PART
I
ITEM
1. BUSINESS
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.
“Registered
users” (“Users”) are defined as users who currently have an account with MassRoots. It does not include users
who have deleted their account nor does it reflect active usage over any set period of time.
Over the past 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 developing our advertising portal so as to automate the processes and platform needed to deliver
our underlying services. In December 2017, we began developing an advertising portal for dispensaries that will enable dispensaries
to list their products on the MassRoots dispensary finder and view analytics of their local consumers. During the second quarter
of 2018, we intend to launch an updated version of the portal and to charge dispensaries a minimum recurring monthly fee, per
location, for access to the portal.
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.
Background
We
were incorporated in the state of Delaware on April 26, 2013 as a technology platform for the cannabis industry.
Our
principal executive office is located at 2420 17
th
Street, Office 3118, Denver, Colorado 80202, and our telephone
number is (833) 467-6687.
On
January 25, 2017, we consummated a reverse triangular merger (the “Whaxy Merger”) pursuant to which we acquired all
of the outstanding common stock of DDDigtal Inc (“DDDigtal”), a Colorado corporation. Upon closing of the Whaxy Merger,
each share of DDDigtal’s common stock was exchanged for such number of shares of our common stock (or a fraction thereof)
based on an exchange ratio equal to approximately 5.273-for-1, such that 1 share of our common stock was issued for every 5.273
shares of DDDigtal’s common stock. At the closing of the Whaxy Merger, all shares of common stock of our newly-formed merger
subsidiary formed for the sole purpose of effectuating the Whaxy Merger, were converted into and exchanged for one share of common
stock of DDDigtal, and all shares of DDDigtal’s common stock that were outstanding immediately prior to the closing of the
Whaxy Merger were automatically cancelled and retired. Upon the closing of the Whaxy Merger, DDDigtal continued as our surviving
wholly-owned subsidiary, and the merger subsidiary ceased to exist.
On
July 13, 2017, we consummated a reverse triangular merger (the “Odava Merger”) pursuant to which we acquired all of
the outstanding common stock of Odava Inc (“Odava”), a Delaware corporation. Upon closing of the Odava Merger, each
share of Odava’s common stock was exchanged for such number of shares of our common stock (or a fraction thereof), based
on an exchange ratio equal to approximately 4.069-for-1, such that 1 share of our common stock was issued for every 4.069 shares
of Odava’s common stock. At the closing of the Odava Merger, all shares of common stock of our newly-formed merger subsidiary
formed for the sole purpose of effectuating the Odava Merger, were converted into and exchanged for one share of common stock
of Odava, and all shares of Odava’s common stock that were outstanding immediately prior to the closing of the Odava Merger
automatically cancelled and retired. Upon the closing of the Odava Merger, Odava continued as our surviving wholly-owned subsidiary,
and the merger subsidiary ceased to exist.
Our
Products and Services
Our
technology platform consists of MassRoots, our consumer-facing social network (accessible through an Android application, iOS
application, and web portal) and our business and advertising portal for companies which can be accessed at
www.massroots.com/dispensaries
.
The
MassRoots Network
The
MassRoots network is accessible as a free mobile application through the Apple App Store, the Amazon App Store, the Google Play
Marketplace, and as a web application at
www.massroots.com
. These applications and services work in a manner similar to
other social review platforms such as Vivino, Untappd and Yelp. Using our network after agreeing to our Terms and Conditions,
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Users
can create a profile by selecting a username and setting their password;
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Users
have the ability to follow other Users on our network which permits them to follow other
Users’ posts which are displayed on their newsfeed;
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Users
have the ability to review strains and products based on factors including, but not limited
to, quality. These reviews are displayed on product pages within the app and on the User’s
profile;
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Users
have the ability to like, comment and report statuses from other Users. By “liking”
a status, a User is indicating their approval of the post’s content. By commenting
on a status, Users are free to voice their opinions or comments with respect to the post.
By reporting a status, Users can flag content that violates our Terms and Conditions,
including spam, harassing content, and posts or comments that appear to solicit the transaction
of cannabis or other products;
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Users
have the ability to tag other Users and use hashtags to categorize posts. By using the
“@” symbol followed by a username, Users can tag other Users in posts they
want them to see or if such Users are included in the picture or post. By using the “#”
followed by a categorical word, Users can categorize posts based on their content;
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Users
have the ability to post pictures with text captions or just text statuses;
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Users
have the ability to search for Users based on their username and the ability to search
by hashtag to display all results within a particular category. Users can sort hashtag
searches by their popularity or when they were posted; and
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Users
have the ability to set their profile to public or private. By setting their profile
to public, any User on MassRoots’ apps will be able to see the public profile’s
posts and follow the account. When a profile is private, another User must request to
follow such account and the account owner must grant permission before they can view
any of the account’s posts.
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User
Growth and Product Distribution Channels
The
MassRoots app is distributed free-of-charge through the Apple App Store, the Google Play Marketplace and the Amazon App Store.
The MassRoots network is also accessible through desktop and mobile web browsers by navigating to www.massroots.com. Our business
and advertising portal can be accessed at www.massroots.com/dispensaries. Through this portal companies can edit their profiles,
distribute information to Users and view analytics such as impressions, views and clicks.
Blockchain
Technologies
MassRoots
Blockchain Technologies, Inc. (“MassRoots Blockchain”) was formed in December 2017 as a wholly-owned subsidiary of
the Company to continue the Company’s efforts in exploring how new technologies may be utilized in the cannabis industry.
Initially, we are focusing on blockchain technology for several reasons, including, but not limited to:
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that
it may enable better tracking of impressions, views, and interactions with posts, advertisements
and dispensary listings;
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that
it has the potential to streamline the collection and organization of data while eliminating
traditional security risks;
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that
it may provide a greater degree of reliability and accuracy with respect to data;
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that
it may allow us to implement an intelligent newsfeed to deliver high-quality and more
relevant content to our Users;
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that
it may enable the development of contracts that are automatically executed when certain
parameters are met;
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that
it has the potential to reduce friction in the cannabis market-place and save businesses
valuable and resources; and
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that
it may provide greater transparency to government regulators.
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In
December 2017, we commenced the re-development of the MassRoots Business Portal, a platform where dispensaries and other industry
participants, such as producers and other ancillary businesses, may advertise their goods and services. To date, we have used
approximately $250,000 for the initial development of the MassRoots Business Portal, including features that allow for tracking
of advertising impressions, enhanced targeting and serving of advertisements, as well as a program that would be designed to reward
Users of the MassRoots platform for providing high quality reviews on cannabis strains and products. The development and implementation
of these any other features, including the possible use of digital instruments, is currently contemplated to be made within the
MassRoots App and platform, and is intended to generate the growth of Users of the MassRoots platform and stimulate the MassRoots
platform’s overall activity.
All
initial development has been outsourced to third party development firms and consultants. Specifically, we have outsourced the
following services: software development services, including, but not limited to, web and mobile development services, blockchain
development and integration services, and infrastructure development, automation, support and management services. During the
second quarter of 2018, we intend to launch an updated version of the MassRoots Business Portal that includes certain features
that use blockchain technology to track advertisement impressions. While we intend to launch an updated version of the MassRoots
Business Portal there can be no assurance as to when, or if, we will complete development of a fully functional portal that utilizes
features based upon such technology. As stated in “Risk Factors,” the development of features based upon the use of
blockchain technology is subject to numerous risks and uncertainties, and there can be no assurance as to when, or if, any such
features will be successfully developed, or that if developed, that they will be accepted or adopted. Further, the likelihood
of our development and implementation of features based upon new technology must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with the inception and development of a product or
service based upon any such relatively new and developing technology.
While
MassRoots Blockchain and the Company intend to devote resources to exploring the feasibility of developing these or other solutions,
there can be no assurances that we will be successful in implementing such solutions, that any such solutions will be economically
viable, or that any of them will result in the generation of User interest, participation or revenue.
We
currently anticipate that MassRoots Blockchain and/or the Company will need to raise additional funds to continue to explore and
develop potential uses and applications of blockchain technologies and uses for our business and other businesses in the cannabis
industry; however, no assurance can be given that additional financing will be available on terms favorable to us, or at all.
App/Play
Store Issues, User Support and Similar Matters
On
November 4, 2014, the MassRoots App was removed from Apple’s iOS App Store because the App Store changed its guidelines
to prohibit the promotion of social cannabis applications. Although existing iOS Users were still able to access and use the MassRoots
App, new users were prohibited from downloading our app. After correspondences with Apple, other cannabis companies and cannabis
advocates, in February 2015 Apple advised us that it revised its enforcement guidelines to permit cannabis applications in the
Apple App Store which restricted access to users located in the states where use of cannabis was permitted. On February 12, 2015,
our application was reinstated to the Apple App Store and can now only be accessed by users in the states which permit the use
of cannabis. Although our app has been reinstated to the Apple App Store, we cannot provide any assurance that Apple’s policy
will not change in the future or that our application will not once again be removed from the Apple App Store.
The
Apple App Store is one of the largest content distribution channels in the world and is the only way to effectively distribute
software to the large percentage of the United States population who own iPhones and iPads. The Apple App Store review team effectively
operates as our iOS App’s regulator; they decide what guidelines iOS apps must operate under and how to enforce such guidelines.
The Apple guidelines related to cannabis-related apps are not published, enforcement of such guidelines is difficult to predict,
and the review and appeal processes are conducted without public oversight. Although we will continue advocating for a more open
and transparent Apple App Store review process that will allow decisions that affect a significant portion of the United States
smartphone owning population to be open to public scrutiny, there can be no assurance that we will be successful in these efforts.
MassRoots,
along with other cannabis apps, regularly encounter issues with the Google Play Store review team in the normal course of business
due to Google Play Store’s absence of clear guidelines regarding cannabis-related apps. On November 8, 2016, the MassRoots
App was removed from the Google Play Store due to a compliance review. However, on March 21, 2017, Google approved the
MassRoots App for distribution to Android devices through the Google Play Store, making it available for download on the Google
Play Store once again.
On
December 1, 2016, MassRoots’ Android application received approval from the Amazon App Store for listing, and is currently
available for download on the Amazon App Store.
Under
their respective developer license agreements, Apple, Inc., Google, Inc. and Amazon.com, Inc. have the right to update the Apple
App Store, Google Play Store and Amazon App Store policies, respectively, to prohibit cannabis-related applications at any time.
This could result in many prospective users being unable to access and join our network and existing Users being unable to access
our app.
Our
activities outside of the application stores have also faced backlash and resistance due to our status as a cannabis-related company.
For example, our Instagram account is followed by more than 450,000 users and we utilize this following to help expand our user-base.
However, in a situation similar to the removal of our application from the Apple App Store, our Instagram account was suspended
in January 2016 without notice or explanation. Our account was reinstated on February 26, 2016. While management believes that
our platform is at the point where any potential suspensions effecting our Company will not affect our User growth, we expect
to continue to face similar situations in the future that may cause disruptions to the execution of our business plan.
Market
Conditions
MassRoots
is poised to take advantage of two rapidly growing industries: cannabis and mobile technology.
Cannabis
Market Growth and Current Trends
Since
the MassRoots app first launched in July 2013, on January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo which
rescinded the Cole Memo (as described below) which was adopted by the Obama administration as a policy of non-interference with
marijuana-friendly state laws.
The
Cole Memo
On
August 29, 2013, Deputy Attorney General James Cole issued a memo (the “Cole Memo”) in response to certain states
passing measures to regulate the medical and adult-use of cannabis. In the Cole Memo, the Department of Justice made clear that
marijuana remains an illegal drug under the Controlled Substances Act and that federal prosecutors will continue to aggressively
enforce the statute. The Department of Justice identified eight enforcement areas that federal prosecutors should prioritize.
Outside of such enforcement priorities, the federal government has traditionally relied on state and local authorities to address
marijuana activity. The Cole Memo established several basic guidelines by which state- regulated cannabis businesses could operate
to minimize the risk of intervention and enforcement by the Department of Justice. The guidelines focused on ensuring that cannabis
did not cross state lines, keeping dispensaries away from schools and public facilities and strict-enforcement of state laws by
regulatory agencies, among other priorities.
The
Sessions Memo
On
January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo (the “Sessions Memo”) on federal marijuana
enforcement policy announcing a return to the rule of law and the rescission of previous nationwide guidance by the Department
of Justice (including, but not limited to, the Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all
U.S. attorneys to enforce the laws enacted by Congress and to follow the well-established principles when pursuing prosecutions
related to marijuana activities. These principles include weighing all relevant considerations, including federal law enforcement
priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative
impact of particular crimes on the community.
Guidance
to Banks Relating to the Marijuana Industry
On
February 14, 2014, the Department of Justice and the Department of Treasury issued guidance to banks about how to serve the marijuana
industry without running afoul of federal regulations. Prior to such guidance, dispensaries were forced to operate on a cash basis,
presenting significant security and accounting issues. Although banks have remained reluctant to work with marijuana businesses
because of federal prohibition laws, this guidance was a major step in legitimizing and accepting the cannabis industry on a national
level. In addition, the adoption of the Rohrabacher Farr Amendment (as discussed below) indicates some level of support in Congress
for medicinal cannabis, even if its actual effect is still undetermined.
For
additional information concerning the Cole Memo, the Sessions Member, the Rohrabacher-Farr Amendment and regulatory conditions,
see the section entitled “Business – Government Regulation.”
Current
States with Laws Permitting the Medical or Adult Use of Cannabis
According
to CNN Money, recreational marijuana is regulated in nine states and the District of Columbia and medical marijuana is regulated
in 30 states. The states which have enacted such laws are listed below the following map:
State
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Year Passed
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1. Alaska*
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1998
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2. Arizona
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2010
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3. Arkansas
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2016
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4. California*
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1996
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5. Colorado*
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2000
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6. Connecticut
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2012
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7. District of Columbia*
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2010
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8. Delaware
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2011
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9. Florida
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2016
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10. Hawaii
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2000
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11. Illinois
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2013
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12. Louisiana
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2015
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13. Maine*
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1999
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14. Maryland
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2014
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15. Massachusetts*
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2012
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16. Michigan
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2008
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17. Minnesota
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2014
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18. Montana
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2004
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19. Nevada*
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2000
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20. New Hampshire
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2013
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21. New Jersey
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2010
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22. New Mexico
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2007
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23. New York
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2014
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24. North Dakota
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2016
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25. Pennsylvania
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2016
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26. Ohio
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2016
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27. Oregon*
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1998
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28. Rhode Island
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2006
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29. Vermont
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2004
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30. Washington*
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1998
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31. West Virginia
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2017
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* State has enacted laws permitting the adult use of cannabis, in addition to medical use.
Public
Support for Regulation of Cannabis Increasing
A
Quinnipiac poll conducted in February 2017 found that 93% of the American people supported regulating the medicinal use of cannabis,
59% supported regulating the adult-use of cannabis and 71% of Americans were opposed to federal government interference with state
marijuana programs. These statistics continue the trend over the past decade toward public support for cannabis.
Market
Conditions that Could Limit Our Business
Cannabis
is a Schedule I controlled substance under Federal law and, as such, there are several factors that could limit our business operations
including, but not limited to:
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The Federal government
and many private employers prohibit drug use of any kind, including cannabis, even where it is permissible under state law.
Random drug screenings and potential enforcement of such employment provisions may significantly reduce the size of the potential
cannabis market;
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Enforcement of Federal
law prohibiting cannabis occurs randomly and often without notice. This could scare many potential investors away from cannabis-related
investments and makes it difficult to make accurate market predictions;
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On
January 4, 2018, the Department of Justice issued the Sessions Memo announcing a return to the rule of law and the rescission
of previous guidance documents. The Sessions Memo rescinded the Cole Memo. Although there is no guarantee that additional
states will pass measures to regulate cannabis use under state law, the Sessions Memo may further deter states from passing
such measures. Furthermore, irrespective of the Sessions Memo, in many states, public support of regulation initiatives may
not maintain enough support to pass. This is especially true when a supermajority is needed to pass measures, like in Florida
where a state constitutional amendment permitting medical cannabis has been proposed, but requires 60% approval to pass. Changes
due to the Sessions Memo and in voters’ attitudes and turnout have the potential to slow or stop the cannabis regulation
movement and potentially reverse recent cannabis regulation victories;
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There
has been some resistance and negativity as a result of recent cannabis regulation at the state level, especially as it relates
to drugged driving. The lack of clearly defined and enforced laws at the state level has the potential to sway public opinion
against marijuana regulation; and
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In
the event that the Federal government does not enforce the Federal law prohibiting cannabis, state laws regarding the
regulation of cannabis are being challenged through lawsuits. Lawsuits have been brought by private groups and local law enforcement
officials. If these lawsuits are successful, state laws permitting cannabis sales may be overturned which will significantly
reduce the size of the potential cannabis market and have a material adverse effect on our business.
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Please
see “Government Regulation” below for additional information.
Government
Regulation
Marijuana
is a categorized as a Schedule I controlled substance by the Drug Enforcement Agency and the United States Department of Justice
and is illegal to grow, possess and consume under Federal law. However, 30 states have passed state laws that permit doctors to
recommend cannabis for medical-use and eight of those states and the District of Columbia have enacted laws that regulate the
adult-use of cannabis for any reason. Because doctors are prohibited from prescribing a Schedule I controlled substance, the passage
of a state medical marijuana does not necessarily guarantee the implementation of a regulated, commercial system through which
patients can purchase cannabis products. This has created an unpredictable business-environment for dispensaries and collectives
that operate under certain state laws but in violation of Federal law.
Cole
Memo
On
August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States attorneys guiding
them to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under certain state laws,
so long as:
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cannabis is not
being distributed to minors and dispensaries are not located around schools and public buildings;
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the proceeds from
sales are not going to gangs, cartels or criminal enterprises;
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cannabis grown in
states where it is legal is not being diverted to other states;
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cannabis-related
businesses are not being used as a cover for sales of other illegal drugs or illegal activity;
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there is not any
violence or use of firearms in the cultivation and sale of marijuana;
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there is strict
enforcement of drugged-driving laws and adequate prevention of adverse health consequences; and
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cannabis is not
grown, used, or possessed on Federal properties.
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The
Cole Memo was a guide for United States attorneys and did not alter in any way the Department of Justice’s authority to
enforce Federal law, including Federal laws relating to cannabis, regardless of state law. As described below, as a result of
the issuance of the Sessions Memo by the Department of Justice on January 4, 2018, the Cole memo was rescinded. Prior to the issuance
of the Sessions Memo, we had implemented standard operating procedures and policies to ensure that we were operating in compliance
with the Cole Memo. We cannot provide assurance that our actions were, are or will be in compliance with the Cole Memo, the Sessions
Memo or any other laws or regulations that currently exist or may be amended or adopted in the future.
Pursuant
to our currently existing Terms and Conditions:
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Users
must agree that they are located in a state where medical-use or adult-use of cannabis is regulated;
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Users
must be of age to consume cannabis in their particular state (18 or 21 years old, depending on the state);
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Users may only post
content that is in compliance with their state’s laws;
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Users may not solicit
or distribute cannabis through MassRoots unless they are a licensed dispensary;
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Posting of any of
the following materials to MassRoots is prohibited and will result in account termination:
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Posting
other drugs or substances, including prescription pain pills;
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Posting
of any violence or threat of violence;
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Posting
of any drugged-driving content; and
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Posting
of any copyright-protected content.
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We
have implemented an aggressive content and account review program to ensure compliance with our Terms and Conditions. Users have
the ability to report any status or account that is in violation of our Terms and Conditions and we encourage Users to do so as
any illegal content jeopardizes the network for all our Users. When a status or account is reported, the post is automatically
removed from the network until further review. A MassRoots employee then reviews the content within 24 hours and either approves
it as in compliance within our Terms and Conditions or permanently deletes it and bans the User’s account.
In
addition, as part of the agreement to allow our app to return to the Apple App Store, we implemented geographic restrictions to
restrict new Users to our mobile apps to the District of Columbia and the 30 states in which the use of marijuana is permitted.
Our
business plan includes allowing cannabis dispensaries to advertise on our network, which we believe could be deemed to be aiding
and abetting illegal activities, a violation of Federal law. We continue to evaluate the effects of the Sessions Memo; however,
we cannot provide assurance that we were, are or will be in compliance with the Cole Memo, the Sessions Memo or any other laws
or regulations.
Rohrabacher-Farr
Amendment
On
December 16, 2014, H.R. 83 - Consolidated and Further Continuing Appropriations Act, 2015 was enacted and included a provision
known as the “Rohrabacher-Farr Amendment” which states:
None
of the funds made available in this Act to the Department of Justice may be used, with respect to the States of Alaska, Arizona,
California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode
Island, South Carolina, Tennessee, Utah, Vermont, Washington, and Wisconsin, to prevent such States from implementing their own
State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.
The
Rohrabacher-Farr Amendment would appear to protect the right of the states to determine their own laws on medical cannabis use;
however, the actual effects of the amendment are still unclear. The Rohrabacher-Farr Amendment did not remove the federal ban
on medical cannabis and cannabis remains regulated as a Schedule I controlled substance. Further, the United States Department
of Justice has interpreted the Rohrabacher-Farr Amendment as only preventing federal action that prevents states from creating
and implementing cannabis laws - not against the individuals or businesses that actually carry out cannabis laws – and has
continued to sporadically initiate enforcement actions against individuals or businesses participating in the cannabis industry
despite such participation being regulated under state law. Whether this interpretation is appropriate is still being litigated,
and, while an initial district court decision has not supported the Department of Justice’s interpretation, such decision
is currently under appellate review. In addition, no matter what the interpretation is adopted by the courts, there is no question
that the Rohrabacher-Farr Amendment does not protect any party not in full compliance with state medicinal cannabis laws.
The
Rohrabacher-Farr Amendment represents one of the first times in recent history that Congress has taken action indicating support
of medical cannabis. The Rohrabacher-Farr Amendment was renewed by Congress in 2015, 2016, 2017 and 2018 and is in effect until
September 30, 2018.
Sessions
Memo
On
January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo on federal marijuana enforcement policy announcing
a return to the rule of law and the rescission of previous nationwide guidance by the Department of Justice (including, but not
limited to, the Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws
enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities. These
principles include weighing all relevant considerations, including federal law enforcement priorities set by the Attorney General,
the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on
the community. The effect of this memo is to shift federal policy from a hands-off approach adopted by the Obama administration
to permitting federal prosecutors across the country to determine how to prioritize resources to regulate marijuana possession,
distribution and cultivation in states where marijuana use is legal.
While
we do not directly harvest or distribute cannabis today, we still may be deemed to be violating federal law, or aiding and abetting
the violation of Federal law and may be irreparably harmed by a change in enforcement by the federal or state governments.
Additional
Government Regulations
We
are subject to general business regulations and laws as well as Federal and state regulations and laws specifically governing
the Internet and e-commerce. These regulations and laws cover among others, sweepstakes, taxation, tariffs, user privacy, data
protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, broadband
residential Internet access and the characteristics and quality of services. Any noncompliance with the foregoing laws and regulations
may harm our business and results of operations.
Competitors
We
compete with other cannabis information platforms such as WeedMaps and Leafly, which provide information with respect to dispensary
locations, strain information, and news relating to the cannabis industry. We believe our primary competitive advantage is the
community we have created and the significant reviews and data we have collected on key cannabis markets.
Intellectual
Property
MASSROOTS
is a federally registered trademark of MassRoots, and ODAVA is a state registered trademark of MassRoots. MassRoots has applied
for the trademark “TOKE”.
Employees
and Consultants
MassRoots
has 5 full-time employees, two part-time employees, and one full-time independent contractor as of April 11, 2018.
ITEM
1A. RISK FACTORS
An
investment in our securities involves a high degree of risk. This Annual Report on Form 10-K contains the risks applicable to
an investment in our securities. The risks and uncertainties we have described are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also affect our operations. The occurrence
of any of these known or unknown risks might cause you to lose all or part of your investment in the offered securities.
Risks
Relating to Our Business and Industry
We
have a limited history upon which an evaluation of our prospects and future performance can be made and have no history of profitable
operations.
We
were incorporated in April 2013 and have a limited operating history and our business is subject to all of the risks inherent
in the establishment of a new business enterprise. Our likelihood of success must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with development and expansion of a new business enterprise.
We may sustain losses in the future as we implement our business plan. There can be no assurance that we will operate profitably.
Since
we have a limited operating history, it is difficult for potential investors to evaluate our business.
Our
limited operating history makes it difficult for potential investors to evaluate our business or prospective operations. As an
early stage company, we are subject to all the risks inherent in the initial organization, financing, expenditures, complications
and delays inherent in a new business. Investors should evaluate an investment in us in light of the uncertainties encountered
by developing companies in a competitive and evolving environment. Our business is dependent upon the implementation of our business
plan. We may not be successful in implementing such plan and cannot guarantee that, if implemented, we will ultimately be able
to attain profitability.
We
will need to obtain additional financing to fund our operations.
We
will need additional capital in the future to continue to execute our business plan. Therefore, we will be dependent upon additional
capital in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise
all of the needed additional capital, and we will need to identify potential investors and negotiate appropriate arrangements
with them. We may not be able to arrange enough investment within the time the investment is required or that if it is arranged,
that it will be on favorable terms. If we cannot obtain the needed capital, we may not be able to become profitable and may have
to curtail or cease our operations.
Cannabis
remains illegal under Federal law.
Despite
the development of a regulated cannabis industry under the laws of certain states, these state laws regulating medical and adult
cannabis use are in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule I controlled
substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that the
Federal government has the right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing
the use of cannabis preempts state laws that regulate its use. Although the prior administration determined that it was not an
efficient use of resources to direct Federal law enforcement agencies to prosecute those lawfully abiding by state laws allowing
the use and distribution of medical and recreational cannabis, on January 4, 2018, the current administration issued the Sessions
Memo announcing a return to the rule of law and the rescission of previous guidance documents. The Sessions Memo rescinds the
Cole Memo which was adopted by the Obama administration as a policy of non-interference with marijuana-friendly state laws. The
Sessions Memo shifts federal policy from a hands-off approach adopted by the Obama administration to permitting federal prosecutors
across the country to decide how to prioritize resources to regulate marijuana possession, distribution and cultivation in states
where marijuana use is regulated. There can be no assurance that federal prosecutors will not prosecute and dedicate resources
to regulate marijuana possession, distribution and cultivation in states where marijuana use is regulated which may cause states
to reconsider their regulation of marijuana which would have a detrimental effect on the marijuana industry. Any such change in
state laws based upon the Sessions Memo and the Federal government’s enforcement of Federal laws could cause significant
financial damage to us and our stockholders.
As
the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting
illegal activities through the services and data that we provide to government regulators, dispensaries, cultivators and consumers.
As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect
our business.
Under
Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis
is illegal. Our business provides services to customers that are engaged in the business of possession, use, cultivation, and/or
transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may
seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal
activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States
or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a).
As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such
an action would have a material negative effect on our business and operations.
Federal
enforcement practices could change with respect to services provided to participants in the cannabis industry, which could adversely
impact us. If the Federal government were to expend its resources on enforcement actions against service providers in the cannabis
industry under guidance provided by the Sessions Memo, such actions could have a material adverse effect on our operations, our
customers, or the sales of our products.
It
is possible that due to the recent Sessions Memo our clients may discontinue the use of our services, our potential source of
customers may be reduced and our revenues may decline. Further, additional government disruption in the cannabis industry could
cause potential customers and users to be reluctant to use and advertise our products, which would be detrimental to the Company.
We cannot predict the impact of the Sessions Memo at this time nor can we predict the nature of any future laws, regulations,
interpretations or applications including the effect of such additional regulations or administrative policies and procedures,
when and if promulgated, could have on our business.
Our
business is dependent on state laws pertaining to the cannabis industry.
Thirty
states allow their citizens to use medical cannabis. In addition, the District of Columbia and eight states (Alaska, California,
Colorado, the District of Columbia, Maine, Massachusetts, Nevada, Oregon and Washington) have regulated the sale of cannabis for
adult use. Continued development of the cannabis industry is dependent upon continued legislative authorization of cannabis at
the state level. Any number of factors could slow or halt progress in this area including, but not limited to, the Sessions Memo.
While there may be ample public support for legislative action, numerous factors impact the legislative process. For example,
in November 2016, voters in Arizona rejected a ballot initiative that would have permitted the adult-use of cannabis. Further
regulation attempts at the state level that create bad public policy could slow or stop further development of the cannabis industry.
Any one of these or other factors could slow or halt use of cannabis, which would negatively impact our business.
New
platform features or changes to existing platform features could fail to attract new users, retain existing users or generate
revenue.
Our
business strategy is dependent on our ability to develop platforms and features to attract new businesses and users, while retaining
existing ones. Staffing changes, changes in user behavior or development of competing platforms may cause Users to switch to alternative
platforms or decrease their use of our platform. To date, our compliance platform is only in its beginning stages and has not
gained widespread market adoption. There is no guarantee that companies and dispensaries will use these features and we may fail
to generate revenue. Additionally, any of the following events may cause decreased use of our platform:
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Emergence of competing
platforms and applications;
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Inability to convince
potential companies to join our platform;
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Technical issues
on certain platforms or in the cross-compatibility of multiple platforms;
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Potential securities
breaches around our data;
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A rise in safety
or privacy concerns; and
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An increase
in the level of spam or undesired content on the network.
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We
are highly dependent on the services of key executives, the loss of whom could materially harm our business and our strategic
direction. If we lose key management or significant personnel, cannot recruit qualified employees, directors, officers, or other
personnel or experience increases in our compensation costs, our business may materially suffer.
We
are highly dependent on our management team, specifically our Chief Executive Officer, Isaac Dietrich. While we have an employment
agreement with Isaac Dietrich, such employment agreement permits Mr. Dietrich to terminate such agreement upon notice. If we lose
key employees, our business may suffer. Furthermore, our future success will also depend in part on the continued service of our
key management personnel and our ability to identify, hire, and retain additional personnel. We do not carry “key-man”
life insurance on the lives of our executive officer, employees or advisors. We experience intense competition for qualified personnel
and may be unable to attract and retain the personnel necessary for the development of our business. Because of this competition,
our compensation costs may increase significantly.
We
will need to obtain additional financing to fund our operations.
We
will need additional capital in the future to continue to execute our business plan. Therefore, we will be dependent upon additional
capital in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise
all of the needed additional capital, and we will need to identify potential investors and negotiate appropriate arrangements
with them. We may not be able to arrange enough investment within the time the investment is required or that if it is arranged,
that it will be on favorable terms. If we cannot obtain the needed capital, we may not be able to become profitable and may have
to curtail or cease our operations. Additional equity financing, if available, may be dilutive to the holders of our capital stock.
Debt financing may involve significant cash payment obligations, covenants and financial ratios that may restrict our ability
to operate and grow our business.
Our
monetization strategy is dependent on many factors outside our control.
There
is no guarantee that our efforts to monetize the MassRoots Retail platform will be successful. Furthermore, our competitors may
introduce more advanced technologies that deliver a greater value proposition to cannabis related businesses in the future. For
example, Google, MJ Freeway, LLC and BioTrackTHC, LLC may decide to introduce features similar to ours to their products, significantly
increasing the competitive environment. In addition, dispensaries may not be able to accept credit or bank cards due to banking
regulations, which could significantly increase the cost and time required for us to generate revenue. All these factors individually
or collectively may preclude us from effectively monetizing our business which would have a material adverse effect on our financial
condition and results of operation.
Changes
in Amazon App Store, Apple App Store or Google Play Store policies could result in our mobile applications being de-listed. In
addition, our third party service providers may decline to provide services due to their policies, or cease to provide services
previously provided to us due to a change of policy.
On
November 4, 2014, the MassRoots App was removed from Apple’s iOS App Store due to the Apple App Store review team changing
their app enforcement guidelines to prohibit all social cannabis applications. After negotiation with Apple and the addition of
certain restrictions, the MassRoots App returned to the Apple App Store in February 2015. Although Apple reversed its decision
and included our app in the Apple App Store, we cannot provide any assurance that Apple’s policy will not change in the
future or that our application will not once again be removed from the Apple App Store.
The
Apple App Store is one of the largest content distribution channels in the world and management believes that it is the only way
to effectively distribute our iOS application to users who own iPhones and iPads. The Apple App Store review team effectively
operates as our iOS App’s regulator; they decide what guidelines iOS apps must operate under and how to enforce such guidelines.
The Apple guidelines related to cannabis-related apps are not published, enforcement of such guidelines is difficult to predict,
and the review and appeal processes are conducted without public oversight. Although we will continue advocating for a more open
and transparent Apple App Store review process that will allow decisions that affect a significant portion of the United States
smartphone owning population to be open to public scrutiny, there can be no assurance that we will be successful in these efforts.
MassRoots,
along with other cannabis apps, regularly encounter issues with the Google Play Store review team in the normal course of business
due to Google Play Store’s absence of clear guidelines regarding cannabis-related apps. In November 2016, the MassRoots
App was removed from the Google Play Store due to a compliance review. However, on March 21, 2017, Google Play approved
the MassRoots App for distribution to Android devices through the Google Play Store once again.
On
December 1, 2016, MassRoots’ Android application received approval from the Amazon App Store for listing, and
is currently available for download on the Amazon App Store.
In
addition to challenges we face with respect to compliance with the Amazon App Store, Apple App Store and Google Play Store guidelines,
service providers may refuse to provide services to us even if they previously provided such services due to our status as a cannabis
related company. For example, in January 2016, after building a strong presence on Instagram and having previously used our
Instagram account to grow our user count and highlight posts about our business, our account was suspended without warning by
Instagram. While the account was reinstated on February 26, 2016, we cannot provide any assurance that our Instagram account
will not be suspended in the future and if suspended that our account will be reinstated. Furthermore, we may face similar situations
in the future with our other services providers that may cause disruptions to our business plan, all of which may have a material
adverse effect on our business and financial condition.
Government
actions or digital distribution platform restrictions could result in our products and services being unavailable in certain geographic
regions which may harm our future growth.
Due
to our connections to the cannabis industry, governments and government agencies could ban or cause our network or apps to become
unavailable in certain regions and jurisdictions. This could greatly impair or prevent us from registering new users in affected
areas and prevent current users from accessing our network. In addition, government action taken against our service providers
or partners could cause our network to become unavailable for extended periods of time.
As
discussed herein, as part of our agreement with Apple in connection with our application being returned to the Apple App Store,
we agreed to limit registration of new members within our iOS application to the locations where cannabis is permitted under state
law (medicinally or recreationally). This restriction prohibits users in several states and countries from accessing our network.
Expansions of such policies by Apple, Google or Amazon may slow our user registration rate which may have a material adverse effect
on our business and future prospects.
Failure
to generate user growth or engagement could greatly harm our business model.
Our
business model involves attracting users to our mobile application and linking their MassRoots account with their profile in MassRoots
Retail. There is no guarantee that growth strategies used in the past will continue to bring new users to our network or that
users will agree to link their MassRoots and MassRoots Retail profiles. Changes in relationships with our partners, contractors
and businesses we retain to grow our network may result in significant increases in the cost to acquire new users. In addition,
new users may fail to engage with our network to the same extent current users are engaging with our network resulting in decreased
use of our network. Decreases in the size of our user base and/or decreased engagement on our network may impair our ability to
generate revenue.
Failure
to attract clients could greatly harm our ability to generate revenue.
Our
ability to generate revenue is dependent on the continued growth of our platform. If we are unable to continue to grow our network
or bring new clients to our network, our ability to generate revenue would be greatly compromised. There is no guarantee businesses
will want to join our platform or that we will be able to generate revenue from our existing user base.
Historically,
we have generated most of our revenue from advertising. The loss of clients or reduction in spending by advertisers may have a
material adverse effect on our business.
Historically,
we have generated most of our revenue from third parties advertising on our website. Some of our third party advertisers include
cannabis companies, including regulated cannabis dispensaries, and mainstream brands such as Uber. As is common in the industry,
our advertisers usually do not have long-term advertising commitments with us. It is possible that such advertisers may not continue
to do business with us for several reasons including that they no longer believe that their advertisements on our website will
generate a competitive return relative to other alternatives or in the alternative they may reduce the prices they are willing
to pay to advertise their products and services on our website.
Our
revenue could be adversely affected by a number of other factors including, but not limited to:
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decreases in User
engagement, including time spent on our website and mobile app;
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our inability to
improve our analytics and measurement solutions that demonstrate the value of our ads and other commercial content;
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loss of market share
to our competitors;
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adverse legal developments
relating to our business, including legislative and regulatory developments and developments in litigation, if any;
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adverse media reports
or other negative publicity involving us or other companies in our industry; and
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the impact of macroeconomic
conditions and conditions in the industry in general.
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The
occurrence of any of these or other factors could result in decreased traffic to our website which may result in less views of
third party ads. If we are unable to generate traffic to our website and as a result third party advertisers no longer continue
to do business with us, our business, financial conditions and results of operation may be materially affected.
User
engagement and growth depends on software and device updates beyond our control.
Our
mobile application and websites are currently available on multiple operating systems, including iOS and Android, across multiple
different manufacturers, including Motorola, LG, Apple and Samsung and on thousands of devices. Changes to the device infrastructure
or software updates on such devices could render our platforms and services useless or inoperable and require users to utilize
our website rather than our mobile application which may result in decreased user engagement. Any decrease in user engagement
may devalue our value proposition to third party advertisers who may no longer continue to do business with us which may have
a material adverse effect on business, financial conditions and results of operation.
We
may be unable to manage growth.
Successful
implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management
and financial resources. To manage growth effectively, we need to continuously:
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Evaluate definitive
business strategies, goals and objectives;
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Maintain a system
of management controls; and
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Attract and retain
qualified personnel, as well as, develop, train and manage management-level and other employees.
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If
we fail to manage our growth effectively, our business, financial condition or operating results could be materially harmed.
We
may not be able to compete successfully with other established companies offering the same or similar services and, as a result,
we may not achieve our projected revenue and user targets.
We
compete with both start-up and established technology companies. Our competitors may have substantially greater financial, marketing
and other resources than we do and may have been in business longer than we have or have greater name recognition and be better
established in the technological or cannabis markets than we are. If we are unable to compete successfully with other businesses
in our existing market, we may not achieve our projected revenue and/or user targets which may have a material adverse effect
on our financial condition.
Expansion
by our well-established competitors into the cannabis industry could prevent us from realizing anticipated growth in users and
revenues.
Competitors
in the social network space, such as Twitter and Facebook, have continued to expand their businesses in recent years into other
social network markets. If they decided to expand their social networks into the cannabis community, this could harm the growth
of our business and user base and cause our revenues to be lower than we expect. In addition, competitors in the point-of-sale
and compliance software space, such as IQ Metrics, may continue to expand their businesses into the cannabis space which could
harm the growth of our business and user base and cause our revenues to be lower than we expect.
Government
regulation of the Internet and e-commerce is evolving, and unfavorable changes could substantially harm our business and results
of operations.
We
are subject to general business regulations and laws as well as Federal and state regulations and laws specifically governing
the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet, e-commerce or other
online services, and increase the cost of providing online services. These regulations and laws may cover sweepstakes, taxation,
tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications,
consumer protection, broadband residential Internet access and the characteristics and quality of services. It is not clear how
existing laws governing issues such as property ownership, sales, use and other taxes, personal privacy apply to the Internet
and e-commerce. Unfavorable resolution of these issues may harm our business and results of operations.
The
failure to enforce and maintain our intellectual property rights could enable others to use trademarks used by our business which
could adversely affect the value of the Company.
The
success of our business depends on our continued ability to use our existing tradename in order to increase our brand awareness.
As of the date hereof, MASSROOTS is a federally registered trademark owned by us, ODAVA is a state registered trademark owned
by us and RETAIL is a state registered trademark of Odava, Inc. In addition, we have applied for the trademark “TOKE”.
The unauthorized use or other misappropriation of any of the foregoing trademarks could diminish the value of our business which
would have a material adverse effect on our financial condition and results of operation.
Due
to our involvement in the cannabis industry, we may have a difficult time obtaining insurance coverage for our business which
may expose us to additional risk and financial liabilities.
Insurance
that may otherwise be readily available, such as workers compensation, general liability, and directors and officers insurance,
is more expensive and difficult for us to obtain because we are a service provider to companies in the cannabis industry. Although
we currently maintain director’s and officer’s liability insurance there can be no assurance that we will be able
to maintain such policy in the future or at costs that are affordable to us due to the nature of our business operations. If we
are unable to maintain insurance related to our Company and business operations we will be exposed to additional risk and financial
liabilities which may have a material adverse effect on our business and financial condition.
Participants
in the cannabis industry may have difficulty accessing the service of banks, which may make it difficult for us to operate.
Despite
recent rules issued by the United States Department of the Treasury mitigating the risk to banks which do business with cannabis
companies operating in compliance with applicable state laws, as well as recent guidance from the United States Department of
Justice, banks remain wary of accepting funds from businesses in the cannabis industry. Since the use of cannabis remains illegal
under Federal law, there remains a compelling argument that banks may be in violation of Federal law when accepting for deposit
funds derived from the sale or distribution of cannabis. Consequently, businesses involved in the cannabis industry continue to
have trouble establishing banking relationships. Although we currently have a bank account, our inability to open additional bank
accounts or maintain our current account may make it difficult, if not impossible, for us, or some of our advertisers, to do business.
Our
independent registered accounting firm has expressed concerns about our ability to continue as a going concern.
The
report of our independent registered accounting firm expresses concern about our ability to continue as a going concern based
on the absence of significant revenues, our significant losses from operations and our need for additional financing to fund all
of our operations. It is not possible at this time for us to predict with assurance the potential success of our business. The
revenue and income potential of our proposed business and operations are unknown. If we cannot continue as a viable entity, we
may be unable to continue our operations and you may lose some or all of your investment in our securities.
In
the past we have experienced material weaknesses in our internal control over financial reporting, which if continued, could impair
our financial condition.
As
reported in our Annual Report on Form 10-K, our management concluded that our internal control over financial reporting was not
effective as of December 31, 2017 and 2016 due to material weaknesses regarding our controls and procedures. The Company did not
have sufficient segregation of duties to support its internal control over financial reporting. Due to our small size and limited
resources, segregation of all conflicting duties has not always been possible and may not be economically feasible in the near
term; however, we do expect to hire additional accounting personnel in the near future. We have and do endeavor to take appropriate
and reasonable steps to make improvements to remediate these deficiencies. If we have continued material weaknesses in our internal
financial reporting, our financial condition could be impaired or we may have to restate our financials, which could cause us
to expend additional funds that would have a material impact on our ability to generate profits and on the success of our business.
Risks
Relating to Use of New Technology
Government
regulation of the Internet, blockchain technology and cryptocurrency is evolving, and unfavorable changes could substantially
harm us and our subsidiary.
We
are subject to federal and state regulations and laws governing the Internet, blockchain technology and e-commerce. Existing and
future laws and regulations may impede the growth of the Internet, blockchain technology and e-commerce and/or other online services,
and may increase the cost of providing online services. Changes in regulations and laws may effect sweepstakes, taxation, tariffs,
user privacy, data protection, pricing, content, intellectual property rights, distribution, electronic contracts and other communications,
consumer protection, broadband residential Internet access and the characteristics and quality of services. In addition, many
governments and regulatory agencies have not established specific regulations pertaining to blockchain technology and other instruments
that use such technology and no assurance can be given that such governments or regulatory authorities will not implement adverse
changes to laws and regulations. Any such changes to federal and state regulations and laws may harm our and our subsidiary’s
business and results of operations.
There
are no assurances that we will be successful in developing blockchain-based solutions, that such solutions will be economically
viable or that such solutions will be able to generate any revenue.
While
we are devoting development resources to exploring the feasibility of developing block-chain based solutions, there can be no
assurances that we will be successful in implementing such solutions, that they will be economically viable, or such solutions
will generate any revenue.
The
development and acceptance of digital instruments is subject to a variety of factors which are difficult to evaluate.
We
may explore the use of digital instruments for use in connection with our platform or programs; however, there can be no assurance
that we will adopt or use any such instruments, or be successful in doing so. The development and use of such instruments is subject
to a variety of factors that are difficult to evaluate including, but not limited to:
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the
problems, expenses, difficulties, complications, and delays frequently encountered in
connection with the development of a new product or service based upon relatively new
and developing technology;
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the
acceptance and use of the new technology by consumers;
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regulation
by governmental and quasi-governmental agencies;
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the
maintenance and development of the protocols for the new technology;
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generic
economic conditions and the regulatory environment relating to the new technology; and
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the
availability and popularity of other forms or methods of buying and selling goods and
services.
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The
slowing or stopping of the development, general acceptance, adoption and usage of digital instruments or compliance with regulations
by governmental and quasi-governmental agencies may deter or delay the acceptance of such instruments.
The
potential application of U.S. laws with respect to traditional investment securities to digital instruments is unclear
.
The
use of digital instruments is novel and the application of U.S. federal and state securities laws is unclear in many respects.
Specifically, regulation with respect to such instruments is currently undeveloped, likely to evolve, may vary significantly among
international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive
bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions,
which may severely impact the permissibility of the use of digital instruments, the technology behind them or the means of transaction
in or transferring them. In the event that securities laws restrict the ability for digital instruments to be transferred in a
manner similar to traditional investment securities, this would have a material adverse effect on the value of such instruments,
which could result in a material impact on the use of such instruments as a possible means to provide rewards on the MassRoots
platform.
Our
failure to comply with any laws, rules and regulations, some of which may not exist yet or that are subject to interpretations
that may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines. The effect
of any future regulatory change is impossible to predict, but such change could be substantial and materially adverse to the adoption
and value our new technology, when and if developed, accepted and adopted.
Risks
Relating to our Common Stock
Due
to our connection to the cannabis industry, there can be no assurance that our common stock will ever be approved for listing
on a national securities exchange.
Currently,
shares of our common stock are quoted on the OTCQB and are not traded or listed on any securities exchange. Even if we desire
to have our shares listed on a national securities exchange, the fact that our network is associated with the use of cannabis,
the legal status of which is uncertain at the state and Federal level, may make any efforts to become listed on a securities exchange
more problematic. While we remain determined to work towards getting our securities listed on a national exchange, there can be
no assurance that this will occur. As a result we may never develop an active trading market for our securities which may limit
our investors’ ability to liquidate their investments.
The
market price of our common stock may be volatile and adversely affected by several factors.
The
market price of our common stock could fluctuate significantly in response to various factors and events, including, but not limited
to: our ability to execute our business plan; operating results below expectations; announcements regarding regulatory developments
with respect to the cannabis industry; our issuance of additional securities, including debt or equity or a combination thereof,
necessary to fund our operating expenses; announcements of technological innovations or new products by us or our competitors;
and period-to-period fluctuations in our financial results.
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
Our
common stock is subject to the "penny stock" rules of the SEC and the trading market in the securities is limited, which
makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.
Rule
15g-9 under the Exchange Act establishes the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer
approve a person's account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In
order to approve a person's account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability
determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the
transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock"
rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of
our common stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and
the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in
penny stocks.
We
are an "emerging growth company" within the meaning of the Securities Act, and if we decide to take advantage of certain
exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive
to investors.
For
as long as we remain an “emerging growth company”, as defined in the Jumpstart (“JOBS”) Act, we will have
the option to take advantage of certain exemptions from various reporting and other requirements that are applicable to other
public companies that are not "emerging growth companies," including, but not limited to, not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the "Sarbanes-Oxley
Act") and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved. We may take advantage of these and other exemptions until we
are no longer an "emerging growth company". In addition, the JOBS Act provides that an emerging growth company
can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with
new or revised accounting standards.
We
will remain an emerging growth company until the earliest of (1) the last day of the fiscal year during which we have total
annual gross revenues of $1.07 billion or more, (2) the last day of the fiscal year following the fifth anniversary of the
completion of our initial public offering, (3) the date on which we have, during the previous three-year period, issued more
than $1.0 billion in non-convertible debt, and (4) the date on which we are deemed to be a "large accelerated filer"
under the Exchange Act (i.e., the first day of the fiscal year after we have (a) more than $700,000,000 in outstanding common
equity held by our non-affiliates, measured each year on the last day of our second fiscal quarter, and (b) been public for
at least 12 months).
Even
after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company," which
would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock
less attractive because we may rely on these exemptions. If some investors find our common stock or warrants less attractive as
a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We
do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment.
Cash
dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the
foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive
any funds absent a sale of their shares of common stock. If we do not pay dividends, our common stock may be less valuable because
a return on your investment will only occur if our stock price appreciates. We cannot assure stockholders of a positive return
on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their
investment.
You
could lose all of your investment.
An
investment in our securities is speculative and involves a high degree of risk. Potential investors should be aware that the value
of an investment in the Company may go down as well as up. In addition, there can be no certainty that the market value of
an investment in the Company will fully reflect its underlying value. You could lose your entire investment.
Our
management controls a large block of our common stock that will allow them to control us.
As
of the date of this Annual Report, members of our management team beneficially own approximately 13.35% of our outstanding common
stock. As a result, management may have the ability to control substantially all matters submitted to our stockholders for approval
including:
|
●
|
election
and removal of our directors;
|
|
●
|
amendment
of our Certificate of Incorporation or Bylaws; and
|
|
●
|
adoption
of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving
us.
|
In
addition, management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting
to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over
our stock price. Any additional investors will own a minority percentage of our common stock and will have minority voting rights.
Because
we can issue additional shares of common stock, purchasers of our common stock may incur immediate dilution and experience further
dilution.
We
are authorized to issue up to 200,000,000 shares of common stock, of which 153,944,886 shares of common stock are issued and outstanding
as of April 11, 2018. Our Board of Directors has the authority to cause us to issue additional shares of common stock without
consent of any of stockholders. Consequently, our stockholders may experience further dilution in their ownership of our stock
in the future,
which could have an adverse effect on the trading market for our
common
stock
.
If
our proposal to adopt the Second Amended and Restated Certificate of Incorporation is adopted by a majority of our outstanding
voting capital stock at our 2018 annual meeting of stockholders, the Second Amended and Restated Certificate of Incorporation
will contain an exclusive forum provision with respect to all Internal Corporate Claims, which may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable and discourage lawsuits against us or our current or former
directors or officers and/or stockholders in such capacity
.
Our
proposed Second Amended and Restated Certificate of Incorporation provides that all Internal Corporate Claims must be brought
solely and exclusively in the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction, the Superior
Court of the State of Delaware, or, if such other court does not have jurisdiction, the United States District Court for the District
of Delaware). If our proposed Second Amended and Restated Certificate of Incorporation is adopted by a majority of our outstanding
voting capital stock at our 2018 annual meeting of stockholders, then all of our stockholders will be subject to the exclusive
forum provision of the Second Amended and Restated Certificate of Incorporation. The exclusive forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes based upon Internal Corporate Claims, which
may discourage lawsuits against us or our current or former directors or officers and/or stockholders in such capacity. In addition,
if a court were to find this exclusive-forum provision to be inapplicable or unenforceable in an action, we may incur costs associated
with resolving the dispute in other jurisdictions, which could have a material adverse effect on our business and operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES
On
February 1, 2018, we entered into a Membership Agreement with WeWork pursuant to which we will lease offices located at 2420 17
th
Street,
Office 3118, Denver, Colorado 80202 effective as of February 2, 2018. The term of the agreement is for one month which shall automatically
be renewed for successive one month terms unless terminated by either party. Pursuant to the terms of the Membership Agreement
we will pay a fee of $1,360 per month for the leased premises.
We
do not own any properties or land.
We
believe that our facilities are adequate for our current needs and that, if required, we will be able to expand our current space
or locate suitable new office space and obtain a suitable replacement for our executive and administrative headquarters.
ITEM
3. LEGAL PROCEEDINGS
We
are not currently a party to any legal proceedings, and we are not aware of any pending or potential legal actions.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
names and ages of our Directors and Executive Officers are set forth below. All Directors are elected annually by the stockholders
to serve until the next annual meeting of the stockholders and until their successors are duly elected and qualified. The officers
are elected by our Board.
Name
|
|
Age
|
|
Executive Position
|
Isaac Dietrich
|
|
26
|
|
Chief Executive Officer, Chairman and Director
|
|
|
|
|
|
Jesus Quintero
|
|
56
|
|
Chief Financial Officer
|
|
|
|
|
|
Charles Blum
|
|
79
|
|
Director
|
|
|
|
|
|
Cecil Kyte
|
|
46
|
|
Director
|
|
|
|
|
|
Graham Farrar
|
|
40
|
|
Director
|
Isaac
Dietrich, Chief Executive Officer, Chairman of the Board and Director -
Isaac Dietrich is the founder, largest shareholder,
and has been a director of the Company since our inception. He also serves as Chief Executive Officer and Chairman of the Board
effective as of December 13, 2017. In addition, he previously held the following positions with the Company: Chief Executive Officer
(April 2013 – October 2017); Chairman of the Board of the Company (April 2013 – October 2017); and Chief Financial
Officer (April 2013 – May 2014 and August 2017 – October 2017). In his various positions, Mr. Dietrich has been responsible
for executing MassRoots’ strategic business development. Mr. Dietrich was the co-founder and majority shareholder of RoboCent.com
from June 2012 where he helped scale the business until his buyout in December 2016. He has served as Chairman of 2Meet, Inc.
since May 2017. He also founded Tidewater Campaign Solutions, LLC, a Virginia Beach-based political strategy firm that was retained
by 30 political local and congressional campaigns and political action committees from January 2010 to December 2012. From February
2010 to December 2010, Mr. Dietrich served as Field Director for former Congressman E. Scott Rigell’s campaign. Mr. Dietrich
is qualified to serve as a member of the Board because of his business management experience and his years of service with us
in various executive capacities together with his knowledge of our Company and relevant experience in the cannabis industry.
Jesus
Quintero, Chief Financial Officer -
From January 2017 through December 2017 Jesus Quintero served as a financial consultant
to several domestic and international companies including, but not limited to, Premier Radiology Services, ATR Wireless Inc. and
GAM Distribution Corporation. From May 2014 until December 2016, Mr. Quintero served as Chief Financial Officer of the Company,
and from January 2013 until October 2014, he served as Chief Financial Officer of Brazil Interactive Media. Mr. Quintero has held
senior finance positions with Avnet Inc., Latin Node, Inc., Globetel Communications Corp and Telefonica of Spain and has extensive
experience in public company reporting and SEC compliance matters. His prior experience also includes tenure with PricewaterhouseCoopers
and Deloitte & Touch. Mr. Quintero received a B.S. in Accounting from St. John’s University and is a Certified Public
Accountant in the State of New York.
Charles
R. Blum, Director
– Charles Blum has served as a director of MassRoots since December 2017. Mr. Blum served as
President and Chief Executive Officer of QS Energy (formerly STWA, Inc.) from July 2007 to January 2009, and until June 2017 he
served as a member of the Board of QS Energy. Mr. Blum spent 22 years as the President/CEO of the Specialty Equipment Market
Association (“SEMA”). SEMA, a trade group representing 6,500 business members who are actively engaged in the manufacture
and distribution of automotive parts and accessories. SEMA produces the world’s largest automotive aftermarket Trade Show
which is held annually in Las Vegas, Nevada. Mr. Blum led the association as its members grew from a handful of small entrepreneurial
companies into an industry membership that sells over 31 billion dollars of product at the retail level annually. Mr. Blum is
qualified to serve as a member of the Board because he has a proven record of accomplishment as a senior executive.
Cecil
Kyte, Director
– Cecile Kyte has served as a director of MassRoots since December 2017. Mr. Kyte has served in
various capacities at Rightscorp’s, including serving as Chief Executive Officer since June 2015, Chief Financial Officer
since October 2016 and Chairman of the company’s board of directors since December 2015. Rightscorp’s mission is to
support copyright holders’ abilities to litigate and monetize efforts aimed at piracy and peer to peer infringement on the
internet. From 2007 to 2013, Mr. Kyte served as CEO and Chairman of Save The World Air, Inc., a California based publicly traded
energy technology company. Under his stewardship, that company grew from roughly $10 million in market capitalization in 2007
to an excess of $350 million by 2013 and accessed roughly $40 million in equity based capital. From 2008 until 2013, Mr. Kyte
served as Chief Executive Officer and Chairman of the Board of QS Energy (formerly STWA, Inc.). Additionally, having been a pilot
for 30 years Mr. Kyte has served as an airline captain and flight instructor who is recognized and included in the prestigious
FAA Airmen Certification database. This database recognizes pilots who have met or exceeded the high educational, licensing and
medical standards established by the Federal Aviation Administration. Mr. Kyte received a Bachelor of Science Degree in Business
Administration with emphasis in Accounting from California State University, Long Beach. Mr. Kyte is qualified to serve as a member
of the Board because of his previous and current experience running a public company, as well as his educational requirements
to hold such a position.
Graham
Farrar, Director
– Graham Farrar has served as Director of MassRoots since February 2018. He is the owner and founder
of Elite Garden Wholesale, a business which provides supplies for the growth of hydroponic crops, since January 2016. In addition,
since April 2016, Mr. Farrar has also served as the President of G&H Supply Company which is a licensed commercial cannabis
grower. From March 2014 until October 2015, Mr. Farrar served as Chief Product Officer of iStoryTime Inc, and from April 2008
until March 2014 he served as the founder and owner of zukka, a company which published the iStoryTime library of narrated
and interactive children’s books for iPhones, iPads, Kindles and Nooks. In addition, Mr. Farrar has served in various other
capacities including, but not limited to: Senior Account Executive for Network Hardware Resale; Manager, World Wide Customer Support
and Senior Manager Quality Assurance for Sonos Inc.; and Senior Manager Partner Sales Engineers and Manager, World Wide Technical
Sales for Openwave Systems (previously Software.com). Furthermore, Mr. Farrar has served as Chair of Education Outreach Committee
and a member of the board of Santa Barbara Bowl Foundation since January 2011 and August 2004, respectively. In addition, from
January 2001 until May 2010, Mr. Farrar served as a member of the board of Heal the Ocean and from January 2000 until March 2007
he served as a member of the board of Seacology. Mr. Farrar is qualified to serve as a member of the Company’s Board
because of his experience in the cannabis industry as well as his experience serving a member of the board of various organizations.
Family
Relationships
There
are no family relationships among our directors and executive officers.
Other
Directorships
Other
than as disclosed above, none of the directors of the Company are also directors of issuers with a class of securities registered
under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act).
Legal
Proceedings
We
are not aware of any of our directors or officers being involved in any legal proceedings in the past ten years relating to any
matters in bankruptcy, insolvency, criminal proceedings (other than traffic and other minor offenses) or being subject to any
of the items set forth under Item 401(f) of Regulation S-K.
CORPORATE
GOVERNANCE
Governance
of Our Company
We
seek to maintain high standards of business conduct and corporate governance, which we believe are fundamental to the overall
success of our business, serving our stockholders well and maintaining our integrity in the marketplace. Our corporate governance
guidelines and Code of Conduct and Ethics, together with our Certificate of Incorporation, Bylaws and the charters for each of
our Board committees, form the basis for our corporate governance framework. We also are subject to certain provisions of the
Sarbanes-Oxley Act and the rules and regulations of the SEC. The full text of the Code of Conduct and Ethics is available on our
website at
www.massroots.com/investors/governance
and is also filed as an exhibit to our Annual Report on Form 10-K for
the year ended December 31, 2014 as filed with the SEC on April 1, 2015.
As
described below, our Board has established three standing committees to assist it in fulfilling its responsibilities to the Company
and its stockholders: The Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.
Our
Board of Directors
Our
Board currently consists of four members. The number of directors on our Board can be evaluated and amended by action of our Board.
Our
Board has decided that it would judge the independence of its directors by the heightened standards established by the Nasdaq
Stock Market, despite the Company not being subject to these standards at this time. Accordingly, the Board has determined that
our three non-employee directors, Cecil Kyte, Graham Farrar and Charles R. Blum each meet the independence standards established
by the Nasdaq Stock Market and the applicable independence rules and regulations of the SEC, including the rules relating to the
independence of the members of our Audit Committee and Compensation Committee. Our Board considers a director to be independent
when the director is not an officer or employee of the Company or its subsidiaries, does not have any relationship which would,
or could reasonably appear to, materially interfere with the independent judgment of such director, and the director otherwise
meets the independence requirements under the listing standards of the Nasdaq Stock Market and the rules and regulations of the
SEC.
Our
Board believes its members collectively have the experience, qualifications, attributes and skills to effectively oversee the
management of our Company, including a high degree of personal and professional integrity, an ability to exercise sound business
judgment on a broad range of issues, sufficient experience and background to resolve the issues facing our Company, a willingness
to devote the necessary time to their Board and committee duties, a commitment to representing the best interests of the Company
and our stockholders and a dedication to enhancing stockholder value.
Risk
Oversight.
Our Board oversees the management of risks inherent in the operation of our business and the implementation
of our business strategies. Our Board performs this oversight role by using several different levels of review. In connection
with its reviews of the operations and corporate functions of our Company, our Board addresses the primary risks associated with
those operations and corporate functions. In addition, our Board reviews the risks associated with our Company’s business
strategies periodically throughout the year as part of its consideration of undertaking any such business strategies. Each of
our Board committees also coordinates oversight of the management of our risk that falls within the committee’s areas of
responsibility. In performing this function, each committee has full access to management, as well as the ability to engage advisors.
The Board is also provided with updates by the Chief Executive Officer and other executive officers of the Company on a regular
basis.
Stockholder
Communications.
Although we do not have a formal policy regarding communications with the Board, stockholders may communicate
with the Board by writing to us at 2420 17
th
Street, Office 3118, Denver, Colorado 80202, Attention: Legal. Stockholders
who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as
appropriate. Please note that the foregoing communication procedure does not apply to (i) stockholder proposals pursuant to Exchange
Act Rule 14a-8 and communications made in connection with such proposals or (ii) service of process or any other notice in a legal
proceeding.
Board
Committees
On
December 9, 2015, our Board designated the following three committees of the Board: the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee.
Audit
Committee
.
Effective as of December 28, 2017, the Board appointed each of Cecil Kyte, Graham Farrar and Charles
R. Blum as a member of the Audit Committee. Cecil Kyte is the Chairman of the Audit Committee. The Audit Committee is responsible
for, among other things, overseeing the financial reporting and audit process and evaluating our internal controls over financial
reporting. The Board has determined that Cecil Kyte is an “audit committee financial expert” serving on its Audit
Committee. The Board has determined that each member of the Audit Committee is “independent,” as that term is defined
by applicable SEC rules. In addition, the Board has determined that each member of the Audit Committee is “independent,”
as that term is defined by the rules of the Nasdaq Stock Market. A copy of the Audit Committee Charter is available on our website
at
www.massroots.com/investors/governance
.
Compensation
Committee
.
Effective as of December 28, 2017, the Board appointed each of Cecil Kyte, Graham Farrar and Charles
R. Blum as a member of the Compensation Committee. Cecil Kyte is the Chairman of the Compensation Committee. The Compensation
Committee is responsible for, among other things, establishing and overseeing the Company’s executive and equity compensation
programs, establishing performance goals and objectives, and evaluating performance against such goals and objectives. The Board
has determined that each member of the Compensation Committee is “independent,” as that term is defined by applicable
SEC rules. In addition, the Board has determined that each member of the Compensation Committee is “independent,”
as that term is defined by the rules of the Nasdaq Stock Market. A copy of the Compensation Committee Charter is available on
our website at
www.massroots.com/investors/governance
.
Nominating
and Corporate Governance Committee
.
Effective as of December 28, 2017, the Board appointed each of Cecil Kyte,
Graham Farrar and Charles R. Blum as a member of the Nominating and Corporate Governance Committee. Cecil Kyte is the Chairman
of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is responsible for, among
other things, identifying and recommending candidates to fill vacancies occurring between annual stockholder meetings and reviewing
the Company’s policies and programs relating to matters of corporate citizenship, including public issues of significance
to the Company and its stockholders. The Board has determined that each member of the Nominating and Corporate Governance Committee
is “independent,” as that term is defined by applicable SEC rules. In addition, the Board has determined that each
member of the Nominating and Corporate Governance Committee is “independent,” as that term is defined by the rules
of the Nasdaq Stock Market. A copy of the Nominating and Corporate Governance Committee Charter is available on our website at
www.massroots.com/investors/governance
.
Changes
in Nominating Procedures
None.
Section
16 Reporting Compliance
Section
16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of our
outstanding shares of common stock (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership
and reports of changes in ownership in our common stock and other equity securities. Such persons are required by SEC regulations
to furnish to us copies of all Section 16(a) forms they file. To our knowledge, based solely on our review of copies of the reports
received by us or written representations from certain Reporting Persons that no other reports were required, we believe that
during the fiscal year ended December 31, 2017, all filing requirements applicable to the Reporting Persons were timely met except:
|
●
|
Steven
Osborn, Charles Blum, Nathan Shelton and Cecil Kyte failed to file their initial Form 3 in a timely manner.
|
|
●
|
George
Pullar failed to file his initial Form 3 and his Form 4 in a timely manner resulting in the failure to timely report one transaction.
|
|
●
|
Jesus
Quinetero failed to file his Form 4 in a timely manner resulting in the failure to timely report one transaction.
|
|
●
|
Ean
Seeb failed to file two Form 4s in a timely manner resulting in the failure to timely report two transactions.
|
|
●
|
Vincent
Keber failed to file two Form 4s in a timely manner resulting in the failure to timely report two transactions.
|
|
●
|
Terence
Fitch failed to file his Form 4 in a timely manner resulting in the failure to timely report one transaction.
|
|
●
|
Scott
Kveton failed to file his Form 4 in a timely manner resulting in the failure to timely report one transaction.
|
ITEM
11. EXECUTIVE COMPENSATION
Named
Executive Officers
Our
“named executive officers” for the 2017 fiscal year consisted of the following individuals:
|
|
Isaac
Dietrich, Chief Executive Officer
|
|
|
Scott
Kveton, former Chief Executive Officer
Lance
Galey, former Chief Technology Officer
|
No
other executive officers earned over $100,000 during the previous fiscal year.
Summary
Compensation Table
The
table below summarizes all compensation awarded to, earned by, or paid to our Chief Executive Officer and our two most highly
compensated executive officers (the “named executive officers”) at the end of our last fiscal year for all services
rendered in all capacities to us during the years during which they served as executive officers. Where a named executive officer
is also a director, all compensation related to such individuals position as an officer.
Name &
Principal
Position
|
|
Year
|
|
|
Salary
$
|
|
|
Bonus
$
|
|
|
Stock
Awards (1)
$
|
|
|
Option
Awards (1)
$
|
|
|
Non-Equity
Incentive Plan
Compensation
$
|
|
|
All Other
Compensation
$
|
|
|
Total
$
|
Isaac Dietrich
|
|
2017
|
|
|
|
96,971
|
|
|
$
|
190,659
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
287,630
|
Chief Executive Officer, Director
|
|
2016
|
|
|
|
107,917
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
107,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel Hunt
|
|
2017
|
|
|
|
94,222
|
|
|
|
—
|
|
|
|
174,000
|
(2)
|
|
|
683,113
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
951,335
|
former Chief Operating Officer (4)
|
|
2016
|
|
|
|
104,377
|
|
|
|
—
|
|
|
|
178,000
|
(2)
|
|
|
777,195
|
(3)(14)
|
|
|
—
|
|
|
|
—
|
|
|
1,059,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lance Galey
|
|
2017
|
|
|
|
117,742
|
|
|
|
—
|
|
|
|
102,000
|
(15)
|
|
|
868,346
|
(3)(13)
|
|
|
—
|
|
|
|
—
|
|
|
1,088,088
|
former Chief Technology Officer (5)
|
|
2016
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
204,000
|
(15)
|
|
|
84,055
|
(3)(13)
|
|
|
—
|
|
|
|
—
|
|
|
298,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Kveton
|
|
2017
|
|
|
|
33,692
|
|
|
|
—
|
|
|
|
899,000
|
(9)
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000
|
|
|
972,692
|
former Chief Executive Officer (6)
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Osborn
|
|
2017
|
|
|
|
57,442
|
|
|
|
—
|
|
|
|
173,698
|
(10)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
231,140
|
former Chief Technology Officer (7)
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Robert Pullar
|
|
2017
|
|
|
|
96,769
|
|
|
|
—
|
|
|
|
209,240
|
(11)
|
|
|
415,899
|
(12)
|
|
|
—
|
|
|
|
100,000
|
|
|
821,908
|
former Chief Financial Officer (5)
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
(1)
|
|
These amounts are the aggregate fair value of the equity compensation incurred by the Company for payments to executives during the fiscal year. The aggregate fair value is computed in accordance with FASB ASC Topic 718. The fair market value was calculated using the Black-Scholes options pricing model. Assumptions underlying the valuation of each specific award are included in Note 9 of our Financial Statements included in this Annual Report on Form 10-K.
|
(2)
|
|
On December 14, 2015, the Company’s Compensation Committee approved the grant of 200,000 unvested restricted shares to Mr. Hunt. However, pursuant to the Company’s 2015 Equity Incentive Plan (the “2015 Plan”), the grant would not occur until stockholder’s approved such plan, which occurred in January 2016 (as described further in the section below entitled “Our Equity Incentive Plans”). As such, this grant was included as compensation for Mr. Hunt in fiscal year 2016 and 2017. Upon Mr. Hunt’s resignation as Chief Operating Officer in July 2017, all stock awards were fully vested.
|
(3)
|
|
On December 19, 2016, the Company granted each to Mr. Hunt and Mr. Galey 1,000,000 options to purchase the Company’s common stock at $0.86 per share for ten years, vesting over the course of one year. In the second quarter of 2017, the Company’s Compensation Committee accelerated the vesting of these options such that the options vested immediately in full.
|
(4)
|
|
Resigned as Chief Operating Officer on July 9, 2017.
|
(5)
|
|
Resigned as Chief Technology Officer on July 22, 2017.
|
(6)
|
|
Appointed as Chief Executive Officer on October 16, 2017 and resigned on December 13, 2017.
|
(7)
|
|
Appointed as Chief Technology Officer on October 16, 2017 and resigned on January 8, 2018.
|
(8)
|
|
Appointed as Chief Financial Officer on December 21, 2016 and resigned on August 28, 2017.
|
(9)
|
|
On July 18, 2017 and July 19, 2017, the Company’s Compensation Committee approved the grant of 50,000 and 1,500,000 unvested restricted shares to Mr. Kveton, respectively. Upon Mr. Kveton resignation as Chief Executive Officer in December 2017, stock awards were fully vested.
|
(10)
|
|
On July 18, 2017 and July 19, 2017, the Company’s Compensation Committee approved the grant of 50,000 vested and 1,000,000 unvested restricted shares to Mr. Osborn, respectively. Upon Mr. Osborn resignation as Chief Technology Officer in January 2018, stock awards were fully vested.
|
(11)
|
|
On August 23, 2017, the Company’s Compensation Committee approved the grant of 250,000 and vested restricted shares to Mr. Pullar. On January 3, 2017, the Company’s Compensation Committee approved the grant of 100,000 unvested restricted shares to Mr. Pullar, which vested immediately upon his resignation in August 2017.
|
(12)
|
|
On December 21, 2017, the Company’s Compensation Committee approved the grant of 425,000 options to purchase shares of Common Stock including (i) 250,000 options to purchase shares of Common Stock vesting in one (1) year and (ii) up to 175,000 options to purchase shares of Common Stock, upon meeting specified EBITDA thresholds. Upon Mr. Pullar resigning from his position in August 2017, all options were vested.
|
(13)
|
|
On November 3, 2016, the Company’s Compensation Committee approved the grant of 600,000 options to purchase shares of Common Stock vesting over one year to Mr. Galey. In the second quarter of 2017, the Company’s Compensation Committee accelerated the vesting of these options such that the options vested immediately in full.
|
(14)
|
|
On December 10, 2015, the Company’s Compensation Committee approved the grant of 800,000 options to purchase shares of Common Stock vesting on the completion of certain milestones to Mr. Hunt. In the second quarter of 2017, the Company’s Compensation Committee accelerated the vesting of these options such that the options vested immediately in full.
|
(15)
|
|
On October 3, 2016, the Company’s
Compensation Committee approved a grant of 600,000 shares of the Company's Common Stock to Mr. Galey, vesting as follows: (a) 300,000
shares on October 3, 2016 and (b) 50,000 shares on the first day of each month from November 2016 through April 2017.
|
Outstanding
Equity Awards at December 31, 2017
The
following table sets forth the equity awards our named executive officers had outstanding at December 31, 2017.
Option Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number of securities underlying unexercised options Exercisable
|
|
|
Number of securities underlying unexercised
options
Unexercisable
|
|
|
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned
Options
|
|
|
Option
exercise price
|
|
|
Option
expiration date
|
|
Isaac Dietrich
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Daniel Hunt
|
|
|
100,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.50
|
|
|
|
1/1/2025
|
|
|
|
|
800,000
|
(1)
|
|
|
—
|
|
|
|
|
|
|
$
|
1.00
|
|
|
|
12/14/2025
|
|
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.86
|
|
|
|
12/19/2026
|
|
Lance Galey
|
|
|
600,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.53
|
|
|
|
10/3/2026
|
|
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.86
|
|
|
|
12/19/2026
|
|
George Robert Pullar
|
|
|
425,000
|
(2)
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.86
|
|
|
|
1/1/2027
|
|
Steven Osborn
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Scott Kveton
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
(1)
|
The options
to purchase up to 800,000 shares of common stock were awarded pursuant to the 2015 Plan, which vest as follows: upon the Company
reaching 2,500,000 registered Users, 200,000 options shall vest; upon the Company reaching $1,000,000 in cumulative revenue,
200,000 options shall vest; and, upon the Company reaching $2,500,000 in cumulative revenue, 200,000 options shall vest. In
the second quarter of 2017, the Company’s Compensation Committee accelerated the vesting of these options to immediate.
|
(2)
|
The
options to purchase up to 425,000 shares of common stock include (i) 250,000 options to purchase shares of common stock vesting
in one year and (ii) up to 175,000 options to purchase shares of common stock, upon meeting specified earnings before interest,
taxes, depreciation and amortization, or EBITDA, thresholds. Upon Mr. Pullar resigning from his position in August 2017, all options
were vested.
|
Narrative
Disclosure to Summary Compensation and Option Tables
Isaac
Dietrich
Isaac
Dietrich provides services to us as our Chief Executive Officer pursuant to an at-will agreement that provides that Mr. Dietrich
would be paid an amount determined by the Company in accordance with the Company’s normal payroll procedures. From April
1, 2014 to March 31, 2015, Mr. Dietrich was paid a salary of $5,000 per month. From April 1, 2015 until March 31, 2016, Mr. Dietrich
was paid a salary of $6,500 per month. From April 1, 2016 until September 30, 2016, Mr. Dietrich was paid a salary of $10,833
per month. From October 1, 2016 and thereafter, Mr. Dietrich was paid a salary of $7,917 per month. Mr. Dietrich received $190,659
in bonuses in 2017. Starting December 13, 2017, Mr. Dietrich has been paid a salary of $12,083 per month. Mr. Dietrich did not
receive any compensation related to his position as a director.
In
December 2015, Mr. Dietrich started receiving health, vision and dental insurance. No retirement plan, life insurance or employee
benefits program has been awarded to Mr. Dietrich and he serves at the direction of the Board.
Daniel
Hunt
Daniel
Hunt provided services to us as our Chief Operating Officer pursuant to an “at-will” agreement that became effective
July 19, 2015. Pursuant to this agreement, Mr. Hunt received a salary of $78,000 per year and the agreement may be terminated
by either party with or without cause with one month’s written notice. From January 1, 2015 until July 17, 2015, Mr. Hunt
served as an at-will employee with a salary of $3,500 per month. From July 17, 2015 to March 31, 2016, Mr. Hunt was paid a salary
of $6,500 per month. From April 1, 2016 until September 30, 2016, Mr. Hunt was paid a salary of $10,833 per month. From October
1, 2016 and thereafter, Mr. Hunt was paid a salary of $7,500 per month.
In
addition, on January 1, 2015, the Company approved the issuance of 50,000 shares of common stock and options to purchase up to
100,000 shares of common stock at $0.50 per share pursuant to the Company’s 2014 Equity Incentive Plan to Mr. Hunt, which
would vest over the period of one year on a monthly basis. The fair market value was calculated using the Black-Scholes options
pricing model, assuming approximately 2.17% risk-free interest, 0% dividend yield, 150% volatility, and expected term of 5.25
years.
On
December 14, 2015, the Board approved a grant of options to purchase up to 800,000 shares of common stock at $1.00 per share to
Mr. Hunt pursuant to the 2015 Plan, which vest as follows: upon the Company reaching 1,000,000 registered Users, 200,000 options
shall vest; upon the Company reaching 2,500,000 registered Users, 200,000 options shall vest; upon the Company reaching $1,000,000
in cumulative revenue, 200,000 options shall vest; and, upon the Company reaching $2,500,000 in cumulative revenue, 200,000 options
shall vest. The fair market value was calculated using the Black-Scholes options pricing model. Under this model, the fair market
value of the 200,000 options that vest upon the Company reaching 1,000,000 register Users was calculated assuming approximately
2.23% risk-free interest, 0% dividend yield, 280% volatility, and expected term of 5.25 years. Upon Mr. Hunt resigning in July
2017, all options were vested. As of December 31, 2017, 800,000 options had vested.
On
December 19, 2016, the Board approved a grant of options to purchase up to 1,000,000 shares of common stock at $0.86 per share
to Mr. Hunt pursuant to the Company’s 2017 Equity Incentive Plan, which vest as follows: (i) 83,333 options on the first
day of each of January, February, April, May, July, August, October and November of 2017; and (ii) 83,334 options on the first
day of each of March, June, September and December of 2017. Because no options vested in fiscal year 2016, this grant will be
included as compensation for Mr. Hunt in fiscal year 2017. Upon Mr. Hunt resigning in July 2017, all options were accelerated
and fully vested. As of December 31, 2017, 1,000,000 options had vested.
Lance
Galey
Lance
Galey provided services to us as our Chief Technology Officer pursuant to an “at-will” agreement that became effective
June 20, 2016.
On
October 3, 2016, pursuant to the Company’s 2016 Equity Incentive Plan, the Board issued Mr. Galey a stock grant of 600,000
restricted shares of the Company’s common stock (the “Galey Stock Award”) and ten-year options to purchase up
to 600,000 shares of the Company’s common stock with an exercise price of $0.51 (the “Galey Option Award”).
The Galey Stock Award will vest as follows: (i) 300,000 shares will vest on October 3, 2016 and (i) 50,000 shares will vest
on the first day of each month from November 2016 through April 2017. If the Company terminates the employment of Mr. Galey prior
to the full vesting of the Galey Stock Award and Galey Option Award, or in the event of a change of control, merger, or similar
event affecting the Company, all remaining unvested options and shares will vest immediately. Upon Mr. Galey resigning in July
2017, all options were vested. As of December 31, 2017, options to purchase up to 600,000 shares of common stock had vested.
On
December 19, 2016, the Board approved a grant of unvested options to purchase up to 1,000,000 shares of common stock at $0.86
per share pursuant to the Company’s 2017 Equity Incentive Plan to Mr. Galey, which vest as follows: (i) 83,333 options on
the first day of each of January, February, April, May, July, August, October and November of 2017; and (ii) 83,334 options on
the first day of each of March, June, September and December of 2017. Because no options vested in fiscal year 2016, this grant
will be included as compensation for Mr. Galey in fiscal year 2017. Upon Mr. Galey resigning in July 2017, all options were accelerated
and fully vested. As of December 31, 2017, 1,000,000 options had vested.
Compensation
Adjustments
On
March 29, 2016, our Board, upon the recommendation of the Company’s Compensation Committee, approved increases in the salary
of Mr. Dietrich and Mr. Hunt, such that each would receive $10,833 per month for their services in their respective positions.
On
October 5, 2016, our Board, upon the recommendation of the Company’s Compensation Committee, approved adjustments to several
officers’ compensation packages. Specifically, in connection with the Board’s expense reduction initiatives, the Board
approved (i) a decrease of the annual salary of the Company’s President and Chief Executive Officer, Isaac Dietrich, to
$95,000 per year from $130,000 per year; (ii) a decrease of the annual salary of the Company’s Chief Operating Officer,
Daniel Hunt, to $90,000 per year from $130,000 per year; and (iii) a decrease of the annual salary of the Company’s Chief
Technology Officer, Lance Galey, to $60,000 per year from $150,000 per year.
In
addition to the salary decrease, Mr. Galey agreed to waive $51,785 in salary which he had earned but deferred payment of in connection
with the Board’s approval of the Galey Stock Award and the Galey Option Award.
Except
Lance Galey, George Robert Pullar, Scott Kveton, and Daniel Hunt each of who’s awards were accelerated, at no time during
the periods listed in the above tables, with respect to any named executive officers, was there:
|
●
|
any
outstanding option or other equity-based award re-priced or otherwise materially modified (such as by extension of exercise
periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or
the change of the bases upon which returns are determined);
|
|
|
|
|
●
|
any
waiver or modification of any specified performance target, goal or condition to payout with respect to any amount included
in non-stock incentive plan compensation or payouts;
|
|
|
|
|
●
|
any
non-equity incentive plan award made to a named executive officer;
|
|
|
|
|
●
|
any
nonqualified deferred compensation plans including nonqualified defined contribution plans; or
|
|
|
|
|
●
|
any
payment for any item to be included under All Other Compensation (column (i)) in the Summary Compensation Table.
|
Director
Compensation
Our
interested, employee director does not receive any additional compensation for his service as director.
The
following table shows for the fiscal year ended December 31, 2017, certain information with respect to the compensation of all
non-employee directors of the Company:
Name
|
|
Fees Earned or
Paid in Cash
|
|
|
Stock
Awards
(1)
|
|
|
Option and Warrant
Awards
(1)
|
|
|
Total
|
|
Ean Seeb
(2)(3)
|
|
$
|
100,000
|
|
|
$
|
-
|
(5)
|
|
$
|
1,142,179
|
(3)(7)
|
|
$
|
1,242,179
|
|
Vincent Keber
(2)(3)
|
|
$
|
100,000
|
|
|
$
|
-
|
(5)
|
|
$
|
1,142,179
|
(3)(7)
|
|
$
|
1,242,179
|
|
Terence Fitch
(2)
|
|
$
|
100,000
|
|
|
$
|
-
|
(5)
|
|
$
|
1,236,487
|
(3)(7)
|
|
$
|
1,336,487
|
|
Nathan Shelton
(4)(6)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cecil Kyte
(4)
|
|
$
|
15,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,000
|
|
Charles Blum
(4)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
These
amounts are the aggregate fair value of the equity compensation granted to our directors during the fiscal year. The fair
value is computed in accordance with FASB ASC Topic 718. The fair market value was calculated using the Black-Scholes options
pricing model. Assumptions underlying the valuation of each specific award are included in Note 9 of our Financial Statements
included in this Annual Report on Form 10-K.
|
(2)
|
Messrs.
Seeb, Keber and Fitch joined our Board on June 4, 2014, March 31, 2014 and December 9, 2015, respectively and resigned as
members of the Board on December 12, 2017.
|
(3)
|
On
December 19, 2016, the Company granted Messrs. Seeb Fitch and Keber ten-year options to acquire up to 1,000,000 shares of
the Company’s common stock each at an exercise price of $0.86 per share and vesting monthly over one year. Upon resignation
from the Board, these options vested immediately.
|
(4)
|
Messrs.
Shelton, Kyte, and Blum joined our Board on December 12, 2017.
|
(5)
|
As
discussed below, on July 26, 2017, the Board approved a grant of common stock of 500,000 shares to each of Messrs. Keber and
Seeb and 750,000 shares to Mr. Fitch. These shares were rescinded upon their resignation on December 12, 2017.
|
(6)
|
Mr.
Shelton resigned from our Board effective February 21, 2018.
|
(7)
|
As
discussed below, on December 13, 2017, the Board approved an award of warrants to purchase up to 1,500,000 shares of common
stock to Messrs. Keber and Seeb and warrants to purchase up to 1,850,000 shares of common stock to Mr. Fitch.
|
On
December 19, 2016, the Board approved a grant of options to purchase up to 1,000,000 shares of common stock at $0.86 per share
pursuant to the Company’s 2017 Equity Incentive Plan to each of Messrs. Seeb, Keber and Fitch which vest as follows for
each such recipient: (i) 83,333 options on the first day of each of January, February, April, May, July, August, October and November
of 2017; and (ii) 83,334 options on the first day of each of March, June, September and December of 2017. Because no options vested
in fiscal year 2016, this grant will be included as compensation for Messrs. Seeb, Keber and Fitch in fiscal year 2017. These
options immediately vested upon Messrs. Seeb, Keber and Fitch’s resignations on December 12, 2017.
On
July 26, 2017, the Board approved a grant of common stock of 500,000 shares to each of Messrs. Keber and Seeb and 750,000 shares
to Mr. Fitch. These shares were rescinded upon their resignation on December 12, 2017.
On
December 13, 2017, the Board approved a grant of vested warrants to purchase up to 1,500,000 shares of common stock at $0.20 per
share to each of Messrs. Seeb and Keber and warrants to purchase 1,850,000 shares of common stock at $0.20 per share to Mr. Fitch.
Indemnification
of Officers and Directors
Our
Amended and Restated Certificate of Incorporation provides that we shall indemnify our officers and directors to the fullest extent
permitted by applicable law against all liability and loss suffered and expenses (including attorneys” fees) incurred in
connection with actions or proceedings brought against them by reason of their serving or having served as officers, directors
or in other capacities. We shall be required to indemnify a director or officer in connection with an action or proceeding commenced
by such director or officer only if the commencement of such action or proceeding by the director or officer was authorized in
advance by the Board of Directors.
We
currently maintain director’s and officer’s liability insurance having a total aggregate limit of liability of $1,000,000,
and an umbrella policy for up to $1,000,000 in excess coverage.
Our
Equity Incentive Plans
Our
stockholders approved our 2014 Equity Incentive Plan (“2014 Plan”) in June 2014, our 2015 2015 Plan in December 2015,
our 2016 Equity Incentive Plan (“2016 Plan”) in October 2016 and our 2017 Equity Incentive Plan (“2017 Plan”,
and collectively, the “Plans”) in December 2016. The Plans are identical, except for number of shares reserved for
issuance under each.
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 nonstatutory 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 (as defined herein).
Plan
Details
The
following table and information below sets forth information as of December 31, 2017 on our Plans:
Plan Category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
|
|
|
Weighted-average exercise price of outstanding options, warrants and rights
(b)
|
|
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
2014 Equity Incentive Plan
|
|
|
1,685,792
|
|
|
$
|
0.31
|
|
|
|
0
|
|
2015 Equity Incentive Plan
|
|
|
3,059,157
|
|
|
$
|
0.94
|
|
|
|
0
|
|
2016 Equity Incentive Plan
|
|
|
1,971,771
|
|
|
$
|
0.51
|
|
|
|
0
|
|
2017 Equity Incentive Plan
|
|
|
7,660,850
|
|
|
$
|
0.87
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
14,377,570
|
|
|
$
|
0.76
|
|
|
|
0
|
|
Summary
of the Plans
Authorized
Shares
A
total of 4,000,000 shares of our common stock are reserved for issuance pursuant to the 2014 Plan. A total of 4,500,000 shares
of our common stock are reserved for issuance pursuant to the 2015 Plan. A total of 6,000,000 shares of our common stock are reserved
for issuance pursuant to the 2016 Plan. A total of 25,000,000 shares of our common stock are reserved for issuance pursuant to
the 2017 Plan. Shares issued under our Plans may be authorized but unissued or reacquired shares of our common stock. Shares subject
to stock awards granted under our Plans that expire or terminate without being exercised in full, or that are paid out in cash
rather than in shares, will not reduce the number of shares available for issuance under our Plans. Additionally, shares issued
pursuant to stock awards under our Plans that we repurchase or that are forfeited, as well as shares reacquired by us as consideration
for the exercise or purchase price of a stock award, will become available for future grant under our Plans.
Administration
Our
Board, or a duly authorized committee thereof (collectively, the “Committee”), has the authority to administer our
Plans. Our Board may also delegate to one or more of our officers the authority to designate employees other than Directors and
officers to receive specified stock, which, in respect to those awards, said officer or officers shall then have all that the
Committee would have.
Subject
to the terms of our Plans, the Committee has the authority to determine the terms of awards, including recipients, the exercise
price or strike price of stock awards, if any, the number of shares subject to each stock award, the fair market value of a share
of our common stock, the vesting schedule applicable to the awards, together with any vesting acceleration, the form of consideration,
if any, payable upon exercise or settlement of the stock award and the terms and conditions of the award agreements for use under
the Plans. The Committee has the power to modify outstanding awards under the Plans, subject to the terms of the Plans and applicable
law. Subject to the terms of our Plans, the Committee has the authority to reprice any outstanding option or stock appreciation
right, cancel and re-grant any outstanding option or stock appreciation right in exchange for new stock awards, cash or other
consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the
consent of any adversely affected participant.
Stock
Options
Stock
options may be granted under the Plans. The exercise price of options granted under our Plans must at least be equal to the fair
market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except that
with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must
not exceed 5 years and the exercise price must equal at least 110% of the fair market value on the grant date. The Committee will
determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable
to the Committee, as well as other types of consideration permitted by applicable law. No single participant may receive more
than 25% of the total options awarded in any single year. Subject to the provisions of our Plans, the Committee determines the
other terms of options.
Performance
Shares
Performance
shares may be granted under our Plans. Performance shares are awards that will result in a payment to a participant only if performance
goals established by the administrator are achieved or the awards otherwise vest. The Committee will establish organizational
or individual performance goals or other vesting criteria in its discretion, which, depending on the extent to which they are
met, will determine the number and/or the value of performance shares to be paid out to participants. After the grant of a performance
share, the Committee, in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such
performance shares. The Committee, in its sole discretion, may pay earned performance units or performance shares in the form
of cash, in shares or in some combination thereof, per the terms of the agreement approved by the Committee and delivered to the
participant. This agreement will state all terms and condition of the agreements.
Restricted
Stock
The
terms and conditions of any restricted stock awards granted to a participant will be set forth in an award agreement and, subject
to the provisions in the Plans, will be determined by the Committee. Under a restricted stock award, we issue shares of our common
stock to the recipient of the award, subject to vesting conditions and transfer restrictions that lapse over time or upon achievement
of performance conditions. The Committee will determine the vesting schedule and performance objectives, if any, applicable to
each restricted stock award. Unless the Committee determines otherwise, the recipient may vote and receive dividends on shares
of restricted stock issued under our Plans.
Other
Share-Based Awards and Cash Awards
The
Committee may make other forms of equity-based awards under our Plans, including, for example, deferred shares, stock bonus awards
and dividend equivalent awards. In addition, our Plans authorizes us to make annual and other cash incentive awards based on achieving
performance goals that are pre-established by our compensation committee.
Change
in Control
If
the Company is merged or consolidated with another entity or sells or otherwise disposes of substantially all of its assets to
another company while awards or options remain outstanding under the Plans, unless provisions are made in connection with such
transaction for the continuance of the Plans and/or the assumption or substitution of such awards or options with new options
or stock awards covering the stock of the successor company, or parent or subsidiary thereof, with appropriate adjustments as
to the number and kind of shares and prices, then all outstanding options and stock awards which have not been continued, assumed
or for which a substituted award has not been granted shall, whether or not vested or then exercisable, unless otherwise specified
in the relevant agreements, terminate immediately as of the effective date of any such merger, consolidation or sale.
Change
in Capitalization
If
the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend,
or other increase or reduction of the number of shares of the common stock outstanding, without receiving consideration therefore
in money, services or property, then awards amounts, type, limitations, and other relevant consideration shall be appropriately
and proportionately adjusted. The Committee shall make such adjustments, and its determinations shall be final, binding and conclusive.
Plan
Amendment or Termination
Our
Board has the authority to amend, suspend, or terminate our Plans, provided that such action does not materially impair the existing
rights of any participant without such participant’s written consent. The Plans will terminate ten years after the earlier
of (i) the date the each Plan is adopted by the Board, or (ii) the date a Plan is approved by the stockholders, except that awards
that are granted under the applicable Plan prior to its termination will continue to be administered under the terms of the that
Plan until the awards terminate, expire or are exercised.
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|
SECURITY
OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding the beneficial ownership of our Common Stock by (i) each person who,
to our knowledge, owns more than 5% of our Common Stock, (ii) each of our current directors and the named executive officer identified
under the heading “Executive Compensation” and (iii) all of our current directors and executive officers as a group.
We have determined beneficial ownership in accordance with applicable rules of the SEC, and the information reflected in the table
below is not necessarily indicative of beneficial ownership for any other purpose. Under applicable SEC rules, beneficial ownership
includes any shares of Common Stock as to which a person has sole or shared voting power or investment power and any shares of
Common Stock which the person has the right to acquire within 60 days after April 11, 2018 through the exercise of any option,
warrant or right or through the conversion of any convertible security. Unless otherwise indicated in the footnotes to the table
below and subject to community property laws where applicable, we believe, based on the information furnished to us that each
of the persons named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
The
information set forth in the table below is based on 153,944,886 shares of our Common Stock issued and outstanding on April 11,
2018. In computing the number of shares of Common Stock beneficially owned by a person and the percentage ownership of that person,
we deemed to be outstanding all shares of Common Stock subject to options, warrants, rights or other convertible securities held
by that person that are currently exercisable or will be exercisable within 60 days after April 11, 2018. We did not deem these
shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated,
the principal address of each of the stockholders below is in care of MassRoots, Inc., 2420 17
th
Street, Office 3118,
Denver, Colorado 80202.
|
|
Number
of
Shares
Beneficially
Owned
|
|
|
Percentage
Beneficially
Owned
|
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
Isaac
Dietrich
|
|
|
17,738,831
|
(1)
|
|
|
11.52
|
%
|
Charles
R. Blum
|
|
|
500,000
|
(2)
|
|
|
*
|
|
Cecil
Kyte
|
|
|
1,500,000
|
(3)
|
|
|
*
|
|
Graham
Farrar
|
|
|
500,000
|
(4)
|
|
|
*
|
|
Jesus
Quintero
|
|
|
320,075
|
|
|
|
*
|
|
All
directors and named executive officers as a group (5 persons)
|
|
|
20,558,906
|
|
|
|
13.35
|
%
|
(1)
|
Includes 17,738,831 shares of common stock. Excludes
warrants to purchase up to 85,000 shares of common stock.
The forgoing warrants
contains an ownership limitation such that the holder may not convert any of such securities to the extent that such conversion
would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding
common stock together with all shares owned by the holder and its affiliates.
|
(2)
|
Includes (i) 250,000 shares
of
common stock
and
(ii) an option to purchase up to 250,000 shares of
common stock
.
|
(3)
|
Includes (i) 750,000 shares
of
common stock
and
(ii) an option to purchase up to 750,000 shares of
common stock
.
|
(4)
|
Includes (i) 250,000 shares
of
common stock
and
(ii) an option to purchase up to 250,000 shares of
common stock
.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our
Board approved formation of an Audit Committee in December 2015 which is comprised of three members of the Board.
As
disclosed in our Form 8-K filed on January 21, 2016, we dismissed N.K.A. L&L CPAs, PA (formerly known as Bongiovanni &
Associates, PA) (“L&L”) as our independent accountant on January 15, 2016, and engaged Liggett & Webb P.A.
(“Liggett Webb”) to serve as our new independent accountant.
The
following table sets forth the aggregate fees billed to us by Liggett Webb for the fiscal year ended December 31, 2016 and a portion
of the fiscal year ended December 31, 2017.
|
|
Liggett Webb
|
|
|
|
2017
|
|
|
2016
|
|
Audit Fees
|
|
$
|
72,500
|
|
|
$
|
71,500
|
|
Audit-Related Fees
|
|
|
54,000
|
|
|
|
—
|
|
Tax Fees
|
|
|
—
|
|
|
|
—
|
|
Other Fees
|
|
|
—
|
|
|
|
2,500
|
|
Totals
|
|
$
|
126,500
|
|
|
$
|
74,000
|
|
Audit
Fees
The
aggregate fees billed for each of the last two fiscal years for professional services rendered by Liggett Webb for the audit of
the Company’s annual financial statements and review of financial statements included in the Company’s Form 10-K or
services that are normally provided by the registered independent accountant in connection with statutory and regulatory filings
or engagements for the fiscal years ending December 31, 2017 and 2016 were: $72,500 and $71,500, respectively.
Audit-Related
Fees
The
aggregate fees billed in either of the last two fiscal years for assurance and related services by the registered independent
accountant that are reasonably related to the performance of the audit or review of the registrant’s financial statements
and are not reported under item (1) for the fiscal years ending December 31, 2017 and 2016 were $54,000, and $0, respectively.
Audit related fees primarily include fees due to the acquisition audits for FlowHub LLC., Odava, LLLC and DDDigtal LLC.
Tax
Fees
The
aggregate fees were billed for professional services rendered by the principal accountant for tax compliance, tax advice, and
tax planning for the fiscal years ending December 31, 2017 and 2016 was $0 and $0, respectively.
All
Other Fees
Other
fees billed for professional services provided by the principal accountant, other than the services reported above, for the fiscal
years ending December 31, 2017 and 2016 were $0 and $2,500.
The
Audit Committee of the Company approves all auditing services and the terms thereof and non-audit services (other than non-audit
services published under Section 10A(g) of the Exchange Act or the applicable rules of the SEC or the Pubic Company Accounting
Oversight Board) to be provided to us by the independent auditor; provided, however, the pre-approval requirement is waived with
respect to the provisions of non-audit services for us if the “de minimus” provisions of Section 10A(i)(1)(B) of the
Exchange Act are satisfied.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
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 audited 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. Our consolidated financial statements include the accounts of DDDigtal, Inc., Odava,
Inc., and MassRoots Blockchain Technologies, Inc. All intercompany transactions were eliminated during consolidation.
Acquisitions
DDDigtal
Inc.
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 of DDDigtal, 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”). The primary reason for this combination was the
acquisition of DDDigtal’s menu management software, which has been integrated with MassRoots’ business portal to expand
the services provided to our clients.
On
January 25, 2017 (the “Effective Date”), the Merger 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 such number of shares of the Company’s
common stock (or a fraction thereof), based on 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 on a pro rata basis
to all stockholders of DDDigtal (the “Share Consideration”) in exchange for all of the outstanding shares of common
stock of DDDigtal’s. In addition, on the Effective Date, each share of the common stock of Merger Subsidiary was exchanged
for one share of common stock of DDDigtal, and all shares of DDDigtal common stock outstanding immediately prior to the Effective
Date were automatically cancelled and retired. As of the Effective Date, DDDigtal continued as a surviving wholly-owned subsidiary
of the Company, and the Merger Subsidiary ceased to exist.
Pursuant
to the terms of the Merger Agreement, in December 2016, the Company paid each of Zachary Marburger and Micah Davidson $40,000
and $20,000, respectively, as repayment for outstanding debts owed by DDDigtal to such individuals.
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 employment with the
Company.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
A
summary of consideration is as follows:
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
|
|
The
following summarizes the current estimates of fair value of assets acquired and liabilities assumed:
Cash
|
|
$
|
8,672
|
|
Accounts receivable
|
|
|
3,583
|
|
Property and equipment
|
|
|
3,333
|
|
Goodwill
|
|
|
2,967,772
|
|
Assets acquired
|
|
$
|
2,983,360
|
|
During
management’s annual review of these assets, it was determined that the fair-market value of DDDigtal’s menu management
software was $1,253,000 based upon projected cash-flows and valuations of comparable software services. This value will be amortized
over an expected three-year useful life. The remaining $1,714,772 in goodwill was impaired and written-off in December 2017.
Pro
forma Results
The
following tables set forth the unaudited pro forma results of the Company as if the acquisition of DDDigtal had taken place on
the first day of the periods presented. These combined results are not necessarily indicative of the results that may have been
achieved had the companies been combined as of the first day of the periods presented.
|
|
Twelve months ended December 31, 2017
|
|
|
Twelve months ended December 31, 2016
|
|
Total revenues
|
|
$
|
319,242
|
|
|
$
|
740,264
|
|
Net loss
|
|
|
(44,389,569
|
)
|
|
|
(18,193,082
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.46
|
)
|
|
$
|
(0.34
|
)
|
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Odava,
Inc.
On
July 5, 2017, the Company entered into an Agreement and Plan of Merger (the “July 2017 Merger Agreement”) with MassRoots
Compliance Technology, Inc., a wholly-owned subsidiary of the Company (“MCT”), Odava, Inc., a Delaware corporation
(“Odava”), and Scott Kveton, an individual acting solely in his capacity as a stockholder representative of Odava.
Pursuant to the July 2017 Merger Agreement, the parties agreed to merge MCT with and into Odava, whereby Odava survived as a wholly-owned
subsidiary of MassRoots (the “Odava Merger”). The primary reason for this combination was the acquisition of Whaxy’s
point-of-sale software for dispensaries, which MassRoots planned to offer as an additional service to its clients.
On
July 13, 2017 (the “Odava Merger Effective Date”), the Odava Merger became effective upon the filing of a certificate
of merger with the Secretary of State of the State of Delaware, in the form as required by and executed in accordance with the
relevant provisions of the Delaware General Corporation Law.
Pursuant
to the terms of the July 2017 Merger Agreement, each share of Odava’s common stock was exchanged for such number of shares
of MassRoots’ common stock (or a fraction thereof), based on an exchange ratio equal to approximately 4.069-for-1, such
that one share of MassRoots’ common stock was issued for approximately every 4.069 shares of Odava’s common stock.
On
the Odava Merger Effective Date, the Company issued an aggregate of 3,250,000 shares of common stock pro rata to all stockholders
of Odava (the “Share Consideration”) in exchange for all of their shares of Odava’s common stock. In addition,
on the Odava Merger Effective Date, shares of the common stock of MCT were converted into and exchanged for one share of common
stock of Odava, and all shares of Odava common stock outstanding immediately prior to the Odava Merger Effective Date were automatically
cancelled and retired. As of the Odava Merger Effective Datem Odava continued as a surviving wholly-owned subsidiary of Massroots,
and MCT ceased to exist. In addition, the Company issued an aggregate of 2,600,000 shares of its common stock to the founders
of Odava in connection with the Odava Merger. Furthermore, pursuant to the terms of the Odava Merger Agreement, the Company paid
each of Scott Kveton and Steven Osborn $30,000 and $5,000, respectively, as repayment for outstanding debts owed by Odava to such
individuals.
As
a condition to the closing of the Odava Merger, the Company hired Scott Kveton as its new Director of Business Development, and
Steven Osborn as its Principal Architect.
A
summary of consideration is as follows:
Cash and costs incurred
|
|
$
|
40,570
|
|
3,250,000 shares of the Company’s common stock
|
|
|
1,966,250
|
|
Total purchase price
|
|
$
|
2,006,820
|
|
The
following summarizes the current estimates of fair value of assets acquired and liabilities assumed:
Cash
|
|
$
|
2,601
|
|
Goodwill
|
|
|
2,004,219
|
|
Assets acquired
|
|
$
|
2,006,820
|
|
The
above estimated fair value of the intangible assets is based on a preliminary purchase price allocation prepared by management.
As this software has never been monetized and market conditions have changed significantly since the acquisition, the value of
this of this asset is significantly impaired and we have written off the $2,006,820 in goodwill associated with Odava.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
Pro
forma results
The
following tables set forth the unaudited pro forma results of the Company as if the acquisition of Odava had taken place on the
first day of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved
had the companies been combined as of the first day of the periods presented.
|
|
Twelve months ended December 31, 2017
|
|
|
Twelve months ended December 31, 2016
|
|
Total revenues
|
|
$
|
319,242
|
|
|
$
|
701,581
|
|
Net loss
|
|
|
(44,405,275
|
)
|
|
|
(18,030,668
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.46
|
)
|
|
$
|
(0.34
|
)
|
The
Company accounts for acquisitions in accordance with the provisions of Accounting Standards Codification (“ASC”) 805
Business Combinations (“ASC 805”). The Company assigns to all identifiable assets acquired a portion of the cost of
the acquired company equal to the estimated fair value of such assets at the date of acquisition. The Company records the excess
of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired as goodwill.
The
Company recorded goodwill in the aggregate amount of $0 as a result of the acquisitions of DDDitgal and Odava during the year
ended December 31, 2017.
The
Company accounts for and reports acquired goodwill under ASC subtopic 350-10, Intangibles-Goodwill and Other (“ASC 350”).
In accordance with ASC 350-10, at least annually, the Company tests its intangible assets for impairment or more often if events
and circumstances warrant. Any write-downs will be included in results from operations. As this software has never been monetized
and market conditions have changed significantly, the value of the Odava acquisition was deemed fully impaired and fully written-off
as of December 31, 2017.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
NOTE
2 –GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As
of December 31, 2017, the Company had cash of $1,201,587 and working capital deficit (current liabilities in excess of current
assets) of $12,731,564. During the twelve months ended December 31, 2017, the Company used net cash in operating activities of
$7,997,465. 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 twelve months of 2017, the Company received $4,753,196, $950,000, $3,248,000 and $442,500 from the exercise of common stock
warrants, proceeds from issuance of convertible notes, sale of common stock and proceeds from simple agreements for future tokens,
respectively. The Company does not have cash sufficient to fund operations.
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 potentially 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 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 consolidated financial statements do not necessarily purport to
represent realizable or settlement values. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of MassRoots, Inc. and its wholly-owned operating subsidiaries.
All material intercompany accounts and transactions are eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates include stock-based compensation,
fair values relating to derivative liabilities and the valuation allowance related to deferred tax assets. Actual results may
differ from these estimates.
Fair
Value of Financial Instruments
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.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
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. As of December 31, 2017, MassRoots was indebted to four debtor in secured convertible notes. The
concentration of credit amongst these debtors make it likely they would wield significant influence over MassRoots and the disposition
of assets in the event of a default.
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 occurred. When retired or otherwise disposed, the related carrying value and accumulated
depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected
in earnings.
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends,
and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability
to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts and
if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required
payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts
receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection.
As of December 31, 2017 and December 31, 2016, based upon the review of the outstanding accounts receivable, the Company has determined
that an allowance for doubtful accounts is not required.
Revenue
Recognition
The
Company recognizes revenue when services are realized or realizable and earned less estimated future doubtful accounts.
The Company
considers revenue realized or realizable and earned when all of the following criteria are met:
|
(i)
|
persuasive
evidence of an arrangement exists;
|
|
(ii)
|
the services
have been rendered and all required milestones achieved;
|
|
(iii)
|
the sales
price is fixed and determinable; and
|
|
(iv)
|
collectability
is reasonably assured.
|
The
Company primarily generates revenue by charging businesses to advertise on the network. The Company has the ability to target
advertisements directly to a clients’ target audience, based on their location, on their mobile devices. In cases where
clients sign advertising contracts for an extended period of time, the Company only realizes revenue for services provided during
that quarter and defers all other revenue to future periods.
Acquisitions
and Subsidiaries
Subsidiaries
are all entities over which MassRoots has the power to govern the financial and operating policies generally accompanying a shareholding
of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether MassRoots controls another entity. Subsidiaries are fully consolidated from
the date on which control is transferred to MassRoots.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2017 and 2016
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.
Inter-company
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 $960,239
and $985,342, as advertising for the year ended December 31, 2017 and 2016, 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.
Income
Taxes
The
Company follows ASC subtopic 740-10, Income Taxes- (“ASC 740-10”) for recording the provision for income taxes. Deferred
tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets
and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized
or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period.
If
available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized,
a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.
Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred
income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and
tax purposes in different periods.
Convertible
Instruments
U.S.
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under otherwise applicable 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.
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.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
Derivative Financial
Instruments
The Company classifies
as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice
of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts
are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash
settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s
control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share
settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each
reporting date to determine whether a change in classification between assets and liabilities is required.
The Company’s
free-standing derivatives consisted of warrants to purchase common stock that were issued in connection with the issuance of debt
and sale of common stock, and of embedded conversion options with convertible debentures. The Company evaluated these derivatives
to assess their proper classification in the balance sheet as of December 31, 2017 using the applicable classification criteria
enumerated under ASC 815 Derivatives and Hedging. The Company determined that certain embedded conversion and/or exercise features
do not contain fixed settlement provisions. The convertible debentures contain a conversion feature such that the Company could
not ensure it would have adequate authorized shares to meet all possible conversion demands.
As such, the Company
was required to record the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such
derivatives to fair value at the end of each reporting period.
Long-Lived Assets
The Company reviews
its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Intangible
assets are stated at cost and reviewed annually to examine any impairments, usually assuming an estimated useful lives of 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 acquisition method of accounting in accordance with ASC 805, “Business Combinations,”
where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based
on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted,
up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities
assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible
assets acquired less liabilities assumed is recognized as goodwill.
The Company tests
for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events or circumstances
indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.
Segment Reporting
Operating segments
are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the
Chief Executive Officer, or decision-making group, in deciding the method to allocate resources and assess performance. The Company
currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
Net Earnings (Loss)
Per Common Share
The Company computes
earnings (loss) per share under ASC subtopic 260-10, Earnings Per Share (“ASC 260-10”). 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 December 31, 2017 and 2016 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,
2017
|
|
|
December 31,
2016
|
|
Common stock issuable upon conversion of convertible debentures
|
|
|
6,147,059
|
|
|
|
1,081,000
|
|
Options to purchase common stock
|
|
|
14,377,570
|
|
|
|
14,824,158
|
|
Warrants to purchase common stock
|
|
|
35,187,847
|
|
|
|
15,488,056
|
|
Totals
|
|
|
55,712,476
|
|
|
|
31,393,214
|
|
Reclassification
Certain reclassifications
have been made to the prior years’ data to conform to the current year presentation. These reclassifications had no effect
on reported income (losses).
Recent Accounting
Pronouncements
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.
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 will be effective for the Company in the first fiscal quarter of 2018 on a prospective
basis, and early adoption is permitted. The Company does not expect the standard to have a material impact on our 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. Early adoption is permitted, including adoption during an interim period. The Company has not yet completed
the analysis of how adopting this guidance will affect its consolidated financial statements and related disclosures.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
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 expects
to apply the guidance using the modified retrospective transition method. The Company does not expect the adoption of ASU 2014-09
to have a material impact on the Company’s financial position or results of operations but will result in additional disclosures
regarding the Company’s revenue recognition policies. The Company also does not expect the adoption of ASU 2014-09 will require
material or significant changes to its internal controls over financial reporting. In connection with the application of that guidance
and the adoption of ASU 2014-09, the Company expects that it will expand its revenue recognition inquiries and update its questionnaires
primarily to identify matters that would signal variable consideration implications under the new guidance.
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. Early application is permitted for annual or interim reporting periods for which the financial statements
have not previously been issued. The Company has adopted this standard and included the necessary disclosures in the footnotes
to our financial
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 (i.e., January 1,
2019, for a calendar year entity). 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
Consolidated Financial Statements
December 31, 2017 and
2016
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 is not expected to have a material impact on the Company’s financial position and results of operations.
There are other various
updates recently issued, most of which represented technical corrections to the accounting literature or application to specific
industries and are not expected to have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 4 –
INVESTMENTS
In 2016, the Company
paid a $60,000 acquisition deposit to acquire DDDigital, LLC.
As of December 31,
2017 and 2016, the carrying value of our investments in privately held companies totaled $403,249 and $175,000, respectively. 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.
To facilitate the
integration with dispensary point of sale systems, in 2015, the Company invested $175,000 in exchange for preferred shares of Flowhub
LLC (“Flowhub”), a seed-to-sale system, equal to 8.95% of the then outstanding equity of Flowhub. The preferred shares
are considered non-marketable securities. On May 12, 2017, the Company sold its preferred shares in Flowhub for net proceeds of
$250,000. The gain on sale of securities of $75,000 was recorded in current period operations.
During the twelve
months ended December 31, 2017, the Company acquired 23,810 shares of Class A common stock of Hightimes Holding Corp. for $100,002,
or $4.20 per share. The acquired 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 at 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 to 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 this the note 430,622 shares of CannaRegs’ common stock, approximately 4.31% of CannaRegs’ issued
and outstanding shares of December 31, 2017.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
NOTE 5 –
PROPERTY AND EQUIPMENT
Property and equipment
as of December 31, 2017 and December 31, 2016 is summarized as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Computers
|
|
$
|
55,244
|
|
|
$
|
72,124
|
|
Office equipment
|
|
|
43,590
|
|
|
|
36,850
|
|
Subtotal
|
|
|
98,834
|
|
|
|
108,974
|
|
Less accumulated depreciation
|
|
|
(43,688
|
)
|
|
|
(31,652
|
)
|
Property and equipment, net
|
|
$
|
55,146
|
|
|
$
|
77,322
|
|
Depreciation expense
for the fiscal years ended December 31, 2017 and 2016 was $27,194 and $19,451, respectively. The company incurred a loss on disposal
of property and equipment of $55,848 and $0 for fiscal years December 31, 2017 and 2016, 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 to be exchanged for a number of shares of the Company’s common stock (or a fraction thereof),
based on an exchange ratio, as ultimately calculated, equal to approximately 5.273-for-1, such that 1 share of the Company’s’
common stock was issued for every 5.273 shares of DDDigtal’s common stock.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
On the Effective Date, the Company issued 2,926,830 shares of
the Company’s common stock
pro rata
to all stockholders of DDDigtal (the “Share Consideration”) in exchange
for all of their shares of DDDigtal’s common stock. At the same time, each share of the common stock of Merger Subsidiary
was converted into and exchanged for one share of common stock of DDDigtal held by the Company, and all shares of DDDigtal common
stock outstanding immediately prior to the Effective Date automatically cancelled and retired. DDDigtal continued as a surviving
wholly-owned subsidiary of the Company, and Merger Subsidiary ceased to exist.
Also pursuant to the terms of the Merger Agreement, the Company
paid cash consideration, in December 2016, of $40,000 to Zachary Marburger and $20,000 to Micah Davidson, as repayment of outstanding
debts owed by DDDigtal to the individuals.
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 Merger Agreement, the Company will pay 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. Initially the recording of acquisition was as disclosed in Note 1.
|
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
NOTE 7 –
CONVERTIBLE NOTES PAYABLE
On March 24, 2014,
the Company issued convertible debentures to certain accredited investors in the aggregate principal amount of $269,100. The debentures
originally matured on March 24, 2016 and accrue no interest. The debentures are convertible into shares of the Company’s
common stock at $0.10 per share. In March 2016, the debentures were amended to extend the maturity date to March 24, 2018. In 2016,
the Company issued an aggregate of 1,010,000 shares of its common stock in settlement of $101,000 of outstanding debentures and
during the twelve months ended December 31, 2017, the Company issued an aggregate of 1,081,000 shares of its common stock in settlement
of $108,100 of outstanding debentures. As of December 31, 2017 and December 31, 2016, the aggregate carrying value of the debentures
was $0 and $108,100, net of debt discounts of $0, respectively.
In February 2016, the Company issued to
a service provider a 12 month convertible debenture at 15% interest with a principal amount of $35,000 along with 35,000 3-year
warrants to purchase shares of common stock at $1.00 per share. The convertible debenture is payable at maturity, and convertible
at the investor’s determination at a price equal to 90% of the price of a subsequent public underwritten offering if one
occurs over $5 million, or, if no such subsequent offering occurs, at $0.75 per share. During the year ended December 31, 2016,
the Company issued an aggregate of 343,767 shares in full settlement of the debenture obligation.
On March 14, 2016, the Company sold
to investors six (6) month secured convertible original issue discount notes with a principal amount in the aggregate of $1,514,669,
together with five-year warrants to purchase an amount of shares of the Company’s common stock equal to the number of shares
of common stock issuable upon the conversion of the notes in full and having an exercise price of $1.00 per share with reset provisions.
If the Company exercises its right to prepay the note, the Company must make payment to the investor of an amount in cash equal
to the sum of the then outstanding principal amount of the note that it desires to prepay, multiplied by (a) 1.2, during the first
ninety (90) days after the execution of the note, or (b) 1.35, 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) $1.00, and (ii) a 25% discount to the price at
which the Company next conducts an offering after the issuance date of the note; provided, however, for any part of the principal
amount of the note that is not paid at its maturity date, September 14, 2016, the conversion price for such amount is 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, September 14, 2016. The notes require that any
net proceeds received in subsequent offerings made by the Company first be used to repay the notes’ outstanding principal
amount. Because the note was not repaid by the maturity date, the investors became entitled to receive, in aggregate, but calculated
pro rata to the principal amounts remaining outstanding at the time of maturity, up to five hundred thousand (500,000) shares of
the Company’s common stock. Gross proceeds received by the Company for the notes and warrants in this offering were $1,420,000,
while net proceeds were $1,271,600 (excluding any legal fees). On September 14, 2016, upon maturity of the notes, the Company
was unable to make the required payment of the then outstanding aggregate principal amount of $966,384 and was in default under
the notes. Penalties in aggregate of $584,735 were added to the carrying amount of the notes and were charged to current period
interest.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
During the year ended December 31, 2016,
the Company paid an aggregate of $1,479,498 cash and issued 1,754,462 shares of its common stock upon conversion of $619,906 of
the debenture obligation and accrued interest. In addition, the Company issued an aggregate of 304,523 shares of its common stock
as penalty shares valued at $163,621 and was charged to current period interest. As of December 31, 2016, the debentures
were paid in full.
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. Net proceeds received were $942,500 after deduction of legal and other
fees. If the Company exercises its right to prepay the notes, the Company shall make payment to the investors in an amount equal
to the sum of the then outstanding principal amount of the notes that the Company desires to prepay, multiplied by (a) 1.1, during
the first ninety (90) days after the execution of the note, or (b) 1.25, at any point thereafter. The notes are convertible into
shares of the Company’s common stock at a price per share equal to the lower of (i) $0.75 and (ii) a 25% discount to the
price at which the Company next conducts an offering after the issuance date of the notes; provided, however, if any part of the
principal amount of the notes remains unpaid at its maturity date, the conversion price will be equal to 65% of the average of
the three trading days with the lowest daily weighted average prices of the Company’s common stock occurring during the fifteen
days prior to the notes’ maturity date.
In connection with
the issuance of the notes, the Company and the investors also entered into a security agreement pursuant to which the notes 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.
On August 17, 2017,
upon issuance of the secured convertible notes and warrants, the Company determined that the features associated with the embedded
conversion option and reset provisions embedded in the issued warrants, in the form of a ratchet provision, 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 twelve
months ended December 31, 2017, the Company amortized $654,774 of debt discounts to current period interest.
NOTE 8 –
DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS
The Company identified
conversion features embedded within convertible debt and certain warrants outstanding during the twelve months ended December 31,
2017 and December 31, 2016. The Company has determined that the features associated with the embedded conversion option and exercise
prices, in the form of ratchet provisions, should be accounted for at fair value, as a derivative liability, as the Company cannot
determine if a sufficient number of shares would be available to settle all potential future conversion transactions.
On March 17, 2016,
upon issuance of the secured convertible debentures, the Company determined that the features associated with the embedded conversion
option and reset provisions embedded in the issued warrants, in the form of a ratchet provision, should be accounted for at fair
value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle
all potential future conversion transactions. At the date of inception, the Company estimated the fair value of the embedded derivatives
of $1,769,121 using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected
volatility of 112.29%, (3) weighted average risk-free interest rate of 0.47% to 1.04% (4) expected life of 0.05 to 5.00 years,
and (5) estimated fair value of the Company’s common stock of $1.04 per share. The estimated fair value of the embedded derivative
of $1,769,121 was charged to debt discount up to the net proceeds of $1,420,000 and amortized over the term of the debenture with
the excess charged to current period interest.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
On September 14, 2016, upon the maturity
of certain secured convertible debentures (see Note 7), the embedded conversion terms changed. As such, the Company estimated the
fair value of the change in the embedded derivative of $951,254 using the Binomial Option Pricing Model based on the following
assumptions: (1) dividend yield of 0%, (2) expected volatility of 106.24%, (3) weighted average risk-free interest rate of 0.30%,
(4) expected life of three months, and (5) estimated fair value of the Company’s common stock of $0.51 per share. The estimated
fair value of the embedded derivative of $951,254 was charged to current period interest.
On December 31, 2016,
the Company estimated the fair value of the embedded derivatives of $1,301,138 using the Binomial Option Pricing Model based on
the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 110.39%, (3) weighted average risk-free interest
rate of 1.47%, (4) expected life of 4.21 years, and (5) estimated fair value of the Company’s common stock of $1.03 per share.
On January 4, 2017,
warrant holders exercised outstanding warrants to purchase an aggregate of 682,668 shares of the Company’s common stock,
and as such the Company transferred to estimated fair value of the embedded derivatives $610,967 from liability to equity. The
Company estimated the fair value at the time of exercise using the Binomial Option Pricing Model based on the following assumptions:
(1) dividend yield of 0%, (2) expected volatility of 110.13%, (3) weighted average risk-free interest rate of 1.94%, (4) expected
life of 4.20 years, and (5) estimated fair value of the Company’s common stock of $1.07 per share.
On July 21, 2017,
upon issuance of the warrants in connection with the sale of common stock, the Company determined that the features associated
with the reset provisions embedded in the issued warrants, in the form of a ratchet provision, 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 estimated the fair value of the embedded derivatives of $1,003,870 using
the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 103.46%,
(3) weighted average risk-free interest rate of 1.81% (4) expected life of 5.00 years, and (5) estimated fair value of the Company’s
common stock of $0.5687 per share. The estimated fair value of the embedded derivative of $1,003,870 was reclassified from equity
at the date of issuance.
On August 17, 2017,
upon issuance of the secured convertible notes and warrants, the Company determined that the features associated with the embedded
conversion option and reset provisions embedded in the issued notes and warrants, in the form of a ratchet provision, 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 estimated the fair value of
the embedded derivatives of $798,429 using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield
of 0%, (2) expected volatility of 102.73%, (3) weighted average risk-free interest rate of 1.11% to 1.78% (4) expected life of
0.49 to 5.00 years, and (5) estimated fair value of the Company’s common stock of $0.457 per share. The estimated fair value
of the embedded derivative of $798,429 together with the issuance costs of $102,500 (aggregate of $900,929) was charged to debt
discount and amortized over the term of the debenture with the excess charged to current period interest.
On December 31, 2017,
the Company estimated the fair value of the embedded derivatives of $9,493,307 using the Binomial Option Pricing Model based on
the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 108.44%, (3) weighted average risk-free interest
rate of 1.28% to 2.20%, (4) expected life of 0.13 to 4.65 years, and (5) estimated fair value of the Company’s common stock
of $0.601 per share.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
The Company adopted
the provisions of ASC 825-10, Financial Instruments (“ASC 825-10”). ASC 825-10 defines fair value as the price that
would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions
that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk
of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be
used to measure fair value:
|
●
|
Level 1 – Quoted prices in active markets for identical
assets or liabilities.
|
|
●
|
Level 2 – Observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions
(less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally
from or corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
●
|
Level 3 – Unobservable inputs to the valuation methodology
that are significant to the measurement of fair value of assets or liabilities.
|
All items required
to be recorded or measured on a recurring basis are based upon Level 3 inputs.
To the extent that
valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value
requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement
is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
The Company recognizes
its derivative liabilities as Level 3 and values its derivatives using the methods discussed below. While the Company believes
that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate
of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods
discussed are that of volatility and market price of the underlying common stock of the Company.
As of December 31,
2017 and December 31, 2016, the Company did not have any derivative instruments that were designated as hedges.
Items recorded or
measured at fair value on a recurring basis in the accompanying financial statements consisted of the following items as of December
31, 2017 and December 31, 2016:
|
|
December 31,
2017
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liability
|
|
$
|
9,493,307
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,493,307
|
|
|
|
December 31,
2016
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liability
|
|
$
|
1,301,138
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,301,138
|
|
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
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, 2017:
Balance, January 1, 2016
|
|
|
-
|
|
Transfers in to Level 3:
|
|
|
2,720,375
|
|
Transfers out due to conversions and payoffs
|
|
|
(2,001,149
|
)
|
Mark to market to December 31, 2016
|
|
|
581,912
|
|
Balance, December 31, 2016
|
|
$
|
1,301,138
|
|
Loss on change in warrant and derivative liabilities for the year ended December 31, 2016
|
|
$
|
(581,912
|
)
|
Balance, January 1, 2017
|
|
$
|
1,301,138
|
|
Transfers in due to issuance of liability warrants in connection with sale of common stock
|
|
|
1,003,870
|
|
Transfers in due to issuance of convertible notes and warrants with embedded conversion and
|
|
|
|
|
reset options
|
|
|
798,431
|
|
Transfers out due to warrant exercise
|
|
|
(610,967
|
)
|
Mark to market to December 31, 2017
|
|
|
7,000,835
|
|
Balance, December 31, 2017
|
|
$
|
9,493,307
|
|
Loss on change in warrant liabilities for the twelve months ended December 31, 2017
|
|
$
|
(7,000,835
|
)
|
Fluctuations in the
Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As
the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases,
therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant
unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair
value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility
would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation
factors would not result in a material change in our Level 3 fair value.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
NOTE 9 –
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 December
31, 2017 and December 31, 2016, 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 December 31, 2017, there were 112,165,839 shares
of common stock issued and outstanding and 12,572,500 shares of common stock to be issued under the Company’s 2017 Employee
Stock Option Plan. As of December 31, 2016, there were 71,908,370 shares of common stock issued and outstanding and 1,740,000 shares
of common stock to be issued under the Company’s 2015 Employee Stock Option Plan.
The following common
stock transactions were recorded during the years ended December 31, 2017 and 2016:
During the year ended December 31, 2016,
the Company issued an aggregate of 624,000 shares of its common stock which was previously classified as shares to be issued as
of December 31, 2015.
During the year ended December 31, 2016,
the Company issued an aggregate of 4,225,675 shares of its common stock for services rendered and recorded another 1,740,000 shares
to be issued for services rendered at an average stock price of $0.70 per share.
During the year ended December 31, 2016,
the Company issued an aggregate of 639,051 shares of its common stock for the cashless exercise of stock warrants.
During the year ended December 31, 2016,
the Company issued an aggregate of 5,242,393 shares of its common stock for the cash exercise of stock warrants.
During the year ended December 31, 2016,
the Company issued an aggregate of 264,158 shares of its common stock for the cashless exercises of stock options.
During the year ended December 31, 2016,
the Company issued an aggregate of 210,000 shares of its common stock for the cash exercise of stock options.
During the year ended December 31, 2016,
the Company issued an aggregate of 10,350,376 shares of its common stock for net sales proceeds of $5,000,275.
During the year ended December 31, 2016,
the Company issued an aggregate of 3,108,229 shares of its common stock in settlement of $1,359,891 secured convertible debentures
(see Note 7).
During the year ended December 31, 2016,
the Company issued an aggregate of 304,523 shares of its common stock in payment of penalties relating to secured convertible debentures
of $163,621 (see Note 7).
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
During the year ended
December 31, 2017, the Company issued an aggregate of 22,740,898 shares of its common stock for services valued at $15,474,330.
During the year ended
December 31, 2017, the Company sold an aggregate of 2,434,000 shares of its common stock and warrants to purchase shares of common
stock for net proceeds of $2,676,444.
During the year ended
December 31, 2017, the Company issued an aggregate of 436,011 shares for its common stock upon the cashless exercise of common
stock options.
During the year ended
December 31, 2017, the Company issued an aggregate of 355,689 shares of its common stock for the cashless exercise of common stock
warrants.
During the year ended
December 31, 2017, the Company issued an aggregate of 1,081,000 shares of its common stock in settlement of $108,100 of convertible
debt.
During the year ended
December 31, 2017, the Company issued an aggregate of 7,033,041 shares of its common stock upon the exercise of common stock warrants
for net proceeds of $4,759,762.
During the year ended
December 31, 2017, the Company issued an aggregate of 2,926,830 shares of its common stock to acquire DDDigtal (Note 1).
During the year ended
December 31, 2017, the Company issued an aggregate of 3,250,000 shares of its common stock to acquire Odava (Note 1).
During the year ended December 31, 2017,
three former board members agreed to surrender an aggregate of 1,750,000 shares of the Company’s common stock in exchange
for five-year warrants to purchase up to 4,850,000 shares of the Company’s common stock at an exercise price of $0.20 per
share. As a result of the exchange in equity, the Company recorded stock-based compensation of $811,988.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
NOTE 10 – WARRANTS
In January 2016, the Company issued warrants
to purchase 100,000 shares of common stock at $0.83 per share to certain service providers. The estimated fair value of $68,369
was charged to current period operations. The fair market value was calculated using the Black Scholes Option Pricing Model, assuming
approximately 1.46% risk-free interest, 0% dividend yield, 119.14% volatility, and expected life of five years.
In February 2016, the Company issued warrants
to purchase 35,000 shares of common stock at $1.00 per share to a service provider. The estimated fair value of $24,301was charged
to current period operations. The fair market value was calculated using the Black Scholes Option Pricing Model, assuming approximately
0.71% risk-free interest, 0% dividend yield, 117.43% volatility, and expected life of 3 years.
On March 24, 2016, in connection with the
issuance of convertible notes, the Company granted to the same investors five-year warrants to purchase an aggregate of 1,514,669
shares of the Company’s common stock at $1.00 per share. The warrants may be exercised any time after the issuance through
and including the fifth (5th) anniversary of its original issuance. The warrants have a fair market value of $910,596. The fair
market value was calculated using the Binomial Option Pricing Model, assuming approximately 0.47% risk-free interest, 0% dividend
yield, 112.3% volatility, and expected life of five years. In August 2016, upon the sale of the Company’s common stock, the
Company issued an additional 1,514,669 warrants to purchase the Company’s common stock at $0.50 per share, exercisable through
March 14, 2021. The exercise price of the previously issued 1,514,669 warrants issued in connection with the debt was reset from
$1.00 per share to $0.50. As of December 31, 2017, the price protection provision in the warrants had expired and there were 836,670
outstanding.
In August and September 2016, the Company
issued an aggregate of 3,385,002 warrants to purchase the Company’s common stock at $0.90 per share, exercisable for three
years in connection with the sale of common stock.
In August 2016, upon the sale of the Company’s
common stock, the Company issued an additional 1,514,669 warrants to purchase the Company’s common stock at $0.50 per share,
exercisable through March 14, 2021. The exercise price of the previously issued 1,514,669 warrants issued in connection with the
debt was reset from $1.00 per share to $0.50.
In October 2016, upon the sale of the Company’s
common stock, the Company issued an additional 6,659,000 warrants to purchase the Company’s common stock at $0.90 per share,
exercisable through October 26, 2019.
In July 2017, upon the sale of the Company’s
common stock, the Company issue an additional 2,394,000 to purchase the Company’s common stock at $0.65 per share, exercisable
through July 24, 2022. These warrants contain certain anti-dilutive (reset) provisions (See Note 8).
In August and September 2017, in connection
with the issuance of convertible notes, the Company granted to the same investors five-year warrants to purchase an aggregate of
2,090,000 shares of the Company’s common stock at $0.50 per share. The warrants may be exercised any time after the issuance
through and including the fifth (5th) anniversary of its original issuance. The warrants have a fair market value of $715,432.
The fair market value was calculated using the Binomial Option Pricing Model, assuming approximately 0.47% risk-free interest,
0% dividend yield, 102.73% volatility, and expected life of five years. These warrants contain certain anti-dilutive (reset) provisions
(See Note 8).
In December 2017, the Company issued warrants
to purchase 4,850,000 shares of common stock at $0.20 per share to former Directors of the Company. The estimated fair value of
$1,450,737 was charged to current period operations. The fair market value was calculated using the Black Scholes Option Pricing
Model, assuming approximately 2.18% risk-free interest, 0% dividend yield, 223,02% volatility, and expected life of 5 years.
In December 2017, upon the sale of the
Company’s common stock, the Company issue an additional 10,250,000 to purchase the Company’s common stock at $0.40
per share, exercisable through December 31, 2022.
In December 2017, upon the sale of the
Company’s common stock, the Company issued an additional 8,521,000 warrants to purchase the Company’s common stock
at $0.20 per share, exercisable through December 31, 2022. The exercise price of the previously issued 4,484,000 warrants issued
in connection with the July 2017 common stock sale and August and September convertible debt was reset from $0.65 and $0.50 per
share, respectively, to $0.20. These warrants contain certain anti-dilutive (reset) provisions (See Note 8).
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
Warrants outstanding and exercisable at December 31, 2017 are
as follows:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
|
Warrants
|
|
|
In Years
|
|
|
Warrants
|
|
$
|
0.20
|
|
|
|
17,855,500
|
|
|
|
4.69
|
|
|
|
17,855,500
|
|
|
0.40
|
|
|
|
10,250,000
|
|
|
|
4.84
|
|
|
|
10,250,000
|
|
|
0.50
|
|
|
|
936,670
|
|
|
|
2.25
|
|
|
|
936,670
|
|
|
0.60
|
|
|
|
50,000
|
|
|
|
2.25
|
|
|
|
50,000
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
3.10
|
|
|
|
100,000
|
|
|
0.90
|
|
|
|
5,070,002
|
|
|
|
1.63
|
|
|
|
5,070,002
|
|
|
1.00
|
|
|
|
372,000
|
|
|
|
0.25
|
|
|
|
372,000
|
|
|
1.06
|
|
|
|
146,200
|
|
|
|
0.98
|
|
|
|
146,200
|
|
|
3.00
|
|
|
|
407,475
|
|
|
|
0.86
|
|
|
|
407,475
|
|
|
|
|
|
|
35,187,847
|
|
|
|
|
|
|
|
35,187,847
|
|
A summary of the warrant activity for the twelve months ended
December 31, 2017 is as follows:
|
|
|
|
|
Weighted-
|
|
|
Weighted-
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2016
|
|
|
9,018,609
|
|
|
$
|
0.42
|
|
|
|
2.26
|
|
|
$
|
6,857,509
|
|
Grants
|
|
|
13,164,340
|
|
|
|
0.72
|
|
|
|
2.51
|
|
|
|
|
|
Exercised
|
|
|
(6,734,893
|
)
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
15,448,056
|
|
|
$
|
0.81
|
|
|
|
2.4
|
|
|
$
|
4,225,936
|
|
Grants
|
|
|
28,105,500
|
|
|
|
0.27
|
|
|
|
4.2
|
|
|
|
-
|
|
Exercised
|
|
|
(7,728,209
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(637,500
|
)
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
35,187,847
|
|
|
$
|
0.41
|
|
|
|
2.3
|
|
|
$
|
9,314,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2017
|
|
|
35,187,847
|
|
|
$
|
0.41
|
|
|
|
2.3
|
|
|
$
|
9,314,959
|
|
Exercisable at December 31, 2017
|
|
|
35,187,847
|
|
|
$
|
0.41
|
|
|
|
2.3
|
|
|
$
|
9,314,959
|
|
The aggregate intrinsic
value outstanding stock warrants was $6,481,984, based on warrants with an exercise price less than the Company’s stock price
of $0.601 as of December 31, 2017, which would have been received by the warrant holders had those warrant holders exercised their
warrants as of that date.
On July 21, 2017,
upon the sale of the Company’s common stock, the Company issued warrants to purchase up to 2,394,000 shares of the Company’s
common stock at $0.65 per share, exercisable through July 21, 2022. These warrants contain certain anti-dilutive (reset) provisions
(See Note 8).
On August 24, 2017,
in connection with the issuance of convertible notes, the Company granted to the same investors five-year warrants to purchase
up to 2,090,000 shares of the Company’s common stock at $0.50 per share. These warrants contain certain anti-dilutive (reset)
provisions (See Note 8).
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
NOTE 11 –
EMPLOYEE EQUITY INCENTIVE PLANS
The Company’s
stockholders approved our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan
in December 2015 (the “2015 Plan”), our 2016 Equity Incentive Plan (“2016 Plan”) in October 2016 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. As of December
31, 2017, 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.
During the year ended December 31, 2016,
the Company granted options to purchase 9,958,031 for ten years. The fair value of $6,450,317, was determined using the Black-Scholes
Option Pricing Model, assuming approximately 1.75% to 2.10% risk-free interest, 0% dividend yield, 107.63% to 119.16% volatility,
and expected life of five to ten years and will be charged to operations over the vesting terms of the options.
During the year ended
December 31, 2017, the Company granted ten-year options to purchase up to 2,854,000 shares of common stock. The fair value of $2,014,591,
was determined using the Black-Scholes Option Pricing Model, assuming approximately 1.81% to 2.35% risk-free interest, 0% dividend
yield, 103.66% to 110.16% 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
|
|
|
Number of
|
|
|
Vesting
|
Price
|
|
|
Options
|
|
|
Terms
|
$
|
0.50
|
|
|
|
80,000
|
|
|
Immediately
|
|
0.50
|
|
|
|
100,000
|
|
|
Quarterly over one year
|
|
0.50
|
|
|
|
605,000
|
|
|
Quarterly over two years
|
|
0.81
|
|
|
|
5,000
|
|
|
Immediately
|
|
0.82
|
|
|
|
150,000
|
|
|
Quarterly over two years
|
|
0.85
|
|
|
|
150,000
|
|
|
Quarterly over one year
|
|
0.87
|
|
|
|
125,000
|
|
|
Immediately
|
|
0.89
|
|
|
|
425,000
|
|
|
Monthly over one year
|
|
0.89
|
|
|
|
90,000
|
|
|
Quarterly over two years
|
|
0.95
|
|
|
|
400,000
|
|
|
Quarterly over two years
|
|
0.98
|
|
|
|
24,000
|
|
|
Monthly over two years
|
|
1.05
|
|
|
|
50,000
|
|
|
Immediately
|
|
1.05
|
|
|
|
95,000
|
|
|
Monthly over two years
|
|
1.05
|
|
|
|
60,000
|
|
|
Monthly over one year
|
|
1.06
|
|
|
|
60,000
|
|
|
Monthly over one year
|
|
1.07
|
|
|
|
110,000
|
|
|
Monthly over one year
|
|
1.07
|
|
|
|
325,000
|
|
|
Monthly over two years
|
|
0.83
|
|
|
|
2,854,000
|
|
|
|
On June 21, 2017,
the Company accelerated vesting of 5,000,000 options such that the options vested in full, immediately. As a result, the Company
charged $2,544,741 to operations during the twelve months ended December 31, 2017.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
Stock options outstanding
and exercisable on December 31, 2017 are as follows:
Exercise
|
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
|
Options
|
|
|
In Years
|
|
|
Options Exerciseable
|
|
$
|
0.10
|
|
|
|
1,056,786
|
|
|
|
6.43
|
|
|
|
1,056,786
|
|
$
|
0.50
|
|
|
|
689,631
|
|
|
|
7.74
|
|
|
|
689,631
|
|
$
|
0.51
- 0.75
|
|
|
|
2,076,779
|
|
|
|
8.69
|
|
|
|
1,996,779
|
|
$
|
0.76
- 1.00
|
|
|
|
9,926,072
|
|
|
|
8.70
|
|
|
|
9,233,070
|
|
$
|
1.01
- 2.00
|
|
|
|
629,164
|
|
|
|
8.61
|
|
|
|
629,164
|
|
|
|
|
|
|
14,378,432
|
|
|
|
|
|
|
|
13,605,430
|
|
A summary of the stock
option activity for the twelve months ended December 31, 2017 is as follows:
|
|
|
|
|
Weighted-
|
|
|
Weighted-
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
|
|
Intrinsic
Value
|
|
Outstanding at December 31, 2015
|
|
|
5,625,000
|
|
|
$
|
0.59
|
|
|
|
9.30
|
|
|
|
|
|
Grants
|
|
|
9,958,031
|
|
|
|
0.78
|
|
|
|
9.84
|
|
|
|
|
|
Exercised
|
|
|
(636,780
|
)
|
|
|
0.50
|
|
|
|
8.80
|
|
|
|
|
|
Forfeiture/Cancelled
|
|
|
(122,093
|
)
|
|
|
0.55
|
|
|
|
8.80
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
14,824,158
|
|
|
$
|
0.52
|
|
|
|
9.37
|
|
|
$
|
4,566,717
|
|
Grants
|
|
|
2,854,000
|
|
|
|
0.50
|
|
|
|
9.60
|
|
|
|
-
|
|
Exercised
|
|
|
(436,011
|
)
|
|
|
0.16
|
|
|
|
8.80
|
|
|
|
|
|
Forfeiture/Canceled
|
|
|
(2,863,715
|
)
|
|
$
|
0.73
|
|
|
|
8.80
|
|
|
|
-
|
|
Outstanding at December
31, 2017
|
|
|
14,378,432
|
|
|
$
|
0.76
|
|
|
|
8.48
|
|
|
$
|
771,359
|
|
Exercisable at December 31, 2017
|
|
|
13,605,430
|
|
|
$
|
0.76
|
|
|
|
8.50
|
|
|
$
|
646,109
|
|
The aggregate intrinsic
value of outstanding stock options was based on options with an exercise price less than the Company’s common stock price
of $0.601 as of December 31, 2017, which would have been received by the option holders had those option holders exercised their
options as of that date.
Option valuation models
require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes
option 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.
The fair value of
all options that were vested as of the year ended December 31, 2017 and 2016 was $5,821,631 and $3,112,156, respectively
Unrecognized compensation expense of $173,220 at December 31, 2017 will be expensed in future periods.
NOTE 12 – 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 SAB 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.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
As of December
31, 2017, we have not completed our accounting for the tax effects of the Act; however, a reasonable estimate was made to measure
most of our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future as a result
of the reduction on the federal tax rate, and we recorded a provisional amount for our one-time transition tax liability. The provisional
tax expense recorded of approximately $1,700,000 related to the re-measurement of our deferred tax asset balance and resulted in
a reduction of our deferred tax asset and a corresponding increase to our income tax expense.
At December 31, 2017, the Company
has available for federal income tax purposes a net operating loss carry forward of approximately $45,000,000, 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, 2017, the Company has increased the valuation allowance from $4,946,000 to $11,090,000.
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 Colorado. The Company is no longer subject to income tax examinations by tax
authorities for tax years ending before December 31, 2013.
The Company’s deferred taxes as of
December 31, 2017 and 2016 consist of the following:
|
|
2017
|
|
|
2016
|
|
Non-Current deferred tax asset:
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
|
11,090,000
|
|
|
|
4,946,000
|
|
Valuation allowance
|
|
|
(11,090,000
|
)
|
|
|
(4,946,000
|
)
|
Net non-current deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
The
Company is delinquent in filing its payroll taxes related to stock compensation awards. At December 31, 2017, the Company has,
in payroll tax liabilities, including interest and penalties, of approximately $1,599,489, due to federal and state taxing authorities.
The actual liability may be higher or lower due to interest or penalties assessed by federal and state taxing authorities. The
Company expects to settle these liabilities by June 30, 2018.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
NOTE
13 – RELATED PARTY TRANSACTIONS
On August
31, 2016, Isaac Dietrich, the Company’s Chief Executive Officer, participated in the Company’s registered offering
that took place beginning August 12, 2016 and continued until October 24, 2016, whereby Mr. Dietrich purchased $5,000
of the Company’s securities consisting of 10,000 shares of the Company’s common stock and warrants to purchase 10,000
shares at $0.90 per share.
On July
21, 2017, Isaac Dietrich, the Company’s Chief Executive Officer, participated in the Company’s private placement
that took, whereby Mr. Dietrich purchased $10,000 of the Company’s securities consisting of 20,000 shares of the Company’s
common stock and warrants to purchase 20,000 shares at $0.65 per share. As a result of the ratchet provision in the warrants that
was triggered by the Company’s December 2017 private placement, the number of warrants increased to 65,000 and the exercise
price decreased to $0.20.
NOTE 14 –
SUBSEQUENT EVENTS
In January 2018, the Company entered into
Simple Agreement for Future Tokens (the “Original SAFT Agreements”) with six investors pursuant to which the Company
received an aggregate of $500,000. On February 13, 2018, the Company entered into Amended and Restated Simple Agreement for Future
Tokens (the “SAFT Agreements”) with the investors which amended the terms of the Original SAFT Agreements, which totaled
$942,500. Pursuant to the SAFT Agreements, the investors will receive tokens in MassRoots Blockchain Technologies, Inc., a Delaware
company and wholly-owned subsidiary of the Company (“MassRoots Blockchain”). The tokens are issuable to the investors
upon the public sale of tokens of MassRoots Blockchain (the “Qualifying Token Sale”). Investors are entitled receive
such number of tokens equal to the amount invested by the investor divided by the Discount Price. “Discount Price”
means the price per token sold in the Qualifying Token Sale divided by the Discount Rate. “Discount Rate” means 50%.
The SAFT Agreements terminate upon either (i) the issuance of the tokens to the investors or (ii) the payment, or setting aside
for payment, of amounts due the investor upon the occurrence of a Dissolution Event. “Dissolution Event” means (i)
a voluntary termination of operations of the Company, (ii) a general assignment for the benefit of the Company’s creditors
or (iii) any other liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.
From January 1 to January 16, 2018, the
Company made payment to the Holders of the August 2017 convertible debt in an aggregate of (i) $510,937.50 in cash and (ii) pursuant
to the right of conversion of the Notes, issued an aggregate of 3,742,648 shares of the Company’s common stock. The Company
believes that it has completed all of its obligations under the Notes and they are retired.
Effective January 10, 2018, the Board appointed
Jesus Quintero as Chief Financial Officer of the Company to replace Isaac Dietrich who was serving as Interim Chief Financial Officer
of the Company. On January 10, 2018, the Company entered into a CFO Services Agreement with Jesus Quintero pursuant to which Mr.
Quintero will serve as Chief Financial Officer of the Company for a term of one year (the “Initial Term”), which term
shall be automatically renewed for successive one year periods thereafter unless Mr. Quintero provides the Company with written
notice of his intention not to renew the agreement at least 90 days prior to the expiration of the Initial Term. The
agreement may be terminated by either party upon 90 days prior written notice to the other party. Pursuant to the terms of the
agreement, Mr. Quintero shall receive a fee of $4,000 per month and received a onetime issuance of 250,000 shares of the Company’s
common stock, all of which vested as of January 10, 2018.
On January 31, 2018, Company entered into
separate securities purchase agreements (the “Securities Purchase Agreements”) with certain accredited investors pursuant
to which the Company sold an aggregate of $2,740,000 of units (the “Units”) at a purchase price of $0.20 per Unit.
Each Unit consists of one share of common stock and a warrant to purchase one share of common stock.
MASSROOTS,
INC.
Notes to
Consolidated Financial Statements
December 31, 2017 and
2016
On February 1, 2018, the Compensation Committee
of the Board of Directors approved a stock grant of 750,000 and 250,000 shares of common stock, respectively, to Cecil Kyte and
Charles Blum. On the same date, t
he Compensation Committee of the Board of
Directors approved an option to purchase up to 750,000 and 250,000 shares of common stock at $0.40 per share, respectively, to
Cecil Kyte and Charles Blum.
On February 1, 2018, the Company entered into a Membership Agreement (the “Membership Agreement”) with WeWork pursuant
to which the Company leases offices located at 2420 17
th
Street, Office 3118, Denver, Colorado 80202 effective
as of February 2, 2018. The term of the Membership Agreement is for one month which term shall automatically be renewed for successive
one month terms unless terminated by either party. Pursuant to the terms of the Membership Agreement the Company will pay a fee
of $1,360 per month for the leased premises.
On February 2, 2018, the Company entered
into a Settlement and Lease Termination Agreement (the “Agreement”) with Market Center Investors, LLC (the “Landlord”)
with respect to the Company’s leased premises located at 1624 Market Street, Suite 201, Denver, Colorado 80202 (the “Leased
Premises”). In December 2017, the Landlord commenced a legal action to recover possession of the Leased Premises in the District
Court for the City and County of Denver, Colorado (the “Lawsuit”) for failure of the Company to make certain payments
pursuant to the terms of its lease (the “Lease”) with the Landlord. Pursuant to the terms of the Agreement, the Company
paid the Landlord $145,000 and surrendered to the Landlord any and all possessory interests and other rights in or to the Leased
Premises. In addition, each party agreed to release and discharge the other party and its affiliated entities together with its
directors, officers, members, managers, employees and agents from and against any and all claims, demands, causes of action and
other liabilities arising under or relating to the Lease and a Stipulation for Dismissal with Prejudice was filed with respect
to the Lawsuit.
Effective February 21, 2018, Nathan Shelton
resigned as a member of the Board of Directors of the Company and well as a member of the Audit, Compensation and Nominating and
Corporate Governance Committees (collectively, the “Committees”). Mr. Shelton’s resignation was not the result
of any disagreement with the Company, any matter related to the Company’s operations, policies or practices, the Company’s
management or the Board. Effective February 21, 2018, the Board appointed Graham Farrar as a member of the Board and as a member
of the Committees to fill the vacancies created upon the resignation of Mr. Shelton. Mr. Farrar is deemed an “independent”
director as such term is defined by the rules of The Nasdaq Stock Market LLC. There are no family relationships between Mr. Farrar
and any of our other officers and directors. Mr. Farrar was granted (i) 250,000 shares of the Company’s common stock and
(ii) an option to purchase up to 250,000 shares of the Company’s common stock at an exercise price equal to $0.36 per share.
The shares and option vested in full as of February 21, 2018.
From January 1 to April 10, 2018, the Company
issued an aggregate of 13,962,500 shares of its common stock recorded as to be issued on December 31, 2017.
From January 1 to April 10, 2018, the Company
retired an aggregate of 1,790,000 shares of its common stock recorded as to be retired on December 31, 2017.
From January 1 to April 10, 2018, the Company
issued an aggregate of 3,394,000 shares of its common stock for services in addition to shares issued to Messers Kyte, Farrar,
Blum, and Quintero discussed above.
From January 1 to April 10, 2018, the Company
issued an aggregate of 95,134 shares for its common stock upon the cashless exercise of common stock options.
From January 1 to April 10, 2018, the Company
issued an aggregate of 7,104,765 shares of its common stock for the cashless exercise of common stock warrants.
From January 1 to April 10, 2018, the Company
issued an aggregate of 70,000 shares of its common stock upon the exercise of common stock warrants for net proceeds of $63,000.
The Company evaluates events that have
occurred after the balance sheet date but before the financial statements are issued.
F-34