accurately reflect the actual number of people or organizations using our platform.
PART I
ITEM 1. BUSINESS
Unless we have indicated otherwise or the
context otherwise requires, references in this Annual Report on Form 10-K to “MassRoots,” the “Company,”
“we,” “us” and “our” or similar terms are to MassRoots, Inc. Unless otherwise indicated, all
share and per share information relating to our common stock in this Annual Report on Form 10-K has been adjusted to reflect the
“Exchange” which occurred during our “Reorganization”. See the section entitled “Fundraising During
the Year and Our Reorganization” contained in this “Item 1” for additional discussion of the Exchange and Reorganization.
Organization
We were incorporated in the state of Delaware
on April 26, 2013 as a technology platform for the cannabis industry.
On January 25, 2017, we consummated a reverse
triangular merger (the “Whaxy Merger”), whereby we acquired all of the outstanding common stock of DDDigtal Inc (“DDDigtal”),
a Colorado corporation. Upon consummation of the Whaxy Merger, each share of DDDigtal’s common stock was exchanged for a
number of shares of our common stock (or a fraction thereof), based on an exchange ratio, as ultimately calculated, equal to approximately
5.273-for-1, such that 1 share of our common stock was issued for every 5.273 shares of DDDigtal’s common stock. At the
same time, all shares of common stock of our merger subsidiary, created solely for the purpose of effectuating the Whaxy Merger,
was converted into and exchanged for one share of common stock of DDDigtal, and all shares of DDDigtal’s common stock that
were outstanding immediately prior to the effectiveness of the Whaxy Merger automatically cancelled and retired. DDDigtal continued
as our surviving wholly-owned subsidiary (“Whaxy”), and the merger subsidiary ceased to exist. In connection with
the Whaxy Merger, each stockholder of DDDigtal prior to such merger entered into a lock-up agreement with us, thereby prohibiting
each such stockholder from offering, selling, contracting to sell, pledging, giving, donating, transferring or otherwise disposing
of, directly or indirectly, any shares of our common stock obtained pursuant to the Whaxy Merger for a period of six (6) months
following the effective date of such merger, which was January 25, 2017.
Our principal executive office is located
at MassRoots, Inc., 1624 Market Street, Suite 201, Denver, CO 80202, and our telephone number is (720) 442-0052.
For the year ended December 31, 2016, we raised
an aggregate of $6,158,770 from the sale of our securities (including the exercise of previously issued warrants for the purchase
of our common stock). For the year ended December 31, 2016, we had a net loss of $18,030,124.
Our independent registered public accounting
firm has issued an audit opinion for our Company, which includes an explanatory paragraph expressing substantial doubt as to our
ability to continue as a going concern.
Emerging Growth Company
We are an “emerging growth company,”
as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable
to other public companies.
Section 107(b) of the JOBS Act provides that
an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of
the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company”
can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have
irrevocably opted out of the extended transition period for complying with new or revised accounting standards pursuant to Section
107(b) of the JOBS Act.
We could remain an “emerging growth
company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross
revenues are $1 billion, as adjusted, or more, (ii) the date that we become a “large accelerated filer” as defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the
market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently
completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during
the preceding three-year period.
Background
MassRoots was formed in April 2013 as a technology
platform for the medical cannabis community. In July 2013, we launched in the App Store and since that time, have grown into a
community of more than 1,000,000 cannabis consumers. Our platform enables medical cannabis patients to review strains and products
based on their effect, for example, being effective at treating back-pain or nausea. We then present this information in easy-to-use,
actionable formats for everyday cannabis consumers to make purchasing decisions. Our growth has been primarily driven by MassRoots’
increasing popularity as one of the first national cannabis brands and word of mouth virility from our Users.
As a technology company, MassRoots is able
to rapidly scale its products and services with minimal marginal costs – each additional User or business that we add to
our platform only costs negligible server hosting fees. It also allows us to have exposure to every regulated cannabis market
without establishing a physical presence in each state. This minimizes the costs of scaling and required capital while, at the
same time, offering a direct role in the cannabis industry without ever touching the plant itself.
MassRoots has strong relationships in both
the technology and cannabis industries. As a semi-finalist for the Extreme Tech Challenge, MassRoots was introduced to some of
the leading technology investors and developers in Silicon Valley and became one of the first cannabis-related companies to present
on stage at the Consumer Electronics Show (CES) in early 2016. At the same time, MassRoots raised much of its seed-stage capital
from the ArcView Group, the largest network of cannabis investors and businesses in the industry, enabling the Company to develop
relationships with the key plays in the cannabis sector.
Definitions of Key Metrics
Total users (“Users”) is defined
as every user who currently has an account with MassRoots. It does not include users who have deleted their account. It does not
reflect active usage over any set period of time.
User interactions (“Interactions”)
is defined as anytime a User follows another User, posts a status, comments on a status, or likes a status.
Our Products and Services
Our technology platform consists of: our consumer-facing
social network (accessible through our Android application, iOS application, and web portal) and our business-facing advertising
portal, MassRoots for Business.
The MassRoots Network
The MassRoots network is accessible as a free
mobile application through the iOS App Store, the Amazon App Store, the Google Play Marketplace, and as a website at www.MassRoots.com.
These applications and services work in a similar manner as other social networks, such as Facebook, Instagram, Twitter and Vine:
•
|
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Users
may create a profile by choosing a username, setting their password and agreeing to our
Terms and Conditions. We do not require Users’ real names or phone numbers.
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•
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Users have the ability to follow other
Users on the network. By “following” an account, Users are essentially “opting-in” to their posts,
allowing them to be displayed on their newsfeed.
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•
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Users have the ability to reviews strains and products
based on their quality and other factors. These reviews are then displayed on product pages within the app and on the users’
profile.
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•
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Users’ newsfeed displays all the posts from
Users in which they follow in reverse-chronological order, with the most recent posts being at the top. A Users’ profile
page displays all the posts from that particular Users.
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•
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Users have the ability to like, comment and report
statuses from other Users. By “liking” a status, a User is indicating their approval of the post’s content.
By commenting on a status, Users are free to voice their opinions or comments on the post’s content. By reporting a
status, Users can flag content that violates our Terms and Conditions, including spam and harassing content.
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•
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Users have the ability to tag other Users and use
hashtags to categorize posts. By using the “@” symbol followed by a username, Users can tag other Users in posts
they want them to see or if they are included in the picture or post. By using the “#” followed by a categorical
word, Users can categorize posts based on their content.
|
•
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Users have the ability to post pictures with text
captions or just text statuses.
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•
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Users have the ability to search for Users based
on their username and the ability to search by hashtag to display all results within a particular category. Users can sort
hashtag searches by their popularity or when they were posted.
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•
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Users have the ability to set their profile to public
and private. By setting their profile to public, any User on MassRoots’ apps will be able to see the public profile’s
posts and follow the account. When a profile is private, another User must request to follow their account and the account
owner must grant permission before they can view any of the account’s posts.
|
Integration with Dispensary Point of
Sale Systems
During the third quarter of 2016, we began
integrating MassRoots with dispensary point of sale systems, enabling businesses to target advertising to Users based on their
purchasing history. For example, if a particular User goes to a dispensary every week for a month and purchases a chocolate brownie
edible and then does not come back for two weeks, the dispensary would be able to send them a targeted ad offering them 20% off
their next chocolate brownie edible purchase. The dispensary would be able to control the advertising offer, the targeting options,
and all other relevant information. This will enable cannabis-related businesses to use data to target advertising directly to
the consumers most likely to take action based on them, very similar to other social networks.
To facilitate this integration with dispensary
point of sale systems, during the second quarter of 2015, MassRoots invested $175,000 in exchange for preferred shares of Flowhub
LLC (“Flowhub”), a seed-to-sale system, equal to 8.95% of the then outstanding equity of Flowhub. Since that time,
we have been working with Flowhub to integrate their system with our network. We believe that Flowhub has developed the “next
generation” of seed-to-sale software and believe there is tremendous amount of synergies between the data both MassRoots
and Flowhub collect. We believe that by consolidating data from such cannabis point of sale systems, grow operations, and our
consumer-facing social network, we will have some of the most important data available in the cannabis industry.
On January 25, 2017, pursuant to the Whaxy
Merger, we acquired DDDigtal and its menu management and online ordering platform for licensed cannabis businesses, known as “Whaxy”.
Prior to the acquisition, Whaxy had processed over $5 million in volume across 40,000 unique transactions. The acquisition of
Whaxy expands our offerings to include a full suite of dispensary software solutions – online ordering, marketing, and real-time
inventory management— for cannabis businesses. Additionally, the Company retained Zach Marburger and Micah Davidson, Whaxy’s
former Chief Executive Officer and Chief Technology Officer, respectively, as part of the MassRoots team.
User Growth and Product Distribution Channels
The MassRoots app is distributed free of charge
through the iOS App Store, the Google Play Marketplace and the Amazon App Store. Prospective users can search for MassRoots on
these platforms, read user-reviews and make a decision on whether to download and utilize the MassRoots app. The MassRoots network
is also accessible through desktop and mobile web browsers by navigating to www.MassRoots.com. Our MassRoots for Business portal
is distributed at MassRoots.com/business where companies may request access.
MassRoots has primarily gained Users through
organic growth - Users telling their friends to join the network. This is supported by the number of endorsements MassRoots receives
on Instagram and Twitter, viewable by searching “#MassRoots”.
App/Play Store Issues, User Support
and Similar Matters
On November 4, 2014, the MassRoots App was
removed from Apple’s iOS App Store due to what we originally believed was a compliance issue with the App Store review team.
Existing iOS Users were still able to access and use the MassRoots App; however, new Users were prohibited from downloading it.
We discovered that this was a result of the App Store review team changing their app enforcement guidelines to prohibit all social
cannabis applications.
When we learned of the true nature of this
policy change, we began organizing the cannabis community and industry against it. In early January 2015, we co-signed a letter
to Apple’s CEO, Tim Cook, along with several cannabis business leaders, arguing that the App Store’s policies were
stifling innovation in the cannabis industry. Over 10,000 of our Users sent personal emails to Apple advocating why MassRoots
should return to the App Store - with their arguments ranging from freedom of speech and expression to cannabis patients suffering
from anxiety who need social support networks.
In early February 2015, an App Store representative
informed us Apple had revised its enforcement guidelines - social cannabis applications that were geo-restricted to the 23 states
with medical cannabis laws were once again permitted. On February 12, 2015, MassRoots returned to the App Store after we implemented
the geo-restrictions.
While we are grateful to Apple for reversing
its decision, we cannot guarantee this policy will remain in place. The iOS App Store is one of the largest content distribution
channels in the world and is the only way to effectively distribute software to the large percentage of the United States population
who own iPhones and iPads. The iOS App Store review team is essentially a regulator for our product - they decide what rules all
applications in the iOS App Store must operate by and how to enforce those regulations. The rules related to cannabis-related
apps are not published, enforcement of those rules is difficult to predict, and the App review and appeal processes are conducted
in secret without public oversight. MassRoots will continue to push for a more open and transparent app review process - especially
when such policies and decisions directly impact a large portion of the population - but there is no guarantee we will be successful
in those efforts.
MassRoots, along with most other cannabis
apps, regularly encounter issues with the Google Play Store review team in the normal course of business due to Google Play Store’s
absence of clear rules and guidelines regarding cannabis-related apps. On November 18, 2016, the MassRoots App was removed from
the Google Play Store due to a compliance review. On March 21, 2017, Google Play approved the MassRoots App for distribution to
Android devices through the Google Play Store once again.
On December 1, 2016, MassRoots’ Android
application received approval from the Amazon App Store for listing, and is presently available for download on the Amazon App
Store.
Under their respective developer license agreements,
Apple, Inc., Google, Inc. and Amazon.com, Inc. have the right to update their iOS App Store, Play Store and Amazon App Store policies,
respectfully, to prohibit cannabis-related applications at any time. This could result in many prospective users being unable
to access and join our network and existing Users being unable to access our App.
Our activities outside of the application
stores have also faced backlash and resistance due to our status as a cannabis-related company. For example, our Instagram account
has a wide following of over 435,000 followers, one of the most of any cannabis related company, and we utilize this following
to help expand our user-base. However, in a situation similar to the iOS App Store removal, our Instagram account (along with
several other cannabis related accounts) was suspended in January 2016 without notice or explanation from Instagram. The account
was later reinstated on February 26, 2016. While we feel that our platform is at the point where any potential suspension will
not affect our User growth, we expect to continue to face similar situations in the future that may cause disruptions, if only
temporary, to our business plan.
Market Conditions
MassRoots is poised to take advantage of two
rapidly growing industries: cannabis and mobile technology.
Cannabis Market Growth and Current Trends
Since the MassRoots app first launched in
July 2013, there have been a series of events that have help further shape the development of the cannabis and mobile technology
industries:
On August 29, 2013, Deputy Attorney General
James Cole issued a memo (“The Cole Memo”) in response to certain states passing measures to legalize the medical
and adult-use of cannabis. The Cole Memo does not alter the Department of Justice’s authority to enforce Federal law, including
Federal laws relating to cannabis, regardless of state law, but does recommend that U.S. Attorneys to focus their time and resources
on certain priorities, rather than businesses legally operating under state law. These guidelines focus on ensuring that cannabis
does not cross state lines, keeping dispensaries away from schools and public facilities, and strict-enforcement of state laws
by regulatory agencies, among other priorities.
On January 1, 2014, the first sales of cannabis
for adult-use permissible under state law took place in Colorado. This event resulted in significant media coverage for the industry.
Since that time, three other states and the District of Columbia have made adult-use permissible under their state law and several
states have ballot proposals pending at upcoming elections.
On February 14, 2014, the Departments of Justice
and Treasury issued a joint memo allowing banks and financial institutions to accept deposits from dispensaries operating legally
under state law. In most cases, dispensaries had been forced to operate on a cash basis, presenting significant security and accounting
issues. This was a major step in legitimizing and accepting the cannabis industry on a national level. Further, the passing of
the Rohrabacher Farr Amendment (as defined below) in 2014 and 2015 indicates some level of support in Congress for medicinal cannabis,
even if its actual effect is still undetermined.
For additional information concerning the
Cole Memo, Rohrabacher Farr Amendment and regulatory conditions, see the section entitled “Business – Government Regulation.”
Current States With Laws Permitting
the Medical or Adult Use of Cannabis
As of December 31, 2016, 28 states and the
District of Columbia have passed laws allowing some degree of medical use of cannabis, while eight of those states and the District
of Columbia have also legalized the adult-use of cannabis. The states which have enacted such laws are listed below:
State
|
Year
Passed
|
1. Alaska*
|
1998
|
2. Arizona
|
2010
|
3. Arkansas
|
2016
|
4. California*
|
1996
|
5. Colorado*
|
2000
|
6. Connecticut
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2012
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7. District of Columbia*
|
2010
|
8. Delaware
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2011
|
9. Florida
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2016
|
10. Hawaii
|
2000
|
11. Illinois
|
2013
|
12. Maine*
|
1999
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13. Maryland
|
2014
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14. Massachusetts*
|
2012
|
15. Michigan
|
2008
|
16. Minnesota
|
2014
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17. Montana
|
2004
|
18. Nevada*
|
2000
|
19. New Hampshire
|
2013
|
20. New Jersey
|
2010
|
21. New Mexico
|
2007
|
22. New York
|
2014
|
23. North Dakota
|
2016
|
24. Pennsylvania
|
2016
|
25. Ohio
|
2016
|
26. Oregon*
|
1998
|
27. Rhode Island
|
2006
|
28. Vermont
|
2004
|
29. Washington*
|
1998
|
* State has
enacted laws permitting the adult use of cannabis, in addition to medical use.
Public Support for Legalization Increasing
A Quinnipiac poll conducted in February 2017
found that 93% of the American people supported legalizing the medicinal use of cannabis, 59% supported legalizing the adult-use
of cannabis, and 77% of Americans were opposed to federal government interference with state marijuana programs.
A 2017 ArcView Market Research report predicts
an additional 14 states will legalize the adult-use of cannabis and two states will legalize medical-use within the next five
years. If public support for cannabis legalization continues to increase, we believe it is likely that Federal policies towards
marijuana will be reformed. The combination of additional states legalizing adult-use under state law, expansion of medical-use
provisions in states where it is currently permitted under state law and increased public awareness is projected to cause marijuana
sales permitted under state law to grow from $1.43 billion in 2013 to $10.2 billion in 2018, according to ArcView Market Research.
Market Conditions that Could Limit Our
Business
Cannabis is a Schedule I Controlled Substance
under Federal law and, as such, there are several factors that could limit our market and our business. They include, but are
not limited to:
•
|
|
The Federal government and many private employers
prohibit drug use of any kind, including cannabis, even where it is permissible under state law. Random drug screenings and
potential enforcement of these employment provisions significantly reduce the size of the potential cannabis market;
|
•
|
|
Enforcement of Federal law prohibiting cannabis occurs
randomly and often without notice. This could scare many potential investors away from cannabis-related investments and makes
it difficult to make accurate market predictions;
|
•
|
|
There is no guarantee that additional states will
pass measures to legalize cannabis under state law. In many states, public support of legalization initiatives is within the
margin of error of pass or fail. This is especially true when a supermajority is needed to pass measures, like in Florida
where a state constitutional amendment permitting medical cannabis has been proposed, but requires 60% approval to pass. Changes
in voters’ attitudes and turnout have the potential to slow or stop the cannabis legalization movement and potentially
reverse recent cannabis legalization victories;
|
•
|
|
There has been some resistance and negativity as
a result of recent cannabis legalization at the state level, especially as it relates to drugged driving. The lack of clearly
defined and enforced laws at the state level has the potential to sway public opinion against marijuana legalization; and
|
•
|
|
Even if the Federal government does not enforce the
Federal law prohibiting cannabis, the legality of the state laws regarding the legalization of cannabis are being challenged
through lawsuits. Oklahoma and Nebraska recently sued Colorado over the legalization of cannabis, and other lawsuits have
been brought by private groups and local law enforcement officials. If these lawsuits are successful, state laws permitting
cannabis sales may be overturned and significantly reduce the size of the potential cannabis market and affect our business.
|
Additional discussion of government regulations
is available in the “Government Regulation” section below.
Fundraising and Previous Offerings
Since our inception, we have spent considerable
effort on fundraising to support the operations of the Company.
In connection with an offering that occurred
in October 2013, the Company filed an Amended and Restated Certificate of Incorporation which authorized the issuance of 21 shares
of preferred stock (6,397,958 common shares post-Exchange, as defined below) with a par value of $1.00 per share, 17.65 shares
(5,377,332 common shares post-Exchange) of which were designated as Series A Preferred Stock. Among other rights and privileges,
holders of Series A Preferred Stock are entitled to a cumulative dividend of 7% annually, preferential payments over common stock
in liquidation and other events, and the ability to convert their Series A Preferred Stock to common stock on a one to one basis
(taking into account any unpaid dividends).
In October 2013, the Company entered into
agreements to issue 5.88, 5.88, and 5.89 Series A Preferred shares (1,791,428, 1,791,428, and 1,791,475 common shares post-Exchange)
to Bass Point Capital, LLC, WM18 Finance LTD, and Rother Investments, LLC, respectively, in exchange for a $50,000 investment
from each. In addition, the Company entered into an agreement to issue as compensation for services provided a total of 2.94 Series
A Preferred shares (895,715 common shares post-Exchange) to Douglas Leighton for financial consulting services (collectively,
the “Original Offering”).
The Reorganization and Exchange
In preparation for the March 2014 Offering
(as defined herein) and the Company’s intention of becoming a publicly traded entity, on March 18, 2014 the Company entered
into an Agreement and Plan of Reorganization with its shareholders in which the following was effected: (i) on March 21, 2014,
the Company’s Amended and Restated Certificate of Incorporation was amended to allow for the issuance of 200,000,000 shares
of the Company’s common stock and amended the par value of the Company’s common stock to $0.001 per share; (ii) on
March 24, 2014, each of the Company’s preferred shareholders converted their shares into common stock on a one for one basis
(including the accrued divided); and (iii) on March 24, 2014, each of the Company’s shareholders surrendered their shares
of the Company’s common stock in exchange for the pro-rata distribution of 36,000,000 newly issued shares of Company’s
common stock, based on the percentage of the total shares of common stock held by the shareholder immediately prior to the exchange
(the “Exchange”).
The March 2014 Offering and Registration
Rights
In March 2014, we raised gross proceeds of
$475,000 through an offering of our securities to certain accredited and non-accredited investors consisting of: (i) $269,100
face amount of convertible debentures convertible into up to 2,691,000 shares of the Company’s common stock at $0.10 per
share (the “2014 Debentures”), together with warrants, exercisable into an amount of our common stock equal to fifty
percent (50%) of the common stock underlying the 2014 Debentures, at $0.40 per share (the “2014 Debenture Warrants”);
and (ii) 2,059,000 shares of our common stock at $0.10 per share with a warrant, exercisable into an amount of our common stock
equal to fifty percent (50%) of the common stock purchased, at $0.40 per share (the “2014 Common Stock Warrants”)
(collectively, the “March 2014 Offering”). Five investors received 2014 Debentures and 2014 Debenture Warrants, while
36 accredited and unaccredited investors received the common stock and 2014 Common Stock Warrants. In July 2015, one investor
exchanged 1,000,000 shares of our common stock for a warrant exercisable into 1,000,000 shares of our common stock at $0.001 per
share, with materially the same terms as the $0.001 Consulting Warrants (as defined below).
In connection with the March 2014 Offering,
we entered into certain registration rights agreements (the “Registration Rights Agreement”), whereby we agreed to
use our commercially reasonable efforts to prepare and file a registration statement with the SEC within forty-five (45) days
after March 24, 2014, covering all outstanding shares of common stock (including all shares of common stock sold in the March
2014 Offering), in addition to all shares of common stock underlying the 2014 Debentures, 2014 Debenture Warrants, and 2014 Common
Stock Warrants.
Additionally, as payment for consulting services
provided in relation to the March 2014 Offering, we issued Dutchess Opportunity Fund, II LP (“Dutchess”) a warrant
exercisable into 4,050,000 shares of our common stock at $0.001 per share, and a warrant exercisable into 2,375,000 shares of
our common stock at $0.40 per share. The Company also granted certain registration rights to Dutchess covering all shares of common
stock issuable upon the exercise of each of the warrants it received in connection to the March 2014 Offering. As of December
31, 2016, all such warrants issued as payment for consulting services had been exercised.
On September 15, 2014, our resale registration
statement on Form S-1 covering 50,400,000 shares of common stock outstanding or shares of common stock underlying warrants or
debentures received in connection to the March 2014 Offering (“2014 Registration Statement”) became effective.
In March 2016, holders of the 2014 Debentures
agreed to revise the maturity date of the 2014 Debentures from March 24, 2016 to March 24, 2018.
Between January 1, 2016 and December 31, 2016,
holders of the 2014 Debenture Warrants and 2014 Common Stock Warrants exercised such warrants into 1,809,011 shares of the Company’s
common stock, resulting in gross proceeds to the Company of $723,604.
Additional Offerings / Private Placements
From September 15, 2014 to March 11, 2015,
we completed an offering of $861,000 of our securities to certain accredited and non-accredited investors consisting of 1,732,000
shares of our common stock at $0.50 per share and warrants to purchase up to 866,000 shares of common stock at $1 per share.
From April 1, 2015 through April 17, 2015,
we completed an offering of 960,337 shares of the Company’s common stock to certain accredited and unaccredited investors,
pursuant to which, the Company received gross proceeds of $576,200. The Company terminated this offering as of April 17, 2015.
The Company compensated Chardan Capital Markets, LLC, its placement agent for the offering, $20,000 in cash and 262,560 shares
of common stock as commission for this placement.
From June 10, 2015 through July 13, 2015,
we sold 1,540,672 shares of unregistered common stock to certain accredited investors for gross proceeds of $1,140,502. In connection
with this offering, Chardan Capital Markets LLC, its placement agent for the offering, received $27,200 in cash and 80,560 shares
of the Company’s common stock as commission for this placement.
On November 9, 2015, we sold 815,500 shares
of common stock, with warrants to purchase 407,475 shares of common stock, in a registered offering to certain unaccredited and
accredited investors for gross proceeds of $1,019,375 to the Company. We did not utilize a placement agent in this transaction.
In December 2015, we issued 146,200 three
year warrants with an exercise price of $1.06 to our holders of outstanding warrants issued in conjunction with our September
15, 2014 to March 11, 2015 offering. These warrants were issued in exchange for the holder agreeing to waive certain provisions
providing price protection of the warrant received in the September 15, 2014 to March 11, 2015 offering.
The March 2016 Note Offering
In March 2016, we completed a private offering
(“March 2016 Note Offering”) to certain accredited investors of six (6) month secured convertible notes with a principal
amount of $1,514,669 (the “Bridge Notes”) 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 Bridge Notes in
full and having an exercise price of $1.00 per share. The Bridge Notes were secured by all the assets of the Company, and each
of the executive officers of the Company entered into a lock-up agreement whereby they agreed to not sell or offer any shares
of the Company’s common stock owned by them until the Bridge Notes were fully repaid, redeemed or converted. The Bridge
Notes were convertible into shares of the Company’s common stock at a price per share equal to the lower of (i) one dollar
($1.00), and (ii) a 25% discount to the price at which the Company next conducts an offering after the issuance date of the Bridge
Note; provided, however, if any part of the principal amount of the Bridge Note remains unpaid at its maturity date, the conversion
price would be 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 Bridge Note’s maturity date.
On September 14, 2016, upon maturity of the
Bridge 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 Bridge Notes. Because the Bridge Notes were 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
Bridge Notes and warrants in the March 2016 Note Offering were $1,420,000, while net proceeds were $1,271,600 (excluding any legal
fees). In connection with the March 2016 Note Offering, Chardan Capital Markets LLC, our placement agent for the offering, received
$123,400 in cash as commission for this placement.
On October 7, 2016, the Company announced
that the Company had completed the repayment to the holders of all outstanding principal and other amounts due pursuant to the
March 2016 Note Offering. In total, 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 Bridge Notes and is no longer in default under the Bridge Notes or any related agreements. The
Bridge Notes are now retired.
Our 2016 Direct Registered Offering
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 “2016 Direct Registered Offering”).
The purchase price paid by 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.
NASDAQ Application and Withdrawal
On August 20, 2015, we applied to have our
common stock listed on the NASDAQ Capital Market (“NASDAQ”). In connection to this application, we also received approval
from our shareholders to effect a reverse stock split in order to meet the initial listing requirements of NASDAQ.
While we believe the Company would meet the
NASDAQ listing requirements, on May 23, 2016, the Company received preliminary notice that its application for listing had been
denied. While not confirmed in writing by NASDAQ, the Company believes that this preliminary denial was at least partially related
to the cannabis-related nature of our business. On June 7, 2016, the Company formally withdrew its application to list on NASDAQ
and reaffirmed its focus on its core business. The Company will continue to evaluate the potential for filing a new application
with NASDAQ or other securities exchange going forward; however, there can be no assurance that the Company will ever decide to
file a new application, or, even if a new application is filed, that the Company will ever be successful in having its shares
listed on a securities exchange.
Employees and Consultants
MassRoots has 31 full-time employees, two
part time employees, and one full time independent contractor.
Government Regulation
Marijuana is a categorized as a Schedule I controlled substance by the Drug
Enforcement Agency and the United States Department of Justice and is illegal to grow, possess and consume under Federal law.
However, 28 states and the District of Columbia have passed state laws that permit doctors to prescribe cannabis for
medical-use and eight states and the District of Columbia have enacted laws that legalize the adult-use of cannabis for any
reason. This has created an unpredictable business-environment for dispensaries and collectives that legally operate under
certain state laws but in violation of Federal law.
Cole Memo
On August 29, 2013, United States Deputy Attorney
General James Cole issued the Cole Memo to United States Attorneys guiding them to prioritize enforcement of Federal law away
from the cannabis industry operating as permitted under certain state laws, so long as:
•
|
|
cannabis is not being distributed to
minors and dispensaries are not located around schools and public buildings;
|
•
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|
the proceeds from sales are not going to gangs, cartels
or criminal enterprises;
|
•
|
|
cannabis grown in states where it is legal is not
being diverted to other states;
|
•
|
|
cannabis-related businesses are not being used as
a cover for sales of other illegal drugs or illegal activity;
|
•
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|
there is not any violence or use of fire-arms in
the cultivation and sale of marijuana;
|
•
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|
there is strict enforcement of drugged-driving laws
and adequate prevention of adverse health consequences; and
|
•
|
|
cannabis is not grown, used, or possessed on Federal
properties.
|
The Cole Memo is meant only as a guide for
United States Attorneys and does not alter in any way the Department of Justice’s authority to enforce Federal law, including
Federal laws relating to cannabis, regardless of state law. We believe we have implemented procedures and policies to ensure we
are operating in compliance with the “Cole Memo”. However, we cannot provide assurance that our actions are in full
compliance with the Cole Memo or any other laws or regulations. Per MassRoots’ Terms and Conditions:
•
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Users must agree that they are located in a state
where medical-use or adult-use of cannabis is legal;
|
•
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Users must be of legal age to consume cannabis in
their particular state (18 or 21 years old, depending on the state);
|
•
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Users may only post content that is in compliance
with their state’s laws;
|
•
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Users may not solicit or distribute cannabis through
MassRoots unless they are a licensed dispensary (we also do not currently facilitate in-app messaging, forcing all conversations
to take place in a public environment);
|
•
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Posting of any other drugs or substances, including
prescription pain pills, is prohibited and will result in account termination;
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•
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Posting of any violence or threat of violence is
prohibited and will result in account termination;
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•
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Posting of any drugged-driving content is prohibited
and will result in account termination; and
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•
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Posting of any copyright-protected content is prohibited
and will result in account termination.
|
We have implemented an aggressive content
and account review program to ensure compliance with our Terms and Conditions. Users have the ability to report any status or
account that is in violation of our terms and we encourage Users to do so as any illegal content jeopardizes the network for all
our Users. When a status or account is reported, the post is automatically removed from the network until further review. A MassRoots
employee then reviews the content within 24 hours and either approves it as within our Terms and Conditions or permanently deletes
it and bans the User account.
In addition, as part of the agreement to allow
our app to return to the Apple App Store, we implemented restrictions to restrict new Users to our mobile apps to the 28 states
with medical cannabis laws.
Our business plan includes allowing cannabis
dispensaries to advertise on our network which we believe could be deemed to be aiding and abetting illegal activities, a violation
of Federal law. We intend to remain within the guidelines outlined in the Cole Memo. However, we cannot provide assurance that
we are in full compliance with the Cole Memo or any other laws or regulations.
Rohrabacher Farr Amendment
On December 16, 2014, H.R. 83 - Consolidated
and Further Continuing Appropriations Act, 2015 was enacted and included a provision known as the “Rohrabacher Farr Amendment”
which states:
None of the funds made available in this Act
to the Department of Justice may be used, with respect to the States of Alaska, Arizona, California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi,
Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee, Utah, Vermont,
Washington, and Wisconsin, to prevent such States from implementing their own State laws that authorize the use, distribution,
possession, or cultivation of medical marijuana.
The Rohrabacher Farr Amendment represents
one of the first times in recent history that Congress has taken action indicating support of medical cannabis. The Rohrabacher
Farr Amendment was renewed by Congress in 2015 and remains in effect currently.
The Rohrabacher Farr Amendment would appear
to protect the right of the states to determine their own laws on medical cannabis use; however, the actual effects of the amendment
are still unclear. The Rohrabacher Farr Amendment did not remove the federal ban on medical cannabis and cannabis remains regulated
as a Schedule I controlled substance. Further, the United States Department of Justice has interpreted the Rohrabacher Farr Amendment
as only preventing federal action that prevents states from creating and implementing cannabis laws - not against the individuals
or businesses that actually carry out cannabis laws – and has continued to sporadically commence enforcement actions against
individuals or businesses participating in the cannabis industry despite such participation being legal under state law. Whether
this interpretation is appropriate is still being litigated, and, while an initial district court decision has not supported the
Department of Justice’s interpretation, such decision is currently under appellate review. In addition, no matter what the
interpretation is adopted by the courts, there is no question that the Rohrabacher Farr Amendment does not protect any party not
in full compliance with state medicinal cannabis laws.
Potential Changes to Federal Laws and
Enforcement Priorities
Although the Department of Justice has stated
in the Cole Memo that it is not an efficient use of limited resources to direct federal law enforcement agencies to prosecute
those lawfully abiding by state laws allowing the use and distribution of medical cannabis, there is no guarantee that the Department
of Justice’s position will not change regarding the low-priority enforcement of federal laws. However, the United State
Department of Justice is now under new leadership following the 2016 election. The new administration could introduce a less favorable
cannabis enforcement policy. To date, the new administration has not affirmed or altered the policies outlined in the Cole Memo.
There can be no assurances that the new administration or any future administration would not change the current enforcement policy
and decide to strongly enforce the federal laws.
In light of the 2005 U.S. Supreme Court ruling
in
Gonzales v. Raich
, under the commerce clause of the constitution, Congress may pass laws to criminalize the production
and use of home-grown cannabis even where states have approved its use for medicinal purposes, which leads to the conclusion that
the Controlled Substances Act may preempt state laws relating to any cannabis-related activity. Any such change in the federal
enforcement program of current federal laws could cause significant financial damage to our business. While we do not directly
harvest or distribute cannabis today, we still may be deemed to be violating federal law and may be irreparably harmed by a change
in enforcement by the federal or state governments.
Trademarks
On March 31, 2014, we applied for a trademark
of the “MassRoots, Inc.” name in the United States. However, several factors, including the Company’s app being
removed from Apple’s iOS App Store, required the Company to focus its resources in other areas, away from completing the
trademark application process, and the trademark application was deemed to be abandoned. The Company reapplied for this trademark
in 2016, and is currently responding to staff comments on its application.
Competitors, Methods of Completion, Competitive
Business Conditions
MassRoots competes with cannabis information
platforms such as WeedMaps and Leafly. All of these services and MassRoots provide information on dispensary locations, strain
information, and news relating to the cannabis industry. MassRoots’ primary competitive advantage is the social aspects
of our platform – Users have profiles, build an online personality and preferences, and follow other Users with similar
interests.
Network effects have come to dominate consumer
habits, which can provide protection to networks such as MassRoots. For example, Google+ failed to obtain a dominant market share
in desktop-based social networking because it wasn’t introduced until Facebook had already conquered the market. Similarly,
when Facebook introduced Poke as a competitor to SnapChat in late 2012, it failed to overtake SnapChat due to the market dominance
already achieved by SnapChat. Even if a well-financed competitor to MassRoots were to emerge, they would not only have to convince
Users on why their platform is superior, but also get them to switch away from the network their friends are already using. Every
User that MassRoots gains, every interaction that takes place on our network and every day that we grow, the barrier to entry
to competitors becomes higher.
Legal Proceedings
We are not currently a party to any legal
proceedings, and we are not aware of any pending or potential legal actions.
Sources and Availability of Raw Materials
We do not use raw materials in our business.
Seasonal Aspect of our Business
None of our products are affected by seasonal
factors.
Reports to Security Holders
We are required to file reports and other
information with the SEC. You may read and copy any document that we file at the SEC’s public reference facilities at 100
F. Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-732-0330 for more information about its public reference
facilities. Our SEC filings are available to you free of charge at the SEC’s web site at www.sec.gov. We are an electronic
filer with the SEC and, as such, our information is available through the Internet site maintained by the SEC that contains reports,
proxy and information statements and other information regarding issuers that file electronically with the SEC. This information
may be found at www.sec.gov and posted on our website at investors.massroots.com.
ITEM 1A. RISK FACTORS
As a “smaller reporting company”,
we are not required to provide the information required by this Item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As a “smaller reporting company”,
we are not required to provide the information required by this Item.
ITEM 2. PROPERTIES
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 paid a base rate of $0 for the first month,
$8,288 for months two through 13, $8,584 for the months 14 through 25, and $8,880 for the months 25 through 37. We did not
incur a significant cost related to the move to this location.
We amended this lease in January 2016 to include
Suite 203, also located at 1624 Market Street in Denver, CO 80202, which allowed 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 paid $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 $3,896 for each month from June 1, 2018 to November 30, 2018. Pursuant to the amendment, the lease on Suite
201 was also extended to November, 30, 2018.
We do not own any properties or land.
We believe that our facilities are adequate
for our current needs and that, if required, we will be able to expand our current space or locate suitable new office space and
obtain a suitable replacement for our executive and administrative headquarters.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Since April 9, 2015, our common stock has
been quoted on the OTCQB under the symbol “MSRT”. Trading in our common stock has historically lacked consistent volume,
and the market price has been volatile.
The following table presents, for the periods
indicated, the high and low sales prices of the Company’s common stock, and is based upon information provided by the OTCQB
Marketplace. These quotations below reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not
necessarily represent actual transactions.
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2016
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High
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Low
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First
Quarter
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$
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1.54
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$
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0.65
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Second
Quarter
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$
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1.67
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$
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0.66
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Third
Quarter
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$
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0.85
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|
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$
|
0.38
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Fourth
Quarter
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$
|
1.08
|
|
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$
|
0.40
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2015
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High
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|
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Low
|
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Second
Quarter
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$
|
7.01
|
|
|
$
|
1.02
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Third
Quarter
|
$
|
2.34
|
|
|
$
|
0.80
|
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Fourth
Quarter
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$
|
1.80
|
|
|
$
|
0.84
|
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Holders
As March 20, 2017, there were 111 shareholders
of record per the Company’s transfer agency’s listing of shareholders. The number of record holders was determined
from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names
of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Pacific Stock
Transfer Company, located at 173 Keith Street, Suite 3, Warrenton, Virginia 20186.
Dividend Policy
We have not paid any cash dividends on our
common stock and have no present intention of paying any dividends on the shares of our common stock. Our current policy is to
retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be
determined from time to time by our Board of Directors.
Recent Sales of Unregistered Securities
On January 25, 2017, in connection with the
Whaxy Merger, the Company issued 2,926,829 shares of its common stock pro rata to all stockholders of DDDigtal, in exchange for
all of their shares of common stock of DDDigtal, now our wholly-owned subsidiary.
From October 10 to November 10, 2016, holders
of our $0.50 financing warrants, issued pursuant to our March 2016 Note Offering, exercised 1,510,000 warrants on a cashless basis
into 633,774 shares of the Company’s common stock.
From August 24 to September 30, 2016, a service
provider to the Company converted $35,000 of a convertible debenture issued for services into 84,385 shares of the Company’s
common stock.
From September 15, 2016 to October 6, 2016,
the Company issued 2,377,861 shares of its common stock to holders of the Bridge Notes issued in the March 2016 Note Offering,
in satisfaction of its debt obligations.
ITEM 6. SELECTED FINANCIAL DATA
As a “smaller reporting company”,
we are not required to provide the information required by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion
of our financial condition and results of operations in conjunction with financial statements and notes thereto included elsewhere
in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute
to these differences include those discussed below and elsewhere, particularly in “Risk Factors” section of the Company’s
prospectus, dated and filed with the SEC on August 11, 2016.
Overview
MassRoots, Inc. is a Delaware corporation
formed on April 26, 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 Annual Report on Form 10-K.
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 User-base 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 the the second quarter of 2017.
The Team
MassRoots has 31 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.
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
As more of our localized advertising features
come online throughout 2017, we are competing with dispensary locators and strain guides, such as WeedMaps and Leafly, for dispensaries’
advertising budgets.
Results Of Operations
|
|
For the Fiscal Year ended
|
|
|
31-Dec-16
|
|
31-Dec-15
|
|
$ Change
|
|
% Change
|
Gross revenue
|
|
$
|
701,581
|
|
|
$
|
213,963
|
|
|
$
|
487,618
|
|
|
|
227.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
14,303,960
|
|
|
|
6,339,063
|
|
|
|
7,964,897
|
|
|
|
125.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(13,602,379
|
)
|
|
|
(6,125,100
|
)
|
|
|
(7,477,279
|
)
|
|
|
(122.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income /(Expense)
|
|
|
(4,427,745
|
)
|
|
|
(2,347,798
|
)
|
|
|
(2,079,947
|
)
|
|
|
(88.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(18,030,124
|
)
|
|
|
(8,472,898
|
)
|
|
|
(9,557,226
|
)
|
|
|
(112.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.15
|
)
|
|
|
(79.9
|
)%
|
Since inception on April 26, 2013, and during the year ended December 31, 2016, our business operations have been primarily focused
developing our mobile applications, web platform and increasing our User-base.
Revenues
Since beginning to monetize our platform in
August 2015, we have generated minimal revenues from our operations. We cannot guarantee we will be successful in our business
operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including the financial
risks associated with the limited capital resources currently available to us, and risks associated the implementation of our
business strategies.
For the year ended December 31, 2016, we generated
$701,581 in total revenues, as compared to $213,963 for the year ended December 31, 2015, an increase of $487,618. This revenue
was primarily generated from advertising sales. Of our $701,581 in 2016 revenues, $669,778, or 95% was generated from advertising
services. Our User-base averaged roughly 850,000 Users during this time period, equating to an average of $0.78 in revenue per
User during 12 months of monetization.
Operating Expenses
Our cost of revenues increased $122,816 during
2016, from $57,611 during fiscal year 2015 to $180,427 during fiscal year 2016. This increase was mainly a result of higher sales
and merchandise activity in 2016.
We incurred $985,342 in advertising expenses
during fiscal year 2016, an increase of $267,569, from $717,773 in fiscal year 2015. This increase was mainly a result of increased
marketing in 2016.
Payroll and related expenses increased $731,808
to $2,112,879 during fiscal year 2016 from $1,381,071 during fiscal year 2016. This increase was mainly a result of added personnel
in 2016.
Over the course of fiscal year 2016, we issued
$4,199,906 in common stock for services, as compared to $1,219,904 during fiscal year 2015, an increase of $2,980,002. This increase
was mainly a result of a combination of additional consultants added for our business development and higher valuation of our
stock price.
Options issued for services also increased during fiscal year 2016 to $3,112,156
from $1,273,483 during 2015, an increase of $1,838,673. This increase was mainly a result of compensation to employees past
services. We saw a decrease in the value of warrants issued for services from $229,365 during 2015 to $68,369 during 2016, a
decrease of $160,996.
MassRoots’ other general and administrative
expenses increased to $3,644,881 during fiscal year 2016 from $1,459,946 in 2016, an increase of $2,184,935. This increase was
attributed to the following:
•
|
|
Legal expenses increased during the year ended
December 31, 2016 to $295,325 from $223,548 during the year ended December 31, 2015. This increase was
primarily a result of additional costs associated with our Registration Statement filed in 2016 and our March 2016
Note Offering.
|
•
|
|
Independent contractor expenses decreased from $144,452
during 2015 to $72,183 during 2016 due to our initiative to bring all programing and development in house in 2015.
|
•
|
|
During fiscal 2016, MassRoots incurred $2,112,690
in consulting and accounting related expenses as compared to $345,411 in fiscal 2015. This increase was primarily
caused by increased investor relations and other professionals in establishing a market for our common stock.
|
•
|
|
Travel and related expenses increased to $188,723
in fiscal 2016 from $182,929 during the same period in 2015. Over the course of the year, the MassRoots team attended over
25 conferences and hundreds of meetings with cannabis related businesses that have built the relationships necessary for our
Company to grow.
|
The combination of these increasing expenditures
resulted in MassRoots’ total operating expenses growing to $14,303,960 in fiscal year 2016 versus $6,339,063 in 2015, an
increase of $7,964,897.
Loss from Operations
MassRoots’ Loss from Operations increased
$7,477,279 to $13,602,379 during fiscal year 2016, from $6,125,100 during fiscal year 2015.
Other Income (Expense)
During the fiscal years ended 2016 and 2015, the
Company realized losses related to the fair value mark to market adjustments of its derivative liabilities of $581,912 and $2,236,401,
respectively.
During the fiscal years ended 2016 and 2015, interest expense increased to
$3,845,833 during fiscal 2016 from $111,397 during fiscal 2015, an increase of $3,734,436. This increase is mainly from
non-cash interest and penalty charges relating to our 2016 issued convertible debt of $1,265,376 and $763,872, respectively
and amortization of debt discounts. For the fiscal years ended 2016 and 2015, the Company recorded amortization of discount on
notes payable of $1,549,669 and $107,016, respectively.
Net Loss
Our net loss increased $9,557,226 to $18,030,124
during fiscal year 2016, from $8,472,898 during fiscal year 2015.
Liquidity And Capital Resources
Net cash used in operations for the year ended
December 31, 2016 and December 31, 2015 was $6,182,816 and $3,129,240, 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 Note 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 year ended December 31, 2016 and December 31, 2015 was $83,750 and $244,035, respectively. These investing activities were
related to the purchase of equipment, primarily computers, for the year ended December 31, 2016 and December 31, 2015 of $23,750
and $69,035, respectively. During the year ended December 31, 2016, MassRoots made a deposit of our 2017 acquisition of DDDigtal
LLC and in 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 by $160,285.
Net cash provided by financing activities for
the year ended December 31, 2016 and December 31, 2015 was $6,254,740 and $3,617,663, respectively. During the year ended
December 31, 2016, these funds came mainly from warrant and option exercises, the Company’s March 2016 Note Offering and
equity issuances, while during the year ended December 31, 2015, they came primarily from equity issuances and warrant exercises.
Capital Resources
As of December 31, 2016, we had cash on hand
of $374,490. From January 1, 2017 through March 18, 2017, the Company received an aggregate of approximately $2,900,000 proceeds
from the exercise of warrants to purchase shares of the Company’s common stock. We believe the capital raised from the
exercise of such warrants is sufficient to fund the Company’s operations through the end of June 2017. In addition, as of
March 18, 2017, there were warrants outstanding to purchase up to 561,000 shares of the Company’s common stock with an
exercise price of $0.40 per share and warrants outstanding to purchase up to 6,975,002 shares of the Company’s common stock
with an exercise price of $0.90 per share, which, if all were exercised, would supply $6,501,902 in cash to the Company. These
warrants have various expiring dates through October 2019.
We currently have two credit cards with American
Express, one with a credit limit of $3,000 and one with no pre-set credit limit. Additionally, we have a $10,000 line of credit
with On-Deck Financial. We currently have no other 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 completed its
March 2016 Note Offering, whereby it sold to investors six (6) month secured convertible original issue discount Bridge 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 Bridge Notes in
full and having an exercise price of $1.00 per share with reset provisions. The Bridge Notes were 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 Bridge Note; provided, however, for any part of the principal
amount of the Bridge Note that was not paid at its maturity date, September 14, 2016, the conversion price for such amount was
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 such maturity date. On September 14, 2016, upon maturity of the Bridge 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 Bridge Notes. Because the Bridge Notes were 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 Bridge Notes
and warrants in this offering were $1,420,000, while net proceeds were $1,271,600 (excluding any legal fees). As of October 7,
2016, the Company completed the repayment of all outstanding principal and other amounts due under the Bridge Notes. Since the
issuance of the Bridge 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 Bridge 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 Bridge Notes and is no longer in default under the Bridge Notes or any
related agreements. The Bridge Notes have been retired.
From August 12, 2016 to October 21, 2016,
Company completed its 2016 Direct Registered 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 does not have 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
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15,
Disclosure of Uncertainties about an Entities Ability to
Continue as a Going Concern, which is included in Accounting Standards Codification (ASC) 205, Presentation of Financial Statements
.
This update provides an explicit requirement for management to assess an entity's ability to continue as a going concern, and
to provide related footnote disclosure in certain circumstances.
The amendments are effective for annual periods
ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application
is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The adoption
of this standard is not expected to have a material impact on the Company’s financial position and results of operations.
The FASB issued ASU 2016-02,
Leases (Topic
842)
. ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should
recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is
permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented
using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar
year entity). Early application is permitted for all public business entities and all nonpublic business entities upon issuance.
The adoption of this standard is not expected to have a material impact on the Company’s financial position and results
of operations.
The FASB issued ASU No. 2016-09,
“Improvements to Employee Share-Based Payment Accounting.”
The amendment is part of the FASB’s simplification
initiative and is intended to simplify the accounting around share-based payment award transactions. The amendments include changing
the recording of excess tax benefits from being recognized as a part of surplus capital to being charged directly to the income
statement, changing the classification of excess tax benefits within the statement of cash flows, and allowing companies to account
for forfeitures on an actual basis, as well as tax withholding changes. The amendments in this update are effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. The amendment requires different
transition methods for various components of the standard. Early adoption is permitted. The adoption of this standard is not expected
to have a material impact on the Company’s financial position and results of operations.
In November 2016, the FASB issued ASU No.
2016-18, S
tatement of Cash Flows (Topic 230): Restricted Cash
(a consensus of the FASB Emerging Issues Task Force). This
ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows
include cash and restricted cash equivalents. This ASU is effective for public business entities for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material
impact on the Company’s financial position and results of operations
In April 2015, the FASB issued ASU No. 2015-03(ASU
2015-03),
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
.
This standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction
from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective on a retrospective
basis for annual and interim reporting periods beginning after December 15, 2015, but early adoption is permitted. The adoption
of this standard did not have a material impact on the Company’s financial position and results of operations.
There are other 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As a “smaller reporting company”,
we are not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The financial statements required to be included
in this report appear as indexed in the appendix to this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision
and with the participation of our management, including our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon
that evaluation, and due to identified control deficiencies regarding the lack of segregation of duties and the need for a stronger
internal control environment, our principal executive officer and principal financial officer concluded that our disclosure controls
and procedures were ineffective as of the end of the period covered by this report.
Our principal executive officer and principal
financial officer do not expect that our disclosure controls and procedures or our internal controls will prevent all error or
fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have
been detected.
To address the material weaknesses, we performed
additional analysis and other post-closing procedures in an effort to ensure our financial statements included in this annual
report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the
financial statements included in this report fairly present in all material respects our financial condition, results of operations
and cash flows for the periods presented.
Management’s Report on Internal Control
Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934, as amended. Our management, including our principal executive officer and principal financial officer, assessed the
effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework (2013). A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial
statements will not be prevented or detected on a timely basis.
There was a material weakness in the Company’s
internal control over financial reporting due to the fact that the Company did not have an adequate process established to ensure
appropriate levels of review of accounting and financial reporting matters, which resulted in our closing process not identifying
all required adjustments and disclosures in a timely fashion. We expect that the Company will need to hire accounting personnel
with the requisite knowledge to improve the levels of review of accounting and financial reporting matters. The Company may experience
delays in doing so and any such additional employees would require time and training to learn the Company’s business and
operating processes and procedures. For the near-term future, until such personnel are in place, this will continue to constitute
a material weakness in the Company’s internal control over financial reporting that could result in material misstatements
in the Company’s financial statements not being prevented or detected.
The Company’s management, including
the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent
all errors and all fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
The Company’s CEO and or CFO has identified
control deficiencies regarding the lack of segregation of duties and the need for a stronger internal control environment. The
small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties,
due to the cost/benefit of such remediation.
Because of the above material weakness, management
has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2016, based on the
criteria established in “Internal Control-Integrated Framework” issued by the COSO.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The names and ages of our Directors and Executive
Officers are set forth below. Our By-Laws provide for not less than one and not more than nine Directors. All Directors are elected
annually by the stockholders to serve until the next annual meeting of the stockholders and until their successors are duly elected
and qualified. The officers are elected by our Board.
Name
|
|
Age
|
|
Position and Term
|
Isaac Dietrich
|
|
|
24
|
|
|
Director and Chairman of the Board (Since 2013),
Chief Executive Officer (Since 2013)
|
|
|
|
|
|
|
|
Vincent “Tripp” Keber
|
|
|
48
|
|
|
Director (Since 2014)
|
|
|
|
|
|
|
|
Ean Seeb
|
|
|
41
|
|
|
Director (Since 2014)
|
|
|
|
|
|
|
|
Terence Fitch
|
|
|
57
|
|
|
Director (Since 2015)
|
|
|
|
|
|
|
|
Daniel Hunt
|
|
|
23
|
|
|
Chief Operations Officer (Since 2015)
|
|
|
|
|
|
|
|
Lance Galey
|
|
|
41
|
|
|
Chief Technology Officer (Since 2016)
|
|
|
|
|
|
|
|
George Robert Pullar
|
|
|
48
|
|
|
Chief Financial Officer (Since 2016)
|
Isaac Dietrich, Chief Executive Officer,
Chairman of the Board and Director -
Isaac
Dietrich is the founder, CEO, largest shareholder, and Chairman of the Board
of MassRoots, each since our inception. He is responsible for executing our strategic business development. Mr. Dietrich was the
co-founder and majority shareholder of RoboCent.com from June 2012 until his buyout in December 2016, scaling the business to
millions in revenue. He also founded Tidewater Campaign Solutions, LLC, a Virginia Beach-based political strategy firm that was
retained by 30 political campaigns and political action committees from January 2010 to December 2012. From February to December
2010, Mr. Dietrich served as Field Director for former Congressman E. Scott Rigell’s campaign.
Vincent “Tripp” Keber, Director
–
Tripp Keber has served as a Director of MassRoots since 2014. Mr. Keber also is a co-founder, Director and Chief Executive
Officer of Dixie Elixirs & Edibles, a Colorado licensed medical marijuana infused products manufacturer. He is a founding
director of the National Cannabis Industry Association, and, since 2013, has served as a director of the Marijuana Policy Project.
He is also an advisory board member of the Medical Marijuana Industry Group in Colorado. Mr. Keber also serves as a board member
of American Cannabis Company (2014-current). In his current role as CEO of Dixie, Mr. Keber is responsible for the overall strategy,
licensing, marketing, branding and expansion efforts related to the Dixie brand, both domestically and internationally. Mr. Keber
has been featured on CBS’s 60 Minutes and CNBC.
Prior to joining Dixie, Mr. Keber served as
Chief Operating Officer for Bella Terra Resort Development Company, and EVP of Business Development for Sagebrush Realty Development.
He has a BS in Political Science from Villanova University and currently resides in both Aspen and Denver, CO with his family.
He is involved in several charitable organizations located within his community and assists in the research and development of
cannabis support for veterans suffering from PTSD. As an experienced leader in the legal cannabis industry, we believe that Mr.
Keber will use his experience and industry knowledge to help guide our leadership team.
Ean Seeb, Director –
Ean Seeb has
served as a Director of MassRoots since 2014. Mr. Seeb was previously the co-owner and manager of Denver Relief LLC,
formerly Denver’s oldest medical and adult use cannabis operation. Denver Relief’s cultivation and infused products
manufacturing facility was sold in July 2016 to county music legend Willie Nelson (CMH Brands). As a founding partner of
Denver Relief Consulting LLC and seasoned cannabis dispensary operator, Mr. Seeb has significant experience
navigating complex legislation and regulatory demands unique to legal cannabis operations. Mr. Seeb also serves as a
board member of Quark Distribution (2014-present), Manna Molecular Science (2015-current), Vapor Slide (2016-current) and is on
the board of advisors for U.S. Coffee (2017-current). He serves as a current board member and former Board Chair for
the National Cannabis Industry Association and holds leadership positions with charitable organizations focused on a range of
social causes, from civil rights to sustainable volunteer farming. Mr. Seeb has been actively involved with non-profit
groups for over two decades. His years of humanitarian experience lead Mr. Seeb to conceptualize and develop a cannabis-centric
service organization called the Denver Relief GREEN TEAM in 2010. He holds a B.S. degree in Business Administration with an emphasis
in Computer Information Systems from University of Northern Colorado. We believe that Mr. Seeb will use his experience
and industry knowledge to help guide our leadership team.
Terence Fitch, Director
- Terence Fitch
has served as a Director of the Company since 2015. Mr. Fitch is a seasoned corporate executive with 23 years of marketing, sales,
finance, manufacturing, supply chain and media experience. Mr. Fitch founded Drink Teck, LLC in 2013 and has served as its Chief
Executive Officer since that time. Drink Teck LLC is a functional beverage company which uses liposome technology to cost-effectively
formulate drinks for the consumer health and wellness sector. Prior to founding Drink Teck LLC, Mr. Fitch spent 3 years at Coca
Cola Refreshments as Senior Vice President and General Manager. Before that, 18 years at, Coca-Cola Enterprises, where, from 2004
to 2010, he served as the Senior Vice President and General Manager of the Western Region and was responsible for a team of 13,500
sales, strategy, marketing, operations, manufacturing, supply chain and analytical professionals and accountable for over $4.2
billion in sales. From 1998 to 2002, Mr. Fitch acted as Division Vice President and General Manager for Coca-Cola Enterprises
and, from 1994-1998, was the Regional Vice President of Sales and Marketing of the Gulf States for Coca-Cola Enterprises. Mr.
Fitch has a Bachelor of Science in Marketing and Finance from Arizona State University. Mr. Fitch brings a strong understanding
of financial reporting and corporate governance matters, along with expertise in corporate governance, enterprise risk management
and strategic planning, which we believe will strengthen the Board’s collective qualifications, skills, and experience.
Daniel “Dan” Hunt, Chief Operations
Officer -
Since June 2015, Daniel Hunt has served as the Company’s Chief Operations Officer, responsible for overseeing
the Company’s daily operations, including marketing, sales, business development, staffing, processes and infrastructure.
From July 2014 to June 2015, Mr. Hunt served as the Company’s Vice President of Marketing, where he was responsible for
the coordination and implementation of the Company’s marketing initiatives. From June 2011 to July 2014, Mr. Hunt served
as Head of Business Development for SearchParty Music, a media production company in Massachusetts. Prior to joining the Company,
Mr. Hunt attended James Madison University from 2012-2014, where he gained experience while supporting the operations of early-stage
startups as a member of the Society of Entrepreneurs. Mr. Hunt also served on the board of managers of Flowhub, LLC, a private
cannabis point-of-sale company, from May 2015 to September 2016.
Lance Galey, Chief Technology Officer –
Lance Galey joined MassRoots as its Chief Technology Officer in June 2016. Previously, Mr. Galey was the Chief Cloud Architect
for Autodesk from February 2014 to April 2016, where he helped transform their products into strategic SaaS businesses. From June
2012 to February 2015, Mr. Galey served as Vice President and Principal Architect at Salesforce, where he led the architecture
and development of numerous core infrastructure services underlying a large portfolio of Salesforce SaaS applications and was
selected as the executive MVP for the technology division of Salesforce.com. Prior to his time at Salesforce, Mr. Galey served
as Technical Advisor for PLUMgrid Inc. (2012-2013); Chief Architect and Head of OpenStack Engineering of Cloud Services for WebEx,
a division of Cisco (2011-2012); and as the Director of Architecture for the Disney Connected and Advanced Technologies division
of The Walt Disney Company (2009-2011). Mr. Galey also served as Sr. Program Manager at Microsoft Inc. (2006-2009) and began his
career at Amazon (2005-2006) and Level 3 Communications (2000-2005). Mr. Galey is passionate about helping technology companies
scale their teams and products to meet growing demands. He holds a B.S. in computer science from Regis University.
George Robert “Bob” Pullar, Chief Financial Officer –
Bob Pullar
joined MassRoots as its Chief Financial Officer in December 2016. Prior to joining MassRoots, since October 2006, Mr. Pullar,
co-owned and served as Managing Director of Axis Private Equity Group, LLC, an investment firm focused on making equity investments
in well-managed, profitable companies. Mr. Pullar’s experience includes the negotiation of leveraged buyouts, management
buyouts, recapitalizations and equity investments with privately held businesses and subsidiaries or divisions of public companies.
Mr. Pullar brings to the Company a strong understanding of and tremendous experience in the financial industry.
Legal Proceedings
We know of no pending proceedings to which
any director, member of senior management, or affiliate is either a party adverse to us, or our subsidiaries, or has a material
interest adverse to us or our subsidiaries.
None of our executive officers or directors
have (i) been involved in any bankruptcy proceedings within the last five years, (ii) been convicted in or has pending any criminal
proceedings (other than traffic violations and other minor offenses), (iii) been subject to any order, judgment or decree enjoining,
barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity or (iv) been found
to have violated any Federal, state or provincial securities or commodities law and such finding has not been reversed, suspended
or vacated.
Corporate Governance
Governance of Our Company
We seek to maintain high standards of business
conduct and corporate governance, which we believe are fundamental to the overall success of our business, serving our shareholders
well and maintaining our integrity in the marketplace. Our corporate governance guidelines and code of business conduct, together
with our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws and the charters for each of our Board
committees, form the basis for our corporate governance framework. We also are subject to certain provisions of the Sarbanes-Oxley
Act and the rules and regulations of the SEC. The full text of the Code of Conduct is available on our website at www.massroots.com/investors.
As described below, our Board has established
three standing committees to assist it in fulfilling its responsibilities to the Company and its stockholders: the Audit Committee,
the Compensation Committee and the Nominating and Corporate Governance Committee.
Our Board of Directors
Our Board of Directors (our “Board”)
currently consists of five members. The number of directors on our Board can be determined from time to time by action of our
Board.
Our Board has decided that it would judge
the independence of its directors by the heightened standards established by the NASDAQ Stock Market, despite the Company not
being subject to these standards at such time. Accordingly, the Board has determined that our three non-employee directors, Ean
Seeb, Terence Fitch, and Tripp Keber, each meet the independence standards established by the NASDAQ Stock Market and the applicable
independence rules and regulations of the SEC, including the rules relating to the independence of the members of our Audit Committee
and Compensation Committee. Our Board considers a director to be independent when the director is not an officer or employee of
the Company or its subsidiaries, does not have any relationship which would, or could reasonably appear to, materially interfere
with the independent judgment of such director, and the director otherwise meets the independence requirements under the listing
standards of the NASDAQ Stock Market and the rules and regulations of the SEC.
Our Board believes its members collectively
have the experience, qualifications, attributes and skills to effectively oversee the management of our Company, including a high
degree of personal and professional integrity, an ability to exercise sound business judgment on a broad range of issues, sufficient
experience and background to have an appreciation of the issues facing our Company, a willingness to devote the necessary time
to their Board and committee duties, a commitment to representing the best interests of the Company and our stockholders and a
dedication to enhancing stockholder value.
Committees of the Board
In December 2015, our Board designated the
following three committees of the Board: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance
Committee.
Terence Fitch is the Chairman of the Audit
Committee, and Ean Seeb and Tripp Keber are members. the Audit Committee is responsible for, among other things, overseeing the
financial reporting and audit process and evaluating our internal controls over financial reporting. The Board has determined
that Terence Fitch, Ean Seeb and Tripp Keber would each be considered “independent directors” and “Audit Committee
financial experts” within the meaning of the NASDAQ and Exchange Act rules.
Tripp Keber is the Chairman of the Compensation
Committee, and Ean Seeb is a member. The Compensation Committee is responsible for, among other things, establishing and overseeing
the Company’s executive and equity compensation programs, establishing performance goals and objectives, and evaluating
performance against such goals and objectives. The Board has determined that Tripp Keber and Ean Seeb would each be considered
“independent directors” within the meaning of the NASDAQ and Exchange Act rules.
Ean Seeb is the Chairman of the Nominating
and Corporate Governance Committee, and Tripp Keber is a member. The Nominating and Corporate Governance Committee is responsible
for, among other things, identifying and recommending candidates to fill vacancies occurring between annual shareholder meetings
and reviewing the Company’s policies and programs relating to matters of corporate citizenship, including public issues
of significance to the Company and its shareholders. The Board has determined that Ean Seeb and Tripp Keber would be considered
“independent directors” within the meaning of the NASDAQ and Exchange Act rules.
Current copies of the charters of the Audit
Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on our corporate website at
https://massroots.com/investors/governance.
Risk Oversight
Our Board oversees the management of risks
inherent in the operation of our business and the implementation of our business strategies. Our Board performs this oversight
role by using several different levels of review. In connection with its reviews of the operations and corporate functions of
our Company, our Board addresses the primary risks associated with those operations and corporate functions. In addition, our
Board reviews the risks associated with our Company’s business strategies periodically throughout the year as part of its
consideration of undertaking any such business strategies. Each of our Board committees also coordinates oversight of the management
of our risk that falls within the committee’s areas of responsibility. In performing this function, each committee has full
access to management, as well as the ability to engage advisors. The Board also is provided updated by the CEO and other executive
officers of the Company on a regular basis.
Section 16 Reporting Compliance
Section 16(a) of the Securities Exchange Act
of 1934 requires our directors and executive officers and persons who own more than 10% of our outstanding shares of common stock
(collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and reports of changes in ownership
in our common stock and other equity securities. Specific due dates for these records have been established, and we are required
to report in this report any failure in 2016 to file by these dates. To the Company’s knowledge, based solely on its review
of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required,
the Company believes that during its fiscal year ended December 31, 2016, all filing requirements applicable to the Reporting
Persons were timely met.
Shareholder Communications
Although we do not have a formal policy regarding
communications with the Board, shareholders may communicate with the Board by writing to us at 1624 Market Street, Suite 201,
Denver, CO 80202, Attention: Legal. Shareholders who would like their submission directed to a member of the Board may so specify,
and the communication will be forwarded, as appropriate. Please note that the foregoing communication procedure does not apply
to (i) shareholder proposals pursuant to Exchange Act Rule 14a-8 and communications made in connection with such proposals or
(ii) service of process or any other notice in a legal proceeding.
ITEM 11. EXECUTIVE COMPENSATION
Named Executive Officers
Our “named executive officers”
for the 2016 fiscal year consisted of the following individuals:
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Isaac Dietrich, our Chief Executive Officer
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Dan Hunt, our Chief
Operations Officer
Lance Galey, Chief Technology Officer
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No other executive officers earned over $100,000
during the previous fiscal year.
Summary Compensation Table
The table below summarizes all compensation
awarded to, earned by, or paid to our Chief Executive Officer and our two most highly compensated executive officers (the “named
executive officers” listed above) at the end of our last fiscal year for all services rendered in all capacities to us during
the years during which they served as executive officers. Where a named executive officer is also a director, all compensation
related to such individuals position as an officer.
Name
&
Principal
Position
|
|
Year
|
|
Salary
$
|
|
Bonus
$
|
|
Stock
Awards (1)
$
|
|
Option
Awards (1)
$
|
|
Non-Equity
Incentive Plan
Compensation
$
|
|
All
Other
Compensation
$
|
|
Total
$
|
|
Isaac
Dietrich
Chief Executive Officer, Director
|
|
|
2016
2015
|
|
|
|
107,917
81,220
|
|
|
|
—
—
|
|
|
|
—
—
|
|
|
|
—
—
|
|
|
|
—
—
|
|
|
|
—
—
|
|
|
|
107,917
81,220
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
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Daniel
Hunt
Chief Operating Officer
|
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|
2016
2015
|
|
|
|
104,377
67,500
|
|
|
|
__
—
|
|
|
|
178,000
(2)
25,000
(4)(6)
|
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|
|
706,335
(3)
245,951
(4)(6)
|
|
|
|
__
—
|
|
|
|
__
—
|
|
|
|
988,712
338,451
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
|
|
|
|
|
|
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Lance
Galey
Chief
Technology Officer
|
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|
2016
2015
|
|
|
|
10,000
—
|
|
|
|
__
—
|
|
|
|
__
—
|
|
|
|
706,335
(3)
—
|
|
|
|
__
—
|
|
|
|
__
—
|
|
|
|
716,335
—
|
|
|
|
|
|
|
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|
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(1)
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These
amounts are the aggregate fair value of the equity compensation incurred by the Company for payments to executives during
the fiscal year. The aggregate fair value is computed in accordance with FASB ASC Topic 718. The fair market value was calculated
using the Black-Scholes options pricing model. Assumptions underlying the valuation of each specific award are included in
Note 9 of our Financial Statements included in this Annual Report on Form 10-K.
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(2)
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On
December 14, 2015, the Company’s Board approved the grant of 200,000 unvested restricted shares to Mr. Hunt. However,
pursuant to the 2015 Plan, the grant would not occur until shareholder approval of the 2015 Plan became effective, which occurred
in January 2016 (as described further in the section below entitled “Our Equity Incentive Plans”). As such, this
grant will be included as compensation for Mr. Hunt in fiscal year 2016.
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(3)
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On
December 19, 2016, the Company granted each to Mr. Hunt and Mr. Galey 1,000,000 options to purchase the Company’s common
stock at $0.86 per share for ten years, vesting immediately.
|
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(4)
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|
On
January 1, 2015, the Company approved the issuance to Daniel Hunt of 50,000 shares of its common stock and 100,000 options
to purchase shares of common stock at $0.50 per share pursuant to the 2014 Plan (as defined below), which would vest over the
period of one year on a monthly basis.
|
|
(5)
|
|
On
December 14, 2015, the Board approved a grant of 800,000 vested options to purchase shares of common stock at $1.00 per share
to Mr. Hunt pursuant to the 2015 Plan (as defined below) which vest as follows: upon the Company reaching 1,000,000 registered
Users, 200,000 options shall vest; upon the Company reaching 2,500,000 registered Users, 200,000 options shall vest; upon
the Company reaching $1,000,000 in cumulative revenue, 200,000 options shall vest; and, upon the Company reaching $2,500,000
in cumulative revenue, 200,000 options shall vest.
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Outstanding
Equity Awards at December 31, 2016 Fiscal Year End
The
following table sets forth the equity awards our named executive officers had outstanding at December 31, 2016.
Option Awards
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Name
|
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|
Number of securities underlying unexercised options Exercisable
|
|
|
|
Number of securities underlying unexercised
options
Unexercisable
|
|
|
|
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned
Options
|
|
|
|
Option
exercise price
|
|
|
|
Option
expiration date
|
|
Isaac Dietrich
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
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|
Daniel Hunt
|
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|
100,000
|
|
|
|
—
|
|
|
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—
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$
|
0.50
|
|
|
|
1/1/2025
|
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|
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200,000
|
|
|
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—
|
|
|
|
600,000
|
(1)
|
|
$
|
1.00
|
|
|
|
12/14/2025
|
|
|
|
|
—
|
|
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|
1,000,000
|
|
|
|
—
|
|
|
$
|
0.86
|
|
|
|
12/19/2026
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Lance Galey
|
|
|
400,000
|
|
|
|
200,000
|
|
|
|
—
|
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$
|
0.53
|
|
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10/3/2026
|
|
|
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—
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1,000,000
|
|
|
|
—
|
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|
$
|
0.86
|
|
|
|
12/19/2026
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(1)
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The 600,000 unvested
options were awarded pursuant to the 2015 Plan, which vest as follows: upon the Company reaching 2,500,000 registered Users,
200,000 options shall vest; upon the Company reaching 1,000,000 in cumulative revenue, 200,000 options shall vest; and, upon
the Company reaching $2,500,000 in cumulative revenue, 200,000 options shall vest.
|
Narrative
Disclosure to Summary Compensation and Option Tables
Isaac
Dietrich
Isaac
Dietrich provides services to us as our Chief Executive Officer pursuant to an at-will agreement (with one month notice to be
given prior to termination) that provides that Mr. Dietrich would be paid an amount determined by the Company in accordance with
the Company’s normal payroll procedures. From April 1, 2014 to March 31, 2015, Mr. Dietrich was paid a salary of $5,000
per month. From April 1, 2015 until March 31, 2016, Mr. Dietrich was paid a salary of $6,500 per month. From April 1, 2016 until
September 30, 2016, Mr. Dietrich was paid a salary of $10,833 per month. From October 1, 2016 and thereafter, Mr. Dietrich was
paid a salary of $7,917 per month. Mr. Dietrich did not receive any compensation related to his position as a director.
In
December 2015, Mr. Dietrich started receiving health, vision and dental insurance. No retirement plan, life insurance or employee
benefits program has been awarded to Mr. Dietrich and he serves at the direction of the Board.
Daniel
Hunt
Daniel
“Dan” Hunt provides services to us as our Chief Operating Officer pursuant to an “at-will” agreement that
became effective July 19, 2015. Pursuant to this agreement, Mr. Hunt receives a salary of $78,000 per year and may be terminated
by either party with or without cause with one (1) month’s written notice. From January 1, 2015 until July 17, 2015, Mr.
Hunt served as an at will employee with a salary of 3,500 per month. From July 17, 2015 to March 31, 2016, Mr. Hunt was paid a
salary of $6,500 per month. From April 1, 2016 until September 30, 2016, Mr. Hunt was paid a salary of $10,833 per month. From
October 1, 2016 and thereafter, Mr. Hunt was paid a salary of $7,500 per month
In
addition, on January 1, 2015, the Company approved the issuance to Mr. Hunt 50,000 shares of its common stock and 100,000 options
to purchase shares of common stock at $0.50 per share pursuant to the 2014 Plan, which would vest over the period of one year
on a monthly basis. The fair market value was calculated using the Black-Scholes options pricing model, assuming approximately
2.17% risk-free interest, 0% dividend yield, 1.50% volatility, and expected term of 5.25 years.
On
December 14, 2015, the Board approved a grant of 800,000 unvested options to purchase shares of common stock at $1.00 per share
to Mr. Hunt pursuant to the 2015 Plan, which vest as follows: upon the Company reaching 1,000,000 registered Users, 200,000 options
shall vest; upon the Company reaching 2,500,000 registered Users, 200,000 options shall vest; upon the Company reaching $1,000,000
in cumulative revenue, 200,000 options shall vest; and, upon the Company reaching $2,500,000 in cumulative revenue, 200,000 options
shall vest. The fair market value was calculated using the Black-Scholes options pricing model. Under this model, the fair market
value of the 200,000 options that vest upon the Company reaching 1,000,000 register Users was calculated assuming approximately
2.23% risk-free interest, 0% dividend yield, 280% volatility, and expected term of 5.25 years. No cost is recognized in 2015 for
the other 600,000 options as the probability of achieving those targets is not currently estimable. As of December 31, 2016, 200,000
options had vested.
On
that same date, the Company’s Board approved the grant of 200,000 unvested restricted shares to Mr. Hunt. However, pursuant
to the 2015 Plan, the grant did not occur until shareholder approval of the 2015 Plan became effective, which occurred in January
2016. As such, this grant has been included as compensation for Mr. Hunt in fiscal year 2016.
On
December 19, 2016, the Board approved a grant of unvested options to purchase up to 1,000,000 shares of common stock at $0.86
per share to Mr. Hunt pursuant to the 2017 Plan (as defined below), which vest as follows: (i) 83,333 options on the first day
of each of January, February, April, May, July, August, October and November of 2017; and (ii) 83,334 options on the first day
of each of March, June, September and December of 2017. Because no options vested in fiscal year 2016, this grant will included
as compensation for Mr. Hunt in fiscal year 2017.
Lance
Galey
Lance
Galey provides services to us as our Chief Technology Officer pursuant to an “at-will” agreement that became effective
June 20, 2016.
On
October 3, 2016, pursuant to the Company’s 2016 Plan (as defined below), the Board granted Mr. Galey a stock grant of 600,000
unvested restricted shares of the Company’s common stock (the “Galey Stock Award”) and unvested options to purchase
up to 600,000 shares of the Company’s common stock with an exercise price of $0.51 which will expire ten years from issuance
(the “Galey Option Award”). The Galey Stock Award will vest as follows: (i) 300,000 shares will vest on October 3,
2016 and (i) 50,000 shares will vest on the first day of each month from November 2016 through April 2017. If the Company terminates
the employment of Mr. Galey prior to the full vesting of the Galey Stock Award and Galey Option Award, or in the event of a change
of control, merger, or similar event affecting the Company, all remaining unvested options and shares will vest immediately.
On
December 19, 2016, the Board approved a grant of unvested options to purchase up to 1,000,000 shares of common stock at $0.86
per share pursuant to the 2017 Plan to Mr. Galey pursuant to the 2017 Plan, which vest as follows: (i) 83,333 options on the first
day of each of January, February, April, May, July, August, October and November of 2017; and (ii) 83,334 options on the first
day of each of March, June, September and December of 2017. Because no options vested in fiscal year 2016, this grant will be
included as compensation for Mr. Galey in fiscal year 2017.
Compensation
Adjustments
On
March 29, 2016, our Board, upon the recommendation of the Company’s Compensation Committee, approved increases in the salary
of Mr. Dietrich and Mr. Hunt, such that each would receive $10,833 per month for their services in their respective positions.
On
October 5, 2016, our Board, upon the recommendation of the Company’s Compensation Committee, approved adjustments to several
officers’ compensation packages. Specifically, in connection with the Board’s expense reduction initiatives, the Board
approved (i) a decrease of the annual salary of the Company’s President and Chief Executive Officer, Isaac Dietrich, to
$95,000 per year from $130,000 per year; (ii) a decrease of the annual salary of the Company’s Chief Operating Officer, Dan
Hunt, to $90,000 per year from $130,000 per year; and (iii) a decrease of the annual salary of the Company’s Chief Technology
Officer, Lance Galey, to $60,000 per year from $150,000 per year.
In
addition to the salary decrease, Mr. Galey agreed to waive $51,785 in salary which he had earned but deferred payment of in connection
with the Board’s approval of the grant, pursuant to the Company’s 2016 Plan, to Mr. Galey of an 600,000 unvested restricted
shares of the Company’s common stock (the “Galey Stock Award”) and unvested options to purchase up to 600,000
shares of the Company’s common stock with an exercise price of $0.51 which will expire ten years from issuance (the “Galey
Option Award”). The Galey Stock Award will vest as follows: (i) 300,000 shares will vest on October 3, 2016 and (i)
50,000 shares will vest on the first day of each month from November 2016 through April 2017. If the Company terminates the employment
of Mr. Galey prior to the full vesting of the Galey Stock Award and Galey Option Award, or in the event of a change of control,
merger, or similar event affecting the Company, all remaining unvested options and shares will vest immediately.
At
no time during the periods listed in the above tables, with respect to any named executive officers, was there:
•
|
|
any outstanding
option or other equity-based award re-priced or otherwise materially modified (such as by extension of exercise periods, the
change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of
the bases upon which returns are determined);
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•
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|
any waiver
or modification of any specified performance target, goal or condition to payout with respect to any amount included in non-stock
incentive plan compensation or payouts;
|
•
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|
any non-equity
incentive plan award made to a named executive officer;
|
•
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|
any nonqualified
deferred compensation plans including nonqualified defined contribution plans; or
|
•
|
|
any payment
for any item to be included under All Other Compensation (column (i)) in the Summary Compensation Table.
|
Director
Compensation
Our
interested, employee directors do not receive any additional compensation for their service as directors.
The
following table shows for the fiscal year ended December 31, 2016, certain information with respect to the compensation of all
non-employee directors of the Company:
Name
|
|
|
|
Fees
Earned or
Paid in Cash
|
|
Stock
Awards
(1)
|
|
Option
Awards
(1)
|
|
Total
|
|
Ean
Seeb
(2)(3)
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
706,335
|
|
$
|
706,335
|
|
Tripp
Keber
(2)(3)
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
706,335
|
|
$
|
706,335
|
|
Terence
Fitch
(2)
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
706,335
|
|
$
|
706,335
|
|
(1)
|
|
These
amounts are the aggregate fair value of the equity compensation granted to our directors during the fiscal year. The fair
value is computed in accordance with FASB ASC Topic 718. The fair market value was calculated using the Black-Scholes options
pricing model. Assumptions underlying the valuation of each specific award are included in Note 9 of our Financial Statements
included in this Annual Report on Form 10-K.
|
(2)
|
|
Messrs.
Seeb, Keber and Fitch joined our Board on June 4, 2014, March 31, 2014 and December 9, 2015, respectively.
|
(3)
|
|
As discussed
below, Ean Seeb and Tripp Keber received stock awards and options on June 4, 2014 intended to compensate them for approximately
three years of service on the Company’s Board. On December 19, 2016, the Company granted Messrs. Seeb and Keber options
to acquire 1,000,000 shares of the Company’s common stock each, for ten years with an exercise price of $0.86
per share and vesting monthly over one year.
|
On
December 9, 2015, in exchange for his service as a Director, the Board approved the issuance to Mr. Terence Fitch, pursuant to
the 2015 Plan, unvested options to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $0.90
per share that will expire ten years from date of issuance and vest monthly over the period of one year, beginning January 1,
2016. All vesting per the above schedule shall cease thirty days from the time the applicable director is dismissed from the Board,
fails to win re-election by shareholders, or resigns as a director. The fair market value of the options was calculated using
the Black-Scholes options pricing model, assuming approximately 2.23% risk-free interest, 0% dividend yield, 280% volatility,
and expected term of 5.25 years.
Also
on December 9, 2015, the Company’s Board approved the grant of 100,000 shares to Mr. Fitch. However, pursuant to the 2015
Plan, the grant did not occur until shareholder approval of the 2015 Plan became effective, which occurred in January 2016. As
such, this grant has been included as compensation for Mr. Fitch in fiscal year 2016.
On
June 6, 2014, each of Ean Seeb and Tripp Keber, received the following pursuant to the 2014 Plan for their service as a director:
(i) a stock award of 250,000 shares of our Common Stock (the “Stock Award”) and (ii) options to purchase up to 750,000
shares of our common stock at $0.10 per share (each an “Option”) which vest as follows:
•
|
|
Beginning
on October 1, 2014, 250,000 Options shall begin to vest over the period of one year on a monthly basis, such that 20,833 Options
shall vest on the first of each month, except for every third month when 20,834 Options shall vest;
|
•
|
|
Beginning
on the later of (i) the date that Company attains 830,000 Users (“Users” are defined for the purposes of the Options
as the number of unique registrations for MassRoots Inc.’s network through MassRoots Inc.’s mobile application
and/or website (final determination shall be by the Committee)) or (ii) October 1, 2015, 250,000 Options shall begin to vest
over the period of one year on a monthly basis, such that 20,833 Options shall vest on the first of each month, except for
every third month when 20,834 Options shall vest; and
|
•
|
|
Beginning
on the later of (1) the date that Company attains 1,080,000 Users or (2) October 1, 2016, 250,000 Options shall vest immediately.
|
All
vesting per the above schedule shall cease thirty days from the time the applicable director is dismissed from the Board, fails
to win re-election by shareholders, or resigns as a director. As of December 31, 2016, 750,000 Options held by each of Messrs.
Seeb and Keber had vested and were available for exercise. No additional grants were made to Messrs. Keber and Seeb during 2015.
The fair market value was calculated using the Black-Scholes options pricing model, assuming approximately 2.61% risk-free interest,
0% dividend yield, 150% volatility, and expected life of 10 years.
On
December 19, 2016, the Board approved a grant of unvested options to purchase up to 1,000,000 shares of common stock at $0.86
per share pursuant to the 2017 Plan to each of Messrs. Seeb, Keber and Fitch pursuant to the 2017 Plan, which vest as follows
for each such recipient: (i) 83,333 options on the first day of each of January, February, April, May, July, August, October and
November of 2017; and (ii) 83,334 options on the first day of each of March, June, September and December of 2017. Because no
options vested in fiscal year 2016, this grant will be included as compensation for Messrs. Seeb, Keber and Fitch in fiscal year
2017.
Indemnification
of Officers and Directors
Our
Amended and Restated Certificate of Incorporation provides that we shall indemnify our officers and directors to the fullest extent
permitted by applicable law against all liability and loss suffered and expenses (including attorneys” fees) incurred in
connection with actions or proceedings brought against them by reason of their serving or having served as officers, directors
or in other capacities. We shall be required to indemnify a director or officer in connection with an action or proceeding commenced
by such director or officer only if the commencement of such action or proceeding by the director or officer was authorized in
advance by the Board of Directors.
We
currently maintain director’s and officer’s liability insurance having a total aggregate limit of liability of $1,000,000,
and an umbrella policy for up to $1,000,000 in excess coverage.
Our
Equity Incentive Plans
Our
shareholders approved our 2014 Equity Incentive Plan (“2014 Plan”) in June 2014, our 2015 Equity Incentive Plan (“2015
Plan”) in December 2015, our 2016 Equity Incentive Plan (“2016 Plan”) in October 2016 and our 2017 Equity Incentive
Plan (“2017 Plan”, and collectively, the “Plans”) in December 2016. The Plans are identical, except for
number of shares reserved for issuance under each.
The
Plans provide for the grant of incentive stock options to our employees and our parent and subsidiary corporations’ employees,
and for the grant of nonstatutory stock options, stock bonus awards, restricted stock awards, performance stock awards and other
forms of stock compensation to our employees, including officers, consultants and directors. Our Plans also provide that the grant
of performance stock awards may be paid out in cash as determined by the Committee (as defined herein).
Plan
Details
The
following table and information below sets forth information as of December 31, 2016 on our Plans:
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
|
Number
of securities remaining available for future issuance under equity compensation plans
(excluding securities reflected in column (a))
(c)
|
Equity
compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Equity Incentive
Plan
|
|
|
2,233,220
|
|
|
|
|
|
|
$
|
0.31
|
|
|
0
|
2015 Equity Incentive
Plan
|
|
|
3,336,248
|
|
|
|
|
|
|
$
|
0.94
|
|
|
24,095
|
2016 Equity Incentive
Plan
|
|
|
2,220,117
|
|
|
|
|
|
|
$
|
0.51
|
|
|
144,219
|
2017 Equity Incentive
Plan
|
|
|
8,775,000
|
|
|
|
|
|
|
$
|
0.87
|
|
|
13,507,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
—
|
Total
|
|
|
16,564,585
|
|
|
|
|
|
|
$
|
0.76
|
|
|
13,676,083
|
Summary
of the Plans
Authorized
Shares
A
total of 4,000,000 shares of our common stock are reserved for issuance pursuant to the 2014 Plan. A total of 4,500,000 shares
of our common stock are reserved for issuance pursuant to the 2015 Plan. A total of 6,000,000 shares of our common stock are reserved
for issuance pursuant to the 2016 Plan. A total of 25,000,000 shares of our common stock are reserved for issuance pursuant to
the 2017 Plan. Shares issued under our Plans may be authorized but unissued or reacquired shares of our common stock. Shares subject
to stock awards granted under our Plans that expire or terminate without being exercised in full, or that are paid out in cash
rather than in shares, will not reduce the number of shares available for issuance under our Plans. Additionally, shares issued
pursuant to stock awards under our Plans that we repurchase or that are forfeited, as well as shares reacquired by us as consideration
for the exercise or purchase price of a stock award, will become available for future grant under our Plans.
Administration
Our
Board, or a duly authorized committee thereof (collectively, the “Committee”), has the authority to administer our
Plans. Our Board may also delegate to one or more of our officers the authority to designate employees other than Directors and
officers to receive specified stock, which, in respect to those awards, said officer or officers shall then have all that the
Committee would have.
Subject
to the terms of our Plans, the Committee has the authority to determine the terms of awards, including recipients, the exercise
price or strike price of stock awards, if any, the number of shares subject to each stock award, the fair market value of a share
of our common stock, the vesting schedule applicable to the awards, together with any vesting acceleration, the form of consideration,
if any, payable upon exercise or settlement of the stock award and the terms and conditions of the award agreements for use under
the Plans. The Committee has the power to modify outstanding awards under the Plans, subject to the terms of the Plans and applicable
law. Subject to the terms of our Plans, the Committee has the authority to reprice any outstanding option or stock appreciation
right, cancel and re-grant any outstanding option or stock appreciation right in exchange for new stock awards, cash or other
consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the
consent of any adversely affected participant.
Stock
Options
Stock
options may be granted under the Plans. The exercise price of options granted under our Plans must at least be equal to the fair
market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except that
with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must
not exceed 5 years and the exercise price must equal at least 110% of the fair market value on the grant date. The Committee will
determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable
to the Committee, as well as other types of consideration permitted by applicable law. No single participant may receive more
than 25% of the total options awarded in any single year. Subject to the provisions of our Plans, the Committee determines the
other terms of options.
Performance
Shares
Performance
shares may be granted under our Plans. Performance shares are awards that will result in a payment to a participant only if performance
goals established by the administrator are achieved or the awards otherwise vest. The Committee will establish organizational
or individual performance goals or other vesting criteria in its discretion, which, depending on the extent to which they are
met, will determine the number and/or the value of performance shares to be paid out to participants. After the grant of a performance
share, the Committee, in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such
performance shares. The Committee, in its sole discretion, may pay earned performance units or performance shares in the form
of cash, in shares or in some combination thereof, per the terms of the agreement approved by the Committee and delivered to the
participant. This agreement will state all terms and condition of the agreements.
Restricted
Stock
The
terms and conditions of any restricted stock awards granted to a participant will be set forth in an award agreement and, subject
to the provisions in the Plans, will be determined by the Committee. Under a restricted stock award, we issue shares of our common
stock to the recipient of the award, subject to vesting conditions and transfer restrictions that lapse over time or upon achievement
of performance conditions. The Committee will determine the vesting schedule and performance objectives, if any, applicable to
each restricted stock award. Unless the Committee determines otherwise, the recipient may vote and receive dividends on shares
of restricted stock issued under our Plans.
Other
Share-Based Awards and Cash Awards
The
Committee may make other forms of equity-based awards under our Plans, including, for example, deferred shares, stock bonus awards
and dividend equivalent awards. In addition, our Plans authorizes us to make annual and other cash incentive awards based on achieving
performance goals that are pre-established by our compensation committee.
Change
in Control
If
the Company is merged or consolidated with another entity or sells or otherwise disposes of substantially all of its assets to
another company while awards or options remain outstanding under the Plans, unless provisions are made in connection with such
transaction for the continuance of the Plans and/or the assumption or substitution of such awards or options with new options
or stock awards covering the stock of the successor company, or parent or subsidiary thereof, with appropriate adjustments as
to the number and kind of shares and prices, then all outstanding options and stock awards which have not been continued, assumed
or for which a substituted award has not been granted shall, whether or not vested or then exercisable, unless otherwise specified
in the relevant agreements, terminate immediately as of the effective date of any such merger, consolidation or sale.
Change
in Capitalization
If
the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend,
or other increase or reduction of the number of shares of the common stock outstanding, without receiving consideration therefore
in money, services or property, then awards amounts, type, limitations, and other relevant consideration shall be appropriately
and proportionately adjusted. The Committee shall make such adjustments, and its determinations shall be final, binding and conclusive.
Plan
Amendment or Termination
Our
Board has the authority to amend, suspend, or terminate our Plans, provided that such action does not materially impair the existing
rights of any participant without such participant’s written consent. The Plans will terminate ten (10) years after the
earlier of (i) the date the each Plan is adopted by the Board, or (ii) the date a Plan is approved by the stockholders, except
that awards that are granted under the applicable Plan prior to its termination will continue to be administered under the terms
of the that Plan until the awards terminate, expire or are exercised.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information with respect to the beneficial ownership of common stock by: (i) each director,
(ii) each of the executive officers of the Company, (iii) all current directors and executive officers as a group, and (iv) each
stockholder known to the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock.
Each
of the Company’s outstanding debentures convertible into common stock and warrants to purchase common stock include a provision
which prevents the Company from effecting the conversion or exercise of the respective debenture or warrant, to the extent that,
as a result of such conversion or exercise, the holder beneficially owns more than 4.99%, in the aggregate, of the issued and
outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of
common stock upon the conversion or exercise (collectively, the “4.99% Blocker”).
Unless
otherwise indicated in the footnotes to the table, all information set forth in the table is as of March 20, 2017, and the address
for each director and executive officer of the Company is: c/o MassRoots, Inc., 1624 Market Street, Suite 201, Denver, CO 80202.
Mr. Dietrich is the only beneficial owner of more than 5% of the outstanding shares of common stock; therefore a table listing
5% beneficial owners has been omitted.
|
|
Number
of
Shares
Beneficially
Owned
(1)
|
|
Percentage
Outstanding
(2)
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
|
|
|
Isaac
Dietrich
|
|
|
17,743,831
|
(3)
|
|
21.19%
|
(3)
|
|
Daniel
Hunt
|
|
|
1,234,166
|
(6)
|
|
1.47%
|
|
|
Ean
Seeb
|
|
|
1,575,454
|
(4)
|
|
1.88%
|
|
|
Vincent
“Tripp” Keber
|
|
|
1,416,666
|
(5)
|
|
1.69%
|
|
|
Terence
Fitch
|
|
|
616,666
|
(7)
|
|
0.74%
|
|
|
George
Robert Pullar
(10)
|
|
|
204,169
|
(11)
|
|
0.24%
|
|
|
Lance
Galey
(8)
|
|
|
2,033,332
|
(9)
|
|
2.43%
|
|
|
All
directors and named executive officers as a group (7 persons)
|
|
|
24,824,284
|
|
|
29.65%
|
|
|
|
|
|
|
(1)
|
The
Company believes that each shareholder has sole voting and investment power with respect to the shares of common stock listed,
except as otherwise noted. The number of shares beneficially owned by each shareholder is determined under the rules of the
SEC, and the information is not necessarily indicative of ownership for any other purpose. Under these rules, beneficial ownership
includes (i) any shares as to which the person has sole or shared voting power or investment power and (ii) any shares which
the individual has the right to acquire within 60 days after March 20, 2017 through the exercise of any stock option, warrant,
conversion of preferred stock or other right, but such shares are deemed to be outstanding only for the purposes of computing
the percentage ownership of the person that beneficially owns such shares and not for any other person shown in the table.
The inclusion herein of any shares of common stock deemed beneficially owned does not constitute an admission by such shareholder
of beneficial ownership of those shares of common stock.
|
(2)
|
Based
on 83,728,315 shares of common stock issued and outstanding as of March 20, 2017.
|
(3)
|
The
17,743,831 shares of common stock include (i) 17,718,831 shares of common stock; (ii) up to 5,000 shares of common stock issuable
upon exercise of our $1.00 warrants; and (iii) up to 20,000 shares of common stock issuable upon exercise of our $0.90 warrants.
These are aggregated without regard to the 4.99% Blocker and the percentage outstanding calculated without regard to the 4.99%
Blocker. With regard to the 4.99% Blocker, the amount beneficially owned would be 17,738,831 shares, which would be equal
to 21.19% of the Company’s outstanding shares.
|
(4)
|
Mr.
Seeb’s 1,575,454 shares of common stock consists of (i) 363,788 shares common stock held by Denver Relief Consulting,
which is controlled by Mr. Seeb, (ii) 30,000 shares of common stock held by E-3 Events, which Mr. Seeb shares a
1/3 interest in, (iii) up to 15,000 shares of common stock issuable upon exercise of our $1.00 warrants, also held by E-3
Events, (iv) vested options to purchase up to 750,000 shares of our common stock; and (v) options issued pursuant to the 2017
Plan to purchase up to 416,666 shares of our common stock which have vested by or will vest within 60 days of the date of
this report.
|
(5)
|
Mr.
Keber’s 1,416,666 shares of common stock consists of (i) 250,000 shares common stock held by Dixie Holdings LLC, which
is controlled by Mr. Keber; (ii) vested options to purchase up to 750,000 shares of our common stock; and (iii) options to
purchase up to 416,666 shares of our common stock which have vested by or will vest within 60 days of the date of this report.
|
(6)
|
Mr.
Hunt’s 1,234,166 shares of common stock consists of (i) 280,000 shares of common stock; (ii) up to 37,500 shares of
common stock issuable upon exercise of our $0.40 warrants; (iii) vested options to purchase up to 500,000 shares of our common
stock; and (iv) options issued pursuant to the 2017 Plan to purchase up to 416,666 shares of our common stock which have vested
by or will vest within 60 days of the date of this report. These amounts do not include the unvested grants of 50,000 shares
of restricted stock and the underlying shares related to options to purchase up to 400,000 shares of our common stock held
by Mr. Hunt which had not yet vested and were not exercisable within 60 days of the date of this report, and/or contained
conditions preventing their exercise.
|
(7)
|
Mr.
Fitch’s 616,666 shares of common stock consists of (i) 100,000 shares common stock; (ii) vested options to purchase
up to 100,000 shares of our common stock; and (iii) options issued pursuant to the 2017 Plan to purchase up to 416,666 shares
of our common stock which have vested by or will vest within 60 days of the date of this report.
|
(8)
|
Mr.
Galey became the Company’s Chief Technology Officer on June 20, 2016.
|
(9)
|
Mr.
Galey’s 2,033,332 shares of common stock consists of (i) 600,000 shares common stock; (ii) options issued pursuant to
the 2016 Plan to purchase up to 1,016,666 shares of our common stock which have vested by or will vest within 60 days of the
date of this report; and (iii) options issued pursuant to the 2017 Plan to purchase up to 416,666 shares of our common stock
which have vested by or will vest within 60 days of the date of this report.
|
(10)
|
Mr.
Pullar became the Company’s Chief Financial Officer on December 21, 2016.
|
(11)
|
Mr.
Pullar’s 204,169 shares of common stock consists of (i) 100,000 shares common stock; and (ii) options issued pursuant
to the 2017 Plan to purchase up to 104,169 shares of our common stock which have vested by or will vest within 60 days of
the date of this report.
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in Control
We
are unaware of any contract, or other arrangement or provision, the operation of which may at any subsequent date result in a
change in control of our Company.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except
as described herein, none of the following parties (each a “Related Party”) has, in our fiscal years ended December 31,
2016 and 2015, had any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction
that has or will materially affect us (except those described in Item 11, above):
•
|
|
any
of our directors or officers;
|
•
|
|
any person
who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our outstanding
shares of common stock; or
|
•
|
|
any member
of the immediate family (including spouse, parents, children, siblings and in- laws) of any of the above persons.
|
On
October 28, 2014, each of Isaac Dietrich and Stewart Fortier, our then Chief Executive Officer and Chief Technology Officer (former),
respectively, each participated in the Company’s private offering that took place beginning September 15, 2014 and continued
until March 11, 2015, whereby Mr. Dietrich purchased $5,000 of the Company’s securities consisting of 10,000 shares of the
Company’s common stock and warrants to purchase 5,000 shares at $1 per share, while Mr. Fortier purchased $10,000 of the
Company’s securities consisting of 20,000 shares of the Company’s common stock and warrants to purchase 5,000 shares
at $1 per share. On March 11, 2015, E3 Events, LLC, which is controlled by our Director, Ean Seeb, purchased $15,000 of the Company’s
securities consisting of 30,000 shares of the Company’s common stock and warrants to purchase 15,000 shares at $1 per share.
On March 10, 2015, Michael and Shelly Seeb, Mr. Seeb’s parents, as well as JEAP Partners, owned by Mr. Seeb’s father
in law, participated in the Company’s private offering, purchasing $5,000 and $20,000 of the Company’s securities
respectively. Each of these purchases were made on the same terms as other, non-affiliated investors.
On
August 31, 2016, Isaac Dietrich, our Chief Executive Officer, participated in the 2016 Direct Registered Offering that took place
beginning August 12, 2016 and continued until October 24, 2016, whereby Mr. Dietrich purchased $5,000 of the Company’s securities
consisting of 10,000 shares of the Company’s common stock and warrants to purchase up to 10,000 shares of Company’s
common stock at $0.90 per share.
Director
Independence
Our
Common Stock is not quoted or listed on any national exchange or interdealer quotation system with a requirement that a majority
of our Board be independent and therefore, the Company is not subject to any director independence requirements. Our Board considers
a director to be independent when the director is not an officer or employee of the Company or its subsidiaries, does not have
any relationship which would, or could reasonably appear to, materially interfere with the independent judgment of such director,
and the director otherwise meets the independence requirements under the listing standards of the NASDAQ Stock Market and the
rules and regulations of the SEC. Under this standard, Messrs. Dietrich and Hunt, along with our former directors, Messrs. Fortier
and Knight, would not be considered “independent” under such standards.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our
Board approved formation of an Audit Committee in December 2016 which is comprised of three members of the Board.
As
disclosed in our Form 8-K filed on January 21, 2016, pursuant to the recommendation of our Audit Committee, we dismissed N.K.A.
L&L CPAs, PA (formerly known as Bongiovanni & Associates, PA), (“L&L”) as our independent accountant on
January 15, 2016, and engaged Liggett & Webb P.A. (“Liggett Webb”) to serve as our new independent accountant.
The following table sets forth the aggregate fees billed to us by L&L for a portion of the fiscal year ended December 31,
2015, and by Liggett Webb for a portion of the fiscal year ended December 31, 2015 and for the fiscal year ended December 31,
2016:
|
|
Liggett
Webb
|
|
L&L
|
|
|
2015
|
|
2016
|
|
2015
|
Audit
Fees
|
|
$
|
47,558
|
|
|
$
|
71,500
|
|
|
$
|
26,500
|
|
Audit-Related Fees
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
Tax Fees
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
Other
Fees
|
|
|
—
|
|
|
|
2,500
|
|
|
|
3,000
|
|
Totals
|
|
$
|
47,558
|
|
|
$
|
74,000
|
|
|
$
|
29,500
|
|
Audit fees represent amounts billed for professional services rendered for the audit of our annual financial statements and fees
associated with reviewing our quarterly filings.
Other
fees represent the fees associated with reviewing our Registration Statements on Form S-1.
The
audit committee of the Company approves all auditing services and the terms thereof and non-audit services (other than non-audit
services published under Section 10A(g) of the Exchange Act or the applicable rules of the SEC or the Pubic Company Accounting
Oversight Board) to be provided to us by the independent auditor; provided, however, the pre-approval requirement is waived with
respect to the provisions of non-audit services for us if the “de minimus” provisions of Section 10A(i)(1)(B) of the
Exchange Act are satisfied.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements
Report
of Independent Registered Public Accounting Firm
Balance
Sheets as of December 31, 2016 and 2015
Statements
of Operations for the Years Ended December 31, 2016 and 2015
Statements
of Stockholders’ (Deficit) Equity for the Years Ended December 31, 2016 and 2015
Statements
of Cash Flows for the Years Ended December 31, 2016 and 2015
Notes
to Financial Statements
(b)
Exhibit Index
No.
|
|
Description
|
Note(s)
|
|
2.1
|
|
|
Plan
of Reorganization, dated March 18, 2014.
|
(1)
|
|
2.2
|
|
|
Agreement
and Plan of Merger between MassRoots, Inc. and Whaxy Inc. and DDDigtal Inc. and Zachary Marburger and the Stockholders of
DDDigtal Inc., dated December 15, 2016.
|
(2)
|
|
3.1
|
|
|
Amended
and Restated Certificate of Incorporation of the Company.
|
(1)
|
|
3.2
|
|
|
Amendment
to Amended and Restated Certificate of Incorporation of the Company.
|
(1)
|
|
3.3
|
|
|
Bylaws
of the Company.
|
(1)
|
|
4.1
|
|
|
Form
of Common Stock Certificate.
|
(1)
|
|
10.1
|
|
|
Amended
Employment Agreement between the Company and Isaac Dietrich, dated April 1, 2014.
|
(5)+
|
|
10.2
|
|
|
Amended
Employment Agreement between the Company and Daniel Hunt, dated June 17, 2015.
|
(6)+
|
|
10.3
|
|
|
Employment
Agreement between the Company and Stewart Fortier, dated April 1, 2014.
|
(1)+
|
|
10.4
|
|
|
Lease
between the Company and RVOF Market Center LLC.
|
(5)
|
|
10.5
|
|
|
First
Amendment to Lease between the Company and RVOF Market Center LLC, dated December 11, 2015.
|
(7)+
|
|
10.6
|
|
|
Subscription
Agreement between MassRoots and Flowhub, dated May 26, 2015.
|
(8)
|
|
10.7
|
|
|
2014
Equity Incentive Plan and forms of stock option agreement and stock award agreement thereunder.
|
(1)+
|
|
10.8
|
|
|
Consulting
Agreement between MassRoots and Demeter Capital, dated June 15, 2015.
|
(10)
|
|
10.9
|
|
|
Investment
Banking Agreement between Chardan and the Company, dated September 24, 2015.
|
(11)
|
|
10.10
|
|
|
2015
Equity Incentive Plan and forms of stock option agreement and stock award agreement thereunder.
|
(7)+
|
|
10.11
|
|
|
Form
of Security Agreement Related to Convertible Debentures from the March 2014 Offering.
|
(1)
|
|
10.12
|
|
|
Form
of Subscription Agreement from the March 2014 Offering.
|
(1)
|
|
10.13
|
|
|
Form
of Warrant issued for consulting services from the March 2014 Offering at $0.40 per share.
|
(1)
|
|
10.14
|
|
|
Form
of Warrant issued for consulting services from the March 2014 Offering at $0.001 per share.
|
(1)
|
|
10.15
|
|
|
Form
of Warrant issued together with Convertible Debentures from the March 2014 Offering at $0.40 per share.
|
(1)
|
|
10.16
|
|
|
Form
of Convertible Debenture Agreement Issued in the March 2014 Offering.
|
(1)
|
|
10.17
|
|
|
Form
of Debenture Registration Rights Agreement related to the March 2014 Offering.
|
(1)
|
|
10.18
|
|
|
Form
of Warrant issued with Subscription Agreement from March 2014 Offering at $0.40 per share.
|
(1)
|
|
10.19
|
|
|
Form
of Subscription Agreement from September 15, 2014 to the March 11, 2015 Private Placement.
|
(7)+
|
|
10.20
|
|
|
Form
of Warrant issued with Subscription Agreement in September 15, 2014 to March 11, 2015 Private Placement at $1.00 per share.
|
(7)+
|
|
10.21
|
|
|
Form
of Subscription Agreement from April 1, 2015 through April 17, 2015 Private Placement.
|
(12)
|
|
10.22
|
|
|
Form
of Subscription Agreement from June 10, 2015 through July 13, 2015 Private Placement.
|
(13)
|
|
10.23
|
|
|
Form
of Warrant Utilized by Service Providers.
|
(14)+
|
|
10.24
|
|
|
Form
of Subscription Agreement for the Registered Offering Occurring in November 2015.
|
(11)
|
|
10.25
|
|
|
Form
of Warrant for the Registered Offering Occurring in November 2015.
|
(11)
|
|
10.26
|
|
|
Form
of Note in March 2016 Note Offering.
|
(15)
|
|
10.27
|
|
|
Form
of Warrant in March 2016 Note Offering.
|
(15)
|
|
10.28
|
|
|
Form
of Security Agreement in March 2016 Note Offering.
|
(15)
|
|
10.29
|
|
|
Form
of Securities Purchase Agreement utilized in March 2016 Note Offering.
|
(15)
|
|
10.30
|
|
|
2016
Equity Incentive Plan and forms of stock option agreement and stock award agreement thereunder.
|
(4)+
|
|
10.31
|
|
|
Senior
Secured Promissory Note between the Company and Santino Walter Productions, LLC, dated March 23, 2016.
|
(16)
|
|
10.32
|
|
|
420
Event Agreement between the Company and Santino Walter Productions, LLC, dated March 23, 2016.
|
(16)
|
|
10.33
|
|
|
License
Agreement between the Company and Santino Walter Productions, LLC, dated March 23, 2016.
|
(16)
|
|
10.34
|
|
|
Employment
Agreement between the Company and Lance Galey Hunt, dated June 20, 2016.
|
(17)+
|
|
10.35
|
|
|
Employment
Agreement between the Company and Robert Pullar, dated December 21, 2016.
|
(18)+
|
|
10.36
|
|
|
Form
of Lock-Up Agreement between MassRoots, Inc. and each stockholder of DDDigtal Inc.
|
(3)
|
|
10.37
|
|
|
2017
Equity Incentive Plan and forms of stock option agreement and stock award agreement thereunder.
|
(9)
|
|
14.1
|
|
|
Code
of Ethics of the Company.
|
(5)
|
|
16.1
|
|
|
Letter
of L&L CPAS, PA dated January 29, 2016.
|
(19)
|
|
31.1
|
|
|
Certification
of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act.
|
*
|
|
31.2
|
|
|
Certification
of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act.
|
*
|
|
32.1
|
|
|
Certification
of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act.
|
*
|
|
32.2
|
|
|
Certification
of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act.
|
*
|
|
99.1
|
|
|
Charter
of the Audit Committee.
|
(20)
|
|
99.2
|
|
|
Charter
of the Compensation Committee.
|
(20)
|
|
99.3
|
|
|
Charter
of the Nominating/Corporate Governance Committee.
|
(20)
|
|
101
|
|
|
The
following materials from our Annual Report on Form 10-K for the year ended December 31, 2016 are formatted in XBRL (eXtensible
Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated
Statement of Stockholders’ Equity/ (Deficit), (iv) Consolidated Statements of Cash Flow, and (iv) Notes to Consolidated
Financial Statements.
|
*
|
+
Indicates management contract or compensatory plan or arrangement.
*
Filed herewith.
|
(1)
|
Incorporated
by reference to our Registration Statement on Form S-1 filed with the SEC on June 13,
2014.
|
|
(2)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on December 16, 2016.
|
|
(3)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on January 27, 2017.
|
|
(4)
|
Incorporated
by reference to our Current Report on Form 8-K filed on September 23, 2016.
|
|
(5)
|
Incorporated
by reference to our Annual Report on Form 10-K filed with the SEC on March 31, 2015.
|
|
(6)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on June 19, 2015.
|
|
(7)
|
Incorporated
by reference to our Annual Report on Form 10-K filed with the SEC on March 30, 2016.
|
|
(8)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on May 28, 2015.
|
|
(9)
|
Incorporated
by reference to our Definitive Schedule 14C Information Statement filed with the SEC
on December 9, 2016.
|
|
(10)
|
Incorporated
by reference to our Quarterly Report on Form 10-Q filed with the SEC on July 22, 2015.
|
|
(11)
|
Incorporated
by reference to Amendment No. 1 to our Registration Statement on Form S-1/A filed with
the SEC on October 7, 2015.
|
|
(12)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on April 17, 2015.
|
|
(13)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on July 14, 2015.
|
|
(14)
|
Incorporated
by reference our Registration Statement on Form S-1 filed with the SEC on April 11, 2016.
|
|
(15)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on March 18, 2016.
|
|
(16)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on March 23, 2016.
|
|
(17)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on June 27, 2016
|
|
(18)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on December 27, 2016.
|
|
(19)
|
Incorporated
by reference to our Current Report on Form 8-K/A filed with the SEC on February 1, 2016.
|
|
(20)
|
Incorporated
by reference to our Current Report on Form 8-K filed with the SEC on December 14, 2015.
|
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
|
|
|
March 31, 2017
|
By:
|
/s/
Isaac Dietrich
Isaac Dietrich
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities
and on the dates indicated.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Isaac Dietrich
|
|
Principal Executive
Officer and Chairman of the Board of Directors
|
|
March
31, 2017
|
Isaac Dietrich
|
|
|
|
|
|
|
|
|
|
/s/
Vincent “Tripp” Keber
|
|
Director
|
|
March
31, 2017
|
Vincent “Tripp”
Keber
|
|
|
|
|
|
|
|
|
|
/s/
Terence Fitch
|
|
Director
|
|
March
31, 2017
|
Terence Fitch
|
|
|
|
|
|
|
|
|
|
/s/
Daniel Hunt
|
|
Director, Chief
Operations Officer
|
|
March
31, 2017
|
Daniel Hunt
|
|
|
|
|
|
|
|
|
|
/s/
Ean Seeb
|
|
Director
|
|
March
31, 2017
|
Ean Seeb
|
|
|
|
|
|
|
|
|
|
/s/
George Robert Pullar
|
|
Chief Financial
Officer and Chief Accounting Officer
|
|
March
31, 2017
|
George Robert
Pullar
|
|
|
|
|
MASSROOTS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Balance Sheets as
of December 31, 2016 and 2015
|
F-3
|
Statements of Operations
for the Years Ended December 31, 2016 and 2015
|
F-4
|
Statement of Stockholders’
(Deficit) Equity for the Years Ended December 31, 2016 and 2015
|
F-5
|
Statements of Cash
Flows for the Years Ended December 31, 2016 and 2015
|
F-7
|
Notes to Financial
Statements
|
F-8
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of
MassRoots, Inc.
Denver, Colorado
We have audited the accompanying balance sheets
of MassRoots, Inc. (the “Company”) as of December 31, 2016 and 2015, and the related statements of
operations, stockholders’ (deficit) equity, and cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015,
and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements,
the Company has a working capital deficit and has negative cash flows from operations. These factors raise substantial doubt about
the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Liggett & Webb, P.A.
New York, New York
March 31, 2017
MASSROOTS, INC.
BALANCE SHEETS
DECEMBER 31, 2016 AND 2015
|
|
|
2016
|
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
374,490
|
|
|
$
|
386,316
|
|
Accounts
receivable
|
|
|
3,306
|
|
|
|
39,500
|
|
Prepaid
and other
|
|
|
—
|
|
|
|
12,938
|
|
Total
current assets
|
|
|
377,796
|
|
|
|
438,754
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
77,322
|
|
|
|
73,023
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Investments
|
|
|
235,000
|
|
|
|
175,000
|
|
Deposits
and other assets
|
|
|
33,502
|
|
|
|
33,502
|
|
Total
other assets
|
|
|
268,502
|
|
|
|
208,502
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
723,620
|
|
|
$
|
720,279
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
382,550
|
|
|
$
|
109,997
|
|
Accrued
expenses
|
|
|
—
|
|
|
|
84,355
|
|
Deferred
revenue
|
|
|
27,010
|
|
|
|
—
|
|
Derivative
liability
|
|
|
1,301,138
|
|
|
|
—
|
|
Total
current liabilities
|
|
|
1,710,698
|
|
|
|
194,352
|
|
|
|
|
|
|
|
|
|
|
Long
term debt:
|
|
|
|
|
|
|
|
|
Convertible
notes payable, long term
|
|
|
108,100
|
|
|
|
209,100
|
|
Total
liabilities
|
|
|
1,818,798
|
|
|
|
403,452
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
(deficit) equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 200,000,000 shares authorized; 71,908,370 and 46,939,965 shares issued and outstanding as of December 31, 2016
and 2015, respectively
|
|
|
71,908
|
|
|
|
46,940
|
|
Common
stock to be issued, 1,740,000 and 624,000 shares, respectively
|
|
|
1,740
|
|
|
|
624
|
|
Additional
paid in capital
|
|
|
28,693,819
|
|
|
|
12,101,784
|
|
Accumulated
deficit
|
|
|
(29,862,645
|
)
|
|
|
(11,832,521
|
)
|
Total
stockholders’ (deficit) equity
|
|
|
(1,095,178
|
)
|
|
|
316,827
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ (deficit) equity
|
|
$
|
723,620
|
|
|
$
|
720,279
|
|
See the accompanying notes to the financial statements
MASSROOTS, INC.
STATEMENTS OF OPERATIONS
|
|
Year ended
December 31,
|
|
|
2016
|
|
2015
|
Revenues:
|
|
$
|
701,581
|
|
|
$
|
213,963
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
180,427
|
|
|
|
57,611
|
|
Advertising
|
|
|
985,342
|
|
|
|
717,773
|
|
Payroll
and related expenses
|
|
|
2,112,879
|
|
|
|
1,381,071
|
|
Stock
based compensation
|
|
|
7,380,431
|
|
|
|
2,722,662
|
|
Other
general and administrative expenses
|
|
|
3,644,881
|
|
|
|
1,459,946
|
|
Total
operating expense
|
|
|
14,303,960
|
|
|
|
6,339,063
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(13,602,379
|
)
|
|
|
(6,125,100
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Loss
on change in fair value of derivative liabilities
|
|
|
(581,912
|
)
|
|
|
(2,236,401
|
)
|
Interest
expense
|
|
|
(3,845,833
|
)
|
|
|
(111,397
|
)
|
Total
other income (expense):
|
|
|
(4,427,745
|
)
|
|
|
(2,347,798
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(18,030,124
|
)
|
|
|
(8,472,898
|
)
|
|
|
|
|
|
|
|
|
|
Provision
of income taxes (benefit)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(18,030,124
|
)
|
|
$
|
(8,472,898
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share-basic and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding-basic and diluted
|
|
|
53,151,429
|
|
|
|
43,834,157
|
|
See the accompanying notes to the financial statements
MASSROOTS, INC.
STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
Common stock
|
Additional
|
|
|
|
Common stock
|
To be issued
|
Paid in
|
Accumulated
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
Balance, January 1, 2014
|
38,909,000
|
$ 38,909
|
1,048,000
|
$ 1,048
|
$ 2,372,867
|
$ (3,359,623)
|
$ (946,799)
|
Common stock issued due from prior year
|
1,048,000
|
1,048
|
(1,048,000)
|
(1,048)
|
-
|
-
|
-
|
Common stock canceled in consideration of warrants
|
(1,000,000)
|
(1,000)
|
-
|
-
|
1,000
|
-
|
-
|
Sale of common stock
|
3,966,509
|
3,967
|
34,000
|
34
|
3,071,576
|
-
|
3,075,577
|
Common stock issued in settlement of convertible notes
|
600,000
|
600
|
-
|
-
|
59,400
|
-
|
60,000
|
Common stock issued upon exercise of warrants for cash
|
2,426,341
|
2,426
|
-
|
-
|
534,660
|
-
|
537,086
|
Common stock issued upon exercise of options for cash
|
-
|
-
|
50,000
|
50
|
4,950
|
-
|
5,000
|
Common stock issued upon cashless exercise of warrants
|
41,995
|
42
|
-
|
-
|
(42)
|
-
|
-
|
Common stock issued for services rendered
|
948,120
|
948
|
540,000
|
540
|
1,218,416
|
|
1,219,904
|
Fair value of warrants issued for services
|
-
|
-
|
-
|
-
|
229,365
|
|
229,365
|
Fair value of stock options issued for services
|
-
|
-
|
-
|
-
|
1,273,483
|
-
|
1,273,483
|
Reclassify fair value of derivative liability to equity upon note payment(s)
|
-
|
-
|
-
|
-
|
3,336,109
|
-
|
3,336,109
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(8,472,898)
|
(8,472,898)
|
Balance, December 31, 2015
|
46,939,965
|
$ 46,940
|
624,000
|
$ 624
|
$ 12,101,784
|
$ (11,832,521)
|
$ 316,827
|
See the accompanying notes to the financial
statements
MASSROOTS, INC.
STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
Additional
|
|
|
|
Common stock
|
To be issued
|
Paid in
|
Accumulated
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
Balance, December 31, 2015
|
46,939,965
|
$ 46,940
|
624,000
|
$ 624
|
$ 12,101,784
|
$ (11,832,521)
|
$ 316,827
|
Common stock issued related to 2015 stock grants
|
624,000
|
624
|
(624,000)
|
(624)
|
-
|
-
|
-
|
Common stock issued for services rendered
|
4,225,675
|
4,226
|
1,740,000
|
1,740
|
4,193,940
|
-
|
4,199,906
|
Common stock issued upon exercise of warrants for cash
|
5,242,393
|
5,242
|
-
|
-
|
1,128,252
|
-
|
1,133,494
|
Common stock issued upon exercise of options for cash
|
210,000
|
210
|
-
|
-
|
24,790
|
-
|
25,000
|
Common stock issued upon cashless exercise of warrants
|
639,051
|
639
|
-
|
-
|
(639)
|
-
|
-
|
Common stock issued upon cashless exercise of options
|
264,158
|
264
|
-
|
-
|
(264)
|
-
|
-
|
Sale of common stock
|
10,350,376
|
10,350
|
-
|
-
|
4,989,925
|
-
|
5,000,275
|
Common stock issued in settlement of convertible notes
|
3,108,229
|
3,108
|
-
|
-
|
1,356,783
|
-
|
1,359,891
|
Common stock issued for penalties related to convertible notes
|
304,523
|
305
|
-
|
-
|
163,316
|
-
|
163,621
|
Fair value of warrants issued for services rendered
|
-
|
-
|
-
|
-
|
68,369
|
-
|
68,369
|
Reclassify fair value of derivative liability to equity upon note payment and warrant exercise(s)
|
-
|
-
|
-
|
-
|
1,555,407
|
-
|
1,555,407
|
Fair value of stock options issued for services
|
-
|
-
|
-
|
-
|
3,112,156
|
-
|
3,112,156
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(18,030,124)
|
(18,030,124)
|
Balance, December 31, 2016
|
71,908,370
|
$ 71,908
|
1,740,000
|
$ 1,740
|
$ 28,693,819
|
$ (29,862,645)
|
$ (1,095,178)
|
See the accompanying notes to the financial statements
MASSROOTS, INC.
STATEMENTS OF CASH FLOWS
|
Year
ended December 31,
|
|
2016
|
2015
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net loss
|
$ (18,030,124)
|
$ (8,472,898)
|
Adjustments to reconcile net loss to net
cash used in operating activities:
|
|
|
Depreciation
|
19,451
|
10,174
|
Amortization of debt discounts
|
1,549,669
|
107,016
|
Stock based compensation
|
7,380,431
|
2,722,662
|
Change in fair value of derivative
liabilities
|
581,912
|
2,236,401
|
Non cash interest
|
1,265,376
|
4,381
|
Penalties related to note maturity
|
763,872
|
-
|
Changes in operating assets and
liabilities:
|
|
|
Accounts receivable
|
36,194
|
(28,299)
|
Prepaid and other
|
12,938
|
209,370
|
Deposits
|
-
|
(30,953)
|
Accounts payable and other liabilities
|
210,455
|
112,906
|
Deferred revenue
|
27,010
|
-
|
Net cash used in operating
activities
|
(6,182,816)
|
(3,129,240)
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Purchase of equipment
|
(23,750)
|
(69,035)
|
Investment in DDDigtal LLC
|
(60,000)
|
-
|
Investment in Flowhub
|
-
|
(175,000)
|
Net cash used in investing
activities
|
(83,750)
|
(244,035)
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net proceeds from sale of common
stock
|
5,000,275
|
3,075,577
|
Proceeds from issuance of convertible
note
|
1,420,000
|
-
|
Proceeds from exercise of warrants
|
1,133,494
|
542,086
|
Proceeds from exercise of options
|
25,000
|
-
|
Repayments of convertible notes
|
(1,324,029)
|
-
|
Net cash provided by
financing activities
|
6,254,740
|
3,617,663
|
|
|
|
Net (decrease) increase in cash
|
(11,826)
|
244,388
|
|
|
|
Cash, beginning of period
|
386,316
|
141,928
|
Cash, end of period
|
$ 374,490
|
$ 386,316
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
Cash paid during period for interest
|
$ -
|
$ -
|
Cash paid during period for taxes
|
$ -
|
$ -
|
|
|
|
Non cash investing and financing
activities:
|
|
|
Common stock issued in settlement
of debt
|
$ 1,359,891
|
$ 60,000
|
Common stock issued in payment of penalties
related to notes payable
|
$ 163,621
|
$ -
|
Beneficial conversion feature relating
to convertible note payable
|
$ 945,596
|
$ -
|
Reclassification of derivative liability
to equity upon note payment(s)
|
$ 1,555,407
|
$ 3,336,109
|
See the accompanying notes to the financial statements
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
A summary of the significant accounting policies
applied in the preparation of the accompanying financial statements follows.
Business and organization
MassRoots, Inc. (“MassRoots” or
the “Company”) has created a technology platform for the cannabis industry focused on enabling users to share their
cannabis content, follow their favorite dispensaries, and stay connected with the legalization movement. The Company was incorporated
in the State of Delaware on April 26, 2013.
Use of estimates
The preparation of financial statements in
conformity with generally accepted accounting principles in the United States (“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 (“ASC”)
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 receivable, 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 ASC subtopic 820-10, Fair
Value Measurements and Disclosures (“ASC 820-10”) and 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.
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 December 31, 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.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
Concentrations of Credit Risk
Financial instruments and related items, which
potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company
places its cash and temporary cash investments with credit quality institutions. At times, such amounts may be in excess of the
FDIC insurance limit. At December 31, 2016 and 2015, deposits in excess of FDIC limits were $124,490 and $136,316,
respectively.
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 period and
defers all other revenue to future periods.
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.
At December 31, 2016 and 2015,
the Company had deferred revenues of $27,010 and $0, respectively.
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.
Property and Equipment
Property and equipment are stated at cost
and depreciated using the straight-line method over their estimated useful lives of three to five 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.
Long-Lived Assets
The Company follows ASC 360-10-15-3, “Impairment
or Disposal of Long-lived Assets,” which established a “primary asset” approach to determine the cash flow estimation
period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived
assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
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.
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: Accounting for Redeemable Equity Instruments: Distinguishing Liabilities from Equity.
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.
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 December 31, 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. Certain
outstanding warrants at December 31, 2016 contain an anti-dilutive (reset) feature such that the Company could not ensure
it would have adequate authorized shares to meet all possible conversion demands.
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 ASC 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.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
The computation of basic and diluted income
(loss) per share as of December 31, 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:
|
|
2016
|
|
2015
|
Common stock issuable upon conversion of convertible
debentures
|
|
|
1,081,000
|
|
|
|
2,091,000
|
|
Options to purchase common stock
|
|
|
14,824,158
|
|
|
|
5,625,000
|
|
Warrants to purchase common stock
|
|
|
15,448,056
|
|
|
|
9,018,609
|
|
Totals
|
|
|
31,353,214
|
|
|
|
16,734,609
|
|
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $985,342 and $717,773 as advertising costs
for the year ended December 31, 2016 and 2015, respectively.
Income Taxes
The Company follows ASC 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.
Deferred taxes are classified as current or
non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising
from temporary differences that are not related to an asset or liability are classified as current or non-current depending on
the periods in which the temporary differences are expected to reverse and are considered immaterial.
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
In August 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15,
Disclosure of Uncertainties about an Entities Ability to
Continue as a Going Concern, which is included in Accounting Standards Codification (ASC) 205, Presentation of Financial Statements
.
This update provides an explicit requirement for management to assess an entity’s ability to continue as a going concern,
and to provide related footnote disclosure in certain circumstances.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
The amendments are effective for annual periods
ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016.
Early application is permitted for annual or interim reporting periods for which the financial statements have not previously
been issued. The adoption of this standard is not expected to have a material impact on the Company’s financial position
and results of operations.
The FASB issued ASU 2016-02,
Leases (Topic
842)
. ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should
recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. For leases with a term of twelve months or less, a lessee
is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented
using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar
year entity). Early application is permitted for all public business entities and all nonpublic business entities upon issuance.
The adoption of this standard is not expected to have a material impact on the Company’s financial position and results
of operations.
The FASB issued ASU No. 2016-09,
“Improvements to Employee Share-Based Payment Accounting.”
The amendment is part of the FASB’s simplification
initiative and is intended to simplify the accounting around share-based payment award transactions. The amendments include changing
the recording of excess tax benefits from being recognized as a part of surplus capital to being charged directly to the income
statement, changing the classification of excess tax benefits within the statement of cash flows, and allowing companies to account
for forfeitures on an actual basis, as well as tax withholding changes. The amendments in this update are effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. The amendment requires
different transition methods for various components of the standard. Early adoption is permitted. The adoption of this standard
is not expected to have a material impact on the Company’s financial position and results of operations.
In November 2016, the FASB issued ASU No.
2016-18, S
tatement of Cash Flows (Topic 230): Restricted Cash
(a consensus of the FASB Emerging Issues Task Force). This
ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows
include cash and restricted cash equivalents. This ASU is effective for public business entities for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. The adoption of this standard is not expected to have a
material impact on the Company’s financial position and results of operations
In April 2015, the FASB issued ASU No. 2015-03
(ASU 2015-03),
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs
. This standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as
a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective
on a retrospective basis for annual and interim reporting periods beginning after December 15, 2015, but early adoption
is permitted. The adoption of this standard did not have a material impact on the Company’s financial position and results
of operations.
There are other 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.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 2 –GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As of December 31, 2016, the Company
had cash of $374,490 and working capital deficit (current liabilities in excess of current assets) of $1,332,902. During
the year ended December 31, 2016, the Company used net cash in operating activities of $6,182,816. 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 2016,
the Company sold shares of common stock and warrants for net proceeds of approximately $5,000,000. In addition, the Company
received approximately $1,158,494 from the exercise of common stock warrants and options and $1,420,000 from the issuance of convertible
notes. It is anticipated that the proceeds from the sale of its common stock and warrants and from the warrant exercise will not
provide the Company with cash sufficient to fund operations in 2017.
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 December 31, 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.
Accordingly, the accompanying 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 financial statements
do not include any adjustment that might result from the outcome of this uncertainty.
NOTE 3 – INVESTMENTS
To facilitate the integration with dispensary
point of sale systems, in 2015, the Company invested $175,000 in exchange for preferred shares of Flowhub LLC (“Flowhub”),
a seed-to-sale system, equal to 8.95% of the then outstanding equity of Flowhub. The Company currently is working with Flowhub
to integrate their system with the Company’s network. The acquired preferred shares are considered non-marketable securities.
In 2016, the Company paid $60,000 acquisition
deposit to acquire DDDitgal LLC. See Subsequent Events Note 13.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2016
and 2015 is summarized as follows:
|
|
2016
|
|
2015
|
Computers
|
|
$
|
72,124
|
|
|
$
|
58,141
|
|
Office equipment
|
|
|
36,850
|
|
|
|
27,083
|
|
Subtotal
|
|
|
108,974
|
|
|
|
85,224
|
|
Less accumulated depreciation
|
|
|
(31,652
|
)
|
|
|
(12,201
|
)
|
Property and equipment, net
|
|
$
|
77,322
|
|
|
$
|
73,023
|
|
Depreciation expense for the year ended December 31, 2016
and 2015 was $19,451 and $10,174, respectively.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
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 0% 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. In 2016, the Company
issued an aggregate of 1,010,000 shares of its common stock in settlement of 101,000 of outstanding debentures. As of December 31, 2016
and 2015, the aggregate carrying value of the debentures was $108,100 and $209,100, net of debt discounts of $0, respectively.
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 year ended December 31, 2016,
the Company issued 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 were $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 year ended December 31, 2016,
the Company paid an aggregate of $1,479,498 cash and issued 1,754,462 shares of its common stock upon conversion of $619,906 of
the debenture obligation and accrued interest. 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. As of December 31, 2016, the debentures
were paid in full.
The Company’s convertible debt is summarized
as follows as of December 31, 2016 and 2015:
|
|
2016
|
|
2015
|
Note payable dated March 24, 2014
|
|
$
|
108,100
|
|
|
$
|
209,100
|
|
Less: current portion
|
|
|
—
|
|
|
|
—
|
|
Long term portion
|
|
$
|
108,100
|
|
|
$
|
209,100
|
|
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 6 – DERIVATIVE LIABILITIES
AND FAIR VALUE MEASUREMENTS
The Company identified conversion features
embedded within convertible debt and warrants outstanding during the year ended December 31, 2016 and 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 warrant holders agreed to amend the warrants to remove the ratchet provision in exchange
for a warrant of 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 three 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.
On December 31, 2016, the Company
estimated the fair value of the embedded derivatives of $1,301,138 using the Binomial Option Pricing Model based on the following
assumptions: (1) dividend yield of 0%, (2) expected volatility of 110.39%, (3) weighted average risk-free interest rate of 1.47%,
(4) expected life of 4.21 years, and (5) estimated fair value of the Company’s common stock of $1.03 per share.
The Company adopted the provisions of ASC
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.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
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 December 31, 2016 and 2015,
the Company did not have any derivative instruments that were designated as hedges.
Items recorded or measured at fair value on
a recurring basis in the accompanying financial statements consisted of the following items as of December 31, 2015
and 2016:
|
December 31,
2015
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Derivative liability
|
$
|
-
|
|
$
|
-
|
|
$ -
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Derivative liability
|
$
|
1,301,138
|
|
$
|
-
|
|
$ -
|
|
|
$
|
1,301,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a summary of
changes in fair value of the Company’s Level 3 financial liabilities for the two years ended December 31, 2016:
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
Balance, January 1, 2015
|
|
$
|
1,099,708
|
|
Transfers out due to term modifications
|
|
|
(3,336,109
|
)
|
Mark-to-market
|
|
|
2,236,401
|
|
Balance, December 31, 2015
|
|
|
—
|
|
Transfers in to Level 3:
|
|
|
2,720,375
|
|
Transfers out due to conversions and payoffs
|
|
|
(2,001,149
|
)
|
Mark to market to December 31, 2016
|
|
|
581,912
|
|
Balance, December 31, 2016
|
|
$
|
1,301,138
|
|
Loss on change in warrant and derivative liabilities for the year
ended December 31, 2016
|
|
$
|
(581,912
|
)
|
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 increases
for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing
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
Preferred stock
T
he Company
is authorized to issue 21 Series A preferred shares at $1.00 par value per share with 1:1 conversion and voting rights. As of
December 31, 2016 and 2015, there were no shares of Series A preferred shares issued and outstanding.
Common stock
The Company is authorized to issue 200,000,000
shares of its common stock at $0.001 par value per share. As of December 31, 2016, there were 71,908,370 shares of common
stock issued and outstanding and 1,740,000 shares of common stock to be issued. 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.
The following is a summary of the common stock
transactions incurred during the years ended December 31, 2016 and 2015:
From September 15, 2014 to March 11, 2015,
the Company completed an offering of $861,000 of its securities to certain accredited and non-accredited investors, consisting
of 1,722,000 shares of its common stock at $0.50 per share. As of December 31, 2015, 1,732,000 shares of common stock
had been issued, of which 10,000 shares of common stock were improperly issued and were booked as shares to be rescinded.
In April 2015, the Company issued 960,337
shares of its common stock to certain accredited and unaccredited investors, pursuant to which, the Company received gross proceeds
of $576,200. The Company terminated this offering as of April 17, 2015. The Company compensated Chardan Capital Markets,
LLC $20,000 cash and 262,560 shares of common stock as commission for this placement.
On April 28, 2015, the Company entered
into a consulting agreement with Torrey Hills Capital. Under the terms of the agreement, Torrey Hills Capital was issued 75,000
shares of common stock for setting-up non-deal roadshows for the Company.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
On May 12, 2015, the Company entered
into a consulting agreement with Caro Capital. Under the terms of the agreement, Caro was issued 200,000 shares of common stock
for setting-up non-deal roadshows for the Company for a period of one year.
On June 15, 2015, the Company entered
into a consulting agreement with Demeter Capital. Under the terms of the agreement, Demeter Capital was issued 100,000 shares
of common stock for consulting services.
From June to July 2015, the Company issued
1,540,672 shares of its unregistered common stock to certain accredited investors for gross proceeds of $1,140,502. In connection
with this offering, Chardan Capital received $27,200 in cash and 80,560 shares of common stock as commission for the placement.
On November 9, 2015, the Company sold
815,500 shares of its common stock, with warrants to purchase 407,475 shares of its common stock, in a registered offering to
certain unaccredited and accredited investors for gross proceeds of $1,019,375 to the Company. MassRoots did not utilize a placement
agent in this transaction. As of December 31, 2015, 781,500 shares of common stock had been issued and 34,000 shares
of commons stock were recorded as to be issued.
During the year ended December 31, 2015,
the Company issued 1,340,000 shares of its common stock for the exercise of $0.40 warrants; 1,086,341 shares of its common stock
for the exercise of $0.001 warrants; and 41,995 shares of its common stock for the cashless exercise of $1.00 warrants.
During the year ended December 31, 2015,
the Company issued 230,000 shares of its common stock to six employees and consultants under the Company’s 2014 Equity Incentive
Plan (the “2014 Plan”). During the same time period, the Company granted 540,000 shares of its common stock to ten
employees and consultants under the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). As of December 31, 2015,
none of the share issuances under the 2015 Plan had been made and 540,000 shares of common stock were recorded as to be issued.
In October 2015, the holder of 50,000
options at $0.10 per share exercised their right to purchase common stock for $5,000. These shares of common stock were recorded
as to be issued as of December 31, 2015.
During the year ended December 31, 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.
During the year ended December 31, 2016,
the Company issued an aggregate of 4,225,675 shares of its common stock for services rendered and recorded another 1,740,000 shares
to be issued for services rendered at an average stock price of $0.70 per share.
During the year ended December 31, 2016,
the Company issued an aggregate of 639,051 shares of its common stock for the cashless exercise of stock warrants.
During the year ended December 31, 2016,
the Company issued an aggregate of 5,242,393 shares of its common stock for the cash exercise of stock warrants.
During the year ended December 31, 2016,
the Company issued an aggregate of 264,158 shares of its common stock for the cashless exercises of stock options.
During the year ended December 31, 2016,
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 10,350,376
shares of its common stock for net sales proceeds of $5,000,275.
The Company issued an aggregate of 3,108,229
shares of its common stock in settlement of $1,359,891 secured convertible debentures (see Note 5).
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
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
From September 2014 to March 31, 2015,
in connection to the sale of 1,722,000 shares of common stock, the Company granted three−year warrants to purchase an aggregate
of 861,000 shares of its common stock at $1.00 per share. The warrants may be exercised any time after the issuance through and
including the third (3
rd
) anniversary of its original issuance. The warrants have a fair market value of
$
168,358.
The fair market value was calculated using the Black-Scholes options pricing model, assuming approximately 1% risk-free interest,
0% dividend yield, 150% volatility, and expected life of 3 years. See Note 6 for further discussion.
On February 27, 2015, the Company issued
warrants for a nominal amount to purchase 100,000 shares of common stock at $0.50 per share to certain service providers, valued
at $43,704.
On April 8, 2015, the Company issued
warrants to purchase 50,000 shares of its common stock at $0.60 per share to certain service providers, valued at $51,378.
In July 2015, a shareholder retired 1,000,000
shares of registered common stock in exchange for 1,000,000 warrants exercisable at $0.001 per share for a period of three years.
On July 30, 2015, the Company issued
warrants to purchase 175,000 shares of its common stock at $0.90 per share to certain service providers, valued at $100,340
On November 9, 2015, in connection to
the sale of 815,500 shares of its common stock, the Company granted three−year warrants to purchase an aggregate of 407,475
shares of its common stock at $3.00 per share. The warrants may be exercised any time after the issuance through and including
the third (3
rd
) anniversary of its original issuance.
In December 2015, the Company issued
146,200 three-year warrants with an exercise price of $1.06 to our holders of outstanding warrants issued in conjunction with
our September 15, 2014 to March 11, 2015 offering. These warrants were issued in exchange for the holder agreeing to waive
certain provisions providing price protection of the warrant received in the September 15, 2014 to March 11, 2015 offering.
During the year ended December 31, 2015,
warrants to purchase 1,340,000 shares of common stock at $0.40 per share were exercised for gross proceeds to the Company of $536,000.
Over the same time period, warrants to purchase 1,086,341 shares of common stock at $0.001 per share were exercised for gross
proceeds to the Company of $1,086. In October 2015, a shareholder exercised 100,000 warrants to purchase shares of common
stock at $1.00 per share through the warrant’s cashless provision pursuant to which he was issued 41,995 shares of common
stock at $1.00 per share for no gross proceeds to the Company.
In January 2016, the Company issued warrants
to purchase 100,000 shares of common stock at $0.83 per share to certain service providers. 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 five years.
In February 2016, the Company issued warrants
to purchase 35,000 shares of common stock at $1.00 per share to a service provider. The estimated fair value of $24,301was charged
to current period operations. The fair market value was calculated using the Black Scholes Option Pricing Model, assuming approximately
0.71% risk-free interest, 0% dividend yield, 117.43% volatility, and expected life of 3 years.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
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 0.47% risk-free interest,
0% dividend yield, 112.3% volatility, and expected life of five 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 three
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.
In October 2016, upon the sale of the Company’s
common stock, the Company issued an additional 6,659,000 warrants to purchase the Company’s common stock at $0.90 per share,
exercisable through October 26, 2019.
Warrants outstanding and exercisable on December 31, 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
|
|
|
|
1,000,000
|
|
|
|
1.53
|
|
|
|
1,000,000
|
|
|
0.40
|
|
|
|
1,604,041
|
|
|
|
0.23
|
|
|
|
1,604,041
|
|
|
0.50
|
|
|
|
1,619,338
|
|
|
|
4.14
|
|
|
|
1,619,338
|
|
|
0.60
|
|
|
|
50,000
|
|
|
|
3.27
|
|
|
|
50,000
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
4.04
|
|
|
|
100,000
|
|
|
0.90
|
|
|
|
9,725,002
|
|
|
|
2.76
|
|
|
|
9,725,002
|
|
|
1.00
|
|
|
|
796,000
|
|
|
|
0.93
|
|
|
|
796,000
|
|
|
1.06
|
|
|
|
146,200
|
|
|
|
1.98
|
|
|
|
146,200
|
|
|
3.00
|
|
|
|
407,475
|
|
|
|
1.86
|
|
|
|
407,475
|
|
|
|
|
|
|
15,448,056
|
|
|
|
2.44
|
|
|
|
15,448,056
|
|
A summary of the warrant activity for
the two years ended December 31, 2016 is as follows:
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual
Term
|
|
|
Intrinsic Value
|
|
Outstanding at January 1, 2015
|
|
|
9,324,000
|
|
|
$
|
0.26
|
|
|
|
4.3
|
|
|
|
|
|
Grants
|
|
|
2,220,950
|
|
|
|
0.11
|
|
|
|
5.0
|
|
|
|
|
|
Exercised
|
|
|
(2,526,341
|
)
|
|
|
0.25
|
|
|
|
1.3
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
9,018,609
|
|
|
$
|
0.42
|
|
|
|
2.26
|
|
|
|
6,857,509
|
|
Grants
|
|
|
13,164,340
|
|
|
|
0.72
|
|
|
|
2.51
|
|
|
|
-
|
|
Exercised
|
|
|
(6,734,893
|
)
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
15,448,056
|
|
|
$
|
0.81
|
|
|
|
2.4
|
|
|
$
|
4,225,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2016
|
|
|
15,448,056
|
|
|
$
|
0.81
|
|
|
|
2.4
|
|
|
$
|
4,225,936
|
|
Exercisable at December 31, 2016
|
|
|
15,448,056
|
|
|
$
|
0.81
|
|
|
|
2.4
|
|
|
$
|
4,225,936
|
|
The aggregate intrinsic value outstanding
stock warrants was $4,225,936, based on warrants with an exercise price less than the Company’s stock price of $1.03 as
of December 31, 2016, which would have been received by the warrant holders had those warrant holders exercised their
warrants as of that date.
NOTE 9 – EMPLOYEE EQUITY INCENTIVE
PLANS
The Company’s shareholders approved
our 2014 Plan in June 2014, our 2015 Plan in December 2015, our 2016 Equity Incentive Plan (“2016 Plan”)
in October 2016 and our 2017 Equity Incentive Plan (“2017 Plan”, together with the 2014 Plan, 2015 Plan and 2016 Plan,
the “Plans”) in December 2016. The Plans are identical, except for number of shares reserved for issuance under
each. As of December 31, 2016, the Company had granted an aggregate of 16,564,585 securities under the plans, with 13,676,083
available for future issuances.
The Plans provide for the grant of incentive
stock options to our employees and our parent and subsidiary corporations’ employees, and for the grant of non-statutory
stock options, stock bonus awards, restricted stock awards, performance stock awards and other forms of stock compensation to
our employees, including officers, consultants and directors. Our Plans also provide that the grant of performance stock awards
may be paid out in cash as determined by the Committee.
During the year ended December 31, 2016,
the Company granted options to purchase 9,958,031 for ten years. The fair value of $6,450,317, was determined using the Black-Scholes
Option Pricing Model, assuming approximately 1.75% to 2.10% risk-free interest, 0% dividend yield, 107.63% to 119.16% volatility,
and expected life of five to ten years and will be charged to operations over the vesting terms of the options.
During the year ended December 31, 2015,
the Company granted options to purchase 3,925,000 for seven to ten years. The fair value of $3,197,634, was determined using the
Black-Scholes Option Pricing Model, assuming approximately 0.48% to 2.53% risk-free interest, 0% dividend yield, 119.43% to 129.88%
volatility, and expected life of seven to ten years and will be charged to operations over the vesting terms of the options.
The summary terms of the issuances are as
follows:
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
Exercise
|
|
Number of
|
|
Vesting
|
Price
|
|
Options
|
|
Terms
|
$
|
0.51
|
|
|
|
600,000
|
|
|
50% immediately; 50% six months
|
|
0.51
|
|
|
|
1,566,781
|
|
|
Monthly over one year
|
|
0.77
|
|
|
|
1,600,000
|
|
|
Monthly over one year
|
|
0.80
|
|
|
|
160,000
|
|
|
Monthly over one year
|
|
0.83
|
|
|
|
100,000
|
|
|
Market contingent
|
|
0.86
|
|
|
|
5,400,000
|
|
|
Monthly over one year
|
|
0.89
|
|
|
|
100,000
|
|
|
Monthly over one year, beginning April 2017
|
|
1.00
|
|
|
|
50,000
|
|
|
Monthly over one year
|
|
1.05
|
|
|
|
381,250
|
|
|
Monthly over one year
|
|
0.78
|
|
|
|
9,958,031
|
|
|
|
Stock options outstanding and exercisable
on December 31, 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
|
|
|
|
7.43
|
|
|
|
1,000,000
|
|
|
0.50
|
|
|
|
628,220
|
|
|
|
8.08
|
|
|
|
628,220
|
|
|
0.51
|
|
|
|
2,166,781
|
|
|
|
9.76
|
|
|
|
1,456,769
|
|
|
0.60
|
|
|
|
105,000
|
|
|
|
8.27
|
|
|
|
105,000
|
|
|
0.77
|
|
|
|
1,600,000
|
|
|
|
9.95
|
|
|
|
99,999
|
|
|
0.80
|
|
|
|
145,000
|
|
|
|
9.04
|
|
|
|
145,000
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
9.05
|
|
|
|
-
|
|
|
0.86
|
|
|
|
5,400,000
|
|
|
|
9.97
|
|
|
|
1,312,499
|
|
|
0.89
|
|
|
|
100,000
|
|
|
|
9.98
|
|
|
|
-
|
|
|
0.90
|
|
|
|
1,860,413
|
|
|
|
8.95
|
|
|
|
1,860,413
|
|
|
1.00
|
|
|
|
837,494
|
|
|
|
8.97
|
|
|
|
237,494
|
|
|
1.05
|
|
|
|
381,250
|
|
|
|
9.22
|
|
|
|
373,436
|
|
|
|
|
|
|
14,824,158
|
|
|
|
9.37
|
|
|
|
7,218,830
|
|
A summary of the stock option activity
for the two years ended December 31, 2016:
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual
Term
|
|
|
Intrinsic Value
|
|
Outstanding at January 1, 2015
|
|
|
2,050,000
|
|
|
$
|
0.10
|
|
|
|
9.6
|
|
|
|
|
|
Grants
|
|
|
3,925,000
|
|
|
|
0.80
|
|
|
|
9.9
|
|
|
|
|
|
Exercised
|
|
|
(50,000
|
)
|
|
|
0.10
|
|
|
|
9.3
|
|
|
|
|
|
Canceled
|
|
|
(300,000
|
)
|
|
|
0.10
|
|
|
|
8.6
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
5,625,000
|
|
|
|
0.59
|
|
|
|
9.30
|
|
|
$
|
6,044,500
|
|
Grants
|
|
|
9,958,031
|
|
|
|
0.78
|
|
|
|
9.84
|
|
|
|
-
|
|
Exercised
|
|
|
(636,780
|
)
|
|
|
0.50
|
|
|
|
8.80
|
|
|
|
|
|
Forfeiture/Canceled
|
|
|
(122,093
|
)
|
|
$
|
0.55
|
|
|
|
8.80
|
|
|
|
-
|
|
Outstanding at December 31, 2016
|
|
|
14,824,158
|
|
|
$
|
0.52
|
|
|
|
9.37
|
|
|
$
|
4,566,717
|
|
Exercisable at December 31, 2016
|
|
|
7,218,830
|
|
|
$
|
0.35
|
|
|
|
9.03
|
|
|
$
|
2,596,395
|
|
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
The aggregate intrinsic value of outstanding
stock options was based on options with an exercise price less than the Company’s stock price of $1.03 as of December 31, 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.
The fair value of all options vesting during
the year ended December 31, 2016 and 2015 of $3,112,156 and $1,273,393, respectively. Unrecognized compensation
expense of $5,185,927 at December 31, 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 the Company leased on March 20, 2015
pursuant to a lease agreement with RVOF Market Center, LLC (“201 Lease”). Under the 201 Lease, MassRoots 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. The Company 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),
the Company 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. Pursuant to the amendment,
the lease on suite 201 was extended to November 30, 2018
Rent expense charged to operations during
the year ended December 31, 2016 and 2015 was $138,818 and $64,438, respectively.
Future minimum lease payments under these
two agreements are as follows:
Year Ending December 31,
|
|
|
|
2017
|
|
|
|
149,395
|
|
|
2018
|
|
|
|
139,904
|
|
|
|
|
|
$
|
289,299
|
|
Litigation
The Company is subject at times to other legal
proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect
on its financial position, results of operations or liquidity. There was no outstanding litigation as of December 31, 2016.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 11 – RELATED PARTY TRANSACTIONS
On August 31, 2016, Isaac Dietrich, the
Company’s Chief Executive Officer, participated in the Company’s registered offering that took place beginning August
12, 2016 and continued until October 24, 2016, whereby Mr. Dietrich purchased $5,000 of the Company’s securities
consisting of 10,000 shares of the Company’s common stock and warrants to purchase 10,000 shares at $0.90 per share.
NOTE 12 – INCOME TAXES
At December 31, 2016, the Company
has available for federal income tax purposes a net operating loss carry forward of approximately $12,500,000, expiring in the
year 2036, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount
of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more
likely than not that the benefits will not be realized. Due to possible significant changes in the Company’s ownership,
the future use of its existing net operating losses may be limited. All or portion of the remaining valuation allowance may
be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits. During
the year ended December 31, 2016, the Company has increased the valuation allowance from $2,374,000 to $4,946,000.
The Company has adopted the provisions of ASC 740-10-25, which provides recognition criteria and a related measurement model for
uncertain tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected
to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would
be sustained upon examination by tax authorities.
Tax position that meet the more likely than
not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater
than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating to open income tax returns
that were considered to be uncertain.
Sections 382 and 383 of the Internal Revenue
Code of 1986, as amended (the “Code”), provide for annual limitations on the utilization of net operating loss and
credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general, an
ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders,
as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of
such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In
the event such ownership change occurs, the annual limitation may result in the expiration of the net operating losses prior to
full utilization.
The Company is required to file income tax
returns in the U.S. Federal jurisdiction and in Colorado. The Company is no longer subject to income tax examinations by tax authorities
for tax years ending before December 31, 2012.
The Company’s deferred taxes as of December 31, 2016
and 2015 consist of the following:
|
|
2016
|
|
2015
|
Non-Current deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
4,946,000
|
|
|
$
|
2,374,000
|
|
Valuation allowance
|
|
|
(4,946,000
|
)
|
|
|
(2,374,000
|
)
|
Net non-current deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 13 – SUBSEQUENT EVENTS
Acquisition
On December 15, 2016, the Company
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Whaxy Inc., a wholly-owned subsidiary of
the Company (“Merger Subsidiary”), DDDigtal Inc, a Colorado corporation (“DDDigtal”), Zachary Marburger,
an individual acting solely in his capacity as Stockholder Representative, and all of the stockholders of DDDigtal. Pursuant to
the Merger Agreement, the parties agreed to merge Merger Subsidiary with and into DDDigtal, whereby DDDigtal would survive as
a wholly-owned subsidiary of MassRoots (the “Merger”).
On January 25, 2017 (the “Effective
Date”), the Merger was completed and became effective upon the filing of certificates of merger with the respective Secretary
of State of the States of Delaware and Colorado, in such forms as required by, and executed in accordance with, the relevant provisions
of the Delaware General Corporation Law and the Colorado Business Corporation Act.
Pursuant to the terms of the Merger Agreement,
each share of DDDigtal’s common stock was to be exchanged for a number of shares of the Company’s common stock (or
a fraction thereof), based on an exchange ratio, as ultimately calculated, equal to approximately 5.273-for-1, such that 1 share
of the Company’s’ common stock was issued for every 5.273 shares of DDDigtal’s common stock.
On the Effective Date, the Company issued
2,926,829 shares of the Company’s common stock
pro rata
to all stockholders of DDDigtal (the “Share Consideration”)
in exchange for all of their shares of DDDigtal’s common stock. At the same time, each share of the common stock of Merger
Subsidiary was converted into and exchanged for one share of common stock of DDDigtal held by the Company, and all shares of DDDigtal
common stock outstanding immediately prior to the Effective Date automatically cancelled and retired. DDDigtal continued as a
surviving wholly-owned subsidiary of the Company, and Merger Subsidiary ceased to exist.
Also pursuant to the terms of the Merger Agreement,
the Company paid cash consideration of $40,000 to Zachary Marburger and $20,000 to Micah Davidson, as repayment of outstanding
debts owed by DDDigtal to the individuals.
As a condition to the closing of the Merger,
the Company hired Zachary Marburger as its new Vice President of Strategy, and engaged Micah Davidson as a Senior Software Engineer.
As a condition of Mr. Marburger’s employment and pursuant to the Merger Agreement, the Company will pay Mr. Marburger an
additional $40,000 following the one-year anniversary of his constant employment with the Company.
From January 1 to March 31, 2017, the Company
issued 1,740,000 shares recorded as to be issued as of December 31, 2016; 2,926,829 shares to all stockholders of DDDigtal; received
exercises for 4,355,000 shares of the Company’s $0.90 warrants for cash proceeds to the Company of $3,919,500; received exercises
for 1,000,000 shares of the Company’s $0.001 warrants for cash proceeds to the Company of $1,000; received exercises for
1,080,541 shares of the Company’s $0.40 warrants for cash proceeds to the Company of $432,216; received exercises for 682,668
shares of the Company’s $0.50 warrants for cash proceeds to the Company of $0 with total shares issued of 355,689 shares;
received exercises for 75,000 shares of the Company’s $0.50 options for cash proceeds to the Company of $0 with total shares
issued of 41,153 shares; issued 2,908,232 shares under the Company’s 2017 Employee Stock Option Program; and 1,081,000 shares
for received conversions for $108,100 in convertible debt at $0.10 per share.
The Company had 2,522,041 shares recorded as to be issued on March 31, 2017.
From January
1 to March 31, 2017, the Company issued 2,354,000 options to purchase common stock at a weighted average exercise price of $0.84
per share to employees of the Company under the 2017 Plan.
MASSROOTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
On February 23, 2017, the Company subscribed
to 23,810 shares of Class A Common Stock of High Times Holding Corporation for $100,002.