NOTE 2 –GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As of March 31, 2017, the Company had cash
of $2,228,708 and working capital of $1,352,254. However, during the three months ended March 31, 2017, the Company
used net cash in operating activities of $2,473,430. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
In
the first quarter of 2017, the Company received $4,443,196 from the exercise of common stock warrants. It is anticipated that the
proceeds from the warrant exercise will provide the Company with cash sufficient to fund operations through August 2017. (See Subsequent
Events-Note 11)
The Company's primary source of operating
funds since inception has been cash proceeds from private placements of common stock, proceeds from the exercise of warrants and
options and issuance of notes payable. The Company has experienced net losses and negative cash flows from operations since inception
and expects these conditions to continue for the foreseeable future. The Company 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 unaudited condensed interim
financial statements have been prepared in conformity with U.S. GAAP, which contemplates continuation of the Company as a going
concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of
assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.
The unaudited condensed interim financial statements do not include any adjustment that might result from the outcome of this uncertainty.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial
statements include the accounts of MassRoots, Inc. and its wholly owned operating subsidiaries. All material intercompany accounts
and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with US 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 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.
The Company follows ASC 825-10, which permits
entities to choose to measure many financial instruments and certain other items at fair value.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows,
the Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
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 March 31, 2017 and December 31, 2016, based upon
the review of the outstanding accounts receivable, the Company has determined that an allowance for doubtful accounts is not required.
Property and Equipment
Property and equipment are stated at cost
and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years. When retired or otherwise disposed,
the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any
amount realized from disposition, is reflected in earnings.
Revenue Recognition
The Company recognizes revenue when services
are realized or realizable and earned less estimated future doubtful accounts. The Company considers revenue realized or realizable
and earned when all of the following criteria are met:
|
(i)
|
persuasive
evidence of an arrangement exists,
|
|
(ii)
|
the
services have been rendered and all required milestones achieved,
|
|
(iii)
|
the
sales price is fixed and determinable, and
|
|
(iv)
|
collectability
is reasonably assured.
|
The Company primarily generates revenue by
charging businesses to advertise on the network. The Company has the ability to target advertisements directly to a clients’
target audience, based on their location, on their mobile devices. In cases where clients sign advertising contracts for an extended
period of time, the Company only realizes revenue for services provided during that quarter and defers all other revenue to future
quarters.
DDDigtal
typically uses the completed contract method for website development services, which typically have construction periods of 60
days or less. Contracts are considered complete when title has passed and the customer has accepted the product.
DDDigtal
defers any revenue for which the product has not been delivered or services have not been rendered or are subject to refund until
such time that DDDigtal and the customer jointly determine that the product has been delivered or services have been rendered
or no refund will be required. DDDigtal launched an online service platform. DDDigtal recognizes revenue on a monthly basis based
upon a transaction fee plus a fixed monthly service charge.
Income Taxes
The Company follows ASC subtopic 740-10, Income
Taxes- (“ASC 740-10”) for recording the provision for income taxes. Deferred tax assets and liabilities are computed
based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal
tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or
benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more
likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to
reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary
differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
Convertible Instruments
U.S. GAAP requires companies to bifurcate
conversion options from their host instruments and account for them as free standing derivative financial instruments according
to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid
instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under
otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and
(c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under ASC 480-10.
When the Company has determined that the embedded conversion options
should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for
the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the
underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
Derivative Financial Instruments
The Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement
or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the
Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including
a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or
(ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
The Company assesses classification of its common stock purchase warrants and other free standing derivatives at each reporting
date to determine whether a change in classification between assets and liabilities is required.
The Company’s free standing derivatives
consisted of warrants to purchase common stock that were issued in connection with the issuance of debt and of embedded conversion
options with convertible debentures. The Company evaluated these derivatives to assess their proper classification in the balance
sheet as of March 31, 2017 using the applicable classification criteria enumerated under ASC 815-Derivatives and Hedging. The
Company determined that certain embedded conversion and/or exercise features do not contain fixed settlement provisions. The
convertible debentures contain a conversion feature such that the Company could not ensure it would have adequate authorized shares
to meet all possible conversion demands.
As such, the Company was required to record
the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value
at the end of each reporting period.
Stock Based Compensation
The Company measures the cost of services
received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the
fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured
on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized
over the period during which services are required to be provided in exchange for the award, usually the vesting period.
Long-Lived Assets
The Company reviews its property
and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted
operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
Indefinite Lived Intangibles
and Goodwill Assets
The Company accounts for business
combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where
the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based
on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted,
up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities
assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified
intangible assets acquired less liabilities assumed is recognized as goodwill.
The Company tests for indefinite lived intangibles and goodwill
impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset
exceeds its fair value and may not be recoverable.
Segment Reporting
Operating segments are defined
as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating
decision maker, or decision making group, in deciding the method to allocate resources and assess performance. The Company currently
has one reportable segment for financial reporting purposes, which represents the Company’s core business.
Net Earnings (Loss) Per Common Share
The Company computes earnings (loss) per share
under ASC subtopic 260-10, Earnings Per Share (“ASC 260-10”). Net loss per common share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share,
if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities
into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The computation of basic and diluted income
(loss) per share as of March 31, 2017 and 2016 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:
|
|
March
31,
2017
|
|
March
31,
2016
|
Common
stock issuable upon conversion of convertible debentures
|
|
|
—
|
|
|
|
3,652,333
|
|
Options to purchase
common stock
|
|
|
16,688,942
|
|
|
|
6,210,461
|
|
Warrants
to purchase common stock
|
|
|
8,243,847
|
|
|
|
10,653,278
|
|
Totals
|
|
|
24,932,789
|
|
|
|
20,516,072
|
|
Reclassification
Certain reclassifications have been made to
the prior years’ data to conform to the current year presentation. These reclassifications had no effect on reported income
(losses).
Recent Accounting Pronouncements
There are various updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to have a material impact on the Company's financial position, results of operations or cash flows.
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
Subsequent Events
The Company evaluates events that have occurred
after the balance sheet date but before the financial statements are issued.
NOTE 4 – INVESTMENTS
As of March 31, 2017 and December 31, 2016, the carrying
value of our investments in privately held companies totaled $275,002 and $235,000, respectively. These investments
are accounted for as cost method investments, as we own less than 20% of the voting securities and do not have the ability to
exercise significant influence over operating and financial policies of the entities.
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.
During the three months ended March 31, 2017,
the Company acquired 23,810 Class A common stock of Hightimes Holding Corp. for $100,002 ($4.20 per share). The acquired common
shares are considered non-marketable securities.
In addition, at December 31, 2016, the Company
had paid $60,000 acquisition deposit to acquire DDDigtal LLC, (See Note 1).
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2017
and December 31, 2016 is summarized as follows:
|
|
March
31,
2016
|
|
December
31,
2016
|
Computers
|
|
$
|
106,180
|
|
|
$
|
72,124
|
|
Office
equipment
|
|
|
36,850
|
|
|
|
36,850
|
|
Subtotal
|
|
|
143,030
|
|
|
|
108,974
|
|
Less
accumulated depreciation
|
|
|
(37,429
|
)
|
|
|
(31,652
|
)
|
Property and equipment,
net
|
|
$
|
105,601
|
|
|
$
|
77,322
|
|
Depreciation expense for the three months
ended March 31, 2017 and 2016 was $5,776 and $3,542, respectively.
NOTE 6 – 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 and during the
three months ended March 31, 2017, the Company issued an aggregate of 1,081,000 shares of its common stock in settlement of $108,100
of outstanding debentures
As of March 31, 2017 and December 31, 2016,
the aggregate carrying value of the debentures was $0 and $108,100, net of debt discounts of $0, respectively.
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
NOTE 7 – DERIVATIVE LIABILITIES
AND FAIR VALUE MEASUREMENTS
The Company identified conversion features
embedded within convertible debt and warrants outstanding during the three months ended March 31, 2017 and year ended December 31, 2016.
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.
On March 17, 2016, upon issuance of the secured
convertible debentures, 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 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.
On January 4, 2017, warrant holders exercised
outstanding warrants for 682,668 shares of Common Stock, and as such the Company transferred to estimated fair value of the embedded
derivatives of $610,967 from liability to equity. The Company estimated the fair value at the time of exercise using the Binomial
Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 110.13%, (3) weighted
average risk-free interest rate of 1.94%, (4) expected life of 4.20 years, and (5) estimated fair value of the Company’s
common stock of $1.07 per share.
On March 31, 2017, the Company estimated
the fair value of the embedded derivatives of $636,273 using the Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%, (2) expected volatility of 104.88%, (3) weighted average risk-free interest rate of 1.24%, (4) expected
life of 3.96 years, and (5) estimated fair value of the Company’s common stock of $0.955 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.
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.
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
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 March 31, 2017 and December 31, 2016,
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 March 31, 2017 and December 31, 2016:
|
|
March
31,
2017
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
Derivative
liability
|
|
$
|
636,273
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
636,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 three months ended March 31, 2017:
Balance, January 1, 2017
|
|
$
|
1,301,138
|
|
Transfers out due to
warrant exercise
|
|
|
(610,967
|
)
|
Mark
to market to March 31, 2017
|
|
|
(53,898
|
)
|
Balance, March 31, 2017
|
|
$
|
636,273
|
|
Gain on change in warrant
liabilities for the three months ended March 31, 2017
|
|
$
|
53,898
|
|
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
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 8 – 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
March 31, 2017 and December 31, 2016, 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 March 31, 2017, there were 87,546,315 shares of common stock issued
and outstanding and 112,500 shares of common stock to be issued. 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.
The following common stock transactions were
recorded during the three months ended March 31, 2017:
During the three months ended March 31, 2017,
the Company issued an aggregate of 4,810,232 shares of its common stock for services valued at $2,954,560.
During the three months ended March 31, 2017,
the Company issued an aggregate of 41,153 shares for its common stock for cashless exercise of common stock options.
During the three months ended March 31, 2017,
the Company issued an aggregate of 355,689 shares of its common stock for the cashless exercise of common stock warrants.
During the three months ended March 31, 2017,
the Company issued an aggregate of 1,081,000 shares of its common stock in settlement of $108,100 of convertible debt.
During the three months ended March 31, 2017,
the Company issued an aggregate of 6,423,041 shares of its common stock for exercise of common stock warrants. Net proceeds were
$4,443,196.
During the three months ended March 31, 2017,
the Company issued an aggregate of 2,926,830 shares of its common stock to acquire DDDigtal LLC (Note 1).
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
NOTE 9 – WARRANTS
Warrants outstanding and exercisable on March
31, 2017 are as follows:
Warrants
Outstanding
|
|
Warrants
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
Exercisable
|
|
Exercise
|
|
Number
of
|
|
Remaining
Life
|
|
Number
of
|
|
Price
|
|
Warrants
|
|
In
Years
|
|
Warrants
|
|
$
|
0.40
|
|
|
|
537,500
|
|
|
|
0.48
|
|
|
|
537,500
|
|
|
0.50
|
|
|
|
936,670
|
|
|
|
3.84
|
|
|
|
936,670
|
|
|
0.60
|
|
|
|
50,000
|
|
|
|
3.02
|
|
|
|
50,000
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
3.80
|
|
|
|
100,000
|
|
|
0.90
|
|
|
|
5,270,002
|
|
|
|
2.48
|
|
|
|
5,270,002
|
|
|
1.00
|
|
|
|
796,000
|
|
|
|
0.66
|
|
|
|
796,000
|
|
|
1.06
|
|
|
|
146,200
|
|
|
|
1.73
|
|
|
|
146,200
|
|
|
3.00
|
|
|
|
407,475
|
|
|
|
1.61
|
|
|
|
407,475
|
|
|
|
|
|
|
8,243,847
|
|
|
|
2.27
|
|
|
|
8,243,847
|
|
A summary of the warrant activity for
the three months ended March 31, 2017 is as follows
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Weighted-Average
|
|
Remaining
|
|
Aggregate
|
|
|
Shares
|
|
Exercise
Price
|
|
Contractual
Term
|
|
Intrinsic
Value
|
Outstanding at December 31, 2016
|
|
|
15,448,056
|
|
|
$
|
0.81
|
|
|
|
2.4
|
|
|
|
4,225,936
|
|
Grants
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
|
(6,788,668
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(415,541
|
)
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
8,243,847
|
|
|
$
|
0.81
|
|
|
|
2.3
|
|
|
$
|
1,044,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected
to vest at March 31, 2017
|
|
|
8,243,847
|
|
|
$
|
1.03
|
|
|
|
2.3
|
|
|
$
|
1,044,597
|
|
Exercisable at March 31, 2017
|
|
|
8,243,847
|
|
|
$
|
1.03
|
|
|
|
2.3
|
|
|
$
|
1,044,597
|
|
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
The aggregate intrinsic value outstanding
stock warrants was $1,044,597, based on warrants with an exercise price less than the Company’s stock price of $0.955 as
of March 31, 2017, which would have been received by the warrant holders had those warrant holders exercised their warrants
as of that date.
NOTE 10 – 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 in December 2016 (“2017 Plan”, together with the 2014 Plan, 2015 Plan
and 2016 Plan, the “Plans”). The Plans are identical, except for number of shares reserved for issuance under each.
As of March 31, 2017, the Company had granted an aggregate of 29,006,347 securities under the plans, with 11,094,084 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 three months ended March 31, 2017,
the Company granted options to purchase 2,069,000 shares of common stock for ten years. The fair value of $1,724,020, was determined
using the Black-Scholes Option Pricing Model, assuming approximately 1.88% to 2.35% risk-free interest, 0% dividend yield, 104.96%
to 110.16% volatility, and expected life of five 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:
Exercise
|
|
Number
of
|
|
Vesting
|
Price
|
|
Options
|
|
Terms
|
$
|
0.81
|
|
|
|
5,000
|
|
|
Immediately
|
|
0.82
|
|
|
|
150,000
|
|
|
Quarterly over two
years
|
|
0.85
|
|
|
|
150,000
|
|
|
Quarterly over one
year
|
|
0.87
|
|
|
|
125,000
|
|
|
Immediately
|
|
0.89
|
|
|
|
425,000
|
|
|
Monthly over one year
|
|
0.89
|
|
|
|
90,000
|
|
|
Quarterly over two
years
|
|
0.95
|
|
|
|
400,000
|
|
|
Quarterly over two
years
|
|
0.98
|
|
|
|
24,000
|
|
|
Monthly over two years
|
|
1.05
|
|
|
|
50,000
|
|
|
Immediately
|
|
1.05
|
|
|
|
95,000
|
|
|
Monthly over two years
|
|
1.05
|
|
|
|
60,000
|
|
|
Monthly over one year
|
|
1.06
|
|
|
|
60,000
|
|
|
Monthly over one year
|
|
1.07
|
|
|
|
110,000
|
|
|
Monthly over one year
|
|
1.07
|
|
|
|
325,000
|
|
|
Monthly
over two years
|
|
0.95
|
|
|
|
2,069,000
|
|
|
|
Stock options outstanding and exercisable
on March 31, 2017 are as follows:
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
Exercise
|
|
Number
of
|
|
Remaining
Life
|
|
Number
of
|
Price
|
|
Options
|
|
In
Years
|
|
Options
Exercisable
|
$
|
0.10
|
|
|
|
1,500,000
|
|
|
|
7.18
|
|
|
|
1,250,000
|
|
|
0.50
|
|
|
|
549,006
|
|
|
|
7.83
|
|
|
|
549,006
|
|
|
0.51
|
|
|
|
2,041,779
|
|
|
|
9.52
|
|
|
|
1,600,101
|
|
|
0.60
|
|
|
|
105,000
|
|
|
|
8.03
|
|
|
|
105,000
|
|
|
0.77
|
|
|
|
1,600,000
|
|
|
|
9.70
|
|
|
|
283,332
|
|
|
0.80
|
|
|
|
145,000
|
|
|
|
8.80
|
|
|
|
145,000
|
|
|
0.81
|
|
|
|
5,000
|
|
|
|
9.96
|
|
|
|
—
|
|
|
0.82
|
|
|
|
150,000
|
|
|
|
9.96
|
|
|
|
—
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
8.80
|
|
|
|
—
|
|
|
0.85
|
|
|
|
150,000
|
|
|
|
9.92
|
|
|
|
—
|
|
|
0.86
|
|
|
|
5,400,000
|
|
|
|
9.73
|
|
|
|
1,749,997
|
|
|
0.87
|
|
|
|
125,000
|
|
|
|
9.98
|
|
|
|
125,000
|
|
|
0.89
|
|
|
|
615,000
|
|
|
|
9.79
|
|
|
|
116,672
|
|
|
0.90
|
|
|
|
1,860,413
|
|
|
|
8.70
|
|
|
|
1,860,413
|
|
|
0.95
|
|
|
|
400,000
|
|
|
|
9.88
|
|
|
|
30,000
|
|
|
0.98
|
|
|
|
24,000
|
|
|
|
9.82
|
|
|
|
10,000
|
|
|
1.00
|
|
|
|
837,494
|
|
|
|
8.72
|
|
|
|
241,660
|
|
|
1.05
|
|
|
|
586,250
|
|
|
|
9.25
|
|
|
|
459,276
|
|
|
1.06
|
|
|
|
60,000
|
|
|
|
9.85
|
|
|
|
3,000
|
|
|
1.07
|
|
|
|
435,000
|
|
|
|
9.78
|
|
|
|
81,662
|
|
|
|
|
|
|
16,688,942
|
|
|
|
9.14
|
|
|
|
8,610,119
|
|
A summary of the stock option activity
for the three months ended March 31, 2017:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Weighted-Average
|
|
Remaining
|
|
Aggregate
|
|
|
Shares
|
|
Exercise
Price
|
|
Contractual
Term
|
|
Intrinsic
Value
|
|
Outstanding
at December 31, 2016
|
|
|
|
14,824,158
|
|
|
|
0.52
|
|
|
|
9.37
|
|
|
$
|
4,566,717
|
|
|
Grants
|
|
|
|
2,069,000
|
|
|
|
0.95
|
|
|
|
9.60
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
(79,214
|
)
|
|
|
0.50
|
|
|
|
8.80
|
|
|
|
|
|
|
Forfeiture/Canceled
|
|
|
|
(125,002
|
)
|
|
$
|
0.51
|
|
|
|
8.80
|
|
|
|
—
|
|
|
Outstanding
at March 31, 2017
|
|
|
|
16,688,942
|
|
|
$
|
0.75
|
|
|
|
9.14
|
|
|
$
|
3,513,787
|
|
|
Exercisable
at March 31, 2017
|
|
|
|
8,610,119
|
|
|
$
|
0.68
|
|
|
|
8.89
|
|
|
$
|
2,429,690
|
|
The aggregate intrinsic value of outstanding
stock options was based on options with an exercise price less than the Company’s common stock price of $0.955 as of March
31, 2017, 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 three months ended March 31, 2017 and 2016 of $2,276,443 and $670,767, respectively. Unrecognized compensation
expense of $4,973,087 at March 31, 2017 will be expensed in future periods.
MASSROOTS, INC.
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2017
NOTE 11 – SUBSEQUENT EVENTS
From April 1 to May 5, 2017, the Company issued
250,000 shares of common stock for the exercise of the Company’s $0.40 warrants for proceeds of $100,000 and 250,000 shares
of common stock under the Company’s 2017 Employee Stock Option Program.
As
previously reported, on May 26, 2015, the Company invested $175,000 in exchange for 494,118 Class A Preferred Shares of Flowhub
LLC (“Flowhub”), a seed-to-sale system, equal to 8.95% of the then outstanding equity of Flowhub. On March 9, 2017,
we transferred all of our 494,118 Class A Preferred Shares of Flowhub to three investors, in exchange for $250,000.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and
analysis in conjunction with our unaudited financial statements and related notes contained in Part I, Item 1 of this Quarterly
Report. Please also refer to the Note About Forward Looking Statements for information on such statements contained in this Quarterly
Report immediately preceding Item 1.
Overview
MassRoots, Inc. is a Delaware corporation
formed on April 24, 2013. Our principal place of business is located at 1624 Market Street, Suite 201, Denver, CO 80202, our telephone
number is (720) 442-0052 and our corporate website is www.MassRoots.com/Investors.
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.
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 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 is
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.
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. Certain mainstream brands to advertise
with MassRoots 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.
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 incremental cost. Because MassRoots is not involved in the production or sale of cannabis, we do not
have to build out-grow 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 nascent 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
|
|
Three
months ended March 31,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
Change
|
|
%
Change
|
Revenues:
|
|
$
|
134,741
|
|
|
$
|
93,385
|
|
|
$
|
41,356
|
|
|
|
44
|
%
|
Total
operating expense
|
|
|
7,635,816
|
|
|
|
2,378,567
|
|
|
|
5,257,249
|
|
|
|
221
|
%
|
Loss
from operations
|
|
|
(7,501,075
|
)
|
|
|
(2,285,182
|
)
|
|
|
(5,215,893
|
)
|
|
|
228
|
%
|
Total
other income (expense):
|
|
|
53,898
|
|
|
|
(351,041
|
)
|
|
|
404,939
|
|
|
|
115
|
%
|
NET
LOSS
|
|
$
|
(7,447,177
|
)
|
|
$
|
(2,636,223
|
)
|
|
$
|
(4,810,954
|
)
|
|
|
182
|
%
|
Revenues
For the three months ended March 31, 2017
and 2016, we generated revenues of $134,741 and $93,385, respectively, an increase of $41,356. Of this $134,741 generated in the
three months ended March 31, 2017, all was made up of advertising revenue related to the MassRoots network. The increase in revenues
for the three months ended March 31, 2017 was primarily caused by more digital advertising sales and 420 Rally ticket sales.
Operating Expenses
For the three months ended March 31, 2017
and 2016, our operating expenses were $7,635,816 and $2,378,567, respectively, an increase of $5,257,249. For the three months
ended March 31, 2017, these increases were mainly attributed to an increase stock based compensation to our employees and key
consultants which, for 2017 was $5,231,003 as compared to $1,002,719 for the same period last year (a non-cash increase of $4,228,284).
In addition we incurred additional consulting and other service provider fees and increases in payroll and payroll-related expenditures
as we expanded our business.
Other Income (Expense)
For the three months ended March 31, 2017
and 2016, the Company recorded interest expense of $-0- and $128,184, respectively. As of March 31, 2017, the remaining notes
payable have been eliminated. For the three months ended March 31, 2017 and 2016, the Company realized gains (loss) related to
the fair value mark to market adjustments of its derivative liabilities of $53,898 and $(222,857), respectively. The derivative
liabilities are caused by certain price protections found in the warrants issued as part of the Company’s convertible debt
offering. For the three months ended March 31, 2017 and 2016, the Company recorded amortization of discount on notes payable of
$-0- and $119,549, respectively, included in the interest discussion above.
Net Loss
For the three months ended March 31, 2017
and 2016, we had net losses of $7,447,177 and $2,636,223, respectively, an increase of $4,810,954, for the reasons discussed above.
Liquidity and Capital Resources
Net cash used in operations for the three
months ended March 31, 2017 and 2016 was $2,473,430 and $1,385,002, 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 an expansion
of MassRoots’ development team.
Net cash used in investing activities for
the three months ended March 31, 2017 and 2016 was $122,052 and $15,704, respectively. These investing activities were related
to the purchase of equipment, primarily computers, for the three months ended March 31, 2017 and 2016 of $30,722 and $15,704,
respectively. In addition, during the three months ended March 31, 2017, we purchased an equity investment of $100,002 and received
$8,672 in connection with the acquisition of DDDigtal, LLC.
Net cash provided by financing activities for
the three months ended March 31, 2017 and 2016 was $4,449,700 and $1,428,000, respectively. During the three months ended
March 31, 2017, these funds came mainly from warrant and option exercises. While for the three months ended March 31, 2016 the
Company received proceeds from its March 2016 convertible debt offering and warrant and option exercises.
Capital Resources
As of March 31, 2017, we had cash on hand
of $2,228,708 and as of March 31, 2017, there are warrants outstanding to purchase up to 836,670 shares with an exercise price
of $0.50 per share and up to 5,095,002 shares with an exercise price of $0.90 per share, which, if all were exercised, would supply
$5,003,836 in cash to the Company.
We currently have no external sources of liquidity
such as arrangements with credit institutions, with the exception of a credit card from American Express, 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
During the three months ended March 31, 2017,
we received approximately $4,443,000 proceeds from the exercise of our previously issued warrants.
Required Capital Over the Next Fiscal Year
We do not believe MassRoots has sufficient
capital to reach cash-flow positive. We expect to need to raise at least $5,000,000 over the next year to continue to fund operations;
however, we expect to raise a majority of these funds through warrant exercises.
We
prepared the accompanying condensed consolidated financial statements assuming that we will continue as a going concern,
which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have not yet
established an ongoing source of revenues sufficient to cover our operating costs and allow us to continue as a going concern.
Our ability to continue as a going concern depends on the ability to obtain adequate capital to fund operating losses until
we generate adequate cash flows from operations to fund its operating costs and obligations. If we are unable to obtain adequate
capital, we could be forced to cease operations.
We depend upon our
ability, and will continue to attempt, to secure equity and/or debt financing. We cannot be certain that additional funding will
be available on acceptable terms, or at all. Our management has determined that there is substantial doubt about our ability
to continue as a going concern within one year after the condensed consolidated financial statements are issued.
The
accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
Off-Balance Sheet Arrangements
As of March 31, 2017, we did not have any
off-balance sheet arrangements.
Critical Accounting Policies and Estimates
For a discussion of our accounting policies and related items,
please see the Notes to the Financial Statements, included in Part I, Item 1 of this Quarterly Report.