The accompanying notes are an integral part of these consolidated financial statements.
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, 2020 and 2019
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, 2020, the Company had cash
of $1,485 and a working capital deficit (current liabilities in excess of current assets) of $37,623,852. During the year ended December
31, 2020, the net loss available to common stockholders was $111,623,487 and net
cash used in operating activities was $1,037,843. These conditions raise substantial doubt about the Company’s ability to continue
as a going concern for one year from the issuance of the audited consolidated financial statements.
During the year ended December 31, 2020, the Company
received proceeds of $637,000, $132,911, and $321,000 from the issuance of convertible notes, non-convertible notes, and Series X preferred
shares, 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.
Accordingly, the accompanying
audited 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 consolidated financial statements are issued.
The carrying amounts of assets and liabilities presented in the audited consolidated financial statements do not necessarily purport to
represent realizable or settlement values. The audited 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 2021. As of the date of this Annual Report on Form 10-K, 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 2021.
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The 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.
Emerging Growth Company
We are an “emerging
growth company” under the JOBS Act. For as long as we are an “emerging growth company,” we are not required to: (i)
comply with any new or revised financial accounting standards that have different effective dates for public and private companies until
those standards would otherwise apply to private companies, (ii) provide an auditor’s attestation report on management’s assessment
of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (iii) comply with
any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory audit firm rotation
or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit
and the financial statements of the issuer or (iv) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the
SEC determines otherwise. However, we have elected to “opt out” of the extended transition period discussed in (i) and will
therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards are required
for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period
for compliance with new or revised accounting standards is irrevocable.
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 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.
Cash
For purposes of the 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 December 31, 2020 and 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 December 31, 2020 and 2019, the uninsured
balances amounted to $0.
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.
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.
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.
Advertising
The Company charges the costs of advertising to expense as incurred.
Advertising costs were $58,961 and $29,764 for the year ended December 31, 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.
Beneficial Conversion Features and Deemed Dividends
The Company records a beneficial conversion feature
for preferred stock when, on the date of issuance, the conversion rate is less than the Company’s stock price. The Company also
records, when necessary, a contingent beneficial conversion resulting from price protection of the conversion price of preferred stock,
based on the change in the intrinsic value of the conversion options embedded in such preferred stock.
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; (iii) the settlement of warrant provisions, based
on the fair value of the common shares issued; and (iv) amortization of discount on preferred stock resulting from recognition of a beneficial
conversion feature.
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 December 31, 2020 and 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.
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 year ended December 31, 2020 and 2019 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,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Common shares issuable upon conversion of convertible notes
|
|
|
2,562,481,459
|
|
|
|
3,697,833,022
|
|
Options to purchase common shares
|
|
|
27,621,765
|
|
|
|
27,621,765
|
|
Warrants to purchase common shares
|
|
|
2,521,077,555
|
|
|
|
3,342,376,365
|
|
Common shares issuable upon conversion of preferred stock
|
|
|
6,709,317,940
|
|
|
|
-
|
|
Total potentially dilutive shares
|
|
|
11,820,498,719
|
|
|
|
7,067,831,152
|
|
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 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
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 – INVESTMENTS
As of December 31, 2020 and
2019, the carrying value of our investments in privately held companies totaled $0 and $0, 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 year 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 year 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 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.
On February 24, 2020, the Company terminated the
Agreement and Plan of Merger by and among the Company, Merger Subsidiary, COWA and Christopher Alameddin.
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, 2020
and December 31, 2019 is summarized as follows:
|
|
December 31,
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 years ended December
31, 2020 and 2019 was $0 and $6,720, respectively.
NOTE 7 – SOFTWARE COSTS
In January 2018, MassRoots entered into a Master
Services Agreement with MEV, LLC (“MEV”) pursuant to which MEV will assist with the development and servicing of the Company’s
technology platform, including its mobile applications, business portal and WeedPass. MassRoots has capitalized the billable costs of
engineers that were devoted to building the system and developing additional features that enhanced its ability to generate revenue. MassRoots
did not capitalize any costs associated with maintenance, user-testing, analysis and planning of the system. The Company has been amortizing
these capitalized costs using a straight-line methodology over five years, since July 5, 2018.
During fiscal year 2018, MassRoots paid MEV $521,839
with respect to the development and maintenance of its platform, of which MassRoots capitalized $260,565 in development costs.
During the year ended December 31, 2020 and 2019,
MassRoots incurred amortization of software costs of $0 and $38,549, respectively. During the same period, MassRoots incurred impairment
of software costs of $0 and $196,315, respectively.
NOTE 8 – ADVANCES,
NON-CONVERTIBLE NOTES PAYABLE AND PPP NOTE PAYABLE
During the year ended December 31, 2020 and 2019,
the Company received aggregate proceeds from advances of $3,696 and $0, received forgiveness of advances for $250,000 and $0, and repaid
an aggregate of $3,009 and $595,000, respectively. Included in the year ended December 31, 2020 were $3,696 of advances from and $509
of repayments to the Company’s Chief Executive Officer (See Note 18). The remaining 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 December 31, 2020 and 2019, the Company owed $88,187 and $337,500 in principal and $0 and $10,500
in accrued interest, respectively.
During the year ended December 31, 2020 and 2019,
the Company received proceeds from the issuance of non-convertible notes of $82,911and $175,000 and repaid an aggregate of $39,641 and
$45,400, 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. On April 17, 2020, the outstanding principal balance of $23,500
and accrued interest of $17,281 on non-convertible notes held by one holder was consolidated into a new non-convertible note with a face
value of $79,000, resulting in a loss on debt settlement of $38,219. As of December 31, 2020 and 2019, the Company owed $269,520 and $115,750
in principal and $251,612 and $117,924 in accrued interest, respectively.
On May 4, 2020, the Company received proceeds
of $50,000 from a PPP note. The note has a maturity date of May 4, 2020 and bears 1% interest per annum. As of December 31, 2020,
the Company owed $50,000 in principal and $330 in accrued interest on this note.
NOTE 9 – ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
As of December 31, 2020 and 2019, the Company
owed accounts payable and accrued expenses of $4,948,890 and $5,455,063, respectively. These are primarily comprised of payments to vendors,
accrued interest on debt, 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, 2019, and 2020. As of December
31, 2020 and 2019, the Company owed payroll tax liabilities, including penalties, of $3,864,055 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 June 30, 2021.
NOTE 11 – COMMITMENTS AND CONTINGENCES
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.
Power Up Lending Group, Ltd. Complaint
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 Up’s 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. On February 9, 2021,
a motion for default judgment was granted and the default judgment in the total amount of $350,551.10 was entered against the Company
and Mr. Dietrich jointly and severally.
Sheppard Mullin’s Demand for Arbitration
On December 1, 2020, Sheppard, Mullin, Richter
& Hampton LLP (“Sheppard Mullin”), the Company’s former securities counsel, filed a demand for arbitration at JAMS
in New York, New York against the Company, alleging the Company’s breach of an engagement agreement dated January 4, 2018, and a
failure of the Company to pay $487,390.73 of outstanding legal fees to Sheppard Mullin. Sheppard Mullin seeks to collect the entirety
of the amount owed by the Company in accordance with said engagement agreement.
Rother Investments’ Petition
On October 28, 2020, Rother Investments, LLC (“Rother
Investments”) filed a complaint in the District Court of 419th Judicial District, Travis County, Texas against the Company, alleging the
Company’s default under a certain promissory note (the “Rother Investments Note”) in payment of the outstanding principal
amount and interest under the Note, as described in the complaint. Rother Investments seeks to collect the amount of $124,750.00 as of
the date of the complaint with late fees continuing to accrue on a daily basis, monetary relief of over $100,000 but not more than $200,000.00
pursuant to Tex. R. Civ. P. 47(c)(3), court’s costs and attorney’s fees, pre-judgment and post-judgment interest, and such
other relief as the court deems appropriate.
Trawick’s Complaint
On or about January 25, 2021, Travis Trawick (“Trawick”)
filed a complaint against the Company and Isaac Dietrich, an officer and director of the Company, in the Circuit Court for the City of Virginia Beach,
Virginia, asserting the Company’s failure to remit payments under the certain promissory note, as subsequently amended and
modified, and ancillary documents thereto (collectively, the “Note”), and Mr. Dietrich’s failure to fulfill its obligations,
as the guarantor, under the Note. Trawick demands a judgment in his favor in the amount exceeding $130,336.15, the exact amount to be
proven at trial including pre and post-judgment interest, reasonable attorneys’ fees, court costs, other taxable costs, and such
other relief as the court deems appropriate.
NOTE 12 – 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.
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) 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 year ended December 31, 2020, (i) the noteholder converted $37,000 of principal into an aggregate of 31,109,551
shares of common stock; and (ii) $1,049,329 of accrued interest was reclassified to the principal balance of this note. As of December
31, 2020 and 2019, the remaining carrying value of the note was $2,892,330 and $1,880,000, respectively, net of debt discount of $0. As
of December 31, 2020 and 2019, accrued interest payable of $1,073,809 and $1,327,110, respectively, was outstanding on the note.
On
January 25, 2019, the Company issued a convertible promissory note in the principal amount of $55,000 (including original issuance discount
of $5,000) that matured July 25, 2019 and bearing a one-time interest fee of 10%. 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 $0.075 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%. As of December 31, 2020 and 2019, the remaining carrying value of the notes
was $55,000 and $50,000, net of debt discount of $0 and $5,000, respectively. As of December 31, 2020 and 2019, accrued interest payable
of $92,600 and $40,219, respectively, was outstanding on the note. During the quarter ended December 31, 2020, this note was included
in convertible notes payable on the consolidated balance sheet whereas it had been previously included in non-convertible notes payable.
The accompanying balance sheet for December 31, 2019 has been adjusted to reflect the reclassification of this 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) 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 year ended December 31, 2020, one of the holders converted $24,826
of principal into an aggregate of 35,005,850 shares of common stock; and one of the holders converted $168,820 of principal and $362,027
of accrued interest into 26.54237 shares of Series Y preferred shares having a stated value of $530,847, resulting in a reduction of the
derivative liability by $719,416 and a gain on settlement of $719,416. As of December 31, 2020 and 2019, the remaining carrying value
of the notes was $164,174 and $247,746, net of debt discount of $0 and $110,074, respectively. As of December 31, 2020 and 2019, accrued
interest payable of $1,191,998 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%. During the year ended December 31, 2020, two of the holders converted $72,600 of principal and $112,671 of accrued
interest into 9.26353 shares of Series Y preferred shares having a stated value of $185,271, resulting in a reduction of the derivative
liability by $301,257 and a gain on settlement of $301,257. As of December 31, 2020 and 2019, the remaining carrying value of the notes
was $36,300 and $14,871, net of debt discount of $0 and $94,029, respectively. As of December 31, 2020 and 2019, accrued interest payable
of $57,231 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%. During the year ended December 31, 2020, the holders converted $110,000 of principal and $123,451 of accrued
interest into 11.67255 shares of Series Y preferred shares having a stated value of $233,451, resulting in a reduction of the derivative
liability by $379,600 and a gain on settlement of $379,600. As of December 31, 2020 and 2019, the remaining carrying value of the notes
was $0 and $15,027, net of debt discount of $0 and $94,973, respectively. As of December 31, 2020 and 2019, accrued interest payable of
$0 and $38,904, respectively, 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 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 year ended December 31, 2020, the noteholders converted $31,137 of principal
and $128 of accrued interest into an aggregate of 6,253,056 shares of common stock; and the noteholders converted $4,793,113 of principal
and $2,564,325 of accrued interest into 367.8719 shares of Series Y preferred shares having a stated value of $7,357,438, resulting in
a reduction of the derivative liability by $89,648,951 and a gain on settlement of $89,648,951. As of December 31, 2020 and 2019, the
remaining carrying value of the notes was $38,500 and $4,781,395, net of debt discount of $0 and $81,355, respectively. As of December
31, 2020 and 2019, accrued interest payable of $54,473 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%. During the year ended December 31, 2020, the noteholders converted
$700,700 of principal and $462,763 of accrued interest into 58.17315 shares of Series Y preferred shares having a stated value of $1,163,463,
resulting in a reduction of the derivative liability by $1,885,194, a reduction in debt discount by $72,637 and a gain on settlement of
$1,812,557. As of December 31, 2020, the remaining carrying value of the notes was $0, net of debt discount of $0. As of December 31,
2020, accrued interest payable of $13,844 was outstanding on the notes.
On
December 15, 2020, $79,143 of accrued compensation owed to the Company’s Chief Financial Officer was settled by the issuance of
a convertible note in the amount of $64,143, having a maturity date of June 15, 2021 and bearing interest of 12% per annum, resulting
in a gain on settlement of accounts payable of $15,000. The holder 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 $0.0003 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. As a result of the beneficial conversion feature of the note, debt discount
of $64,143 was recognized with a corresponding increase in additional paid-in capital. On December 24, 2020, the holder converted $64,143
of principal into 3.20716 shares of Series Y preferred shares having a stated value of $64,143, resulting in a reduction in debt discount
by $60,971 and a loss on settlement of $60,971. As of December 31, 2020, the remaining carrying value of the note was $0, net of debt
discount of $0. As of December 31, 2020, accrued interest payable of $0 was outstanding on the note (See Note 18).
As of December 31, 2020
and 2019, the remaining carrying value of the convertible notes was $3,186,303 and $6,989,039, net of debt discount of $0 and $380,431,
respectively. As of December 31, 2020 and 2019, accrued interest payable of $2,483,955 and $3,495,717, respectively, 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 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.
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.
During the
year ended December 31, 2020, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately
prior to conversion of the underlying instrument), 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 128.94%, (3) risk-free
interest rate of 0.06% to 1.56%, and (4) expected life of 0.06 to 2.11 years.
On December 31, 2020, the Company estimated
the fair value of the embedded derivatives of $25,475,514 using the Black-Scholes Pricing Model based on the following assumptions: (1)
dividend yield of 0%, (2) expected volatility of 132.11%, (3) risk-free interest rate of 0.08% to 0.13%, and (4) expected life of 0.04
to 2.08 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, 2020,
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, 2020 and 2019:
|
|
December 31,
2020
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liability
|
|
$
|
25,475,514
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,475,514
|
|
|
|
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
|
|
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, 2020:
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
|
|
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions
|
|
|
573,230
|
|
Transfers out due to conversions of convertible notes and accrued interest into common shares
|
|
|
(278,545
|
)
|
Transfers out due to conversions of convertible notes, accrued interest and warrants into Series Y preferred shares
|
|
|
(165,826,982
|
)
|
Derivative liability due to authorized shares shortfall
|
|
|
170,319,590
|
|
Mark to market to December 31, 2020
|
|
|
451,351
|
|
Balance, December 31, 2020
|
|
$
|
25,4754,514
|
|
|
|
|
|
|
Loss on change in derivative liabilities for the year ended December 31, 2020
|
|
$
|
(451,351
|
)
|
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 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, 2020 and 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, 2020 and
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, 2020 and
2019, there were 1,000 shares of Series C Preferred Stock outstanding.
On November 23, 2020, the
Company authorized the issuance of 100 shares of Series X Preferred Stock, par value $0.0001 per share. The Series X Preferred Stock has
a $20,000 stated value and is convertible into shares of common stock at $0.002 per share, subjected to certain adjustments. In the event
the Company issues or sells any securities with an effective price or exercise or conversion price less than the Conversion Price, the
Conversion Price shall be reduced to the sale price or exercise or conversion price of the securities issued or sold. The Certificate
of Designation for the Series X Preferred Stock was filed on November 23, 2020.
From November 25 to December
23, 2020, the Company issued an aggregate of 16.05 shares of Series X Preferred Stock for aggregate proceeds of $321,000. Upon each issuance
of Series X shares, the conversion price was less than the Company’s stock price. Accordingly, during the year ended December 31,
2020, the Company recognized an aggregate beneficial conversion feature of $454,200 upon issuance of the Series X preferred shares. The
resulting amortization of the preferred stock discount of $46,448 is recognized as a deemed dividend in the accompanying statement of
operations. The preferred stock discount is being amortized over 120 days, which is the maximum amount of time the Company has to conduct
a stockholder vote to increase the Company’s authorized shares.
As of December 31, 2020 and
2019, there were 16.05 and 0 shares, respectively, of Series X Preferred Stock outstanding.
On December 30, 2020, the
Company authorized the issuance of 1,000 shares of Series Y Preferred Stock, par value $0.001 per share. The Series Y Preferred Stock
has a $20,000 stated value and is convertible into shares of common stock at $0.002 per share, subjected to certain adjustments. In the
event the Company issues or sells any securities with an effective price or exercise or conversion price less than the Conversion Price,
the Conversion Price shall be reduced to the sale price or exercise or conversion price of the securities issued or sold. The Certificate
of Designation for the Series Y Preferred Stock was filed on December 30, 2020.
From December 23 to December
30, 2020, the Company issued 654.781794 shares of Series Y Preferred Stock, having a stated value of $13,095,636, in exchange for convertible
notes payable of $5,775,767 (net of debt discount of $133,608), accrued interest of $3,625,237, and 14,765,624,721 warrants. The exchanges
resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $92,934,419, a reduction of
derivative liabilities related to the warrants of $72,892,563, and a net gain on settlement of $162,132,350. Included in the foregoing
amounts is 3.20716 shares of Series Y Preferred Stock, having a stated value of $64,143, issued to the Company’s Chief Financial
Officer, in exchange for convertible notes of $3,172 (net of debt discount of $60,971), resulting in a loss on settlement of $60,971.
Upon each issuance of Series Y shares, the conversion price was less than the Company’s stock price. Accordingly, during the year
ended December 31, 2020, the Company recognized an aggregate beneficial conversion feature of $21,594,115 upon issuance of the Series
Y preferred shares. The resulting amortization of the preferred stock discount of $1,028,091 is recognized as a deemed dividend in the
accompanying statement of operations. The preferred stock discount is being amortized over 120 days, which is the maximum amount of time
the Company has to conduct a stockholder vote to increase the Company’s authorized shares.
As of December 31, 2020,
there were 626.995464 shares of Series Y Preferred Stock outstanding and 27.786334 shares to be issued.
Common Stock
The Company is authorized to issue 500,000,000
shares of common stock, par value $0.001 per share.
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.
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 year ended December
31, 2020, a warrant exercise in 2019, to purchase 120,000 common shares, was rescinded. The rescission was recorded as a decrease in common
stock to be issued of $120 and a decrease in additional paid-in capital of $5,880 with a corresponding increase in accounts payable and
accrued expenses of $6,000.
During the year ended December 31, 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.
As of December 31, 2020 and 2019, there were 493,726,405
and 384,266,948 shares, respectively, of common stock issued and outstanding.
NOTE 15 – WARRANTS
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.
During the year ended December 31, 2019, 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.
From December 23 to December
30, 2020, the Company issued 654.78 shares of Series Y Preferred Stock, having a stated value of $13,095,636, in exchange for convertible
notes payable of $5,775,767 (net of debt discount of $133,608), accrued interest of $3,625,237, and 14,764,624,721 warrants. The exchanges
resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $92,934,419, a reduction of
derivative liabilities related to the warrants of $72,892,563, and a net gain on settlement of $162,132,350.
During the year ended December 31, 2020, the Company
recorded $95,838,488 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 $95,838,488 with a corresponding decrease in the accumulated deficit.
A summary of the warrant activity for the years
ended December 31, 2020 and 2019 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
74,910,002
|
|
|
$
|
0.14
|
|
|
|
3.89
|
|
|
$
|
-
|
|
Granted
|
|
|
3,321,040,292
|
|
|
$
|
0.00064
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(15,367,659
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
Canceled/Exchanged
|
|
|
(38,206,270
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
3,342,376,365
|
|
|
$
|
0.00265
|
|
|
|
2.96
|
|
|
$
|
8,791,956
|
|
Granted
|
|
|
13,943,650,911
|
|
|
$
|
0.00040
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled/Exchanged
|
|
|
(14,764,949,721
|
)
|
|
$
|
0.00042
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
2,521,077,555
|
|
|
$
|
0.00109
|
|
|
|
2.04
|
|
|
$
|
14,804,944
|
|
Exercisable at December 31, 2020
|
|
|
2,521,077,555
|
|
|
$
|
0.00109
|
|
|
|
2.04
|
|
|
$
|
14,804,944
|
|
Exercise Price
|
|
Warrants
Outstanding
|
|
|
Weighted Avg.
Remaining Life
|
|
|
Warrants
Exercisable
|
|
$0.0001 – 0.25
|
|
|
2,520,512,553
|
|
|
|
2.04
|
|
|
|
2,520,512,553
|
|
0.26 – 0.50
|
|
|
465,002
|
|
|
|
0.68
|
|
|
|
465,002
|
|
0.51 – 0.75
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
0.76 – 1.00
|
|
|
100,000
|
|
|
|
0.04
|
|
|
|
100,000
|
|
|
|
|
2,521,077,555
|
|
|
|
2.04
|
|
|
|
2,521,077,555
|
|
The aggregate intrinsic value
of outstanding stock warrants was $14,804,944, based on warrants with an exercise price less than the Company’s stock price of $0.0063
as of December 31, 2020 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 (the “2016 Plan”) in October 2016, our 2017 Equity Incentive Plan in December 2016 (the “2017
Plan” and together with the 2014 Plan, 2015 Plan, the 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, 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 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.
The Company estimates the
fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such
as the expected option term, expected volatility of the Company’s stock price over the expected term, expected risk-free interest
rate over the expected option term and expected dividend yield rate over the expected option term. The Company believes this valuation
methodology is appropriate for estimating the fair value of stock options granted. These amounts are estimates and thus may not be reflective
of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line
basis over the requisite service period for each award.
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.
A summary
of the Company’s stock option activity during the year ended December 31, 2019, is presented below:
Exercise
Price
|
|
|
Number of
Options
|
|
|
Vesting Terms
|
$
|
0.075
|
|
|
|
250,000
|
|
|
Immediately
|
There were no options issued during the year ended December 31, 2020.
A summary of the stock option activity for the
years ended December 31, 2020 and 2019 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
27,371,765
|
|
|
$
|
0.50
|
|
|
|
8.42
|
|
|
$
|
-
|
|
Granted
|
|
|
250,000
|
|
|
$
|
0.075
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture/Cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
7.49
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture/Cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
6.49
|
|
|
$
|
-
|
|
Exercisable at December 31, 2020
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
6.49
|
|
|
$
|
-
|
|
Exercise Price
|
|
Number of
Options
|
|
|
Remaining Life
In Years
|
|
|
Number of Options
Exercisable
|
|
$0.01 – 0.25
|
|
|
13,306,786
|
|
|
|
7.26
|
|
|
|
13,306,786
|
|
0.26 - 0.50
|
|
|
1,939,631
|
|
|
|
6.26
|
|
|
|
1,939,631
|
|
0.51 – 0.75
|
|
|
1,820,112
|
|
|
|
5.68
|
|
|
|
1,820,112
|
|
0.76 - 1.00
|
|
|
9,926,072
|
|
|
|
5.70
|
|
|
|
9,926,072
|
|
1.01 - 2.00
|
|
|
629,164
|
|
|
|
5.60
|
|
|
|
629,164
|
|
|
|
|
27,621,765
|
|
|
|
|
|
|
|
27,621,765
|
|
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 $0.0063 as of
December 31, 2020, which would have been received by the option holders had those option holders exercised their options as of that date.
The fair value of all options that were vested
as of the year ended December 31, 2020 and 2019 was $0 and $14,000, respectively. Unrecognized compensation expense
of $0 as of December 31, 2020 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, 2020, the Company has available for income
tax purposes of approximately $69,757,321 in federal and $56,394,019 in Colorado state net operating loss carry forward. 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, 2020,
the Company has increased the valuation allowance from $17,520,829 to $18,379,120.
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, 2020
and 2019 consist of the following:
|
|
2020
|
|
|
2019
|
|
Deferred Tax Assets/(Liability) Detail
|
|
|
|
|
|
|
|
|
Stock Compensation
|
|
$
|
52,313
|
|
|
$
|
-
|
|
Amortization
|
|
|
156,072
|
|
|
|
-
|
|
Depreciation
|
|
|
1,180
|
|
|
|
-
|
|
Interest
|
|
|
1,213,854
|
|
|
|
-
|
|
Change in Fair Market Value of Derivative Liabilities
|
|
|
279,582
|
|
|
|
-
|
|
NOL DTA
|
|
|
16,676,120
|
|
|
|
17,520,826
|
|
Valuation allowance
|
|
|
(18,379,120
|
)
|
|
|
(17,520,826
|
)
|
Total gross deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
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.
|
|
2020
|
|
|
2019
|
|
Expected tax at statutory rates
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
Nondeductible Expenses
|
|
|
(11.72
|
)%
|
|
|
(11.00
|
)%
|
State Income Tax, Net of Federal benefit
|
|
|
1.59
|
%
|
|
|
5.00
|
%
|
Current Year Change in Valuation Allowance
|
|
|
(5.83
|
)%
|
|
|
(15.00
|
)%
|
Prior Deferred True-Ups
|
|
|
(5.03
|
)%
|
|
|
-
|
|
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.
During the year ended December 31, 2020, the Company
received aggregate advances of $3,696 and repaid an aggregate of $509 to the Company’s Chief Executive Officer. The advances are
non-interest bearing and due on demand. As of December 31, 2020, the Company owed $3,187 in advances to the Company’s Chief Executive
Officer (See Note 8).
On December 15, 2020, the Company
entered into a settlement agreement (the “Settlement Agreement”) with JDE Development, LLC (“JDE”), a Florida
limited liability company wholly-owned and managed by Jesus Quintero, the Company’s former Chief Financial Officer, in connection
with the outstanding sum of $89,143 due to JDE for the services of Jesus Quintero as the Chief Financial Officer of the Company pursuant
to that certain CFO Services Agreement entered into as of April 1, 2018, by and between the Company and Jesus Quintero. Pursuant to the
Settlement Agreement, the Company agreed to pay JDE $25,000 (the “Cash Settlement”) and to enter into a convertible note with
JDE in the principal amount of $64,143 (the “Note”). In addition, both parties agreed, on behalf of themselves, their past
and present shareholders, members, directors, employees, managers, parents, affiliates, subsidiaries, principals, officers, related entities,
assigns and successors, to irrevocably and fully release each other, and their respective past and present shareholders, members, directors,
employees, managers, parents, affiliates, subsidiaries, principals, officers, related entities, assigns and successors, from any and all
claims and causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever at
law or in equity, upon or by reason of any matter, cause or thing of any nature whatsoever, including but not limited to claims related
to sums payable by the Company to JDE. In accordance with the Settlement Agreement, (i) on December 23, 2020, the Company paid JDE the
Cash Settlement, and (ii) on December 15, 2020, the Company entered into the Note with JDE for a principal amount of $64,143. The Note
had a maturity date of June 15, 2021 and accrued interest at a rate of 12% per annum. The holder
has 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 $0.0003 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 shares of Series Y
Preferred Stock are not convertible to the extent that (i) the Company’s Certificate of Incorporation has not been amended to increase
the number of authorized shares of Common Stock of the Company, or (ii) the holder (together with such holder’s affiliates) would
beneficially own in excess of 4.99% of the shares of Common Stock outstanding immediately after giving effect to such conversion (which
provision may be increased to a maximum of 9.99% by the holder by written notice from such holder to the Company, which notice shall be
effective 61 calendar days after the date of such notice). As a result of the beneficial conversion
feature of the Note, debt discount of $64,143 was recognized with a corresponding increase in additional paid-in capital. On December
24, 2020, the holder converted $64,143 of principal into 3.20716 shares of Series Y preferred shares having a stated value of $64,143,
resulting in a reduction in debt discount by $60,971 and a loss on settlement of $60,971. As of December 31, 2020, the remaining carrying
value of the Note was $0, net of debt discount of $0. As of December 31, 2020, accrued interest payable of $0 was outstanding on the Note
(See Note 12).
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 21, 2021, MassRoots issued 4,448,251
shares of common stock for the settlement of $13,345 in convertible debt and accrued interest.
From February 16 to March 16, 2021, MassRoots
received proceeds of $200,000 for the sale of 10 shares of Series X Preferred Stock.
From January 7 to March 25, 2021, MassRoots exchanged
$35,000 in convertible debt, $60,444 in accrued interest, and warrants to purchase 131,249,975
shares of common stock at $0.0004/share into 4.82388 shares of
Series Y Preferred Stock.
On March 17, 2021, MassRoots issued 27.78633
shares of Series Y Preferred Stock that were recorded as to be issued as of December 31, 2020.
F-27