NOTE
2 –GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As of September 30, 2017, the Company had cash
of $267,322 and working capital deficit (current liabilities in excess of current assets) of $2,377,272. During the nine
months ended September 30, 2017, the Company used net cash in operating activities of $7,200,176. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
In the
first nine months of 2017, the Company received $4,753,196, $942,500, $1,198,000 and $442,500 from the exercise of common stock
warrants, proceeds from issuance of convertible notes, sale of common stock and related party advances, respectively. The
Company does not have cash sufficient to fund operations.
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.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
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 capital
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.
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.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends,
and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability
to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts and
if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required
payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts
receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection.
As of September 30, 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.
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.
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.
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.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
If
available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized,
a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.
Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred
income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and
tax purposes in different periods.
Convertible
Instruments
U.S.
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported
in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered
a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described
under 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 sale of common stock, and of embedded conversion options with convertible debentures. The Company evaluated
these derivatives to assess their proper classification in the balance sheet as of September 30, 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.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
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.
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 September 30, 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:
|
|
September 30,
2017
|
|
September 30,
2016
|
Common stock issuable upon conversion of convertible debentures
|
|
|
3,538,894
|
|
|
|
2,744,432
|
|
Options to purchase common stock
|
|
|
14,574,977
|
|
|
|
5,569,883
|
|
Warrants to purchase common stock
|
|
|
11,864,347
|
|
|
|
14,079,715
|
|
Totals
|
|
|
29,978,218
|
|
|
|
22,394,030
|
|
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
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 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.
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 September 30, 2017 and December
31, 2016, the carrying value of our investments in privately held companies totaled $403,249 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 acquired preferred shares are considered non-marketable
securities. On May 12, 2017, the Company sold its preferred shares in Flowhub for net proceeds of $250,000. The gain on sale
of securities of $75,000 was recorded in current period operations.
During
the nine months ended September 30, 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.
On
July 13, 2017, the Company purchased a convertible promissory note in the principal sum of $300,000 from Cannaregs, Ltd, a Colorado
limited liability company. The promissory note bears interest at 5% per annum payable upon maturity at December 19, 2019
and is unsecured. As of September 30, 2017, the carrying value of the promissory note was $303,247, including accrued interest.
In
the event the issuer consummates, prior to maturity, an equity financing in excess of $2,000,000, the outstanding principal and
any accrued and unpaid interest automatically converts to equity securities of the same class or series issued by the issuer at
the lesser of: a) 90% of the price paid per equity security or b) a price reflecting a valuation cap of $4,500,000.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
NOTE 5
– PROPERTY AND EQUIPMENT
Property
and equipment as of September 30, 2017 and December 31, 2016 is summarized as follows:
|
|
September 30,
2016
|
|
December 31,
2016
|
Computers
|
|
$
|
125,089
|
|
|
$
|
72,124
|
|
Office equipment
|
|
|
44,253
|
|
|
|
36,850
|
|
Subtotal
|
|
|
169,342
|
|
|
|
108,974
|
|
Less accumulated depreciation
|
|
|
(52,497
|
)
|
|
|
(31,652
|
)
|
Property and equipment, net
|
|
$
|
116,845
|
|
|
$
|
77,322
|
|
Depreciation
expense for the three and nine months ended September 30, 2017 was $9,410 and $21,344, respectively; and $5,499 and $14,224
for the three and nine months ended September 30, 2016, 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 nine months ended September 30, 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 September 30, 2017 and December 31, 2016, the aggregate carrying value of the debentures was $0 and $108,100, net
of debt discounts of $0, respectively.
On
August 17, 2017, the Company issued convertible notes to certain accredited investors. The total principal amount of the notes
is $1,045,000 and matures on February 18, 2018 with 0% interest rate. Net proceeds received were $942,500 after deduction of legal
and other fees. If the Company exercises its right to prepay the Note, the Company shall make payment to the Investor of an amount
in cash equal to the sum of the then outstanding principal amount of the Note that it desires to prepay, multiplied by (a) 1.1,
during the first ninety (90) days after the execution of this Note, or (b) 1.25, 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) seventy five
cents ($0.75), 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, if any part of the principal amount of the Note remains unpaid at its Maturity Date (as defined in
the Note), the conversion price will 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 Notes’ Maturity Date.
In
connection with the issuance of the notes, the Company and the Investors also entered into a Security Agreement, whereby the Notes
are secured with all the assets of the Company currently held or hereafter acquired.
In
connection with the issuance of the notes, the Company issued an aggregate of 2,090,000 warrants to purchase an amount of shares
of the Company’s common stock with an initial exercise price of $0.50, expiring five years from the date of issuance. The
warrants contain certain anti-dilutive (reset) provisions.
On
August 17, 2017, upon issuance of the secured convertible notes and warrants, 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.
During
the three and nine months ended September 30, 2017, the Company amortized $187,272 of debt discounts to current period interest.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
NOTE 7
– DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS
The
Company identified conversion features embedded within convertible debt and certain warrants outstanding during the nine months
ended September 30, 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
July 21, 2017, upon issuance of the warrants in connection with the sale of common stock, the Company has determined that the
features associated with the 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. The Company estimated the fair value of the embedded derivatives of $1,003,870
using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility
of 103.46%, (3) weighted average risk-free interest rate of 1.81% (4) expected life of 5.00 years, and (5) estimated fair value
of the Company’s common stock of $0.5687 per share. The estimated fair value of the embedded derivative of $1,003,870
was reclassified from equity at the date of issuance.
On
August 17, 2017, upon issuance of the secured convertible notes and warrants, the Company has determined that the features associated
with the embedded conversion option and reset provisions embedded in the issued notes and 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.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
The
Company estimated the fair value of the embedded derivatives of $798,429 using the Binomial Option Pricing Model based on the
following assumptions: (1) dividend yield of 0%, (2) expected volatility of 102.73%, (3) weighted average risk-free interest rate
of 1.11% to 1.78% (4) expected life of 0.49 to 5.00 years, and (5) estimated fair value of the Company’s common stock of
$0.457 per share. The estimated fair value of the embedded derivative of $798,429 together with the issuance costs of $102,500
(aggregate of $900,929) was charged to debt discount and amortized over the term of the debenture with the excess charged to current
period interest.
On September 30, 2017, the Company estimated
the fair value of the embedded derivatives of $1,506,414 using the Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%, (2) expected volatility of 101.58%, (3) weighted average risk-free interest rate of 1.20% to 1.92%, (4)
expected life of 0.39 to 4.90 years, and (5) estimated fair value of the Company’s common stock of $0.3320 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.
|
All
items required to be recorded or measured on a recurring basis are based upon Level 3 inputs.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
The
Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed below. While the
Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in
a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values
using the methods discussed are that of volatility and market price of the underlying common stock of the Company.
As
of September 30, 2017 and December 31, 2016, the Company did not have any derivative instruments that were designated
as hedges.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
Items
recorded or measured at fair value on a recurring basis in the accompanying financial statements consisted of the following items
as of September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Derivative liability
|
|
$
|
1,506,414
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,506,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine
months ended September 30, 2017:
Balance, January 1, 2017
|
|
$
|
1,301,138
|
|
Transfers in due to issuance of liability warrants in connection with sale of common stock
|
|
|
1,003,870
|
|
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset options
|
|
|
798,431
|
|
Transfers out due to warrant exercise
|
|
|
(610,967
|
)
|
Mark to market to September 30, 2017
|
|
|
(986,058
|
)
|
Balance, September 30, 2017
|
|
$
|
1,506,414
|
|
Gain on change in warrant liabilities for the nine months ended September 30, 2017
|
|
$
|
986,058
|
|
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 September 30, 2017 and December 31, 2016, there were no shares of Series A preferred shares issued and outstanding.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited
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 September 30, 2017, there were 111,326,981 shares of common stock
issued and outstanding and 1,551,217 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 nine months ended September 30, 2017:
During the nine months ended September 30,
2017, the Company issued an aggregate of 22,745,898 shares of its common stock for services valued at $14,204,255.
During the nine months ended September 30,
2017, the Company sold 2,394,000 shares of its common stock and warrants for net proceeds of $1,198,000.
During the nine months ended September 30,
2017, the Company issued an aggregate of 41,153 shares for its common stock for cashless exercise of common stock options.
During the nine months ended September 30,
2017, the Company issued an aggregate of 355,689 shares of its common stock for the cashless exercise of common stock warrants.
During the nine months ended September 30,
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 nine months ended September 30,
2017, the Company issued an aggregate of 6,933,041 shares of its common stock for exercise of common stock warrants. Net proceeds
were $4,753,196.
During the nine months ended September 30,
2017, the Company issued an aggregate of 2,926,830 shares of its common stock to acquire DDDigtal (Note 1).
During the nine months ended September 30,
2017, the Company issued an aggregate of 3,250,000 shares of its common stock to acquire Odava (Note 1).
NOTE 9
– WARRANTS
Warrants
outstanding and exercisable at September 30, 2017 are as follows:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
|
Warrants
|
|
|
In Years
|
|
|
Warrants
|
|
|
$
|
0.50
|
|
|
|
3,056,670
|
|
|
|
4.42
|
|
|
|
3,056,670
|
|
|
|
0.60
|
|
|
|
50,000
|
|
|
|
2.52
|
|
|
|
50,000
|
|
|
|
0.65
|
|
|
|
2,364,000
|
|
|
|
4.81
|
|
|
|
2,364,000
|
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
3.30
|
|
|
|
100,000
|
|
|
|
0.90
|
|
|
|
5,070,002
|
|
|
|
1.97
|
|
|
|
5,070,002
|
|
|
|
1.00
|
|
|
|
670,000
|
|
|
|
0.22
|
|
|
|
670,000
|
|
|
|
1.06
|
|
|
|
146,200
|
|
|
|
1.23
|
|
|
|
146,200
|
|
|
|
3.00
|
|
|
|
407,475
|
|
|
|
1.11
|
|
|
|
407,475
|
|
|
|
|
|
|
|
11,864,347
|
|
|
|
3.04
|
|
|
|
11,864,347
|
|
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
A
summary of the warrant activity for the nine months ended September 30, 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
|
|
|
4,484,000
|
|
|
|
0.58
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
|
(7,248,668
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(819,041
|
)
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
11,864,347
|
|
|
$
|
0.83
|
|
|
|
3.0
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2017
|
|
|
11,864,347
|
|
|
$
|
0.83
|
|
|
|
3.0
|
|
|
$
|
—
|
|
Exercisable at September 30, 2017
|
|
|
11,864,347
|
|
|
$
|
0.83
|
|
|
|
3.0
|
|
|
$
|
—
|
|
The
aggregate intrinsic value outstanding stock warrants was $0, based on warrants with an exercise price less than the Company’s
stock price of $0.332 as of September 30, 2017, which would have been received by the warrant holders had those warrant holders
exercised their warrants as of that date.
On July 21, 2017, upon the sale of the Company’s
common stock, the Company issued 2,394,000 warrants to purchase the Company’s common stock at $0.65 per share, exercisable
through July 21, 2022. These warrants contain certain anti-dilutive (reset) provisions (See Note 7).
On
August 24, 2017, in connection with the issuance of convertible notes, the Company granted to the same investors five year warrants
to purchase an aggregate of 2,090,000 shares of the Company’s common stock at $0.50 per share. The warrants may be exercised
any time after the issuance through and including the fifth (5
th
) anniversary of its original issuance. These warrants
contain certain anti-dilutive (reset) provisions (See Note 7).
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 September 30, 2017, the Company had granted an aggregate of 37,950,282 securities
under the plans, with 2,150,149 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 nine months ended September 30, 2017, the Company granted options to purchase 2,854,000 shares of common stock for ten
years. The fair value of $2,054,521, was determined using the Black-Scholes Option Pricing Model, assuming approximately 1.81%
to 2.35% risk-free interest, 0% dividend yield, 103.66% 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.
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
The
summary terms of the issuances are as follows:
Exercise
|
|
Number of
|
|
Vesting
|
Price
|
|
Options
|
|
Terms
|
$
|
0.50
|
|
|
|
80,000
|
|
|
Immediately
|
|
0.50
|
|
|
|
100,000
|
|
|
Quarterly over one year
|
|
0.50
|
|
|
|
605,000
|
|
|
Quarterly over two years
|
|
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
|
|
0.83
|
|
|
|
2,854,000
|
|
|
|
On
June 21, 2017, the Company accelerated vesting of 5,000,000 options to fully vesting. As a result, the Company charged $2,544,741
to operations during the nine months ended September 30, 2017.
Stock
options outstanding and exercisable on September 30, 2017 are as follows:
Exercise
|
|
Number of
|
|
Remaining Life
|
|
Number of
|
Price
|
|
Options
|
|
In Years
|
|
Options Exercisable
|
$
|
0.10
|
|
|
|
1,056,786
|
|
|
|
6.68
|
|
|
|
806,786
|
|
|
0.50
|
|
|
|
689,631
|
|
|
|
7.99
|
|
|
|
689,631
|
|
|
0.51
|
|
|
|
1,891,779
|
|
|
|
9.02
|
|
|
|
1,891,779
|
|
|
0.60
|
|
|
|
105,000
|
|
|
|
7.53
|
|
|
|
105,000
|
|
|
0.77
|
|
|
|
758,331
|
|
|
|
9.20
|
|
|
|
683,331
|
|
|
0.80
|
|
|
|
145,000
|
|
|
|
8.30
|
|
|
|
145,000
|
|
|
0.81
|
|
|
|
5,000
|
|
|
|
9.45
|
|
|
|
5,000
|
|
|
0.82
|
|
|
|
37,500
|
|
|
|
9.46
|
|
|
|
37,500
|
|
|
0.85
|
|
|
|
150,000
|
|
|
|
9.42
|
|
|
|
75,000
|
|
|
0.86
|
|
|
|
5,204,165
|
|
|
|
9.22
|
|
|
|
5,204,165
|
|
|
0.87
|
|
|
|
125,000
|
|
|
|
9.48
|
|
|
|
125,000
|
|
|
0.89
|
|
|
|
577,500
|
|
|
|
9.28
|
|
|
|
285,000
|
|
|
0.90
|
|
|
|
1,745,413
|
|
|
|
8.20
|
|
|
|
1,745,413
|
|
|
0.95
|
|
|
|
125,000
|
|
|
|
9.38
|
|
|
|
125,000
|
|
|
0.98
|
|
|
|
24,000
|
|
|
|
9.32
|
|
|
|
8,000
|
|
|
1.00
|
|
|
|
837,494
|
|
|
|
8.22
|
|
|
|
837,494
|
|
|
1.05
|
|
|
|
430,838
|
|
|
|
8.66
|
|
|
|
415,838
|
|
|
1.06
|
|
|
|
30,000
|
|
|
|
9.35
|
|
|
|
30,000
|
|
|
1.07
|
|
|
|
168,326
|
|
|
|
9.28
|
|
|
|
164,993
|
|
|
|
|
|
|
14,106,763
|
|
|
|
8.77
|
|
|
|
13,379,930
|
|
MASSROOTS,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(unaudited)
A
summary of the stock option activity for the nine months ended September 30, 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
|
|
|
2,854,000
|
|
|
|
0.50
|
|
|
|
9.71
|
|
|
|
—
|
|
Exercised
|
|
|
(522,428
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
Forfeiture/Canceled
|
|
|
(3,048,967
|
)
|
|
$
|
0.73
|
|
|
|
|
|
|
|
—
|
|
Outstanding at September 30, 2017
|
|
|
14,106,763
|
|
|
$
|
0.76
|
|
|
|
8.77
|
|
|
$
|
245,174
|
|
Exercisable at September 30, 2017
|
|
|
13,379,930
|
|
|
$
|
0.76
|
|
|
|
8.79
|
|
|
$
|
187,174
|
|
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 $0.332 as of September 30, 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 historical data. 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 nine months ended September 30, 2017 and 2016 of $5,678,272 and $1,974,710,
respectively. Unrecognized compensation expense of $286,153 at September 30, 2017 will be expensed in future periods.
NOTE
11 – SUBSEQUENT EVENTS
On October 4, 2017 and October 5, 2017, the
Company entered into a Simple Agreement for Future Tokens with two accredited investors, relating to the future right to purchase
$25,000 and $100,000 in units of a cryptographic token (a “Token”), respectively, at a discount, if the Company conducts
a public sale of its Tokens. Pursuant to the agreements, in the event the Company conducts such a public sale of its Tokens, it
will automatically issue to each investor a number of Tokens equal to such investor’s investment, based on a rate that is
fifty percent (50%) of the price per Token in the public sale. In the event the Company sells Tokens in the public sale at different
prices, each investor’s Tokens shall be determined based on the most advantageous rate publicly marketed.
On October 5, 2017, the Company issued 394,858
shares of its common stock to a member of the Board of Directors in connection with a cashless exercise of 443,214 shares pursuant
to a Stock Option Agreement, dated June 4, 2014. The shares are reflected as shares to be issued as of September 30, 2017 (See
Note 8).
On October 5, 2017, the Company issued 45,000
shares to a former employee for services rendered. The shares are reflected as shares to be issued as of September 30, 2017 (See
Note 8).
On October 17, 2017, the Company issued stock
certificates for, in the aggregate, 349,000 shares of its common stock which had been sold in connection with an offering of up
to $2,000,000 of its common stock and warrants conducted in July 2017, and closed on July 21, 2017. Such shares were inadvertently
not issued following such closing. One of the stock certificates noted above was issued for 70,000 shares of the Company’s
common stock, but should have been issued for 30,000 shares, so the Company will rescind 40,000 of such shares. The 309,000 shares
(which does not include the 40,000 shares of common stock issued in error) are reflected as shares to be issued as of September
30, 2017 (See Note 8).
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 (833) 467-6687 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.
MassRoots was formed in April 2013 as a technology
platform for the medical cannabis community and over the past four years, has empowered over a million cannabis consumers with
the knowledge they need to shape local, state and corporate cannabis policies while making educated cannabis decisions within regulated
markets. In July 2017, we merged with Odava, Inc. (“Odava”), and shifted our focus to providing compliance technology
for cannabis businesses to run their business more efficiently, submit reports to state regulators, and build loyalty amongst consumers
in their local neighborhoods.
Our
platform is the heart of the cannabis industry ecosystem -- connecting dispensary operators, cultivators, cannabis consumers,
and regulatory agencies in a closed-loop environment with compliance at the core. We are currently available to dispensaries and
cultivators in the State of Oregon, and dispensaries are able to submit data to state regulators on a daily basis. Over the coming
quarters, we plan to expand our regulatory compliance platform to the Alaska, Colorado, Maryland, Florida and California markets.
MassRoots
and Odava’s Value Proposition to State Regulators
Through
our point-of-sale software, we enable dispensary operators to easily record sales, track inventory, and submit this data with
state regulatory agencies on a daily basis. This provides regulators with a fully transparent snapshot of the entire cannabis
supply chain with millions of data points, updated daily, which they can utilize to detect potential illegal diversion and ensure
compliance with state regulations.
As
part of our point-of-sale solution, we also provide an ID scanner to determine whether patients are over the age 18 or 21, depending
on the state or local laws and regulations. Utilizing the same database of Department of Motor Vehicles information utilized by
mainstream brands, IDs are checked against DMV databases in 46 states and provides the highest-level of age authentication publicly
available, although such age confirmations may not always be correct.
We
believe that by providing the software that makes the cannabis industry as compliant and transparent as possible, we will contribute
to the acceleration of the spread of legal and regulated cannabis markets. We believe that the vast majority of prohibitionist
policies are formulated based on incorrect data and preconceptions that can be objectively proven false.
MassRoots’
and Odava’s Value Proposition to Dispensary Operators
The
Odava Retail Platform is available to dispensary operators in Oregon as a paid software-as-a-service platform to manage their
point-of-sale, compliance and loyalty program operations. Our software streamlines dispensary operations and work flows, while
enabling seamless interaction with their customers through the MassRoots App.
MassRoots’
and Odava’s Value Proposition to Users
MassRoots
helps provide cannabis consumers with the information they need to influence local, state, and corporate cannabis policies, while
staying better connected with dispensaries in their local areas. Cannabis consumers can view previous order history at local dispensaries,
see which strains and products dispensaries have in stock, while receiving updates of legalization-related events happening in
their local communities.
MassRoots’
and Odava’s Value Proposition to Investors
As
a technology company, the MassRoots platform is able to rapidly scale with minimal marginal costs – each additional dispensary,
user of our mobile application or cultivator that we add costs negligible server hosting fees. Our business model gives us exposure
to every regulated cannabis market without establishing a physical presence in each state. This minimizes required capital while,
at the same time, offering a direct role in the cannabis industry without ever touching the plant itself.
The
Team
MassRoots
has 6 full-time employees working at our headquarters in downtown Denver, Colorado, along with several outside contractors building
out the technology platform.
2017
Elections
On November 7, 2017, voters in New Jersey
and Virginia elected pro-legalization Governors who have both said they will move quickly to enact legislation that decriminalizes
or legalizes marijuana in their States. This is in addition to a bevy of other positive news for marijuana reformers with the elections
in Georgia, Ohio, Philadelphia, Detroit and New York. This comes on the heels of the 2016 elections where 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.
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.
German
Trading
The
Company was made aware that its Common Stock has been trading on the Stuttgart Exchange and München Exchange in Germany,
both under the ticker symbol 2R1. On November 10, 2017, the stock price closed at €0.157 on the Stuttgart Exchange and at
€0.153 on the München Exchange.
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. Odava competes with cannabis seed-to-sale technology platforms such as MJ Freeway, BioTrack THC, Greenbits,
Flowhub, and Treez. We believe the cloud-based infrastructure of our platform, its ease-of-use, the potential for automatic API
integrations and dynamic regulatory compliance engine present a significantly higher value proposition than our competitors.
Results
of Operations for the Three Months Ended September 30, 2017 as Compared to the Three Months Ended September 30, 2016
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Revenues:
|
|
$
|
11,516
|
|
|
$
|
209,003
|
|
|
$
|
(197,487
|
)
|
|
|
(95
|
)%
|
Total operating expense
|
|
|
7,533,530
|
|
|
|
2,094,211
|
|
|
|
5,439,319
|
|
|
|
260
|
%
|
Loss from operations
|
|
|
(7,522,014
|
)
|
|
|
(1,885,208
|
)
|
|
|
(5,636,806
|
)
|
|
|
299
|
%
|
Total other income (expense):
|
|
|
444,948
|
|
|
|
(1,567,456
|
)
|
|
|
2,012,404
|
|
|
|
128
|
%
|
NET LOSS
|
|
$
|
(7,077,066
|
)
|
|
$
|
(3,452,664
|
)
|
|
$
|
(3,624,402
|
)
|
|
|
105
|
%
|
Revenues
For the three months ended September 30, 2017
and 2016, we generated revenues of $11,516 and $209,003, respectively, a decrease of $197,487. Of the $11,516 generated in the
three months ended September 30, 2017, all was made up of advertising revenue related to the MassRoots network. The decrease in
revenues for the three months ended September 30, 2017 was primarily caused by a lack of revenues from the 420 Rally being generated
in 2017.
Operating
Expenses
For
the three months ended September 30, 2017 and 2016, our operating expenses were $7,533,530 and $2,094,211, respectively, an increase
of $5,439,319. For the three months ended September 30, 2017, these increases were mainly attributed to increased stock-based
compensation to our employees and key consultants which, for 2017 was $5,510,554 as compared to $613,353 for the same period last
year (a non-cash increase of $4,897,201). 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 September 30, 2017 and 2016, the Company recorded interest expense of $189,125 and $2,573,814, respectively.
As of September 30, 2017, we had outstanding $1,095,000 in convertible notes. For the three months ended September 30, 2017 and
2016, the Company realized gains related to the fair value mark to market adjustments of its derivative liabilities of $634,073
and $1,006,358, respectively. The derivative liabilities are caused by certain price protections included in the notes and warrants
issued as part of the Company’s convertible debt and common stock offering. For the three months ended September 30, 2017
and 2016, the Company recorded amortization of discount on notes payable of $187,272 and $676,617, respectively, included in the
interest discussion above. In addition, during the three months ended September 30, 2016, we incurred non-cash interest and penalties
relating to our convertible debt of $1,265,375 and $584,735, respectively.
Net
Loss
For
the three months ended September 30, 2017 and 2016, we had net losses of $7,077,066 and $3,452,664, respectively, an increase
of $3,624,402, for the reasons discussed above.
Results
of Operations for the Nine Months Ended September 30, 2017 as Compared to the Nine Months Ended September 30, 2016
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
Revenues:
|
|
$
|
289,130
|
|
|
$
|
794,621
|
|
|
$
|
(505,491
|
)
|
|
|
(64
|
)%
|
Total operating expense
|
|
|
27,315,960
|
|
|
|
6,795,371
|
|
|
|
20,520,589
|
|
|
|
302
|
%
|
Loss from operations
|
|
|
(27,026,830
|
)
|
|
|
(6,000,750
|
)
|
|
|
(21,026,080
|
)
|
|
|
350
|
%
|
Total other income (expense):
|
|
|
871,933
|
|
|
|
(2,254,354
|
)
|
|
|
3,126,287
|
|
|
|
139
|
%
|
NET LOSS
|
|
$
|
(26,154,897
|
)
|
|
$
|
(8,255,104
|
)
|
|
$
|
(17,899,793
|
)
|
|
|
217
|
%
|
Revenues
For
the nine months ended September 30, 2017 and 2016, we generated revenues of $289,130 and $794,621, respectively, a decrease of
$505,491. The $289,130 generated in the nine months ended September 30, 2017 was primarily comprised of advertising revenue related
to the MassRoots network. The decrease in revenues for the nine months ended September 30, 2017 was primarily caused by no revenues
from the 420 Rally being generated in 2017.
Operating
Expenses
For
the nine months ended September 30, 2017 and 2016, our operating expenses were $27,315,960 and $6,795,371, respectively, an increase
of $20,520,589. This increase was mainly attributable to an increase stock based compensation to our employees and key consultants
which, for 2017 was $19,882,527 as compared to $2,306,662 for the same period last year (a non-cash increase of $17,575,865).
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 nine months ended September 30, 2017 and 2016, the Company recorded interest expense of $189,125 and $3,575,008, respectively.
As of September 30, 2017, we had outstanding $1,095,000 in convertible notes. For the nine months ended September 30, 2017 and
2016, the Company realized gains related to the fair value mark to market adjustments of its derivative liabilities of $986,058
and $1,320,654, respectively. The derivative liabilities are caused by certain price protections included in the warrants issued
as part of the Company’s convertible debt and common stock offerings. For the nine months ended September 30, 2017 and 2016,
the Company recorded amortization of discount on notes payable of $187,272 and $1,549,669, respectively, included in the interest
discussion above. Lastly, during the nine months ended September 30, 2017, we sold our security investment in Flowhub for $250,000
realizing a gain on sale of securities of $75,000.
Net
Loss
For
the nine months ended September 30, 2017 and 2016, we had net losses of $26,154,897 and $8,255,104, respectively, an increase
of $17,899,793, for the reasons discussed above.
Liquidity
and Capital Resources
Net cash used in operations for the nine months
ended September 30, 2017 and 2016 was $7,200,176 and $2,915,832, 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
nine months ended September 30, 2017 and 2016 was $236,833 and $19,100, respectively. These investing activities in 2017 were proceeds
from sale of securities of $250,000 and received $11,273 in connection with the acquisitions of DDDigtal Inc and Odava, net with
the purchase of equipment, primarily computers, of $57,533, investment in convertible note of $300,000 and equity investment of
$100,002. For the nine months ended September 30, 2016, $19,100 was used to purchase office equipment.
Net cash provided by financing activities for
the nine months ended September 30, 2017 and 2016 was $7,429,841 and $2,675,231, respectively. During the nine months ended September
30, 2017, these funds came mainly from warrant and option exercises of $4,753,196, proceeds from sale of common stock and warrants
of $1,198,000, proceeds from issuance of convertible debt of $942,500 and proceeds from related party advances of $442,500. While
for the nine months ended September 30, 2016 the Company received proceeds from its March 2016 convertible debt offering and warrants
of $1,420,000, for sale of common stock of $1,660,500 and option and warrant exercises of $621,331.
Capital Resources
As of September 30, 2017, we had cash on hand
of $267,322 and as of September 30, 2017; there are warrants outstanding to purchase up to aggregate of 10,640,672 shares with
an exercise prices of $0.50 to $.90 per share, which, if all were exercised, would supply $7,745,437 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 nine months ended September 30,
2017, we received approximately $4,753,000 proceeds from the exercise of our previously issued warrants.
On July 21, 2017, we received aggregate gross
proceeds to the Company of $1,198,000 in connection with the sale of 2,394,000 shares of common stock and warrants to purchase
up to 2,394,000 shares of common stock.
On August 24, 2017, we received net proceeds
to the Company of $942,500 in connection with the issuance of convertible notes and warrants to purchase $2,090,000 shares of common
stock.
On September 27, 2017, we received aggregate
gross proceeds to the Company of $420,000 in connection with the sale to two investors of a right to receive units of a cryptographic
token at a fifty percent (50%) discount, if the Company conducts a public sale of such tokens on or before November 30, 2017. The
$420,000 is included in amounts due to related parties at September 30, 2017.
Required
Capital Over the Next Fiscal Year
We do not believe MassRoots has sufficient
capital to become cash-flow positive from operations. We expect to need to raise at least $2,500,000 over the next quarter to continue
to fund operations.
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 September 30, 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.