PART
I
Throughout this Annual Report on Form 10-K,
the “Company,” “MassRoots,” “we,” “us,” and “our” refers to MassRoots,
Inc. and its subsidiaries.
ITEM
1. BUSINESS
Overview
MassRoots, Inc. was formed in April 2013 as
a technology platform for the cannabis industry. Powered by more than one million registered users, MassRoots enables 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 presents 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.
“Registered
users” or “Users” are defined as users who currently have an account with MassRoots. It does not include users
who have deleted their account nor does it reflect active usage over any set period of time.
Over the past seven years, MassRoots has
established itself as a leading technology company in the emerging cannabis industry, building a User-base of more than one million
registered Users and partnering with some of the most recognized brands in the industry.
We are now focused on monetizing our user-base
through a consumer rewards program, MassRoots Rewards, which we have been developing since 2017. Additionally, we plan to monetize
our YouTube Channel, which has 265,000 subscribers, through product placements and sponsorships. Management believes that
our YouTube Channel has one of the largest followings in the regulated cannabis industry while our Instagram account is followed
by almost 400,000 users.
Background
We
were incorporated in the state of Delaware on April 26, 2013 as a technology platform for the cannabis industry.
Our principal executive office is located at 1560 Broadway, Office
17-105, Denver, Colorado 80202, and our telephone number is (720) 240-9546.
On
January 25, 2017, we consummated a reverse triangular merger (the “Whaxy Merger”) pursuant to which we acquired all
of the outstanding common stock of DDDigtal Inc (“DDDigtal”), a Colorado corporation. Upon closing of the Whaxy Merger,
each share of DDDigtal’s common stock was exchanged for such number of shares of our common stock (or a fraction thereof)
based on an exchange ratio equal to approximately 5.273-for-1, such that 1 share of our common stock was issued for every 5.273
shares of DDDigtal’s common stock. At the closing of the Whaxy Merger, all shares of common stock of our newly-formed merger
subsidiary formed for the sole purpose of effectuating the Whaxy Merger, were converted into and exchanged for one share of common
stock of DDDigtal, and all shares of DDDigtal’s common stock that were outstanding immediately prior to the closing of the
Whaxy Merger were automatically cancelled and retired. Upon the closing of the Whaxy Merger, DDDigtal continued as our surviving
wholly-owned subsidiary, and the merger subsidiary ceased to exist.
On
July 13, 2017, we consummated a reverse triangular merger (the “Odava Merger”) pursuant to which we acquired all of
the outstanding common stock of Odava Inc (“Odava”), a Delaware corporation. Upon closing of the Odava Merger, each
share of Odava’s common stock was exchanged for such number of shares of our common stock (or a fraction thereof), based
on an exchange ratio equal to approximately 4.069-for-1, such that 1 share of our common stock was issued for every 4.069 shares
of Odava’s common stock. At the closing of the Odava Merger, all shares of common stock of our newly-formed merger subsidiary
formed for the sole purpose of effectuating the Odava Merger, were converted into and exchanged for one share of common stock
of Odava, and all shares of Odava’s common stock that were outstanding immediately prior to the closing of the Odava Merger
automatically cancelled and retired. Upon the closing of the Odava Merger, Odava continued as our surviving wholly-owned subsidiary,
and the merger subsidiary ceased to exist.
Our
Products and Services
Our
technology platform consists of MassRoots, our consumer-facing social network, which is accessible through the Apple App Store,
the Amazon App Store and the Google Play Marketplace, and our business and advertising portal for companies which can be accessed
at www.massroots.com/business.
The
MassRoots Network
The
MassRoots network is accessible as a free mobile application through the Apple App Store, the Amazon App Store, the Google Play
Marketplace, and as a web application at www.massroots.com. These applications and services work in a manner similar
to other social review platforms such as Vivino, Untappd and Yelp. Using our network after agreeing to our Terms and Conditions,
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Users
can create a profile by selecting a username and setting their password;
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Users
have the ability to follow other Users on our network which permits them to follow other Users’ posts which are displayed
on their newsfeed;
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Users
have the ability to review strains and products based on factors including, but not limited to, quality. These reviews are
displayed on product pages within the app and on the User’s profile;
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Users
have the ability to like, comment and report statuses from other Users. By “liking” a status, a User is indicating
their approval of the post’s content. By commenting on a status, Users are free to voice their opinions or comments
with respect to the post. By reporting a status, Users can flag content that violates our Terms and Conditions, including
spam, harassing content, and posts or comments that appear to solicit the transaction of cannabis or other products;
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Users
have the ability to tag other Users and use hashtags to categorize posts. By using the “@” symbol followed by
a username, Users can tag other Users in posts they want them to see or if such Users are included in the picture or post.
By using the “#” followed by a categorical word, Users can categorize posts based on their content;
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Users
have the ability to post pictures with text captions or just text statuses;
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Users
have the ability to search for other Users based on their username and the ability to search by hashtag to display all results
within a particular category. Users can sort hashtag searches by their popularity or when they were posted; and
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Users
have the ability to set their profile to public or private. By setting their profile to public, any User on MassRoots’
apps will be able to see the public profile’s posts and follow the account. When a profile is private, another User
must request to follow such account and the account owner must grant permission before they can view any of the account’s
posts.
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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 advertising 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.
Blockchain
Technologies
MassRoots
Blockchain Technologies, Inc. (“MassRoots Blockchain”) was formed in December 2017 as a wholly-owned subsidiary of
the Company to continue the Company’s efforts in exploring how new technologies may be utilized in the cannabis industry.
Initially, we are focusing on blockchain technology for several reasons, including, but not limited to:
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that
it may enable better tracking of impressions, views, and interactions with posts, advertisements and dispensary listings;
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that
it has the potential to streamline the collection and organization of data while eliminating traditional security risks;
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that
it may provide a greater degree of reliability and accuracy with respect to data;
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that
it may allow us to implement an intelligent newsfeed to deliver high-quality and more relevant content to our Users;
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that
it may enable the development of contracts that are automatically executed when certain parameters are met;
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that
it has the potential to reduce friction in the cannabis market-place and save businesses valuable resources; and
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that
it may provide greater transparency to government regulators.
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In December 2017, we commenced the re-development
of the MassRoots Business Portal, a platform where dispensaries and other industry participants, such as producers and other ancillary
businesses, may advertise their goods and services. To date, we have used approximately $370,000 for the initial development of
the MassRoots Business Portal, including features that allow for tracking of advertising impressions, enhanced targeting and serving
of advertisements, as well as a program that would be designed to reward Users of the MassRoots platform for providing high quality
reviews on cannabis strains and products. The development and implementation of these any other features, including the possible
use of digital instruments, is subject to additional funding, is currently contemplated to be made within the MassRoots App and
platform, and is intended to generate the growth of Users of the MassRoots platform and stimulate the MassRoots platform’s
overall activity.
All
initial development has been outsourced to third party development firms and consultants. Specifically, we have outsourced the
following services: software development services, including, but not limited to, web and mobile development services, blockchain
development and integration services, and infrastructure development, automation, support and management services. As stated in
“Risk Factors,” the development of features based upon the use of blockchain technology is subject to numerous risks
and uncertainties, and there can be no assurance as to when, or if, any such features will be successfully developed, or that
if developed, that they will be accepted or adopted. Further, the likelihood of our development and implementation of features
based upon new technology must be considered in light of the problems, expenses, difficulties, complications and delays frequently
encountered in connection with the inception and development of a product or service based upon any such relatively new and developing
technology.
While we intend to devote resources to exploring
the feasibility of developing these or other solutions, there can be no assurances that we will be successful in implementing such
solutions, that any such solutions will be economically viable, or that any of them will result in the generation of User interest,
participation or revenue.
We currently anticipate that we will need
to raise additional funds to continue to explore and develop potential uses and applications of blockchain technologies and uses
for our business and other businesses in the cannabis industry; however, no assurance can be given that additional financing will
be available on terms favorable to us, or at all.
Market
Conditions
MassRoots
is poised to take advantage of two rapidly growing industries: cannabis and mobile technology.
Cannabis
Market Growth and Current Trends
On
January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo which rescinded the Cole Memo (as described below)
which was adopted by the Obama administration as a policy of non-interference with marijuana-friendly state laws.
The
Cole Memo
On
August 29, 2013, Deputy Attorney General James Cole issued a memo (the “Cole Memo”) in response to certain states
passing measures to regulate the medical and adult-use of cannabis. In the Cole Memo, the Department of Justice made clear that
marijuana remains an illegal drug under the Controlled Substances Act and that federal prosecutors will continue to aggressively
enforce the statute. The Department of Justice identified eight enforcement areas that federal prosecutors should prioritize.
Outside of such enforcement priorities, the federal government has traditionally relied on state and local authorities to address
marijuana activity. The Cole Memo established several basic guidelines by which state-regulated cannabis businesses could operate
to minimize the risk of intervention and enforcement by the Department of Justice. The guidelines focused on ensuring that cannabis
did not cross state lines, keeping dispensaries away from schools and public facilities and strict-enforcement of state laws by
regulatory agencies, among other priorities.
The
Sessions Memo
On
January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo (the “Sessions Memo”) on federal marijuana
enforcement policy announcing a return to the rule of law and the rescission of previous nationwide guidance by the Department
of Justice (including, but not limited to, the Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all
U.S. attorneys to enforce the laws enacted by Congress and to follow the well-established principles when pursuing prosecutions
related to marijuana activities. These principles include weighing all relevant considerations, including federal law enforcement
priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative
impact of particular crimes on the community.
Although
the Sessions Memo rescinded the Cole Memo, it is unclear at this time whether the Sessions Memo indicates that the Trump administration
will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement; however,
a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis
could have a material adverse effect on our business.
Guidance
to Banks Relating to the Marijuana Industry
On
February 14, 2014, the Department of Justice and the Department of Treasury issued guidance to banks about how to serve the marijuana
industry without running afoul of federal regulations. Prior to such guidance, dispensaries were forced to operate on a cash basis,
presenting significant security and accounting issues. Although banks have remained reluctant to work with marijuana businesses
because of federal prohibition laws, this guidance was a major step in legitimizing and accepting the cannabis industry on a national
level. In addition, the adoption of the Joyce Amendment (formerly known as the Rohrabacher-Farr Amendment) (as discussed below)
indicates some level of support in Congress for medicinal cannabis, even if its actual effect is still undetermined.
For
additional information concerning the Cole Memo, the Sessions Member, the Joyce Amendment and regulatory conditions, see the section
entitled “Business – Government Regulation.”
Current
States with Laws Permitting the Medical or Adult Use of Cannabis
Recreational marijuana
is regulated in 11 states and the District of Columbia and medical marijuana is regulated in 33 states and the District of Columbia.
In addition, 14 additional states have legalized low-tetrahydrocannabinol (“THC”)/high-cannabidiol (“CBD”)
extracts for select medical conditions. The states which have enacted such laws are listed in the following table:
STATE
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YEAR PASSED
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1. Alaska*
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1998
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2. Arizona
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2010
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3. Arkansas
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2016
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4. California*
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1996
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5. Colorado*
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2000
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6. Connecticut
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2012
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7. District of Columbia*
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2010
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8. Delaware
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2011
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9. Florida
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2016
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10. Hawaii
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2000
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11. Illinois*
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2013
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12. Louisiana
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2015
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13. Maine*
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1999
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14. Maryland
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2014
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15. Massachusetts*
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2012
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16. Michigan*
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2008
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17. Minnesota
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2014
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18. Missouri
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2018
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19. Montana
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2004
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20. Nevada*
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2000
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21. New Hampshire
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2013
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22. New Jersey
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2010
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23. New Mexico
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2007
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24. New York
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2014
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25. North Dakota
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2016
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26. Pennsylvania
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2016
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27. Ohio
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2016
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28. Oklahoma
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2018
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29. Oregon*
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1998
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30. Rhode Island
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2006
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31. Utah
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2018
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32. Vermont*
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2004
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33. Washington*
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1998
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34. West Virginia
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2017
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* State has enacted laws permitting the adult use of cannabis, in addition to medical use.
Public
Support for Regulation of Cannabis Increasing
A Gallup poll conducted in October 2019 found
that 66% of Americans supported regulating the use of cannabis which indicates an increasing trend over the past decade toward
public support for cannabis.
Market
Conditions that Could Limit Our Business
Cannabis
is a Schedule I controlled substance under Federal law and, as such, there are several factors that could limit our business operations
including, but not limited to:
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The
Federal government and many private employers prohibit drug use of any kind, including cannabis, even where it is permissible
under state law. Random drug screenings and potential enforcement of such employment provisions may significantly reduce the
size of the potential cannabis market;
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Enforcement
of Federal law prohibiting cannabis occurs randomly and often without notice. This could scare many potential investors away
from cannabis-related investments and makes it difficult to make accurate market predictions;
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On January 4, 2018, the Department of Justice issued the Sessions Memo announcing a return to the rule of law and the rescission of previous guidance documents. The Sessions Memo rescinded the Cole Memo. Although there is no guarantee that additional states will pass measures to regulate cannabis use under state law, the Sessions Memo may further deter states from passing such measures; however, it is unclear at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. Furthermore, irrespective of the Sessions Memo, in many states, public support of regulation initiatives may not maintain enough support to pass. This is especially true when a supermajority is needed to pass measures, like in Florida where a state constitutional amendment permitting medical cannabis required 60% approval to pass. Changes due to the Sessions Memo and in voters’ attitudes and turnout have the potential to slow or stop the cannabis regulation movement and potentially reverse recent cannabis regulation victories;
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There
has been some resistance and negativity as a result of recent cannabis regulation at the state level, especially as it relates
to drugged driving. The lack of clearly defined and enforced laws at the state level has the potential to sway public opinion
against marijuana regulation; and
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In
the event that the Federal government does not enforce the Federal law prohibiting cannabis, state laws regarding the
regulation of cannabis are being challenged through lawsuits. Lawsuits have been brought by private groups and local law enforcement
officials. If these lawsuits are successful, state laws permitting cannabis sales may be overturned which will significantly
reduce the size of the potential cannabis market and have a material adverse effect on our business.
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Please
see “Government Regulation” below for additional information.
Government
Regulation
Marijuana is a categorized
as a Schedule I controlled substance by the Drug Enforcement Agency and the United States Department of Justice and is illegal
to grow, possess and consume under Federal law. However, 33 states and the District of Columbia have passed laws that permit doctors
to recommend cannabis for medical-use and 11 of those states and the District of Columbia have enacted laws that regulate the
personal-use of cannabis by adults, subject to possession limits. Because doctors are prohibited from prescribing a Schedule I
controlled substance, the passage of medical marijuana laws does not necessarily guarantee the implementation of a regulated,
commercial system through which patients can purchase cannabis products. This has created an unpredictable business-environment
for dispensaries and collectives that operate under certain state laws but in violation of Federal law.
Cole
Memo
On
August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States attorneys guiding
them to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under certain state laws,
so long as:
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cannabis
is not being distributed to minors and dispensaries are not located around schools and public buildings;
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the
proceeds from sales are not going to gangs, cartels or criminal enterprises;
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cannabis
grown in states where it is legal is not being diverted to other states;
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cannabis-related
businesses are not being used as a cover for sales of other illegal drugs or illegal activity;
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there
is not any violence or use of firearms in the cultivation and sale of marijuana;
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there
is strict enforcement of drugged-driving laws and adequate prevention of adverse health consequences; and
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cannabis
is not grown, used, or possessed on Federal properties.
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The Cole Memo was a guide for United States
attorneys and did not alter in any way the Department of Justice’s authority to enforce Federal law, including Federal laws
relating to cannabis, regardless of state law. As described below, as a result of the issuance of the Sessions Memo by the Department
of Justice, on January 4, 2018, the Cole memo was rescinded. Prior to the issuance of the Sessions Memo, we had implemented standard
operating procedures and policies to ensure that we were operating in compliance with the Cole Memo. It is unclear at this time
whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis
or what types of activities will be targeted for enforcement, and we cannot provide assurance that our actions were, are or will
be in compliance with the Cole Memo, the Sessions Memo or any other laws or regulations that currently exist or may be amended
or adopted in the future.
Pursuant
to our currently existing Terms and Conditions:
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Users
must agree that they are located in a state where medical-use or adult-use of cannabis is regulated;
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Users
must be of age to consume cannabis in their particular state (18 or 21 years old, depending on the state);
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Users
may only post content that is in compliance with their state’s laws;
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Users
may not solicit or distribute cannabis through MassRoots unless they are a licensed dispensary;
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Posting
of any of the following materials to MassRoots is prohibited and will result in account termination:
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Posting
other drugs or substances, including prescription pain pills;
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Posting
of any violence or threat of violence;
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Posting
of any drugged-driving content; and
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Posting
of any copyright-protected content.
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We
have implemented an aggressive content and account review program to ensure compliance with our Terms and Conditions. Users have
the ability to report any status or account that is in violation of our Terms and Conditions and we encourage Users to do so as
any illegal content jeopardizes the network for all our Users. When a status or account is reported, the post is automatically
removed from the network until further review. A MassRoots employee then reviews the content within 24 hours and either approves
it as in compliance within our Terms and Conditions or permanently deletes it and bans the User’s account.
In addition, we have implemented geographic
restrictions to restrict new Users to our mobile apps to the District of Columbia and the 33 states in which the use of marijuana
is permitted.
Our business plan includes allowing cannabis
dispensaries to advertise on our network, which we believe could be deemed to be aiding and abetting illegal activities, a violation
of Federal law. We continue to evaluate the effects of the Sessions Memo; however, it is unclear at this time whether the Sessions
Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities
will be targeted for enforcement, and we cannot provide assurance that we were, are or will be in compliance with the Cole Memo,
the Sessions Memo or any other laws or regulations.
Joyce
Amendment (formerly known as the Rohrabacher-Farr Amendment)
On
December 16, 2014, H.R. 83 - Consolidated and Further Continuing Appropriations Act, 2015 was enacted and included a provision
now known as the “Joyce Amendment” which states:
None of the funds made available in this Act
to the Department of Justice may be used, with respect to the States of Alabama, Alaska, Arizona, California, Colorado, Connecticut,
Delaware, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee,
Utah, Vermont, Washington, and Wisconsin, to prevent such states from implementing their own state laws that authorize the use,
distribution, possession, or cultivation of medical marijuana.
The Joyce Amendment would appear to protect
the right of the states to determine their own laws on medical cannabis use; however, the actual effects of the amendment are
still unclear. The Joyce Amendment did not remove the federal ban on medical cannabis and cannabis remains regulated as a Schedule
I controlled substance. Further, the United States Department of Justice has interpreted the Joyce Amendment as only preventing
federal action that prevents states from creating and implementing cannabis laws - not against the individuals or businesses that
actually carry out cannabis laws – and has continued to sporadically initiate enforcement actions against individuals or
businesses participating in the cannabis industry despite such participation being regulated under state law. As of April 2020,
the United States Court of Appeals, Ninth Circuit, has held in support of the Joyce Amendment and stated on at least one occasion
that United States Department of Justice was prohibited from spending federal appropriations funds for prosecuting individuals
engaged in conduct permitted by state law. In addition, no matter what the interpretation is adopted by the courts, there is no
question that the Joyce Amendment does not protect any party not in full compliance with state medicinal cannabis laws.
The
Joyce Amendment represents one of the first times in recent history that Congress has taken action indicating support of medical
cannabis. The Joyce Amendment was renewed by Congress in 2015, 2016, 2017, 2018, 2019 and is in effect until September 30, 2020.
Sessions
Memo
On
January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo on federal marijuana enforcement policy announcing
a return to the rule of law and the rescission of previous nationwide guidance by the Department of Justice (including, but not
limited to, the Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws
enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities. These
principles include weighing all relevant considerations, including federal law enforcement priorities set by the Attorney General,
the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on
the community. The effect of this memo is to shift federal policy from a hands-off approach adopted by the Obama administration
to permitting federal prosecutors across the country to determine how to prioritize resources to regulate marijuana possession,
distribution and cultivation in states where marijuana use is legal.
While
we do not directly harvest or distribute cannabis today, we still may be deemed to be violating federal law, or aiding and abetting
the violation of Federal law and may be irreparably harmed by a change in enforcement by the federal or state governments.
Although the Sessions Memo rescinded the Cole
Memo, it is unclear at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal
laws applicable to cannabis or what types of activities will be targeted for enforcement; however, a significant change in the
federal government’s enforcement policy with respect to current federal laws applicable to cannabis could have a material
adverse effect on our business.
Additional
Government Regulations
We
are subject to general business regulations and laws as well as Federal and state regulations and laws specifically governing
the Internet and e-commerce. These regulations and laws cover among others, sweepstakes, taxation, tariffs, user privacy, data
protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, broadband
residential Internet access and the characteristics and quality of services. Any noncompliance with the foregoing laws and regulations
may harm our business and results of operations.
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.
Recent
Developments
Financings and Other Sources of
Funding
On
January 7, 2020, we issued and sold a convertible note in the principal amount of $55,000 (including a $5,000 original issuance
discount) to an accredited investor which note matures on July 7, 2020.
On
March 5, 2020, we issued and sold a convertible note in the aggregate principal amount of $72,600 (including a $6,600 original
issuance discount) to an accredited investor which note matures on September 5, 2020.
On
March 17, 2020, we issued and sold a convertible note in the aggregate principal amount of $17,600 (including a $1,600 original
issuance discount) to an accredited investor which note matures on September 17, 2020.
On
April 17, 2020, we issued and sold convertible notes in the aggregate principal amount of $330,000 (including an aggregate of $30,000
original issuance discount) to accredited investors which notes mature on October 17, 2020.
On May 3, 2020, we received a loan in the principal
amount of $50,000 pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”). The PPP loan matures in May 2022 and bears an interest rate of 1% per annum. Payments
of principal and interest of any unforgiven balance commence in December 2020.
On June 26, 2020, we issued and sold a secured
promissory note in the principal amount of $60,000 with 10% annual interest. On the two-year anniversary of the issuance of this
note, June 26, 2022, all principal and interest becomes due and payable.
On July 8, 2020, we issued and sold a promissory
note in the principal amount of $22,911 with 10% annual interest maturing on December 31, 2020.
On July
13, 2020, we 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 which notes mature on January 13, 2021.
Termination
of COWA Agreement and Plan of Merger
On
February 12, 2019, we 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 pursuant
to which Merger Subsidiary was to be merged with and into COWA with COWA surviving the merger as the wholly-owned subsidiary of
the Company. On February 24, 2020, we terminated the Merger Agreement as a result of the closing conditions set forth in the Merger
Agreement not being satisfied.
Intellectual
Property
MASSROOTS
and TOKE are federally registered trademarks of MassRoots, ODAVA is a state registered trademark of MassRoots and RETAIL is a
state registered trademark of Odava.
Employees
and Consultants
As
of July 10, 2020 MassRoots has 2 full-time employees and 3 full-time independent contractors.
ITEM
1A. RISK FACTORS
An
investment in our securities involves a high degree of risk. This Annual Report on Form 10-K contains the risks applicable to
an investment in our securities. The risks and uncertainties we have described are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also affect our operations. The occurrence
of any of these known or unknown risks might cause you to lose all or part of your investment in the offered securities.
Risks
Relating to Our Business and Industry
We
have a limited history upon which an evaluation of our prospects and future performance can be made and have no history of profitable
operations.
We
were incorporated in April 2013 and have a limited operating history and our business is subject to all of the risks inherent
in the establishment of a new business enterprise. Our likelihood of success must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with development and expansion of a new business enterprise.
We may sustain losses in the future as we implement our business plan. There can be no assurance that we will operate profitably.
Since
we have a limited operating history, it is difficult for potential investors to evaluate our business.
Our
limited operating history makes it difficult for potential investors to evaluate our business or prospective operations. As an
early stage company, we are subject to all the risks inherent in the initial organization, financing, expenditures, complications
and delays inherent in a new business. Investors should evaluate an investment in us in light of the uncertainties encountered
by developing companies in a competitive and evolving environment. Our business is dependent upon the implementation of our business
plan. We may not be successful in implementing such plan and cannot guarantee that, if implemented, we will ultimately be able
to attain profitability.
We
will need to obtain additional financing to fund our operations.
We
will need additional capital in the future to continue to execute our business plan. Therefore, we will be dependent upon additional
capital in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise
all of the needed additional capital, and we will need to identify potential investors and negotiate appropriate arrangements
with them. We may not be able to arrange enough investment within the time the investment is required or that if it is arranged,
that it will be on favorable terms. If we cannot obtain the needed capital, we may not be able to become profitable and may have
to curtail or cease our operations. Additional equity financing, if available, may be dilutive to the holders of our capital stock.
Debt financing may involve significant cash payment obligations, covenants and financial ratios that may restrict our ability
to operate and grow our business.
Cannabis
remains illegal under Federal law.
Despite the development of a regulated cannabis
industry under the laws of certain states, these state laws regulating medical and adult cannabis use are in conflict with the
Federal Controlled Substances Act, which classifies cannabis as a Schedule I controlled substance and makes cannabis use and possession
illegal on a national level. The United States Supreme Court has ruled that the Federal government has the right to regulate and
criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that
regulate its use. Although the prior administration determined that it was not an efficient use of resources to direct Federal
law enforcement agencies to prosecute those lawfully abiding by state laws allowing the use and distribution of medical and recreational
cannabis, on January 4, 2018, the current administration issued the Sessions Memo announcing a return to the rule of law and the
rescission of previous guidance documents. The Sessions Memo rescinds the Cole Memo which was adopted by the Obama administration
as a policy of non-interference with marijuana-friendly state laws. The Sessions Memo shifts federal policy from a hands-off approach
adopted by the Obama administration to permitting federal prosecutors across the country to decide how to prioritize resources
to regulate marijuana possession, distribution and cultivation in states where marijuana use is regulated. However, it is unclear
at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable
to cannabis or what types of activities will be targeted for enforcement. A significant change in the federal government’s
enforcement policy with respect to current federal laws applicable to cannabis could have a material adverse effect on our business.
Furthermore, there can be no assurance that federal prosecutors will not prosecute and dedicate resources to regulate marijuana
possession, distribution and cultivation in states where marijuana use is regulated which may cause states to reconsider their
regulation of marijuana which would have a detrimental effect on the marijuana industry. Any such change in state laws based upon
the Sessions Memo and the Federal government’s enforcement of Federal laws could cause significant financial damage to us
and our stockholders.
As
the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting
illegal activities through the services and data that we provide to government regulators, dispensaries, cultivators and consumers.
As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect
our business.
Under
Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis
is illegal. Our business provides services to customers that are engaged in the business of possession, use, cultivation, and/or
transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may
seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal
activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States
or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” As a result of such
an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have
a material negative effect on our business and operations.
Federal
enforcement practices could change with respect to services provided to participants in the cannabis industry, which could adversely
impact us. If the Federal government were to expend its resources on enforcement actions against service providers in the cannabis
industry under guidance provided by the Sessions Memo, such actions could have a material adverse effect on our operations, our
customers, or the sales of our products.
It is possible that due to the Sessions Memo
and the continuing uncertainty respecting enforcement of federal cannabis laws that our clients may discontinue the use of our
services, our potential source of customers may be reduced and our revenues may decline. Further, additional government disruption
in the cannabis industry could cause potential customers and users to be reluctant to use and advertise our products, which would
be detrimental to the Company. We cannot predict the impact of the Sessions Memo, Attorney General William Barr’s interpretation
of the Sessions Memo, or his willingness to enforce federal cannabis laws at this time nor can we predict the nature of any future
laws, regulations, interpretations or applications including the effect of such additional regulations or administrative policies
and procedures, when and if promulgated, could have on our business.
We
are subject to legislative uncertainty that could slow or halt the legalization and use of cannabis, which could negatively affect
our business.
Continued
development of the cannabis industry is dependent upon continued legislative authorization of cannabis at the state level, as
well as the U.S. government’s continued non-enforcement of federal cannabis laws against state-law-compliant cannabis
businesses. Further, progress, while generally expected, is not assured. Some industry observers believe that well-funded interests,
including businesses in the alcohol beverage and the pharmaceutical industries, may have a strong economic opposition to the continued
legalization of cannabis. The pharmaceutical industry, for example, is well funded with a strong and experienced lobby that eclipses
the funding of the medical cannabis movement. Any inroads legalization opponents could make in halting the impending cannabis
industry could have a detrimental impact on our business. While there may be ample public support for legislative action, numerous
factors impact the legislative process. Any one of these or other factors could slow or halt use of cannabis, which would negatively
impact our business.
Our
business depends on continued purchases by businesses and individuals selling or using cannabis pursuant to state laws in the
United States.
Thirty-three states and the District of Columbia
allow their citizens to use medical cannabis, and eleven states and the District of Columbia have regulated the sale of cannabis
for adult use. In addition, several additional states have legalized low-THC/high-CBD extracts for select medical conditions (“CBD
States”). Several CBD States are considering legalizing medical cannabis, and several medical states may extend legalization
to adult-use.
The
states’ cannabis programs have proliferated and grown even though the cultivation, sale and possession of cannabis is considered
illegal under U.S. federal law. Under the Controlled Substances Act (“CSA”), cannabis is a Schedule I drug, meaning
that the Drug Enforcement Administration recognizes no accepted medical use for cannabis, and the substance is considered illegal
under federal law.
In
an effort to provide guidance to U.S. Attorneys’ offices regarding the enforcement priorities associated with cannabis in
the United States, the U.S. Department of Justice (the “DOJ”) has issued a series of memoranda detailing its suggested
enforcement approach. During the administration of former President Obama, each memorandum acknowledged the DOJ’s authority
to enforce the CSA in the face of state laws, but noted that the DOJ was more committed to using its limited investigative and
prosecutorial resources to address the most significant threats associated with cannabis in the most effective, consistent, and
rational way.
On
August 29, 2013, the DOJ issued what came to be called the Cole Memo which gave U.S. Attorneys the discretion not to prosecute
federal cannabis cases that were otherwise compliant with applicable state law that had legalized medical or adult-use cannabis
and that have implemented strong regulatory systems to control the cultivation, production, and distribution of cannabis. Accordingly,
the Cole Memo provided lawful cannabis-related enterprises a tacit federal go-ahead in states with legal cannabis programs,
provided that the state had adopted and was enforcing strict regulations and oversight of the medical or adult-use cannabis
program in accordance with the specific directives of the Cole Memorandum.
On
January 4, 2018, Attorney General Jefferson Sessions issued a memorandum that rescinded previous DOJ guidance on the state-legal cannabis
industry, including the Cole Memo. Attorney General Sessions wrote that the previous guidance on cannabis law enforcement was
unnecessary, given the well-established principles governing federal prosecution that are already in place. As a result, federal
prosecutors could and still can use their prosecutorial discretion to decide whether to prosecute even state-legal adult-use cannabis
activities.
In November 2018, Attorney General Sessions
resigned and left the DOJ. As a nominee, Attorney General William Barr testified before the U.S. Senate and wrote to Congress
that, as Attorney General, he would not seek to prosecute cannabis companies that relied on the Cole Memorandum and are complying
with state law. Although proposals have been introduced to Congress in favor of protection state-legal marijuana regulations,
as of the date of this Annual Report, no federal law has been enacted.
Since
December 2014, companies that are strictly complying with state medical cannabis laws have been protected against enforcement
for that activity by an amendment (originally called the Rohrabacher-Blumenauer Amendment, now called the Joyce Amendment) to
the Omnibus Spending Bill, which prevents federal prosecutors from using federal funds to impede the implementation of medical
cannabis laws enacted at the state level. Federal courts have interpreted the provision to bar the DOJ from prosecuting any person
or entity in strict compliance with state medical cannabis laws.
While the protection of the Joyce Amendment
prevents prosecutions, it does not make cannabis legal. Accordingly, if the protection expires, prosecutors could prosecute federally
illegal activity that occurred within the statute of limitations even if the Joyce Amendment protection was in place when the
illegal activity occurred. The protection of the Joyce Amendment depends on its continued inclusion in the federal Omnibus Spending
Bill, or in some other legislation, and entities’ strict compliance with the state medical cannabis laws. That protection
has been extended through September 30, 2020. While industry observers expect Congress to extend the protection in future Omnibus
Spending Bills, there can be no assurance that it will do so.
Although
several cannabis law reform bills are pending in the U.S. Congress, passage of any of them and ultimately the President’s
support and approval remain uncertain. President Trump has stated that he would support federal legislation that would defer to
states that have legalized cannabis (in other words, if a state legalized cannabis, cannabis in that state would not be federally
illegal after the point at which the state legalized it).
Until
the U.S. Government changes the law with respect to cannabis, and particularly if Congress does not extend the protection of state
medical cannabis programs, there is a risk that federal authorities could enforce current federal cannabis law. An increase in
federal enforcement against companies licensed under state cannabis laws could negatively impact the state cannabis industries
and, in turn, our revenues, profits, financial condition, and business model.
Because
our business is dependent, in part, upon continued market acceptance of cannabis by consumers, any negative trends will adversely
affect our business operations.
We
are dependent on public support, continued market acceptance and the proliferation of consumers in the legal cannabis markets.
While we believe that the market and opportunity in the space continue to grow, we cannot predict the future growth rate or size
of the market. Any downturns in, or negative outlooks on, the cannabis industry may adversely affect our business and financial
condition.
New
platform features or changes to existing platform features could fail to attract new users, retain existing users or generate
revenue.
Our
business strategy is dependent on our ability to develop platforms and features to attract new businesses and users, while retaining
existing ones. Staffing changes, changes in user behavior or development of competing platforms may cause Users to switch to alternative
platforms or decrease their use of our platform. There is no guarantee that companies and dispensaries will use these features
and we may fail to generate revenue. Additionally, any of the following events may cause decreased use of our platform:
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Emergence
of competing platforms and applications;
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Inability
to convince potential companies to join our platform;
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Technical
issues on certain platforms or in the cross-compatibility of multiple platforms;
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Securities
breaches with respect to our data;
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A
rise in safety or privacy concerns; and
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An increase
in the level of spam or undesired content on the network.
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We
are highly dependent on the services of key executives, the loss of whom could materially harm our business and our strategic
direction. If we lose key management or significant personnel, cannot recruit qualified employees, directors, officers, or other
personnel or experience increases in our compensation costs, our business may materially suffer.
We
are highly dependent on our management team, specifically our Chief Executive Officer, Isaac Dietrich. While we have an employment
agreement with Isaac Dietrich, such employment agreement permits Mr. Dietrich to terminate such agreement upon notice. If we lose
key employees, our business may suffer. Furthermore, our future success will also depend in part on the continued service of our
key management personnel and our ability to identify, hire, and retain additional personnel. We do not carry “key-man”
life insurance on the lives of our executive officer, employees or advisors. We experience intense competition for qualified personnel
and may be unable to attract and retain the personnel necessary for the development of our business. Because of this competition,
our compensation costs may increase significantly.
Our
monetization strategy is dependent on many factors outside our control.
There
is no guarantee that our efforts to monetize the MassRoots Retail platform will be successful. Furthermore, our competitors may
introduce more advanced technologies that deliver a greater value proposition to cannabis related businesses in the future. In
addition, dispensaries may not be able to accept credit or bank cards due to banking regulations, which could significantly increase
the cost and time required for us to generate revenue. All these factors individually or collectively may preclude us from effectively
monetizing our business which would have a material adverse effect on our financial condition and results of operation.
Changes
in Amazon App Store, Apple App Store or Google Play Store policies could result in our mobile applications being de-listed. In
addition, our third party service providers may decline to provide services due to their policies, or cease to provide services
previously provided to us due to a change of policy.
On
November 4, 2014, the MassRoots App was removed from Apple’s iOS App Store due to the Apple App Store review team changing
their app enforcement guidelines to prohibit all social cannabis applications. After negotiation with Apple and the addition of
certain restrictions, the MassRoots App returned to the Apple App Store in February 2015. Although Apple reversed its decision
and included our app in the Apple App Store, we cannot provide any assurance that Apple’s policy will not change in the
future or that our application will not once again be removed from the Apple App Store.
The
Apple App Store is one of the largest content distribution channels in the world and management believes that it is the only way
to effectively distribute our iOS application to users who own iPhones and iPads. The Apple App Store review team effectively
operates as our iOS App’s regulator; they decide what guidelines iOS apps must operate under and how to enforce such guidelines.
The Apple guidelines related to cannabis-related apps are not published, enforcement of such guidelines is difficult to predict,
and the review and appeal processes are conducted without public oversight. Although we will continue advocating for a more open
and transparent Apple App Store review process that will allow decisions that affect a significant portion of the United States
smartphone owning population to be open to public scrutiny, there can be no assurance that we will be successful in these efforts.
MassRoots,
along with other cannabis apps, regularly encounter issues with the Google Play Store review team in the normal course of business
due to Google Play Store’s absence of clear guidelines regarding cannabis-related apps. In November 2016, the MassRoots
App was removed from the Google Play Store due to a compliance review. However, on March 21, 2017, Google Play approved
the MassRoots App for distribution to Android devices through the Google Play Store once again.
On
December 1, 2016, MassRoots’ Android application received approval from the Amazon App Store for listing, and
is currently available for download on the Amazon App Store.
In
addition to challenges we face with respect to compliance with the Amazon App Store, Apple App Store and Google Play Store guidelines,
service providers may refuse to provide services to us even if they previously provided such services due to our status as a cannabis
related company. For example, in January 2016, after building a strong presence on Instagram and having previously used our
Instagram account to grow our user count and highlight posts about our business, our account was suspended without warning by
Instagram. While the account was reinstated on February 26, 2016, we cannot provide any assurance that our Instagram account
will not be suspended in the future and if suspended that our account will be reinstated. Furthermore, we may face similar situations
in the future with our other services providers that may cause disruptions to our business plan, all of which may have a material
adverse effect on our business and financial condition.
Government
actions or digital distribution platform restrictions could result in our products and services being unavailable in certain geographic
regions which may harm our future growth.
Due
to our connections to the cannabis industry, governments and government agencies could ban or cause our network or apps to become
unavailable in certain regions and jurisdictions. This could greatly impair or prevent us from registering new users in affected
areas and prevent current users from accessing our network. In addition, government action taken against our service providers
or partners could cause our network to become unavailable for extended periods of time.
As
discussed herein, as part of our agreement with Apple in connection with our application being returned to the Apple App Store,
we agreed to limit registration of new members within our iOS application to the locations where cannabis is permitted under state
law (medicinally or recreationally). This restriction prohibits users in several states and countries from accessing our network.
Expansions of such policies by Apple, Google or Amazon may slow our user registration rate which may have a material adverse effect
on our business and future prospects.
Failure
to generate user growth or engagement could greatly harm our business model.
Our
business model involves attracting users to our mobile application and linking their MassRoots account with their profile in MassRoots
Retail. There is no guarantee that growth strategies used in the past will continue to bring new users to our network or that
users will agree to link their MassRoots and MassRoots Retail profiles. Changes in relationships with our partners, contractors
and businesses we retain to grow our network may result in significant increases in the cost to acquire new users. In addition,
new users may fail to engage with our network to the same extent current users are engaging with our network resulting in decreased
use of our network. Decreases in the size of our user base and/or decreased engagement on our network may impair our ability to
generate revenue.
Failure
to attract clients could greatly harm our ability to generate revenue.
Our
ability to generate revenue is dependent on the continued growth of our platform. If we are unable to continue to grow our network
or bring new clients to our network, our ability to generate revenue would be greatly compromised. There is no guarantee businesses
will want to join our platform or that we will be able to generate revenue from our existing user base.
Historically,
we have generated most of our revenue from advertising. The loss of clients or reduction in spending by advertisers may have a
material adverse effect on our business.
Historically, we have generated most of our
revenue from third parties advertising on our website. Some of our third party advertisers have included cannabis companies such
as regulated cannabis dispensaries and mainstream brands such as Uber. As is common in the industry, our advertisers usually do
not have long-term advertising commitments with us. It is possible that such advertisers may not continue to do business with
us for several reasons including that they no longer believe that their advertisements on our website will generate a competitive
return relative to other alternatives or in the alternative they may reduce the prices they are willing to pay to advertise their
products and services on our website.
Our
revenue could be adversely affected by a number of other factors including, but not limited to:
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decreases
in User engagement, including time spent on our website and mobile app;
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our
inability to improve our analytics and measurement solutions that demonstrate the value of our ads and other commercial content;
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loss
of market share to our competitors;
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adverse
legal developments relating to our business, including legislative and regulatory developments and developments in litigation,
if any;
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adverse
media reports or other negative publicity involving us or other companies in our industry; and
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the
impact of macroeconomic conditions and conditions in the industry in general.
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The
occurrence of any of these or other factors could result in decreased traffic to our website which may result in less views of
third party ads. If we are unable to generate traffic to our website and as a result third party advertisers no longer continue
to do business with us, our business, financial conditions and results of operation may be materially affected.
User
engagement and growth depends on software and device updates beyond our control.
Our
mobile application and websites are currently available on multiple operating systems, including iOS and Android, across multiple
different manufacturers, including Motorola, LG, Apple and Samsung and on thousands of devices. Changes to the device infrastructure
or software updates on such devices could render our platforms and services useless or inoperable and require users to utilize
our website rather than our mobile application which may result in decreased user engagement. Any decrease in user engagement
may devalue our value proposition to third party advertisers who may no longer continue to do business with us which may have
a material adverse effect on business, financial conditions and results of operation.
We
may be unable to manage growth.
Successful
implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management
and financial resources. To manage growth effectively, we need to continuously:
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Evaluate
definitive business strategies, goals and objectives;
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Maintain
a system of management controls; and
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Attract
and retain qualified personnel, as well as, develop, train and manage management-level and other employees.
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If
we fail to manage our growth effectively, our business, financial condition or operating results could be materially harmed.
We
may not be able to compete successfully with other established companies offering the same or similar services and, as a result,
we may not achieve our projected revenue and user targets.
We
compete with both start-up and established technology companies. Our competitors may have substantially greater financial, marketing
and other resources than we do and may have been in business longer than we have or have greater name recognition and be better
established in the technological or cannabis markets than we are. If we are unable to compete successfully with other businesses
in our existing market, we may not achieve our projected revenue and/or user targets which may have a material adverse effect
on our financial condition.
Expansion
by our well-established competitors into the cannabis industry could prevent us from realizing anticipated growth in users and
revenues.
Competitors
in the social network space, such as Twitter and Facebook, have continued to expand their businesses in recent years into other
social network markets. If they decided to expand their social networks into the cannabis community, this could harm the growth
of our business and user base and cause our revenues to be lower than we expect. In addition, competitors in the point-of-sale
and compliance software space may expand their offerings into the cannabis space which could harm the growth of our business and
user base and cause our revenues to be lower than we expect.
Government
regulation of the Internet and e-commerce is evolving, and unfavorable changes could substantially harm our business and results
of operations.
We
are subject to general business regulations and laws as well as Federal and state regulations and laws specifically governing
the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet, e-commerce or other
online services, and increase the cost of providing online services. These regulations and laws may cover sweepstakes, taxation,
tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications,
consumer protection, broadband residential Internet access and the characteristics and quality of services. It is not clear how
existing laws governing issues such as property ownership, sales, use and other taxes, personal privacy apply to the Internet
and e-commerce. Unfavorable resolution of these issues may harm our business and results of operations.
The
failure to enforce and maintain our intellectual property rights could enable others to use trademarks used by our business which
could adversely affect the value of the Company.
The
success of our business depends on our continued ability to use our existing tradename in order to increase our brand awareness.
As of the date hereof, MASSROOTS and TOKE are federally registered trademarks owned by us, ODAVA is a state registered trademark
owned by us and RETAIL is a state registered trademark of Odava, Inc. The unauthorized use or other misappropriation of any of
the foregoing trademarks could diminish the value of our business which would have a material adverse effect on our financial
condition and results of operation.
Due
to our involvement in the cannabis industry, we may have a difficult time obtaining insurance coverage for our business which
may expose us to additional risk and financial liabilities.
Insurance that may otherwise be readily
available, such as workers compensation, general liability, and directors and officers insurance, is more expensive and difficult
for us to obtain because we are a service provider to companies in the cannabis industry. If we are unable to obtain and maintain
insurance related to our Company and business operations we will be exposed to additional risk and financial liabilities which
may have a material adverse effect on our business and financial condition.
We
and our customers may have difficulty accessing the service of banks, which may make it difficult for us and for them to sell
our products.
Financial
transactions involving proceeds generated by cannabis-related activities can form the basis for prosecution under the U.S.
federal money laundering statutes, unlicensed money transmitter statutes and the U.S. Bank Secrecy Act. Guidance issued by the
Financial Crimes Enforcement Network clarifies how financial institutions can provide services to cannabis-related businesses
consistent with their obligations under the Bank Secrecy Act. Furthermore, since the rescission by U.S. Attorney General Sessions
on January 4, 2018 of the Cole Memo, U.S. federal prosecutors have had greater discretion when determining whether to charge
institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. As a result,
given these risks and their own related disclosure requirements, some banks remain hesitant to offer banking services to cannabis-related businesses.
Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships.
While we do not presently have challenges with our banking relationships, should we have an inability to maintain our current
bank accounts, or the inability of our customers to maintain their current banking relationships, it would be difficult for us
to operate our business, may increase our operating costs, could pose additional operational, logistical and security challenges
and could result in our inability to implement our business plan.
Our
independent registered accounting firm has expressed concerns about our ability to continue as a going concern.
The
report of our independent registered accounting firm expresses concern about our ability to continue as a going concern based
on the absence of significant revenues, our significant losses from operations and our need for additional financing to fund all
of our operations. It is not possible at this time for us to predict with assurance the potential success of our business. The
revenue and income potential of our proposed business and operations are unknown. If we cannot continue as a viable entity, we
may be unable to continue our operations and you may lose some or all of your investment in our securities.
In
the past we have experienced material weaknesses in our internal control over financial reporting, which if continued, could impair
our financial condition.
As
reported in our Annual Report on Form 10-K, our management concluded that our internal control over financial reporting was not
effective as of December 31, 2019 and 2018 due to material weaknesses regarding our controls and procedures. The Company did not
have sufficient segregation of duties to support its internal control over financial reporting. Due to our small size and limited
resources, segregation of all conflicting duties has not always been possible and may not be economically feasible in the near
term; however, we do expect to hire additional accounting personnel in the near future. We have and do endeavor to take appropriate
and reasonable steps to make improvements to remediate these deficiencies. If we have continued material weaknesses in our internal
financial reporting, our financial condition could be impaired or we may have to restate our financials, which could cause us
to expend additional funds that would have a material impact on our ability to generate profits and on the success of our business.
The
spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially
create widespread business continuity issues of unknown magnitude and duration.
The
outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in
financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States,
have reacted by instituting quarantines and restricting travel. Many experts predict that the outbreak will trigger a period
of global economic slowdown or a global recession. COVID-19 or another pandemic could have material and adverse effects on our
ability to successfully operate due to, among other factors:
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a
general decline in business activity of cannabis dispensaries;
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the
destabilization of the markets could negatively impact our customer and user growth and access to capital and credit markets
which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely
basis; and
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a
deterioration in our ability to ensure business continuity during a disruption.
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The
rapid development of this situation makes it nearly impossible to predict the ultimate adverse impact of COVID-19 on our business
and operations. Nevertheless, COVID-19 presents material uncertainty which could adversely affect our results of operations, financial
condition and cash flows. We continue to assess the potential impact of COVID-19, which remains uncertain at this time.
Risks
Relating to Use of New Technology
Government
regulation of the Internet, blockchain technology and cryptocurrency is evolving, and unfavorable changes could substantially
harm us and our subsidiary.
We
are subject to federal and state regulations and laws governing the Internet, blockchain technology and e-commerce. Existing and
future laws and regulations may impede the growth of the Internet, blockchain technology and e-commerce and/or other online services,
and may increase the cost of providing online services. Changes in regulations and laws may effect sweepstakes, taxation, tariffs,
user privacy, data protection, pricing, content, intellectual property rights, distribution, electronic contracts and other communications,
consumer protection, broadband residential Internet access and the characteristics and quality of services. In addition, many
governments and regulatory agencies have not established specific regulations pertaining to blockchain technology and other instruments
that use such technology and no assurance can be given that such governments or regulatory authorities will not implement adverse
changes to laws and regulations. Any such changes to federal and state regulations and laws may harm our and our subsidiary’s
business and results of operations.
There
are no assurances that we will be successful in developing blockchain-based solutions, that such solutions will be economically
viable or that such solutions will be able to generate any revenue.
While
we intend to continue to devote development resources to exploring the feasibility of developing block-chain based solutions,
there can be no assurances that we will obtain additional funding to continue such development or that we will be successful in
implementing such solutions, that they will be economically viable, or such solutions will generate any revenue.
The
development and acceptance of digital instruments is subject to a variety of factors which are difficult to evaluate.
We
may explore the use of digital instruments for use in connection with our platform or programs; however, there can be no assurance
that we will adopt or use any such instruments, or be successful in doing so. The development and use of such instruments is subject
to a variety of factors that are difficult to evaluate including, but not limited to:
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the
problems, expenses, difficulties, complications, and delays frequently encountered in connection with the development of a
new product or service based upon relatively new and developing technology;
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the
acceptance and use of the new technology by consumers;
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regulation
by governmental and quasi-governmental agencies;
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the
maintenance and development of the protocols for the new technology;
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●
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generic
economic conditions and the regulatory environment relating to the new technology; and
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●
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the
availability and popularity of other forms or methods of buying and selling goods and services.
|
The
slowing or stopping of the development, general acceptance, adoption and usage of digital instruments or compliance with regulations
by governmental and quasi-governmental agencies may deter or delay the acceptance of such instruments.
The
potential application of U.S. laws with respect to traditional investment securities to digital instruments is unclear.
The
use of digital instruments is novel and the application of U.S. federal and state securities laws is unclear in many respects.
Specifically, regulation with respect to such instruments is currently undeveloped, likely to evolve, may vary significantly among
international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive
bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions,
which may severely impact the permissibility of the use of digital instruments, the technology behind them or the means of transaction
in or transferring them. In the event that securities laws restrict the ability for digital instruments to be transferred in a
manner similar to traditional investment securities, this would have a material adverse effect on the value of such instruments,
which could result in a material impact on the use of such instruments as a possible means to provide rewards on the MassRoots
platform.
Our
failure to comply with any laws, rules and regulations, some of which may not exist yet or that are subject to interpretations
that may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines. The effect
of any future regulatory change is impossible to predict, but such change could be substantial and materially adverse to the adoption
and value our new technology, when and if developed, accepted and adopted.
Risks
Relating to our Common Stock
Due
to our connection to the cannabis industry, there can be no assurance that our common stock will ever be approved for listing
on a national securities exchange.
Currently,
shares of our common stock are quoted on the OTC Pink Tier of the OTC Markets and are not traded or listed on any securities exchange.
Even if we desire to have our shares listed on a national securities exchange, the fact that our network is associated with the
use of cannabis, the legal status of which is uncertain at the state and Federal level, may make any efforts to become listed
on a securities exchange more problematic. While we remain determined to work towards getting our securities listed on a national
exchange, there can be no assurance that this will occur. As a result we may never develop an active trading market for our securities
which may limit our investors’ ability to liquidate their investments.
The
market price of our common stock may be volatile and adversely affected by several factors.
The market price of our common stock could
fluctuate significantly in response to various factors and events, including, but not limited to: our ability to execute our business
plan; operating results below expectations; announcements regarding regulatory developments with respect to the cannabis industry;
our issuance of additional securities, including debt or equity or a combination thereof, necessary to fund our operating expenses; announcements
of technological innovations or new products by us or our competitors; period-to-period fluctuations in our financial results;
and other events or factors, many of which may be out of our control, including, but not limited to, pandemics such as COVID-19.
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
Our
common stock is subject to the “penny stock” rules of the SEC and the trading market in the securities is limited,
which makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.
Rule
15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer
approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability
determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the
transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock”
rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of
our common stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and
the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in
penny stocks.
We
are an “emerging growth company” within the meaning of the Securities Act, and if we decide to take advantage of certain
exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive
to investors.
For
as long as we remain an “emerging growth company”, as defined in the Jumpstart Our Business Startups (“JOBS”)
Act, we will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable
to other public companies that are not “emerging growth companies,” including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley
Act”), and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved. We may take advantage of these and other exemptions until we
are no longer an “emerging growth company”. In addition, the JOBS Act provides that an emerging growth company
can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with
new or revised accounting standards.
We
will remain an emerging growth company until the earliest of (1) the last day of the fiscal year during which we have total
annual gross revenues of $1.07 billion or more, (2) the last day of the fiscal year following the fifth anniversary of the
completion of our initial public offering, (3) the date on which we have, during the previous three-year period, issued more
than $1.0 billion in non-convertible debt, and (4) the date on which we are deemed to be a “large accelerated
filer” under the Exchange Act (i.e., the first day of the fiscal year after we have (a) more than $700,000,000 in outstanding
common equity held by our non-affiliates, measured each year on the last day of our second fiscal quarter, and (b) been public
for at least 12 months).
Even
after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which
would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock
less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result,
there may be a less active trading market for our common stock and our stock price may be more volatile.
We
do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment.
Cash
dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the
foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive
any funds absent a sale of their shares of common stock. If we do not pay dividends, our common stock may be less valuable because
a return on your investment will only occur if our stock price appreciates. We cannot assure stockholders of a positive return
on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their
investment.
You
could lose all of your investment.
An
investment in our securities is speculative and involves a high degree of risk. Potential investors should be aware that the value
of an investment in the Company may go down as well as up. In addition, there can be no certainty that the market value of
an investment in the Company will fully reflect its underlying value. You could lose your entire investment.
Because
we can issue additional shares of common stock, purchasers of our common stock may incur immediate dilution and experience further
dilution.
We are authorized to issue up to 500,000,000 shares
of common stock of which 493,726,405 shares of common stock are issued and outstanding as of July 10, 2020. Our Board of Directors
has the authority to cause us to issue additional shares of common stock without consent of any of stockholders. In addition, we
are authorized to issue up to 10,000,000 shares of preferred stock of which 6,000 shares are designated as Series A Preferred Stock,
of which no shares are issued and outstanding, 2,000 shares are designated as Series B Preferred Stock, of which no shares are
issued and outstanding and 1,000 shares are designated as Series C Preferred Stock, of which 1,000 shares are issued and outstanding
as of July 10, 2020. Consequently, our stockholders may experience further dilution in their ownership of our stock in the future, which
could have an adverse effect on the trading market for our common stock. Furthermore,
our Certificate of Incorporation gives our Board the right to create one or more new series of preferred stock. As a result, our
Board may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that
could adversely affect the voting power and equity interests of the holders of our common stock. Preferred stock, which could be
issued with the right to more than one vote per share, could be used to discourage, delay or prevent a change of control of our
Company, which could materially adversely affect the price of our common stock.
Our
Certificate of Incorporation contains an exclusive forum provision with respect to all Internal Corporate Claims, which may limit
a stockholder’s ability to bring a claim in a judicial forum that it finds favorable and discourage lawsuits against us
or our current or former directors or officers and/or stockholders in such capacity.
Our
Certificate of Incorporation provides that all Internal Corporate Claims (as defined in the Certificate of Incorporation) must
be brought solely and exclusively in the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction,
the Superior Court of the State of Delaware, or, if such other court does not have jurisdiction, the United States District Court
for the District of Delaware). All of our stockholders are subject to the exclusive forum provision of our Certificate of Incorporation.
The exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable
for disputes based upon Internal Corporate Claims, which may discourage lawsuits against us or our current or former directors
or officers and/or stockholders in such capacity. In addition, if a court were to find this exclusive-forum provision to be inapplicable
or unenforceable in an action, we may incur costs associated with resolving the dispute in other jurisdictions, which could have
a material adverse effect on our business and operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES
On May 1, 2020, we entered into a Membership Agreement (the “Membership Agreement”)
with WeWork pursuant to which we lease offices located at 1560 Broadway, Suite 17-105, Denver, Colorado 80202. The initial term
of the Membership Agreement is for six months which term shall automatically be renewed for successive one month periods
unless terminated by either party. Pursuant to the terms of the Membership Agreement, we pay a fee of $1,170 per month
for the leased premises.
We do not own any property or land.
We
believe that our facilities are adequate for our current needs and that, if required, we will be able to expand our current space
or locate suitable new office space and obtain a suitable replacement for our executive and administrative headquarters.
ITEM
3. LEGAL PROCEEDINGS
From time to time, we may become involved in
various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below,
we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material
adverse effect on our business, financial condition or operating results.
On October 11, 2019, Power Up Lending
Group, Ltd. (“Power Up”) filed a complaint against the Company and Isaac Dietrich, an officer and director of the
Company, in the Supreme Court of the State of New York, County of Nassau. The complaint alleges, among other things, (i) the occurrence
of events of default in certain notes (the “Power Up Notes”) issued by the Company to Power Up, (ii) misrepresentations
by the Company including, but not limited to, with respect to the Company’s obligation to timely file its required reports
with the SEC and (iii) lost profits as a result of the Company’s failure to convert the Power Up Notes in accordance with
the terms thereof. In addition, the complaint alleges, among other things, that Mr. Dietrich took affirmative steps to deliberately
cause the Company to breach its financial obligations. As a result of the foregoing, Power Up has requested (i) the greater of
$312,000 and the “parity value” as such term is defined in the Power Up Notes together with $2,000 per day until the
Company issues shares upon conversion of the Power Up Notes together with applicable interest thereon; (ii) $165,000 as a result
of the misrepresentations; (iii) for an amount of lost profits to be determined by the court but in no event less than $312,000;
(iv) $312,000 as against Mr. Dietrich; (v) an award for reasonable legal fees and costs of litigation; (vi) a judgment awarding
specific performance under the Power Up Notes; and (vii) the costs and disbursement of the action, pre-judgment interest, default
interest and such other further relief as the court deems proper.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
MassRoots, Inc. (“MassRoots”
or the “Company”) has created a technology platform for the cannabis industry focused on enabling users to share their
cannabis content, follow their favorite dispensaries, and stay connected with the legalization movement. The Company was incorporated
in the State of Delaware on April 26, 2013.
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the
“SEC”). Our consolidated financial statements include the accounts of DDDigtal, Inc., Odava, Inc., MassRoots Supply
Chain, Inc., and MassRoots Blockchain Technologies, Inc., our wholly-owned subsidiaries. All intercompany transactions were eliminated
during consolidation.
NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY
PLANS
As of December 31,
2019, the Company had cash of $1,120 and working capital deficit (current liabilities in excess of current assets) of $36,868,926.
During the year ended December 31, 2019, net cash used by the Company in operating activities was $1,797,227. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the
consolidated financial statements.
During the year ended
December 31, 2019, the Company received proceeds of $1,407,500, $172,949, $549,000, and $175,000 from the sale of preferred B
shares and warrants, exercise of warrants, issuance of convertible notes, and issuance of non-convertible notes, 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 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 consolidated financial statements are issued. The carrying amounts of
assets and liabilities presented in the consolidated financial statements do not necessarily purport to represent realizable
or settlement values. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
In March 2020, the World Health Organization declared COVID-19
a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments,
has adversely affected workforces, customers, economies, and financial markets globally, leading to an economic downturn. It has
also disrupted the normal operations of many businesses, including ours. It is not possible for us to predict the duration or magnitude
of the adverse results of the outbreak of COVID-19 and its effects on our business or results of operations at this time. A health
pandemic is a disease outbreak that spreads rapidly and widely by infection and affects many individuals in an area or population
at the same time. Customers might avoid public gathering places in the event of a health pandemic, and local, regional or national
governments might continue to limit or ban public gatherings to halt or delay the spread of disease. The conditions may impact
our clients’ and our ability to raise capital.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying 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 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, fair value of our payroll tax 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 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 Statements of Cash Flows, the Company considers
highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2019, and
2018, the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal
Deposit Insurance Corporation in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The
Company minimizes this risk by placing its cash deposits with major financial institutions. At December 31, 2019 and 2018, the
uninsured balances amounted to $0.
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
occurred. 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;
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(ii)
|
Identify the performance
obligation in the contract;
|
|
(iii)
|
Determine the transaction
price;
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(iv)
|
Allocate the transaction
price to the performance obligations in the contract; and
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(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.
Investments
Investments are accounted for under the
cost or the equity method of accounting, as appropriate. The Company accounts for investments in limited partnerships or limited
liability corporations, whereby the Company owns a minimum of 5.0% of the investee’s outstanding voting stock, under the
equity method of accounting. These investments are recorded at the amount of the Company’s investment and adjusted each period
for the Company’s share of the investee’s income or loss, and dividends paid. As investments accounted for under the
cost method do not have readily determinable fair values, the Company only estimates fair value if there are identified events
or changes in circumstances that could have a significant adverse effect on the investment’s fair value.
Software, Equipment and Leasehold Improvements
Software, equipment and leasehold
improvements are stated at cost. Depreciation and amortization for software, equipment and leasehold improvements is computed
using the straight line method based on the useful lives of the assets (one to five years) or the remaining lease term, if
shorter. Any allowance for leasehold improvements received from the landlord for improvements to our facilities is amortized
using the straight-line method over the lesser of the remaining lease term or the useful life of the leasehold
improvements. Repairs and maintenance costs are expensed as incurred.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. For the twelve months ended December 31, 2019 and 2018, the Company charged to
operations $29,764 and $501,451, 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 using the effective interest method.
Deemed Dividends and Beneficial Conversion Feature
The Company records, when necessary, deemed
dividends for: (i) warrant price protection, based on the difference between the fair value of the warrants immediately before
and after the repricing (inclusive of any full ratchet provisions), (ii) the exchange of preferred shares for convertible notes,
based on the amount of the face value of the convertible notes in excess of the carrying value of the preferred shares, and (iii)
the settlement of warrant provisions, based on the fair value of the common shares issued. The Company also records, when necessary,
a contingent beneficial conversion resulting from price protection of the conversion price of Series A preferred shares, based
on the change in the intrinsic value of the conversion options embedded in the preferred stock.
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, 2019 and 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. The Company also records derivative liabilities for instruments,
including convertible notes, preferred stock, and warrants, in which the Company does not have sufficient authorized shares to
cover the conversion of these instruments into shares of common stock.
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 twelve months ended December 31, 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:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Common stock issuable upon conversion of convertible notes
|
|
|
3,697,833,022
|
|
|
|
13,146,218
|
|
Options to purchase common shares
|
|
|
27,621,765
|
|
|
|
27,371,765
|
|
Warrants to purchase common shares
|
|
|
3,342,376,365
|
|
|
|
74,910,002
|
|
Totals
|
|
|
7,067,831,152
|
|
|
|
115,427,985
|
|
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 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 consolidated financial statements and related disclosures.
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 issued ASU
2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging (“ASU
2017-11”) – Adopted in July 2017, ASU No. 2017-11 is intended to simplify the accounting for financial
instruments with characteristics of liabilities and equity. Among the issues addressed are: (i) determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities from equity for
mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily redeemable
non-controlling interests. The Company has adopted ASU No. 2017-11 effective as of January 1, 2018. The adoption of ASU No.
2017-11 impacted the Company’s consolidated financial statements by reclassifying derivative liabilities with a fair
value of $9,493,307 on January 1, 2018 to the accumulated deficit.
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 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 December 31, 2019 and 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 we owned 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.
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 year ended December 31, 2019. The Company sold 45,974 shares of Class A common stock for proceeds of $35,000 during
the twelve months ended December 31, 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 December 31, 2019 and 2018, respectively. The Company recorded an impairment
expense of $155,336 on its holdings during fiscal year 2018 and recorded a $91,931 loss on the sale of investment during the year ended December 31, 2019. The Company sold its shares of Regs Technology for $55,983 during the year ended December
31, 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, the Company
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 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 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 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 December 31, 2019, the Merger had not been effectuated.
As of December 31, 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 December
31, 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 December 31,
2019 and December 31, 2018 is summarized as follows:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Computers
|
|
$
|
6,366
|
|
|
$
|
6,366
|
|
Office equipment
|
|
|
17,621
|
|
|
|
17,621
|
|
Subtotal
|
|
|
23,987
|
|
|
|
23,987
|
|
Less accumulated depreciation
|
|
|
(23,987
|
)
|
|
|
(17,254
|
)
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
6,733
|
|
Depreciation expense for the years ended December 31, 2019 and
2018 was $6,720 and $4,797, respectively. The Company incurred a loss on the write-off of property and equipment of $0 and $47,612
for fiscal years December 31, 2019 and 2018, respectively.
NOTE 7 – SOFTWARE COSTS
On December 15, 2016, the Company
entered into a merger agreement (the “DDDigtal Merger Agreement”) with Whaxy, a wholly-owned subsidiary of the Company,
DDDigtal, a Colorado corporation, Zachary Marburger, an individual acting solely in his capacity as stockholder representative,
and all of the stockholders of DDDigtal. Pursuant to the DDDigtal Merger Agreement, the parties agreed to merge Whaxy with and
into DDDigtal, whereby DDDigtal survived as a wholly-owned subsidiary of MassRoots (the “DDDigtal Merger”).
On January 25, 2017, the DDDigtal Merger was
completed and became effective upon the filing of certificates of merger with the respective Secretary of State of the States of
Delaware and Colorado, in such forms as required by, and executed in accordance with, the relevant provisions of the Delaware General
Corporation Law and the Colorado Business Corporation Act.
Pursuant to the terms of the DDDigtal Merger
Agreement, each share of DDDigtal’s common stock was to be exchanged for a number of shares of the Company’s common
stock (or a fraction thereof), based on an exchange ratio, as ultimately calculated, equal to approximately 5.273-for-1, such that
1 share of the Company’s common stock was issued for every 5.273 shares of DDDigtal’s common stock.
On the effective date of the DDDigtal Merger
(the “DDDigtal Effective Date”), the Company issued an aggregate of 2,926,830 shares of the Company’s common
stock pro rata to all stockholders of DDDigtal in exchange for all of the outstanding shares of DDDigtal’s common
stock. At the same time, each share of the common stock of Merger Subsidiary was converted into and exchanged for one share of
common stock of DDDigtal held by the Company, and all shares of DDDigtal common stock outstanding immediately prior to the DDDigtal
Effective Date were automatically cancelled and retired. At the DDDigtal Effective Date, DDDigtal continued as a surviving wholly-owned
subsidiary of the Company and Whaxy ceased to exist.
In addition, pursuant to the terms of the DDDigtal
Merger Agreement, the Company paid cash consideration, in December 2016, of $40,000 to Zachary Marburger and $20,000 to Micah Davidson,
as repayment of outstanding debts owed by DDDigtal to such individuals.
As a condition to the closing of the DDDigtal
Merger, the Company hired Zachary Marburger as its Vice President of Strategy and engaged Micah Davidson as a Senior Software
Engineer. As a condition of Mr. Marburger’s employment and pursuant to the DDDigtal Merger Agreement, the Company paid Mr.
Marburger an additional $40,000 following the one-year anniversary of his constant employment with the Company.
Cash (paid in December 2016)
|
|
$
|
60,000
|
|
2,926,830 shares of the Company’s common stock
|
|
|
2,883,220
|
|
Liabilities assumed
|
|
|
40,140
|
|
Total purchase price
|
|
$
|
2,983,360
|
|
|
|
|
|
|
Cash
|
|
$
|
8,672
|
|
Accounts receivable
|
|
|
3,583
|
|
Property and equipment
|
|
|
3,333
|
|
|
|
|
|
|
Software
|
|
|
1,253,000
|
(1)
|
|
|
|
|
|
Goodwill
|
|
|
1,714,772
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
2,983,360
|
|
|
(1)
|
The estimated useful life
for software development is assumed at three years. The acquisition was completed in January 2017, however the allocation of proceeds
to identifiable assets was recognized during fourth quarter of 2017. During management’s annual review of these assets for
fiscal year 2018, the remaining value of these assets was written-off due to minimal revenue generated from this software. MassRoots
recorded an impairment expense of $415,378 during fiscal year 2018 for these assets, as compared to $1,714,772 during fiscal year
2017, a reduction of $1,299,394.
|
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 fiscal year 2019 and 2018, MassRoots
incurred amortization of software costs of $38,549 and $438,264, respectively. During the same period, MassRoots incurred impairment
of software costs of $196,315 and $606,714, respectively.
NOTE 8 –
ADVANCES AND NON-CONVERTIBLE NOTES PAYABLE
During the years ended December 31, 2019
and 2018, the Company received aggregate proceeds from advances of $0 and $528,650 and repaid an aggregate of $595,000 and $360,000,
respectively, of advances. The advances 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 December 31, 2019 and 2018, the Company owed advances of $337,500 and $932,500 and accrued interest of $10,500 and $0, respectively.
During the years ended December 31, 2019
and 2018, the Company received aggregate proceeds from non-convertible notes of $175,000 and $0 and repaid an aggregate of $45,400
and $0, respectively, of non-convertible notes. The non-convertible notes had maturity dates from March 21, 2019 to September
15, 2019 and have annual interest rates from 0%-20%. As of December 31, 2019 and 2018, the Company owed $165,750 and $26,150 in
principal and accrued interest of $158,143 and $10,000, respectively.
NOTE 9 –
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of December 31, 2019, the Company owed
accounts payable and accrued expenses of $5,455,063, as compared to $959,688 as of December 31, 2018. These are primarily comprised
of payments to vendors, accrued interests on debts, and accrued legal bills.
NOTE 10 – ACCRUED PAYROLL AND
RELATED EXPENSES
The Company is delinquent in filing
its payroll taxes, primarily related to stock compensation awards in 2016 and 2017, but also including payroll for 2018 and
2019. At December 31, 2019 and 2018, the Company owes payroll tax liabilities, including interest and penalties, of
approximately $3,724,050 and $2,992,023 due to federal and state taxing authorities. The actual liability may be higher or lower due to interest or penalties assessed by federal and state taxing
authorities. The Company expects to settle these liabilities by December 31, 2020.
NOTE 11 – COMMITMENTS AND CONTENGIENCES
In the ordinary course of business,
the Company is occasionally involved in lawsuits incidental to its business, including litigation related to its convertible debt. Although
it is difficult to predict the ultimate outcome of these cases, management believes that any ultimate liability would not have
a material adverse effect on the Company’s consolidated financial condition or results of operations. However, any unforeseen
unfavorable development in any of these cases could have a material adverse effect on the Company’s consolidated financial
condition, the Company records the potential results of operations or
cash flows in the period in which such a determination is made.
NOTE 12 – CONVERTIBLE NOTES PAYABLE
On August 17, 2017, the Company issued
secured convertible notes to certain accredited investors in the aggregate principal amount of $1,045,000. The notes matured on
February 18, 2018 and accrued no interest. Net proceeds received by the Company were $942,500 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) $0.75 and (ii) a 25% 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 at its 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 were secured by all of
the assets of the Company currently held or thereafter acquired.
In connection with the issuance of the
notes, the Company issued five-year warrants to purchase an aggregate of 2,090,000 shares of Company’s common stock with
an initial exercise price of $0.50 per share. The warrants contain certain anti-dilutive (reset) provisions.
From January 1 to January 16, 2018, the Company made payment
to the holders of the notes in an aggregate of (i) $510,938 in cash and (ii) pursuant to the right of conversion of the notes,
an aggregate of 3,742,648 shares of the Company’s common stock. The Company believes that it has completed all of its obligations
under the notes and they are retired.
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
remaining face value of the notes was $390,000. During the year ended December 31, 2019, holders of the July 2018 notes converted
$390,000 in principal and $22,831 in interest into an aggregate of 10,102,353 shares of the Company’s common stock for settlement
of the remaining balance due. The balance of these notes was $0 as of December 31, 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
$15,000) maturing June 1, 2019 and bearing interest 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 year ended December 31, 2019, the holder converted $90,000
in principal and $9,000 of accrued interest into an aggregate of 6,879,913 shares of common stock. As of December 31, 2019, the
aggregate carrying value of the notes 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 matured 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 year ended December 31, 2019, the holder converted $345,000 of principal into an aggregate of 53,522,295
shares of common stock. As of December 31, 2019, the remaining carrying value of the note was $1,880,000, net of debt discount
of $0. As of December 31, 2019, accrued interest payable of $1,327,110 was outstanding on the note.
From January
to June 2019, the Company issued convertible promissory notes in the aggregate principal amount of $389,000 (including
aggregate original issuance discount of $39,000) maturing at various dates from July 15, 2019 through June 6, 2020 and
bearing interest from 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 year ended December 31, 2019, the holders
converted $31,180 of principal and $8,000 of accrued interest into an aggregate of 10,000,000 shares of common stock. As of
December 31, 2019, the remaining carrying value of the notes was $247,746, net of debt discount of $110,074. As of December
31, 2019, accrued interest payable of $456,900 was outstanding on the notes.
On November
13, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $108,900, having aggregate
original issuance discount of $9,900, resulting in net proceeds of $99,000. The notes mature May 13, 2020 and bear interest
of 12% per annum. During the first 180 days the notes are outstanding, the Company shall have the right to prepay the notes
for an amount equal to 120% (during the first 90 days) or 135% (during the subsequent 90 days) 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 $0.01 per share, subject to adjustment. In the event
of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s
common stock during the 20 days prior to the Conversion Date. 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 if
the Market Capitalization falls below $2,500,000, but not exceeding, 9.99%. As of December 31, 2019, the remaining carrying
value of the notes was $14,871, net of debt discount of $94,029. As of December 31, 2019, accrued interest payable of $48,789
was outstanding on the notes.
On December 6, 2019,
the Company issued convertible promissory notes in the aggregate principal amount of $110,000, having aggregate original issuance
discount of $10,000, resulting in net proceeds of $100,000. The notes mature June 6, 2020 and bear interest of 12% per annum.
During the first 180 days the notes are outstanding, the Company shall have the right to prepay the notes for an amount equal
to 120% (during the first 90 days) or 135% (during the subsequent 90 days) 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 $0.01 per share, subject to adjustment. In the event of default, the conversion
price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days
prior to the Conversion Date. 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 if the Market Capitalization (as defined in the
notes) falls below $2,500,000, but not exceeding, 9.99%. As of December 31, 2019, the remaining carrying value of the notes was
$15,027, net of debt discount of $94,973. As of December 31, 2019, accrued interest payable of $38,904 was outstanding on the
notes.
In December 2019,
the Company and the holders of all of the outstanding Series A and Series B Preferred Shares (the “Preferred Shares”)
entered into Exchange Agreements whereby 2,800 Series A Preferred Shares outstanding and 1,126 Series B Preferred Shares outstanding
were canceled in exchange for the issuance of an aggregate of $3,500,000 and $1,548,250 of convertible promissory notes, respectively.
The notes have maturity dates from December 24, 2019 through May 18, 2020 and bear interest of 12% per annum. During the first
180 days the notes are outstanding, the Company shall have the right to prepay the notes for an amount equal to 120% (during the
first 90 days) or 135% (during the subsequent 90 days) 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 $0.005 per share, subject to adjustment. In the event of default, the Outstanding Balance shall immediately
increase to 130% of the Outstanding Balance and a penalty of $100 per day shall accrue until the default is remedied. For a period
of two years from the issuance date, in the event the Company issues or sells any additional common shares or common stock equivalents
at a price less than the Conversion Price (as defined in the notes) then in effect (a “Dilutive Issuance”), the Conversion
Price of the notes shall be reduced to the Dilutive Issuance Price and the number of shares issuable upon conversion shall be
increased on a full ratchet basis. 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 9.99% 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. During the year ended December 31, 2019, the noteholders converted $185,500 of
principal and $300 of accrued interest into an aggregate of 30,669,903 shares of common stock and 37,160,000 shares of common stock to be issued.
As of December 31, 2019, the remaining
carrying value of the notes was $4,781,395, net of debt discount of $81,355. As of December 31, 2019, accrued interest payable
of $1,583,795 was outstanding on the notes.
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 (See Note 13).
NOTE 13 – 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.
On January 1,
2018 the Company estimated the fair value of the embedded derivatives of $9,493,307 using the Binomial Option Pricing Model
based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 108.44%, (3) weighted average
risk-free interest rate of 1.28% to 2.20%, and (4) expected life of 0.13 to 4.65 years.
During the year ended December 31, 2019,
upon issuance, the Company estimated the fair value of the embedded derivatives using the Black-Scholes Pricing Model based
on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 110.59% to 119.18%, (3) risk-free interest
rate of 1.48% to 2.33%, and (4) expected life of 0.01 to 3.0 years.
On December 31, 2019, the Company
estimated the fair value of the embedded derivatives of $20,236,870 using the Black-Scholes Pricing Model based on the
following assumptions: (1) dividend yield of 0%, (2) expected volatility of 119.18%, (3) risk-free interest rate of 1.48% to
1.62%, and (4) expected life of 0.01 to 3.09 years.
The Company adopted the
provisions of 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 non-performance. 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, 2019, 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 consolidated financial statements consisted of the
following items as of December 31, 2019 and 2018:
|
|
December 31,
2019
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liability
|
|
$
|
20,236,870
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,236,870
|
|
|
|
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 two years ended December 31, 2019:
Balance, January 1, 2018
|
|
$
|
9,493,307
|
|
Cumulative effect adjustment to reclassify fair value of derivative liabilities to retained earnings
|
|
|
(9,493,307
|
)
|
Balance, December 31, 2018
|
|
|
-
|
|
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions
|
|
|
686,059
|
|
Transfers out due to conversions of convertible notes and accrued interest into common shares
|
|
|
(56,142
|
)
|
Derivative liability due to authorized shares shortfall
|
|
|
18,921,538
|
|
Mark to market to December 31, 2019
|
|
|
685,415
|
|
Balance, December 31, 2019
|
|
$
|
20,236,870
|
|
|
|
|
|
|
Loss on change in derivative liabilities for the year ended December 31, 2019
|
|
$
|
(685,415
|
)
|
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 14 – STOCKHOLDERS’
DEFICIT
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 Series A
preferred stock have a $1,250 stated value and are convertible into shares of common stock at $0.05 per share, subject to
certain adjustments. 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. Accordingly, the fair value of the Series A Preferred Stock of
$5,882,340 was recognized, offset by preferred stock issuance costs of $5,585,594, net of a decrease in additional paid in capital
of $296,746 for the fair value of the canceled warrants.
From July 5, 2019 to September
19, 2019, the Company issued an aggregate of 80,000,000 shares of common stock and 903,823,564 shares of common stock to be issued
upon the conversion of 3,200 shares of Series A Preferred Stock. Accordingly,
Series A Preferred Stock was decreased by $3,137,248, common stock was increased by the par value of the common shares issued of
$80,000, common stock to be issued was increased by the par value of the common shares to be issued $903,824, and additional paid
in capital was increased by $2,153,424.
On December 3, 2019, the Company retired
the remaining 2,800 shares of Series A Preferred Stock in exchange for the issuance of convertible notes (the “Exchange”)
in the aggregate principal amount of $3,500,000. Accordingly, Series A Preferred Stock was decreased by $2,745,086, additional
paid in capital was decreased by $754,914 (stemming from recognition of a deemed dividend recognized immediately prior to the Exchange),
and convertible notes payable was increased by $3,500,000. In addition, the derivative liabilities on the Series A Preferred Stock
(stemming from the inability to convert caused by the authorized shares shortfall) of $2,012,420 was eliminated with a corresponding
decrease in derivative liability for authorized shares shortfall expense. Lastly, derivative liabilities on the newly issued convertible
notes (stemming from the inability to convert caused by the authorized shares shortfall) of $54,364 was recognized as an increase
in derivative liabilities and a corresponding increase in debt discount on the convertible notes payable.
As of December 31, 2019, there were 0 shares of Series A Preferred
Stock outstanding.
On June 24, 2019,
the Company authorized the issuance of 2,000 shares of Series B Preferred Stock, par value $0.001 per share. The Series B Preferred
Stock have a $1,250 stated value and are convertible into shares of common stock at $0.05 per share, subjected to certain adjustments.
The Certificate of Designation for the Series B Preferred Stock was filed on July 9, 2019.
From June 24 to November
16, 2019, the Company issued 1,126 shares of Series B Preferred Stock for proceeds of $1,407,500.
From December 3 through
December 31, 2019, the Company retired the remaining 1,126 shares of Series B Preferred Stock in exchange for the issuance of convertible
notes (the “Exchange”) in the aggregate principal amount of $1,548,250. Accordingly, Series B Preferred Stock
was decreased by the par value of the preferred shares of $1, additional paid in capital was decreased by $826,883 (for the remaining
carrying value of the preferred shares), additional paid in capital was decreased by $721,366 (stemming from recognition of a deemed
dividend recognized immediately prior to the Exchange), and convertible notes payable was increased by $1,548,250. In addition,
the derivative liabilities on the Series B Preferred Stock (stemming from the inability to convert caused by the authorized shares
shortfall) of $776,965 was eliminated with a corresponding decrease in derivative liability for authorized shares shortfall expense.
Lastly, derivative liabilities on the newly issued convertible notes (stemming from the inability to convert caused by the authorized
shares shortfall) of $85,370 was recognized as an increase in derivative liabilities and a corresponding increase in debt discount
on the convertible notes payable.
As of December 31,
2019, there were 0 shares of Series B Preferred Stock outstanding.
On July 16, 2019,
the Company authorized the issuance of 1,000 Series C Preferred Stock, par value $0.001 per share. The 1,000 Series C preferred
shares are convertible into 1,000,000 shares of common stock upon the Company listing on a national exchange and other conditions.
The Certificate of Designation for the Series C Preferred Stock was filed on July 19, 2019.
On October 21, 2019, the Company issued
1,000 Series C Preferred Shares with a value of $10,000 for services rendered.
As of December 31,
2019, there were 1,000 shares of Series C Preferred Stock outstanding.
Common Stock
The Company is authorized to issue 500,000,000 shares of common
stock, par value $0.001 per share. As of December 31, 2019, there were 384,266,948 shares of common stock issued and outstanding.
The following common stock transactions
were recorded during the years ended December 31, 2019 and 2018:
During the year ended December 31, 2018, the Company issued
an aggregate of 14,362,500 shares of its common stock recorded as to be issued on December 31, 2017.
During the year ended December 31, 2018, the Company retired
an aggregate of 1,790,000 shares of its common stock recorded as to be retired on December 31, 2017 in exchange for warrants issued
in December 2017.
During the year ended December 31, 2018, the Company issued
an aggregate of 13,594,000 shares of its common stock, having an aggregate fair value of $3,508,187, for services rendered.
During the year ended December 31, 2018, the Company issued
an aggregate of 95,134 shares for its common stock upon the cashless exercise of outstanding options.
During the year ended December 31, 2018, the Company issued
an aggregate of 7,906,470 shares of its common stock upon the cashless exercise of outstanding warrants.
During the year ended December 31, 2018, the Company issued
an aggregate of 3,742,648 shares of its common stock for the settlement of convertible debt with a principal amount of $636,250.
During the year ended December 31, 2018, the Company issued
an aggregate of 4,605,000 shares of its common stock upon the exercise of outstanding warrants for net proceeds of $637,230.
During the year ended December 31, 2018, the Company issued
an aggregate of 13,700,000 shares of common stock for cash proceeds of $2,740,000.
During the year ended December 31, 2018, the Company received
$564,000 recorded as subscription receivable as of December 31, 2017.
During the year ended December 31, 2018, the Company issued
an aggregate of 324,881 shares in lieu of interest expense $52,483.
During the year ended December 31, 2018, the Company received
cash proceeds of $6,000 upon the exercise of warrants. The Company has yet not issued 80,000 shares of common stock underlying
the warrants and are accounted for as common stock to be issued.
During the year ended December 31, 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.
During the year ended December 31, 2019, the Company issued
an aggregate of 1,591,240 shares of its common stock as interest expense with a value of $36,830.
During the year ended December 31, 2019, the Company issued
5,553,191 shares of its common stock to satisfy a true-up provision with a value of $22,213.
During the year ended December 31, 2019, 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 $208,700, for services rendered.
During the year ended December 31, 2019, the
Company issued an aggregate of 3,997,661 shares of its common stock upon the cashless exercise of outstanding warrants. Accordingly,
common stock was increased by the par value of the common shares issued of $3,998 with a corresponding decrease in additional paid
in capital.
During
the year ended December 31, 2019, the Company issued 9,000,000 shares for the settlement of a warrant provision. The
fair value of the common shares issued of $437,400 was recognized as a deemed dividend whereby common stock was increased by the
par value of the common shares issued of $9,000, additional paid in capital was increased by $428,400 and retained earnings was
decreased by $437,400.
During the year ended December 31, 2019, 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.
During
the year ended December 31, 2019, the Company issued an aggregate of 111,174,464 shares of its common stock and 37,160,000 shares
of common stock to be issued, having an aggregate fair value of $1,732,318, for the settlement of convertible debt with a principal
amount of $1,041,680 and accrued interest of $40,131, which
resulted in the elimination of $46,978 of derivative liabilities and an aggregate loss on conversion of convertible notes of $603,529. Accordingly,
common stock was increased by the par value of the common shares issued of $111,174, common stock to be issued was increased by
the par value of the common shares to be issued of $37,160 and additional paid in capital was increased by $1,583,984.
During the year ended December 31, 2019, the
Company issued an aggregate of 1,250,000 shares of its common stock as origination shares with a principal amount of $141,333.
During the year ended December 31, 2019,
the Company issued an aggregate of 80,000,000 shares of common stock and 903,823,564 shares of common stock to be issued upon the
conversion of 3,200 shares of Series A Preferred Stock. Accordingly, Series A Preferred Stock was decreased by $3,137,248,
common stock was increased by the par value of the common shares issued of $80,000, common stock to be issued was increased by
the par value of the common shares to be issued of $903,824 and additional paid in capital was increased by $2,153,424.
NOTE 15 – WARRANTS
In January 2018, the Company issued warrants to purchase up
to 250,000 shares of the Company’s common stock at an exercise price of $0.20 per share to a service provider of the Company.
The estimated fair value of $86,483 was charged to current period operations. The fair market value was calculated using the Black
Scholes option pricing model, assuming approximately 2.49% risk-free interest, 0% dividend yield, 112.14% volatility, and expected
life of five years.
In January 2018, in conjunction with the sale of the Company’s
common stock, the Company granted warrants to purchase up to 13,700,000 shares of the Company’s common stock at an exercise
price of $0.40 per share, exercisable through January 31, 2023. Due to price protection provisions, the exercise price of the warrants
was adjusted to $0.20 on July 26, 2018.
In July 2018, the Company issued warrants to purchase up to
an aggregate of 6,600,000 shares of the Company’s common stock as part of the sale of convertible debentures.
In November 2018, MassRoots repriced warrants to purchase common
stock covered by the Registration Statement on Form S-1 that was declared effective by the SEC on July 17, 2018 to $0.075 per share.
During the year ended December 31, 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 year ended
December 31, 2019, the Company issued 568,118,340 warrants to purchase shares of common stock at $0.075 per share pursuant to the
Series B Preferred Stock offering.
During the year ended December 31, 2019,
as a result of the Company’s Series B Preferred Stock offering, the ratchet provisions in certain warrants were triggered,
causing the exercise price to be reset to $0.00224 per share. Accordingly, warrants to purchase 600,551,672 shares of common stock
were repriced to a $0.00224 per share exercise price as of December 31, 2019. In addition, warrants to purchase an additional 2,729,734,691
shares of common stock at $0.00224 per share were issued as a result of this ratchet provision.
The Company recorded $28,933,472 in
deemed dividends as a result of the triggering of price protection provisions in certain outstanding warrants. Accordingly,
additional paid in capital was increased by $28,933,472 with a corresponding decrease in the accumulated deficit.
Warrants outstanding and exercisable at December 31, 2019 are
as follows:
Exercise Price
|
|
Warrants
Outstanding
|
|
|
Weighted Avg.
Remaining Life
|
|
|
Warrants
Exercisable
|
|
$0.001 – 0.25
|
|
|
3,341,486,363
|
|
|
|
2.96
|
|
|
|
3,341,486,363
|
|
0.26 – 0.50
|
|
|
565,002
|
|
|
|
1.42
|
|
|
|
565,002
|
|
0.51 – 0.75
|
|
|
50,000
|
|
|
|
0.27
|
|
|
|
50,000
|
|
0.76 – 1.00
|
|
|
275,000
|
|
|
|
0.75
|
|
|
|
275,000
|
|
|
|
|
3,342,376,365
|
|
|
|
2.96
|
|
|
|
3,342,376,365
|
|
A summary of the warrant activity for the years ended December
31, 2019 and 2018 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2018
|
|
|
35,187,847
|
|
|
$
|
0.41
|
|
|
|
2.30
|
|
|
$
|
-
|
|
Grants
|
|
|
60,832,338
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,184,508
|
)
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(925,675
|
)
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
74,910,002
|
|
|
$
|
0.14
|
|
|
|
3.89
|
|
|
$
|
-
|
|
Grants
|
|
|
3,321,040,292
|
|
|
|
0.00064
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(15,367,659
|
)
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(38,206,270
|
)
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
3,342,376,365
|
|
|
$
|
0.00265
|
|
|
|
2.96
|
|
|
$
|
8,791,956
|
|
Exercisable at December 31, 2019
|
|
|
3,342,376,365
|
|
|
$
|
0.00265
|
|
|
|
2.96
|
|
|
$
|
8,791,956
|
|
The aggregate intrinsic value outstanding
stock warrants was $8,791,956, based on warrants with an exercise price less than the Company’s stock price of $0.005 as
of December 31 2019, which would have been received by the warrant holders had those holders exercised the warrants as of that
date.
NOTE 16 – 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 year
ended December 31, 2018, the Company granted ten-year options outside of our Plans to purchase up to 13,250,000 shares of the
Company’s common stock. The fair value of $2,146,193, was determined using the Black-Scholes option pricing model,
assuming approximately 2.78% - 2.98% risk-free interest, 0% dividend yield, 112.67% - 116.28% 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 for
the twelve months ended December 31, 2018 are as follows:
Exercise Price
|
|
|
Number of
Options
|
|
|
Vesting Terms
|
$
|
0.20
|
|
|
|
12,000,000
|
|
|
Immediately
|
|
0.36
|
|
|
|
250,000
|
|
|
Immediately
|
|
0.40
|
|
|
|
1,000,000
|
|
|
Immediately
|
During the year ended December
31, 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 for
the twelve months ended December 31, 2019 are as follows:
Exercise
Price
|
|
|
Number of
Options
|
|
|
Vesting Terms
|
$
|
0.075
|
|
|
|
250,000
|
|
|
Immediately
|
Stock options outstanding and exercisable on December 31, 2019
are as follows:
Exercise Price
|
|
Number of
Options
|
|
|
Remaining Life
In Years
|
|
|
Number of Options
Exercisable
|
|
$0.01 – 0.25
|
|
|
13,306,786
|
|
|
|
8.26
|
|
|
|
13,306,786
|
|
0.26 - 0.50
|
|
|
1,939,631
|
|
|
|
7.26
|
|
|
|
1,939,631
|
|
0.51 – 0.75
|
|
|
1,820,112
|
|
|
|
6.68
|
|
|
|
1,820,112
|
|
0.76 - 1.00
|
|
|
9,926,072
|
|
|
|
6.71
|
|
|
|
9,926,072
|
|
1.01 - 2.00
|
|
|
629,164
|
|
|
|
6.61
|
|
|
|
629,164
|
|
|
|
|
27,621,765
|
|
|
|
|
|
|
|
27,621,765
|
|
A summary of the stock option activity for the years ended December
31, 2019 and 2018 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2018
|
|
|
14,378,432
|
|
|
$
|
0.76
|
|
|
|
7.23
|
|
|
$
|
-
|
|
Grants
|
|
|
13,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(256,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture/Cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
27,371,765
|
|
|
$
|
0.50
|
|
|
|
8.42
|
|
|
$
|
-
|
|
Grants
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture/Cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
7.49
|
|
|
$
|
-
|
|
Exercisable at December 31, 2019
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
7.49
|
|
|
$
|
-
|
|
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 $0.005 as of December
31, 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 as of the year
ended December 31, 2019 and 2018 was $14,000 and $459,834, respectively. Unrecognized compensation expense
of $0 at December 31, 2019 will be expensed in future periods.
NOTE 17 – INCOME TAXES
The Tax Cuts and Jobs Acts (the
“Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%.
ASC 740, “Income Taxes”, requires that effects of changes in tax rates to be recognized in the period enacted. Recognizing
the late enactment of the Act and complexity of accurately accounting for its impact, the Securities and Exchange Commission in
Staff Accounting Bulletin 118 provides guidance that allows registrants to provide a reasonable estimate of the Act in their financial
statements and adjust the reported impact in a measurement period not to exceed one year.
At December 31, 2019, the Company
has available for federal income tax purposes a net operating loss carry forward of approximately $83,792,687, which begin expiring
in the year 2033, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full
amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it
is more likely than not that the benefits will not be realized. Due to possible significant changes in the Company’s ownership,
the future use of its existing net operating losses may be limited. All or portion of the remaining valuation allowance may
be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits. During
the year ended December 31, 2019, the Company has increased the valuation allowance from $14,503,490 to $17,520,829.
The Company has adopted the provisions
of ASC 740-10-25, which provides recognition criteria and a related measurement model for uncertain tax positions taken or expected
to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken in a tax return be recognized
in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities.
Tax position that meet the more likely
than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is
greater than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating to open income tax
returns that were considered to be uncertain.
Sections 382 and 383 of the Internal Revenue
Code of 1986, as amended (the “Code”), provide for annual limitations on the utilization of net operating loss and
credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general, an
ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders,
as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of
such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the
event such ownership change occurs, the annual limitation may result in the expiration of the net operating losses prior to full
utilization.
The Company is required to file income
tax returns in the U.S. Federal jurisdiction and in California and Colorado. The Company is no longer subject to income tax examinations
by tax authorities for tax years ending before December 31, 2015.
The Company’s deferred taxes as of
December 31, 2019 and 2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
Non-Current deferred tax asset: (Estimated)
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
17,520,826
|
|
|
$
|
14,503,490
|
|
Valuation allowance
|
|
|
(17,520,826
|
)
|
|
|
(14,503,490
|
)
|
Net non-current deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Income Taxes
The Company follows 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.
Reconciliation
between the provision for income taxes and the expected tax benefit using the federal statutory rate of 21% for 2019 and 21% for
2018 is as follows:
|
|
2018
|
|
|
2019
|
|
US federal statutory income tax rate
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
State tax – net of benefit
|
|
|
(5
|
)%
|
|
|
(5
|
)%
|
Non-deductible expenses
|
|
|
11
|
%
|
|
|
11
|
%
|
Increase in valuation allowance
|
|
|
15
|
%
|
|
|
15
|
%
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
NOTE 18 – RELATED PARTY TRANSACTIONS
On October 1, 2019, Isaac Dietrich, the Company’s Chief
Executive Officer, forfeited warrants received on July 21, 2017.
On October 21, 2019, the Company issued 1,000 shares of
Series C Preferred Stock, having an aggregate fair value of $10,000, to Isaac Dietrich in recognition of his service to the Company.
NOTE 19 – SUBSEQUENT EVENTS
The Company evaluates events that have
occurred after the balance sheet date but before the financial statements are issued.
On January 7, 2020, the Company 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 January 8, 2020, the Company issued
37,160,000 shares of common stock that were recorded as to be issued as of December 31, 2019.
On February 24, 2020, the Company terminated
the Agreement and Plan of Merger dated February 11, 2019 by and among the Company, Merger Subsidiary, COWA and Christopher Alameddin.
On March 5, 2020, the Company issued and
sold a convertible note in the aggregate principal amount of $72,600 (including an aggregate of $6,600 original issuance discount)
to an accredited investor.
On March 17, 2020, the Company issued and
sold a convertible note in the aggregate principal amount of $17,600 (including an aggregate of $1,600 original issuance discount)
to an accredited investor.
On April 17, 2020, the Company issued and
sold convertible notes in the aggregate principal amount of $330,000 (including an aggregate of $30,000 original issuance discount)
to accredited investors.
On April 17, 2020, a shareholder retired
69,000 shares of the Company’s common stock.
From January 8, 2020 to May 13, 2020, the
Company issued 72,368,457 shares of common stock for the settlement of $82,268 in convertible debt and accrued interest.
On May 3, 2020, the Company received a loan
in the principal amount of $50,000 pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief,
and Economic Security Act (the “CARES Act”). The PPP loan matures in May 2022 and bears an interest rate of 1.0% per
annum. Payments of principal and interest of any unforgiven balance commence in December 2020.
The
Company was unable to meet the original filing deadline of this Annual Report on Form 10-K which was due on March 30, 2020 as
a result of circumstances relating to COVID-19. Specifically, as set forth in the Company’s Current Report on Form 8-K filed
with the SEC on March 30, 2020, as a result of the volatility in the markets due to COVID-19, the Company was unable to
identify and raise capital necessary for it to, among other things, pay accounting and audit fees necessary for the preparation
and filing of this Annual Report.
On June 26, 2020, the Company issued and sold
a secured promissory note in the principal amount of $60,000 with 10% annual interest. On the two-year anniversary of the issuance
of this note, June 26, 2022, all principal and interest becomes due and payable.
On July 8, 2020, the Company issued and sold
a promissory note in the principal amount of $22,911 with 10% annual interest maturing on December 31, 2020.
On
July 13, 2020, the Company 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 which notes mature on January 13, 2021.
F-28