NOTE 2 – GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As of March 31, 2019,
the Company had cash of $485 and working capital deficit (current liabilities in excess of current assets) of $7,906,960. During
the three months ended March 31, 2019, the Company used net cash in operating activities of $286,583 and used net cash in investing
activities of $32,500. 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, 2019, the Company received proceeds of $150,000 and $140,000 from the issuance of convertible notes and advances,
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.
For the foreseeable future, the Company
’
s
ability to continue its operations is dependent upon its ability to obtain additional capital through public or private equity
offerings, debt financings or other sources
to fund its
future operations
;
however,
financing may not
be available to the Company on acceptable terms, or at all. The Company’s failure to raise capital as and when needed would
have a negative impact on its financial condition and its ability to pursue its business strategy and the Company may be forced
to curtail or cease operations.
Management’s plans 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 for one year from the date the financial statements are issued. 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
Principles of Consolidation
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 Quarterly Report on 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 its subsidiaries.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
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 March 31, 2019, the unaudited condensed consolidated results of
operations for the three months ended March 31, 2019 and 2018, and the unaudited condensed consolidated results of cash flows for
the three months ended March 31, 2019 and 2018 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 Annual Report
on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on April 16, 2019 (the “Annual Report”).
The December 31, 2018 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.
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.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
Revenue Recognition
The Company recognizes revenue when services
are realized or realizable and earned less estimated future doubtful accounts.
The Company’s revenues accounted
for under ASC Topic 606 generally do not require significant estimates or judgments based on the nature of the Company’s
revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in
the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.
In accordance with ASC 606, the Company
recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which MassRoots expects to be entitled in exchange for those goods or services. MassRoots recognizes revenue in accordance with
that core principle by applying the following:
|
(i)
|
Identify
the contract(s) with a customer;
|
|
(ii)
|
Identify
the performance obligation in the contract;
|
|
(iii)
|
Determine
the transaction price;
|
|
(iv)
|
Allocate
the transaction price to the performance obligations in the contract; and
|
|
(v)
|
Recognize
revenue when (or as) MassRoots satisfies a performance obligation.
|
The Company primarily
generates revenue by charging businesses to advertise on the Company’s network. The Company has the ability to target advertisements
directly to a clients’ target audience, based on their location and 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.
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.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. For the three months ended March 31, 2019 and 2018, the Company charged to operations
$27,208 and $64,577, respectively, as advertising expense.
Other Receivables
The Company was owed $22,500 in loans
extended to Cowa Science Corporation as of March 31, 2019.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
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.
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.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
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 months ended March 31, 2019 and 2018 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.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
Potentially dilutive
securities excluded from the computation of basic and diluted net loss per share are as follows:
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
Common stock issuable upon conversion of convertible debentures
|
|
|
11,531,315
|
|
|
|
-
|
|
Options to purchase common stock
|
|
|
27,621,765
|
|
|
|
15,371,765
|
|
Warrants to purchase common stock
|
|
|
72,160,002
|
|
|
|
37,119,049
|
|
Totals
|
|
|
111,313,082
|
|
|
|
52,490,814
|
|
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”) 2017-04 (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 its 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 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 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.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
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 did not have 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 is effective for the Company as of January 1, 2019.
The adoption of this guidance did not have a material impact on the Company’s consolidated financial condition or results
of operations.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
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 March 31, 2019
and December 31, 2018, the carrying value of our investments in privately held companies totaled $247,912 and $247,912, 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.
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 1.9308657-for-one 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. In 2018, CannaRegs re-incorporated as a Delaware
C corporation under the name Regs Technology, Inc. (“Regs Technology”), keeping the same capitalization structure
and business operations. MassRoots values its holdings at $147,876 and $147,876 as of March 31, 2019 and December 31, 2018, respectively.
The Company recorded an impairment expense of $155,336 on its holdings during fiscal year 2018. MassRoots owns less than 1% of
Regs Technology’s issued and outstanding shares as of March 31, 2019.
NOTE 5 –
PROPERTY AND EQUIPMENT
Property and equipment
as of March 31, 2019 and December 31, 2018 is summarized as follows:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Computers
|
|
$
|
6,366
|
|
|
$
|
6,366
|
|
Office equipment
|
|
|
17,621
|
|
|
|
17,621
|
|
Subtotal
|
|
|
23,987
|
|
|
|
23,987
|
|
Less accumulated depreciation
|
|
|
(18,437
|
)
|
|
|
(17,254
|
)
|
Property and equipment, net
|
|
$
|
5,550
|
|
|
$
|
6,733
|
|
Depreciation expense for the three months
ended Mach 31, 2019 and 2018 was $1,183 and $10,226, respectively.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
NOTE 6 – SOFTWARE COSTS
In January 2018, MassRoots entered into
a Master Services Agreement with MEV, LLC (“MEV”) pursuant to which MEV will assist with the development and servicing
of the Company’s technology platform, including its mobile applications, business portal and WeedPass. MassRoots has capitalized
the billable costs of engineers that were devoted to building the system and developing additional features that enhanced its ability
to generate revenue. MassRoots did not capitalize any costs associated with maintenance, user-testing, analysis and planning of
the system. The Company is amortizing these capitalized costs using a straight-line methodology over five years, beginning July
5, 2018.
During fiscal year 2018, MassRoots paid
MEV $521,839 with respect to the development and maintenance of its platform, of which MassRoots has capitalized $260,565 in development
costs.
During three months ended March 31, 2019
and 2018, MassRoots incurred amortization of software costs of $12,850 and $97,265, respectively.
NOTE 7 – ADVANCES AND NOTES PAYABLE
As of March 31, 2019, the Company owed
advances of $942,500, as compared to $958,650 as of December 31, 2018, which were primarily for Simple Agreements for Future Tokens,
entered into with eight accredited investors issued pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended, by virtue of
Section 4(a)(2) thereof and
Regulation D thereunder
in 2017 and 2018.
As of March 31, 2019, the Company owed $146,150, as compared to $0 as of December 31, 2018, under notes
payable agreements not convertible into shares of common stock.
NOTE 8 –
CONVERTIBLE NOTES PAYABLE
On July 5, 2018, the
Company issued secured convertible notes to certain accredited investors in the aggregate principal amount of $1,650,000. The notes
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 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) $0.25 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. The Company also issued five-year
warrants to purchase an aggregate of 6,600,000 shares of Company’s common stock with an initial exercise price of $0.25.
The warrants contain certain anti-dilutive (reset) provisions.
In
December 2018, the Company made payments of an aggregate of
$1,762,500 to holders of July
2018 notes
. As of December 31, 2018, the aggregate carrying value of the notes was $390,000. During three months ended March
31, 2019, holders of the July 2018 notes converted $345,000 in principal amount into an aggregate of 8,906,275 shares of the Company’s
common stock for the settlement of convertible debt. During three months ended March 31, 2019, an additional $2,580 in interest
was accrued, leaving a balance of $47,580 as of March 31, 2019. The balance of these notes were converted during April 2019.
In December 2018,
the Company issued convertible promissory notes in the aggregate principal amount of $90,000 (including an original issuance discount
of $15,000) maturing in June 2019, bearing an interest rates of 5% per annum. The Company shall have the right to prepay the notes
for an amount equal to 130% multiplied by the portion of the Outstanding Balance (as defined in the note) being prepaid. The investor
shall have the right to convert the Outstanding Balance of the note at any time into shares of common stock of the Company at
a conversion price of $0.075 per share, subject to adjustment.
Commencing on June 17, 2019,
the investor shall have the right to redeem all or any portion of the note; provided, however, the investor may not request redemption
in an amount that exceeds $350,000 during any single calendar month; provided, further however, upon the occurrence of an event
of default, the redemption amount in any calendar month may exceed $350,000. Payments on redemption amounts may be made in cash,
by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of (a)
$0.075 per share, subject to adjustment
and (b) the Market Price (as defined in the note), or a combination thereof. Upon
the occurrence of an event of default, the investor may accelerate the note pursuant to which the Outstanding Balance will become
immediately due and payable in cash at the Mandatory Default Amount (as defined in the note). The Company is prohibited from effecting
a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would
beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving
effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased
by the investor up to, but not exceeding, 9.99%.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
On December 17, 2018, the Company issued
a secured convertible promissory note in the principal amount of $2,225,000 (including an original issuance discount of $200,000)
which note matures on December 17, 2019 and bears interest at a rate of 8% per annum (which shall be increased to 22% upon the
occurrence of an event of default). The Company shall have the right to prepay the note for an amount equal to 125% multiplied
by the portion of the Outstanding Balance (as defined in the note) being prepaid. In addition, the note is secured by the Security
Agreement (as defined below). The investor shall have the right to convert the Outstanding Balance of the note at any time into
shares of common stock of the Company at a conversion price of $0.35 per share, subject to adjustment. Commencing on June 17, 2019,
the investor shall have the right to redeem all or any portion of the note; provided, however, the investor may not request redemption
in an amount that exceeds $350,000 during any single calendar month; provided, further however, upon the occurrence of an event
of default, the redemption amount in any calendar month may exceed $350,000. Payments on redemption amounts may be made in cash,
by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of (a)
$0.35 per share, subject to adjustment and (b) the Market Price (as defined in the note), or a combination thereof. Upon the occurrence
of an event of default, the investor may accelerate the note pursuant to which the Outstanding Balance will become immediately
due and payable in cash at the Mandatory Default Amount (as defined in the note). The Company is prohibited from effecting a conversion
of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially
own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to
the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased by the
investor up to, but not exceeding, 9.99%.
Pursuant to the
terms of the Agreement, the Company also entered into a security agreement (the “Security Agreement”) on the closing
date pursuant to which the Company granted the investor a security interest in the Collateral (as defined in the Security Agreement).
As of March 31, 2019, the aggregate carrying value of the note was $2,302,380, net of debt discount of $230,620.
From
January to March 2019, the Company issued convertible promissory notes in the aggregate principal amount of $173,333 (including
an original issuance discount of $114,333) maturing between July 2, 2019 and October 27, 2019, bearing interest rates of 5-10
%
per annum. The Company shall have the right to prepay the notes for an amount equal to 130% multiplied by the portion of the Outstanding
Balance (as defined in the note) being prepaid. The investor shall have the right to convert the Outstanding Balance of the note
at any time into shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. Upon maturity,
payment may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion
price of the lesser of (a) $0.075 per share, subject to adjustment and (b) the Market Price (as defined in the note), or a combination
thereof. Upon the occurrence of an event of default, the investor may accelerate the note pursuant to which the Outstanding Balance
will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the note). The Company is prohibited
from effecting a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates,
would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after
giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may
be increased by the investor up to, but not exceeding, 9.99%.
NOTE 9 – 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 March 31, 2019, 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 March 31, 2019, there were 181,990,849 shares of common stock issued
and outstanding.
The following common
stock transactions were recorded during the three months ended March 31, 2019:
The Company issued an aggregate of 80,000
shares of its common stock recorded as to be issued on December 31, 2018.
The Company issued an aggregate of 900,000
shares of its common stock and recorded 200,000 shares of common stock as to be issued as interest expense with a value of $111,583.
The Company issued an aggregate of 2,950,000
shares of its common stock, having an aggregate fair value of $173,200 for services rendered.
The Company issued an aggregate of 448,102
shares of its common stock upon the cashless exercise of outstanding warrants.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
The Company issued an aggregate of 8,906,275
shares of its common stock for the settlement of convertible debt with a principal amount of $345,000.
NOTE 10 – WARRANTS
Warrants outstanding and exercisable at March
31, 2019 are as follows:
Exercise Price
|
|
Warrants
Outstanding
|
|
|
Weighted Avg.
Remaining Life
|
|
|
Warrants
Exercisable
|
|
$0.01 – 0.25
|
|
|
66,444,998
|
|
|
|
3.89
|
|
|
|
66,444,998
|
|
0.26 – 0.50
|
|
|
565,002
|
|
|
|
2.17
|
|
|
|
565,002
|
|
0.51 – 0.75
|
|
|
50,000
|
|
|
|
1.02
|
|
|
|
50,000
|
|
0.76 – 1.00
|
|
|
5,100,002
|
|
|
|
0.50
|
|
|
|
5,100,002
|
|
|
|
|
72,160,002
|
|
|
|
|
|
|
|
72,160,002
|
|
A summary of the warrant activity for the
three months ended March 31, 2019 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
74,910,002
|
|
|
$
|
0.14
|
|
|
|
3.89
|
|
|
$
|
-
|
|
Grants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(2,750,000
|
)
|
|
|
0.075
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2019
|
|
|
72,160,002
|
|
|
$
|
0.15
|
|
|
|
3.64
|
|
|
$
|
50,345
|
|
Exercisable at March 31, 2019
|
|
|
72,160,002
|
|
|
$
|
0.15
|
|
|
|
3.64
|
|
|
$
|
50,345
|
|
The aggregate intrinsic
value outstanding stock warrants was $50,345, based on warrants with an exercise price less than the Company’s stock price
of $0.076 as of March 31, 2019, which would have been received by the warrant holders had those holders exercised the warrants
as of that date.
NOTE 11 –
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 together with the 2014 Plan, 2015 Plan, 2016 Plan, the “Prior Plans”)
and our 2018 Equity Incentive Plan in June 2018 (the “2018 Plan”, and together with the Prior Plans, the “Plans”).
The 2014 Plan, the 2015 Plan, the 2016 Plan and the 2017 Plan are identical, except for number of shares reserved for issuance
under each. As of December 31, 2018, the Company had granted an aggregate of 60,600,000 securities under the Plans, with 3,900,000
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. The Prior Plans also provide that the grant
of performance stock awards may be paid out in cash as determined by the committee administering the Prior Plans.
During the three months
ended March 31, 2019, the Company granted ten-year options outside of our Plans to purchase up to 250,000 shares of the Company’s
common stock. The fair value of $14,000, was determined using the Black-Scholes option pricing model, assuming approximately 2.43%
risk-free interest, 0% dividend yield, 114% volatility, and expected life of ten years and will be charged to operations over the
vesting terms of the options.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
The summary terms
of the issuances are as follows:
Exercise Price
|
|
|
Number of
Options
|
|
|
Vesting Terms
|
$
|
0.075
|
|
|
|
250,000
|
|
|
Immediately
|
Stock options outstanding and exercisable
on March 31, 2019 are as follows:
Exercise Price
|
|
Number of
Options
|
|
|
Remaining Life
In Years
|
|
|
Number of Options
Exercisable
|
|
$0.01 – 0.25
|
|
|
13,306,786
|
|
|
|
9.00
|
|
|
|
13,306,786
|
|
0.26 - 0.50
|
|
|
1,939,631
|
|
|
|
8.01
|
|
|
|
1,939,631
|
|
0.51 – 0.75
|
|
|
1,820,112
|
|
|
|
7.43
|
|
|
|
1,820,112
|
|
0.76 - 1.00
|
|
|
9,926,072
|
|
|
|
7.46
|
|
|
|
9,926,072
|
|
1.01 - 2.00
|
|
|
629,164
|
|
|
|
7.36
|
|
|
|
629,164
|
|
|
|
|
27,621,765
|
|
|
|
|
|
|
|
27,621,765
|
|
A summary of the stock option activity for
the three months ended March 31, 2019 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
27,371,765
|
|
|
$
|
0.50
|
|
|
|
8.67
|
|
|
$
|
-
|
|
Grants
|
|
|
250,000
|
|
|
|
0.075
|
|
|
|
9.98
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeiture/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
27,621,765
|
|
|
|
0.50
|
|
|
|
8.42
|
|
|
$
|
250
|
|
Exercisable at March 31, 2019
|
|
|
27,621,765
|
|
|
$
|
0.50
|
|
|
|
8.42
|
|
|
$
|
250
|
|
The aggregate intrinsic
value of outstanding stock options was $1,250, based on options with an exercise price less than the Company’s stock price
of $0.076 as of March 31, 2019, 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 pricing
model with a volatility figure derived from 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 for the three months ended March 31, 2019 and 2018 was $14,000 and $459,834, respectively. Unrecognized compensation
expense of $0 at December 31, 2018 will be expensed in future periods.
MASSROOTS, INC.
Notes to Condensed Consolidated Financial
Statements
March 31, 2019 (Unaudited)
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, 2019 to May 17, 2019:
MassRoots issued 200,000 shares recorded
as to be issued.
MassRoots issued 1,555,160 shares of common
stock and recorded 2,206,250 shares of common stock as to be issued for the cash exercise of warrants, receiving $226,950
in proceeds.
MassRoots issued 3,383,415 shares of common
stock and recorded 1,661,440 shares of common stock as to be issued for the cashless exercise of warrants.
MassRoots issued 200,000 shares as interest on debt.
MassRoots issued 1,196,078 for the settlement
of $47,580 in convertible debt from its July 2018 offering. The July 2018 notes have been fully satisfied and are retired.
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 condensed consolidated financial statements and related notes contained in Part
I, Item 1 of this Quarterly Report. Please also refer to the note about forward-looking information for information on such statements
contained in this Quarterly Report immediately preceding Item 1.
Overview
We were incorporated in April 2013 as a
technology platform for the cannabis industry. Powered by more than one million registered users, we enable 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
present 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 six years, we have established
our self as a leading technology company in the emerging cannabis industry, building a user base of over 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, we have generated approximately $1.2 million in revenue.
Historically, we have focused on building
a consumer-facing application and have not spent significant resources on developing our advertising portal for dispensaries. However,
we are now focusing our efforts on developing our advertising portal so as to automate the processes and platform needed to deliver
our underlying services. In the summer of 2018, we launched a revamped MassRoots Business Portal and a consumer rewards program,
called WeedPass®, which is accessible through the MassRoots mobile application. After an introductory free trial period, we
charge dispensaries fees for their dispensary listing and access to our consumer rewards program. We intend to upgrade and further
develop the MassRoots Business Portal to better serve our clients. According to ArcView Market Research, 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/business.
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., our wholly-owned subsidiary, to explore how blockchain technology may be utilized in the cannabis industry.
Results of Operations
|
|
For the three months ended
|
|
|
|
31-Mar-19
|
|
|
31-Mar-18
|
|
|
$ Change
|
|
|
% Change
|
|
Gross revenue
|
|
$
|
4,383
|
|
|
$
|
1,492
|
|
|
$
|
2,891
|
|
|
|
193.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
968,498
|
|
|
|
5,134,544
|
|
|
|
(4,166,046
|
)
|
|
|
(81.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(964,115
|
)
|
|
|
(5,133,052
|
)
|
|
|
4,168,937
|
|
|
|
(81.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income /(Expense)
|
|
|
(532,384
|
)
|
|
|
(350,196
|
)
|
|
|
(182,188
|
)
|
|
|
52.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,496,499
|
)
|
|
$
|
(5,483,248
|
)
|
|
$
|
3,986,749
|
|
|
|
(72.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
|
|
|
|
|
|
Revenues
For the three months ended March 31, 2019
and 2018, we generated revenues of $4,383 and $1,492, respectively, an increase of $2,891. The increase is attributed to the Company’s
new online advertising portal and new rewards sales program for businesses.
Operating Expenses
For the three months ended March 31, 2019
and 2018, our operating expenses were $968,498 and $5,134,544, respectively, a decrease of $4,166,046. For the three months ended
March 31, 2019, these decreases were attributed to significant reductions in payroll, stock-based compensation and other general
and administrative expenses. There was a decrease in payroll and related expenses of $254,411 due to reduction in the number of
employees as payroll and related expenses were $171,319 for the three months ended March 31, 2019 as compared to $425,730 for same
period in 2018. Advertising expense decreased to $27,208 for the three months ended March 31, 2019 from $64,577 for the same period
in 2018, a decrease of $37,369. Stock-based compensation decreased by $2,930,050 from $187,200 for the three months ended March
31, 2019 as compared to $3,117,250 for the same period in 2018. For the three months ended March 31, 2019 and 2018, the Company
recorded amortization of software costs of $12,850 and $97,265, respectively. This is primarily a result of a reduction in the
Company’s software costs for the period. Other general and administrative expenses decreased $863,331 from $566,391 for the
three months ended March 31, 2019 as compared to $1,429,722 for the three months ended March 31, 2018. This reduction was attributed
to lower overhead costs for offices expenses, legal fees, rent expense and contractor services for the three months ended March
31, 2019 as compared to the same period in 2018.
Other Income (Expense)
For the three months ended March 31, 2019
and 2018, the Company recorded interest expense of $238,787 and $350,196, respectively, related to the conversion of convertible
debentures. As of March 31, 2019, the Company recorded a loss on the conversion of convertible notes payable of $293,597 and $0
for the three months ended March 31, 2019 and 2018, respectively.
Net Loss
For the three months ended March 31, 2019
and 2018, we had net losses of $1,496,499 and $5,483,248, respectively, a decrease of $3,986,749 for the reasons discussed above.
Liquidity and Capital Resources
Net cash used in operations for the three
months ended March 31, 2019 and 2018 was $286,583 and $3,535,373, respectively. This $3,248,790 decrease was primarily caused
by a decrease in cash provided by interest and amortization of debt discounts (non-cash items), an increase in accounts payable
and other liabilities and a decrease in stock-based compensation (non-cash items). Net cash used in operations for the three
months ended March 31, 2018 was primarily based on the utilization of $1,113,554 in cash to reduce accounts payable and other
liabilities and the loss for the three months ended March 31, 2018 which was offset by the increase in stock-based compensation
(non-cash item).
Net cash used in investing
activities for the three months ended March 31, 2019 and 2018 was $32,500 and $0, respectively. During the three months ended
March 31, 2019, the Company used cash to invest in Cowa Science Corporation.
Net cash provided by financing activities
for the three months ended March 31, 2019 and 2018 was $290,000 and $3,008,562, respectively. During the three months ended March
31, 2019, these funds were derived mainly from proceeds related to advances and the conversion of convertible notes. During the
three months ended March 31, 2018, net cash provided by financing activities was derived mainly from sales of our common stock.
These conditions raise substantial doubt
about our ability to continue as a going concern for one year from the issuance of the financial statements. Our 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 issuances of notes payable. We have experienced net losses and negative cash flows from operations since
inception and expect these conditions to continue for the foreseeable future.
For the foreseeable
future, our ability to continue our operations is dependent upon our ability to obtain additional capital through public or private
equity offerings, debt financings or other sources
to fund our future operations
;
however, financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would
have a negative impact on our financial condition and our ability to pursue our business strategy and we may be forced to curtail
or cease operations.
Capital Resources
As of March 31, 2019, we had cash on hand
of $485. We currently have no external sources of liquidity such as arrangements with credit institutions or off-balance sheet
arrangements that will have or are reasonably likely to have a current or future effect on our financial condition or immediate
access to capital.
Off-Balance Sheet Arrangements
As of March 31, 2019, 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 Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1
of this Quarterly Report.