UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

OR

 

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

For the transition period from ___________to ____________

 

Commission File Number 000-55431

 

 

MASSROOTS, INC.
(Exact name of business as specified in its charter)

 

Delaware   46-2612944

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer
Identification No.)

 

1560 Broadway, Office 17-105, Denver, CO   80202
(Address of principal executive offices)   (Zip code)

 

(720) 240-9546

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

As of December 16, 2020, there were 493,726,405 shares of the registrant’s common stock issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
  ITEM 1. Financial Statements  
    Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019 1
    Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 2
    Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 3
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited) 5
    Notes to Condensed Consolidated Financial Statements (unaudited) 6
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 25
  ITEM 4. Controls and Procedures 25
       
PART II. OTHER INFORMATION 26
  ITEM 1. Legal Proceedings 26
  ITEM 1A. Risk Factors 26
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
  ITEM 3. Defaults Upon Senior Securities 26
  ITEM 4. Mine Safety Disclosures 26
  ITEM 5. Other Information 26
  ITEM 6. Exhibits 30
  SIGNATURES 31

 

-i -

 

 

FORWARD-LOOKING STATEMENTS

 

Statements in this Quarterly Report on Form 10-Q may be “forward-looking statements.”

 

Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions.  These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and “would.” These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K, and our other filings with SEC.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Any forward-looking statements speak only as of the date on which they are made, and we disclaim any obligation to publicly update or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by applicable law.

 

-ii -

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2020     2019  
    (Unaudited)        
ASSETS            
Current assets:            
Cash   $ 650     $ 1,120  
Prepaid expenses     -       1,975  
Total current assets     650       3,095  
                 
Total assets   $ 650     $ 3,095  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Bank overdrafts   $ 71     $ 13,749  
Accounts payable and accrued expenses     8,169,332       5,455,063  
Accrued payroll and related expenses     3,818,230       3,724,050  
Advances     337,500       337,500  
Non-convertible notes payable, current portion     154,020       165,750  
Derivative liabilities     63,588,991       20,236,870  
Convertible notes payable, net of debt discount of $203,570 and $380,431, respectively     7,723,636       6,939,039  
Total current liabilities     83,791,780       36,872,021  
                 
Non-convertible notes payable     110,000       -  
Total liabilities     83,901,780       36,872,021  
                 
Commitments and contingencies (See Note 8)                
                 
Stockholders’ deficit:                
Preferred stock - Series C, $0.001 par value, 1,000 shares authorized; 1,000 shares issued and outstanding     1       1  
Common stock, $0.001par value, 500,000,000 shares authorized; 493,726,405 and 384,266,948 shares issued and outstanding, respectively     493,727       384,267  
Common stock to be issued, 907,499,814 and 944,659,814 shares, respectively     907,500       944,660  
Additional paid in capital     246,665,759       151,364,371  
Accumulated deficit     (331,968,117 )     (189,562,225 )
Total stockholders’ deficit     (83,901,130 )     (36,868,926 )
                 
Total liabilities and stockholders’ deficit   $ 650     $ 3,095  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
                         
Revenues   $ 2,316     $ 909     $ 2,316     $ 23,658  
                                 
Operating Expenses:                                
Cost of revenues     150       -       150       3,530  
Advertising     43,020       2,967       43,020       39,332  
Payroll and related expense     63,879       152,809       239,770       495,069  
Stock-based compensation     -       25,500       -       212,700  
Amortization of software costs     -       12,849       -       38,549  
Impairment of software costs     -       196,315       -       196,315  
Allowance for uncollectible advances to COWA Science Corporation (“COWA”)     -       157,500       -       360,500  
Other general and administrative expenses     101,189       574,677       413,417       1,538,126  
Total Operating Expenses     208,238       1,122,617       696,357       2,884,121  
                                 
Loss From Operations     (205,922 )     (1,121,708 )     (694,041 )     (2,860,463 )
                                 
Other Income (Expense):                                
Interest expense     (1,602,204 )     (1,546,805 )     (3,607,210 )     (2,136,983 )
Preferred stock issuance costs     -       (5,585,594 )     -       (5,585,594 )
Change in derivative liability for authorized shares shortfall     66,572,635       (15,050,821 )     (43,406,183 )     (15,050,821 )
Change in fair value of derivative liabilities     (85,287 )     94,534       303,593       61,635  
Impairment on investment     -       (91,929 )     -       (91,929 )
Gain (loss) on conversion of convertible notes     -       (248,022 )     882       (674,099 )
Total Other Income (Expense)     64,885,144       (22,428,637 )     (46,708,918 )     (23,477,791 )
                                 
Net Income (Loss) Before Income Taxes     64,679,222       (23,550,345 )     (47,402,959 )     (26,338,254 )
                                 
Provision for Income Taxes (Benefit)     -       -       -       -  
                                 
Net Income (Loss)     64,679,222       (23,550,345 )     (47,402,959 )     (26,338,254 )
                                 
Deemed dividend from warrant price protection     -       (24,126,726 )     (95,002,933 )     (27,935,469 )
Contingent beneficial conversion feature on Preferred Shares issuance     -       (39,746,515 )     -       (39,746,515 )
Deemed dividend for issuance of common shares to settle warrant provision     -       -       -       (437,400 )
                                 
Net Income (Loss) Available to Common Stockholders   $ 64,679,222     $ (87,423,586 )   $ (142,405,892 )   $ (94,457,638 )
                                 
Net income (loss) per common share:                                
Basic   $ 0.05     $ (0.13 )   $ (0.10 )   $ (0.28 )
Diluted   $ -     $ (0.13 )   $ (0.10 )   $ (0.28 )
                                 
Weighted average common shares outstanding:                                
Basic     1,401,226,219       650,391,047       1,387,478,585       337,350,454  
Diluted     40,198,748,273       650,391,047       1,387,478,585       337,350,454  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

UNAUDITED

 

    Preferred Stock                                            
    Series B to be Issued     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at June 30, 2020     -     $ -       1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500     $ 246,665,759     $ (396,647,339 )   $ (148,580,352 )
                                                                                         
Net income     -       -       -       -       -       -       -       -       -       64,679,222       64,679,222  
                                                                                         
Balance at September 30, 2020     -     $ -       1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500     $ 246,665,759     $ (331,968,117 )   $ (83,901,130 )
                                                                                         
    Preferred Stock                                            
    Series B to be Issued     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at June 30, 2019     160     $ -       -     $ -       203,414,654     $ 203,415       1,126,250     $ 1,126     $ 79,700,759     $ (87,938,181 )   $ (8,032,881 )
                                                                                         
Issuance of preferred shares for cash     356       1       -       -       -       -       -       -       444,999       -       445,000  
                                                                                         
Conversion of Series A Convertible Preferred Stock to common shares     -       -       -       -       80,000,000       80,000       903,823,564       903,824       2,153,424       -       3,137,248  
                                                                                         
Common shares issued upon conversion of convertible notes and accrued interest     -       -       -       -       64,629,200       64,630       -       -       487,393       -       552,023  
                                                                                         
Common shares issued for services     -       -       -       -       -       -       2,550,000       2,550       22,950       -       25,500  
                                                                                         
Common shares issued to settle a true-up provision     -       -       -       -       5,553,191       5,553       -       -       16,660       -       22,213  
                                                                                         
Contingent beneficial conversion feature on Preferred Shares issuance     -       -       -       -       -       -       -       -       42,121,906       (39,617,731 )     2,504,175  
                                                                                         
Deemed dividend related to warrant price protection     -       -       -       -       -       -       -       -       24,126,726       (24,126,726 )     -  
                                                                                         
Net loss     -       -       -       -       -       -       -       -       -       (23,550,345 )     (23,550,345 )
                                                                                         
Balance at September 30, 2019     516     $ 1       -     $ -       353,597,045     $ 353,598       907,499,814     $ 907,500     $ 149,074,817     $ (175,232,983 )   $ (24,897,067 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

UNAUDITED

 

    Preferred Stock                                            
    Series B to be Issued     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at December 31, 2019     -     $ -       1,000     $ 1       384,266,948     $ 384,267       944,659,814     $ 944,660     $ 151,364,371     $ (189,562,225 )   $ (36,868,926 )
                                                                                         
Issuance of common shares previously to be issued     -       -       -       -       37,160,000       37,160       (37,160,000 )     (37,160 )     -       -       -  
                                                                                         
Common shares issued upon conversion of convertible notes and accrued interest     -       -       -       -       72,368,457       72,369       -       -       298,386       -       370,755  
                                                                                         
Common shares contributed back to the Company and promptly retired     -       -       -       -       (69,000 )     (69 )     -       -       69       -       -  
                                                                                         
Deemed dividend related to warrant price protection     -       -       -       -       -       -       -       -       95,002,933       (95,002,933 )     -  
                                                                                         
Net loss     -       -       -       -       -       -       -       -       -       (47,402,959 )     (47,402,959 )
                                                                                         
Balance at September 30, 2020     -     $ -       1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500     $ 246,665,759     $ (331,968,117 )   $ (83,901,130 )
                                                                                         
    Preferred Stock                                            
    Series B to be Issued     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at December 31, 2018     -     $ -       -     $ -       168,706,472     $ 168,707       80,000     $ 80     $ 73,770,195     $ (80,775,348 )   $ (6,836,366 )
                                                                                         
Issuance of common shares previously to be issued     -       -       -       -       80,000       80       (80,000 )     (80 )     -       -       -  
                                                                                         
Sale of Series B Convertible Preferred Stock and warrants     516       1       -       -       -       -       -       -       644,999       -       645,000  
                                                                                         
Conversion of Series A Convertible Preferred Stock to common shares     -       -       -       -       80,000,000       80,000       903,823,564       903,824       2,153,423       -       3,137,247  
                                                                                         
Common shares issued as origination shares     -       -       -       -       1,250,000       1,250       -       -       140,083       -       141,333  
                                                                                         
Common shares issued upon conversion of convertible notes and accrued interest     -       -       -       -       80,504,561       80,505       -       -       1,417,262       -       1,497,767  
                                                                                         
Common shares issued upon exercise of warrants for cash     -       -       -       -       1,555,160       1,555       1,126,250       1,126       170,269       -       172,950  
                                                                                         
Common shares issued in settlement of a warrant provision     -       -       -       -       9,000,000       9,000       -       -       428,400       (437,397 )     3  
                                                                                         
Common shares issued upon cashless exercise of warrants     -       -       -       -       3,997,661       3,998       -       -       (3,998 )     -       -  
                                                                                         
Common shares issued for services     -       -       -       -       2,950,000       2,950       2,550,000       2,550       193,200       -       198,700  
                                                                                         
Options issued for services     -       -       -       -       -       -       -       -       14,000       -       14,000  
                                                                                         
Common shares issued to settle a true-up provision     -       -       -       -       5,553,191       5,553       -       -       16,660       -       22,213  
                                                                                         
Contingent beneficial conversion feature on Preferred Shares issuance     -       -       -       -       -       -       -       -       42,194,855       (39,746,515 )     2,448,340  
                                                                                         
Deemed dividend related to warrant price protection     -       -       -       -       -       -       -       -       27,935,469       (27,935,469 )     -  
                                                                                         
Net loss     -       -       -       -       -       -       -       -       -       (26,338,254 )     (26,338,254 )
                                                                                         
Balance at September 30, 2019     516     $ 1       -     $ -       353,597,045     $ 353,598       907,499,814     $ 907,500     $ 149,074,817     $ (175,232,983 )   $ (24,897,067 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

UNAUDITED

 

    Nine Months Ended September 30,  
    2020     2019  
Cash flows from operating activities:            
Net loss   $ (47,402,959 )   $ (26,338,254 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in fair value of derivative liabilities     (303,593 )     (61,635 )
Change in derivative liability for authorized shares shortfall     43,406,183       15,050,821  
Depreciation and amortization     -       42,111  
Interest and amortization of debt discount     3,607,210       2,136,983  
(Gain) loss on conversion of convertible notes payable     (882 )     674,099  
Stock-based compensation     -       212,700  
Allowance for advance given to COWA     -       360,500  
Impairment on investment     -       65,000  
Loss on sale of investment in Canna Regs     -       91,929  
Impairment loss on software costs     -       196,315  
Preferred stock issuance costs     -       5,585,594  
Security deposit written off     -       36,000  
Changes in operating assets and liabilities:                
Accounts receivable     -       (167 )
Prepaid expenses     1,975       (2,340 )
Advance given to COWA     -       (370,500 )
Accounts payable and accrued expenses     (119,176 )     497,323  
Accrued payroll and related expenses     94,180       434,309  
Net cash used in operating activities     (717,062 )     (1,389,212 )
                 
Cash flows from investing activities:                
Proceeds from sale of Reg Tech and High Times     -       90,983  
Net cash provided by investing activities     -       90,983  
                 
Cash flows from financing activities:                
Bank overdrafts     (13,678 )     -  
Proceeds from sale of Series B preferred shares and warrants     -       645,000  
Proceeds from exercise of warrants     -       172,950  
Proceeds from issuance of convertible notes payable     637,000       350,000  
Proceeds from issuance of non-convertible notes payable     132,911       176,000  
Repayment of non-convertible notes payable     (39,641 )     -  
Repayments of advances     -       (72,650 )
Net cash provided by financing activities     716,592       1,271,300  
                 
Net decrease in cash     (470 )     (26,929 )
                 
Cash, beginning of period     1,120       29,568  
                 
Cash, end of period   $ 650     $ 2,639  
                 
                 
Supplemental disclosures of cash flow information:                
Cash paid during period for interest   $ -     $ -  
Cash paid during period for taxes   $ -     $ -  
                 
                 
Supplemental disclosure of non-cash investing and financing activities:                
Issuance of common shares previously to be issued   $ 37,160     $ -  
Common shares issued upon conversion of convertible notes and accrued interest   $ 370,755     $ 823,668  
Common shares contributed back to the Company and promptly retired   $ 69     $ -  
Deemed dividend related to warrant price protection   $ 95,002,933     $ 27,935,469  
Derivative liability recognized as debt discount on newly issued convertible notes   $ 528,076     $ -  
Common shares issued upon cashless exercise of warrants   $ -     $ 3,998  
Common shares issued in settlement of a warrant provision   $ -     $ 437,400  
Common stock issued for Series A Preferred Stock conversions   $ -     $ 3,137,248  
Contingent beneficial conversion feature on Preferred Shares issuance   $ -     $ 39,746,515  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

5

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Overview

 

MassRoots, Inc. (“MassRoots” or the “Company”) has created a technology platform for the cannabis industry focused on enabling users to share their cannabis content, follow their favorite dispensaries, and stay connected with the legalization movement. The Company was incorporated in the State of Delaware on April 26, 2013.

 

Our condensed consolidated financial statements include the accounts of DDDigtal, Inc., Odava, Inc., MassRoots Supply Chain, Inc., and MassRoots Blockchain Technologies, Inc., our wholly-owned subsidiaries.

 

Basis of Presentation

 

The interim condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly the Company’s results of operations for the three and nine months ended September 30, 2020 and 2019, its cash flows for the nine months ended September 30, 2020 and 2019, and its financial position as of September 30, 2020 have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.

 

Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these interim condensed consolidated financial statements. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC on July 16, 2020 (the “Annual Report”). The December 31, 2019 balance sheet is derived from those statements.

 

NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

 

As of September 30, 2020, the Company had cash of $650 and a working capital deficit (current liabilities in excess of current assets) of $83,791,130. During the nine months ended September 30, 2020, the net loss available to common stockholders was $142,405,892 and net cash used in operating activities was $717,062. 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, 2020, the Company received proceeds of $637,000 and $132,911 from the issuance of convertible notes 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.

 

6

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

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 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 2020. 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 2020.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The 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.

 

7

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

Cash

 

For purposes of the 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, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, 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

 

The Company recognizes revenue when services are realized or realizable and earned, less estimated future doubtful accounts.

 

The Company’s revenues are accounted for under ASC Topic 606, “Revenue From Contracts With Customers” (“ASC 606”) and generally do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.

 

In accordance with ASC 606, the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. 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 only recognizes revenue for services provided during that quarter and defers the remaining unearned revenue to future periods.

 

8

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

Advertising

 

The Company charges the costs of advertising to expense as incurred. Advertising costs were $43,020 and $39,332 for the nine months ended September 30, 2020 and 2019, 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.

 

9

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

Deemed Dividends and Beneficial Conversion Features

 

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; and (iii) the settlement of warrant provisions, based on the fair value of the common shares issued. The Company also records, when necessary, a contingent beneficial conversion resulting from price protection of the conversion price of Series A Preferred Stock, based on the change in the intrinsic value of the conversion options embedded in such preferred stock.

 

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 common shares, 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, 2020 and December 31, 2019 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 was required to record the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period. 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.

 

10

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

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.

 

Reclassifications

 

Certain reclassifications have been made to the prior years’ data to conform to the current year presentation. These reclassifications had no effect on reported income (losses).

  

Recent Accounting Pronouncements

  

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 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 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, 2020 and December 31, 2019 is summarized as follows:

 

    September 30,
2020
    December 31,
2019
 
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 three months ended September 30, 2020 and 2019 was $0 and $1,078, respectively.

 

Depreciation expense for the nine months ended September 30, 2020 and 2019 was $0 and $3,549, respectively.

 

11

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

NOTE 5 – ADVANCES AND NON-CONVERTIBLE NOTES PAYABLE

 

During the nine months ended September 30, 2020 and 2019, the Company received aggregate proceeds from advances of $0 and $0 and repaid an aggregate of $0 and $72,650, respectively, of advances. The advances were 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 2017 and 2018. As of September 30, 2020 and December 31, 2019, the Company owed $337,500 and $337,500 in principal and $10,500 and $10,500 in accrued interest, respectively.

  

During the nine months ended September 30, 2020 and 2019, the Company received proceeds from the issuance of non-convertible notes of $132,911 and $176,000 and repaid an aggregate of $39,641 and $0, respectively, of non-convertible notes. The non-convertible notes have maturity dates ranging from March 18, 2019 to June 26, 2022 and accrue interest at rates ranging from 0% to 36% per annum. As of September 30, 2020 and December 31, 2019, the Company owed $264,020 and $165,750 in principal and $259,428 and $158,143 in accrued interest, respectively.

 

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

As of September 30, 2020 and December 31, 2019, the Company owed accounts payable and accrued expenses of $8,169,332 and $5,455,063, 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, 2019, and 2020. As of September 30, 2020 and December 31, 2019, the Company owed payroll tax liabilities, including penalties, of $3,818,230 and $3,724,050, 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 by March 31, 2021.

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

In the ordinary course of business, the Company is occasionally involved in lawsuits incidental to its business, including litigation related to its convertible notes. Although it is difficult to predict the ultimate outcome of these cases, management believes that any ultimate liability would not have a material adverse effect on the Company’s condensed consolidated financial condition or results of operations. However, any unforeseen unfavorable development in any of these cases could have a material adverse effect on the Company’s condensed consolidated financial condition. The Company records the potential effects on operations or cash flows in the period in which such effects are probable and reasonably estimable.

 

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 alleges, 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. In addition, the complaint alleges, among other things, that Mr. Dietrich took affirmative steps to deliberately cause the Company to breach its financial obligations. As a result of the foregoing, Power Up has requested: (i) the greater of $312,000 and the “parity value” as such term is defined in the Power Up Notes together with $2,000 per day until the Company issues shares upon conversion of the Power Up Notes together with applicable interest thereon; (ii) $165,000 as a result of the misrepresentations; (iii) an amount of lost profits to be determined by the court, but in no event less than $312,000; (iv) $312,000 as against Mr. Dietrich; (v) an award for reasonable legal fees and costs of litigation; (vi) a judgment awarding specific performance under the Power Up Notes; and (vii) the costs and disbursement of the action, pre-judgment interest, default interest and such other further relief as the court deems proper. On August 24, 2020, the Supreme Court of the State of New York, County of Nassau adjourned a hearing on Power Ups motion for default judgment with respect to the complaint filed by Power Up on October 11, 2019 against the Company and Mr. Dietrich until September 14, 2020. On September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Mr. Dietrich, alleging that the defendants failed to appear and did not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer. As of September 30, 2020, the Company has recorded $131,174 in principal and $233,124 of accrued interest and penalties for the Power Up Notes as current liabilities.

 

12

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE

 

On July 5, 2018, the Company issued secured convertible notes to certain accredited investors in the aggregate principal amount of $1,650,000. The notes matured on January 5, 2019 and accrued no interest. Net proceeds received by the Company were $1,492,500 after deduction of legal and other fees. During 2019, the remaining principal amount of $390,000 and accrued interest of $22,831 were converted into shares of the Company’s common stock.

 

In connection with the issuance of the July 2018 notes, the Company and the investors also entered into a security agreement pursuant to which the notes are secured by all of the assets of the Company held as of July 5, 2018 and acquired thereafter. The Company also issued five-year warrants to purchase an aggregate of 6,600,000 shares of Company’s common stock with an initial exercise price of $0.25. The warrants contain certain anti-dilutive provisions.

  

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 nine months ended September 30, 2020, the noteholder converted $37,000 of principal into an aggregate of 31,109,551 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the note was $1,843,000 and $1,880,000, respectively, net of debt discount of $0. As of September 30, 2020 and December 31, 2019, accrued interest payable of $1,659,676 and $1,327,110, respectively, was outstanding on the note.

 

13

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

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 nine months ended September 30, 2020, one of the holders converted $24,826 of principal into an aggregate of 35,005,850 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $332,994 and $247,746, net of debt discount of $0 and $110,074, respectively. As of September 30, 2020 and December 31, 2019, accrued interest payable of $1,282,188 and $456,900, respectively, was outstanding on the notes.

 

On November 13, 2019, the Company issued 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%. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $108,900 and $14,871, net of debt discount of $0 and $94,029, respectively. As of September 30, 2020 and December 31, 2019, accrued interest payable of $140,798 and $48,789, respectively, was outstanding on the notes.

 

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%. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $110,000 and $15,027, net of debt discount of $0 and $94,973, respectively. As of September 30, 2020 and December 31, 2019, accrued interest payable of $103,613 and $38,904, respectively, was outstanding on the notes.

 

14

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

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 common shares 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 nine months ended September 30, 2020, the noteholders converted $31,137 of principal and $128 of accrued interest into an aggregate of 6,253,056 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $4,831,613 and $4,781,395, net of debt discount of $0 and $81,355, respectively. As of September 30, 2020 and December 31, 2019, accrued interest payable of $2,375,264 and $1,583,795, 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%. As of September 30, 2020, the remaining carrying value of the notes was $497,129, net of debt discount of $203,571. As of September 30, 2020, accrued interest payable of $373,256 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 common shares to convert all of the convertible promissory notes into common shares. 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

 

The Company does not have enough authorized and unissued common shares to convert all of its outstanding convertible promissory notes into common shares. As a result of this authorized shares shortfall, the embedded conversion feature in all of the Company’s outstanding convertible notes payable and convertible preferred shares as well as the Company’s outstanding warrants have been accounted for as derivative liabilities, at fair value, 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, 2020, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion), 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 126.80%, (3) risk-free interest rate of 0.10% to 1.56%, and (4) expected life of 0.08 to 0.5 years.

 

15

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

On September 30, 2020, the Company estimated the fair value of the embedded derivatives of $63,588,991 using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 125.94%, (3) risk-free interest rate of 0.05% to 0.13%, and (4) expected life of 0.05 to 2.34 years.

  

During the year ended December 31, 2019, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion), 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 110.59% to 119.18%, (3) risk-free interest rate of 1.48% to 2.33%, and (4) expected life of 0.01 to 3.0 years.

 

On December 31, 2019, the Company estimated the fair value of the embedded derivatives of $20,236,870 using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 119.18%, (3) risk-free interest rate of 1.48% to 1.62%, and (4) expected life of 0.01 to 3.09 years.

 

ASC 820 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. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

All items required to be recorded or measured on a recurring basis are based upon Level 3 inputs.

  

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

The Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.

 

At September 30, 2020 and December 31, 2019, the Company did not have any derivative instruments that were designated as hedges.

 

16

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

Items recorded or measured at fair value on a recurring basis in the accompanying condensed consolidated financial statements consisted of the following items as of September 30, 2020 and December 31, 2019:

 

    September 30, 
2020
    Quoted Prices 
in Active 
Markets for 
Identical Assets
(Level 1)
    Significant 
Other 
Observable 
Inputs 
(Level 2)
    Significant 
Unobservable 
Inputs 
(Level 3)
 
Derivative liabilities   $ 63,588,991     $              -     $                 -     $ 63,588,991  

 

    December 31,
2019
    Quoted Prices 
in Active 
Markets for 
Identical Assets
(Level 1)
    Significant 
Other 
Observable 
Inputs 
(Level 2)
    Significant 
Unobservable
Inputs 
(Level 3)
 
Derivative liabilities   $ 20,236,870     $          -     $            -     $ 20,236,870  

 

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, 2020: 

 

Balance, December 31, 2019   $ 20,236,870  
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions     528,076  
Transfers out due to conversions of convertible notes and accrued interest into common shares     (278,545 )
Change in derivative liability due to authorized shares shortfall     43,406,183  
Mark to market to September 30, 2020     (303,593 )
Balance, September 30, 2020   $ 63,588,991  
         
Gain on change in derivative liabilities for the nine months ended September 30, 2020   $ 303,593  

 

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

 

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 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.

 

As of September 30, 2020 and December 31, 2019, there were 0 shares of Series A Preferred Stock outstanding.

 

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 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.

 

17

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

As of September 30, 2020 and December 31, 2019, there were 0 shares of Series B Preferred Stock outstanding.

  

On July 16, 2019, the Company authorized the issuance of 1,000 shares of Series C Preferred Stock, par value $0.001 per share. The 1,000 Series C preferred shares automatically convert into an aggregate of 1,000,000 shares of common stock upon the Company listing on a national exchange or upon a Change in Control (as defined in the Series C Certificate of Designation). The Certificate of Designation for the Series C Preferred Stock was filed on July 19, 2019, and a Certificate of Correction to the Certificate of Designation was filed on June 24, 2020.

  

As of September 30, 2020 and December 31, 2019, there were 1,000 shares of Series C Preferred Stock outstanding.

 

Common Stock

 

The Company is authorized to issue 500,000,000 shares of common stock, par value $0.001 per share. As of September 30, 2020 and December 31, 2019, there were 493,726,405 and 384,266,948 shares of common stock issued and outstanding, respectively.

 

The following common stock transactions were recorded during the nine months ended September 30, 2020:

 

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 common shares contributed of $69 with a corresponding increase in additional paid in capital.

  

During the nine months ended September 30, 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 elimination 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 common shares issued of $72,369 and additional paid in capital was increased by $298,386.

 

NOTE 12 – WARRANTS

  

A summary of the Company’s warrant activity during the nine months ended September 30, 2020, is presented below:

 

    Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2019     3,342,376,365     $ 0.00265       2.96     $ 8,791,956  
Grants     13,819,650,911       0.00040                  
Exercised     -       -                  
Expired/Canceled     (325,000 )     0.73077                  
Outstanding at September 30, 2020     17,161,702,276     $ 0.00050       2.21     $ 27,439,900  
Exercisable at September 30, 2020     17,161,702,276     $ 0.00050       2.21     $ 27,439,900  

 

Exercise Price   Warrants
Outstanding
    Weighted Avg.
Remaining
Life
    Warrants
Exercisable
 
$0.0001 – 0.25     17,161,137,274       2.21       17,161,137,274  
0.26 – 0.50     465,002       0.93       465,002  
0.76 – 1.00     100,000       0.29       100,000  
      17,161,702,276       2.21       17,161,702,276  

 

18

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

The aggregate intrinsic value of outstanding stock warrants was $27,439,900, based on warrants with an exercise price less than the Company’s stock price of $0.002 as of September 30, 2020, 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”) and our 2018 Equity Incentive Plan in June 2018 (the “2018 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, 2020, the Company had granted an aggregate of 64,310,000 securities under the Plans, with 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.

 

The fair value of all options that vested during the nine months ended September 30, 2020 and 2019 was $0 and $14,000, respectively. Unrecognized compensation expense of $0 at September 30, 2020 will be expensed in future periods.

 

A summary of the Company’s stock option activity during the nine months ended September 30, 2020, is presented below:

 

    Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2019     27,621,765     $ 0.49       7.49     $          -  
Grants     -                          
Exercised     -                          
Expired/Canceled     -                          
Outstanding at September 30, 2020     27,621,765     $ 0.49       6.74     $ -  
Exercisable at September 30, 2020     27,621,765     $ 0.49       6.74     $ -  

 

Exercise Price   Number of
Options
    Remaining Life
In Years
    Number of Options
Exercisable
 
$0.01 – 0.25     13,306,786       7.51       13,306,786  
0.26 – 0.50     1,939,631       6.51       1,939,631  
0.51 – 0.75     1,820,112       5.93       1,820,112  
0.76 – 1.00     9,926,072       5.96       9,926,072  
1.01 – 2.00     629,164       5.85       629,164  
      27,621,765       6.74       27,621,765  

  

19

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

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 $0.0020 as of September 30, 2020, which would have been received by the option holders had those option holders exercised their options as of that date.

 

NOTE 14 – EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted earnings (loss) per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of: (i) shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method, and (ii) shares issuable upon conversion of convertible notes. The Company calculated the potential diluted earnings per share in accordance with ASC 260, as follows:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
                         
Numerator:                                
Net income (loss) (numerator for basic and diluted earnings (loss) per share)   $ 64,679,222     $ (23,550,345 )   $ (47,402,959 )   $ (26,338,254 )
                                 
Weighted average shares outstanding (denominator for basic earnings (loss) per share)     1,401,226,219       650,391,047       1,387,478,585       337,350,454  
                                 
Effects of dilutive securities:                                
Assumed exercise of warrants, treasury stock method     15,058,062,718       -       -       -  
Assumed conversion of convertible notes     23,739,459,336       -       -       -  
Weighted average dilutive potential common shares     38,797,522,054       -       -       -  
                                 
Denominator for diluted earnings (loss) per share - weighted average shares and assumed potential common shares     40,198,748,273       650,391,047       1,387,478,585       337,350,454  
                                 
Basic earnings per share   $ 0.05     $ (0.04 )   $ (0.03 )   $ (0.08 )
                                 
Diluted earnings per share   $ -     $ (0.04 )   $ (0.03 )   $ (0.08 )

 

The following securities were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:

 

    September 30,     September 30,  
    2020     2019  
Common shares issuable upon conversion of convertible notes     -       1,456,478,815  
Options to purchase common shares     27,621,765       27,621,765  
Warrants to purchase common shares     12,015,002       2,517,052,238  
Common shares issuable upon conversion of preferred stock     1,000,000       1,131,613,184  
Total potentially dilutive shares     40,636,767       5,132,766,002  

 

NOTE 15 – SUBSEQUENT EVENTS

 

The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued.

 

On September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Isaac Dietrich, an officer and director of the Company, in connection with the Power Up Notes, alleging that the defendants failed to appear and did not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer. On November 19, 2020, Power Up’s motion to enter a default judgment was granted.

 

On November 25, 2020, the Company entered into a securities purchase agreement with an accredited investor for the sale of 3.3 shares of the Company’s newly-created Series X Convertible Preferred Stock, par value $0.0001 per share, resulting in aggregate proceeds of $66,000. The purchase and issuance of such shares of Series X Preferred Stock closed on December 1, 2020. 

 

20

 

 

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.

 

COVID-19 Pandemic

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus, COVID-19 originating in Wuhan, China (and the risks to the international community as the virus spread globally beyond its point of origin). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report on Form 10-Q. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. 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 2020.

 

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 2020.

 

Overview

 

MassRoots, Inc. was formed in April 2013 and over the past seven years has partnered with numerous cannabis-related brands to advertise products to its broad following across its website, MassRoots.com, and social media accounts. Management believes that our YouTube Channel has one of the largest followings in the regulated cannabis industry with more than 265,000 subscribers while our Instagram account is followed by 387,000 users. Additionally, MassRoots has 920,000 opt-in email subscribers, and 172,500 followers on our verified Twitter account.

  

For much of our history, MassRoots has focused on building a technology platform for the cannabis industry. As part of our marketing strategy, we garnered a significant following across web, social media, and email channels that was highly successful at driving users to our platform.

 

While our long-term goal remains building a technology platform for the cannabis industry, we believe it will likely take significant capital to do so. Therefore, we believe it is in the best interests of our shareholders to focus on monetizing our existing media channels over the coming months with the goal of generating positive cash-flows from operations.

 

We are focused on monetizing our audience through product placements, display ads, and daily deals.

 

Competitors

 

We compete with other cannabis platforms such as WeedMaps and Leafly, which provide news and other information related to the cannabis industry. We believe our primary competitive advantage is the community and audience we have established, along with the data we have cultivated on key cannabis markets.

 

The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. In order to generate meaningful revenues, our technologies must be fully developed, gain market recognition and acceptance and develop a critical level of successful sales and product installations. In addition, management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding through equity or debt financing to adequately support research and development efforts, protect intellectual property, form relationships with strategic partners and provide for working capital and general corporate purposes. There can be no assurance that the Company will be successful in achieving its plans as set forth above.

Our costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for product development and commercialization activities, and administration, travel, legal and accounting expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly-traded technology company. We currently have 3 full-time employees. Because using third party expertise and resources is more efficient than maintaining full time resources, we also expect to incur consulting expenses related to technology development and some administrative, sales and legal functions commensurate with our current levels.

 

21

 

 

The amount that we spend for any specific purpose may vary significantly from quarter to quarter, and could depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions, and changes in or revisions to our sales and marketing strategies.

 

Research, development, and commercial acceptance of new technologies are, by their nature, unpredictable. Although we undertake development and commercialization efforts with reasonable diligence, there can be no assurance that the net proceeds from our securities offerings will be sufficient to enable us to develop our technology to the extent needed to create future sales to sustain operations. If the net proceeds from these offerings are insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual or other property, or other alternatives.

 

We cannot assure that our technologies will be accepted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore, we have no committed source of financing and we cannot assure that we will be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to scale back our development plans by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, our operations. 

 

For the Three Months Ended September 30, 2020 and 2019

 

    For the three months ended  
    Sept 30,
2020
    Sept 30,
2019
    $
Change
    %
Change
 
Revenue   $ 2,316     $ 909     $ 1,407       154.7 %
                                 
Operating Expenses     208,238       1,122,617       (914,379 )     (81.4 )%
                                 
Loss from Operations     (205,922 )     (1,121,708 )     915,786       (81.6 )%
                                 
Other Income (Expense)     64,885,144       (22,428,637 )     87,313,781       389.3 %
                                 
Net Income (Loss) Available to Common Stockholders   $ 64,679,222     $ (23,550,345 )   $ 88,229,567       374.6 %

  

Revenues

 

For the three months ended September 30, 2020 and 2019, we generated revenues of $2,316 and $909, respectively, an increase of $1,407 primarily due to the relaunch of product placements on the Company’s YouTube channel.

 

Operating Expenses

 

For the three months ended September 30, 2020 and 2019, our operating expenses were $208,238 and $1,122,617, respectively, a decrease of $914,379. This decrease was attributable to a decrease in payroll and related expenses of $88,930 due to reduction in the number of employees, as payroll and related expenses decreased to $63,879 for the three months ended September 30, 2020 from $152,809 for same period in 2019. Advertising increased to $43,020 for the three months ended September 30, 2020 from $2,967 for the same period in 2019, an increase of $40,053. For the three months ended September 30, 2020 and 2019, the Company recorded amortization of software costs of $0 and $12,849, respectively, a decrease of $12,849. This is primarily a result of the Company not incurring any software development costs. Other general and administrative expenses decreased by $473,488 from $574,677 for the three months ended September 30, 2019, to $101,189 for the three months ended September 30, 2020. This reduction was attributable to lower overhead costs for office expenses, legal fees, rent expense and contractor services for the three months ended September 30, 2020 as compared to the same period in 2019. 

 

Loss from Operations

   

During the three months ended September 30, 2020, we incurred losses of $205,922 from operations, as compared to losses of $1,121,708 during the same period in 2019, a difference of $915,786, for the reasons stated above.

 

Other Income (Expense)

 

For the three months ended September 30, 2020 and 2019, the Company recorded interest expense of $1,602,204 and $1,546,805, respectively, primarily related to Company’s convertible notes. The Company recorded a $0 loss and $248,022 loss on the conversion of convertible notes payable for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020 and 2019, the Company recorded a $66,572,635 gain and a $15,050,821 loss, respectively, on the change in fair value of derivative liabilities for the authorized share shortfall. For the three months ended September 30, 2020 and 2019, the Company recorded $85,287 loss and $94,534 gain, respectively, of changes in the fair value of the derivative liability for the authorized shares shortfall.

 

Net Income (Loss) Available to Common Stockholders

 

For the three months ended September 30, 2020, we had net income of $64,679,222, as compared to a net loss of $23,550,345 for the same period in 2019, an increase of $88,229,567 for the reasons discussed above.

 

22

 

 

For the Nine Months Ended September 30, 2020 and 2019

 

    For the nine months ended  
    Sept 30,
2020
    Sept 30,
2019
    $
Change
    %
Change
 
Revenue   $ 2,316     $ 23,658     $ (21,342 )     (90.2 )%
                                 
Operating Expenses     696,357       2,884,121       (2,187,764 )     (75.9 )%
                                 
Loss from Operations     (694,041 )     (2,860,463 )     2,166,422       75.7 %
                                 
Other Income (Expense)     (46,708,918 )     (23,477,791 )     (23,231,127 )     98.9 %
                                 

Net Loss Available to Common Stockholders

  $ (142,405,892 )   $ (94,457,638 )   $ (47,948,254 )     50.8 %

 

Revenues

 

For the nine months ended September 30, 2020 and 2019, we generated revenues of $2,316 and $23,658, respectively, a decrease of $21,342 primarily due to service interruptions to both the Company’s website and production of content.

 

Operating Expenses

 

For the nine months ended September 30, 2020 and 2019, our operating expenses were $696,357 and $2,884,121, respectively, a decrease of $2,187,764. This decrease was attributable to a decrease in stock-based compensation of $212,700 from $212,700 for the nine months ended September 30, 2019 to $0 for the same period in 2020. There was a decrease in payroll and related expenses of $255,299 due to reduction in the number of employees as payroll and related expenses decreased to $239,770 for the nine months ended September 30, 2020 from $495,069 for same period in 2019. Advertising expense increased to $43,020 for the nine months ended September 30, 2020 from $39,332 for the same period in 2019, an increase of $3,688. For the nine months ended September 30, 2020 and 2019, the Company recorded amortization of software costs of $0 and $38,549, respectively, a decrease of $38,549. This is primarily a result of the Company not incurring any software development costs. Other general and administrative expenses decreased by $1,124,709 from $1,538,126 for the nine months ended September 30, 2019 to $413,417 for the nine months ended September 30, 2020. This reduction was attributable to lower overhead costs for office expenses, legal fees, rent expense and contractor services for the nine months ended September 30, 2020 as compared to the same period in 2019. 

 

Loss from Operations

  

During the nine months ended September 30, 2020, we incurred losses of $694,041 from operations, as compared to losses of $2,860,463 during the same period in 2019, a difference of $2,166,422, for the reasons stated above.

 

Other Income (Expense)

 

For the nine months ended September 30, 2020 and 2019, the Company recorded interest expense of $3,607,210 and $2,136,983, respectively, primarily related to Company’s convertible notes. The Company recorded a gain of $882 and a loss of $674,099 on the conversion of convertible notes payable for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded gains of $303,593 and $61,635, respectively, of the change in fair value of derivative liabilities. For the nine months ended September 30, 2020 and 2019, the Company recorded $43,406,183 and $15,050,821, respectively, of changes in the fair value of the derivative liability for the authorized shares shortfall.

 

23

 

 

Net Loss Available to Common Stockholders

 

For the nine months ended September 30, 2020 and 2019, we had net losses of $142,405,892 and $94,457,638, respectively, an increase of $47,948,254 for the reasons discussed above.

 

Liquidity and Capital Resources

 

Net cash used in operations for the nine months ended September 30, 2020 and 2019 was $717,062 and $1,389,212, respectively. This $672,150 decrease was primarily caused by a decrease in stock-based compensation (non-cash items), an increase in interest and amortization of debt discount, and a decrease in accounts payable and accrued expenses.  Net cash used in operations for the nine months ended September 30, 2019 was primarily based on the utilization of $370,500 in advances to COWA Science Corporation, net of repayments, and the loss for the nine months ended September 30, 2019, partially offset by the increase in stock-based compensation (non-cash item), along with increases in accounts payable and accrued payroll. 

 

Net cash provided by investing activities for the nine months ended September 30, 2020 and 2019 was $0 and $90,983, respectively.

 

Net cash provided by financing activities for the nine months ended September 30, 2020 and 2019 was $716,592 and $1,271,300, respectively. During the nine months ended September 30, 2020, these funds were derived mainly from proceeds related to the issuance of convertible and non-convertible notes. During the nine months ended September 30, 2019, net cash provided by financing activities was derived from the issuance of convertible notes, advances, sales of preferred shares, and exercise of warrants. 

 

Capital Resources

 

As of September 30, 2020, the Company had cash of $650 and working capital deficit (current liabilities in excess of current assets) of $83,791,130. During the nine months ended September 30, 2020, net cash used in operating activities was $717,062. 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.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2020, we did not have any off-balance sheet arrangements.

 

24

 

 

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

As a “smaller reporting company” we are not required to provide the information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon such evaluation, the Company’s CEO (the principal executive officer) and CFO (the principal financial officer) concluded that the Company’s disclosure controls and procedures as of September 30, 2020 were not effective.

 

Due to identified control deficiencies regarding the lack of segregation of duties and the need for a stronger internal control environment, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report. Specifically, the Company’s controls and procedures were ineffective because the Company did not have an adequate process established to ensure appropriate levels of review of accounting and financial reporting matters, which resulted in the Company’s closing process not identifying all required adjustments and disclosures in a timely fashion. The Company expects that it will need to hire accounting personnel with the requisite knowledge to improve the levels of review of accounting and financial reporting matters. The Company may experience delays in doing so and any such additional employees would require time and training to learn the Company’s business and operating processes and procedures. For the near-term future, until such personnel are in place, this will continue to constitute a material weakness in the Company’s disclosure controls and procedures that could result in material misstatements in the Company’s financial statements not being prevented or detected.

 

To address the material weaknesses, the Company performed additional analysis and other procedures in an effort to ensure its financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States. Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

 

The Company’s principal executive officer and principal financial officer do not expect that the Company’s disclosure controls and procedures or its internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during its most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

25

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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 previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on July 16, 2020, our Quarterly Reports on Form 10-Q, for the quarters ended June 30, 2020 and March 31, 2020, as filed with the SEC on September 4, 2020, and as otherwise set forth herein, 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.

 

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 alleges, 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. In addition, the complaint alleges, among other things, that Mr. Dietrich took affirmative steps to deliberately cause the Company to breach its financial obligations. As a result of the foregoing, Power Up has requested: (i) the greater of $312,000 and the “parity value” as such term is defined in the Power Up Notes together with $2,000 per day until the Company issues shares upon conversion of the Power Up Notes together with applicable interest thereon; (ii) $165,000 as a result of the misrepresentations; (iii) an amount of lost profits to be determined by the court, but in no event less than $312,000; (iv) $312,000 as against Mr. Dietrich; (v) an award for reasonable legal fees and costs of litigation; (vi) a judgment awarding specific performance under the Power Up Notes; and (vii) the costs and disbursement of the action, pre-judgment interest, default interest and such other further relief as the court deems proper. On August 24, 2020, the Supreme Court of the State of New York, County of Nassau adjourned a hearing on Power Ups motion for default judgment with respect to the complaint filed by Power Up on October 11, 2019 against the Company and Mr. Dietrich until September 14, 2020. On September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Mr. Dietrich, alleging that the defendants failed to appear and did not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer.

 

ITEM 1A. RISK FACTORS

 

As a “smaller reporting company,” we are not required to provide the information required by this Item 1A. Please see the Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on July 16, 2020

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company does not have enough authorized and unissued common shares to convert all of the convertible promissory notes into common shares. 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 The Company has recorded the full value of the principal, default penalties, and interest as current liabilities, as fully described in “Note 9 - Convertible Notes Payable” in the Company’s notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q. The amount of principal in default pursuant to the convertible notes is $7,927,206.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 1.01 – Entry into a Material Definitive Agreement.” of Form 8-K.

 

On November 25, 2020, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Purchaser”) for the sale of 3.3 shares of the Company’s newly-created Series X Convertible Preferred Stock, par value $0.0001 per share (the “Series X Preferred Stock”), resulting in aggregate proceeds of $66,000. The purchase and issuance of such shares of Series X Preferred Stock closed on December 1, 2020 (the “Initial Closing Date”).

 

26 

 

 

The Company may hold one or more subsequent closings to sell up to an additional 96.7 shares of Series X Preferred Stock pursuant to securities purchase agreements substantially in the form of the Purchase Agreement (the “Financing”). Each investor in any subsequent closing will be required to represent that, at the time of the applicable closing, it (i) has a substantive, pre-existing relationship with the Company and (ii) did not independently contact the Company as a result of general solicitation, any press release or any other public disclosure disclosing the material terms of the Financing.

 

The Purchase Agreement contains certain customary representations, warranties, and covenants for transactions of this type including, but not limited to, the below:

 

Participation in Future Financing. The Purchase Agreement provides for participation by the Purchaser in Subsequent Financings (as defined below) pursuant to the Series X COD (as defined below). 

 

Moratorium on Subsequent Equity Sales. Subject to certain exceptions, until 120 days after the Initial Closing Date, neither the Company nor any of its subsidiaries will issue, enter into any agreement to issue, or announce the issuance or proposed issuance of any shares of the Company’s common stock (“Common Stock”) or any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Stock (“Common Stock Equivalents”).

 

Moratorium on Certain Transactions. Subject to certain exceptions, until the date that is the eighteenth (18) month anniversary of the Initial Closing Date, the Company will not, without the consent of the holders of a majority of the outstanding Series X Preferred Stock, enter into any Variable Rate Transaction (as defined in the Purchase Agreement).

 

Most Favored Nation. Subject to certain exceptions, until the earlier of (i) the date that is the eighteenth (18) month anniversary of the Initial Closing Date or (ii) such time as the Purchaser does not hold any Series X Preferred Stock (or Common Stock issued pursuant to the conversion of the Series X Preferred Stock), in the event that the Company issues or sells any Common Stock or Common Stock Equivalents, if the Purchaser then holding Series X Preferred Stock (or Common Stock issued pursuant to the conversion of the Series X Preferred Stock) purchased under a Purchase Agreement reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to such investors than the terms and conditions granted to the Purchaser pursuant to the Purchase Agreement, upon notice to the Company by the Purchaser, the Company shall amend the terms of the Purchase Agreement so as to give the Purchaser the benefit of such more favorable terms or conditions.

 

Amendment to Certificate of Incorporation. Pursuant to the Purchase Agreement, within forty-five (45) days of the Initial Closing Date, the Company shall file with the SEC a preliminary proxy statement in accordance with Regulation 14A promulgated under the Exchange Act, notifying the Company’s stockholders of a special meeting to amend the Company’s Certificate of Incorporation to increase the Company’s authorized shares of Common Stock.

 

Each share of Series X Preferred Stock is convertible into such number of shares of the Company’s Common Stock as determined by dividing (i) the Series X Conversion Amount by (ii) the Series X Conversion Price. The “Series X Conversion Amount” means, with respect to each share of Series X Preferred Stock, as of the applicable date of determination, the sum of (1) $20,000 per share of Series X Preferred Stock, subject to adjustment (the “Series X Stated Value”), plus (2) with respect to each share of Series X Preferred Stock, all dividends, whether declared or not, on such share of Series X Preferred Stock (the “Series X Additional Amount”). The “Series X Conversion Price” means $0.002, subject to adjustment. Subject to limited exceptions, a holder of Series X Preferred Stock will not have the right to convert any portion of the Series X Preferred Stock to the extent that, after giving effect to the conversion, the holder, together with its affiliates, would beneficially own in excess of 4.99% (subject to adjustment to up to 9.99% solely at the holder’s discretion upon 61 days’ prior notice to the Company) of the number of shares of Common Stock outstanding immediately after giving effect to its conversion.. Until the filing and effectiveness of an amendment to the Company’s Certificate of Incorporation to increase the number of shares of the Company’s Common Stock that the Company is authorized to issue with the Secretary of State of the State of Delaware, the Series X Preferred Stock will not be convertible for any reason.

 

27 

 

 

The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the form of Purchase Agreement, a copy of which is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 3.02 – Unregistered Sales of Equity Securities.” and “Item 5.03 – Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.” of Form 8-K.

 

Reference is made to the disclosures set forth above for the purpose of providing the disclosure required under “Item 1.01 – Entry into a Material Definitive Agreement.” of Form 8-K, which are hereby incorporated herein by reference.

 

33,000,000 shares of Common Stock are issuable upon the conversion of the Series X Preferred Stock sold pursuant to the Purchase Agreement in accordance with and subject to the limitations contained in the Series X COD.

 

The shares of Series X Preferred Stock have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were offered and issued in reliance on the exemption from the registration requirements under the Securities Act afforded by Section 4(a)(2) of the Securities Act, based on the fact that the Investor is an “accredited investor,” as such term is defined in Rule 501 of Regulation D, in a transaction not involving a public offering.

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 3.03 – Material Modification to Rights of Security Holders.” of Form 8-K.

 

In connection with the Financing, on November 23, 2020, the Company filed the Certificate of Designations, Preferences and Rights of the Series X Convertible Preferred Stock (the “Series X COD”) with the Delaware Secretary of State.

 

Pursuant to the Series X COD, 100 shares of the Company’s blank check preferred stock have been designated as “Series X Preferred Stock.” The Series X Preferred Stock have the following rights, preferences, powers, privileges and restrictions, qualifications and limitations:

 

Dividends. The holders of Series X Preferred Stock shall have no dividend rights except as may be declared by the Company’s board of directors.

 

Ranking. The Series X Preferred Stock rank senior to the Company’s Common Stock and preferred stock with respect to the payment of dividends and distributions of the assets of the Company upon liquidation, dissolution or winding up of the Company.

 

Voting. Except as otherwise required by law, or as provided in the section entitled “Protective Provisions,” shares of Series X Preferred Stock are not entitled to vote on any matter. As to all matters for which voting by class is specifically required by law, each outstanding share of Series X Preferred Stock is entitled to one vote.

 

Protective Provisions. Except where the vote or written consent of the holders of a greater number of shares is required by law, without first obtaining the affirmative vote or the written consent of a majority of the outstanding Series X Preferred Stock, including the Required Holder (as defined in the Series X COD), the Company will not: (a) amend or repeal any provision of, or add any provision to, its Certificate of Incorporation or bylaws, or file any certificate of designations or articles of amendment of any series of shares of preferred stock, if such action would adversely alter or change in any respect the preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series X Preferred Stock; (b) increase or decrease (other than by conversion) the authorized number of Series X Preferred Stock; (c) create or authorize (by reclassification or otherwise) any new class or series of shares that has a preference over or is on a parity with the Series X Preferred Stock with respect to dividends or the distribution of assets on the liquidation, dissolution or winding up of the Company; (d) pay dividends or make any other distribution on any shares of any capital stock of the Company junior in rank to the Series X Preferred Stock; (e) issue any Series X Preferred Stock other than as provided in the Series X COD; or (f) circumvent a right of the Series X Preferred Stock.

 

28 

 

 

Participation in Future Financing. Except for certain exempt issuances, from the Initial Closing Date until the eighteen (18) month anniversary of the Initial Closing Date, upon any issuance by the Company of Common Stock or Common Stock Equivalents for cash consideration, indebtedness or a combination of such in a transaction exempt from registration under the Securities Act (a “Subsequent Financing”), the holders of the Series X Preferred Stock will have the right to participate in an amount equal to an aggregate of thirty percent (30%) of the Subsequent Financing on the same terms, conditions and price provided for in the Subsequent Financing. In addition, the Purchaser has the right to exchange the Series X Preferred Stock as consideration in a Subsequent Financing.

 

Redemption. Upon receipt of a conversion notice for Series X Preferred Stock from a holder, the Company shall have the right (but not the obligation) to redeem all or part of the Series X Preferred Stock which the holder is seeking to convert at a price per share equal to the product of 125% of the (1) Series X Stated Value plus (2) the Series X Additional Amount.

 

Purchase Rights If at any time the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to all or substantially all of the record holders of any class of Common Stock (the “Purchase Rights”), then each holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of all the Series X Preferred Stock (without taking into account any limitations or restrictions on the convertibility of the Series X Preferred Stock) held by such holder immediately prior to the date on which a record is taken for the grant, issuance or sale of such Purchase Rights.

 

Price Protection. Except for certain exempt issuances, in the event the Company issues or sells any securities, including options or convertible securities (or amends any outstanding securities of the Company), at an effective price of, or with an exercise or conversion price of less than the Series X Conversion Price, then upon such issuance or sale, the Series X Conversion Price shall be reduced to the sale price or the exercise or conversion price of the securities issued or sold.

 

The foregoing description of the Series X COD is not complete and is qualified in its entirety by reference to the full text of the Series X COD, a copy of which is attached hereto as Exhibit 3.2 and is incorporated herein by reference.

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 8.01 – Other Events.” of Form 8-K.

 

On September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Isaac Dietrich, an officer and director of the Company, in connection with certain defaults of the Power Up Notes, alleging that the defendants failed to appear and did not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer. On November 19, 2020, Power Up’s motion to enter a default judgment was granted.

 

29 

 

 

ITEM 6. EXHIBITS

 

(b) Exhibit Index

 

No.   Description of Exhibit 
3.1*   Certificate of Designations, Preferences and Rights of the Series X Convertible Preferred Stock.
10.1*#   Form of Series X Securities Purchase Agreement.
31.1*   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.
**

Furnished herewith.

# Schedules, exhibits and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. the Company hereby undertakes to furnish copies of such omitted materials supplementally upon request by the SEC.

30 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  MASSROOTS, INC.
     
Date: December 18, 2020 By: /s/ Isaac Dietrich
    Isaac Dietrich, Chief Executive Officer
(Principal Executive Officer)
     
Date: December 18, 2020 By: /s/ Jesus Quintero
    Jesus Quintero, Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

31

 

 

Massroots (PK) (USOTC:MSRT)
Historical Stock Chart
From Jun 2021 to Jul 2021 Click Here for more Massroots (PK) Charts.
Massroots (PK) (USOTC:MSRT)
Historical Stock Chart
From Jul 2020 to Jul 2021 Click Here for more Massroots (PK) Charts.