NOTE 2 – GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As of September 30, 2020, the Company
had cash of $650 and a working capital deficit (current liabilities in excess of current assets) of $83,791,130. During the
nine months ended September 30, 2020, the net loss available to common stockholders was
$142,405,892 and net cash used in operating activities was $717,062. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern for one year from the issuance of the unaudited condensed
consolidated financial statements.
During the nine months ended September
30, 2020, the Company received proceeds of $637,000 and $132,911 from the issuance of convertible notes and non-convertible notes,
respectively. The Company does not have sufficient cash 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 and equity 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. 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 regarding 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 increase revenues. The Company’s continued existence is dependent upon its
ability to translate its audience into revenues. However, the outcome of management’s plans cannot be determined with
any degree of certainty.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
Accordingly, the accompanying unaudited condensed consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business for one year from the date the condensed consolidated financial statements are
issued. The carrying amounts of assets and liabilities presented in the unaudited condensed consolidated financial statements do
not necessarily purport to represent realizable or settlement values. The unaudited condensed consolidated financial statements
do not include any adjustments that might result should the Company be unable to continue
as a going concern.
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 including our financial condition, liquidity, or results of operations at this time. Management is actively monitoring
the global situation and its impact on the Company’s financial condition, liquidity, operations, customers, industry, and
workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able
to estimate the effects that the COVID-19 outbreak will have on its results of operations, financial condition, or liquidity for
fiscal year 2020. As of the date of this Quarterly Report on Form 10-Q, the Company has experienced delays in securing new customers
and related revenues and the longer this pandemic continues there may be additional impacts. Furthermore, the COVID-19 outbreak
has and may continue to impact the Company’s ability to raise capital.
Although the Company
cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have
a material adverse effect on the Company’s results of future operations, financial position, liquidity, and capital resources,
and those of the third parties on which the Company relies in fiscal year 2020.
NOTE 3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements
include the accounts of MassRoots, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America (“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 payroll tax liabilities, deemed dividends 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 estimated fair value of
certain financial instruments, including cash, accounts payable and accrued liabilities are carried at historical cost basis, which
approximates their 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 condensed consolidated 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.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
Cash
For purposes of the
condensed consolidated 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 September 30, 2020 and December 31, 2019, the Company had no cash equivalents. The
Company maintains its cash 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 September 30, 2020 and December 31, 2019, 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 incurred. When retired or otherwise disposed, the related carrying value and accumulated depreciation are
removed from the respective accounts and the net difference less any amount realized from disposition is reflected in earnings.
Accounts Receivable
and Allowance for Doubtful Accounts
The Company monitors
outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information.
The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts
receivable. There is judgment involved with estimating the allowance for doubtful accounts, and if the financial condition of the
Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required
to record additional allowances or charges against revenues. The Company writes-off accounts receivable against the allowance when
it determines a balance is uncollectible and no longer actively pursues its collection.
Revenue Recognition
The Company recognizes revenue when services
are realized or realizable and earned, less estimated future doubtful accounts.
The Company’s
revenues are accounted for under ASC Topic 606, “Revenue From Contracts With Customers” (“ASC 606”) and
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. The Company recognizes revenue in accordance
with that core principle by applying the following:
|
|
(i)
|
Identify the contract(s) with a customer;
|
|
|
(ii)
|
Identify the performance obligation in the contract;
|
|
|
(iii)
|
Determine the transaction price;
|
|
|
(iv)
|
Allocate the transaction price to the performance obligations in the contract; and
|
|
|
(v)
|
Recognize revenue when (or as) the Company satisfies a performance obligation.
|
The Company primarily
generates revenue by charging businesses to advertise on the Company’s website and social media channels. In cases where
clients enter advertising contracts for an extended period of time, the Company only recognizes revenue for services provided during
that quarter and defers the remaining unearned revenue to future periods.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
Advertising
The Company charges the costs of advertising to expense as incurred.
Advertising costs were $43,020 and $39,332 for the nine months ended September 30, 2020 and 2019, respectively.
Stock-Based Compensation
Stock-based compensation
expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For stock-based
awards to employees, non-employees and directors, the Company calculates the fair value of the award on the date of grant using
the Black-Scholes option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires
judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used
in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent
uncertainties and the application of management’s judgment.
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 freestanding derivative financial
instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks
of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured
at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings
as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under
ASC 480, “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.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
Deemed Dividends and Beneficial Conversion Features
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 Stock, based on
the change in the intrinsic value of the conversion options embedded in such 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 freestanding derivatives at each
reporting date to determine whether a change in classification between assets and liabilities is required.
The Company’s
freestanding derivatives consisted of warrants to purchase common stock that were issued in connection with the issuance of debt
and the sale of common shares, and of embedded conversion options within convertible notes. The Company evaluated these derivatives
to assess their proper classification in the balance sheet as of September 30, 2020 and December 31, 2019 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 notes 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 life 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
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
indefinite lived intangibles and goodwill for 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.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
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.
Reclassifications
Certain reclassifications
have been made to the prior years’ data to conform to the current year presentation. These reclassifications had no effect
on reported income (losses).
Recent Accounting
Pronouncements
In August 2020, the FASB issued ASU 2020-06,
which simplifies the guidance on accounting for convertible debt instruments by removing the separation models for: (1) convertible
debt with a cash conversion feature; and (2) convertible instruments with a beneficial conversion feature. As a result, the Company
will not separately present in equity an embedded conversion feature in such debt. Instead, we will account for a convertible debt
instrument wholly as debt, unless certain other conditions are met. We expect the elimination of these models will reduce reported
interest expense and increase reported net income for the Company’s convertible instruments falling under the scope of those
models before the adoption of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating
diluted earnings per share and the treasury stock method will be no longer available. The provisions of ASU 2020-06 are applicable
for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after
December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its condensed consolidated financial statements.
In August 2018, the
FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework
- Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes certain
disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy,
the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13
also adds disclosure requirements, including changes in unrealized gains and losses for the period included in other comprehensive
income for recurring Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used
to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, and the range and weighted
average of significant unobservable inputs used to develop Level 3 fair value measurements, should be applied prospectively for
only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be
applied retrospectively to all periods presented upon their effective date. ASU 2018-13 became effective for us on January 1, 2020.
The adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements and
related disclosures.
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 – PROPERTY AND EQUIPMENT
Property and equipment as of September
30, 2020 and December 31, 2019 is summarized as follows:
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
Computers
|
|
$
|
6,366
|
|
|
$
|
6,366
|
|
|
Office equipment
|
|
|
17,621
|
|
|
|
17,621
|
|
|
Subtotal
|
|
|
23,987
|
|
|
|
23,987
|
|
|
Less accumulated depreciation
|
|
|
(23,987
|
)
|
|
|
(23,987
|
)
|
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Depreciation expense for the three months ended September 30,
2020 and 2019 was $0 and $1,078, respectively.
Depreciation expense for the nine months ended September 30,
2020 and 2019 was $0 and $3,549, respectively.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
NOTE 5 – ADVANCES AND NON-CONVERTIBLE NOTES PAYABLE
During the nine months ended September
30, 2020 and 2019, the Company received aggregate proceeds from advances of $0 and $0 and repaid an aggregate of $0 and $72,650,
respectively, of advances. The advances were primarily for Simple Agreements for Future Tokens, entered into with accredited investors
issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section
4(a)(2) thereof and/or Regulation D thereunder in 2017 and 2018. As of September 30, 2020 and December 31, 2019, the
Company owed $337,500 and $337,500 in principal and $10,500 and $10,500 in accrued interest, respectively.
During the nine months
ended September 30, 2020 and 2019, the Company received proceeds from the issuance of non-convertible notes of $132,911 and $176,000
and repaid an aggregate of $39,641 and $0, respectively, of non-convertible notes. The non-convertible notes have maturity dates
ranging from March 18, 2019 to June 26, 2022 and accrue interest at rates ranging from 0% to 36% per annum. As of September
30, 2020 and December 31, 2019, the Company owed $264,020 and $165,750 in principal and $259,428 and $158,143 in accrued interest,
respectively.
NOTE 6 –
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of September 30, 2020 and December 31,
2019, the Company owed accounts payable and accrued expenses of $8,169,332 and $5,455,063, respectively. These are primarily comprised
of payments to vendors, accrued interest on debt, and accrued legal bills.
NOTE 7 – 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, 2019, and
2020. As of September 30, 2020 and December 31, 2019, the Company owed payroll tax liabilities, including penalties, of $3,818,230
and $3,724,050, respectively, 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 March 31, 2021.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the
Company is occasionally involved in lawsuits incidental to its business, including litigation related to its convertible notes. 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 condensed 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 condensed
consolidated financial condition. The Company records the potential effects on operations or cash flows in the period in which
such effects are probable and reasonably estimable.
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) 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. On August 24, 2020, the Supreme Court of the State of New York, County of Nassau adjourned a hearing
on Power Ups motion for default judgment with respect to the complaint filed by Power Up on October 11, 2019 against the Company
and Mr. Dietrich until September 14, 2020. On September 14, 2020, Power-Up filed a motion
for leave to enter a default judgment against the Company and Mr. Dietrich, alleging that the defendants failed to appear and did
not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer. As of September 30, 2020, the Company has recorded $131,174 in principal and $233,124 of accrued
interest and penalties for the Power Up Notes as current liabilities.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
NOTE 9 –
CONVERTIBLE NOTES PAYABLE
On July 5, 2018, the
Company issued secured convertible notes to certain accredited investors in the aggregate principal amount of $1,650,000. The notes
matured on January 5, 2019 and accrued no interest. Net proceeds received by the Company were $1,492,500 after deduction of legal
and other fees. During 2019, the remaining principal amount of $390,000 and accrued interest of $22,831 were converted into shares
of the Company’s common stock.
In connection with
the issuance of the July 2018 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.
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) that matured on December 17, 2019 and bears interest at a rate of 8% per annum (which
increased to 22% on July 16, 2019 upon the occurrence of an event of default). The note is secured by the Security Agreement
(as defined below). The investor has the right to convert the Outstanding Balance (as defined in the note) 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 has 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%.
In connection with the December 2018 note,
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 the noteholder indicating that events of default had occurred and asserting default penalties
of $761,330. During the year ended December 31, 2019, the noteholder converted $345,000 of principal into an aggregate of 53,522,295
shares of common stock. During the nine months ended September 30, 2020, the noteholder converted $37,000 of principal into an
aggregate of 31,109,551 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining carrying value of
the note was $1,843,000 and $1,880,000, respectively, net of debt discount of $0. As of September 30, 2020 and December 31, 2019,
accrued interest payable of $1,659,676 and $1,327,110, respectively, was outstanding on the note.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
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) that matured at dates ranging from July 15, 2019 to June 6, 2020 and accruing interest at rates ranging
from 5% to 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes)
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 investors 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%. In January 2020, one of
the promissory notes was amended whereby the conversion price for $9,202 which is a portion of the principal amount of the note
was amended to $0.0004 per share. The amendment was deemed a debt modification and accounted for accordingly. During
the year ended December 31, 2019, the noteholders converted $31,180 of principal and $8,000 of accrued interest into an aggregate
of 10,000,000 shares of common stock. During the nine months ended September 30, 2020, one of the holders converted $24,826 of
principal into an aggregate of 35,005,850 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining
carrying value of the notes was $332,994 and $247,746, net of debt discount of $0 and $110,074, respectively. As of September 30,
2020 and December 31, 2019, accrued interest payable of $1,282,188 and $456,900, respectively, was outstanding on the notes.
On November
13, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $108,900, having an aggregate
original issuance discount of $9,900, resulting in cash proceeds of $99,000. The notes matured on May 13, 2020 and accrue
interest at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the
notes) 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 September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $108,900 and
$14,871, net of debt discount of $0 and $94,029, respectively. As of September 30, 2020 and December 31, 2019, accrued
interest payable of $140,798 and $48,789, respectively, was outstanding on the notes.
On December 6,
2019, the Company issued convertible promissory notes in the aggregate principal amount of $110,000, having an aggregate original
issuance discount of $10,000, resulting in cash proceeds of $100,000. The notes matured on June 6, 2020 and accrue interest
at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes)
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 September 30, 2020 and December 31, 2019, the
remaining carrying value of the notes was $110,000 and $15,027, net of debt discount of $0 and $94,973, respectively. As of September
30, 2020 and December 31, 2019, accrued interest payable of $103,613 and $38,904, respectively, was outstanding on the notes.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
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 and 1,126 Series B Preferred Shares 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 matured
at dates ranging from December 24, 2019 to May 18, 2020 and accrue interest at a rate of 12% per annum. The investors have
the right to convert the Outstanding Balance (as defined in the notes) 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.
During the nine months ended September 30, 2020, the noteholders converted $31,137 of principal and $128 of accrued interest into
an aggregate of 6,253,056 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining carrying value
of the notes was $4,831,613 and $4,781,395, net of debt discount of $0 and $81,355, respectively. As of September 30, 2020 and
December 31, 2019, accrued interest payable of $2,375,264 and $1,583,795, respectively, was outstanding on the notes.
From January to September 2020, the Company
issued convertible promissory notes in the aggregate principal amount of $700,700, having an aggregate original issuance discount
of $63,700, resulting in cash proceeds of $637,000. The notes mature from July 2020 to March 2021 and accrue interest at a
rate 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 investors 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. Notwithstanding the foregoing, upon the occurrence of an event of default, the conversion
price for the April 2020 notes, having an aggregate original principal amount of $330,000, shall not be less than $0.001. 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 September 30, 2020, the remaining carrying value of the notes was $497,129, net of debt discount of $203,571. As of September
30, 2020, accrued interest payable of $373,256 was outstanding on the notes.
Upon the issuance of certain convertible
notes, the Company determined that the features associated with the embedded conversion option embedded in the notes, should be
accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would
be available to settle all potential future conversion transactions.
The Company does not have enough authorized
and unissued common shares to convert all of the convertible promissory notes into common shares. As a result of this authorized
shares shortfall, all of the convertible notes payable, including those where the maturity date has not yet been reached, are in
default. Accordingly, (i) interest has been accrued at the default interest rate, if applicable, and (ii) the embedded conversion
option has been accounted for, at fair value, as a derivative liability (See Note 10).
NOTE 10 –
DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS
The Company does not have enough authorized
and unissued common shares to convert all of its outstanding convertible promissory notes into common shares. As a result of this
authorized shares shortfall, the embedded conversion feature in all of the Company’s outstanding convertible notes payable
and convertible preferred shares as well as the Company’s outstanding warrants have been accounted for as derivative liabilities,
at fair value, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future
conversion transactions.
During the nine months ended September 30,
2020, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion),
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 119.33% to 126.80%, (3) risk-free interest rate of 0.10% to 1.56%, and (4)
expected life of 0.08 to 0.5 years.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
On September 30, 2020, the Company estimated
the fair value of the embedded derivatives of $63,588,991 using the Black-Scholes Pricing Model based on the following assumptions:
(1) dividend yield of 0%, (2) expected volatility of 125.94%, (3) risk-free interest rate of 0.05% to 0.13%, and (4) expected life
of 0.05 to 2.34 years.
During the year ended December 31, 2019,
upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion),
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.
ASC 820 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. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input
that is significant to the fair value measurement. ASC 820 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.
At September 30, 2020
and December 31, 2019, the Company did not have any derivative instruments that were designated as hedges.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
Items recorded or
measured at fair value on a recurring basis in the accompanying condensed consolidated financial statements consisted of the following
items as of September 30, 2020 and December 31, 2019:
|
|
|
September 30,
2020
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Derivative liabilities
|
|
$
|
63,588,991
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
63,588,991
|
|
|
|
|
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 liabilities
|
|
$
|
20,236,870
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,236,870
|
|
The following table
provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the nine months ended September
30, 2020:
|
Balance, December 31, 2019
|
|
$
|
20,236,870
|
|
|
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions
|
|
|
528,076
|
|
|
Transfers out due to conversions of convertible notes and accrued interest into common shares
|
|
|
(278,545
|
)
|
|
Change in derivative liability due to authorized shares shortfall
|
|
|
43,406,183
|
|
|
Mark to market to September 30, 2020
|
|
|
(303,593
|
)
|
|
Balance, September 30, 2020
|
|
$
|
63,588,991
|
|
|
|
|
|
|
|
|
Gain on change in derivative liabilities for the nine months ended September 30, 2020
|
|
$
|
303,593
|
|
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/(decreases)
for each of the related derivative instruments, the value to the holder of the instrument generally increases/(decreases), therefore
increasing/(decreasing) the liability on the Company’s balance sheet. Decreases in the conversion price of the Company’s
convertible notes are another driver for the changes in the derivative valuations during each reporting period. As the conversion
price decreases for each of the related derivative instruments, the value to the holder of the instrument (especially those with
full ratchet price protection) 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 measurements. A 10% change in pricing inputs and changes
in volatilities and correlation factors would not result in a material change in our Level 3 fair value.
NOTE 11 – 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 has a
$1,250 stated value and is 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.
As of September 30, 2020 and 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 has a $1,250 stated value and is 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.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
As of September 30,
2020 and 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 shares of Series C Preferred Stock, par value $0.001 per share. The 1,000
Series C preferred shares automatically convert into an aggregate of 1,000,000 shares of common stock upon the Company
listing on a national exchange or upon a Change in Control (as defined in the Series C Certificate of Designation). The
Certificate of Designation for the Series C Preferred Stock was filed on July 19, 2019, and a Certificate of Correction to
the Certificate of Designation was filed on June 24, 2020.
As of September 30,
2020 and 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 September 30, 2020 and December 31, 2019, there were 493,726,405 and
384,266,948 shares of common stock issued and outstanding, respectively.
The following common
stock transactions were recorded during the nine months ended September 30, 2020:
On January 8, 2020,
the Company issued 37,160,000 shares of the Company’s common stock previously recorded as to be issued as of December 31,
2019.
On March 7, 2020, a stockholder
returned 69,000 shares of the Company’s common stock back to the Company. The shares were immediately
retired. Accordingly, common stock was decreased by the par value of the common shares contributed of $69 with a
corresponding increase in additional paid in capital.
During the nine months ended September
30, 2020, the Company issued an aggregate of 72,368,457 shares of its common stock, having an aggregate fair value of $370,755,
upon the conversion of convertible notes with a principal amount of $92,964 and accrued interest of $128, which resulted in the
elimination of $278,545 of derivative liabilities and an aggregate net gain on conversion of convertible notes of $882. Accordingly,
common stock was increased by the par value of the common shares issued of $72,369 and additional paid in capital was increased
by $298,386.
NOTE 12 – WARRANTS
A summary of the Company’s warrant
activity during the nine months ended September 30, 2020, is presented below:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at December 31, 2019
|
|
|
3,342,376,365
|
|
|
$
|
0.00265
|
|
|
|
2.96
|
|
|
$
|
8,791,956
|
|
|
Grants
|
|
|
13,819,650,911
|
|
|
|
0.00040
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expired/Canceled
|
|
|
(325,000
|
)
|
|
|
0.73077
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
17,161,702,276
|
|
|
$
|
0.00050
|
|
|
|
2.21
|
|
|
$
|
27,439,900
|
|
|
Exercisable at September 30, 2020
|
|
|
17,161,702,276
|
|
|
$
|
0.00050
|
|
|
|
2.21
|
|
|
$
|
27,439,900
|
|
|
Exercise Price
|
|
Warrants
Outstanding
|
|
|
Weighted Avg.
Remaining
Life
|
|
|
Warrants
Exercisable
|
|
|
$0.0001 – 0.25
|
|
|
17,161,137,274
|
|
|
|
2.21
|
|
|
|
17,161,137,274
|
|
|
0.26 – 0.50
|
|
|
465,002
|
|
|
|
0.93
|
|
|
|
465,002
|
|
|
0.76 – 1.00
|
|
|
100,000
|
|
|
|
0.29
|
|
|
|
100,000
|
|
|
|
|
|
17,161,702,276
|
|
|
|
2.21
|
|
|
|
17,161,702,276
|
|
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
The aggregate intrinsic
value of outstanding stock warrants was $27,439,900, based on warrants with an exercise price less than the Company’s stock
price of $0.002 as of September 30, 2020, which would have been received by the warrant holders had those holders exercised the
warrants as of that date.
NOTE 13 – STOCK OPTIONS
Our stockholders approved
our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan in December 2015 (the
“2015 Plan”), our 2016 Equity Incentive Plan in October 2016 (“2016 Plan”), 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 the number of shares reserved for issuance under each. As of September
30, 2020, the Company had granted an aggregate of 64,310,000 securities under the Plans, with 190,000 shares available for future
issuances.
The Plans provide
for the grant of incentive stock options to our employees and our subsidiaries’ employees, and for the grant of 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.
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 the options.
The fair value of all options that vested
during the nine months ended September 30, 2020 and 2019 was $0 and $14,000, respectively. Unrecognized compensation expense
of $0 at September 30, 2020 will be expensed in future periods.
A summary of the Company’s stock
option activity during the nine months ended September 30, 2020, is presented below:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at December 31, 2019
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
7.49
|
|
|
$
|
-
|
|
|
Grants
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
6.74
|
|
|
$
|
-
|
|
|
Exercisable at September 30, 2020
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
6.74
|
|
|
$
|
-
|
|
|
Exercise Price
|
|
Number of
Options
|
|
|
Remaining Life
In Years
|
|
|
Number of Options
Exercisable
|
|
|
$0.01 – 0.25
|
|
|
13,306,786
|
|
|
|
7.51
|
|
|
|
13,306,786
|
|
|
0.26 – 0.50
|
|
|
1,939,631
|
|
|
|
6.51
|
|
|
|
1,939,631
|
|
|
0.51 – 0.75
|
|
|
1,820,112
|
|
|
|
5.93
|
|
|
|
1,820,112
|
|
|
0.76 – 1.00
|
|
|
9,926,072
|
|
|
|
5.96
|
|
|
|
9,926,072
|
|
|
1.01 – 2.00
|
|
|
629,164
|
|
|
|
5.85
|
|
|
|
629,164
|
|
|
|
|
|
27,621,765
|
|
|
|
6.74
|
|
|
|
27,621,765
|
|
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
September 30, 2020 (Unaudited)
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
$0.0020 as of September 30, 2020, which would have been received by the option holders had those option holders exercised their
options as of that date.
NOTE 14 – EARNINGS (LOSS) PER
SHARE
Basic earnings (loss)
per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during
each such period. Diluted earnings (loss) per share data is computed using the weighted average number of common and dilutive common
equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of: (i) shares that would be issued
upon the exercise of stock options and warrants, computed using the treasury stock method, and (ii) shares issuable upon conversion
of convertible notes. The Company calculated the potential diluted earnings per share in accordance with ASC 260, as follows:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (numerator for basic and diluted earnings (loss) per share)
|
|
$
|
64,679,222
|
|
|
$
|
(23,550,345
|
)
|
|
$
|
(47,402,959
|
)
|
|
$
|
(26,338,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (denominator for basic earnings (loss) per share)
|
|
|
1,401,226,219
|
|
|
|
650,391,047
|
|
|
|
1,387,478,585
|
|
|
|
337,350,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of warrants, treasury stock method
|
|
|
15,058,062,718
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Assumed conversion of convertible notes
|
|
|
23,739,459,336
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Weighted average dilutive potential common shares
|
|
|
38,797,522,054
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share - weighted average shares and assumed potential common shares
|
|
|
40,198,748,273
|
|
|
|
650,391,047
|
|
|
|
1,387,478,585
|
|
|
|
337,350,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.05
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
-
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
The following securities
were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Common shares issuable upon conversion of convertible notes
|
|
|
-
|
|
|
|
1,456,478,815
|
|
|
Options to purchase common shares
|
|
|
27,621,765
|
|
|
|
27,621,765
|
|
|
Warrants to purchase common shares
|
|
|
12,015,002
|
|
|
|
2,517,052,238
|
|
|
Common shares issuable upon conversion of preferred stock
|
|
|
1,000,000
|
|
|
|
1,131,613,184
|
|
|
Total potentially dilutive shares
|
|
|
40,636,767
|
|
|
|
5,132,766,002
|
|
NOTE 15 – SUBSEQUENT EVENTS
The Company evaluates events that have
occurred after the balance sheet date but before the condensed consolidated financial statements are issued.
On
September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Isaac Dietrich, an officer
and director of the Company, in connection with the Power Up Notes, alleging that the defendants failed to appear and did not establish
a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer. On November 19, 2020,
Power Up’s motion to enter a default judgment was granted.
On
November 25, 2020, the Company entered into a securities purchase agreement with an accredited investor for the sale of 3.3
shares of the Company’s newly-created Series X Convertible Preferred Stock, par value $0.0001 per share, resulting in
aggregate proceeds of $66,000. The purchase and issuance of such shares of Series X Preferred Stock closed on December 1,
2020.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion
and analysis in conjunction with our condensed consolidated financial statements and related notes contained in Part I, Item 1
of this Quarterly Report. Please also refer to the note about forward-looking information for information on such statements contained
in this Quarterly Report immediately preceding Part I, Item 1.
COVID-19 Pandemic
On January 30, 2020, the World Health Organization
(“WHO”) announced a global health emergency because of a new strain of coronavirus, COVID-19 originating in Wuhan,
China (and the risks to the international community as the virus spread globally beyond its point of origin). In March 2020, the
WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak
continues to evolve as of the date of this Quarterly Report on Form 10-Q. As such, it is uncertain as to the full magnitude that
the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively
monitoring the global situation and its impact on the Company’s financial condition, liquidity, operations, customers, industry,
and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not
able to estimate the effects that the COVID-19 outbreak will have on its results of operations, financial condition, or liquidity
for fiscal year 2020.
As of the date of this Quarterly Report
on Form 10-Q, the Company has experienced delays in securing new customers and related revenues and the longer this pandemic
continues there may be additional impacts. Furthermore, the COVID-19 outbreak has and may continue to impact the Company’s
ability to raise capital.
Although the Company cannot estimate the
length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse
effect on the Company’s results of future operations, financial position, liquidity, and capital resources, and those of
the third parties on which the Company relies in fiscal year 2020.
Overview
MassRoots, Inc. was formed in April 2013
and over the past seven years has partnered with numerous cannabis-related brands to advertise products to its broad following
across its website, MassRoots.com, and social media accounts. Management believes that our YouTube Channel has one of the largest
followings in the regulated cannabis industry with more than 265,000 subscribers while our Instagram account is followed by 387,000
users. Additionally, MassRoots has 920,000 opt-in email subscribers, and 172,500 followers on our verified Twitter account.
For much of our history, MassRoots has
focused on building a technology platform for the cannabis industry. As part of our marketing strategy, we garnered a significant
following across web, social media, and email channels that was highly successful at driving users to our platform.
While our long-term goal remains building
a technology platform for the cannabis industry, we believe it will likely take significant capital to do so. Therefore, we believe
it is in the best interests of our shareholders to focus on monetizing our existing media channels over the coming months with
the goal of generating positive cash-flows from operations.
We are focused on monetizing our audience
through product placements, display ads, and daily deals.
Competitors
We compete with other cannabis platforms
such as WeedMaps and Leafly, which provide news and other information related to the cannabis industry. We believe our primary
competitive advantage is the community and audience we have established, along with the data we have cultivated on key cannabis
markets.
The Company’s financial statements have
been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. In order to generate meaningful revenues, our technologies must be fully developed, gain market
recognition and acceptance and develop a critical level of successful sales and product installations. In addition, management
believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding
through equity or debt financing to adequately support research and development efforts, protect intellectual property, form relationships
with strategic partners and provide for working capital and general corporate purposes. There can be no assurance that the Company
will be successful in achieving its plans as set forth above.
Our costs include employee salaries and benefits, compensation
paid to consultants, materials and supplies for product development and commercialization activities, and administration, travel,
legal and accounting expenses, sales and marketing costs, general and administrative expenses, and other costs associated with
an early stage, publicly-traded technology company. We currently have 3 full-time employees. Because using third party expertise
and resources is more efficient than maintaining full time resources, we also expect to incur consulting expenses related to technology
development and some administrative, sales and legal functions commensurate with our current levels.
The amount that we spend for any specific purpose may vary significantly
from quarter to quarter, and could depend on a number of factors including, but not limited to, the pace of progress of our commercialization
and development efforts, actual needs with respect to product testing, development and research, market conditions, and changes
in or revisions to our sales and marketing strategies.
Research, development, and commercial acceptance of new technologies
are, by their nature, unpredictable. Although we undertake development and commercialization efforts with reasonable diligence,
there can be no assurance that the net proceeds from our securities offerings will be sufficient to enable us to develop our technology
to the extent needed to create future sales to sustain operations. If the net proceeds from these offerings are insufficient
for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional
financing through follow-on equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual
or other property, or other alternatives.
We cannot assure that our technologies will be accepted, that we
will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore, we have no committed
source of financing and we cannot assure that we will be able to raise money as and when we need it to continue our operations.
If we cannot raise funds as and when we need them, we may be required to scale back our development plans by reducing expenditures
for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, our
operations.
For the Three Months Ended September 30, 2020 and 2019
|
|
|
For the three months ended
|
|
|
|
|
Sept 30,
2020
|
|
|
Sept 30,
2019
|
|
|
$
Change
|
|
|
%
Change
|
|
|
Revenue
|
|
$
|
2,316
|
|
|
$
|
909
|
|
|
$
|
1,407
|
|
|
|
154.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
208,238
|
|
|
|
1,122,617
|
|
|
|
(914,379
|
)
|
|
|
(81.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(205,922
|
)
|
|
|
(1,121,708
|
)
|
|
|
915,786
|
|
|
|
(81.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
64,885,144
|
|
|
|
(22,428,637
|
)
|
|
|
87,313,781
|
|
|
|
389.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common
Stockholders
|
|
$
|
64,679,222
|
|
|
$
|
(23,550,345
|
)
|
|
$
|
88,229,567
|
|
|
|
374.6
|
%
|
Revenues
For the three months ended September 30,
2020 and 2019, we generated revenues of $2,316 and $909, respectively, an increase of $1,407 primarily due to the relaunch of product
placements on the Company’s YouTube channel.
Operating Expenses
For the three months ended September 30,
2020 and 2019, our operating expenses were $208,238 and $1,122,617, respectively, a decrease of $914,379. This decrease was attributable
to a decrease in payroll and related expenses of $88,930 due to reduction in the number of employees, as payroll and related expenses
decreased to $63,879 for the three months ended September 30, 2020 from $152,809 for same period in 2019. Advertising increased
to $43,020 for the three months ended September 30, 2020 from $2,967 for the same period in 2019, an increase of $40,053. For the
three months ended September 30, 2020 and 2019, the Company recorded amortization of software costs of $0 and $12,849, respectively,
a decrease of $12,849. This is primarily a result of the Company not incurring any software development costs. Other general and
administrative expenses decreased by $473,488 from $574,677 for the three months ended September 30, 2019, to $101,189 for the three
months ended September 30, 2020. This reduction was attributable to lower overhead costs for office expenses, legal fees, rent
expense and contractor services for the three months ended September 30, 2020 as compared to the same period in 2019.
Loss from Operations
During the three months ended September
30, 2020, we incurred losses of $205,922 from operations, as compared to losses of $1,121,708 during the same period in 2019, a
difference of $915,786, for the reasons stated above.
Other Income (Expense)
For the three months ended September 30,
2020 and 2019, the Company recorded interest expense of $1,602,204 and $1,546,805, respectively, primarily related to Company’s
convertible notes. The Company recorded a $0 loss and $248,022 loss on the conversion of convertible notes payable for the three
months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020 and 2019, the Company recorded
a $66,572,635 gain and a $15,050,821 loss, respectively, on the change in fair value of derivative liabilities for the authorized
share shortfall. For the three months ended September 30, 2020 and 2019, the Company recorded $85,287 loss and $94,534 gain, respectively,
of changes in the fair value of the derivative liability for the authorized shares shortfall.
Net Income (Loss) Available to
Common Stockholders
For the three months ended September 30,
2020, we had net income of $64,679,222, as compared to a net loss of $23,550,345 for the same period in 2019, an increase
of $88,229,567 for the reasons discussed above.
For the Nine Months Ended September 30, 2020 and 2019
|
|
|
For the nine months ended
|
|
|
|
|
Sept 30,
2020
|
|
|
Sept 30,
2019
|
|
|
$
Change
|
|
|
%
Change
|
|
|
Revenue
|
|
$
|
2,316
|
|
|
$
|
23,658
|
|
|
$
|
(21,342
|
)
|
|
|
(90.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
696,357
|
|
|
|
2,884,121
|
|
|
|
(2,187,764
|
)
|
|
|
(75.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(694,041
|
)
|
|
|
(2,860,463
|
)
|
|
|
2,166,422
|
|
|
|
75.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
(46,708,918
|
)
|
|
|
(23,477,791
|
)
|
|
|
(23,231,127
|
)
|
|
|
98.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Available to Common Stockholders
|
|
$
|
(142,405,892
|
)
|
|
$
|
(94,457,638
|
)
|
|
$
|
(47,948,254
|
)
|
|
|
50.8
|
%
|
Revenues
For the nine months ended September 30,
2020 and 2019, we generated revenues of $2,316 and $23,658, respectively, a decrease of $21,342 primarily due to service interruptions
to both the Company’s website and production of content.
Operating Expenses
For the nine months ended September 30,
2020 and 2019, our operating expenses were $696,357 and $2,884,121, respectively, a decrease of $2,187,764. This decrease was attributable
to a decrease in stock-based compensation of $212,700 from $212,700 for the nine months ended September 30, 2019 to $0 for the
same period in 2020. There was a decrease in payroll and related expenses of $255,299 due to reduction in the number of employees
as payroll and related expenses decreased to $239,770 for the nine months ended September 30, 2020 from $495,069 for same period
in 2019. Advertising expense increased to $43,020 for the nine months ended September 30, 2020 from $39,332 for the same period
in 2019, an increase of $3,688. For the nine months ended September 30, 2020 and 2019, the Company recorded amortization of software
costs of $0 and $38,549, respectively, a decrease of $38,549. This is primarily a result of the Company not incurring any software
development costs. Other general and administrative expenses decreased by $1,124,709 from $1,538,126 for the nine months ended
September 30, 2019 to $413,417 for the nine months ended September 30, 2020. This reduction was attributable to lower overhead
costs for office expenses, legal fees, rent expense and contractor services for the nine months ended September 30, 2020 as compared
to the same period in 2019.
Loss from Operations
During the nine months ended September
30, 2020, we incurred losses of $694,041 from operations, as compared to losses of $2,860,463 during the same period in 2019, a
difference of $2,166,422, for the reasons stated above.
Other Income (Expense)
For the nine months ended September
30, 2020 and 2019, the Company recorded interest expense of $3,607,210 and $2,136,983, respectively, primarily related to
Company’s convertible notes. The Company recorded a gain of $882 and a loss of $674,099 on the conversion of
convertible notes payable for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended
September 30, 2020 and 2019, the Company recorded gains of $303,593 and $61,635, respectively, of the change in fair value of
derivative liabilities. For the nine months ended September 30, 2020 and 2019, the Company recorded $43,406,183 and
$15,050,821, respectively, of changes in the fair value of the derivative liability for the authorized shares shortfall.
Net Loss Available to Common Stockholders
For the nine months ended September 30,
2020 and 2019, we had net losses of $142,405,892 and $94,457,638, respectively, an increase of $47,948,254 for the reasons discussed
above.
Liquidity and Capital Resources
Net cash used in operations for the nine
months ended September 30, 2020 and 2019 was $717,062 and $1,389,212, respectively. This $672,150 decrease was primarily caused
by a decrease in stock-based compensation (non-cash items), an increase in interest and amortization of debt discount, and a decrease
in accounts payable and accrued expenses. Net cash used in operations for the nine months ended September 30, 2019 was primarily
based on the utilization of $370,500 in advances to COWA Science Corporation, net of repayments, and the loss for the nine months
ended September 30, 2019, partially offset by the increase in stock-based compensation (non-cash item), along with increases in
accounts payable and accrued payroll.
Net cash provided by investing activities
for the nine months ended September 30, 2020 and 2019 was $0 and $90,983, respectively.
Net cash provided by financing activities
for the nine months ended September 30, 2020 and 2019 was $716,592 and $1,271,300, respectively. During the nine months ended September
30, 2020, these funds were derived mainly from proceeds related to the issuance of convertible and non-convertible notes. During
the nine months ended September 30, 2019, net cash provided by financing activities was derived from the issuance of convertible
notes, advances, sales of preferred shares, and exercise of warrants.
Capital Resources
As of September 30, 2020, the Company had
cash of $650 and working capital deficit (current liabilities in excess of current assets) of $83,791,130. During the nine months
ended September 30, 2020, net cash used in operating activities was $717,062. These conditions raise substantial doubt about our
ability to continue as a going concern for one year from the issuance of the condensed consolidated financial statements. Our primary
source of operating funds since inception has been cash proceeds from the public and private placements of our securities, including
debt securities, and proceeds from the exercise of warrants and options. We have experienced net losses and negative cash flows
from operations since inception and expect these conditions to continue for the foreseeable future. For
the foreseeable future, our ability to continue our operations is dependent upon our ability to obtain additional capital through
public or private equity offerings, debt financings or other sources; however, financing may not be available to us on acceptable
terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our
ability to pursue our business strategy and we may be forced to curtail or cease operations.
Management’s plans regarding these
matters encompass the following actions: 1) obtain funding from new and current investors to alleviate our working capital deficiency;
and 2) implement a plan to generate revenues. Our continued existence is dependent upon our ability to translate our audience into
revenues. However, the outcome of our plans cannot be determined with any degree of certainty.
Accordingly, the accompanying
condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America, 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 condensed consolidated financial statements are
issued. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily
purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did not have
any off-balance sheet arrangements.
Contractual Obligations
Our contractual obligations are included
in our notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q.
To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet
future requirements, we will be required to obtain additional funds through equity or debt financings. No assurance can be given
that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.
Critical Accounting Policies and Estimates
For a discussion of our accounting policies
and related items, please see the notes to the condensed consolidated financial statements, included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.