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.
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 Date 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 DDDigtal 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
|
|
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.
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.
|
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.
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-Average
|
|
|
|
|
|
|
|
|
|
Weighted-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-Average
|
|
|
|
|
|
|
|
|
|
Weighted-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.
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
MASSROOTS,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
674,776
|
|
|
$
|
1,201,587
|
|
Prepaid
expenses
|
|
|
551,517
|
|
|
|
16,556
|
|
TOTAL
CURRENT ASSETS
|
|
|
1,226,293
|
|
|
|
1,218,143
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment - net
|
|
|
46,575
|
|
|
|
55,146
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Investments
|
|
|
403,249
|
|
|
|
403,249
|
|
Software
Cost, net of amortization of $486,324 and $389,059
|
|
|
766,676
|
|
|
|
863,941
|
|
Deposits
and other assets
|
|
|
-
|
|
|
|
33,502
|
|
Total
Other Assets
|
|
|
1,169,925
|
|
|
|
1,300,692
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
2,442,793
|
|
|
|
2,573,981
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
144,230
|
|
|
|
1,257,783
|
|
Accrued
payroll and related
|
|
|
1,601,231
|
|
|
|
1,601,232
|
|
Advances
|
|
|
942,500
|
|
|
|
800,394
|
|
Convertible
notes payable, net of debt discount of $0 and $248,009
|
|
|
-
|
|
|
|
796,991
|
|
Derivative
liability
|
|
|
-
|
|
|
|
9,493,307
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,687,961
|
|
|
|
13,949,707
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
2,687,961
|
|
|
|
13,949,707
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
Series
A preferred stock, $1.00 par value, 21 shares authorized; 0 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value, 200,000,000 shares authorized; 153,944,886 and 112,165,839 shares issued and outstanding
|
|
|
153,945
|
|
|
|
112,166
|
|
Common
stock to be issued, 0 and 12,572,500 shares, respectively
|
|
|
-
|
|
|
|
12,573
|
|
Additional
paid in capital
|
|
|
69,843,042
|
|
|
|
63,315,749
|
|
Subscriptions
receivable
|
|
|
-
|
|
|
|
(564,000
|
)
|
Accumulated
deficit
|
|
|
(70,242,155
|
)
|
|
|
(74,252,214
|
)
|
TOTAL
STOCKHOLDERS’ DEFICIT
|
|
|
(245,168
|
)
|
|
|
(11,375,726
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
2,442,793
|
|
|
$
|
2,573,981
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MASSROOTS,
INC.
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
Three
months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
1,492
|
|
|
$
|
134,741
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
64,577
|
|
|
|
193,431
|
|
Payroll and related
expense
|
|
|
425,730
|
|
|
|
851,860
|
|
Stock based compensation
|
|
|
3,117,250
|
|
|
|
5,231,003
|
|
Other general and administrative
expenses
|
|
|
1,429,722
|
|
|
|
1,359,522
|
|
Amortization
of Software costs
|
|
|
97,265
|
|
|
|
-
|
|
Total
General and Administrative expenses
|
|
|
5,134,544
|
|
|
|
7,635,816
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
FROM OPERATIONS
|
|
|
(5,133,052
|
)
|
|
|
(7,501,075
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Loss on change in fair
value of derivative liabilities
|
|
|
-
|
|
|
|
53,898
|
|
Interest
(expense)
|
|
|
(350,196
|
)
|
|
|
-
|
|
Total
Other Income (Expense)
|
|
|
(350,196
|
)
|
|
|
53,898
|
|
|
|
|
|
|
|
|
|
|
Net
Loss before Income Taxes
|
|
|
(5,483,248
|
)
|
|
|
(7,447,177
|
)
|
|
|
|
|
|
|
|
|
|
Provision for Income
taxes (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS)
|
|
$
|
(5,483,248
|
)
|
|
$
|
(7,447,177
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share-basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding-basic and diluted
|
|
|
141,834,002
|
|
|
|
80,267,659
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MASSROOTS
, INC.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT)
FOR
THE THREE MONTHS ENDED MARCH 31, 2018
|
|
Common
Stock
|
|
|
Common
Stock to be Issued
|
|
|
Additional
Paid
|
|
|
Subscriptions
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
In
Capital
|
|
|
Receivable
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance
as of December 31, 2017
|
|
|
112,165,839
|
|
|
$
|
112,166
|
|
|
|
12,572,500
|
|
|
$
|
12,573
|
|
|
$
|
63,315,749
|
|
|
$
|
(564,000
|
)
|
|
$
|
(74,252,214
|
)
|
|
$
|
(11,375,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassify
fair value of derivative liabilities to retained earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,493,307
|
|
|
|
9,493,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock previously to be issued
|
|
|
14,362,500
|
|
|
|
14,363
|
|
|
|
(14,362,500
|
)
|
|
|
(14,363
|
)
|
|
|
-
|
|
|
|
564,000
|
|
|
|
-
|
|
|
|
564,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock shares to be retired in 2018
|
|
|
(1,790,000
|
)
|
|
|
(1,790
|
)
|
|
|
1,790,000
|
|
|
|
1,790
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon conversion of debentures
|
|
|
3,742,648
|
|
|
|
3,743
|
|
|
|
-
|
|
|
|
-
|
|
|
|
632,507
|
|
|
|
-
|
|
|
|
-
|
|
|
|
636,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of common stock
|
|
|
13,700,000
|
|
|
|
13,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,726,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,740,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued upon cashless exercise of options
|
|
|
95,134
|
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(95
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued upon cashless exercise of warrants
|
|
|
7,104,765
|
|
|
|
7,105
|
|
|
|
-
|
|
|
|
|
|
|
|
(7,105
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon exercise of warrants for cash
|
|
|
70,000
|
|
|
|
70
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62,930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
4,494,000
|
|
|
|
4,494
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,425,853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,430,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
686,903
|
|
|
|
-
|
|
|
|
-
|
|
|
|
686,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,483,248
|
)
|
|
|
(5,483,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2018
|
|
|
153,944,886
|
|
|
$
|
153,945
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
69,843,042
|
|
|
$
|
-
|
|
|
$
|
(70,242,155
|
)
|
|
$
|
(245,168
|
)
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MASSROOTS,
INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
Three
months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(5,483,248
|
)
|
|
$
|
(7,447,177
|
)
|
Adjustments to reconcile
net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
105,836
|
|
|
|
5,776
|
|
Stock based compensation
|
|
|
3,117,250
|
|
|
|
5,231,003
|
|
Interest and amortization
of debt discount
|
|
|
350,196
|
|
|
|
-
|
|
(Gain) Loss on change
in Fair Value of derivative liability
|
|
|
-
|
|
|
|
(53,898
|
)
|
Changes in operating
assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivables
|
|
|
-
|
|
|
|
6,889
|
|
Prepaid and other
|
|
|
(534,961
|
)
|
|
|
-
|
|
Security deposit
|
|
|
33,502
|
|
|
|
-
|
|
Advanced settlement
|
|
|
(10,394
|
)
|
|
|
-
|
|
Deferred revenue
|
|
|
-
|
|
|
|
5,823
|
|
Accounts
payable and other liabilities
|
|
|
(1,113,554
|
)
|
|
|
(221,846
|
)
|
Net
Cash used in operating activities
|
|
|
(3,535,373
|
)
|
|
|
(2,473,430
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Equity investment in
High Times Holding Corp
|
|
|
-
|
|
|
|
(100,002
|
)
|
Investment in DDDigital
LLC
|
|
|
-
|
|
|
|
8,672
|
|
Purchase
of Property and Equipment
|
|
|
-
|
|
|
|
(30,722
|
)
|
Net
Cash used in investing activities
|
|
|
-
|
|
|
|
(122,052
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from common
stock sales
|
|
|
3,304,000
|
|
|
|
-
|
|
Proceeds from exercise of warrants
|
|
|
63,000
|
|
|
|
4,443,196
|
|
Payments of advances
|
|
|
(245,000
|
)
|
|
|
-
|
|
Proceeds from advances
|
|
|
397,500
|
|
|
|
6,504
|
|
Repayment of loans
|
|
|
(510,938
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
3,008,562
|
|
|
|
4,449,700
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
(526,811
|
)
|
|
|
1,854,218
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
1,201,587
|
|
|
|
374,490
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
674,776
|
|
|
$
|
2,228,708
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during period for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash
paid during period for taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non
cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued in settlement of debt
|
|
$
|
636,250
|
|
|
$
|
108,100
|
|
Proceeds
received from subscriptions receivable
|
|
$
|
564,000
|
|
|
|
-
|
|
Common
stock issued to acquire DDDigtal LLC
|
|
$
|
-
|
|
|
$
|
2,883,220
|
|
Net
assets acquired from acquisition of DDDigtal LLC
|
|
$
|
-
|
|
|
$
|
15,588
|
|
Derivative
liability reclassed to retained earnings
|
|
$
|
9,493,307
|
|
|
|
-
|
|
Reclassification
of derivative liability to equity upon warrant exercise(s)
|
|
$
|
-
|
|
|
$
|
610,967
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
NOTE
1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
MassRoots,
Inc. (“MassRoots” or the “Company”) has created a technology platform for the cannabis industry focused
on enabling users to share their cannabis content, follow their favorite dispensaries, and stay connected with the legalization
movement. The Company was incorporated in the State of Delaware on April 26, 2013.
The
accompanying unaudited condensed, consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) for financial information and pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”). Our unaudited condensed, consolidated financial
statements include the accounts of DDDigtal, Inc., Odava, Inc., and MassRoots Blockchain Technologies, Inc. All intercompany transactions
were eliminated during consolidation.
NOTE
2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As
of March 31, 2018, the Company had cash of $674,776 and working capital deficit (current liabilities in excess of current assets)
of $1,461,669. During the three months ended March 31, 2018, the Company used net cash in operating activities of $3,535,373.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year from the
issuance of the financial statements.
During
the three months ended March 31, 2018, the Company received approximately $63,000, $3,304,000 and $397,500 from the exercise of
common stock warrants, sale of common stock and proceeds from advances, respectively. The Company does not have cash sufficient
to fund operations for the next fiscal year. These conditions raise substantial doubt about the Company’s ability to continue
as a going concern for one year from the issuance of the financial statements.
The
Company’s primary source of operating funds since inception has been cash proceeds from private placements of common stock,
proceeds from the exercise of warrants and options and issuance of notes payable. The Company has experienced net losses and negative
cash flows from operations since inception and expects these conditions to continue for the foreseeable future. The Company will
require additional financing to fund future operations.
Management’s
plans with regard to these matters encompass the following actions: 1) obtain funding from new and current investors to alleviate
the Company’s working capital deficiency; and 2) implement a plan to generate sales. The Company’s continued existence
is dependent upon its ability to translate its user base into sales. However, the outcome of management’s plans cannot be
ascertained with any degree of certainty.
Accordingly,
the accompanying condensed, consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates
continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the condensed, consolidated financial statements do not
necessarily purport to represent realizable or settlement values. The condensed, consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying interim unaudited condensed, consolidated financial statements have been prepared in accordance with U.S. GAAP for
interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X of the Securities Act
of 1933, as amended, and reflect the accounts and operations of the Company and those of our subsidiaries.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
All
intercompany accounts and transactions have been eliminated in consolidation. Accordingly, the accompanying interim unaudited
condensed, consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the consolidated financial position of the Company as of March 31, 2018, the unaudited condensed,
consolidated results of operations for the three months ended March 31, 2018 and 2017, and the unaudited condensed, consolidated
results of cash flows for the three months ended March 31, 2018 and 2017 have been included. These interim unaudited condensed,
consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial
statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes contained
in the Company’s most recent Annual Report on Form 10-K filed with the SEC on April 17, 2018, as amended on April 30, 2018.
The December 31, 2017 balances reported herein are derived from the audited consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on April 17, 2018, as amended
on April 30, 2018. The results for the interim periods are not necessarily indicative of results to be expected for the full year.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Significant estimates include stock-based compensation,
fair values relating to derivative liabilities and the valuation allowance related to deferred tax assets. Actual results may
differ from these estimates.
Fair
Value of Financial Instruments
Accounting
Standards Codification (“ASC”) subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure
of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities as reflected in the balance sheets, approximate fair value because of the short-term maturity
of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are
either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment
of future cash flows, interest rate risk and credit risk.
The
Company follows ASC 825-10, which permits entities to choose to measure many financial instruments and certain other items at
fair value.
Cash
and Cash Equivalents
For
purposes of the Statement of Cash Flows, the Company considers highly liquid investments with an original maturity of three months
or less to be cash equivalents.
Property
and Equipment
Property
and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.
Repair and maintenance costs are expensed as incurred. When retired or otherwise disposed, the related carrying value and accumulated
depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected
in earnings.
Acquisitions
and Subsidiaries
Subsidiaries
are all entities over which MassRoots has the power to govern the financial and operating policies generally accompanying a shareholding
of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether MassRoots’ controls another entity. Subsidiaries are fully consolidated
from the date on which control is transferred to MassRoots.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
The
purchase method of accounting is used to account for the acquisition of subsidiaries by MassRoots. The cost of an acquisition
is measured as the fair value of the assets transferred in consideration, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities
and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the MassRoots’
share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
Intercompany
transactions, balances and unrealized gains on transactions between MassRoots’ companies are eliminated. Unrealized losses
are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Advertising
The
Company follows the policy of charging the costs of advertising to expense as incurred. The Company charged to operations $64,577
and $193,431, as advertising expenses for the three months ended March 31, 2018 and 2017, respectively.
Stock
Based Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of
the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete.
The fair value amount is then recognized over the period during which services are required to be provided in exchange for the
award, usually the vesting period.
Long-Lived
Assets
The
Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management
at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Intangible assets are stated at cost and reviewed annually to examine any impairments, usually assuming an estimated useful lives
of 3 to 5 years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from
the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
Indefinite
Lived Intangibles and Goodwill Assets
The
Company accounts for business combinations under the purchase acquisition method of accounting in accordance with ASC 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and
liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available,
and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset
valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the
tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The
Company tests for indefinite lived intangibles and goodwill impairment in the fourth quarter of each year and whenever events
or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
Segment
Reporting
Operating
segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly
by the Chief Executive Officer, or decision-making group, in deciding the method to allocate resources and assess performance.
The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings (loss) per share under ASC subtopic 260-10, Earnings Per Share. Net loss per common share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per
share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities
into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The
computation of basic and diluted income (loss) per share as of March 31, 2018 and 2017 excludes potentially dilutive securities
when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common
stock during the period.
Potentially
dilutive securities excluded from the computation of basic and diluted net loss per share are as follows:
|
|
March
31,
2018
|
|
|
March
31,
2017
|
|
Common
stock issuable upon conversion of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
Options
to purchase common stock
|
|
|
15,371,765
|
|
|
|
16,688,942
|
|
Warrants
to purchase common stock
|
|
|
37,119,049
|
|
|
|
8,243,847
|
|
Totals
|
|
|
52,490,814
|
|
|
|
24,932,789
|
|
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
Financial
Accounting Standards Board (“FASB”) Accounting Standards Updates (“ASU”) 2017-04 (Topic 350), “Intangibles
- Goodwill and Others”
– Issued in January 2017, ASU 2017-04 simplifies how an entity is required to
test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss
by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04
is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. The Company
is currently evaluating the effect that ASU 2017-04 will have on our consolidated financial statements and related disclosures.
FASB
ASU 2017-01 (Topic 805), “Business Combinations: Clarifying the Definition of a Business”
– Issued
in January 2017, ASU 2017-01 revises the definition of a business and provides new guidance in evaluating when a set of transferred
assets and activities is a business. This guidance became effective for the Company on January 1, 2018. The Company believes the
standard did not have a material impact on its consolidated financial statements and related disclosures.
FASB
ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”
–
Issued in August 2016, the amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are
required to present a statement of cash flows under ASC Topic 230,
“Statement of Cash Flows”
. The amendments
in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company believes the standard did not have a material impact on our condensed, consolidated financial
statements and related disclosures.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
FASB
ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers”
– Issued in May 2014, ASU
2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step
model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued
ASU No. 2015-14,
“Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”
.
This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08,
“Principal
versus Agent Considerations (Reporting Gross versus Net)”,
which amends the principal versus agent guidance and
clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred
to the customer. In addition, the FASB issued ASU Nos. 2016-20,
“Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Customers”
and 2016-12,
“Narrow-Scope Improvements and Practical
Expedients”
, both of which provide additional clarification of certain provisions in Topic 606. These ASC updates are
effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted
only as of annual reporting periods after December 15, 2016. The standard permits the use of either the retrospective or cumulative
effect transition method.
The
Company applied the guidance using the modified retrospective transition method. The Company believes the adoption of ASU 2014-09
did not have a material impact on the Company’s financial position or results of operations but resulted in additional disclosures
regarding the Company’s revenue recognition policies. Additionally, the Company has expanded its revenue recognition inquiries
and update its questionnaires primarily to identify matters that would signal variable consideration implications under the new
guidance. The Company also does not believe the adoption of ASU 2014-09 required material or significant changes to its internal
controls over financial reporting.
FASB
ASU No. 2014-15,
“Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern,
which is included in Accounting Standards Codification (ASC) 205, Presentation of Financial Statements” -
Issued
August 2014, this update provides an explicit requirement for management to assess an entity's ability to continue as an ongoing
concern, and to provide related footnote disclosures in certain circumstances.
The
amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods
beginning after December 15, 2016. The Company has adopted this standard, included the necessary disclosures in the
footnotes to its financial statements, and does not believe such adoption has had a material impact on its financial statements.
FASB
ASU 2016-02, Leases (Topic 842)
- ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise
from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the
lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with
a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize
lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning
of the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments
in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
application is permitted for all public business entities and all nonpublic business entities upon issuance. The adoption of this
standard is not expected to have a material impact on the Company’s financial position and results of operations.
FASB
ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”
- The amendment is part
of the FASB’s simplification initiative and is intended to simplify the accounting around share-based payment award transactions.
The amendments include changing the recording of excess tax benefits from being recognized as a part of surplus capital to being
charged directly to the income statement, changing the classification of excess tax benefits within the statement of cash flows,
and allowing companies to account for forfeitures on an actual basis, as well as tax withholding changes. The amendments in this
update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal
years. The adoption of this standard has not had a material impact on the Company’s financial position and results of operations.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
FASB
issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
–
Adopted in November 2016, this ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown
in the statement of cash flows include cash and restricted cash equivalents. This ASU is effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this
standard did not have a material impact on the Company’s financial position and results of operations.
FASB
Issued ASU No. 2014-09, (“ASU 606”), Revenue from Contracts with Customers
– In May 2014, the FASB
issued ASU 2014-09,
“Revenue from Contracts with Customers
”. The FASB also issued subsequent amendments
to ASU 2014-09 to provide clarification on the guidance. ASU 2014-09 will be effective for annual periods beginning after December
15, 2017, which for us will be in the period beginning January 1, 2018. We have performed our detailed evaluation, using a five-step
model specified in the guidance, to assess the impacts of the new standard.
|
●
|
Under the new standard,
revenue will be recognized when the Company satisfies its performance obligation by transferring promised products or services
to its customer. The standard allows for application of the guidance to a portfolio of contracts or performance obligations
with similar characteristics.
|
|
●
|
The Company’s
revenue recognition will be achieved upon delivery of advertising and listing services as there are no other promised services
as part of the Company’s contracts with customers.
|
|
●
|
To determine the
amount of consideration which the Company expects to be entitled in exchange for transferring promised services, the Company
has considered if variable consideration exists. The Company has reviewed its standard terms and conditions and its customary
business practices to determine the transaction price. The Company has reviewed its pricing policies and strategies including
marketing, loyalty and incentive programs for determining whether the Company has any variable or non-cash consideration.
No material items were noted.
|
|
●
|
The Company’s
sales transactions do not require any additional performance obligation after delivery. Therefore, the Company does not have
multiple performance obligations for which the Company will have to allocate the transaction price.
|
|
●
|
The Company expects
to recognize revenue upon delivery to the customer as its performance obligation will be satisfied at that point in time.
|
The
Company expects to apply the guidance using the modified retrospective transition method. Based on the Company’s analysis
performed to date, the Company does not expect the adoption of ASU 2014-09 will have a material impact on its financial position
or results of operations but will result in additional disclosures regarding its revenue recognition policies. Additionally, the
Company has expanded its revenue recognition inquiries and updated its questionnaires primarily to identify matters that would
signal variable consideration implications and performance obligations under the new guidance. The Company also does not expect
the adoption will require material or significant changes to its internal controls over financial reporting.
FASB
issued ASU 2017-11, Earnings Per Share (“ASC 260”), Distinguishing Liabilities from Equity (“ASC
480”), and Derivatives and Hedging (“ASC 815”)
- Adopted in July 2017, A
SU
No. 2017-11 is intended to simplify the accounting for financial instruments with characteristics of liabilities and equity. Among
the issues addressed are: (i) determining whether an instrument (or embedded feature) is indexed to an entity’s own stock;
(ii) distinguishing liabilities from equity for mandatorily redeemable financial instruments of certain nonpublic entities; and
(iii) identifying mandatorily redeemable non-controlling interests. The Company adopted ASU No. 2017-11 as of January 1, 2018.
The adoption of ASU No. 2017-11 has eliminated the derivative liabilities from the Company’s financial statements.
There
are other various updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to have a material impact on the Company's financial position, results of operations
or cash flows. The Company implemented these standards using the modified retrospective transition method.
NOTE
4 – INVESTMENTS
As
of March 31, 2018, the carrying value of our investments in privately held companies totaled $403,249. These investments are accounted
for as cost method investments, as we own less than 20% of the voting securities and do not have the ability to exercise significant
influence over operating and financial policies of the entities.
During
the twelve months ended December 31, 2017, the Company acquired 23,810 shares of Class A common stock of Hightimes Holding Corp.
(“Hightimes”) for $100,002, or $4.20 per share. As a result of a forward stock split which became effective on January
15, 2018, each one share of common stock was exchanged for 1.93 shares of common stock. As a result of such forward stock split,
MassRoots currently owns 45,974 shares of Class A common stock of Hightimes. The shares of Class A common stock are considered
non-marketable securities.
On
July 13, 2017, the Company purchased an unsecured convertible promissory note in the principal amount of $300,000 from Cannaregs,
Ltd, a Colorado limited liability company (“Cannaregs”). The note bears interest at a rate of 5% per annum and matures
on December 19, 2019. In the event Cannaregs consummates an equity financing in excess of $2,000,000 prior to the maturity date
of the note, the outstanding principal and any accrued and unpaid interest thereon automatically converts into equity securities
of the same class or series issued by Cannaregs in the equity financing at the lesser of: a) 90% of the price paid per equity
security or b) a price reflecting a valuation cap of $4,500,000. On July 17, 2017, MassRoots converted this note into 430,622
shares of CannaRegs’ common stock, or approximately 4.31% of CannaRegs’ issued and outstanding shares of March 31,
2018.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and equipment as of March 31, 2018 and December 31, 2017 is summarized as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Computers
|
|
$
|
56,900
|
|
|
$
|
55,244
|
|
Office
equipment
|
|
|
43,590
|
|
|
|
43,590
|
|
Subtotal
|
|
|
100,490
|
|
|
|
98,834
|
|
Less
accumulated depreciation
|
|
|
(53,915
|
)
|
|
|
(43,688
|
)
|
Property
and equipment, net
|
|
$
|
46,575
|
|
|
$
|
55,146
|
|
Depreciation
expense for the three months ended March 31, 2018 and 2017 was $10,226 and $5,776, respectively.
NOTE
6 – SOFTWARE COSTS
On
December 15, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
Whaxy Inc., a wholly-owned subsidiary of the Company (“Merger Subsidiary”), DDDigtal Inc., a Colorado corporation
(“DDDigtal”), Zachary Marburger, an individual acting solely in his capacity as stockholder representative, and all
of the stockholders of DDDigtal. Pursuant to the Merger Agreement, the parties agreed to merge Merger Subsidiary with and into
DDDigtal, whereby DDDigtal survived as a wholly-owned subsidiary of MassRoots (the “Merger”).
On
January 25, 2017 (the “Effective Date”), the Merger was completed and became effective upon the filing of certificates
of merger with the respective Secretary of State of the States of Delaware and Colorado, in such forms as required by, and executed
in accordance with, the relevant provisions of the Delaware General Corporation Law and the Colorado Business Corporation Act.
Pursuant
to the terms of the Merger Agreement, each share of DDDigtal’s common stock was exchanged for such number of shares of the
Company’s common stock (or a fraction thereof), based upon an exchange ratio equal to approximately 5.273-for-1, such that
1 share of the Company’s common stock was issued for every 5.273 shares of DDDigtal’s common stock.
On
the Effective Date, the Company issued an aggregate of 2,926,830 shares of the Company’s common stock pro rata to
all stockholders of DDDigtal in exchange for all of their shares of DDDigtal’s common stock. At the same time, each share
of common stock of Merger Subsidiary was converted into and exchanged for one share of common stock of DDDigtal held by the Company,
and all shares of DDDigtal common stock outstanding immediately prior to the Effective Date were automatically cancelled and retired.
DDDigtal continued as a surviving wholly-owned subsidiary of the Company, and Merger Subsidiary ceased to exist.
In
addition, pursuant to the terms of the Merger Agreement, in December 2016, the Company paid cash consideration in the amount of
$40,000 to Zachary Marburger and $20,000 to Micah Davidson, as repayment of outstanding debts owed by DDDigtal to such individuals.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
As
a condition to the closing of the Merger, the Company hired Zachary Marburger as its Vice President of Strategy, and engaged Micah
Davidson as a Senior Software Engineer. As a condition of Mr. Marburger’s employment and pursuant to the terms of the Merger
Agreement, the Company paid Mr. Marburger an additional $40,000 following the one-year anniversary of his constant employment
with the Company.
Cash
(paid in December 2016)
|
|
$
|
60,000
|
|
2,926,830
shares of the Company’s common stock
|
|
|
2,883,220
|
|
Liabilities
assumed
|
|
|
40,140
|
|
Total
purchase price
|
|
$
|
2,983,360
|
|
Cash
|
|
$
|
8,672
|
|
Accounts
receivable
|
|
|
3,583
|
|
Property
and equipment
|
|
|
3,333
|
|
|
|
|
|
|
Software
|
|
|
1,253,000
|
(1)
|
|
|
|
|
|
Goodwill
|
|
|
1,714,772
|
|
|
|
|
|
|
Assets
acquired
|
|
$
|
2,983,360
|
|
(1)
|
The estimated useful
life for software development is assumed at 3 years. The acquisition was completed in January 2017, however the allocation
of proceeds to identifiable assets was recognized during fourth quarter of 2017.
|
NOTE
7 – CONVERTIBLE NOTES PAYABLE
On
August 17, 2017, the Company issued secured convertible notes to certain accredited investors in the aggregate principal amount
of $1,045,000. The notes mature on February 18, 2018 and accrue no interest. The Company received net proceeds received of approximately
$942,500 after deducting legal and other fees. If the Company exercises its right to prepay the notes, the Company shall make
payment to the investors in an amount equal to the sum of the then outstanding principal amount of the notes that the Company
desires to prepay, multiplied by (a) 1.1, during the first ninety days after the issuance of the note, or (b) 1.25, at any point
thereafter. The notes are convertible into shares of the Company’s common stock at a price per share equal to the lower
of (i) $0.75 or (ii) a 25% discount to the price at which the Company next conducts an offering after the issuance date of the
notes; provided, however, if any part of the principal amount of the notes remains unpaid at its maturity date, the conversion
price will be equal to 65% of the average of the three trading days with the lowest daily weighted average prices of the Company’s
common stock occurring during the fifteen days prior to the notes’ maturity date.
In
connection with the issuance of the notes, the Company and the investors also entered into a security agreement pursuant to which
the notes are secured by all of the assets of the Company currently held or thereafter acquired.
In
connection with the issuance of the notes, the Company issued five-year warrants to purchase an aggregate of 2,090,000 shares
of Company’s common stock with an initial exercise price of $0.50. The warrants contain certain anti-dilutive (reset) provisions.
From
January 1 to January 16, 2018, the Company made payments to the holders of the August 2017 notes as follows (i) an aggregate of
$510,937.50 in cash and (ii) an aggregate of 3,742,648 shares of the Company’s common stock pursuant to the conversion features
of the notes. The Company believes that it has satisfied all of its obligations under the notes and all of the notes are retired
as of March 31, 2018.
NOTE
8 – CAPITAL STOCK
Preferred
Stock
T
he
Company is authorized to issue 21 shares of Series A Preferred Stock, par value $1.00 per share. Each share of Series A Preferred
Stock is convertible into one share of common stock and may vote with holders of common stock on an as converted basis. As of
March 31, 2018, there were no shares of Series A Preferred Stock issued and outstanding.
Common
Stock
The
Company is authorized to issue 200,000,000 shares of common stock, par value $0.001 per share. As of March 31, 2018, there were
153,944,886 shares of common stock issued and outstanding and 0 shares of common stock to be issued.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
The
following common stock transactions were recorded during the three months ended March 31, 2018:
The
Company issued an aggregate of 14,362,500 shares of its common stock recorded as to be issued on December 31, 2017.
The
Company retired an aggregate of 1,790,000 shares of its common stock recorded as to be retired on December 31, 2017.
The
Company issued an aggregate of 4,494,000 shares of its common stock for services rendered.
The
Company issued an aggregate of 95,134 shares for its common stock upon the cashless exercise of options.
The
Company issued an aggregate of 7,104,765 shares of its common stock upon the cashless exercise of warrants.
The
Company issued an aggregate of 3,742,648 shares of its common stock for the settlement of convertible debt.
The
Company issued an aggregate of 70,000 shares of its common stock upon the exercise of warrants for net proceeds of $63,000.
The
Company issued an aggregate of 13,700,000 shares of its common stock for cash proceeds of $2,740,000.
The
Company received $564,000 recorded as subscription receivable as of December 31, 2017.
NOTE
9 – WARRANTS
In
January 2018, the Company issued warrants to purchase up to 250,000 shares of common stock at an exercise price of $0.20 per share
to a service provider of the Company. The estimated fair value of $86,483 was charged to current period operations. The fair market
value was calculated using the Black Scholes Option Pricing Model, assuming approximately 2.49% risk-free interest, 0% dividend
yield, 112.14% volatility, and expected life of 5 years.
In
January 2018, in conjunction with the sale of the Company’s common stock, the Company granted warrants to purchase up to
13,700,000 shares of the Company’s common stock at an exercise price of $0.40 per share, exercisable through January 31,
2023.
Warrants
outstanding and exercisable at March 31, 2018 are as follows:
|
|
|
Warrants
Outstanding
|
|
|
|
|
|
Warrants
Exercisable
|
|
$
|
0.20
|
|
|
|
12,275,370
|
|
|
|
4.51
|
|
|
|
12,275,370
|
|
|
0.40
|
|
|
|
18,700,000
|
|
|
|
4.81
|
|
|
|
18,700,000
|
|
|
0.50
|
|
|
|
440,002
|
|
|
|
2.01
|
|
|
|
440,002
|
|
|
0.60
|
|
|
|
50,000
|
|
|
|
2.01
|
|
|
|
50,000
|
|
|
0.83
|
|
|
|
100,000
|
|
|
|
2.80
|
|
|
|
100,000
|
|
|
0.90
|
|
|
|
5,000,002
|
|
|
|
1.50
|
|
|
|
5,000,002
|
|
|
1.06
|
|
|
|
146,200
|
|
|
|
0.73
|
|
|
|
146,200
|
|
|
3.00
|
|
|
|
407,475
|
|
|
|
0.61
|
|
|
|
407,475
|
|
|
|
|
|
|
37,119,049
|
|
|
|
|
|
|
|
37,119,049
|
|
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
A
summary of the warrant activity for the three months ended March 31, 2018 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2017
|
|
|
35,187,847
|
|
|
$
|
0.41
|
|
|
|
2.3
|
|
|
$
|
9,314,959
|
|
Grants
|
|
|
13,950,000
|
|
|
$
|
0.40
|
|
|
|
4.8
|
|
|
|
|
|
Exercised
|
|
|
(11,646,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(372,000
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at March 31, 2018
|
|
|
37,119,049
|
|
|
$
|
0.43
|
|
|
|
4.17
|
|
|
|
|
|
Exercisable
at March 31, 2018
|
|
|
37,119,049
|
|
|
$
|
0.43
|
|
|
|
4.17
|
|
|
$
|
576,015
|
|
The
aggregate intrinsic value outstanding stock warrants was $576,015, based on warrants with an exercise price less than the Company’s
stock price of $0.25 as of March 31, 2018, which would have been received by the warrant holders had those warrant holders exercised
their warrants as of that date.
NOTE
10 –STOCK OPTIONS
Our
stockholders approved our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan
in December 2015 (the “2015 Plan”), our 2016 Equity Incentive Plan in October 2016 (“2016 Plan”) and our
2017 Equity Incentive Plan in December 2016 (“2017 Plan”, and together with the 2014 Plan, 2015 Plan and 2016 Plan,
the “Plans”). The Plans are identical, except for number of shares reserved for issuance under each Plan. As of March
31, 2018, the Company had granted an aggregate of 39,500,000 securities under the plans, with 0 available for future issuances.
The
Plans provide for the grant of incentive stock options to our employees and our parent and subsidiary corporations’ employees,
and for the grant of non-statutory stock options, stock bonus awards, restricted stock awards, performance stock awards and other
forms of stock compensation to our employees, including officers, consultants and directors. Our Plans also provide that the grant
of performance stock awards may be paid out in cash as determined by the committee administering the Plans.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
During
the three months ended March 31, 2018, the Company granted ten-year options outside of our Plans to purchase up to 1,250,000 shares
of common stock. The fair value of $459,834, was determined using the Black-Scholes Option Pricing Model, assuming approximately
2.78% risk-free interest, 0% dividend yield, 116.08% volatility, and expected life of five to ten years and will be charged to
operations over the vesting terms of the options.
The
summary terms of the issuances are as follows:
Exercise
Price
|
|
|
Number
of Options
|
|
|
Vesting
Terms
|
$
|
0.36
|
|
|
|
250,000
|
|
|
Immediately
|
|
0.40
|
|
|
|
1,000,000
|
|
|
Immediately
|
|
0.39
|
|
|
|
1,250,000
|
|
|
Immediately
|
Stock
options outstanding and exercisable on March 31, 2018 are as follows:
Exercise
Price
|
|
|
Number
of Options
|
|
|
Remaining
Life In Years
|
|
|
Number
of Options Exercisable
|
|
$
|
0 –
0.25
|
|
|
|
1,056,786
|
|
|
|
6.18
|
|
|
|
1,056,786
|
|
$
|
0.26 - 0.50
|
|
|
|
1,939,631
|
|
|
|
9.02
|
|
|
|
1,939,631
|
|
$
|
0.51 – 0.75
|
|
|
|
1,820,112
|
|
|
|
8.43
|
|
|
|
1,820,112
|
|
$
|
0.76 - 1.00
|
|
|
|
9,926,072
|
|
|
|
8.46
|
|
|
|
9,926,072
|
|
$
|
1.01
- 2.00
|
|
|
|
629,164
|
|
|
|
8.36
|
|
|
|
629,164
|
|
|
|
|
|
|
15,371,765
|
|
|
|
|
|
|
|
15,371,765
|
|
A
summary of the stock option activity for the three months ended March 31, 2018 is as follows:
|
|
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-Average
Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2017
|
|
|
14,378,432
|
|
|
$
|
0.76
|
|
|
|
8.48
|
|
|
$
|
771,359
|
|
Grants
|
|
|
1,250,000
|
|
|
|
0.39
|
|
|
|
9.80
|
|
|
|
|
|
Exercised
|
|
|
(256,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture/Canceled
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2018
|
|
|
15,371,765
|
|
|
|
0.73
|
|
|
|
8.37
|
|
|
|
|
|
Exercisable
at March 31, 2018
|
|
|
15,371,765
|
|
|
$
|
0.73
|
|
|
|
8.37
|
|
|
$
|
156,299
|
|
The
aggregate intrinsic value outstanding stock options was $156,299, based on options with an exercise price less than the Company’s
stock price of $0.25 as of March 31, 2018, which would have been received by the option holders had those option holders exercised
their options as of that date.
MASSROOTS,
INC.
Notes
to Condensed Consolidated Financial Statements
March
31, 2018
Due
to a clerical error, MassRoots’ Annual Report on Form 10-K filed on April 17, 2018, as amended on April 30, 2018, stated
that 2,454,761 options were canceled/expired for the twelve months ending December 31, 2017 and the options outstanding as of
December 31, 2017 were 14,377,570. It should have stated that 2,863,715 options were canceled/expired for the twelve months ending
December 31, 2017 and the options outstanding as of December 31, 2017 were 14,378,432. While we are correcting this error in this
Quarterly Report on Form 10-Q and subsequent filings, we do not believe it has a material impact on our fiscal 2017 financial
statements.
Option
valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated
using the Black-Scholes option model with a volatility figure derived historical data. The Company accounts for the expected life
of options based on the contractual life of options for non-employees.
NOTE
11 – RELATED PARTY TRANSACTIONS
None.
NOTE
12 – SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
From
April 1 to May 16, 2018, the Company issued an aggregate of 542,648 shares of common stock upon the cashless exercise of warrants.
PART
II- INFORMATION NOT REQUIRED IN PROSPECTUS