NOTE 2 – GOING CONCERN AND MANAGEMENT’S
LIQUIDITY PLANS
As of September 30, 2021, the Company had cash
of $1,082 and a working capital deficit (current liabilities in excess of current assets) of $17,514,830. During the nine months ended
September 30, 2021, the net loss available to common stockholders was $17,531,575 and net
cash used in operating activities was $548,640. These conditions raise substantial doubt about the Company’s ability to continue
as a going concern for one year from the issuance of the unaudited condensed consolidated financial statements.
During the nine months ended September 30, 2021,
the Company received proceeds of $200,000 and $1,515,424 from the issuance of preferred shares and non-convertible notes, respectively.
The Company does not have sufficient cash 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
and equity 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’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; 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 could 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
regarding 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 increase revenues. The Company’s continued existence is dependent upon its
ability to translate its audience into revenues. However, the outcome of management’s plans cannot be determined with any degree
of certainty.
Accordingly, the accompanying
unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business for one year from the date the unaudited condensed consolidated
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 should the Company be unable to continue as a going
concern.
In March 2020, the World
Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related
adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, leading to
an economic downturn. It has also disrupted the normal operations of many businesses, including ours. It is not possible for us to predict
the duration or magnitude of the adverse results of the outbreak of COVID-19 and its effects on our business including our financial condition,
liquidity, or results of operations at this time. Management is actively monitoring the global situation and its impact on the Company’s
financial condition, liquidity, operations, customers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and
the global responses to curb its spread, the Company is not able to estimate the effects that the COVID-19 outbreak will have on its results
of operations, financial condition, or liquidity for fiscal year 2021. As of the date of this Quarterly Report on Form 10-Q, the Company
has experienced delays in securing new customers and related revenues and the longer this pandemic continues there may be additional impacts.
Furthermore, the COVID-19 outbreak has and may continue to impact the Company’s ability to raise capital.
Although the Company cannot
estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material
adverse effect on the Company’s results of future operations, financial position, liquidity, and capital resources, and those of
the third parties on which the Company relies in fiscal year 2021.
NOTE 3 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The unaudited condensed consolidated financial
statements include the accounts of MassRoots, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America (“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, fair value of payroll tax liabilities, deemed dividends 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 estimated fair value of certain
financial instruments, including cash, accounts payable and accrued liabilities are carried at historical cost basis, which approximates
their 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 condensed consolidated 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
For purposes of the unaudited
condensed consolidated statements of cash flows, the Company considers highly liquid investments with an original maturity of three months
or less to be cash equivalents. As of September 30, 2021 and December 31, 2020, the Company had no cash equivalents. The Company maintains
its cash in banks insured by the Federal Deposit Insurance Corporation in accounts that at times may be in excess of the federally insured
limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At September
30, 2021 and December 31, 2020, the uninsured balances amounted to $0.
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 incurred. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the
respective accounts and the net difference less any amount realized from disposition is reflected in earnings.
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.
Revenue Recognition and
Deferred Revenue
Revenues are accounted
for under ASC Topic 606, “Revenue From Contracts With Customers” (“ASC 606”). ASC 606 is based on the principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature,
amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments.
In accordance with ASC 606, the Company 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) the Company satisfies a performance obligation.
|
The Company primarily generates
revenue by charging businesses to advertise on the Company’s website and social media channels. In cases where clients enter advertising
contracts for an extended period of time, the Company recognizes revenue pro rata over the contract term and any unearned revenue is deferred
to future periods.
Based on the nature of
the Company’s revenue streams, revenues generally do not require significant estimates or judgments. 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.
Deferred revenue represents the amount of prepaid
advertising fees the Company has received from customers and it is included in current liabilities in the accompanying condensed consolidated
balance sheets. Deferred revenue shall be recognized in the future as the advertising services are provided.
Advertising
The Company charges the costs of advertising to
expense as incurred. Advertising costs were $18,125 and $43,020 for the nine months ended September 30, 2021 and 2020, respectively.
Stock-Based Compensation
Stock-based compensation
expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For stock-based awards
to employees, non-employees and directors, the Company calculates the fair value of the award on the date of grant using the Black-Scholes
option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including
estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value
of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application
of management’s judgment.
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 freestanding 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, “Distinguishing Liabilities From Equity.”
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 using
the effective interest method.
Beneficial Conversion Features and Deemed
Dividends
The Company records a
beneficial conversion feature for preferred stock when, on the date of issuance, the conversion rate is less than the Company’s
stock price. The Company also records, when necessary, a contingent beneficial conversion resulting from price protection of the conversion
price of preferred stock, based on the change in the intrinsic value of the conversion options embedded in such preferred stock.
The Company records,
when necessary, deemed dividends for: (i) warrant price protection, based on the difference between the fair value of the warrants immediately
before and after the repricing (inclusive of any full ratchet provisions); (ii) the exchange of preferred shares for convertible notes,
based on the amount of the face value of the convertible notes in excess of the carrying value of the preferred shares; (iii) the settlement
of warrant provisions, based on the fair value of the shares of common stock issued; and (iv) amortization of discount on preferred stock
resulting from recognition of a beneficial conversion feature.
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 freestanding derivatives at each reporting date to determine whether a
change in classification between assets and liabilities is required.
The Company’s freestanding
derivatives consisted of warrants to purchase common stock that were issued in connection with the issuance of debt and the sale of shares
of common stock, and of embedded conversion options within convertible notes. The Company evaluated these derivatives to assess their
proper classification in the balance sheet as of September 30, 2021 and December 31, 2020 using the applicable classification criteria
enumerated under ASC 815, “Derivatives and Hedging.” The Company determined that certain embedded conversion and/or exercise
features did not contain fixed settlement provisions. The convertible notes contained 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 is 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. The Company also records derivative liabilities for instruments, including convertible notes, preferred
stock, and warrants, in which the Company does not have sufficient authorized shares to cover the conversion of these instruments into
shares of common stock.
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 life 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
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 indefinite
lived intangibles and goodwill for 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 Loss Per Common Share
Net loss per share is computed
by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per
share includes 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 diluted earnings (loss)
per share 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:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Shares of common stock issuable upon conversion of convertible notes
|
|
|
226,347,786
|
|
|
|
5,722,267,406
|
|
Options to purchase shares of common stock
|
|
|
27,621,765
|
|
|
|
27,621,765
|
|
Warrants to purchase shares of common stock
|
|
|
11,575,000
|
|
|
|
17,161,702,276
|
|
Shares of common stock issuable upon conversion of preferred stock
|
|
|
7,817,778,624
|
|
|
|
18,017,191,930
|
|
Total potentially dilutive shares
|
|
|
8,083,323,175
|
|
|
|
40,928,783,377
|
|
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, which
simplifies the guidance on accounting for convertible debt instruments by removing the separation models for: (1) convertible debt with
a cash conversion feature; and (2) convertible instruments with a beneficial conversion feature. As a result, the Company will not separately
present in equity an embedded conversion feature in such debt. Instead, we will account for a convertible debt instrument wholly as debt,
unless certain other conditions are met. We expect the elimination of these models will reduce reported interest expense and increase
reported net income for the Company’s convertible instruments falling under the scope of those models before the adoption of ASU
2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury
stock method will be no longer available. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2021,
with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the
impact of ASU 2020-06 on its unaudited condensed consolidated financial statements.
In August 2018, the FASB
issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes
to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes certain disclosure requirements,
including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers
between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds disclosure requirements, including
changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements,
and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments
on changes in unrealized gains and losses, and the range and weighted average of significant unobservable inputs used to develop Level
3 fair value measurements, should be applied prospectively for only the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU
2018-13 became effective for us on January 1, 2020. The adoption of this update did not have a material impact on the Company’s
unaudited condensed consolidated financial statements and related disclosures.
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 – PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2021
and December 31, 2020 is summarized as follows:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Computers
|
|
$
|
6,366
|
|
|
$
|
6,366
|
|
Office equipment
|
|
|
17,621
|
|
|
|
17,621
|
|
Subtotal
|
|
|
23,987
|
|
|
|
23,987
|
|
Less accumulated depreciation
|
|
|
(23,987
|
)
|
|
|
(23,987
|
)
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Depreciation expense for the nine months ended September 30, 2021 and
2020 was $0.
NOTE 5 – ADVANCES, NON-CONVERTIBLE NOTES PAYABLE AND PPP NOTE
PAYABLE
Advances
During the nine months
ended September 30, 2021 and 2020, the Company received aggregate proceeds from non-interest bearing advances of $53,991 and $0 and repaid
an aggregate of $20,178 and $0, respectively, of advances. Included in the nine months ended September 30, 2021 were $2,091 of advances
from and $5,278 of repayments to the Company’s Chief Information Officer and $25,000 of advances from Empire Services, Inc. (See
Note 14). The remaining advances are primarily for Simple Agreements for Future Tokens, entered into with 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/or Regulation D thereunder in 2018. As of September 30, 2021 and December 31, 2020, the Company owed $122,000 and $88,187
in principal and $4,000 and $0 in accrued interest, respectively, on advances.
Non-Convertible Notes
Payable
During the nine months ended
September 30, 2021 and 2020, the Company received proceeds from the issuance of non-convertible notes of $1,515,424 and $132,911 and repaid
an aggregate of $25,000 and $39,641, respectively, of non-convertible notes. Included in the nine months ended September 30, 2021 and
2020 were $1,515,424 and $20,520, respectively, of advances from and $0 of repayments to the Company’s Chief Executive Officer and
Empires Services, Inc., (See Note 14). The non-convertible notes have maturity dates ranging from March 31, 2019 to June 24, 2023 and
accrue interest at rates ranging from 0% to 35% (default interest rate) per annum.
On June 2, 2021, one of the
holders of non-convertible notes entered into an agreement to cancel the entire amount owed to him (including principal of $79,000 and
accrued interest of $63,055), resulting in gain on forgiveness of debt of $142,055 (See Note 8 – Trawick’s Complaint).
On June 4, 2021, one of the
holders of a non-convertible note payable for $60,000 extended the due date of the note from June 26, 2022 to June 24, 2023.
On June 25, 2021, a law firm
the Company formerly used received an arbitration award of $459,251 for unpaid legal bills. On September 23, 2021, the Company entered
into a Resolution Agreement to settle the arbitration award for an aggregate of $275,000 to be paid as follows: (i) $25,000 by September
30, 2021; (ii) $15,000 per month by the last day of each month from October 2021 through January 2023; and (iii) $10,000 by February 28,
2023. The Company imputed an interest rate of 10% and discounted the note accordingly. The imputed debt discount of $17,991 is being amortized
to interest expense over the term of the note. The Company recognized a $202,242 gain on settlement. As of September 30, 2021, the remaining
carrying value of the note was $232,502, net of debt discount of $17,498.
As of September 30, 2021
and December 31, 2020, the Company owed principal of $1,888,446 and $219,520 (of which $128,857 and $60,000 is long-term), net of debt
discount of $17,498 and $0, and accrued interest of $372,480 and $251,612, respectively, on non-convertible notes.
PPP Note Payable
On May 4, 2020, the Company
received proceeds of $50,000 from a PPP note. The note had a maturity date of May 4, 2022 and bore 1% interest per annum. On April
6, 2021, the Small Business Administration forgave the Company’s Paycheck Protection Program loan in the principal amount of $50,000
and accrued interest of $466, resulting in gain on forgiveness of debt of $50,466. As of September 30, 2021 and December 31, 2020, the
Company owed $0 and $50,000 in principal and $0 and $330 in accrued interest, respectively, on this note.
NOTE 6 – ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
As of September 30, 2021 and December 31, 2020,
the Company owed accounts payable and accrued expenses of $4,218,421 and $4,948,890, respectively. These are primarily comprised of payments
to vendors, accrued interest on debt, and accrued legal bills.
NOTE 7 – ACCRUED PAYROLL AND RELATED
EXPENSES
The Company is delinquent in filing its payroll
taxes, primarily related to stock compensation awards in 2016 and 2017, but also including payroll for 2018 through 2021. As of September
30, 2021 and December 31, 2020, the Company owed payroll tax liabilities, including penalties, of $4,037,298 and $3,864,055, respectively,
to federal and state taxing authorities. The actual liability may be higher or lower due to interest or penalties assessed by federal
and state taxing authorities. The Company expects to settle these liabilities during 2022.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
From time to time, we may become involved in various
lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently
not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
Power Up Lending Group, Ltd. Complaint
As disclosed in the Company’s Annual Report
on Form 10-K filed with the SEC on April 16, 2021, on October 11, 2019, Power Up Lending Group, Ltd. (“Power Up”) filed a
complaint against the Company and Isaac Dietrich, an officer and director of the Company, in the Supreme Court of the State of New York,
County of Nassau. The complaint alleged, among other things, (i) the occurrence of events of default in certain notes (the “Power
Up Notes”) issued by the Company to Power Up, (ii) misrepresentations by the Company including, but not limited to, with respect
to the Company’s obligation to timely file its required reports with the SEC and (iii) lost profits as a result of the Company’s
failure to convert the Power Up Notes in accordance with the terms thereof.
On April 30, 2021, the Company entered into a
settlement agreement (the “Settlement”) with PowerUp by accepting an offer communicated to the Company via electronic mail.
In accordance with the terms of the Settlement, PowerUp, the judgment creditor of a judgment against the Company and Isaac Dietrich, the
Company’s Chief Information Officer and director, in the total amount of $350,551.10 entered in the Office of the Clerk of the County
of Nassau on February 23, 2021 (the “Judgement”), agreed to a settlement and filing of a satisfaction of judgment in consideration
of receipt of the sum of $150,000.00 (the “Settlement Amount”) on April 30, 2021. The Company accepted the aforementioned
offer by remitting the Settlement Amount timely and in full. Accordingly, a satisfaction of Judgment was filed by PowerUp with the Office
of the Clerk of the County of Nassau on May 3, 2021.
Sheppard Mullin’s Demand for Arbitration
On December 1, 2020, Sheppard, Mullin, Richter&
Hampton LLP (“Sheppard Mullin”), the Company’s former securities counsel, filed a demand for arbitration at JAMS in
New York, New York against the Company, alleging the Company’s breach of an engagement agreement dated January 4, 2018, and a failure
of the Company to pay $487,390.73 of outstanding legal fees to Sheppard Mullin. Sheppard Mullin was awarded $459,251 in unpaid legal fees,
disbursements and interest on June 25, 2021. A judgement confirming the arbitration award was entered on September 8, 2021 in the Federal
District Court located in Denver, Colorado.
On September 23, 2021, the Company entered into a Resolution Agreement
with Sheppard, Mullin, Richter & Hampton concerning the $459,250.88 judgement entered against the Company. Under the terms of the
Resolution Agreement, the Company was required to make a $25,000 initial payment by September 30, 2021 and is required to make $15,000
monthly payments from October 2021 to January 2023 with a final $10,000 payment due in February 2023. The Company has made both the September
and October 2021 payments.
Rother Investments’ Petition
On October 28, 2020, Rother Investments, LLC (“Rother
Investments”) filed a complaint in the District Court of 419th Judicial District, Travis County, Texas against the Company, alleging
the Company’s default under a certain promissory note (the “Rother Investments Note”) in payment of the outstanding
principal amount and interest under the Note, as described in the complaint. Rother Investments seeks to collect the amount of $124,750
as of the date of the complaint with late fees continuing to accrue on a daily basis, monetary relief of over $100,000 but not more than
$200,000 pursuant to Tex. R. Civ. P. 47(c)(3), court’s costs and attorney’s fees, pre-judgment and post-judgment interest,
and such other relief as the court deems appropriate. On May 19, 2021, Rother Investments, LLC received a default judgment against the
Company in the amount of $144,950. On June 17, 2021, MassRoots filed a motion to set aside default and motion for new trial asserting
it was improperly served. On July 20, 2021, the court granted the Company’s motion finding and ordered a new trial of the matter.
Trawick’s Complaint
As previously reported by the Company in its Annual
Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2021, on or about January 25, 2021, Travis Trawick
(“Trawick”) filed a complaint (“Trawick’s Lawsuit”) against the Company and Isaac Dietrich, the Company’s
Chief Information Officer and director, in the Circuit Court for the City of Virginia Beach, Virginia (the “Court”), asserting
the Company’s failure to remit payments under the certain promissory note, as subsequently amended and modified, and ancillary documents
thereto (collectively, the “Note”), and Mr. Dietrich’s failure to fulfill its obligations, as the guarantor, under the
Note.
On May 4, 2021, Trawick requested that the Clerk
of the Court filed for entry an order to dismiss Trawick’s Lawsuit with prejudice.
Iroquois Master Fund
On June 30, 2021, the Company received an e-mail
containing a demand (the “Demand”) for arbitration (the “Arbitration”) at American Arbitration Association in
Denver, Colorado, by Iroquois Master Fund Ltd. (“Iroquois”) against the Company, Isaac Dietrich and Danny Meeks, the Company’s
directors, and Empire Services, Inc. (“Empire”). The Demand alleges breach of contract and various related state law claims
against the defendants, and sought, inter alia, specific performance of the subject warrant, damages in an amount not less than
$12 million, equitable relief, and attorney’s fees for the Company’s alleged failure to reserve more than 150 million shares
of common stock that Iroquois is allegedly entitled to in connection with the exercise of a certain warrant issued by the Company on July
21, 2017, and subsequently purchased by Iroquois from an unrelated third party. As a result of a legal action commenced by Isaac Dietrich,
Danny Meeks, and Empire (See – “Litigation” below), Iroquois informed the American Arbitration Association (the
arbitral body overseeing the Arbitration) that it would (i) dismiss the Counterclaim Defendants from the Arbitration without prejudice,
(ii) assert its claims against Isaac Dietrich, Danny Meeks, and Empire the in the action commended by them, and (iii) proceed with the
Arbitration with respect to the Company only.
Litigation
On July 21, 2021, in response to the Demand, Isaac
Dietrich, Danny Meeks, and Empire, filed a complaint (the “Complaint”) against Iroquois in the United States District Court
of the Southern District of New York alleging that the aforementioned plaintiffs were not parties to the warrant the Demand based on,
and as such, the Demand could not have brought against them. Declaratory relief and injunctive relief were sought in the Complaint. On
August 20, 2021, Iroquois submitted an answer with counterclaims stating that Iroquois informed the American Arbitration Association (the
arbitral body overseeing the Arbitration) that it would (i) dismiss the Counterclaim Defendants from the Arbitration without prejudice,
(ii) assert its claims against Isaac Dietrich, Danny Meeks, and Empire the in the action commended by them, and (iii) proceed with the
Arbitration with respect to the Company only. In its answer, Iroquois made allegations substantially similar to the claims made in the
Arbitration, asserted defenses, and requested an award in not less than $12 million against Demand, Isaac Dietrich, Danny Meeks, and Empire,
an entry of an award of a constructive trust against them, and costs and expenses, including its reasonable attorneys’ fees, incurred
in prosecuting said action and the Arbitration.
Settlement
On September 30, 2021,
the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Iroquois;
Dietrich; Meeks; and Empire. Pursuant to the Settlement Agreement, in exchange for terminating any duties owed by the Company to Iroquois
under the Warrant, the Company agreed to pay, on its own behalf and on behalf of Dietrich, Meeks, and Empire, one million dollars ($1,000,000)
and issue shares of the Series Z Convertible Preferred Stock, par value $0.001 per share (the “Series Z”), sufficient in number
such that if they are converted into the Company’s common stock, par value $0.001 per share (“Common Stock”) by Iroquois,
such shares of Common Stock will be equal in number to 9.99% of the issued and outstanding shares of Common Stock at the time of such
conversion.
NOTE 9 – CONVERTIBLE
NOTES PAYABLE
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 $225,000) that matured on December 17, 2019 and bears interest at a rate of 8% per annum (which increased to 22% on July 16, 2019 upon
the occurrence of an event of default). The note is secured by the Security Agreement (as defined below). The investor has the right to
convert the Outstanding Balance (as defined in the note) 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 has 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%.
In connection with the
December 2018 note, 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). On July 16,
2019, the Company received a notice from the noteholder indicating that events of default had occurred and asserting default penalties
of $761,330. During the year ended December 31, 2019, the noteholder converted $345,000 of principal into an aggregate of 53,522,295 shares
of common stock. During the year ended December 31, 2020, (i) the noteholder converted $37,000 of principal into an aggregate of 31,109,551
shares of common stock; and (ii) $1,049,329 of accrued interest was reclassified to the principal balance of this note. On January 20,
2021, the noteholder converted $13,345 of principal into an aggregate of 4,448,251 shares of common stock, having
a fair value of $133,002, resulting in a reduction of the derivative liability by $118,778 and a loss on conversion of $880. As
of September 30, 2021 and December 31, 2020, the remaining carrying value of the note was $2,878,985 and $2,892,330, respectively. As
of September 30, 2021 and December 31, 2020, accrued interest payable of $1,575,001 and $1,073,809, respectively, was outstanding on the
note.
On January
25, 2019, the Company issued a convertible promissory note in the principal amount of $55,000 (including original issuance discount of
$5,000) that matured July 25, 2019 and bearing a one-time interest fee of 10%. The investor has the right to convert the Outstanding Balance
(as defined in the note) 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 any 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%. On May 19, 2021, the investor received a default judgment against the
Company in the amount of $144,950. In accordance with the judgment, commencing May 19, 2021, the Company began accruing interest at the
rate of 18% per annum. On June 17, 2021, the Company filed a motion to set aside default and motion for new trial asserting it was improperly
served. On July 20, 2021, the court granted the Company’s motion finding and ordered a new trial of the matter. As
of September 30, 2021 and December 31, 2020, the remaining carrying value of the note was $148,685 and $55,000, respectively. As of September
30, 2021 and December 31, 2020, accrued interest payable of $0 and $92,600, respectively, was outstanding on the note (See Note 8 –
Rother Investments’ Petition).
From January
to June 2019, the Company issued convertible promissory notes in the aggregate principal amount of $389,000 (including aggregate original
issuance discount of $39,000) that matured at dates ranging from July 15, 2019 to June 6, 2020 and accruing interest at rates ranging
from 5% to 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes 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 notes), or a combination thereof.
Upon the occurrence of an event of default, the investors 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 notes). The Company is prohibited from effecting
a conversion of any 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%. In January 2020, one of the promissory notes was amended whereby the conversion price for $9,202 which is a portion
of the principal amount of the note was amended to $0.0004 per share. The amendment was deemed a debt modification and accounted for accordingly.
During the year ended December 31, 2019, the noteholders converted $31,180 of principal and $8,000 of accrued interest into an aggregate
of 10,000,000 shares of common stock. During the year ended December 31, 2020, one of the holders converted $24,826 of principal into
an aggregate of 35,005,850 shares of common stock; and one of the holders converted $168,820 of principal and $362,027 of accrued interest
into 26.54237 shares of Series Y preferred shares having a stated value of $530,847, resulting in a reduction of the derivative liability
by $719,416 and a gain on settlement of $719,416. On April 30, 2021, one of the holders of non-convertible notes entered into an
agreement to cancel the entire amount owed to them (including principal of $131,174 and accrued
interest of $304,485) in exchange for a cash payment of $150,000 by the Company, resulting in a reduction of the derivative liability
of $300,424 and a gain on settlement of debt of $586,083 (See Note 8 – Power Up Lending Group, Ltd. Complaint). On May 1,
2021, one of the holders converted $33,000 of principal and $1,185,200 of accrued interest into
60.91 shares of Series Y preferred shares having a stated value of $1,218,200, resulting in a reduction of the derivative liability by
$936,405 and a gain on settlement of $936,405. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the notes
was $0 and $164,174, respectively. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 and $1,191,998, respectively,
was outstanding on the notes.
On
November 13, 2019, the Company issued three convertible promissory notes in the aggregate principal amount of $108,900, having an aggregate
original issuance discount of $9,900, resulting in cash proceeds of $99,000. The notes matured on May 13, 2020 and accrue interest at
a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes at any
time into shares of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default,
the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the
20 days prior to the conversion date. The Company is prohibited from effecting a conversion of any 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 if the Market Capitalization (as defined in the notes) falls below $2,500,000,
but not exceeding, 9.99%. During the year ended December 31, 2020, two of the holders converted $72,600 of principal and $112,671 of accrued
interest into 9.26353 shares of Series Y preferred shares having a stated value of $185,271, resulting in a reduction of the derivative
liability by $301,257 and a gain on settlement of $301,257. As of September 30, 2021 and December 31, 2020, the carrying value of the
remaining note was $36,300. As of September 30, 2021 and December 31, 2020, accrued interest payable of $87,789 and $57,231, respectively,
was outstanding on the remaining note.
On
December 6, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $110,000, having an aggregate original
issuance discount of $10,000, resulting in cash proceeds of $100,000. The notes matured on June 6, 2020 and accrue interest at a
rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes at
any time into shares of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default,
the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the
20 days prior to the conversion date. The Company is prohibited from effecting a conversion of any 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 if the Market Capitalization (as defined in the notes) falls below $2,500,000,
but not exceeding, 9.99%. During the year ended December 31, 2020, the holders converted $110,000 of principal and $123,451 of accrued
interest into 11.67255 shares of Series Y preferred shares having a stated value of $233,451, resulting in a reduction of the derivative
liability by $379,600 and a gain on settlement of $379,600. As of September 30, 2021 and December 31, 2020, the remaining carrying value
of the notes was $0. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 was outstanding on the notes.
In
December 2019, the Company and the holders of all of the outstanding Series A and Series B Preferred Shares (the “Preferred Shares”)
entered into Exchange Agreements whereby 2,800 Series A Preferred Shares and 1,126 Series B Preferred Shares were canceled in exchange
for the issuance of an aggregate of $3,500,000 and $1,548,250 of convertible promissory notes, respectively. The notes matured at dates
ranging from December 24, 2019 to May 18, 2020 and accrue interest at a rate of 12% per annum. The investors have the right to convert
the Outstanding Balance (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion
price of $0.005 per share, subject to adjustment. In the event of default, the Outstanding Balance shall immediately increase to 130%
of the Outstanding Balance and a penalty of $100 per day shall accrue until the default is remedied. For a period of two years from the
issuance date, in the event the Company issues or sells any additional shares of common stock or common stock equivalents at a price less
than the Conversion Price (as defined in the notes) then in effect (a “Dilutive Issuance”), the Conversion Price of the notes
shall be reduced to the Dilutive Issuance Price and the number of shares issuable upon conversion shall be increased on a full ratchet
basis. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor,
together with its affiliates, would beneficially own more than 9.99% 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. During the year ended December
31, 2019, the noteholders converted $185,500 of principal and $300 of accrued interest into an aggregate of 30,669,903 shares of common
stock and 37,160,000 shares of common stock to be issued. During the year ended December 31, 2020, the noteholders converted $31,137 of
principal and $128 of accrued interest into an aggregate of 6,253,056 shares of common stock; and the noteholders converted $4,793,113
of principal and $2,564,325 of accrued interest into 367.8719 shares of Series Y preferred shares having a stated value of $7,357,438,
resulting in a reduction of the derivative liability by $89,648,951 and a gain on settlement of $89,648,951. On January 7, 2021, a noteholder
converted $38,500 of principal and $55,261 of accrued interest into 3.72667 shares of Series Y preferred shares having a stated value
of $74,533, resulting in a reduction of the derivative liability by $3,880,958 and a gain on settlement of $3,900,186. As of September
30, 2021 and December 31, 2020, the remaining carrying value of the notes was $0 and $38,500, respectively. As of September 30, 2021 and
December 31, 2020, accrued interest payable of $0 and $54,473, respectively, was outstanding on the notes.
From
January to September 2020, the Company issued convertible promissory notes in the aggregate principal amount of $700,700, having an aggregate
original issuance discount of $63,700, resulting in cash proceeds of $637,000. The notes mature from July 2020 to March 2021 and
accrue interest at a rate of 12% per annum. During the first 180 days the notes are outstanding, the Company shall have the right to prepay
the notes for an amount equal to 120% (during the first 90 days) or 135% (during the subsequent 90 days) of the Outstanding Balance (as
defined in the notes) being prepaid. The investors have the right to convert the Outstanding Balance of the notes at any time into shares
of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default, the conversion
price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior
to the conversion date. Notwithstanding the foregoing, upon the occurrence of an event of default, the conversion price for the April
2020 notes, having an aggregate original principal amount of $330,000, shall not be less than $0.001. The Company is prohibited from effecting
a conversion of any 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 if the Market Capitalization
(as defined in the notes) falls below $2,500,000, but not exceeding, 9.99%. During the year ended December 31, 2020, the noteholders converted
$700,700 of principal and $462,763 of accrued interest into 58.17315 shares of Series Y preferred shares having a stated value of $1,163,463,
resulting in a reduction of the derivative liability by $1,885,194, a reduction in debt discount by $72,637 and a gain on settlement of
$1,812,557. On March 23, 2021, a noteholder converted $21,944 of accrued interest into 1.09721 shares of Series Y preferred shares having
a stated value of $21,945, resulting in a reduction of the derivative liability by $17,548 and a gain on settlement of $17,548. As of
September 30, 2021 and December 31, 2020, the remaining carrying value of the notes was $0. As of September 30, 2021 and December 31,
2020, accrued interest payable of $0 and $13,844 was outstanding on the notes.
On
December 15, 2020, $79,143 of accrued compensation owed to the Company’s former Chief Financial Officer was settled by the issuance
of a convertible note in the amount of $64,143, having a maturity date of June 15, 2021 and bearing interest of 12% per annum, resulting
in a gain on settlement of accounts payable of $15,000. The holder has the right to convert the Outstanding Balance (as defined in the
note) of the note at any time into shares of common stock of the Company at a conversion price of $0.0003 per share, subject to adjustment.
In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s
common stock during the 20 days prior to the conversion date. As a result of the beneficial conversion feature of the note, debt discount
of $64,143 was recognized with a corresponding increase in additional paid-in capital. On December 24, 2020, the holder converted $64,143
of principal into 3.20716 shares of Series Y preferred shares having a stated value of $64,143, resulting in a reduction in debt discount
by $60,971 and a loss on settlement of $60,971. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the note
was $0. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 was outstanding on the note.
As of September 30, 2021
and December 31, 2020, the remaining carrying value of the convertible notes was $3,063,970 and $3,186,303, respectively. As of September
30, 2021 and December 31, 2020, accrued interest payable of $1,661,704 and $2,483,955, respectively, was outstanding on the notes.
Upon the issuance of
certain convertible notes, the Company determined that the features associated with the embedded conversion option embedded in the notes,
should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would
be available to settle all potential future conversion transactions.
The Company does not
have enough authorized and unissued shares of common stock to convert all of the convertible promissory notes into shares of common stock.
As a result of this authorized shares shortfall, all of the convertible notes payable, including those where the maturity date has not
yet been reached, are in default. Accordingly, (i) interest has been accrued at the default interest rate, if applicable, and (ii) the
embedded conversion option has been accounted for, at fair value, as a derivative liability (See Note 10).
NOTE 10 – DERIVATIVE
LIABILITIES AND FAIR VALUE MEASUREMENTS
Upon the issuance of
certain convertible debentures, warrants, and preferred stock, the Company determined that the features associated with the embedded conversion
option embedded in the debentures, should be accounted for at fair value, as a derivative liability, as the Company cannot determine if
a sufficient number of shares would be available to settle all potential future conversion transactions.
During the nine months
ended September 30, 2021, upon issuance of the instruments underlying the derivative liabilities
and upon revaluation (immediately prior to conversion of the underlying instrument), the Company estimated the fair value of the
embedded derivatives using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected
volatility of 133.69% to 138.77%, (3) risk-free interest rate of 0.01% to 0.14%, and (4) expected life of 0.06 to 1.85 years.
On September 30, 2021,
the Company estimated the fair value of the embedded derivatives of $4,289,634 using the Black-Scholes Pricing Model based on the following
assumptions: (1) dividend yield of 0%, (2) expected volatility of 137.90%, (3) risk-free interest rate of 0.07% to 0.09%, and (4) expected
life of 0.01 to 1.33 years.
During
the year ended December 31, 2020, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately
prior to conversion of the underlying instrument), the Company estimated the fair value of the embedded derivatives using the Black-Scholes
Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 119.33% to 128.94%, (3) risk-free
interest rate of 0.06% to 1.56%, and (4) expected life of 0.06 to 2.11 years.
On December 31, 2020,
the Company estimated the fair value of the embedded derivatives of $25,475,514 using the Black-Scholes Pricing Model based on the following
assumptions: (1) dividend yield of 0%, (2) expected volatility of 132.11%, (3) risk-free interest rate of 0.08% to 0.13%, and (4) expected
life of 0.04 to 2.08 years.
The
Company adopted the provisions of ASC 825-10. ASC 825-10 defines fair value as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal
or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset
or liability, such as inherent risk, transfer restrictions, and risk of non-performance. ASC 825-10 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
|
●
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
●
|
Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
|
All
items required to be recorded or measured on a recurring basis are based upon Level 3 inputs.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair
value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed
and is determined based on the lowest level input that is significant to the fair value measurement.
The
Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed above. While the Company
believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that
of volatility and market price of the underlying common stock of the Company.
As
of September 30, 2021 and December 31, 2020, the Company did not have any derivative instruments that were designated as hedges.
Items
recorded or measured at fair value on a recurring basis consisted of the following items as of September 30, 2021 and December 31, 2020:
|
|
September 30,
2021
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liabilities
|
|
$
|
4,289,634
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,289,634
|
|
|
|
December 31,
2020
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative liabilities
|
|
$
|
25,475,514
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,475,514
|
|
The following table provides a summary of changes
in fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2021:
Balance, December 31, 2020
|
|
$
|
25,475,514
|
|
Transfers out due to conversions of convertible notes, accrued interest and warrants into shares of Series Y preferred stock
|
|
|
(4,834,911
|
)
|
Transfers out due to conversions of convertible notes and accrued interest into shares of common stock
|
|
|
(118,778
|
)
|
Transfers out due to cash payments made pursuant to settlement agreements
|
|
|
(175,565,103
|
)
|
Change in derivative liability due to authorized shares shortfall
|
|
|
159,633,797
|
|
Mark to market to September 30, 2021
|
|
|
(300,885
|
)
|
Balance, September 30, 2021
|
|
$
|
4,289,634
|
|
|
|
|
|
|
Gain on change in derivative liabilities for the nine months ended September 30, 2021
|
|
$
|
300,885
|
|
Fluctuations in the Company’s stock price
are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases/(decreases)
for each of the related derivative instruments, the value to the holder of the instrument generally increases/(decreases), therefore increasing/(decreasing)
the liability on the Company’s balance sheet. Decreases in the conversion price of the Company’s convertible notes are another
driver for the changes in the derivative valuations during each reporting period. As the conversion price decreases for each of the related
derivative instruments, the value to the holder of the instrument (especially those with full ratchet price protection) generally increases,
therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant
unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value
of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally
result in higher fair value measurements. A 10% change in pricing inputs and changes in volatilities and correlation factors would not
result in a material change in our Level 3 fair value.
NOTE 11 – STOCKHOLDERS’ DEFICIT
Preferred
Stock
Series
A
The
Company is authorized to issue 10,000,000 shares of blank check preferred stock, par value $0.001 per share.
On July 2, 2019, the
Company authorized the issuance of 6,000 Series A preferred stock, par value $0.001 per share. The Series A preferred stock has a $1,250
stated value per share and is convertible into shares of common stock at $0.05 per share, subject to certain adjustments. The Certificate
of Designation for the Series A preferred stock was filed on July 9, 2019.
During the periods presented, there were 0
shares of Series A Preferred Stock outstanding.
Series
B
On
June 24, 2019, the Company authorized the issuance of 2,000 shares of Series B Preferred Stock, par value $0.001 per share. The Series
B Preferred Stock has a $1,250 stated value per share and is convertible into shares of common stock at $0.05 per share, subjected to
certain adjustments. The Certificate of Designation for the Series B Preferred Stock was filed on July 9, 2019.
During
the periods presented, there were 0 shares of Series B Preferred Stock outstanding.
Series
C
On
July 16, 2019, the Company authorized the issuance of 1,000 Series C Preferred Stock, par value $0.001 per share. The 1,000 Series C preferred
shares are convertible into 1,000,000 shares of common stock upon the Company listing on a national exchange and other conditions. The
Certificate of Designation for the Series C Preferred Stock was filed on July 19, 2019.
As
of September 30, 2021 and December 31, 2020, there were 1,000 shares of Series C Preferred Stock outstanding.
Series
X
On
November 23, 2020, the Company authorized the issuance of 100 shares of Series X Preferred Stock, par value $0.0001 per share. The Series
X Preferred Stock has a $20,000 stated value per share and is convertible into shares of common stock at $0.002 per share, subjected to
certain adjustments. In the event the Company issues or sells any securities with an effective price or exercise or conversion price less
than the Conversion Price, the Conversion Price shall be reduced to the sale price or exercise or conversion price of the securities issued
or sold. The Certificate of Designation for the Series X Preferred Stock was filed on November 23, 2020.
From
November 25 to December 23, 2020, the Company issued an aggregate of 16.05 shares of Series X Preferred Stock for aggregate proceeds of
$321,000. Upon each issuance of Series X shares, the conversion price was less than the Company’s stock price. Accordingly, during
the year ended December 31, 2020, the Company recognized an aggregate beneficial conversion feature of $454,200 upon issuance of the Series
X preferred shares with a $454,200 increase in Discount on preferred stock and a corresponding increase in additional paid-in capital.
The preferred stock discount was amortized over 120 days commencing November 25, 2020 (the date of the initial issuance of the Series
X preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the Company’s
authorized shares. Amortization of the preferred stock discount of $46,448 was recognized as a deemed dividend for the year ended December
31, 2020. As of December 31, 2020, unamortized debt discount on Series X Preferred Stock was $407,752.
From
February 16 to March 10, 2021, the Company issued an aggregate of 10.00 shares of Series X Preferred Stock for aggregate proceeds of $200,000.
Upon each issuance of Series X shares, the conversion price was less than the Company’s stock price. Accordingly, during the nine
months ended September 30, 2021, the Company recognized an aggregate beneficial conversion feature of $2,852,500 upon issuance of the
Series X preferred shares with a $2,852,500 increase in Discount on preferred stock and a corresponding increase in additional paid-in
capital. The preferred stock discount was amortized over 120 days commencing November 25, 2020 (the date of the initial issuance of the
Series X preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the Company’s
authorized shares. Amortization of the preferred stock discount of $3,260,252 was recognized as a deemed dividend for the nine months
ended September 30, 2021. As of September 30, 2021, unamortized debt discount on Series X Preferred Stock was $0.
As
of September 30, 2021 and December 31, 2020, there were 26.05 and 16.05 shares, respectively, of Series X Preferred Stock outstanding.
Series
Y
On
December 30, 2020, the Company authorized the issuance of 1,000 shares of Series Y Preferred Stock, par value $0.001 per share. The Series
Y Preferred Stock has a $20,000 stated value per share and is convertible into shares of common stock at $0.002 per share, subjected to
certain adjustments. In the event the Company issues or sells any securities with an effective price or exercise or conversion price less
than the Conversion Price, the Conversion Price shall be reduced to the sale price or exercise or conversion price of the securities issued
or sold. The Certificate of Designation for the Series Y Preferred Stock was filed on December 30, 2020.
From
December 23 to December 30, 2020, the Company issued 654.781794 shares of Series Y Preferred Stock, having a stated value of $13,095,636,
in exchange for convertible notes payable of $5,775,767 (net of debt discount of $133,608), accrued interest of $3,625,237, and 14,765,624,721
warrants. The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $92,934,419,
a reduction of derivative liabilities related to the warrants of $72,892,563, and a net gain on settlement of $162,132,350. Included in
the foregoing amounts is 3.20716 shares of Series Y Preferred Stock, having a stated value of $64,143, issued to the Company’s Chief
Financial Officer, in exchange for convertible notes of $3,172 (net of debt discount of $60,971), resulting in a loss on settlement of
$60,971. Upon each issuance of Series Y shares, the conversion price was less than the Company’s stock price. Accordingly, during
the year ended December 31, 2020, the Company recognized an aggregate beneficial conversion feature of $21,594,115 upon issuance of the
Series Y preferred shares with a $21,594,115 increase in Discount on preferred stock and a corresponding increase in additional paid-in
capital. The preferred stock discount was amortized over 120 days commencing December 23, 2020 (the date of the initial issuance of the
Series Y preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the Company’s
authorized shares. Amortization of the preferred stock discount of $1,028,091 was recognized as a deemed dividend for the year ended December
31, 2020. As of December 31, 2020, unamortized debt discount on Series Y Preferred Stock was $20,566,024.
From
January 7 to March 23, 2021, the Company issued 4.82388 shares of Series Y Preferred Stock, having a stated value of $96,478, in exchange
for convertible notes payable of $38,500, accrued interest of $77,205, and 131,249,975 warrants. The exchanges resulted in a reduction
of derivative liabilities related to the convertible notes and accrued interest of $2,502,223, a reduction of derivative liabilities related
to the warrants of $1,396,283, and a net gain on settlement of $3,917,734. On May 1, the Company issued 60.91 shares of Series Y Preferred
Stock, having a stated value of $1,218,200, in exchange for a convertible note payable of $33,000 and accrued interest of $1,185,200.
The exchange resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $936,405, and
a net gain on settlement of $936,405. Upon each issuance of Series Y shares, the conversion price was less than the Company’s stock
price. Accordingly, during the nine months ended September 30, 2021, the Company recognized an aggregate beneficial conversion feature
of $10,972,647 upon issuance of the Series Y preferred shares with a $10,972,647 increase in Discount on preferred stock and a corresponding
increase in additional paid-in capital. The preferred stock discount was amortized over 120 days commencing December 23, 2020 (the date
of the initial issuance of the Series Y preferred shares), which is the maximum amount of time the Company had to conduct a stockholder
vote to increase the Company’s authorized shares. Amortization of the preferred stock discount of $31,538,671 was recognized as
a deemed dividend for the nine months ended September 30, 2021. As of September 30, 2021, unamortized debt discount on Series Y Preferred
Stock was $0.
On
March 17, 2021, the Company issued 27.78633 shares of Series Y Preferred Stock that were recorded as to be issued as of December 31, 2020.
As
of September 30, 2021 and December 31, 2020, there were 720.515674 and 626.995464 shares of Series Y Preferred Stock outstanding and 0
and 27.78633 shares to be issued, respectively.
Series
Z
On September 30, 2021,
the Company authorized the issuance of 500 shares of Series Z Preferred Stock, par value $0.001 per share. The Series Z Preferred Stock
has a $20,000 stated value per share and all 500 Series Z preferred shares, in aggregate, are convertible into 19.98% of the issued and
outstanding common shares of the Company (post conversion). The conversion rate is applicable on a pro rata basis to each share of Series
Z Preferred Stock upon conversion. This anti-dilutive conversion feature is in effect until such time an S-1 Registration Statement is
declared effective by the SEC in conjunction with a NASDAQ listing.
On
September 30, 2021, the Company entered into a Series Z Preferred Stock Issuance Agreement with the Company’s Chief Executive Officer
whereby the Company received $1,000,000 in exchange for the issuance of: (i) a $1,000,000 note payable; and (ii) 250 Series Z Preferred
Shares having a fair value of $632,019 (See Note 14). The note bears interest of 8% per annum and is due within three days of the Company’s
next closing of equity financing of $3,000,000 or more. The proceeds received were allocated to the debt and equity on a relative fair
value basis. Accordingly, debt discount of $387,262 was recognized with a corresponding increase in additional paid-in capital. Since
the due date is contingent upon a future event, the entire debt discount was amortized to interest expense immediately.
On September 30, 2021,
an investor owning warrants to purchase 156,250,079 common shares at $0.0004 per share entered into an agreement to cancel the aforementioned
warrants in exchange for: (i) a cash payment of $1,000,000 by the Company; and (ii) 250 Series Z Preferred Shares having a fair value
of $632,019. The settlement resulted in a reduction in the derivative liability of $5,750,067, offset by a reduction in cash of $1,000,000,
an increase in additional paid-in capital of $632,019 and a gain on settlement of debt of $4,118,048.
Common
Stock
On
September 30, 2021, the Company amended its Articles of Incorporation to change the number of authorized common shares to 1,200,000,000
shares of common stock, par value $0.001 per share, which has been reflected retroactively in the accompanying consolidated financial
statements.
On
January 8, 2020, the Company issued 37,160,000 shares of the Company’s common stock previously recorded as to be issued as of December
31, 2019.
On March 7, 2020, a stockholder
returned 69,000 shares of the Company’s common stock back to the Company. The shares were immediately retired. Accordingly, common
stock was decreased by the par value of the shares of common stock contributed of $69 with a corresponding increase in additional paid
in capital.
During
the year ended December 31, 2020, a warrant exercise in 2019, to purchase 120,000 shares of common stock, was rescinded. The rescission
was recorded as a decrease in common stock to be issued of $120 and a decrease in additional paid-in capital of $5,880 with a corresponding
increase in accounts payable and accrued expenses of $6,000.
During the year ended
December 31, 2020, the Company issued an aggregate of 72,368,457 shares of its common stock, having an aggregate fair value of $370,755,
upon the conversion of convertible notes with a principal amount of $92,964 and accrued interest of $128, which resulted in the reduction
of $278,545 of derivative liabilities and an aggregate net gain on conversion of convertible notes of $882. Accordingly, common stock
was increased by the par value of the shares of common stock issued of $72,369 and additional paid in capital was increased by $298,386.
On January 20, 2021,
the Company issued 4,448,251 shares of its common stock, having a fair value of $133,002, upon the
conversion of convertible notes with a principal amount of $13,345, which resulted in the
reduction of $118,778 of derivative liabilities and a loss on conversion of $880.
On
June 2, 2021, the Company issued 1,006,250 shares of the Company’s common stock previously recorded as to be issued as of December
31, 2020.
On June 4, 2021, an investor
owning 1,485,000 shares of the Company’s common stock and warrants to purchase 971,562,497 common shares at $0.0004 per share entered
into an agreement to cancel the aforementioned common shares and warrants in exchange for a cash payment of $11,000 by the Company. Accordingly,
the cancelation agreement resulted in a reduction in common stock of $1,485 for the par value of the common shares, a reduction in additional
paid-in capital of $9,515, and a reduction in the derivative liability of $74,134,327 and a gain on settlement of $74,134,327.
On
June 6, 2021, the Company awarded an aggregate of 2,175,431 fully-vested shares of common stock, having a fair value of $166,855, to the
Chief Executive Officer for services rendered.
As of September 30, 2021
and December 31, 2020, there were 499,871,337 and 493,726,405 shares, respectively, of common stock issued and outstanding.
NOTE 12 – WARRANTS
From January 7 to March 23, 2021, the Company
issued 4.82388 shares of Series Y preferred stock, having a stated value of $96,478, in exchange for convertible notes payable of $38,500,
accrued interest of $77,205, and 131,249,975 warrants. The exchanges resulted in a reduction of derivative liabilities related to the
convertible notes and accrued interest of $2,502,223, a reduction of derivative liabilities related to the warrants of $1,396,283, and
a net gain on settlement of $3,917,734 (See Note 9).
On June 4, 2021, an investor
owning 1,485,000 shares of the Company’s common stock and warrants to purchase 971,562,497 common shares at $0.0004 per share entered
into an agreement to cancel the aforementioned common shares and warrants in exchange for a cash payment of $11,000 by the Company. The
cancelation agreement resulted in a reduction in common stock of $1,485 for the par value of the common shares, a reduction in additional
paid-in capital of $9,515, and a reduction in the derivative liability of $74,134,327 and a gain on settlement of debt of $74,134,327
(See Note 11).
On June 4, 2021, an investor
owning warrants to purchase 1,250,000,002 common shares at $0.0004 per share entered into an agreement to cancel the aforementioned common
shares and warrants in exchange for a cash payment of $15,000 by the Company. Accordingly, the cancelation agreement resulted in a reduction
in the derivative liability of $95,380,286 and a gain on settlement of $95,365,286.
On September 30, 2021,
an investor owning warrants to purchase 156,250,079 common shares at $0.0004 per share entered into an agreement to cancel the aforementioned
warrants in exchange for: (i) a cash payment of $1,000,000 by the Company; and (ii) 250 Series Z Preferred Shares having a fair value
of $632,019. The settlement resulted in a reduction in the derivative liability of $5,750,067, offset by a reduction in cash of $1,000,000,
an increase in additional paid-in capital of $632,019 and a gain on settlement of debt of $4,118,048.
A summary of the Company’s warrant activity
during the nine months ended September 30, 2021, is presented below:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2020
|
|
|
2,521,077,555
|
|
|
$
|
0.00109
|
|
|
|
2.04
|
|
|
$
|
14,804,944
|
|
Grants
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired/Canceled
|
|
|
(2,509,502,555
|
)
|
|
$
|
0.0005
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
11,575,000
|
|
|
$
|
0.12927
|
|
|
|
1.17
|
|
|
$
|
9,200
|
|
Exercisable at September 30, 2021
|
|
|
11,575,000
|
|
|
$
|
0.12927
|
|
|
|
1.17
|
|
|
$
|
9,200
|
|
Exercise Price
|
|
Warrants
Outstanding
|
|
|
Weighted Avg.
Remaining
Life
|
|
|
Warrants
Exercisable
|
|
$0.0004 – 0.20
|
|
|
11,450,000
|
|
|
|
1.17
|
|
|
|
11,450,000
|
|
0.40
|
|
|
125,000
|
|
|
|
1.25
|
|
|
|
125,000
|
|
|
|
|
11,575,000
|
|
|
|
1.17
|
|
|
|
11,575,000
|
|
The aggregate intrinsic value
of outstanding stock warrants was $9,200, based on warrants with an exercise price less than the Company’s stock price of $0.0372
as of September 30, 2021, which would have been received by the warrant holders had those holders exercised the warrants as of that date.
NOTE 13 – STOCK OPTIONS
Our stockholders approved
our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan in December 2015 (the “2015
Plan”), our 2016 Equity Incentive Plan in October 2016 (“2016 Plan”), our 2017 Equity Incentive Plan in December 2016
(“2017 Plan” and together with the 2014 Plan, 2015 Plan, 2016 Plan, the “Prior Plans”), our 2018 Equity Incentive
Plan in June 2018 (the “2018 Plan”), and our 2021 Equity Incentive Plan in September 2021 (“2021 Plan” , and together
with the Prior Plans, the “Plans”). The Prior Plans are identical, except for the number of shares reserved for
issuance under each. As of September 30, 2021, the Company had granted an aggregate of 64,310,000 securities under the Plans, with
50,190,000 shares available for future issuances.
The Plans provide for the
grant of incentive stock options to our employees and our subsidiaries’ employees, and for the grant of 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.
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
the options.
A summary of the Company’s stock option
activity during the nine months ended September 30, 2021, is presented below:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2020
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
6.59
|
|
|
$
|
-
|
|
Grants
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
5.74
|
|
|
$
|
-
|
|
Exercisable at September 30, 2021
|
|
|
27,621,765
|
|
|
$
|
0.49
|
|
|
|
5.74
|
|
|
$
|
-
|
|
Exercise Price
|
|
Number of
Options
|
|
|
Remaining Life
In Years
|
|
|
Number of Options
Exercisable
|
|
$0.01 – 0.25
|
|
|
13,306,786
|
|
|
|
6.51
|
|
|
|
13,306,786
|
|
0.26 – 0.50
|
|
|
1,939,631
|
|
|
|
5.51
|
|
|
|
1,939,631
|
|
0.51 – 0.75
|
|
|
1,820,112
|
|
|
|
4.93
|
|
|
|
1,820,112
|
|
0.76 – 1.00
|
|
|
9,926,072
|
|
|
|
4.96
|
|
|
|
9,926,072
|
|
1.01 – 2.00
|
|
|
629,164
|
|
|
|
4.85
|
|
|
|
629,164
|
|
|
|
|
27,621,765
|
|
|
|
5.74
|
|
|
|
27,621,765
|
|
The aggregate intrinsic value
of outstanding stock options was $0, based on options with an exercise price less than the Company’s stock price of $0.0372 as of
September 30, 2021, which would have been received by the option holders had those option holders exercised their options as of that date.
NOTE 14 – RELATED PARTY TRANSACTIONS
During the nine months ended
September 30, 2021 and 2020, the Company received aggregate advances of $2,091 and $0 and repaid an aggregate of $5,278 and $0, respectively,
to the Company’s Chief Information Officer and $25,000 of advances from Empire Services, Inc. The advances are non-interest bearing
and due on demand. As of September 30, 2021 and December 31, 2020, the Company owed $0 and $3,187, respectively, in advances to the Company’s
Chief Information Officer and $25,000 and $0, respectively, in advances to Empire Services, Inc. (See Note 5).
During the nine months ended
September 30, 2021 and 2020, the Company received aggregate proceeds of $1,515,424 and $20,520, respectively, and repaid $0 from the issuance
of non-convertible notes to the Company’s Chief Executive Officer and Empires Services, Inc. The non-convertible notes bear interest
from 15% to 20% and have maturity dates ranging from December 31, 2020 through October 15, 2021. For those notes in default, the interest
rate increases to 35% per annum from the date of default. As of September 30, 2021 and December 31, 2020, the Company owed $1,535,944
and $0, respectively, in non-convertible notes payable to the Company’s Chief Executive Officer and Empire Services, Inc. (See Note
5).
On September 30, 2021,
the Company entered into a Series Z Preferred Stock Issuance Agreement with the Company’s Chief Executive Officer whereby the Company
received $1,000,000 in exchange for the issuance of: (i) a $1,000,000 note payable; and (ii) 250 Series Z Preferred Shares having a fair
value of $632,019. The note bears interest of 8% per annum and is due within three days of the Company’s next closing of equity
financing of $3,000,000 or more. The proceeds received were allocated to the debt and equity on a relative fair value basis. Accordingly,
debt discount of $387,262 was recognized with a corresponding increase in Additional paid-in capital. Since the due date is contingent
upon a future event, the entire debt discount was amortized to interest expense immediately (See Note 11).
NOTE 15 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred
after the balance sheet date but before the unaudited condensed consolidated financial statements are issued.
On September 30, 2021, MassRoots, Inc. entered
into definitive agreements to acquire the Company for consideration of (i) 495,000,000 shares of
Common Stock, (ii) within 3 business days of the closing of the Company’s next capital raise, repayment of a $1 million advance
made to purchase Empire’s Virginia Beach location and (iii) a promissory note in the principal amount of $3.7 million with a maturity
date of September 30, 2023. The acquisition was effective October 1, 2021 upon the effectiveness of a Certificate of Merger in Virginia.
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 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 Part I, Item 1.
Overview
MassRoots, Inc. was formed in April 2013 as a
technology company. The Company recently closed its acquisition of Empire Services, Inc. (“Empire”), acquiring the entirety
of its issued and outstanding equity. Our primary focus is expanding the number of metal recycling facilities Empire operates and utilizing
technology to improve its operational efficiency.
COVID-19 Pandemic
In March 2020, the World Health Organization declared
COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments,
has adversely affected workforces, customers, economies, and financial markets globally, leading to an economic downturn. It has also
disrupted the normal operations of many businesses, including ours. It is not possible for us to predict the duration or magnitude of
the adverse results of the outbreak of COVID-19 and its effects on our business including our financial condition, liquidity, or results
of operations at this time. Management is actively monitoring the global situation and its impact on the Company’s financial condition,
liquidity, operations, customers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses
to curb its spread, the Company is not able to estimate the effects that the COVID-19 outbreak will have on its results of operations,
financial condition, or liquidity for fiscal year 2021. As of the date of this Quarterly Report on Form 10-Q, the Company has experienced
delays in securing new customers and related revenues and the longer this pandemic continues there may be additional impacts. Furthermore,
the COVID-19 outbreak has and may continue to impact the Company’s ability to raise capital.
Although the Company cannot estimate the length
or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the
Company’s results of future operations, financial position, liquidity, and capital resources, and those of the third parties on
which the Company relies in fiscal year 2021.
For the Three Months Ended September 30, 2021 and 2020
|
|
For the three months ended
|
|
|
|
Sept 30,
2021
|
|
|
Sept 30,
2020
|
|
|
$
Change
|
|
|
%
Change
|
|
Revenue
|
|
$
|
54
|
|
|
$
|
2,316
|
|
|
$
|
(2,262
|
)
|
|
|
(97.67
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
395,312
|
|
|
|
208,238
|
|
|
|
187,074
|
|
|
|
89.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(395,258
|
)
|
|
|
(205,922
|
)
|
|
|
(189,336
|
)
|
|
|
91.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
6,274,716
|
|
|
|
64,885,144
|
|
|
|
(58,610,428
|
)
|
|
|
(90.62
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Stockholders
|
|
$
|
5,879,458
|
|
|
$
|
64,679,222
|
|
|
$
|
(58,799,764
|
)
|
|
|
(90.91
|
%)
|
Revenues
For the three months ended September 30, 2021
and 2020, we generated revenues of $54 and $2,316, respectively, a decrease of $2,262 primarily due to the relaunch of product placements
on the Company’s YouTube and social media channels.
Operating Expenses
For the three months ended September 30, 2021
and 2020, our operating expenses were $395,258 and $208,238, respectively, an increase of $187,074. There was a decrease in advertising
expenses from $43,020 for the three months ended September 30, 2020 to ($4,578) for the same period in 2021, a decrease of $47,598 as
the Company advertised less. There was an increase in payroll and related expenses of 2,814, as payroll and related expenses increased
to $66,693 for the three months ended September 30, 2021 from $63,879 for same period in 2020. Other general and administrative expenses
increased by $232,008 from $101,189 for the three months ended September 30, 2020, to $333,197 for the three months ended September 30,
2021. This increase was attributable to higher travel and legal costs for the three months ended September 30, 2021 as compared to the
same period in 2020.
Loss from Operations
During the three months ended September 30, 2021,
we incurred losses of $395,258 from operations, as compared to losses of $205,922 during the same period in 2020, a difference of $189,336,
for the reasons stated above.
Other Income (Expense)
For the three months ended September 30, 2021 and 2020, the Company
recorded interest expense of $699,254 and $ 1,602,204, respectively, primarily related to Company’s convertible notes. The Company
recorded $0 and a $0 loss on the conversion of convertible notes payable for the three months ended September 30, 2021 and 2020, respectively.
For the three months ended September 30, 2021 and 2020, the Company recorded a $0 change and a $85,287 loss, respectively, on the change
in fair value of derivative liabilities. For the three months ended September 30, 2021 and 2020, the Company recorded gains of $2,641,481
and $66,572,635, respectively, of the change in the fair value of the derivative liability for the authorized shares shortfall. The Company
recorded a $4,332,489 gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable during the three
months ended September 30, 2021, as compared to $0 during the same period in 2020. There was a $0 gain on the forgiveness of debt for
the three months ended September 30, 2021, as compared to $0 during the same period in 2020.
Net Income (Loss) Available to Common Stockholders
For the three months ended September 30, 2021,
we had income available to common stockholders of $5,879,458 as compared to a net loss of $64,679,222 for the same period in 2020, a difference
of $58,799,764 for the reasons discussed above.
For the Nine Months Ended September 30, 2021 and 2020
|
|
For the nine months ended
|
|
|
|
Sept 30,
2021
|
|
|
Sept 30,
2020
|
|
|
$
Change
|
|
|
%
Change
|
|
Revenue
|
|
$
|
1,660
|
|
|
$
|
2,316
|
|
|
$
|
(656
|
)
|
|
|
(28.32
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
1,196,292
|
|
|
|
696,357
|
|
|
|
502,251
|
|
|
|
72.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(1,196,292
|
)
|
|
|
(694,041
|
)
|
|
|
(502,251
|
)
|
|
|
72.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
18,463,640
|
|
|
|
(46,708,918
|
)
|
|
|
65,172,558
|
|
|
|
(139.53
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Stockholders
|
|
$
|
(17,531,575
|
)
|
|
$
|
(142,405,892
|
)
|
|
$
|
124,874,317
|
|
|
|
(87.69
|
%)
|
Revenues
For the nine months ended September 30, 2021 and
2020, we generated revenues of $1,660 and $2,316, respectively, a decrease of $656 primarily due to the relaunch of product placements
on the Company’s YouTube and social media channels.
Operating Expenses
For the nine months ended September 30, 2021 and
2020, our operating expenses were $1,196,292 and $696,357, respectively, an increase of $502,251. There was a decrease in advertising
expenses from $43,020 for the nine months ended September 30, 2020 to $18,125 for the same period in 2021, a decrease of $24,895. There
was a decrease in payroll and related expenses of $14,167 due to reduction in the number of employees, as payroll and related expenses
decreased to $225,603 for the nine months ended September 30, 2021 from $ 239,770 for same period in 2020. Other general and administrative
expenses increased by $540,510 from $413,417 for the nine months ended September 30, 2020, to $953,927 for the nine months ended September
30, 2021. This increase was attributable to higher travel and legal costs for the nine months ended September 30, 2021 as compared to
the same period in 2020.
Loss from Operations
During the nine months ended September 30, 2021,
we incurred losses of $1,196,292 from operations, as compared to losses of $694,041 during the same period in 2020, a difference of $502,251,
for the reasons stated above.
Other Income (Expense)
For the nine months ended September 30, 2021 and
2020, the Company recorded interest expense of $1,667,413 and $3,607,210, respectively, primarily related to Company’s convertible
notes. The Company recorded a $880 loss and $882 gain on the conversion of convertible notes payable for the nine months ended September
30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded a $300,885 and a $303,593
gain, respectively, on the change in fair value of derivative liabilities. For the nine months ended September 30, 2021 and 2020, the
Company recorded losses of $159,633,797 and $43,406,183, respectively, of changes in the fair value of the derivative liability for the
authorized shares shortfall. The Company recorded a $179,272,324 gain on settlement of convertible notes payable and accrued interest,
warrants and accounts payable during the nine months ended September 30, 2021, as compared to $0 during the same period in 2020. There
was a $192,521 gain on the forgiveness of debt for the nine months ended September 30, 2021, as compared to $0 during the same period
in 2020.
Net Income (Loss) Available to Common Stockholders
For the nine months ended September 30, 2021,
we had net losses available to common stockholders of $17,531,575 as compared to a net loss of $142,405,892 for the same period in 2020,
a difference of $124,874,317 for the reasons discussed above.
Liquidity and Capital Resources
Net cash used in operations for the nine months
ended September 30, 2021 and 2020 was $548,640 and $717,062, respectively. This $168,422 decrease was primarily caused by an increase
in accounts payable and accrued expenses, accrued payroll and related expenses, and deferred revenue. Net cash used in operations for
the nine months ended September 30, 2020 was primarily based on the loss for the nine months ended September 30, 2020, partially offset
by decreases in accounts payable and accrued payroll.
Net cash provided by financing activities for
the nine months ended September 30, 2021 and 2020 was $548,237 and $716,592 respectively. During the nine months ended September 30, 2021,
these funds were derived mainly from proceeds related to the issuance of preferred shares and non-convertible notes. During the nine months
ended September 30, 2020, net cash provided by financing activities was derived from the issuance of convertible notes, offset by repayment
of non-convertible notes.
Capital Resources
As of September 30, 2021, the Company had cash
of $1,082 and working capital deficit (current liabilities in excess of current assets) of $17,514,830. During the nine months ended September
30, 2021, the net loss available to common stockholders was $17,531,575 and net cash used in operating activities was $548,640. These
conditions raise substantial doubt about our ability to continue as a going concern for one year from the issuance of the condensed consolidated
financial statements. Our primary source of operating funds since inception has been cash proceeds from the public and private placements
of our securities, including debt securities, and proceeds from the exercise of warrants and options. 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; 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.
Management’s plans regarding these matters
encompass the following actions: 1) obtain funding from new and current investors to alleviate our working capital deficiency; and 2)
implement a plan to generate revenues. Our continued existence is dependent upon our ability to translate our audience into revenues.
However, the outcome of our plans cannot be determined with any degree of certainty.
Accordingly, the accompanying
condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America, 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 condensed consolidated financial statements are issued. The
carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily purport to
represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty such as the final settlement amounts of our notes payable and accrued interest.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any
off-balance sheet arrangements.
Contractual Obligations
Our contractual obligations are included in our
notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q. To the extent
that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements,
we will be required to obtain additional funds through equity or debt financings. No assurance can be given that any additional financing
will be made available to us or will be available on acceptable terms should such a need arise.
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 on Form 10-Q.