NOTE
2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As of March 31, 2018,
the Company had cash of $674,776 and working capital deficit (current liabilities in excess of current assets) of $1,461,669. During
the three months ended March 31, 2018, the Company used net cash in operating activities of $3,535,373. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial
statements.
During the three months
ended March 31, 2018, the Company received approximately $63,000, $3,304,000 and $397,500 from the exercise of common stock warrants,
sale of common stock and proceeds from advances, respectively. The Company does not have cash sufficient to fund operations for
the next fiscal year. These conditions raise substantial doubt about the Company’s ability to continue as a going concern
for one year from the issuance of the financial statements.
The
Company’s primary source of operating funds since inception has been cash proceeds from private placements of common stock,
proceeds from the exercise of warrants and options and issuance of notes payable. The Company has experienced net losses and negative
cash flows from operations since inception and expects these conditions to continue for the foreseeable future. The Company will
require additional financing to fund future operations.
Management’s plans with regard to these
matters encompass the following actions: 1) obtain funding from new and current investors to alleviate the Company’s working
capital deficiency; and 2) implement a plan to generate sales. The Company’s continued existence is dependent upon its ability
to translate its user base into sales. However, the outcome of management’s plans cannot be ascertained with any degree of
certainty.
Accordingly,
the accompanying condensed, consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates
continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the condensed, consolidated financial statements do not
necessarily purport to represent realizable or settlement values. The condensed, consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The accompanying interim unaudited condensed,
consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the
instructions to SEC Form 10-Q and Article 10 of Regulation S-X of the Securities Act of 1933, as amended, and reflect the accounts
and operations of the Company and those of our subsidiaries.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
All intercompany accounts and transactions
have been eliminated in consolidation. Accordingly, the accompanying interim unaudited condensed, consolidated financial statements
do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated
financial position of the Company as of March 31, 2018, the unaudited condensed, consolidated results of operations for the three
months ended March 31, 2018 and 2017, and the unaudited condensed, consolidated results of cash flows for the three months ended
March 31, 2018 and 2017 have been included. These interim unaudited condensed, consolidated financial statements do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in
conjunction with the consolidated financial statements and related notes contained in the Company’s most recent Annual Report
on Form 10-K filed with the SEC on April 17, 2018, as amended on April 30, 2018. The December 31, 2017 balances reported herein
are derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2017, filed with the SEC on April 17, 2018, as amended on April 30, 2018. The results for the interim periods
are not necessarily indicative of results to be expected for the full year.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates include stock-based compensation,
fair values relating to derivative liabilities and the valuation allowance related to deferred tax assets. Actual results may
differ from these estimates.
Fair
Value of Financial Instruments
Accounting Standards
Codification (“ASC”) subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair
value of certain financial instruments. The carrying value of cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities as reflected in the balance sheets, approximate fair value because of the short-term maturity of these
instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized
or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future
cash flows, interest rate risk and credit risk.
The
Company follows ASC 825-10, which permits entities to choose to measure many financial instruments and certain other items at
fair value.
Cash
and Cash Equivalents
For
purposes of the Statement of Cash Flows, the Company considers highly liquid investments with an original maturity of three months
or less to be cash equivalents.
Property
and Equipment
Property
and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.
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.
Acquisitions
and Subsidiaries
Subsidiaries are all
entities over which MassRoots has the power to govern the financial and operating policies generally accompanying a shareholding
of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether MassRoots’ controls another entity. Subsidiaries are fully consolidated
from the date on which control is transferred to MassRoots.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
The
purchase method of accounting is used to account for the acquisition of subsidiaries by MassRoots. The cost of an acquisition
is measured as the fair value of the assets transferred in consideration, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities
and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the MassRoots’
share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
Intercompany transactions, balances and
unrealized gains on transactions between MassRoots’ companies are eliminated. Unrealized losses are also eliminated unless
the transaction provides evidence of an impairment of the asset transferred.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $64,577 and $193,431, as advertising expenses
for the three months ended March 31, 2018 and 2017, respectively.
Stock
Based Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of
the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete.
The fair value amount is then recognized over the period during which services are required to be provided in exchange for the
award, usually the vesting period.
Long-Lived
Assets
The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Intangible assets are stated at cost and reviewed annually to examine any impairments, usually assuming an estimated useful lives
of 3 to 5 years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from
the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
Indefinite
Lived Intangibles and Goodwill Assets
The
Company accounts for business combinations under the purchase acquisition method of accounting in accordance with ASC 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and
liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available,
and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset
valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the
tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The
Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events
or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
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 as of March 31, 2018 and 2017 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:
|
|
March
31,
2018
|
|
|
March
31,
2017
|
|
Common stock issuable
upon conversion of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
Options
to purchase common stock
|
|
|
15,371,765
|
|
|
|
16,688,942
|
|
Warrants
to purchase common stock
|
|
|
37,119,049
|
|
|
|
8,243,847
|
|
Totals
|
|
|
52,490,814
|
|
|
|
24,932,789
|
|
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
Financial
Accounting Standards Board (“FASB”) Accounting Standards Updates (“ASU”) 2017-04 (Topic 350), “Intangibles
- Goodwill and Others”
– Issued in January 2017, ASU 2017-04 simplifies how an entity is required to
test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss
by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04
is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. The Company
is currently evaluating the effect that ASU 2017-04 will have on our consolidated financial statements and related disclosures.
FASB ASU 2017-01
(Topic 805), “Business Combinations: Clarifying the Definition of a Business”
– Issued in January
2017, ASU 2017-01 revises the definition of a business and provides new guidance in evaluating when a set of transferred assets
and activities is a business. This guidance became effective for the Company on January 1, 2018. The Company believes the standard
did not have a material impact on its consolidated financial statements and related disclosures.
FASB
ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”
–
Issued in August 2016, the amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are
required to present a statement of cash flows under ASC Topic 230,
“Statement of Cash Flows”
. The amendments
in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company believes the standard did not have a material impact on our condensed, consolidated financial
statements and related disclosures.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
FASB
ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers”
– Issued in May 2014, ASU
2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step
model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued
ASU No. 2015-14,
“Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”
.
This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08,
“Principal
versus Agent Considerations (Reporting Gross versus Net)”,
which amends the principal versus agent guidance and
clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred
to the customer. In addition, the FASB issued ASU Nos. 2016-20,
“Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Customers”
and 2016-12,
“Narrow-Scope Improvements and Practical
Expedients”
, both of which provide additional clarification of certain provisions in Topic 606. These ASC updates are
effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted
only as of annual reporting periods after December 15, 2016. The standard permits the use of either the retrospective or cumulative
effect transition method.
The Company applied the
guidance using the modified retrospective transition method. The Company believes the adoption of ASU 2014-09 did not have a material
impact on the Company’s financial position or results of operations but resulted in additional disclosures regarding the
Company’s revenue recognition policies. Additionally, the Company has expanded its revenue recognition inquiries and update
its questionnaires primarily to identify matters that would signal variable consideration implications under the new guidance.
The Company also does not believe the adoption of ASU 2014-09 required material or significant changes to its internal controls
over financial reporting.
FASB
ASU No. 2014-15,
“Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern,
which is included in Accounting Standards Codification (ASC) 205, Presentation of Financial Statements” -
Issued
August 2014, this update provides an explicit requirement for management to assess an entity's ability to continue as an ongoing
concern, and to provide related footnote disclosures in certain circumstances.
The amendments are
effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after
December 15, 2016. The Company has adopted this standard, included the necessary disclosures in the footnotes to its
financial statements, and does not believe such adoption has had a material impact on its financial statements.
FASB ASU 2016-02,
Leases (Topic 842)
- ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months
or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets
and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the
earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU
2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application
is permitted for all public business entities and all nonpublic business entities upon issuance. The adoption of this standard
is not expected to have a material impact on the Company’s financial position and results of operations.
FASB
ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”
- The amendment is part
of the FASB’s simplification initiative and is intended to simplify the accounting around share-based payment award transactions.
The amendments include changing the recording of excess tax benefits from being recognized as a part of surplus capital to being
charged directly to the income statement, changing the classification of excess tax benefits within the statement of cash flows,
and allowing companies to account for forfeitures on an actual basis, as well as tax withholding changes. The amendments in this
update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal
years. The adoption of this standard has not had a material impact on the Company’s financial position and results of operations.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
FASB
issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
–
Adopted in November 2016, this ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown
in the statement of cash flows include cash and restricted cash equivalents. This ASU is effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this
standard did not have a material impact on the Company’s financial position and results of operations.
FASB
Issued ASU No. 2014-09, (“ASU 606”), Revenue from Contracts with Customers
– In May 2014, the FASB
issued ASU 2014-09,
“Revenue from Contracts with Customers
”. The FASB also issued subsequent
amendments to ASU 2014-09 to provide clarification on the guidance. ASU 2014-09 will be effective for annual periods
beginning after December 15, 2017, which for us will be in the period beginning January 1, 2018. We have performed our
detailed evaluation, using a five-step model specified in the guidance, to assess the impacts of the new standard.
|
●
|
Under
the new standard, revenue will be recognized when the Company satisfies its performance
obligation by transferring promised products or services to its customer. The standard
allows for application of the guidance to a portfolio of contracts or performance obligations
with similar characteristics.
|
|
●
|
The
Company’s revenue recognition will be achieved upon delivery of advertising and
listing services as there are no other promised services as part of the Company’s
contracts with customers.
|
|
●
|
To
determine the amount of consideration which the Company expects to be entitled in exchange
for transferring promised services, the Company has considered if variable consideration
exists. The Company has reviewed its standard terms and conditions and its customary
business practices to determine the transaction price. The Company has reviewed its pricing
policies and strategies including marketing, loyalty and incentive programs for determining
whether the Company has any variable or non-cash consideration. No material items were
noted.
|
|
●
|
The Company’s sales transactions do not require any additional performance obligation after delivery. Therefore,
the Company does not have multiple performance obligations for which the Company will have to allocate the transaction price.
|
|
●
|
The
Company expects to recognize revenue upon delivery to the customer as its performance
obligation will be satisfied at that point in time.
|
The Company expects to apply the guidance using
the modified retrospective transition method. Based on the Company’s analysis performed to date, the Company does not expect
the adoption of ASU 2014-09 will have a material impact on its financial position or results of operations but will result in additional
disclosures regarding its revenue recognition policies. Additionally, the Company has expanded its revenue recognition inquiries
and updated its questionnaires primarily to identify matters that would signal variable consideration implications and performance
obligations under the new guidance. The Company also does not expect the adoption will require material or significant changes
to its internal controls over financial reporting.
FASB issued ASU 2017-11, Earnings
Per Share (“ASC 260”), Distinguishing Liabilities from Equity (“ASC 480”), and Derivatives and
Hedging (“ASC 815”)
- Adopted in July 2017, A
SU No. 2017-11 is intended
to simplify the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed
are: (i) determining whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing
liabilities from equity for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily
redeemable non-controlling interests. The Company adopted ASU No. 2017-11 as of January 1, 2018. The adoption of ASU No. 2017-11
has eliminated the derivative liabilities from the Company’s financial statements.
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.
The Company implemented these standards using the modified retrospective transition method.
NOTE
4 – INVESTMENTS
As of March 31, 2018,
the carrying value of our investments in privately held companies totaled $403,249. These investments are accounted for as cost
method investments, as we own less than 20% of the voting securities and do not have the ability to exercise significant influence
over operating and financial policies of the entities.
During the twelve months ended December 31,
2017, the Company acquired 23,810 shares of Class A common stock of Hightimes Holding Corp. (“Hightimes”) for $100,002,
or $4.20 per share. As a result of a forward stock split which became effective on January 15, 2018, each one share of common stock
was exchanged for 1.93 shares of common stock. As a result of such forward stock split, MassRoots currently owns 45,974 shares of
Class A common stock of Hightimes. The shares of Class A common stock are considered non-marketable securities.
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 thereon automatically converts into equity securities of the same
class or series issued by Cannaregs in the equity financing 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 this note into 430,622 shares of CannaRegs’
common stock, or approximately 4.31% of CannaRegs’ issued and outstanding shares of March 31, 2018.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and equipment as of March 31, 2018 and December 31, 2017 is summarized as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Computers
|
|
$
|
56,900
|
|
|
$
|
55,244
|
|
Office
equipment
|
|
|
43,590
|
|
|
|
43,590
|
|
Subtotal
|
|
|
100,490
|
|
|
|
98,834
|
|
Less
accumulated depreciation
|
|
|
(53,915
|
)
|
|
|
(43,688
|
)
|
Property
and equipment, net
|
|
$
|
46,575
|
|
|
$
|
55,146
|
|
Depreciation expense for
the three months ended March 31, 2018 and 2017 was $10,226 and $5,776, respectively.
NOTE
6 – SOFTWARE COSTS
On December 15, 2016, the Company
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Whaxy Inc., a wholly-owned subsidiary of
the Company (“Merger Subsidiary”), DDDigtal Inc., a Colorado corporation (“DDDigtal”), Zachary Marburger,
an individual acting solely in his capacity as stockholder representative, and all of the stockholders of DDDigtal. Pursuant to
the Merger Agreement, the parties agreed to merge Merger Subsidiary with and into DDDigtal, whereby DDDigtal survived as a wholly-owned
subsidiary of MassRoots (the “Merger”).
On
January 25, 2017 (the “Effective Date”), the Merger was completed and became effective upon the filing of certificates
of merger with the respective Secretary of State of the States of Delaware and Colorado, in such forms as required by, and executed
in accordance with, the relevant provisions of the Delaware General Corporation Law and the Colorado Business Corporation Act.
Pursuant to the terms of the Merger Agreement,
each share of DDDigtal’s common stock was exchanged for such number of shares of the Company’s common stock (or a fraction
thereof), based upon an exchange ratio equal to approximately 5.273-for-1, such that 1 share of the Company’s common stock
was issued for every 5.273 shares of DDDigtal’s common stock.
On the Effective Date, the Company issued an
aggregate of 2,926,830 shares of the Company’s common stock pro rata to all stockholders of DDDigtal in exchange
for all of their shares of DDDigtal’s common stock. At the same time, each share of common stock of Merger Subsidiary was
converted into and exchanged for one share of common stock of DDDigtal held by the Company, and all shares of DDDigtal common stock
outstanding immediately prior to the Effective Date were automatically cancelled and retired. DDDigtal continued as a surviving
wholly-owned subsidiary of the Company, and Merger Subsidiary ceased to exist.
In addition, pursuant to the terms of the
Merger Agreement, in December 2016, the Company paid cash consideration in the amount of $40,000 to Zachary Marburger and $20,000
to Micah Davidson, as repayment of outstanding debts owed by DDDigtal to such individuals.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
As a condition to the closing of the Merger,
the Company hired Zachary Marburger as its Vice President of Strategy, and engaged Micah Davidson as a Senior Software Engineer.
As a condition of Mr. Marburger’s employment and pursuant to the terms of the Merger Agreement, the Company paid Mr. Marburger
an additional $40,000 following the one-year anniversary of his constant employment with the Company.
Cash
(paid in December 2016)
|
|
$
|
60,000
|
|
2,926,830
shares of the Company’s common stock
|
|
|
2,883,220
|
|
Liabilities
assumed
|
|
|
40,140
|
|
Total
purchase price
|
|
$
|
2,983,360
|
|
Cash
|
|
$
|
8,672
|
|
Accounts
receivable
|
|
|
3,583
|
|
Property
and equipment
|
|
|
3,333
|
|
|
|
|
|
|
Software
|
|
|
1,253,000
|
(1)
|
|
|
|
|
|
Goodwill
|
|
|
1,714,772
|
|
|
|
|
|
|
Assets
acquired
|
|
$
|
2,983,360
|
|
(1)
|
The estimated useful life for software development is assumed at 3 years. The acquisition was completed in January
2017, however the allocation of proceeds to identifiable assets was recognized during fourth quarter of 2017.
|
NOTE
7 – CONVERTIBLE NOTES PAYABLE
On August 17, 2017,
the Company issued secured convertible notes to certain accredited investors in the aggregate principal amount of $1,045,000. The
notes mature on February 18, 2018 and accrue no interest. The Company received net proceeds received of approximately $942,500
after deducting legal and other fees. If the Company exercises its right to prepay the notes, the Company shall make payment to
the investors in an amount equal to the sum of the then outstanding principal amount of the notes that the Company desires to prepay,
multiplied by (a) 1.1, during the first ninety days after the issuance of the note, or (b) 1.25, at any point thereafter. The notes
are convertible into shares of the Company’s common stock at a price per share equal to the lower of (i) $0.75 or (ii) a
25% discount to the price at which the Company next conducts an offering after the issuance date of the notes; provided, however,
if any part of the principal amount of the notes remains unpaid at its maturity date, the conversion price will be equal to 65%
of the average of the three trading days with the lowest daily weighted average prices of the Company’s common stock occurring
during the fifteen days prior to the notes’ maturity date.
In
connection with the issuance of the notes, the Company and the investors also entered into a security agreement pursuant to which
the notes are secured by all of the assets of the Company currently held or thereafter acquired.
In
connection with the issuance of the notes, the Company issued five-year warrants to purchase an aggregate of 2,090,000 shares
of Company’s common stock with an initial exercise price of $0.50. The warrants contain certain anti-dilutive (reset) provisions.
From January 1 to January 16, 2018, the
Company made payments to the holders of the August 2017 notes as follows (i) an aggregate of $510,937.50 in cash and (ii) an aggregate
of 3,742,648 shares of the Company’s common stock pursuant to the conversion features of the notes. The Company believes
that it has satisfied all of its obligations under the notes and all of the notes are retired as of March 31, 2018.
NOTE
8 – CAPITAL STOCK
Preferred
Stock
T
he
Company is authorized to issue 21 shares of Series A Preferred Stock, par value $1.00 per share. Each share of Series A Preferred
Stock is convertible into one share of common stock and may vote with holders of common stock on an as converted basis. As of
March 31, 2018, there were no shares of Series A Preferred Stock issued and outstanding.
Common
Stock
The
Company is authorized to issue 200,000,000 shares of common stock, par value $0.001 per share. As of March 31, 2018, there were
153,944,886 shares of common stock issued and outstanding and 0 shares of common stock to be issued.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
The
following common stock transactions were recorded during the three months ended March 31, 2018:
The
Company issued an aggregate of 14,362,500 shares of its common stock recorded as to be issued on December 31, 2017.
The
Company retired an aggregate of 1,790,000 shares of its common stock recorded as to be retired on December 31, 2017.
The Company issued an aggregate of 4,494,000
shares of its common stock for services rendered.
The Company issued an aggregate of 95,134
shares for its common stock upon the cashless exercise of options.
The Company issued an aggregate of 7,104,765
shares of its common stock upon the cashless exercise of warrants.
The
Company issued an aggregate of 3,742,648 shares of its common stock for the settlement of convertible debt.
The Company issued an aggregate of 70,000
shares of its common stock upon the exercise of warrants for net proceeds of $63,000.
The
Company issued an aggregate of 13,700,000 shares of its common stock for cash proceeds of $2,740,000.
The Company received $564,000 recorded
as subscription receivable as of December 31, 2017.
NOTE
9 – WARRANTS
In January 2018, the Company issued warrants
to purchase up to 250,000 shares of common stock at an exercise price of $0.20 per share to a service provider of the Company.
The estimated fair value of $86,483 was charged to current period operations. The fair market value was calculated using the Black
Scholes Option Pricing Model, assuming approximately 2.49% risk-free interest, 0% dividend yield, 112.14% volatility, and expected
life of 5 years.
In January 2018, in conjunction with the
sale of the Company’s common stock, the Company granted warrants to purchase up to 13,700,000 shares of the Company’s
common stock at an exercise price of $0.40 per share, exercisable through January 31, 2023.
Warrants
outstanding and exercisable at March 31, 2018 are as follows:
|
|
|
Warrants
Outstanding
|
|
|
|
|
|
Warrants
Exercisable
|
|
$
|
0.20
|
|
|
|
12,275,370
|
|
|
|
4.51
|
|
|
|
12,275,370
|
|
|
0.40
|
|
|
|
18,700,000
|
|
|
|
4.81
|
|
|
|
18,700,000
|
|
|
0.50
|
|
|
|
440,002
|
|
|
|
2.01
|
|
|
|
440,002
|
|
|
0.60
|
|
|
|
50,000
|
|
|
|
2.01
|
|
|
|
50,000
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
2.80
|
|
|
|
100,000
|
|
|
0.90
|
|
|
|
5,000,002
|
|
|
|
1.50
|
|
|
|
5,000,002
|
|
|
1.06
|
|
|
|
146,200
|
|
|
|
0.73
|
|
|
|
146,200
|
|
|
3.00
|
|
|
|
407,475
|
|
|
|
0.61
|
|
|
|
407,475
|
|
|
|
|
|
|
37,119,049
|
|
|
|
|
|
|
|
37,119,049
|
|
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
A
summary of the warrant activity for the three months ended March 31, 2018 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2017
|
|
|
35,187,847
|
|
|
$
|
0.41
|
|
|
|
2.3
|
|
|
$
|
9,314,959
|
|
Grants
|
|
|
13,950,000
|
|
|
$
|
0.40
|
|
|
|
4.8
|
|
|
|
|
|
Exercised
|
|
|
(11,646,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(372,000
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at March 31, 2018
|
|
|
37,119,049
|
|
|
$
|
0.43
|
|
|
|
4.17
|
|
|
|
|
|
Exercisable
at March 31, 2018
|
|
|
37,119,049
|
|
|
$
|
0.43
|
|
|
|
4.17
|
|
|
$
|
576,015
|
|
The
aggregate intrinsic value outstanding stock warrants was $576,015, based on warrants with an exercise price less than the Company’s
stock price of $0.25 as of March 31, 2018, which would have been received by the warrant holders had those warrant holders exercised
their warrants as of that date.
NOTE
10 –STOCK OPTIONS
Our stockholders approved
our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan in December 2015 (the
“2015 Plan”), our 2016 Equity Incentive Plan in October 2016 (“2016 Plan”) and our 2017 Equity Incentive
Plan in December 2016 (“2017 Plan”, and together with the 2014 Plan, 2015 Plan and 2016 Plan, the “Plans”).
The Plans are identical, except for number of shares reserved for issuance under each Plan. As of March 31, 2018, the Company had
granted an aggregate of 39,500,000 securities under the plans, with 0 available for future issuances.
The
Plans provide for the grant of incentive stock options to our employees and our parent and subsidiary corporations’ employees,
and for the grant of non-statutory stock options, stock bonus awards, restricted stock awards, performance stock awards and other
forms of stock compensation to our employees, including officers, consultants and directors. Our Plans also provide that the grant
of performance stock awards may be paid out in cash as determined by the committee administering the Plans.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
During
the three months ended March 31, 2018, the Company granted ten-year options outside of our Plans to purchase up to 1,250,000 shares
of common stock. The fair value of $459,834, was determined using the Black-Scholes Option Pricing Model, assuming approximately
2.78% risk-free interest, 0% dividend yield, 116.08% volatility, and expected life of five to ten years and will be charged to
operations over the vesting terms of the options.
The
summary terms of the issuances are as follows:
Exercise
Price
|
|
|
Number
of Options
|
|
|
Vesting
Terms
|
$
|
0.36
|
|
|
|
250,000
|
|
|
Immediately
|
|
0.40
|
|
|
|
1,000,000
|
|
|
Immediately
|
|
0.39
|
|
|
|
1,250,000
|
|
|
Immediately
|
Stock
options outstanding and exercisable on March 31, 2018 are as follows:
Exercise
Price
|
|
|
Number
of Options
|
|
|
Remaining
Life In Years
|
|
|
Number
of Options Exercisable
|
|
$
|
0
– 0.25
|
|
|
|
1,056,786
|
|
|
|
6.18
|
|
|
|
1,056,786
|
|
$
|
0.26
- 0.50
|
|
|
|
1,939,631
|
|
|
|
9.02
|
|
|
|
1,939,631
|
|
$
|
0.51
– 0.75
|
|
|
|
1,820,112
|
|
|
|
8.43
|
|
|
|
1,820,112
|
|
$
|
0.76
- 1.00
|
|
|
|
9,926,072
|
|
|
|
8.46
|
|
|
|
9,926,072
|
|
$
|
1.01
- 2.00
|
|
|
|
629,164
|
|
|
|
8.36
|
|
|
|
629,164
|
|
|
|
|
|
|
15,371,765
|
|
|
|
|
|
|
|
15,371,765
|
|
A
summary of the stock option activity for the three months ended March 31, 2018 is as follows:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2017
|
|
|
14,378,432
|
|
|
$
|
0.76
|
|
|
|
8.48
|
|
|
$
|
771,359
|
|
Grants
|
|
|
1,250,000
|
|
|
|
0.39
|
|
|
|
9.80
|
|
|
|
|
|
Exercised
|
|
|
(256,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture/Canceled
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2018
|
|
|
15,371,765
|
|
|
|
0.73
|
|
|
|
8.37
|
|
|
|
|
|
Exercisable
at March 31, 2018
|
|
|
15,371,765
|
|
|
$
|
0.73
|
|
|
|
8.37
|
|
|
$
|
156,299
|
|
The
aggregate intrinsic value outstanding stock options was $156,299, based on options with an exercise price less than the Company’s
stock price of $0.25 as of March 31, 2018, which would have been received by the option holders had those option holders exercised
their options as of that date.
MASSROOTS,
INC.
Notes to
Condensed Consolidated Financial Statements
March
31, 2018
Due to a clerical
error, MassRoots’ Annual Report on Form 10-K filed on April 17, 2018, as amended on April 30, 2018, stated that 2,454,761
options were canceled/expired for the twelve months ending December 31, 2017 and the options outstanding as of December 31, 2017
were 14,377,570. It should have stated that 2,863,715 options were canceled/expired for the twelve months ending December 31, 2017
and the options outstanding as of December 31, 2017 were 14,378,432. While we are correcting this error in this Quarterly Report
on Form 10-Q and subsequent filings, we do not believe it has a material impact on our fiscal 2017 financial statements.
Option
valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated
using the Black-Scholes option model with a volatility figure derived historical data. The Company accounts for the expected life
of options based on the contractual life of options for non-employees.
NOTE
11 – RELATED PARTY TRANSACTIONS
None.
NOTE
12 – SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
From April 1 to May 16,
2018, the Company issued an aggregate of 542,648 shares of common stock upon the cashless exercise of warrants.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis in conjunction with our unaudited financial statements and related notes contained
in Part I, Item 1 of this Quarterly Report. Please also refer to the note about forward-looking information for information on
such statements contained in this Quarterly Report immediately preceding Item 1.
Overview
MassRoots
was formed in April 2013 as a technology platform for the cannabis industry. Powered by more than one million registered users,
MassRoots enables consumers to rate cannabis products and strains based on their efficacy (i.e., effectiveness for treating ailments
such as back-pain or epilepsy) and then presents this information in easy-to-use formats for consumers to make educated purchasing
decisions at their local dispensary. Businesses are able to leverage MassRoots by strategically advertising to consumers based
on their preferences and tendencies.
Over
the past five years, MassRoots has established itself as a leading technology company in the emerging cannabis industry, building
a user-base of one million registered users, partnering with some of the most recognized brands in the industry and raising significant
capital from institutional and private investors. Since inception, the Company has generated approximately $1.2 million in revenue.
Historically, we have focused on building a
consumer-facing application and have not spent significant resources on developing our advertising portal for dispensaries. We
are now focusing our efforts on generating recurring monthly revenue from our advertising portal while automating the processes
and platform needed to deliver our underlying services. In December 2017, we began developing of what we believe will be an industry-defining
advertising portal for dispensaries, enabling dispensaries to list their products on the MassRoots dispensary finder and view analytics
of their local consumers. Starting in May 2018, MassRoots will charge dispensaries a minimum of $420 per month per location for
access to its advertising portal with a twelve-month commitment.
With
MassRoots’ wide-spread audience and following in some of the leading medical cannabis markets in the country, we believe
our business portal will be well-received by our client base. According to ArcView Market Research, there are projected to be
over 2,700 state-regulated dispensaries in the United States by 2020. Companies such as WeedMaps, Inc. and Leafly, Inc., which
have a similar business model to MassRoots, are reported to be generating over $25 million in revenue per year.
In
2018, MassRoots has fully repaid its convertible debt and reduced its liabilities by more than $10 million while investing significant
capital into the continued development of its platform. MassRoots’ has also reduced its operating expenses by more than
$2 million during the first quarter of 2018 as compared to 2017 as we continue to focus on automation with technology rather than
expansion of payroll.
In the summer of 2017, we began exploring the
implementation of an initiative to reward users within our platform to incentivize user-growth, encourage quality revenues of strains
and products and increase user engagement with businesses, and we have invested a considerable amount of resources to exploring
the rewards initiative. Rewards models have created powerful loyalty programs and stimulated spending for airline, hotel, and credit
card businesses. We believe that if we are able to implement such a rewards model, it could offer a market-defining competitive
advantage.
User
Growth and Product Distribution Channels
The
MassRoots app is distributed free-of-charge through the Apple App Store, the Google Play Marketplace and the Amazon App Store.
The MassRoots network is also accessible through desktop and mobile web browsers by navigating to
www.massroots.com
.
Our business and adverting portal can be accessed at
www.massroots.com/dispensaries
. Through this portal, companies
can edit their profiles, distribute information to users and view analytics such as impressions, views and clicks.
Competitors
We compete with other cannabis information
platforms such as WeedMaps and Leafly, which provide information with respect to dispensary locations, strain information, and
news relating to the cannabis industry. We believe our primary competitive advantage is the community we have created and the significant
reviews and data we have collected on key cannabis markets.
Blockchain
Technology
In December 2017, we formed MassRoots Blockchain
Technologies, Inc., a wholly-owned subsidiary of MassRoots, to explore how blockchain technology may be utilized in the cannabis
industry.
Results
of Operations
|
|
For
the three months ended
|
|
|
|
31-Mar-18
|
|
|
31-Mar-17
|
|
|
$
Change
|
|
|
%
Change
|
|
Gross revenue
|
|
$
|
1,492
|
|
|
$
|
134,741
|
|
|
$
|
(133,249
|
)
|
|
|
(98.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
5,134,544
|
|
|
|
7,635,816
|
|
|
|
(2,501,272
|
)
|
|
|
(32.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(5,133,052
|
)
|
|
|
(7,501,075
|
)
|
|
|
2,363,023
|
|
|
|
31.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income /(Expense)
|
|
|
(350,196
|
)
|
|
|
53,898
|
|
|
|
(404,094
|
)
|
|
|
(749.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,483,248
|
)
|
|
$
|
(7,447,177
|
)
|
|
$
|
1,963,929
|
|
|
|
26.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
-
|
|
|
|
-
|
|
Revenues
For
the three months ended March 31, 2018 and 2017, we generated revenues of $1,492 and $134,741, respectively, a decrease of $133,249.
During the first quarter of 2018, MassRoots was redeveloping its online advertising portal for businesses which is expected to
launch in the second quarter of 2018.
Operating
Expenses
For the three months ended March 31, 2018
and 2017, our operating expenses were $5,134,544 and $7,635,816, respectively, a decrease of $2,501,272. For the three months ended
March 31, 2018, these decreases were mainly attributed to a decrease in stock-based compensation to our employees and key consultants
which, for 2018, was $3,117,250 as compared to $5,231,003 for the same period last year (a non-cash decrease of $2,113,753). There
was a decrease in payroll and related expenses of $426,130 as payroll and related expenses were $425,730 in 2018 as compared to
$851,860 for the same period in 2017, and advertising expense decreased to $64,577 for 2018 from $193,431 expensed in 2017, a decrease
of $128,854. For the three months ended March 31, 2018 and 2017, the Company recorded amortization of software costs of $97,265
and $0, respectively. This is primarily a result of MassRoots reducing its employee work-force and advertising activity.
Other
Income (Expense)
For the three months ended March 31, 2018
and 2017, the Company recorded interest expense of $350,196 and $0, respectively, related-to the Company’s convertible debt
issued in August 2017. As of March 31, 2018 the remaining notes payable had been paid in full. For the three months ended March
31, 2018, the Company had no gain or loss and a gain related to the fair value mark to market adjustments of its derivative liabilities,
while recognizing a gain on its derivative liabilities of $53,898 during the same period as of March 31, 2017.
Net
Loss
For
the three months ended March 31, 2018 and 2017, we had net losses of $5,483,248 and $7,447,177, respectively, a decrease of $1,963,929,
for the reasons discussed above.
Liquidity
and Capital Resources
Net cash used in operations for the three months
ended March 31, 2018 and 2017 was $3,535,373 and $2,473,430, respectively. This increase was primarily caused by the utilization
of $1,113,554 in cash to reduce accounts payable and other liabilities as compared to $221,846 during the same period in 2017.
In addition, the Company made prepayments in cash of $534,961 during the three months ended March 31, 2018 as compared to $0 during
the same period in 2017.
Net cash used in investing activities for
the three months ended March 31, 2018 and 2017 was $0 and $122,052, respectively. These investing activities were related to the
purchase of equipment for the three months ended March 31, 2017 of $30,722 and the purchase of an equity investment of $100,002
in HighTimes Holdings Corp., and we received $8,672 in connection with the acquisition of DDDigtal, LLC.
Net
cash provided by financing activities for the three months ended March 31, 2018 and 2017 was $3,008,562 and $4,449,700, respectively.
During the three months ended March 31, 2018, these funds came mainly from sales of common stock while during the same period
in 2017, these funds came mainly from warrant and option exercises.
These conditions raise substantial doubt
about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The
Company’s primary source of operating funds since inception has been cash proceeds from private placements of common stock,
proceeds from the exercise of warrants and options and issuance of notes payable. The Company has experienced net losses and negative
cash flows from operations since inception and expects these conditions to continue for the foreseeable future. The Company will
require additional financing to fund future operations.
Capital
Resources
As
of March 31, 2018, we had cash on hand of $674,776. We currently have no external sources of liquidity such as arrangements with
credit institutions or off-balance sheet arrangements that will have or are reasonably likely to have a current or future effect
on our financial condition or immediate access to capital.
Off-Balance
Sheet Arrangements
As
of March 31, 2018, we did not have any off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
For
a discussion of our accounting policies and related items, please see the Notes to the Condensed Consolidated Financial
Statements, included in Part I, Item 1 of this Quarterly Report.