NOTE
2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As of September 30, 2019, the Company had
cash of $2,639 and working capital deficit (current liabilities in excess of current assets) of $24,900,238. During the nine months
ended September 30, 2019, net cash used in operating activities was $1,389,212. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern for one year from the issuance of the financial statements.
During the nine months ended September 30,
2019, the Company received proceeds of $645,000, $350,000, $176,000, $172,950, and $90,983 from the sale of preferred stock and
warrants, issuance of convertible notes, advances, the exercise of warrants, and proceeds from sales of assets, respectively. The
Company does not have cash sufficient to fund operations for the next fiscal year.
The Company’s primary source of
operating funds since inception has been cash proceeds from the public and private placements of the Company’s securities,
including debt securities, and proceeds from the exercise of warrants and options. The Company has experienced net losses and
negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future. For
the foreseeable future, the Company’s ability to continue its operations is dependent upon its ability to obtain additional
capital through public or private equity offerings, debt financings or other sources; however, financing
may not be available to the Company on acceptable terms, or at all. The Company’s failure to raise capital as and when needed
could have a negative impact on its financial condition and its ability to pursue its business strategy, and the Company may be
forced to curtail or cease operations.
Management’s
plans with regard to these matters encompass the following actions: 1) obtain funding from new and 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
determined with any degree of certainty.
Accordingly,
the accompanying unaudited condensed consolidated 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 for one year from the date the financial statements are issued. The carrying amounts of assets and liabilities
presented in the unaudited condensed consolidated financial statements do not necessarily purport to represent realizable or settlement
values. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for
interim financial information and pursuant to instructions to the SEC’s Quarterly Report on Form 10-Q and Article 8 of Regulation
S-X of the Securities Act of 1933, as amended, and reflect the accounts and operations of the Company and those of its subsidiaries.
All
intercompany accounts and transactions have been eliminated in consolidation. Accordingly, the accompanying interim unaudited
condensed consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the unaudited condensed consolidated financial position of the Company as of September 30,
2019, the unaudited condensed consolidated results of operations for the three and nine months ended September 30, 2019 and
2018, and the unaudited condensed consolidated results of cash flows for the nine months ended September 30, 2019 and 2018 have
been included. These interim unaudited condensed consolidated financial statements do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial
statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2018 filed with the SEC on April 16, 2019 (the “Annual Report”). The December 31, 2018 balances reported herein are
derived from the audited consolidated financial statements included in the Annual Report. The results for the interim periods
are not necessarily indicative of results to be expected for the full year.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. 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
The
Financial Accounting Standards Board (“FASB”) 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 Condensed Consolidated 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 three to
five years. Repair and maintenance costs are expensed as incurred. 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.
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.
Revenue
Recognition
The
Company recognizes revenue when services are realized or realizable and earned less estimated future doubtful accounts.
The
Company’s revenues accounted for under ASC Topic 606, Revenue From Contracts With Customers (“ASC 606”) generally
do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices
are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s
contracts do not include multiple performance obligations or material variable consideration.
In
accordance with ASC 606, the Company recognizes revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. MassRoots
recognizes revenue in accordance with that core principle by applying the following:
|
(i)
|
Identify
the contract(s) with a customer;
|
|
(ii)
|
Identify
the performance obligation in the contract;
|
|
(iii)
|
Determine
the transaction price;
|
|
(iv)
|
Allocate
the transaction price to the performance obligations in the contract; and
|
|
(v)
|
Recognize
revenue when (or as) MassRoots satisfies a performance obligation.
|
The
Company primarily generates revenue by charging businesses to advertise on the Company’s network. The Company has the ability
to target advertisements directly to a client’s target audience based on their location and 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 periods.
Acquisitions
and Subsidiaries
Subsidiaries
are all entities over which MassRoots has the power to govern the financial and operating policies generally accompanying a shareholding
of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether MassRoots controls another entity. Subsidiaries are fully consolidated from
the date on which control is transferred to MassRoots.
The
purchase method of accounting is used to account for the acquisition of subsidiaries by MassRoots. The cost of an acquisition
is measured as the fair value of the assets transferred as consideration, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities
and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the MassRoots’
share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
Advertising
The
Company follows the policy of charging the costs of advertising to expense as incurred. For the three months ended September 30,
2019 and 2018, the Company charged to operations $2,967 and $36,407, respectively, as advertising expense. For the nine months
ended September 30, 2019 and 2018, the Company charged to operations $39,332 and $468,958, respectively, as advertising expense.
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,
non-employees and directors, the fair value of the award is measured on the grant date. 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.
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 to 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, “Distinguishing Liabilities From Equity.”
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company
records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction
and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of
the related debt to their stated date of redemption.
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 the 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 December 31, 2018 using
the applicable classification criteria enumerated under ASC 815, Derivatives and Hedging. The Company determined that certain
embedded conversion and/or exercise features did not contain fixed settlement provisions. The convertible debentures contained 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.
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.
Intangible assets are stated at cost and reviewed annually to examine any impairments, usually assuming an estimated useful lives
of three to five years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed
from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
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 Executive Officer, 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. 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, for the nine months ended September 30, 2019 and 2018 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,
2019
|
|
|
September 30,
2018
|
|
|
Common stock issuable upon conversion of convertible debentures
|
|
|
1,456,478,815
|
|
|
|
6,600,000
|
|
|
Options to purchase common stock
|
|
|
27,621,765
|
|
|
|
27,357,765
|
|
|
Warrants to purchase common stock
|
|
|
2,517,052,238
|
|
|
|
41,226,339
|
|
|
Common stock issuable upon conversion of preferred stock
|
|
|
1,131,613,184
|
|
|
|
-
|
|
|
Totals
|
|
|
5,132,766,002
|
|
|
|
75,184,104
|
|
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
FASB
Accounting Standards Updates (“ASU”) 2017-04 (Topic 350), “Intangibles – Goodwill and Others” –
Issued in January 2017, ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2
from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting
unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December
15, 2019 including interim periods within those periods. The Company is currently evaluating the effect that ASU 2017-04 will
have on its condensed consolidated financial statements and related disclosures.
FASB ASU 2017-01
(Topic 805), “Business Combinations: Clarifying the Definition of a Business” – Issued in January 2017,
ASU 2017-01 revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and
activities is a business. This guidance was effective for the Company in the first fiscal quarter of 2018. The adoption of this
standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
FASB
ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers” – Issued in May 2014, ASU
2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model
that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No.
2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. This amendment
defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08, “Principal versus
Agent Considerations (Reporting Gross versus Net)”, which amends the principal versus agent guidance and clarifies
that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer.
In addition, the FASB issued ASU Nos. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers” and 2016-12, “Narrow-Scope Improvements and Practical Expedients”, both of which provide
additional clarification of certain provisions in Topic 606. These ASUs are effective for annual reporting periods beginning after
December 15, 2017; however, early adoption is permitted as of annual reporting periods after December 15, 2016. The standard permits
the use of either the retrospective or cumulative effect transition method.
The
Company has applied the guidance using the modified retrospective transition method. The adoption of ASU 2014-09 did not have
a material impact on the Company’s financial position or results of operations but such adoption resulted in additional
disclosures regarding the Company’s revenue recognition policies. The adoption of ASU 2014-09 did not require material or
significant changes to its internal controls over financial reporting. In connection with the application of that guidance and
the adoption of ASU 2014-09, the Company has expanded its revenue recognition inquiries and updated its questionnaires to identify
matters that would signal variable consideration implications under the new guidance.
FASB
ASU 2016-02, Leases (Topic 842) – ASU 2016-02 requires that a lessee recognize the assets and liabilities that
arise from operating leases. A lessee should recognize, in the statement of financial position, a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases
with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset
not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure
leases at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should
apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years (i.e. January 1, 2019, for a calendar year entity). Early application is permitted for all public business
entities and all non-public business entities upon issuance. The adoption of this standard did not have a material impact on the
Company’s financial position and results of operations.
FASB
ASU No. 2018-07 (Topic 718), “Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”
– Issued in June 2018, ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from non-employees. The amendments also clarify that Topic 718 does not apply to share-based
payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services
to customers as part of a contract accounted for under Topic 606. The new standard is effective for the Company as of January
1, 2019. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial
condition or results of operations.
There
are other various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations
or cash flows.
NOTE
4 – INVESTMENTS
As
of September 30, 2019 and December 31, 2018, the carrying value of our investments in privately held companies totaled $0 and
$247,912, respectively. These investments are accounted for as cost method investments, as the Company owns less than 20% of the
voting securities and did not have the ability to exercise significant influence over operating and financial policies of the
entities.
During
the twelve months ended December 31, 2017, the Company acquired 23,810 shares of Class A common stock of Hightimes Holding Corp.
for $100,002, or $4.20 per share. As a result of a forward share split of 1.9308657-for-1 on January 15, 2018, MassRoots owned
45,974 shares of Class A common stock. The acquired Class A common stock were considered non-marketable securities. The Company
incurred an impairment of $65,000 on these shares during the nine months ended September 30, 2019. The Company sold 45,974 shares
of Class A common stock for proceeds of $35,000 during the nine months ended September 30, 2019.
On
July 13, 2017, the Company purchased an unsecured convertible promissory note in the principal amount of $300,000 from CannaRegs,
Ltd, a Colorado limited liability company (“CannaRegs”). The note bears interest at a rate of 5% per annum and matures
on December 19, 2019. In the event CannaRegs consummates an equity financing in excess of $2,000,000 prior to the maturity date
of the note, the outstanding principal and any accrued and unpaid interest automatically converts into equity securities of the
same class or series issued by CannaRegs 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.
On July 17, 2017,
MassRoots converted the note into 430,622 shares of CannaRegs’ common stock. In 2018, CannaRegs re-incorporated as a Delaware
C corporation under the name Regs Technology, Inc. (“Regs Technology”), keeping the same capitalization structure
and business operations. MassRoots valued its holdings at $0 and $147,876 as of September 30, 2019 and December 31, 2018, respectively.
The Company recorded an impairment expense of $155,336 on its holdings during fiscal year 2018 and recorded a $91,929 loss on
the sale of investment during the nine months ended September 30, 2019. The Company sold its shares of Regs Technology for $55,983
during the nine months ended September 30, 2019. MassRoots owned less than 1% of Regs Technology’s issued and outstanding
shares prior to the sale.
NOTE 5 – Advances
to COWA Science Corporation
On February 11, 2019, MassRoots, Inc. entered
into an Agreement and Plan of Merger (the “Merger Agreement”) with MassRoots Supply Chain, Inc., a wholly-owned subsidiary
of the Company (“Merger Subsidiary”), COWA Science Corporation, a Delaware corporation (“COWA”), and Christopher
Alameddin, an individual acting solely in his capacity as a stockholder representative (“Stockholder Representative”).
Pursuant to the Merger Agreement, Merger Subsidiary will be merged with and into COWA, whereby the separate corporate existence
of Merger Subsidiary will cease and COWA will be the surviving entity (the “Surviving Entity”) and will be a wholly-owned
subsidiary of the Company (the “Merger”).
Upon effectiveness of the Merger (such time,
the “Effective Date”), MassRoots will issue 50,000,000 shares of its common stock, par value $0.001 per share (“Common
Stock”) to the stockholders of COWA, allocated pro-rata based on each stockholder’s respective holdings of
COWA immediately prior to the Effective Date; and each share of the common stock of Merger Subsidiary will be converted into one
newly issued, fully paid and non-assessable share of common stock of the Surviving Entity. If (i) within three (3) years after
the Effective Date, COWA has generated an aggregate of $2.5 million in revenue, the Company shall issue an aggregate of 25 million
shares of Common Stock to the COWA stockholders; and (ii) within three (3) years after the Effective Date, COWA has generated an
aggregate of $7.5 million in revenue (inclusive of the $2.5 million in revenue generated in clause (i)), the Company shall issue
an aggregate of 25 million additional shares of Common Stock to the COWA stockholders.
As of September 30, 2019, the Merger had not been effectuated.
As of September 30, 2019,
MassRoots had advanced $370,500 to COWA for working capital, which is to be repaid on-demand should the Merger not be effectuated.
As of September 30, 2019, COWA had repaid $10,000 and the Company wrote off the $360,500 balance of these advances.
NOTE
6 – PROPERTY AND EQUIPMENT
Property
and equipment as of September 30, 2019 and December 31, 2018 is summarized as follows:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Computers
|
|
$
|
6,366
|
|
|
$
|
6,366
|
|
|
Office equipment
|
|
|
17,621
|
|
|
|
17,621
|
|
|
Subtotal
|
|
|
23,987
|
|
|
|
23,987
|
|
|
Less accumulated depreciation
|
|
|
(20,816
|
)
|
|
|
(17,254
|
)
|
|
Property and equipment, net
|
|
$
|
3,171
|
|
|
$
|
6,733
|
|
Depreciation
expense for the three months ended September 30, 2019 and 2018 was $1,078 and $5,002,
respectively.
Depreciation
expense for the nine months ended September 30, 2019 and 2018 was $3,549 and $20,417, respectively.
NOTE
7 – SOFTWARE COSTS
In
January 2018, MassRoots entered into a Master Services Agreement with MEV, LLC (“MEV”) pursuant to which MEV will
assist with the development and servicing of the Company’s technology platform, including its mobile applications, business
portal and WeedPass. MassRoots has capitalized the billable costs of engineers that were devoted to building the system and developing
additional features that enhanced its ability to generate revenue. MassRoots did not capitalize any costs associated with maintenance,
user-testing, analysis and planning of the system. The Company has been amortizing these capitalized costs using a straight-line
methodology over five years, since July 5, 2018.
During
fiscal year 2018, MassRoots paid MEV $521,839 with respect to the development and maintenance of its platform, of which MassRoots
has capitalized $260,565 in development costs.
During the three months ended September
30, 2019 and 2018, MassRoots incurred amortization of software costs of $12,849 and $108,182, respectively. During the same period,
MassRoots incurred impairment of software costs of $196,315 and $0, respectively.
During
the nine months ended September 30, 2019 and 2018, MassRoots incurred amortization of software costs of $38,549 and $315,229,
respectively. During the same period, MassRoots incurred impairment of software costs of $196,315 and $0, respectively.
NOTE
8 – ADVANCES AND NOTES PAYABLE
As
of September 30, 2019, the Company owed advances of $882,500, as compared to $942,500 as of December 31, 2018, which were primarily
for Simple Agreements for Future Tokens, entered into with eight accredited investors issued pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, by virtue of Section
4(a)(2) thereof and/or Regulation D thereunder in 2017 and 2018.
As
of September 30, 2019, the Company owed $178,500 under notes payable agreements which are not convertible into shares of common
stock. Such notes payable agreements had maturity dates from March 21, 2019 to September 15, 2019, carried a collective $26,000
in original issuance discounts, have annual interest rates from 0%-20% annually, and have incurred an aggregate of $60,661 in
default penalties as of September 30, 2019.
NOTE
9 – CONVERTIBLE NOTES PAYABLE
On
July 5, 2018, the Company issued secured convertible notes to certain accredited investors in the aggregate principal amount of
$1,650,000. The notes had a maturity date of January 5, 2019 and accrued no interest. Net proceeds received by the Company were
$1,492,500 after deduction of legal and other fees. If the Company exercises its right to prepay the notes, the Company shall
make payment to the investors in an amount equal to the sum of the then outstanding principal amount of the notes that the Company
desires to prepay, multiplied by (a) 1.1, during the first 90 days after the execution of the 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) $0.25 and (ii) a 15% discount to the price at which the Company next conducts an offering after the issuance date of the
notes; provided, however, if any part of the principal amount of the notes remains unpaid after the maturity date, 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 pursuant to which
the notes are secured by all of the assets of the Company held as of July 5, 2018 and acquired thereafter. The Company also issued
five-year warrants to purchase an aggregate of 6,600,000 shares of Company’s common stock with an initial exercise price
of $0.25. The warrants contain certain anti-dilutive provisions.
In
December 2018, the Company made payments of an aggregate of $1,762,500 to holders of July
2018 notes. As of December 31, 2018, the aggregate carrying value of the notes was $390,000. During nine months ended September
30, 2019, holders of the July 2018 notes converted $392,980 in principal and interest into an aggregate of 10,102,353 shares of
the Company’s common stock for the settlement of convertible debt. The balance of these notes was $0 as of September 30,
2019.
In
December 2018, the Company issued convertible promissory notes in the aggregate principal amount of $90,000 (including an aggregate
original issuance discount of $12,840) maturing in June 2019 and bearing interest rates of 5% per annum. The Company shall
have the right to prepay the notes for an amount equal to 130% multiplied by the portion of the Outstanding Balance (as defined
in the notes) being prepaid. The investors shall have the right to convert the Outstanding Balance of the note at any time into
shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. During the nine months
ended September 30, 2019, the holder converted $90,000 in principal and $9,000 of interest into an aggregate of 6,879,913 shares
of common stock. As of September 30, 2019, the aggregate carrying value of the note was $0.
On
December 17, 2018, the Company issued a secured convertible promissory note in the principal amount of $2,225,000 (including an
original issuance discount of $225,000) which matures on December 17, 2019 and bears interest at a rate of 8% per annum (which
shall be increased to 22% upon the occurrence of an event of default). The Company shall have the right to prepay the note for
an amount equal to 125% multiplied by the portion of the Outstanding Balance (as defined in the note) being prepaid. In addition,
the note is secured by the Security Agreement (as defined below). The investor shall have the right to convert the Outstanding
Balance of the note at any time into shares of common stock of the Company at a conversion price of $0.35 per share, subject to
adjustment. Commencing on June 17, 2019, the investor shall have the right to redeem all or any portion of the note; provided,
however, the investor may not request redemption in an amount that exceeds $350,000 during any single calendar month; provided,
further however, upon the occurrence of an event of default, the redemption amount in any calendar month may exceed $350,000.
Payments on redemption amounts may be made in cash, by converting the redemption amount into shares of the Company’s common
stock at a conversion price of the lesser of (a) $0.35 per share, subject to adjustment and (b) the Market Price (as defined in
the note), or a combination thereof. Upon the occurrence of an event of default, the investor may accelerate the note pursuant
to which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as defined in
the note). The Company is prohibited from effecting a conversion of the note to the extent that, as a result of such conversion,
the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s
common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note,
which beneficial ownership limitation may be increased by the investor up to, but not exceeding, 9.99%.
Pursuant to the terms of the agreement, the Company also entered
into a security agreement (the “Security Agreement”) on the closing date pursuant to which the Company granted the
investor a security interest in the Collateral (as defined in the Security Agreement). On July 16, 2019, the Company received
a notice from an investor indicating that events of default had occurred and asserting default penalties of $761,330. During the
nine months ended September 30, 2019, the holder converted $288,000 of principal into an aggregate of 53,272,295 shares of common
stock. As of September 30, 2019, the aggregate carrying value of the note was $2,837,002, net a debt discount of $42,269.
From January to June
2019, the Company issued convertible promissory notes in the aggregate principal amount of $389,000 (including an aggregate original
issuance discount of $39,000) maturing between July 2, 2019 and June 6, 2020 and bearing interest rates of 5% to 12% per annum.
The Company shall have the right to prepay the notes for an amount equal to 130% multiplied by the portion of the Outstanding Balance
(as defined in the notes) being prepaid. The investor shall have the right to convert the Outstanding Balance of the notes at any
time into shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. Upon maturity,
payment may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion
price of the lesser of (a) $0.075 per share, subject to adjustment and (b) the Market Price (as defined in the notes), or a combination
thereof. Upon the occurrence of an event of default, the investor may accelerate the note pursuant to which the Outstanding Balance
will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the notes). The Company is prohibited
from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates,
would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after
giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may
be increased by the investor up to, but not exceeding, 9.99%. During the nine months ended September 30, 2019, the holders converted
$25,000 in principal and $8,000 in interest into an aggregate of 10,000,000 shares of common stock. As of September 30, 2019, the
aggregate carrying value of these notes were $518,718, net a debt discount of $111,546.
Upon
the issuance of certain convertible debentures, the Company determined that the features associated with the embedded conversion
option embedded in the debentures, 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.
NOTE
10 – DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS
Upon the issuance of certain convertible debentures, warrants,
and preferred stock the Company determined that the features associated with the embedded conversion option embedded in the debentures,
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 $15,404,103 using the Black-Scholes Pricing Model based on the following assumptions:
(1) dividend yield of 0%, (2) expected volatility of 110.59% to 112.80%, (3) weighted average risk-free interest rate of 1.55%
to 2.33%, (4) expected life of one year, and (5) estimated fair value of the Company’s common stock of $0.046 to $0.056 per
share.
On September 30, 2019, the Company estimated the fair value
of the embedded derivatives of $15,342,468 using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend
yield of 0%, (2) expected volatility of 120.15%, (3) weighted average risk-free interest rate of 1.16%, (4) expected life of 0.63
to 0.68 years, and (5) estimated fair value of the Company’s common stock of $0.004 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 December 31, 2018, 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 September 30, 2019 and December 31, 2018:
|
|
|
September 30,
2019
|
|
|
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Derivative liability
|
|
$
|
15,342,468
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,342,468
|
|
|
|
|
December 31,
2018
|
|
|
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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, 2019:
|
Balance, January 1, 2019
|
|
$
|
-
|
|
|
Transfers in due to authorized shortfall
|
|
|
15,050,821
|
|
|
Transfers in due to issuance of convertible debentures
|
|
|
353,282
|
|
|
Transfers out due to debenture conversions
|
|
|
-
|
|
|
Mark to market to September 30, 2019
|
|
|
(61,635
|
)
|
|
Balance, September 30, 2019
|
|
$
|
15,342, 468
|
|
|
Gain on change in warrant liabilities for the nine months ended September 30, 2019
|
|
$
|
61,635
|
|
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
11 – CAPITAL STOCK
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of blank check preferred stock, par value $0.001 per share.
On July 2, 2019,
the Company authorized the issuance of 6,000 Series A preferred stock, par value $0.001 per share. The Certificate of Designation
for the Series A preferred stock was filed on July 9, 2019.
On July 2, 2019 and July 11, 2019, the
Company entered into exchange agreements with certain stockholders pursuant to which it exchanged warrants issued in July 2018
to purchase an aggregate of 26,000,000 shares of the Company’s common stock for an aggregate of 6,000 shares of Series A
Preferred Stock.
From July 5, 2019 to September 19, 2019,
the Company issued an aggregate of 80,000,000 shares of common stock upon the conversion of 3,200 shares of Series A Preferred
Stock.
On June 24, 2019,
the Company authorized the issuance of 2,000 shares of Series B Convertible Preferred Stock, par value $0.001 per share. The Certificate
of Designation for the Series B Convertible Preferred Stock was filed on July 9, 2019.
As of September 30,
2019, there were 516 shares of Series B Convertible Preferred Stock recorded as to be issued for cash consideration of $645,000.
On July 16, 2019,
the Company authorized the issuance of 1,000 Series C preferred stock, par value $0.001 per share. The Certificate of Designation
for the Series C preferred stock was filed on July 19, 2019.
Common Stock
The Company is authorized to issue 500,000,000
shares of common stock, par value $0.001 per share. As of September 30, 2019, there were 353,597,045 shares of common stock issued
and outstanding.
The following common
stock transactions were recorded during the nine months ended September 30, 2019:
The Company issued an aggregate of 80,000
shares of its common stock recorded as to be issued on December 31, 2018 for a cash warrant exercise.
The Company issued an aggregate of 1,591,240
shares of its common stock as interest expense with a value of $36,830.
The Company issued 5,553,191 shares of its common stock to satisfy
a true-up provision with a value of $22,213.
The Company issued an aggregate of 2,950,000
shares of its common stock and recorded an additional 2,550,000 shares as to be issued, having an aggregate fair value of $198,700,
for services rendered.
The Company issued an aggregate of 3,997,661
shares of its common stock upon the cashless exercise of outstanding warrants.
The Company issued 9,000,000 shares for
the settlement of a warrant provision.
The Company issued an aggregate of 1,555,160
shares of its common stock and recorded an additional 1,126,250 shares of common stock as to be issued for the cash exercise of
warrants for proceeds of $172,950.
The Company issued an aggregate of 78,913,321 shares of its
common stock for the settlement of convertible debt with a principal amount of $786,838.
The Company issued an aggregate of 1,250,000
shares of its common stock as origination shares with a principal amount of $141,333.
The Company issued an aggregate of 80,000,000 shares of common
stock upon the conversion of 3,200 shares of Series A Preferred Stock.
NOTE 12 – WARRANTS
During the nine months ended September 30, 2019, the Company
received $172,950 from cash exercises of warrants to purchase 1,555,160 shares of common stock. During the same period, the Company
issued 3,997,661 shares of common stock upon the cashless exercise of warrants to purchase 12,686,249 shares of common stock.
On
July 2, 2019 and July 11, 2019, the Company entered into exchange agreements with certain stockholders pursuant to which it exchanged
warrants issued in July 2018 to purchase an aggregate of 26,000,000 shares of the Company’s common stock for an aggregate
of 6,000 shares of Series A Preferred Stock.
During the nine months
ended September 30, 2019, the Company issued 12,900,000 warrants to purchase shares of common stock at $0.075 per share pursuant
to the Series B Convertible Preferred Stock offering.
During the nine months ended
September 30, 2019, as a result of the Company’s Series B Convertible Preferred Stock offering, the ratchet provisions
in certain warrants were triggered, causing the exercise price to be reset to $0.00224 per share. Warrants to purchase
35,879,998 shares of common stock at an exercise price of $0.075 outstanding as of December 31, 2018 were repriced to a
$0.00224 per share exercise price as of September 30, 2019. Warrants to purchase an additional 2,841,222,285 shares of common
stock at $0.00224 per share were issued as a result of this ratchet provision.
The Company recorded a $27,935,469 deemed dividend as
a result of the triggering of these ratchet provisions.
Warrants
outstanding and exercisable at September 30, 2019 are as follows:
|
Exercise Price
|
|
Warrants
Outstanding
|
|
|
Weighted Avg.
Remaining Life
|
|
|
Warrants
Exercisable
|
|
|
$0.001 – 0.25
|
|
|
2,514,568,356
|
|
|
|
3.24
|
|
|
|
2,514,568,356
|
|
|
0.26 – 0.50
|
|
|
565,002
|
|
|
|
1.67
|
|
|
|
565,002
|
|
|
0.51 – 0.75
|
|
|
50,000
|
|
|
|
0.52
|
|
|
|
50,000
|
|
|
0.76 – 1.00
|
|
|
1,869,000
|
|
|
|
0.17
|
|
|
|
1,869,000
|
|
|
|
|
|
2,517,052,358
|
|
|
|
|
|
|
|
2,517,052,358
|
|
A
summary of the warrant activity for the nine months ended September 30, 2019 is as follows:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at December 31, 2018
|
|
|
74,910,002
|
|
|
$
|
0.14
|
|
|
|
3.49
|
|
|
$
|
-
|
|
|
Grants
|
|
|
2,494,122,285
|
|
|
|
0.00252
|
|
|
|
4.25
|
|
|
|
3,691,301
|
|
|
Exercised
|
|
|
(15,367,659
|
)
|
|
|
0.05
|
|
|
|
3.75
|
|
|
|
-
|
|
|
Forfeited/Cancelled
|
|
|
(36,612,270
|
)
|
|
|
1.00
|
|
|
|
-
|
|
|
|
-
|
|
|
Vested and expected to vest at September 30, 2019
|
|
|
2,517,052,358
|
|
|
$
|
0.00363
|
|
|
|
3.24
|
|
|
$
|
931,309
|
|
|
Exercisable at September 30, 2019
|
|
|
2,517,052,358
|
|
|
$
|
0.00363
|
|
|
|
3.24
|
|
|
$
|
931,309
|
|
The
aggregate intrinsic value outstanding stock warrants was $931,309, based on warrants with an exercise price less than the Company’s
stock price of $0.004 as of September 30, 2019, which would have been received by the warrant holders had those holders exercised
the warrants as of that date.
NOTE
13 – STOCK OPTIONS
Our
stockholders approved our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan
in December 2015 (the “2015 Plan”), our 2016 Equity Incentive Plan (“2016 Plan”) in October 2016, our
2017 Equity Incentive Plan in December 2016 (“2017 Plan” and together with the 2014 Plan, 2015 Plan, 2016 Plan, the
“Prior Plans”) and our 2018 Equity Incentive Plan in June 2018 (the “2018 Plan”, and together with the
Prior Plans, the “Plans”). The Prior Plans are identical, except for number of shares reserved for issuance under
each. As of December 31, 2018, the Company had granted an aggregate of 60,600,000 securities under the Plans, with 3,900,000 shares
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. The Prior Plans also provide that
the grant of performance stock awards may be paid out in cash as determined by the committee administering the Prior Plans.
During the nine months
ended September 30, 2019, the Company granted ten-year options outside of our Plans to purchase up to 250,000 shares of the Company’s
common stock for advisory services. The fair value of $14,000, was determined using the Black-Scholes option pricing model, assuming
approximately 2.43% risk-free interest, 0% dividend yield, 114% volatility, and expected life of 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
Price
|
|
|
Number of
Options
|
|
|
Vesting Terms
|
|
$
|
0.075
|
|
|
|
250,000
|
|
|
Immediately
|
Stock
options outstanding and exercisable on September 30, 2019 are as follows:
|
Exercise Price
|
|
Number of
Options
|
|
|
Remaining Life
In Years
|
|
|
Number of Options
Exercisable
|
|
|
$0.01 – 0.25
|
|
|
13,306,786
|
|
|
|
8.75
|
|
|
|
13,306,786
|
|
|
0.26 - 0.50
|
|
|
1,939,631
|
|
|
|
7.76
|
|
|
|
1,939,631
|
|
|
0.51 – 0.75
|
|
|
1,820,112
|
|
|
|
7.18
|
|
|
|
1,820,112
|
|
|
0.76 - 1.00
|
|
|
9,926,072
|
|
|
|
7.21
|
|
|
|
9,926,072
|
|
|
1.01 - 2.00
|
|
|
629,164
|
|
|
|
7.21
|
|
|
|
629,164
|
|
|
|
|
|
27,621,765
|
|
|
|
|
|
|
|
27,621,765
|
|
A
summary of the stock option activity for the nine months ended September 30, 2019 is as follows:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at December 31, 2018
|
|
|
27,371,765
|
|
|
$
|
0.50
|
|
|
|
8.42
|
|
|
$
|
-
|
|
|
Grants
|
|
|
250,000
|
|
|
|
0.075
|
|
|
|
9.73
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeiture/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at September 30, 2019
|
|
|
27,621,765
|
|
|
|
0.50
|
|
|
|
8.17
|
|
|
$
|
-
|
|
|
Exercisable at September 30, 2019
|
|
|
27,621,765
|
|
|
$
|
0.50
|
|
|
|
8.17
|
|
|
$
|
-
|
|
The
aggregate intrinsic value of outstanding stock options was $0, based on options with an exercise price less than the Company’s
stock price of $0.004 as of September 30, 2019, 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 pricing model with a volatility figure derived from 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 that were vested for the nine months ended September 30, 2019 and 2018 was $14,000 and
$459,834, respectively. There was no unrecognized compensation expense at September 30, 2019 that will be expensed in future
periods.
NOTE
14 – SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
From October 1, 2019 to February 24, 2020:
On October 11, 2019, Power Up Lending Group, Ltd. filed a
complaint against the Company demanding, among other things, (i) $312,000 and $2,000 in per day until issuance of certain conversion
shares together with interest thereon with respect to the first cause of action; (ii) $156,000 together with interest thereon with
respect to the second cause of action; (iii) lost profits in no event less than $312,000 with respect to the third cause of action;
(iv) reasonable legal fees and costs of litigation with respect to the fourth cause of action;
and (v) $312,000.with respect to the fifth cause of action.
On October 21, 2019, the Company issued 1,000 Series C Preferred
Series.
From November 13, 2019 to November 18, 2019,
MassRoots issued an aggregate of 610 shares of its Series B Convertible Preferred Stock for proceeds of $762,500. The proceeds
were used to repay the Company’s Simple Agreements for Future Tokes with an original principal amount of $545,000.
On November
13, 2019, MassRoots issued and sold convertible notes in the aggregate principal amount of $108,900 (including an aggregate of
$9,900 original issuance discount) to accredited investors.
From October 29, 2019 to January 16, 2020,
MassRoots issued 109,448,360 shares of common stock for the settlement of $308,268 in convertible debt and accrued interest.
On December,
2019, MassRoots exchanged 2,800 shares of Series A Convertible Preferred Stock for convertible notes with an aggregate principal
amount of $3,500,000.
From
December 3 to December 31, 2019, MassRoots exchanged 1,126 shares of Series B Convertible Preferred Stock for convertible notes
with an aggregate principal amount $1,548,250.
On December 6, 2019, MassRoots issued and sold
convertible notes in the aggregate principal amount of $110,000 (including an aggregate of $10,000 original issuance discount)
to accredited investors.
On January 7, 2020, MassRoots issued and sold
a convertible note in the aggregate principal amount of $55,000 (including an aggregate of $5,000 original issuance discount) to
an accredited investor.
On February 24, 2020, MassRoots terminated the Agreement and Plan
of Merger dated February 11, 2019 by and among the Company, MassRoots Supply Chain, Inc., COWA Science Corporation and Christopher
Alameddin.
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 condensed consolidated financial statements
and related notes contained in Part I, Item 1 of this Quarterly Report. Please also refer to the note about forward-looking information
for information on such statements contained in this Quarterly Report immediately preceding Item 1.
Overview
We
were incorporated in April 2013 as a technology platform for the cannabis industry. Powered by more than one million registered
users, we enable consumers to rate cannabis products and strains based on their efficacy (i.e., effectiveness for treating ailments
such as back-pain or epilepsy) and then present this information in easy-to-use formats for consumers to make educated purchasing
decisions at their local dispensary. Businesses are able to leverage MassRoots by strategically advertising to consumers based
on their preferences and tendencies.
Over
the past six years, we have established our self as a leading technology company in the emerging cannabis industry, building a
user base of over one million registered users, partnering with some of the most recognized brands in the industry and raising
significant capital from institutional and private investors.
Historically, we have focused on building
a consumer-facing application and have not spent significant resources on developing our advertising portal for dispensaries.
However, we are now focusing our efforts on developing our advertising portal so as to automate the processes and platform needed
to deliver our underlying services. In the summer of 2018, we launched a revamped MassRoots Business Portal and a consumer rewards
program, called WeedPass®, which is accessible through the MassRoots mobile application. After an introductory free trial
period, we charge dispensaries fees for their dispensary listing and access to our consumer rewards program. We intend to upgrade
and further develop the MassRoots Business Portal to better serve our clients in the second quarter of 2020. According to CannaBiz
Media, there were more than 3,200 dispensary and retailer licenses in the United States as of September 30, 2018.
User
Growth and Product Distribution Channels
The
MassRoots app is distributed free-of-charge through the Apple App Store, the Google Play Marketplace and the Amazon App Store.
The MassRoots network is also accessible through desktop and mobile web browsers by navigating to www.massroots.com. Our business
and adverting portal can be accessed at www.massroots.com/business. Through this portal, companies can edit their profiles,
distribute information to users and view analytics such as impressions, views and clicks.
Competitors
We compete with other cannabis information
platforms such as WeedMaps and Leafly, which provide information with respect to dispensary locations, strain information, and
news relating to the cannabis industry. We believe our primary competitive advantage is the community we have created and the
significant reviews and data we have collected on key cannabis markets.
Blockchain
Technology
In
December 2017, we formed MassRoots Blockchain Technologies, Inc., our wholly-owned subsidiary, to explore how blockchain technology
may be utilized in the cannabis industry.
For
the three months ended September 30, 2019 and 2018
|
|
|
For the three months ended
|
|
|
|
|
30-Sept-19
|
|
|
30-Sept-18
|
|
|
$ Change
|
|
|
% Change
|
|
|
Gross revenue
|
|
$
|
909
|
|
|
$
|
4,014
|
|
|
$
|
(3,105
|
)
|
|
|
(77.27
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,122,617
|
|
|
|
3,914,253
|
|
|
|
(2,791,636
|
)
|
|
|
(71.32
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(1,121,708
|
)
|
|
|
(3,910,239
|
)
|
|
|
2,788,531
|
|
|
|
71.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income /(Expense)
|
|
|
(22,428,637
|
)
|
|
|
(616,752
|
)
|
|
|
(21,811,885
|
)
|
|
|
(3,536.57
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(23,550,345
|
)
|
|
$
|
(4,526,991
|
)
|
|
$
|
(19,023,354
|
)
|
|
|
(420.22
|
)%
|
Revenues
For
the three months ended September 30, 2019 and 2018, we generated revenues of $909 and $4,014, respectively, a decrease of $3,105.
Operating
Expenses
For the three months ended September 30, 2019
and 2018, our operating expenses were $1,122,617 and $3,914,253, respectively, a decrease of $2,791,636. This decrease was attributable
to a decrease in stock-based compensation of $2,229,481 from $2,254,981 for the three months ended September 30, 2018 to $25,500
for the same period in 2019. There was a decrease in payroll and related expenses of $231,749 due to reduction in the number of
employees as payroll and related expenses decreased to $152,809 for the three months ended September 30, 2019 from $384,558 for
same period in 2018. Advertising expense decreased to $2,967 for the three months ended September 30, 2019 from $36,407 for the
same period in 2018, a decrease of $33,440. For the three months ended September 30, 2019 and 2018, the Company recorded amortization
of software costs of $12,849 and $108,182, respectively, a decrease of $95,333. This is primarily a result of the Company incurring
fewer software development costs. During the three months ended September 30, 2019, the Company recorded $196,315 in impairment
of software costs, as compared to $0 during the same period in 2018, an increase of $196,315. The Company incurred a $157,500 allowance
for advances given to COWA Science Corporation for the three months ended September 30, 2019, as compared to $0 for the same period
in 2018, an increase of $157,500. Other general and administrative expenses decreased $555,448 from $1,130,125 for the three months
ended September 30, 2018 to $574,677 for the three months ended September 30, 2019. This reduction was attributed to lower overhead
costs for offices expenses, legal fees, and contractor services for the three months ended September 30, 2019 as compared to the
same period in 2018.
Other Income (Expense)
For the three months ended September 30, 2019
and 2018, the Company recorded interest expense of $1,546,805 and $456,155, respectively, primarily related to Company’s
convertible debentures. The Company recorded a $248,022 and $0 loss on the conversion of convertible debentures payable for the
three months ended September 30, 2019 and 2018, respectively. During the three months ended September 30, 2019, the Company recorded
a $91,929 loss on the sale of securities, as compared to $0 for the same period in 2018. For the three months ended September 30,
2019, the Company incurred $5,585,594 in preferred stock issuance costs, as compared to $0 for the same period in 2018. The Company
recorded $15,050,821 in derivative liabilities due to an authorized share shortfall for the three months ended September 30, 2019,
as compared to $0 for the same period in 2018. For the three months ended September 30, 2019 and 2018, the Company recorded $94,534
and $(160,597), respectively, for the change in fair value of derivative liabilities.
Net
Loss
For the three months ended September 30,
2019 and 2018, we had net losses of $23,550,345 and $4,526,991, respectively, an increase of $19,023,354 for the reasons discussed
above.
For
the nine months ended September 30, 2019 and 2018
|
|
|
For the nine months ended
|
|
|
|
|
30-Sept-19
|
|
|
30-Sept-18
|
|
|
$ Change
|
|
|
% Change
|
|
|
Gross revenue
|
|
$
|
23,658
|
|
|
$
|
7,743
|
|
|
$
|
15,915
|
|
|
|
205.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
2,884,121
|
|
|
|
11,941,053
|
|
|
|
(9,056,932
|
)
|
|
|
(75.85
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(2,860,463
|
)
|
|
|
(11,933,310
|
)
|
|
|
9,072,847
|
|
|
|
76.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income /(Expense)
|
|
|
(23,477,791
|
)
|
|
|
(1,014,943
|
)
|
|
|
(22,462,848
|
)
|
|
|
(2,213.21
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(26,338,254
|
)
|
|
$
|
(12,948,253
|
)
|
|
$
|
(13,390,001
|
)
|
|
|
(103.41
|
)%
|
Revenues
For
the nine months ended September 30, 2019 and 2018, we generated revenues of $23,658 and $7,743, respectively, an increase of $15,915.
The increase is attributed to a license for the Company’s YouTube channel.
Operating
Expenses
For the nine months ended September 30, 2019
and 2018, our operating expenses were $2,884,121 and $11,941,053, respectively, a decrease of $9,056,932. This decrease was primarily
attributable to a decrease in stock-based compensation of $5,234,929 from $5,447,629 for the nine months ended September 30, 2018
to $212,700 for the same period in 2019. There was a decrease in payroll and related expenses of $1,718,472 due to reduction in
the number of employees as payroll and related expenses decreased to $495,069 for the nine months ended September 30, 2019 from
$2,213,541 for same period in 2018. Advertising expense decreased to $39,332 for the nine months ended September 30, 2019 from
$468,958 for the same period in 2018, a decrease of $429,626. For the nine months ended September 30, 2019 and 2018, the Company
recorded amortization of software costs of $38,549 and $315,299, respectively, a decrease of $276,750. This is primarily a result
of the Company incurring fewer software development costs. During the nine months ended September 30, 2019, the Company recorded
$196,315 in impairment of software costs, as compared to $0 during the same period in 2018, an increase of $196,315. The Company
incurred a $360,500 allowance for advances given to COWA Science Corporation for the nine months ended September 30, 2019, as compared
to $0 for the same period in 2018, an increase of $360,500. Other general and administrative expenses decreased $1,957,500 from
$3,495,626 for the nine months ended September 30, 2018 to $1,538,126 for the nine months ended September 30, 2019. This reduction
was attributed to lower overhead costs for offices expenses, legal fees, and contractor services for the nine months ended September
30, 2019 as compared to the same period in 2018.
Other Income (Expense)
For the nine months ended September 30, 2019
and 2018, the Company recorded interest expense of $2,136,983 and $854,346, respectively, primarily related to Company’s
convertible debentures. For the nine months ended September 30, 2019 and 2018, the Company recorded a loss on the conversion of
convertible debentures payable of $674,099 and $0, respectively. During the nine months ended September 30, 2019, the Company recorded
a $91,929 loss on the sale of securities, as compared to $0 for the same period in 2018. For the nine months ended September 30,
2019, the Company incurred $5,585,594 in preferred stock issuance costs, as compared to $0 for the same period in 2018. The Company
recorded $15,050,821 in derivative liabilities due to an authorized share shortfall for the nine months ended September 30, 2019,
as compared to $0 for the same period in 2018. For the nine months ended September 30, 2019, the Company recorded $61,635 and $(160,597)
for the change in fair value of derivative liabilities for the same period in 2018.
Net
Loss
For the nine months ended September 30,
2019 and 2018, we had net losses of $26,338,254 and $12,948,253, respectively, an increase of $13,390,001 for the reasons discussed
above.
Liquidity
and Capital Resources
Net cash used in operations for the nine
months ended September 30, 2019 and 2018 was $1,389,212 and $5,718,352, respectively. This $4,329,140 decrease was primarily caused
by a decrease in stock-based compensation (non-cash items) and an increase in accounts payable and accrued expenses. Net
cash used in operations for the nine months ended September 30, 2018 was primarily caused by the loss for the nine months ended
September 30, 2018 which was offset by the decrease in stock-based compensation (non-cash item).
Net cash provided by investing activities
for the nine months ended September 30, 2019 was $90,983, while $224,076 was used in investing activities during the nine months
ended September 30, 2018, respectively.
Net cash provided by financing activities for
the nine months ended September 30, 2019 and 2018 was $1,271,300 and $4,752,062, respectively. During the nine months ended September
30, 2019, these funds were derived mainly from proceeds related to sale of preferred stock and the issuance of convertible notes.
During the nine months ended September 30, 2018, net cash provided by financing activities was derived mainly from sales of our
common stock.
These
conditions raise substantial doubt about our ability to continue as a going concern for one year from the issuance of the financial
statements. Our 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 issuances of notes payable. We have experienced net losses and negative
cash flows from operations since inception and expect these conditions to continue for the foreseeable future. For
the foreseeable future, our ability to continue our operations is dependent upon our ability to obtain additional capital through
public or private equity offerings, debt financings or other sources to fund our future operations;
however, financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed
would have a negative impact on our financial condition and our ability to pursue our business strategy and we may be forced to
curtail or cease operations.
Capital
Resources
As
of September 30, 2019, the Company had cash of $2,639. We currently have no external sources of liquidity such as arrangements
with credit institutions or off-balance sheet arrangements that will have or are reasonably likely to have a current or future
effect on our financial condition or immediate access to capital.
Off-Balance
Sheet Arrangements
As
of September 30, 2019, 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 Condensed Consolidated Financial Statements,
included in Part I, Item 1 of this Quarterly Report.