UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2020

 

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

 

For the transition period from ________ to _________

 

Commission File Number: 000-55431

 

 

MASSROOTS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   46-2612944
(State or 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)

 

(303) 816-8070

(Registrant’s telephone number, including area code)

 

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

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value per share

 

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes     No 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes     No 

 

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 definition 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

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

 

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,838,262.

 

Number of shares of common stock outstanding as of April 14, 2021 was 498,174,656.

 

Documents Incorporated by Reference

 

Portions of the Registrant’s proxy statement for our 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 

 

 

 

 

  

MASSROOTS, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2020
TABLE OF CONTENTS

 

    Page  
PART I   1
Item 1. Business 1
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 24
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Mine Safety Disclosures 24
     
PART II   25
Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities 25
Item 6. Selected Financial Data 25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31
Item 9A. Controls and Procedures 32
Item 9B. Other Information 33
     
PART III   35
Item 10. Directors, Executive Officers and Corporate Governance 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 35
Item 13. Certain Relationships and Related Transactions and Director Independence 35
Item 14. Principal Accounting Fees and Services 35
     
PART IV   36
Item 15. Exhibits and Financial Statement Schedules 36

 

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FORWARD-LOOKING STATEMENTS

 

Statements in this Annual Report on Form 10-K may be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).

 

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” and elsewhere in this Annual Report on Form 10-K. 

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K or to reflect the occurrence of unanticipated events, except as required by law.

 

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PART I

 

Throughout this Annual Report on Form 10-K, the “Company,” “MassRoots,” “we,” “us,” and “our” refers to MassRoots, Inc. and its subsidiaries.

 

ITEM 1. BUSINESS 

 

Overview

 

MassRoots, Inc. was formed in April 2013 as a technology platform for the cannabis industry. In March 2021, we relaunched our website, MassRoots.com, which aims to enable cannabis consumers to find the best products, connect with other enthusiasts, and deliver fresh content that both delights and informs our audience. Additionally, we plan to monetize our YouTube Channel, which has 273,000 subscribers, through product placements and sponsorships. Management believes that our YouTube Channel has one of the largest followings in the regulated cannabis industry while our Instagram account is followed by 378,000 users.

 

Background

 

We were incorporated in the state of Delaware on April 26, 2013 as a technology platform for the cannabis industry.

 

Our principal executive office is located at 1560 Broadway, Office 17-105, Denver, Colorado 80202, and our telephone number is (720) 240-9546.

 

On January 25, 2017, we consummated a reverse triangular merger (the “Whaxy Merger”) pursuant to which we acquired all of the outstanding common stock of DDDigtal Inc (“DDDigtal”), a Colorado corporation. Upon closing of the Whaxy Merger, each share of DDDigtal’s common stock was exchanged for such number of shares of our common stock (or a fraction thereof) based on an exchange ratio equal to approximately 5.273-for-1, such that 1 share of our common stock was issued for every 5.273 shares of DDDigtal’s common stock. At the closing of the Whaxy Merger, all shares of common stock of our newly-formed merger subsidiary formed for the sole purpose of effectuating the Whaxy Merger, were converted into and exchanged for one share of common stock of DDDigtal, and all shares of DDDigtal’s common stock that were outstanding immediately prior to the closing of the Whaxy Merger were automatically cancelled and retired. Upon the closing of the Whaxy Merger, DDDigtal continued as our surviving wholly-owned subsidiary, and the merger subsidiary ceased to exist.

 

On July 13, 2017, we consummated a reverse triangular merger (the “Odava Merger”) pursuant to which we acquired all of the outstanding common stock of Odava Inc (“Odava”), a Delaware corporation. Upon closing of the Odava Merger, each share of Odava’s common stock was exchanged for such number of shares of our common stock (or a fraction thereof), based on an exchange ratio equal to approximately 4.069-for-1, such that 1 share of our common stock was issued for every 4.069 shares of Odava’s common stock. At the closing of the Odava Merger, all shares of common stock of our newly-formed merger subsidiary formed for the sole purpose of effectuating the Odava Merger, were converted into and exchanged for one share of common stock of Odava, and all shares of Odava’s common stock that were outstanding immediately prior to the closing of the Odava Merger automatically cancelled and retired. Upon the closing of the Odava Merger, Odava continued as our surviving wholly-owned subsidiary, and the merger subsidiary ceased to exist.

 

Our Products and Services

 

Our website, MassRoots.com, which aims to enable cannabis consumers to find the best products, connect with other enthusiasts, and deliver fresh content that both delights and informs our audience.

 

User Growth and Product Distribution Channels

 

The MassRoots platform is accessible through desktop and mobile web browsers by navigating to www.massroots.com.

 

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Blockchain Technologies

 

MassRoots Blockchain Technologies, Inc. (“MassRoots Blockchain”) was formed in December 2017 as a wholly-owned subsidiary of the Company to continue the Company’s efforts in exploring how new technologies may be utilized in the cannabis industry. Initially, we are focusing on blockchain technology for several reasons, including, but not limited to:

 

  that it may enable better tracking of impressions, views, and interactions with posts, advertisements and dispensary listings;

 

  that it has the potential to streamline the collection and organization of data while eliminating traditional security risks;

 

  that it may provide a greater degree of reliability and accuracy with respect to data;

 

  that it may allow us to implement an intelligent newsfeed to deliver high-quality and more relevant content to our audience;

 

  that it may enable the development of contracts that are automatically executed when certain parameters are met;

 

  that it has the potential to reduce friction in the cannabis market-place and save businesses valuable resources; and

 

  that it may provide greater transparency to government regulators.

 

In December 2017, we commenced the re-development of the MassRoots Business Portal, a platform where dispensaries and other industry participants, such as producers and other ancillary businesses, will be able to advertise their goods and services. To date, we have used approximately $370,000 for the initial development of the MassRoots Business Portal, including features that allow for tracking of advertising impressions, enhanced targeting and serving of advertisements, as well as a program that would be designed to reward audience for providing high quality reviews on cannabis strains and products. The development and implementation of these any other features, including the possible use of digital instruments, is subject to additional funding, is currently contemplated to be made within the MassRoots App and platform, and is intended to generate the growth of Users of the MassRoots platform and stimulate the MassRoots platform’s overall activity.

 

All initial development has been outsourced to third party development firms and consultants. Specifically, we have outsourced the following services: software development services, including, but not limited to, web and mobile development services, blockchain development and integration services, and infrastructure development, automation, support and management services. As stated in “Risk Factors,” the development of features based upon the use of blockchain technology is subject to numerous risks and uncertainties, and there can be no assurance as to when, or if, any such features will be successfully developed, or that if developed, that they will be accepted or adopted. Further, the likelihood of our development and implementation of features based upon new technology must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the inception and development of a product or service based upon any such relatively new and developing technology.

 

While we intend to devote resources to exploring the feasibility of developing these or other solutions, there can be no assurances that we will be successful in implementing such solutions, that any such solutions will be economically viable, or that any of them will result in the generation of User interest, participation or revenue.

 

We currently anticipate that we will need to raise additional funds to continue to explore and develop potential uses and applications of blockchain technologies and uses for our business and other businesses in the cannabis industry; however, no assurance can be given that additional financing will be available on terms favorable to us, or at all.

 

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Market Conditions

 

MassRoots is poised to take advantage of two rapidly growing industries: cannabis and mobile technology.

 

Cannabis Market Growth and Current Trends

  

On January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo which rescinded the Cole Memo (as described below) which was adopted by the Obama administration as a policy of non-interference with marijuana-friendly state laws.

 

The Cole Memo

 

On August 29, 2013, Deputy Attorney General James Cole issued a memo (the “Cole Memo”) in response to certain states passing measures to regulate the medical and adult-use of cannabis. In the Cole Memo, the Department of Justice made clear that marijuana remains an illegal drug under the Controlled Substances Act and that federal prosecutors will continue to aggressively enforce the statute. The Department of Justice identified eight enforcement areas that federal prosecutors should prioritize. Outside of such enforcement priorities, the federal government has traditionally relied on state and local authorities to address marijuana activity. The Cole Memo established several basic guidelines by which state-regulated cannabis businesses could operate to minimize the risk of intervention and enforcement by the Department of Justice. The guidelines focused on ensuring that cannabis did not cross state lines, keeping dispensaries away from schools and public facilities and strict-enforcement of state laws by regulatory agencies, among other priorities.

 

The Sessions Memo

 

On January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo (the “Sessions Memo”) on federal marijuana enforcement policy announcing a return to the rule of law and the rescission of previous nationwide guidance by the Department of Justice (including, but not limited to, the Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws enacted by Congress and to follow the well-established principles when pursuing prosecutions related to marijuana activities. These principles include weighing all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.

 

Although the Sessions Memo rescinded the Cole Memo, it is unclear at this time whether the Biden Administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement; however, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could have a material adverse effect on our business.

 

Guidance to Banks Relating to the Marijuana Industry

 

On February 14, 2014, the Department of Justice and the Department of Treasury issued guidance to banks about how to serve the marijuana industry without running afoul of federal regulations. Prior to such guidance, dispensaries were forced to operate on a cash basis, presenting significant security and accounting issues. Although banks have remained reluctant to work with marijuana businesses because of federal prohibition laws, this guidance was a major step in legitimizing and accepting the cannabis industry on a national level. In addition, the adoption of the Joyce Amendment (formerly known as the Rohrabacher-Farr Amendment) (as discussed below) indicates some level of support in Congress for medicinal cannabis, even if its actual effect is still undetermined.

 

For additional information concerning the Cole Memo, the Sessions Member, the Joyce Amendment and regulatory conditions, see the section entitled “Business – Government Regulation.”

 

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Current States with Laws Permitting the Medical or Adult Use of Cannabis 

 

Recreational marijuana is regulated in 15 states and the District of Columbia and medical marijuana is regulated in 33 states and the District of Columbia. In addition, 15 additional states have legalized low-tetrahydrocannabinol (“THC”)/high-cannabidiol (“CBD”) extracts for select medical conditions. The states which have enacted such laws are listed in the following table:

 

STATE   YEAR
PASSED
1. Alaska*   1998
2. Arizona*   2010
3. Arkansas   2016
4. California*   1996
5. Colorado*   2000
6. Connecticut   2012
7. District of Columbia*   2010
8. Delaware   2011
9. Florida   2016
10. Hawaii   2000
11. Illinois*   2013
12. Louisiana   2015
13. Maine*   1999
14. Maryland   2014
15. Massachusetts*   2012
16. Michigan*   2008
17. Minnesota   2014
18. Missouri   2018
19. Montana*   2004
20. Nevada*   2000
21. New Hampshire   2013
22. New Jersey*   2010
23. New Mexico   2007
24. New York*   2014
25. North Dakota   2016
26. Pennsylvania   2016
27. Ohio   2016
28. Oklahoma   2018
29. Oregon*   1998
30. Rhode Island   2006
31. Utah   2018
32. Vermont*   2004
33. Washington*   1998
34. West Virginia   2017

 

* State has enacted laws permitting the adult use of cannabis, in addition to medical use.

   

Public Support for Regulation of Cannabis Increasing

 

A Gallup poll conducted in October 2019 found that 66% of Americans supported regulating the use of cannabis which indicates an increasing trend over the past decade toward public support for cannabis.

 

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Market Conditions that Could Limit Our Business

 

Cannabis is a Schedule I controlled substance under Federal law and, as such, there are several factors that could limit our business operations including, but not limited to:

 

  The Federal government and many private employers prohibit drug use of any kind, including cannabis, even where it is permissible under state law. Random drug screenings and potential enforcement of such employment provisions may significantly reduce the size of the potential cannabis market;

 

  Enforcement of Federal law prohibiting cannabis occurs randomly and often without notice. This could scare many potential investors away from cannabis-related investments and makes it difficult to make accurate market predictions;

 

  On January 4, 2018, the Department of Justice issued the Sessions Memo announcing a return to the rule of law and the rescission of previous guidance documents. The Sessions Memo rescinded the Cole Memo. Although there is no guarantee that additional states will pass measures to regulate cannabis use under state law, the Sessions Memo may further deter states from passing such measures; however, it is unclear at this time whether the the Biden administration will issued new guidance or strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. Furthermore, irrespective of the Sessions Memo, in many states, public support of regulation initiatives may not maintain enough support to pass. This is especially true when a supermajority is needed to pass measures, like in Florida where a state constitutional amendment permitting medical cannabis required 60% approval to pass. Changes due to the Sessions Memo and in voters’ attitudes and turnout have the potential to slow or stop the cannabis regulation movement and potentially reverse recent cannabis regulation victories;

 

  There has been some resistance and negativity as a result of recent cannabis regulation at the state level, especially as it relates to drugged driving. The lack of clearly defined and enforced laws at the state level has the potential to sway public opinion against marijuana regulation; and

 

  In the event that the Federal government does not enforce the Federal law prohibiting cannabis, state laws regarding the regulation of cannabis are being challenged through lawsuits. Lawsuits have been brought by private groups and local law enforcement officials. If these lawsuits are successful, state laws permitting cannabis sales may be overturned which will significantly reduce the size of the potential cannabis market and have a material adverse effect on our business.

 

Please see “Government Regulation” below for additional information.

 

Government Regulation

 

Marijuana is a categorized as a Schedule I controlled substance by the Drug Enforcement Agency and the United States Department of Justice and is illegal to grow, possess and consume under Federal law. However, 33 states and the District of Columbia have passed laws that permit doctors to recommend cannabis for medical-use and 11 of those states and the District of Columbia have enacted laws that regulate the personal-use of cannabis by adults, subject to possession limits. Because doctors are prohibited from prescribing a Schedule I controlled substance, the passage of medical marijuana laws does not necessarily guarantee the implementation of a regulated, commercial system through which patients can purchase cannabis products. This has created an unpredictable business-environment for dispensaries and collectives that operate under certain state laws but in violation of Federal law.

 

Cole Memo

 

On August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States attorneys guiding them to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under certain state laws, so long as:

 

  cannabis is not being distributed to minors and dispensaries are not located around schools and public buildings;

 

  the proceeds from sales are not going to gangs, cartels or criminal enterprises;

 

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  cannabis grown in states where it is legal is not being diverted to other states;

 

  cannabis-related businesses are not being used as a cover for sales of other illegal drugs or illegal activity;

 

  there is not any violence or use of firearms in the cultivation and sale of marijuana;

 

  there is strict enforcement of drugged-driving laws and adequate prevention of adverse health consequences; and

 

  cannabis is not grown, used, or possessed on Federal properties.

 

The Cole Memo was a guide for United States attorneys and did not alter in any way the Department of Justice’s authority to enforce Federal law, including Federal laws relating to cannabis, regardless of state law. As described below, as a result of the issuance of the Sessions Memo by the Department of Justice, on January 4, 2018, the Cole memo was rescinded. Prior to the issuance of the Sessions Memo, we had implemented standard operating procedures and policies to ensure that we were operating in compliance with the Cole Memo. It is unclear at this time whether the Biden administration will issue new guidance or strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement, and we cannot provide assurance that our actions were, are or will be in compliance with the Cole Memo, the Sessions Memo or any other laws or regulations that currently exist or may be amended or adopted in the future.

 

Pursuant to our currently existing Terms and Conditions:

 

  Users must agree that they are located in a state where medical-use or adult-use of cannabis is regulated;

 

  Users must be of age to consume cannabis in their particular state (18 or 21 years old, depending on the state);

 

  Users may only post content that is in compliance with their state’s laws;

 

  Users may not solicit or distribute cannabis through MassRoots unless they are a licensed dispensary;

 

  Posting of any of the following materials to MassRoots is prohibited and will result in account termination:

 

  Posting other drugs or substances, including prescription pain pills;

  

  Posting of any violence or threat of violence;

 

  Posting of any drugged-driving content; and

 

  Posting of any copyright-protected content.

 

We have implemented an aggressive content and account review program to ensure compliance with our Terms and Conditions. Users have the ability to report any status or account that is in violation of our Terms and Conditions and we encourage Users to do so as any illegal content jeopardizes the network for all our Users. When a status or account is reported, the post is automatically removed from the network until further review. A MassRoots employee then reviews the content within 24 hours and either approves it as in compliance within our Terms and Conditions or permanently deletes it and bans the User’s account.

 

In addition, we have implemented geographic restrictions to restrict new Users to our mobile apps to the District of Columbia and the 33 states in which the use of marijuana is permitted.

 

Our business plan includes allowing cannabis dispensaries to advertise on our network, which we believe could be deemed to be aiding and abetting illegal activities, a violation of Federal law. We continue to evaluate the effects of the Sessions Memo; however, it is unclear at this time whether the Biden administration will issue new guidance or will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement, and we cannot provide assurance that we were, are or will be in compliance with the Cole Memo, the Sessions Memo or any other laws or regulations.

 

Joyce Amendment (formerly known as the Rohrabacher-Farr Amendment)

 

On December 16, 2014, H.R. 83 - Consolidated and Further Continuing Appropriations Act, 2015 was enacted and included a provision now known as the “Joyce Amendment” which states:

 

None of the funds made available in this Act to the Department of Justice may be used, with respect to the States of Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Washington, and Wisconsin, to prevent such states from implementing their own state laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

 

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The Joyce Amendment would appear to protect the right of the states to determine their own laws on medical cannabis use; however, the actual effects of the amendment are still unclear. The Joyce Amendment did not remove the federal ban on medical cannabis and cannabis remains regulated as a Schedule I controlled substance. Further, the United States Department of Justice has interpreted the Joyce Amendment as only preventing federal action that prevents states from creating and implementing cannabis laws - not against the individuals or businesses that actually carry out cannabis laws – and has continued to sporadically initiate enforcement actions against individuals or businesses participating in the cannabis industry despite such participation being regulated under state law. As of April 2020, the United States Court of Appeals, Ninth Circuit, has held in support of the Joyce Amendment and stated on at least one occasion that United States Department of Justice was prohibited from spending federal appropriations funds for prosecuting individuals engaged in conduct permitted by state law. In addition, no matter what the interpretation is adopted by the courts, there is no question that the Joyce Amendment does not protect any party not in full compliance with state medicinal cannabis laws.

 

The Joyce Amendment represents one of the first times in recent history that Congress has taken action indicating support of medical cannabis. The Joyce Amendment was renewed by Congress in 2015, 2016, 2017, 2018, 2019 and 2020 and is in effect until September 30, 2021.

 

Sessions Memo

 

On January 4, 2018, Attorney General Jefferson B. Sessions, III issued a memo on federal marijuana enforcement policy announcing a return to the rule of law and the rescission of previous nationwide guidance by the Department of Justice (including, but not limited to, the Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities. These principles include weighing all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. The effect of this memo is to shift federal policy from a hands-off approach adopted by the Obama administration to permitting federal prosecutors across the country to determine how to prioritize resources to regulate marijuana possession, distribution and cultivation in states where marijuana use is legal.

 

While we do not directly harvest or distribute cannabis today, we still may be deemed to be violating federal law, or aiding and abetting the violation of Federal law and may be irreparably harmed by a change in enforcement by the federal or state governments.

 

Although the Sessions Memo rescinded the Cole Memo, it is unclear at this time whether the Biden administration will issue new guidance or will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement; however, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could have a material adverse effect on our business. 

 

Additional Government Regulations

 

We are subject to general business regulations and laws as well as Federal and state regulations and laws specifically governing the Internet and e-commerce. These regulations and laws cover among others, sweepstakes, taxation, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, broadband residential Internet access and the characteristics and quality of services. Any noncompliance with the foregoing laws and regulations may harm our business and results of operations.

 

Competitors

 

We compete with other cannabis information platforms such as WeedMaps and Leafly, which provide information with respect to dispensary locations, strain information, and news relating to the cannabis industry.

 

Recent Developments 

 

Financings and Other Sources of Funding

 

On January 7, 2020, we issued and sold a convertible note in the principal amount of $55,000 (including a $5,000 original issuance discount) to an accredited investor which note matures on July 7, 2020.

 

On March 5, 2020, we issued and sold a convertible note in the aggregate principal amount of $72,600 (including a $6,600 original issuance discount) to an accredited investor which note matures on September 5, 2020.

 

On March 17, 2020, we issued and sold a convertible note in the aggregate principal amount of $17,600 (including a $1,600 original issuance discount) to an accredited investor which note matures on September 17, 2020.

 

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On April 17, 2020, we issued and sold convertible notes in the aggregate principal amount of $330,000 (including an aggregate of $30,000 original issuance discount) to accredited investors which notes mature on October 17, 2020.

 

On May 3, 2020, we received a loan in the principal amount of $50,000 pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP loan matures in May 2022 and bears an interest rate of 1% per annum. The Company has applied for forgiveness of the principal and accrued interest due under the loan.

 

On June 26, 2020, we issued and sold a secured promissory note in the principal amount of $60,000 with 10% annual interest. On the two-year anniversary of the issuance of this note, June 26, 2022, all principal and interest becomes due and payable.

 

On July 8, 2020, we issued and sold a promissory note in the principal amount of $22,911 with 10% annual interest maturing on December 31, 2020.

 

On July 13, 2020, we issued and sold convertible notes in the aggregate principal amount of $110,000 (including an aggregate of $10,000 original issuance discount) to accredited investors which notes mature on January 13, 2021.

 

On August 31, 2020, we issued and sold convertible notes in the aggregate principal amount of $66,000 (including an aggregate of $6,000 original issuance discount) to accredited investors which notes mature on March 1, 2021. 

 

On September 1, 2020, we issued and sold convertible notes in the aggregate principal amount of $49,500 (including an aggregate of $4,500 original issuance discount) to accredited investors which notes mature on March 1, 2021. 

 

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 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.

 

On December 21, 2020, the Company entered into a securities purchase agreement with an accredited investor for the sale 7.5 shares of the Company’s Series X Convertible Preferred Stock, par value $0.0001 per share, resulting in aggregate proceeds of $150,000. The purchase and issuance of such shares of Series X Preferred Stock closed on December 23, 2020.

 

On December 22, 2020, the Company entered into a securities purchase agreement with an accredited investor for the sale 5.25 shares of the Company’s Series X Convertible Preferred Stock, par value $0.0001 per share, resulting in aggregate proceeds of $105,000. The purchase and issuance of such shares of Series X Preferred Stock closed on December 29, 2020.

 

Between December 22 and March 23, 2021, the Company entered into a number of securities exchange agreements with twenty two (22) holders of its equity and debt securities for the total issuance and sale of 659.605674 shares of the Company’s Series Y Convertible Preferred Stock, par value $0.001 per share, resulting in aggregate exchange of 14,896,874,671 warrants to purchase common stock of the Company at $0.0004 per share and the exchange of the promissory notes in the aggregate principal amount and accrued interest totaling $5,947,876.20. The Purchasers constituted a significant portion of warrantholders and debtholders of the Company. See Item 9B. Other Information.

 

Termination of COWA Agreement and Plan of Merger

 

On February 12, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MassRoots Supply Chain, Inc., a wholly-owned subsidiary of the Company (“Merger Subsidiary”), COWA Science Corporation, a Delaware corporation (“COWA”), and Christopher Alameddin, an individual acting solely in his capacity as a stockholder representative pursuant to which Merger Subsidiary was to be merged with and into COWA with COWA surviving the merger as the wholly-owned subsidiary of the Company. On February 24, 2020, we terminated the Merger Agreement as a result of the closing conditions set forth in the Merger Agreement not being satisfied.

 

Intellectual Property

 

MASSROOTS and TOKE are federally registered trademarks of MassRoots, ODAVA is a state registered trademark of MassRoots and RETAIL is a state registered trademark of Odava.

 

Employees and Consultants

 

As of April 12, 2021, MassRoots has 3 full-time employees and 1 full-time independent contractor.

 

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ITEM 1A. RISK FACTORS

 

An investment in our securities involves a high degree of risk. This Annual Report on Form 10-K contains the risks applicable to an investment in our securities. The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our operations. The occurrence of any of these known or unknown risks might cause you to lose all or part of your investment in the offered securities.

  

Risks Relating to Our Business and Industry

  

We have a limited history upon which an evaluation of our prospects and future performance can be made and have no history of profitable operations.

 

We were incorporated in April 2013 and have a limited operating history and our business is subject to all of the risks inherent in the establishment of a new business enterprise. Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with development and expansion of a new business enterprise. We may sustain losses in the future as we implement our business plan. There can be no assurance that we will operate profitably.

 

Since we have a limited operating history, it is difficult for potential investors to evaluate our business.

 

Our limited operating history makes it difficult for potential investors to evaluate our business or prospective operations. As an early-stage company, we are subject to all the risks inherent in the initial organization, financing, expenditures, complications and delays inherent in a new business. Investors should evaluate an investment in us in light of the uncertainties encountered by developing companies in a competitive and evolving environment. Our business is dependent upon the implementation of our business plan. We may not be successful in implementing such plan and cannot guarantee that, if implemented, we will ultimately be able to attain profitability.

 

We will need to obtain additional financing to fund our operations.

 

We will need additional capital in the future to continue to execute our business plan. Therefore, we will be dependent upon additional capital in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise all of the needed additional capital, and we will need to identify potential investors and negotiate appropriate arrangements with them. We may not be able to arrange enough investment within the time the investment is required or that if it is arranged, that it will be on favorable terms. If we cannot obtain the needed capital, we may not be able to become profitable and may have to curtail or cease our operations. Additional equity financing, if available, may be dilutive to the holders of our capital stock. Debt financing may involve significant cash payment obligations, covenants and financial ratios that may restrict our ability to operate and grow our business.

 

Cannabis remains illegal under Federal law.

 

Despite the development of a regulated cannabis industry under the laws of certain states, these state laws regulating medical and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule I controlled substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that the Federal government has the right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that regulate its use. Although the prior administration determined that it was not an efficient use of resources to direct Federal law enforcement agencies to prosecute those lawfully abiding by state laws allowing the use and distribution of medical and recreational cannabis, on January 4, 2018, the current administration issued the Sessions Memo announcing a return to the rule of law and the rescission of previous guidance documents. The Sessions Memo rescinds the Cole Memo which was adopted by the Obama administration as a policy of non-interference with marijuana-friendly state laws. The Sessions Memo shifts federal policy from a hands-off approach adopted by the Obama administration to permitting federal prosecutors across the country to decide how to prioritize resources to regulate marijuana possession, distribution and cultivation in states where marijuana use is regulated. However, it is unclear at this time whether the Biden administration will issue new guidance or will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. A significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could have a material adverse effect on our business. Furthermore, there can be no assurance that federal prosecutors will not prosecute and dedicate resources to regulate marijuana possession, distribution and cultivation in states where marijuana use is regulated which may cause states to reconsider their regulation of marijuana which would have a detrimental effect on the marijuana industry. Any such change in state laws based upon the Sessions Memo and the Federal government’s enforcement of Federal laws could cause significant financial damage to us and our stockholders.

 

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As the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services and data that we provide to government regulators, dispensaries, cultivators and consumers. As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business.

 

Under Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our business provides services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.

 

Federal enforcement practices could change with respect to services provided to participants in the cannabis industry, which could adversely impact us. If the Federal government were to expend its resources on enforcement actions against service providers in the cannabis industry under guidance provided by the Sessions Memo, such actions could have a material adverse effect on our operations, our customers, or the sales of our products.

 

It is possible that due to the Sessions Memo and the continuing uncertainty respecting enforcement of federal cannabis laws that our clients may discontinue the use of our services, our potential source of customers may be reduced and our revenues may decline. Further, additional government disruption in the cannabis industry could cause potential customers and users to be reluctant to use and advertise our products, which would be detrimental to the Company. We cannot predict the impact of the Sessions Memo, whether the Attorney General Merrick Garland will issue new guidance, or his willingness to enforce federal cannabis laws at this time nor can we predict the nature of any future laws, regulations, interpretations or applications including the effect of such additional regulations or administrative policies and procedures, when and if promulgated, could have on our business.

 

We are subject to legislative uncertainty that could slow or halt the legalization and use of cannabis, which could negatively affect our business.

 

Continued development of the cannabis industry is dependent upon continued legislative authorization of cannabis at the state level, as well as the U.S. government’s continued non-enforcement of federal cannabis laws against state-law-compliant cannabis businesses. Further, progress, while generally expected, is not assured. Some industry observers believe that well-funded interests, including businesses in the alcohol beverage and the pharmaceutical industries, may have a strong economic opposition to the continued legalization of cannabis. The pharmaceutical industry, for example, is well funded with a strong and experienced lobby that eclipses the funding of the medical cannabis movement. Any inroads legalization opponents could make in halting the impending cannabis industry could have a detrimental impact on our business. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these or other factors could slow or halt use of cannabis, which would negatively impact our business.

 

Our business depends on continued purchases by businesses and individuals selling or using cannabis pursuant to state laws in the United States.

 

Thirty-three states and the District of Columbia allow their citizens to use medical cannabis, and eleven states and the District of Columbia have regulated the sale of cannabis for adult use. In addition, several additional states have legalized low-THC/high-CBD extracts for select medical conditions (“CBD States”). Several CBD States are considering legalizing medical cannabis, and several medical states may extend legalization to adult-use.

 

The states’ cannabis programs have proliferated and grown even though the cultivation, sale and possession of cannabis is considered illegal under U.S. federal law. Under the Controlled Substances Act (“CSA”), cannabis is a Schedule I drug, meaning that the Drug Enforcement Administration recognizes no accepted medical use for cannabis, and the substance is considered illegal under federal law.

 

In an effort to provide guidance to U.S. Attorneys’ offices regarding the enforcement priorities associated with cannabis in the United States, the U.S. Department of Justice (the “DOJ”) has issued a series of memoranda detailing its suggested enforcement approach. During the administration of former President Obama, each memorandum acknowledged the DOJ’s authority to enforce the CSA in the face of state laws, but noted that the DOJ was more committed to using its limited investigative and prosecutorial resources to address the most significant threats associated with cannabis in the most effective, consistent, and rational way.

 

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On August 29, 2013, the DOJ issued what came to be called the Cole Memo which gave U.S. Attorneys the discretion not to prosecute federal cannabis cases that were otherwise compliant with applicable state law that had legalized medical or adult-use cannabis and that have implemented strong regulatory systems to control the cultivation, production, and distribution of cannabis. Accordingly, the Cole Memo provided lawful cannabis-related enterprises a tacit federal go-ahead in states with legal cannabis programs, provided that the state had adopted and was enforcing strict regulations and oversight of the medical or adult-use cannabis program in accordance with the specific directives of the Cole Memorandum.

 

On January 4, 2018, Attorney General Jefferson Sessions issued a memorandum that rescinded previous DOJ guidance on the state-legal cannabis industry, including the Cole Memo. Attorney General Sessions wrote that the previous guidance on cannabis law enforcement was unnecessary, given the well-established principles governing federal prosecution that are already in place. As a result, federal prosecutors could and still can use their prosecutorial discretion to decide whether to prosecute even state-legal adult-use cannabis activities.

  

In November 2018, Attorney General Sessions resigned and left the DOJ. As a nominee, Attorney General William Barr testified before the U.S. Senate and wrote to Congress that, as Attorney General, he would not seek to prosecute cannabis companies that relied on the Cole Memorandum and are complying with state law. Although proposals have been introduced to Congress in favor of protection state-legal marijuana regulations, as of the date of this Annual Report, no federal law has been enacted.

   

Since December 2014, companies that are strictly complying with state medical cannabis laws have been protected against enforcement for that activity by an amendment (originally called the Rohrabacher-Blumenauer Amendment, now called the Joyce Amendment) to the Omnibus Spending Bill, which prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level. Federal courts have interpreted the provision to bar the DOJ from prosecuting any person or entity in strict compliance with state medical cannabis laws.

 

While the protection of the Joyce Amendment prevents prosecutions, it does not make cannabis legal. Accordingly, if the protection expires, prosecutors could prosecute federally illegal activity that occurred within the statute of limitations even if the Joyce Amendment protection was in place when the illegal activity occurred. The protection of the Joyce Amendment depends on its continued inclusion in the federal Omnibus Spending Bill, or in some other legislation, and entities’ strict compliance with the state medical cannabis laws. That protection has been extended through September 30, 2021. While industry observers expect Congress to extend the protection in future Omnibus Spending Bills, there can be no assurance that it will do so.

 

Although several cannabis law reform bills are pending in the U.S. Congress, passage of any of them and ultimately the President’s support and approval remain uncertain. President Biden has stated that he would support federal legislation that would defer to states that have legalized cannabis (in other words, if a state legalized cannabis, cannabis in that state would not be federally illegal after the point at which the state legalized it).

 

Until the U.S. Government changes the law with respect to cannabis, and particularly if Congress does not extend the protection of state medical cannabis programs, there is a risk that federal authorities could enforce current federal cannabis law. An increase in federal enforcement against companies licensed under state cannabis laws could negatively impact the state cannabis industries and, in turn, our revenues, profits, financial condition, and business model.

 

Because our business is dependent, in part, upon continued market acceptance of cannabis by consumers, any negative trends will adversely affect our business operations.

 

We are dependent on public support, continued market acceptance and the proliferation of consumers in the legal cannabis markets. While we believe that the market and opportunity in the space continue to grow, we cannot predict the future growth rate or size of the market. Any downturns in, or negative outlooks on, the cannabis industry may adversely affect our business and financial condition.

 

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New platform features or changes to existing platform features could fail to attract new users, retain existing users or generate revenue.

 

Our business strategy is dependent on our ability to develop platforms and features to attract new businesses and users, while retaining existing ones. Staffing changes, changes in user behavior or development of competing platforms may cause Users to switch to alternative platforms or decrease their use of our platform. There is no guarantee that companies and dispensaries will use these features and we may fail to generate revenue. Additionally, any of the following events may cause decreased use of our platform:

 

  Emergence of competing platforms and applications;

 

  Inability to convince potential companies to join our platform;

 

  Technical issues on certain platforms or in the cross-compatibility of multiple platforms;

  

  Securities breaches with respect to our data;

 

  A rise in safety or privacy concerns; and

 

  An increase in the level of spam or undesired content on the network.

 

We are highly dependent on the services of key executives, the loss of whom could materially harm our business and our strategic direction. If we lose key management or significant personnel, cannot recruit qualified employees, directors, officers, or other personnel or experience increases in our compensation costs, our business may materially suffer.

 

We are highly dependent on our management team, specifically our Chief Executive Officer, Isaac Dietrich. While we have an employment agreement with Isaac Dietrich, such employment agreement permits Mr. Dietrich to terminate such agreement upon notice. If we lose key employees, our business may suffer. Furthermore, our future success will also depend in part on the continued service of our key management personnel and our ability to identify, hire, and retain additional personnel. We do not carry “key-man” life insurance on the lives of our executive officer, employees or advisors. We experience intense competition for qualified personnel and may be unable to attract and retain the personnel necessary for the development of our business. Because of this competition, our compensation costs may increase significantly.

  

Our monetization strategy is dependent on many factors outside our control.

 

There is no guarantee that our efforts to monetize the MassRoots platform will be successful. Furthermore, our competitors may introduce more advanced technologies that deliver a greater value proposition to cannabis related businesses in the future. In addition, dispensaries may not be able to accept credit or bank cards due to banking regulations, which could significantly increase the cost and time required for us to generate revenue. All these factors individually or collectively may preclude us from effectively monetizing our business which would have a material adverse effect on our financial condition and results of operation.

 

Changes in Amazon App Store, Apple App Store or Google Play Store policies could result in our mobile applications being de-listed. In addition, our third party service providers may decline to provide services due to their policies, or cease to provide services previously provided to us due to a change of policy.

 

On November 4, 2014, the MassRoots App was removed from Apple’s iOS App Store due to the Apple App Store review team changing their app enforcement guidelines to prohibit all social cannabis applications. After negotiation with Apple and the addition of certain restrictions, the MassRoots App returned to the Apple App Store in February 2015. Although Apple reversed its decision and included our app in the Apple App Store, we cannot provide any assurance that Apple’s policy will not change in the future. The MassRoots App is currently not available in the App Store due to financial constraints facing the Company.

 

The Apple App Store is one of the largest content distribution channels in the world and management believes that it is the only way to effectively distribute our iOS application to users who own iPhones and iPads. The Apple App Store review team effectively operates as our iOS App’s regulator; they decide what guidelines iOS apps must operate under and how to enforce such guidelines. The Apple guidelines related to cannabis-related apps are not published, enforcement of such guidelines is difficult to predict, and the review and appeal processes are conducted without public oversight. Although we will continue advocating for a more open and transparent Apple App Store review process that will allow decisions that affect a significant portion of the United States smartphone owning population to be open to public scrutiny, there can be no assurance that we will be successful in these efforts.

 

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MassRoots, along with other cannabis apps, regularly encounter issues with the Google Play Store review team in the normal course of business due to Google Play Store’s absence of clear guidelines regarding cannabis-related apps. In November 2016, the MassRoots App was removed from the Google Play Store due to a compliance review. However, on March 21, 2017, Google Play approved the MassRoots App for distribution to Android devices through the Google Play Store once again.

 

In addition to challenges we face with respect to compliance with the Amazon App Store, Apple App Store and Google Play Store guidelines, service providers may refuse to provide services to us even if they previously provided such services due to our status as a cannabis related company. For example, in January 2016, after building a strong presence on Instagram and having previously used our Instagram account to grow our user count and highlight posts about our business, our account was suspended without warning by Instagram. While the account was reinstated on February 26, 2016, we cannot provide any assurance that our Instagram account will not be suspended in the future and if suspended that our account will be reinstated. Furthermore, we may face similar situations in the future with our other services providers that may cause disruptions to our business plan, all of which may have a material adverse effect on our business and financial condition.

 

Government actions or digital distribution platform restrictions could result in our products and services being unavailable in certain geographic regions which may harm our future growth.

 

Due to our connections to the cannabis industry, governments and government agencies could ban or cause our network or apps to become unavailable in certain regions and jurisdictions. This could greatly impair or prevent us from registering new users in affected areas and prevent current users from accessing our network. In addition, government action taken against our service providers or partners could cause our network to become unavailable for extended periods of time.

 

As discussed herein, as part of our agreement with Apple in connection with our application being returned to the Apple App Store, we agreed to limit registration of new members within our iOS application to the locations where cannabis is permitted under state law (medicinally or recreationally). This restriction prohibits users in several states and countries from accessing our network. Expansions of such policies by Apple, Google or Amazon may slow our user registration rate which may have a material adverse effect on our business and future prospects.

 

Failure to generate user growth or engagement could greatly harm our business model.

 

Our business model involves attracting building and maintaining an active audience. There is no guarantee that growth strategies used in the past will continue to bring new users to our platform. Changes in relationships with our partners, contractors and businesses we retain to grow our network may result in significant increases in the cost to acquire new users and audience members. Decreases in the size of our audience and/or decreased engagement on our network may impair our ability to generate revenue.

 

Failure to attract clients could greatly harm our ability to generate revenue.

 

Our ability to generate revenue is dependent on the continued growth of our platform. If we are unable to continue to grow our network or bring new clients to our network, our ability to generate revenue would be greatly compromised. There is no guarantee businesses will want to join our platform or that we will be able to generate revenue from our existing user base.

 

Historically, we have generated most of our revenue from advertising. The loss of clients or reduction in spending by advertisers may have a material adverse effect on our business.

 

Historically, we have generated most of our revenue from third parties advertising on our website. Some of our third party advertisers have included cannabis companies such as regulated cannabis dispensaries and mainstream brands such as Uber. As is common in the industry, our advertisers usually do not have long-term advertising commitments with us. It is possible that such advertisers may not continue to do business with us for several reasons including that they no longer believe that their advertisements on our website will generate a competitive return relative to other alternatives or in the alternative they may reduce the prices they are willing to pay to advertise their products and services on our website.

  

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Our revenue could be adversely affected by a number of other factors including, but not limited to:

 

  decreases in audience, including time spent on our website and mobile app;

 

  our inability to improve our analytics and measurement solutions that demonstrate the value of our ads and other commercial content;

 

  loss of market share to our competitors;

 

  adverse legal developments relating to our business, including legislative and regulatory developments and developments in litigation, if any;

 

  adverse media reports or other negative publicity involving us or other companies in our industry; and

 

  the impact of macroeconomic conditions and conditions in the industry in general.

 

The occurrence of any of these or other factors could result in decreased traffic to our website which may result in less views of third party ads. If we are unable to generate traffic to our website and as a result third party advertisers no longer continue to do business with us, our business, financial conditions and results of operation may be materially affected.

 

User engagement and growth depends on software and device updates beyond our control.

 

Our mobile application and websites are currently available on multiple operating systems, including iOS and Android, across multiple different manufacturers, including Motorola, LG, Apple and Samsung and on thousands of devices. Changes to the device infrastructure or software updates on such devices could render our platforms and services useless or inoperable and require users to utilize our website rather than our mobile application which may result in decreased user engagement. Any decrease in user engagement may devalue our value proposition to third party advertisers who may no longer continue to do business with us which may have a material adverse effect on business, financial conditions and results of operation.

 

We may be unable to manage growth.

 

Successful implementation of our business strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial resources. To manage growth effectively, we need to continuously:

 

  Evaluate definitive business strategies, goals and objectives;

 

  Maintain a system of management controls; and

 

  Attract and retain qualified personnel, as well as, develop, train and manage management-level and other employees.

 

If we fail to manage our growth effectively, our business, financial condition or operating results could be materially harmed.

 

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We may not be able to compete successfully with other established companies offering the same or similar services and, as a result, we may not achieve our projected revenue and user targets.

 

We compete with both start-up and established technology companies. Our competitors may have substantially greater financial, marketing and other resources than we do and may have been in business longer than we have or have greater name recognition and be better established in the technological or cannabis markets than we are. If we are unable to compete successfully with other businesses in our existing market, we may not achieve our projected revenue and/or user targets which may have a material adverse effect on our financial condition.

 

Expansion by our well-established competitors into the cannabis industry could prevent us from realizing anticipated growth in users and revenues.

 

Competitors in the social network space, such as Twitter and Facebook, have continued to expand their businesses in recent years into other social network markets. If they decided to expand their social networks into the cannabis community, this could harm the growth of our business and user base and cause our revenues to be lower than we expect. In addition, competitors in the point-of-sale and compliance software space may expand their offerings into the cannabis space which could harm the growth of our business and user base and cause our revenues to be lower than we expect.

 

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes could substantially harm our business and results of operations.

 

We are subject to general business regulations and laws as well as Federal and state regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet, e-commerce or other online services, and increase the cost of providing online services. These regulations and laws may cover sweepstakes, taxation, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, broadband residential Internet access and the characteristics and quality of services. It is not clear how existing laws governing issues such as property ownership, sales, use and other taxes, personal privacy apply to the Internet and e-commerce. Unfavorable resolution of these issues may harm our business and results of operations.

 

The failure to enforce and maintain our intellectual property rights could enable others to use trademarks used by our business which could adversely affect the value of the Company.

 

The success of our business depends on our continued ability to use our existing tradename in order to increase our brand awareness. As of the date hereof, MASSROOTS and TOKE are federally registered trademarks owned by us, ODAVA is a state registered trademark owned by us and RETAIL is a state registered trademark of Odava, Inc. The unauthorized use or other misappropriation of any of the foregoing trademarks could diminish the value of our business which would have a material adverse effect on our financial condition and results of operation.

 

Due to our involvement in the cannabis industry, we may have a difficult time obtaining insurance coverage for our business which may expose us to additional risk and financial liabilities.

 

Insurance that may otherwise be readily available, such as workers compensation, general liability, and directors and officers insurance, is more expensive and difficult for us to obtain because we are a service provider to companies in the cannabis industry. If we are unable to obtain and maintain insurance related to our Company and business operations we will be exposed to additional risk and financial liabilities which may have a material adverse effect on our business and financial condition.

  

We and our customers may have difficulty accessing the service of banks, which may make it difficult for us and for them to sell our products.

 

Financial transactions involving proceeds generated by cannabis-related activities can form the basis for prosecution under the U.S. federal money laundering statutes, unlicensed money transmitter statutes and the U.S. Bank Secrecy Act. Guidance issued by  the Financial Crimes Enforcement Network clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy Act. Furthermore, since the rescission by U.S. Attorney General Sessions on January 4, 2018 of the Cole Memo, U.S. federal prosecutors have had greater discretion when determining whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. As a result, given these risks and their own related disclosure requirements, some banks remain hesitant to offer banking services to cannabis-related businesses. Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships. While we do not presently have challenges with our banking relationships, should we have an inability to maintain our current bank accounts, or the inability of our customers to maintain their current banking relationships, it would be difficult for us to operate our business, may increase our operating costs, could pose additional operational, logistical and security challenges and could result in our inability to implement our business plan.

  

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Our independent registered accounting firm has expressed concerns about our ability to continue as a going concern.

 

The report of our independent registered accounting firm expresses concern about our ability to continue as a going concern based on the absence of significant revenues, our significant losses from operations and our need for additional financing to fund all of our operations. It is not possible at this time for us to predict with assurance the potential success of our business. The revenue and income potential of our proposed business and operations are unknown. If we cannot continue as a viable entity, we may be unable to continue our operations and you may lose some or all of your investment in our securities.

 

In the past we have experienced material weaknesses in our internal control over financial reporting, which if continued, could impair our financial condition.

 

As reported in our Annual Report on Form 10-K, our management concluded that our internal control over financial reporting was not effective as of December 31, 2020 and 2019 due to material weaknesses regarding our controls and procedures. The Company did not have sufficient segregation of duties to support its internal control over financial reporting. Due to our small size and limited resources, segregation of all conflicting duties has not always been possible and may not be economically feasible in the near term; however, we do expect to hire additional accounting personnel in the near future. We have and do endeavor to take appropriate and reasonable steps to make improvements to remediate these deficiencies. If we have continued material weaknesses in our internal financial reporting, our financial condition could be impaired or we may have to restate our financials, which could cause us to expend additional funds that would have a material impact on our ability to generate profits and on the success of our business.

 

The spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of unknown magnitude and duration. 

 

The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines and restricting travel. Many experts predict that the outbreak will trigger a period of global economic slowdown or a global recession. COVID-19 or another pandemic could have material and adverse effects on our ability to successfully operate due to, among other factors:

 

  a general decline in business activity of cannabis dispensaries;
     
  the destabilization of the markets could negatively impact our customer and user growth and access to capital and credit markets which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis; and
     
  a deterioration in our ability to ensure business continuity during a disruption.

 

The rapid development of this situation makes it nearly impossible to predict the ultimate adverse impact of COVID-19 on our business and operations. Nevertheless, COVID-19 presents material uncertainty which could adversely affect our results of operations, financial condition and cash flows. We continue to assess the potential impact of COVID-19, which remains uncertain at this time. 

 

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Risks Relating to Use of New Technology

 

Government regulation of the Internet, blockchain technology and cryptocurrency is evolving, and unfavorable changes could substantially harm us and our subsidiary.

 

We are subject to federal and state regulations and laws governing the Internet, blockchain technology and e-commerce. Existing and future laws and regulations may impede the growth of the Internet, blockchain technology and e-commerce and/or other online services, and may increase the cost of providing online services. Changes in regulations and laws may effect sweepstakes, taxation, tariffs, user privacy, data protection, pricing, content, intellectual property rights, distribution, electronic contracts and other communications, consumer protection, broadband residential Internet access and the characteristics and quality of services. In addition, many governments and regulatory agencies have not established specific regulations pertaining to blockchain technology and other instruments that use such technology and no assurance can be given that such governments or regulatory authorities will not implement adverse changes to laws and regulations. Any such changes to federal and state regulations and laws may harm our and our subsidiary’s business and results of operations.

 

There are no assurances that we will be successful in developing blockchain-based solutions, that such solutions will be economically viable or that such solutions will be able to generate any revenue.

 

While we intend to continue to devote development resources to exploring the feasibility of developing block-chain based solutions, there can be no assurances that we will obtain additional funding to continue such development or that we will be successful in implementing such solutions, that they will be economically viable, or such solutions will generate any revenue.

  

The development and acceptance of digital instruments is subject to a variety of factors which are difficult to evaluate.

 

We may explore the use of digital instruments for use in connection with our platform or programs; however, there can be no assurance that we will adopt or use any such instruments, or be successful in doing so. The development and use of such instruments is subject to a variety of factors that are difficult to evaluate including, but not limited to:

 

  the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the development of a new product or service based upon relatively new and developing technology;

 

  the acceptance and use of the new technology by consumers;

 

  regulation by governmental and quasi-governmental agencies;

 

  the maintenance and development of the protocols for the new technology;

 

  general economic conditions and the regulatory environment relating to the new technology; and

 

  the availability and popularity of other forms or methods of buying and selling goods and services.

 

The slowing or stopping of the development, general acceptance, adoption and usage of digital instruments or compliance with regulations by governmental and quasi-governmental agencies may deter or delay the acceptance of such instruments.

  

The potential application of U.S. laws with respect to traditional investment securities to digital instruments is unclear.

 

The use of digital instruments is novel and the application of U.S. federal and state securities laws is unclear in many respects. Specifically, regulation with respect to such instruments is currently undeveloped, likely to evolve, may vary significantly among international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the permissibility of the use of digital instruments, the technology behind them or the means of transaction in or transferring them. In the event that securities laws restrict the ability for digital instruments to be transferred in a manner similar to traditional investment securities, this would have a material adverse effect on the value of such instruments, which could result in a material impact on the use of such instruments as a possible means to provide rewards on the MassRoots platform.

 

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Our failure to comply with any laws, rules and regulations, some of which may not exist yet or that are subject to interpretations that may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines. The effect of any future regulatory change is impossible to predict, but such change could be substantial and materially adverse to the adoption and value our new technology, when and if developed, accepted and adopted.

 

Risks Related to Digital Assets

 

The further development and acceptance of cryptographic and algorithmic protocols governing the issuance of and transactions in cryptocurrencies, which represent a rapidly changing industry, are subject to a variety of factors that are difficult to evaluate.

 

The use of Digital Assets to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving industry that employs cryptocurrency assets based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance of cryptocurrencies as a means of payment has not, and may never, occur. The growth of the Digital Assets industry in general, and the use of Digital Assets in particular, is subject to a high degree of uncertainty. The factors affecting the further development of the Digital Assets industry, include but are not limited to:

 

continued worldwide growth in the adoption and use of Digital Assets as a medium of exchange;

 

government and quasi-government regulation of Digital Assets and their use, or restrictions on or regulation of access to and operation of the Digital Assets systems;

 

the maintenance and development of the open-source software protocol of Digital Asset Networks;

 

changes in consumer demographics and public tastes and preferences;

 

the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies and digital forms of fiat currencies;

 

general economic conditions and the regulatory environment relating to Digital Assets; and

 

the impact of regulators focusing on Digital Assets and Digital Securities and the costs associated with such regulatory oversight.

 

The outcome of these factors could have negative effects on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations as well as potentially negative effect on the value of any bitcoin, ethereum or other Digital Assets we hold or acquire, which would harm investors in our securities.

 

Currently, there is relatively small use of bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in us.

 

As relatively new products and technologies, bitcoins and the Bitcoin Network have only recently become widely accepted as a means of payment for goods and services by many major retail and commercial outlets, and use of bitcoins by consumers to pay such retail and commercial outlets remains limited. Conversely, a significant portion of bitcoin demand is generated by speculators and investors seeking to profit from the short- or long-term holding of bitcoins. A lack of expansion by bitcoins into retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in the price of bitcoin, either of which could adversely impact an investment in us.

 

Political or economic crises may motivate large-scale sales of Digital Assets, which could result in a reduction in Digital Asset values and adversely affect an investment in us.

 

Geopolitical crises may motivate large-scale sales of Digital Assets, which could rapidly decrease the price of Digital Assets. Alternatively, as an emerging asset class with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage investment in Digital Assets as investors focus their investment on less volatile asset classes as a means of hedging their investment risk.

 

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As an alternative to fiat currencies that are backed by central governments, Digital Assets such as bitcoin and ethereum, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of Digital Assets either globally or locally. Large-scale sales of Digital Assets would result in a reduction in Digital Asset values and could adversely affect an investment in us.

 

Regulatory changes or actions may alter the nature of an investment in us or restrict the use of Digital Assets in a manner that adversely affects our business, prospects or operations.

 

As Digital Assets have grown in both popularity and market size, governments around the world have reacted differently to Digital Assets; certain governments have deemed them illegal, and others have allowed their use and trade without restriction, while in some jurisdictions, such as in the U.S., subject to extensive, and in some cases overlapping, unclear and evolving regulatory requirements. Ongoing and future regulatory actions may impact our ability to continue to operate, and such actions could affect our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations.

 

Current interpretations require the regulation of bitcoins and other Digital Assets under the CEA by the CFTC, we may be required to register and comply with such regulations. To the extent that we decide to continue operations, the required registrations and regulatory compliance steps may result in extraordinary, non-recurring expenses to us. We may also decide to cease certain operations. Any disruption of our operations in response to the changed regulatory circumstances may be at a time that is disadvantageous to investors.

 

Current and future legislation, CFTC and other regulatory developments, including interpretations released by a regulatory authority, may impact the manner in which bitcoins and other Digital Assets are treated for classification and clearing purposes. In particular, derivatives on these assets are not excluded from the definition of “commodity future” by the CFTC. We cannot be certain as to how future regulatory developments will impact the treatment of bitcoins and other Digital Assets under the law.

 

Bitcoins have been deemed to fall within the definition of a commodity and, we may be required to register and comply with additional regulation under the CEA, including additional periodic report and disclosure standards and requirements. Moreover, we may be required to register as a commodity pool operator and to register us as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary, non-recurring expenses, thereby materially and adversely impacting an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain of our operations. Any such action may adversely affect an investment in us.

 

If federal or state legislatures or agencies initiate or release tax determinations that change the classification of bitcoins, ethereum or other Digital Assets as property for tax purposes (in the context of when such Digital Assets are held as an investment), such determination could have a negative tax consequence on our Company or our shareholders.

 

Current IRS guidance indicates that Digital Assets such as bitcoins should be treated and taxed as property, and that transactions involving the payment of bitcoins for goods and services should be treated as barter transactions. While this treatment creates a potential tax reporting requirement for any circumstance where the ownership of a bitcoin passes from one person to another, usually by means of bitcoin transactions (including off-blockchain transactions), it preserves the right to apply capital gains treatment to those transactions which may have adversely affect an investment in our Company.

 

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On December 5, 2014, the New York State Department of Taxation and Finance issued guidance regarding the application of state tax law to Digital Assets such as bitcoins. The agency determined that New York State would follow IRS guidance with respect to the treatment of Digital Assets such as bitcoins for state income tax purposes. Furthermore, they defined Digital Assets such as bitcoin to be a form of “intangible property,” meaning the purchase and sale of bitcoins for fiat currency is not subject to state income tax (although transactions of bitcoin for other goods and services maybe subject to sales tax under barter transaction treatment). It is unclear if other states will follow the guidance of the IRS and the New York State Department of Taxation and Finance with respect to the treatment of Digital Assets such as bitcoins for income tax and sales tax purposes. If a state adopts a different treatment, such treatment may have negative consequences including the imposition of greater a greater tax burden on investors in bitcoin or imposing a greater cost on the acquisition and disposition of bitcoins, generally; in either case potentially having a negative effect on prices in the Bitcoin Exchange Market and may adversely affect an investment in our Company.

 

Foreign jurisdictions may also elect to treat Digital Assets such as bitcoins differently for tax purposes than the IRS or the New York State Department of Taxation and Finance. To the extent that a foreign jurisdiction with a significant share of the market of bitcoin users imposes onerous tax burdens on bitcoin users, or imposes sales or value added tax on purchases and sales of bitcoins for fiat currency, such actions could result in decreased demand for bitcoins in such jurisdiction, which could impact the price of bitcoins and negatively impact an investment in our Company.

 

Security Risks Related to Our Digital Assets Holdings

 

Our Digital Assets may be subject to loss, damage, theft or restriction on access.

 

There is a risk that part or all of the Digital Assets we may hold in the future could be lost, stolen, destroyed or become inaccessible. To minimize the risk of loss, damage and theft, security breaches, and unauthorized access we may hold our Digital Assets at exchanges. Nevertheless, the exchanges we utilize may not be impenetrable and may not be free from defect or immune to acts of God, and any loss due to a security breach, software defect or act of God will be borne by us. Any of these events may adversely affect our operations and, consequently, an investment in us.

 

The loss or destruction of a private key required to access a Digital Assets may be irreversible. Our loss of access to our private keys could adversely affect an investment in our Company.

 

Digital Assets such as bitcoin are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet in which the Digital Assets are held. We plan to safeguard and keep private the private keys we may hold in the future relating to our Digital Assets not held at exchanges; to the extent a private key is lost, destroyed or otherwise compromised and no backup of the private key is accessible, we will be unable to access the Digital Assets held by it and the private key will not be capable of being restored by the Network. Any loss of private keys relating to digital wallets used to store our Digital Assets could adversely affect an investment in us.

 

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Security threats to us could result in, a loss of Company’s Digital Assets.

 

Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the Bitcoin Exchange Market since the launch of the Bitcoin Network. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses, could harm our business operations or result in loss of our bitcoins and other Digital Assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect an investment in us. Furthermore, we believe that, as our assets continues to grow, it may become a more appealing target for security threats such as hackers and malware.

 

The security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of an employee of ours, or otherwise, and, as a result, an unauthorized party may obtain access to our, private keys, data or bitcoins. Additionally, outside parties may attempt to fraudulently induce employees of ours to disclose sensitive information in order to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security system occurs, the market perception of the effectiveness of our security system could be harmed, which could adversely affect an investment in us. In the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each of which could adversely affect an investment in us.

 

Incorrect or fraudulent Digital Asset transactions may be irreversible.

 

Digital Asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction. Once a transaction has been verified and recorded in a block that is added to a blockchain, an incorrect transfer of Digital Assets or a theft of Digital Assets generally will not be reversible, and we may not be capable of seeking compensation for any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, our Digital Assets could be transferred from us in incorrect amounts or to unauthorized third parties. To the extent that we are unable to seek a corrective transaction with such third party or are incapable of identifying the third party which has received our Digital Assets through error or theft, we will be unable to revert or otherwise recover incorrectly transferred Digital Assets. To the extent that we are unable to seek redress for such error or theft, such loss could adversely affect an investment in us.

 

Lack of insurance protection and limited legal recourses for digital assets expose us and our shareholders to the risk of loss of the Digital Assets we may hold for which no person is liable.

 

The Digital Assets we may purchase are not insured. Therefore, a loss may be suffered related to our Digital Assets which is not covered by insurance and for which no person or entity is liable in damages which would adversely affect our operations and, consequently, adversely affect an investment in us.

 

Digital Assets are not subject to FDIC or SIPC protections.

 

The bitcoins and other Digital Assets we may purchase and hold will likely not be held at a banking institution or a member of the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection Corporation (“SIPC”) and, therefore, the Digital Assets will not be subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.

 

Risks Relating to our Common Stock

 

Due to our connection to the cannabis industry, there can be no assurance that our common stock will ever be approved for listing on a national securities exchange.

 

Currently, shares of our common stock are quoted on the OTC Pink Tier of the OTC Markets and are not traded or listed on any securities exchange. Even if we desire to have our shares listed on a national securities exchange, the fact that our network is associated with the use of cannabis, the legal status of which is uncertain at the state and Federal level, may make any efforts to become listed on a securities exchange more problematic. While we remain determined to work towards getting our securities listed on a national exchange, there can be no assurance that this will occur. As a result we may never develop an active trading market for our securities which may limit our investors’ ability to liquidate their investments.

 

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The market price of our common stock may be volatile and adversely affected by several factors.

 

The market price of our common stock could fluctuate significantly in response to various factors and events, including, but not limited to: our ability to execute our business plan; operating results below expectations; announcements regarding regulatory developments with respect to the cannabis industry; our issuance of additional securities, including debt or equity or a combination thereof, necessary to fund our operating expenses; announcements of technological innovations or new products by us or our competitors; period-to-period fluctuations in our financial results; and other events or factors, many of which may be out of our control, including, but not limited to, pandemics such as COVID-19.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

Our common stock is subject to the “penny stock” rules of the SEC and the trading market in the securities is limited, which makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.

 

Rule 15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

We are an “emerging growth company” within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

 

For as long as we remain an “emerging growth company,” as defined in the Jumpstart Our Business Startups (“JOBS”) Act, we will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these and other exemptions until we are no longer an “emerging growth company”. In addition, the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.

 

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We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more, (2) the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering, (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, and (4) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act (i.e., the first day of the fiscal year after we have (a) more than $700,000,000 in outstanding common equity held by our non-affiliates, measured each year on the last day of our second fiscal quarter, and (b) been public for at least 12 months).

  

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment.

 

Cash dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares of common stock. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment.

  

You could lose all of your investment.

 

An investment in our securities is speculative and involves a high degree of risk. Potential investors should be aware that the value of an investment in the Company may go down as well as up. In addition, there can be no certainty that the market value of an investment in the Company will fully reflect its underlying value. You could lose your entire investment.

 

Because we can issue additional shares of common stock, purchasers of our common stock may incur immediate dilution and experience further dilution.

 

We are authorized to issue up to 500,000,000 shares of common stock of which 498,174,656 shares of common stock are issued and outstanding as of April 14, 2021. Our Board of Directors has the authority to cause us to issue additional shares of common stock without consent of any of stockholders. In addition, we are authorized to issue up to 10,000,000 shares of preferred stock of which 6,000 shares are designated as Series A Preferred Stock, of which no shares are issued and outstanding, 2,000 shares are designated as Series B Preferred Stock, of which no shares are issued and outstanding, 1,000 shares are designated as Series C Preferred Stock, of which 1,000 shares are issued and outstanding, 100 shares of Series X Preferred Stock, of which 26.05 are issued and outstanding, and 1,000 shares of Series Y Preferred Stock, of which 659.605674 are issued and outstanding, as of April 14, 2021. Consequently, our stockholders may experience further dilution in their ownership of our stock in the future, which could have an adverse effect on the trading market for our common stock. Furthermore, our Certificate of Incorporation gives our Board the right to create one or more new series of preferred stock. As a result, our Board may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that could adversely affect the voting power and equity interests of the holders of our common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be used to discourage, delay or prevent a change of control of our Company, which could materially adversely affect the price of our common stock.

 

Our Certificate of Incorporation contains an exclusive forum provision with respect to all Internal Corporate Claims, which may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable and discourage lawsuits against us or our current or former directors or officers and/or stockholders in such capacity.

 

Our Certificate of Incorporation provides that all Internal Corporate Claims (as defined in the Certificate of Incorporation) must be brought solely and exclusively in the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction, the Superior Court of the State of Delaware, or, if such other court does not have jurisdiction, the United States District Court for the District of Delaware). All of our stockholders are subject to the exclusive forum provision of our Certificate of Incorporation. The exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes based upon Internal Corporate Claims, which may discourage lawsuits against us or our current or former directors or officers and/or stockholders in such capacity. In addition, if a court were to find this exclusive-forum provision to be inapplicable or unenforceable in an action, we may incur costs associated with resolving the dispute in other jurisdictions, which could have a material adverse effect on our business and operations.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES

 
On May 1, 2020, we entered into a Membership Agreement (the “Membership Agreement”) with WeWork pursuant to which we lease offices located at 1560 Broadway, Suite 17-105, Denver, Colorado 80202. The initial term of the Membership Agreement is for six months which term shall automatically be renewed for successive one month periods unless terminated by either party. Pursuant to the terms of the Membership Agreement, we pay a fee of $1,170 per month for the leased premises.

 

We do not own any property or land.

 

We believe that our facilities are adequate for our current needs and that, if required, we will be able to expand our current space or locate suitable new office space and obtain a suitable replacement for our executive and administrative headquarters.

 

ITEM 3. 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 set forth below, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results. 

 

Power Up Lending Group, Ltd. Complaint

 

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 Up’s 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. On February 9, 2021, a motion for default judgment was granted and the default judgment in the total amount of $350,551.10 was entered against the Company and Mr. Dietrich jointly and severally.

 

Sheppard Mullin’s Demand for Arbitration

 

On December 1, 2020, Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin”), the Company’s former securities counsel, filed a demand for arbitration at JAMS in New York, New York against the Company, alleging the Company’s breach of an engagement agreement dated January 4, 2018, and a failure of the Company to pay $487,390.73 of outstanding legal fees to Sheppard Mullin. Sheppard Mullin seeks to collect the entirety of the amount owed by the Company in accordance with said engagement agreement.

 

Rother Investments’ Petition

 

On October 28, 2020, Rother Investments, LLC (“Rother Investments”) filed a complaint in the District Court of 419th Judicial District, Travis County, Texas against the Company, alleging the Company’s default under a certain promissory note (the “Rother Investments Note”) in payment of the outstanding principal amount and interest under the Note, as described in the complaint. Rother Investments seeks to collect the amount of $124,750.00 as of the date of the complaint with late fees continuing to accrue on a daily basis, monetary relief of over $100,000 but not more than $200,000.00 pursuant to Tex. R. Civ. P. 47(c)(3), court’s costs and attorney’s fees, pre-judgment and post-judgment interest, and such other relief as the court deems appropriate.

 

Trawick’s Complaint

 

On or about January 25, 2021, Travis Trawick (“Trawick”) filed a complaint against the Company and Isaac Dietrich, an officer and director of the Company, in the Circuit Court for the City of Virginia Beach, Virginia, asserting the Company’s failure to remit payments under the certain promissory note, as subsequently amended and modified, and ancillary documents thereto (collectively, the “Note”), and Mr. Dietrich’s failure to fulfill its obligations, as the guarantor, under the Note. Trawick demands a judgment in his favor in the amount exceeding $130,336.15, the exact amount to be proven at trial including pre and post-judgment interest, reasonable attorneys’ fees, court costs, other taxable costs, and such other relief as the court deems appropriate.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

From April 9, 2015 to October 16, 2019, our common stock was quoted on the OTCQB under the symbol “MSRT.” Since October 17, 2019, our common stock has been quoted on the OTC Pink Tier of the OTC Markets under the symbol “MSRT.”

 

Holders

 

As April 14, 2021, there were 165 stockholders of record per the Company’s transfer agency’s listing of stockholders. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Pacific Stock Transfer Company, located at 173 Keith Street, Suite 3, Warrenton, Virginia 20186.

 

Dividend Policy

 

We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy will be determined from time to time by our Board of Directors.

 

Recent Sales of Unregistered Securities 

 

During the quarter ended December 31, 2020, we issued 16.05 shares of Series X Preferred Stock for proceeds of $321,000.

 

The issuance of the above securities was deemed to be exempt from the registration requirements of the Securities Act, by Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

 

Between December 22 and March 23, 2021, the Company entered into a number of securities exchange agreements with twenty two (22) holders of its equity and debt securities for the total issuance and sale of 659.605674 shares of the Company’s Series Y Convertible Preferred Stock, par value $0.001 per share, resulting in aggregate exchange of 14,896,874,671 warrants to purchase common stock of the Company at $0.0004 per share and the exchange of the promissory notes in the aggregate principal amount and accrued interest totaling $5,947,876.20. The Purchasers constituted a significant portion of warrantholders and debtholders of the Company. The Company issued an aggregate of 659.605674 shares of Series Y Preferred Stock in reliance upon Section 3(a)(9) of the Securities Act of 1933, as amended, as involving an exchange by the Company exclusively with its security holders. See Item 9B. Other Information.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

    Number of 
securities 
to be issued 
upon
exercise of 
outstanding options, 
warrants and rights
(a)
    Weighted- 
average exercise 
price of 
outstanding 
options, 
warrants and 
rights 
(b)
    Number of 
securities 
remaining available for 
future issuance under 
equity compensation plans 
(excluding securities 
reflected in column 
(a) (c)
 
Equity compensation plans approved by security holders (1)     27,820,903     $ 0.50       190,000  
Equity compensation plans not approved by security holders                  
Total     27,820,903     $ 0.50       190,000  

 

(1) Includes the 2014 Equity Incentive Plan, 2015 Equity Incentive Plan, 2016 Equity Incentive Plan, 2017 Equity Incentive Plan and 2018 Equity Incentive Plan.

  

ITEM 6. SELECTED FINANCIAL DATA

 

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

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in the section titled “Risk Factors.” 

 

Overview 

 

MassRoots, Inc. was formed in April 2013 as a technology platform for the cannabis industry. In March 2021, we relaunched our website, MassRoots.com, which aims to enable cannabis consumers to find the best products, connect with other enthusiasts, and deliver fresh content that both delights and informs our audience. Additionally, we plan to monetize our YouTube Channel, which has 273,000 subscribers, through product placements and sponsorships. Management believes that our YouTube Channel has one of the largest followings in the regulated cannabis industry while our Instagram account is followed by 378,000 users.

 

Competitors 

 

We compete with other cannabis information platforms such as WeedMaps and Leafly, which provide information with respect to dispensary locations, strain information, and news relating to the cannabis industry. 

 

Blockchain Technology 

 

In December 2017, we formed MassRoots Blockchain Technologies, Inc., our wholly-owned subsidiary, to explore how blockchain technology may be utilized in the cannabis industry. 

 

Recent Developments and Other Sources of Funding 

 

Financings 

 

On January 7, 2020, we issued and sold a convertible note in the principal amount of $55,000 (including a $5,000 original issuance discount) to an accredited investor which note matures on July 7, 2020.

 

On March 5, 2020, we issued and sold a convertible note in the aggregate principal amount of $72,600 (including a $6,600 original issuance discount) to an accredited investor which note matures on September 5, 2020. 

 

On March 17, 2020, we issued and sold a convertible note in the aggregate principal amount of $17,600 (including a $1,600 original issuance discount) to an accredited investor which note matures on September 17, 2020. 

 

On April 17, 2020, we issued and sold convertible notes in the aggregate principal amount of $330,000 (including an aggregate of $30,000 original issuance discount) to accredited investors which notes mature on October 17, 2020. 

 

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On May 3, 2020, we received a loan in the principal amount of $50,000 pursuant to the PPP of the CARES Act. The PPP loan matures in May 2022 and bears an interest rate of 1% per annum. The Company has applied for forgiveness of the principal and accrued interest due under the loan.

 

On June 26, 2020, we issued and sold a secured promissory note in the principal amount of $60,000 with 10% annual interest. On the two-year anniversary of the issuance of this note, June 26, 2022, all principal and interest becomes due and payable. 

 

On July 8, 2020, we issued and sold a promissory note in the principal amount of $22,911 with 10% annual interest maturing on December 31, 2020. 

 

On July 13, 2020, we issued and sold convertible notes in the aggregate principal amount of $110,000 (including an aggregate of $10,000 original issuance discount) to accredited investors which notes mature on January 13, 2021. 

 

On August 31, 2020, we issued and sold convertible notes in the aggregate principal amount of $66,000 (including an aggregate of $6,000 original issuance discount) to accredited investors which notes mature on March 1, 2021. 

 

On September 1, 2020, we issued and sold convertible notes in the aggregate principal amount of $49,500 (including an aggregate of $4,500 original issuance discount) to accredited investors which notes mature on March 1, 2021. 

 

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 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.

 

On December 21, 2020, the Company entered into a securities purchase agreement with an accredited investor for the sale 7.5 shares of the Company’s Series X Convertible Preferred Stock, par value $0.0001 per share, resulting in aggregate proceeds of $150,000. The purchase and issuance of such shares of Series X Preferred Stock closed on December 23, 2020.

 

On December 22, 2020, the Company entered into a securities purchase agreement with an accredited investor for the sale 5.25 shares of the Company’s Series X Convertible Preferred Stock, par value $0.0001 per share, resulting in aggregate proceeds of $105,000. The purchase and issuance of such shares of Series X Preferred Stock closed on December 29, 2020.

 

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Results of Operations For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

 

    For the Fiscal Year ended  
    31-Dec-20     31-Dec-19     $
Change
    %
Change
 
Revenues   $ 6,964     $ 23,703     $ (16,739 )     (70.6 )%
                                 
Operating expenses     1,167,175       3,469,139       (2,301,964 )     (66.4 )%
                                 
Loss from Operations     (1,160,211 )     (3,445,436 )     2,285,225       (66.3 )%
                                 
Other Expense     (13,550,249 )     (30,823,476 )     17,273,227       (56.0 )%
                                 
Net Loss   $ (14,710,460 )   $ (34,268,912 )   $ 19,558,452       (57.1 )%
                                 
Net loss per share - basic and diluted   $ (0.08 )   $ (0.19 )   $ 0.11       57.9 %

 

Since inception on April 26, 2013, and during the year ended December 31, 2020, our business operations have been primarily focused developing our mobile applications, web platform and blockchain features for our products, and increasing our User-base.

 

Revenues

 

For the year ended December 31, 2020, we generated $6,964 in revenues, as compared to $23,703 for the year ended December 31, 2019, a decrease of $16,739. This decrease is primarily related to service interruptions on our platform and downsizing of our sales and corporate staff.

 

Operating Expenses

 

For the years ended December 31, 2020 and 2019, our operating expenses were $1,167,175 and $3,469,139, respectively, a decrease of $2,301,964. The decrease was mainly attributed to stock-based compensation to our employees and key consultants which, for 2020, was $0 as compared to $222,700 for 2019, a non-cash decrease of $222,700. In addition, impairment expense decreased by $196,315 as impairment expense was $0 in 2020 as compared to $196,315 in 2019, which was mainly attributed to impairment expenses associated with our business portal. There was an decrease in payroll and related expenses of $853,064 as payroll and related expenses were $303,850 for 2020 as compared to $1,156,914 for the same period in 2019, which was the result of a decrease in our labor force. Advertising expense increased by $29,197 to $58,961 for 2020 as compared to $29,764 for 2019 due to a re-focus on the Company’s YouTube channnel. For the years ended December 31, 2020 and 2019, we recorded amortization of software costs of $0 and $38,549, respectively.

 

Our other general and administrative expenses decreased to $803,081 for the year ended December 31, 2020 from $1,460,867 for the year ended December 31, 2019, a decrease of $657,786. This decrease was mainly attributed to the following:

 

  Consulting and accounting expenses decreased during the year ended December 31, 2020 to $355,963 from $452,477 during the year ended December 31, 2019. This decrease was primarily a result of us having fewer consulting projects with firms in fiscal year 2020.

 

  Independent contractor expenses decreased from $284,328 during the year ended December 31, 2019 to $51,442 during the year ended December 31, 2020 due to us engaging fewer individual consultants.

 

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  Travel and related expenses decreased to $3,372 during the year ended December 31, 2020 from $21,506 during the year ended December 31, 2019. This was a result of our team attending fewer conferences and meetings with cannabis related businesses in 2020 as compared to 2019.

 

The decrease of these expenditures resulted in our total operating expenses declining to $1,167,175 during the year ended December 31, 2020 compared to $3,469,139 during the year ended December 31, 2019, a decrease of $2,301,964.

 

Loss from Operations

 

Our loss from operations decreased $2,285,225 to $1,160,211 during the year ended December 31, 2020, from $3,445,436 during the year ended December 31, 2019.

 

Other (Expense)

 

During the year ended December 31, 2020, we incurred other (expense) of $(13,550,249), as compared to $(30,823,476) for the year ended December 31, 2019, a decrease of $17,273,227. This decrease is primarily due to a gain of the forgiveness of debt of $250,000 and a gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable of $162,109,131 for the year ended December 31, 2020. The Company’s derivative liability for authorized shares shortfall expense increased by $(151,398,053) to $(170,319,590) in fiscal year 2020 from ($18,921,537) during fiscal year 2019. Preferred stock issuance costs fell to $0 during the year ended December 31, 2020 from $(5,585,594) during the same period in 2019. The Company realized a $882 gain on the conversion of convertible debentures during fiscal year 2020 as compared to a $(603,529) loss in fiscal year 2020. In addition, interest expense increased by $203,851 to $(5,139,321) during fiscal year 2020 as compared to $(4,935,470) during fiscal year 2019. Lastly, the expense for the loss on change in fair value of derivative liabilities decreased by $234,064, to $(451,351) during fiscal year 2020, as compared to $(685,415) during the prior year.

 

Net Loss

 

Our net loss decreased by $19,558,452 to $14,710,460 during the year ended December 31, 2020, from $34,268,912 during the year ended December 31, 2019.

 

Liquidity and Capital Resources 

 

Net cash used in operations for the year ended December 31, 2020 and 2019 was $1,037,843 and $1,797,227, respectively. The decrease in 2020 resulted primarily from the net loss of $14,710,460, partially offset by non-cash items including derivative liability for authorized shares shortfall of $170,319,590, gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable of $162,109,131, interest and amortization of debt discount of $5,139,321, change in fair value of derivative liabilities of $451,351, gain on forgiveness of debt of $250,000 and gain on conversion of convertible notes payable of $882, as well as an increase in accrued payroll and related expenses of $140,005 and an increase in accounts payable and accrued expenses of $77,520. The decrease in 2019 resulted primarily from the net loss of $34,268,912, partially offset by non-cash items including derivative liability for authorized shares shortfall of $18,921,537, preferred stock issuance costs of $5,585,594, interest and amortization of debt discount of $4,716,970, change in fair value of derivative liabilities of $685,415, and loss on conversion of convertible notes payable of $603,529, as well as an increase in accrued payroll and related expenses of $732,027 and an increase in accounts payable and accrued expenses of $557,360.

 

Net cash provided by (used in) investing activities for the year ended December 31, 2020 and 2019 was $0 and $90,981, respectively. Net cash provided by investing activities for the year ended December 31, 2019 was attributed to proceeds from sale of investments of $90,981.

 

Net cash provided by financing activities for the year ended December 31, 2020 and 2019 was $1,038,208 and $1,677,798, respectively. For the year ended December 31, 2020, these funds came mainly from the sale of Series X Preferred Stock amounting to $321,000, proceeds from issuance of convertible debt of $637,000, proceeds from issuance of non-convertible notes payable of $82,911, proceeds from the issuance of a $50,000 PPP loan, offset by repayment of advances in the amount of $3,009, repayment of non-convertible notes in the amount of $39,641, and the repayment of $13,749 in bank overdrafts. Comparatively, for the year ended December 31, 2019, these funds came mainly from the sale of Series B Preferred Stock and warrants amounting to $1,407,500, proceeds from issuance of convertible debt of $549,000 and proceeds from issuance of non-convertible notes payable of $175,000, offset by repayment of advances in the amount of $595,000. 

 

Capital Resources

 

As of December 31, 2020, we had cash on hand of $1,485. We currently have no external sources of liquidity such as arrangements with credit institutions that will have or are reasonably likely to have a current or future effect on our financial condition or immediate access to capital.

 

We are dependent on the sale of our securities to fund our operations, and will remain so until we generate sufficient revenues to pay for our operating costs; however, no assurance can be given that additional financing will be available on terms favorable to us, or at all.

 

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Fundraising

 

During the year ended December 31, 2020, the Company received proceeds of $637,000, $132,911, and $321,000 from the issuance of convertible notes, non-convertible notes, and Series X preferred shares, respectively.

   

Required Capital over the Next Fiscal Year

 

We do not believe that we have sufficient capital to become cash-flow positive from operations. We expect that we will need to raise additional funds to continue to fund operations.

 

We prepared the accompanying consolidated financial statements assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have not yet established an ongoing source of revenues sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going concern depends on our ability to obtain adequate capital to fund operating losses until we generate adequate cash flows from operations to fund our operating costs and obligations. If we are unable to obtain adequate capital, we could be forced to cease operations.

 

We depend upon our ability to secure equity and/or debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Our management has determined that there is substantial doubt about our ability to continue as a going concern within one year after the consolidated financial statements are issued.

 

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

   

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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 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 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.

  

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements required to be included in this report appear as indexed in the appendix to this report beginning on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

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ITEM 9A. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Exchange Act, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of our 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 and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon such evaluation, our CEO and CFO concluded that our disclosure controls and procedures as of December 31, 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.

 

To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our financial statements included in this Annual Report on Form 10-K have been prepared in accordance with generally accepted accounting principles in the U.S. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Our principal executive officer and principal financial officer do not expect that our disclosure controls and procedures or our 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.

  

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our management, including our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

There was a material weakness in our internal control over financial reporting due to the fact that we did not have an adequate process established to ensure appropriate levels of review of accounting and financial reporting matters, which resulted in our closing process not identifying all required adjustments and disclosures in a timely fashion.

 

We plan to take steps to enhance and improve the design of our internal control over financial reporting. To remediate our material weaknesses, we plan to appoint additional qualified personnel with the requisite knowledge to improve the levels of review of accounting and financial reporting matters; however, such remediation efforts are largely dependent upon our securing additional financing or generating significant revenue to cover the costs of implementing the changes required.

 

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Until we remediate our material weakness in internal control over financial reporting such weaknesses could result in material misstatements in our financial statements not being prevented or detected.

 

The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent all errors and all fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

 

The Company’s CEO and CFO has identified control deficiencies regarding the lack of segregation of duties and the need for a stronger internal control environment. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.

 

Because of the above material weakness, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020, based on the criteria established in “Internal Control-Integrated Framework” issued by the COSO.

 

This Annual Report does not include an attestation of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the fourth quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

ITEM 9B. 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.

 

Between December 22 and March 23, 2021, the Company entered into a number of securities exchange agreements (each, individually, the “Exchange Agreement”) with twenty two (22) holders of its equity and debt securities (each, individually, the “Purchaser”) for the total issuance and sale of 659.605674 shares of the Company’s newly-created Series Y Convertible Preferred Stock, par value $0.001 per share (the “Series Y Preferred Stock”), resulting in aggregate exchange of 14,896,874,671 warrants to purchase common stock of the Company at $0.0004 per share and the exchange of the promissory notes in the aggregate principal amount and accrued interest totaling $5,947,876.20. The Purchasers constituted a significant portion of warrantholders and debtholders of the Company.

 

The terms and condition of Exchange Agreement for each Purchaser are essentially the same, except for the date of the agreement and the number of securities exchanged, as more particularly illustrated in the table below:

 

Purchaser   Date   Number of Issued shares of Series Y     Number of warrants to purchase common stock of the Company at $0.0004 per share exchanged     Aggregate amount of principal exchanged     Aggregate amount of accrued interest under promissory notes exchanged  
Cavalry Fund I LP   December 27, 2020     192.6387       1,125,000,022     $ 2,340,923.00     $ 1,302,635.47  
Timothy Tyler Berry   December 22, 2020     1.745592       -     $ 13,750.00     $ 21,161.85  
Charles Berman   December 22, 2020     34.41448       1,101,562,289     $ 323,125.00     $ 173,862.36  
Lucas Hoppel   December 23, 2020     26.54237       -     $ 168,820.00     $ 362,027.34  
L1 Capital Global Opportunities Master Fund   December 23, 2020     196.3126       1,106,250,021     $ 2,370,240.00     $ 1,363,895.68  
Jay Elliott Berman   December 22, 2020     17.37794       524,999,899     $ 154,000.00     $ 102,385.04  
Michael Scrobe   December 22, 2020     1.18724       -     $ 5,500.00     $ 18,244.74  
Joseph Reda   December 22, 2020     7.31678       187,500,021     $ 55,000.00     $ 58,773.42  
Jesus Quintero   December 24, 2020     3.20716       -     $ 64,143.20       -  
Mohit Bhansali   December 26, 2020     1.25       125,000,000       -       -  
Acquisition Group LTD   December 27, 2020     6.51242       750,000,026       -       -  
The Special Equities Opportunity Fund LLC   December 26, 2020     7.36394       46,874,965     $ 90,750.00     $ 48,388.21  
US Commonwealth Life A1 Police 2013-17   December 26, 2020     11.25       1,125,000,051       -       -  
Steven M. Markowitz 1999 Trust   December 30, 2020     79.76707       1,101,562,289     $ 323,125.00     $ 1,080,914.16  
Cambridge Capital Ltd   December 23, 2020     30.391242       3,500,000,029       -       -  
Robert Halpern   December 27, 2020     6.51242       750,000,026       -       -  
Arthur Eli Kaplan   December 29, 2020     2.5       40,625,049       -       -  
Richard Taney   December 30, 2020     0.70551       81,250,010       -       -  
Cavalry Fund I LP   March 23, 2021     1.09721       -       -     $ 21,944.20  
Ciaran Thompson   January 7, 2021     3.72667       131,249,975     $ 38,500.00       -  
NG Bahamas Ltd   December 23, 2020     27.78633       3,199,999,999       -       -  
                                     
Total:         659.605674       14,896,874,671     $ 5,947,876.20     $ 4,554,232.47  

 

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The Company may hold one or more subsequent closings to sell the remaining shares of Series Y Preferred Stock pursuant to securities Exchange Agreements substantially in the form of the Exchange Agreement (the “Refinancing”).

 

The Exchange Agreement contains certain customary representations, warranties, and covenants for transactions of this type.

 

The foregoing description of the Exchange Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the form of Exchange Agreement, a copy of which is attached hereto as Exhibit 10.45 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.” which are hereby incorporated herein by reference.

 

659.605674 shares of Series Y Preferred Stock sold pursuant to the Exchange Agreement in accordance with and subject to the limitations contained in the Series Y COD (defined infra). The shares of Series Y Preferred Stock have not been registered under the Securities Act of 1933, as amended (the “Securities Act”). The Company issued an aggregate of 659.605674 shares of Series Y Preferred Stock in reliance upon Section 3(a)(9) of the Securities Act of 1933, as amended, as involving an exchange by the Company exclusively with its security holders.

 

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 December 30, 2020, the Company filed the Certificate of Designations, Preferences and Rights of the Series Y Convertible Preferred Stock (the “Series Y COD”) with the Delaware Secretary of State.

 

Pursuant to the Series Y COD, 1,000 shares of the Company’s blank check preferred stock have been designated as “Series Y Preferred Stock.” The Series Y Preferred Stock have the following rights, preferences, powers, privileges and restrictions, qualifications and limitations:

 

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

 

Ranking. The Series Y 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. Series Y Preferred Stock is, however, junior to Series X Preferred Stock of the Company.

 

Voting. Except as otherwise required by law, or as provided in the section entitled “Protective Provisions,” shares of Series Y 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 Y 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 Y Preferred Stock, including the Required Holder (as defined in the Series Y 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 Y Preferred Stock; (b) increase or decrease (other than by conversion) the authorized number of Series Y 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 Y 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 Y Preferred Stock; (e) issue any Series Y Preferred Stock other than as provided in the Series Y COD; or (f) circumvent a right of the Series Y Preferred Stock.

 

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 Y 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 Y Preferred Stock as consideration in a Subsequent Financing.

 

Redemption. Upon receipt of a conversion notice for Series Y Preferred Stock from a holder, the Company shall have the right (but not the obligation) to redeem all or part of the Series Y Preferred Stock which the holder is seeking to convert at a price per share equal to the product of 125% of the (1) Series Y Stated Value plus (2) the Series Y 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 Y Preferred Stock (without taking into account any limitations or restrictions on the convertibility of the Series Y 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 Y Conversion Price, then upon such issuance or sale, the Series Y 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 Y COD is not complete and is qualified in its entirety by reference to the full text of the Series Y COD, a copy of which is attached hereto as Exhibit 3.8 and is incorporated herein by reference.

 

34

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this item is incorporated by reference to our proxy statement for our 2021 Annual Meeting of Stockholders.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information required by this item is incorporated by reference to our proxy statement for our 2021 Annual Meeting of Stockholders.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. 

 

The information required by this item is incorporated by reference to our proxy statement for our 2021 Annual Meeting of Stockholders.

  

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this item is incorporated by reference to our proxy statement for our 2021 Annual Meeting of Stockholders.

  

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this item is incorporated by reference to our proxy statement for our 2021 Annual Meeting of Stockholders.

 

35

 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) Financial Statements

 

Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-2
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-3
Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2020 and 2019 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-5
Notes to Consolidated Financial Statements F-6

  

36

 

 

(b) Exhibit Index

 

No.   Description
2.1   Plan of Reorganization, dated March 18, 2014 (Incorporated by reference to our Registration Statement on Form S-1 filed with the SEC on June 13, 2014)
2.2   Agreement and Plan of Merger between MassRoots, Inc. and Whaxy Inc. and DDDigtal Inc. and Zachary Marburger and the Stockholders of DDDigtal Inc., dated December 15, 2016 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 16, 2016)
2.3   Agreement and Plan of Merger between MassRoots, Inc. and MassRoots Compliance Technology, Inc. and Odava, Inc. and Scott Kveton and the Stockholders of Odava, Inc. (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 5, 2017)
2.4   Agreement and Plan of Merger between MassRoots, Inc., MassRoots Supply Chain, Inc., COWA Science Corporation and Christopher Alameddin, as the representative of the Stockholders of COWA Science Corporation, dated February 11, 2019 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on February 12, 2019)
3.1   Second Amended and Restated Certificate of Incorporation of MassRoots, Inc. (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on June 19, 2018)
3.2   Bylaws of the Company (Incorporated by reference to our Registration Statement on Form S-1 filed with the SEC on June 13, 2014)
3.3   State of Delaware Certificate of Merger of Domestic Corporation Into Domestic Corporation, for MassRoots Compliance Technology, Inc. and Odava Inc., effective as of July 13, 2017 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 14, 2017)
3.4   Certificate of Designations, Preferences and Rights of the Series A Preferred Stock (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 12, 2019)
3.5   Certificate of Designations, Preferences and Rights of the Series B Preferred Stock (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 12, 2019)
3.6   Certificate of Designations, Preferences and Rights of the Series C Preferred Stock (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 22, 2019)
3.7   Certificate of Correction to the Certificate of Designations, Preferences and Rights of the Series C Preferred Stock (Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on July 16, 2020)
3.8   Certificate of Designations, Preferences and Rights of the Series X Convertible Preferred Stock. (Incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on December 18, 2020)
3.9*   Certificate of Designations, Preferences and Rights of the Series Y Preferred Stock
4.1   Form of Common Stock Certificate (Incorporated by reference to our Registration Statement on Form S-1 filed with the SEC on June 13, 2014)
4.2*   Description of Registrant’s Securities (included herewith)
10.1+   2014 Equity Incentive Plan and forms of stock option agreement and stock award agreement thereunder (Incorporated by reference to our Registration Statement on Form S-1 filed with the SEC on June 13, 2014)
10.2+   2015 Equity Incentive Plan and forms of stock option agreement and stock award agreement thereunder (Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on March 30, 2016)
10.3   Form of Warrant utilized by Service Providers (Incorporated by reference our Registration Statement on Form S-1 filed with the SEC on April 11, 2016)
10.4   Form of Warrant dated March 2016 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on March 18, 2016)

 

37

 

 

10.5   Form of Securities Purchase Agreement dated March 2016 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on March 18, 2016)
10.6+   2016 Equity Incentive Plan and forms of stock option agreement and stock award agreement thereunder. (Incorporated by reference to our Current Report on Form 8-K filed on September 23, 2016)
10.7+   2017 Equity Incentive Plan and forms of stock option agreement and stock award agreement thereunder (Incorporated by reference to our Definitive Schedule 14C Information Statement filed with the SEC on December 9, 2016)
10.8   Form of Joinder Agreement to Agreement and Plan of Merger made by each stockholder of Odava, Inc. and agreed to and acknowledged by MassRoots, Inc. and MassRoots Compliance Technology, Inc. (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 5, 2017)
10.9   Form of Subscription Agreement dated July 2017 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 24, 2017)
10.10   Form of Warrant dated July 2017  (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 24, 2017)
10.11   Form of Warrant dated August 2017 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 18, 2017)
10.12   Form of Securities Purchase Agreement dated August 2017 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 18, 2017)
10.13   Form of Security Agreement dated August 2017 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on August 18, 2017)
10.14   Form of Amended and Restated Simple Agreement for Future Tokens (Incorporated by reference to our Registration Statement on Form S-1 filed with the SEC on February 14, 2018)
10.15   Form of Director Separation Agreement (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 14, 2017)
10.16   Form of Warrant dated December 2017  (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 14, 2017)
10.17   Form of Mutual Release and Non-Disparagement Agreement  (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 14, 2017)
10.18   Form of Separation Agreement  (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 14, 2017)
10.19+   Employment Agreement by and between the Company and Isaac Dietrich  (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 14, 2017)
10.20   Form of Warrant dated December 2017 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 29, 2017)
10.21   Form of Subscription Agreement dated December 2017 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 29, 2017)
10.22+   CFO Services Agreement by and between the Company and Jesus Quintero (Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on April 16, 2019)
10.23   Form of Securities Purchase Agreement dated January 31, 2018 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 31, 2018)
10.24   Form of Warrant dated January 31, 2018 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 31, 2018)
10.25   Membership Agreement between the Company and WeWork dated May 1, 2020 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 5, 2020)

 

38

 

 

10.26   Form of Securities Purchase Agreement (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 20, 2018)
10.27   Form of Secured Convertible Promissory Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 20, 2018)
10.28   Form of Security Agreement (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on December 20, 2018)
10.29+   2018 Equity Incentive Plan (Incorporated by reference to our Definitive Proxy Statement on Schedule 14A filed with the SEC on May 11, 2018)
10.30   Securities Purchase Agreement dated May 16, 2019 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 24, 2019)
10.31   Convertible Promissory Note dated May 16, 2019 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 24, 2019)
10.32   Form of Subscription Agreement (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 12, 2019)
10.33   Form of Warrant (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 12, 2019)
10.34   Form of Exchange Agreement (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 12, 2019)
10.35   Form of Separation Agreement (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 22, 2019)
10.36   Form of Convertible Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on November 26, 2019)
10.37   Form of Series A Exchange Agreement (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.38   Form of Series A Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.39   Form of Series B Exchange Agreement (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.40   Form of Series B Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.41   Form of December Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.42   Form of January Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.43   Form of First March Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.44   Form of Second March Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.45   Form of April Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on April 21, 2020)
10.46   Form of Notes (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 4, 2020)
10.47   Form of September Note (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 4, 2020)
10.48   Form of Series X Securities Purchase Agreement (Incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on December 18, 2020)
10.49*   Form of Securities Exchange Agreement
14.1   Code of Ethics of the Company (Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on April 1, 2015)
21.1*   List of Subsidiaries
31.1*   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*   Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 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 Schema
101.CAL*   XBRL Taxonomy Calculation Linkbase
101.DEF*   XBRL Taxonomy Definition Linkbase
101.LAB*   XBRL Taxonomy Label Linkbase
101.PRE*   XBRL Taxonomy Presentation Linkbase

 

  * filed herewith.

 

  + Denotes a management contract or compensatory plan.

 

39

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 15th day of April, 2021.

 

  MASSROOTS, INC.
     
  By: /s/ Isaac Dietrich
   

Isaac Dietrich

Chief Executive Officer

(Principal Executive Officer)

     
  By: /s/ Isaac Dietrich
   

Isaac Dietrich

Chief Financial Officer 

(Principal Financial and Accounting Officer)

 

Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signatures   Title   Date
         
/s/ Isaac Dietrich   Chief Executive Officer (Principal Executive Officer) and   April 15, 2021
Isaac Dietrich   Chairman of the Board of Directors    
         
/s/ Isaac Dietrich   Chief Financial Officer    April 15, 2021
Isaac Dietrich   (Principal Financial and Accounting Officer)    

 

40

 

  

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

MassRoots, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of MassRoots, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2020 and 2019 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern 

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and expects continuing future losses that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ RBSM LLP

 
   
We have served as the Company’s auditor since 2017.
   
Henderson, Nevada  
April 15, 2021  

 

F-1

 

 

MASSROOTS, INC.

CONSOLIDATED BALANCE SHEETS

 

    December 31,     December 31,  
    2020     2019  
             
ASSETS            
Current assets:            
Cash   $ 1,485     $ 1,120  
Prepaid expenses     97,132       1,975  
Total current assets     98,617       3,095  
                 
Total assets   $ 98,617     $ 3,095  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Bank overdrafts   $ -     $ 13,749  
Accounts payable and accrued expenses     4,948,890       5,455,063  
Accrued payroll and related expenses     3,864,055       3,724,050  
Advances     88,187       337,500  
Non-convertible notes payable, current portion     159,520       115,750  
Derivative liabilities     25,475,514       20,236,870  
Convertible notes payable, net of debt discount of $0 and $380,431, respectively     3,186,303       6,989,039  
Total current liabilities     37,722,469       36,872,021  
                 
Non-convertible notes payable     60,000       -  
PPP note payable     50,000       -  
Total liabilities     37,832,469       36,872,021  
                 
Commitments and contingencies (See Note 8)                
                 
Stockholders’ deficit:                
Preferred stock - 10,000,000 shares authorized, 9,989,900 shares undesignated                
Preferred stock - Series X, $0.0001 par value, $20,000 stated value, 100 shares authorized; 16.05 and 0 shares issued and outstanding, respectively     -       -  
Preferred stock - Series Y, $0.001 par value, $20,000 stated value, 1,000 shares authorized; 654.781794 and 0 shares issued; 626.995464 and 0 shares outstanding, and 27.786334 and 0 to be issued, respectively     1       -  
Preferred stock - Series C, $0.001 par value, 1,000 shares authorized; 1,000 shares issued and outstanding     1       1  
Preferred stock - Series A, $0.001 par value, 6,000 shares authorized; 0 shares issued and outstanding     -       -  
Preferred stock - Series B, $0.001 par value, 2,000 shares authorized; 0 shares issued and outstanding     -       -  
Common stock, $0.001 par 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, 907,379,814 and 944,659,814 shares, respectively     907,380       944,660  
Additional paid in capital     283,024,527       151,364,371  
Discount on preferred stock     (20,973,776 )     -  
Accumulated deficit     (301,185,712 )     (189,562,225 )
Total stockholders’ deficit     (37,733,852 )     (36,868,926 )
                 
Total liabilities and stockholders’ deficit   $ 98,617     $ 3,095  

 

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

 

F-2

 

 

MASSROOTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Year Ended
December 31,
 
    2020     2019  
             
             
Revenues   $ 6,964     $ 23,703  
                 
Operating Expenses:                
Cost of revenues     1,283       3,530  
Advertising     58,961       29,764  
Payroll and related expense     303,850       1,156,914  
Stock-based compensation     -       222,700  
Amortization of software costs     -       38,549  
Impairment of software costs     -       196,315  
Allowance for uncollectible advances to COWA Science Corporation (“COWA”)     -       360,500  
Other general and administrative expenses     803,081       1,460,867  
Total Operating Expenses     1,167,175       3,469,139  
                 
Loss From Operations     (1,160,211 )     (3,445,436 )
                 
Other Income (Expense):                
Interest expense     (5,139,321 )     (4,935,470 )
Preferred stock issuance costs     -       (5,585,594 )
Change in derivative liability for authorized shares shortfall     (170,319,590 )     (18,921,537 )
Change in fair value of derivative liabilities     (451,351 )     (685,415 )
Impairment on investment     -       (91,931 )
Gain on forgiveness of debt     250,000       -  
Gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable     162,109,131       -  
Gain (loss) on conversion of convertible notes     882       (603,529 )
Total Other Income (Expense)     (13,550,249 )     (30,823,476 )
                 
Net Loss Before Income Taxes     (14,710,460 )     (34,268,912 )
                 
Provision for Income Taxes (Benefit)     -       -  
                 
Net Loss     (14,710,460 )     (34,268,912 )
                 
Deemed dividend from warrant price protection     (95,838,488 )     (28,933,472 )
Deemed dividend resulting from amortization of preferred stock discount     (1,074,539 )     -  
Contingent beneficial conversion feature on preferred shares issuance     -       (45,147,093 )
Deemed dividend for issuance of common shares to settle warrant provision     -       (437,400 )
Deemed dividend from exchange of preferred shares for convertible notes     -       (1,476,280 )
                 
Net Loss Available to Common Stockholders   $ (111,623,487 )   $ (110,263,157 )
                 
Net loss per common share:                
Basic   $ (0.08 )   $ (0.19 )
Diluted   $ (0.08 )   $ (0.19 )
                 
Weighted average common shares outstanding:                
Basic     1,390,934,274       576,802,421  
Diluted     1,390,934,274       576,802,421  

 

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

 

F-3

 

 

MASSROOTS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 

    Preferred Stock                                                  
    Series X     Series Y     Series B     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Discount on
Preferred
    Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Stock     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 )     -       -       -       -  
                                                                                                                                 
Issuance of Series A preferred shares in exchange for warrants canceled     -       -       -       -       -       -       -       -       -       -       -       -       (296,746 )     -       -       (296,746 )
                                                                                                                                 
Sale of Series B Convertible Preferred Stock and warrants     -       -       -       -       1,126       1       -       -       -       -       -       -       1,407,499       -       -       1,407,500  
                                                                                                                                 
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 as origination shares     -       -       -       -       -       -       -       -       1,250,000       1,250       -       -       140,083       -       -       141,333  
                                                                                                                                 
Common shares issued upon conversion of convertible notes and accrued interest     -       -       -       -       -       -       -       -       111,174,464       111,174       37,160,000       37,160       1,583,984       -       -       1,732,318  
                                                                                                                                 
Common shares issued upon exercise of warrants for cash     -       -       -       -       -       -       -       -       1,555,160       1,555       1,126,250       1,126       170,268       -       -       172,949  
                                                                                                                                 
Common shares issued in settlement of a warrant provision     -       -       -       -       -       -       -       -       9,000,000       9,000       -       -       428,400       -       (437,400 )     -  
                                                                                                                                 
Common shares issued upon cashless exercise of warrants     -       -       -       -       -       -       -       -       3,997,661       3,998       -       -       (3,998 )     -       -       -  
                                                                                                                                 
Preferred and common shares issued for services     -       -       -       -       -       -       1,000       1       2,950,000       2,950       2,550,000       2,550       203,199       -       -       208,700  
                                                                                                                                 
Options issued for services     -       -       -       -       -       -       -       -       -       -       -       -       14,000       -       -       14,000  
                                                                                                                                 
Common shares issued to settle a true-up provision     -       -       -       -       -       -       -       -       5,553,191       5,553       -       -       16,661       -       -       22,214  
                                                                                                                                 
Contingent beneficial conversion feature on Preferred Shares issuance     -       -       -       -       -       -       -       -       -       -       -       -       45,147,093       -       (45,147,093 )     -  
                                                                                                                                 
Deemed dividend related to warrant price protection     -       -       -       -       -       -       -       -       -       -       -       -       28,933,472       -       (28,933,472 )     -  
                                                                                                                                 
Deemed dividend resulting from exchange of preferred Series A and B shares for convertible notes     -       -       -       -       -       -       -       -       -       -       -       -       (1,476,280 )     -       -       (1,476,280 )
                                                                                                                                 
Preferred Series B shares exchanged for convertible notes     -       -       -       -       (1,126 )     (1 )     -       -       -       -       -       -       (826,883 )     -       -       (826,884 )
                                                                                                                                 
Net loss     -       -       -       -       -       -       -       -       -       -       -       -       -       -       (34,268,912 )     (34,268,912 )
                                                                                                                                 
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       -       -       -  
                                                                                                                                 
Rescission of warrants exercised in prior year     -       -       -       -       -       -       -       -       -       -       (120,000 )     (120 )     (5,880 )     -       -       (6,000 )
                                                                                                                                 
Deemed dividend related to warrant price protection     -       -       -       -       -       -       -       -       -       -       -       -       95,838,488       -       (95,838,488 )     -  
                                                                                                                                 
Convertible note issued to CFO with BCF     -       -       -       -       -       -       -       -       -       -       -       -       64,143       -       -       64,143  
                                                                                                                                 
Sale of Series X preferred shares     16.05       -       -       -       -       -       -       -       -       -       -       -       321,000       -       -       321,000  
                                                                                                                                 
BCF recognized upon issuance of Series X preferred shares     -       -       -       -       -       -       -       -       -       -       -       -       454,200       (454,200 )     -       -  
                                                                                                                                 
Series Y preferred shares issued in exchange for convertible notes, accrued interest and warrants     -       -       654.781794       1       -       -       -       -       -       -       -       -       13,095,635       -       -       13,095,636  
                                                                                                                                 
BCF recognized upon issuance of Series Y preferred shares     -       -       -       -       -       -       -       -       -       -       -       -       21,594,115       (21,594,115 )     -       -  
                                                                                                                                 
Deemed dividend resulting from amortization of preferred stock discount     -       -       -       -       -       -       -       -       -       -       -       -       -       1,074,539       (1,074,539 )     -  
                                                                                                                                 
Net loss     -       -       -       -       -       -       -       -       -       -       -       -       -               (14,710,460 )     (14,710,460 )
                                                                                                                                 
Balance at December 31, 2020     16.05     $ -       654.781794     $ 1       -     $ -       1,000     $ 1       493,726,405     $ 493,727       907,379,814     $ 907,380     $ 283,024,527     $ (20,973,776 )   $ (301,185,712 )   $ (37,733,852 )

 

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

 

F-4

 

 

MASSROOTS, INC.

CONSOLIDATED STATEMENTS OF CASHFLOWS

 

    Year Ended
December 31,
 
    2020     2019  
Cash flows from operating activities:            
Net loss   $ (14,710,460 )   $ (34,268,912 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in fair value of derivative liabilities     451,351       685,415  
Change in derivative liability for authorized shares shortfall     170,319,590       18,921,537  
Depreciation and amortization     -       45,282  
Interest and amortization of debt discount     5,139,321       4,716,970  
(Gain) loss on conversion of convertible notes payable     (882 )     603,529  
Gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable     (162,109,131 )     -  
Gain on forgiveness of debt     (250,000 )     -  
Stock-based compensation     -       222,700  
Impairment on COWA advances     -       360,500  
Impairment of investment     -       65,000  
Loss on sale of investment in Canna Regs     -       91,931  
Impairment loss on software costs     -       196,315  
Preferred stock issuance costs     -       5,585,594  
Changes in operating assets and liabilities:                
Prepaid expenses     (95,157 )     12,025  
Advance to COWA, net     -       (360,500 )
Security deposit     -       36,000  
Accounts payable and accrued expenses     77,520       557,360  
Accrued payroll and related expenses     140,005       732,027  
Net cash used in operating activities     (1,037,843 )     (1,797,227 )
                 
Cash flows from investing activities:                
Proceeds from sale of Reg Tech and High Times     -       90,981  
Net cash provided by investing activities     -       90,981  
                 
Cash flows from financing activities:                
Bank overdrafts     (13,749 )     13,749  
Proceeds from sale of Series X preferred shares     321,000       -  
Proceeds from sale of Series B preferred shares and warrants     -       1,407,500  
Proceeds from exercise of warrants     -       172,949  
Proceeds from issuance of convertible notes payable     637,000       549,000  
Proceeds from issuance of non-convertible notes payable     82,911       175,000  
Repayment of non-convertible notes payable     (39,641 )     (45,400 )
Proceeds from advances     3,696       -  
Proceeds from PPP note payable    

50,000

     

-

 
Repayments of advances     (3,009 )     (595,000 )
Net cash provided by financing activities     1,038,208       1,677,798  
                 
Net increase (decrease) in cash     365       (28,448 )
                 
Cash, beginning of year     1,120       29,568  
                 
Cash, end of year   $ 1,485     $ 1,120  
                 
Supplemental disclosures of cash flow information:                
Cash paid during period for interest   $ -     $ 218,500  
Cash paid during period for taxes   $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Issuance of common stock previously to be issued   $ 37,160     $ 80  
Issuance of preferred Series A shares in exchange for warrants canceled   $ -     $ 296,746  
Conversions of preferred Series A shares to common shares   $ -     $ 3,137,248  
Common stock issued as origination shares   $ -     $ 141,333  
Common stock issued upon conversion of convertible notes and accrued interest   $ 370,755     $ 1,732,318  
Common shares contributed back to the Company and promptly retired   $ 69     $ -  
Common stock issued in settlement of a warrant provision   $ -     $ 437,400  
Common stock issued in exercise of cashless warrants   $ -     $ 3,998  
Deemed dividend related to warrant price protection   $ 95,838,488     $ 28,933,472  
Contingent beneficial conversion feature on preferred Series A shares   $ -     $ 45,147,093  
Deemed dividend resulting from exchange of preferred Series A and Series B shares for convertible notes   $ -     $ 1,476,280  
Preferred Series B shares exchanged for convertible notes   $ -     $ 826,884  
Convertible note payable issued to CFO with BCF   $ 64,143     $ -  
Derivative liability recognized as debt discount on newly issued convertible notes   $ 573,230     $ -  
Series Y preferred shares issued as settlement for convertible notes payable, accrued interest and warrants   $ 13,095,636     $ -  
Amortization of discount on preferred stock   $ 1,074,539     $ -  
Reclassify accrued interest to convertible notes payable   $ 1,049,329     $ -  
Recission of warrants exercised in prior year   $ 6,000          

 

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

 

F-5

 

 

MASSROOTS, INC.

 

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

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

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Our consolidated financial statements include the accounts of DDDigtal, Inc., Odava, Inc., MassRoots Supply Chain, Inc., and MassRoots Blockchain Technologies, Inc., our wholly-owned subsidiaries. All intercompany transactions were eliminated during consolidation.

 

NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

 

As of December 31, 2020, the Company had cash of $1,485 and a working capital deficit (current liabilities in excess of current assets) of $37,623,852. During the year ended December 31, 2020, the net loss available to common stockholders was $111,623,487 and net cash used in operating activities was $1,037,843. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the audited consolidated financial statements.

 

During the year ended December 31, 2020, the Company received proceeds of $637,000, $132,911, and $321,000 from the issuance of convertible notes, non-convertible notes, and Series X preferred shares, respectively. The Company does not have sufficient cash to fund operations for the next fiscal year.

 

The Company’s primary source of operating funds since inception has been cash proceeds from the public and private placements of the Company’s securities, including debt and equity securities, and proceeds from the exercise of warrants and options. The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future. The Company’s ability to continue its operations is dependent upon its ability to obtain additional capital through public or private equity offerings, debt financings or other sources; however, financing may not be available to the Company on acceptable terms, or at all. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and its ability to pursue its business strategy, and the Company may be forced to curtail or cease operations.

  

Management’s plans regarding these matters encompass the following actions: 1) obtain funding from new and current investors to alleviate the Company’s working capital deficiency; and 2) implement a plan to increase revenues. The Company’s continued existence is dependent upon its ability to translate its audience into revenues.  However, the outcome of management’s plans cannot be determined with any degree of certainty.

 

Accordingly, the accompanying audited 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 consolidated financial statements are issued. The carrying amounts of assets and liabilities presented in the audited consolidated financial statements do not necessarily purport to represent realizable or settlement values. The audited consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, leading to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak of COVID-19 and its effects on our business including our financial condition, liquidity, or results of operations at this time. Management is actively monitoring the global situation and its impact on the Company’s financial condition, liquidity, operations, customers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects that the COVID-19 outbreak will have on its results of operations, financial condition, or liquidity for fiscal year 2021. As of the date of this Annual Report on Form 10-K, 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.

 

F-6

 

 

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, liquidity, and capital resources, and those of the third parties on which the Company relies in fiscal year 2021.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  

Principles of Consolidation

 

The 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.

 

Emerging Growth Company

 

We are an “emerging growth company” under the JOBS Act. For as long as we are an “emerging growth company,” we are not required to: (i) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies, (ii) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (iii) comply with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer or (iv) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. However, we have elected to “opt out” of the extended transition period discussed in (i) and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards are required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.

 

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 consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk.

 

The Company follows ASC 825-10, which permits entities to choose to measure many financial instruments and certain other items at fair value.

  

Cash

 

For purposes of the 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 December 31, 2020 and 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 December 31, 2020 and 2019, the uninsured balances amounted to $0.

  

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.

 

F-7

 

 

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.

 

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.

 

Advertising

 

The Company charges the costs of advertising to expense as incurred. Advertising costs were $58,961 and $29,764 for the year ended December 31, 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.

 

F-8

 

 

Income Taxes

 

The Company follows ASC Subtopic 740-10, “Income Taxes” (“ASC 740-10”) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period.

 

If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.

 

Convertible Instruments

 

U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under ASC 480, “Distinguishing Liabilities From Equity.”

  

When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption using the effective interest method.

 

Beneficial Conversion Features and Deemed Dividends

 

The Company records a beneficial conversion feature for preferred stock when, on the date of issuance, the conversion rate is less than the Company’s stock price. The Company also records, when necessary, a contingent beneficial conversion resulting from price protection of the conversion price of preferred stock, based on the change in the intrinsic value of the conversion options embedded in such preferred stock.

 

The Company records, when necessary, deemed dividends for: (i) warrant price protection, based on the difference between the fair value of the warrants immediately before and after the repricing (inclusive of any full ratchet provisions); (ii) the exchange of preferred shares for convertible notes, based on the amount of the face value of the convertible notes in excess of the carrying value of the preferred shares; (iii) the settlement of warrant provisions, based on the fair value of the common shares issued; and (iv) amortization of discount on preferred stock resulting from recognition of a beneficial conversion feature.

 

Derivative Financial Instruments

 

The Company classifies as equity any contracts that: (i) require physical settlement or net-share settlement; or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that: (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control); or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

 

F-9

 

 

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 December 31, 2020 and 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.

 

Segment Reporting

 

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the Chief Executive Officer, or decision-making group, in deciding the method to allocate resources and assess performance. The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.

 

Net Earnings (Loss) Per Common Share

 

The Company computes earnings (loss) per share under ASC subtopic 260-10, Earnings Per Share. Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods, as applicable.

 

F-10

 

 

The computation of basic and diluted income (loss) per share, for the year ended December 31, 2020 and 2019 excludes potentially dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during the period.

  

Potentially dilutive securities excluded from the computation of basic and diluted net loss per share are as follows:

 

    December 31,     December 31,  
    2020     2019  
Common shares issuable upon conversion of convertible notes     2,562,481,459       3,697,833,022  
Options to purchase common shares     27,621,765       27,621,765  
Warrants to purchase common shares     2,521,077,555       3,342,376,365  
Common shares issuable upon conversion of preferred stock     6,709,317,940       -  
Total potentially dilutive shares     11,820,498,719       7,067,831,152  

 

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 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 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.

 

F-11

 

 

NOTE 4 – INVESTMENTS

 

As of December 31, 2020 and 2019, the carrying value of our investments in privately held companies totaled $0 and $0, respectively. These investments are accounted for as cost method investments, as we owned less than 20% of the voting securities and do not have the ability to exercise significant influence over operating and financial policies of the entities.

 

During the year ended December 31, 2017, the Company acquired 23,810 shares of Class A common stock of Hightimes Holding Corp. for $100,002, or $4.20 per share. As a result of a forward share split of 1.9308657-for-1 on January 15, 2018, MassRoots owned 45,974 shares of Class A common stock. The acquired Class A common stock were considered non-marketable securities. The Company incurred an impairment of $65,000 on these shares during the year ended December 31, 2019. The Company sold 45,974 shares of Class A common stock for proceeds of $35,000 during the year ended December 31, 2019.

 

On July 13, 2017, the Company purchased an unsecured convertible promissory note in the principal amount of $300,000 from CannaRegs, Ltd, a Colorado limited liability company (“CannaRegs”). The note bears interest at a rate of 5% per annum and matures on December 19, 2019. In the event CannaRegs consummates an equity financing in excess of $2,000,000 prior to the maturity date of the note, the outstanding principal and any accrued and unpaid interest automatically converts into equity securities of the same class or series issued by CannaRegs at the lesser of: a) 90% of the price paid per equity security or b) a price reflecting a valuation cap of $4,500,000.

 

On July 17, 2017, MassRoots converted the note into 430,622 shares of CannaRegs’ common stock. In 2018, CannaRegs re-incorporated as a Delaware C corporation under the name Regs Technology, Inc. (“Regs Technology”), keeping the same capitalization structure and business operations. MassRoots valued its holdings at $0 and $147,876 as of December 31, 2019 and 2018, respectively. The Company recorded an impairment expense of $155,336 on its holdings during 2018 and recorded a $91,931 loss on the sale of investment during the year ended December 31, 2019. The Company sold its shares of Regs Technology for $55,983 during the year ended December 31, 2019. MassRoots owned less than 1% of Regs Technology’s issued and outstanding shares prior to the sale.

 

NOTE 5 – ADVANCES TO COWA SCIENCE CORPORATION

 

On February 11, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MassRoots Supply Chain, Inc., a wholly-owned subsidiary of the Company (“Merger Subsidiary”), COWA Science Corporation, a Delaware corporation (“COWA”), and Christopher Alameddin, an individual acting solely in his capacity as a stockholder representative (“Stockholder Representative”). Pursuant to the Merger Agreement, Merger Subsidiary will be merged with and into COWA, whereby the separate corporate existence of Merger Subsidiary will cease and COWA will be the surviving entity (the “Surviving Entity”) and will be a wholly-owned subsidiary of the Company (the “Merger”).

 

Upon effectiveness of the Merger (such time, the “Effective Date”), MassRoots will issue 50,000,000 shares of its common stock to the stockholders of COWA, allocated pro-rata based on each stockholder’s respective holdings of COWA immediately prior to the Effective Date and each share of the common stock of Merger Subsidiary will be converted into one newly issued, fully paid and non-assessable share of common stock of the Surviving Entity. If (i) within three years after the Effective Date, COWA has generated an aggregate of $2.5 million in revenue, the Company shall issue an aggregate of 25 million shares of common stock to the COWA stockholders; and (ii) within three years after the Effective Date, COWA has generated an aggregate of $7.5 million in revenue (inclusive of the $2.5 million in revenue generated in clause (i)), the Company shall issue an aggregate of 25 million additional shares of common stock to the COWA stockholders.

 

On February 24, 2020, the Company terminated the Agreement and Plan of Merger by and among the Company, Merger Subsidiary, COWA and Christopher Alameddin.

 

As of December 31, 2019, MassRoots had advanced $370,500 to COWA for working capital, which is to be repaid on-demand should the Merger not be effectuated. As of December 31, 2019, COWA had repaid $10,000 and the Company wrote off the $360,500 balance of these advances. 

  

F-12

 

 

NOTE 6 – PROPERTY AND EQUIPMENT

 

Property and equipment as of December 31, 2020 and December 31, 2019 is summarized as follows:

 

    December 31,
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 years ended December 31, 2020 and 2019 was $0 and $6,720, respectively.

 

NOTE 7 – SOFTWARE COSTS

  

In January 2018, MassRoots entered into a Master Services Agreement with MEV, LLC (“MEV”) pursuant to which MEV will assist with the development and servicing of the Company’s technology platform, including its mobile applications, business portal and WeedPass. MassRoots has capitalized the billable costs of engineers that were devoted to building the system and developing additional features that enhanced its ability to generate revenue. MassRoots did not capitalize any costs associated with maintenance, user-testing, analysis and planning of the system. The Company has been amortizing these capitalized costs using a straight-line methodology over five years, since July 5, 2018.

 

During fiscal year 2018, MassRoots paid MEV $521,839 with respect to the development and maintenance of its platform, of which MassRoots capitalized $260,565 in development costs.

 

During the year ended December 31, 2020 and 2019, MassRoots incurred amortization of software costs of $0 and $38,549, respectively. During the same period, MassRoots incurred impairment of software costs of $0 and $196,315, respectively.

 

NOTE 8 – ADVANCES, NON-CONVERTIBLE NOTES PAYABLE AND PPP NOTE PAYABLE

 

During the year ended December 31, 2020 and 2019, the Company received aggregate proceeds from advances of $3,696 and $0, received forgiveness of advances for $250,000 and $0, and repaid an aggregate of $3,009 and $595,000, respectively. Included in the year ended December 31, 2020 were $3,696 of advances from and $509 of repayments to the Company’s Chief Executive Officer (See Note 18). The remaining 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 December 31, 2020 and 2019, the Company owed $88,187 and $337,500 in principal and $0 and $10,500 in accrued interest, respectively.

  

During the year ended December 31, 2020 and 2019, the Company received proceeds from the issuance of non-convertible notes of $82,911and $175,000 and repaid an aggregate of $39,641 and $45,400, 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. On April 17, 2020, the outstanding principal balance of $23,500 and accrued interest of $17,281 on non-convertible notes held by one holder was consolidated into a new non-convertible note with a face value of $79,000, resulting in a loss on debt settlement of $38,219. As of December 31, 2020 and 2019, the Company owed $269,520 and $115,750 in principal and $251,612 and $117,924 in accrued interest, respectively.

 

On May 4, 2020, the Company received proceeds of $50,000 from a PPP note. The note has a maturity date of May 4, 2020 and bears 1% interest per annum. As of December 31, 2020, the Company owed $50,000 in principal and $330 in accrued interest on this note.

 

NOTE 9 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

As of December 31, 2020 and 2019, the Company owed accounts payable and accrued expenses of $4,948,890 and $5,455,063, respectively. These are primarily comprised of payments to vendors, accrued interest on debt, and accrued legal bills.

 

F-13

 

 

NOTE 10 – 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 December 31, 2020 and 2019, the Company owed payroll tax liabilities, including penalties, of $3,864,055 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 June 30, 2021.

 

NOTE 11 – COMMITMENTS AND CONTINGENCES

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results. 

 

Power Up Lending Group, Ltd. Complaint

 

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 Up’s 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. On February 9, 2021, a motion for default judgment was granted and the default judgment in the total amount of $350,551.10 was entered against the Company and Mr. Dietrich jointly and severally.

 

Sheppard Mullin’s Demand for Arbitration

 

On December 1, 2020, Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin”), the Company’s former securities counsel, filed a demand for arbitration at JAMS in New York, New York against the Company, alleging the Company’s breach of an engagement agreement dated January 4, 2018, and a failure of the Company to pay $487,390.73 of outstanding legal fees to Sheppard Mullin. Sheppard Mullin seeks to collect the entirety of the amount owed by the Company in accordance with said engagement agreement.

 

Rother Investments’ Petition

 

On October 28, 2020, Rother Investments, LLC (“Rother Investments”) filed a complaint in the District Court of 419th Judicial District, Travis County, Texas against the Company, alleging the Company’s default under a certain promissory note (the “Rother Investments Note”) in payment of the outstanding principal amount and interest under the Note, as described in the complaint. Rother Investments seeks to collect the amount of $124,750.00 as of the date of the complaint with late fees continuing to accrue on a daily basis, monetary relief of over $100,000 but not more than $200,000.00 pursuant to Tex. R. Civ. P. 47(c)(3), court’s costs and attorney’s fees, pre-judgment and post-judgment interest, and such other relief as the court deems appropriate.

 

Trawick’s Complaint

 

On or about January 25, 2021, Travis Trawick (“Trawick”) filed a complaint against the Company and Isaac Dietrich, an officer and director of the Company, in the Circuit Court for the City of Virginia Beach, Virginia, asserting the Company’s failure to remit payments under the certain promissory note, as subsequently amended and modified, and ancillary documents thereto (collectively, the “Note”), and Mr. Dietrich’s failure to fulfill its obligations, as the guarantor, under the Note. Trawick demands a judgment in his favor in the amount exceeding $130,336.15, the exact amount to be proven at trial including pre and post-judgment interest, reasonable attorneys’ fees, court costs, other taxable costs, and such other relief as the court deems appropriate.

 

NOTE 12 – 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.

 

F-14

 

 

In December 2018, the Company made payments of an aggregate of $1,762,500 to holders of July 2018 notes. As of December 31, 2018, the aggregate remaining face value of the notes was $390,000. During the year ended December 31, 2019, holders of the July 2018 notes converted $390,000 in principal and $22,831 in interest into an aggregate of 10,102,353 shares of the Company’s common stock for settlement of the remaining balance due. The balance of these notes was $0 as of December 31, 2019.

 

In December 2018, the Company issued convertible promissory notes in the aggregate principal amount of $90,000 (including an aggregate original issuance discount of $15,000) maturing June 1, 2019 and bearing interest of 5% per annum. The Company shall have the right to prepay the notes for an amount equal to 130% multiplied by the portion of the Outstanding Balance (as defined in the notes) being prepaid. The investors shall have the right to convert the Outstanding Balance of the note at any time into shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. During the year ended December 31, 2019, the holder converted $90,000 in principal and $9,000 of accrued interest into an aggregate of 6,879,913 shares of common stock. As of December 31, 2019, the aggregate carrying value of the notes was $0.

 

On December 17, 2018, the Company issued a secured convertible promissory note in the principal amount of $2,225,000 (including an original issuance discount of $225,000) that matured on December 17, 2019 and bears interest at a rate of 8% per annum (which increased to 22% on July 16, 2019 upon the occurrence of an event of default). The note is secured by the Security Agreement (as defined below). The investor has the right to convert the Outstanding Balance (as defined in the note) of the note at any time into shares of common stock of the Company at a conversion price of $0.35 per share, subject to adjustment. Commencing on June 17, 2019, the investor has the right to redeem all or any portion of the note; provided, however, the investor may not request redemption in an amount that exceeds $350,000 during any single calendar month; provided, further however, upon the occurrence of an event of default, the redemption amount in any calendar month may exceed $350,000. Payments on redemption amounts may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of: (a) $0.35 per share, subject to adjustment; and (b) the Market Price (as defined in the note), or a combination thereof. Upon the occurrence of an event of default, the investor may accelerate the note pursuant to which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the note). The Company is prohibited from effecting a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased by the investor up to, but not exceeding, 9.99%.

 

In connection with the December 2018 note, the Company also entered into a security agreement (the “Security Agreement”) on the closing date pursuant to which the Company granted the investor a security interest in the Collateral (as defined in the Security Agreement). On July 16, 2019, the Company received a notice from the noteholder indicating that events of default had occurred and asserting default penalties of $761,330. During the year ended December 31, 2019, the noteholder converted $345,000 of principal into an aggregate of 53,522,295 shares of common stock. During the year ended December 31, 2020, (i) the noteholder converted $37,000 of principal into an aggregate of 31,109,551 shares of common stock; and (ii) $1,049,329 of accrued interest was reclassified to the principal balance of this note. As of December 31, 2020 and 2019, the remaining carrying value of the note was $2,892,330 and $1,880,000, respectively, net of debt discount of $0. As of December 31, 2020 and 2019, accrued interest payable of $1,073,809 and $1,327,110, respectively, was outstanding on the note.

 

On January 25, 2019, the Company issued a convertible promissory note in the principal amount of $55,000 (including original issuance discount of $5,000) that matured July 25, 2019 and bearing a one-time interest fee of 10%. The investor has the right to convert the Outstanding Balance (as defined in the note) of the note at any time into shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. Upon maturity, payment may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of: (a) $0.075 per share, subject to adjustment; and (b) the Market Price (as defined in the notes), 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 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%. As of December 31, 2020 and 2019, the remaining carrying value of the notes was $55,000 and $50,000, net of debt discount of $0 and $5,000, respectively. As of December 31, 2020 and 2019, accrued interest payable of $92,600 and $40,219, respectively, was outstanding on the note. During the quarter ended December 31, 2020, this note was included in convertible notes payable on the consolidated balance sheet whereas it had been previously included in non-convertible notes payable. The accompanying balance sheet for December 31, 2019 has been adjusted to reflect the reclassification of this note.

 

F-15

 

 

From January to June 2019, the Company issued convertible promissory notes in the aggregate principal amount of $389,000 (including aggregate original issuance discount of $39,000) that matured at dates ranging from July 15, 2019 to June 6, 2020 and accruing interest at rates ranging from 5% to 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. Upon maturity, payment may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of: (a) $0.075 per share, subject to adjustment; and (b) the Market Price (as defined in the notes), or a combination thereof. Upon the occurrence of an event of default, the investors may accelerate the note pursuant to which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the notes). The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased by the investor up to, but not exceeding, 9.99%. In January 2020, one of the promissory notes was amended whereby the conversion price for $9,202 which is a portion of the principal amount of the note was amended to $0.0004 per share.   The amendment was deemed a debt modification and accounted for accordingly. During the year ended December 31, 2019, the noteholders converted $31,180 of principal and $8,000 of accrued interest into an aggregate of 10,000,000 shares of common stock. During the year ended December 31, 2020, one of the holders converted $24,826 of principal into an aggregate of 35,005,850 shares of common stock; and one of the holders converted $168,820 of principal and $362,027 of accrued interest into 26.54237 shares of Series Y preferred shares having a stated value of $530,847, resulting in a reduction of the derivative liability by $719,416 and a gain on settlement of $719,416. As of December 31, 2020 and 2019, the remaining carrying value of the notes was $164,174 and $247,746, net of debt discount of $0 and $110,074, respectively. As of December 31, 2020 and 2019, accrued interest payable of $1,191,998 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%. During the year ended December 31, 2020, two of the holders converted $72,600 of principal and $112,671 of accrued interest into 9.26353 shares of Series Y preferred shares having a stated value of $185,271, resulting in a reduction of the derivative liability by $301,257 and a gain on settlement of $301,257. As of December 31, 2020 and 2019, the remaining carrying value of the notes was $36,300 and $14,871, net of debt discount of $0 and $94,029, respectively. As of December 31, 2020 and 2019, accrued interest payable of $57,231 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%. During the year ended December 31, 2020, the holders converted $110,000 of principal and $123,451 of accrued interest into 11.67255 shares of Series Y preferred shares having a stated value of $233,451, resulting in a reduction of the derivative liability by $379,600 and a gain on settlement of $379,600. As of December 31, 2020 and 2019, the remaining carrying value of the notes was $0 and $15,027, net of debt discount of $0 and $94,973, respectively. As of December 31, 2020 and 2019, accrued interest payable of $0 and $38,904, respectively, was outstanding on the notes.

 

F-16

 

 

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 year ended December 31, 2020, the noteholders converted $31,137 of principal and $128 of accrued interest into an aggregate of 6,253,056 shares of common stock; and the noteholders converted $4,793,113 of principal and $2,564,325 of accrued interest into 367.8719 shares of Series Y preferred shares having a stated value of $7,357,438, resulting in a reduction of the derivative liability by $89,648,951 and a gain on settlement of $89,648,951. As of December 31, 2020 and 2019, the remaining carrying value of the notes was $38,500 and $4,781,395, net of debt discount of $0 and $81,355, respectively. As of December 31, 2020 and 2019, accrued interest payable of $54,473 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%. During the year ended December 31, 2020, the noteholders converted $700,700 of principal and $462,763 of accrued interest into 58.17315 shares of Series Y preferred shares having a stated value of $1,163,463, resulting in a reduction of the derivative liability by $1,885,194, a reduction in debt discount by $72,637 and a gain on settlement of $1,812,557. As of December 31, 2020, the remaining carrying value of the notes was $0, net of debt discount of $0. As of December 31, 2020, accrued interest payable of $13,844 was outstanding on the notes.

 

On December 15, 2020, $79,143 of accrued compensation owed to the Company’s Chief Financial Officer was settled by the issuance of a convertible note in the amount of $64,143, having a maturity date of June 15, 2021 and bearing interest of 12% per annum, resulting in a gain on settlement of accounts payable of $15,000. The holder has the right to convert the Outstanding Balance (as defined in the note) of the note at any time into shares of common stock of the Company at a conversion price of $0.0003 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date. As a result of the beneficial conversion feature of the note, debt discount of $64,143 was recognized with a corresponding increase in additional paid-in capital. On December 24, 2020, the holder converted $64,143 of principal into 3.20716 shares of Series Y preferred shares having a stated value of $64,143, resulting in a reduction in debt discount by $60,971 and a loss on settlement of $60,971. As of December 31, 2020, the remaining carrying value of the note was $0, net of debt discount of $0. As of December 31, 2020, accrued interest payable of $0 was outstanding on the note (See Note 18).

 

As of December 31, 2020 and 2019, the remaining carrying value of the convertible notes was $3,186,303 and $6,989,039, net of debt discount of $0 and $380,431, respectively. As of December 31, 2020 and 2019, accrued interest payable of $2,483,955 and $3,495,717, respectively, was outstanding on the notes.

 

Upon the issuance of certain convertible notes, the Company determined that the features associated with the embedded conversion option embedded in the notes, should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.

 

F-17

 

 

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 13).

 

NOTE 13 – DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS

 

Upon the issuance of certain convertible debentures, warrants, and preferred stock, the Company determined that the features associated with the embedded conversion option embedded in the debentures, should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.

 

During the year ended December 31, 2019, upon issuance, 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.

 

During the year ended December 31, 2020, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion of the underlying instrument), the Company estimated the fair value of the embedded derivatives using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 119.33% to 128.94%, (3) risk-free interest rate of 0.06% to 1.56%, and (4) expected life of 0.06 to 2.11 years.

 

On December 31, 2020, the Company estimated the fair value of the embedded derivatives of $25,475,514 using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 132.11%, (3) risk-free interest rate of 0.08% to 0.13%, and (4) expected life of 0.04 to 2.08 years.

 

The Company adopted the provisions of ASC 825-10. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

 

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

 

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

 

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

 

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

  

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

 

F-18

 

 

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

 

As of December 31, 2020, the Company did not have any derivative instruments that were designated as hedges.

  

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

 

    December 31, 
2020
    Quoted Prices 
in Active 
Markets for 
Identical Assets
(Level 1)
    Significant 
Other 
Observable 
Inputs 
(Level 2)
    Significant 
Unobservable 
Inputs 
(Level 3)
 
Derivative liability   $ 25,475,514     $         -     $                -     $ 25,475,514  

 

    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 liability   $ 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 two years ended December 31, 2020: 

 

Balance, December 31, 2018   $ -  
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions     686,059  
Transfers out due to conversions of convertible notes and accrued interest into common shares     (56,142 )
Derivative liability due to authorized shares shortfall     18,921,538  
Mark to market to December 31, 2019     685,415  
Balance, December 31, 2019   $ 20,236,870  
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions     573,230  
Transfers out due to conversions of convertible notes and accrued interest into common shares     (278,545 )
Transfers out due to conversions of convertible notes, accrued interest and warrants into Series Y preferred shares     (165,826,982 )
Derivative liability due to authorized shares shortfall     170,319,590  
Mark to market to December 31, 2020     451,351  
Balance, December 31, 2020   $ 25,4754,514  
         
Loss on change in derivative liabilities for the year ended December 31, 2020   $ (451,351 )

 

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.

 

F-19

 

 

NOTE 14 – 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 have a $1,250 stated value and are 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.

 

On July 2, 2019 and July 11, 2019, the Company entered into exchange agreements with certain stockholders pursuant to which it exchanged warrants issued in July 2018 to purchase an aggregate of 26,000,000 shares of the Company’s common stock for an aggregate of 6,000 shares of Series A Preferred Stock. Accordingly, the fair value of the Series A Preferred Stock of $5,882,340 was recognized, offset by preferred stock issuance costs of $5,585,594, net of a decrease in additional paid in capital of $296,746 for the fair value of the canceled warrants.

 

From July 5, 2019 to September 19, 2019, the Company issued an aggregate of 80,000,000 shares of common stock and 903,823,564 shares of common stock to be issued upon the conversion of 3,200 shares of Series A Preferred Stock.  Accordingly, Series A Preferred Stock was decreased by $3,137,248, common stock was increased by the par value of the common shares issued of $80,000, common stock to be issued was increased by the par value of the common shares to be issued $903,824, and additional paid in capital was increased by $2,153,424.

 

On December 3, 2019, the Company retired the remaining 2,800 shares of Series A Preferred Stock in exchange for the issuance of convertible notes (the “Exchange”) in the aggregate principal amount of $3,500,000.  Accordingly, Series A Preferred Stock was decreased by $2,745,086, additional paid in capital was decreased by $754,914 (stemming from recognition of a deemed dividend recognized immediately prior to the Exchange), and convertible notes payable was increased by $3,500,000. In addition, the derivative liabilities on the Series A Preferred Stock (stemming from the inability to convert caused by the authorized shares shortfall) of $2,012,420 was eliminated with a corresponding decrease in derivative liability for authorized shares shortfall expense. Lastly, derivative liabilities on the newly issued convertible notes (stemming from the inability to convert caused by the authorized shares shortfall) of $54,364 was recognized as an increase in derivative liabilities and a corresponding increase in debt discount on the convertible notes payable.

 

As of December 31, 2020 and 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 have a $1,250 stated value and are 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.

 

From June 24 to November 16, 2019, the Company issued 1,126 shares of Series B Preferred Stock for proceeds of $1,407,500.

 

From December 3 through December 31, 2019, the Company retired the remaining 1,126 shares of Series B Preferred Stock in exchange for the issuance of convertible notes (the “Exchange”) in the aggregate principal amount of $1,548,250.  Accordingly, Series B Preferred Stock was decreased by the par value of the preferred shares of $1, additional paid in capital was decreased by $826,883 (for the remaining carrying value of the preferred shares), additional paid in capital was decreased by $721,366 (stemming from recognition of a deemed dividend recognized immediately prior to the Exchange), and convertible notes payable was increased by $1,548,250. In addition, the derivative liabilities on the Series B Preferred Stock (stemming from the inability to convert caused by the authorized shares shortfall) of $776,965 was eliminated with a corresponding decrease in derivative liability for authorized shares shortfall expense. Lastly, derivative liabilities on the newly issued convertible notes (stemming from the inability to convert caused by the authorized shares shortfall) of $85,370 was recognized as an increase in derivative liabilities and a corresponding increase in debt discount on the convertible notes payable.

 

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

 

F-20

 

 

On July 16, 2019, the Company authorized the issuance of 1,000 Series C Preferred Stock, par value $0.001 per share. The 1,000 Series C preferred shares are convertible into 1,000,000 shares of common stock upon the Company listing on a national exchange and other conditions. The Certificate of Designation for the Series C Preferred Stock was filed on July 19, 2019.

 

On October 21, 2019, the Company issued 1,000 Series C Preferred Shares with a value of $10,000 for services rendered.

 

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

 

On November 23, 2020, the Company authorized the issuance of 100 shares of Series X Preferred Stock, par value $0.0001 per share. The Series X Preferred Stock has a $20,000 stated value and is convertible into shares of common stock at $0.002 per share, subjected to certain adjustments. In the event the Company issues or sells any securities with an effective price or exercise or conversion price less than the Conversion Price, the Conversion Price shall be reduced to the sale price or exercise or conversion price of the securities issued or sold. The Certificate of Designation for the Series X Preferred Stock was filed on November 23, 2020.

 

From November 25 to December 23, 2020, the Company issued an aggregate of 16.05 shares of Series X Preferred Stock for aggregate proceeds of $321,000. Upon each issuance of Series X shares, the conversion price was less than the Company’s stock price. Accordingly, during the year ended December 31, 2020, the Company recognized an aggregate beneficial conversion feature of $454,200 upon issuance of the Series X preferred shares. The resulting amortization of the preferred stock discount of $46,448 is recognized as a deemed dividend in the accompanying statement of operations. The preferred stock discount is being amortized over 120 days, which is the maximum amount of time the Company has to conduct a stockholder vote to increase the Company’s authorized shares.

 

As of December 31, 2020 and 2019, there were 16.05 and 0 shares, respectively, of Series X Preferred Stock outstanding.

 

On December 30, 2020, the Company authorized the issuance of 1,000 shares of Series Y Preferred Stock, par value $0.001 per share. The Series Y Preferred Stock has a $20,000 stated value and is convertible into shares of common stock at $0.002 per share, subjected to certain adjustments. In the event the Company issues or sells any securities with an effective price or exercise or conversion price less than the Conversion Price, the Conversion Price shall be reduced to the sale price or exercise or conversion price of the securities issued or sold. The Certificate of Designation for the Series Y Preferred Stock was filed on December 30, 2020.

 

From December 23 to December 30, 2020, the Company issued 654.781794 shares of Series Y Preferred Stock, having a stated value of $13,095,636, in exchange for convertible notes payable of $5,775,767 (net of debt discount of $133,608), accrued interest of $3,625,237, and 14,765,624,721 warrants. The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $92,934,419, a reduction of derivative liabilities related to the warrants of $72,892,563, and a net gain on settlement of $162,132,350. Included in the foregoing amounts is 3.20716 shares of Series Y Preferred Stock, having a stated value of $64,143, issued to the Company’s Chief Financial Officer, in exchange for convertible notes of $3,172 (net of debt discount of $60,971), resulting in a loss on settlement of $60,971. Upon each issuance of Series Y shares, the conversion price was less than the Company’s stock price. Accordingly, during the year ended December 31, 2020, the Company recognized an aggregate beneficial conversion feature of $21,594,115 upon issuance of the Series Y preferred shares. The resulting amortization of the preferred stock discount of $1,028,091 is recognized as a deemed dividend in the accompanying statement of operations. The preferred stock discount is being amortized over 120 days, which is the maximum amount of time the Company has to conduct a stockholder vote to increase the Company’s authorized shares.

 

As of December 31, 2020, there were 626.995464 shares of Series Y Preferred Stock outstanding and 27.786334 shares to be issued.

 

Common Stock

 

The Company is authorized to issue 500,000,000 shares of common stock, par value $0.001 per share.

 

During the year ended December 31, 2019, the Company issued an aggregate of 80,000 shares of its common stock recorded as to be issued on December 31, 2018 for a cash warrant exercise.

 

During the year ended December 31, 2019, the Company issued an aggregate of 1,591,240 shares of its common stock as interest expense with a value of $36,830.

 

F-21

 

 

During the year ended December 31, 2019, the Company issued 5,553,191 shares of its common stock to satisfy a true-up provision with a value of $22,213.

 

During the year ended December 31, 2019, the Company issued an aggregate of 2,950,000 shares of its common stock and recorded an additional 2,550,000 shares as to be issued, having an aggregate fair value of $208,700, for services rendered.

  

During the year ended December 31, 2019, the Company issued an aggregate of 3,997,661 shares of its common stock upon the cashless exercise of outstanding warrants. Accordingly, common stock was increased by the par value of the common shares issued of $3,998 with a corresponding decrease in additional paid in capital.

 

During the year ended December 31, 2019, the Company issued 9,000,000 shares for the settlement of a warrant provision.  The fair value of the common shares issued of $437,400 was recognized as a deemed dividend whereby common stock was increased by the par value of the common shares issued of $9,000, additional paid in capital was increased by $428,400 and retained earnings was decreased by $437,400.

 

During the year ended December 31, 2019, the Company issued an aggregate of 1,555,160 shares of its common stock and recorded an additional 1,126,250 shares of common stock as to be issued for the cash exercise of warrants for proceeds of $172,950.

 

During the year ended December 31, 2019, the Company issued an aggregate of 111,174,464 shares of its common stock and 37,160,000 shares of common stock to be issued, having an aggregate fair value of $1,732,318, for the settlement of convertible debt with a principal amount of $1,041,680 and accrued interest of $40,131, which resulted in the elimination of $46,978 of derivative liabilities and an aggregate loss on conversion of convertible notes of $603,529.  Accordingly, common stock was increased by the par value of the common shares issued of $111,174, common stock to be issued was increased by the par value of the common shares to be issued of $37,160 and additional paid in capital was increased by $1,583,984.

 

During the year ended December 31, 2019, the Company issued an aggregate of 1,250,000 shares of its common stock as origination shares with a principal amount of $141,333.

 

During the year ended December 31, 2019, the Company issued an aggregate of 80,000,000 shares of common stock and 903,823,564 shares of common stock to be issued upon the conversion of 3,200 shares of Series A Preferred Stock.  Accordingly, Series A Preferred Stock was decreased by $3,137,248, common stock was increased by the par value of the common shares issued of $80,000, common stock to be issued was increased by the par value of the common shares to be issued of $903,824 and additional paid in capital was increased by $2,153,424.

 

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 year ended December 31, 2020, a warrant exercise in 2019, to purchase 120,000 common shares, was rescinded. The rescission was recorded as a decrease in common stock to be issued of $120 and a decrease in additional paid-in capital of $5,880 with a corresponding increase in accounts payable and accrued expenses of $6,000.

 

During the year ended December 31, 2020, the Company issued an aggregate of 72,368,457 shares of its common stock, having an aggregate fair value of $370,755, upon the conversion of convertible notes with a principal amount of $92,964 and accrued interest of $128, which resulted in the 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.

 

As of December 31, 2020 and 2019, there were 493,726,405 and 384,266,948 shares, respectively, of common stock issued and outstanding.

 

F-22

 

 

NOTE 15 – WARRANTS

 

During the year ended December 31, 2019, the Company received $172,950 from cash exercises of warrants to purchase 1,555,160 shares of common stock. During the same period, the Company issued 3,997,661 shares of common stock upon the cashless exercise of warrants to purchase 12,686,249 shares of common stock.

 

On July 2, 2019 and July 11, 2019, the Company entered into exchange agreements with certain stockholders pursuant to which it exchanged warrants issued in July 2018 to purchase an aggregate of 26,000,000 shares of the Company’s common stock for an aggregate of 6,000 shares of Series A Preferred Stock.

 

During the year ended December 31, 2019, the Company issued 568,118,340 warrants to purchase shares of common stock at $0.075 per share pursuant to the Series B Preferred Stock offering.

 

During the year ended December 31, 2019, as a result of the Company’s Series B Preferred Stock offering, the ratchet provisions in certain warrants were triggered, causing the exercise price to be reset to $0.00224 per share. Accordingly, warrants to purchase 600,551,672 shares of common stock were repriced to a $0.00224 per share exercise price as of December 31, 2019. In addition, warrants to purchase an additional 2,729,734,691 shares of common stock at $0.00224 per share were issued as a result of this ratchet provision.

 

During the year ended December 31, 2019, the Company recorded $28,933,472 in deemed dividends as a result of the triggering of price protection provisions in certain outstanding warrants. Accordingly, additional paid in capital was increased by $28,933,472 with a corresponding decrease in the accumulated deficit.

 

From December 23 to December 30, 2020, the Company issued 654.78 shares of Series Y Preferred Stock, having a stated value of $13,095,636, in exchange for convertible notes payable of $5,775,767 (net of debt discount of $133,608), accrued interest of $3,625,237, and 14,764,624,721 warrants. The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $92,934,419, a reduction of derivative liabilities related to the warrants of $72,892,563, and a net gain on settlement of $162,132,350.

 

During the year ended December 31, 2020, the Company recorded $95,838,488 in deemed dividends as a result of the triggering of price protection provisions in certain outstanding warrants. Accordingly, additional paid in capital was increased by $95,838,488 with a corresponding decrease in the accumulated deficit.

 

A summary of the warrant activity for the years ended December 31, 2020 and 2019 is as follows:

 

    Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2018     74,910,002     $ 0.14       3.89     $ -  
Granted     3,321,040,292     $ 0.00064                  
Exercised     (15,367,659 )   $ 0.06                  
Canceled/Exchanged     (38,206,270 )   $ 0.12                  
Outstanding at December 31, 2019     3,342,376,365     $ 0.00265       2.96     $ 8,791,956  
Granted     13,943,650,911     $ 0.00040                  
Exercised     -                          
Canceled/Exchanged     (14,764,949,721 )   $ 0.00042                  
Outstanding at December 31, 2020     2,521,077,555     $ 0.00109       2.04     $ 14,804,944  
Exercisable at December 31, 2020     2,521,077,555     $ 0.00109       2.04     $ 14,804,944  

 

Exercise Price   Warrants
Outstanding
    Weighted Avg.
Remaining Life
    Warrants
Exercisable
 
$0.0001 – 0.25     2,520,512,553       2.04       2,520,512,553  
0.26 – 0.50     465,002       0.68       465,002  
0.51 – 0.75     -       -       -  
0.76 – 1.00     100,000       0.04       100,000  
      2,521,077,555       2.04       2,521,077,555  

 

The aggregate intrinsic value of outstanding stock warrants was $14,804,944, based on warrants with an exercise price less than the Company’s stock price of $0.0063 as of December 31, 2020 which would have been received by the warrant holders had those holders exercised the warrants as of that date.

 

F-23

 

 

NOTE 16 – 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 (the “2016 Plan”) in October 2016, our 2017 Equity Incentive Plan in December 2016 (the “2017 Plan” and together with the 2014 Plan, 2015 Plan, the 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 number of shares reserved for issuance under each. As of December 31, 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 parent and subsidiary corporations’ employees, and for the grant of non-statutory stock options, stock bonus awards, restricted stock awards, performance stock awards and other forms of stock compensation to our employees, including officers, consultants and directors. The Prior Plans also provide that the grant of performance stock awards may be paid out in cash as determined by the committee administering the Prior Plans.

 

The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of the Company’s stock price over the expected term, expected risk-free interest rate over the expected option term and expected dividend yield rate over the expected option term. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted. These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.

 

During the year ended December 31, 2019, the Company granted ten-year options outside of our Plans to purchase up to 250,000 shares of the Company’s common stock for advisory services. The fair value of $14,000, was determined using the Black-Scholes option pricing model, assuming approximately 2.43% risk-free interest, 0% dividend yield, 114% volatility, and expected life of ten years and will be charged to operations over the vesting terms of the options.

 

A summary of the Company’s stock option activity during the year ended December 31, 2019, is presented below:

 

Exercise
Price
    Number of
Options
    Vesting Terms
$ 0.075       250,000     Immediately

 

There were no options issued during the year ended December 31, 2020.

 

A summary of the stock option activity for the years ended December 31, 2020 and 2019 is as follows:

 

    Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2018     27,371,765     $ 0.50       8.42     $                   -  
Granted     250,000     $ 0.075                  
Exercised     -                          
Forfeiture/Cancelled     -                          
Outstanding at December 31, 2019     27,621,765     $ 0.49       7.49     $ -  
Granted     -                          
Exercised     -                          
Forfeiture/Cancelled     -                          
Outstanding at December 31, 2020     27,621,765     $ 0.49       6.49     $ -  
Exercisable at December 31, 2020     27,621,765     $ 0.49       6.49     $ -  

 

F-24