NOTE 2 – GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As of September 30,
2018, the Company had cash of $11,221 and working capital deficit (current liabilities in excess of current assets) of $5,490,050.
During the nine months ended September 30, 2018, the Company used net cash in operating activities of $5,718,352. 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 nine months ended September 30, 2018, the Company received approximately $323,000, $3,304,000, $1,492,500 and $503,500 from
the exercise of common stock warrants, sale of common stock, proceeds from issuance of convertible notes, and proceeds from advances
including simple agreements for future tokens, respectively. The Company does not have cash sufficient to fund operations for
the next fiscal year.
The Company’s
primary source of operating funds since inception has been cash proceeds from the public and private placements of the Company’s
securities, including debt securities, and proceeds from the exercise of warrants and options. The Company has experienced net
losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future.
The Company 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 unaudited 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 unaudited condensed
consolidated financial statements do not necessarily purport to represent realizable or settlement values. The unaudited
condensed consolidated financial statements do not include any adjustments that might result 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 pursuant to instructions to the SEC’s Form 10-Q and Article 8 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.
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 unaudited
condensed consolidated financial position of the Company as of September 30, 2018, the unaudited condensed consolidated results
of operations for the three and nine months ended September, 2018 and 2017, and the unaudited condensed consolidated results of
cash flows for the nine months ended September 30, 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 and May 24, 2018 (the
“Annual Report”). The December 31, 2017 balances reported herein are derived from the audited consolidated financial
statements included in the Annual Report. 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
The Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) subtopic 825-10, Financial Instruments
(“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The 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 three to five 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.
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.
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. For the three months ended September 30, 2018 and 2017, the Company charged to
operations $36,407 and $302,809, respectively, as advertising expense. For the nine months ended September 30, 2018 and 2017,
the Company charged to operations $468,958 and $865,052, respectively, as advertising expense.
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 three to five years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed
from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
Indefinite Lived
Intangibles and Goodwill 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.
Net Earnings (Loss)
Per Common Share
The Company computes
earnings (loss) per share under ASC subtopic 260-10, Earnings Per Share. Net loss per common share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share, if presented,
would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common
stock using the “treasury stock” and/or “if converted” methods as applicable.
The computation of
basic and diluted income (loss) per share, for the three and nine months ended September 30, 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:
|
|
Sept 30,
2018
|
|
|
Sept 30,
2017
|
|
Common stock issuable upon conversion of convertible debentures
|
|
|
6,600,000
|
|
|
|
3,538,894
|
|
Options to purchase common stock
|
|
|
27,357,765
|
|
|
|
14,574,977
|
|
Warrants to purchase common stock
|
|
|
41,226,339
|
|
|
|
11,864,347
|
|
Totals
|
|
|
75,184,104
|
|
|
|
29,978,218
|
|
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
FASB Accounting
Standards Updates (“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 was effective for the Company in the
first fiscal quarter of 2018. The Company believes the standard does 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 has adopted this guidance and does not believe it materially impacts its consolidated financial
statements and related disclosures.
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 ASUs are effective for annual reporting
periods beginning after December 15, 2017; however, early adoption is permitted 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 has
applied the guidance using the modified retrospective transition method. The Company does not believe the adoption of ASU
2014-09 had a material impact on the Company’s financial position or results of operations but such adoption resulted
in additional disclosures regarding the Company’s revenue recognition policies. The Company also does not believe the
adoption of ASU 2014-09 required 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 has expanded its revenue
recognition inquiries and updated its questionnaires 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 ASC 205, Presentation of Financial Statements” –
Issued in 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 its financial statements. The adoption of this standard has not had a material impact on the Company’s financial position
and results of operations.
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 twelve
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.
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.
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, ASU 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 has adopted ASU No. 2017-11 effective as of January 1, 2018. The adoption of ASU No. 2017-11 has eliminated
the derivative liabilities from the Company’s financial statements. The adoption of this standard has not had a material
impact on the Company’s financial position and results of operations.
FASB ASU No.
2018-07 (Topic 718), “Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”
–
Issued
in June 2018, ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services
from nonemployees. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide
(1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract
accounted for under Topic 606. The new standard will be effective for the Company on January 1, 2019. Early adoption is permitted.
We do not expect adoption of this guidance will have a material impact on the Company’s consolidated financial condition
or 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
As of September 30, 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. for $100,002, or $4.20 per share.
As a result of a forward share split of 1.93:1 on January 15, 2018, MassRoots currently owns 45,974 shares of Class A common
stock. 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 into equity securities of the same class
or series issued by Cannaregs at the lesser of: a) 90% of the price paid per equity security or b) a price reflecting a valuation
cap of $4,500,000.
On July 17, 2017,
MassRoots converted the note into 430,622 shares of CannaRegs’ common stock, or less than 3% of CannaRegs’
issued and outstanding shares as of September 30, 2018.
NOTE 5 –
PROPERTY AND EQUIPMENT
Property and equipment
as of September 30, 2018 and December 31, 2017 is summarized as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Computers
|
|
$
|
59,512
|
|
|
$
|
55,244
|
|
Office equipment
|
|
|
45,831
|
|
|
|
43,590
|
|
Subtotal
|
|
|
105,343
|
|
|
|
98,834
|
|
Less accumulated depreciation
|
|
|
(64,886
|
)
|
|
|
(43,688
|
)
|
Property and equipment, net
|
|
$
|
40,457
|
|
|
$
|
55,146
|
|
Depreciation expense
for the three months ended September 30, 2018 and 2017 was $5,002 and $9,410, respectively; and $20,417 and $21,344 for the nine
months ended September 30, 2018 and 2017, 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.
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 (the “Share
Consideration”) in exchange for all of the outstanding 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 were automatically cancelled
and retired. At the Effective Date, 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, 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 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 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 three years. The acquisition was completed
in January 2017, however the allocation of proceeds to identifiable assets was recognized during fourth quarter of 2017.
|
In January 2018, MassRoots entered into
a Master Services Agreement with MEV, LLC (“MEV”) pursuant to which MEV will assist with the development and servicing
of the Company’s technology platform, including its mobile applications, business portal and WeedPass. As of September 30,
2018, the Company has paid MEV approximately $460,000 with respect to the development and maintenance of its platform, of which
it has capitalized $218,348 including depreciation expenses of $10,917.
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 matured on February 18, 2018 and accrued no interest. Net proceeds received by the Company 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 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 were
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 payment to the holders of the notes in an aggregate of (i) $510,937.50 in cash and (ii) pursuant to the right of
conversion of the notes, 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.
On July 5, 2018, the
Company issued secured convertible notes to certain accredited investors in the aggregate principal amount of $1,650,000. The notes
have a maturity date of January 5, 2019 and accrued no interest. Net proceeds received by the Company were $1,492,500 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 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) $0.25 and (ii) a 15% 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 after the 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 as of July 5, 2018 or thereafter acquired.
In connection with the issuance of the notes, the Company issued five-year warrants to purchase an aggregate
of 6,600,000 shares of Company’s common stock with an initial exercise price of $0.25. The warrants contain certain anti-dilutive
(reset) provisions.
NOTE 8 – CAPITAL STOCK
Preferred Stock
The Company is authorized
to issue 10,000,000 shares of blank check preferred stock, par value $0.001 per share As of September 30, 2018, there were no
shares of preferred stock issued and outstanding.
Common Stock
The Company is authorized to issue 500,000,000
shares of common stock, par value $0.001 per share. As of September 30, 2018, there were 163,017,534 shares of common stock issued
and outstanding.
The following common
stock transactions were recorded during the nine months ended September 30, 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 in exchange for warrants issued in December 2017.
The Company issued an aggregate of 11,594,000
shares of its common stock, having an aggregate fair value of $3,310,747, for services rendered.
The Company issued an aggregate of 95,134
shares for its common stock upon the cashless exercise of outstanding options.
The Company issued an aggregate of 7,647,413
shares of its common stock upon the cashless exercise of outstanding warrants.
The Company issued an aggregate of 3,742,648
shares of its common stock for the settlement of convertible debt with a principal amount of $880,000.
The Company issued an aggregate of 1,370,000
shares of its common stock upon the exercise of outstanding warrants for net proceeds of $323,000.
The Company issued an aggregate of 13,700,000
shares of common stock for cash proceeds of $2,740,000.
The Company received $564,000 recorded
as subscription receivable as of December 31, 2017.
The Company issued an aggregate of 130,000
shares for stock payable of $32,995.
NOTE 9- WARRANTS
In January 2018, the Company issued warrants
to purchase up to 250,000 shares of the Company’s 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 five 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. Due to price
protection provisions, the exercise price of the warrants was adjusted to $0.20 on July 26, 2018.
The Company issued warrants to purchase
up to an aggregate of 6,600,000 shares of the Company’s common stock as part of the sale of convertible debentures.
Warrants outstanding and exercisable at September 30, 2018
are as follows:
Exercise
Price
|
|
Warrants
Outstanding
|
|
|
Weighted Avg.
Remaining Life
|
|
|
Warrants
Exercisable
|
|
$0.01 – 0.25
|
|
|
30,082,660
|
|
|
|
4.34
|
|
|
|
30,082,660
|
|
0.26 – 0.50
|
|
|
5,440,002
|
|
|
|
4.08
|
|
|
|
5,440,002
|
|
0.51 – 0.75
|
|
|
50,000
|
|
|
|
1.52
|
|
|
|
50,000
|
|
0.76 – 1.00
|
|
|
5,100,002
|
|
|
|
1.00
|
|
|
|
5,100,002
|
|
1.01 – 2.00
|
|
|
146,200
|
|
|
|
0.23
|
|
|
|
146,200
|
|
2.01 and up
|
|
|
407,475
|
|
|
|
0.11
|
|
|
|
407,475
|
|
|
|
|
41,226,339
|
|
|
|
|
|
|
|
41,226,339
|
|
A summary of the warrant activity for the nine months ended
September 30, 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
|
|
|
|
2.0
|
|
|
$
|
-
|
|
Grants
|
|
|
20,550,000
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,139,508
|
)
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(372,000
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2018
|
|
|
41,226,339
|
|
|
$
|
0.35
|
|
|
|
3.3
|
|
|
$
|
-
|
|
Exercisable at September 30, 2018
|
|
|
41,226,339
|
|
|
$
|
0.35
|
|
|
|
3.6
|
|
|
$
|
-
|
|
The aggregate intrinsic
value outstanding stock warrants was $0, based on warrants with an exercise price less than the Company’s stock price of
$0.12 as of September 30, 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 (“2016 Plan”) in October 2016, our 2017 Equity
Incentive Plan in December 2016 (“2017 Plan”) and our 2018 Equity Incentive Plan in June 2018 (the “2018 Plan”),
and together with the 2014 Plan, 2015 Plan, 2016 Plan, 2017 Plan, and 2018 Plan the “Plans”). The Plans are identical,
except for number of shares reserved for issuance under each. As of September 30, 2018, the Company had granted an aggregate of
58,600,000 securities under the Plans, with 5,900,000 shares available for future issuances.
The Plans provide
for the grant of incentive stock options to our employees and our parent and subsidiary corporations’ employees, and for
the grant of non-statutory stock options, stock bonus awards, restricted stock awards, performance stock awards and other forms
of stock compensation to our employees, including officers, consultants and directors. 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 nine months
ended September 30, 2018, the Company granted ten-year options outside of our Plans to purchase up to 13,250,000 shares of the
Company’s common stock. The fair value of $2,136,883, was determined using the Black-Scholes option pricing model, assuming
approximately 2.78% - 2.98% risk-free interest, 0% dividend yield, 112.67% -116.28% volatility, and expected life of 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
|
$
|
0.20
|
|
|
|
12,000,000
|
|
|
Immediately
|
|
0.36
|
|
|
|
250,000
|
|
|
Immediately
|
|
0.40
|
|
|
|
1,000,000
|
|
|
Immediately
|
Stock options outstanding and exercisable on September 30,
2018 are as follows:
Exercise
Price
|
|
Number of
Options
|
|
|
Remaining Life
In Years
|
|
|
Number of Options
Exercisable
|
|
$0.01 – 0.25
|
|
|
13,056,786
|
|
|
|
9.49
|
|
|
|
13,056,786
|
|
0.26 - 0.50
|
|
|
1,939,631
|
|
|
|
8.51
|
|
|
|
1,939,631
|
|
0.51 – 0.75
|
|
|
1,820,112
|
|
|
|
7.93
|
|
|
|
1,820,112
|
|
0.76 - 1.00
|
|
|
9,926,072
|
|
|
|
7.96
|
|
|
|
9,912,072
|
|
1.01 - 2.00
|
|
|
629,164
|
|
|
|
7.86
|
|
|
|
629,164
|
|
|
|
|
27,371,765
|
|
|
|
|
|
|
|
27,357,765
|
|
A summary of the stock option activity for the nine months
ended September 30, 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
|
|
|
13,250,000
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(256,667
|
)
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
Forfeiture/Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
27,371,765
|
|
|
|
0.50
|
|
|
|
8.73
|
|
|
$
|
-
|
|
Exercisable at September 30, 2018
|
|
|
27,357,765
|
|
|
$
|
0.50
|
|
|
|
8.73
|
|
|
$
|
-
|
|
The aggregate intrinsic
value of outstanding stock options was $25,363, based on options with an exercise price less than the Company’s stock price
of $0.13 as of September 30, 2018, which would have been received by the option holders had those option holders exercised their
options as of that date.
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 pricing 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 –
SUBSEQUENT EVENTS
The Company evaluates events that have
occurred after the balance sheet date but before the financial statements are issued.
On October 17, 2018, MassRoots issued 1,750,000
shares of common stock upon the exercise of warrants for proceeds of $196,875.
On October 30, 2018, MassRoots issued
2,000,000 shares of common stock, and recorded an additional 205,000 shares of common stock to be issued, for services rendered
under the 2018 Plan with an intrinsic value of $217,678.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion
and analysis in conjunction with our unaudited financial statements and related notes contained in Part I, Item 1 of this Quarterly
Report. Please also refer to the note about forward-looking statements contained in this Quarterly Report immediately preceding
Part I, Item 1.
Overview
MassRoots was formed in April 2013 as
a technology platform for the cannabis industry. Powered by more than one million registered users (“Users”), MassRoots
enables consumers to rate cannabis products and strains based on their efficacy (i.e. effectiveness for treating ailments such
as back-pain or epilepsy) and then presents this information in easy-to-use formats for consumers to make educated purchasing
decisions at their local dispensary. Businesses are able to leverage MassRoots by strategically advertising to consumers based
on their preferences and tendencies.
Over the past five years, MassRoots has
established itself as a leading technology company in the emerging cannabis industry, building a user-base of one million registered
Users, partnering with some of the most recognized brands in the industry and raising significant capital from institutional and
private investors. Since inception, the Company has generated approximately $1.2 million in revenue.
For much of our history, we have focused
on building a consumer-facing application and only recently shifting our efforts to developing our advertising portal. In June
2018, we launched MassRoots for Business, a business portal which enables dispensaries to list their location and key information
on the MassRoots dispensary finder as well as viewing analytics about their local consumers. We are charging dispensaries a minimum
recurring monthly fee, per location, for access to the portal. In addition, in September2018, we launched our WeedPass rewards
program which is fully integrated with our mobile applications and business portals.
Our WeedPass
rewards program
incentivizes consumer loyalty with concert, movie and sporting event tickets.
With MassRoots’ wide-spread audience
and following in some of the leading medical cannabis markets in the country, we believe our business portal will be well-received
by our client base. According to New Frontier Financial, there are projected to be over 2,700 state-regulated dispensaries in
the United States by 2020.
User Growth and Product Distribution Channels
The MassRoots app is distributed free-of-charge
through the Apple App Store, the Google Play Marketplace and the Amazon App Store. The MassRoots network is also accessible through
desktop and mobile web browsers by navigating to
www.massroots.com
. Our business and adverting portal can be accessed
at
www.massroots.com/dispensaries
. Through this portal, companies can edit their profiles, distribute information
to Users and view analytics such as impressions, views and clicks.
Competitors
We compete with other cannabis information
platforms such as WeedMaps and Leafly, which provide information with respect to dispensary locations, strain information and
news relating to the cannabis industry. We believe our primary competitive advantage is the community we have created and the
significant reviews and data we have collected on key cannabis markets.
Blockchain Technology
In December 2017, we formed MassRoots
Blockchain Technologies, Inc., a wholly-owned subsidiary of the Company to explore how blockchain technology may be utilized in
the cannabis industry.
For the three months ended September 30, 2018 and 2017
|
|
For the three months ended
|
|
|
|
30-Sept-18
|
|
|
30-Sept-17
|
|
|
$ Change
|
|
|
% Change
|
|
Gross revenue
|
|
$
|
4,014
|
|
|
$
|
11,516
|
|
|
$
|
(7,502
|
)
|
|
|
(65.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
3,914,253
|
|
|
|
7,533,530
|
|
|
|
(3,619,277
|
)
|
|
|
(48.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(3,910,239
|
)
|
|
|
(7,522,014
|
)
|
|
|
3,611,775
|
|
|
|
(48.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income /(Expense)
|
|
|
(616,752
|
)
|
|
|
444,948
|
|
|
|
(1,061,700
|
)
|
|
|
(238.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,526,991
|
)
|
|
$
|
(7,077,066
|
)
|
|
$
|
2,550,075
|
|
|
|
(36.0
|
%)
|
Revenues
For the three months ended September 30, 2018
and 2017, we generated revenues of $4,014 and $11,516, respectively, a decrease of $7,502. This was attributed to restructuring
of our sales strategy and the implementation of a new sales strategy for the Company in 2018, which included the deployment of
a new online advertising portal for businesses in late June 2018.
Operating Expenses
For the three months ended September 30,
2018 and 2017, our operating expenses were $3,914,253 and $7,533,530, respectively, a decrease of $3,619,277. The decreases during
the three months ended September 30, 2018 were mainly attributed to a decrease in stock-based compensation to our employees and
key consultants which, for 2018, was $2,254,981 as compared to $5,510,554 for the period ended September 30, 2017 (a non-cash
decrease of $3,255,573). There was a decrease in payroll and related expenses of $427,217 as payroll and related expenses were
$384,558 for the three months ended September 30, 2018 as compared to $811,775 for the same period in 2017 related to taxes and
penalties attributed to equity issuances to employees not recorded previously. In addition, the Company recorded amortization
of software costs of $108,182 and $0, for the three months ended September 30, 2018 and 2017, respectively.
Other Income (Expense)
For the three months ended September 30,
2018 and 2017, the Company recorded net interest expense of $456,155 and $189,125, respectively, related to the Company’s
convertible debt issued in August 2017, and also interest expense related to taxes and penalties attributed to equity issuances
to employees not recorded previously. As of September 30, 2018, the remaining notes payable had been paid in full. For the three
months ended September 30, 2018 and 2017, the Company incurred a $160,597 loss and a $634,073 gain, respectively, related to the
fair value mark to market adjustments of its derivative liabilities.
Net Loss
For the three months ended September 30,
2018 and 2017, we had net losses of $4,526,991 and $7,077,066, respectively, a decrease of $2,550,075, for the reasons discussed
above.
For the nine months ended September 30, 2018 and 2017
|
|
For the nine months ended
|
|
|
|
30-Sept-18
|
|
|
30-Sept-17
|
|
|
$ Change
|
|
|
% Change
|
|
Gross revenue
|
|
$
|
7,743
|
|
|
$
|
289,130
|
|
|
$
|
(281,387
|
)
|
|
|
(97.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
11,941,053
|
|
|
|
27,315,960
|
|
|
|
(15,374,907
|
)
|
|
|
(56.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(11,933,310
|
)
|
|
|
(27,026,830
|
)
|
|
|
15,093,520
|
|
|
|
(55.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income /(Expense)
|
|
|
(1,014,943
|
)
|
|
|
871,933
|
|
|
|
(1,886,876
|
)
|
|
|
(216.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(12,948,253
|
)
|
|
$
|
(26,154,897
|
)
|
|
$
|
13,206,644
|
|
|
|
(50.5
|
%)
|
Revenues
For the nine months ended September 30, 2018
and 2017, we generated revenues of $7,743 and $289,130, respectively, a decrease of $281,387. This was attributed to restructuring
of our sales model and implementation of a new sales strategy for the Company in 2018, which included the deployment of a new online
advertising portal for businesses in late June 2018.
Operating Expenses
For the nine months ended September 30,
2018 and 2017, our operating expenses were $11,941,053 and $27,315,960, respectively, a decrease of $15,374,907. The decrease
during the nine months ended September 30, 2018 were mainly attributed to a decrease in stock-based compensation to our employees
and key consultants which, for 2018, was $5,447,629 as compared to $19,882,527 for the period ended September 30, 2017 (a non-cash
decrease of $14,434,898). There was a decrease in payroll and related expenses of $519,370 as payroll and related expenses were
$2,213,541 for the nine ended September 30, 2018 as compared to $2,732,911 for the same period in 2017. In addition, the Company
recorded amortization of software costs of $315,299 and $0, for the nine months ended September 30, 2018 and 2017, respectively.
The main factor that attributed to the decrease in the Company’s operating expenses was a reduction in the Company’s
employee work-force.
Other Income (Expense)
For the nine months ended September 30,
2018 and 2017, the Company recorded net interest expense of $854,346 and $189,125, respectively, related-to the Company’s
convertible debt issued in August 2017 and also interest expense related to taxes and penalties attributed to equity issuances
to employees not recorded previously. As of September 30, 2018, the remaining notes payable had been paid in full. For the nine
months ended September 30, 2018 and 2017, the Company recognized a gain of $0 and $75,000, respectively, on the sale of securities,
while for the nine months ended September 30, 2018 and 2017, the Company incurred a loss of $160,597 and a gain of $986,058, respectively,
related to the fair value mark to market adjustments of its derivative liabilities.
Net Loss
For the nine months ended September 30,
2018 and 2017, we had net losses of $12,948,253 and $26,154,897, respectively, a decrease of $13,206,644 for the reasons discussed
above.
Liquidity and Capital Resources
Net cash used in operations for the nine
months ended September 30, 2018 and 2017 was $5,718,352 and $7,200,176, respectively. This decrease was primarily caused by net
losses of $12,948,253 and $26,154,897 for the nine months ended September 30, 2018 and 2017, respectively. These reductions were
offset by non-cash amounts for depreciation and amortization, stock-based compensation and interest and amortization of debt discounts
for the nine months ended September 30, 2018 and 2017.
Net cash used in investing
activities for the nine months ended September 30, 2018 and 2017 was $224,076 and $236,833, respectively. For the nine months
ended September 30, 2018, investing activities were related to the purchase of equipment and investment in a new customer
internet application called WeedPass. For the nine months ended September 30, 2017, investing activities were related to cash
used for purchases of property and equipment and the purchase of an equity investment of $100,002 in HighTimes Holdings Corp.
These items were offset by proceeds from sale of securities and we received $8,672 in connection with the acquisition of
DDDigtal, LLC.
Net cash provided by financing
activities for the nine months ended September 30, 2018 and 2017 was $4,752,062 and $7,329,841, respectively. During the nine
months ended September 30, 2018, these funds came mainly from sales of common stock and proceeds from convertible debentures,
offset by repayments of related-party advances, while during the same period in 2017, these funds came mainly from warrant
and stock subscriptions as well as proceeds from the issuance of convertible notes, offset by repayments of advances.
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 the public and private placements
of the Company’s securities, including debt securities, and proceeds from the exercise of warrants and options. The Company
has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for
the foreseeable future. The Company will require additional financing to fund future operations. No assurance can be made
that such financing will be obtained.
Capital Resources
As of September 30, 2018, we had cash
on hand of $11,221. We currently have no external sources of liquidity such as arrangements with credit institutions or off-balance
sheet arrangements that will have or are reasonably likely to have a current or future effect on our financial condition or immediate
access to capital.
Off-Balance Sheet Arrangements
As of September 30, 2018, we did not have
any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
For a discussion of our accounting policies
and related items, please see the Notes to the Condensed Consolidated Financial Statements, included in Part I, Item 1 of
this Quarterly Report.